Entrepreneurial Views of Competitive Strategy -

1. Entrepreneurial views of competitive strategy
Assignment for part-time MBA Competitive Strategies, week 4
By Gulcin Askin, Michelle Donovan, Kivanc Ozuolmez and Peter Tempelman
September 24, 2012

2. The reasons for differences in performance of firms have been subject to research for
more than fifty years. Building on earlier positioning and resource-based views, we will
compare and contrast the leading entrepreneurial views and look at a new definition of
“performance”.
In the articles of Jacobson (1992), Coff (1999), Martin and Moldoveanu (2003),
Stoelhorst, and Bridoux (2008) several similarities can be observed. Each author looks deeper
into the inner workings of a firm to reach their conclusions. The following elements are
discussed in at least two of the articles referred to above. The concept of rent appropriation
is a dominant concept in the articles of Coff (1999) and Martin and Moldoveanu (2003) and to
a lesser extent in Stoelhorst and Bridoux (2008). In these articles the authors discuss how rent
that is created is divided by stakeholders in the firm: employees and owners (Stoelhorst and
Bridoux 2008), or shareholders, management and employees (Martin and Moldoveanu 2003,
Coff 1999).
The extent to which rent that is created in a firm can be used as a measure of
performance of that firm is discussed by Coff (1999) and Stoelhorst and Bridoux (2008). For
instance, in a situation where the process to divide rent results in a high level of appropriation
by employees, the output of rent to shareholders would in that case be less than in a situation
where employees had not appropriated a large part of the rent. Hence, the observable rent
would be relatively low suggesting that the company has not performed well; but Coff
observes that the link between generated rent and performance can be misleading and asks
whether a firm that generates rent that is not observable in traditional measures of
performance can have a strategic advantage. He even suggests that in the long term, survival
of the firm may be the best measurement of performance, because all stakeholders have an
interest in the firm’s continued existence. Stoelhorst and Bridoux (2008) develop existing
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3. RBV-theory to deal with the issue of rent. Rent appropriation can only take place if there is
rent that can be appropriated in the first place.
Jacobson (1992), Martin and Moldoveanu (2003) and Stoelhorst and Bridoux (2008)
all discuss the ways in which value creation takes place within the firm. Jacobson (1992)
focuses on the Austrian School, in which profit is a result of a market imperfection that is
exploited by the entrepreneur. Stoelhorst and Bridoux (2008) mention two traditional sources
of value created: Ricardian Rent theory and (Schumpetarian) Rent theory. They add three
other sources of value created: through exchange, through production and through innovation.
This last method of value creation is possible if the firm has talented employees. These
talented employees have the knowledge necessary to come up with innovations that will give
the firm a competitive advantage. Talented employees as a condition for value creation are
mentioned by Jacobson ‘knowledge of people’ (1992) and Martin and Moldoveanu (2003).
Also the role of the entrepreneur is discussed by both Jacobson (1992) and Stoelhorst and
Bridoux (2008): rent due to superior skill. Martin and Moldoveanu (2003) focus on the
“talent” within a firm as a source of advantage over competitors now that we have entered the
“Information Age” and explain that the value of the business is the product of knowledge
and information. If there are no ideas, skills, or talent of knowledge workers then there are
no profits. In the current era, there is a shortage of talent; therefore in recent years the talent
has found ways to negotiate a higher share of the profits. We can surmise then that if talent is
mobile, it will move to firms where it is best rewarded, and so firms should look at the way
they attract and keep talent as an important source of competitive advantage.
A final, but important element in these articles is the emphasis on the economy as a
dynamic system rather then a static system: equilibrium vs. disequilibrium. Jacobson (1992)
argues that only in disequilibrium opportunities for entrepreneurs exist. Stoelhorst and
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4. Bridoux (2008) identify pure profit, increasing returns and resource complementarities as
components of payment that stem from a dynamic environment.
