Published on December 30, 2008
BUSINESS AND ENVIRONMENT : BUSINESS AND ENVIRONMENT Aleksandra Gregoric Assistant Professor Copenhagen Business School Ekonomska fakulteta Ljubljana email@example.com firstname.lastname@example.org Ljubljana, 6.12.2007 Course objectives : Course objectives Analyzing the firm and its value chain; Analyzing firms’ business environment as the determinant of the nations’ competitive advantage (Porter, 1990 and beyond); Discussing the role of institutions in sustaining a firm’s (country's) competitive advantage (focus: institutional change in transition); Providing a tool for a better coordination between various factors, improving the flexibility and the efficiency of the decision-making and in the creation of sustainable relationship with the main constituencies: how to create value in negotiations? Slide 3: Decision making and the firm WE START with the description of the firm and its competitive advantage and of the role of the business environment in sustaining firm’s competitiveness TO SHOW the importance of efficient decision-making and value-creating negotiations for firm long-term success! A competitive firm : A competitive firm A firm achieves COMPETITIVE ADVANTAGE if it can earn higher rates of profitability than rival firms. The firm’s profitability depends jointly on: 1. industry conditions (Porter’s five forces); 2. the amount of value that a firm can create in relation to its competitors; Resources Organizational capabilities (efficiency in the use of resources) Value creation : Value creation Value created = consumer surplus - producer surplus (B-P) + (P-C) Consumer surplus (the value map) : Consumer surplus (the value map) Slide 7: Generic strategies: approaching customers How to avoid being stuck in the middle? Careful analysis of the industry and the firm itself! Organizing a firm : Organizing a firm The organization of activities should follow the firm strategy, which reflects the firm’s positioning in the industry. A FIRM is more than a set of activities. It is a set of interdependent systems, network of activities. These activities require different trade-offs, coordination of activities and also optimization of activities in a way that it maximizes firm value. The way a firm organizes and perform discrete activities is one of the determinants of the firm’s competitive advantage. Organizing activities: the value chain : Organizing activities: the value chain The organization of firm’s activities can be presented in the value chain The value chain and firm’s competitiveness : The value chain and firm’s competitiveness Through performing these activities, firms CREATE VALUE when: provide comparable buyer value but perform the activities more efficiently than competitors; perform activities in a unique way that creates greater buyer value and commands a higher price; Slide 11: Porter (1990): the prosperity of a country Companies must shift from competing on endowments or comparative advantages to competing on distinctive products and processes. This requires the ability to CREATE VALUABLE GOODS AND SERVICES using EFFICIENT METHODS. And, it requires the corresponding changes in the microeconomic environment: The role of the environment : The role of the environment Porter (1990): sustaining competitive advantage A nation (country) increases its productivity (prosperity) by constant upgrading towards more sophisticated industry segments (innovation driven, constantly upgrading industries with rising wages and skills); Upgrading to sophisticated industries is mainly determined by the characteristics of the business environment in which the firm operate (Diamond conditions); The Diamond : The Diamond Factor conditions: upgrading in more important than the stock itself; factor scarcity can itself be a source of competitive advantage; Demand conditions: sophistication of home demand, ability to anticipate foreign trends; Related and supporting industries (example of Italian leather industry); Firm strategy, structure and rivalry, The Diamond : The Diamond Factor creation : FIRM STRATEGY, STRUCTURE, AND RIVALRY RELATED AND SUPPORTING INDUSTRIES FACTOR CONDITIONS DEMAND CONDITIONS A cluster of domestic rivals stimulate factor creation Related and supporting industries create or stimulate the creation of transferable factors Home demand influences priorities for factor-creating investments Trans- national business activity Access to foreign resources interna- lized within MNCs Factor creation Demand conditions : FIRM STRATEGY, STRUCTURE, AND RIVALRY RELATED AND SUPPORTING INDUSTRIES FACTOR CONDITIONS DEMAND CONDITIONS Trans- national business activity Sophisticated factor- creating mechanisms attract foreign students and participation by foreign firms which pulls through the nation’s products World-class reputation spills over to related industries Intense rivalry makes home demand larger and more sophisticated Experience of foreign demand increases quality standards Demand conditions Domestic rivalry : FIRM STRATEGY, STRUCTURE, AND RIVALRY RELATED AND SUPPORTING INDUSTRIES FACTOR CONDITIONS DEMAND CONDITIONS Trans- national business activity New entrants emerge from related and supporting industries Early product penetration feeds entry Factor abundance or specialized factor-creating mechanisms spawn new entrants Exposure to dynamic competition from foreign firms and/or in foreign markets Domestic rivalry Slide 18: Improving business environment: Italian Footwear Cluster Slide 19: Development stages and the Diamond Beyond Porter : Beyond Porter How does export success translate into ‘lasting competitiveness’? What is the causal linkage between he nation’s success and the elements of the Diamond? What about the macroeconomic factors? 3. Does it work for small nations as well? Nations complementing each other? Generalized Double Diamond approach (Moon, C.H., Rugman, A. M., Verbeke, A.) Foreign ownership/foreign home base (Singapore) Similarity of home/foreign markets; Foreign suppliers; Global industry structure; Generalized Double Diamond approach : Generalized Double Diamond approach Role of institutions : Role of institutions What about institutions? North (1990): INSTITUTIONS are… A set of rules, formal or informal, that actors generally follow, whether for normative, cognitive, or material reasons, and organizations as durable entities with formally recognized members, whose rules also contribute to the institutions of the political economy. Slide 23: The firm develops relations within... Industrial relations (wages, working conditions); Are unions strong? Are labor markets flexible? Flexible labor markets make it less-risky to pursue new opportunities, but less likely that they will develop firm-specific skills. Vocational training and education (securing the human skills); Corporate governance (securing financing); Where do firms find financing? Is capital deeply involved for the long-term or more attentive to current share prices? Slide 24: The firm develops relations within... Inter-firm relations (suppliers, customers, other firms); Do firms relate through strict contracts or through long-term relationships & trust? This will effect the kinds of information they have and their ability to collaborate , share knowledge, etc. Employees (ensuring information sharing; preventing moral hazard); ECONOMIES DIFFER IN THE WAY FIRMS SOLVE THE COORDINATION PROBLEMS (liberal/coordinated economies). INSTITUTIONS PROVIDE SUPPORT to the firms in coordinating relations; Slide 25: The German Coordinated Market Model Slide 26: The American Liberal Market Model Slide 27: Coordination: markets patient capital; network reputation monitoring; information gathering through network and close relationship with suppliers/buyers; technology diffusion; group/industry based networks; consensus decision-making; industrial relations, wage equalization; highly skilled labor costs, supervised training system; relational contracting; financing conditional on value, share price; knowledge exchange through movements of labor and skills; no requirements for stakeholders representations in decision-making; market relationships between firms and employees; general skills, overall employability; formal contracting (antitrust regulation); Slide 28: A tentative summary: Global Competitiveness Index What is in all these the role of the manager? : What is in all these the role of the manager? entrepreneur; organizer/implementer; contractor; power-holder; facilitator, relationship-builder; competitor (game theory); adapter (+ facilitator of new structures); accountable agent; What is the role of the manager? : What is the role of the manager? Managing, facilitating the complex set of relationships between and among primary stakeholders with different rights, objectives, power and responsibilities, implying constant trade-offs. These relationships in fact constitute a firm. The role of the manager : The role of the manager In practice, Managers organize their work according to informal roles, including: a) interpersonal roles, such as being a leader; b) informational roles, such as being the spokesperson for the firm or one of its units; and c) decisional roles, such as being a negotiator or someone who handles the disturbances. Managers rely on intuition and judgment to make their decisions. In the next lectures we thus look to… : In the next lectures we thus look to… Art of decision making; 2. Biases and heuristics behind the decision making; 3. Art of negotiations; But before that, we sum up with a case study…. Case study: Prochnik : Case study: Prochnik Analyze the case of Prochik from the perspective of the diamond factors! Questions: 1- Which of the 4 elements changed with transition in 1990? 2- How would you describe the role of the government before transition? How did it influence the operations of Prochnik and its competitive advantage? 3- How would you define the generic strategy of Polish coats on the US market before transition? 4- Do you think that the post-transition Prochnik built his competitive advantage as purely home-based? 5- How would you classify the generic strategy of Prochink in the post-transition period? Do you think the change in the strategy correctly reflected the change in the environment (the diamond)? Case study: Prochnik : Case study: Prochnik Analyze the case of Prochik from the perspective of the diamond factors! Questions: 6- In your opinion, what change within Prochnik’s value chain was the most important for the success of the company? 7- How do you view the role of domestic demand? Could Prochik rely on it to detect foreign markets’ needs? 8- What was the role of the supporting firms in Prochik success? 9-Which were the fundamental challenges of the post-transition Prochnik and how did the firm deal with them? 10- Would you define Prochnik as flexible? 11- How would you respond to the request of the director of Brinkmann? Discuss!