Hosmer and ethics (reader)

The basic gist of the long Hosmer article is

• that the trust and commitment of all stakeholders in the firm is needed.
• the strategic decisions of [firms] result in benefits and harms. Harms include job losses, terminations of supplier contracts, deterioration of environments etc. They can't be avoided but until recently have been ignored
• It is the responsibility of managers to distribute the harms and benefits amongst the stakeholders of the company. This can be done arbritrarily or thoughtfully. If it is done thoughtfully then it is ethics in action.
• Ethical means offer the only means of taking into account the interests and rights of each stakeholder and compare them through the use of known principles
• Stakeholders who [see ethics in action] develop trust in the direction of the firm
• Stakeholders who develop trust in the direction of the firm will show commitment to its future...leading to competitive and economic success for that firm.

The argument is that the industry position (porter) and the leveraging of resources (RBV, Prahalad and Hamel) is not enough without trust, commitment and effort, and that can be achieved through ethical behaviour and strategic planning.

Corporate Social Responsibility (CSR) U4S4P45

Milton Friedman - "Few trends so thoroughly undermine the very foundations of our free society as the acceptance by corporate officials of a social responsibility other than to make as much money for their stockholders as possible" (Friedman, 1962).

Of course, this was written at a time when Communism (and by association socialism) were the number one enemy of the free american.

CSR is not an issue for strategy makers in organisations of all types and sectors.

Questions...

• Does the org have a 'moral' responsibility to be a good citizen, or to consider the objectives of stakeholders other than the owners?
• Is there a clear distinction between CSR and corporate governance
• If you believe the organisation has a wider responsibility, how great an impact upon an organisation's objectives should these other stakeholders exert? Should this wider responsibility have an impact on the organisation's ability to make a profit or deliver a service?
• How much will this responsibility cost - and does the cost outweigh any benefit?
• Will acknowledging this responsibility have any impact in reality on the way the org operates?

CSR can present a problem for governments due to strong corporate lobbies arguing for the status quo.
Governments also have competing priorities, and prosperity vs society arguments may come up.

There is frequent relocation of manufacturing activities to developing economies to save costs. But these countries often have lower social standards, and so the potential for unwanted externalities may increase.
If the org is a "citizen" within society, then how bound should the organisation be by norms and morals that guide and influence behaviour in that society?

But what about ethics? Corporate ethics involve establishing and following a set of standards that regulat conduct and interaction with a variety of interested stakeholders - u4s4p52. So an ethical strategy is the product of negotiation with the various concerns of stakeholders (Goodpaster, 1991). But who should the manager answer to when conflict arises? Shareholder? Government? Consumer? Society?

CSR itself is potentially unethical - it does not properly reward shareholders for the risk they are exposed to by investing their capital.

However if employees believe their organisation is unethical their motivation may deteriorate leading to a failure of organisational purpose, and potentially even bigger failures.

Enron and Parmalat were both "brought down" by unethical employees. In this case all stakeholders lost out, including shareholders (except maybe competitors).

Stakeholder analysis

A stakeholder analysis will allow you to assess the relative importance of each potential stakeholder group in order to manage their impact on the strategy process.

Stakeholders attain power from:-

• Formal authority (manager, director etc)
• Organisational structures and procedures (particularly in bureaucracies)
• Control of decision processes (ability to influence the context of decision making - director's wife...)
• Control of knowledge and information (knowledge and information are sources of power as they are important to the achievement of competitive advantage)
• Boundary management (the ability to monitor and control transactions with other parties outside the organisation - brokers, secretaries, etc)
• Control of technology

Winstanley et al (1995)'s stakeholder power matrix can be used to understand where a stakeholder group might hold and seek to exercise power. It's a typical matrix with quadrants, with continuums for operational power and criteria power.

Operational power is the ability to affect the operation of the firm. Criteria power is the ability to influence decision making. The four quadrants are

• Arm's length power (power over rules of the game)
• Comprehensive Power (major shareholders of a firm)
• Operational Power (key groups of employees or suppliers of key materials/services)
• Disempowered (end customers for a niche product or staff with unmarketable skills)

Salience
...The salience of stakeholder claims. Salience == prominence, importance, significance. The interests of the most salient stakeholder feature most prominently in a manager's thoughts. A definitive stakeholder has the most salience and is the most significant stakeholder for any organisation.

