Business Strategy: Understanding Industry Analysis and New Product Development, Lecture notes of Business

Download Business Strategy: Understanding Industry Analysis and New Product Development and more Lecture notes Business in PDF only on Docsity! Business Strategy 17.09.2018 — 23.11.2018 (1 term) BUSINESS STRATEGY 1—THE CONCEPT OF STRATEGY Strategy = unifying theme that gives coherence and direction to a pattern of goals or objectives and plans to achieve them e It requires resources e Implies consistency, integration and cohesiveness It concerns many different academic disciplines (military, sociology, psychology) BUT economics has probably been the most influential one Starting point for a successful strategy 1. Objective appraisal of resources > knowing your strengths and weaknesses Ex) LG exploited her talent and augmented it with capabilities she has assembled. JB: talent as a visionary and brought in the technical know-how he lacked. 2. Long term goals (simple and consistent) > focus on the goal Ex) Lady Gaga: devotion to develop her alter ego. JB: exploit WWW to create a new way to buy goods 3. Awareness about the competitive environment > fast learning from it Ex) LG: awareness of the music business, the marketing potential of social networks. JB: combination of low prices and awareness of the business potential of the web 4. Effective implementation > effective strategy WHY strategy? Enterprises need business strategies to give direction and purpose, to deploy resources in the most effective manner and to coordinate decisions made by different individuals Common elements of strategic decisions e Important e not easily reversible ° require a significant commitment of resources SUCCESS (for organizations/individuals) is seldom the outcome of ¢ a purely random process ¢ superiority in endowments of skills and resources > strategies built on the 4 elements plays always an influential role for successful careers Focusing ona single goal in your life > outstanding success BUT may be matched with failures in other areas of life (poor relationship with family, friends Strategy vs tactics Tactic > scheme for a specific action “win the battle” Ex) for amazon: introducing free shipping Strategy > overall plan for deploying resources to establish a favourable position “win the war” Ex) for amazon: amazon prime Business Strategy 17.09.2018 — 23.11.2018 (1 term) Strategic management = strategy + business = Strategy: from the Greek “to lead an army” = Management: The process of getting things done efficiently and effectively with and through other people > PLANNING ORGANIZING LEADING CONTROLLING Evolution of strategic management > driven more by the practical needs of business than by the development of theory. ° 1950: financial budgeting (post war period) > difficult to coordinating decisions and maintaining control in growing companies ° 1960: corporate planning > long term development of the firm, possibility for firms to grow after recovery (usually 5-year corporate plans) ° 1970: emergence of strategic management > crisis and uncertainty due to oil shocks and competition, strategy used to face emergencies. Increasing focus for competition ° 1990: quest for competitive advantage > trying to change the shape of the economic system, looking for profit sources inside the firm rather than outside. Resources and capabilities of the firm become the main source of competitive advantage ° 2000: adapting to turbulence > new challenges, exploiting technology, quest for strategic innovation and social/environmental responsibility As the business environment has become more unpredictable, strategy has become less concerned with detailed plans and more about the quest for success 2 - STRATEGY ASSESSMENT FIRM ° Goals “simple, consistent, INDUSTRY long-term” ENVIRONMENT ° Resources “objective <—— | STRATEGY +—> Customers appraisal of resources” Suppliers ° Structure “effective Employees implementation” Strategy as the Linking point between firm and environment > “how can you reach customers?” Strategic fit = for a strategy to be successful, it must be consistent with the firm’s external environment and with its internal environment. The failure of many companies is caused by a lack of consistency between the 2. How do we make money? © Business strategy > how to compete (within a single industry) look for a strategy to be more profitable than competitors: competitive advantage. Responsibility of divisional management Ex) Lady Gaga: changes in image, interaction with fans through digital media, theatricality Business Strategy 17.09.2018 — 23.11.2018 (1 term) In practice, the fact that a firm takes a narrow (shareholders) or broad (stakeholders) view is a matter of pragmatics rather than arbitrary choice > important trade-off Profit and purpose Corporations are not only about making money. World’s most successful companies (in terms of shareholders and profit) are those that are motivated by factors other than profits Focusing on profit may not make you achieve goals: > it could be an effective guide to management only if managers knew what determines profit. Over focusing on profit will shift the attention from the real objective to the profit alone > motivation: the goal of maximizing the return of shareholders may not be inspiring employees to pursue a common goal NB: strategy is important also for not-for-profit organizations. Oru Cur a ed eda ed Snug SUL ULg ned pd ie eat cay Examples Royal Opera House Salvation Army UK Ministry of Defence Guggenheim Museum Habitat for Humanity European Central Bank Stanford University Greenpeace New York Police Dept Linux World Health Organization Analysis of goals Identification of mission, goals and performance indicators and establishing consistency and performance _ between them is a critical area of strategy analysis for all non-profits Analysis of the Main tools of competitive Main arena for competition _ Not important. However, competitive analysis are the same as for and competitive strategy is _ there is inter-agency environment for-profit firms the market for funding competition for public funding Analysis of Identifying and exploiting distinctive resources and Analysis of resources and resources and capabilities critical to designing strategies that confer capabilities essential in capabilities competitive advantage determining priorities and designing strategies Strategy The basic principles of organizational design, performance management and leadership implementation are common to all organizational types Amazon.com 7 ? Vision: imagine a world where sales are made online, given the disadvantages of a physical bookshop (some books are not available) He had to identify how he was going to connect the platform with a physical delivery of the book and to convince people to buy books online > increasing product range, lowering prices How could he lower prices? No rent, no employees, higher delivery costs but free delivery with a 100$ sale First years: not making a positive profit, due to the development of the company through investments. Positive revenues but negative profits Business Strategy 17.09.2018 — 23.11.2018 (1 term) > how could he convince investors? With a good business plan, he had clear in mind where he wanted to go. He convinced them that the short term loss would eventually end up in long term profits 2000: dotcom bubble > investors didn’t trust companies, loss of trust in the possibility of making money through internet After 2000: amazon recovered >A’s strategy and plan were better designed wrt others, diversification, other retailer could sell their stuff Geographical scope: from US to EU-Asia (France, Japan) >now almost a gobal platform Product scope: product diversification Vertical scope: change Why did amazon buy whole meal food? And why did it open Amazon go? Probably due to the fact that traditional retailers are now opening online stores Innovation: logistic services, assistance Goal of amazon prime: costumer’s loyalty > amazon prime video, music, now All these companies are trying to build a kind of ecosystem, a way to make the customer use the platform as much as possible Some key concepts from the original strategy still apply STRATEGY AS DESIGN > planning in advance and choosing rationally what you want to do, where you want to compete (intended strategy) = strategy conceived by the top management team. It’s more the result of negotiation rather than rational deliberation and it’s usually 10-30% of the realized strategy STRATEGY AS PROCESS > respond to external/internal forces (emergent strategy, developed as time goes by) - made by every member of the organization REALIZED STRATEGY is a conjunction of the 2 elements, the ACTUAL strategy, what you have planned and what you modify during the life of the business. For the success of the business it is important to have a link between the 2 elements, you can’t start by producing mobile phones and then become a book seller Planned emergence = strategic planning combining design and emergence. The balance between the 2 depends greatly upon the stability and predictability of a company’s business environment Ex) intel started the business producing memory chips, than it abandoned them and concentrated on microprocessors > why? Incremental decisions subsequently promulgated by top management into strategy Mintzberg’s Critique of Formal Strategic Planning: ¢ The fallacy of prediction - the future is unknown ¢ The fallacy of detachment - impossible to divorce formulation from implementation ¢ The fallacy of formalization - inhibits flexibility, spontaneity, intuition and learning. FIT - entrepreneurial formula: as long as these 3 elements are together the strategy is going to be effective ¢ How Business Strategy 17.09.2018 — 23.11.2018 (1 term) ¢ What ¢ Whom and where Organizational consequences of the extreme growth: huge increase in the number of employees > how to formalize/communicate goals? Strategic plans (formal document, usually annual) concerning vision, guidelines. Usually lasting 3-5 years and combine top-down initiatives with bottom-up strategy proposals. NB: strategic planning may not be particularly effective at formulating strategies, their primary value is to create a mechanism capable of linking strategy to a system of implementation. 1) CEO prepares a draft of the business plan to be reviewed by the headquarter 2) Once it is approved > operating plan, the translation of these goals into action. Organizational units transform the framework of priorities into a real strategic plan, to be presented during meetings. 