Summary 'Managing Business Strategically', modules 1-6. Including the summaries of all articles, extra readings, lecture slides and lecture notes. Year 2020/2021.
MBS, MODULES 1-6
Articles, Lecture Slides and Lecture Notes
1
,Module 1 – Business Models: Value
Creation
1. Review
1. Porter’s Five Forces
Does industry matter, and how attractive are industries?
- The structure of the industry environment of the firm will ultimately determine its
profitability, provides a snapshot of the attractiveness of an industry.
- Strong roots in industrial organization.
- External forces (competitive structure) are most determining of strategic advantage and
profitability.
- The more competitive an industry is, the lower the profitability per firm.
- The closer to a monopoly, the higher the profitability.
Five forces of Rivalry:
A. Suppliers of the firm (bargaining power).
B. Substitutes to the product.
a. A product produced by a firm that aims at serving the same customer needs as those
aimed for by the focal firm, but with different core technology (computers, tablets,
smartphones).
C. Buyers of the firm (bargaining power).
D. Potential new entrants.
a. New entrant is a firm producing a product that aims at serving the same customer
needs as those aimed for by the focal firm, with a similar core technology.
b. If entry barriers are high (minimum efficient scale, government concessions,
protective patents), the threat of entrants is low and vice versa.
Incumbent firm that already operates in the same industry as the focal firm and frequently
possesses similar technologies and core competencies.
Buyer: firm or set of private consumers interested in acquiring the firm’s core products or services.
Bargaining power diminishes when there are many of them and when the products of the firm are
unique and critical to the buyers’ welfare. Buyers can respond to low bargaining power by:
- Organizing themselves (buyer cooperatives);
- Vertical integration.
Supplier: firm that provides the focal firm with the inputs it needs to sustain its core production or
service delivery process. Bargaining power diminishes when there are many of them and when the
products of the supplier are commodities and unimportant to the firm’s welfare. Suppliers can
respond to their low bargaining power by:
- Organizing themselves;
- Vertical integration (seeking control over supply chain).
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, 2. The Resource-Based View (RBV)
Firm resources: Firm resources include all assets, capabilities, organizational processes, firm
attributes, information, knowledge, etc. controlled by a firm that enable the firm to conceive of and
implement strategies that improve its efficiency and effectiveness.
Competitive advantage: when implementing a value creating strategy not simultaneously being
implemented by any current or potential competitor.
Sustainable competitive advantage: when implementing a value creating strategy not
simultaneously being implemented by any current or potential competitors and when these other
firms are unable to duplicate the benefits of this strategy.
RBV: tries to explain why some firms perform better than others in the same industry. Two
conditions for a sustained competitive advantage:
1. Resource heterogeneity: firms may possess unique strategic resources (industry-based view
says they should have access to the same resources).
2. Resource mobility: mobility barriers imply that resources cannot easily be transferred from
one firm to another but can only become a source of competitive advantage if firms are
heterogeneous in terms of the strategic resources they control.
For a resource to become a source of CA, four attributes are required:
- Valuable (enabling a firm to improve efficiency and effectiveness);
- Rare (only possessed by no other or a limited number of firms);
- Imperfectly imitable (rivals cannot obtain them);
- Substitutability (not strategically equivalent).
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, 2. Articles
Article 1: Introduction to Special Topic Forum: Value Creation and Value
Capture: A Multilevel Perspective
(1) What is value, with a focus on the difference between use and exchange value?
Value creation: microlevel (individual, group) and macrolevel (organization theory, strategic
management).
Significant variance in the parties/targets/users (stakeholders, customers, business owners,
individual employees, employee groups or teams, organizations) for which new value is created and
in the potential sources or creators of value.
- Problem 1: plurality in both the targets and sources of value creation introduces a host of
challenges to scholars, including the development of a common definition for the term.
- Problem 2: value creation refers to both content as the process of new value creation. What
is valuable? Who values what?
- Problem 3: value creation is often confused with value capture/retention, while they should
be viewed as distinct processes. Value created by organizations may spill over into society as
a whole.
Use value: the specific quality of a new job, task, product or service as perceived by users in
relation to their needs (such as the speed or quality of performance on a new task or the aesthetics
or performance features of a new product or service).
Exchange value: either the monetary amount realized at a certain point in time, when the exchange
of the new task, good, service or product takes place, or the amount paid by the user to the seller
for the use value of the focal task, job, product or service.
Together, value creation depends on the relative amount of value that is subjectively realized by a
target user/buyer, who is the focus of value creation, and that this subjective value realization must
at least translate into the user’s willingness to exchange a monetary amount for the value received.
Two economic conditions that may be necessary for value creation activities to endure:
I. Monetary amount exchanged must exceed the producer’s costs.
II. Monetary amount that a user will exchange is a function of the perceived performance
difference between the new value that is created and the target user’s closest alternative.
Use value and exchange value are determined by novelty and appropriateness. Users need
specialized knowledge about- as well as an understanding of the meaning of the new product to
evaluate novelty and appropriateness.
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, (1) How can (a) individuals, (b) organizations, and (c) society create value?
Two ways to conceptualize the process of value creation:
1. Single universal conceptualization.
2. Contingency perspective that explicates how value is created from the vantage point or
perspective of a particular source.
