STRATEGY & MARKETING

1. Corporate governance

A company is a group of people working together for a specific objective, which transform inputs in
products and services through human, technological and financial resources.

The company is defined by its boundaries: the variety of outputs, the level of integration and the
geography of served markets.

Corporate governance refers to the set of systems, principles and processes by which a company is
governed. It helps to match individuals’ and company’s objectives.

Principles of a Corporate Governance:

- Rights and equitable treatments of shareholders: transfer shares, be informed, vote in meetings,
participate in big decisions, elect and remove board, share profits, have equal rights.
- Interest of other stakeholders: create cooperation and sustainable growth with operators like
employees, investors, creditors, suppliers, local communities, customers, policy makers.
- Role and responsibilities of the board: set goals, watch over big investments, review budgets and
business plans, select key executives, manage conflicts of interest, oversee disclosure and
communication.
- Integrity and ethical behavior: organization should develop an ethical code for choosing and
guiding directors.
- Disclosure and transparency: about results, goals, ownership, board members, remuneration, risks,
information on stakeholders, governance policies.

In Netherlands and Germany, it’s used to split supervisory board (shareholders and employees) from
executive board.

In USA and UK, it’s used a single tired board of directors with executives hired and fired by non-executives,
chosen by shareholders.

Company’s objectives: short-term value, shareholders’ value, economic value, stakeholders’ value.

Short-term value is by definition linked to annual profits and it’s visible from the Annual Report.

Shareholders’ value is the value delivered to shareholders’ because of the ability of the company to grow
earnings. it’s depressing for a stakeholder to know that he is working only for shareholders. Focusing only
on dividends can bring risks like an economic breakdown (like 2008).

Economic value is the ability of the company to generate positive cash flow through the years to come. It’s
driven by profitability, capital efficiency, growth, real options, cost of capital. Can be estimated by NPV.

Stakeholders’ value: The intrinsic or extrinsic worth of a business is measured by a combination of financial
success, usefulness to society, and satisfaction of employees.

Shareholders, management and stakeholders have to mix their perspectives of profit, growth and wellness.

2. Strategy formation

The concept of strategy originates where the objective is to destroy the enemy. “Strategy” comes from the
Greek word “Strategos” which means generalship.
From military we take the concept of policy and strategy:

- Policy is derived from a purpose or a cause;

- strategy is concerned with how to achieve the policy or goal with the means available;
- tactics are the particular movements and actions.

In business, strategy has the scope to create a competitive advantage.

In business, strategy is not about competitors (like in war, sum-zero game), it’s about the customer.

Strategic decision: has long-term effects, requires large amount of resources and involves top
management.

Strategy: an integrated and comprehensive plan, which identifies the scope and the direction of the
organization, looks at long-term performances and integrates a coherent set of strategic decisions.

The Abell Space is a three dimensions matrix to cross what product/service

we want to provide to our customers (who) and in which way (how).

An SBU strategic business unit is a part of the company that

offers a specific output to a specific group of customers, has its
own competitors, can be managed separately and stand-alone
and has its own profit center and strategy managers.

Level of strategy:

- Corporate Strategy defines in which industries and markets the company is going to compete;
- Business Unit Strategy is concerned with how the company competes within a particular industry
or market;
- Functional Strategies are the elaboration and implementation of business strategies through
individual functions.

Companies have three approaches to create value:

- Technology driven approach: innovation is driven by a scientific breakthrough or a technological

opportunity (step 1). The second step is design and producing and the third is selling with pricing
and marketing. Customers are seen as passive actors and the market doesn’t affect the value
generation process.
- Market driven approach: here the first step is value definition in which you identify the benefits
the customer is looking for, you select you target market and you position your value. The second
step is realize the value by developing and producing product and service. The third step is value
communication to customer through personal selling, promotion and advertising. In this approach,
the market takes part of the first and last step. It has a key role and represent a source for ideas.
- Customers as innovators and co-creators: customers as the functional source of innovation. The
market influences the value creation through all the development process.
 Examples: optical gyroscope, M&M’s, Threadless.

In modern markets, there is a consolidated trend to shift value creation from up-stream (focus on the
product/process) to down-stream value (relation with customers).

Up-stream competitive advantage is suffering erosion made by commoditization, outsourcing and

short product life cycle.

The competition is growing and getting harder and the customers are becoming richer and more
focused and being the center of the market.

It’s now fundamental to look at customer experience.

This logical flow of strategy

definition and implementation is
the guide to follow to analyze the
company and the market and to
implement a valid strategy.

The step that we are going to

analyze is the analysis of internal
and external environment by
making a SWOT analysis. We have to
keep in mind how strategy has to be
a link between inside and outside
the company. Long-term goals,
knowledge of the environment and
of resources are the basis of a
successful strategy.

3. SWOT Analysis. The environment, part 1.

Macro environment: PESTE analysis

- Political factors: political stability, antitrust regulation, employment law, tax policy;
- Economic factors: GDP, trends, interest rates, inflation rate, unemployment level, price control,
exchange rate;
- Social factors: demographic changes, life expectancies, birth rate, consumer activism;
- Technological factors: patent protections, industries spending in R&D, productivity improvements
through automation;
- Ecological factors: environmental protection aws, Kyoto protocol, decommissioning costs.

To make out a good PESTE analysis can be useful to give to all possible events a probability of occurrence
(%) and a rate for the goodness of their impact in the next 3-5 years (-5<x<+5).
Macro environment: Macro Demand Analysis

To carry out a macro demand analysis we have first to understand the market qualification (which
market?) and then the demand forecasting.

Needs: a goal of a company is satisfying needs, but what are needs? A need is a sense of privation
compared with the general satisfaction level. According to Attali and Guillame, there are true and false
needs, or needs that can be created. According to Keynes, there are absolute needs, regardless the
situation of others that can be fully satisfied and relative needs, needs of superiority that can’t be fully
satisfied. According to Abbott, there are generic and derived needs, generic needs have a constant growth
path and derived one rise and fall while time passes by.

The desire is an object that can satisfy a need. The demand is made by all the desires, which people can
buy.

Needs derive from sense of privation, which motivates

human beings to go to higher-order needs once they
have satisfied the lower-order ones (homeostasis). In
Maslow’s pyramid needs are ranked by “urgency”.

Different meanings of the term “market”:

- Economic theory: collection of economic operators (buyers and sellers) who interact to make
transactions involving a product;
- Marketing theory: mostly, customer groups. “Customers, current and potential, who share a
particular need or want which could be satisfied by a particular product/service” (Kotler, 1992).
- Other meanings: geographical, demographic, product.

The “6 O” model helps to characterize the market:

- Offering: interprets market needs;

- Occupants: the subjects that forms a market, those who form the demand;
- Occasions: the moment in which the buying process begins and the frequency of purchase;
- Organization: the participants in the buying process;
- Objectives: the scope and motivation of making a purchase;
- Operations: the methods used to make a purchase.

An exchange is the process where two parties exchange something. A transaction is an exchange of value,
with negotiation and economic return. A relationship is the result of a long history of transactions and here
value doesn’t come only from the object of transaction.

To forecast purchases volume we have to give attention to customers, geographic area, lapse of time,
context and marketing.

Demand is affected both by decision-making variables and by environmental variables: firsts are price,
product/service, sales point, publication and personal relationship. Seconds are macro-environment,
economic trends, customers’ disposable income, competition system, position, complementary products,
substitute products.
 Environmental variables can lever the potential
demand, decision-making variables (marketing effort)
can move the company in as S curve under the
potential demand.

Market share= Demand from a company A/ Market demand. Indicates the competitive capacity of a
company.

In estimating the market share, it’s crucial to choose an appropriate system of reference: general market
or niche?

Relative market share: MS of the company/ MS of the market leader.

There are also market shares for awareness and marketing pressure.

Macro environment: market qualification

- Potential market: market achieved when marketing is infinite;

- Qualified market: market with the requisites to be available for the purchase;
- Available market: qualified + interested and rich enough;
- Served market: available + reached by company’s marketing;
- Penetrated market: market that already bought the product/service.

Macro Environment: demand forecasting

There are several kinds of demand forecasting. This because data availability and forecasting objective can
change: if quantitative data are available, we will use quantitative methods; if not, we will use qualitative
methods. Moreover, we can choose to forecast market size of an existing product, demand for new
products or demand for established products.

Market size New products Established products

Quantitative -Coefficient method -Diffusion models -Time series
-Analytical/Epidemiological -Linear regression
Qualitative -“Desk” methods -Gaussian -Market test
-Adoption models -Market research

Coefficient method

Coefficients are parameters representing a past experience or a future expectation on the evolution of a
phenomenon. Methods can be different varying product types or repurchase rate.

Es. Market size (Q) = potential market (N) * coverage (n/N) * penetration (Cu)

Where coverage represent the percentage of effective users and penetration the individual rate of
consumption.
Epidemiologic models

The demand growth of a new product is seen

like an epidemic. Purchasers infect non-
purchasers until the product will infect
everyone.

Gaussian (Roger’s Model)

In the Gaussian model is made the assumption that the number of customers
over time follows a Gaussian distribution.

There are six types of buyers:

- Precursors: buy because the product is new;

- Innovators: recognize its value for money and usefulness;
- Innovative majority: buy with prudence;
- Conservative majority: sceptics;
- Conservatives: affected by tradition;
- Unyielding: affected by rigidity.

Opinion surveys (established, qualitative)

Pros. Cons.
Experts External viewpoint, experience. Statistically insignificant,
potentially costly.
Sales Force Cheap and quick, direct contact Statistically insignificant, only
with customers. internal.
Customers Statistically significant, Costly, long, complex.
unfiltered.

Time series

In time series, you start from data about the past demand and you use extrapolation techniques to
forecast. Extrapolation techniques can be moving averaged (weighted), autoregressive, exponential
smoothing.

Time series take into account the effects of trend, seasonality, cyclicity and randomness.

Casual models

The casual models are based on the concept that future demand of products is a mathematical
consequence of other variables.

Examples are linear regression and logit models (logistic regression).

 4. SWOT Analysis. The environment, part 2.

The external Micro analysis has to be done by looking at customers not as a number but as individuals. The
first distinction to make is to distingue B2C commerce from B2B commerce.

A company has to create competitive advantage by uncovering costs and risks of a transaction and
removing it before competitors.

Explicit costs and risks: linked to money.

Hidden costs and risks: invisible but a pain for customers, reducing them is a key to competitive advantage
when explicit costs are flat in the market. Example: time to buy (cost), not the right product (risk).

The consumer customer

Purchase and consumption is only a little aspect in the life of a man.

The stimuli-response model explains how the customer with his characteristics start from external stimuli
(environmental or marketing) to make his purchase decision.

