Strategy Marketing

Strategy & marketing

Biomarketing

Biomarketing: in order to understand men's reaction to something before the filter of the brain, it considers bio-factors like the blood pressure. The company has to create value and be competitive according to the target market. A unique managerial process is needed: merge of strategy and marketing.

Introduction to corporate governance

What is a company (and its boundaries)?

Company: it consists of different resources and it has its own goals. The resources have to be managed in order to achieve something. The company tries to transform the input into the output (products, services, and experience) through resources (human, financial, technological). There is a progressive trend of dematerialization of the output. A company is not a closed system but it interacts with different actors (environment).

Stakeholders: those who own the equity; the relation with stakeholders depends on the type of the problem.

Shareholders

- Those who have a stake (suppliers, customers, consultants), those who make the transformation possible.

- Those who indirectly affect the company: public institutions, governments, communities, non-governmental.

- Employees (internal actors) with different objectives, not merged with the company itself.

Supply chain

Raw materials supplier → manufacturing → distribution → customer → consumer.

The more in the upstream, the more technological issues are crucial. The more in the downstream, the more market-related problems are crucial.

The company's boundaries

There are discriminant aspects that lead to different problems.

• Different type of complexity: it can realize:
  • A single output: single product
  • A diversified portfolio of outputs: multi-product
• Steps of the supply chain managed internally (fully integrated: whole supply chain). It can:
  • Be vertically integrated
  • Outsource many activities
• Geographical coverage. It can serve:
  • A single geographical market: local
  • Several countries (internationalization), global

Nowadays: new globalization, more complex than before. There are companies of different complexity and type: the objectives of stakeholders can vary a lot. It’s important to frame and manage different objectives and actors of the company: what prevails is the company’s objective.

What is corporate governance?

We operate in a world with rules and principles that have to be followed: Corporate Governance. The company also has a social role: there is a set of rules and principles that have to be followed. Now it is necessary to set up a Corporate Governance which is more important for companies in the stock exchange.

Publicly traded companies suffer from an incentive problem resulting from the different objectives of management, stakeholders, and shareholders: a system of checks and balances (the Corporate Governance) is necessary.

Definition

Corporate Governance refers to the set of systems, principles, and processes by which a company is governed. They provide the guidelines for how the company can be directed or controlled such that it can fulfill its goals and objectives in a manner that adds to the value of the company and is also beneficial for all stakeholders in the long term. A company objective is long-term oriented: a company wants to survive.

The reference framework

The Corporate Governance is a set of possible frameworks, a set of rules that vary depending on the country in which the company operates. There are technical and legal requirements. Corporate Governance is not just a set of ideas. There are significant numbers of very technical legal requirements:

• Cadbury Report (UK, 1992)
• Sarbanes-Oxley Act (US, 2002)
• OECD principles (2004)

Contemporary discussion of Corporate Governance tends to refer to these three documents.

Principles of corporate governance

• Rights and equitable treatment of shareholders: In a company, there are different types of shareholders with different rights and duties. Shareholders can convey or transfer their share, receive information on the corporation on a regular basis, participate and vote in general shareholder meetings, must be involved in decisions with a huge impact on the company, elect/remove members of the board, share in the profits of the corporations. All the shareholders belonging to the same category must have the same rights and duties: minority shareholders should be protected from abusive actions and foreign shareholders should have the same rights.
• Interest of other stakeholders: Organizations should recognize that they have legal, contractual, social, and market-driven obligations to employees, investors, creditors, suppliers, local communities, customers, policymakers. Thus, the corporate governance should encourage active co-operation between corporations and stakeholders in creating wealth, jobs, and the sustainability of financially sound enterprises. It is necessary to avoid opportunistic behaviors depending on the specific nature of the stake.
• Role and responsibilities of the board: The board needs sufficient relevant skills and understanding to review and challenge management performance. In particular, the company should fulfill certain key functions: setting performance objectives, overseeing major capital expenditures, acquisitions, and divestitures, reviewing annual budgets and business plans, monitoring the effectiveness of the company’s governance practices, selecting, compensating, and monitoring key executives, managing potential conflicts of interest of management, board members, and shareholders, overseeing the process of disclosure and communications. Every company has to set up its own statute that identifies the company and set the responsibility of the BoD. The strategic plan is an informal way to check the BoD (comparing what has been planned with what has been achieved).
• Integrity and ethical behavior: Integrity should be a fundamental requirement in choosing corporate officers and board members; organizations should develop a code of conduct for their directors and executives that promotes ethical and responsible decision-making. Pointing out the key values (ex. Nike is outsourcing production: suppliers assessed concerning social requirements).
• Disclosure and transparency: Disclosure of materials matters concerning the organization should be timely and balanced to ensure that all investors have access to clear, factual information. Disclosure should include material information on the financial and operating results of the company, company objectives, major share ownership, and voting rights, information about board members, remuneration policy for members, foreseeable risk factors, issues regarding employees and other stakeholders, governance structures, and policies. In order to manage the entropy of the economic system. (Ex. Banks: information about the possibility to give back the money).

