Management and Organizational Studies 4410A/B Chapter 3 Textbook Notes.docx

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Western University
Management and Organizational Studies
Management and Organizational Studies 4410A/B
Raymond Leduc

Chapter 3: Analyzing the Internal Environment of the Firm Case Study: - Focus: discrepancies in the automotive sector - MartinRea, relatively new firm and has grown in the last 10 years - Analysis of activities performed by each firm and an appreciation of how effectively and efficiently different firms perform those activities shed a light on discrepancies Magna employed “hydroforming”  uses liquid under pressure to shape metal tubing and form automobile frames without the need of stamping and welding SWOT  OT are common across different firms within an industry, SW are unique and create a starting point for competitive advantage Value-Chain Analysis - Views organization as sequential process of value-creating activities - Splits up firm into activities to help understand all the inputs in place and costs incurred in creating the firms product or service - Value is the amount that buyers are willing to pay for g&s Porter’s two categories of activities 1. Five Primary Activities  contribute to the physical creation of product/service, its sale & transfer to the buyer and service after sale i. Inbound logistics o Receiving, storing and distributing inputs to the product  include: handling, warehousing, inventory control (JIT used by Toyota) , vehicle scheduling and returns to suppliers ii. Operations o All activities associated with transforming inputs into final product  Machining, packaging, assembly, testing, printing, and facility operations o I.e. environmentally friendly manufacturing = competitive advantage  Shaw Industries  polyester carpet made from 100% petroleum-based materials, keeping one billion plastic bottles out of landfills/year  EcoSolution Q  industry’s first nylon covering containing recycled content iii. Outbound logistics o Collecting, storing and distributing the product or service to buyers  Finished goods, warehousing, material handling, delivery vehicle operation, order processing and scheduling o Campbell’s Soup  use electronic network to facilitate its continuous replenishment program iv. Marketing and sales o Firm’s efforts to gather market intelligence and understand its customers, activities associated with purchases or products/services and influence used to get them to make the purchases  Market research, consumer analysis, advertising, promotion, sales force, quoting, channel selection, channel relationships, and pricing o It’s not enough to have a great product, you have to convince it’s in the partners best interest to carry the product  i.e. Saflex’s marketing department changed brand name to KeepSafe = success STRATEGY SPOTLIGHT 3.1 – Redirecting Marketing Efforts at Staples - Staples hit a decline  CEO Sargent took out 600 casual customer items and added 700 small- business customer items = Improved quality of merchandise  they stops ads in Sunday newspaper cause businesses don’t read ‘em and put more money into direct marketing  Upgraded website and doubled direct sales force  allocated previous advertising budget to training associated and adding more staff v. Service o Range of activities associated with enhancing or maintaining the value of the product  Installation, maintenance, support, repair, training, parts supply and product adjustment o Internet-based retailers provide great example how customer service is critical for adding value o Sephora rep has instant access to customer’s products  Favourite lipstick shade o Swiss Chalet, guides customers to build profiles of food preferences to make online ordering easier o Pizza Pizza lets your repeat recent orders with one click 2. Support Activities  add value by themselves or through important relationships with primary and support activities i. Procurement o Refers to the function of purchasing input (rather than inputs themselves) to be used in the firm’s value chain  Raw materials, supplies and other consumable items, as well as assets such as machinery, laboratory equipment, office equipment and buildings ii. Technology development o Technology development related to the product and its features supports the entire value chain whereas others may be associated particularly with either primary or support activities o Technology offers massive benefits in tracking and locating goods (RFID), improving both speed and accuracy in the handling of billions of dollars of inventory that pass though the channel iii. Human resource management  supports primary and support activities and entire value chain o Recruiting, hiring, training, developing and compensation o Starbucks baristas are unquestionably the soul of the corporations success o Lululemon’s “ambassadors” o Employees usually leave a firm because they have reaches a plateau and want new opportunities and challenges -> AT&T allowing employees to partake in short-term assignments in different departments STRATEGY SPOTLIGHT 3.3 – SAS and Employee Turnover - Industry turnover, 20%  SAS turnover, 4% - They treat their employees well  gym, cafeteria (with a pianist), on-site medical and child care, flexible work schedules, employer retirement contributions of 15% of employee pay, etc. - David Russo (director of HR @ SAS) “This is not tree-huggery. This is money in the bank” STRATEGY SPOTLIGHT 3.4 – Removing Individual Metric in Performance Evaluation - William Taylor, ITT China’s president saw high turnover in Shanghai sales office o Employee’s leaving if they get a 3 in performance rating, o Southern Europe individual performance does not sit well… so they got rid of it iv. General Administration  supports entire value chain not individual activities o General management, planning, financing, accounting, legal and government affairs, quality management, and information systems  BCE CFO Michael Sabia declined his bonus 3 years in a row even though they met targets. His refusal was a response to billing glitches STRATEGY SPOTLIGHT 3.2 – How a Firm’s General Administration Can Create Value - Southwest’s CFO, Gary Kelly is a key contributor to airline’s solid financial performance - They saved money