Cultural and social factors:

- Culture: set of values accepted by a group of people and bequeathed.

- Social classes: characterized by profession, education, source of income and area of residence.
- Reference groups: group that have a direct or indirect influence on a man.
- Family: development of purchase and consumption behaviors, roles within family.
- Roles and status: role of the individual in the groups he belong.

Personal factors: age, occupation, wealth, lifestyle, personality, self-concept.

Decision-making and psychological factors: every buying process is influenced by the psychology of the
customer, which can be divided into perception, motivation, attitudes and learning.

- Perception: process through which one detects, selects, organizes and interprets the information
he/she receives in order to build a personal, significant representation of a situation and of the
world.

Perception is a selective process: exposition  attention  retention  action.

Selective attention: people is more attentive only to particular stimuli that reach his curiosity.

Selective distortion: individuals make a subjective interpretation because of their own preconceptions.

Selective retention: tendency to forget, tendency to retain subjectively the information that were the most
comprehensible, significant and confirmatory of preconceptions.

Cognitive economy explains that customers’ information processing capacity is finite, so they will often
trade off accuracy of results and optimal outcomes for efficiency of information storage and processing
(principle of scarcity). Brand promise is the relationship of trust that makes a customer not think to
alternatives when he is used to a brand.

- Motivation: is the anticipation of the satisfaction that may be obtained by carrying out a
determined action. We can distingue biogenic motivation (hunger, thirst, etc.) or psychogenic
(need to be recognized, esteem, etc.). Moreover, motivation for buying can be rational or
emotional.
- Learning: is the process that includes changes on behavior due to the satisfaction or the
dissatisfaction that ensue from a stimulus.
 - Attitudes and beliefs: a belief is a thought that someone holds about a situation, thing or fact. An
attitude is the tendency to make enduring evaluations (whether favourable or unfavourable) on
objects, ideas, people, situations, etc. attitudes can be of behave, affective or knowledge.

Phases of the buying process:

1. Problem/need recognition: it can be triggered by internal or external stimuli. Marketing has to

advertise;
2. Information search: Searching and gathering information to provide alternatives through internal
sources (past experiences) or external sources (personal, public, marketing). Marketing has to be
direct and provide information;
3. Evaluation of alternatives: Definition of decision criteria (price, perceived brand quality,
performance of the product, exclusivity, etc.). Marketing has to provide instructions and evaluation
criteria;
4. Purchase decision: key factors are point of sale, purchase conditions, customer’s previous
experience, importance of the product, pressure of the sellers. Marketing has to establish
relationship;
5. Post purchase behavior: comparison between expectations and performance/experience.
Marketing has to provide assurrances.

Roles in the buying process:

- Initiator: who identifies the need;

- Influencer: who influence the decision;
- Decider: who makes the buying decision;
- Buyer: who makes the purchase;
- User: who uses the product/service.

Business customers

This kind of market offers some peculiarities: the demand is often derived from at least two lower levels,
so it’s characterized by particular dynamics. The structure is reduced to less clients, stable and
interdependent with the company. The relationship is balanced in negotiation, reciprocally active,
complex and proceduralized.

Customers can be producers, re-sellers, public administration and no-profit organizations.

Factors influencing the business buying process:

- Situational: factors that characterize the type of purchase;

- Environmental: external variables that influence the process;
- Organizational: procedures and settings of the company;
- Interpersonal: roles and abilities of the actors;
- Individual: actors’ characteristics.

There is also difference between task and non-task methods: the firsts and rigid and goal oriented, the
seconds are more flexible and human centered.

Purchase types are characterized in terms of novelty, complexity, uncertainty, importance, specificity and
personalization.

The buying process is similar to the B2C but a bit more complex and with two more phases:

1. Recognition or anticipation of the problem/need;

2. Definition of the functional and technical specifications;
 3. Search for information;
4. Request for an offer;
5. Evaluation of alternatives;
6. Decision;
7. Post-purchase.

The buying roles are the same as B2C but this time it’s not a single person to carry out all the activities but
there is a purchase center.

“Power” signifies the real ability of an individual to change the opinion of others. There are five sources of
power:

- Reward power: ability to offer benefits to who buys;

- Coercive power: ability to impose penalties to who don’t buy;
- Attraction power: ability to persuade;
- Expertise power: ability to convince others because of being famous for being experts;
- Status power: power in the company.

5. SWOT Analysis. The competition (part 3)

Porter’s five forces model

This scheme analyze the forces of competitive pressure for a company: new entrants, substitutes, existing
competitors, buyers and suppliers.

New entrants

The only protection against new entrants are the entry barriers. These barriers are a function of:

- Capital requirements;
- Economies of scale;
- Absolute cost advantage: cost advantages that are irrespective to scale;
- Product differentiation: product recognition and customers’ loyalty;
- Access to channel of distribution;
- Governmental and legal barriers;
- Retaliation (actual or threatened): aggression made by established firms.

Bargaining power of buyers

The buyers’ price sensitivity is a function of:

- The importance of the product in the customer’s cost structure;

- Product differentiation;
- The level of competition among buyers.

The relative bargaining power (potere contrattuale) is a function of:

- Size and concentration of buyers relative to suppliers;

- Switching costs;
- Buyers’ information;
- Buyers’ capability to integrate upstream.
Bargaining power of suppliers

The bargaining power of suppliers is symmetrical with the bargaining power of buyers. In particular:

- Commodity suppliers have limited power unless they resort to cartelization (e.g. OPEC);
- Suppliers of complex, technically sophisticated components may be able to exert considerable
bargaining power;
- The absence of substitutes increases supplier power;
- High switching cost increases supplier power.

Competition from substitutes

Substitutes are products that perform the same function as the product of the industry (e.g. aspartame vs.
sugar). Substitutes limit the potential return of an industry by placing a ceiling on the prices companies in
the industry can profitably charge. The competition from substitutes is a function of:

- Switching costs;
- Different prices;
- Different quality and performances capability.

Existing competitors

The level of competition in the industry is a function of:

- Industry concentration;
- Diversity of competitors;
- Product differentiation;
- Excess capacity and high exit barriers (for economic, strategic, emotional or legal reasons);
- Scale economies;
- Cost structure: fixed vs. variable.

The intensity of rivalry between companies can change for maturity of the market, acquisitions, and
technological innovations.

A sixth force: complements

Complements are products that have to be used together with another product in order to fully satisfy a
need. Complements have a positive impact on demand and value.

The resource-based view (RBV)

This theory explains how resources (or tangible and

intangible assets) are the key driver to create competitive
advantage and value for the customer. Moreover, the
creation of skills, capabilities and competences starts from
resources.

There are 2+3 kinds

of resources:

- Tangible, physical: characteristic production facilities,

location, production flexibility, capacity surpluses, property
and equipment;
- Tangible, financial: receivable from client, cash and cash
equivalents, liabilities, equity;
 - Intangible, human: knowledge and expertise, adaptability, loyalty, availability, performance;
- Intangible, technological: patents, copyright, company’s secrets, R&D facilities, qualification of
employees;
- Intangible, reputation: brands, corporate image, corporate identity, relationship with suppliers,
customer satisfaction.

Not all the available assets are strategic. Resources can be defined “core” if they pass a five steps test
(SADIC):

- Substitutability: can competitors use different resources to achieve superior results?

- Appropriability: can the competitors appropriate these resources easily?
- Durability: are resource useful in the long term?
- Inimitability: can competitors imitate the resource?
- Competitive superiority: does this resource allow the company to reach a superior performance
than its competitors?

Competencies and core competencies

A competence is the attributes that firms require in order to be able to compete in the marketplace, it’s
created by the efficient configuration of resources and all firms possess competencies.

Core competencies derive from the collective learning of individual members within an organization and
their ability to work across organizational boundaries.

To understand if a competence is a core competence we have to analyze three points:

- Interoperability: a core competence should give the company the access to different markets;
- Differentiability: a core competence should make a significant contribution to the perceived
customer benefits of the end products;
- Inimitability: a core competence should be difficult for competitors to imitate.

CSF Critical success factors

“Those resources, skills and attributes of the organizations in an industry that are essential to deliver
success in the market place. Note that the emphasis is on all the companies in an industry”

Not those factors that apply to individual company success.

Value chain

The value chain is a theory developed by Michael Porter that

groups the different kinds of activities made by a company and
divides them between primary activities and support activities.

Primary activities are the activities involved in the physical

creation of the product and its sale and transfer to the buyer,
as well as after-sale assistance.

Support activities support the primary activities and each

other by providing purchased inputs, technology, human
resources and various company-wide functions.

- P. inbound logistic: receiving, storing, listing, and grouping inputs to the product.
- P. operations: activities aimed at transforming inputs to outputs;
- P. outbound logistic: delivering final products.
 - P. marketing and sales: all activities that make or convince buyers to purchase the company’s
products.
- P. service: is to do with maintaining the product after sale. Service enhances the product value and
allows for after-sale (commercial) interaction with the buyers.
- S. procurement: activities to purchase both raw materials and components.
- S. technology development: to research and innovate company’s products and processes.
- S. human resources management: managing people.
- S. company’s infrastructure: refers to general management, planning procedures, finance,
accounting, public relations…

The end of competitive advantage

For years, companies managed their resources with the goal of finding a clear, big and long competitive
advantage, looking for superiority made by first moving, quality, big dimensions.

Now days, competitors and customers had become too unpredictable and companies have to embrace the
notion of transient advantage: creating a smart portfolio of initiatives that can be easily replaced.

What companies should do to create a portfolio of competitive advantages?

- Think about arenas, not industries: there are not anymore clear boundaries and definitions of
different markets. Everything is changing and mixing.
- Set broad themes, and then let people experiment: engage people and their ideas and not base
studies just on data.
- Adopt metrics that support entrepreneurial growth: evolving means even evolve how we judge
results.
- Focus on experiences and solutions to problems: product features are today easily imitable.
- Build strong relationship and networks: relationship with customers is a source of competitive
advantage.
- Experiment, iterate, and learn: fast changing requires being always in a learning process.

6. The competitive advantage

Let’s first have a look at the traditional approach to search competitive advantage for a company. Michael
Porter identifies three main approaches: cost leadership, differentiation and focus.

Cost leadership

It’s a basic strategy based on low cost position achieved through aggressive cost reduction and high market
share.

The sources of cost advantage are:

- Economies of scale: it’s the phenomenon of decreasing the unitary cost by increasing the
production volume.
- Economies of learning: be able to do something because you did it many times. Learning concerns
to both individuals and company.
- Process technology and process design: technology can improve processes but even BPR (Business
Process Redesign) can help dramatically.
- Product design: standardization and design-for manufacture.
- Input costs: being big guarantees a company to have some advantages in the supply market.
- Capacity utilization: capacity has to be both exploited but flexible.
- Managerial organizational efficiency: you have to be able to reach high goals in term of efficiency.
Cost leadership and the five forces:

- Threat of new entrants: avoided by economy of scale.

