Lessons XVII XVIII: Towards a New Strategy of the Firm: How to Create a Culture for Success. Achieving Unique Corporate Capabilities As a Condition for Being a Leader in the Market (II)

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Lessons XVII XVIII Towards a New Strategy of
the Firm How to Create a Culture for Success.
Achieving Unique Corporate Capabilities As a
Condition for Being a Leader in the Market (II)
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• Firms emerge because the owners and/or managers
  are able to assemble valued goods, services and
  unique capabilities more efficiently than
  households can do.i The source of this
  efficiency is the productivity enhancing effects
  of specialization comparative advantage
  division of labor and associated economies of
  scale, scope and experience.ii
• Firms refer to a corporation or cooperative,
  comprised of a number of people and other assets,
  which may have legal status as a company or
  partnership.iii
• Corporations, usually, act in competitive
  business environments with high degree of
  specialization and coordination. Corporations are
  a collection of specialized resources based on
  specialists coordinating countless specific
  operations. Corporations are so-called vehicles
  used for value maximization based on complex,
  inter-connected operations performed by various
  specialists.
• The activity of corporations aims at maximizing
  profits for various stakeholders groups.
  Efficiency is the primary function of any
  corporation. Firms are profit-seeking
  entities.iv
• i According to Phelan, Stevan E., op. cit.
• ii Ibid., p. 28
• iii Ibid., p. 28
• iv Ibid., p. 28

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• The special status of the corporations,
  including common law, social conventions and its
  own activities, is based on the following rights
• Receive any surplus income generated from its
  assets
• Direct, control or transfer non-human assets
• Alienate (or sell) physical assets
• Lawfully direct the work of employees and
• Appropriate any proceeds from the employment
  relationship. i
• In other words, corporations emerge because
  their owners and/or managers found the way that
  all of the above-mentioned rights were used and
  combined in the most efficient system of
  incorporating certain physical assets and
  specialized skills.
• i Ibid.

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• Let us use, now, a set of assumptions made by
  Phelani in its theoretical model about strategy
  and firms, as follows
• - There are various agents acting in the
  economy. Phelan assumes that each one possesses
  bounded rationality
• - There is an entrepreneur who discovered
  a stock of rare and difficult-to-imitate
  resources (land, labor and capital) that are held
  by other agents in the economy.ii
• - Another assumption is that the
  above-mentioned stock discovered by the
  entrepreneur is unperceived by the other agents
  in the economy.
• Lets assume that the current total marginal
  contribution of the resources (land, labor,
  capital) is 50 M.Uiii, being structured as
  follows
•         Land 10 U.M.
•         Labor 20 U.M.
•         Capital 20 U.M.
• The new total marginal contribution of the same
  resources, i.e. the newly discovered stock of
  rare and difficult-to-imitate resources equals
  100 U.M., being structured as follows
• Land 20 U.M.
• Labor 40 U.M.
• Capital 40 U.M.
• i Ibid., op. cit. ii Ibid., p. 30 iii M.U.
  Monetary Units

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• In conclusion, the new total marginal
  contribution of the resources discovered by the
  entrepreneur doubled comparing with the previous
  total marginal contribution (50 U.M.). The reason
  is that the entrepreneur found new ways of
  leveraging the potential benefits of the
  resources. The same kind of reasoning may be
  applied to land and capital.
• For example, a retailer, considered as being the
  entrepreneur in our example, found new ways of
  improving its current profit margins by
  incorporating new assets. There is another
  subsequent assumption, i.e. the retailer had
  successfully managed to combine, in the past,
  resources in such a way that the total marginal
  contribution of its initial resources (e.g. land,
  capital, labor) led to improved profit margins.
  The retailer had, actually, managed to leverage
  its potential benefits by transforming its
  initial resources (e.g. land, capital, labor)
  into a stock of rare and difficult-to-imitate
  resources. The retailer managed to leverage its
  initial marginal contribution by adding even more
  value to its initial stock. Choosing to
  vertically integrate along the vertical chain,
  implementing automated distribution systems,
  selling branded products from out-of-town
  locations where rents are being lower comparing
  to in-town location are ways of leveraging
  retailers profit margins based on discovering
  the stock of rare and difficult-to-imitate
  resources.