3) BoD has to approve the strategic plan 4) The firm is a dynamic body with review and monitoring systems verifying whether targets, budgets.. are respected and designed in the right way Approval by Draft Discussions Revlon had . with lee] Business ba fe, Business Guidelines Corporate (3 Headquarters Go } Corporate Corporate Forecasts/ Plan Scenarios/ Planning Assumptions Operating Plan/ Performance Capex Operating Budget Targets Budget Performance | Review Ex) BP - Deepwater Horizon Huge environmental disaster in 2010 > corporate strategy responsibility? (structure, culture, system) * Corporate goals: commitment to deliver higher returns to shareholders > short term targets for profits and cash flows. Yet the petroleum business comprises long term projects. ¢ Performance metrics: days lost through injury > didn’t help improving its process safety ¢ Systems and culture: decentralization is ok for businesses where success depends on the effectiveness of local decisions; at high levels of complexity a centralized management may be more appropriate Business Strategy 17.09.2018 — 23.11.2018 (1 term) Framework of Political Economic Social Technological or PEST = environmental scanning framework providing a simple but systematic approach to identifying factors (the most important ones) that are likely to shape the competitive conditions within an industry. > how macroeconomic factors might impact a business organization: ¢ How does politics play a role in industries? Taxes, laws and permits, limitations to what you can sell ina certain country ¢ How does economy play a role in industries? Cost of labor, tariffs, growth, exchange rates ¢ How does social play a role in industries? Demographics, income, education, customer trends, social structure ¢ How does technologies play a role in industries? Sustainability, new products > destroy business by developing technologies l.e. before we wanted small phones now we want bigger phones PEST analysis — opening case “marijuana” P: licensing, taxation, trademarks E: cost of labour, capital and energy, the level of economic activity S: shifting attitudes towards the consumption of marijuana T: use of advanced greenhouses, automated fertilization and irrigation Example applying PEST — airline industry P: Need license from government > authorization to land in a country (black list because of dangerous condition ex Siria) E: Countries don’t have money to fly, currency (for example Turkey) S: Some airline offering food with different options T: WiFi in planes, TV, making flying more pleasant The determinants of industry profitability - 3 key influences 1. The value of the product to customers 2. The intensity of competition 3. Relative bargaining power at different levels within the value chain PORTER’S FIVE FORCES of competition framework > 5 forces which (considered together) will determine how profitable a company is. There are horizontal and vertical forces. 1) Rivalry between competitors 2) Bargaining power of suppliers (+ complements, ex: apps for iPhone) 3) Bargaining power of costumers 4) Threat of potential new entrants 5) Substitute products NB: in WHICH INDUSTRY are we applying the framework? Business Strategy 17.09.2018 — 23.11.2018 (1 term) +Rivalry >+ price competition > - industry profitability The extent to which industry profitability is depressed by aggressive price competition depends upon: ¢ Concentration (number / size distribution of firms) > how many competitors are already in the industry? How concentrated is the market? (some companies may be the result of mergers) Ex: P&G can exercise considerable discretion over prices, Coca Cola and Pepsi charge similar prices and the battle focus on advertisement, promotion and development. ¢ Diversity of competitors (differences in goals, cost structure, etc.) > which needs are still to be satisfied? ¢ Product differentiation > ex) MILK industry: tax, organic, fresh or long lasting. The more similar a product among different firms, the higher the possibility for the customer to switch to a competitor e Excess capacity & exit barriers > how much will | earn if | sell my plants in case of which I stop running my business? Unused capacity encourage firs to offer price cuts to attract new business ~ Cc we — Extent of scale economies > may encourage firms to compete on price in order to gain the cost benefit of higher volumes — Ratio of fixed to variable costs > if it’s high firms will likely take on marginal business at any price and it could be a huge problem PERFECT DUOPOLY MONOPOLY COMPETITION CONCENTRATION Many firms Few firms 2 1 ENTRY & EXIT BARRIERS __ No barriers Significant barriers High barriers PRODUCT Homogeneous Potential for product differentiation DIFFERENTIATION product INFORMATION Perfect Imperfect availability of information information flow 2) Bargaining power of suppliers (similar to buyers) ¢ Differentiation of inputs ¢ Switching costs of suppliers > technology / legal ¢ Presence of substitute inputs ¢ Supplier concentration > ex) making pasta in the U.S. worths more than making it in Italy ¢ Importance of volume to supplier Business Strategy 17.09.2018 — 23.11.2018 (1 term) ¢ Cost relative to total purchases in the industry ¢ Impact of inputs on cost or differentiation ¢ Threat of forward integration relative to threat of backward integration by firms in the industry * Complements may influence the suppliers’ product > smartphone relies on internet, so its profitability relies on high speed internet connection ¢ Relative bargaining power o Size and concentration of buyers relative to suppliers o Buyer’s information o Ability to integrate vertically ¢ Buyer’s price sensitivity o The greater the importance of an item in the total cost, the more sensitive the buyers will be about the price they pay o The less differentiated the product of the supplying industry, the more willing the buyer is to switch suppliers on the basis of price o +competition among buyers, the more they want low prices from sellers o The more critical an industry’s product to the quality of the buyer’s product, the less sensitive are buyers to the prices they are charged + barriers to entry >- entrants’ threat > + industry profitability If an industry earns return on capital > cost of capital, it will attract firms from outside the industry. Entrants’ threat to industry profitability depends upon the height of barriers to entry. The principal sources of barriers to entry are: * Capital requirements > it can be so large to discourage new entrants. Ex) duopoly of Boeing and Airbus is protected by huge costs in R&D and production ¢ Economies of scale > one of the main sources is product development costs. Ex) it costs $18 million to develop an Airbus superjumbo and 400 planes must be sold to breakeven. Once it had committed to the project, Boeing was excluded from the superjumbo segment of the market e Absolute cost advantage > usually deriving from acquisition of low-cost sources of raw materials (Ex: Saudi Aramco’s access to the world’s biggest and most accessible oil reserves) or economies of learning ¢ Product differentiation > advantage of brand recognition and customer loyalty e Access to channels of distribution > especially for consumer goods ¢ Legal and regulatory barriers > licences, patets, copyrights + environmental safety standards ¢ Retaliation > aggressive price-cutting, increased advertising, sales promotion... ¢ Capacity > supposing a new firm wants to beat Zara, it should try to produce more Ex) increased health awareness in the US > + demand for smoothies > low barriers > + + bars resulting in market saturation and high rate of business failures Business Strategy 17.09.2018 — 23.11.2018 (1 term) Key success factors (=elements that can make your strategy successful within the firm’s market environment - resources..) 1) What do customers want? > demand analysis WHO my customers are (young/old..) WHAT do they want (affordable product and low quality or high quality?) 2) How to survive competition > competition analysis WHO are my competitors WHAT are the drivers of competition (how do firms survive in the industry?) o Price > customers are price sensitive © Differentiation (in the broader sense: making something unique, provide people with items that are different from others - especially fashion industry) HOW INTENSE is competition HOW can we identify a competitive advantage in this industry? How cana firm have a CA in this industry? Ex) reducing cost of labour by looking for cheaper workforce What do customers want (analysis of demand) How to survive competition (analysis of competition) Super Quality/freshness > price competition markets — Low prices > + position Convenient location > loyalty Fidelity > large stores Pleasant experience > supply Range of products Italian coffee market case What do customers want How to survive competition Key success factors Operational efficiency Scale efficient stores Low wage costs + bargaining power Wide range of products > big stores Convenient location + parking Key success factors Who > adults High quality & price Quality control Wide range of products Intensity & Flavour Supply Health Consumption: powder, pods, Caffeine instant Customer experience Organic Origin Ck ing th iate level of analysi Supply Quality Control Consumption Distribution The difficulty in drawing industry boundaries and the need to define industries more broadly or more narrowly depending on the kinds of questions we are seeking to answer means that it is sometimes helpful to undertake more detailed, disaggregated analysis. Business Strategy 17.09.2018 — 23.11.2018 (1 term) > 4- SEGMENTATION ANALYSIS - industry boundaries > process of dividing potential markets or consumers into specific groups (age, needs, price sensitivity, gender). Market research analysis using segmentation is a basic component of any marketing effort. Purpose of segmentation analysis: identify attractive segments, to select strategies for different segments and determine how many segment to serve variable 2 Construct a segmentation matrix 3. Analyze segment attractiveness 4. Identify KSFs in each segment segments 5 Analyze benefits of ae —+—- Similarity of KSFs broad vs. narrow scope. —— focus Identify segmentation variables 1. Identify key variables —- Reduce to 2 or 3 variables and categories. Identify discrete categories for each Potential for economies of scope across Product differentiation benefits of segment Basis for segmentation: customer and product characteristics BUYERS characteristics Industrial buyers. | ——————» Size Technology Replacement Household buyers | ————— Demographics Income/lifestyle Consumption habits oo Distribution channel Size Broker/distributor Exclusive/non exclusive Geographical location Opportunities for differentiation Characteristics of the products Price level Features and design Performance characteristics