Jay B. Barney – Looking Inside for Competitive Advantage
Academy of Management Executive, 1995, Vol. 9, No. 4
Summary
A competitive advantage is shaped by both environmental threats and opportunities, and internal strengths and weaknesses. The author Jay B. Barney indirectly states that valuable tools are available to analyze external forces, but there seems to be a lack of valuable tools to analyze internal threats and opportunities – in the article referred to as “internal attributes” or “resources and capabilities” that are built on a company’s financial, physical, human, and organizational assets. In order to overcome this gap, which the traditional SWOT analysis leaves out, Barney suggests focusing on:
1. The question of value – Is the organization able to consistently add value?
2. Rareness – Resources and capabilities must be rare in order to guarantee a competitive advantage and/or a unique selling proposition.
3. Imitability – Companies who enter the market might have a cost disadvantage by imitating e.g. production, design, distribution channels.
4. Organizations – A culture that fosters competitive potential towards competitive advantage
Evaluation
By reading the article only once, the reader could wrongly assume that the SWOT analysis solely focuses on the external environment, while neglecting the internal environment at the same time. Organizations usually use the SWOT analysis to evaluate both external and internal threats and opportunities.
The author mentions various examples of how organizations were and are able to react in the market place. In order to be successful in adding sustainable value, he suggests to reward risk taking and creativity. Some organizations do not foster risk taking at all, and creativity falls short. But there are still successful entities in the marketplace, and consistently able to add value – for other reasons (monopoly, backward-integrated feedstock, etc.).
When he talks about rareness as a means for an organization to position itself, he does not mention the possible downsides of decentralizations (see AT&T e.g.), and the possible time frame necessary to not only prepare and educate the people involved, but also to implement what can be considered a cultural change in the organization.
Regarding Imitability, Jay Barney does not mention that entire industry segments, mainly in Asia, exists and operate successfully, simply because they only produce and offer me-too products. In addition, a company that is able to simply copy a product successfully without spending millions of dollars on research and development has a clear cost advantage, and not – as he describes it – “firms [have] a cost disadvantage in imitating another’s resources and capabilities”.
Last but not least, Mr. Barney mentions organizations as such that need to focus on the competitive potential of its internal attributes. His examples are valuable, but he does not mention leadership as a powerful part of an organization that basically can create this competitive potential. Sam Walton (Wal-Mart) and Michael O’Leary (Ryanair) are only two excellent examples as leaders as well as entrepreneurs.
Friday, January 16, 2009
Sunday, January 11, 2009
How to write a really Great Business Plan
William A. Sahlman (1997) - How to write a really Great Business Plan
Harvard Business Review, July – August 1997, pp. 98-108
Summary
In his essay, William A. Sahlman states that too much time is wasted on number crunching, and figures, such as capital, time, predicted revenues and profits regarding business plans for new ventures. Since accurate numbers related to a business plan are difficult to predict anyway, he suggests to focus on a framework that is based on four critical factors: people, opportunity, context, and possibilities.
Sahlman considers most entrepreneurs as wide-eyed optimists, who naively believe in their ideas, but who fail to ask “the right questions” related to the above framework. When it comes to the first factor – people, it should clearly be determined in a business plan who the people are who start the venture, what their experience and their knowledge is regarding the product or service, moreover production processes, the market itself, the competition, the customers etc. Questions to ask: What do these people know? Whom do they know? How well are they themselves known in the market place?
The second factor, opportunity, should explain the profile of the business, its economics, the expected success, but also what could possibly hinder that success (vulnerabilities). The necessary questions focus both on the market (Is the market large enough, or rapidly growing, or both?) and on the industry (Is the industry and its structure indeed sufficiently attractive?)
The context defines the macroeconomics, or – in other words – the external factors that cannot be controlled by the entrepreneur, such as demographic trends, a possible inflation, regulatory environment, government rules, etc. However, the question remains how the entrepreneur reacts when this context inevitably changes.
The last factor, the possibilities regarding risk and reward, determines the scenario of what can possibly go right and wrong, and how to respond to it. What magnitude of reward can be expected, and when can the reward be expected?
Evaluation
William Sahlman is obviously a person who is very familiar with new ventures and the countless business plans that go in line with start up companies. His view is based on observation and experience that lead to above conclusion. His valuable insight and knowledge can help and support new ventures that have to present a business plan sooner or later. But his framework is not a scientific model that can be discussed on a scholarly level, since it lacks representative observation and results.
Similarly, Peter Drucker offers seven sources as “diagnostic disciplines” in his book “Innovation and Entrepreneurship” (1985) that need to be considered not only when starting a new venture, but also when writing a business plan. Drucker describes the first four as internal sources, including industry and market structure (see Sahlman’s “Opportunity factor” above). The so-called outside factors include macroeconomic issues, such as demographics and changes in perception of the customers (see Sahlman’s “Context-factor”).
