module 1 understanding business

8/8/2019 Module 1 Understanding Business

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UnderstandngBusness

MODULE 1


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Introduction 4Purpose 4

Learnng objectves 4

1.Theroleofmodernbusiness. 61.1 Learnng objectves 61.2 introducton 6

1.3 Te role of busness n socety 6

1.4 Stakeolders 11

1.5 Key ponts 13

2.Thechangingbusinessenvironment 162.1 Learnng objectves 16

2.2 introducton 16

2.3 Te tree envronments model 162.4 Te mcro-envronment 17

2.5 Envronmental cange and nstablty: te mcro-envronment 21

2.6 Te macro-envronment 22

2.7 Te nternal envronment 24

2.8 Envronmental cange and nstablty: te macro-envronment 24

2.9 Key ponts 25

3.Managingresourcesandcapabilitiesinthemodernbusinessworld 28

3.1 Learnng objectves 283.2 introducton 28

3.3 Te need for nnovaton 28

3.4 Wat s nnovaton? 30

3.5 Managng resources and capabltes for compettve advantage 33

3.6 Key ponts 38

4.Howbusinessesimplementmodern-daystrategies 404.1 Learnng objectves 40

4.2 introducton 40

4.3 Delberate and emergent strateges. 404.4 Organsatonal structure 41

4.5 Common types of organsatonal structure 44

4.6 Wat s culture? 50

4.7 Key ponts 53

ReferencesandAcknowledgements 56Acknowledgements 57


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introducton


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iNTRODUCTiON

Introduction

PurposeThe purpose of the Understanding Business module is to help students

understand how modern companies operate in todays business environment.

The workbook is broken down into four sessions that analyse:

the roles that modern businesses play in society,

the external environment within which they compete,

how they manage their resources and capabilities to sustain

competitiveness, and the importance of innovation,

how environmental change and contingency theory has inuenced strategy

formulation and the structures and cultures of contemporary businesses.

The module draws on a broad range of theories from leading business writers

and academics, and includes four online tutorial activities (one per session)

that are designed to reinforce the student learning. Each session will alsocontain a series of short questions to help students reect upon the key

learning points.

Learnng objectves

The aims of this module are to:

understand the role of business in modern society,

understand the external environment in which businesses compete and how

this has changed,

identify and evaluate the resources and capabilities of an organisation, andthe role of innovation in enhancing performance,

explain the meaning of contingency theory and how this has inuenced

strategy, structure and culture in modern businesses.

After completing this module, students should be able to:

understand and identify environmental issues and the level of control a

business can exert over these inuences,

appreciate the importance of resources, capabilities and innovation in

enhancing performance,

understand the importance of structure, processes and culture in enhancingor hindering organisational performance and implementing

strategic objectives.


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Te role ofmodern busness


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ThE ROLE OF MODERN BUSiNESS

1.Theroleofmodernbusiness.

1.1 Learnng objectves

This session is intended to help you to:

develop an understanding of the changing attitudes to the role of business

in society,

understand the importance of corporate governance and why it has evolved,

evaluate the corporate social responsibility of organisations and the different

approaches that are used,

undertake a stakeholder analysis and identify the most powerful and

inuential stakeholders, and the potential for conicts of interest.

1.2 introducton

Session 1 of the module is designed to help you understand the different

schools of thought and perspectives that exist when dening the role of a

business in society. Changes have occurred in the way that stakeholders

view commercial organisations, leading to the development of powerful

pressure groups. Organisations have responded by adopting corporate social

responsibility policies that incorporate a broad range of marketing and public

relations tools. Moreover, corporate governance scandals on both sides of the

Atlantic have created increased stakeholder activism. The session will conclude

with an analysis of stakeholder power and inuence, and how organisations

must manage these forces in order to protect their brand reputations and retain

customer loyalty.

1.3 Te role of busness n socety

When dening the role of a business in society, there is an unending choice

of sources to choose from. However, in order to simplify the process the

denition that will be adopted for this module is taken from the Task Force on

Corporate Social Performance (1980). This denes a business as follows:

A business corporation exists primarily to produce goods and services

that society wants and needs. In order for the business to be sustainable

this objective must be achieved whilst making a prot. This is naturallyone of the key differentiators between a private sector organisation

and a public sector or not-for-prot organisation. (Cannon 1994)

According to Milton Friedman (1970), achieving protability (or prot

maximisation) was the rst and foremost responsibility of a private sector

corporation; if they were successful in this mission, they could not be

reasonably expected to assume others. This viewpoint became known as

Friedmans [or stockholder] capitalism, where businesses have only one

objective: to increase their prots. Provided a business conformed to the

law and ethical customs (normally accepted moral standards), the primary

responsibility of a business was to serve the goal of prot maximisation. The

professional manager performed the role of an agent who acted on behalf of


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the principle or the shareholder(s) and their responsibility was to maximise returns

to the owners of the organisation. According to Friedman, someone must pay for

social responsibility, either shareholders in the form of lower dividends, customers in

higher prices or workers in lower wages. Moreover, Friedman concluded that business

people were not competent to decide on social needs and priorities. This was the

responsibility of the state and specialist providers, i.e. charitable organisations.

This view persisted throughout the 1970s and the 1980s, when multinational

corporations were becoming powerful forces that had tremendous inuence over

the environment. As early as 1967, J.K. Galbraith (in his book The New Industrial

State) wrote about how the multinational corporations had become richer and more

powerful than many countries. More recently, a paper by Anderson and Cavanagh

(1996) claimed that the worlds largest 200 companies generated 28 per cent of

the worlds gross domestic product and in many instances the individual rms were

larger than many national economies. The 1960s and 1970s were also decades

when big was considered to be beautiful and large corporations dominated the

commercial landscape. Small business was not considered to be important or relevantany more, since control of resources and economies of scale were key competitive

considerations (Curran et al., 1987).

An alternative view of the role of the business in society is based upon the

stakeholder theory of the modern corporation, or what is known as Kantian

capitalism. According to Immanuel Kant, each person has a right not to be treated as

a means to an end. Therefore stakeholder theory acknowledges that the shareholders

or owners of a corporation are a key stakeholder (those individuals or organisations

who have a stake in a business or are affected by it). However, the theory also states

that other stakeholders also have a claim on the rm in the form of basic rights and

these should not be subordinated to the rights of the owners. The stakeholders should

therefore not be used as a means to an end but should be an end unto themselves.

The stakeholder theory does not give primacy to one stakeholder group over another.

These stakeholder groups will have conicting interests and it will be managements

responsibility to keep the relationship among stakeholders in balance. Management

must act in the interests of the stakeholders as their agent and it must act in the

interests of the corporation to ensure the survival of the rm. This will then safeguard

the long-term stakes of each group.

Although a business enterprise must perform economic functions in order to survive,

at the same time the businesss long-term prosperity and survival depends uponsociety providing the necessary resources such as people, raw materials, services

and infrastructure. Business can therefore be viewed from a systems perspective (see

Figure 1.1 below) in that they convert inputs from the environment into protable goods

and services that are returned to the environment where they are sold. Businesses

therefore interact with their environment and are social institutions or open systems

as opposed to closed systems. Businesses are therefore expected to create wealth,

supply markets and generate employment, whereas society is expected to provide an

environment in which business can develop and prosper. It might therefore be said

that there is interdependence between business and society.