before the recession (1 billion)  didn’t lay anyone off - Kelly criticized for conservative approach - Success due to “consistency and the fact that they don’t listen to other people” o Legal  protection of firms intellectual property through patents, trademarks and copyright Resource-Based View of the Firm - How resources are used by organizations is a critical decision - Resource-Based View (RBV) combines 2 perspectives 1. Internal analysis of phenomena within a company 2. An external analysis of the industry and its competitive environment o RBV is a useful framework for gaining insights into why some competitors are more profitable than others o Also allows to build on the insights from SWOT (SWOT is useful for identifying internal strengths and capabilities but doesn’t reveal how to turn them into a competitive advantage) Types of Firm Resources - They are fundamental to firm’s operations and each firm possess a unique bundle of resources - Accumulation resources is constrained and time consuming - 3 types of resources 1. Tangible Resources  easy to identify, measure and value o Physical assets (real estate, cash, facilities & equipment), borrowing capacity, natural resources, components, parts, physical proximity to customer/suppliers o Can only seldom provide a basis for competitive advantage (too easy to imitate, describe and identify) 2. Intangible Resources  hard to identify and quantify o Not concrete; can be elusive  brand names, company rep, knowledge, technology, patents, trade secrets, expertise and experience 3. Organizational capabilities  not specific tangible or intangible assets but the competencies and skills  Lean manufacturing, excellent product development capabilities, superb innovation processes, and flexibility in manufacturing processes o the firm does with the resources in its control o Concerned with organizational capacity to make decisions, coordinate the use of tangible and intangible resources and leverage these to bring about a desired result o They are the processes and routines that rise from numerous exchanges of info and knowledge and that guide the interactions of the firm’s employees o Gillette  they know the physiology of facial hair and skin, metallurgy of blade strength & sharpness, dynamics of cartridge moving across skin & physics of razor blade = MACH 3 & Fusion Firm Resources and Sustainable Competitive Advantages - For a resource or capability to provide a firm with the potential for a sustainable competitive advantage it must meet 4 criteria: 1. Valuable o Valuable when they contribute to the fulfillment of customers’ needs at a price they are willing to pay o Valuable because they enable a firm to formulate and implement strategies to exploit opportunities, minimize threats and improve efficiency and effectiveness 2. Rare  possessed by few competing firms 3. Inimitable  it constrains competition o Physical uniqueness  Beautiful resort location, mineral rights, pharmaceutical patents cannot be imitated  Many managers believe they have many resources like this but few do  Advantages diminish with time as alternative locations are developed, patents expire and monopolists become regulated o Path dependency (unique historical conditions)  Cannot be bought quickly and easily; resources built up over time in ways that are difficult to accelerate  Gerber Products Co.  brand name, brand loyalty o Causal ambiguity (difficult to reveal how it could be created)  In many cases they are organizational capabilities  Involve complex web of social interactions that may depend on particular individuals o Social complexity (culture, trust, rep)  Interpersonal relationships among the managers of a firm, its culture, reputation with suppliers and customers 4. Difficult to substitute o Substitutes may be similar but not the same  using different resources to produce a similar product Competitive Advantages and Competitive Parity - When a firm possesses resources and capabilities that are at least valuable, the firm can at least achieve competitive parity with competitors but if they are not difficult to imitate, parity will only allow temporary competitive advantage  ALL FOUR CRITERIAS MUST BE SATISFIED The Generation and Distribution of a Firm’s Profits: Extending the Resource-Based View of the Firm - RBV useful in determining when firms will create competitive advantages and enjoy high levels of profitability - BUT it does not address how a firm’s profits will be distributed to a firm’s management and employees - Viewpoint DataLabs much of profits were generated by highly skilled professionals working together on a variety of products and they kept demanding raises every 6 months or else they were not happy - The following explain the extent to which managers and employees will obtain high levels of profits… 1. Employee Bargaining Power o If they are vital to forming a firm’s unique capability o EX. Marketing professionals who have access to valuable info that helps them understand customer demands o Consulting, advertising, accounting  client loyalty enables them to “take clients with them” when they leave which enhances their bargaining power 2. Employee Replacement Cost o If employee skills are idiosyncratic and rare they should have high bargaining power because replacing them would be high 3. Employee Exit Cost  REDUCES bargaining power o Individual may face high personal costs when leaving a firm, so threat of leaving may not be credible o Expertise may be firm specific so outside of that firm they are worthless 4. Manager Bargaining Power o Based on how well they create resource based advantages  Though organizing, coordinating, leveraging employees as well as other forms of capital such as plant, equipment and financial capital Evaluating Firm Performance - Two approaches used in evaluating a firm’s performance 1. Financial Ratio Analysis o Must take into account firm’s performance from historical perspective and compare to industry o Five financial ratios i. Short-term solvency or liquidity ii. Long-term solvency or liquidity iii. Asset Management (or turnover) iv. Profitability v. Market Value o Meaningful ratios must include analysis of how ratios change over time and how they are
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