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What's business strategy?
A plan to achieve competitive advantage that involves making four inter-related strategic choices:
- Markets to compete in--> customers and industries (sectors of activity)
Unique value the firm will offer in those markets--> what customers are willing to pay for. Value can be
distinguished between:
○ Objective--> the product itself
○ Subjective--> based on the customer perception. Very influenced by marketing
And between:
○ Economic/monetary--> price
○ Non monetary--> quality, speed, status
- The resources and capabilities required to offer that unique value better than competitors
- Ways to sustain the advantage by preventing imitation
Is strategy planned?
Plan--> strategic management process
No plan--> emergent strategy
STRATEGIC MANAGEMENT PROCESS
A process to formulate a plan and allocate resources to achieve competitive advanatage. Based on:
Strategy formulation
○ Mission--> purpose, vision
○ External analysis--> industry, customers, opportunities/threaths
○ Internal analysis--> resources and capabilities, strenghts/weaknesses
a.
--> business level strategies (cost or differentiation)
Strategic vehicles
○ Make or buy, acquisitions, diversification, alliances, internationalization
b.
Strategy implementation
Dynamic strategic actions (business models, game theory) ○
○ Governance and ethics
○ Social value creation
c.
ANALYSIS OF THE EXTERNAL ENVIRONMENT
When we define a business we need to assess:
- Size and scope of the activitites
- Differentiation with respect to competition
- Differentiation among market segments
We can try to answer to three questions:
- Customer needs--> what do customers need?
- Customer groups--> who needs to be served?
- Technologies --> how do we satisfy customers' needs?
BUSINESS STRATEGY
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Business
The business represents a choice of some groups of clients and functions offered to serve the needs,
generally based on one spefici technology.
It represents the point of view of a company:
- Among all the potential segments of clients, which one does the firm serve?
- Among all the potential functions to serve client's needs, which one does the firm satisfy?
- Among all the potential technologies, which one is the company able to accomplish?
Product
Product is the application of a determined technology to the satisfaction of a determined need of a
determined group of clients.
Industry
The industry is determined as the sum of more businesses generally based on the same technology.
THE GENERAL ENVIRONEMENT AND INDUSTRY ATTRACTIVENESS - PROFITABILITY
PESTEL factors affect the company and the opportunity to do business, positively and negatively.
- Political--> elections, war
- Economic --> cut on interest rates, inflation
- Social--> migration, education, racism, population growth rate/decline
- Technology--> AI, green tech, crypto
- Environment--> natural disasters
- Legal --> green deal, EU law on reporting
Why does competition matter? Because not all industries are created equal. Some are more attracctive
because of their size, growthr ate, average net profits, and/or future sales projections
Industry attractiveness
How concentrated (dominated by few large firms) or fragmented (large number of smaller companies)
is the selected industry
- The attractiveness of the industry (barriers to entry)
- Key success factors (brand recognition, price, ecc)
- The nature of the participants (who are the major competitors)
The attractiveness of an industry is defined by porter's five forces:
- Rivarly
- Threaths of new entrants
- Threath of substitute products
- Supplier's power
- Buyers' power
We can add a sixth force:
Complementary goods
Influenced by
- Relative importance for value creation
- Visibility for final user
- Threat of entry
SOME LIMITATIONS
Markets that are unattractive from a five-forces prospective can still be attractive to new entrants -
but only when they offer unique value (tesla)
If firms figure out how to circumvent the barriers to entry into an attractive market, it can be
profitable even if they aren't able to enter with a particularly unique value proposition
Industries as they have historically been defined are weak to identify where to compete - you
compete at the "job to be done" level (understand the functional, emotional, and social needs of
your customer segment)
INTERNAL ANALYSIS
The value chain is a tool used to explain how a company accomplishes its activity and what are tis
points of excellence.
The goal of a business is to deliver value to all stakholders. This value is the source of competitive
advanatage for a company.
- Inbound logistics--> raw materials and inputs for production
- Outbound logistics--> distribution or delivery of products to clients
Support activities are necessary thorughout each step.
However, as they are not core of the company, they can be outsourced.
You can increase/decrease margin by expanding or reducing these activities.
What is the firm better at, compared to compeittors?
Priorities--> why a firm allocates critical resources and display capabilities
□ Values--> core identity drivers
□ Mission--> what is our business?
□ Vision--> what do we want to become?
