Organizational Resources and Competitive Advantage

1
Organizational Resources and Competitive
Advantage

• TIM 431 (3)
• Dan Spears, PhD

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Examples of Firm Resources and Capabilities
Human
Financial
Superior CEO characteristics Experienced
managers Well trained, motivated, loyal
employees High performance structure or culture
Excellent cash flow Strong balance sheet Superior
past performance Strong links to financiers
Knowledge and Learning
Superior technology development Excellent
innovation processes and organizational
entrepreneurship Outstanding learning processes
Physical
General Organizational
State-of-the-art plant or machinery Superiority
in a value-adding process or function Superior
locations or raw materials Outstanding products
and/or services
Excellent reputation or brand name Patents Exclusi
ve Contracts Superior linkages with stakeholders
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Six Questions that Determine the Value of Firm
Resources and Capabilities
4. Do organizational systems exist that allow
realization of potential? 5. Is the organization
aware of and realizing the advantages?
1. Does the resource or capability have value in
the market? 2. Is the resource or capability
unique? 3. Is there a readily available
substitute for the resource or capability?
Firm Resources and Capabilities Financial Physic
al Human Knowledge and Learning General Organiz
ational
6. Is the resource or capability difficult or
costly to imitate?
Potential Competitive Advantage or Core
Competency
The Competitive Advantage or Core Competency Is
Sustainable
Actual Source of Competitive Advantage
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Types of Resources

• Tangible Resources
• Can be seen, touched and/or quantified
• Examples are manufacturing processes and products
• Tend to be easy to imitate
• Intangible Resources
• Hard to quantify
• Examples are knowledge, skills, abilities and
  relationships with stakeholders
• Difficult to imitate. Makes them good sources of
  competitive advantage
• Industry Differences
• The resources and capabilities that lead to
  competitive advantage vary from industry to
  industry

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Competitiveness and Resource Interconnectedness
Human
High Quality Managers High Quality
Employees Better Training
Financial
Knowledge and Learning
Strong Financial Position
More Innovation More Learning
Physical
General Organizational
State-of-the-art Plant and Machinery Superior
Functional Processes Superior Products and
Services
Strong Brand Better Reputation Strong Stakeholder
Relationships
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Commonly Used Financial Ratios

• Profitability
• Gross profit margin
• Sales-COGS / Sales X 100
• Efficiency of operations and product pricing
• Net profit margin
• Net profit aft. Tax / Sales X 100
• Efficiency after all expenses are considered
• Return on Assets (ROA)
• Net profit aft. Tax / Total Assets X 100
• Productivity of Assets
• Return on Equity (ROE)
• Net profit aft. Tax / Stockholders Equity X 100
• Earnings power of equity

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Commonly Used Financial Ratios

• Liquidity
• Current Ratio
• Current Assets / Current Liabilities
• Short-run debt paying ability
• Quick Ratio
• Current Assets - Inventories / Current
  Liabilities
• Short-term liquidity
• Leverage
• Debt to Equity
• Total Liabilities / Stockholders Equity
• Extent to which stockholders investments are
  leveraged
• Total Debt to Total Assets (Debt Ratio)
• Total Liabilities / Total Assets
• Percent of assets financed through borrowing

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Commonly Used Financial Ratios

• Activity
• Asset Turnover
• Sales / Total Assets
• Efficiency of asset utilization
• Inventory Turnover
• Cost of Goods Sold / Average Inventory
• Managements ability to control inventory
  investments
• Average Collection Period
• Receivables X 365 days / Annual Credit Sales
• Effectiveness of collection and credit policies
• Information may only be available to internal
  managers
• Accounts Receivable Turnover
• Annual Credit Sales / Receivables
• Effectiveness of collection and credit policies
• Information may only be available to internal
  managers

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Strategic Leadership

• Create organizational vision
• Envision what the organization should be like in
  the future
• Communicate this vision to followers
• Empower followers to enact the vision
• Establish core values for the organization
• Develop strategies and a management structure
• Foster an environment conducive to organizational
  learning and development
• Serve as coach, teacher and facilitator
• Help organizational members question their
  assumptions
• Serve as a steward for the organization

