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Systems Model of the Firm
FirmOutputsInputs
Suppliers Customers
Costs Profits
Returns
MaterialsEmployeesEquipmentFacilitiesMoney
ProductsServicesSupport
ResourcesCapabilitiesCompetencies
Sources of Competitive AdvantageResources: the assets available to a firm to
perform activities to produce value for the marketTangible Intangible
Capabilities: the procedures and processes the firm has developed to use its resources effectively; the ability to put resources to productive use
Core Competencies: the activities that are unique to a firm that allow it to differentiate its products or services from competitors
Ratio of Market Value to Book Value for Selected Companies
Copyright © 2007 The McGraw-Hill Companies, Inc. All rights reserved.
Annual Market Book Ratio of Sales Value Value Market to
Company ($ billions) ($ billions) ($ billions) Book Value
Google 3.2 60.4 2.9 20.8
Genentech 3.9 75.0 6.8 11.0
Yahoo! 3.6 47.9 7.1 6.7
eBay 3.2 42.8 6.7 6.4
Southwest Airlines 6.5 11.7 5.5 2.1
Union Pacific (Railroad) 12.2 16.7 12.7 1.3
Ford Motor Company 171.6 16.7 16.0 1.0
Intellectual Capital Intellectual Capital = Market Value – Book Value
• Human Capital: the individual capabilities, skills, and experience of the firm’s employees
• Social Capital: the network of relations the individuals have throughout the organization
• Knowledge: the accumulated and integrated experiences of individuals in the organization– Tacit– Explicit
Human Capital• Attracting
– “Hire for attitude, train for skills”– IQ v. EQ
• Developing– Train– Evaluate
• Retaining– Tangible Rewards– Intangible Rewards
Social Capital• Combines and leverages human capital• Creates ‘social complexity’ and ‘causal ambiguity’• Social Networks
– Closure– Bridging
• Organizational Culture• Can have negative consequences
– Closed club– Group think– Organizational inertia
Knowledge
• Tacit knowledge– Embedded in personal experience– Resides within the individual– Shared only with consent
• Explicit Knowledge– Documented and codified– Can be widely distributed and shared
Source of Strategic Success
The willingness and ability of the people in the firm to support the strategy.
What is the most important factor in achieving strategic success?
Management’s Profound ChallengeWe have to meet organizational objectives
through individual efforts• Individuals have their own needs and motives
• Individuals are resistant to being managed
• The tension between the individual and the organization can be resolved through shared values– Management’s responsibility is to create a context of
shared values that individuals can commit to– Values convey the message of a common purpose
which satisfies individual needs and organizational objectives
Leadership
Leader’s success is measured by how effectively they create strategic change
Leadership is a process whereby an individual influences a group of individuals to achieve a common goal.
Leadership is the art of getting someone else to do something you want done because he wants to do it.
Managers and Leaders
ManagementCustodial Managers
LeadershipChange Agents
Action Agenda
Rational ProcessPlanning, ControllingTop Down
Emergent ProcessMotivating, EmpoweringBottom Up
Outcomes Stability, Efficiency, Incremental Change
Transformation, Growth, Radical Change
Concern Doing things right Doing the right things
Relationships Authoritative Facilitating
Perspective Short-term Goals Long-term Objectives
Bartlett and Ghoshal
• Building: (attracting and developing)– locating and attracting the best of the best at every level– constantly developing those talented individuals
• Bonding: (retaining)– developing the engaging, motivating, and bonding culture
that will attract and energize people so they commit to the organization
– renegotiating implicit and explicit contracts with key stakeholders to reward their value creation
• Linking: (social capital)– developing social networks that actively link, leverage,
and embed individual knowledge and abilities
Strategy must be built on a human resource foundation
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