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What is business strategy
What is business strategy
The word strategy comes from the Greek word strategos, meaning, “the art of the general.ˮ In other words, the origin of strategy comes from the art of war, and, specifically, the role of a general in a war. origins First Industrial Revolution (mid-1700s to mid-1800s) Most firms remain small and with little fixed capital-Companies lacked power to influence market outcomes Second Industrial Revolution (second half of 19th Century) Railroads built mass markets 1850 Access to capital and credit allowed economies of scale ʼVisible handʼʼ superseded ‘ʼinvisible handʼ Large, vertically integrated companies in U.S., then Europe Captains of industry articulated strategic thinking, i.e the role of actorsʼ actions World War II era 1939 1945 Allocating scarce resources across the economy was problematic “Learning curvesˮ concept 1920s 1930s): for each doubling of cumulated output total costs would decline 10 to 30% The Theory of Games 1944 Company can exert positive control over market forces by using formal planning academic contribution: Schumpeter → with the concept of innovation Penrose → how companies grow, managerial capabilites are the key elements Elite US business schools → managers should be trained to think strategically Is important to plan, have emergency plans, and evaluate the risky environment. Both in war and in businesses
definitions of strategy
Ansoff 1960s) Strategic decisions deal more with factors external to the firm than with internal factors…specifically with the selection of the product mix which the firm will produce and the markets to which it will sell. ( focus on external environment) Chandler(1960s): Strategy can be defined as the determination of the basic long-term goals and objectives of an enterprise, and the adoption of courses of action and the allocation of resources necessary for carrying out those goals (focus on internal and external environment)
COMPANY BUSINESS STRATEGY
📢 A companyʼs business strategy is its dynamic plan to gain and sustain competitive advantage in the marketplace This theory involves prediction about which market are attractive and how a company can offer unique value to customer (not imitable by competitors) → has to be a dynamic plan It involves making 4 inter-related strategic choices markets to compete in: is important to get the segment of the customer we want to address unique value the firm will offer in the markets Key concept ⇒ if there is not a value proposition that is not unique, the business cannot survive. The value is what for which the consumer would pay for. We can do the distinction btw a objective (technology, quality, workforce) and subjective value (perceived, based on marketing campaigns) b monetary and non monetary value resources and capabilities required to offer a unique value better than competitors such as patents, private resources way to sustain the advantage by preventing imitation to survive to competition ➡ A firm has competitive advantage when it can consistently generate above-average profits (profit in excess of what an investor expect from investment with that amount of risk) Strategic management process There is a process to set up a strategy
Strategy formulation (purpose, vision)
mission external analysis (industry, customers, opportunities/threats) examining the forces that influence industry attractiveness, including opportunities and threats that exist in the environment. internal analysis (resource and capabilities, strengths/weaknesses) analysis of a firmʼs resources and capabilities (its strength and weaknesses) to assess how effectively the firm is able to deliver the unique value (value proposition) that it hopes to provide to customers
differentiation among market segments
WHAT do customer needs? Which segment I am addressing to solve problems/provide value WHO need to be served? The customer segments HOW do we satisfy customersʼ needs? ex: in the transport activities definition of business 💡 The business represents a choice of some groups of clients and functions offered to serve their needs, generally based on one specific technology. definition of a product 💡 The product offered is the application of a technology to satisfy a need of a group of consumers ( can be a good or a service) ex: in the Viennaʼs New Year Eve concert: technology, are the instruments, the place, the broadcast the need is: entertainment, status.. the group of people: people really wanting to go there -because it is costly, need to participate a lottery definition of industry 💡 The industry is determined as the sum of more businesses generally based on the same technology
A firmʼs industry will determine which customers and competitors the company will have → and if manager do not identify properly it ⇒ vulnerable to unseen competitors A good perspective to identify an industry is CUSTOMERORIENTED VIEW, not product or service produced Industry analysis (inside) Inside the industry there is competition. Competition matter because businesses are not all created equal, may changing in size, growth rate, average net profits and future sales projections. STRATEGIC TOOLS to use to measure the attractiveness of a industry how concentrated or fragmented is the selected industry cost structure to enter in the market/ are any typologies of barrier → more are less attractive Key success factor: which are? How long does it take to obtain them? The nature of the participants: Who are the competitors?
industry attractiveness - Porterʼs 5 forces
Some firms are more profitable than others because they operate in industries where these forces are weaker , or they develop strategies to overcome these pressures. (^1) 💡 Rivalry ⇒ from direct competitors it is usually the most powerful of the 5 competitive forces Strategies pursued by one firm can be successfully only to the extents that they provide competitive advantage over those of rival firms How can compete direct competitors? Product differentiation, switching costs/barrier Product differentiation refers to the unique features, branding, or quality that distinguish a product from its competitors. High differentiation can create switching costs—barriers that make it costly or inconvenient for consumers to switch to a competitor's product. Growth trends at the industry level The overall growth rate of an industry influences rivalry. In a growing industry, firms can gain market share without aggressive competition. In a stagnant or declining industry, competition intensifies as firms fight over a fixed or shrinking market. economies of scale and of scope Economies of Scale occur when firms reduce per-unit costs by increasing production volume. Larger firms benefit from cost efficiencies, making it harder for smaller firms to compete.