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• Successful corporations managed to add value
  through a combination of different physical
  assets and specialization.
• Matalan, a UK discount retailer, made a
  strategic choice as the initial resources (e.g.
  land, capital and labor) were combined in a way
  that generated improved marginal contribution.
  Had the same initial resources not been combined
  in such a way, Matalan would not have leveraged
  its financial benefits through improved marginal
  contribution.
• The issue is that successful corporations manage
  not only to incorporate new resources (e.g. land,
  capital, labor) but, also, new capabilities.
• A unique corporate capability induces superior
  results by producing higher marginal
  contribution. A newly acquired resource like land
  may produce rents, i.e. returns above its initial
  cost. Newly acquired resources (e.g. land and
  capital) may, also, produce quasi-rentsi or
  returns above their next best useii. The
  difference between the two types of rents, i.e.
  rents and quasi-rents, is that the second one
  refers to a set of unique corporate capabilities
  that leverage organizational efficiency by
  recombining the acquired assets in new ways.
• i Phelan, Stevan E., op. cit., p. 31 ii
  Phelan, Stevan E., op. cit., p. 31

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• The rents induced by acquired assets lead to
  the initial marginal contribution. The
  entrepreneur gets a total current marginal
  contribution of 50 U.M., in our example.
• The quasi-rents produced by recombining the
  same kind of assets in new ways are similar to
  saying that the entrepreneur obtains returns
  above their next best use. The current marginal
  contribution is, actually, exceeded by the new
  marginal contribution. It means that the
  entrepreneur found a way of leveraging its
  financial position by recombining the newly
  acquired assets into unique corporate
  capabilities.
• Graphically, the so-called blue triangle (see
  the graphic below) is the representation of the
  current combination related to the newly acquired
  assets producing rents, i.e. returns above
  their initial costs.
• The green triangle is the graphical
  representation of the new combination related to
  the newly acquired unique corporate
  capabilities inducing quasi-rents, i.e. returns
  above their next best use.

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• The distance between the two triangles gives the
  real measure of competitive advantages. In our
  example, the difference between the current
  marginal contribution and the new one (50 U.M.
  100 U.M.) gives the value of the distance between
  two different states of the same business. The
  current state of the business generates rents.
  The new state of the business related to the new
  marginal contribution induces quasi-rents.
• Firstly, the entrepreneur discovered assets
  perceived, also, by other agents in the economy.
  Business generates rents. The entrepreneur
  should focus on discovering those unique
  corporate capabilities as a condition for
  achieving competitive advantages in the economy.
• Secondly, the entrepreneur discovered those
  unique corporate capabilities. Business generates
  quasi-rents. The entrepreneur may achieve
  competitive advantages in the economy.

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• In conclusion, corporations should not be
  regarded only as ways of reducing transaction
  costs. A firm is not only a nexus of contracts
  made only for minimizing transaction costs, i.e.
  those costs that different stakeholders would
  have had to pay them if they had not chosen to
  set up a company. A corporation is a way of
  transforming physical assets and specialized
  skills into a set of unique capabilities used,
  then, for achieving competitive advantages in the
  economy.
• Corporations, usually, act towards achieving
  those conditions generating quasi-rents. Firms
  are more than profit seekers. They are
  quasi-rent seekers. They tend to act in a more
  or less structured way for generating
  quasi-rents. In our example, finding that stock
  of rare and difficult-to-imitate resources is a
  prerequisite for obtaining quasi-rents, i.e.
  returns above their next best use.
• A strategic plan is a way of structuring
  organizational resources and unique capabilities.
  The business environment in which corporations
  activate is changeable. So do internal,
  organizational environment. The key issue for any
  corporation is dealing with both external and
  internal environments in a way that will secure
  the obtaining of quasi-rents.

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• Those firms trying to get only rents, i.e.
  returns above their initial costs, will loose
  momentum. The competition in the economy is not
  based on getting the best rents, i.e. returns
  above their initial costs. A competitive company
  will get returns above their next best use.
• It is clear for us, based on our own theory,
  that the key-factor which warranties the
  superiority of a firm within a high-structured
  business environment is not the profit itself but
  the quasi-rent. This is the real factor that
  allows us to make a clear distinction between a
  competitive and healthy firm, on the one hand,
  and just a profit-making firm, on the other hand,
  that in the long run will prove not to be able to
  prevent the risk of the new type of competition
  emerging within a knowledge-based economy. We
  propose, therefore, to pass from an actual or
  manifest approach of the firm to a virtual or
  latent approach, that focuses on those factors or
  resources difficult to imitate as being the ones
  which warranty the quasi-rent, the truly real
  factor of growth in the long run.
• Therefore, a competitive business environment is
  based on competing stocks of rare and
  difficult-to-imitate resources. The extent to
  which an economy is based on competing rare and
  difficult-to-imitate resources gives the real
  measure of national competitiveness.