Gundy and Kickul (see “Entrepreneurship Strategy”, pp. 63-64) offer a similar approach for strategic assessments of new ventures, by also focusing on four factors: people, available resources, knowledge and information that are possessed, and the idea’s ability to generate revenue.
While Sahlman considers people and their skills the most necessary factor, other potential investors might consider the financial outlook, or marketing strategies and sales programs the most necessary issues when it comes to evaluate a business plan. The framework he suggests seems to be very helpful, but remains a subjective tool that might fall short when generalizing all ventures and all potential investors.
Harvard Business Review, July – August 1997, pp. 98-108
Summary
In his essay, William A. Sahlman states that too much time is wasted on number crunching, and figures, such as capital, time, predicted revenues and profits regarding business plans for new ventures. Since accurate numbers related to a business plan are difficult to predict anyway, he suggests to focus on a framework that is based on four critical factors: people, opportunity, context, and possibilities.
Sahlman considers most entrepreneurs as wide-eyed optimists, who naively believe in their ideas, but who fail to ask “the right questions” related to the above framework. When it comes to the first factor – people, it should clearly be determined in a business plan who the people are who start the venture, what their experience and their knowledge is regarding the product or service, moreover production processes, the market itself, the competition, the customers etc. Questions to ask: What do these people know? Whom do they know? How well are they themselves known in the market place?
The second factor, opportunity, should explain the profile of the business, its economics, the expected success, but also what could possibly hinder that success (vulnerabilities). The necessary questions focus both on the market (Is the market large enough, or rapidly growing, or both?) and on the industry (Is the industry and its structure indeed sufficiently attractive?)
The context defines the macroeconomics, or – in other words – the external factors that cannot be controlled by the entrepreneur, such as demographic trends, a possible inflation, regulatory environment, government rules, etc. However, the question remains how the entrepreneur reacts when this context inevitably changes.
The last factor, the possibilities regarding risk and reward, determines the scenario of what can possibly go right and wrong, and how to respond to it. What magnitude of reward can be expected, and when can the reward be expected?
Evaluation
William Sahlman is obviously a person who is very familiar with new ventures and the countless business plans that go in line with start up companies. His view is based on observation and experience that lead to above conclusion. His valuable insight and knowledge can help and support new ventures that have to present a business plan sooner or later. But his framework is not a scientific model that can be discussed on a scholarly level, since it lacks representative observation and results.
Similarly, Peter Drucker offers seven sources as “diagnostic disciplines” in his book “Innovation and Entrepreneurship” (1985) that need to be considered not only when starting a new venture, but also when writing a business plan. Drucker describes the first four as internal sources, including industry and market structure (see Sahlman’s “Opportunity factor” above). The so-called outside factors include macroeconomic issues, such as demographics and changes in perception of the customers (see Sahlman’s “Context-factor”).
Gundy and Kickul (see “Entrepreneurship Strategy”, pp. 63-64) offer a similar approach for strategic assessments of new ventures, by also focusing on four factors: people, available resources, knowledge and information that are possessed, and the idea’s ability to generate revenue.
While Sahlman considers people and their skills the most necessary factor, other potential investors might consider the financial outlook, or marketing strategies and sales programs the most necessary issues when it comes to evaluate a business plan. The framework he suggests seems to be very helpful, but remains a subjective tool that might fall short when generalizing all ventures and all potential investors.
Friday, January 9, 2009
Owner-Managers and the Practice of Strategic Management
Adrian Woods, Paul Joyce – Owner-Managers and the Practice of Strategic Management
International Small Business Journal, Vol. 21 (2), pp. 181-194
Summary
Based on Mintzberg’s organizational studies of entrepreneurship (1979), where he argues that small business owners use personal and arbitrary forms of control to conduct their business rather than strategic management (anti-planning theory), Woods and Joyce researched whether Mintzberg’s theory still holds true, or whether small businesses have adopted both the language and practice of strategic analysis and planning.
Assumptions:
Planning in general is positively linked to growth.
Managers who use strategic planning will achieve optimal development regarding their ventures.
The knowledge of strategic tools suggested by theories and theoretical frameworks will lead managers to value the results of applying these tools.
The access to this knowledge is possible through business school programs, management consultants, business books etc.
Managers may use the tool to make judgments and apply these judgments to decision making processes.
Decision making processes lead to feedback loops.
The use of tools can lead to better management strategies.
The benefits may result in improved business performance.
Research:
Five hundred and thirteen small business firms were selected at random and interviewed by asking among other questions, if the interviewees had heard about/were familiar with strategic tools, such as cost benefit analysis, scenario planning, SWOT analysis etc.