Parties to corporate governance

There are a lot of actors involved:

• Internal stakeholders: Management, Shareholders
• External Shareholders: Shareholders forgo decision rights and entrust managers to act in the shareholders’ interest.

Why corporate governance is important?

• There can be opportunistic behaviors;
• The economic system is becoming more complex (many distinct interests);
• The growing level of interconnection of distinct economic systems.

Since the context continuously changes, the nature of the Corporate Governance is always evolving. Corporate Governance practices evolve in the light of the changing circumstances of a company and must be tailored to meet those circumstances. There is no single model of good Corporate Governance: solutions vary depending on the country.

Examples

- In the Netherlands and Germany, there is not a unique body which governs but two: two-tiered Board of Directors (Supervisory Board - interest of shareholders and employees - and Executive Board - in charge of the day by day activities, company executives). The dual system of governance can lead to a sort of paralysis if the two boards don’t agree, but theoretically, it is perfect.

- In the U.S. and U.K., there is a unique body: one single-tiered Board of Directors (executives and non-executive directors) composed of managers and independent directors (external people representing the interest of shareholders). It is simple, fast, and easy, but shareholders must control carefully the BoD.

Value for the company

It is of course important for large corporations; it sets out reasonable principles of management, but what is more important is the DNA of a business! The principles of the Corporate Governance are not enough to be sure; what matters is the system values of the company. It is fundamental to achieve the company’s goal: a unique objective is needed (otherwise it’s a mess), but it is also necessary to establish a hierarchy. The customer satisfaction is not the objective since it may go together with low profits that lead to not satisfied shareholders. The company’s role is to exchange value with the market: a transaction must create value for both the customer and the company.

The company's objective

The objective of the company is the shareholders' value maximization. It is related to the company capability to create dividends/cash in the long term for shareholders. It is the corporate goal. A profitable company does not necessarily create value for shareholders: profits could be lower than the average return of capital expected by the shareholders. The profitability is not enough: extra profitability.

• Short-term profits: short-term profit is by definition a profit realized from assets in twelve months or less; short-term profit is based on annual reports data. Annual reports give a primarily historical perspective but provide limited information about strategic strength or any other future-oriented matters.
• Shareholder value: the value delivered to shareholders because of management’s ability to grow earnings, dividends, and share price. It is the sum of all strategic decisions that affect the firm’s ability to efficiently increase the amount of free cash flow over time.

The power of shareholder value: this notion that shareholder interest should reign supreme did not always so deeply infuse American business. It became widely accepted only in the 1990s, and since 2000 it has come under increasing fire from business and legal scholars, and from a few others who ought to know (former General Electric CEO Jack Welch declared in 2009, “Shareholder value is the dumbest idea in the world”). These arguments began to reshape corporate practice in the 1980s. By the mid-‘90s, they had congealed into the simple doctrine that the job of a chief executive is to keep shareholders happy. This heyday ended with the stock-market collapse that began in 2000. The popping of the tech-stock bubble demolished the notion that stock prices are reliable gauges of corporate value. Scientists began to say “it can be awfully hard to motivate employees or entice customers with the motto ‘We maximize shareholders value’”. (The pitfall of rooting on shareholder interest).

• Economic value: drivers of economic value are profitability, capital efficiency, growth, real options, cost of capital present value of long-term free cash flow. The long term combines internal with external perspective: satisfied customers will continue buying the company’s products in the long run. The shareholders’ perspective leads to turn from long term to short term: basically, shareholders’ value is mystified as market value on a daily basis (distorted implementation of the perspective). A better objective is the company’s value creation: the company’s capability to generate cash flow in the long run which means having a positive NPV.

