Introduction to Business Management

Andrea Tracogna
Professor of Management, University of Trieste

Andrea Tracogna
 What is a firm? Why do firms exist?

 Firms exist to coordinate and motivate people’s

economic activity
 When markets fail to yield an efficient solution to the
problems of coordination and motivation other
mechanisms may be better. The firm is the principal
such alternative.

Andrea Tracogna
 The Firm’s Stakeholders

 Who are the stakeholders? – Anyone who has an

interest in the success of a business
• Customers
• Managers
• Employees
• Owners
• Local Community/Environment
• Suppliers
• Government
• Creditors

Andrea Tracogna
 The firm’s objectives

Customer S
Net e atisfaction
ROS Incom B
r an
aw d
ROCE EV
Rate of innovation a re
ne s
s
A
owt h
Rate of gr
t e rm
on g
L i v a l of
v Levels
Sur o y e ment
V A
Susta empl M
inabil Tot
i ty al S
tock
sha r e ho l
e t der
M ar k Ret
urn
Net n
i
M ar g ROE Earnings Growth

Andrea Tracogna
 Corporate Governance

Whose that job?

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 What Businesses Do


Meet the needs of stakeholders

Buy inputs – raw materials, labour, machinery
and equipment, land

Produce outputs – goods and services

Focus on efficient use of resources

Generate profit/surplus

Andrea Tracogna
 A firm’s resource portfolio

 Intangibles
 Tangibles •Knowledge
• Financial – Human Resources
Resources – Organizational
• Technical competencies
assets – Technology
• “Networks” •Trust
– brands
– reputation
– Relational
competence

Andrea Tracogna
 What Businesses Do

Take Inputs Process/Manufacture Output

Costs – Fixed and Variable Revenue

Profit

Andrea Tracogna
 THE CASH-TO-CASH CYCLE

Total cycle: Economic cycle + CD

Economic cycle: I1 + T + I2

cash-to-cash cycle

Inventories Transformation Inventories

Debts’ Credits’
delay delay

T I2 CD
I1

DD

Andrea Tracogna
 A Firm’s value offer

Brand
Brand Product
Product

Store
Storeexperience
experience Services
Services

Value
Valueoffer
offer

Promotion
Promotion Price
Price

Communication
Communication Customer
Customerrelation
relation

Andrea Tracogna
 THE SUPPLY CHAIN

Suppliers Focal firm Distributors Customers

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 What happens inside a Supply Chain?
Materials flow

Paper flow

Plant and Wharehouse Subsidiary POS End

suppliers customer

Cash flow

Suppliers Focal firm Reseller

Information flow
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 THE VALUE SYSTEM

Research Tech systems Communities Information

providers

End
Suppliers Focal firm Distributors
Customers

Design Complementors Logistic services POS management

Andrea Tracogna
 THE VALUE CHAIN

FIRM’S INFRASTRUCTURE

SUPPORT HRM

M
AR
ACTIVITIES

GI
PRODUCT DEVELOPMENT AND TECHNOLOGY

N
PROCUREMENT

INBOUND OPERATIONS OUTBOUND MARKETING

M
SERVICES

A
LOGISTICS LOGISTICS AND SALES

RG
IN
PRIMARY ACTIVITIES
Andrea Tracogna
 TOWARDS THE HOLLOW CORPORATION?

Andrea Tracogna
 What is “outsourcing”?

 “Outsourcing” is a term coined to describe the

practice chosen by many companies of
contracting out to other companies some -
usually manufacturing - activities of the value
chain that used to be carried out in-house.

The big question is: Has outsourcing

gone too far?

Andrea Tracogna
 There can be different reasons for outsourcing

 First of all, the search for flexibility. Firms outsource production when
demand is high and cancel it when orders are cancelled or demand
falls. Thanks to the substitution effect between fixed and variable
costs they obtain higher cost elasticity.
 Lower costs, especially when the firm can benefit from suppliers’
economies of scale (a supplier can integrate demand from a large
number of clients, as against the purchasing firm) and economies of
specialisation (a supplier can specialise in single activities and reach
world-class levels of excellence).
 Less investments in fixed (machinery, equipment, production lines,
transport systems) and working capital (input and output stocks),
which are undertaken by suppliers.
 Less investments in R&D as firms can take advantage of the
numerous innovations available on the outside supply market.
 A greater focus of the outsourcing firm on client needs and services
and product development activities, i.e. on key activities for value
creation;

