1. 1 B300 B Fall Semester 2009 Chapter Seven & Chapter Eight

2. Important Reminder Strategy is about the direction and scope of an organisation over the long-term to achieve organisational change. An action is strategic when it allows a firm to become better than its competitors, and when this competitive advantage is sustainable i.e. can be maintained. A strategy means performing different activities than competitors or performing similar activities in different ways. 2

3. Chapters seven and eight deal with the internal administration of the organisation and how such internal organisations can create a sustainable competitive advantage.

4. 4 THIS TUTORIAL…. Chapter 7 The Firm as an Administrative Organisation by E.T. Penrose

5. Penrose’s Theory of the firm: Focus of Theory 1)Internal organization of the firm. 2)The growth of firms through new products and new ways of production. 5 Definition of Firm: Firms are defined as social organisations that produce products and services via: (1)Planning (2)Administration (3)Organisation How can firms do that? How can they plan, administer, and organise?

6. The only way a firm can plan, administer, and organise matters is by having a collection of productive resources including: Physical Resources (tangible resources): -Plant equipment -Land and natural resources -Raw materials and semi finished goods Human Resources (intangible resources): -Skilled and unskilled labour -Administrative staff -Managerial staff -Technical staff 6

7. Comparing Between Penrose’s Approach and Traditional Economics Approach to Theory of the Firm Traditional EconomicPenrose’s Approach Traditional economic theory states that for a firm to grow, it must grow in the quantity of outputs that it owns. In traditional economics, we are dealing with the SIZE of the Firm. Penrose shows how two firms that own the same inputs might differ greatly in their performance owing to differences in the ways they organise, administer and plan the functioning of those inputs. 7

8. 8 A Closer Look at Penrose’s Theory of the Firm: Penrose stated that the most important factor indicating the success of an organisation is actually the internal dynamics of the organisation. A firm cannot be successful without improving and using its resources efficiently; Definition of internal dynamics of the organisation: How the physical and human resources are used. Are they used efficiently? Is there a minimum waste or a maximum waste?

9. A Closer Look at Penrose’s Theory of the Firm: Penrose claims that “resources consist of a bundle of potential services” The potential is discovered and emerges through the ways in which the resources are used. How they are used depends on managers’ mental images which define the possibilities and restrictions that are faced. These images determine a manager’s views of his or her competitors and potential consumers, and the environment in general. 9

10. In other words, The interaction between the manager’s mental images and the physical resources at the manager’s disposal determines the dynamic of firm growth or contraction. 10

11. 11 Are Firms Path Dependent? A very important point to consider throughout the strategy book: ARE FIRMS PATH DEPENDENT? What is the meaning of path dependency? Path dependency explains how a decision and/or strategy one faces is limited and depends upon many factors.

12. YES, a firm is path dependent. It cannot take a step forward, with out looking at many factors. In other words, it has managerial limits Past goals, past decisions, past events Whether the firm is a large firm or a small firm; if it is a large firm, information is slowly delivered. Are the firms with new managers who do not have the level of experience and understanding of the internal organisation or not? 12

13. 13 Chapter 8 Looking Inside for Competitive Advantage by J.B. Barney

14. Chapter Objective: Barney builds on Penrose’s work by focusing on the role of resources and capabilities. He claims that sustainable competitive advantage (don’t forget this is the object of strategy!) is developed when resources and capabilities can: (1)Add value to a firm (2)Are rare (3)Are hard to imitate (4)Interact with the appropriate organisational structure. 14

15. Important Relationships Leading to Sustainable Competitive Advantage: Resources In order for a firm to maintain a sustainable competitive advantage, it has to have productive tangible and intangible resources. Capabilities Capabilities: refer to the ability of the firm to use resources,that is, how production and distribution are organized. Competences Core competences: are the most important strategic capabilities, they are the set of differentiated skills, complementary assets and routines that provide the basis for a firm’s competitive capacities and sustainable advantages 15

16. How Can we Measure Sustainable Competitive Advantage? This can be done by using a SWOT Analysis. –SWOT analysis analyses both the internal and external factors of firm. –Internal factors include: “strengths and weaknesses” –External factors include: “opportunities and threats” –For a firm to gain a sustainable competitive advantage, it has to look at and analyse its “internal factors”-through the strengths and weaknesses of its resources and capabilities. For example, between 1990-1993, Southwest Airlines’ profit continued to increase despite losses at other US airlines that totaled almost 10 billion. How did this happen? These firms have gained a sustainable competitive advantage despite the opportunities and threats of their environment.

17. When Examining Internal Factors (Resources & Capabilities), firms have certain questions to answer. Question No. One: The Question of Value Do a firm’s resources and capabilities add value by being able to use opportunities efficiently? In order to maintain a sustainable competitive advantage, the answer should be yes. (1)Firms should be careful that resources and capabilities may have added value in the past, but because of changes in customer tastes, industry structures and/or technologies, become less valuable in the future. (2)Firms should link between analysing the strengths and weaknesses of its resources and capabilities with the analysis of environmental opportunities and threats. 17

18. Example for the Question of Value For example, Sony, between 1990- 1993, has been able to use its experience and resources in designing, manufacturing, and selling to take advantage of the external market opportunities. 18

19. When Examining Internal Factors (Resources & Capabilities), firms have certain questions to answer. Question No. Two: The Question of Rareness How many competitor firms already have the valuable resources and capabilities that your firm has? In order to maintain a sustainable competitive advantage, the answer should state that the firms resources must be rare and hard to imitate when compared to its competitors. 19 For example, two global communications industries, NEC and AT&T have the same capabilities and resources that are valuable. However, they are not rare—meaning that there is no sustainable competitive advantage for these two firms.

20. When Examining Internal Factors (Resources & Capabilities), firms have certain questions to answer. Question No. Three: The Question of Imitability Do firms without a resource or capability face a cost disadvantage in obtaining it compared to firms that already have it? In order to maintain a sustainable competitive advantage, the answer should state that the firms resources must be very hard to imitate. This can be done by understanding the importance of the firms: (1)History As firms develop, they gain skills, abilities, and resources that are unique to them usually reflecting their history. (2)Decisions A firm’s competitive advantage in quality depends on the numerous decisions they have to take.. (3)Socially Complex Resources Resources that are very difficult to imitate.

21. When Examining Internal Factors (Resources & Capabilities), firms have certain questions to answer. Question No. Four: The Question of the Organisation Are firms organised to exploit their resources and capabilities in a way that would help them acquire a sustainable competitive advantage.