- Bargaining power of buyers: buyers can be convinced by decreasing prices enough to avoid any
reasoning of switching.
- Bargaining power of suppliers: first, the company must be able to absorb cost increase and then
make huge purchases can reduce the power of suppliers.
- Substitutes: by investing in R&D and patents you can do yourself your substitutes or you can keep
the price lower than any substitute.
- Existing competitors: competitors will avoid price wars against the cost leader.

Cost leadership and risks:

- Technological change that nullifies past investments or learning.

- Low-cost learning by new players (or followers) through imitation.
- Inability to see required products or marketing change because of attention placed on cost.
- Inflation in cost that narrows the price differential.

Differentiation strategy

In this approach, you mix unique features of products and high customer service to command a premium
price. You keep high quality, so you refer only to a little exclusive market. To keep this approach well done
you have to be rapid in innovations.

Tangible differentiation is concerned with the observable characteristics of a product or service that are
relevant to the customers.

Intangible differentiation concerns the social, emotional, psychological considerations that affect
customers’ choices.

Factors that drive differentiation: unique product features, unique product performances, exceptional
services, new technologies, quality of inputs, exceptional skills or experience, detailed information,
extensive personal relationship with buyers and suppliers.

Differentiation strategy and the five forces:

- Threat of new entrants: it can be difficult to develop new products with same performances but
lower price.
- Bargaining power of buyers: because of different products, the price sensitivity is not so high.
- Bargaining power of suppliers: absorb price increase in high margins or increase final product price
and trust on customers’ loyalty.
- Substitutes: customers’ loyalty will reduce the will to change.
- Existing competitors: brand loyalty will avoid price war too.

Differentiation and risks:

- Cost differential with low-cost competitors becomes too great undermining brand loyalty.
- Customers become more sophisticated and their need for the differentiating factor falls.
- Imitation narrows perceived differentiation.
- Makers of counterfeit goods may attempt to replicate differentiated features of the company’s
products.
Focus strategy

This approach is developed when a company wants to reach a narrow strategic target (niche). The
assumption is to serve customers more efficiently or effectively than a big company, using both
differentiation and low costs. Focus strategy is a continuous trade-off between profitability and sales
volume.

Focus strategy and risks

- The cost differential with wide range competitors can eliminate the cost advantage of serving a
narrow niche or offset the differentiation achieved by focus.
- Company can get wrong in understanding and/or producing the right response to niche’s
customers’ needs.
- A competitor can attack a submarket within our niche.

As we already noticed a few pages up, it’s not enough anymore to focus only on competitive advantage. The
value is moving from upstream to downstream, so from product to customer.

The big picture

Value is created by uncovering the hidden costs and risks related to commerce. Moreover, every company
has a higher see of the market than customers’ have because a company can see many different but similar
cases. Each customer holds a piece of a puzzle and the entire puzzle reveals a big picture, a larger meaning.

Watch at the market not as a target but as a phenomenon allow companies to extract hidden value, even
using precise tools:

- Relaying and connecting: take information and pattern from an existing situation to better face new
experiences.
- Benchmarking and mirroring: it’s a process of acquire information and then give them back to
customers in a smart way, helping them to understand what and how they are doing.
- Predicting: the most sophisticated use of marketplace data lies in discerning patterns that can help
predict future trends.

7. Segmentation & targeting

Today’s markets are both very broad and too much differentiated inside, so sometimes you can’t do
undifferentiated marketing but neither one-to-one marketing approach. This is the key driver for modern
segmentation.

Segmenting is the simple process of identifying groups of similar customers that can be homogeneous in
responding to a marketing stimulus.

Segmentation is a marketing process through which the company divides the market into various sub-
groups –with different demand profiles but internally homogenous– on the basis of which management
develops specific marketing plans to best satisfy their requirements.

A market segment has to have two basic characteristics: internal similarity (every member of the segment
has to have some common aspects with others), external diversity (none of the outsiders has the peculiaritis
of the segment).

To choose or evaluate a good market segment we have to test if it has five characteristics:

- Measurability: it must be possible to measure the size and buying power of the segments.
- Accessibility: real possibility of obtaining the segment using marketing actions.
 - Homogeneity: within the segment as regards one or more characteristics (describers),
heterogeneity compared with other segments.
- Importance: a segment large enough to justify a targeted marketing action.
- Duration: possibility of exploiting the segment for a particular period of time.

Advantages of segmentation: the diversity of a broad market will be reduced, so it will be more efficient to
focus resources and professionals. Segmentation means even be more expert and strong in the segment, so
we will create some entry barriers, to protect the market share during time. Customers will be more
satisfied, marketing and risk more focused and controlled.

Disadvantages of segmentation: every segment needs its own differentiated product. This means more
projecting costs (R&D, engineering), more production costs and more stocks. Moreover, there is the risk of
inefficient resources exploitation (duplication). Of course, even service costs will grow, for example
advertising, market research, and distribution.

To use segmentation and save money from differentiation companies try to standardize and modularize:
high external variety but low internal variety.

Segmentation can be done approaching by product or by customer and with mathematical or heuristics
methods. The segment obtained has to be validated and descripted and a product/market matrix is done.

Segmentation by product is good because it’s simple, immediate, clear and comprehensible. It’s bad because
it doesn’t consider the variable related to the customer’s characteristics, it doesn’t show well the competition
among products and it’s simplistic.

Segmentation by customers can be done approaching by characteristics, behaviors or needs. Different

methods are used for B2B or B2C market.

B2C markets

Approach Type of characteristics Example of variables

Customer Socio-demographic Age, gender, family size, family role, income, occupation,
characteristics social class, religion, etc.
Geographic Continent, country, region, type of residence and work area,
population concentration, etc.
Psychographic Personality, lifestyle (es. VALS test)
Customer Product usage User/non-user, brand-user/non brand-user, intensity of
behavior usage, type of usage, time of usage, etc.
Buying process Frequency of purchase, point of sales used, duration of
purchase process, participants in the purchase process,
loyalty to brands or distributors, etc.
Customer Benefits sought Price, quality, safety, variety, functionality, convenience,
needs entertainment, indulgence, status, etc.

Once segmentation by characteristics is done, we can use it for estimate the size of the segment; assist in
product design and pricing; provide implication for the content and channel of marketing communication;
aware of ethically; politically; religiously sensitive issues.

Once segmentation by behaviors is done, we can use it for sustain the usage of current users and convince
non-users; understand if customer’s loyalty is to the company or to the point of sale and react; understand
the roles and psychology behind the purchase process.
Once segmentation by needs is done, we can use it for design product and marketing to satisfy customer’s
needs and communicate it.

B2B markets

Approach Type of characteristics Example of variables

Customer Socio-demographic Company size, sector, type of activity, type of management,
characteristics etc.
Geographic Continent, country, region, location (industrial/non-industrial
area), etc.
Customer Product usage User/non-user, consumption volume, product application type,
behavior etc.
Buying process Purchase lot size, complexity of buying process, roles in burying
process, distributor to purchase from, loyalty to distributors,
etc.
Customer Benefits sought Punctuality of delivery, speed of delivery, supply continuity,
needs technical support, certification, price, level of customization,
etc.

For both B2C and B2B when a segmentation process starts it’s useful to focus on more than one single
approach. In fact, to fully satisfy customers, we have to know their characteristics, behaviors and needs.

Statistical-mathematical segmentation methods

These methods require data of the market to feed mathematical methods and algorithms.

There are always three main steps:

- Survey research: qualitative research to collect data;

- Data analysis: to eliminate correlated variables and define clusters;
- Segment profiling: description of the segment the key characteristic of customers.

Heuristic segmentation methods

Empirical (generally qualitative) methods based on the experience of the marketer. We will see three specific
methods:

Successive elimination approach (Porter). In this method, you start from all the possible segmentation
variables on a market. Segments are created removing from all the possible combinations of variables those
combinations that are nonsense (es. Expansive goods for poor people). This is the complete process:

1. You make a list of all the possible segmentation variables;

2. Variables identified as relevant are compared in pairs using a matrix;
3. Unimportant “crossovers” and contradictions are eliminated;
4. Variables are gradually combined to reduce the number of combinations;
5. Products are entered according also to the different use functions;
6. The final product-market (segments) matrix is built.

Two phase approach (Wind and Cardozo). Segments are created by passing the market in a two-filter system.
The first is a macro segmentation based on external characteristics and purchase situations. The second is a
micro segmentation based on the characteristics of the individuals.
Multi phase approach, “Nested approach” (Bonoma and Shapiro). It’s a five step hierarchical approach. The
more we move toward the center, the more it’s difficult to find information.

Once the market has been divided into segments, it’s important to define and qualify those segments. For
each segment, we have to estimate: product, size, customer characteristics, level of purchase/year, buying
process methods, roles in the buying process, customer’s principal needs, current/expected trends and
developments.

Targeting

Not all the segments have the same appeal for a company. It’s important to identify the right segments to
attack. This is the targeting marketing process. Criteria for target markets are:

- Size;
- Expected growth;
- Competitive position;
- Cost to reach;
- Compatibility with the organization’s objectives and resources.

A crowded segment is a segment attacked by all the companies in the market.

To choose the target segments it’s useful to analyze segments using a two variable matrix: attractiveness of
the segment and compatibility of segments with company’s strategies and resources.

High-interest segments, but high Segments with high

Attractiveness H
investment entry/presence priority
of the
Segments to defend only with
segment L Segments of no interest
marginal spaces (self-financing)
L H
Compatibility of segments with the company's new strategies and resources

There are three main marketing approaches to

segments:

- Undifferentiated: cost leadership for the

entire market;
- Differentiated: differentiation strategy;
- Concentrated: focalization strategy.
 It is possible to look at targeting strategies in more
detail by identifying five possible approaches:
- Single element: focus only on one product for one
target;
- Product specialization: one product for all the
different segments;
- Market specialization: all products for one specific
segment;
- Selective specialization: one product for each
segment;
- Total coverage: whole market.

Of course marketing strategies change for different levels of

segmentation.

8. Positioning

After the phases of segmentation and targeting where a company analyze and select the market segments
to attack, positioning is the phase through which a firm decides how it wants to be perceived by the
market. The position that we are talking about is the customer's mind.

Using Kotler's words: "Positioning is the act of "drawing" the firm's offer and image in a way to be set in a
precise position in the target customer's mind"

We are not alone in the market, so positioning has to take into account that the customer will always
compare our offer with the competitor's one.

