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BASIC CONCEPTS. BUSINESS 189 DR. MARK FRUIN SPRING 2007. BASIC CONCEPTS/MODELS. FROM SOURCES TO SALES: VERTICAL INTEGRATION ACTIVITY SEQUENCE INDUSTRIES & SECTORS FIRMS VALUE CHAINS STRATEGY STACKS FIRM BOUNDARIES

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basic concepts

BASIC CONCEPTS

BUSINESS 189

DR. MARK FRUIN

SPRING 2007

basic concepts models
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)
from sources to sales vertical integration activity sequence
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
industries sectors
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
firms
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
value chains i
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
value chains ii
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
strategy stack
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
firm boundaries
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
firm boundaries10
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
what is strategy
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
three main models of strategic success
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
michael porter models
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
resource based view
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
mundane muddled model
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
donut ring model
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?
general model of strategy
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