The subjects of rent appropriation, measurement of performance, value creation within
the firm, talent, the role of the entrepreneur and the emphasis on disequilibrium as discussed
by Jacobson (1992), Coff (1999), Martin and Moldoveanu (2003) and Stoelhorst, and Bridoux
(2008) all explain performance differences between firms as a consequence of various
processes within the firm. This is unlike the views of the theories of the “standard economic
models” which explain differences in performance as coming from those global concepts of
“the environment” and “the market”, and the positioning school, who start to look a little
more closely, focussing on the position of the firm within in its industry. Strategy in the
positioning school can be summarized as follows: a) strategy as fit b) there are barriers to
competition c) strategies are generic positions in the market d) the essence of strategy is
analysis (Stoelhorst 2008).
Therefore, according to the positioning school a firm derives a favourable competitive
position and therewith possibly a higher performance due to an optimal fit between the firm
and its environment (a). This position is such that the firm is protected by barriers from
competition therewith protecting its profitability (b). The strategy underlying the favourable
position is generic in character (c) and so strategy development is largely a matter of analysis
of the external environment (d). Porter’s (1979) five forces model concentrates on the forces
acting upon a firm from the outside.
The resource based view (RBV) on the other hand looks more to the firm itself to find
how differences in the resources that a firm controls can help explain the difference in
performance between firms. The differences between the RBV and Jacobson (1992), Coff
(1999), Martin and Moldoveanu (2003) and Stoelhorst, and Bridoux (2008) are not as
apparent as the differences between these authors and the positioning school. Strategy in the
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5. RBV can be summarized as follows: a) strategy as stretch b) resources are the ultimate source
of competitive advantage c) strategy is about having a clear view of the future and developing
unique resource combinations to realize this vision (Stoelhorst 2008). Some of the elements
described in the first part of this paper can also be found in the traditional RBV. However, this
paper is about the differences, so we will focus on these. Prahalad and Hamel (1990), who
wrote about core competencies, and Stalk, Evans and Schulman (1992), who discussed
capabilities, (1992) provided some insights into what goes on inside the firm. Also Grant
(1996) gave some insight into the processes within the firm by describing the way specialized
knowledge is integrated. Prahalad and Hamel and Stalk, Evans and Schulman are not very
specific however. Jacobson (1992), Martin and Moldoveanu (2003) and Stoelhorst and
Bridoux (2008) on the other hand are more detailed about the processes that go on inside the
firm by which value is created.
Traditional RBV identifies resources as a source of competitive advantage. Prahalad
and Hamel (1990) and Grant (1996) explicitly identify knowledge as an important resource.
Coff (1999) and Martin and Moldoveanu (2003) develop on this further study the role of
knowledge and describe the consequences this resource has for the appropriation of rent and
its effects on rent as a measure of firm performance.
To summarize, starting with the IO and positioning views, followed by resource based
views and then the entrepreneurial views, the perspective moves from seeing firms from a
distance, first within “the economy”, then within their industry, then looking at the firm itself
and then even inside it, and from this new perspective, we need to consider a new definition
of performance.
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6. Albert Heijn is a supermarket chain which offers convenience to its
customers due to its high number of locations throughout the country,
wide range of products, and many different supermarket formats.
Revenue is generated by selling groceries to customers and franchising
their brand name. The central elements of their cost structure are rent for store locations and
warehouses, manufacturing, purchasing (of goods as well as infrastructure), logistics,
advertising and staff salaries. Their advanced automatic replenishment systems enable them
to use information strategically (for example, to reduce instances of out-of-stock products)
and due to bulk-buying and hard negotiation with suppliers, Albert Heijn keeps costs under
control.
The KLM is a ‘hybrid carrier’. It provides air
transportation services to travellers in a number of ways: as a full service network carrier in a
hub-spoke system (Air France KLM), a holiday carrier in a point-to-point system
(Transavia.com), a low cost carrier in a point-to- point (Transavia.com) and a traditional
freight carrier (Air France KLM Cargo, MartinAir Cargo). In addition, maintenance services
are provided worldwide through ‘KLM Engineering & Maintenance’ division.
