Entrepreneurial Views of Competitive Strategy

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Entrepreneurial Views of Competitive Strategy

  1. 1. Entrepreneurial views of competitive strategy Assignment for part-time MBA Competitive Strategies, week 4 By Gulcin Askin, Michelle Donovan, Kivanc Ozuolmez and Peter Tempelman September 24, 2012
  2. 2. The reasons for differences in performance of firms have been subject to research formore than fifty years. Building on earlier positioning and resource-based views, we willcompare and contrast the leading entrepreneurial views and look at a new definition of“performance”. In the articles of Jacobson (1992), Coff (1999), Martin and Moldoveanu (2003),Stoelhorst, and Bridoux (2008) several similarities can be observed. Each author looks deeperinto the inner workings of a firm to reach their conclusions. The following elements arediscussed in at least two of the articles referred to above. The concept of rent appropriationis a dominant concept in the articles of Coff (1999) and Martin and Moldoveanu (2003) and toa lesser extent in Stoelhorst and Bridoux (2008). In these articles the authors discuss how rentthat is created is divided by stakeholders in the firm: employees and owners (Stoelhorst andBridoux 2008), or shareholders, management and employees (Martin and Moldoveanu 2003,Coff 1999). The extent to which rent that is created in a firm can be used as a measure ofperformance of that firm is discussed by Coff (1999) and Stoelhorst and Bridoux (2008). Forinstance, in a situation where the process to divide rent results in a high level of appropriationby employees, the output of rent to shareholders would in that case be less than in a situationwhere employees had not appropriated a large part of the rent. Hence, the observable rentwould be relatively low suggesting that the company has not performed well; but Coffobserves that the link between generated rent and performance can be misleading and askswhether a firm that generates rent that is not observable in traditional measures ofperformance can have a strategic advantage. He even suggests that in the long term, survivalof the firm may be the best measurement of performance, because all stakeholders have aninterest in the firm’s continued existence. Stoelhorst and Bridoux (2008) develop existing 2
  3. 3. RBV-theory to deal with the issue of rent. Rent appropriation can only take place if there isrent that can be appropriated in the first place. Jacobson (1992), Martin and Moldoveanu (2003) and Stoelhorst and Bridoux (2008)all discuss the ways in which value creation takes place within the firm. Jacobson (1992)focuses on the Austrian School, in which profit is a result of a market imperfection that isexploited by the entrepreneur. Stoelhorst and Bridoux (2008) mention two traditional sourcesof value created: Ricardian Rent theory and (Schumpetarian) Rent theory. They add threeother sources of value created: through exchange, through production and through innovation.This last method of value creation is possible if the firm has talented employees. Thesetalented employees have the knowledge necessary to come up with innovations that will givethe firm a competitive advantage. Talented employees as a condition for value creation arementioned by Jacobson ‘knowledge of people’ (1992) and Martin and Moldoveanu (2003).Also the role of the entrepreneur is discussed by both Jacobson (1992) and Stoelhorst andBridoux (2008): rent due to superior skill. Martin and Moldoveanu (2003) focus on the“talent” within a firm as a source of advantage over competitors now that we have entered the“Information Age” and explain that the value of the business is the product of knowledgeand information. If there are no ideas, skills, or talent of knowledge workers then there areno profits. In the current era, there is a shortage of talent; therefore in recent years the talenthas found ways to negotiate a higher share of the profits. We can surmise then that if talent ismobile, it will move to firms where it is best rewarded, and so firms should look at the waythey attract and keep talent as an important source of competitive advantage. A final, but important element in these articles is the emphasis on the economy as adynamic system rather then a static system: equilibrium vs. disequilibrium. Jacobson (1992)argues that only in disequilibrium opportunities for entrepreneurs exist. Stoelhorst and 3