a switching cost b cost/benefits relationship c customerʼs attitude Oil and gas companies like Exxon and Shell are highly profitable because there are few alternatives, and demand remains strong. 4 💡 Suppliersʼ power → can affect the competition Factor that influence it: Concentration and size of suppliers Availability of substitute goods Importance of the good Switching costs: If firms rely on unique materials or specialized suppliers, itʼs costly to switch, increasing supplier power. Relative importance of customer purchased volumes Availability of information Threats of vertical integration (downstream) Car manufacturers like Ford and GM face lower profits because they rely on specialized suppliers for chips and raw materials, making them vulnerable to price increases. 5 💡 Buyerʼs power The bargaining power of consumers can be the most important force affecting competitive advantage Price sensitivity: financial performance, availability of information; relative importance of customer purchased volumes and costs; importance of the good Buyersʼ bargaining power : product standardization; concentration; threats of vertical integration (upstream) Luxury brands like Rolex and Louis Vuitton are highly profitable because customers cannot negotiate prices, and limited supply increases demand. We can add an “additionalˮ force the those of Porter
6 💡 Complementary goods products that have to be consumed tgh ⇒ are important to determine Relative importance for value creation Visibility for final user Threat of entry SOMETIMES THERE are exceptions Some industries may be unattractive from a 5-forces perspective but stull be attractive to new entrants because high new different value Or if firms figure out to circumvent the barriers to enter, it can be profitable to enter in a market even without unique value proposition ⇒ example Walmart producing their Coca-Cola/ Pepsi and stopped selling the original/others and in few years gained an interesting share. After entered in others industry analysis - general environment Attractive (profitable) industries are those where firms hold power over buyers and suppliers, create barriers to entry to deter new competitors, and minimize the threat of substitutes , all while keeping rivalry low. Porterʼs Five Forces framework helps assess industry attractiveness and profitability. However, these forces are dynamic , meaning they can change over time due to actions taken by firms both inside and outside the industry. The Role of the General Environment It is important to consider broader external factors that influence industry conditions and firms performance. These are PESTEL environment factors + complementary products/services + demographics
complementary product/services
📢 Definition: Complementary products or services enhance the value of another product when used together. They serve the same customer base , increasing the buyerʼs willingness to pay for both products. Competition vs. Collaboration: Firms may both compete and collaborate with complementors, requiring strategic management of relationships.
demographic force
Demographic forces involve changes in the basic characteristics of a population (including changes in the overall number of people, the average age, the number of each gender or ethnicity, or the
📢 Value chain refers to the sequence of all activities that are performed by a firm to turn raw materials into the finished product that is sold to a buyer. Each activity is designed to add value to the prior activity, which is why it is referred to as the value chain. Is a tool theorised by Porter, to explain how a company accomplishes its activities and which are the excellences in doing that. A good company, by doing its activities, should generate value ⇒ which is the competitive advantage What the companies can do are primary activity (vertically) → production process that a firm use inbound logistics operations → manufacture/production ⇒ ex a insurance company = checking claims outbound logistics → sending out the goods marketing and sales after-sales services transversal activities: serve more primary activity (vertical) → administrative elements procurements technology department HR management Firm infrastructure When this tool was formulates, a company was internalising all these functions (80s). Now there are much more outsourcing (also of the primary activities) The idea of the value chain, by expanding or reducing some these activities we can increase or decrease the margin
example: IKEA operations is more expanded IKEA does a lot of production activities because provide easy assemble pieces. The core activities in fact relies in operations. IKEA produces massive amount of pieces, that can be used across different number of models. This reduces the cost of production ( for economies of scale) and at the same time increase the offer and variablity after sales service is small Technological development : is a very strong transversal activity ⇒ like engineering is important for the design of the subsequent steps → but this has effects also on other improving operations for IKEA is expanding margin, priorities, resources and capabilities: what is the firm better at compared to competitors
priorities
Why a firm allocates critical resources and display capabilities Values → core identity attitude: THE PRINCIPLES Mission vs vision: vision: what the company wants to become mission: company primary purpose A good mission statement is sufficiently broad: a declaration for attitude it reflect customer orientation, pointing to products/services, markets, technologies Underlies the companyʼs philosophy, providing a strategic baseline ⇒ everyone from the mission, should know what is the company
resources
What a firm employs to create value and sustainable competitive advantage. Theory of resource-based view: a theory on which a business is made of resource But having just these resources is not ENOUGH ➢Physical resources ➢ Financial resources ➢ Human resources ➢ Intangible resources
capabilities