Agle(1999) et al says salience results from:

1. the power the stakeholder has over the actions of the organisation - their ability to influence decisions
2. the legitimacy of their claim over the organisation, which can be based on moral or legal grounds
3. the urgency with which an organisation feels it needs to satisfy stakeholder claims or respond to their demands

Stakeholders with most authority and whose claims need to be met most urgently are the most salient to managers.

In organisations where only owners are salient, strategy will focus on shareholder value.

Stakeholder Groups U4S3P34

Lynch 2003

1. Those who have to carry out the actions necessitated by the strategy
2. Those who have a stake in the outcome

Hitt et al (2003) list three groups

1. Capital market stakeholders
2. Product market stakeholders
3. Organisational stakeholders

Argenti (2003) splits stakeholders into primary (Managers, Employees, Customers, Shareholders, Communities) and secondary (media, suppliers, government [local/regional/national], creditors, ngos). Primary stakeholders provide resources without which the firm cannot operate.

Agency theory of the firm (manager is the owner's agent) creates a potential conflict of interest - moral hazard - where managers may use their discretion to control assets for their own benefit.

Moral Hazard - actions by party A which affect party B but cannot be monitored or evaluated fully by party B

Purpose as a public statement u4s2p24

Pearce (1982) said a mission/purpose/vision etc normally have the following components

• product or service, market, and production and delivery technology
• company goals
• company philosophy
• company self-concept (understanding its place in its environment)
• present and future public image
• attitude to stakeholders etc.

But don't expect to find anything about values, beliefs or strategic direction!

Not for Profit organisations u4s2p20

Most NFPs do not have shareholders in the traditional sense, and they exist to fulfil the objectives set out in legislation or the founding documents. However managers in nfps should recognise that there are still implicit wishes of donors and resource providers, eg government, charitable donors. NFPs are not above the "shareholder vs stakeholder" debate.

Sometimes there are issues finding quantifiable measures in NFPs. Sometimes the approach is cost-benefit analysis (when making decisions), other times efficiency and effectiveness (where the decision has already been made and your job is to implement).

Resources - the opportunity cost of the provision of public services etc. should be recognised.

The market - the justification that a market makes more efficient allocation of resources is sometimes used to support the reduction in the public supply of services.


Does privatisation of a NFP alter its purpose? Would a requirement to act more like a business enable the delivery of purpose more effectively?

Profit in for-profit organisations

u4s2p12 Issues:-

1. profit as a source of purpose in for-profit organisations
   
   • assumes key influence over strategy is from shareholder(s)
   • objectives of all other stakeholders take second place (org does not accept a role in delivery of benefit to wider stakeholders)
     HOWEVER, for all for-profit orgs, profitability is crucial
2. measuring profit
   What measures should be used? Profit? Income? Value added? NPV?
   
   • Economic Profit - over a particular time period, short run or long run. Can be
     
     • Normal Profits - economic profit of a normally efficient organisation in a "perfect" market
     • Abnormal Profits - profits in excess of normal earned by an org exploiting its competitive advantage
   • Accounting Profit (net profit after interest and tax, or before tax, or operating profit - net before interest and tax) 
   • ROCE, ROSE
   • Residual Income
   • Economic Value Added
   • Net Present Value
3. the importance of risk
   Shareholders are the principle providers of funds and so have a special moral status which means they are due rewards for the risk they incur through their investment
4. the significance/demands of survival
   Recognising that many firms have a day to day struggle to survive, and the "perfect" market does not exist, so turbulence and strong competitive activity can affect establishment of purpose. In a very hostile environment it may be that "survival is the only sensible purpose (Lynch 2003).
5. a stakeholder perspective
   This assumes that Grant's assessment of the potential outcomes of the shareholder approach is invalid, and that net negative externalities are developing because of the shareholder approach. But a stakeholder perspective is more complex than a shareholder-only one. The stakeholder perspective requires that interests of all stakeholders are considered during the strategy process.
   