A good mission statement:
○ Is isufficient broad--> a declaration of attitude, appealing to stakeholders
○ Reflects customer orientation, pointing to products/services, markets, technologies
○ Underlines the company's philosophy, providing a strategic baseline
Resources--> what a firm employs to create value and sustainable competitive advantage
○ Physical
○ Financial
○ Human
○ Intangible
Theory of resource-based view--> a company is a bundle of resources that enables them to be
competitive
Capabilities--> how a firm does things
○ Operating capabilities--> efficiently use resources
Theory of dynamic capabilities--> firm's ability to integrate, build, and reconfigure internal and external
competences to address rapidly changing environments.
Disney case:
- Mission--> entertainment
- Value--> innovate, nostalgia
Capabilities--> high quality drawings + technologies; make good acquisitions/manage portfolio; exploit
intangible assets (licensing), marketing skills
- Resources --> good drawers/technicians; money; copyright, portfolio companies
Characteristics:
- Renewal of resources to continue to provide value
- Exclusive to the company
- Interconnected and expanding
- Unique - not imitable
THE VRIO MODEL OF SUSTAINABLE COMPETITIVE ADVANTAGE
- Value
- Rarity
- Inimitability
- Organized
Value--> you need to constantly create value. Value can be:
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--> perceived value by the client of the product/service with respect to the competitors'
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
Tangible elements
○ - Characteristics of the product/service (size, shape, colour, weight, design, materials, technology, etc.)
○ Performances of the product/service (reliability, taste, speed, time span, safety, etc.)
Complementary elements (assistance, accessories, availability, delivery, payments, updates, etc. ) ○
Intangible elements
○ Brand, status connected to the purchase/use of the good, company’s reputation
→ Social, emotional, psychological, aestetic factors
Business unit strategy--> search for competitive advantage within a single market, industry, or line of
business
Corporate strategy--> search for competitive advantage through participation in different industries
and markets
Vertical integration--> diversification into adjacent markets along the vvalue chain (backward or
inward). Ex: barilla steps backward and buys a supplier of flour/ inward with a distributor
Horizontal diversification--> diversification into adjacent markets which are not in the current value
chain, via: greenfield/organic entry, acquisitions, alliances.
Levels of diversification
- Single business--> a firm earning more than 95% of revenues from a single line of business
Dominant vertical business--> a firms earns more than 70% of revenues from its main line of
business and the rest from business located along the value chain
Dominant business--> a firm that earns more than 70% of revenues from its main line of business and
the remainder from other lines across different value chains
Related-constrained diversification--> a firm earns less than 70% of its revenue from its main line of
business, and its other lines of business share product, technological and distribution linkages with the
main business
- Related linked diversifcation--> a firm operates in related markets, but fewer linkages
Unrelated diversified firm (conglomerate)--> competes in product categories and markets with fews,
if any commonaltities between them
Too much diversification is not good. Because you might loose control and ability to coordinate all activities.
Acid test: what value does entry into adjacent markets bring to the existing business?
Exploitation of existing resources/capabilities (front end - closer to custome or back end - firm
operation)
○ Expansion/enhancement of existing resources/capabilities (front end or back end)
Mechanisms of value creation
- Employing slack--> unused resource capacity or management skills - via economies of scope
- Creating synergy
- Shared knowledge
- Similar business models and dominant logics of business
- Spreading capital
- Provide a stepping stone to a new industry--> first mover
- Stopping competitors--> acquiring them
- Staying ahead of technology
Case: EBAY
Should ebay take seriously the criticism of Elliot management?
Sum of the parts--> the value of each individual business is higher than their collective value under
Ebay
- The letter was public and Ebay is listed
- It is not the first time Ebay lacks focus in its portfolio and has to proceed with diverstitures
- Elliot management could significantly replace the board of directors (15 are up for re-election)
What value does the corporate office add(8ss)?
- Not employing slack
- No synergies
- Potential shared knowledge
- Similar models between marketplace and stubhub
- We dont know about spreading capital
- Stepping stone into new industry
- No stopping competitors
- No clear evidence about staying ahead of technology
Is Ebay a conglomerate? Technically Ebay is a dominant business. But practically it is a conglomerate
because its portfolio is unrelated and it has small corporate office dimenionss (120/14000)
DIVERSIFICATION
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Conglomerate--> corporate group growing by unrelated diversification
Differentiation that leads to value destruction
- Excessive pride/overconfidence (hubris)
- Sunk cost fallacy (escalation of commitment)
- Imitation
- Poor governancee, incetives and management
- Lack of resources
COST LEADERSHIP - Walmart
- Everyday low prices
- Purchase in bulk--> nagotiate lowest possible price
- Control of overhead cost
- Reinvest savings
- Centralized distribution system
- Stock management via ICT
- Cut all unnecessary costs (marketing, advertising)
Cost advantage strategy
Winning with customers by manufacturing and distributing at the lowest cost possible.