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ENVIRONMENTAL BOUNDARY

Figure 1.1: Systems model

So if an organisation adopts Friedmans capitalist approach of prot maximisation

without due regard for other stakeholders, this will have implications for the

organisations future sustainability. For example, if the business chooses to pay its

employees low wages and refuses to invest in their training and development, this

will ultimately result in low morale and motivation, and hence productivity. It will also

make it difcult for the organisation to recruit good employees in the future. Moreover,

if the business adopts an adversarial approach to its suppliers and uses its size

and economic power to negotiate very low cost inputs, this will impact upon the

sustainability of the supplier in the long-term possibly forcing them out of business.This will restrict the availability of quality inputs into the manufacturing or service

delivery process.

If the organisation pollutes the atmosphere and contributes signicantly to global

warming then this will jeopardise the availability of key resources that are necessary

to produce goods and services; for example, the non-availability of cheap and plentiful

water for industrial and service processes and the absence of appropriate energy

supplies and key raw materials such as paper and cardboard. Finally, if a business is

able to use its multinational status to avoid paying corporation tax this may ultimately

result in insufcient government funds being available for critical infrastructure

such as schools, police forces, road and rail networks, sea and airports, and thecommunications systems.

There has subsequently been a change in the attitude of a broad range of

stakeholders towards successful multinational corporations since the 1990s. As we

have moved from the capitalist era to the information age with increasing exposure

to the global media and the internet, stakeholders of organisations have become

increasingly knowledgeable of their commercial practices, resulting in the growth of

extremely powerful pressure groups such as Greenpeace and inuential campaigns

such as the animal rights initiative SHAC (Stop Huntingdon Animal Cruelty), to name

just two examples.


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It has therefore become increasingly difcult for a modern business to pursue a

strategy based purely on prot maximisation without paying attention to their broader

stakeholder base. Failing to do this has often resulted in militant action against them

and a fall in the share price of the company. Modern businesses now have to expend

signicant levels of resources protecting their corporate image and ensuring that

they are behaving as responsible corporate citizens. New forms of terminology havetherefore entered the business vocabulary such as corporate governance, corporate

social responsibility, green marketing and societal marketing, cause-related marketing,

Fair Trade, organic foods, carbon footprints, recycling, renewable energy, and ethical

consumers. We will now look at some of these key areas in more depth.

Corporate governance

In the late 1980s and early 1990s a series of scandals involving UK companies

(Maxwell, Guinness, Polly Peck and BCCI) led to the introduction of voluntary codes of

conduct for British Plcs following the publication of the Cadbury Report on corporate

governance. Its recommendations included splitting the roles of Chairman and ChiefExecutive, as well as appointing non-executive directors and an audit committee.

This was designed to prevent too much power being vested in one individual and

to introduce an objectivity and external perspective on boardroom and auditing

procedures.

The Cadbury Report was followed by a number of other reports by leading British

business leaders, including Hampel (ICI), Greenbury (Marks & Spencer) and Higgs

(investment banking). This voluntary approach to boardroom control has been largely

successful and is in contrast to the approach adopted by the USA following the Enron

and WorldCom accounting scandals in 2001. The US response was to introduce

legislation to control senior executive greed with the passing of the Sarbanes Oxley

Act. This requires corporations with a listing on the US stock markets to undergo

expensive and bureaucratic auditing procedures. This has had a negative impact on

investment in the US, with many new public companies choosing to list in London due

to the lower otation costs.

Green marketing and societal marketing

Green marketing acknowledges that marketing activity has an impact on the

environment and society as a whole. Marketing is therefore criticised for promoting

excessive consumption and materialism and therefore the over-exploitation ofnatural resources for the production of goods and services for the consumer. Built-

in obsolescence and shorter product life cycles, excessive packaging, and the

transportation of goods over long distances have also been criticised, as has the non-

recyclable nature of some products.


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Green marketing is therefore seen to address these issues and seek solutions that

may include various forms of recycling, reduction of organisations carbon footprint and

the use of renewable energy. Some examples of green marketing are as follows:

McDonalds decided to recycle all the cooking oil from its restaurants in the UK and

use it to fuel its eet of in-house delivery vehicles.

The Co-operative Bank has wind turbines installed on the roof of its Manchester

headquarters in order to exploit the advantages of renewable energy.

The Waitrose supermarket group has a policy of sourcing only locally produced

food products in order to reduce travelling and thereby reduce CO2

emissions.

Cause-related marketing

Cause-related marketing is a commercial activity by which businesses or charities

form a partnership with each other to market an image, product or service for mutual

benet. A famous example of this was Tescos computers for schools initiative.

Another high prole but less successful programme involved Starbucks and Oxfam,where Starbucks contributed 100,000 to Oxfams rural development programme in

Ethiopia. This was designed to create an exchange of expertise to achieve sustainable

coffee supplies.

Fairtrade

The Fairtrade initiative has attracted considerable interest following the heavy criticism

levelled at multinational corporations for exploiting Third World producers in order

to maximise their prots. Fairtrade seeks to overcome this problem by requiring

companies to pay above market prices. This is designed to address the injustices of

conventional trade, which discriminates against the poorest and weakest producers.

Companies that participate in the programme gain the right to display the Fairtrade

logo on their products. The Fairtrade mark appears on more than 1500 products

(mainly food- and drink-related) and Nestl was the rst of the four global coffee

companies to launch a product with the Fairtrade label.

Ethical consumers

These are customers who are only interested in buying good and services from

organisations that set genuinely high standards of corporate social responsibility:

Customers increasingly look for a company with a genuinely moral stance

a company that hypes its ethics and fails to live up to its promises is

not marketing effectively, nor is it behaving morally. (Anonymous 2005)

In the early days of increasing social and environmental awareness, many companies

used ethical consumerism as a means of differentiating their brand from other

companies. However, many of the claims made by the organisation were not upheld

in reality. For example, BP rebranded itself as an environmentally caring organisation

with a new sunower logo and the strap line Beyond Petroleum. This rebranding

exercise has been followed by a series of accidents and oil spills in the US and

Alaska respectively, caused by a lack of any proper preventative maintenance. At the

other end of the continuum there are the genuine pro-active companies where ethical

behaviour is standard policy and the company walks the talk. The Co-operatives

nancial services and retail divisions are an excellent example of this.


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Corporate social responsibility

All of the developments that we have discussed so far can be incorporated under the

term corporate social responsibility (CSR). CSR is an expression used to describe

what some see as a companys obligation to be sensitive to the needs of all of its

stakeholders in its business operations (i.e. Kantian capitalism). The principle is closely

linked with the imperative of ensuring that these operations are sustainable and thatit is recognised that it is necessary to take account not only of the nancial/economic

dimension in decision-making, but also the social and environmental consequences:

sustainable development. This is sometimes referred to as the triple bottom line,

consisting of economic, ethical and equitable factors:

The economic bottom line is concerned with nancial prot,

The equitable bottom line is concerned with the equal and fair treatment of

employees and other stakeholders,

The ethical bottom line is concerned with the extent to which the business is

behaving in a morally acceptable manner.

1.4 Stakeolders

A companys stakeholders are all those people or groups who are inuenced by

and/or can inuence a companys decisions and actions, both locally and globally.

These include (but are not limited to) employees, customers, suppliers, community

organisations, subsidiaries and afliates, joint venture partners, local neighbourhoods,

investors, and shareholders (see Figure 1.2 below). Society now expects many things

from its corporate sector, so some rms use stakeholder analysis to identify and

classify these expectations.