There are two levels of positioning:

- Strategic product positioning: analyzing the strength of the product positioning into the customers’
mind and its differential elements towards competitors;
- Strategic portfolio positioning: analyzing the products/brands mix in a portfolio strategy
perspective.

Positioning is a process that allow the company to understand what are the important factors for
consumer's choice, how he react to competitors' offer and how to find space and build a distinctive offer
in the market.

Positioning allows the company to create a good and coherent marketing plan and to find new
opportunities (niches).

Some wrong business myths about positioning:

- The better product wins over competitors: it's quite always nonsense to talk about an absolute
"better" or "best" product. Every customer has his own evaluation criteria. You have to focus on a
target and move your product and its image near to what customers want.
 - You can't choose your competitors: pricing, emphasis on different criteria and comparison or
independent positioning are drivers to place the product/company within different sets of
competitors.
- Innovation means better product and technology: again, it's the customer itself that choose how
he evaluate products, there is no constriction to buy the most technologically advanced product. To
innovate doesn't mean to advance but to create some new form of value for customers.

Positioning tools

Perception map: the perception map is a graph with two couples of

relevant attributes. By placing your offer and competitors’ ones, you
understand where you are now and what are the free spots that you can
evaluate to attack.

Value curve: it synthetize the perception of

products/services taking into account several features.

Positioning with success is a process that can’t be done without address to a precise customers’ segment;
link the product to a “mental category” that customer already know; be delimited and defined; be simple
and clear; have a clear competitive advantage; be long-lasting; be coherent.

Re-positioning

External factors like environment, demand or competition can bring a company to decide to change its
position in the market. Re-positioning is done when radical change of customer or competitors’ strategic
movement occurs. Re-positioning means to change the image perceived by customers, and it’s a difficult
and risky process because the current state is usually deep-stated in customers’ mind. To do a good job is
useful to keep a constant contact with the past to facilitate the process of identification.

Re-positioning strategies

Change the perception on one or more feature through one or more

marketing leverage.

New product launch on different segments (with different perceptions

among customers).
 Focus on the same product, extending the perceptions on the product.

Value proposition: is the sum of the ideas behind a product. It contains the reasons why our
product/service should be chosen to the detriment of competitors’ one. It contains the customer’s
perceptions and the ways through which her need are satisfied and value is created. it’s the base to build
the marketing mix.

9. 10. Corporate strategy

Corporate Strategy has to deal with the following scopes:

- Product scope: how specialized should the company be in terms of the range of product it supplies?
(e.g. Coca-Cola is specialized while GE is diversified)
- Geographical scope: what is the optimal geographical spread of activities for the company?

Modifying the product scope

There are three strategies for a company that already operates in a market and wants to introduce new
products:

- Concentric: introduce new products related to the ones already produced. Core competences will
help developing good products and being these products complements this introduction will help
to sell both new and old products. New products can even balance seasonality or cyclicality of old
ones. This approach can be useful to energize mature and low-growth markets.
- Horizontal: introduce new, unrelated products for existing customers. The meaning of this
approach is to exploit the distribution channel that the company already has to easily market new
products when the demand of existing ones is saturated. New products will balance seasonality or
cyclicality of old ones.
- Conglomerate: introduce new, unrelated products. When the actual market is saturated and the
company sees some unique opportunities of business. Core competences would make products
very competitive and extended activities would avoid monopoly laws. New products will balance
seasonality or cyclicality of old ones.

Two main typologies of business portfolios exist:

- Unrelated portfolio: every product has its own market and distribution channel. It’s good because
of “bank effect”, transfer of human resources through different BU, risk diversification in different
markets’ trends, sharing of infrastructural activities. It’s bad because the organization is very
complex, there are different cultures operating, and there are not many synergies.
- Related portfolio: all products belong to the same market. It’s good because you can share resources
and create economies of scale and scope, share competences and concentrate on similar target
markets. It’s bad because the risk is high and concentrated and it’s a very complex system to
manage.

Actually, most of the companies doesn’t have strictly one or another type of portfolios but they are in an in-
the-middle situation.
In the last years there is a trend of refocusing only on core business after a diversification era (from ‘50s to
‘80s).

Portfolio analysis

Portfolio analysis is designed to help a company make decisions on market selection and direction in an
integrated manner for all its businesses. Analogously, a business may use portfolio analysis to develop
integrated plans for its products.

The question of market selection and direction are naturally thought about in terms of two primary factors:
some measure of a market’s attractiveness and some measure of a business’s competitive position within
the market.

There are some general assumptions to do about portfolio analysis:

- There are certain key characteristics on which products and markets can be meaningfully compared
(e.g. market share);
- These characteristics are related to performance measures (e.g. profitability);
- It’s necessary to invest in a product to achieve these characteristics;
- Companies are limited in their investments;
- The portfolio can be internally cross-subsidized. Products receiving investment resources today will
eventually yield surplus resources to subsidize other products in turn.

BCG Matrix

The growth-share matrix describes products in terms of just two

factors: market growth rate and relative market share.

This positioning is often influencing the cash flows of a company

because the market growth affects the cash outflows for
investments in R&D, marketing, etc. and relative market share
affects cash inflows because of the sales amount.

Let’s see the four main possibilities of being in the matrix:

- Stars are products with high growth and high share so they
have good incomes but huge outcomes and maybe they still need
external financing.
- Cash cows are products with low growth and high share so they often have big net profits.
- Question marks are products with high growth and low share. They need large investments to
survive and growth.
- Dogs are products with low share and low growth. They are often traps since they often require the
reinvestment of all the revenues they generate.

The BCG matrix method is based on four assumptions:

- High market share means high margins and vice-versa;

- Sales growth requires investments to adjust capacity;
- Market share growth requires investments to adjust marketing expenditures;
- Every market will occur in maturity and end its growth.
 As we said, product lifecycle always do its job and so
every product will always become a cow or a dog.
Only cows make considerable profits, so it’s a
company’s priority to invest in stars and question
marks to make shore they will maintain or gain their
leadership in market share until they will become
cows. Founds for investing are guaranteed by
current cash cows. Dogs need dedicated strategies,
often harvest or divest.

GE/McKinsey Matrix

It’s another 2 dimensions matrix to

compare investment opportunities. This
time dimensions are market segment
attractiveness and business strength. It’s
used to build a 3x3 matrix. For estimating
the two values we take into account several
different variables.

The algorithm to calculate business

strength and industry attractiveness is
simple:

- You decide all the variables to take into account, divided for the two categories;
- For every category you weight the variables so that the sum of the weight scores is 100;
- For every variable you evaluate the strength of the company with a 1<=x<=10 score;
- You sum all the weighted scores to obtain the final value of the category (1<=X<=10).

Here some examples of variables:

Market segment attractiveness Business Strengths

Market size Relative market share
Growth rate Price competitiveness
Profit margin potentials Product or service quality perception
Competitive intensity Marketer’s knowledge of customers and the market
Cyclical or seasonal sales Sales effectiveness
Position on learning curve Geography coverage

Once you estimate the attractiveness and strength, you fix the results in the matrix. After this, it’s crucial to
choose the right strategy:

1. Premium Invest / Grow. These businesses are a target for investment, they have strong business
strengths, are in attractive markets and they should therefore have high returns on investment and
competitive advantage. They should receive financial and managerial support to maintain their
strong position and to continue contributing to long-term profitability.
2. Selective Invest/ Grow. Businesses in this box have good business strength in an industry that is
losing its attractiveness. They should be supported if necessary but they may be self-supporting in
cash flow terms.
 3. Challenge Invest/ Grow. Businesses here are
in very attractive industries but have average
business strength. They should be invested
into improve their long-term competitive
position.
4. Protective Selectivity / Earnings. Strong
businesses in unattractive markets should be
net cash generators and could provide funds
for use throughout the rest of the portfolio.
Investment should be aimed at keeping these
businesses in a dominant position of strength
but over-investment can be disastrous
especially in a mature market.
5. Prime Selectivity / Earnings. Businesses with average business strengths and in average industries
can improve their positions by creative segmentation to create profitable segments and by selective
investment to support the segmentation strategy. The business needs to create superior returns by
concentrating on building segment to differentiate themselves.
6. Opportunistic Selectivity / Earnings. These businesses are in very attractive markets but their
business strength is weak. Investment must be aimed at improving the business strengths. These
businesses will probably have to be funded by other businesses in the group, as they are not self-
funding. Only businesses that can improve their strengths should be retained if not they should be
divested.
7. Restructured Harvest/ Divest. They have average business strengths in a nun attractive market and
the strategy should be to harvest the business in a controlled way to prevent a defeat or the business
could be used to upset a competitor.
8. Opportunistic Harvest / Divest. Businesses with weak business strengths in moderately attractive
industries are candidates for a controlled exit or divestment. Attempts to gain market share by
increasing business strengths could prove to be very expensive and must be done with caution.
9. Harvest / Divest. These businesses have neither strengths nor an attractive industry and should be
exited. Investments made should only be done to fund the exit.

Geographical scope

As we saw at the beginning of the paragraph, corporate strategy is divided into product and geographical
scope. Let’s now have a look at this second aspect.

In recent years, there is a clear trend of companies to expand their market boundaries worldwide. Of course
this choice is justified by several reasons:

- Expansion of the business because internal markets are saturated and too small;
- Access to resources and production input for those companies that need raw materials they can’t
find in their homeland;
- Business portfolio balancing (balancing risk): the same product can be in different stages of the
lifecycle in different markets. This guarantees long-term stability and the global penetration avoids
risk of economic/technological/socio-political problems;
- Search for efficiency: economy of scale, economy of scope, resources purchasing;
- Market expansion: needs, preferences, customers and distribution channels are becoming
worldwide accessible and similar so it’s easy to transfer marketing and sales;
- Technological innovation: access to critical technological skills for innovating and sustaining its
competitive advantage;
 - Benefits of positioning: trade-off between high and low profitability in markets with different
importance.

Internationalization is not only good: the fall of entry barriers and rivalry among existing firms increase and
buyers acquire more bargaining power. Therefore, usually profitability decrease.

To define a precise internationalization strategy it’s important to select both the geographical location
(where) and the modes of international expansion (how).

The selection of the geographical location

Decisions related to the geographical location should take into account three main factors:

- Influence of national resource: for a company it’s convenient to locate near the resources needed
to produce and create competitive advantage (es. Low cost labor in far east for Nike);
- Specificity of the competitive advantage: The advantage of location, for firms whose competitive
advantages stem (radice/si radica) from internal resources and skills, depends on where they can
make the most of such skills;
- Asset transferability: divide production plans and target markets location is held back by
transportation costs, preferences of customers of internal production and importation barriers
made by governments.

Porter’s diamond of national advantage

This is a more sophisticated tool to estimate a country’s

advantage within a particular sector. Let’s see the key
factors:

- Factor conditions: the availability of competitive

resources like skilled labor or infrastructures;
- Demand conditions: the home-market of the
particular sector;
- Related and supporting industries: the presence of
suppliers or others that can create competitive advantage;
- Firm strategy, structure and rivalry: the conditions
in the nation governing how companies are created, organized and managed, as well as the nature
of domestic rivalry.

Every production process is made by several links of a supply chain and every link has its own “best place”
to be. The good choice is a trade off between the ideal location of every link and the importance of the
relationship between the activities.

Modes of international expansion

There are many ways to enter a foreign market such as export, trademark and licensing or direct investment.

Some questions will help the choice:

- Is the competitive advantage specific to the company or rather it is linked to the host country?
- Is the product transferable? Are there barriers to import?
- Does the company have a full range of resources and expertise to establish a competitive advantage
in the foreign market?
- Are the firm’s resources easily appropriable?
- What is the nature of the transaction costs involved?
Strategic-organizational model of a global firm

The strategic-organizational model selection comes from the prevalence of determinants of integration or
local responsiveness:

Determinants of integration Determinants of local responsiveness

Presence of key international customers
Presence of international competitors
Investment intensity
Technological intensity
Needs/opportunities regarding cost reduction
Markets homogeneity
Concentration of raw materials sources
Differences about consume needs
Differences about distribution channels
Presence of substitute local products
Markets fragmentation
Needs of local governments

The result of this trade off are three main configurations:

global model, international model and multinational model.

Multinational model

It tries to differentiate its products/processes to satisfy the different local customers’ needs and
political/economical/social situation.

The company is spread in local business units with relative autonomy on production and innovation.

The central management considers different BU as a portfolio of different products and in monitoring, is
mainly focused only on financial aspects. The operative business is managed and done in loco.

Advantages Disadvantages
High flexibility and ability to effectively respond to Low efficiency and difficulty in exploiting on a global
local needs. scale knowledge and expertise held by the parent
company and the local subsidies.

Global model

It tries to exploit the huge potential of a global economy of scale by neglecting the differences between
different markets. It’s a very concentrated system where all the activities except for logistics and selling are
done in a single country.

Because of the proximity of central management and operating resources, the managerial control is high
and affects decisions and information flow.

Advantages Disadvantages
High efficiency obtained by the exploitation Limited flexibility, risks related to the protectionist policies
of economies of scale. by the countries that import the firm’s products and risk
related to the exchange rates fluctuations.
International model

It consists in the transfer of centrally developed products to other countries where they may be adapted to
local needs. It requires both a strong central nucleus of critical resources for product developing and
production and the development in foreign countries of those resources that are necessary to adapt the
new products and services to local needs.

The central management must have administrative control with an international mentality. Many assets,
resources, responsibilities and decisions are still decentralized, but controlled by the headquarters.

Advantages Disadvantages
Ability to take advantage of the wealth of knowledge Poor flexibility and efficiency compared to the
and expertise of the parent company on a global scale. multinational and global models.

Merges & acquisitions

Changes in geographical or product scope can be made by internal growth or external growth when the
company modifies its boundaries.

Types of M&A:

- Acquisition: acquire a controlling stake in a target company. It can be good to think about if the
opportunity is not going to last, the target is undervalued, it will ease entry in a new market, skills
and competences are complementary, the target fits and enhances the company’s portfolio;
- Joint venture: join forces with another company. It can be good to think about if it will ease entry to
a new market, skills and competences are complementary, you are not ready to commit to a full
blown acquisition, additional resources are needed for a compelling project;
- Divestiture: sell a whole business unit. It can be good to think about if the unit needs more resources
and capital that you can provide.

Acquisitions have at least three advantages compared with internal growth:

- They are faster to accomplish because the target company already exists and works;
- There is more information available to evaluate is goodness of acquisition respect to an internal
investment;
- Developing necessarily linked with failing. If you buy an already completed reality, you don’t occur
in failing developing costs.

In M&A you can found yourself both on the buying side or in the selling side. If you buy, you can go for
friendly or hostile deal; you can pay in cash or shares; you can seek total ownership (100% of shares) or
simple majority. If you sell, you can run an auction or focus on one specific buyer; you can sell totally or
remain as a minority shareholder; you can sell to the SBU’s management, usually backed up by a financial
investor; you can distribute the shares in the SBU to the shareholders (”spin off”).

There are four critical decisions that make or break a deal:

1. How should you pick your targets?

2. Which deals should you close?
3. Where do you really need to integrate?
4. What should you do when the deal goes off track?
Reasons for making acquisition:

- Increase market power: when you grow in quality or when you reduce unitary costs. It derives from
the size of the firm and its ability to compete. Market power increases by horizontal acquisitions,
vertical acquisitions and related acquisitions.
- Overcome barriers to entry like economies of scale, product differentiation and customers’ loyalty.
Making a cross-border acquisition of an existing firm may be more effective than entering an existing
market with a new unfamiliar product.
- Cost of new product development: to design, develop, produce and market a new product is a long
and very expansive process. An acquisition is a fast and less risky diversification and redesign of the
company’s scope.
- Lower risk compared to developing new products: acquisitions are more easily evaluated in terms
of risk and outcomes. Therefore, it’s easier for managers to choose.
- Increase diversification: it’s easier and quicker to develop new products relying on a company with
different know how and distribution channels.
- Reshaping the firm’s competitive scope: it may be useful for a company to diversify its portfolio and
not be dependent on just a few products and markets and their volatility. Again, acquisition is a
quicker, easier and more informing way than internal development.
- Learning and developing new capabilities: acquisitions can be done specifically to gain a particular
capability, resource or knowledge that belongs to the target company.

Value creation in acquisitions

Value can be created by stand-alone improvements or synergies. Many acquisitions fail in creating value
and destroy shareholders’ and company’s capital.

The scope of an acquisition has not to be

only to invest capital but it should be a
possibility to mix internal and external
competences and resources to create
value through synergies. An acquisition is
good when the new big company creates
something bigger than what the two
separated companies can create standing
alone.

There are many types of synergies

- Cost saving or “hard synergies”: the most common type of synergies, easy to estimate. They often
come from eliminating jobs, facilities, and related expenses that are no longer needed when
functions are consolidated, or they come from economies of scale in purchasing.
- Revenue enhancements or “soft synergies”: the goal is to achieve higher sales together than each
company on its own can do. Sometimes the target is attractive because of its higher-level products
or complements, sometimes for its distribution channel. It’s hard to estimate their value.
- Process improvements: they occur when managers transfer best practices and core competencies
from one company to the other. That results in both cost savings and revenue enhancements. The
transfer of best practices can flow in either direction.
- Financial engineering: an example is when a transaction allows the Acquirer to refinance the
Target’s debt at the Acquirer’s more favorable borrowing rate, without negatively affecting the
Acquirer’s credit rating.
Synergies are part of the value so they are taken into consideration during evaluation and negotiation. To
estimate an acquisition it can be useful to look at Porter’s Value Chain and how it will change in the new big
company. Moreover, synergies can materialize only through a successful integration.

Problems with acquisitions:

- Integration difficulties: first it’s difficult to mix different cultures and resources organizations, then
it’s difficult to build effective relationship through new colleagues and to re-assign roles.
- Inadequate evaluation of target: it’s both about failing to esteem the target’s value and failing to
esteem the complementary costs of making an acquisition.
- Large or extraordinary debt: debts are risky, expansive to sustain in years and they can remove the
possibility to start new projects.
- Inability to achieve synergies: firms tend to underestimate indirect costs of integration when
evaluating a potential acquisition.
- Too much diversification: many information flows can bring managers to ignore them and focus only
on financial results to evaluate business units.
- Managers overly focused on acquisitions: managers during an acquisition may forgot that they
firstly have to manage the core business. Moreover, acquisitions can scare management and create
- Too large: Additional costs may exceed the benefits of the economies of scale and additional market
power. Larger size may lead to more bureaucratic controls. Formalized controls often lead to
relatively rigid and standardized managerial behavior. Firm may produce less innovation.

11. Branding

“A brand is a brand name, a term, a symbol, a design or a combination of these, that aims at identifying
the products or services of a company, or of a group of companies and at differentiating them from those of
competitors”

Today’s markets are hyper-competitive so branding is important to create loyalty and define a clear and
coherent value proposition to be transferred to the market.

How to build a brand:

1. Identify the target segments;

2. Fix the ideas that the brand has to transmit;
3. Extract from the brand identity its design and marketing mix;
4. Communicate the brand to the market;
5. Shape the whole brand to all stakeholders;
6. Create the brand equity.

Brand positioning

Brands should make people understand the position of a company, but today there are so many brands that
even brands need their own positioning.
 - Phase one: defining a competitive frame. Understand the target market and the competing brands.
To identify the real competitor brands we have to analyze what brands the customer take into
account when he think to a purchase.
- Phase two: defining points of parity (POP) and points of difference (POD).
POP: characteristics and performances in which the company is similar with competitors. Category
POP are features perceived as necessary to be an alternative in the market. Competitive POP are
features introduced to neutralized competitors’ POD.
POD: characteristics and performances in which the company is different with competitors.
Upstream POD refer both on efficiency and cost saving and on quality of the product. Downstream
POD refer in knowledge and relationship between firm and customers.

Managing brand portfolio

The brand portfolio is the set of all the brands of a company.

The brand architecture is the way different brands in a portfolio are related, taking into account brand
groups and internal synergies.

Managing a brands portfolio means:

- Decide the number of brands;

- Decide the role of each brand;
- Define relations among brands.

Managing a brands portfolio impacts on:

- Resources: decide a priority for brands in assigning R&D and marketing resources.
- Efficiency: economies of scale and scope;
- Growth: defining priorities of target markets;
- Leverage: exploit the brand extension leverage.

There are many types of relations between brands:

- A unique brand for the whole organization;

- Endorsed brand: the “parent” brand supports the “son” brand;
- House of brands: the “parent” brand has poor visibility in the “son” brands.

A good brand portfolio has to perform as a good soccer team. Each brand covers its box (target market)
without overlapping and all the brand play together to contribute to company’s victory.

This utopia is often far from the real situation, made by overlapping and free market boxes.

Remarks on brand positioning

Companies are jealous of their upstream POD and they try to build walls to keep their know how inside.
They can do it but working this way their abilities are hidden even to customers and upstream value can’t
be visible and useful to build downstream value and grow visibility and sales.

When you innovate or develop a new product, you have to take care about customers’ perception and the
learning principle of scarcity. Being the first mover in a new market doesn’t mean always to be advantaged.
You have to build a strong brand image and translate the value you created in the value customers want.

12. Marketing mix, introduction and product

Marketing strategy is the definition of the value proposition that the company wants to give to the market.
It’s tied with corporate strategy and customers’ needs.
Marketing mix is a way of interpreting operational marketing, or rather to translate marketing strategy
into effective decisions.

A famous marketing mix model is the 4P model, dividing operational marketing into product, price,
promotion and place.

This model comes from 1960 and in 50 years, it has been improved:

- There is a fifth P: personal selling or relationship, the story and loyalty between firm and
customer;
- There are service marketing Ps: people, who gets in contact with the customer is part of the offer;
process; physical evidence, the physical place where you sell your product or service.

Product

Narrow view: A product is the object resulting from transforming activities using materials into a good that
can be offered on the market to satisfy wants or needs (Giacomazzi, 2002).

Broader view: A product is something that can be offered to a market to satisfy a want or a need. Products
that are marketed include physical goods, services, experiences, events, persons, places, properties,
organizations, information and ideas” (Philip Kotler).

The product is a tradeoff between company’s world (product = how it’s made) and user’s world (product =
set of attributes that solve a problem).

There are several drivers to classify a product, here we see a few of them.

Durability and tangibility:

- Durable goods;
- Non-durable goods;
- Services.

Consumer goods:

- Convenience goods: purchased frequently and with minimum effort;

- Shopping goods: goods the customer compares on such bases as quality, price and style;
- Specialty goods: have unique characteristics for which buyers are willing to make a special
purchasing effort;
- Unsought goods: goods a customer does not normally think of buying.

Industrial goods:

- Material and parts: completely absorbed by the final product;

- Processing material: enter the product partially, not easily recognizable;
- Long-lasting goods that facilitate developing or managing the finished product;
- Business services: do not enter in the product;
- Short-lasting goods and services that facilitate developing or managing the finished product.

Service

A service is an activity or series of more or less intangible activities which usually, but not always, involve an
interaction between the customer and the providing personnel and/or individuals or goods and/or systems
of the providing entity, for the purpose of providing solutions to a customer’s problem. (Giacomazzi, 2002).
Services are characterized by intangibility, non-storability, simultaneous and contextual production and
consumption, labor intensity, variability, higher difficulty in gaining customer loyalty.

Service providers:

- Public institutions: police, post, hospital;

- Private non-profit organizations: school, museum;
- Industrial organizations: banks, airlines.

If we look the nature of the market more in detail, we discover that today just a few transactions are of
products only or service only. Often, a company provides a mix of the two:

- Tangible basic goods: low differentiation and little service required (commodities);
- Tangible goods and added service: added services are important for products with higher complexity
and differentiation (car);
- Mixed tangible and intangible offering: both product and services are of significant importance
(restaurant);
- Service with some goods: service is the main offer with some facilitating goods (airlines);
- Pure service: main offer is the service with little products involved (baby-sitting).

Services can be made and used by different actors. The table below brings some examples:

As products, even services have a concept, a state that defines what the service does, who is aimed at and
what it means for the customer.

Factors that characterize a service:

- Method of provision: services with the same function may be offered and provided in different ways,
depending on the philosophy of the service provider;
- Speed of provision: it influences the duration of the intervention;
- Assurance of results: tendency to go from a “provision logic” to a “result logic”.

From the customer’s point of view, there are three phases in purchasing a service: before purchasing, service
encounter and after purchasing. During all the phases of a service, the customer will be worried about risks
of different natures: performance, financial, time loss, opportunity, psychological, social, and physical.

A company has to work on two sides: first, it has to reduce negative consequence and provide a reliable
quality service and then it has to reduce the uncertainty that the customer feels when he face a new service
purchase.

Key drivers to success are quality controls and branding, to create and communicate the strength of
company’s services.
In the three phases of the service purchase, it’s important to stay close to the customer, understand his
needs and explain what is happening. Customization and after-purchase following are always drivers to
competitive advantage.

Experience

Customer experience originates from a set of interactions between a customer and a product, a company, or
part of its organization, which provoke a reaction. This experience is strictly personal and implies the
customer’s involvement at different levels (rational, emotional, sensorial, physical, and spiritual) (Gentile et
al., 2007).

Customer experience is defined by the direct contact of the customer with the different touchpoints in order
to generate, through the five senses, changes that may be functional, cognitive and emotional in nature.
Interaction after interaction, the value perceived by the customer in terms of quality of the experiences tends
to enhance (Boaretto et al., 2007).

Experience is the highest level of creating downstream value and competitive advantage:

Commodity  Good  Service  Experience

Today the same product in terms of quality can cost many times more if sold through a customer experience,
often linked to a brand. (Es. Starbucks).

In a world saturated by commercial offers, customer’s attention and retention are the real scarce resources.
An experience, for its personal and emotional nature, is something that a customer will remember and a
good driver to loyalty and word of mouth passive marketing.

A framework for customer experience:

13. Distribution & pricing

Distribution

A distribution channel is a set of interdependent organizations involved in the process of making product
and service available for use or consumption. The purpose of distribution channels is making a product or
service available for final customers’ use or consumption.

A distribution channel has several functions:

- Flow of physical products, transportation: It can be done by a dedicate business unit or an external
company;
- Flow of physical products, warehousing: Logistic department, logistic service provider or
intermediaries has to keep an appropriate level of inventories to avoid stock-out;
- Flow of information, gather information on current and potential customers: distribution channel
is the closest link with final customer. It has to provide to the company information about current
and potential customers.
 - Flow of information, management of the direct touchpoint with customers: as we saw, physical
evidence is part of the marketing mix. Touchpoints management can influence product perception
and sales.
- Flow of finance, negotiation of prices: between company and intermediaries impact on revenues,
between intermediaries and final customers impact on product perception.
- Flow of finance, receiving or refunding customer payment: accounting departments and bank are
active stakeholders in the chain.

Moreover, it is the consequence of many factors

- Geographic and demographic develop of markets;

- Specialization;
- Economies of scale;
- Diminished number of contacts necessary to put into contact demand and supply;
- Lack of financial resources to preside the market directly.

Designing the distribution channel

To do it we have to pass through four steps:

1. Determining the customer service: lot size, delivery time, spatial distribution, product variety,
complementary services.
2. Setting objectives and fixing constraints: different target segments have different primary
requirements, so even objectives of distribution may change from case to case. Constrains can be
customer needs, product features, competitors’ behavior, corporate strategy.
3. Identifying alternatives: described by channel type, size and roles and responsibilities along the
channel. For the choice, you better focus on strengths and weaknesses of intermediaries,
competitors’ channels and laws.
4. Evaluating alternatives.

Manage the distribution channel

To do it we have to pass through four steps:

1. Selecting the actors: on the base of experience; reputation and potential; product portfolio;
localization and competences.
2. Training the actors: sellers are the first touch between customers and product. Even if they are not
company employees (because of no direct distribution channel but retailers) they are stakeholders
in the selling process and they have to transmit the product value and meaning to customers.
3. Motivating the actors: intermediaries are somehow “customers” with needs and desires, so they
have to be supported and awarded with incentives.
4. Assessing performance: periodically evaluate their performance in terms of market share, sales,
service quality provided, level of inventories, cooperation and goodwill.

New trends in distribution channels

In last years different levels of the chain had left a conflictual relationship model and embraced a more
cooperative relationship.

The quality and attractiveness of the distribution channel in gaining more and more importance as a part of
the total value perceived by the customer. Value network as a competitive advantage.

Vertical marketing system: focal firms extend their control through all the chain, creating a sort of vertical
integration in performances control.
Horizontal marketing system: partnership among companies at the same tier of the supply-chain, synergies
in marketing efforts and increased effectiveness, companies extend/complete their product set.

Channel proliferation: the same product is promoted and sold through several channel types, to reach
more targets.

E-commerce

Direct channel, rapid growth. It’s important to focus on distribution center. The purchase process is
different and the customer can switch between online and traditional channels along the purchase process.

Pros
Saving by reducing the intermediaries role;
Saving thanks to online promotion/advertising;
New customers;
Direct control of the final market;
Not limited geographically;
Possibility to provide abundant information on
products;
Create market for niche products.
Cons
Greater competition because of international
companies and more knowledge comparing
opportunities of customers;
Not everybody use online channels: there is still
the need to keep traditional channels;
Inability to experience the product: e.g. luxury
product need to be experienced.

Trade marketing: design of a marketing strategy for the retailer or the intermediary. It means cooperate
and stimulate retailers to bring to customers marketing efforts.

Pricing

Pricing is important because it determines profitability, demand, positioning and distinctiveness.

Pricing is affected by some variables:

- General economic situation: inflation or deflation in good or bad economic periods;

- Product lifecycle: price of a product often decrease when the product gets old;
- Cost structure: same products can be produced over time with different unitary cost;
- Laws and norms: both for pricing limits or for operational norms that affect cost structure;
- Competitive system: high competition means less freedom in pricing.

Price is a very strong signal perceived by customers as a quality indicator.

Price index: PI(i) = P(i) / P(avg. category)

Pricing policy

Establishing criteria and guidelines for setting product/service price. Pricing is about set general prices, set
variability of prices in response to external factors and set price evolution along product lifecycle.

Price setting is a six steps process:

I) Defining pricing objectives

Orientation Pricing objective

Market Volume
Market share
Growth rate
Profit Contribution margin
Short term profit
Long term profit
 ROI
Rapid recovery from R&D investments
External environment Creating brand image
Increasing intermediaries’ loyalty
Survival Cash flow
Use of the plants

II) Demand forecasting

III) Cost analysis

The first expenses to cover are COGS (Cost of Goods Sold). To estimate them there are several methods:

- Job order costing;

- Process costing;
- Operation costing;
- Activity based costing.

Then, also other costs must be covered (administration, marketing, sales, etc.).

IV) Analysis of competitors’ behavior

Understand the price range of the market and if it’s possible and already done to set a premium price for
products with distinctive characteristics.

V) Selecting the pricing method

In pricing, it’s good to refer to the 3C

Model to choose the pricing policy: the
price has to fluctuate between ceiling price
and costs and competitor’s price. Outside
these boundaries the price become too
high or too low.

