Posts Tagged competitive advantage
Today small businesses find it tough enough to survive let alone expand in the global markets. Opportunity does exist, however, in the global markets through making alliances with strategic partners. The partners to alliances look at alliances as temporary or until considered no longer necessary and the alliance has served its need (Grosse, 2000).
The idea behind strategic alliances is to co-create value, but often businesses find it difficult because of the unwillingness to share or a lack of common values. The small business alliance depends on trust and openness to work toward a common value. The parties to a strategic alliance have to negotiate to fill in their strategic weaknesses and improve the competency of the alliance (Grosse, 2000; Mockler & Gartenfeld, 2001). Mockler and Gartenfeld argued effective negotiation at the start of the alliance cements the likelihood of a successful partnership.
Liu (2009) asserted international alliances should collaborate to find critical technology and knowledge in a strategic alliance and negotiate learning activities leading to competitive advantage. The partners to an alliance should structure the alliance so it becomes a “race to learn” by mixing competition in with cooperation, but this structure leads to instability. Grosse (2000) argued a one-sided alliance leads to unstable relations and the objective should seek to strengthen weaknesses in the competencies of the alliance partners.
Grosse (2000) claimed the strategic alliance partners need to find a strategic fit by settling the cooperation level, the effectiveness of the cooperation level, and molding the culture of the alliance. Partners should seek a significant understanding of each other to form an effective alliance. An understanding will help foster a successful work relation and avoid failure. A successful partnership will promote value creation through knowledge gathering. Planning has a critical role in forming successful strategic alliances.
Do you have what it takes to expand through inter-firm alliances to succeed into global markets? If you need help planning for global expansion contact us to learn more.
Grosse, R. E. (2000). Thunderbird on global business strategy. New York: John Wiley & Sons.
Liu, W. K. (2009). Advantage competition of inter-partner learning in international strategic alliance. Journal of Global Business Issues, 3(2), 123-128. Retrieved from http://search.proquest.com/docview/223750245?accountid=35812
Mockler, R. J., & Gartenfeld, M. E. (2001). Using multinational strategic alliance negotiations to help ensure alliance success: An entrepreneurial orientation. Strategic Change, 10(4), 215-215. doi: 10.1002/jsc.536
“History repeats itself” is a saying I hear on occasion and often wonder about. Today, for example, some businessmen say they cannot work because of uncertain conditions, yet Adam Smith designed capitalism as the “epitome of risk taking” (Bernstein, 1996, p. 19). According to Bernstein, up to the time of the reformation, the stable Protestant tradition stressed abstinence to avoid risk. Protestants considered the danger inherent in risk-taking as akin to gambling. Adam Smith (1904) introduced capitalism believing the danger attached to risk also came with opportunity. Instead of looking at risk as a zero-sum game where someone wins and someone loses, Smith believed trade resulted in a mutually worthwhile pursuit. Smith believed both parties to trade and risk taking could become wealthier contrary to practice before the reformation that relied on exploitation to gain wealth (Bernstein, 1996).
Recent conversations have talked about how unacceptable the transfer of wealth is from the elite to its underlings. Some business people espouse the pre-reformation idea that wealth transfer should only come from exploitation of underlings, while others see wealth transfer more like Adam Smith did. Smith believed business is risky, but full of opportunity and new wealth came to those adventuresome people willing to innovate (Bernstein, 1996). Today with the coming of supply-side economics, some want to return to the days of exploitation and stymie adventuresome entrepreneurs willing to innovate and create new trade. Does history repeat itself? Has the pendulum swung too far in the wrong direction?
I believe an efficient economic system has to balance opportunities with risk taking. If business people do not take risk, I do not see where innovation comes from under such conditions. Stable well-established businesses do not like to remove themselves from their comfort zone and their products and services eventually become stale and do not satisfy consumer needs. Meanwhile, society needs to provide more incentives to entrepreneurs to innovate and create new trade.
