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Topic Notes
Jerry Leung 1
Wicked Characteristics of wicked problems include:
problems • The problem involves many stakeholders with different values
and priorities
• The issue’s roots are complex and tangled
• The problem is difficult to come to grips with and changes with
every attempt to address it
• The challenge has no precedent
• There is nothing to indicate the right answer to the problem
Factors of production
Jerry Leung 2
Role of The economic impact of scarcity
businesses
Scarcity is the condition of any productive resource that has finite supply.
Introduction All the factors of production (above) are limited. This results in:
to basic • Competition in resources – businesses compete with each other
economics for materials, employees and customers whilst consumers
compete with other consumers
• Trade-offs – entities must give up something to get something
else (e.g. allocation of money on advertising versus production
materials or customer support)
Economic systems
Jerry Leung 3
Role of Economic systems (continued)
businesses
Capitalism and socialism are competing philosophies but are not
Introduction mutually exclusive – for example, public schools and major health care
to basic programs in capitalist systems (e.g. the United States and Australia) are all
economics programs that fit the economic definition of socialism.
The forces of supply and demand determine the quantity of goods and
services produced alongside the prices in which they are sold.
Supply refers to the specific quantity of a product that the seller is able
and willing to provide at various price points at a given time.
Demand
Jerry Leung 4
Role of Supply
businesses
A supply curve is a graph of the quantities of a product that sellers will
Introduction offer for sale, regardless of demand, at various prices. They will typically
to basic slope upwards.
economics
Buyers wish to buy at the lowest possible price whilst sellers wish to sell
at the highest possible price. The market therefore arrives at a
compromise which is the equilibrium point – the point at which the
quantity supplies is equal to the quantity demanded.
Jerry Leung 5
Role of Understanding how an economy operates
businesses
Competition
Introduction
to basic Competition is the situation in which two or more suppliers of a product
economics are rivals in the pursuit of the same customers.
Jerry Leung 6
Role of Understanding how an economy operates (continued)
businesses
Unemployment
Introduction
to basic The unemployment rate is the percentage of the labour force (everyone
economics over 16 who has or is looking for a job) currently without employment.
Inflation
Jerry Leung 7
Role of Understanding how an economy operates (continued)
businesses
The role of government in a free-market system
Introduction
to basic Deregulation involves removing regulations that allow the market to
economics prevent excesses and correct itself over time. Reasons for deregulation:
• Government can stifle innovation that ultimately help everyone by
boosting the economy
• Regulations burden individual companies and industries with
unfair costs and limitations
Protecting stakeholders
Fostering competition
Based on the belief that competition benefits the economy and society in
general, governments intervene in markets to preserve competition and
to ensure no single enterprise becomes too powerful (see page 5).
• Antitrust legislation limits what businesses can and cannot do to
ensure all competitors have a chance of succeeding
• Previously, a few large companies (known as trusts) in some
industries controlled enough of the supply and distribution in
their respective industries that they could muscle smaller
competitors out of the way
• Governments may occasionally prohibit mergers or acquisitions
to preserve competition and consumer choice (or only permit
them with conditions fulfilled, e.g. divesting some parts of the
company or making other concessions)
Jerry Leung 8
Role of The role of government in a free-market system (continued)
businesses
Stabilising and stimulating the economy
Introduction
to basic Monetary policy involves adjusting the nation’s money supply (the
economics amount of spendable money in the economy at any given time) by
increasing or decreasing interest rates.
Jerry Leung 9
Role of Economic measures and monitors (continued)
businesses
The gross domestic product (GDP) is the value of all the final goods and
Introduction services produced by businesses located within a nation’s borders. It
to basic excludes outputs from overseas operations of domestic companies.
economics • It measures a country’s output – its production, distribution and
use of goods and service
• This is through computing the sum of all goods and services
produced for final use in a country during a specific period
The concept of shared value can be defined as the policies and operating
practices that enhance the competitiveness of a company while
simultaneously advancing the economic and social conditions in the
communities in which it operates.
• Creating shared value aims to create economic value in a way
that also creates value for society by addressing its needs and
challenges – by focussing on identifying and expanding the
connections between social and economic progress
• This requires a deeper appreciation of societal needs, a greater
understanding of the true bases of company productivity and the
ability to collaborate across profit/non-profit boundaries
• In neoclassical thinking, a requirement for social improvement
imposes a constraint on the corporation (e.g. hiring disabled).
