Appunti delle lezioni di Corporate Strategy

Vision and resource allocation

Vision assures:

• Consistency in resource allocation in the long term
• Focus for the efforts of individuals in the medium term
• Inventiveness and involvement in the short term

From the vision (i.e., the ambitious project for the long term), goals (i.e., desiderata qualitative in the medium term) and objectives (i.e., specific quantitative target in short term and basins for compensations) are obtained.

Disney's resource strategy

Disney has resources that create value, which allow it to have a competitive advantage. At the centre of the strategy, there is Mickey Mouse with its features, for instance, the fact that he is an actor who does not get paid (so, no salary). He works only for Disney and he can be difficulty copied, Mickey is protected by copyright. With him, the control is 100% of the company (e.g., no scandals etc.). Moreover, he is durable. Since he is an intangible resource, more they use him and more he creates value (we can have simultaneous usages). Every moment there are new customers, who are children, and parents know that the contents created by the company are good for their children.

Understanding resources

The starting point is to understand the resources that a company has, the larger ones have tons of resources.

• Resources: human, financial, physical and knowledge factors that provide a firm with means to perform its business process. They are stocks, so stable level of things like: tangible and intangible assets, human resources and competencies.
• P.S. activities are flows, like: R&D, transformation, distribution, marketing etc.; the outflows are leakage and forgetting.

Firms’ performance depends on two elements:

• Average performance of the industry;
• Deviation from average performance of the industry (competitive (dis)advantage).

Resource based view

The Resource Based View is based on some fundamentals:

• Each firm is different because of an original set of resources;
• Resources could be developed only in the long term (path dependency);
• Resources could be difficult to imitate;
• External environment has fast changes; resources are at the basis of development.

Then there are some implications for CS, which is influenced by the availability of resources and the velocity in accumulation of new ones.

Analysis of resources and capabilities

• Understanding role of resources and capabilities in strategy
• Identifying resources and capabilities
• Appraising resources and capabilities
• Developing strategy implications

The process to manage them is:

1. List the resources (finding and understanding all the resources, synthetic understanding);
2. Identify their features (making them unique and able to create value for the company);
3. Identify resources of value.

Classification and tests for resources

Classification of resources

• By nature (the most common ones)
  • Tangible physical, easy to be identified and fully represented in annual report
  • Intangible assets
  • Human resources
  • Organizational capacities
• By activity transformation
  • R&D
• Per strategic level
  • Corporate or Business

Tests to understand where to compete

• Resources are higher than competitors in the new industry?
• They are a critical success factor in the new business?
• Additional resources are equal to those of competitors?
• Resources can be transferred and replicated?

To identify the most important resources, you have to analyze them one by one and run a test to understand if they are relevant or not. The name of this test is DIA, it means that the most valuable resources you can have in a company are those that have simultaneously three features: demand, inimitability and appropriability.

DIA features

1. Does the resource have a demand? It depends on:
   • Does the resource meet the evolution of customers’ needs? Customer preferences
   • Resource substitutability: are alternative resources available?
2. Is it possible to imitate the resources? It depends on:
   • Scarcity: is the availability of resource limited?
   • Replicability: are barriers to imitation in place? (path dependency- causal ambiguity-economic deterrent)
3. Does the firm take the profit generated by the resources? It depends on:
   • Property rights: is it possible to identify the owner of the property right on the resource?
   • Bargaining power: does the firm influence the price for customers?

Google's corporate strategy

Case Study 2: Alphabet's Google

Google is monetizing the data that we provide, it is profiling us that later it can sell our contact to companies. Google is making money thanks to AdSense, customizing our profile and selling it, as well as paying space on websites. Through data and AdSense, firms can target the right audience. The second stream of revenues is AdWords, so the payment from words, by receiving money from firms to give them the best keywords and put them on the top of the research. Google has all the information because users through their researches tell Google what they are interested in.

Google's structure and strategy

Google needs to have its own browser, even if it is expensive, since in other browsers we can block the flow of information. Instead, Google uses cookies and we want to share our data. They want to go ahead collecting data, just to profile customers. Different industries are linked one to the other, this is a corporate perspective. Its business is based on sharing information and so advertising!