Figure 1.2: Stakeholder diagram


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The concept of stakeholders is important for two reasons:

Most stakeholders contribute some kind of resource to the organisation or they

can inuence those that are actually contributing resources, e.g. employees

contribute their labour, suppliers contribute goods, raw materials and components,

while customers contribute orders and sales. Pressure groups meanwhile can

dissuade suppliers and customers from transacting business with an organisationor employees from working with them if their interests are ignored, e.g. Huntingdon

Life Sciences and animal rights activists.

Conicts of interest between stakeholders are inevitable. For example, customers

want high quality and low prices, while shareholders are interested in minimising

costs and maximising prots. The same type of problem will occur when

managers pay themselves high salaries and bonuses that are unrelated to overall

improvements in corporate performance. This has led to considerable shareholder

activism and high prole publicity, e.g. the fat cat pay disputes.

The analysis of stakeholders therefore involves identifying who they are (using the

stakeholder diagram in Figure 1.2) and considering their power and interest so thattheir expectations and interests can be managed effectively. Once identied, the

relative power and interest of the stakeholders can be mapped onto a power and

interest matrix (see Figure 1.3 below).

Power

Figure 1.3: Power and interest matrix (Johnson et al. 2007)

We will now analyse each individual quadrant of the power and interest matrix:

Category D: stakeholders with high power and high interest. These stakeholders

are key players in the organisation and are often involved in managing the

organisation and its future. If the key players are not directly involved in managing

the organisation it is vital that they are given serious consideration in developing

its long-term plans and the future direction, because they have the power to block

proposed plans and implement their own alternative agenda.

Category C: stakeholders with high power and low interest. These stakeholders

must be kept satised and would normally include institutional shareholders.


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Institutional shareholders will often remain compliant while they receive acceptable

returns on their investment and are pleased with the organisations management

and activities. However, the ability of the Category C stakeholders to reposition

themselves on the power and interest matrix into Category D and become

stakeholders with continuing a high degree of power and an increase in their

level of interest should not be under-estimated. This occurs when Category Cshareholders are not kept satised and feel that their interests are not being best

served. The shift in position of unsatised Category C stakeholders may impede an

organisations plans and prevent the expectations of key players from being met.

For example, when Shell decided to dispose of its North Sea oil rigs by sinking

them into the sea, Greenpeace moved from Category C to Category D

with measures that included attacks on Shells petrol stations.

Category B: stakeholders with low power and high interest. These stakeholders

are not able to exert any real power in inuencing the organisation and its actions.

However, they have a high level of interest in the organisation and will voice their

concerns if their interests arent being considered in a suitable manner. If Category

B stakeholders voice their concerns loudly enough and in the right way (e.g. via

lobbying or petitions), they may be able to inuence one of the powerful group[s]

of stakeholders in either Category C or D and affect their behaviour. Therefore,

organisations need to keep Category B stakeholders informed of the organisations

activities and decisions, and in doing so, convince them that their interests are

being taken into account and considered seriously.

Category A: stakeholders with low power and interest. These stakeholders only

require the minimum amount of effort to be allocated to them. However, Category A

stakeholders should not be ignored as they may acquire a stake in the organisation

by becoming a customer, supplier or competitor, which will mean an increased level

of interest and/or power.

1.5 Key ponts

The important points that this session has covered include:

two opposing theories concerning the role of business in society (Friedman and

Kant),

organisational responses to stakeholder pressure,

the reasons behind the development of CSR, corporate governance and other

green and humanitarian initiatives,

the importance of identifying key stakeholders and being able to analyse theirpower and inuence.


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Actvty 1.1

Using an internet search facility or another source of information, select an

organisation of your choice and answer the following questions:

What level of CSR is this organisation trying to achieve? What advantages and

disadvantages might accrue from this stance?

Is this a position that might be adopted by other organisations or not? Give your

reasons.

What voluntary standards has the organisation set for itself?

Using a stakeholder analysis (power-interest matrix), how might different

stakeholders view the organisations stance on CSR?

Do you have any recommendations or ideas for improvement?

Your answers to the above questions will form the basis of an online discussion and

should be posted on the tutor group forum, along with a brief summary of your chosen

organisation. Once you have submitted your written answers you should read and

comment on at least one of the contributions of another member of the group.

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2.

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ThE ChANGiNG BUSiNESS ENViRONMENT

2.Thechangingbusinessenvironment

2.1 Learnng objectvesThis session is intended to help you to:

understand how the external environment of an organisation is structured,

critically evaluate the level of inuence between the three environments,

learn how to scan the environment and identify likely changes or trends,

understand how environmental change has caused high levels of instability

and the implications this has for modern businesses.

2.2 introducton

In Session 2 we will be analysing the external environment of the modern

organisation and how it is structured. Considerable change has occurred in

the external environment during the last fteen to twenty years, resulting in an

increasingly high level of instability and volatility. We will therefore be analysingthe source of this change using the three environments model as well as the

implications of these changes for the modern business.

2.3 Te tree envronments model

Generally speaking the business environment can be divided into two

areas: the external environment and the internal environment. The external

environment is concerned with everything that takes place outside the

organisation and the internal environment is concerned with everything

that happens within the organisation. A common mistake made by many

organisations is that they spend too much attention on managing the internal

environment and not the external changes that are taking place in the external

environment. However, both environments are important.

There are two basic approaches to dealing with environmental forces: reactive

and proactive. The reactive organisation regards environmental factors as

being uncontrollable and will therefore tend to adjust their business plans to

t the environmental changes that occur. Proactive organisations such as

entrepreneurial technology companies, however, look for ways to change

the organisations environment in the belief that many (if not most) of the

environmental factors can be controlled or inuenced in some way. Forexample, the business writer Tom Peters spoke about the Silicon Valley

entrepreneurs who wanted to change the world through technology; companies

such as Intel, Microsoft, Apple, eBay, Amazon and Google have certainly done

that.

The external environment consists of two further divisions called the micro-

environment and the macro-environment. Combined with the internal

environment of an organisation this creates what is known as the three

environments model (see Figure 2.1).


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Figure 2.1: The three environments model (source: Blythe, 2001, p.18, Figure 2.1)

2.4 Te mcro-envronment

We will start by looking at the micro-environment which is made up of those factors

that impact closely on the organisation and typically consists of the following elements:

competitors

customers

suppliers

intermediaries

some publics

Competitors

A common mistake that rms make is failing to recognise who their competitors

are. Many companies dene their competition too narrowly and often ignore indirect

competitors. For example, a high street retailer might focus on competition from other

high street retailers and not recognise a dot.com company as being competition for

the consumers limited expenditure. Companies therefore need to determine which

competitors offer the closest substitutes in terms of meeting the consumers needs.


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At the extreme, all businesses compete with one another for consumers money

and consumers have only a xed amount to spend. For example, a consumer who

chooses to buy an expensive house may also be choosing not to have any expensive

holidays for the next two years. Competitors can therefore be either rms supplying

similar products or rms competing for the consumers hard-earned money.

Michael Porters ve forces model (1990) offers a useful approach to competitor

analysis and consists of the following:

The bargaining power of suppliers: if this is strong then the competitive pressure

will also be greater.

The bargaining power of customers: as above, the stronger the bargaining power

the greater the competitive pressures.

The threat of new entrants: barriers to market entry can make this difcult.