Inputs used (raw materials) Business Strategy 17.09.2018 — 23.11.2018 (1 term) Customer segmentation Demographic Gender, age, ethnicity Socio-economic Income, education, occupation Psychographic Personality, lifestyle Geographic Region, urban/suburban/rural behavioural Purchase occasion, loyalty, use rate Ex) marijuana case Product attributes > different flavour User characteristics > age, lifestyle, socio-economic grouping Geography Segmentation and KSFs Segment Key Success Factors Low price bicycles sold primarily through Low cast through global sourcing of components and department and discount stores, mainly low wage assembly under the retailer's own brand Supply contract with major retailer Leading competitors: Assemblers in Taiwan & China and a few US manufacturers Medium-priced bicycles sold mainly under Cost efficiency through Iscale and low wage costs manufacturer's brand; distributed through Reputation for qualit soecialist cycle stores Good dealer reputation International marketing and & distribution Leading competitors: Raleigh, Peugeot, Fuji High-priced bicycles for enthusiasts Quality components and assembly Design innovation ~ e.g. less weight/wind resistance Reputation (e.g. success in racing) Strong dealer relations Children’s bicycles/tricycles sold through Similar to low price bicycle segment discount stores and toy stores Strategic groups > A strategic group is a group of firms in an industry that follow the same or similar strategies Identifying strategic groups: ¢ Identify principal strategic variables which distinguish firms. * Position each firm in relation to these variables. ¢ Identify clusters Illy illy wv Lavazza ‘OD Lavazza 5 uv ge Starbucks y = = | ¢——___» y a 3 Quarta coffee 3 Nespresso £ a Quarta - > > Geographical scope Grocery stores HoReCa Bars Distribution channels Business Strategy 17.09.2018 — 23.11.2018 (1 term) Industry Sales Growth | Maturity | Decline Introduction Time Introduction: small sales, little knowledge and low market rate of penetration. Growth: accelerating market penetration thanks to technical improvements and + efficiency Maturity stage: increasing market saturation. Replacement Decline stage: industry becomes challenged by new industries that produce technologically superior substitute products Product Innovation Rate of innovation Time Introduction: rapid product technology, no dominant product technology (competitors fight for attention) Competition is mainly between alternative design and technologies. Little knowledge by the consumer, sales are focused on enthusiasts. Growth Consumers become increasingly informed about the product > price sensitive Emergence of dominant design = product architecture that defines the look, functionality and production method for the product and becomes accepted by the industry as a whole. Ex) Mc Donald’s design became a standard for the fast food industry Emergence of technical standards > where there are network effects (= people want to be connected one another somehow) making customer want to choose the same technology as everyone else to avoid being stranded. Once a dominant design emerges, the focus of innovation shifts from product innovation to process innovation: after a certain period product innovation starts decreasing, it’s quite difficult to completely innovate a smartphone now; it was much easier in the past. Business Strategy 17.09.2018 — 23.11.2018 (1 term) Demand can be driven by: ¢ Trends > Ex) in the past families were large and people needed huge houses for many people, now studio apartments with 1 or 2 bedrooms PC case Introduction: high level of product development, many entrants, customers are only knowledgeable enthusiasts. Very different products Growth: increase in sales, increase in the performance of the PCs Maturity: much of the demand becomes replacement demand, decrease in the sale growth rate, innovation becomes predictable and incremental, competition focused on price How typical is the life cycle pattern? * Technology-intensive industries (e.g. pharmaceuticals, semiconductors, computers) may retain features of emerging industries. * Other industries (especially those providing basic necessities, e.g. food processing, construction, apparel) reach maturity, but not decline. ¢ Industries may experience life cycle regeneration, e.g. TVs ¢ Life cycle model can help us to anticipate industry evolution— but dangerous to assume any common, pre-determined pattern of industry development Ex) TV: black & white > colour > large screens > flat screens > HD > smart. Tv producers had to face the competition from PCs, by creating smart TVs . ~ Flat” ~ Color portable SEEN HOT Ba 1930 50 a ) 10 Vs Ex) CARS: evolution trend in this industry has been much slower Why do we have a different pattern between the two? ¢ Easier to buy anew TV rather than a new car > much more expensive both for the customer and the supplier Ex) RETAILING Warehouse Clubs e.g. Price Club Sam’s Club Internet Retailers e.g. Amazon, Peapod Discount Stores eg. K-Mart Wal-Mart “Category eg. Toy: Home Depot Mail order, catalogue retailing e.g, Sears Roebuck 1880s 1920s 1960s 1980s 2000 Demand Technology Products Manufacturing Trade Competition Key success factors Business Strategy 17.09.2018 — 23.11.2018 (1 term) Introduction Early adopters (few people) Rapid product innovation & technology competing Wide variety Short-runs, skill intensive Few competitors Product innovation > it’s important to succeed in this face so that youcan create a standard. Ex) Apple gained success because they were the 1st Capabilities Growth Increasing market penetration (+ demand) Standard > product innovation becomes well known and acquires the name of the company Ex) Blue- Ray, BIC Design/quality improvement, dominant design emerges Capacity shortage, mass production Maturity Consolidation & replacement (loyalty or substitution) Incremental innovation Commodization, brand differentiation Over capacity emerges, deskilling of production Man. In countries with low cost of labour Decline Obsolescence Little innovation > companies are not able anymore to invest in innovation, pointless since the product is obsolete. Other solution: trying to find a new way to innovate, like audiobooks Differentiation difficult Overcapacity Product shifts from advanced to developing countries Entry, mergers, exits Process innovation > doing things in a better way, being able to produce different lines of smartphones in order to penetrate the market Large scale production Consolidation > M&A making larger and more profitable groups in order to face the decrease in demand and become more efficient (Ex: Versace + Michael Kors) Efficiency > trying to review as much as possible your costs in order to increase profits. Maybe by increasing production (ec of scale / learning) Or lowering wages and overheads Price wars > when the demand is decreasing you try to survive by offering the lowest possible cost and in some cases you exit the market. Ex) electronic calculators — Casio Lower number of competitors Rationalize > reducing costs as much as you can. Decide which products are important and eliminate the others, decrease the range of products Ex) cameras, DVDs, De alio entrants > companies belonging to other industry that shifted interests (Commodore) De novo entrants > start-ups (Apple) The driving forces of industry evolution Business Strategy 17.09.2018 — 23.11.2018 (1 term) - Tangible: easy to identify and evaluate (financial statements). How can we create additional value from them? Same input and greater output or lower input and same output; how to make those resources more profitable - Intangible: usually more valuable than tangible, mostly invisible in financial statements. Difference BV/MKT value is given by intangibles. Most important are intellectual property, reputation and brand (whose value can be increased by the range of products) - Human: comprise expertise and effort offered by employees. Do not appear on BS but they are crucial. Appraising resources > How are resources obtained? RESOURCE ‘CHARACTERISTICS INDICATORS Financial Borrowing capacity Debt/Equity ratio Tangible Internal funds generation Credit rating Resources Net cash flow Physical Plant and equipment: Market value of fixed assets. Size, location, technology flexibility. | Scale of plants Land and buildings ‘Alternative uses for fixed assets Raw materials Technology | Patent, copyrights, know how, R&D — | No. Of patents owned Intangible facilities Royalty income Resources Technical and scientific employees R&D expenditure R&D staff Reputation | Brands. Customer loyalty, company | Brand equity reputation (with suppliers, customers, | Customer retention government) Supplier loyalty Human Resources ‘Training, experience, adaptability, Employee qualifications, commitment and loyalty of Pay rates, turnover employees R&D investments are useful to understand if the firm cares about innovation Brand equity is an indicator of the strength of a company’s reputation Information about tangible resources: books (balance sheet) Intangible assets: market to book value (balance sheet) > if the market value is higher than the one in the balance sheet, it means they are worth more than their assets, due to knowledge, goodwill, brand (Ex: Unilever 46 times their assets) Comparison ranking 2011 — now Coca-Cola - 2% Microsoft slightly increased, it’s a consolidated position New industries in the rank: Automotive industry, social media and other internet based companies Apple reputation is related to technical skills, loyalty of consumers Google reputation is related to the fact that it is popular Inimitability of resources Business Strategy 17.09.2018 — 23.11.2018 (1 term) / cannot be ; J imitated = * Patents * Unique locations * Unique assets (e.g mineral rights) ——— Difficult to imitate * Brand loyalty + Employee satisfaction * Reputation for fairness Can be imitated (but may not be) + Capacity preemption * Economies of seale Easy to imitate + Cash + Commodities Easy to replicate > economy of scale Difficult > brand employees Cannot be replicated > patents, trademarks, unique location (Ex: restaurant in piazza Duomo, they can imitate it but it won’t ever be the same), assets (Ex: the permission of extracting oil in a specific place, or the exclusive supply of a specific raw material) Coca-Cola > uniqueness, can be replicated but it won’t be exactly as coca cola Capabilities = firm’s capacity to deploy resources for a desired result >To perform a task, a team of resources must work together. Organizational capabilities > firm’s capacity to deploy resources for a desired end result. Distinctive: things that a company does particularly well wrt competitors. The capability to have