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2. 2 Learning Objectives To understand: the characteristics of resources and capabilities that create a foundation for sustainable competitive advantage how resources are interconnected and the implications of resource interconnectedness for firm performance the responsibilities of boards of directors and the agency issues associated with corporate governance the usefulness of the value chain in understanding sources of competitive advantage

3. 3 StrategicDirection Strategy Formulation (corporate and business level) Strategy Implementation and Control Strategic Restructuring Internal and External Analysis

4. 4 Organizational Resources Leading to Sustainable Competitive Advantage Organizational Resources and Capabilities Financial Physical Human Knowledge & Learning Organizational Valuable? Unique? Potential for Competitive Advantage Appropriate systems in place? Managers taking advantage of potential? Realized Competitive Advantage Difficult or costly to imitate? No readily available substitute? Sustainable Competitive Advantage

5. 5 Organizational Resource Interconnectedness Human Resources Knowledge and Learning Resources General Organizational Resources Physical Resources Financial Resources

6. 6 Human Resources Managers – CEO and top management team Employees – recruitment, training programs, rewards system Owners/board of directors – effective corporate governance Managers – CEO and top management team Employees – recruitment, training programs, rewards system Owners/board of directors – effective corporate governance

7. 7 Position of Board of Directors Shareholders Board of Directors Board of Directors Chief Executive Officer (CEO) Top Manage- Ment Team Top Manage- Ment Team VP-Legal VP-FinancialVP-MarketingVP-Human Res.

8. 8 Corporate Governance Corporate governance is concerned with the balance between: Economic and social goals Individual goals of managers and firm goals The board of directors: Hires, fires, supervises and compensates top management Approves major strategic decisions Ensures that the firm and its managers are acting responsibly Provides advice to top management Provides a social network that helps firms acquire resources Corporate governance is concerned with the balance between: Economic and social goals Individual goals of managers and firm goals The board of directors: Hires, fires, supervises and compensates top management Approves major strategic decisions Ensures that the firm and its managers are acting responsibly Provides advice to top management Provides a social network that helps firms acquire resources

9. 9 Agency Theory Agents--managers with a fiduciary duty to act in the best interests of owners Agency problem--managers maximize their own self- interests at the expense of owners High salaries of CEOs Emphasis on short-term performance at expense of long- term performance Empire building for status CEO duality Agents--managers with a fiduciary duty to act in the best interests of owners Agency problem--managers maximize their own self- interests at the expense of owners High salaries of CEOs Emphasis on short-term performance at expense of long- term performance Empire building for status CEO duality

10. 10 Physical Resources Tangible resources such as machinery, plants and products – easy to imitate, but the processes to create them are not Locations – competitive clusters can provide advantages to companies and consumers Tangible resources such as machinery, plants and products – easy to imitate, but the processes to create them are not Locations – competitive clusters can provide advantages to companies and consumers

11. 11 Financial Resources Strong cash flow, low levels of debt, strong credit rating, access to low interest capital and reputation for creditworthiness can increase strategic flexibility – more responsive to new opportunities Locations – competitive clusters can provide advantages to companies and consumers Strong cash flow, low levels of debt, strong credit rating, access to low interest capital and reputation for creditworthiness can increase strategic flexibility – more responsive to new opportunities Locations – competitive clusters can provide advantages to companies and consumers

12. 12 Use of Financial Analysis in Strategic Management Identify strengths and weaknesses Diagnose problems Declining profitability Insufficient liquidity Leverage too high or too low Internal mismanagement Essential comparisons Firm to competitors Firm to itself over time Identify strengths and weaknesses Diagnose problems Declining profitability Insufficient liquidity Leverage too high or too low Internal mismanagement Essential comparisons Firm to competitors Firm to itself over time

13. 13 Some Commonly Used Ratios Profitability Gross Profit Margin Net Profit Margin ROA ROE Liquidity Current Quick Leverage Debt to Equity Total Debt to Total Assets (Asset Ratio) Activity Asset TurnoverAverage Collection Period Accounts Receivable TurnoverInventory Turnover Profitability Gross Profit Margin Net Profit Margin ROA ROE Liquidity Current Quick Leverage Debt to Equity Total Debt to Total Assets (Asset Ratio) Activity Asset TurnoverAverage Collection Period Accounts Receivable TurnoverInventory Turnover

14. 14 Knowledge and Learning Resources Organizational learning leads to strengths in other resource areas. It involves: Knowledge creation Knowledge retention Knowledge sharing Knowledge utilization Two types of knowledge: Codified – can be communicated with precision through written means. Typically not a good source of sustainable competitive advantage Tacit – difficult to describe with words. Better source of sustainable competitive advantage Organizational learning leads to strengths in other resource areas. It involves: Knowledge creation Knowledge retention Knowledge sharing Knowledge utilization Two types of knowledge: Codified – can be communicated with precision through written means. Typically not a good source of sustainable competitive advantage Tacit – difficult to describe with words. Better source of sustainable competitive advantage

15. 15 General Organizational Resources Some general organizational resources are hard to imitate and are therefore excellent sources of sustainable competitive advantage: Organizational reputation Corporate brands Unique configurations of stakeholder relationships – joint venture, long-term contracts and other types of partnerships and alliances Organizational structure and internal systems Organizational culture Some general organizational resources are hard to imitate and are therefore excellent sources of sustainable competitive advantage: Organizational reputation Corporate brands Unique configurations of stakeholder relationships – joint venture, long-term contracts and other types of partnerships and alliances Organizational structure and internal systems Organizational culture

16. 16 The Value Chain Primary Activities Inbound Logistics Operations Outbound Logistics Marketing and Sales Service Activities that Support the Primary Activities Administration Technology Development Human Resource Development Procurement Primary Activities Inbound Logistics Operations Outbound Logistics Marketing and Sales Service Activities that Support the Primary Activities Administration Technology Development Human Resource Development Procurement