The threat of substitute products and services: this is often not identied until it is

too late.The rivalry among current competitors: this can be concentrated (involving a small

number of large rms) or fragmented (involving a large number of small rms).

The main strength of Porters model is that it broadens the concept of competition and

enables businesses to look at the wider picture.

Figure 2.2: Porters ve forces framework (1990)

1.

2.

3.

4.

5.


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Customers

Confusion often occurs between the use of the terms consumer and customer. A

consumer is someone who ultimately uses a product or service, whereas the customer

is someone who performs the function of buying the product or service. The customer

may also be the consumer, since they buy and use the product/service. Small children

are consumers of sweets and toy although it is often their parents who are thecustomers who purchase and pay for them.

Customers may change their needs or may even disappear altogether. Increased

competition for customers and the availability of more information relating to current

offerings through the internet has also resulted in declining customer loyalty and

promiscuous consumer behaviour.

Suppliers

Supplier behaviour impacts closely on organisational performance. A poor supplier

can cause problems by supplying poor-quality goods or materials, or failing to meetdelivery dates that eventually impacts on the rms customers. This is obviously of

greater importance for manufacturers and retailers, as opposed to professional service

companies who only purchase consumable items. The competition to secure good

suppliers can therefore be almost as intense as the rivalry to win customers.

Current thinking and trends in purchasing and supply is that the relationship between

suppliers and their customers should be partnership based with a high level of

information exchange. For example, rather than playing suppliers off against one

another and pushing the costs onto another member of the supply chain, partnership

approaches are designed to remove costs from the supply chain through joint co-

operation. This philosophy relies on the supplier and purchaser integrating their

activities and developing a mutual understanding of each others problems.

Intermediaries

Intermediaries include retailers, wholesalers, agents and others who distribute the

rms goods. Intermediaries may also include marketing services providers such as

research agencies, advertising agencies, distribution companies providing transport,

and warehousing and exhibition organisers, etc. Intermediaries are therefore any

individuals or organisations that stand between the company and the consumer and

help to distribute goods and services. As with suppliers, good relationships basedon information-sharing and good communication are very important for effective

performance.

Publics

A companys publics also form part of the micro-environment. Publics is a generic

term for all groups that have actual or potential impact on the company. The range

of publics can include nancial publics, local publics, governmental publics, media

publics, citizen action publics and many others. The marketing activity concerned with

these publics is called public relations.


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Financial publics are likely to include banks and shareholders who control the

companys nances and can pressure the rm to behave in certain ways. These

pressures are often strong and can threaten the rms existence.

Local publics consist mainly of local organisations and individuals who pressure

the organisation to take certain actions such as cleaning up pollution or sponsoring

local charities. For example, when Anita Roddick was establishing The Body Shop

retail network, her franchisees were expected (as part of their franchise agreement)

to participate in local community projects raising funds for local charities or setting

up play areas, etc. The activities helped to improve the image of the company and

generate positive feelings amongst the employees of the organisation.

Porters ve forces framework is based upon the American business model. This

means that organisations seek monopolistic power and try to restrict the number

of players (or industry rivals) by creating barriers to entry to the market. Barriers to

entry can be created through large economies of scale that make it impossible for

small businesses to compete. The large capital costs needed to establish a rm andenter the market are another barrier to entry. Moreover, competitor retaliation and

government restrictions also cause problems to new entrants. For example, when

Freddie Laker established his low-cost airline Skytrain in the late 1970s he was forced

out of business by the predatory pricing of the major national carriers. Virgin Atlantic

was also the victim of a dirty tricks campaign from British Airways when it entered the

transatlantic market for air travel.

Government barriers to market entry are often overcome by the formation of joint

ventures between local and foreign multinationals. These barriers are designed to

help locally-based companies gain skills and knowledge of production techniques.

Meanwhile, branding can also act as a barrier to entry by differentiating a rmsproduct or service from potential competitors. Finally, a rm can gain a rst mover

advantage into an industry during which time they build up a large market share and

asset base, and an established reputation or brand. This absolute cost and reputation

advantage can often be difcult to usurp, e.g. eBays competitive advantage in online

auctions.

Once barriers to entry have been established, the rm can build up large market

share and economies of scale. This increases the companys bargaining power when

negotiating with suppliers as well as customers, thereby increasing prot margins.

In terms of substitute products, these may be copied by existing rivals (patent

rights permitting) or the companies offering the substitute product or service maybe acquired. The industry rivalry can be concentrated, involving a small number of

large rms (duopolies or oligopolies) or it can be fragmented with a large number

of small rms. In fragmented markets, the barriers to entry are usually low and will

be populated by small and medium-sized enterprises (SMEs). Where markets are

concentrated, the barriers to entry will be high and access will probably require

an innovative product or service that becomes a substitute of existing products or

services. The recent trend in downloadable music is an example of a substitute

product. This is what is known as a disruptive or discontinuous technology that can

make existing products obsolete or marginalised. (This will be discussed further in

Session 3 when we look at innovation.) Companies with high economies of scale andestablished brand reputations may also enter concentrated markets from adjacent

industries. For example, Google (search engines) and Nokia (mobile phones) are

currently planning an assault on the downloadable music market and the Apple

iPhone.


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2.5 Envronmental cange and nstablty: te mcro-envronment

The micro-environment of the modern business has changed quite dramatically in

recent years. Due to globalisation, more foreign companies are now entering markets

through mergers and acquisitions or through organic development (often from adjacent

industries which have similar resources and capabilities). The number of substitute

products and processes is also increasing due to technological developments drivenby digitisation and the internet. This is where smaller entrepreneurial business can

enter concentrated markets with disruptive technologies.

The rivalry between industry competitors and suppliers is also intensifying due to

increased competition from more players but also due to the increasing power of the

buyers or customers. Customers now have access to a vast range of information on

the internet. Specialist websites that compare products and services have resulted

in customers becoming very knowledgeable and sophisticated buyers. In addition,

due to increased global competition, there is now a broader range of goods and

services available, leading to increased customer expectations. In order to meet these

increased expectations and still make a prot, companies have been forced to employmore intermediaries. For example, outsourcing support services to specialist providers

in order to reduce overall costs and forming production and marketing alliances to

share resources and risks have become major growth areas. The implications of

this increased commercial activity have been the need to manage public stakeholder

expectations so as not to damage the brand reputation of the rm. This involves

keeping nancial stakeholders happy but also a wider range of publics. The methods

discussed in Session 1 provide some examples of how companies have addressed

some of these issues.

It can therefore be seen from this analysis of the micro-environment that not only

have there been considerable amounts of change but that this has also resulted in

increasing levels of environmental instability. Increased competition and technological

innovation has made customer retention and sales forecasting more difcult. There

has also been a marked reduction in the length of both business and product/service

life cycles (that is, how long it takes a product or business to progress through various

stages from introduction and growth to maturity and decline). Planning has become

more difcult to execute and the implications of these changes for the resources

and capabilities of the rm and its structure, systems, processes and culture will be

discussed further in Sessions 3 and 4.


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2.6 Te macro-envronment

The next external layer consists of what is known as the macro-environment. This

includes the major forces that impact on the micro-environment and all the elements

within it. It is therefore harder to inuence the macro-environment, although large

and powerful multinationals are able to make a signicant impact. The main elements

of the macro-environment can be classied as STEEP factors, which represent thefollowing (see Figure 2.3 below):

social

technological

economic

environmental

political.