a good design is distinctive for Apple Core: those that provide a basis for entering new markets and make a disproportionate contribute to ultimate costumer value > resources without which the company wouldn’t have CA. Core capability of Tesla in the electric car field: produce luxurious, well designed and reliable cars (long duration), speed Identifying organizational capabilities 1) FUNCTIONAL ANALYSIS Some firms are very good because they know how to innovate their strategy or how to use corporate functions Business Strategy 17.09.2018 — 23.11.2018 (1 term) FUNCTION CAPABILITY EXEMPLARS ‘CORPORATE FUNCTIONS Rnancisleont ot ‘Exxon MODI, PepLICD ‘Management development Genseal Electric, Shel Strategcinnowation Google, Haier Multidhisional coordination Uniever, Shet Acquisition management sco Systems Luxcttica International management Shell, Banco Santander MANAGEMENT Comprehensive, integrated MIS network inkedto | WalMart, Capttal One, Dell Computer INFORMATION managerial deesion mating nao Research 16, ert, eo ovative new product develop ment aM, Apple Fas-cyele new product Sevelopment Canon, sites (2243) OPERATIONS efficiency in volume manufactunng. ‘riggs & Stratton, WKK Continuous improvements in operations Toyota, Harley Davidson lexibdity and speed of responie Four Season Hotels PRODUCT DESIGN Design capability Nokia, Apple MARKETING Brand management Procter & Gamble, Alta Buling reputation for quality Johason & Johnson Responsiveness to market trends Mv, Loreal SALES AND DISTRIBUTION | Effective sales promotion and extcution Pepsico, Pizer Eiiclency and speed of order processing LL bean, Del Computer Speed of distribution ‘Amazon.com ustomer service me sapore Meh 2) VALUE CHAIN ANALYSIS The value chain: the McKinsey business system Technology > product design > manufacturing > marketing > distribution > service The Porter Value Chain Primary activities: involved in the transformation of inputs and interface with customers Support activities: transversal to the entire firm but still crucial How do we get from the industry analysis to the usage of something like this? Identify KSF in the industry > do | have them? If not, how can | achieve them? Understand which are the resources and capabilities needed to obtain the KSF FIRM INFRASTRUCTURE HUMAN RESOURCE MANAGEMENT TECHNOLOGY DEVELOPMENT PROCUREMENT INBOUND | OPERATIONS |OUTBOUND | MARKETING| SERVICE Locistics Logistics | &SALES How do | transform resources into capabilities? Once there is the knowledge within the firm, how can | make it a capability (= something systematic)? ¢ Training (employees) ¢ Set up organizational processes defining roles ¢ Establish some routines = ensure that resources are used always in the same way, learning by doing ¢ Processes ¢ Organizational structure * Motivation Business Strategy 17.09.2018 — 23.11.2018 (1 term) 2. Identify distinctive R&C in (a) Purchasing (b) Distribution and warehousing (Q Instore operations (d) Marketing (e) IT (f) Human resource management (g) Organization and management RESOURCES [Importance | vWerelatie | [CAPABILITIES | Importance | VWs Relative 10 strenght Strerate Ri. France 6 6 ch Product 3 4 | | Development 2, Technology 7 5 2. Purchasing G. Engineering equipment Supe tluous Strengths Key Strengths Relative Strength 1S. Detibton 8 5 Zone of irrelevorne Key Weaknesses 5 4 Re brands ’ 5 ©. Martine are ° 4 C8. Government 4 8 a Relations 1 ‘Bath scales range from 1 t0 19 a. strategie 7 4 c 1 very high) Management Framework for analysing resources and capabilities 5 Strategiclmportance 4. Develop strategy implications: a) Inrelation to strengths o Howcan these be exploited more effectively and fully? b) In relation to weaknesses: STRATEGY o Identify opportunities to outsource activities that can be better performed by other organizations o Howcan weaknesses be corrected through acquiring and developing resources & capabilities? POTENTIAL FOR 3. appraise the firm’s resources and capabilities in terms of: SUSTAINABLE a) Strategic importance —— >| COMPETITIVE b) Relative strength ADVANTAGE 2. explore the linkages between resources and capabilities t CAPABILITIES 1. identify the firm’s resources and capabilities t RESOURCES Business Strategy 17.09.2018 — 23.11.2018 (1 term) The nature of competitive advantage Walmart > low prices, diversification, dimension... Singapore Airline case Enviable reputation: high quality, high service standards Strategy: planes are young, high capacity, fuel efficient, more time in air. People: employees well-trained, focus on the customer Any opportunity to cut costs is considered (innovation, reducing waste...) 2012: entered the low-cost segment The emergence of competitive advantage — how does competitive advantage emerge? e External sources of changes: ¢ Changing customer demand > ability to respond to changes ¢ Changing prices ¢ Technological change > Resource heterogeneity among firms means differential impact > Some firms are faster and more effective in exploiting change (+ flexibility). Key capabilities: anticipate changes and speed (“time-based competition”). Key requirement for a fast response: information and short cycle times Ex) ZARA: very fast response to trends, it takes 3 weeks to design and produce new collections Singapore Airline case External change: purchase of a bigger airplane: changed cost structure and load factors. Efficient if the plane if full, otherwise it’s not worth it. e Internal sources: some firms have greater creative and innovative capability (strategic) innovation: creating value for customers from novel products, experiences or delivery... When two or more firms compete within the same market, one firm possess a Competitive Advantage over its rivals when it earns a persistently higher rate of profit > BUT Competitive advantage may not always be reflected in higher profits Competitive advantage from innovation Strategic innovation: creating customer value from novel products, experiences or models of product delivery Ex) new retail concepts - Sephora Ex) challenging conventional ways of doing business — Nike outsourcing manufacturing and concentrating upon design. Strategic innovation may involve: ° Creating new industries > something that was not present in the market. Ex) Freddie Laker pioneered low cost air travel Business Strategy 17.09.2018 — 23.11.2018 (1 term) ° Creating new customer segments > changing the way a product is perceived. Ex) Tesla with electric cars: making them trendy and sporty ° Finding new sources for competitive advantage > fast delivery for Amazon Sustaining competitive advantage: once established it is eroded by competition > isolating mechanisms For a firm to imitate the strategy of another, 4 conditions must be met: REQUIREMENT FOR IMITATION Identification = the firm must be able to identify ISOLATING MECHANISM Obscured superior performance that a rival possesses a competitive advantage Incentives for imitation =the firm must believe that by investing in that imitation it can earn superior returns, too Diagnosis =the firm must be able to diagnose the features of its rival’s strategy that give rise to the competitive advantage =the firm must be able to acquire through transfer or replication the R&C Ex) until UK commission revealed Pedigree Petfood had ROE = 47% nobody had realized that the petfood industry was profitable Deterrence: signal aggressive intentions to imitators Pre-emptions: exploit all available investment opportunities Rely upon multiple sources of competitive advantage to cause ambiguity Protecting suppliers, unique resources (DOP, IGP) necessary for imitating the strategy Why did many firms replicate the idea of smartphones and no one smart glasses? No one buys them, no incentive to replicate that idea. Hybrid cars: Toyota being aggressive in the market in order to reduce opportunities for other companies. Trying to make this segment less attractive by producing low cost hybrid cars (good engines and low costs) Ex) Urban Outfitters: emotional bond with the customer, layout of each store is changed every 2 weeks, enhancing loyalty, many other peculiarity > attempts to imitate UO would most likely fail because of the difficulty of replicating every aspect. Singapore Airlines case Is the competitive advantage sustainable? Difficult to copy the cost-effective strategy and the excellence given by complex set of activities Competitive advantage in different industries SOURCE OF IMPERFECTION OF |OPPORTUNITY FOR COMPETITIVE MARKET TYPE COMPETITION [ADVANTAGE * None (efficient markets) None ¢ Imperfect information Insider trading TRADING * Transactions costs Cost minimization MARKETS * Systematic behavioural trends \Superior diagnosis (e.g. chart * Overshooting analysis) Contrarianism Cost per unit of output {in real $) Business Strategy 17.09.2018 — 23.11.2018 (1 term) The “Law of Experience” The unit cost value added to a standard product declines by a constant % (typically 20-30%) each time cumulative output doubles, Cumulative Output Recent approaches to cost reduction Corporate restructuring: dramatic changes in strategy and structure to adjust to the business conditions of the 1990’s Key elements: plant closures, outsourcing, delayering and cuts in administrative staff ex) shutting down a plant and focusing more on the others Business process reengineering: the fundamental rethinking and radical redesign of business processes to achieve dynamic improvements in performance ¥ Several jobs combined into one V Steps of a process combined in natural order ¥ Minimizing steps, controls and reconciliation Vv Use case managers as single points of contact V Hybrid centralization/decentralization Case: AirAsia >domestic, low cost, south-east Asia 1. 3. What are the sources of AirAsia’s cost advantage? Outsourcing, low ASK (cost per available seat kilometre), streamline operations, point-to-point network (flight going from specific place to another), single type of airplane (specific training, print same security sheets, maintenance) no business class (more seats), landing in secondary airport (cheaper), reducing turnover (time in land) Should AirAsia expand its long-haul business and to what extent should AirAsia and AirAsiaX be integrated operationally? No, they would lose their advantages: international airports, huge planes. Other airline industries have competitive advantages over that of long-haul LCC. Merger: operational and financial rationale (AirAsia’s growth) What strategy do the other global players follow? Hub: ex) emirates: they concentrate on the flight Milan-Dubai all the people who are directed to china, India, south Africa etc. they will catch a connecting flight in Dubai headed to their final destination. In this way planes are filled and costs are reduced. Differentiation advantage Business Strategy 17.09.2018 — 23.11.2018 (1 term) = providing something unique that is valuable to the buyer beyond simply offering a low price > the key is to create value for the customer TANGIBLE DIFFERENTIATION INTANGIBLE DIFFERENTATION Observable product characteristics: Unobservable and subjective e size, color, materials, etc. characteristics that appeal to customer’s ° performance image, status, identity, and desire for ° packaging exclusivity ° complementary services TOTAL CUSTOMER RESPONSIVENESS Differentiation not just about the product, it embraces the whole relationship between the supplier and the customer. > the customer will perceive the 2 parts together, you have to create an ecosystem, something that is more than the sum of the various parts. Differentiation > concerns choices of how a firm distinguishes its offerings from those of its competitors (i.e. how the firm competes) Segmentation > concerns choices of which customers, needs, localities a firm targets (i.e. where the firm competes) Does differentiation imply segmentation? Not necessarily, depends upon the differentiation strategy: 1. BROAD SCOPE DIFFERENTIATION Appealing to what is common between different customers (McDonalds, Honda, Gillette) 2. FOCUSED DIFFERENTIATION Appealing to what distinguishes different customer groups (MTV, Harley- Davidson, Armani) Analysing differentiation 1. Look at the demand side “what do customers want?” > analyse needs, try to find a solution and differentiate THE What needs doves it What are key PRODUCT satisfy? attributes? —— FORMULATE DIFFERENTIATION STRATEGY What are the pat + ‘Select product positioning in ‘elation to product By what criteria do ieeeaes they choose? + Select target customer group + Ensure customer/product What price premiums ea do product attributes ‘command? + Evaluate costs and benefits of dtferereiation \ THE CUSTOMER, ‘What motvates them? Ex) there are many vegetarians, need for a vegetarian meal. | need to understand what are the attributes of a vegetarian meal? | know that vegetarians are used to pay more for food, so there is room for a premium price. Business Strategy 17.09.2018 — 23.11.2018 (1 term) Ex) Frecciarossa vs Italo: how do they differentiate? Differentiation is not used to charge more but to be chosen. They stimulate customers to satisfy other needs (entertainment) > cinema coach, business rooms, Wi-Fi 2. Supply side “what do | need to provide a different segment?” The Drivers of uniqueness (that are decision variables for the firm): ¢ Product features and product performance * Complementary services (e.g. credit, delivery, repair) ¢ Intensity of marketing activities (e.g. rate of advertising spending) ¢ Technology embodied in design and manufacture ¢ Quality of purchased inputs * Procedures influencing the conduct of each activity (rigor of quality control, services procedures, frequency of sales visits to a customer) ¢ Skill and experience of employees * Location (e.g., with retail stores) ¢ Degree of vertical integration (which influences a firm’s ability to control inputs and intermediate processes) Sport industry when you buy a t-shirt you care about: the material, aesthetics, comfort... Differentiation of software and hardware SUPPORT (SOFTWARE) Differentiated Undifferentiated Differentiated SYSTEM PRODUCT MERCHANDISE (HARDWARE) Undifferentiated SERVICE commonly When | have a supply of electricity | expect a very good service in case of lack of power System: high quality product with high quality service Key to successful differentiation > consistency of internal and external integrity Product integrity: the total balance of product features internal + external integrity ee eee d stu Petesear hen sare el Geis Cost Leadership Scale-efficient plants Access to capital Design for manufacture Process engineering skills Control of overheads and R&D Frequent reports Process innovation Tight cost control Outsourcing/offshoring Specialization of jobs and functions Avoiding marginal customers Incentives linked to quantitative targets accounts Cora Differentiation + Emphasis on branding advertising, design, service, quality, and new product development Marketing abilities Product engineering skills Cross-functional coordination Creativity Research capability Incentives linked to qualitative performance targets Business Strategy 17.09.2018 — 23.11.2018 (1 term) Post-Entry Rial year} [dao ALS O14) ray : oe acid Signaling J anc Pere Pre-entry barriers > Provide no incentives for new entrants in the market * Signaling (THREAT): showing competitors that you have a large scale and you can make special discounts to attract customers * Fortify and defend (BARRIERS): strengthen the competitive advantage of the firm, increasing loyalty and relationships with suppliers. Increasing barriers to entry in the industry * Cover all the bases: trying to be present in all the segment, not to leave any blind spot Ex) Samsung: smartphones, PCs, screens, tablets, appliances, printers, TVs.. covering all the bases could be part of their defensive strategy. Technical skills, knowledge, patents, brand. They may not be profitable in all the divisions, however they have to cover all of them not to leave space for competitors. For Samsung the biggest threat is represented by china: high quality, low prices * Continuous improvement: deterrent for new firms * Capacity extension: by increasing the number of unit the company can produce > economy of scale, if you are able to produce more than your competitors, you will be able to occupy more geographical areas Post-entry barriers > Firms trying to reduce the potential damage that potential entrants may bring ¢ Defend position before entrant becomes established: a new entrant needs huge investments in communication, R&D, distribution etc. Once a newcomer is in the market | try to make it difficult for it to grow. Ex) Incumbent vs start-ups ¢ Introduce fighting brands: AirFrance and AirFrance low cost > creation of a new brand: by introducing fighting brands you have to change services, this may imply loss of reputation for the brand, that’s why they create a new brand. Ex) Armani & Armani jeans, . Fichting prices: Defensive strategies Increase structural barriers - Fill the possible gaps - Raise buyers switching costs / increase capital requirements - Block channel of access /encourage government policies that rise barriers - Continuous improvement Business Strategy 17.09.2018 — 23.11.2018 (1 term) - Form coalitions Increase the perceived threat of a counterattack - Signal initial barriers - Establish blocking positions - Encourage good competition and establish coalitions Lowering the benefits of an attack - Reducing the profit targets - Managing competitors assumptions If attacked: e The counterattack should be as early as possible e Defenders should concentrate their response on the reasons of the attack ¢ Defenders should not only stop challengers, but also deflect them e Defenders should try to view their response as an opportunity to gain position Offensive strategies > improving own position by taking away market share of competitor > Retaliatory in nature > Involves direct & indirect attacks Usually: defensive strategies from big companies, offensive by newcomers Why offensive strategies? - Destabilize the leader - Acquire market share - Sales boost - Leapfrog the competitor Strategic encirclement A Similar to the planned Fang Stack gy | enorlmenofafon (Bypass Atack | the leader's strenghts are dominant Guerrilla attack Seeking for 7 By challengers thatare | Undefended Direct struggle small and have limited | Markets resources FACE TO ll ELUSION FACE Direct struggle: attacking directly with similar products, same services but differences. Highly risky unless attacker has a clear advantage Ex) Uber vs taxi drivers Business Strategy 17.09.2018 — 23.11.2018 (1 term) Flanking attack: attacking indirectly, attacking at weak point Ex) new company entering the electronic appliances field, then slowly attacking Samsung through new development Strategic encirclement: combination of frontal and flank attack, encircling the competitor, trying to occupy all the blind spots and then from that point entering the frontal competition Ex) rumours saying that EasyJet is interested in acquiring traditional airlines. They have a very good market share and they want to expand to longer flights Bypass attack: no defence, avoid the direct competition and trying to occupy other segments Ex) LG entering the lamp industry Seeking for undefended markets: also called leapfrog strategy, overtake the competitor by introducing new technologies, diversifying the product Ex) Flight Milan-London there is a great competition, but if we move to other flights there is still space Guerrilla attack: done by small companies with low resources: to increase the reputation of the brand and customers. Called guerrilla due to the fact that they don’t last much time, only a day, some hours etc. to make a signal and destabilize the competitor Other offensive strategies Engage in underdog strategy - offer an attractive alternative to what customers have been buying. Engage in predatory strategy - accepting lower profits - keeping new competitors out - _ inflicting damage on rivals - forcing rivals to exit the market - cutting prices below costs Engage in Judo strategy - Attacking the competitor where most uncomfortable about defending, or where firm has an advantage. Engage in the pivot and the hammer strategy (Defense+Attack) - Pivot =a firm’s efforts to hold its market position, defend itself against competitors, and retain customers. - Hammer = carries the entire force of the company’s offensive effort 10 - BLUE OCEAN STRATEGY Business Strategy 17.09.2018 — 23.11.2018 (1 term) How did they reduce costs? > reduction or elimination of non-essential costs: animals, stars How did they create more value? > theatres, creating an experience Circus - value curve Blue > big competitors Red > small competitors Green > Cirque du Soleil Cirque du Soleil: opposite way to create value, making their shows completely different and successful Evaluation of BOS - value curve (image) Idea: in every single industry there is a way to represent the value you are giving to the customer. Ex) Videogames ‘80s: amiga > ‘gos: Nintendo > portable consoles > Sony — PlayStation: increasing quality Market segment: kids, teenagers (all the videogames aimed at the same target) Problems in the video game industry - 2006 > difficult to install, games and controllers difficult to understand and use, for non-gamers they are not appealing and the console is non-stylish Sony PlayStation a fering Leved Low] price ‘Won gaming ‘Ontine functionalities