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55 Cards in this Set
- Front
- Back
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Main objective of strategy?
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Determine how firm can achieve sustained competitive advantage
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Accounting Profit v. Economic Profit
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Accounting-profit after subtracting COGS
Economic-Revenues exceed costs after opportunity costs counted Can have large accounting profit with little economic profit |
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Sources of competitive advantage
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Capabilities Perspective-develop resources and capabilities that competitors can't copy (ie: access to policy makers, patent)
Economics Perspective-with perfect comp. no one makes a profit, but market failures give firms advantage (transaction costs, barriers to entry) Unique resources |
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Resource based view of firm
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Firm has competitive advantage when its resources are:
1. More valuable than rival 2. Rare 3. Inimitable 4. Non-substitutable Examples: Brand name associated with high quality , patent, org. culture, supply chain |
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Resources, capabilities and core competencies
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Resources bundled in unique ways to form capabilities
When capability is applicable to wide range of markets, provides benefit to consumer, and is hard to imitate than it becomes core competency |
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Sources of inimitability
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Historical context-some capabilities developed out of specific context in which firm was founded (Porter's Diamond of National competitive advantage)
Path dependence-takes time to build capability and once you set down one path it is hard to change it Casual ambiguity-hard to determine which factor is driving a given result (culture, brand, PR?) |
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Building competencies abroad
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Best firms build new competencies by leveraging local resources and foreign (existing) competencies
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Theory of the firm
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If a hierarchical control structure can lower costs of transactions it is more efficient to form a firm
If arms length transactions are efficient than organize as market transaction instead |
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Major sources of transaction costs
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Unequal information between buyers and sellers
Conflict of interest between buyers and sellers |
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Transaction Costs
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Ex ante costs of negotiating an agreement/contract and ex post costs of enforcing agreement
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How to overcome transaction costs
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Government-regulations, courts, enforcement agencies increase flow of information and reduce conflicts of interest
Intermediaries- credit agencies, auditors, regulators, relationship networks, insurance, patenting system, social pressure Absence of intermediaries and institutions causes institutional void |
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Formal Market intermediaries
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Financial Markets-VC, investment bankers, credit reporting agencies, auditor, bank, SEC, bankruptcy court
Labor Markets-business schools, headhunters Product markets-consumer reports, regulators (FDA), dispute resolution services, courts |
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How institutions help buyers
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Bargaining power of buyer depends on how much credible information they have about various products that can be purchased (market for lemons)
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Transaction costs perspective
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Firms will achieve higher profits if they organize operations in wat that minimizes transaction costs (form cluster)
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Institution
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Set of rules (formal or informal) that actors generaly follow
Orgs are NOT institutions they are actors that create them (rules) and that respond to institutions |
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Three categories of institutions
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1. Normative-the way we behave or are told to behave (habits, rituals, roles)
2. Cognitive-The way we think (common beliefs, assumptions, cultural values) 3. Regulatory-the way we make others behave (laws, forced compliance through sanctions) |
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Why differences between business environment in US and Western Europe?
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Institutional arrangements that differ from country to country (arms length transactions, role of government)
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Embeddedness in webs of relationships
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In all societies firms are embedded in relationships with actors
Industrial relations-relation with union Individual employees-training, aligning incentives Suppliers External training facilities Shareholders |
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Markets v. relationships
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All capitalist economies there is coordination through markets and orgs
Liberal market economy-arms length transactions (US) Coordinated Market-enduring relationships among actors |
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Liberal Market Economies
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US, UK, Australia
Resolve coordination issues through market and organization Market relationships-arms length exchange of goods Emphasis on legal system that supports contracts Market institutions developed to facilitiate this kind of transactions |
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Coordinated Market Economies
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Markets important but more of emphasis on relationships
Relational contracting-agreements that rely on norms and trust Organizations emerge to foster info exchange, monitoring of behavior, sanctions for defection (business associations, unions, cross shareholding) |
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Patterned Wage Bargaining
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Germany
Begins in metal sector and any changes in wages are mirrored by rest of economy |
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Co-determination
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Workers play stronger role in governance and management decisions
Worker reps hold seats on boards |
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Implications of co-determination and pattered wage bargaining
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Since wages are set sector wide, more difficult to poach workers
Employees more loyal to firm Much more poaching and labor mobility in US |
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Low Labor Turnover Implications
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Firms more likely to invest in employees since they will capture full value of training
Results in more skilled labor force leading to more innovative engineering and processess and less layoffs |
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More labor turnover implications
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US workers invest themselves in general skills rather than one proprietary process
US firms have less incentive to train workforce Leads to less skilled workforce which provides firms with incentive to look for breakthrough innovations since they can change workforce easily More outsourcing since firm is not as loyal to employees |
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Bank Centered vs. Capital Market Centered Economies
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German firms have long term relationships with banks
Banks own shares in firms they finance, on boards, more personal meetings German banks have access to in depth info about firm and industry so longer term loans, more loans during bad times US since arms length, stronger equity market and capital market Leads to more short term profit focus since have to please investors |
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Since different countries have different institutional environments...
