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) - PowerPoint PPT Presentation

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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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Title: 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)


1
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)
2
  • 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

3
  • 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.

4
  • 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

5
  • 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.

6
  • 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

7
  • 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.

8
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9
  • 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.

10
  • 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.

11
  • 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.
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