Beta (Facebook Group) is one of the major competitors of Google, because they are also collecting data and sending our profile to adv companies. In case of Apple, the core business is different. For Apple, the largest source of profits is devices.

Alphabet's diversification

From 2016 Google changed its organization and it is now part of a Group, which is Alphabet and that contains:

• Waymo (that creates self-driving cars)
• Nest (a smart device that we can have in our house to control the temperature)
• Google X (that is investing in AI)
• Calico (that is investing in studying longevity), etc.

They are investing in different industries and covering a lot of topics, these industries could have a big chance of development in the future that needs massive investments of billions of dollars today. However, in the conglomerate, Google is the only business having revenues. Every single second it is generating cash, which will be used in other companies (and not so many other Groups can do so). Therefore, Alphabet has both the financial and synergic logic. It has different autonomous businesses, it has one that is producing cash that will be allocated in other industries.

Portfolio matrix and diversification strategy

What there is no in Google is restructuring, we have a venture capital (Google Venture) that is looking for small ventures with huge potentiality for development. This is typical to private equity. On one side we have the so-called Cash Cows (Google) and on the other hand we have Stars (other businesses Google is developing).

Dimensions of diversification

The scope of one company (the boundaries, the edge of the firm, or in other words the size of the company in terms of geographical areas, industries and steps of the value chain) can be described through three dimensions:

• Horizontal: How many industries a company is in and what are these industries;
• Vertical: How many steps of the industry value chain are covered by the company;
• Geographical: Geographical area in which a company is present.

If we increase the level of diversification, so the number of industries in which we are in, we are increasing complexity, and it asks for coordination, and it means time, efforts and so costs. Increasing the size of a company we have at the beginning an increase in performance but when complexity is huge performance starts collapsing. The red line is the right one.

Sources of the firm's growth

There are different sources of competitive advantage that drive the growth:

• Economies of scale: The bigger I am the less costs I have;
• Economies of learning: Company learns by doing, the more the practice the more they learn; usually market share is an approximation of learning, if we produce more, we learn more;
• Economies of scope: Same mechanisms of economies of scale but we cut costs because we share something between two businesses, like capacity of production, so we can share costs;
• Network externalities: More users we have in a network more value each single user has. Users will choose always an industry with a huge network.

Diversification rationale

Why companies diversify? The main reason is because they have excess resources that cannot be left in the bank account, but they must be invested. However, there could be other reasons:

• Offensive: To attack competitors (e.g., Xbox developed to attack Sony operating system);
• Defensive: To respond to competitors’ attack;
• External: Search for opportunities or company for sales;
• Internal: Demand reduction in the core business or underutilization of resources;
• General: Not to suggest the direction;
• Specific: They suggest the direction.

In this field, the concept of core business is fundamental: "the primary area of products, capacity, customers, channel and geographical areas that define what the firm is or wants to be". Core business is the set of products, capacities, customers, channels and geographical areas that define what a company’s ambitions are.

Identifying core business

There are different criteria to identify core business:

• We can start from understanding the core business’ information, its technology, find a way to identify core business based on industry features;
• Have a look at the history of the company. Typically, 90% of times, the core business is related to the first business the company started;
• Look at figures: the core business could be the business which generates more revenues, or which has the largest market share;
• Identify the core business on the basis of competencies.

The relevance of core business is due to the tendency to re-focus on core business and that the sustainable growth is around it.

Types of diversification

• Specialization Ratio: Proportion of a firm’s revenues derived from its largest single business.
• Related Ratio: Proportion of a firm’s revenues derived from its largest single group of related businesses.
• Unrelated-Diversified: Business units not closely related (Company’s competencies can be applied across a greater number of industries, Company has superior strategic capabilities that allow it to keep bureaucratic costs under close control).
• Related-Diversified: <70% of revenues from a single business unit, Businesses share product, technological or distribution linkage (Company’s managers use their strategic management competencies to: Improve the competitive advantage of their business units, Keep bureaucratic costs under control).
• Dominant-business: Between 70% and 95% of revenues from a single business unit.
• Single-business: >95% of revenues from a single business unit.

Portfolio matrix

Matrixes usually have different purposes: