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LECTURE 1
Business models
- Dyadic : a. Product business model: no prior interaction b. Solution business model: prior interaction
- Triadic : a. Matchmaking business model: 2 or more customers groups are brought in a marketplace (fee to use the platform paid by both parties). b. Multisided business model: interaction with 2 or more customers groups, design the product or service and deliver it in a way that connects the parties using a platform. The business model canvas It analyses more in depth:
- Value proposition canvas , which can be called VALUE MAP and shows how the business create value. It is essential to analyse the fit between value proposition and customer segment.
- Customer block , which can be called CUSTOMER PROFILE and details the understanding of the customer. CUSTOMER BLOCK Customer segments block
- Customer jobs : what the customers want to achieve by purchasing a good or service, and the needs they want to satisfy , such as: o Performing tasks, o Improving their social status, o Dealing with emotional aspects, o Supporting activities.
- Customer pains : difficulties that rise in achieving customer’s job, such as: o Solutions do not work, o Emotions, o Not liking something.
- Customer gains : benefits achieved by customers. There are different levels (expected unexpected). A business model can serve the mass market or a niche. Moreover, different “segments” of customers can have specific needs. Customers in matchmaking and multisided business models are divided into different groups with specific needs. Customer relationships Six types:
- Personal assistance
- Dedicated personal assistance
- Self-service (customers’ help themselves)
- Automated services (combines the self – service with customisation based on automatic profiling of the customer)
- Communities
- Co-creation: you tube, where creators upload their videos. Channels Are interfaces between the company and its customers. A channel combines activities, people, and organizations to deliver a product or service to customers. A company can combine different channels to serve customers along the different phases of interaction, such as:
- Own channels : directly controlled by the organization.
- Direct channels : put the organization into contact with customers, more costly.
- Indirect channels : less expensive, mediated by partners who assume part of the business’ risk. Osterwalder distinguish 6 types of customer relationships : 1. Awareness of the proposed products and services
- Evaluation of the value proposition (opportunity to try the product or service) **3. Purchase
- Delivery**
- After sales (assistance) Value proposition block
- Products and services : what the organization offers to complete the customer job, satisfying their needs and creating value.
- Pain relievers : describe how products and services reduce customer’s pains. Not all customer’s problems can be solved, but the most relevant can be addressed to the value proposition itself.
- Gain creators : how much the products and services provided can create benefits for the customers. The infrastructure area
- Key resources : used to deliver the value proposition. Tangible, intangible, human.
- Key activities : are the core activities performed by the organization to make the business model work. They strictly depend on the type of business model offered by the organization.
- Key partners : can help to reach customers through indirect channels. The financial viability area Revenue streams articulate the sources of revenues that the business models can generate. It clarifies how revenues are collected, and the category they belong to:
- Advertising,
- Subscription,
- Transaction fee,
- Sales,
without a plan and combines with the deliberate strategy, becoming a part of the realised strategy. What is strategy? Individuals or organizations achieve their objectives by using a strategy. Why do firms need strategy? Enhances the quality of decision – making, facilitates coordination and focuses the organizations on pursuing its goals. Strategy as decision support
- Strategy gives coherence to decisions. It simplifies decision- making process by constraining the range of decision alternatives considered and acting as a heuristic.
- The strategy – making process permits the knowledge of different individuals to be pooled and integrated.
- Strategy facilitates the use of analytic tools. Strategy as target
- Strategy is not only concerned with how the firm operates now, but also with what the firm will become in the future. Where do we find strategy?
- The starting point of strategy is the idea for a new business.
- The mission statement describes organizational purpose, it addresses “why we exist”.
- A statement of principles of values outlines “what we believe in and how we will behave”.
- The vision statement projects “what we want to be”.
- The strategy statement articulates the company’s competitive plan, which typically describes objectives, business scope and advantage. Levels of strategy Organisational level Level of aggregation Alliance, partnership, and ecosystem Define the organization’s boundaries. *Is the organization cooperating with others? Network strategy If the answer to the question is positive, the company is adopting a network strategy. Corporation, group, organization Define the organization main purpose. *Where to compete? *Which industries? Corporate Strategy It is the top management, which defines the overall direction of the company and allocates resources across different business units. Business unit Such as operations, marketing, design, department… This level involves decisions on how each unit can gain a competitive Business strategy or competitive strategy Business level strategies may include marketing approaches, pricing strategies, product
advantage in its specific market or industry. *How to compete? *Which industries? differentiation, and market positioning. Department, function, internal Unit This level pertains to specific functional areas within a business. Functional Strategy Functional level strategies align with the overall business strategy and aim to optimize the functions within the organization to contribute effectively to achieving broader business objectives. This level includes branding, communication, and channel management. Core areas of strategic management Strategic analysis is focused on the study of:
- The vision, mission, values, and objectives.
- The performance.
- The external environment.
- The internal resources.
- The attitudes of various stakeholders. Decision making is focused on developing strategic options and selecting them. The strategic options are related to the business and corporate strategy levels. Implementation involves real strategic initiatives, and it is complex because it relates different areas of the organization itself. It may also require changes to the management of human resources, their motivation and evaluation, and how the operative tasks are conducted. Corporate strategy and business strategy Corporate strategy defines the scope of the firm in terms of the industries and markets in which it competes. Corporate strategy includes choices over diversification, vertical integration, acquisitions, and new ventures, and the allocation of resources between the different business units. Business strategy is concerned with how the firm competes within a particular industry or market. If the firm prosper, can achieve a competitive advantage. The distinction between corporate and business strategy corresponds to the organizational structure. Corporate strategy refers to the top management, whereas business strategy is a responsibility of the senior managers of divisions or subsidiaries. The sources of superior profitability
through their organizational action (long-term goals of the organization).
- Time horizon : time span for that vision to be achieved. It can change depending on the external environment (3 to 30 years, managers tend not to declare a specific time). How to formulate a mission statement? A mission statement refers to the organization’s purpose and explain what the organization does. What is our business? a. Customer-oriented definition : more effective than the product-oriented as it focuses more on customer’s needs that a business aim to satisfy. b. Product-oriented definition : the company is more focused on the characteristics of the good or service that is providing and on the market. This strategy is riskier because customer’s needs can mutate. A mission statement based on product or services may make the organization less flexible. Goals Measurable future states that an organization aims to achieve. In the context of strategy, they are quantifiable targets which define what the organization should do in pursuing its mission. Goals should be:
- Precise and measurable
- Focused on crucial issues
- Challenging but realistic
- Time-bound (not all goal has to be based on a timeframe, but specific timeframes can act as motivators) Competitive advantage, measuring performance, the concept of value Definitions:
- Firms can achieve a competitive advantage by implementing a value creating strategy that has not been implemented in other firms.
- An organization has something that other don’t.
- The profitability of an organization is greater than the average profitability and profit growth of other companies that competes for the same customer segment. Value creation and value capture Value creation is the process through which a company combines inputs such as labour force and materials to make a product or offer a service that has a perceived benefit for the customer that is higher than the costs paid by the company to create it.
Value captured refers to the portion of the total value created that a specific entity or stakeholder retains or gains from the transaction. It's essentially the benefit or value that a particular party, whether a firm or a customer, obtains from the transaction. Customers compare products and services at different levels of quality. Customer’s utility curve shows that customer is inclined to pay more if the quality is better; whereas firm’s average cost curve shows that when the quality of a product increases, the unitary costs are likely to get higher. Maximising shareholders’ value The maximisation of shareholders value is a movement that had a profound influence, and it can be applied to public companies that are listed on stock markets as well as private companies. Statement of financial position Asset = equity + liabilities Assets non-current, which are expected to have an economic useful life greater than 1 year. While current assets less than one year. Equity money invested into a company by its shareholders, as well as retained earnings which are not distributed. Liabilities non-current, which are bond or long-term loans. Current liabilities, items that must be repaid within 12 months and include trade payables, taxation, and short-term borrowings. Capital employed is estimated by using financial data. It captures the way a business is financed for the long-term and it is the combined value of equity and non-current liabilities.
o Reducing costs, which can lead to reduce investments and, therefore, the imbalance of strategies oriented towards short – term goals and related returns.
- MSV movement encourage the creation of value for all stakeholders, not just shareholders.
- Mazzucato promotes a perspective based on a long – term performance, in fact it is a collective process that should be rewarded. CSR: Corporate Social Responsibility Carrol’s pyramid:
- Philanthropic,
- Ethical,
- Legal,
- Economic. Socially responsible companies should demonstrate ethical conduct and act as good corporate citizens. So, the idea of CSR is about convincing that firms should not just focus on profits. CRS, in fact, can be thought in terms of initiatives that firms carry out that exceeds their legal obligations. Creating shared value Michael Porter and Mark Kramer's article, "Creating Shared Value," redefines the traditional approach to corporate social responsibility (CSR) by introducing the concept of shared value. They characterize shared value as the adoption of policies and operational strategies that not only enhance a company's competitiveness but also advance the economic and social conditions in the communities where it operates. The essence of creating shared value (CSV) lies in aligning a company's resources and activities with the societal needs it encounters. By doing so, the company can effectively address challenges and opportunities while aiming for long-term sustainability. Porter and Kramer argue that conventional CSR is often perceived as a financial burden or cost for a company rather than an avenue to boost profits. They propose a shift in perspective by introducing CSV , which revolves around integrating responsible business practices at the core of an organization. This approach entails actively seeking business opportunities that not only benefit the company economically but also have a positive societal impact. The key distinction lies in how CSV integrates social responsibility into the fundamental strategies and operations of a company , emphasizing that doing good for society can be directly linked to achieving economic success. This approach aims to create value for both the company and society, contributing to increased profitability and bolstering the firm's competitive edge in the market.