What do you think? Is our economic system returning to the stable pre-reformation days bereft of any risk taking relying solely on exploitation? Are you willing to take a risk in today’s economic setting? What incentives do you believe would help entrepreneurs to resume their efforts to innovate new trade? Please leave your thoughts here. Do you want to know more about incentives to small business entrepreneurship to its rightful role? Click here.
Bernstein, P. L. (1996). Against the gods: The remarkable story of risk. Hoboken, NJ: John Wiley & Sons, Inc.
Smith, A. (1904). The wealth of nations (5th ed.). London: UK: Methuen & Co., Ltd.
I have heard the words “employees are our most valuable asset” many times, but have rarely seen accountants embrace the idea of capitalizing human capital as an asset on the balance sheet. The theory goes that companies expense wages as employees earn them. If employees are an asset I believe the part of workers’ employment cost that adds value to the organization should appear on the balance sheet.
Although accounting rules forbid capitalizing human capital, they only recognize human capital on the income statement. Despite this oversight, many call accounting the language of business. At least one article admitted the problem and recommended alternatives for capitalizing human capital. Chen and Ku (2004) concluded, “The succession of the human intellect over machines and equipment in the contribution to industrial value makes a financial statement that relegates human capital expenditure to expenses inadequate if not obsolete” (p. 129). If accounting is the language of business why is the value of its most valuable asset excluded from the balance sheet?
This disparity leads one to believe companies’ accounting standards look at employees not as an asset, but as a liabilities. For example, in finance the main goal of the firm is to maximize shareholder wealth and accounting rules treat human capital as a period cost (expense) instead of an asset. In recent years many companies have reconsidered the view shareholders are the only stakeholders in a firm, and have expanded stakeholders to include customers, suppliers, and employees. Even with the coming of triple bottom-line reporting I have not seen accounting rule-making bodies espouse the capitalizing human capital (Elkington, 1994; Slaper & Hall, 2011).
Similarly, Reimers-Hild, Fritz, and King (2007) described human capital as a continuous investment leading to increased earning power. Reimers-Hild et al. further described human capital as responsible for innovation, creativity, and keeping pace with change. Chen and Ku (2004) developed a theoretical classification framework that would capitalize certain formation and acquisition costs in early stages of development, learning costs in middle stages of development, and replacement costs in final stages. Chen and Ku argued for disclosing these costs as investments if the costs are unique and add value.
Do you believe employees are your greatest asset? I would like to hear your thoughts. Should your greatest asset show on the balance sheet? Please let leave your comments? Click here if you want to understand more about accounting for human capital.
Chen, H. M., & Ku, J. M. (2004). The role of human capital cost in accounting. Journal of Intellectual Capital, 5(1), 116-130. doi: 10.1108/14691930410512950
Elkington, J. (1994). Towards the sustainable corporation: Win-win-win business strategies for sustainable development. California Management Review, 36(2), 90-100. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=9410213932&site=ehost-live
Reimers-Hild, C. I., Fritz, S. M., & King, J. W. (2007). Entrepreneurial Career Development: Using Human Capital, Social Capital, and Distance Education to Achieve Success. Advancing Women in Leadership, 24, 1-N_A.
Slaper, T. F., & Hall, T. J. (2011). The triple bottom line: What is it and how does it work? Indiana Business Review, 86(1), 4-8. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=66506015&site=ehost-live
About 10 years ago the owner of Bimba Manufacturing Company located in Monee, Illinois decided to sell 90% of his stock to employees through an employee stock ownership plan (ESOP). The company produced aluminum cylinders and had two classes of employees. These classes included the managers who made policies and workers who obeyed the policies and performed the work. Under the ESOP instead of workers just obeying the orders of the managers, the company formed cross-functional teams to address problems and improve quality. The teams decided to meet regularly with customers to consider their needs and improve working relations (Jones, 2004).
The ESOP plan changed the workforce orientation improving working relations, accentuating excellence, and leading to a high quality products. Each cross-functional team hired its own workers and socialized together creating a cooperative new culture in the company. Employees effectively relearned their jobs by actively listening and interacting with each other instead of focusing on managers and workers. Managers acted more like advisers and workers gained a more cooperative spirit. Because of this organizational change the company increased sales 70% and the workforce grew 59% (Jones, 2004).