Adding a constraint to a firm that is already maximising profits,
says the theory, will inevitably raise costs and reduce profits
Jerry Leung 10
Role of Introduction to creating shared value (continued)
businesses
• A related concept (with the same conclusion) is the notion of
Creating externalities – which arise when firms create social costs that
shared value they do not have to bear (e.g. pollution)
• Thus, society must impose taxes, regulations and penalties so
that firms ‘internalise’ these externalities (the rationale behind a
lot of government policy)
• Corporate responsibility programs have typically been a reaction
to external pressure to improve firms’ reputation and are now
perceived as a necessary expense – however, societal issues are
still rarely approached from a value perspective but treated as a
peripheral matter
The three avenues for creating shared value are listed below. They are
mutually reinforcing and intertwined.
1
A value chain is a set of activities that a firm operating in a specific industry performs in order to deliver a
valuable product or service for the market.
Jerry Leung 11
Role of How shared value is created (continued)
businesses
Redefining productivity in the value chain2
Creating • Energy use and logistics – better technology, recycling,
shared value cogeneration and numerous other practices have the potential to
create shared value (e.g. logistical systems beginning to be
redesigned to reduce shipping distances, streamline handling,
improve vehicle routing – cheaper costs, environmentally friendly)
• Resource use – heightened environmental awareness and
advances in technology are catalysing new approaches in areas
such as utilisation of water, raw materials and packages as well as
expanding recycling and reuse (similar to above)
• Procurement – the traditional playbook calls for companies to
commoditise and exert maximum bargaining power on suppliers
to drive down prices even when purchasing from small
businesses/subsistence-level farmers, empowering local suppliers
through financial grants and practical assistance can increase
supplier profits and local employment whilst also resulting in a
more reliable supply chain (hence creating shared value)
• Distribution – examining this from a shared value perspective can
lead to more cost-effective, environmentally friendly and/or
humanitarian distribution models (e.g. digitisation of information)
• Employee productivity – traditional approaches to minimise the
cost of expensive employee health care coverage resulted in lost
workdays and diminished productivity, investment in wellness
programs creates shared value (benefits employees’ health whilst
also resulting in a more present and productive workforce)
• Location – the oversimplified thinking that ‘the cheaper the
location, the better’ is being challenged by rising costs of energy
and carbon emissions but also a greater recognition of the
productivity cost of highly dispersed production systems/hidden
costs of distant procurement, remaking value chains closer to
home as to establish deep roots in important communities can
lower production costs and foster local employment
2
A value chain is a set of activities that a firm operating in a specific industry performs in order to deliver a
valuable product or service for the market.
Jerry Leung 12
Role of How shared value is created (continued)
businesses
Building up supportive industry clusters at the company’s locations
Creating • Productivity and innovation are strongly influenced by clusters or
shared value geographic concentrations of firms, related businesses, suppliers,
service providers and logistical infrastructure in a particular field
• They play a crucial role in driving productivity, innovation and
competitiveness. Capable local suppliers foster greater logistical
efficiency and ease of collaboration
• Firms create shared value by building clusters to improve
company productivity while addressing gaps or failures in the
framework conditions surrounding the cluster – this can also lead
to more open and transparent markets
• Enabling fair and open markets can allow a company to secure
reliable supplies and give suppliers better incentives for quality
and efficiency while also substantially improving the incomes and
purchasing power of local citizens (job creation)
• To support cluster development in the communities in which they
operate, companies need to identify gaps and deficiencies in
areas such as logistics, suppliers, distribution channels, training,
market organisation and educational institutions
• Then, the task is to focus on the weaknesses that represent the
greatest constraints to the company’s own productivity and
growth, and distinguish those areas that he company is best
equipped to influence directly from those in which collaboration
is more cost-effective
• Enhancing infrastructure and institutions in a region often
requires collective action (i.e. collaboration with private sector,
trade organisations, government agencies, NGOs) as to share the
cost, win support and assemble the right skills
Jerry Leung 13
Role of Government regulation and shared value
businesses
Regulation is necessary for well-functioning markets, something that
Creating became abundantly clear during the recent financial crisis. However, the
shared value way regulations are designed and implemented determine whether they
benefit society or work against it.
