Riassunto Corporate Strategy

Corporate strategy

An introduction to strategy

Strategy is the overall plan for deploying resources to establish a favorable position. It is different from a tactic, which is a scheme for a specific maneuver. Strategic decisions are important, involving a significant commitment of resources and not easily reversible. Its main components are goals, understanding the environment, resource appraisal, and the implementation.

What makes a successful strategy?

• Resources: The key elements in order to be competitive.
• Team: Create a team of people that help you to reach the goal: alone it’s impossible.
• Relationship between strategies and tactics.

The evolution of strategic management

The concept of strategy as we know today came last, working to find a common topic between all the ages. Initially, the only strategic part in a company was represented by the simple capital budgeting, with some examples of very simple business models. Strategy became important in the 80s, with Michael Porter’s school (Harvard) and the concept of positioning considering the 5 forces (Porter’s competition model).

Michael Porter is the author of two relevant books: the first one is related to the 5-forces model and the different typologies of strategies (focusing, leadership of cost, differentiation); the second one is mainly focused on the concept of competitive advantage as an idea of superior performance (higher than competitors), the value chain and its main drivers, opening a new phase in 1985.

But, a revolutionary concept in the eighties was profitability, meaning that something produces or is likely to produce a profit: a rich industry is easier to be profitable; but there are other industries where it is difficult to be profitable (e.g. airline industry).

In the 90s, the so-called Resource-Based View (RBV) provided a critique to the model of Porter, offering a different perspective: there are different drivers in order to achieve the competitive advantage; they are different, but they lead to the same thing. The last phase (2000s) is related to the strategic innovation, in particular to Kristensen and the evolution of strategy in the CD industries, focusing on a disruptive innovation.

Strategy as a link between the firm and its environment

Strategic decisions are taken searching for fit and expected performance. These decisions should be assessed ex-ante and then, ex-post, you have to evaluate the quality of your strategy, using some performance indicators like market shares and other measures.

• Firm goals & values, resource & capabilities, structure & systems.
• Industry environment: competitors, customers, suppliers.

What are the sources of superior profitability? How to make money?

The profitability of our company should be higher than competitors’ profitability. To do this, we have to answer the following questions:

• Industry attractiveness: Where to compete? Understanding industry and its profitability and choose in which industry you want to compete. Which businesses should we be in? The answer to this question is given by the corporate strategy.
• Competitive advantage: How to compete? How to compete in specific business is the result of the business strategy.

Strategy making: design or process?

Difference between intended strategy (design) and emergent strategy (process): the intended one is the ex-ante strategy, the one that you have planned initially, based on rational choices; the emergent one is a sort of response by decision-makers to some changes in the market, caused by external/internal forces. The final result is the realized strategy.

Mintzberg’s critique of formal strategic planning is based on three different types of fallacy: the fallacy of prediction (future is unknown), of detachment (impossible to divorce formulation from implementation), and of formalization (inhibits flexibility, spontaneity, intuition, and learning).

Strategy making processes within the company: multiple roles of strategy

• Strategy as supporting decision: Improves the quality of decision making.
• Strategy as coordination and communication: It creates consistency and unity.
• Strategy as target: Improves performance by setting high aspirations.
• Strategy as long-term commitment: In order to reach a goal.

Analysis: Strategic model doesn’t give you a unique answer (“a single superior answer”). On one hand, it creates ambiguity: ex-ante, it’s impossible to define an only solution. Strategy analysis can enhance flexibility and innovation by supporting learning, assists us in identifying and understanding the main issues, helps us manage complexity.

Competitive strategy: industry analysis and competitive advantage

Industry analysis: objectives

What are the objectives of industry analysis?

• To understand how industry structure drives competition, which determines the level of industry profitability “How the 5 forces are destroying the profitability or creating profitability”.
• To assess industry attractiveness: Attractive industries are more profitable compared to non-attractive industries, and not only for some years, but usually for decades, due to the typical stability of the industry. This attractiveness is fundamental in order to define a strategy, to position yourself (positioning); my strategy should protect my company from the 5 forces, because the company could be more/less exposed to these forces (e.g. Apple in the PC industry using differentiation in order to protect itself from competition. They protect their competitive advantage using connection between their devices, creating an Apple ecosystem).
• To use evidence on changes in industry structure to forecast future profitability.
• To formulate strategies to change industry structure to improve industry profitability: You will be more profitable than the average by creating a competitive advantage.
• To identify Key Success Factors (KSFs): Industry is more important than management: if an industry is unprofitable by itself, neither the best management can obtain profits.

From environmental analysis to industry analysis

In the 50s, there was an initial model (“preliminary models”) that contained everything. According to Porter, we have to simplify toward the key element and so make decisions. With too many variables, it is difficult to make decisions. So, we concentrate only on the industry environment (and not on the macro environment).

The most profitable industry in a long-term view is the pharmaceutical one.

The spectrum of industry structures

• Perfect competition: Many firms, No barriers, Homogeneous product, Perfect information flow.
• Oligopoly: A few firms, Significant barriers, Potential for product differentiation, Imperfect availability of information.
• Duopoly: Two firms, Significant barriers, Potential for product differentiation, Imperfect availability of information.
• Monopoly: One firm, High barriers, Potential for product differentiation, Imperfect availability of information.

From a company point of view, you want to be a monopolistic company (e.g. iPhone).

Focus on Porter's model

• Threat of substitutes: Extent of competitive pressure from producers of substitutes depends upon:
  • Buyers’ propensity to substitute.
  • The price-performance characteristics of substitutes.

  E.g. Why Alitalia is collapsing? Alitalia was doing revenues fundamentally on few slots; one of the most profitable was Milano-Roma and vice versa. But now we have to consider also trains, we have substitutes. People changed their belief according to the presence of a relevant substitute.

• Threat of entry: Possibility of new entrants in the industry. Anyway, there could be obstacles for new entrants, the so-called entry barriers. The principal sources of barriers to entry are:
  • Capital Requirements (e.g. car manufacturing or pharmaceutical, where it is difficult to enter because you need a lot of money in order to enter in an efficient way. Cost will be over price/revenues. Potential entrants can destroy everything, especially from the cost point of view).
  • Economies of scale.
  • Legal and regulatory barriers (e.g. monopoly).
  • Retaliation (against new competitors e.g. cutting prices).
  • Absolute cost advantage.
  • Product differentiation.
  • Access to channels of distribution.
• Bargaining power of buyers/suppliers: For the power of buyers, you have to consider buyer’s price sensitivity, based on the cost of purchases but also the level of product differentiation. The more the product is standardized, the more the consumer has bargaining power (e.g. they can impose you a discount). The analysis of supplier power is symmetric.
• Rivalry: Industry profitability is depressed by aggressive price competition, that depends upon:
  • Concentration (so, number and size distribution of firms).
  • Diversity of competitors, which is good, because they are not concentrated only on price competition because of the “uniqueness” of the product they produce.
  • Excess capacity and exit barriers can destroy the industry profitability, because you will cut the price in order to sell the excess of capacity.

Which is the unit of analysis of the model? Industry. It is a model that you have to apply to an industry, not on companies. When you think about consumers, suppliers, etc., you don’t have to consider the ones of a specific company but the ones of a specific industry.

Applying 5-forces analysis

Firstly, we want to understand and to forecast the industry profitability and you will use this model in order to forecast it. Past profitability is a poor indicator of future profitability. If we forecast changes in industry structure, we can predict likely impact on competition and profitability. Also, you will use this model in order to improve the industry profitability, finding out strategies to do that, understanding which variables affect profitability in the industry. Protect your company from the most important forces contained in the model.

Drawing industry boundaries

This means identifying the Relevant Market. Here, the key criterion is substitution and we deal with 2 practical issues:

• Identify industry: To which industry does BMW belong? World, European, or world luxury car industry?
• Identify substitutes and competitors (both on demand side and on the supply side) BMW vs Pagani? Do not confound shit with chocolate.

We may need to analyze industry, market competition at different levels of aggregation for different types of decisions and depending on the issues being considered.

• Identifying Key Success Factors. It is the starting point for the analysis of the competitive advantage. You have to assess and understand which is the feature of your product that is important within a specific competition environment. Everything is important within the industry, but there are some factors that are more important (e.g. why Nokia failed in the telephone industry? For the apps, not only because of the operative system: the CEO believed that their OS was the best in the industry myopia marketing). Understand what the critical success factors are, because they are the keys to drive competition and profitability.

A framework for competitor analysis

It is important when there are few competitors in the market.

• Objectives: Identify competitor’s current goals, if performance is meeting its goals and how are they likely to change.
• Strategy: How is the firm competing?
• Assumptions: About the industry and about itself.
• Resource and Capabilities: Analyze competitors’ key strengths and weaknesses.

Predictions are the results of this analysis, predicting what strategy changes will the competitor initiate and how the competitor will respond to our strategic initiatives.