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Leadership Approaches

• Commander
• CEO formulates strategy and then directs
  subordinates to implement
• Change
• CEO formulates strategy and then plans changes to
  structure, personnel, information systems, and
  administration to implement it
• Collaborative
• CEO initiates planning. Group discusses, agrees
  and takes responsibility for their parts of the
  strategy
• Cultural
• CEO and top management team formulate vision and
  strategy and then mold a strategy-supportive
  culture
• Crescive
• Lower-level managers formulate and implement
  their own strategic plans. CEO encourages
  innovation and filters out inappropriate ideas

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Typical Corporate Ownership Structure
External Stakeholders
Individual Shareholders
Board of Directors
Influence
Outsiders and Insiders
Elect
Large-block Shareholders
Monitor Control Provide Services Obtain
Resources
Top Management
Manage
Manager
Manager
Manager
Manager
Manager
Employees
Employees
Employees
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Agency Theory

• Agents
• Managers, as agents for the owners, should pursue
  their best interests
• Agency problem
• Managers may maximize their own self-interests at
  the expense of owners
• Entrenchment
• Occurs when managers gain so much power that they
  use the firm to further their own interests
  rather than the interests of shareholders
• Situations in Which Agency Problems Sometimes
  Exist
• Empire building for status
• Extremely high salaries of some CEOs
• CEO duality

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Effective Boards

• Take an active role in the organization
• Protect shareholder interests
• Advise top management
• Provide resources such as contacts with external
  stakeholders
• Includes outsiders
• External stakeholders who sit on the board
• Bring fresh ideas and breadth of knowledge
• High percentage of outsiders makes a board
  independent. The best defense against agency
  problems
• Includes insiders
• Provide stability and enhanced understanding of
  internal operations

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Employees

• Employees and the way they are managed are
  important sources of competitive advantage
• More sophisticated HR practices lead to higher
  productivity, especially in capital-intensive
  industries
• High performance work practices lead to lower
  turnover, higher productivity and performance
• Effective HR Practices
• Work with people instead of replacing them or
  limiting the scope of their activities
• Get people involved in organizational
  improvements
• Employee stock ownership plans (ESOPs)
• Performance-based compensation plans

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Structure and Culture

• Organizational structure can greatly influence
  performance
• Includes reporting relationships
• Division of people into groups, teams, task
  forces, and departments
• Some organizations are becoming modular in an
  attempt to increase speed and flexibility
• Many organizations are decentralizing
  responsibility and improving rewards for
  innovations and flexibility
• Organizational Culture
• A system of shared values of an organizations
  members

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Defining an Organizations Culture

• Attitude Towards Customers
• Respect vs. indifference
• Attitude Towards Competitors
• Compliance, cooperation, or competitiveness
• Achievement Orientation
• Industry leader or follower
• Risk Tolerance
• Degree to which individuals are encouraged to
  take risks
• Conflict Tolerance
• Degree to which individuals are encouraged to
  express differences

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Defining an Organizations Culture

• Individual Autonomy
• The amount of independence and responsibility
  given to individuals in decision making
• Employee Relations
• Cooperative vs. adversarial relationships among
  employees
• Management Relations
• Cooperative vs. adversarial relationships between
  managers and employees
• Goal Ownership
• Identification with goals and concerns of
  organization as a whole vs. identification with
  goals and concerns of a work group or department
• Management Support
• Cooperative vs. adversarial relationships between
  managers and employees

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Defining an Organizations Culture

• Perceived Compensation Equity
• Perceived relationship between performance and
  rewards
• Decision-making Style
• Rational and structured vs. creative and
  intuitive
• Work Standards
• Diligent, high performing vs. mediocre
• Moral Integrity
• Degree to which employees are expected to exhibit
  truthfulness
• Ethical Integrity
• Degree to which decisions are expected to be
  balanced with regard to stakeholder interests vs.
  focused exclusively on a key objective like
  profitability