Although when first starting a business an owner can design a hierarchical organization for expedience, the firm stands to improve performance by reconsidering the organizational form. In my experience, hierarchical organizations in a small business can stymie the growth of the organization. I have personally experienced the difference and realized the benefits of redesigning the organizational form.
A more nimble team orientation can improve performance and cross-functional communication. The organization can respond better to the companies’ customers and better address their needs. The case of Bimba Manufacturing offers a good lesson in organizational change designed to improve worker and customer relations.
Have you reconsidered the organizational design in your firm? I would like to hear your ideas about changes that can benefit the organizational design in your firm. If you need help I urge you to act now and we can start to help you. Learn more.
Jones, G. R. (2004). Organizational theory, design, and change (4th ed.). Upper Saddle River, NJ: Prentice Hall.
Jones (2007) defined transaction costs as costs involved in negotiating, overseeing, and controlling costs between people. Organizations need to keep these costs low by managing exchanges between organizations. Jones used the health care industry as an example. According to Jones, 40% of the United States budget for health care has to do with managing exchanges between doctors, health-care providers, government agencies, insurance companies, and other merchants. Imagine if the health-care industry could remove these costs how much less health-care goods and services would cost.
Small businesses also have to manage transaction costs to achieve sustainability. Transaction costs involve many kinds of costs. For example, an organization can experience costs resulting in duplication of effort, power imbalances, intellectual property protection issues, knowledge transfer issues, and preserving alliances. Nooteboom (1993) argued small firms have a particular disadvantage with transaction costs because of scale, scope, learning, and experience. Such costs are bounded by rationality, opportunity, uncertain conditions, and transaction specificity. When many firms add value to products or services each firm adds transaction costs multiplying the cost to the consumer for each firm involved in producing the product. On the other hand, outsourcing parts of the production offers economies of scale to spread the cost among more units. Bureaucracy costs can offset the transaction costs saved by larger organizations because of their capability to deal with scale, scope, learning, and experience issues (Jones, 2007).
Small businesses need to weigh these exchange costs in making their products and services competitive. As in the case of health care 40% is a significant added cost for a customer to bear. Unless a firm has the ability to deal with transactions costs it can have a significant disadvantage compared with a larger firm that has these skills. Any time a firm can erase these costs or hold them to a minimum the firm will put itself in a better position to achieve competitive advantage.
How do you manage transaction costs? If you have not considered transaction cost management and want to know more I urge you to contact us to learn more.
Jones, G. R. (2007). Organizational theory, design, and change (5th ed.). Upper Saddle River, NJ: Prentice Hall.
Nooteboom, B. (1993). Firm size effects on transaction costs. Small Business Economics, 5(4), 283-295. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&db=eoh&AN=0328531&site=ehost-live http://www.springerlink.com/link.asp?id=100338
Leaders must start the course of delivering excellence by communicating a vision. Friedman (2006) noted that leaders must align their core values with their vision and convert them into action by owning three skills – authenticity, integrity, and creativity. The total leadership approach is a method that promotes reading background materials and discussing principles that matter. This method is important in assessing and coaching people including giving and receiving feedback, refining ideas and gaining support for them, and reviewing progress and explaining any lessons learned. Newstrom and Davis (2002) described leadership as the “catalyst that transforms potential into reality” (p. 163). People provide the missing ingredient here to transform the vision into reality.
Galpin (1998) suggested the key ingredient for a leader is to put together a strategy that motivates and educates people to act on the strategy. Leaders must motivate employees through their influence. Galpin listed twelve critical influences important to motivating people. The twelve influences include goals and measures, rewards and recognition, communication, training and development, and senior leadership. Critical influences also include rules and policies; physical setting; staffing, selection, and succession; information systems and knowledge sharing; operating procedure changes; organizational structure; and ceremonies and events.