Segmentation analysis

This analysis helps you to change your position in a long-term view of the market, applying the 5-forces model on the segment. The principal stages are:

• Identify key variables and categories: Segmentation variables, reducing them to 2/3 variables and identify discrete categories for each variable.
• Construct a segmentation matrix.
• Analyze segment attractiveness.
• Identify KSFs in each segment.
• Analyze benefits of broad vs. narrow scope: Potential for economies of scope across segments, analyze similarity of KSFs, identify product differentiation benefits of segment focus.

Strategic group analysis

A strategic group is a group of competitors in an industry that follow the same or similar strategies. In some industries, there will be competitors that share the same strategy and, as a result, they will have more or less the same performance. Why? In Porter’s view, they have the same positioning vs. the 5-forces: in the soft-drink industry, Coca Cola and Pepsi have the same strategy (e.g. cover more than one niche) and so similar performance. The problem is that the performance could differ for other reasons. How to identify strategic groups?

• Identify principal strategic variables which distinguish firms.
• Position each firm in relation to these variables.
• Identify clusters.

The factors used in the slide of the automobile industry are product range and geographical scope. But we need to decide these dimensions considering investments (Porter’s idea), because, for example, if we want to move from narrow to broad product range, we need a lot of money (high investments). According to this theory, your first competitors are the ones who stay within the same strategic group to which you belong.

Nature and sources of competitive advantage

Nowadays, superior performance means high profitability. If the level of profitability is major than 10%, you are profitable, and you have obtained a competitive advantage.

How does competitive advantage emerge? “People don’t know what they want” cit. Steve Jobs.

• Internal sources of change (e.g. first, he creates a phone with only one button). Greater creative and innovative capability. Examples are innovatory strategies:
  • Associated with new entrants to an industry (e.g. IKEA in furniture).
  • Reconcile conflicting performance goals (e.g. Toyota’s lean production system combines low cost, high quality, and flexibility).
  • Reconfiguring the value chain (e.g. Zara’s system of design, manufacture, and distribution).
• External sources of change: There are also other possibilities, such as the situation where your product that one day will become unique while before nobody cares about it (e.g. changing in customer demand or in prices, or technological change; sometimes, it is about luck).

Sustaining competitive advantage vs. imitation

• Try to avoid people imitating you, replicating you, obscuring superior performance (e.g. Apple is much more than the product itself).
• Try to eliminate incentives for imitation using deterrence (aggressive intentions vs. imitator) and pre-emption (exploit all available opportunities).
• Resources are usually immobile and difficult to replicate (e.g. in the soccer industry, you need top players like Messi and Ronaldo, but, at the same time, you have to respect rules Man City case).

Sources of competitive advantage

• Cost advantage (NO lower price, it is different): Similar product at lower cost (economies of scale, location of production in emerging economies etc.). You adopt the same price with lower costs.
• Differentiation advantage (customers’ perception of uniqueness): Price premium from unique product, your product is different from competition products. Differentiation is different from diversification; A clear example of differentiation is Ferrari or Hermes: they are beyond any value that you can imagine. For your customers, you are selling a dream. Really huge distance between cost and price.
• Focusing: The variant is to concentrate in a single segment (or few segments), with a focus strategy: you can focus on cost leadership or on differentiation, but only considering a specific segment, a specific niche.

Differentiation advantage, the nature of differentiation

What is differentiation? “Providing something unique that is valuable to the buyer beyond simply offering a low price.” (M. Porter). The key is to create value for the customer.

Two different types of differentiation:

• Tangible differentiation: Differentiation based on product characteristics (size, performance, packaging).
• Intangible differentiation: Differentiation based on unobservable characteristics (e.g. like status, identity, lifestyle etc.).

Differentiation is not just about the product; it embraces the whole relationship between the supplier and the customer.

• Differentiation: How a firm distinguishes itself, how the firm competes.
• Segmentation: Where the firm competes. They are similar and but different concepts.

Does differentiation imply segmentation? Not necessarily, it depends upon the differentiation strategy you use:

• Broad scope differentiation: Appealing to what is common between different customers (e.g. McDonald's, Gillette).
• Focused differentiation: Appealing to what distinguishes different customer groups (e.g. Harley-Davidson, Ralph Lauren).

The Porter value chain

Using the value chain, you can identify differentiation potential on the supply side. Any activity should be developed in order to provide a unique offer. In the Porter’s value chain, you can identify two types of activities:

• Primary Activities:
  • Firm Infrastructure: MIS that supports fast response capabilities.
  • HR management: Training to support customer service excellence.