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BASIC CONCEPTS

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  1. BASIC CONCEPTS BUSINESS 189 DR. MARK FRUIN SPRING 2007

  2. BASIC CONCEPTS/MODELS • FROM SOURCES TO SALES: VERTICAL INTEGRATION ACTIVITY SEQUENCE • INDUSTRIES & SECTORS • FIRMS • VALUE CHAINS • STRATEGY STACKS • FIRM BOUNDARIES • ENVIRONMENTS SHAPE FIRMS, NOT THE OTHER WAY AROUND (IN THEORY OR IN CASE OF HIGH-TECH)

  3. FROM SOURCES TO SALES: VERTICAL INTEGRATION ACTIVITY SEQUENCE • ALL PRODUCTS BEGIN & END SOMEWHERE • THE SUM OF ALL SOURCING, HARVESTING, DESIGNING, DEVELOPING, MAKING/ ASSEMBLING, BRANDING, PACKAGING, AND MARKETING STEPS • VERTICAL INTEGRATION IS THE FORMAL TERM FOR THE STREAM OF THIS ACTIVITY • WHERE FIRMS CLUSTER ALONG STREAM = SIGNIFICANT STEPS/STAGES = INDUSTRY

  4. INDUSTRIES & SECTORS • INDUSTRIES ARE PLACES WHERE VERTICAL INTEGRATION ACTIVITIES COME TOGETHER, CLUSTER & COALESCE • FIRMS AT THESE PLACES OFFER PRODUCTS & SERVICES THAT ARE CLOSE SUBSTITUTES • USUALLY INDUSTRIES ARE ASSOCIATED WITH HARVESTING, PRODUCING, AND DISTRIBUTING ACTIVITIES • SECTORS ARE INTERRELATED INDUSTRIES, LIKE IC CHIPS, HARDWARE & SOFTWARE THAT MAKE UP THE COMPUTER SECTOR

  5. 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, & HIGHER LEVELS = GREATER AUTHORITY & DECISION-MAKING DISCRETION • ALTHO WE THINK FLATER IS BETTER, VERY FEW FLAT ORGANIZATIONS

  6. VALUE CHAINS I • A FIRM’S ORGANIZED MEANS OF CONVERTING INPUTS TO OUTPUTS • TRADITIONALLY, FIRM BOUNDARIES ENCOMPASS VALUE CHAINS • TODAY, MANY STEPS & STAGES IN VALUE CHAINS ARE GEOGRAPHICALLY & ORGANIZATIONALLY SEPARATED • FIRM BOUNDARIES BECOME PERMEABLE

  7. VALUE CHAINS II • IN MOST CASES, DOWNSTREAM CONTROL IN VERTICAL INTEGRATION ACTIVITY STREAM YIELD 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 FINAL ASSEMBLY PROCESSES

  8. STRATEGY STACK • THERE ARE DIFFERENT KINDS OF STRATEGY ASSOCIATED WITH DIFFERENT FIRM LEVELS • ORGANIZATION SUB-UNIT STRATEGY • FUNCTIONAL-LEVEL STRATEGY (FIRST 1/3) • BUSINESS-LEVEL STRATEGY (SECOND 1/3) • BU refers to business units (firms & divisions of firms) competing in an industry; SOMETIMES BL or LB (line of business) • Product/markets are different SEGMENTS of an industry • CORPORATE-LEVEL STRATEGY (THIRD 1/3) • GLOBAL STRATEGY

  9. 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 • HOW MUCH INTERNALIZATION OF VERTICAL INTEGRATION ACTIVITIES/ HIERACHY IS COUNTRY-SPECIFIC • COUNTRY-SPECIFIC MODELS OF WHAT FIRMS ARE • FIRMS CAN BE MORE OR LESS POROUS/ PERMEABLE THAN NATIONAL AVERAGE • IN GLOBAL WORLD, INDUSTRY & FIRM BOUNDARIES ARE DYNAMIC OR FIRMS NOT GLBL

  10. FIRM BOUNDARIES • HOW MANY VALUE CHAINS CAN FIRMS ENCOMPASS & STILL DO WELL? • WHAT ARE THE LIMITS TO ORGANIZATION? • FIRMS, MARKETS & NETWORKS • DEPENDS IN LARGE MEASURE ON HOW SIMILAR/DISSIMILAR VALUE CHAINS ARE • AND ON THE DEGREE OF CONTROL SOUGHT • OR EXISTENCE OF SECRET SAUCE = FIRMWIDE, TOP DOWN SKILLS & COMPETENCES

  11. 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 • LONGTERM SUCCESS DEPENDS ON BEING IN THE RIGHT INDUSTRIES & DOING WELL CONSISTENTLY • OR, SUPERIOR, SUSTAINED PERFORMANCE RELATIVE TO RIVALS IN SAME INDUSTRY

  12. THREE MAIN MODELS OF STRATEGIC SUCCESS • MICHAEL PORTER INDUSTRY-BASED MODEL • RESOURCE-BASED VIEW OF THE FIRM AND STRATEGY • MUNDANE/MUDDLED MODEL = LONG-TERM GOOD CORPORATE GOVERNANCE MODEL • HARDER THAN YOU MIGHT THINK

  13. 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 V.I.A.P. & WITH RIGHT VALUE CHAIN

  14. 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 SINGULAR RESOURCES & CAPABILITIES THAT RIVALS DON’T HAVE • AND ON HOW WELL THOSE RESOURCES & CAPABILITIES ARE MOBILIZED/USED/ COMBINED/SUSTAINED

  15. 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 • ESPECIALLY HARD-TO-DO IN HIGH TECH & GLOBAL INDUSTRIES

  16. DONUT RING MODEL • IN GENERAL, FIRMS REQUIRED TO ADAPT TO THEIR ENVIRONMENTS OR FAIL • WHEN FIRMS HAVE POWER TO SHAPE ENVIRONMENTS, THAT’S UNUSUAL & OFTEN ILLEGAL • DEGREE OF FIT DEGRADES OVER TIME • IN RAPIDLY CHANGING ENVIRONMENTS, FIRMS MAY HAVE MORE POWER, SUCH AS HIGH-TECH INDUSTRIES • CO-EVOLUTION RESULTS (e.g. S.V.) • WHY?

  17. GENERAL MODEL OF STRATEGY • BEYOND BUSINESS MODEL • WHAT’S DIFFERENCE BETWEEN BUS MODEL & STRATEGY? • UNDERSTAND ENVIRONMENT (WHAT’S CALLED FOR) • UNDERSTAND WHAT YOU’VE GOT & WHAT YOU CAN DO WITH IT • ORGANIZATIONAL INERTIA • PEOPLE OFTEN DISAPPOINT • HIGH-LEVEL ORG PERFORMANCE HARD TO SUSTAIN • FIND BOTTLENECKS, DEVELOP DISTINCTIVE COMPETENCIES & PARTNER