A. The individual as a source of value creation
Individuals create value by developing novel and appropriate tasks, services, jobs, products,
processes, or other contributions perceived to be of value by a target user. Locke and Fitzpatrick:
individuals must possess abilities such as knowledge, intelligence and flexibility to create. Amabile:
they must have intrinsic motivation. More value is created by acting creatively to make their
job/service more novel and appropriate.
B. The organization as a source of value creation
Porter: new value is created if firms develop new ways of doing things using new
methods/technologies. Innovation and invention activities impact the value creation process.
Uncertain environments are triggers for innovation, next to entrepreneurial managers and large
social networks.
Four perspectives:
- First perspective: focus on how the target user benefits from the new product. Value
creation involves innovation that establishes or increase the consumer’s valuation on the
benefits of consumption.
- Second perspective: dynamic capabilities help firms to create new advantages as existing
ones are worn away by environmental changes. They are activities that generate and modify
operating routines to create new advantages. Focuses on internal factors to the firm,
emphasis of knowledge creation, learning, entrepreneurship.
- Third perspective: the process through which new organizational knowledge is generated
and hence, value created. Social connections of individuals within the firm will provide
greater information and knowledge that can be used by organizational members to combine
and exchange this information in a way that produces new organizational knowledge.
- Fourth perspective: strategic HRM: the role of management in the process of value creation.
Systems that develop employee skills, enhance the motivation to work toward
organizational objectives increase performance. Ability to explore and exploit employee
knowledge can become the basis of important innovations.
Various stakeholders have different (competing) views about value:
- Investors: short term profits.
- Environmentalists: preserve environment etc.
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, C. Society as a source of value creation
At a societal level, the process of value creation can be conceived in terms of programs and
incentives for entrepreneurship and innovation intended to encourage existing organizations and
new entrepreneurial ventures to innovate and expand their value to society and its members.
To avoid erosion, firms must innovate: introduce new products, methods and initiatives, the key
source of market expansion and economic growth.
Porter: governments create value with laws and regulations, structure and stability, e.g.
‘entrepreneurial friendly’ bankruptcy laws will promote greater entrepreneurial development,
creating value for society as a whole.
New and successful entrepreneurial ventures can create jobs, tax revenues and more/better
products and services for consumers and a higher living standard.
Value creation at the societal level: firm-level innovation and entrepreneurships as well as policies
and incentives for entrepreneurship.
Questions arise:
- What value should be returned to the firm?
- What is a fair distribution?
- Is the firm’s level of value capture appropriate?
(2) What determines the ability of (a) individuals, (b) organizations, and (c) society to capture
value?
Value slippage: when the party creating the value doesn’t retain all the new value that is created,
occurs when use value is high and exchange value is low.
Two key concepts of the nature of the value-capturing process:
1. Competition: supply will decline until it equals demand: high use value but low exchange
value. Competition explains how value slips away from the creator to other competitors and
users. Not limited to organizational level, but in all levels of analysis. Among firms, it keeps
prices low. At individual level, it increases the search for creative solutions to produce
additional value.
Creative destruction: the process whereby higher levels of competition drive firms to
become more innovative by introducing new products that create value, only to lose the
value to competitors who replicate or imitate the product.
2. Isolating mechanisms: any knowledge, physical, or legal barrier that may prevent replication
of the value-creating new task, product or service by a competitor. Causes high bargaining
power.
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,A) Value capture at the individual level is captured by:
- Unique position in a social network;
- Nature of relationship with others in the organization;
- Specialized expertise/knowledge;
- Personal attributes, bargaining power.
B) Value capture at the organizational level is captured by:
- How primary and support activities are configured to maximize and sustain competitive
advantage.
- Rare, inimitable, non-substitutable and valuable resources as isolating mechanisms.
- Resource management:
a) The way the resource portfolio is structured;
b) Bundling of resources to build capabilities;
c) Leveraging capabilities to exploit market opportunities.
C) Value capture at the societal level of analysis is captured by:
- Unique factor/resource advantages;
- Strong demand conditions;
- Industry structure;
- Competitive and innovative markets;
- Healthy, growing markets;
- Thriving business infrastructure.
Implications: are certain targets more/less important than others for value capture? Can value
creation activities survive in the long term if only one target is satisfied? Or minimum use value?
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, 3. Lecture Notes
Session Objectives:
1) Describe the essence of strategic management.
2) Integrate different theoretical perspectives to evaluate the existing business model of a real-
world company with respect to its ability to create and capture value.
1. What is a Strategy?
Strategy refers to the central integrated,
externally oriented concept of how we will
achieve our objectives.
Five elements:
1. Arena’s (where will we be active?)
Be specific about where the business intends the take on:
- Product categories;
- Market segments (air travel local business);
- Geographic areas (where do and where don’t we operate);
- Core technologies;
- Value-adding strategies (product design, manufacturing, selling etc.).
2. Vehicles (how will we get there?)
The means for attaining the needed presence in a particular product category, market segment,
geographic area or value creation stage should be the result of deliberate strategic choice.
A. Product range: how is the business going to accomplish that? Relying on:
- Organic, internal product development;
- Other vehicles: joint ventures or acquisitions for a broadened scope?
B. International expansion: what should be our primary modes, or vehicles?
- Greenfield startups;
- Local acquisitions;
- Licensing;
- Joint ventures.
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