Theory of the Firm for Strategic Management : Economic Value Analysis

Strategic decisions deal with the long-term direction of the firm and its main activities, usually the responsibility of the top managers in an organization. Because the firm is the critical unit of analysis in strategy, we need to define what firms are, how they create value, and what their organizational boundaries are in order to understand their overall performance. However, this must be done in a manner that is most useful for strategic analysis and decision making. In other words, we need a theory of the firm for business strategy. Theory of the Firm for Strategic Management integrates and expands key existing theories, like transaction costs economics and the resource-based view, to develop a value-based theory of the firm. This provides a framework to show how firms can create value for customers and, at the same time, capture economic profits for their owners through business, corporate, international, and social strategies. Cover......Page 1 Half-title......Page 3 Title......Page 7 Copyright......Page 8 Contents......Page 9 Figures......Page 13 Tables......Page 14 Preface......Page 15 Part I Theories of the firm......Page 17 The emergence of strategic management......Page 19 The scope of the field......Page 23 The multidisciplinary basis of business strategy......Page 24 The firm as a production unit......Page 27 The firm as a decision-making process......Page 29 The firm as a contracting solution......Page 32 The firm as a collection of resources......Page 33 The theory of the firm for strategic management......Page 35 A value approach to the analysis of firm strategy......Page 37 Structure of the book......Page 38 Coase and the nature of the firm......Page 43 Williamson and transaction costs economics......Page 47 Property rights and incomplete contracts......Page 51 Agency theory......Page 55 Limitations of the contracting view as a theory of the firm......Page 57 The role of opportunism, hold up, and trust in the emergence of firms......Page 58 Comprehensiveness of the contracting view......Page 61 Usefulness for strategic management and its practice......Page 65 Contributions of the contracting view to a theory of the firm for strategy......Page 67 Example of an in-house cafeteria......Page 69 The resource-based view of the firm......Page 72 Firm growth......Page 73 Competence building......Page 75 Firm heterogeneity and differences in performance......Page 76 Does it provide tautological explanations about performance?......Page 80 Is it a useful theory?......Page 82 Does it explain why firms exist?......Page 84 The firm in strategic management......Page 86 A value-based model of firm strategy......Page 87 The effect of firm boundaries on the value created by internal resources......Page 92 Internal effects......Page 93 External effects......Page 95 Why do different firm strategies exist?......Page 96 What is economic value?......Page 101 Value in economics......Page 102 Value in marketing......Page 104 Value in finance......Page 106 Value in strategy......Page 107 Sources of customer value creation......Page 108 Value creation through enhancing customer benefits......Page 111 Greater utility in existing product or service features......Page 112 Different combinations of product or service features......Page 113 New products and services......Page 114 Reducing monetary costs (price)......Page 115 Reducing nonmonetary costs......Page 116 Information costs......Page 117 Usability......Page 118 Technology costs......Page 119 The influence of externalities......Page 120 Innovation, entrepreneurs, and new value creation......Page 122 The role of entrepreneurs in value creation......Page 124 Williamson’s example of mines and houses......Page 125 Where do profits come from?......Page 130 Profits as a residual income in neoclassical economics......Page 131 Profits as implicit compensation to factors of production......Page 133 Profits as retribution to the entrepreneur......Page 134 Contextual conditions for profits......Page 136 Uncertainty......Page 137 Innovation......Page 138 Specificity......Page 140 Profit generation through resource combinations......Page 143 The sustainability of profits through barriers to competition......Page 145 Barriers with perfect replicability......Page 147 Barriers with limited substitutability......Page 148 Profit sustainability of a new restaurant......Page 150 Part II Firm strategies......Page 155 Elements of business-level strategy......Page 157 Managing resources to create value for customers......Page 159 Value created by products......Page 161 Value created by professional services......Page 163 Value created by networks......Page 164 Market positioning......Page 168 Segmentation......Page 169 Differentiation......Page 172 Competitive dynamics......Page 176 The interaction among the different elements of strategy......Page 180 The influence of the industry and the top managers on business strategy......Page 181 Value analysis at the business level......Page 184 Why do schools exist, but not firms for long-term secretarial services?......Page 185 Value creation at the corporate level......Page 190 The benefits of diversification......Page 193 Implications for resource management......Page 194 Implications for customer relationships......Page 196 Corporate-level costs......Page 197 Business-level costs......Page 198 The effect of diversification on performance......Page 200 Vertical integration......Page 202 Mergers and acquisitions......Page 205 Strategic alliances and cooperation......Page 208 The integration of channel and content in Vivendi......Page 211 The theory of the multinational......Page 214 A value approach to the MNE......Page 219 International presence......Page 223 Global strategy......Page 225 The internationalization of retailers Wal-Mart and Ikea......Page 229 Markets and social value......Page 232 Market imperfections......Page 233 Monopoly......Page 234 Externalities......Page 237 Other market imperfections......Page 239 Wealth distribution......Page 241 Corporate social responsibility......Page 242 Value creation and CSR......Page 247 A dual standard for business and CSR activities......Page 252 Ethics and social strategy......Page 253 CSR in The Body Shop......Page 258 What is a firm?......Page 262 Why do firms exist?......Page 264 What determines firms’ boundaries?......Page 265 What causes performance differences across firms?......Page 266 The strategic definition of firm boundaries......Page 268 Focus on the customer’s perspective......Page 271 Sources of differentiation......Page 273 Industry change and replacement......Page 275 Towards a value theory of the firm in strategic management......Page 276 Areas for future research......Page 277 Limitations of value analysis......Page 280 1 Introduction......Page 283 3 The nature of the firm in strategy......Page 284 6 Business strategy......Page 285 8 International strategy......Page 286 9 Strategy and social value......Page 287 References......Page 288 Index......Page 309 Cover 1 Half-title 3 Title 7 Copyright 8 Contents 9 Figures 13 Tables 14 Preface 15 Part I Theories of the firm 17 1 Introduction 19 The emergence of strategic management 19 The scope of the field 23 The multidisciplinary basis of business strategy 24 The concept of firm 27 The firm as a production unit 27 The firm as a decision-making process 29 The firm as a contracting solution 32 The firm as a collection of resources 33 The theory of the firm for strategic management 35 A value approach to the analysis of firm strategy 37 Structure of the book 38 2 The contracting view of the firm 43 Coase and the nature of the firm 43 Williamson and transaction costs economics 47 Property rights and incomplete contracts 51 Agency theory 55 Limitations of the contracting view as a theory of the firm 57 The role of opportunism, hold up, and trust in the emergence of firms 58 Comprehensiveness of the contracting view 61 Usefulness for strategic management and its practice 65 Contributions of the contracting view to a theory of the firm for strategy 67 Contractual analysis in a make-or-buy decision and its limitations 69 Example of an in-house cafeteria 69 3 The nature of the firm in strategy 72 The resource-based view of the firm 72 Firm growth 73 Competence building 75 Firm heterogeneity and differences in performance 76 Questions about the resource-based view 80 Does it provide tautological explanations about performance? 80 Is it a useful theory? 82 Does it explain why firms exist? 84 The firm in strategic management 86 A value-based model of firm strategy 87 The effect of firm boundaries on the value created by internal resources 92 Internal effects 93 External effects 95 Why do different firm strategies exist? 96 4 Creating economic value 101 What is economic value? 101 Value in economics 102 Value in marketing 104 Value in finance 106 Value in strategy 107 Sources of customer value creation 108 Value creation through enhancing customer benefits 111 Greater utility in existing product or service features 112 Different combinations of product or service features 113 New products and services 114 Value creation through reducing customers' costs 115 Reducing monetary costs (price) 115 Reducing nonmonetary costs 116 Information costs 117 Accessibility 118 Usability 118 Value creation through reducing firms' costs 119 Technology costs 119 Administration costs 120 The influence of externalities 120 Innovation, entrepreneurs, and new value creation 122 The role of entrepreneurs in value creation 124 Value analysis versus transaction costs economics (TCE) as drivers of firm boundaries 125 Williamson’s example of mines and houses 125 5 The appropriation of value by firms 130 Where do profits come from? 130 Profits as a residual income in neoclassical economics 131 Profits as implicit compensation to factors of production 133 Profits as retribution to the entrepreneur 134 Contextual conditions for profits 136 Uncertainty 137 Innovation 138 Specificity 140 Profit generation through resource combinations 143 The sustainability of profits through barriers to competition 145 Barriers with perfect replicability 147 Barriers with asymmetric replicability 148 Barriers with limited substitutability 148 Value analysis, profits, and competitive barriers 150 Profit sustainability of a new restaurant 150 Part II Firm strategies 155 6 Business strategy 157 Elements of business-level strategy 157 Managing resources to create value for customers 159 Value created by products 161 Value created by professional services 163 Value created by networks 164 Market positioning 168 Segmentation 169 Differentiation 172 Competitive dynamics 176 The interaction among the different elements of strategy 180 The influence of the industry and the top managers on business strategy 181 Value analysis at the business level 184 Why do schools exist, but not firms for long-term secretarial services? 185 7 Corporate strategy 190 Value creation at the corporate level 190 Horizontal diversification into new businesses 193 The benefits of diversification 193 Implications for resource management 194 Implications for customer relationships 196 Implications for competitive dynamics 197 The costs of diversification 197 Corporate-level costs 197 Business-level costs 198 The effect of diversification on performance 200 Vertical integration 202 Mergers and acquisitions 205 Strategic alliances and cooperation 208 Value analysis at the corporate level 211 The integration of channel and content in Vivendi 211 8 International strategy 214 The theory of the multinational 214 A value approach to the MNE 219 International presence 223 Global strategy 225 Value analysis in internationalization 229 The internationalization of retailers Wal-Mart and Ikea 229 9 Strategy and social value 232 Markets and social value 232 Market imperfections 233 Monopoly 234 Externalities 237 Other market imperfections 239 Wealth distribution 241 Corporate social responsibility 242 Value creation and CSR 247 A dual standard for business and CSR activities 252 Ethics and social strategy 253 Value analysis in corporate social responsibility 258 CSR in The Body Shop 258 10 Value analysis in strategy 262 Economic value and the theory of the firm 262 What is a firm? 262 Why do firms exist? 264 What determines firms’ boundaries? 265 What causes performance differences across firms? 266 Implications for strategy research and practice 268 The strategic definition of firm boundaries 268 Focus on the customer’s perspective 271 Sources of differentiation 273 Industry change and replacement 275 Towards a value theory of the firm in strategic management 276 Areas for future research 277 Limitations of value analysis 280 Further reading 283 1 Introduction 283 2 The contracting view of the firm 284 3 The nature of the firm in strategy 284 4 Creating economic value 285 5 The appropriation of value by firms 285 6 Business strategy 285 7 Corporate strategy 286 8 International strategy 286 9 Strategy and social value 287 References 288 Index 309 Introduction -- The Contracting View Of The Firm -- The Nature Of The Firm In Strategy -- Creating Economic Value -- The Appropriation Of Value By Firms -- Business Strategy -- Corporate Strategy -- International Strategy -- Strategy And Social Value -- Value Analysis In Strategy. Manuel Becerra. Includes Bibliographical References (p. 272-292) And Index.