Figure 2.3: STEEP model (adapted from Johnson et al. 2007)

Social factors

Social factors include the demographics (population characteristics) of a society, the

prevailing culture (beliefs and attitudes), and subsequently, the buyer behaviour trends

that emanate from these. These factors are important to a companys marketing

department since the demographic data will be used to divide the market into specic

customer segments. The social environment must also be scanned to identify any

changes in buying patterns resulting from changes in demographics and socio-

economic factors, e.g. a more mature and wealthier population will result in a demand

for different types of products and services.


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Technological factors

The technological environment consists of all the innovations and new technologies

that are currently being developed and launched in the marketplace. Information

communication technology has been a very important development in terms of its

impact on modern businesses. For example, the microprocessor, personal computer,

internet, digitisation and bre-optic cable have all had a major impact on howbusinesses run and congure their operations, and how consumers now purchase

products and services, e.g. downloading music and buying airline tickets via the

internet.

Economic environment

The economic environment is concerned with the state of the national and global

economies within which the company competes and undertakes its activities. Key

variables that have to be monitored include interest rates, ination, gross domestic

product and disposable incomes. These factors, plus the health of the national and

global economies (i.e. are they expanding or retracting?), will determine the level of

demand for a product or service.

Environmental factors

This tries to address the problems of global warming caused by increased levels of

industrialisation and consumerism leading to global warming. Current issues facing

organisations include carbon footprints, recycling and renewable energy. Green

marketing and CSR have therefore evolved in response to these developments (see

Session 1).

Political factors

The political environment is concerned with the regulation and legislation that is

imposed on organisations by governments and trade bodies. It is also covers the

areas of government versus private ownership. Global trends have seen a move

away from government ownership of assets towards increased private ownership of

organisations, e.g. utilities companies and national airlines, etc.

Large multinational corporations allocate considerable resources to lobbying political

parties and politicians through special corporate affairs departments, and make large

donations to political parties and US presidential candidates.

Finally, it is important to remember that the STEEP factors will normally interact and

act as a system. For example, a change in the economic environment will inuence

the social environment. An expanding economy that produces more employment

and wealth will create more afuent consumers, who will buy more goods and the

reverse will happen in the event of a recession. New technology will also inuence

both the economic and social environments: the internet has changed the economics

of many business sectors such as nancial services by reducing labour costs and

enhancing productivity. It has also changed consumer buying behaviour by making

them better informed consumers who can compare products and services using online

software and websites.


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2.7 Te nternal envronment

The internal publics are the employees of the organisation. Although employees

are part of the internal environment of the organisation, they live in the external

environment and this will subsequently inuence their attitudes towards the work

environment. However, organisations also develop their own corporate cultures with

their own language, customs, political agendas and pressure groups.

The members of the organisation can give a positive or negative image of the rm

after they leave work for the day. The employees therefore constitute a market in their

own right and the organisation needs their loyalty and commitment. Internal marketing

is needed to ensure positive attitudes are engendered. The days are long gone when

the loyalty of staff could be guaranteed and giving orders was all that was necessary

to ensure obedience.

2.8 Envronmental cange and nstablty: te macro-envronment

Considerable change has occurred in the macro-environment that has impacted uponthe way companies do business. In terms of the political environment, a number of

major changes occurred at the end of the 1980s and the beginning of the 1990s. The

end of the Cold War between Russia and the West and the bringing down of the Iron

Curtain in 1989 opened up a vast area of the world for commercial exploitation by

private corporations. At the same time, China and India were opening up their doors

to foreign direct investment and moving towards market-based economies. The UK

business model the Thatcherite privatisations and the move towards supply-side

economics was now being emulated by other countries and governments across the

world. In addition to these developments, the Single European Market was formed in

1993 and the North American Free Trade Association (NAFTA) was established in thesame year. This move towards deregulation and market-based economies was to have

a signicant impact upon the business environment over the next few years.

The late 1980s and the 1990s also saw major developments taking place in the technological environment, particularly information communication technology (ICT).

This involved merging computer and telecommunications technologies to form the

internet. This was made possible by the widespread ownership of personal computers

that used a compatible industry standard (Wintel) to transfer data using digital

technology through bre-optic cables and via satellites. This made it possible for

companies to relocate their operations in foreign countries (to utilise sources of lower

cost labour and to sell products and services) and to manage and co-ordinate theseoperations using electronic communication. This was one of the major reasons for the

birth of business process outsourcing (oroffshoring) to foreign countries. This will be

discussed in more detail in Session 3.

This was also an era of high economic growth. Following the world recession in early

1990s, the USA experienced its longest period of sustained economic growth since

the 1960s. This was replicated in the UK and many other European countries i.e.

the Republic of Ireland. This period also saw the emergence of the Asian Tigers and

the new emerging economies sometimes referred to as the BRICs: Brazil, Russia,

India and China. The economic environmentwas therefore a major driver of change

in the technological, social and physical environments. Increased disposable incomes

and the falling cost of computers (Moores Law) enabled citizens across the world to


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gain access the internet, resulting in a greater awareness of global brands. One of

the results of this combined activity has been its impact on the physical environment,

with signs of increased ozone depletion and serious pollution in emerging economies

such as China. This has placed considerable pressure on businesses resulting in the

adoption of a broad range of measures discussed in Session 1.

In terms of the socialenvironment, access to global media such as the internet has

created a demand for Western brands and seen the emergence of new middle classes

in the BRICs and Asian Tiger countries. This has impacted on the near environment,

resulting in intense competition (Porters ve forces framework) for these markets. The

impact this has had on the conguration of the resources and capabilities of modern

corporations, as well as their structures and processes, will be discussed at length in

Session 3 and Session 4.

The overall impact of this change has been to increase the volatility and instability of

both the macro- and micro-environments within which modern corporations operate

and compete. The economic instability began a number of years earlier in the early1970s when US President Richard Nixon removed the gold standard that was used

to support the US currency. The gold standard required any future printing of money

to be backed up by deposits of gold in the central bank of the country concerned.

Currencies were now allowed to oat freely, leading to the development of global

currency markets where money was traded on a worldwide scale. This removed the

former currency stability that existed, with high levels of speculation exacerbating this.

In addition to the currency instability, two oil shocks also occurred in 1973 and 1979.

In 1973, the Arab Israeli war and oil embargo occurred while the Saudi Arabians and

other members of the OPEC cartel decided to increase the price of crude oil fourfold.

In 1979, the war between Iran and Iraq placed further pressure on oil prices that hadalready resulted in high levels of world ination.

More recently, the increased competition for customers due to world markets opening

up and the increasing expectations of customers (who now have greater choice) has

made buying patterns and trends less predictable. This problem has been exacerbated

by new technologies that make existing products obsolete or undesirable (built-in

obsolescence) and reduce customer loyalty. This environmental instability has had

serious implications with regards to how modern businesses are run. Sessions 3 and

4 of this module will now look at how business organisations have had to change the

way they manage their resources and capabilities, and the structures, systems and

processes that they have in place in order to compete in this new environment.

2.9 Key ponts

The important points that this session has covered include:

a detailed overview of the three environments of a modern business,

an understanding of how changes in one environment (macro) can inuence the

others (micro and internal),

an illustration of how environmental change creates instability,

the provision of analytical tools for scanning the external environment.


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Actvty 2

Using the same organisation that you selected for your CSR analysis in Activity 1,

Session 1, carry out an appraisal of the organisations macro environment based on

the following criteria:

Complete a STEEP analysis for your chosen organisation.