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Types of Cultures

• Craftsmen
• Focus on quality
• Can evolve into tinkerers if obsession for
  perfection results in products that are
  overengineered and overpriced
• Builder
• Focus on growth
• If efforts to grow become careless, culture
  becomes imperialist
• Pioneer
• Focus on being the leader in product / technology
  development
• If firm pursues impractical products or
  technologies, it becomes escapist
• Salesman
• Focus on marketing
• If firm overemphasizes marketing at the expense
  of product capability or quality, if becomes
  drifter

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We Live in a Knowledge Economy

• Knowledge is an intangible asset
• Core vs. Integrative Knowledge
• Core knowledge--scientific or technological
  knowledge associated with creation of a product
  or service
• Integrative knowledge--helps integrate various
  activities, capabilities and products.
• More difficult to acquire and more difficult to
  imitate
• Codified vs. Tacit Knowledge
• Codified knowledge--can be communicated
  completely through written means
• Tacit knowledge--difficult to articulate in a way
  that is meaningful and complete
• More difficult to acquire and more difficult to
  imitate

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Tasks Associated with Internal Knowledge Creation
and Utilization

• Knowledge Creation
• Develop reward systems that encourage innovative
  thinking.
• Create a forum whereby creative ideas are shared.
  
• Invest in research and development programs.
• Knowledge Retention
• Document findings from research and development
  programs.
• Create information systems that record and
  organize innovative ideas.
• Document both the ideas and managerial responses
  or organizational responses to them.
• Document successes and failures.

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Tasks Associated with Internal Knowledge Creation
and Utilization

• Knowledge Sharing
• Create an information system that shares results
  from research and development projects with other
  parts of the organization.
• Routinely pass new ideas on to managers who can
  act on them.
• Create a database management system to organize
  ideas generated from employees and managers so
  that they can be retrieved systematically at a
  later date.
• Knowledge Utilization
• Reduce bureaucratic barriers that prevent
  knowledge from resulting in new program and
  projects.
• Encourage risk taking.
• Reward success.

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Facilitating Knowledge Transfer in Joint Ventures

• Flexible Learning Objectives
• Enter into a venture with learning objectives,
  but be willing to adjust those objectives if
  needed
• Leadership Commitment
• A strong, higher-level manager must champion the
  learning objective. This person acts as a
  catalyst for knowledge transfer.
• A Climate of Trust
• Critical to the free exchange of knowledge

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Facilitating Knowledge Transfer in Joint Ventures

• Tolerance for Redundancy
• Redundancy leads to more interaction among
  participants and interaction leads to more
  sharing of information
• Creative Chaos
• High-stress events can enhance transfer of
  knowledge by focusing partners on solving
  problems and resolving difficulties
• Focus on Learning in Spite of Performance
• Organizations can still learn from ventures that
  dont perform well

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General Organizational Resources

• Patents and Brands
• Organizational Reputation
• Superior Relationships with Stakeholders
• Other Resources Specific to Each Firm

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Major Concepts in Chapter 3

• The value of a resource or capability as a source
  of competitive advantage depends on its market
  value, its uniqueness, whether a substitute
  exists, whether systems exist to take advantage
  of it, whether the organization is aware of a
  realizing the advantages and whether the the
  resource or capability is easy to imitate.
• Financial resources can be a source of
  competitive advantage, although they may not be
  unique or hard to imitate. Financial analysis is
  an important part of internal analysis

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Major Concepts in Chapter 3

• The value-adding activities (core and support)
  can be sources of competitive advantage
• Humans are an organizations most unique asset.
  HR practices are being given increasing attention
• Boards of directors oversee the actions of top
  managers and provide advice and resources
• Agency problems can exist when managers pursue
  their own interests at the expense of the
  shareholders
• Organizational culture (shared values) is another
  potential source of competitive advantage

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Major Concepts in Chapter 3

• Knowledge management is critical to
  organizational success. The focus is on
  creation, retention, sharing and utilization.
  Joint ventures should be managed so as to
  maximize knowledge acquisition
• General organizational resources include brands,
  patents, reputation and relationships with
  external stakeholders