Andrea Tracogna
 From Fordism to Post-Fordism

 “The era of vertical integration

is over” (R. Reich)
 “Good bye to the old dividing
line between manufacturing
Henry Ford and services” (The
Economist)
 The new international division
of labor, and the
“deindustrialization” of the
West
 The new emerging business
models: Virtual organizing,
Taiichi Ohno hollow corporations,
boundaryless organizations

Andrea Tracogna
 Global sourcing and offshoring

Seen through the labels of the products we buy, the world

looks much smaller than it actually is.
When we visit a footwear or clothing outlet in a Western
country we find trousers coming from Malaysia, shirts
from Turkey, jackets from the United States and jeans
made in Guatemala and, perhaps, high quality shoes
coming from the Marche region or Vigevano in Italy.

Outsourcing + Globalization = Global sourcing

Global sourcing ≠ Offshoring

Andrea Tracogna
 Global sourcing: the Nike case

 Nike has relocated production of its footwear and

clothing to 51 countries where its third party
production units employ more than 500,000
people (as against approximately 14,000 people
directly employed by the multinational).
 From its headquarters in Beaverton, Oregon, Nike
manages a worldwide virtual company combining
internal R&D functions with a low cost
manufacturing strategy. For instance, its “Air Max”
model is designed in sites in Oregon and
Tennessee and developed jointly by American
and Asian technicians in the USA, Taiwan and
South Korea. Sneakers are then assembled in
South Korea (man’s size) and Indonesia (boys’
size) from dozens of components supplied by
firms in Japan, South Korea, Taiwan, Indonesia
and the United States. Similarly, Nike outsources
distribution to firms that specialise in logistics
services.

Andrea Tracogna
 Nike Supply chain: costs, margins and profit (www.nike.com)

Andrea Tracogna
 Global sourcing and Corporate Social Responsibility

 Recently, thanks also to pressure from

consumers groups, governments, trade unions
organisations and non-governmental
organisations, there is a more mature
awareness of the social accountability of
Western companies involved in global sourcing
processes. Most significant measures include
the voluntary adoption of “Ethical Codes of
conduct” by multinationals such as Levi’s, The
Gap, Reebok and Nike.

Andrea Tracogna
 The natural evolution of outsourcing is
Business Process Outsourcing (BPO)

 In BPO the contract manufacturer is responsible for managing a

complete business process on behalf of the client.
 As a result, for instance, contract manufacturing is more often
connected to provision of logistics services and management of
on-line orders.
Supply Chain Management is the coordination of information,
manufacturing and logistics flows
We are witnessing the growth and consolidation of a logistics
services market made up of firms that can replace their clients in all
or part of their logistics activities (Third party logistics providers) or
play the role of web designers or negotiators of relationships with
specialised operators (Fourth party logistics providers

Andrea Tracogna
 The limits and risks of outsourcing

Outsourcing requires every company to find a delicate

balance between two opposite objectives:
 Exploiting opportunities (competitive advantages)
offered by existing markets for resources;
 Limiting strategic vulnerability in the event of a break-
up of relationships with suppliers or overall “market
failure”.
It is not just a matter of deciding “how much” to make or
“how much” to buy. The issue can be dealt with
through negotiating, or structuring the outsourcing
relationship in such a way it can meet monitoring
needs and ensure necessary flexibility. In this respect
there is a large number of outsourcing agreements
between the two extremes of make and buy including
partial integration and long-term contracts.

Andrea Tracogna
 Balancing vertical integration and outsourcing: the Zara case

 A clever balance between vertical

integration and outsourcing. This seems
today to be the “recipe” for success of
many companies such as the Spanish
Zara (controlled by the holding Inditex).
With 745 stores in 56 countries, Zara is
the retail clothing chain with the highest
expansion rate in Europe. As against
many competitors, Zara manufactures
in-house more than half of all garments
it sells, at the Spanish plant in La
Coruna. At the core of its success is a
vertically integrated model which covers
all phases of the fashion process:
design, manufacture, logistics and
distribution to its own stores.

Andrea Tracogna
 Country-specific advantages and Competitiveness:
Porter’s diamond

 Enterprises can benefit from the synergies created by the presence – within
the same Country - of demanding purchasers, specialized suppliers, high-
skilled human resources and developed financial and support institutions.

Demand

Factors of Support
Production Industries

Rivalry

Andrea Tracogna