Corporate Strategy

Corporate strategy

What makes a successful strategy?

These are the three main factors that made a company able to implement a successful strategy. Not being able to use or anticipate such a factor means to fail, for instance, the Blackberry case (was not able to predict the arrival of new smartphone technology).

Describing strategy: competing for the present, preparing for the future

All these brands are part of a single group. What is the reason behind such a strategy group? The main reason for building a group of enterprises is that together they produce more value than the sum of them as a single enterprise. They need to generate value. For example, at the same cost, we increase revenue. That means creating value at a basic level. For a luxury company, the biggest cost is marketing, so they can reduce the risks and use synergies, being in more than one sector.

Corporate strategy means the way a company creates value through the configuration and coordination of its multimarket activities. These companies tend to focus on value creation by combining multi-market activities. Multi-business companies have two levels of strategy:

Business-level strategy (competitive strategy/single enterprise)

It represents how to create a competitive advantage in each business in which the company competes:

• Low cost or focused low cost
• Differentiation or focused differentiation
• Integrated low cost/differentiation
• Blue ocean

Corporate-level strategy (company-wide strategy)

How to create value for the corporation as a whole. Blue ocean strategy was introduced in 2005 by Professors W. Chan Kim and Renee Mauborgne. It encouraged firms to evacuate shark-infested waters. Their book, "Blue Ocean Strategy: How to Create Uncontested Market Space and Make Competition Irrelevant," suggests companies are better off searching for ways to gain "uncontested market space" over competing with similar companies. These new spaces are described as "Blue Oceans," compared to the "Red Oceans" swarming with vicious competition. The Blue Ocean Strategy represents the simultaneous pursuit of high product differentiation and low cost, thereby making competition irrelevant.

In corporate-level strategy, we should consider two fundamental questions. Moreover, we should also know the need for corporate strategy:

• Most industrial activity is carried out by large corporations which compete in more than one market.
• The majority of assets are controlled by multi-business companies.
• Due to their dominant role, these firms play in economic activity, it is likely that most of you, regardless of your chosen career paths, will at some point either work for, advise, or compete with a multi-business corporation.

Strategic concept and tools

The tools that we will have to use are different from those used at a business-level strategy. For example, the five forces model works at the business level because we use it for the external analysis of the environment to understand if one industry is attractive or not. The same can be said for the value chain from Michael Porter; we use it to understand how inputs are changed into the outputs purchased by consumers. Using this viewpoint, Porter described a chain of activities common to all businesses, and he divided them into primary and support activities. Also, SWOT analysis is useful only for a business-level analysis.

In implementing a corporate strategy analysis, we need other tools, for instance, the BCG matrix or core competencies as well. It means that at a corporate level we do not need sources of competitive advantage. Instead, we need a framework useful at a corporate level. We will use a triangle. It is a tool to understand different elements of the strategy at the corporate level. Resources must fit with our organization, and the organization has to fit with the business we are in. All of this then has to fit with the external environment, and by so doing, we will be successful.

Does corporate strategy create value?

Competitive advantage occurs when the company achieves better financial performance than competitors over the long term, typical for industries. Value creation and value destruction: Companies run together higher than the value of the single company (value creation). In the second case, it is the opposite (differentiation discount) = destruction of value. This happens because probably the two businesses combined do not fit each other.

Vision, goals, and objectives

All the following questions are useful to set the triangle, and after this point, we start by analyzing it from the inside:

Vision is a synthesis of an ambitious project for the long term (strategic intent) that:

• Defines the scope of the activity (field of activities)
• May include ethical statements
• Captures the essence of winning
• Is stable over time
• Sets a target that deserves personal effort and commitment

Basically, we can divide the inner part of the triangle as:

• Vision: Represents an ambitious project for the long term.
• Goals: Desiderata qualitative in the medium term.
• Objectives: Specific quantitative target in the short term, basis for compensations.

Vision sets two things: goals (qualitative description) starting from its objectives (numbers, specific quantitative). Mission is different from vision, but in day-to-day practice, companies can mix it. Values seem very theoretical, but they are the most powerful things we’ve got in companies because they can influence employees' behavior, for example.

The Walt Disney Company

Why successful for such a long time? They were the first (unique), they were able to understand what was wrong and then fix it and perform well again. They were able to involve families and create relationships with them. Internal processes control is good for controlling some processes, but not all activities have to be internalized (only the main ones). Management style (built like a flat so all employees could contribute in finding new ideas and using their creativity in implementing the overall strategy/company), image, and brand (the meaning of the brand is important, for example, one important meaning can be our experiences – it was a teaching method as well for children and moreover, everything is under control so for this reason parents can trust Disney and take their children to the cinema – customers trust in Disney).

They are also running new kinds of business: parks, magazines, merchandising, sport, tourism-hotel, music, channels, cruises. The main reason is to create value by managing their brand as a whole and thus creating more value as a group than as separate entities. Increase the awareness of the image. At the center of such a strategy, we have the characters (considered as a resource) that people love, which are providing value for each single business. By doing this, Disney is able to make customers pay more for their services just because they are connected with their brand (higher occupancy rate). This is one corporate advantage that Disney presents. The only exception of coherence with these businesses is sports; it is not clear why they are running it yet.

Characters are resources because they have control over them, are able to create loyalty to the brand, durability (these resources can be used for a long time—they can also be improved over the years). They can act as actors (from a Disney perspective). Appropriability (resources create value) because Disney does not have to pay its characters as normal actors, they work 24/7 and they do not receive or take any money. They are impossible to be imitated—NO IMITATION (because of copyright). They have demand, someone wants to buy these characters, and moreover, every year new children will be born so their demand can remain more or less constant.

Main reason Eisner received stock options

From 1984 to 1987, the revenues increased more and more mainly because they launched the park. He decided overnight that the price for a single ticket would be 10 dollars more and that the park would be open one day per week more. By doing this, they had 300 additional costs but more than 700 revenue. He understood that characters have a strong demand and so the value of these resources was underestimated—no one can copy it, that’s why he received such a compensation.

What Eisner did with this additional money was to invest everything in developing new characters. Right now, the number of characters is so huge that the future of Disney is granted for a long time.

Main role that resources play in a company by using their features that make them more interesting and appealing for customers to create more and more value.

Analyzing resource and capabilities

Resources (assets) each company has its own resources that make them competitive and their strategy successful. It’s the first step to understand the strategy at a corporate level, develop it or understand if it is successful or not. Resources must be coherent with businesses (for example, in Disney, sports were not that coherent with the main businesses) to create more value.

What are the resources of a company?

Resources are human, financial, physical, and knowledge factors that provide a firm the means to perform its business processes. In spite of the definition on the slide, the definition of resources is not that relevant. It is instead substantial to understand what a resource is to identify the corporate strategy and evaluate it. They are all the knowledge factors that company needs to perform their businesses. It is a kind of resource-based view of a company, with such a view we know that most of the success of a company is based on its resources.

Resource-based view

Collected in the long term, it’s hard, for example, to launch a new university (because its resources have a long story behind it, it’s a long time resource). Strategy is related to acquisition from the external environment. The basis of the success of the company, the difference between success or not, can basically be understood by analyzing their resources. Define the scope of our company; everything depends on resources – every company has a different portfolio of resources.

Relevance of resources

For example, in 2002, Marzotto Group, active in fashion, bought Valentino company. The situation of Valentino at that time was 130 billion revenues with costs higher than revenues, losses of 30 million. It was bought for 240 million because they were buying the resources of that company, which was the brand.

To sum up:

• Firms are different because resources are different.
• Resources are collected in the long term.
• Strategy is related to:
  • Availability of resources
  • Velocity in resource acquisition
• Resources are the basis of corporate advantage.
• Resources define the scope of the firms.

So, what we need to do is:

1. Understanding the role of resources and capabilities in strategy
2. Identifying resources and capabilities
3. Appraising resource and capabilities
4. Developing strategy implications

They are so relevant because we are living in a turbulent environment. Changes are fast and unpredictable. The best way to deal with such a problem is to start from our resources to build our future. This means that when the external environment is subject to rapid change, internal resources and capabilities offer a more secure basis for strategy than market focus. Moreover, resources and capabilities are the primary sources of profitability.

Example: Honda

Year by year, thanks to experience and new products, they were developing knowledge and new resources. This allowed them to build more and more businesses through the years. The creation of a resource today allows us to create new resources tomorrow (the knowledge of today becomes the knowledge of tomorrow to create new resources).

The link between resources, capabilities, and competitive advantage: Resource and knowledge are owned by the company, and they are mostly intangible. Then we have employees that are not owned by companies and are not intangible. The task of companies is to combine resources to do something else, called capabilities (develop new merchandising, deliver services in a new market, etc.). So, capabilities mean combining intangible and tangible resources together.

Capabilities examples

• Intel: Always able to have the best processors from Intel, first-to-market.
• Coca-Cola: Able to combine resources to have a strong brand.

Resources are the result of processes, such as R&D, etc. To have these resources, we need flows (publicity, ads, R&D, etc.). Flows are used to reach a resource, but they are not a resource.

The portfolio of Canon is successful because its resources are coherent with their businesses. By doing this, they show their company capabilities.

The resources that we have need to be the right ones that we need in the company. By comparison, Bic has the capability of managing plastic injection, is also good in marketing, and has a famous brand. In 1974, they started to produce Coolants and it was a failure because it was not coherent with their resources and capabilities; the new business did not fit with them.

Test to understand where to compete

• Are the resources higher than competitors in the new industry?
• Are the resources critical success factors in the new business?
• Are additional resources equal to those of competitors?
• Can resources be transferred and replicated?

If we have all of this, we can enter the business because our portfolio of resources will be higher and stronger than that of our competitors.

How to identify core resources

We have to understand features of single resources and then focus on three features: DIA TEST to understand the main resources of a company.

• Demand: Does this resource have a demand? Will someone pay more to have these resources?
• Inimitability: Is this resource difficult or impossible to be imitated? (competitive advantage)
• Appropriability: Is the value generated by this resource owned by the company, or is it shared with someone else? Embedded in one of my employees can be fired, and this resource will still be mine? It is so part of a company that it cannot be shared outside it.

If we have these three features together, the resource will be in the value creation zone (it generates value, no one can copy it, we own the value generated by it). Resources that pass the DIA test could be different between companies: for example, Mondadori has main resources both the copyrights and stores (they have demand, they cannot be imitated, they own all the stuff inside, no one can sell other brands in Mondadori stores apart from Mondadori).

We have different levels of inimitability

• Copyrights
• Unique location (for example, main street)
• Unique assets, for example, the right to extract oil in a specific area
• Brand loyalty
• Etc.

To understand resources, we have got three steps. Thanks to resources, we have capabilities (the company is capable to undertake - combine resources for a particular activity). Also, capabilities are listed, we have to identify main capabilities as well.

We can have different types of capabilities:

• Organizational capabilities: All capabilities
• Organizational competencies: Some capabilities that we do better than others
• Core competencies: Competencies that are the center of the strategy of the company, centers of the company's performance, they are crucial
• Distinctive competencies: Capabilities that the company performs better than competitors

At the end of such analysis, we will have in front of us the main resources and the main capabilities. Then we can focus on which businesses are fit with our resources, in which business that resources can create value.

Diversification and resources

Main resources may be both general or specialized resources. General resources do not give us a strong advantage; the more specialized our resources, the more advantages, but the specialization process has a limit. The business in which we can specialize ourselves is limited. Because we have general and specialized resources, starting from it, companies will develop two different logics of corporate strategy trying to create value in more than one industry.

Financial logic

Portfolio of businesses (general resource). Synergic logic: Portfolio of specialized resources. How the two logic works? Financial logic: We have general resources with different businesses. We manage these businesses as part of the group, but they are autonomous and as a group, we work with these single business units independently (one business produces pens, two consultancy services, three food and beverage, etc.). They are together in a single group, and the group manages them as single businesses. These businesses are fighting one against the other because all of them want to have resources (money, managers, etc.) from the holding. Because of internal competition, the holding manages the internal financial market maximizing profit (the autonomous business has to be better than banks to ask for a loan from the holding, so they have to perform better and better) and from this point of view, the group takes advantage of the internal competition. Thus, whoever owns the company can have both private and public information, so they will be completely aware of the risks of every single business. If we are part of a group, we have both banks and the group to receive funds, meaning that internal decision-makers have more information than external ones. For this reason, the allocation of resources can make more efficient decisions. Moreover, taking part in a group, the holding may take the money from a single company and reinvest it in another more efficient company. Finally, the single business has the advantage, for example, being part of this group gives them the possibility to make investments that they would not have outside the group (from banks), this kind of company has a competitive advantage.