Method Description
Traditional
Mark-up
Break-even point Cost-based pricing
Target return pricing
Perceived value pricing Customer-based pricing
Going rate pricing Competitor-based pricing
Innovative
Give to every transaction a different price, analyzing many current factors.
Dynamic pricing
It’s risky because customer may react badly to this fluctuation.
 English auction (open ascending price auction with or without “reserve”
price”): participants bid openly against one another, with each subsequent
bid higher than the previous bid.
Dutch auction (open descending price auction): auctioneer begins with a
high asking price that is lowered until some participant is willing to accept
the auctioneer's price.
Sealed first-price auction (first-price sealed-bid auction): all bidders
simultaneously submit sealed bids so that no bidder knows the bid of any
other participant. The highest bidder pays the price they submitted.
Auctions
Vickreyauction(sealed-bid second-price auction): identical to the sealed
first-price auction except that the winning bidder pays the second highest
bid rather than their own.
Buyout auction: auction with a set price (the 'buyout' price) that any bidder
can accept at any time during the auction, thereby immediately ending the
auction and winning the item.
Reverse auction: sellers compete to provide a good or service by offering
progressively lower quotes until no supplier is willing to make a lower bid.
Unique bid auction: the highest/lowest unique bid wins (if it is the lowest, in
general a bid fee is introduced).
Price determined according to the availability of the service, when the
Yield management
availability of the service is fixed but the demand is volatile.
Group pricing Exploits quantity discount by grouping buyers

VI) Price decision

Several factors involved, such as psychological factors, other marketing decisions, company’s pricing
policies, possible customer reaction.

Price tactics

Discounts are a routine in B2B market, catalogue prices are often negotiated. Discounts can be classified in
many categories:

- Quantity discounts: it recognize the importance of big customers and it can be partly recovered by
the low unitary costs of producing big lots. Sometimes quantity discounts become loyalty
discounts.
- Commercial discounts: discounts for intermediaries, subject to the service that intermediaries
make to sell company’s products.
- Financial discounts: according to the different value of money over time, discounts are applied if
payments are made in advance of the conditions stated on the price list.
- Seasonal discount: the price changes in relation to the higher or lower availability of the product
related to the seasons.

Promotions are incentives to manufacturers or retailers that serve to change a brand’s perceived price or
value temporarily. Promotions are short-term oriented. Promotions can be directed to retailers (pull) or
customers (push).

Benefits Rules
Invigorate sales of a mature brand. Retail price reduction increase sale, but only in the
Facilitate the introduction of a new product short term.
among retailers. Higher frequency of deals lead to a decrease of
responsiveness.
 Facilitate the introduction of a new product The frequency of deals changes the consumer’s
among consumers. reference price.
Neutralize competitors. Advertising helps promotion effectiveness.
Obtain trial purchase. Promotion of one product affects sales of
Encourage repeated purchases and product usage. complementary and competitive products.
Different effect of promotion for low quality
versus high quality brands.
Different effect of promotion for high market
share versus low market share brands.

14. Business modelling

The importance of modelling

Today making business is difficult: there are many new information flows and technologies, product
lifecycle is getting shorter and competition stronger and wider. A company has to deal with a lot of
internal and external actors and variables but it still must be focused on its core competences and
business. It’s fundamental to have a clear scheme of what the company does, to learn and to share with all
stakeholders.

Definition

The term business models intuitively suggests it has something to do with business and it has something to
do with models.

Business
The activity of buying and selling goods and
services, or a particular company that does this, or
work you do to earn money.
Models
A representation of something, either as a
physical object which is usually smaller than the
real object, or as a simple description of the object
which might be used in calculations.

By combining the two it’s simple to get that a business model is a representation of how a company buys
and sells goods and services and earns money.

Or:

A business model is a conceptual tool that contains a set of elements and their relationship sand allows
expressing a company’s logic of earning money. It is a description of the value a company offers to one or
several segments of customers and the architecture of the firm and its network of partners for creating,
marketing and delivering this value and relationship capital, in order to generate profitable and sustainable
revenue streams.

Use of business models

Business models can contribute in understanding and sharing the logic of a firm:

- Capture: get ideas from every stakeholder and use them in an easy and common way;
- Visualize: a visual system is simple to understand and complexity can be better comprehended;
- Understand: identifying and understanding the relevant elements in a specific domain;
- Communicate and share: formalizing business models helps managers to communicate and share
their understanding among other stakeholders.
The second area in which the business model concept can contribute is in analyzing the business logic of a
company:

- Measure: it may become easier to identify the relevant measures to follow in order to improve
management;
- Observe: understand how the company changes over time;
- Compare: things are only comparable if they are seized and understood in the same way.

The third area of contribution of business models is in improving the management of the business logic of
the firm:

- Plan, change & implement: having a simple and clear map of a company helps to manage
changings;
- React: improving speed and appropriateness of reaction to external pressure;
- Improve decision-making: the decision makers make more informed, and hence, better decisions.

The fourth area of contribution of business models refers to the possible futures of a company:

- Innovate: dividing a business into boxes can stimulate creativity of new visions of the company;
- Stimulate and test: make risk free experiments of new business models.

Business model canvas

It’s a visual chart with 9 blocks describing a firm’s value proposition, infrastructure, customers and finances.

1. Customer segments: For whom are we creating value? Who are our most important customers?
2. Value proposition: What value do we deliver to the customer? Which one of our customer’s
problems are we helping to solve? Which customer needs are we satisfying? What bundles of
products and services are we offering to each Customer Segment?
3. Channels: through which Channels do our Customer Segments want to be reached? How are we
reaching them now? How are our Channels integrated? Which one work best? Which ones are
most cost-efficient? How are we integrating them with customer routines?
4. Customer relationship: what type of relationship does each of our Customer Segments expect us
to establish and maintain with them? Which ones have we established? How costly are they? How
are they integrated with the rest of our business model?
5. Revenue streams: for what value are our customers really willing to pay? For what do they
currently pay? How are they currently paying? How would they prefer to pay? How much does
each Revenue Stream contribute to overall revenues?
 6. Key resources: what Key Resources do our Value Proposition require? Our Distribution Channels?
Customer Relationships? Revenue Streams?
7. Key activities: what Key Activities do our Value Proposition require? Our Distribution Channels?
Customer Relationships? Revenue Streams?
8. Key partners: who are our Key Partners? Who are our Key Suppliers? Which Key Resources are we
acquiring from partners? Which Key Activities do partners perform?
9. Cost structure: what are the most important costs inherent in our business model? Which Key
Resources are most expensive? Which Key Activities are most expensive?

Correlate: long tail. It’s a phenomenon where you pass from selling a small number of “hit” items in large
volume to selling a very large number of niche items, each in relatively small quantities.

15. Blue ocean strategy

Red ocean: it represent the set of all the industries, boundaries, rules and relationships existing now.

Blue ocean: it’s the unknown market space, with no industries and no competition, where demand is
created and not contented.

A blue ocean can be sometimes a completely new industry but many other times an extension and
diversification of a red ocean.

Blue ocean is not easy to find: technological innovation or separating process are not enough, you just go
at the limits of the red ocean.

Red ocean vs. blue ocean strategy:

Red
Compete in existing market place;
Beat the competition;
Exploit existing demand;
Make the value/cost tradeoff;
Align the whole system of company’s activities with
its strategic choice of differentiation or low cost.
Blue
Create uncontested market space;
Make the competition irrelevant;
Create and capture new demand;
Break the value/cost tradeoff;
Align the whole system of company’s activities in
pursuit of differentiation and low cost.

Six principles of blue ocean strategy:

Formulation principles
1. Reach beyond existing demand
2. Reconstruct market boundaries
3. Focus on the big picture, not the numbers
4. Get the strategic sequence right
Execution principles
5. Overcome key organizational hurdles
6. Build execution into strategy

Reach beyond existing demand. Every market has someone outside the market, let’s identify three
categories:

- First tier: “soon-to-be” non-customers that already decided to become customers soon;
- Second tier: “refusing” non-customers that know the market and choose to stay out;
- Third tier: “unexplored” non-customers belonging to distant markets.
With a red ocean approach, you can (with expansive efforts) reach only the first tier. With the blue ocean
strategy, you can go for the largest catchment of non-customers.

Break the value-cost tradeoff: value innovation. Innovation is created when both costs decrease because
you don’t have to invest much in marketing aggression and buyer value increase because you create
elements that industry never offered.

Reconstruct market boundaries: in a red ocean, every boundary is defined and you have to do your best to
get a good position inside it: rivals, buyer groups, product concept, external trends. In the blue ocean
everything is different, you don’t have boundaries:

Path Look across

1 Alternative industries
2 Strategic groups within industries
3 Buyers groups
4 Complementary product and service offering
5 Functional or emotional appeal to buyers
6 Time

Blue ocean strategy tools

Strategic canvas: it’s a two dimensions graph with horizontally all the competing factors of a market (both
already exploited and potential) and vertically the offering level of company and rivals.

ERRC Eliminate-Reduce-Raise-Create Grid: the competing factors have to be analyzed and the company
has to decide if a factor should be eliminated, reduced, raised or created.

Here an example of a mix between strategic canvas and ERRC (Cirque du Soleil):
Visualizing strategy

It builds on the six paths of creating blue oceans and involves a lot of visual stimulation in order to unlock
people’s creativity.

1. Visual awakening 2. Visual exploration 3. Visual strategy fair 4. Visual communication

Compare your business Go into the field to Draw your “to be” Distribute your before-
with your competitors’ explore the six paths to strategy canvas based and-after strategic
by drawing your “as is” creating blue oceans; on insights from field profiles on one page for
strategy canvas; observations; easy comparison;
Observe the distinctive
See where your strategy advantages of Get feedback on Support only those
needs to change. alternative products alternative strategy projects and operational
and services; canvases from moves that allow your
customers, company to close the
See which factors you competitors’ gaps to actualize the new
should eliminate, customers, and strategy.
create, or change. noncustomers;

Use feedback to build

the best “to be” future
strategy.

Sequence of blue ocean strategy

An important part of blue ocean strategy is to “get the strategic sequence right.” To be validated a new
idea has to pass an ordinated sequence of validating steps. Only two options: yes or no. If an idea gets a
no you have to rethink or quit.

1. Buyer utility: is there exceptional buyer utility in your business idea?

2. Price: is your price easily accessible to the mass of buyers?
3. Cost: can you attain your cost target to profit at your strategic price?
4. Adoption: what are the adoption hurdles in actualizing your business idea? Are you addressing
them up front?

16. Disruption

A disruption happens when an established company, well respected and well positioned on the market
(incumbent), is beaten (from a competitive standpoint) by a newcomer, usually a new venture, that took
then the lead of the market.

From the cases on the slides, we can understand a few things: technological innovation brings to disruption
only if there are huge changes in the producing and selling process. New technologies are hard to
intercept because they result weak at the beginning. Disruption is an opportunity but even a risk for
established companies: you can fail in taking wrong initiatives and waste your resource or fail in non-
taking good initiatives and be crushed by competitors.
 Disruption often starts from a low
performance level perceived by the
mainstream market. In fact, the
early users are only a niche. Then,
it grows quality much faster than
rivals and become the best
solution in the market.