gaming, High resolution Processing ‘graphics power The market for video game consoles: Design aesthetic ‘Avaable game tiles Business Strategy 17.09.2018 — 23.11.2018 (1 term) - Current market: core gamers - First tier: marginal gamers - Second tier: tried but refusing - Third tier: never considered Then > Wii (real innovation): - Wireless: movement, increasing the experience, - Fitness: from the simple game they were able to reshape the product enlarging eh market segment - Personalization: face recognition, personal information about performance - Playing in real life (replicating the movement) - Playing with other people (up to 4): solitaire > party a i High Eliminate Raise High resolution graphics Design aesthetics Video Game Console Industry Nintendo Wii Non-gaming ‘unctionalities ‘Available game titles HDTV capability : e 2 6 Reduce Create Processing powor Motion Online gaming Family-friendly games Price Low once Non- gaming Processing Design Motion fumcbonatbe power socthetice igh revolution wor Online alable game Farndy rerty graphics capataines gaming ‘unas umes After Wii > DS — broader target: nintendogs (girls) brain train (adults/elderly people) Now: gaming industry moved to mobile phones/tablets Nintendo Switch: combining TV and mobile Tesla case What business model is Tesla pursuing? High end, fully electric cars with batteries with longer duration and electric engines able to reach very high speed. You pre order the car online, there is no shop. What type of innovation strategy is Tesla pursuing? Electric cars, firm based only on electric cars, not just prototypes. Innovation is in the long distance. Before: electric cars weren’t feasible for travelling and they couldn’t even be used in cities due to the lack of charging stations and they were slow. To solve these problems heavy investments in R&D were needed, that’s why they were working only on prototypes. To overcome some of these issues Tesla reduced differentiation and focused on those problems. They wanted to make electric cars sustainable for everyone, to do so they started producing luxurious sport cars (in order to find people willing to pay not only for the price but also a premium) and with the profits accumulated they were able to produce family cars. Now Tesla is producing 4 types of cars, enlarging the range of product In which stage of the industry life cycle is the electric vehicle industry? Reactions: Porsche and other firms are now interested in developing electric luxury cars, the industry is growing and many new competitors are entering the market Business Strategy 17.09.2018 — 23.11.2018 (1 term) Key Success Factors crucial to survive at this stage of the industry life cycle: first mover, Problems: cost efficiency, still behind what expectations were, the luxurious initial approach is now losing credibility, not profitable, privatization issue BLUE OCEAN STRATEGY: According to some people Tesla is exaggerating in the Blue Ocean approach: self-driving cars, drugs, batteries, batteries for solar panels. Red Ocean Blue Ocean Compete in existing market Beat competition Exploit existing demand Trade-off cost/value Break the trade-off cost + value (tesla 3, but it still costs more than a competitor) Align the firm value chain to overall Align the value chain to seek both strategy (low cost OR differentiation of differentiation AND low cost > not yet focus) present Nissan Leaf vs Traditional premium cars vs tesla High — zero - zero - low (people coming to your house to repair the car) — low vehicle options —a bit higher - high - high - medium Other elements: - Speed: high - Design: high - Online sales: high - Brand: high ELIMINATE (so far) RAISE (so far) - Gas emissions - +mileage - - +R&D - +speed REDUCE (for the future) CREATE (for the future) - Impact of batteries - Larger product range - Increase capacity Problem of tesla: too many industries, too much blue strategy and inability to satisfy all the segments 11 - BUSINESS MODELS 75% of start-ups fail > why? Many business ideas, but inability to transform them ina business, due to the use of a traditional approach - Traditional approach = traditional business plan, pitch, assemble team, introduce product and sell - Lean approach = “methodology that favours experimentation over elaborate planning, customer feedback over intuition and iterative design over traditional big decision up front development” > research before execution, more innovative: business model Business Strategy 17.09.2018 — 23.11.2018 (1 term) VALUE CUSTOMER PROPOSITION: | RELATIONSHIP: | SEGMENTS: eae Peat ig PARTNERS: eer eid naa CHANNELS: ceeeid COST STRUCTURE: eh Ol ete Value proposition: cheap and easy way of transportation Customer segments: normal people and drivers Revenue streams: payment through platforms, drivers has to pay a fee for each ride Key resources: technological platform, drivers, feedbacks Step 1 (Request a cab): The first step in the business model of Uber is about creating a demand. People have a smartphone app which lets them request a cab instantly or schedule it for some time later. Step 2 (Matching): As soon as the request is made, a notification about your details is sent to the nearest driver. Cab driver has the option to accept or reject the ride. In case he rejects, notification is sent to another driver in that area. Step 3 (Ride): Customer can track the cab when it is arriving and the ETA is also shown to the customer. The meter starts as soon as the customer sits in the cab which can be tracked through the customer side app as well. Friendly drivers make sure that the ride is comfortable for the passenger. Step 4 (Payment & Rating): Once the ride is over, customer gets an option to rate the driver. Rating system is an important part of Uber’s business model as it lets a person know about the driver before booking a ride and helps him trust the driver. Takeaways ¢ Go for less ownership model. Uber does not own any cab but still provides over 1 million rides a day through its partner network e Finda solution and disrupt the existing model through technological infrastructure. That is what Uber did in the cab industry e Treat your initial users as kings. e Expand step by step. Do not add everything in your business model in the first go. Uber started with cabs but now even has boats, helicopters, bikes and other means. ¢ Opportunity won’t come to you. You have to look for them. Uber created an opportunity by offering discounted rides for particular events / party venues and hence got its first customers. Business Strategy 17.09.2018 — 23.11.2018 (1 term) e Treat your workforce an important part of your business. Uber calls its drivers as partners and gives them a decent 80% of the total fare. Uber vs Didi China: licensed taxi drivers + online platform Uber: normal drivers + online platform Uber > huge fragmentation, global business model (source of value) SECOND PART OF THE COURSE : Competing in different industries 13 - TECHNOLOGY BASED INDUSTRIES Key element: innovation > firms look for innovation to achieve competitive advantage, and they have an advantage over competitors thanks to innovation. Different by innovation in other industries because in tech based industries it is a crucial element, in the others it may be important but not so important to survive Innovation vs invention > inventing is creating something new, innovation means making this good Invention > creation of new products or processes through: - new knowledge - combination of existing knowledge (geographical knowledge + statistics = GIS) or e-Books Innovation > commercialization of invention - new product or service - use of anew method of production FROM INVENTION TO INNOVATION - Balance creative freedom with discipline - Reconcile differentiation and integration (cross-functional products development teams, product champions, buying innovation, open innovation, corporate incubators) Knowledge > invention > innovation > diffusion > demand can foster the diffusion of an innovation, reaction from the demand side: adaptation (= there is a link between the innovation and the mass market and there is an adaptation on both sides),reaction from the supply side: imitation (supplier will start imitating that innovation, recognition of the success) Innovation may be the result of a single invention or many put together. Not all inventions progress into innovation. Business Strategy 17.09.2018 — 23.11.2018 (1 term) Who gets the benefits from innovation? - as NB: innovation is no guarantor of fame & fortune > y >. it depends on the value created by the innovation and the share of that value that the innovator is able to appropriate (appropriability) Customers - Suppliers IT DEPENDS Imitators and other \___‘ollowers The extent to which innovators appropriate the value of their innovation depends upon: e the strength of their property rights in the innovation — which depends on the innovation being protected > intellectual property: ° Patents = exclusive right to a new and useful product (different lengths) ° Copyrights = exclusive production, publication or sales right to the creators to artistic works (books, photos...) creative industries ° Trademarks = word, symbol or mark used to distinguish the goods or services supplied by a firm. Basis for brand identification ° Trade secret = modest degree of legal protection for recipes, formulae, industrial processes... ¢ the tacitness and complexity of the technology embodied in the innovation > is it easy to comprehend and codify? Easier to copy a skirt rather than an airplane. ¢ the lead-time they have over followers > tacitness and complexity offer time to the innovator, and a temporary competitive advantage. In this time the firm can move down its leaming curve ahead of followers (cut prices... ) e the extent to which they possess the complementary resources needed to finance, produce and commercialise the innovation. > may be accessed through alliances with other firms Alliances: firms make agreement to share their Conpenine innovation in order to create something new (Ex: anaCsae | reeee Google + FCA) > the combination may be difficult ~ Serden and roles may be unclear. Maris J time: easy access to the other firm’s information © complementary ¥ risk: no risk of new mover mre) oa eomeee { resources: 50% sharing financial resources, v \ people... J revenues: 50% (or not) In the case of Peugeot 107 - Toyota Aygo - Citroen C1 > alliance, decided to create a small city car, put mind together to develop the project and then they had no other ties, Business Strategy 17.09.2018 — 23.11.2018 (1 term) Implication: network externalities creates positive feedbacks - once a product gains market leadership, it attracts many more customers. Once established, standards tend to be highly resilient and difficult to displace. Fighting standards war > control over standards is the primary basis for competitive advantage. Sony & Apple lost their standard war but returned as winners in other markets (unusual) 1. Determine the potential for a standard to emerge - analyse network externalities 2. Assemble allies — enlist partners (customers, complementors, competitors) to build a bandwagon 3. Pre-empt the market - use launch and pre- launch publicity and promotion to convince the market that you will be the winner 4. Manage expectations - convince customers, suppliers and the producers of complementary goods that you will emerge as the victor. Achieving compatibility with existing products is a critical issue > Windows won over Mac for many reasons, W was designed for compatibility with the DOS operating system, mac wasn’t. Key resources needed to win a standards war: ¢ Control over an installed base of customers ¢ Owning intellectual property rights in the new technology e The ability to innovate to extend the initial technological advance e First-mover advantage e Strength in complements e Reputation and brand name Implementing technology strategies: creating the conditions for innovation CREATIVITY Conditions: it is associated with particular personality traits, it depends on the environment in which people work and on human interaction. 3d printers can stimulate creativity because people can experiment and play with ideas. Organizing for creativity: particular management systems are required, Ex) Google. For creativity to create value, it must be directed and harnessed. Balancing creative freedom and discipline is crucial for companies like google or apple (leader in innovation) Being creative in orthodontics - Invisalign: dental impression and 3D computer modelling to create a new system to realign teeth. To commercialize the innovation, requires the integration of creativity and technological expertise with capabilities in production, marketing, finance, distribution... Organizational initiatives to stimulate new product development: - Cross functional product development teams - Product champions Ex) 3M - Buying innovation - Open innovation Ex) Procter & Gamble - Corporate incubators Ex) IBM Business Strategy 17.09.2018 — 23.11.2018 (1 term) 14 —- CREATIVE INDUSTRIES e Product or service that contains a substantial element of artistic or creative endeavour ¢ Origin: individual creativity, skill and talent e Potential for wealth and job creation through the generation and exploitation of intellectual property Innovation > analysing a problem and use R&D to create a new product, process or improved ones (knowledge) > can be acquired Creativity > imagination (original or artistic) to produce outcomes that are both original and of value using Talent > is personal Talent: personal, difficult to replicate How can you make money out of talent? Creative content - Intellectual property rights (you get money for the exploitation of a specific content you created). Not physically limited like a product, it is immaterial and there are more possibilities to exploit it. The creative economy > economic sector that employs culture and creativity to generate wealth and jobs through ideas, products or services. ¢ Organizations and individuals whose products and services originate in artistic, aesthetic or cultural content. ¢ Arts and culture organizations, independent creatives (graphic artist, painter, architect, etc), for profit creative businesses (printing, design, advertising, marketing, etc) Creative industries — origins Origins of art: Palaeolithic, ancient Greece: sculpture was paid by rich people and only a group of people could afford and benefit from that artistic product Now: larger possibility of using creative content, linked with technology which created new forms of artistic expression, improved creativity and changed the distribution Why the creative sector? e Significant, indigenous sector e Strong growth potential e High quality employment e Stimulates innovation in wider economy - strong linkages e Important social role/attractiveness of area e Promotes rural and regional development Creative business segments Business Strategy 17.09.2018 — 23.11.2018 (1 term) Cree aug Dre) ‘Communications: Printing, Graphic Design, Advertising Built Environment: Architectural Services, Interior Design, Landscape Design, Architectural Woodwork and Ornamental Design Work Products: Industrial Design Services, Fashion and Special Product Design Culture & Heritage Museums, Lbrarles, Historie Sites Newspaper and Periodical Publishing, TV and Radio Broadcasting, Software Publishing, Motion Picture and Video Production and Distribution, Music Publishing, Sound Recording Studios, Bookstores Media & Film ‘Theater Companies, Musical Groups and Artists, Promoters and Performing Arts ‘Agents, Dance Companies, Musical Instrument Manufacturing, Musical Instrument and Supply Stores Visual and Crafts Artists, Art Dealers, Photography Studios, Fine Visual Arts & Crafts ‘Art Schools, Photographic and Art Supply Stores. Creative industry today: 2.250bIn$, 3% GDP, 30 mIn employees Most important countries for movies/TV shows: US, India, Argentina Workers Creative Workers Creative Other Workers in Greative Enterprises a Oper Enterprises {eg receptionistin Enterprises (0.9. onesies architecture firm; ea: = Pealecatit accountant in baarhn ie orchestra) actor in ae oa contractor) Creative Enterprises Creative Occupations Source: imagination L from it we can have creativity > outcome (which must be original and valuable) From creativity we also have innovation > market ++ growth Creativity relies on talent, which is scarce High skills Design Movies > media content Performing Craft Cultural heritage Business Strategy 17.09.2018 — 23.11.2018 (1 term) The competitive environment of declining industries Features of declining Excess capacity industries Lack of technological change Consolidation (but some new entry as new firms exit) Old machines and employees Smooth adjustment of Predictability of decline capacity depends upon Durable assets Barriers to exit Cot oF closure janagement commitment Strategies of surviving firms How to keep the tie with customers? Lowering as much as possible costs and prices, Innovation of process Blue ocean > airline industry, like Ryanair Nespresso > initially producing coffee, then machines (Differentiation on the taste of coffee) IKEA > new way of delivering products, keeping prices low and including better services (before- after sale) Nespresso, ikea were they already present in the market? In mature industries usually strategic innovation comes from new entrants, for existing companies its different to change (due to integration, it’s costly to change completely your company) Strategies: LEADERSHIP Establish dominant market position * encourage exit of rivals * buy market share through acquisition * acquire capacity * demonstrate commitment + dispel optimism about the industry's future _*_faise the stakes NICHE Identify an attractive segment and dominate it. HARVEST Maximize cash flow from existing sources DIVEST | Get out while there is still a market for industry assets Declining industries: Ex) shops where you can print photos why? Change in trend, demand, people are now used to post photos on Instagram and they don’t print them Ex) bookstores Why declining industries? - Decrease in demand - Decrease of technological changes - Excess capacity Business Strategy 17.09.2018 — 23.11.2018 (1 term) Cost of closure Personal commitment: family company will be highly involved Competitive positioning WEAK High Harvest Divest (if feasible) Low | Divest asap Industry structure (predictability) 17 - FRAGMENTED INDUSTRIES STRONG Leadership Niche Niche Harvest Many competitors, usually small medium firms (different from concentrated where we have few global firms Reasons for fragmentation Fragmented industries Concentrated industries Entry barriers 4 tT Transportation costs tT tT (but repaid by customers) affordable Size advantages L t (Economies of scale, learning, scope) Diseconomy of scale t L Outcome No firm has a significant Few firms with significant market share > no market share > market leader leaders Need to have Fragmented industries Concentrated industries Proximity t (no need of local control) Product range T(creativity) ¥ (standard) Image Local Global Role of regulation Prohibition of concentration Prohibition of fragmentation Strategies in fragmented industries 1. Overcoming fragmentation o Change industry structure, economies of scale, channel or supplier relationships o Add barriers to entry o Make fundamental changes to cost structure Ex) create economies of scale, make acquisitions and standardize diverse market needs Industries are stuck when: existing firms lack resources or skills, or they are myopic, lack of attention by outside firms 2. Cope with fragmentation © Create competitive advantage (lower cost, add differentiation, increase barriers) Business Strategy 17.09.2018 — 23.11.2018 (1 term) o Increase value added o Negate aspects of fragmentation o Add economies of scale Chaining > is where companies establish networks of linked merchandise outlets that are interconnected by IT and function as one large company. ¢ Chaining allows companies to negotiate large price reductions with suppliers. ¢ Companies using chaining can overcome the barrier of high transportation costs by establishing regional distribution centres. Franchising > the parent company grants to its franchisees the right to use the parent’s name, reputation, and business model in a particular location in return for a franchise fee and often a percentage of the profits (McDonalds, KOA). e The franchisees own the business; therefore, they are motivated to make the company-wide business model work effectively, and ensure quality consistent with the customers’ needs. Horizontal Merger > a merger where companies manufacturing similar kinds of commodities or running similar types of businesses merge. ¢ Companies like Macy’s and Kroger chose a strategy of horizontal merger to consolidate their respective industries. e By pursuing horizontal merger, companies are able to obtain economics of scale and secure a national market for their product. 