   • Resource Dependence theory - this is a theory that only stakeholders who contribute significant resource to the firm should be considered, rather than all.
   • The role of government - a stakeholder perspective recognises that governments may intervene in the organisation whereas a shareholder perspective prefers a limited role for government

Reflections on Unit 4 - The Organisation: Stakeholders, purpose and responsibility

The Learning Outcomes are - be able to

• review the strategic purpose of the organisation, and observe how different perspectives can have an impact upon the choice of strategy to pursue
• prepare a stakeholder analysis which describes the balance of exchange of resources and power in your organisation, to identify where stakeholder priorities may be in conflict, and appreciate how managers can mediate between stakeholder groups to deliver a consensus
• develop an appreciation of the relevance of corporate social responsibility to modern strategic thinking, and the impact that corporate citizenship, ethics and environmental responsibility may have upon the organisation

 The context is whether or not your strategy should be to create value for shareholders primarily, or a wider body of stakeholders.

Sloan (1967) supported shareholders. Drucker (1988) supported shareholders. In whose interests should the firm operate?

Grant also supports the shareholder view for 4 reasons.

1. If you're not seeking profit maximisation then your attractiveness to providers of capital will be reduced and you eventually won't exist.
2. If managers are not pursuing profits single-mindedly, then owners will replace them with managers who will.
3. Companies that are doing well and making money are more likely to be inclined to treat their employees well and behave more responsibly than those who are struggling or failing.
4. Diluting organisational purpose makes the process more complex which undermines success.

Stakeholder:- Any group or individual who can affect or is affected by the achievement of the organisation's objectives.

Stakeholder theory is the alternative to shareholder theory. Stakeholder theorists argue that a focus on profit can allow a large number of externalities to emerge.

Smith (2003) attributes problems and scandals at Enron, Global Crossing, Tyco and Worldcom to shareholder theory.

Less sensational example:-

A restaurant may create noise, congestion, smell and obesity which are all not accounted for in the cost of its food. Stakeholder theorists regard these externalities as important, and to be successful organisations should focus on their impact on a wide range of stakeholders (including shareholders) rather than just shareholders.

u4s2p10 - Organisational Purpose. Some definitions

Purposes or Objectives?

Purposes reflect the values and beliefs of the main stakeholders in an organisation, recognise culture and reflect the politics of stakeholder relationships. Purpose statements are normally called mission statements.

Objectives are more specific. Express particular stakeholder group expectations, or milestones. More likely to be quantifiable.

NATO - example of an org with a changed purpose.

RBV - Sustainability of Competitive Advantage

Heterogeneity in a firm's resources and capabilities is a necessary but not sufficient condition for any source of competitive advantage to be sustainable (u3s5p53)

The basis of competitive advantage within an industry can change - example is what has happened to film/camera companies such as Kodak and Polaroid. Superior film manufacturing (for example) was no longer a source of competitive advantage when the market went digital. (Or the market for film photography shrank and a new digital market appeared).

Competing flexibly :- responding to the external environment. Organisations need to be able to adapt while remaining stable enough to exploit any changes made (Volberda 1998).

Dynamic capabilities (Teece, Pisano and Shuen, 1997) are "the firm's ability to integrate, build and reconfigure internal and external competencies to address rapiudly changing environments. Dynamic capabilities thus reflect an organisation's ability to achieve new and innovative forms of competitive advantage given path dependencies and market positions".... because:

Firms operate in rapidly changing environments
It is difficult to adapt capabilities or develop new ones when required
Capabilities are not tradable in markets, but must be built within the organisation (due to tacit knowledge etc)
Capabilities take time to build and develop
The process of learning to develop capabilities is path dependent (history matters, bygones are not bygones)

So firms most likely to gain competitive advantage in turbulent environments are those best able to reconfigure and transform themselves, which is a capability in itself.

