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