  4. 4. Bridoux (2008) identify pure profit, increasing returns and resource complementarities ascomponents of payment that stem from a dynamic environment. The subjects of rent appropriation, measurement of performance, value creation withinthe firm, talent, the role of the entrepreneur and the emphasis on disequilibrium as discussedby Jacobson (1992), Coff (1999), Martin and Moldoveanu (2003) and Stoelhorst, and Bridoux(2008) all explain performance differences between firms as a consequence of variousprocesses within the firm. This is unlike the views of the theories of the “standard economicmodels” which explain differences in performance as coming from those global concepts of“the environment” and “the market”, and the positioning school, who start to look a littlemore closely, focussing on the position of the firm within in its industry. Strategy in thepositioning school can be summarized as follows: a) strategy as fit b) there are barriers tocompetition c) strategies are generic positions in the market d) the essence of strategy isanalysis (Stoelhorst 2008). Therefore, according to the positioning school a firm derives a favourable competitiveposition and therewith possibly a higher performance due to an optimal fit between the firmand its environment (a). This position is such that the firm is protected by barriers fromcompetition therewith protecting its profitability (b). The strategy underlying the favourableposition is generic in character (c) and so strategy development is largely a matter of analysisof the external environment (d). Porter’s (1979) five forces model concentrates on the forcesacting upon a firm from the outside. The resource based view (RBV) on the other hand looks more to the firm itself to findhow differences in the resources that a firm controls can help explain the difference inperformance between firms. The differences between the RBV and Jacobson (1992), Coff(1999), Martin and Moldoveanu (2003) and Stoelhorst, and Bridoux (2008) are not asapparent as the differences between these authors and the positioning school. Strategy in the 4
  5. 5. RBV can be summarized as follows: a) strategy as stretch b) resources are the ultimate sourceof competitive advantage c) strategy is about having a clear view of the future and developingunique resource combinations to realize this vision (Stoelhorst 2008). Some of the elementsdescribed in the first part of this paper can also be found in the traditional RBV. However, thispaper is about the differences, so we will focus on these. Prahalad and Hamel (1990), whowrote about core competencies, and Stalk, Evans and Schulman (1992), who discussedcapabilities, (1992) provided some insights into what goes on inside the firm. Also Grant(1996) gave some insight into the processes within the firm by describing the way specializedknowledge is integrated. Prahalad and Hamel and Stalk, Evans and Schulman are not veryspecific however. Jacobson (1992), Martin and Moldoveanu (2003) and Stoelhorst andBridoux (2008) on the other hand are more detailed about the processes that go on inside thefirm by which value is created. Traditional RBV identifies resources as a source of competitive advantage. Prahaladand Hamel (1990) and Grant (1996) explicitly identify knowledge as an important resource.Coff (1999) and Martin and Moldoveanu (2003) develop on this further study the role ofknowledge and describe the consequences this resource has for the appropriation of rent andits effects on rent as a measure of firm performance. To summarize, starting with the IO and positioning views, followed by resource basedviews and then the entrepreneurial views, the perspective moves from seeing firms from adistance, first within “the economy”, then within their industry, then looking at the firm itselfand then even inside it, and from this new perspective, we need to consider a new definitionof performance. 5
  6. 6. Albert Heijn is a supermarket chain which offers convenience to its customers due to its high number of locations throughout the country, wide range of products, and many different supermarket formats. Revenue is generated by selling groceries to customers and franchisingtheir brand name. The central elements of their cost structure are rent for store locations andwarehouses, manufacturing, purchasing (of goods as well as infrastructure), logistics,advertising and staff salaries. Their advanced automatic replenishment systems enable themto use information strategically (for example, to reduce instances of out-of-stock products)and due to bulk-buying and hard negotiation with suppliers, Albert