No s**t sherlock.... :)

Dynamic capabilities are created in the same way as other capabilities. Organisational routines are the main components. So, make or buy your capabilities? After all, we have been building the argument here that capabilities are built not bought. So why are so many people outsourcing?

By outsourcing, it is possible to take advantage of greater expertise and potential scale economies. Companies like Wipro can take advantage of lower overhead costs in places like Bangalore than almost any "western" firm. So the decision to develop capabilities internally should always be subject to economies of scale questions.


Modularity is the principle unlerlying the potential for external capability development. Modularisation of components and services makes it easy for manufacturers to replace or re-use certain components across a wide product range or future products, or use external firms to supply those modularised products or services.

Transaction cost economics is central to the insource/outsource decision. They suggest that the most efficient way to carry out a transaction is whichever way will minimise the costs of that transaction to the organisation. These costs might include the setting up and running of an internal supply contract, internal costs of management of time and resource, costs of operating at less than optimal scale efficiency etc.

The dilemma is that it is often difficult to evaluate today the true cost of a decision to outsource given that we are uncertain of its impact on our future strategic flexibility. See also table u3s5p64

RBV - Linking it to knowledge and learning u3s4p47

or.. the Knowledge Based View (as part of the Resource based View).

The KBV is considering knowledge the most important asset or resource under the RBV.

Spender (1996) said that the origin of all tangible resources lies outside the firm.

If you agree with this statement then it surely follows that competitive advantage is more likely to arise from the intangible firm-specific knowledge.

He says this is because it adds value to your production process in "a relatively unique manner".

Individuals tend to specialise in particular areas of knowledge and it can be difficult to transfer knowledge between individuals.

Explicit knowledge is the "know why" and is easier to articulate and pass on to other individuals.

Tacit knowledge is the "know how" and is more difficult to articular and pass on.

Grant (1996) says

• individuals are the source of knowledge creation
• efficiency in knowledge production requires that individuals specialise in a particular area of knowledge
• the essential task of the organisation is knowledge integration, ie to co-ordinate the efforts of specialists

So your employees are "assets walking around on two legs".

Tacit knowledge is almost impossible for rivals to imitate or replicate. (non-imitable and non-substitutable).

If an organisation relies heavily on the tacit knowledge of its staff, the greater the potential to permanently lose this expertise within the organisation, leading to a heavier emphasis on knowledge management systems.

Routines are to the organisation what skills are to the individual (Grant 2002, p149). They embody the organisation's learning to date and they come to act as the organisation's memory and an important store of knowledge.

Caveat Emptor: Organisations that have demonstrated a capacity for organisational learning through the creation of efficient routines might also have difficulties with responding to new situations.

RBV - The Resource Audit

Resource Audit u3s3p24

This allows you to identify and then evaluate your resources.

Based on Grant 2002.

Resources are classified as

• Tangible
• Intangible
• Human

Tangible - financial & physical assets
Intangible - IPR, reputation, culture - can be used in more than one area or product without reducing their quantity or value. Although valuable, they can be difficult to value.
Human - skills, knowledge, reasoning, decision making, co-ordinating other resources & assets.

Value Appopriation (u3s2p18)

I've already stated in previous blogs that the importance of a strategic asset is linked to its ability to generate value. Surely, then, it is imperative that the organisation is able to "appropriate" that value?

Therefore, it follows that success not only depends on the ability to create that value but to be able to appropriate it.

This can be helped through legal means such as property rights, eg copyright or patents. This allows resourceful innovation to generate appropriatable value that cannot be (legally) imitated. If your intangible assets include significant intellectual property, this is valuable capital that you need to protect.

The role of managers in the RBV

Barney (1991) says that it is possible to be "lucky" by being able to acquire the right resources at the right moment, however this is not something that should be left to chance. The manager's discrection is emphasised within RBV and managers have an important role in creating capabilities.

It's also important to consider, create, protect and nurture intangible assets. Brand is the example given; Disney's brand is an intangible asset of that company and it's not something that another company can exploit without entering into licencing arrangements or even acquiring Disney.

