Theories of Business FirmsUnderstanding the Profit making behaviours of Firms

• Neoclassical• Behavioural• Agency• Transaction Cost• Value Chain• Porter’s 5 forces of competition

Explains what shapes the systematic structures of firms in responding to their external environments

Systematic structures

Cause driversWhy?

Impact driversWhy?

P/L = Revenue - Costs

Customer, Performance, Scope & ScaleValue Add

Neoclassical Theory

SpecialisedProductionsInputs

People

Outputs

Capital

Products/Services

The Perfect & Closed Systematic Efficiency Perfect Competition

Environment

Supply Demand

Every decision is equal

Info has little value add

Little use for IT systems

Maximised ProfitProduce to sell to outside the firm

Behavioural Theory

Behavioral Theory

ResourcesPeople Profit Satisfactory

Every person contributes to

Profit

Info has value add

HRMBudget

Involvement of employeesDiversity of employee’s motivationsManagement of employees’ performance

People are irrational decision makers because of• Varying different info access• Varying decision making skills• Varying time constrains

Neoclassical Vs behavioural Theory

QB4) What is the fundamental difference between the neoclassical view and the behavioural view of firms?

Agency Theory

AgencyTheory

ResourcesPeople Profit Satisfactory

People Agents

….but people are different and have different interests, motivation drivers, social status regards, profit expectations, etc

Maximum

Every decision is not equal

Info has value add

Decision support

HRM

Budget

Full of People Issues Therefore costs because of Clashes in interests, personality, authority....

Transaction Cost Theory

Transaction Cost Theory

ResourcesPeople Profit Maximum

Cost

Product/Services

Capital

Outputs

Least for Most

MarketValue

Info has value add

+Cost driversEfficiency measures productivity & budgetValue driversMarket value measures efficiency, effectiveness

Efficacy Driven

Porter’s Value Chain

More complex micro information needs

Info has value add

Managing & coordinating a firm’s activities to create Value Adds that contributes to higher Profits

Porter’s 5 Competitive Forces(Competitive Advantage of Firms)

More complex micro & macro information needs

Info has value add

Basis for formulatingCost leadership strategies

Value Differentiation strategiesNiche – mix of the above

Porter’s Diamond Theory(Competitive Advantage of Nations)

More complex micro & macro information needs

Info has value add

Resource Based View of Firms

Resources & Capabilities•Skilled People•Facilities•Equipments•Materials•Methods of Work•Design IP•etc

Products & Services

Goods Production

Service Provisioning

Inputs Outputs

Short termInputs

Long termCompetitive Advantage

Core Competencies

Resources & Capabilities•Skilled People•Facilities•Equipments•Materials•Methods of Work•Design IP•etc

Products & Services

Goods Production

Service Provisioning

Inputs Outputs

Core Competencies

Sustainable Value

Unique

Difficult to imitate

What are the characteristics of resources that enable competitive advantage?

Core Competencies

Resources & Capabilities•Skilled People•Facilities•Equipments•Materials•Methods of Work•Design IP•etc

Products & Services

Goods Production

Service Provisioning

Inputs Outputs

Core Competencies

Sustainable Value

Unique

Difficult to imitate

Can an IS by itself provide a business with sustainable competitive advantage?

Core Competencies

Resources & Capabilities•Skilled People•Facilities•Equipments•Materials•Methods of Work•Design IP•etc

Products & Services

Goods Production

Service Provisioning

Inputs Outputs

Core Competencies

Sustainable Value

Unique

Difficult to imitate

According to RBVF theory, whenever identical firms populate an industry, any one firm CANNOT enjoy sustained advantage? Do you agree?

Theory Information Requirements

Neoclassical

Behavioural

Agency

Transaction Cost

Value Chain

5 Forces

Resource based view of firms

Class work

Static batch

Dynamic real-time

Strategy

PlannedStrategies

AccidentalStrategies

Intended /Deliberate

Emergent

Realised strategies= Goals Achievements

Unrealised strategies= Goals Achievement Gaps

Realised emergent Achievements

A strategy is a set of coordinated actions intended to:1. Give a firm business advantage in one or more locations2. Achieve some underlying enterprise goals that shape this business

advantage

Strategy Perspectives

Also different information capture & reporting

perspectives

Structure – Control Frameworks• Risks • Enhancers

Contents – The Plans• SWOT patterns &

leverage actions

Context – The Reasons• Business /social positions

Strategies @ Different Organisational Perspectives

Market / Product Strategies

Business Unit Strategies

CorporateStrategies

Locations

Locations Locations

IT systems need to provide information at different organisational to product level perspectives & by different

locations and therefore their different currencies, legal compliance reporting systems, etc

Types of International Strategies

IT systems need to cater for these different strategies’ information needs, eg:• Strategy tracking systems• Market intelligence systems• ERP analytics• CRM analytics

Assignment Case StudyWhat challenges does Brian Smith faces in supporting Modemeter’s new business directions?

CEO – John Johnson

CIO BrianSmith

Modmeters – North American firm globalising in 3 continents

1. Requiring ICT capacity to support global operations2. Direct to Customer Sales Capacity3. Name & Logo Change Deployment

Countries ICT infrastructures are not the same:• Hardware & software differences• Support & maintenance differences• Staff access & training differences• Current systems - fragmented

Assignment Case Study

CEO – John Johnson

CIO BrianSmith

Modmeters – North American firm globalising in 3 continents

1. Requiring ICT capacity to support global operations2. Direct to Customer Sales Capacity3. Name & Logo Change Deployment

How to restructure – decentralised or centralised or bothCapacity to support multi-location ICT service provisioning

• Multi-site coordination issues• Change management issues in supporting new or

terminating existing practices• Different ICT infrastructure quality & capacities in countries• People challenges – lacking capacities in cross culture

communications and managing cultural diversity

Honda Supercub

Macho man’s machineNice people’s bike

Dominant US brand & market share during the 1950s……

…. Introduced in 1959……

Now dominant brand & market share

Japanese time based strategy ?

Japanese emergent strategy ?

1. Is Honda’s US strategy deliberate?2. Is this an emergent strategy?3. What can happen if Honda promotes the budda’s

eyebrow feature in the handlebar’s design in the past and NOW?