Introduction to Business Management
Andrea Tracogna
Professor of Management, University of Trieste
Andrea Tracogna
What is a firm? Why do firms exist?
Firms exist to coordinate and motivate people’s
economic activity
When markets fail to yield an efficient solution to the
problems of coordination and motivation other
mechanisms may be better. The firm is the principal
such alternative.
Andrea Tracogna
The Firm’s Stakeholders
Who are the stakeholders? – Anyone who has an
interest in the success of a business
• Customers
• Managers
• Employees
• Owners
• Local Community/Environment
• Suppliers
• Government
• Creditors
Andrea Tracogna
The firm’s objectives
Customer S
Net e atisfaction
ROS Incom B
r an
aw d
ROCE EV
Rate of innovation a re
ne s
s
A
owt h
Rate of gr
t e rm
on g
L i v a l of
v Levels
Sur o y e ment
V A
Susta empl M
inabil Tot
i ty al S
tock
sha r e ho l
e t der
M ar k Ret
urn
Net n
i
M ar g ROE Earnings Growth
Andrea Tracogna
Corporate Governance
Whose that job?
Andrea Tracogna
What Businesses Do
Meet the needs of stakeholders
Buy inputs – raw materials, labour, machinery
and equipment, land
Produce outputs – goods and services
Focus on efficient use of resources
Generate profit/surplus
Andrea Tracogna
A firm’s resource portfolio
Intangibles
Tangibles •Knowledge
• Financial – Human Resources
Resources – Organizational
• Technical competencies
assets – Technology
• “Networks” •Trust
– brands
– reputation
– Relational
competence
Andrea Tracogna
What Businesses Do
Take Inputs Process/Manufacture Output
Costs – Fixed and Variable Revenue
Profit
Andrea Tracogna
THE CASH-TO-CASH CYCLE
Total cycle: Economic cycle + CD
Economic cycle: I1 + T + I2
cash-to-cash cycle
Inventories Transformation Inventories
Debts’ Credits’
delay delay
T I2 CD
I1
DD
Andrea Tracogna
A Firm’s value offer
Brand
Brand Product
Product
Store
Storeexperience
experience Services
Services
Value
Valueoffer
offer
Promotion
Promotion Price
Price
Communication
Communication Customer
Customerrelation
relation
Andrea Tracogna
THE SUPPLY CHAIN
Suppliers Focal firm Distributors Customers
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What happens inside a Supply Chain?
Materials flow
Paper flow
Plant and Wharehouse Subsidiary POS End
suppliers customer
Cash flow
Suppliers Focal firm Reseller
Information flow
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THE VALUE SYSTEM
Research Tech systems Communities Information
providers
End
Suppliers Focal firm Distributors
Customers
Design Complementors Logistic services POS management
Andrea Tracogna
THE VALUE CHAIN
FIRM’S INFRASTRUCTURE
SUPPORT HRM
M
AR
ACTIVITIES
GI
PRODUCT DEVELOPMENT AND TECHNOLOGY
N
PROCUREMENT
INBOUND OPERATIONS OUTBOUND MARKETING
M
SERVICES
A
LOGISTICS LOGISTICS AND SALES
RG
IN
PRIMARY ACTIVITIES
Andrea Tracogna
TOWARDS THE HOLLOW CORPORATION?
Andrea Tracogna
What is “outsourcing”?
“Outsourcing” is a term coined to describe the
practice chosen by many companies of
contracting out to other companies some -
usually manufacturing - activities of the value
chain that used to be carried out in-house.
The big question is: Has outsourcing
gone too far?
Andrea Tracogna
There can be different reasons for outsourcing
First of all, the search for flexibility. Firms outsource production when
demand is high and cancel it when orders are cancelled or demand
falls. Thanks to the substitution effect between fixed and variable
costs they obtain higher cost elasticity.
Lower costs, especially when the firm can benefit from suppliers’
economies of scale (a supplier can integrate demand from a large
number of clients, as against the purchasing firm) and economies of
specialisation (a supplier can specialise in single activities and reach
world-class levels of excellence).
Less investments in fixed (machinery, equipment, production lines,
transport systems) and working capital (input and output stocks),
which are undertaken by suppliers.
Less investments in R&D as firms can take advantage of the
numerous innovations available on the outside supply market.