understand that they would not compare to Pixar exploiting So what are the characteristics of these resources, capabilities… a renewal of resources b exclusive to Disney c interconnected but broad d unique/not imitable The VRIO model of sustainable competitive advantage Resources are not enough → they have to be VRIO resources. What it means? a valuable b Rare c Inimitability d Organised to exploit product Value types of value
absolute value
📖 Difference between the benefits totally perceived and the costs (monetary and non- monetary) totally incurred before, during and after the purchase
relative value
📖 value with respect to the competitorʼs offering real (objective) value 📖 Relative value rationally attributed to a certain offer by a client who is not influenced by brand and by marketing campaigns. perceived (subjective) value
📖 Relative value that a client can assign to a certain product/service Elements which influence value
Classified by nature
➢ Tangible elements ➢ Intangible elements ➢ Economic/monetary elements ➢ Non monetary element
classified by the degree of companyʼs control
➢ Elements totally under the companyʼs control ➢ Elements influenced by the company ➢ Elements outside the companyʼs control
core vs peripherical elements
CORE the activities to concentrate more
hygienic vs motivational factor
Hygienic factor → thing on what cannot compete Motivational → thing on which can compete ⇒ what can be invested Rarity Resources are rare -none have access ⇒ create competitive advantage on the principle of scarcicity example: Rare location like on highway Autogrill) Inimitability Resource can become INIMITABLE FOR THESE REASON
Path dependence
= a trajectory that a company starts to follow, and by following it becomes expert → make it difficult to imitate ex: Experience economies: the more produce and work → more specialised and fast → more cost effective It might be good to specialise, but it can be also a trap (investing in other things)
Tacit knowledge
the pyramid Everything is based on the values, mission and vision ⇒ then based on this there are resources, capabilities and organisation ⇒ finally there are activities Corporate strategy business strategy vs corporate strategy
📓 business strategy ⇒ when a business search competitive advantage within a single market, industry or line of business 📢 corporate strategy ⇒ there is a parent company which decided the corporate strategy and then there are the individual under-business There are 2 main corporate strategies: a Vertical integration = vertical diversification along the value chain → a business in a point of the value chain can decide to buy /obtain a part of the value chain which is preceding or following a Internalising other activities b Horizontal diversification ⇒ diversification into adjacent market which are not in the current value chain. This can be done through greenfield, acquisition, alliances a Companies entering into new industry that try to keep correlated ( esempio unʼazienda che produce cose che si attaccano: post-it e bende per lʼospedale). These are using the same technology - know how level of diversification ( low to high) single business level: a firm earning more than 95% of revenues from a single line of businesses Barilla) dominant vertical business : a firm that earns more than 70% of revenues from its main line of business and the rest from businesses located along the value chain (upstream or downstream) dominant business: A firm that earns more that 70% of revenue from its main line of business and the remaining from other lines across different value chains related-constrained diversification: A firm that earns less than 70% of its revenue from it main line of business, and its other lines of business share product, technological and distribution linkages with the main businesses. Related-linked diversification A firm that operates in related markets, but fewer linkages exist between the new and existing markets than the elements create separately. Unrelated diversified firm (conglomerate) Competes in product categories and markets with few, if any, commonalities between them. diversification and value creation There is an inverted U shape btw the amount of diversification and the profit that can be achieved ⇒ too much diversification is not good ACID TEST what values does entry into adjacent markets bring to the existing business, and why should integration/ acquisition/internaliz. bring more value than an independent business is diversifying into a new market bringing me value? Or should I leave the company to the single market
cost leadership
Is gained by: Supply good at the lowest possible cost below all its competitors ⇒ gain market share Same price as competitors, but to them cost less because more efficient ⇒ greater profits Why is it important to manage stock to save money? To reduce time of inventory, or items getting obsoletete sources The sources of cost advantage ⇒ economies of scale, economies of scope, learning and experience, proprietary knowledge, input costs, different business model economies of scale
when an increase in company size production lowers the companyʼs average
cost per unit produced
HOW?
spread fixed cost of production & general cost (such administrative…)→ reduced marginal fixed cost specialisation of machines and equipment → a firm with high volumes is able to purchase and use specialized equipment that a firm smaller cannot task and employee specialisation in producing → employee more specialized avoid time btw a job and another, then allows a wider range and depth of expertise to potential clients economies of scope
Reduction in cost per unit (average cost) due to increase in the number of
different produced goods
it exist when the cost of conducting two businesses activities within the
same company is less than the cost of those activity operated separately
HOW?
buying more from suppliers FOR DIFFERENT VARIETY(not quantity of same product) → > bargaining power → > discounts share resources and knowledge share cost across different products learning and experience
learning advantage
Reduction in labour cost per unit due to learning HOW?