Consider which elements of the organisations environment have the greatest

impact and therefore require the most attention.

What opportunities and threats do the issues you have identied pose for the

organisation?

Do you have any recommendations for future action?

Your completed STEEP model and answers to items 24 should be posted on the

Tutor Group Forum (TGF) for group analysis and discussion. Once you have submittedyour written answers, you should comment on a minimum of one contribution from

another member of the group.

1.

2.

3.

4.


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Managng resources andcapabltes n te modern

busness world


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MANAGiNG RESOURCES AND CAPABiLiTiES iN ThE MODERN BUSiNESS WORLD

3.Managingresourcesandcapabilitiesinthemodernbusinessworld

3.1 Learnng objectves

This session is intended to help you to:

dene and clarify the meaning of innovation,

understand the meaning of resources and capabilities and the levels of

tangibility and intangibility,

appreciate the implications of innovation for the resource conguration of a

modern business,

understand the need for outsourcing, co-operative strategies and the

development of organisational knowledge.

3.2 introducton

In Session 3, we undertake a detailed analysis of the resources and

capabilities of the modern organisation and how innovation can be applied to

enhance its competitive advantage. The increasing competitive pressures and

customer expectations discussed in Session 2 have created cost and resource

issues for modern companies that have resulted in co-operative strategies and

outsourcing on a large scale.

3.3 Te need for nnovaton

In Session 2 we analysed the modern external environment in which

organisations have to compete for success in order to survive. It was apparentfrom this analysis that the external environment has become increasingly

volatile and competitive. One of the reasons for this enhanced volatility has

been the changes that have occurred in the technological environment,

particularly in the eld of ICT. Merging computer and telecommunications

technology has resulted in the development of the information superhighway,

heralding the end of the capitalist era and the advent of the information age.

Business writer Peter Drucker coined the phrase (1968) the knowledge

worker to describe the new role that employees now played in modern service

economies. As Western economies lost their competitiveness in traditional

manufacturing industries to emerging countries in the Far East and CentralEurope, new industries and jobs were created in services. Major company

restructuring known as downsizing and delayering took place in the 1980s

and 1990s, involving techniques such as business process reengineering

(BPR). This will be discussed in more detail in Session 4 when we look at

organisational structures and contingency theory.

According to the writer Alvin Tofer (1984), developing nationspass through

three phases or waves of change as they grow (see Figure 3.1 below).


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Figure 3.1: Tofers waves of change (1984)

Michael Porter (1985) of Harvard University said that this was a natural development

and there was nothing wrong with a modern economy losing its manufacturing jobs

to the newly industrialised countries (NICs) provided they moved up the value chain

of work into higher value services such as R&D, consultancy, nance, computing,

telecommunications, software, and biotechnology, etc. The margins in these new

service industries were much higher than in traditional commoditised manufacturing

such as iron, steel, textiles and shipbuilding, where price competition had eroded

protability. Moreover, Western economies were also able to remain competitive in

higher-value manufacturing industries such as defence, pharmaceuticals, machine

tools and medical instruments, where high levels of R&D were required or high levels

of automation removed the competitive threat of lower wages. Reinforcing Michael

Porters comments and adding fuel to the ames, Alan Greenspan (2000), head of the

US Federal Reserve, said that companies must be ready to re-invent themselves in

order to survive in the global business environment.

There have been signicant developments in Tofers model since the early 1990s.

China has now become established as a major manufacturing power and in many

instances the new workshop of the world. However, India has taken a slightly different

route; instead of following the traditional path laid down in Tofers model and

becoming an industrial manufacturing power, it has moved primarily into services with

high levels of IT software expertise and research capabilities (including generic drugs).Brazil remains a strong force in agriculture, while Russia is generating huge amounts

of wealth from its mining and energy resources.

The competitive threats from the BRICs has placed increased competitive pressure

on the mature Western economies and hence businesses in these countries have

had to look at their current resources, capabilities and strategies, and devise new

business models or ways of competing in the increasingly volatile environment.

This has subsequently created a need for re-invention or innovation and this will be

discussed in greater depth in relation to the resources and capabilities of the modern

rm. However, before we consider the resources and capabilities of the modern

organisation we will start by dening what is meant by innovation and the differenttypes of innovation that exist.


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3.4 Wat s nnovaton?

Innovation has become a popular word in business over recent years due largely

to the changes that we have discussed earlier in the session. However, like any

commonly used word, it is often misunderstood or misconceptions often occur. It

is therefore important to dene what we mean be innovation and at the same time

remove any misconceptions that may have developed.

One of the rst misconceptions when dening innovation is that the term is often

used interchangeably with the word invention, when in fact the two concepts are

different. Most people associate an invention with something that is tangible and new.

Inventions use new knowledge to create something new such as an artefact, service

or piece of equipment. Inventions are useful if they have the potential to enable people

to do things better and differently, and thereby confer some form of benet or satisfy

a need or desire that would otherwise go unmet. However, inventions cannot always

be put to immediate benecial use. In fact, inventions can only confer benets if they

are useful in helping individuals and organisations to achieve their purposes and

objectives. The concept of invention implies that the application of knowledge createssomething new, but an invention can only lead to an innovation when it serves some

form of useful purpose.

The concept of innovation therefore implies that benet must be derived from the

application of new market or technological knowledge. In 1990, Michael Porter also

stated the need to distinguish between invention and innovation when he dened

innovation as a new way of doing things that is commercialised. From Porters

strategic perspective, inventions need not result in something tangible since a new

way of doing things need not be the result of a new piece of equipment.

To help clarify our understanding of the concept of innovation, we will now look at fourcommon misconceptions that often blur our understanding.

Misinterpretation 1: innovation = invention. As we have already noted, an

invention is essentially a creative idea, whereas innovation takes that idea and puts

it to work. Innovative activity encourages the development of new ideas but it also

turns them into useful products or services that customers need.

Misinterpretation 2: innovation = new products or services only. Innovation

may result in new products or services but it is not solely conned to these

developments. For example, the Austrian economist Joseph Schumpeter (1934)

identied ve ways in which an entrepreneur causes distinct changes in the market

through the introduction of innovations:

Introducing new products or services. This may involve radical or

incremental innovation. The most publicised innovations are usually related

to new product development. For example, small companies have become

international giants through successful product innovation, e.g. Microsoft

(MS-DOS), Intel (microprocessors) and Apple (Macintosh computer).

Introducing new methods of production (process innovation)

e.g. Henry Fords moving assembly line, containerisation in

shipping and Pilkingtons oat glass technology.

Opening a new market. This involves taking existing products or services and

1.

2.

3.


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selling them into new markets. Small business often innovates in this way,

spotting a geographic market overlooked by larger companies or using an

idea from another industry. New marketing methods may also be a source of

innovation, e.g. the way that the product is marketed to the customer. Music

and video downloads are examples of this, creating a new business model

and causing serious problems for many high street music retail chains.The conquest of a new source of supply of raw materials or half-

manufactured goods (and more recently low-cost labour), e.g. business

process outsourcing (BPO) and offshoring (outsourcing overseas).

Carrying out the new organisation of any industry e.g. business process

re-engineering (BPR).

Misinterpretation 3: innovation = original. Innovation does not take place in a

vacuum. New ideas always have roots in the past: they start with what already

exists and become original from the unique way in which they combine or connect

with existing ideas and knowledge. In other words, a new idea is very often the

meeting of two old ideas for the rst time.