Malveaux (1999) put the issue another way by saying one needs to lead by example. For example, if one sees children as the future, the leader must rise and play a role in their lives. If leadership represents listening, the leader should stop talking and start listening. Malveaux promoted self-reflection in deciding how to lead.
The leader embodies all of these characteristics and then some. A leader must assume responsibility and take credit for his or her actions. A leader must have a core ethical boundary that will not cave under pressure or give in to the influence of greed.
Do you believe leadership drives excellence in an organization? I want to know your thoughts. Do you want to learn more?
Friedman, S. D. (2006). Learning to lead in all domains of life. The American Behavioral Scientist, 49(9), 1270-1297. doi: 10.1177/0002764206286389
Galpin, T. J. (1998). When leaders really walk the talk: Making strategy work through people. Human Resource Planning, 21(3), 38-45. Retrieved from https://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=1452186&site=eds-live
Malveaux, J. (1999). Too many chiefs; not enough leaders. Black Issues in Higher Education, 16(8), 30. Retrieved from https://search.ebscohost.com/login.aspx?direct=true&db=f5h&AN=1926388&site=eds-live
Newstrom, J. W., & Davis, K. (2002). Organizational behavior (11th ed.). New York, NY: McGraw-Hill.
Companies can achieve superior performance and gain competitive advantage by using the VRINE model emphasizing value, rarity, inimitability, non-substitutability, and exploitability. These five factors influence a firm’s resources and capabilities to compete and achieve superior performance (Carpenter & Sanders, 2009).
First, a resource must add value to meet demand in the market. The ability to compete by itself does not offer an advantage, but can produce a normal profit. The value added assumes the firm can control costs and the product or services offer potential to consumers. Second, scarce (rare) resources can add competitive advantage at least temporarily. Until competitors can normalize this competitive advantage, the firm can achieve above normal profits. Third, if the products or services added are incapable of reproduction by competitors, the firm can achieve a sustainable competitive advantage earning above normal profits for an extended period. These products or services are such that competitors cannot imitate or substitute for them. Last, a firm has to have the capability to exploit the above four characteristics to achieve competitive advantage. The ability to exploiting these resources allows the firm to achieve improved financial performance than if it can only control them (Carpenter & Sanders, 2009).
Small businesses looking to achieve competitive advantage should employ the VRINE model and ask if it can meet these characteristics. The model shows how a firm can sustain superior financial performance by developing resources that meet the VRINE characteristics.
How does your firm do? Does it meet the VRINE model’s characteristics? Learn more.
Carpenter, M., & Sanders, W. G. (2009). Strategic Management: A Dynamic Perspective Concepts and Cases (Second ed.). Upper Saddle River, NJ: Prentice-Hall.
Often small businesses build relations with various suppliers and channel partners only to later find the relation is not as strong as first thought. The small business entrepreneur needs to protect against interruption occurring in the supply chain and make sure that everyone involved is on the same page.
I have had the unfortunate experience of working with a channel partner only to find later the channel partner only had its own interests in mind. I found the channel partner did not share a common vision and did not want to genuinely build a lasting relation. After working hard to build a good relation, the channel partner let the company down by not performing up to expectations. I call this the “snake in the grass” syndrome.
Because of this experience, I encourage small business entrepreneurs not to put all their eggs in one basket. As much as an owner likes a particular channel partner, competition is good and promotes efficiency. An interruption in the supply chain can have devastating effects on the small business. Consider what would happen if a missing link exists in the supply chain. Finding a new channel partner at the last minute is not easy and could harm the quality of the product or the service provided to customers. I suggest finding at least three suppliers for every slot in the supply chain to avoid last-minute problems.
Another step a small business entrepreneur can take is to make at least an annual evaluation of all channel partners in the supply chain. A business is only as strong as the weakest link in its supply chain so it pays to remove weak channel partners and replace them with stronger ones. I suggest developing a formal written evaluation form and think about what is important to the business.
Do you have a procedure to evaluation channel partners in your supply chain? I want to hear your thoughts? If you want to know more about how to remove the “snake in the grass” I urge to get help now. Learn more.