Three Ways That Create Value for a Firm - Essay Example

 Three Ways That Create Value for a Firm Sull and Escobari (2004) discuss three ways that create value for a firm but given the unpredictable business environment, they suggest positional and resource-based advantages are sustainable. While the first approach is based on strategic positioning of the product or within the industry, the second is based resource-based theory. The three approaches to enhance firm value have different underlying principles and may be applicable in different circumstances. The first is identifying a product with no competitors or which others would not easily venture into. It is not merely identifying a product but as Durkin (1997) states innovative firms make investments in knowledge to develop new products which give them monopoly in the international market. The second contention is on the resource-based theory (RBT) of the firm where rare and valuable resources give it a sustainable competitive advantage (Peteraf & Wernerfelt cited by Bowman & Ambrosini, 2000) while the third approach states that firms should be able to seize opportunities faster than other firms and gain value. The first approach pertains to product and industry innovation while the third concentrates on strategy innovation. The knowledge development in the first approach again would imply investments in resources – technical or human. Hence, all three approaches are not independent of each other although each has its own distinctive features. . The positional approach is also based on Porter’s theory of five competitive forces which determine the firm’s profitability and attractiveness (Porter, 1985). The journal does not specify whether the industry and value of such firms relate to competitiveness in their own nation or the nation where products have been marketed. Pharmaceutical industries operate globally and hence this aspect is not clear whereas Porter insists that competitiveness and productivity pertains to national productivity, which should enhance the value of the firm in the nation in which it operates (Davies & Ellis, 2000). Resources can be defined as anything that gives advantage or disadvantage to the firm. (Mills et al, 2003). The support theory of Johnson et al (2005) divides the resources as threshold resources and unique resources, where threshold resource satisfies customer’s minimum requirements and unique resources contribute to competitive advantage and make it difficult for the competitor to copy the value. A successful business needs to secure the resources according to Scott et al (2005) which the journal specifies should be to secure the employees, core business and networks. While Hamel (1998) states that strategy innovation attracts new customers and thereby enhances firm value, Kim and Mauborgne (2005) that “Value innovation makes the competition irrelevant by offering fundamentally new and superior buyer value in existing markets, and by enabling a quantum leap in buyer value to create new markets.” This principle conforms to the example of EasyJet cited by Sull and Escobari where the airline identified and seized the opportunity to enter the market with cheapest air tickets. Once the opportunity is seized, as stated in the journal, to create value, it is essential to attract the resources to execute the plan. This implies that the third approach is not independent of the resource-based approach which is why in conclusion the authors may have suggested only positional and resource-based advantages as sustainable. Thus we find that the first approach concentrates on the product and industry while second gives importance to resources. The third approach pertains to first-mover advantage but this approach to create value would require the support of the other two approaches. In the world of uncertainty and hyper competition, firms can continue to create value and sustain advantage over competition by adopting certain strategies. Hyper competition demands constant change in technology and processes to meet the challenges which Porter (1996) classifies as operational effectiveness (OE). He calls hyper competition a self-inflicting wound. OE is different from strategic positioning and means performing similar activities better than rivals perform. It requires better utilization of resources. The Japanese have always been able to offer lower costs and superior quality with OE. Through TQM, time-based competition, and benchmarking, resources can be utilized to the optimum level. Secondly, workforce diversity brings about innovation and creativity, thereby enhancing competitive advantage and firm value. Diversity facilitates when a firm uses the output orientation where the individuals and teams are given the authority to make operational decisions (Bassett-Jones, 2005) when systems and processes that add value are too complex for managers to control through supervision and not as Sull and Escobari maintain that responsibility for value creation lies with the managers. Sull and Escobari state that reliance on global capital markets leave companies vulnerable to shifts in global prices and exchange rates but Bartram (2000) contends that because of realistic capital market imperfections like agency costs, transactions costs, taxes, and costs of financing, risk management at the firm level is a means to increase firm value which is to the benefit of the shareholders. They attempt to leverage risks through the use of derivative financial instruments. In hyper competition firms must also take into account the perceived use value subjectively created by the customer who uses consumer surplus as the criterion in making purchase decisions (Bowman & Ambrosini, 2000). Thus, in the insurance market in UK, companies have reduced prices in the face of hyper competition and appointed brokers to pass value to the customer (Watson, 2001). This is classic in the sense suppliers have to pass value to the customer in order to survive. Knowledge management is another technique to sustain competition and create value (Drew, 1999). Unilever PLC held workshops around the world to map its knowledge of tomato sauce technology. It could determine unique factors that contribute to taste, texture and quality of the product. IBM’s turnaround since the 1990s was due to its efforts to exploit and develop knowledge in its businesses. Organizational learning can contribute to value as transfer of knowledge takes place either in tacit form or embedding it into processes and organizational routines (Nonaka cited by Corso, Martini, Paolucci & Pellegrini, 2001). Thus to sustain in hyper competition, workforce diversity, operational effectiveness, knowledge management, organizational learning and customer focused approaches can be effective. References: Bartram, S. 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Harvard Business Review, Nov/Dec96, Vol. 74 Issue 6, p61, 18p Scott, P and Foster, K D(2005)’Building continuity into strategy’, Journal of Corporate Real Estate,7:2,105-119 Sull, D N and Escobari, M(2004) ‘Creating Value in an Unpredictable World’, Business Strategy Review, Autumn Watson, G., (2001), Subregimes of Power and Integrated Supply Chain Management, The Journal of Supply Chain Management, Spring 2001 Read More