A greater focus of the outsourcing firm on client needs and services
and product development activities, i.e. on key activities for value
creation;
Andrea Tracogna
From Fordism to Post-Fordism
“The era of vertical integration
is over” (R. Reich)
“Good bye to the old dividing
line between manufacturing
Henry Ford and services” (The
Economist)
The new international division
of labor, and the
“deindustrialization” of the
West
The new emerging business
models: Virtual organizing,
Taiichi Ohno hollow corporations,
boundaryless organizations
Andrea Tracogna
Global sourcing and offshoring
Seen through the labels of the products we buy, the world
looks much smaller than it actually is.
When we visit a footwear or clothing outlet in a Western
country we find trousers coming from Malaysia, shirts
from Turkey, jackets from the United States and jeans
made in Guatemala and, perhaps, high quality shoes
coming from the Marche region or Vigevano in Italy.
Outsourcing + Globalization = Global sourcing
Global sourcing ≠ Offshoring
Andrea Tracogna
Global sourcing: the Nike case
Nike has relocated production of its footwear and
clothing to 51 countries where its third party
production units employ more than 500,000
people (as against approximately 14,000 people
directly employed by the multinational).
From its headquarters in Beaverton, Oregon, Nike
manages a worldwide virtual company combining
internal R&D functions with a low cost
manufacturing strategy. For instance, its “Air Max”
model is designed in sites in Oregon and
Tennessee and developed jointly by American
and Asian technicians in the USA, Taiwan and
South Korea. Sneakers are then assembled in
South Korea (man’s size) and Indonesia (boys’
size) from dozens of components supplied by
firms in Japan, South Korea, Taiwan, Indonesia
and the United States. Similarly, Nike outsources
distribution to firms that specialise in logistics
services.
Andrea Tracogna
Nike Supply chain: costs, margins and profit (www.nike.com)
Andrea Tracogna
Global sourcing and Corporate Social Responsibility
Recently, thanks also to pressure from
consumers groups, governments, trade unions
organisations and non-governmental
organisations, there is a more mature
awareness of the social accountability of
Western companies involved in global sourcing
processes. Most significant measures include
the voluntary adoption of “Ethical Codes of
conduct” by multinationals such as Levi’s, The
Gap, Reebok and Nike.
Andrea Tracogna
The natural evolution of outsourcing is
Business Process Outsourcing (BPO)
In BPO the contract manufacturer is responsible for managing a
complete business process on behalf of the client.
As a result, for instance, contract manufacturing is more often
connected to provision of logistics services and management of
on-line orders.
Supply Chain Management is the coordination of information,
manufacturing and logistics flows
We are witnessing the growth and consolidation of a logistics
services market made up of firms that can replace their clients in all
or part of their logistics activities (Third party logistics providers) or
play the role of web designers or negotiators of relationships with
specialised operators (Fourth party logistics providers
Andrea Tracogna
The limits and risks of outsourcing
Outsourcing requires every company to find a delicate
balance between two opposite objectives:
Exploiting opportunities (competitive advantages)
offered by existing markets for resources;
Limiting strategic vulnerability in the event of a break-
up of relationships with suppliers or overall “market
failure”.
It is not just a matter of deciding “how much” to make or
“how much” to buy. The issue can be dealt with
through negotiating, or structuring the outsourcing
relationship in such a way it can meet monitoring
needs and ensure necessary flexibility. In this respect
there is a large number of outsourcing agreements
between the two extremes of make and buy including
partial integration and long-term contracts.
Andrea Tracogna
Balancing vertical integration and outsourcing: the Zara case
A clever balance between vertical
integration and outsourcing. This seems
today to be the “recipe” for success of
many companies such as the Spanish
Zara (controlled by the holding Inditex).
With 745 stores in 56 countries, Zara is
the retail clothing chain with the highest
expansion rate in Europe. As against
many competitors, Zara manufactures
in-house more than half of all garments
it sells, at the Spanish plant in La
Coruna. At the core of its success is a
vertically integrated model which covers
all phases of the fashion process:
design, manufacture, logistics and
distribution to its own stores.
Andrea Tracogna
Country-specific advantages and Competitiveness:
Porter’s diamond
Enterprises can benefit from the synergies created by the presence – within
the same Country - of demanding purchasers, specialized suppliers, high-
skilled human resources and developed financial and support institutions.
Demand
Factors of Support
Production Industries
Rivalry
Andrea Tracogna