Results:
Owner-managers do not have as much access to strategic tools as other managers, and as a result do not use as many.
If owner-managers had access to these tools, they would value them and use them as much as other managers.
If tools are used, the strategic planning will improve.
Business performance will improve.
By using the tools, the more critical the users become of their ability in the specific area the tools apply to.
The knowledge about tools increases, as well as the richness of the strategic language being used and the quality of their plans.
If the application of tools available lead to beneficial results (outcomes), the tools will be used. If they are considered not useful, the tools will not be used.
Evaluation
Peters and Waterman in their revolutionary book “In Search of Excellence” (1982) describe the typical entrepreneur in a similar way as Mintzberg did in his study only three years earlier: Intuition and gut-feeling in combination with the right business sense and sufficient self-confidence (self-efficacy) will lead to successful small business ventures, if the market and the consumers will adapt and accept a new and/or innovative product/service. Woods and Joyce are taking this theory a step further, by acknowledging that times have changed, and that more access to above management tools are possible. The overall result is that small businesses are led in a much more professional way than some 20 plus years ago, but that tools are only used if they make perfect sense. There will always be owner-managers who do not appreciate management tools for whatever reason. Nevertheless, the trend seems to be that these individuals are smart enough to at least hire managers who already had access and possess applicable knowledge, and who are able to help run a small business through strategic planning and with the help of strategic analysis. The business world has changed significantly during the last two decades. Therefore Mintzberg’s study, conducted in 1979, became a still valuable but also a rather antiquated research these days. Frederick Taylor’s assumption based on observation and personal experience about scientific management a century ago cannot hold ground to Vroom’s Time-Driven Decision Tree (1998) these days, but one should not neglect Taylor and his revolutionary ideas either. The same goes for Mintzberg.
International Small Business Journal, Vol. 21 (2), pp. 181-194
Summary
Based on Mintzberg’s organizational studies of entrepreneurship (1979), where he argues that small business owners use personal and arbitrary forms of control to conduct their business rather than strategic management (anti-planning theory), Woods and Joyce researched whether Mintzberg’s theory still holds true, or whether small businesses have adopted both the language and practice of strategic analysis and planning.
Assumptions:
Planning in general is positively linked to growth.
Managers who use strategic planning will achieve optimal development regarding their ventures.
The knowledge of strategic tools suggested by theories and theoretical frameworks will lead managers to value the results of applying these tools.
The access to this knowledge is possible through business school programs, management consultants, business books etc.
Managers may use the tool to make judgments and apply these judgments to decision making processes.
Decision making processes lead to feedback loops.
The use of tools can lead to better management strategies.
The benefits may result in improved business performance.
Research:
Five hundred and thirteen small business firms were selected at random and interviewed by asking among other questions, if the interviewees had heard about/were familiar with strategic tools, such as cost benefit analysis, scenario planning, SWOT analysis etc.
Results:
Owner-managers do not have as much access to strategic tools as other managers, and as a result do not use as many.
If owner-managers had access to these tools, they would value them and use them as much as other managers.
If tools are used, the strategic planning will improve.
Business performance will improve.
By using the tools, the more critical the users become of their ability in the specific area the tools apply to.
The knowledge about tools increases, as well as the richness of the strategic language being used and the quality of their plans.
If the application of tools available lead to beneficial results (outcomes), the tools will be used. If they are considered not useful, the tools will not be used.
Evaluation
Peters and Waterman in their revolutionary book “In Search of Excellence” (1982) describe the typical entrepreneur in a similar way as Mintzberg did in his study only three years earlier: Intuition and gut-feeling in combination with the right business sense and sufficient self-confidence (self-efficacy) will lead to successful small business ventures, if the market and the consumers will adapt and accept a new and/or innovative product/service. Woods and Joyce are taking this theory a step further, by acknowledging that times have changed, and that more access to above management tools are possible. The overall result is that small businesses are led in a much more professional way than some 20 plus years ago, but that tools are only used if they make perfect sense. There will always be owner-managers who do not appreciate management tools for whatever reason. Nevertheless, the trend seems to be that these individuals are smart enough to at least hire managers who already had access and possess applicable knowledge, and who are able to help run a small business through strategic planning and with the help of strategic analysis. The business world has changed significantly during the last two decades. Therefore Mintzberg’s study, conducted in 1979, became a still valuable but also a rather antiquated research these days. Frederick Taylor’s assumption based on observation and personal experience about scientific management a century ago cannot hold ground to Vroom’s Time-Driven Decision Tree (1998) these days, but one should not neglect Taylor and his revolutionary ideas either. The same goes for Mintzberg.
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