The Net Present Value (discounted cash flow technique) - more operational view (no bias of shareholders):

• How to increase economic value?
• Make strategic decisions that maximize expected future value – even at the expense of lower near-term earnings;
• Carry assets only if they maximize the long-term value of your firm;
• Return excess cash to shareholders when there are no value-creating opportunities in which to invest;
• Reward operating-unit executives for adding superior multiyear value;
• Reward middle managers and frontline employees for delivering superior performance on key value drivers they influence directly;
• Provide investors with value-relevant information.

Trying to establish a link:

• Stakeholder value: the intrinsic or extrinsic worth of a business is measured by a combination of financial success, usefulness to society, and satisfaction of employees, the priorities determined by the makeup of the individuals and the entities that together own the shares and direct the company.

Manager perspective: the objectives of management may in some situations differ from those of the company’s shareholders. Even when corporate executives own shares in the company, their viewpoint on the acceptance of risk may differ from that of shareholders. Stakeholder perspective: CSR states that corporations should be socially responsible and serve the broader public interest as well as shareholder interests.

Shareholder and stakeholder are forced to engage in a partnership of value creation. In fact, in a long-term view:

• Stakeholders are vulnerable when management fails to create shareholder value;
• Without stakeholder value (e.g., customer value creation) there can be no shareholder value.

It has to be considered also the social aspect: if the company does not respect the environment rules, customers don’t buy anymore and public institutions give extra costs to the company. A future-oriented objective is the most important thing even if the tendency is to look at the past because it is easier.

Emerging trends

Current challenges:

• Environment (sustainability): air pollution, waste material, etc., lead countries to grow their attention to the environmental challenge; the environment became the top priority for all the governments. It has an impact on both the effectiveness and the efficiency and it is good for marketing from a strategic point of view.
• Natural catastrophes helped to build an environmental consciousness; the WWF Living Planet Report shows that we are currently using 50% more natural resources than the Earth can sustain; Al Gore, 2007 Nobel Peace Prize winner, describes global warming as “the greatest challenge mankind ever faced”.
• Social Responsibility (sustainability): different levels of awareness in the different countries, depending on the geographical area (ex. in Africa is less relevant). Increased sensitiveness to topics regarding the working conditions and the health of the company’s employees and clients; growing importance for companies to rank in the first position of the Fortune magazine’s “100 Best Companies to Work For”; battles to lower the “glass-ceiling” effect; 79000 points of sales in the EU selling fair trade products.
• Digitization of the world: There are more people in the world with a mobile phone than people connected to electricity; a massive shift from analogue to digital (communication, media, technology – phone bottoms evolved from physical to digital); the mobile workers in the world exceed the population of India.
• Globalization: nowadays it is easier to reach countries far from the company; globalization is often misunderstood: companies want to be global producing the same product (unique and standardized product) for all the countries (economies of scale). Globalization (easier to reach) is different from standardization (do not create value, companies are not competitive). There is a growing nationalism perspective: countries want to protect local markets by closing the system but it is short-term oriented (it will be a problem in the future). Reduction of geographical limits (technology); rise of companies from emerging markets; despite the downturn and concerns over state intervention, companies are still planning geographical expansion; culturally diverse management team.
• Economic crisis starting from 2008: disappearing countries concerning growth rate; several aspects impact the business and we have to think in a totally new way: incremental adaption. It is not a crisis but a permanent and irreversible change which politicians do not understand (austerity). The context is really dynamic. Austerity policy; low/zero GDP growth; loan problems; weak productivity. There are not only threats but also opportunities: after the 1929 crisis, a lot of countries were born.

Strategy and strategic planning: definitions and basic concepts

What is strategy?

The strategy is about planning to achieve a target. The analogy of war: the concept of strategy originates where the objective is to destroy the enemy. Today, we see military metaphors used everywhere in business: price “wars”, market share “battles”, marketing “campaigns”, promotional “blitzes”, and even “bullet” points.

Definition of strategy

“Strategy” comes from the Greek word ‘strategos’ which means generalship. The art of war, especially the planning movements of troops, ships, aircraft, into favorable positions. A plan of action or policy in business or politics [Oxford dictionary].

Military strategy (military metaphor: plan) - the military way of looking at strategy is to view it as the space between policy and tactics:

• Policy is derived from a purpose or cause;
• Strategy is concerned with how to achieve the policy or goal with the means available;
• Tactics are the particular movements and actions while engaged in battle (operational nature).

Sun Tzu, The Art of War, 500 B.C. – ten decisive factors for victory: