Lezioni, Corporate Strategy

Lesson 11: What is strategy?

Introduction and examples

Example: the premature death of a Google forerunner at Microsoft. Strategic management is the integrative management field that combines analysis, formulation, implementation in the quest for competitive advantage.

Definition of strategy

What strategy is: gaining and sustaining competitive advantage. Strategy is the planned and realized set of actions a firm takes to achieve its goals.

Competitive advantage

A firm that formulates and implements a strategy that leads to superior performance relative to other competitors in the same industry or the industry average has a competitive advantage. Analysis, formulation, and implementation are the three fundamental words of strategic processes. (Ex: Google has a competitive advantage on Yahoo)

Sustainable competitive advantage

A firm that is able to outperform its competitors or the industry average over a prolonged period of time has a sustainable competitive advantage.

Competitive disadvantage and parity

Competitive disadvantage: a firm underperforms its rivals or the industry average. Competitive parity: two or more firms perform at the same level.

Objectives of strategy

The final objective of a strategy is to get success, profits, and competitive advantages: principally is to gain and sustain competitive advantages. Gaining is different from sustaining: the difference is in the time. When we talk about sustaining we are talking about the dynamic part, we are looking over time to sustain a competitive advantage. You can have a competitive advantage today, but you can lose it in the future because of competitors, environment, and so on.

Measurement of performance

In business, we have no absolute measure of performance for competitors; therefore, we compare performance to a benchmark, the performance of other firms in the same industry or an industry average.

Establishing competitive advantage

• When it has the opportunity to charge a higher price than competitors
• When you have something that your competitors cannot copy
• When the firm has particular/peculiar resources
• When the firm is performing better than the others: economies of scale, etc.

Superior performance relative to competitors: ROI higher than its competitors or the industry average. If the average ROI of the industry is 10% and if we perform 15%, we are supposed to be something different.

Examples of competitive advantage

Examples: in Italy, Luxottica → Campari (they made a lot of acquisitions, they grew a lot; why in a similar industry it’s necessary to acquire firms? Campari starts growing at the beginning of the '90s and now they are very big). Illy → Ferrari (but if we consider its performance we have to pay attention to who are its competitors: → Lamborghini, etc.; therefore, how do we define the competitors? Who are my competitors? Who are not my competitors?)

Sources of competitive advantage

There are different sources of competitive advantage (points before) but first, we have to consider the relative performance of the firm.

Testimonial and article reference

Testimonial: find performances and competitors’ performances on AIDA. Article by Porter: “What is strategy?”

Discussion on strategy

The strategy describes the goal-directed actions a firm intends to take in its quest to gain and sustain competitive advantage. The firm that possesses a competitive advantage provides superior value to customers at a competitive price or acceptable value at a lower price. Profitability and market share are the consequences of superior value creation.

Strategy is about being different. If you are different and you are able to become unique, it’s easier for the firm to preserve the competitive advantage. That’s why he said that the strategy is to be different.

Strategic positioning

Managers accomplish this difference through strategic positioning, staking out a unique position in an industry that allows the firm to provide value to customers, while controlling costs. Strategy is not a zero-sum game. If we are all equal, all the same, the competitive advantage is that you don’t have a competitive advantage. If all are different, I could have a competitive advantage but you too. Therefore, in this case, we have a win-win scenario. The objective is not biting you but being different.

Real-world strategy

In the real world, we are fighting among each other but when you think about strategy you would not have to think about a battle because it could be a win-win scenario.

Co-opetition

Co-opetition: trade-off between cooperation and competition. Is it possible to compete and collaborate? In the automotive industry, we can observe it. For example, FIAT & TATA signed a collaboration in 2009; they are competing in the market but they are collaborating for some models of cars; PSA – Toyota collaborates with Toyota for Aygo, 107, C1 but in the market, they compete.

Trade-offs in strategy positioning

Strategy requires trade-offs for strategic positioning: you cannot be in two strategic positions. Southwest airlines (first low-cost company in the airline industry, Ryanair copies it) and Delta Song (Delta airlines). When the low-cost model developed, traditional airlines seek to insert a low-cost model into the traditional model. But this failed because the two models are very different.

The point here is that you cannot be the traditional model and the low-cost model, you cannot be both, you cannot use both strategies, being in two different strategic positions. For example, Alitalia will never solve its problem: it’s too big to be a low-cost company, too small to be a traditional airline company. There are too many trade-offs between the two models.

Leadership strategies

Cost leadership and differentiation leadership: most relevant trade-off. If you are able to solve this trade-off, probably you are able to win a competitive advantage. Ex. IKEA cost advantages but also differentiation advantages.

Deciding what not to do

As emphasized by M. Porter, strategy is as much about deciding what not to do, as it is about deciding what to do.

Firm strategy as a theory

A firm’s strategy can be seen as its managers’ theory about how to compete. Based on their assumptions about competitive conditions, managers express their theory on how to gain and sustain competitive advantage in the strategy they set for the firm. Strategy as a theory of how to compete provides managers with a roadmap to navigate the competitive theory.

The strategic management process

The strategic management process is a never-ending cycle of analysis, formulation, implementation, and feedback. When managers’ theories of how to gain and sustain a competitive advantage do not reflect reality, their firm’s strategy will destroy rather than create value and will lead to inferior performance.

Industry vs firm effects in performance

Managers’ actions tend to be more important in determining firm performance than the forces exerted upon the firm by its external environment. These firm effects (the results of managers’ actions to influence firm performance) tend to have more impact than industry effects. The industry effects are the results attributed to the choice of industry in which to compete.

Monopoly and competition

Monopoly: the firm is price maker, higher profits. Perfect competition: the firm is price taker, lower profits than monopoly.

Unexplained variance

What does it mean unexplained variance? You cannot easily understand if a firm has different performance. You as a manager, you can decide to be in an industry or not, you can try to change the characteristics of the industry, etc., but there are effects that you are not able to affect. That’s also the reason why you don’t understand why some firms have constantly a competitive advantage over competitors.

Ex. Walmart: nobody has been able to copy exactly what WM is doing. We link it to the concept of uncertainty imitability.

Characteristics of a firm

If a firm is characterized by uncertain imitability, it has a competitive advantage because it can’t be copied. The firm has to clear what it has to do but also what it has not to do.

Luxottica bought a lot of brands: now that you have the brands, are you thinking about licensing the brand that you own? No, it’s not our business; the same did L’Oréal which didn’t license their brands.

Strategy planning in long term

Strategy is something that you plan in long term. But what’s the meaning of long term today? Can you establish choices 10 years ahead? Long term today is 5 years, mostly 3 years: you define your plan 3 years in advance. And every year you look at your plan. Luxottica did a plan of revenues of 2 or 3 years.

Strategic management in non-profit organizations

Strategic management is important also for nonprofit organization. NB: Strategy is the quest to gain and sustain competitive advantage.

Operational effectiveness

Strategy is not… Operational effectiveness can be easily copied, for this reason is not strategy. Enterprise resource planning. The most known is the SAP. ERP = software which incorporates organizational processes. The issue is that it incorporates flows of information according to the best practice of the organizational processes, according to the best in class, according to the best in practice organizational processes. So if you use SAP your organizational processes should work more effectively, efficiently because they are incorporating the best practices the SAP has developed over time.

Benchmarking and Six Sigma

Benchmarking is comparison with other companies. We can ask a consultant firm to create a comparative benchmark with my competitor. If we adopt Six Sigma approaches is something related to the quality. The object is to reduce wasting as much as possible all over the firm. Why adopting a Six Sigma approach is not a strategy? Lean manufacturing techniques is not a strategy? Six Sigma? Because they are not sustainable: every firm can copy these approaches. They can give you a temporary advantage. Necessary but not sufficient: such as lean manufacture.

Lean manufacturing in different industries

In the shoes industry: it’s impossible to use lean manufacturing technique. It’s difficult to standardize. A lot of competence are in the minds of the work forces. They have the sensibility on how to shape the production process of how realize a shoe. If the competences are in the mind of the people, we can’t apply lean manufacturing processes. Automotive industry: Toyota production system. All firms adopt those technique: Toyota has any advantage in adapting this approach because it has been copied and implemented.

Strategy formulation across levels

Formulating strategy across levels: corporate, business, and functional managers. Strategy formulation concerns the choice of strategy in terms of where and how to compete. To understand the interdependencies across different levels, it is helpful to break down strategy formulation into 3 distinct levels:

• Corporate strategy: Related to questions such as: Where to compete? In here we define where to compete and the guidelines. Corporate executives need to decide in which industries, market, geographies their company should compete, as well as how they can create synergies across business units that may be quite different. They are responsible for setting overarching strategic goals and allocating scarce resources among the different business divisions, monitoring performance and making adjustments to the overall portfolio of business when needed. Corporate executives determine the scope of the business, deciding whether to enter certain industries and markets and whether to sell certain divisions.
• Business strategy: How to compete? GE is a very diversified company. Decision in how to compete in different business are business strategies. General managers are responsible for formulating a strategic position for their business unit.
• Functional strategy: How to implement? Decisions in how to compete are functional strategy. Within each SBU (strategic business unit) are various business functions such as accounting, finance, HR, IT, product development, operations, marketing, and customer service. Each functional manager is responsible for decisions and actions within a single functional area that aid in the implementation of the business level strategy. The set of functional strategies enables the general managers of the SBUs to pursue their respective business-level strategy, which in turn needs to be in line with the overall corporate level strategy. Functional managers, who are closer to the financial products, services, and customers than high-level managers may sometimes be able to come up with strategic initiatives that may influence the direction of the company.

Business models: putting strategy into action

The aim of the firm is creating value: translate the strategy into an action. The translation of strategy into action takes place in the firm’s business model, which details the firm’s competitive tactics and initiatives. If the firm fails to translate the strategy into a successful business model, the firm will cease to exist.

Transforming strategy into actions

• Transform the theory in actions and initiatives
• The organization implements the actions through structures, processes, culture, and procedures

Famous example “Razor-blade model”: (invented by Gillett) Gillett creates a model in which they sell at a low cost and then they sell at a higher price for the blade. The business model is affected by the way in which they divide the product. They create a lock-in effect. I invite the customer through a very low price of the razor but over time you will buy blades. The same model is used by printers, videogame consoles, and Nespresso. Nespresso, you buy the capsule in exclusive shops, in special channels but I can buy the machines wherever I want. In this way, I expand the expansion of the machinery. The general idea is to give away or sell for a small fee the product and make money on the replacement part needed.

Similarly, telecommunications companies provide a basic cell phone at no charge when you sign up for a 2-year wireless plan. They combine the razor blade model with the subscription-based business model: customers sign up for a lengthy service plan.

Business models of Microsoft and Google

Microsoft: starting from operating system (windows). How does Microsoft make money? Block the system in the computer. After you are used to buy the other Microsoft products and you pay for them. Google: basically, you don’t pay for Google. After it starts with other tools, Google docs, chrome, etc. Google benefited from network effects: the increase of the value of product or services as more people use it. Basically, the two business models are different, in the first you pay, in the second the profitability of Google comes from selling advertisement, selling information and it depends on number of people using the product. If the search engine can’t be for free, this will destroy the entire product.

Business model in opposite directions.

Business model canvas

It’s made of 9 blocks:

• Customer segments
• Value proposition: what is the need of the customer segment?
• Distribution channel: in order to satisfy the customer segments I need the distribution channels
• Customer relationships: what are the relationships which are entailed with your customer segments
• Then there is the revenue model
• Revenues streams (for example razor-blade model) This first part is the part of the model that creates value. You are creating and delivering value to customers.

The second part of the model is the part through which you appropriate value, in order to deliver this value propositions you need:

• Key activities (processes, production, advertising, after-sale services)
• Key resources (in order to produce the value and to deliver that value); they depend on the business. What are for example the key resources of Nespresso? In terms of activities, it might be the transformation process of the coffee, in terms of resources is brand. Apple – iTunes is very important for Apple, it’s a key resource for it. At the beginning the sales of iPod was not good. They started increasing with the launch of iTunes.
• Key partnership, it may happen that you don’t have all the resources, therefore you need partnerships (they could be farmer of the coffee in Nespresso, for example)
• Cost structure

Strategy in the 21st century

Change is the only constant

And it appears to be increasing. What means change?

Accelerating speed of technological change

The picture shows the number of years in order to half of the market using a product (nb of years it took for different techno innovations to reach 50% of the US population). It took 84 years in order for half of the market to use a car, for example. What factors explain this rapidity in technological change adoption? Because emergence of new business models makes the innovation more accessible; because of digital natives.

If the rate of technological increase you have to be agile enough to adjust your product. The competitive advantage that you have is more temporary than sustainable strategy. Competitive advantages are for definition temporary. Nokia, for example, for them was unthinkable to lose the market that they had, everybody had a Nokia. They lost the competitive advantage in very few years. They have not been able to follow the technological change.

Truly global world

Nowadays we are in a truly global world. It means we have the opportunity to reach distant markets and collaborate globally.