Your (strategic) assets cannot be adjusted instantaneously and have to be built over time. Because capability development is not a neat, controlled experiment but happens constantly and concurrently along with other capability development and other factors in the environment, there can be a lack of clarity as to exactly which factors lead to superior performance - this is causal ambiguity (Lippman and Rumelt, 1982)

Barney also says only valuable resources can contribute to competitive advantage. Such resources are:-

• rare
• imperfectly imitable
• non-substitutable

u3s2p14

One thing to note about causal ambiguity is that it helps make resources imperfectly imitable and non-substitutable. This is because potential imitators do not necessarily know what it is they need to imitate. Examples are capabilities which develop due to the interconnectedness of resources within your organisation. These resources are generally tacit - less easily written down - eg the know-how required to ride a bicycle.

Path Dependency - the way in which organisations follow certain pathways of development to arrive at the resource bundle they now posess.

Another important concept is that of the mobility of resources. The more mobile the resources, the less they may be considered valuable (that is unless you are providing that resource!) Sticky, non-easily traded resources are usually considered to be immobile.


Examples of immobile resources may include land, custom fixtures & fittings, or even resources that make up co-specialised assets (Teece 1982), eg a scientist who requires equipment that is expensive to provide, or oil buried under the ice caps that needs specialist equipment and knowledge to extract.

Unit 3 - RBV vs industry structure (market positioning) view

Market positioning view in the 1980s was that the fundamental factor affecting an organisation's profitability was industry structure. Rumelts (1991) found that industry effects ounly accounted for 8% of performance variance, whereas business unit effects accounted for 47%. So if profits are different amongst organisations in the same sector, then industry-level factors cannot be wholly responsible for differences in performance between organisations. Think about how Tesco overtook Sainsbury's in the 1990s.

McGahan and Porter (1997) challenged this, but still found industry effects were 19% and business unit were 32%. They state that environmental turbulence must also be taken into account, and that industry structure has less effect in stable sectors and more in turbulent sectors.

The debate is still raging. Neither is the sole "right approach". u3s2p8,9,10

Porter's 5F is a useful framework for asessing industry attractiveness through external environment analysis. RBV is the approach to use for internal analysis, however it is still complementary to market positioning.

Some definitions:-

Resources: tangible and intangible assets of the firm
Capabilities: the processes through which resources are combined and co-ordinated.
(Strategic) Assets: Resources and Capabilities

This definition seems a little circular!

Finally, Magnitude of Competitive Advantage of a Resource: The extent to which it reduces the cost structure or differentiates the offering of the organisation.

Reflections on Unit 3 - Competing with Capabilities

Today I have been...

Looking over Unit 3 - "Competing with Capabilities"


Why?

Learning!

So What?

Unit 2 was about the Analysis stage of the J&S strategy cycle, in particular environmental threats and how to identify them - focus was the industry. Unit 3 stays at the analysis stage but is more about the organisation, and looking at organisational strengths and weaknesses with a Resource Based View (RBV).

RBV - a theoretical approach which assumes that organisations differ in respect of the resources they posess and the capabilities they have developed, and these differences account for the variation in performance between organisations.


So, the learning outcomes.

• Have a theoretical understanding of RBV (which can be considered complementary to an industry structure/market positioning approach)
• be able to apply the RBV through organisational analysis
• be able to show the basics of how RBV relates to knowledge and learning
• understand the notion of sustainability of competitive advantage
• appreciate the need to consider resourced and capabilities within a dynamic framework (strategic value of capabilities can change over time)

p7 s2 What is a RBV to strategy?

Popularised by Prahalad and Hamel (1990) - immediate competitiveness depends on price/performance of current products but long-term competitiveness depends on ability to develop a core competence around a key skill or skills. These skills, resources and capabilities are complementary.

RBV - critical difference between organisations irrelevant to industry is their assets (resources) and how they use them. Managers determine how well or not they are used. Applicable to commercial and NFP.

Assumption is that orgs are heterogeneous rather than homogeneous. Assets include tangible and intangible assets as well as skills and know-how. Ability to co-ordinate and use these assets is the org's capabilities.

Grant's diagram - Grant 2005 p139/ u3s2p8.