18/19 - COMPETING IN GLOBAL INDUSTRIES Integration of people, cultures, economies Thanks to technology > cheaper ways of transportation, connection, communication Internationalization: firms start selling abroad, move internationally by operating in other contexts. Globalization > Technology allows the easy, constant and growing sharing of ideas, people and products creating a global market (which is not limited by boundaries) KEY DECISIONS (Globalization) a) International strategy Business Strategy 17.09.2018 — 23.11.2018 (1 term) Local resources are more important than central FACTOR CONDITIONS Understand local demand DEMAND RELATED AND CONDITIONS ‘SUPPORTING INDUSTRIES Local districts are important STRATEGY, STRUCTURE, AND RIVALRY Local competition fosters development Cage framework (where to compete?) Evaluate the distance between two countries distance > religion, tradition, language, social norms, lack of networks Ex) affected industries are food, clothes, entertainment (industries with cultural/linguistic content) SI cistance > local institution, political hostility, taxation Ex) affected firms are those working in strategically important industries or where you needa lot of authorization) distance > borders, physical borders, transportation Ex) affected industries are food, flowers (perishable, fragile, heavy products or industries where online communication is important) ECONOMIC distance > currencies, cost of resources, consumer income Ex) affected industries are labour intensive and price sensitive ones Pees ics Distance between two countries increases with Industries most affected by source of distance Strategy: Different languages, ethnicities, religions, social norms Lack of connective ethnic or social networks Industries with high linguistic content (TV, publishing) and cultural content (food, wine, music) Absence of shared political or monetary association Political hostility Weak legal and financial institutions Industries viewed by government as strategically important (e.g. energy, defence, telecommunications) Lack of common border, water way access, adequate transportation or communication links Physical remoteness Product with low value-to-weight (cement) that are fragile or perishable (glass, milk) or where communications are vital (financial services) Different consumer incomes Different costs and quality of natural, financial and human resources Different information or knowledge Products whose demand is sensitive to consumer income levels (luxury goods) Labour-intensive products (clothing) If low opportunity and low importance > ignore, why should you develop If low opportunity and high importance > sequential entry, gradually growing in size. It’s difficult to do it but I’m really interesting in entering this market so | will try to do it little by little Rapid entry > co has already everything it needs to enter and succeed in the market Business Strategy 17.09.2018 — 23.11.2018 (1 term) High ‘SEQUENTIAL RAPIDA ENTRY Strategic importance of the market OPPORTUNISTIC ENTRY IGNORE Low High (High Barriers) (Low Bartiers) Opportunity to develop ALTERNATIVE WAYS OF OVERSEAS MARKET ENTRY [ TRANSACTIONS ] DIRECT INVESTMENT Exporting | [ Licensing | | Joint venture ‘Wholly owned I I I subsidiary Spot Foreign Marketing and. Fully sales agent / distribution integrated distributor only Franchising Marketing and Fully ibuti integrated only Low Resource commitment High Gualapack > glocal approach (global strategy and local adaptation) In Italy there are strong food traditions, for this reason Italian people are not willing to have different flavours Patterns of internationalization 4 TRADING GLOBAL 2 INDUSTRIES INDUSTRIES © aerospace cars © military hardware oil © diamond mining © semiconductors 4 © agriculture © consumer electronics 5 SHELTERED MULTIDOMESTIC § INDUSTRIES INDUSTRIES . © railroads © packaged groceries © laundries/dry cleaning © investment banking © hairdressing © hotels © milk © consulting Low low High’ Foreign Direct Investment How much is the market international (is the product standardized across countries?) Incidence of FDI (how much is it necessary to be locally present for the production process) contrary: exporting Business Strategy 17.09.2018 — 23.11.2018 (1 term) MUNTESMESHIEMAUBEY > food, grocery, hotels Shelter industry > not possible to operate locally (Ex: railroad transportation, no multinational companies Trading industries > Market is international and you can operate without being present locally (Ex: aerospace, agriculture, diamond) production is local, then you can sell loballh > Ex: cars, electronics When do you choose global/multidomestic? Global (= world is a single market) Economy of scale Problem: low differentiation, could be an issue is customization is relevant for the industry, you may not differentiate on the product range but on other soft elements Multidomestic (= world is the sum of local markets) High differentiation: fulfil the needs of the local customer, which will change from country to country Problem: no economy of scale > diseconomy of scale, | cannot save money by producing more. | also need to adapt my product to the different countries, Global means they have many production sites in different countries but they may not have one in each country they are operating. For this reason they may have high transportation costs implying higher costs for R&D Complexity Which legal form will the company take? Operate through FDI or not? (=creating a new plant) Export: 0% investing abroad FDI: 100% investing abroad, subsidiary, | put a lot of money and | will have a higher risk. Alliances: in the middle - If you don’t want to bear the entire risk, you may look for a local partner, make alliances - Joint venture (close to full ownership) > firms looks for majority stakes (+50%) if they want to control the activity. 50/50% they can decide with a contract how to manage issues. Being separate from the owner companies, the joint venture is made up by representatives of both. - 50% if they want to learn an activity which may not bea core business of the company (ex: that’s why Mercedes had minority stake in tesla, bc they wanted to learn) - Strategic alliances: the 2 corporations remain separate legal entities but they cooperate by running projects together. Agreement where companies work together to create something that will be useful for both and establishing that the outcome will be exploited by both (suv project) Starbucks is entering the Italian mkt through percassi group (which will take care of the operations, HR, locations...) and then they will share profits. Strategic partner of Victoria’s secret - Distribution: help in the distribution. | need someone locally that knows how to work (authorization), logistics, they know the market and so it’s faster Business Strategy 17.09.2018 — 23.11.2018 (1 term) The transnational company Heavy flows of Tight complex controls technology, finances, and coordination and people and materials a shared strategic between interdependent decision process units 22 — BUSINESS PLAN Every start-up needs a business plan 1 Anoutput of the strategy formulation process, including both qualitative and quantitative information 2. A document providing detailed forecasting & information (numbers and cash) about the business you are going to get off the ground 3. Adocument that describes a business along with objectives, strategies and the market in which it operates and the outlook & financial forecast for the future - Product/service offered - Goals - Strategy - Financing & Resources needed - Vision/mission - Part of the business model: its value is the relationship that we are building with all the building blocks Final objective > describe a business Business model: tool or framework to design my business Business plan: more analytical and less synthetic description of your business to all stakeholders or to a specific target Purposes of a business plan: External purposes * Get funding from banks (loans), from investors (equity), from foundations (grant) * Get in-kind support from a wide range of stakeholders (i.e. foundations) * Participate to business plan competitions > if you win it you may have financing, an office... Business Strategy 17.09.2018 — 23.11.2018 (1 term) Business plan > useful to explain the project to all “would-be partners” You have to prove: - The existence of a market - The creation of a value to customers - Beable to solve a customer’s problem - Moneymaking chances (profitability) - Good fit with founders + management team + risk/reward balance + market Internal purposes - Freeze hypothesis about your BM and check for its feasibility - Clarify what steps need to be taken to implement the idea - Tocheck how your forecasts may change according to different environmental scenarios - Toknow how much money you need - Be conscious of your project Structure No best structure > different targets require different structures - Toget money froma bank you have to focus on guarantees - Grant making foundations are more interested in the social impact generated - Investors will be interested in financial statements & profitability Revenue is vanity, profit is sanity but cash is However, some elements must always be present: 1. Executive summary > brief summary of the main information of the whole plan. Stakeholders must be able to have a general idea by reading it 2. Business overview > company description & business model, current status, future vision, value proposition. You can focus on the canvas 3. Market opportunity > why is it a good idea? (define the problem) and the competitive advantage (why nobody solved the problem) 4. Market solution > product & service description, explaining my solution to the problem, ability to create barriers to entry 5. The market - contents > identify customers, market insight, industry analysis, marketing plan (product, price, place, promotion) 6. The implementation roadmap > milestones /key points in my business development in order to get how long does it take to reach my goal), roadmap (path that you’re following), recurrent activities. Use the GANTT diagram and convince the audience that the timing is feasible 7. The management team > you have to show that you have a skilled management team 8. Financial analysis > statements and projection (3 — 5 years) income statement, balance sheet, cash flows (+ other analysis, if necessary). Show that you’re able to generate enough cash to cover costs, that you’re profitable and how will you use financial resources. 9. Social impact > important if you’re talking to foundations Business Strategy 17.09.2018 — 23.11.2018 (1 term) 10. Risk analysis > KSFs, every business is risky, try to be able to anticipate all possible objections from the audience 1. Funding request > how much money do | need and in which form, and how will you use the money. This section should be customized according to the stakeholder you’re talking to Main benefits: providing a guide to action, determining the feasibility of the idea, understanding how the different parts of the business work together, break down big tasks into smaller ones.