Lecture Session: 3 Purpose

Dr K. Sankaran Director Justice KS Hegde Institute of Management

View 1: Profit
Profits is the difference between total revenue and opportunity cost of the factors of production Profit is the return to the owner of the factors of production Profit refers to the notion of excess returns to scarce resources

Note: By virtue of Ownership profits are appropriated by the owner.

Perfectly competitive Markets

Large number of buyers and sellers, none of which can influence market price Products being traded are homogenous All buyers and sellers have complete price information Individuals have no preferences concerning those with whom they trade

There are no barriers to entry into or exit from the industry in the long run

View 2: Rent

.From Profits to Rent

Strategy can be viewed as a continuing search for Rent Strategy is the means via which economic rent is earned, either by exploiting existing (market) imperfections or by creating suitable levels of uncertainty and complexity
(Schoemaker, 1990)

What is Rent?
Rent is a structural pattern of sustainable profit potential. Created by demand for a resource in limited supply (Barriers to Imitation/Entry).

Rent relates to profit as Climate relates to weather

Notice the shift: Production Perspective to Managerial Perspective

Strategy from the Economists view: The Creation of Value

Organisations exist to search for and create VALUE, for the customers and for the organisation

Part of the value that organisations create can be retained by themselves - the concept of RENTS
RENTS result from an organisation having resources or capabilities which permit it to produce at lower cost or generate a superior product or service at standard cost, in relation to firms with inferior resources and capabilities.
(Perman and Scouller, 1999)

Sustainable rent provides a source of competitive advantage identifying how the market differs from ideal competitive market conditions

View 3: Strategic Purpose from a Stakeholder perspective

Purpose as the outcome of the demands and interactions of stakeholders

- Continuous interaction perspective with and among stakeholders - More sociological in its way of seeing things - Fits well with evolutionary or emergent rather than rationalist/ economists ideas of strategy

Issue
Emphasis on Organization seen as Measures of success Major difficulty Governance thru Society best served by

Shareholder Perspective
Profitability Less open system Share price and dividends Managerial Capitalism Mix of Directors Inc. external ones Pursuing self Interest

Stakeholder Perspective
Responsibility More open system Stakeholder satisfaction Balancing stakeholder Interests Stakeholder engagement Pursuing joint-interests

Who Are Business Stakeholders?

Evolution and Development of the Stakeholder Concept Views of the Firm

Production

Managerial

Sociological

Do certain stakeholders have primacy?

Economists view: primacy of shareholders, due to scarcity of capital and the presence of competitors But: Shareholders are not a homogeneous group Not all organisations have public equity capital Consider current emphasis on governance, corporate social responsibility, sustainability. Consider that performance indicators likely to be about wider range of objectives than purely economic/financial.

(Johnson, Scholes and Whittington, 2008)

View 4: Purpose as an organisational philosophy

Production Managerial Sociological Ethics

Profit Maximisation

Rent Maximisation

Meeting Stakeholders Expectations

Meeting Societys Expectations

Evolution of beneficiaries over time

Different perspectives

Three stone-cutters:

First stone cutter: Cutting bricks

Second stone cutter: Building a wall

Third stone cutter: Building a cathedral

Economists Model of the Organization

Caledonian MacBrayne

Sellers The Offering Distinctive Competencies

Total system optimization

Buyers Value System

Fleet of Ferries Brand People

Efficient and economical means of transportation

Low cost transportation On time schedule

Probing for a Deeper Sense of Purpose

Caledonian MacBrayne Total system optimization

Relationship with Government Relationship with communities

Low cost transportation On time schedule Enhancing tourism Contribution and protecting to National island Cohesion & communities Scottish Economy

Value

Thank you