Misinterpretation 4: innovation = one-off inspiration. Innovation does not rely

on a sudden ash of inspiration but is normally a gradual process that builds into

something new and worthwhile over a period of time. Thomas Edison, the inventor

of the electric light bulb, once said that creativity is 1 per cent inspiration and 99

per cent perspiration. Considerable resources such as time and/or money are

therefore required.

We will conclude our analysis of innovation by considering the different approaches to

the development and implementation of ideas in business and why they are important.

There are three basic approaches to innovation:

incremental innovation,

radical orbig bang innovation,

technology-push or market-pull innovation.

Most business innovations are incremental and result from deliberate small step

changes to products or processes. Most successful new products or services emerge

gradually from modications and improvements of existing ideas and technology

from putting together familiar things in a slightly different way. For example, the

emergence of jeans and trainers as fashion apparel from their humble origins as

working clothes; or the evolution of vinyl records into music CDs and then into

DVDs. This is sometimes called continuous or incremental innovation which can becontrasted with radical, discontinuous, one step/big bang innovation.

Radical innovation isoften referred to asbeing discontinuous or disruptive because

it makes existing product/service offerings and processes obsolete. For example, the

incremental development of music (mentioned earlier) from vinyl records to CDs and

DVDs is now being threatened by digital technology and downloadable music. This

form of innovation is also sometimes referred to as one step or big bang particularly

if it involves new processes. Henry Fords introduction of the car assembly production

line, Pilkingtons Float glass manufacturing process and the advent of containerisation

all made previous processes obsolete and set technology development on a new

incremental path.

4.

5.


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A more recent example is the microprocessor. This was a radical innovation that

drove the development of the personal computer. However, once the big bang

had occurred, future development of the technology was incremental. The Intel

microprocessor developed in size and power (Moores Law) in incremental stages, i.e.

the 486 chip and then the Pentium 1, 2, 3 and 4 microprocessors, and now the Core

Duo chips. Operations and applications software also developed incrementally in termsof functionality and size along a similar growth path.

Another contrast in approaches to innovation is whether it is a planned and structured

process or the result of a sudden or gradual recognition of the market potential of

the innovation. The structured approach is also sometimes called the technology-

push approach in contrast with the opportunistic market-pull (orcustomer-pull)

approach. The planned and structured approach is often associated with technology

developments where heavy investment capital may be required. Recognising a market

opportunity or the inspired guess approach often ows from a strong awareness of

customers and their needs. In many instances, a hybrid position may exist where both

approaches are applied. The entrepreneur knows on the basis of intuition and gutfeeling that there is a market for their product but no such innovation has previously

been marketed. For example, when Henry Ford was asked about his opinion of market

research his reply was that if he had researched customer needs and wants prior to

the launch of the Model T the only response he would have received would have been

a request for faster horses.

If we return to the writings of Joseph Schumpeter that we mentioned earlier,

Schumpeter was a pioneer who saw innovation as playing a central role in economic

development. He took a business-cycle approach, believing that during economic

downturns or crises, old-fashioned and inefcient rms would be removed by gales of

destruction to be replaced by more competitive and innovative rms. Entrepreneurs

were also seen as the spur to innovation, which was crucial to business success.

The central feature of Schumpeters development theory is that the entrepreneur is the

vehicle for the diffusion of technology through innovation. This places the entrepreneur

at the heart of modern-day economic development. Taking this idea forward, Roy

Rothwell (1993) has moved on from Schumpeters model and offers a more complex

continuum of ve models or generations of innovation. These are innovations that are:

pushed by technological discoveries,

pulled by market or consumer demand,

as an iterative process of both technological-push and market-pull,

as an integrated management process, an integral part of how the rm operates (a

sort of total quality management model that supports creativity inside the rm),

a networked management approach and cooperation, making use of the

communication benets of ICT, to make use of shared planning in response to

multiple market opportunities.

These ideas are very important and are currently inuencing public policy and

business strategies. Nowadays, new methods of gathering market information,

nancing and distribution would be regarded as innovative, especially those making

use of ICT. New forms of organisation are also appearing, with the emergence of ICT-


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supported business networks and clusters.

We will now look at the implications of environmental change and innovation for the

management of the internal resources and capabilities of the organisation.

3.5 Managng resources and capabltes forcompettve advantageIn order to fully understand the role and importance of resources and capabilities in

achieving organisational success, we will start by dening what is actually meant by

the terms resources and capabilities.

Resources comprise the tangible and intangible assets of the rm. Capabilities are

the processes through which resources are combined and coordinated. Tangible

assets include physical assets such as buildings and equipment as well as nancial

assets. Intangible assets include the organisations reputation, its brand and even

its organisational culture. The capabilities of the organisation are its capacity for

undertaking a particular productive activity. An organisations capabilities combine

and coordinate its resources through its functional capabilities such as marketing,

operations and distribution, etc.

In Session 2 we identied the major changes that had occurred in the environment

since the 1980s, resulting in increased customer expectations. Modern customers now

have access to considerable sources of information on the internet and can carry out

extensive information searches quickly and easily before making a purchase. This

means that customers now require products and services that are of an acceptable

quality, inexpensively priced and available now. In the post-war years of the 1950s,

customers had to make a trade-off between price and quality: if you wanted qualityand service, you had to pay a higher price; if you could only afford to pay a low

price, you received low quality and service. Nowadays, as more companies compete

for customers on a global scale, the bargaining power of the buyers (Porter 1985) is

paramount.

In addition to these changes to consumer preferences and power, there has also

been a change in the nature of competition in global markets. In the late 1960s and

early 1970s there was a general consensus of opinion that small rms were irrelevant

since economies of scale, R&D capability, and access to international marketing and

distribution networks were critical to success. Big was beautiful and the small rm in

Western markets was dead. In the UK, this led to a Committee of Inquiry on smallrms in 1969 and the publication of the Bolton Report of 1971. The report recognised

that small enterprises made a special contribution to the health of the economy and

performed eight important roles. One of these roles included the ability to produce

new and innovative products, services and processes. A small rm revival also took

place during the ensuing three decades, as well as the development of an enterprise

culture. During the era of corporate downsizing in the 1980s and early 1990s, Peter

Drucker (1995) commented on how traditional management normally associated with

large multinational corporations was being replaced by a entrepreneurial management

as Western economies and companies restructured and new technology companies

and industries emerged.


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The culmination of all these changes has to put considerable pressure on modern

corporations in a number of key strategic areas:

Cost reduction: Due to increased global competition and the downward pressure

on prices, companies have had to look seriously at ways in which they can reduce

costs in order to compete.

Resource constraints: Increasing customer expectations for quality, service and

variety (as well as low prices), resulting in a need to access a broader range of

resources and capabilities in order to meet customer needs. For example, the

manufacture of a modern mobile phone now requires resources and capabilities

relating to several different industries, i.e. telecommunications, computing,

consumer electronics and media entertainment (content).

An ability to innovate: Due to increased competition from entrepreneurial technology

companies, product life cycles have shrunk in duration, resulting in a need for

organisations to produce new products and services more often and at a faster

pace.

To recall the reference made earlier in this section by Alan Greenspan (former Head

of the Federal Reserve), companies now have to reinvent themselves in order to

compete in the modern business world. We will now analyse this statement using a

resource-based view of the organisation to see how modern corporations have been

able to address the three strategic issues of cost reduction, resource constraints and

the ability to innovate.

Cost reduction

In order to reduce costs and remain competitive, companies have had to review their

current way of doing things and ask fundamental questions such as:

What activities does the organisation carry out and what value do these activities

add?

Does the activity need to be carried out in-house or could it be performed more

cheaply elsewhere?

Does the organisation have to own the resources it needs or does it just need to

be able to control them and access them?

One way of identifying and analysing the resources of an organisation is to produce a

value chain, as shown in Figure 3.2.

Figure 3.2: Porters value chain


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Porters value chain highlights the different value-adding activities of an organisation.

Primary activities contribute to the provision of goods and services for customers,

while support activities allow the primary activities to take place such as the role

of infrastructure, human resources and IT/technology. Put simply, the value chain

provides a framework for the analysis of a rms capabilities. It permits consideration

of which functional activities add value relative to others and/or which might beconsidered core to the rm.

A value chain can be a very helpful tool for understanding the difference between

two organisations that appear to be functioning in similar ways in a similar sector.

Organisations can also construct their value chains in very different ways. For

example, the value chain featured in Figure 3.2 is for a manufacturing company. If

this were to be redrawn using a service company as a template, it would look very

different.

Another approach is to use a transformation model that features the inputs, processes

and outputs involved in a service or manufacturing operation. If we go back to Session

1 and look at Figure 1.1, this is a transformation model with a boundary drawn around

the outside to create a systems model. All the activities that take place inside the

boundary line are in-house activities performed by the organisation. If all the activities

are carried in house, this means that there is a high level of vertical integration within

the rm. Early industrial organisations were vertically integrated due to the unreliability

of supply caused by slow communication and transportation. For example, Henry

Fords rst manufacturing assembly plant at River Rouge even had its own steel mill

to produce all the metal parts for his Model T automobiles. Even the Michelin tyre

company was located at the same site.

Improvements in communication and transport mean that supply chains have become

much more reliable. Moreover, following the removal of political barriers to trade and

the development of ecommerce, organisations no longer have to operate vertically

integrated resource congurations. The major trend has therefore been to exploit

opportunities in newly accessible countries to reduce the cost of production. This

has been achieved through the strategic outsourcing of a broad range of functions

and activities. This is known as business process outsourcing (BPO) or offshoring.

Important resources and capabilities exist outside the organisational boundary and

are rarely owned by the organisation that is sourcing them. However, access and

control rather than ownership are critical success factors in such circumstances.

Companies such as Nike and Reebok outsource all their manufacturing activities to

countries with low-cost labour forces and then focus upon their primary activities ofR&D, marketing and design. This is what is known as an open system, where there is

considerable interaction between the rm and its external environment, whereas Henry

Ford operated a relatively closed system approach, with little interaction with the wider

environment.

China and India have become major outsourcing destinations for multinational

corporations seeking to reduce costs. Since labour is still the highest cost in most

companies, the attraction of a low-cost labour force needs little explanation. The

nancial service industry has been a major player in BPO and offshoring. The advent

of digital technology has made it possible to transfer data along bre-optic cables to

countries such as India where processing takes place overnight (UK time) and theinformation created is transferred back to the relevant Western institution the next

morning at a fth of the normal cost. Low cost and highly skilled computer personnel


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make this possible in India. Outsourcing back ofce services has now been extended

to include front ofce services such as call centres and also research.

Outsourcing has therefore been a critical area in which multinational corporations have

been able to reduce costs and gain a competitive advantage. It also demonstrates that

resources and capabilities do not have to be owned by the organisation concerned,

although accessibility and control are still extremely important. The bargaining power

of the large multinationals obviously places them in a strong position with regards to

such a relationship.

Resource constraints

The mobile phone industry provides a good example of how a single organisation

cannot hope to produce a product that meets customer expectations based solely on

the utilisation of their own internal resources. The fact that producing a modern mobile

phone requires inputs from at least four industries illustrates the need for organisations

to adopt cooperative strategies.

A cooperative strategy between rms involves sharing resources and capabilities in

order to meet consumer needs. Examples of cooperative strategies are as follows:

A joint venture involves the formation of a new company where both risk and

control are shared by both parties.

An alliance can be either equity or non-equity based, and exists when two or

more independent organisations co-operate in developing, manufacturing or selling

products or services (Hennart 1988).

A consortium is an interconnecting set of relationships between a variety of

organisations primarily concerned with bidding for very large and complex projects(e.g. the Caspian Pipeline Consortium) or to gain economies of scale from

aggregated purchasing (e.g. the Spar franchise for independent grocers).

In Japan, consortia are known as keiretsus and exist on a much more formalised

basis than consortia. Typically a keiretsu would involve up to fty different rms joined

together around a large trading company or bank and whose performance is controlled

by interlocking directorates. This formalisation permits the keiretsu to benet from cost-

sharing and/or economies of scale, and enables it to take advantage of a wide range

of market opportunities. Some examples of Japanese keiretsus are Mitsubishi and

Mitsui. In South Korea, the keiretsus are known as chaebols and include organisations

such as Daewoo.

Alliances have become a large growth area due to the need to access better

resources and capabilities in order to meet higher customer expectations. The benets

that can be achieved through an alliance from a resource and capability perspective

include access to funding, skills, know-how, rights, technology, markets, raw materials

and synergies through blending complementary assets plus facilitated learning and

capability building.


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Ability to innovate

The rms ability to innovate is inuenced by many factors including structure, systems

processes and culture. It is important that an innovation-friendly environment or climate

is created this aspect of innovation will be discussed in more detail in Session 4.

Our concern at this stage is how a resource-based approach can be used to facilitate

the creation of an innovative organisation.

One approach is for the company to adopt a knowledge-based view (KBV) derived

from the resource-based perspective. Since most business innovation involves

technology and the basis of technology inherently involves knowledge, then knowledge

is considered to be the principal source of value in the organisation and the

organisations most valuable strategic asset. Whereas the resource-based view (RBV)

considers organisational capabilities to underlie competitive advantage, knowledge-

based theories argue that the true source of competitive advantage is the knowledge

that underlies those capabilities (Spender 1996).

Individuals are therefore assumed to be the ultimate source of all knowledge creationin an organisation. However, problems occur because knowledge is not always

tangible or explicit but is more often tacit and intangible or implicit. Tacit knowledge

is embedded in work routines and relationships, and is rarely codied or placed in

training or procedure manuals. Moreover, the critical distinction between tacit and

explicit knowledge is the transferability of knowledge. Tacit knowledge is only revealed

through its application and even if it is codied or documented it can still be difcult to

transfer. For example, if one person is given detailed instructions of how to build a car

engine, it does not mean that the person will be able to successfully execute the task.

We can now start to understand why employees in innovative technology rms are

frequently described as assets walking around on legs and why key teams often

leave or are poached by rivals. If these staff leave the organisation, the company also

loses important expertise and knowledge. Since we are now in the information age

and most employees are probably knowledge workers (Drucker 1968), the more reliant

organisations will be on the tacit knowledge of their employees.

The outcome of this is that there is greater potential for the organisation to lose its

expertise within the organisation and subsequently valuable contributions to innovation.

This explains the growing emphasis on developing knowledge management systems

i.e. information systems to capture, store and ultimately transfer knowledge within

organisations. Some service rms go to great

module 1 understanding business

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