Heijn keeps costs undercontrol. The KLM is a ‘hybrid carrier’. It provides airtransportation services to travellers in a number of ways: as a full service network carrier in ahub-spoke system (Air France KLM), a holiday carrier in a point-to-point system(Transavia.com), a low cost carrier in a point-to- point (Transavia.com) and a traditionalfreight carrier (Air France KLM Cargo, MartinAir Cargo). In addition, maintenance servicesare provided worldwide through ‘KLM Engineering & Maintenance’ division.Revenue is generated by selling airline tickets to travellers, charging transportation costs fortransporting cargo and maintenance costs to owners/operators of airplanes. The cost structure of the KLM business model consists of investments in equipment(airplanes, facilities), people (i.e. pilots, cabin crew, ground personnel, maintenancepersonnel) and operating costs (i.e., airport charges, landing rights, marketing, andadministration). 6
  7. 7. ABN AMRO is a financial institution which provides tailormade financial solutions, services & consultancy to private, retail and corporate clients inlocal markets and aims for international growth by diversifying and strengthening its fundingprofile meanwhile holding high quality capital and applying effective cost control & riskmanagement mechanisms. Revenue is generated through banking products sold, services and consultancyprovided to private, retail and corporate customers in local and international markets. Mainrevenue components are net interest, fee and commissions income on granted loans andprovided services (portfolio management, insurance, payment and etc.). On the other hand,costs are mainly comprised of regular operating expenses (personnel, information technology,housing and etc.), interest & commission expenses (due to banks and customers), loanimpairments and risk provisions. McKinsey & Company, Inc. is a global managementconsulting firm that focuses on solving issues of concern to senior management. McKinseyserves as an adviser to many businesses, governments, and institutions. It is recognized as oneof the most prestigious consulting firms in the world, works with 100 leading globalcorporations, and two-thirds of the Fortune 1000 list. With its networked model of consulting,McKinsey is able to bring best practices to its clients. As a private firm, McKinsey is not required to disclose compensation figures;therefore details of its cost structure are not publicly available. On the other hand, looking atthe other consultancy firms, McKinsey’s main costs, as well as its main assets, should be itspeople. Additionally, John Huey (1993) says, "The Firm places itself above discussing moneyas a motivation, yet senior partners often earn as much, or more, than the CEOs they advise” 7
  8. 8. ReferencesCoff, Russel W. (1999), When Competitive Advantage Doesn’t Lead to Performance: TheResource-based View and Stakeholder Bargaining Power, Organization Science, 10(2): 119-133.Jacobson, Robert (1992), The “Austrian” School of Strategy, Academy of ManagementReview, 17(4): 782-807Grant, Robert M. (1996), ‘Prospering in Dynamically-Competitive Environments:Organizational Capabilities as Knowledge Integration’, Organization Science, 7(4): 375-387.Martin, Roger L. and Mihnea C. Moldoveanu (2003), Capital versus Talent: The Battle That’sReshaping Business, Harvard Business Review, (July): 36-41.Stalk, George, Philip Evans and Lawrence E. Schulman (1992), ‘Competing on Capabilities:The New Rules of Corporate Strategy’, Harvard Business Review, (March-April): 57-69.Stoelhorst J.W. (2008), Thinking about Strategy, Teaching note, Amsterdam Business School,3d edition.Stoelhorst, J.W. and Flore Bridoux (2008), Value Creation in the Knowledge Economy: TheRigor, Relevance and Morality of the RBV, Working paper, Amsterdam Business School,University of Amsterdam.Prahalad, C.K. and Gary Hamel (1990), ‘The Core Competence of the Corporation’, HarvardBusiness Review, (May-June): 79-91www.abnamro.comwww.klm.comhttp://www.annualreport2009.ahold.com/group/our_strategy/our_business_model.htmJohn Huey, Jane Furth (November 1, 1993). "How McKinsey does it". CNN.http://money.cnn.com/magazines/fortune/fortune_archive/1993/11/01/78550/index.htmReichmuth, Johannes, Hansjochen Ehmer, Peter Berster, Gregor Bischoff, WolfgangGrimme, Erik Grunewald, Sven Maertens (2008) ‘Definition of airline business models’,Analyses of the European air transport market airline business models, (5-13) 8

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