Revenue is generated by selling airline tickets to travellers, charging transportation costs for
transporting cargo and maintenance costs to owners/operators of airplanes.
The cost structure of the KLM business model consists of investments in equipment
(airplanes, facilities), people (i.e. pilots, cabin crew, ground personnel, maintenance
personnel) and operating costs (i.e., airport charges, landing rights, marketing, and
administration).
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7. ABN AMRO is a financial institution which provides tailor
made financial solutions, services & consultancy to private, retail and corporate clients in
local markets and aims for international growth by diversifying and strengthening its funding
profile meanwhile holding high quality capital and applying effective cost control & risk
management mechanisms.
Revenue is generated through banking products sold, services and consultancy
provided to private, retail and corporate customers in local and international markets. Main
revenue components are net interest, fee and commissions income on granted loans and
provided services (portfolio management, insurance, payment and etc.). On the other hand,
costs are mainly comprised of regular operating expenses (personnel, information technology,
housing and etc.), interest & commission expenses (due to banks and customers), loan
impairments and risk provisions.
McKinsey & Company, Inc. is a global management
consulting firm that focuses on solving issues of concern to senior management. McKinsey
serves as an adviser to many businesses, governments, and institutions. It is recognized as one
of the most prestigious consulting firms in the world, works with 100 leading global
corporations, and two-thirds of the Fortune 1000 list. With its networked model of consulting,
McKinsey is able to bring best practices to its clients.
As a private firm, McKinsey is not required to disclose compensation figures;
therefore details of its cost structure are not publicly available. On the other hand, looking at
the other consultancy firms, McKinsey’s main costs, as well as its main assets, should be its
people. Additionally, John Huey (1993) says, "The Firm places itself above discussing money
as a motivation, yet senior partners often earn as much, or more, than the CEOs they advise”
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8. References
Coff, Russel W. (1999), When Competitive Advantage Doesn’t Lead to Performance: The
Resource-based View and Stakeholder Bargaining Power, Organization Science, 10(2): 119-
133.
Jacobson, Robert (1992), The “Austrian” School of Strategy, Academy of Management
Review, 17(4): 782-807
Grant, Robert M. (1996), ‘Prospering in Dynamically-Competitive Environments:
Organizational Capabilities as Knowledge Integration’, Organization Science, 7(4): 375-387.
Martin, Roger L. and Mihnea C. Moldoveanu (2003), Capital versus Talent: The Battle That’s
Reshaping Business, Harvard Business Review, (July): 36-41.
Stalk, George, Philip Evans and Lawrence E. Schulman (1992), ‘Competing on Capabilities:
The New Rules of Corporate Strategy’, Harvard Business Review, (March-April): 57-69.
Stoelhorst J.W. (2008), Thinking about Strategy, Teaching note, Amsterdam Business School,
3d edition.
Stoelhorst, J.W. and Flore Bridoux (2008), Value Creation in the Knowledge Economy: The
Rigor, Relevance and Morality of the RBV, Working paper, Amsterdam Business School,
University of Amsterdam.
Prahalad, C.K. and Gary Hamel (1990), ‘The Core Competence of the Corporation’, Harvard
Business Review, (May-June): 79-91
www.abnamro.com
www.klm.com
http://www.annualreport2009.ahold.com/group/our_strategy/our_business_model.htm
John Huey, Jane Furth (November 1, 1993). "How McKinsey does it". CNN.
http://money.cnn.com/magazines/fortune/fortune_archive/1993/11/01/78550/index.htm
Reichmuth, Johannes, Hansjochen Ehmer, Peter Berster, Gregor Bischoff, Wolfgang
Grimme, Erik Grunewald, Sven Maertens (2008) ‘Definition of airline business models’,
Analyses of the European air transport market airline business models, (5-13)
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