Competitive advantage is gained by
- Reducing price below all of the competitors--> gain market share
OR
- Setting the same price as competitors--> greater profits.
Sources of cost advantage
Economies of scale --> reducing in costs per unit (avg cost) due to increases in efficiency of
productionas the number of produced goods increases.
○ Ability to spread fixed costs of production. Plant/equipment
○ Ability to spread nonproduction costs. R&D, advertising, general and administrative costs
○ Specialization of machines and equipment
○ Task and employee specialization
Economies of scope --> reduction in costs per unit due to increases in the number of different
produced goods
○ Ability to use bargaining power
Ability to use knowledge and resources across different products ○
○ Ability to share costs across different products (like advertising, logistics)
Learning advantage --> reduction in labor cost per unit due to learning
○ Repetition of a task--> increase efficiency and effectiveness
Learning is fast at the beginning, slower later. It is also based on cumulative amount of production.
Experience law/advantage --> reduction in cost per unit with increases in cumulative volume of
production
Estimated drops in costs are 10/30% each time cumulative volume doubles
More important in manufacturing industries
Proprietary knowledge--> information that is not public but can be viewed as a property of the holder.
Like Patents and Trade secrets
Lower Input costs
○ Bargaining power over suppliers (due to purchased volumes or nagotiation tactics)
○ Cooperation with suppliers, single or dual sourcing
Location advantages (lowest-cost locations for wage rates, exchange rates, raw materials and
energy)
○ Preferred access to inputs (for rare and difficult to imitate suppliers)
Different business model--> Eliminating steps/activitis in the value chain and/or Perform different
activities
Implications in terms of strategy
Analysis of costs are useful for
- Making investment/growth decisions
- Making acquisition decisions
Analyzing the company's cost position and opportunities to
reduce costs.
Cost advanatage might be a result of effortful strategies such as development of proprietary knowledge,
business model design or pivot
Tell me the ingredients for cost leadership
Product Differentiation advantage
A strategy whereby companies attempt to gain competitive advantage by offering value that is not
available in other products or services or that other products don't do as well
- Perveiced vs objective value
- Differentiation generally entails higher costs, but not always
Companies need to manage a trade-off between differentiation and cost, finding optimal price
customers are willing to pay for differentiation
Different product features
- Does a better job in functionally meeting a customer need
- Does more jobs for the customer
- Does a unique job that nothing else does
Types
- Better quality/reliability--> lasting longer or breaking down less often
- Convenience--> easier to find, purchase and use
- Brand image--> differentiation pushed via marketing activities
How to define sources of product differentiation
Customer segmentation based on
○ Product attributes
○ Demographics/customer attributes (b2c and b2b)
○ Jobs to be done (functionally, socially, emotionally)
Mapping the consumption chain--> analyzing the steps through which the customer passes:
awarenes, finding, selecting, ordering and purchasing, being delivered, paying, movings/storing the
product, help during use, satisfaction and return, repairing/maintenance/disposal.
Trad-offf--> actually the two can co-exist
Differentiation choices can generate fisrt-mover advantage--> dominant position--> higher
volumes--> cost optimization opportunities.
- Some business models can keep together differentiation and low price
Blue oceans--> the creation of new, untapped market space, where competition is minimal or
irrelevant. In contrast to "red oceans," where businesses compete fiercely in an existing market.
Differentiation - Samsung
- Technology and innovation
- Market segmentation--> diverse products catering to various price points and customer needs
- Worldwide presence and regional customization
- Brand recognition
- Ecosystem--> smooth connectivity amon all samsung devices
- Powerful branding--> effective advertising campaigns
Outsourcing --> the process where a firm contracts out a business process or activity to an external
supplier
Vertical integration (insourcing) --> the process to brin in-housr the business processes or activities
previously conducted outside the company. Can be carried backward or forward in the value chain.
Reaosns for vertical integration: the 3 Cs
Capabilities--> whether the firm has or can build, the capabilities to perform an activity better than
other firms
Coordination--> whether a firm is better able to effectively coordinate its different activities when they
are all conducted internally.
Interdependence of activities:
Modular (pooled) --> low interdependence of activities: the results depend on the sum of each
module's performances. Low coordination required (ok outsourcing).
Sequential--> medium interdependence of activities: one can start to perform the task after the
completion of the previous task and passen on the results. Moderate coordination required () ok
outsourcing with close supplier; ok internalization)
Reciprocal --> high interdependence of activities: tasks are reciprocally dependent. High
coordianton required (ok internalization).