CSR as a marketing tool Critics suggest that some companies may use CSR merely as a marketing ploy rather than a genuine commitment to improving society. This practice, often termed 'CSR-washing’, reflects the notion of using CSR initiatives primarily for public relations purposes.
- Greenwashing: This occurs when a company exaggerates or misleads consumers about the environmental performance of its products. It's a way of presenting products as more eco-friendly than they truly are.
- Pinkwashing: Originally associated with efforts related to breast cancer, this term refers to companies or groups that position themselves as advocates in fighting breast cancer while potentially engaging in practices that might contribute to the problem. Additionally, it's sometimes used concerning an exaggerated or insincere commitment to supporting the LGBTQ+ community causes.
- Bluewashing: This term refers to companies that seek to improve their reputation by aligning with initiatives like the United Nations Global Compact (UNGC) without genuinely intending to implement its principles related to human rights, labor rights, the environment, and anti-corruption. Critics argue that for the UNGC initiative to be effective, its principles must be redefined and rigorously enforced. (CSR can be used to bluewash a frim’s reputation). LECTURE 3 What is the external environment? All the factors outside the organization which might influence it, its strategy, and its operations. Macroenvironment ( macro level ): sociological, environmental, legal, technological, economic, political, and ethical factors. Industry ( meso level ): factors relevant to a particular industry that are still external factors but more specific, such as suppliers, complement, new entrants, substitute products, competitors, buyers. STEEPLE framework
- Sociological factors : population demographics and trends, lifestyles, and societal values.
- Technological factors : innovations, technological change, and awareness.
- Economic factors : general economic wellbeing of an economy.
- Environmental factors , performance, safety, and protection of the natural environment.
- Political factors , conditions, and changes in the political environment, government, regulatory policy…
Competitors are firms whose strategic choices directly affect one another. Standard Industrial Classification (SIC) is a hierarchical classification based on 5 levels of aggregation:
- Sections
- Divisions
- Industry group
- Class
- Subclass A market share is the percentage of total sales completed by a company within an industry in a specific period (one year), it shows the size of the company in that specific industry. To evaluate the competition in an industry there are 2 indexes: **- N – firm concentration ratio
- Herfindahl index** *if a company operates in more than one industry, it is important to distinguish which revenue stream corresponds to the analysed industry. N – firm concentration ratio Is the sum of the number of largest market shares in the industry, and the higher the concentration ratio is, the more concentrated is the industry because a limited number of firms control a larger amount of the market share. Herfindahl index
H =∑
i = 1 N xi 2 N: is the number of shares of the firm in the industry “i” xi: market share of the firm in the industry In an industrial sector (market) with n firms, each having a market share Xi, Herfindahl index is equal to the sum of the squares of the market shares of all n firms operating in an industrial sector or market. The Herfindahl index value ranges from 0 to 1. When the index approaches zero (0) , it indicates minimal market power concentration. Conversely, when the index approaches one (1) , it indicates maximum market concentration. An interesting property of this index is that the reciprocal 1/H index , calculates the number of firms in a hypothetical market if all firms had the same market share. This formula is called numbers – equivalent of firms. Industry categorisations According to the SCP paradigm, the concentration of the industry influences the conduct of competitors and their performance. There are different industry types:
- Perfect competition a. Homogeneous products or services. b. No complex entry requirements, easily enter. c. Excess of capacity can lead to price wars: risk of unprofitability due to the continue fall of the price that comes close to match the average unit cost. d. Theoretical situation, difficult to find in practice. e. Commodity: it is simple to switch from one seller to the other.
- Oligopolies and duopolies a. Oligopolies: few firms compete in ad industry which presents significant barriers to other companies wanting to join the industry. b. Potential for a variety of products to be available. c. Information imperfect, customers are not able to make evaluations and compare products or services. d. Firms monitor others constantly, in fact, activities are interdependent. e. Duopoly is a special case of oligopoly, where only 2 firms fix the quantity of products and their prices. The colluding companies will benefit of higher prices because customers have no opportunity to find the same product somewhere else. 3. Monopolies a. The company operates with weak or no competition. b. The market share controlled by other companies is less then 40%. So, the monopolist sets prices at a level which maximize the value capture. c. Cartel: when firms operate together as a single monopolist. Industry lifecycle Is a model that describes the evolution of an industry from its birth to its final decline. The purpose of knowing the lifetime in which ad industry is operating are the following:
- Evaluate the current stage of the industry and the level of competition.
- Predict the number and types of organizations that exist at each stage.
- Estimate the future level of competition at different stages in the life cycle. LECTURE 4 Six forces analysis Industry competitors: rivalry among existing firms Rivalry among existing firms is influenced by multiple factors, such as the industry type : monopoly and oligopoly industries tend to reduce rivalry. If there is equal distribution of the market shares , markets rivalry increases; whereas when companies with larger market shares operates on the markets, it is difficult to challenge them. However, if the
When a specific category of suppliers contributes significantly to a company's total costs, it creates a situation where the decisions and actions of these suppliers hold substantial influence over the firm's operations and pricing strategies. FORCE 3: bargaining power of buyers Concentration and bargaining power : if buyers are many, the bargaining power is reduced (buyers are price – takers). On the other hand, few buyers can negotiate from a strong position. Switching costs of buyers are low : If buyers can easily switch between competitors, their bargaining power tends to increase. Information asymmetry : buyers might face challenges in evaluating or comparing products or services offered by different competitors, especially in complex or specialized fields. The internet has played a significant role in improving access to information for buyers, enhancing transparency in product/service features and prices, and potentially reducing the role of intermediaries (disintermediation). Buyers as Competition: Sometimes, buyers themselves might enter the competition within the industry they buy from, potentially changing market dynamics. Commodity Perception and Price Sensitivity: If buyers view the product or service as a commodity or it lacks significant differentiation, they tend to be more price sensitive. Industries where products are perceived as similar or interchangeable often face heightened price sensitivity among buyers. Buyers are price – sensitive because the product or service are a large proportion of their costs. When buyers are price-sensitive, even slight variations in price can significantly impact their purchasing decisions. They are more inclined to seek out the best deals, discounts, or lower- priced alternatives. FORCE 4: Threat of new entrants An industry becomes attractive for new entrants when the return on the capital invested ( ROCE ) is expected to be higher than the cost of obtaining the necessary capital to enter the industry. Industries are affected by the threat of new entrants when entry barriers are high. High entry barriers can make it challenging or unattractive for new players to enter the market. There are different types of barriers:
- Exogenous barriers: are investments in fixed assets (i.e., barriers posed by the governments such as licenses, taxes, or authorisations; legal barriers like copyrights and patents). If the industry reached the large-scale production, there are only 2 options:
o make a large investment, but there is the risk of not using the whole capacity, o enter with smaller investments that translates into higher unit costs.
- Endogenous barriers: factors within an industry that incumbents deliberately cultivate to fortify their positioning and impede the entry of new competitors. Such as: o Investments in R&D , adding new features which can rise the barriers of entry. These investments are important to reinforce loyalty of buyers. o Investments in marketing to create a large base of loyal customers: when buyers have low switching costs, the network effect becomes a solution to this issue. In fact, if there is a large base of customers using a product or service, the likelihood of switching to another competitor is low. o Experience developed by incumbents : companies gain a competitive advantage through experience, in fact, the more a good is produced, the better the production process can be optimized. o Control of Supply or Distribution Channels : incumbents may exert control over crucial supply or distribution channels. By limiting new entrants' access to these channels, established companies can prevent potential competitors from reaching buyers effectively. o Investments to Expand Scale : incumbents may invest in enlarging their operations, such as expanding production plants, to make it less appealing for new entrants. Achieving larger scales of operation could deter newcomers due to higher entry costs required to match such scale. o Investments in developing experience: incumbents have more experience. - Ex – post barriers are threats and not barriers because incumbents can act aggressively to defend their market share. o Introducing predatory pricing: lowering prices to a level below the costs sustained by new entrants (by expanding the scale). o Tightening control on supply or distribution channels. o Initiating Litigation: Aggressive incumbents might react to new entrants by filing legal disputes, such as patent or copyright infringement claims. This tactic forces new entrants to divert resources towards legal defence, freezing financial resources and diverting attention away from business growth. Type of industries according to the entry barriers 1. Top dog industry: high investments are needed to enter this industry and incumbents could act aggressively. The typical new entrant is a large firm, an example could be the pharmaceutical one (MATURE AND DECLINE STAGE).
quantities and another ( red ) with potentially higher unit costs if market demand doesn't absorb the production quantities. This underscores the risk of adopting the second technology unless market demand can sustain it. Technological advancements have altered the minimum efficient scale in production. Modern technologies offer greater flexibility, potentially reducing average costs without requiring an increase in plant scale—in fact, they might even decrease the minimum efficient scale.
