B300 B
Fall Semester 2009
Chapter Seven & Chapter Eight
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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.
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Chapters seven and eight deal with the internal
administration of the organisation and how
such internal organisations can create a
sustainable competitive advantage.
THIS TUTORIAL….
Chapter 7
The Firm as an Administrative Organisation by E.T. Penrose
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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.
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?
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• 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
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Comparing Between Penrose’s Approach and Traditional
Economics Approach to Theory of the Firm
Penrose’s Approach
Traditional Economic
Traditional economic theory states
that for a firm to grow, it must
grow in the quantity of outputs
that it owns.
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.
In traditional economics, we are
dealing with the SIZE of the Firm.
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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?
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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.
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• 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.
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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.
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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?
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Chapter 8
Looking Inside for Competitive Advantage
by J.B. Barney
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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)
(2)
(3)
(4)
Add value to a firm
Are rare
Are hard to imitate
Interact with the appropriate organisational structure.
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Important Relationships Leading to Sustainable Competitive
Advantage:
Resources
Capabilities
• In order for a firm to maintain a sustainable competitive advantage, it
has to have productive tangible and intangible resources.
• Capabilities: refer to the ability of the firm to use resources ,that is,
how production and distribution are organized.
• 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
Competences
sustainable advantages
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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.
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.
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Example for the Question of Value
• For example, Sony, between 19901993, has been able to use its
experience and resources in designing,
manufacturing, and selling to take
advantage of the external market
opportunities.
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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.
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.
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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.
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.