Control--> whether the firm desires and can maintain control over a valuable activity or input in the
value chain
Transaction costs--> costs incurred when making an economic trade (outside the cost of the
good) in a market
This depends on:
▪ the specificity of the transaction
▪ The frequency
▪ The uncertainty
The more of these aspects, the more insourcing is recommended (make rather than buy)
Dangers of vertical integration
Loss of flexibility → vulnerability to industry-specific risks and lower agility in adapting to uncertain
environments and market changes
Loss of focus → the more activities to manage, the less the opportunities to be best-in-class and the
greater the diluition of resources and attention
AND VICEVERSA: increased flexibility and focus are the advantages of outsourcing – together with
minimization of investments
Dangers of outsourcing:
- Loss of capabilities (especially to innovate)
- Lack of control over critical areas (e.g. bargaining power of suppliers, imitation)
EX: INTEL
OUTSOURCING AND VERTICAL INTEGRATION
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KLM CASE
Answer the following questions:
What are the goals that KLM tries to pursue through the various alliances described in the
case?
○ Expand market dominance
Maximize profits ○
○ Cost efficiency
○ establish Schiphol Airport as the primary hub for European flights.
○ Circumvent barriers--> Overcome US laws
What are the advantages and disadvantages deriving from alliances for KLM? (please analyse
each case and also define whether each one was more or less advantageous)
KLM northwest
Pro: gained access to the US market, sharing workforce and IT systems after the new
agreement
▪ Cons: loss of pricing authority and seat allocation, tensions
Alcazar --> failed. pro: unify sales forces and integrate routes. Cons: inability to integrate the US
partner
○ Kenya--> beneficial. Revenues more than doubles thanks to this link
○ Alitalis--> failed. Pro: Potential integration into KLM-Northwest network
Airfrance--> beneficial. They were able to continue to operate individually, but created the largest
airline group in the world. Cons: KLM lost majority control (81% Air France ownership)
How does KLM approaches the development of strategic alliances? Can this approach be
generalized to other companies?
KLM follows a six phases process:
▪ Screening
▪ Business plan implementation
▪ Contract negotiation implementation
▪ Development
▪ Management
KLM forms these alliances very consciously, knowing what are the resources needed, the
possible benefits derived from each partnership, and as it evolves, the adjustments needed.
I think this process can be easily generalized and adapted to other companies as it based on
proper assessment of the possible partners and ensures possible adjustements if needed.
Challenges and mistakes to avoid in a strategic alliance
- Lack of communication
- Misaligned expectations
- Misrepresentation
- Hold-up
- Cultural differences
- Lack of trust
- Lack of long-term planning
Possible solutions:
Legal contracts (governance,
operations, exit/termination) - Shared
ownership / Financial collateral bonds
Better to ally or internalize (acquire)?
Advantages and disadvantages of strategic alliances
THE INNOVATION MODEL
Assumptions of closed innovation for sustainable advantage
“To profit from R&D, we must discover, develop and ship it ourselves”
→Innov. processes internally generated and controlled
“We should control our IP, so our competitors don’t profit from our ideas”
→Focusing on inventions and IP rights
“If we discover it first, we will get it to market first”
→Technology-driven innovation and large R&D efforts
“If we are the first to commercialize it, we will win”
→Focus on direct and fast commercial outputs
“All the smart people in our field work for us”
→ R&D led by large companies
Emergin issues that makes the innovation cycle much mroe uncertain
- Emergence of novel forms of innovation
- Increased availability and mobility of skilled people
- More capable Universities
- Enormous increase in amount of Venture Capital
- ICT advancements
CONSEQUENCES:
→ Waste or reshape needed company’s knowledge
→ Decreased product standardization
→ Erosion in oligopoly market positions / increased of qualified suppliers
→ Emergence of small businesses to exploit new techno-market regimes
OPEN INNOVATION
The use of purposive inflows and outflows of knowledge to accelerate internal innovation and expand the
markets for external use of innovation,
Strategies:
Outside-in--> enriching the company’s own knowledge base through the integration of suppliers,
customers, and external knowledge sourcing
Inside out-->earning profits by bringing ideas to market, selling IP, and multiplying technology by
transferring ideas to the outside environment
Coupled process--> co-creation with (mainly) complementary partners through alliances,
cooperation, and joint ventures during which give and take are crucial for success.
Assumptions of open innovation
- Ideas are qidely distributed--> no one has monopoly of useful knowledge + central role of users
Not all the smart people work for us--> it is more useful to create the architecture connecting
technologies(=platforms) rather than another technological building block
- IP (intellectual property) management is necessary to access external IP to fuel our business model
Profit from our own IP in others' business model. Open does nto mean free.