Jerry Leung 14
Role of In French, the term ‘entrepreneur’ describes someone who undertakes a
businesses significant project or activity.
• More specifically, it came to be used to identify the venturesome
Social individuals who stimulated economic progress by finding new
entrepreneur and better ways of doing things (i.e. create value)
-ship • According to Schumpeter, entrepreneurs are the change agents in
the economy as they serve new markets or create new ways of
doing things to move the economy forward
• Drucker does not require entrepreneurs to cause change but sees
them as exploiting the opportunities that change creates (‘the
entrepreneur always searches for change, responds to it and
exploits it as an opportunity’).
• An opportunity, presumably, means an opportunity to create
value in this way. Entrepreneurs have a mindset that sees the
possibilities rather than the problems caused by change
• Drucker also notes that not every new small business is an
entrepreneur, nor does entrepreneurship require a profit motive
• Stevenson added an element of resourcefulness to the
opportunity-oriented definition of an entrepreneur, asserting
that entrepreneurs mobilise the resources of others to achieve
their own entrepreneurial objectives
Jerry Leung 15
Role of Social entrepreneurs (continued)
businesses • If an entrepreneur cannot convince a sufficient number of
customers to pay an adequate price to generate a profit, this is a
Social strong indication that insufficient value is being created to justify
entrepreneur this use of resources
-ship • A re-deployment of the resources happens naturally because
firms that fail to create value cannot purchase sufficient
resources or raise capital
• It is much harder to determine whether a social entrepreneur is
creating sufficient social value to justify the resources used in
creating that value. The survival or growth of a social enterprise
is not proof of its efficiency or effectiveness in improving social
conditions. It is only a weak indicator, at best.
Social entrepreneurs play the role of change agents in the social sector.
The attack underlying causes of problems and seek to create systemic
changes and sustainable improvements by:
• Adopting a mission to create and sustain social value (not just
private value) – social impact is the gauge
• Recognising and relentlessly pursuing new opportunities to serve
that mission – persistence and adaptability to seek opportunity
• Engaging in a process of continuous innovation, adaptation, and
learning – does not necessarily involve inventing something
wholly new, it can simply involve apply an existing idea in a new
way or to a new situation (despite uncertainty, risk of failure)
• Acting boldly without being limited by resources currently in
hand – skilled at doing more with less and at attracting resources
from others, use scarce resources efficiently by drawing in
partners and collaborating with others, take calculated risks
• Exhibiting heightened accountability to the constituencies served
and for the outcomes created – take steps to ensure they are
creating value, assess the needs and values of individuals within
communities in which they operate, understand the expectations
and values of investors, seek to provide real social improvements
and provide attractive return to their investors, assess progress in
terms of social, financial and managerial outcomes
Jerry Leung 16
The internal The role of resources and capabilities in strategy formulation
environment
Strategy is concerned with matching a firm’s resources and capabilities to
the opportunities that arise in the external environment
Jerry Leung 17
The internal Resources and capabilities as a source of profit (cont.)
environment
• Porter’s five forces framework suggests that industry
attractiveness often derives from the ownership of strategic
resources
• When the primary concern of strategy was industry selection and
positioning, companies tended to adopt similar strategies
• The resource-based view, by contrast, recognises that each
company possesses a unique collection of resources and
capabilities; the key to profitability is not doing the same as other
firms but rather exploiting differences
• Establishing competitive advantage involves formulating and
implementing a strategy that exploits a firm’s unique strengths
____________________________________________________________
Resources are the productive assets owned by the firm; capabilities are
what the firm can do
• Individual resources must work together to create/result in
organisation capability
• Organisational capability, when applied through an appropriate
strategy, provides the foundation for competitive advantage
Identifying resources
Jerry Leung 18
The internal Identifying resources (cont.)
environment
Intangible resources (cont.)
• Other types of intellectual property are patents, copyrights, and
trade secrets which form the proprietary knowledge assets of the
firm – increasingly valuable resources (often defended through
litigation) in an increasingly knowledge-based economy
• Firm relationships (are also intangible resources) provide a firm
with access to information, know-how, inputs, and a wide range
of other resources that lie beyond the firm’s boundaries. Being
embedded within an inter-firm network also conveys legitimacy
upon a firm, which can enhance its survival capacity
• Organisational culture (also an intangible resource) is ‘an
amalgam of shared beliefs, values, assumptions, significant
meanings, myths, rituals, and symbols that are held to be
distinctive.’ – exerting a strong influence on organisational
capabilities developed and their efficiency
Classifying capabilities
• This is useful in providing a comprehensive view of an
organisation’s capabilities but may fail to identify those
idiosyncratic capabilities that are truly distinctive and critical to
an organisation’s competitive advantage
• A functional analysis identifies organisational capabilities within
each of the firm’s functional areas (e.g. operations, sales)
• A value chain analysis identifies a sequential chain of the main
activities that the firm undertakes, distinguishing between primary
activities and support activities
• Routines and processes integrate individual actions to create
higher-level capabilities
Jerry Leung 19
The internal Classifying capabilities (cont.)
environment • The capabilities of an organisation may be viewed as a
hierarchical system in which lower-level capabilities are
integrated to form higher-level capabilities
• Dynamic capabilities—capabilities that allow the modification and
adaptation of lower-level operational and functional capabilities
• The effectiveness of a firm’s capabilities depends upon the extent
to which they are mutually reinforcing in delivering the firm’s
value proposition (‘corporate coherence’)
____________________________________________________________
Jerry Leung 20
The internal Appraising the relative strength of a firm’s resources and capabilities
environment
Benchmarking – the process of comparing one’s processes and
performance to those of other companies—offers an objective and
quantitative way for a firm to assess its resources and capabilities relative
to its competitors.
____________________________________________________________
Exploiting key strengths – the foremost task is to ensure that the firm’s
critical strengths are deployed to the greatest effect:
The external The environment is what gives organisations their means of survival. In
environment the private sector, customers keep an organisation in business whilst in
the public sector, it is the government, clients, patients or students. Yet,
it is also the source of threats.
Jerry Leung 21
The external The macro-environment
environment
The PESTEL framework
The key drivers for change are environmental factors that are likely to
have a high impact on the success of failure of strategy. They differ by
industry or sector.
Building scenarios
Jerry Leung 22
The external Industries and sectors
environment
An industry is a group of firms producing the same principal product or
service or more broadly, a group of firms producing products that are
close substitutes for each other.
Jerry Leung 23
The external The threat of entry (continued)
environment
Expected retaliation – price war or pricing blitz
Legislation or government action – patent protection, regulation
of markets, direct government action
Differentiation (providing a product or service with higher
perceived value than competitors)
There does not have to be much actual switching for the substitute threat
to have an effect. The simple risk of substitution puts a cap on the prices
that can be charged in an industry. Two important points to consider are:
The price/performance ratio – a substitute is still an effective
threat even if more expensive, so long as it offers performance
advantages that customers value
Extra-industry effects (the core of the substitution concept) –
substitutes come from outside the incumbent’s industry (not to be
confused for competitors’ threats within the industry), the value
of the substitution concept is to force managers to look outside
their own industry to consider more distant threats and
constraints (more threats of substitution, less attractive industry)
Jerry Leung 24
The external The power of buyers (continued)
environment ‘
Buyer competition threat – if the buyer has some facilities (or can
acquire such facilities) to supply itself it tends to be powerful as it
can raise the threat of doing the suppliers’ job themselves
(backward vertical integration)
Suppliers are those who supply the organisation with what is required to
produce the product or service and includes labour and sources of
finance. The supplier power is likely to be high when there are:
Concentrated suppliers – few suppliers dominant supply
High switching cost – expensive or disruptive to move suppliers
Supplier competition threat – can cut out buyers who are acting
as intermediaries (forward vertical integration), moving closing to
the ultimate customer
Competitive rivalry
The previous wider competitive forces (four forces mentioned above) all
impinge on the direct competitive rivalry between an organisation and
the most immediate rivals. The more competitive rivalry there is, the
worse it is for incumbents within the industry.