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A firm's strategy must fit their institutional environment
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Oligarchic Capitalism
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Resources concentrated in hands of few (Russia, Latin America)
Objective is not economic growth but wealth preservation for the upper class High inequality and informality |
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State Guided Capitalism
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Still privately owned companies but government directs resources
State owns some industries they see as key Governments don't know where to direct money without guide from west |
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Big Firm Capitalism
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Incremental innovation
Not good at radical innovation |
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Entrepreneurial Capitalism
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New firms dominate
Creative destruction Big ideas come from entrep and big firms perfect idea and mass produce |
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Physical property rights issues in Emerging Markets
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Land tenure issues arise when original title is unclear or held by group
Title registration system is backlogged or corrupt and court system is not strong |
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How Poor Land Title System Affects Business
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Deters expansion
Reduces ability to use property as collateral for loans Adds transaction costs to any purchase |
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Intellectual Property Issues in Emerging Markets
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Counterfeit trademark infringement (fake purse)
Pre-empting brand name (local firm registers Wal-mart before it has chance to expand) Imitating brands (Rolox watch) Piracy |
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Cognitive/Normative Institutions and Property Rights
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In different countries different definition of property rights
Communal v. Individual ownership of ideas (diff. ideas of plagiarism) |
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Institutional Void
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Absence of a common institution or market intermediary that helps business and reduces transaction costs
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How market intermediaries facilitate commerce
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Sources of funding (banks)
Information (market research, credit reporting, property appraisals) Risk management (insurance) Professional Expertise (accounting, legal) Logistics (postal service, retailers) Training (MBA programs) |
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How firm can operate with institutional voids
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Promote external development of intermediaries/institutions (lobby government for regulation, form cluster to promote infrastructure)
Attempt to leverage foreign institutions (ADRs) Adopt organizational form to compensate (form conglomerate or business group) |
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Conglomerate v. Business Group
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Emerging markets have a lot of conglomerates (large firms pursuing unrelated diversification)
Business Group-legally independent firms that operate in many industries and are tied together by families Both help overcome transaction costs |
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Grupos
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Latin America business groups
Businesses in many industries Composed of more than one family Loyalty and trust important Elite firms own banks and give group preferential funding |
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How Conglomerates fill institutional voids
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Reputation effects-reputation for honesty/quality can be diffused across industries
Smoother CF stream-less reliance on external financial markets Attract and train employees-employees see greater career opportunities, use diverse experiences to train for top management, economies of scale in training More influence on Gov. |
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Kieretsu
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Japan
Bank controlled Kieretsu-unrelated businesses, similar directors, favoritism in purchasing Non Bank centered-smaller companies subservient to large ones, large companies can concentrate on core activities and small companies have constant business Now cheap capital lead to overcapacity in industries (11 car makers) |
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Why presence of business groups matter to US companies
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Allying with one company gets you in with group
Groups can tie up suppliers to increase barriers to entry |
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Lessons From Sime Darby Case
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Acquisition only makes sense if sum is greater than two parts
Costs and benefits of a corporate strategy vary across institutional contexts Conglomerate form can contribute benefits in emerging markets (reputation, monitoring, information access, financing, access to policy makers) |
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The Missing Middle
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Low income countries lack SMEs and have way more informal orgs.
Informal orgs have low productivity and capacity for tech. advances Correlation between number of SMEs and economic growth Large firms can compensate for inst. voids and better equipped to deal with gov. |
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Benefits of Informal Firm
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Fly under radar of red tape, taxes
Micro finance firms more interested in helping |
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Why SMEs don't grow to large firms
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Held back by lack of financing
Difficult to show collateral Difficult to show credit worthiness |
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Banks and SMEs
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Transaction costs too high for banks since hard to screen
Banks that enter into this risk have less competition from foreign firms Adverse selection-can pick best firms to finance and get huge returns |
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Effects of corruption on business
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Foreign investment declines because firms have preference for cleaner environment (corruption seen as tax)
Investors cant trust information and institutions (financial statements) |
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Costs of corruption for developing countries
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Economic costs
Political costs-govs. lose legitimacy Social costs-undermines people's trust in political system and leadership |
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Tomorrow's Global Giants Not the Usual Suspects Main Points
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Some MNCs in low end segment are beating local competitors, contrary to popular belief
3 competitive strategies 1. Exploit evolving market conditions (by using local knowledge you can bundle product and service offerings) 2. Manage Convergence in Cost (reduction of barriers making supply more expensive for MNCs and higher end tastes making local players pay more) 3. Rework Value Chains (focus on one part of it and partner for rest) |
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Segmenting the Base of the Pyramid Main Points
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To be successful at bottom of pyramid need to create commercial and social value as well as achieving scale
3 segments of bottom 1. Low income-still buy TVs and goods 2. Subsistence-need inexpensive goods for daily use, need to create demand for new product category 3. Extreme Poverty-can serve as client due to international orgs supporting them Value Creation Roles Consumer-companies can offer basic services like water Coproducer-with some training company can train workers which increases productivity Clients |
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Circumstances in which Market Transactions are Costly
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Costly to find trading partner
Costly to write contract Contracts/property rights not enforced Buyer/seller have different info Relationship specific investments Unclear Property Rights |
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Benefits of Clustering
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Reduces transaction costs
Concentration of resources and talent Trade amongst group Discourages people from taking advantage of others Infrastructure develops |