Innovative strategies
Strategies are innovative (or revolutoinary) when they introduce fundamentally different business modelas
than rivals--> offer a different value proposition using different resources and capabilities
Dominant ways to delivar value
Reconfiguration of value chain to eliminate activities--> ex: IKEA eliminates transport, Amazon
eliminated physical stores, Ryanair eliminated served meals.
Low end disruptive innovation--> producing a low cost product/service for the low-end (price
sensitive) segment of the market, then gradually moving upmarket as the product/service improves
its technology and processes. Ex: honda entry in the market with 50c-150c motorbikes, then moving
to larger and superheavyweigh motorbikes
High-end/top-down disruptive innovation--> Producing an outperforming product/service with
respect to competition, to be offered for a premium price (targeted to least price-sensitive buyers).
Ex: Dyson, Apple, Tesla
Value chain reconfiguration to allow for mass customization--> develop mass production of the
various modules of a product, then allowing the customers to select which modules to combine and
assemble to create the final product. Ex: Dell's pc, build a bear
- Blue ocean strategy--> creating new demand in an uncontested market space. Ex: circus the soleil
- Create a platform to coordination and share private assets. Ex: uber, airbnb.
- Free business models--> offering product/services for free. Ex: google docs, wikipedia
Strategies:
Cross-sell (freemium) strategy --> offering a free basic product to gain market penetration
and widespread use, after which users are offered a non-free premium version or are sold
products not directly tied to the free product. Works well for large product user base or high
conversion rate. Ex: spotify
Third-party pay strategy (two-sided market)--> providing free product/service to a group of
consumers/users because a third party will pay to access them. Works well for large product
user bases allowing for segmentation, or communities representing precise customer
segments. Ex: google search engine.
Bundling strategy--> offering a free product with a paid product or service. Ex: amazon prime
THE S CURVE--> innovation follows an S curve.
Three questions about international strategy:
WHY?
○ Reactive motivation--> sustain growth, managing risk, responding to customers or competitors
Proactive motivation--> seek lower-cost resources(offshoring), extending products' life cycles by
leveraging investments or capabilities, economies of scale and scope, acquisition of knowledge
from different customers and locations
WHERE?
Advantages vs risks of going international
▪ Market driven--> regarding customers, distribution, marketing, etc.
▪ Political--> government stability, tariffs, regulations, etc.
▪ Economic--> monetary crises, hyperinflation, recessions, etc.
Choose the locations with the lowest risks
Liability of foreigness--> distance
Cultural --> , language, ethnicity, trust for outsiders, religion, masculinityfemininity,
individualism-collectivism, power distance, uncertainty avoidance, values
Administrative-->legal, political, regulatory institutions) – most important for publicly relevant
industries (e.g., national security, large number of employees, direct government suppliers,
extraction of natural resources, production of staple goods
▪ Geographic--> miles/km, ease of transport/travel
▪ Economic--> avg income
Choose the locations with the lowest distance
National competitive advantage--> Companies from the same country dominate sales in some
industries (e.g. Germany for advanced machineries, Italy for leather goods). This can be
explained by 4 sets of factors that push companies to be more innovative and to gain competitive
advantages due to national conditions.
Porter’s diamond model of national competitive advantage:
HOW?
Local responsiveness (local adjustment - higher cost) vs cost efficiency (standardization/global
integration)
Global strategy --> selling standardized products, using standardized processes around the world
→ Centralized decision-making (economies of scale, learning and exploitation of firm
capabilities), also by focusing only on some parts of the value chain (e.g., R&D)
→ Generally low-cost strategy, but does not imply company-level product differentiation (e.g.
Apple) for a large, ready-made market and to serve universal needs
→ Advantages of cost efficiency are counterbalanced by lower knowledge generation and
flexibility
INTERNATIONALIZATION
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Multidomestic strategy --> tailoring products or services to local markets.
→ Decentralized decision-making
→ Replication of value chain activities in different countries (e.g., R&D, manufacturing,
sales/marketing) = differentiation
→ Local competitive advantages
How to manage costs and adaptations?
- Focus adaptations (focusing on a particular product, segment, or geographic area
- Externalization of adaptations (e.g. franchising and alliances)
- Design adaptability (e.g. lean or flexible manufacturing, modular design)
Transnational strategy--> combining local responsiveness and standardization
--> trade off between local and global
Arbitrage strategy--> exploiting differences across countries to expand sales. Different types of
arbitrage emerge out of the following country differences:
Economic differences (e.g. labour and raw materials costs) ù ○
○ Capital differences (e.g. interest rates)
○ Cultural differences (e.g. food or fashion culture)
○ Administrative differences(e.g. laws, taxes)
Entry modes