Low barriers to entry increase the number of rivals
Powerful buyers with low switching costs force suppliers to high
rivalry in order to offer the best deals
Jerry Leung 25
The external Competitive rivalry
environment
High fixed costs – industries with high fixed cost (e.g. high
investments in capital equipment/initial research) are likely to be
highly rivalrous as organisations seek to reduce unit costs by
increasing their volumes which typically involves price cuts
(leading to pricing wars), if extra capacity can only be added in
large increments the competitor making such an addition is likely
to create short-term overcapacity in the industry and result in
increased competition to use capacity
High exit barriers – high barriers to closure or disinvestment (e.g.
high redundancy costs) increases rivalry and organisations fight to
maintain market share
Low differentiation – rivalry is increased in commodity markets
where products or services are poorly differentiated, little to stop
customers switching as the only way to compete is price
Jerry Leung 26
The external The dynamics of industry structure
environment
Competitive forces change over time. The key drivers for change are likely
to alter industry structures and scenario analyses can be used to
understand possible impacts.
The power of the five forces typically varies with the stages of the
industry life cycle. The industry life cycle is typically comprised of stages
unpredictable length which include stages of:
Development – few players exercising little directly rivalry, highly
differentiated products, weak five forces, profits may actually be
scarce because of high investment requirements
Rapid/high growth – rivalry low due to plenty of market
opportunity, buyers keen to secure supplies and lack
sophistication about what they are buyer (lower buyer power),
barriers to entry may be low and the power of suppliers if there is
a shortage of components of materials
Shake out – growth rate starts to decline (market share is key to
survival), increased rivalry forces weakest new entrants out of the
market, barriers to entry tend to increase as control over
distribution is established alongside economies of scale and
experience curve benefits which come into play, products or
services tend to standard, increased buyer power as they become
confident in switching between suppliers
Decline – extreme rivalry (especially if there are high exit barriers)
Jerry Leung 27
The external Hypercompetition and competitive cycles
environment
Cycles of competition comprises of sequences of move and counter-
move – whereby competitors constantly interact in terms of competitive
moves (e.g. matching of price cuts, imitation of innovation)
In some industries, these interactions become so intense and fast
that industry structures are constantly undermined
Such industries are hypercompetitive – trapped by the aggressive
interactions of competitors into negative downward cycles for all
concerned, with competitors attacking and counter-attacking each
other in a way that precludes stability and makes sustainable
profits impossible. This known as hypercompetition, which occurs
where the frequency, boldness and aggressiveness of dynamic
movements by competitors accelerate to create a condition of
constant disequilibrium and change
The cycle of competition concept underlines the fact that industry
structures are not natural but are often created and reshaped by
the deliberate strategies of competitors
Jerry Leung 28
The external Comparative industry structure analyses
environment
The industry life cycle and cycles of competition notions underline the
need to make industry structure analysis dynamic. One effective means of
doing this is to compare the five forces over time in a ‘radar-plot’.
If one of the forces is very adverse, then this might nullify positive
assessments on the other four axes.
Strategic groups
Jerry Leung 29
The external Strategic groups (continued)
environment
The strategic group concept is useful in:
Understanding competition – enabling managers to focus on their
direct competitors within their particular strategic group,
establishing what distinguishes them from other groups
Analysis of strategic opportunities – identifying the most
attractive ‘strategic spaces’ within an indsutry
Analysis of mobility barriers – identifying obstacles for movement
from one strategic group to another
Market segments
Jerry Leung 30
The external Identifying the strategic customer
environment
The strategic customer is the person(s) at whom the strategy is primarily
addressed because they have the most influence over which goods or
services are purchased.
Unless there is clarity on who the strategic customer is, managers
can end up analysing and targeting the wrong people
It is the desires of the strategic customer that provides the starting
point for strategy. For example, for many consumer goods, the
retail outlet is the strategic customer as the way it displays,
promotes and supports products in store is hugely influential on
the final customer preferences
Critical success factors (CSFs) are those product features that are
particularly valued by a group of customers and, therefore, where the
organisation must excel to outperform competition (these can be
visualised through a strategy canvas – compares competitors’ positions in
a market and potential in different segments).
Jerry Leung 31
The external Opportunities and threats
environment
A strategic gap is an opportunity in the competitive environment that is
not being fully exploited by competitors.
W. Chan Kim and Renee Mauborgne have argued that if
organisations simply concentrate on competing head to head
with competitive rivals, this will lead to competitive convergence
where all ‘players’ find the environment tough and threatening.
This is known as a ‘red ocean’ strategy – red because of the
bloodiness of the competition and the red ink caused by financial
losses. They urge managers to attempt ‘blue ocean’ strategies
Jerry Leung 32