As a result, technological change in a product class is characterized

by long periods of incremental change punctuated by discontinuities
(radical innovations).

Established companies believe that investing aggressively in disruptive technologies is not a rational
financial decision: disruptive products start often as cheap substitutes, so they don’t produce big margins.
Moreover, they start to be sold only in little niches. Market majority at the beginning is not interested in
switching products so disrupting new competitors are not seen as a real risk.

Manage disruption

I) Spot the disruptive technology

Build networking and scouting capabilities: even if you have the biggest R&D department in the market,
most of interesting and exciting things will happen outside your company. You have to be able to reach
outside stimuli and find what is interesting.

Develop an appropriate culture in your organization: the organization has to focus on its human side to
stimulate employees to think out of the box and feel engaged in company’s growing.

A firm should encourage these behaviors through acting on two

levers:

- Social support, which is concerned with providing people

with the security and latitude they need to perform;
- Performance management, which is concerned with
stimulating people to deliver high-quality results and making them
accountable for their actions.
II) Develop your market insight and conduct directed research

A market insight is a discovery. We are searching for a fact, an information that hasn’t been exploited yet
and can give us a better focus on customers. We have to find out something about customers’ latent
needs that can be used to develop appreciated products.

Direct research: once identified a market insight, the problem is how best to serve that market. It’s
important to look at technology and to be open to external helps (acquisitions) if needed.

III) Adapt your business model to the disruptive technology

Build an ambidextrous organization: you have to embrace innovation to grow but you can’t leave your
existing business to survive.

Ambidexterity has two ingredients:

1. Structural separation between organizational units

devoted to:

Exploitation of current technologies and businesses;

Exploration of new, disruptive technological trajectories and businesses, each having its own processes,
structures and cultures.

2. Tight integration between the exploitation and exploration units at the senior executive level.

IV) Investing into disruptive technologies

Good managers are driven to keep their organizations growing but in a static market it’s impossible to
maintain acceptable grow, especially for big companies. On the other hand, disruptive technologies are
small and defective in the beginning, so it’s difficult to trust them. Moreover, the real driver to success are
customers (needs) and not managers, a company must find the right innovation proposals.

A good way to encourage innovation is to finance a secondary company, small and flexible where everyone
can feel the challenge and be motivated. This can be done by:

- Spinning out an independent organization;

- Acquiring an appropriately small company.

Big bang disruption

Big bang disruption is the biggest possible disruption phenomenon, when the market is completely
revolutionized.

In recent years seem that every market is having his big bang disruption. This is not a simple phenomenon,
it’s the result of some megatrends:

- Growth of the sharing economy model;

- Growth of the product servitization model;
- Momentum growth of the entrepreneurial dynamic;
- Reduction of creating, marketing and experimentation costs.

A big bang product is characterized by an anticipated lifecycle: after a first period with just a few
innovators, when the product bangs, everyone gets it, the four phases of early adopters, early majority,
late majority and laggards are concentrated in a very little span.
 18. Business plan

A written document that describes in detail how a new business is going to achieve its goals.

When: Business plan is not made only ah the beginning of a new activity but must be updated over time,
checking the distance between the original forecast.

How: for a consolidated business and stable conditions it’s better to do a simple business plan. For
startups there are specific tools like LLP Lean LaunchPad: a startup business faces unknown and
unpredictable variables. It needs tools to take fast and smart decisions during the first phase of its life.

Who: made by management to be presented to every stakeholder interested. Because of its large
audience it has to be clear and simple.

Why: both for planning a project and so for evaluating profitability, feasibility, risks, resources and for
communicate to internal and external stakeholders.

12 steps for a successful business plan

1. Define your business activity.

2. Define the current status of the business.
3. Define the external market, your competitors and your marketing positioning.
4. Define your objectives for the period of the plan.
5. Develop a strategy for achieving the objectives.
6. Identify the risks and opportunities.
7. Develop a strategy for limiting risks and exploiting opportunities.
8. Refine the strategies into working plans.
9. Project costs and revenues and develop a financial plan.
10. Document it concisely.
11. Get I approved.
12. Use it.

Practical tips: tell a story; be concise; support with references; give importance both to people and
numbers; use a nice layout; use a solid structure; add your own.

For every time you add data, indicate the source. Moreover data can be from company’s history (best
choice), market (source is fundamental) or personal assumptions (to motivate).

Now we will analyze in detail the different sections of a business plan, but first remember that when you do
a BP you have to keep in mind that every section is related to others and the reader has to never forget
that he is reading a wide and complete scheme. Moreover, managerial tools are important to organize
data and give a clear view.

I) Executive summary

2-3 pages maximum, many topics are company introduction, business idea and market opportunity.

Executive summary is not an introduction, it’s a little summery of the whole project. It has to include
objective, management team, products or services, market, assets and competences, strategy, key financial
data, funding required and use.

Goals: Introducing the reader to the business, offering first elements to assess whether the venture is
interesting or not, giving the opportunity to evaluate whether to continue reading or not.

Premises: All the other sections of the business plan. This is the last section developed (but the first read by
the target).
II) Product and services

It’s important not to focus only on physical aspect but even on the value proposed to the client.

 Physical technical description;

 Type of usage;
 Product positioning map: cost, quality, features, values, service, image;
 Product lifecycle stage.

Goals: presenting products/services main features, characteristics, physical and technical description,
advantages for users, plus, etc.

Premises: market & Product Fit; market opportunity, business opportunity, disruptive technology,
untapped need, etc.

Following: go-to-market strategy; operation (production, localization, channels, delivery, etc.).

Tools: photos, drawings, models, technical description, product lifecycle and product positioning maps, etc.

III) Strategic plan

Values, vision, mission, objectives

Values: in what you believe. Vision: where you want to be on the long term: it reflects values and corporate
culture. Mission: how to reach the ideal stated in the vision. Objectives: results aligned with Values-Vision-
Mission.

S.M.A.R.T.: Specific –Measurable –Attainable –Realistic (Relevant) –Time-related.

Goals: Presenting the culture and the long term goals of the company.

Premises: None.

Following: Strategy, Organization, Role of innovation & R&D, HRM, Recruiting Style, Markets, Products, etc.

Tools: Corporate culture.

Every company has its own corporate objectives but there are many common key points related mostly to
profitability, low risk, becoming big, etc.

Strategic analysis (internal vs. external)

The strategy is the core of the whole plan: every activity should be a consequence of the strategy chosen,
and the objectives set. Every strategic analysis should touch this points: internal and external opportunities
and threats; competition in the industry; company’s competences, skills, resources; KSF key success
factors of the market; sources of competitive advantage.

Goals: Identify threats and opportunities in the market; identify Strengths and Weaknesses; define the
structure of the industry and market in terms of intensity of rivalry and presence of extra profits; the type
of competition; the Key Success Factor in the market; the core competences of the company; the sources of
competitive advantage.

Premises: Corporate Culture, Vision, Mission, etc.

Following: Strategy.

Tools: P.E.S.T. Analysis; Porter 5 Forces; KSF; Porter’s Value Chain, Competitive Analysis Maps, SWOT
Analysis.
Strategy

Strategy is the creation of a unique and valuable position, involving a different set of activities.

Goals: Identify positioning and sources of competitive advantage in the business environment; identify the
strategy and the strategic objectives to guide marketing and operations.

Premises: Business Opportunity, Market Need, Innovation, Technology.

Following: Marketing Plan, Operating Plan.

Tools: P.E.S.T. Analysis; Porter 5 Forces; KSF; Porter’s Value Chain, Competitive Analysis Maps, SWOT
Analysis.

IV) Marketing plan

Already well analyzed previously in the course.

V) Operating plan

The operating plan is the translation of the strategic plan into a set of activities.

Nine steps to create a winning operating plan

1. Break the project into the smallest possible components activities;

2. Identify linkages and critical paths;
3. Order the activities with the critical and higher risk ones scheduled as early as possible;
4. Set measurable targets for each activity;
5. Assign responsibilities;
6. Set up a mechanism for tracking the reporting on each target;
7. Establish a culture that encourages problem reporting;
8. Execute the plan;
9. Act immediately if a target is missed or a problem report is generated.

VI) Financial plan

The fundamental goals of the financial statement sections are: forecast sales; forecast and control costs;
forecast cash flows; valuate the return of the investment.

This section is fundamental for a potential investor and for the chief of the venture.

It’s a 3x3 division:

Three types of voices:

- Sales forecast;
- Operational Costs = costs to be sustained to perform activities;
- Capital Spending or the investment to set up the activities.
Three financial statements:

- Profit and Loss –economic perspective  is your business profitable?

- Balance Sheet –asset perspective  to whom do you own money?
- Cash Flow –financial perspective  is the business financially sustainable?

Three time periods:

- Historical: what’s done in the past; previous years performances;

- Current: what is the current state of the business (now and next few months);
- Forecast the future: what we expect from the future.

VII) Risk analysis

Methodologies:

- Financial Ratios (Liquidity, etc.);

- Break-even analysis;
- What-if analysis;
- Worst-case analysis;
- NPV;
- Distribution of observations (mean, standard deviation, skewness).

19. Startup

A startup is a company that, operating in an unconventional way, wants to reach in a short period of time
the leadership of its market. Because of its unconventional sources of advantage (innovation, customer
understanding, virality, etc.) marketing management has to be different too. Startup companies often
reach visibility even through passive advertisement, so marketing becomes cheaper.

Every startup has to develop a must-have product, understand clients and integrate and cross functions.

Engines of growth:

- Word of mouth;
- A side effect of using the product;
- Reward;
- Paid Advertising (if you keep the cost of ad below marginal revenue);
- Repeat Use (stickiness).

The three Engines of Growth

1. Sticky Engine of Growth

- If you are focused on retaining customers for the long term;

- The domain of repeat use.

2. Viral Engine of Growth

- If you are focused on acquiring new clients;

- Verify that each client bring more than 1 friend to the platform;
- The domain of word of mouth;
- The product must be perfect and exciting.

3. Paid Engine of Growth

 20. Lean Startup Method & Metrics

What is a startup? A startup is a temporary organization in search of a scalable, repeatable, profitable

business model.

What is a business model? A business model describes the rationale of how an organization creates,
delivers, and captures value.

Lean startup is a method for developing new businesses based on a shorten of new product development
cycles by using business-hypothesis-driven experimentation, and iterative product releases.

According to this approach, startups should iteratively build products/services to meet the needs of early
customers. In this way, they can reduce the market risks and lower high initial project funding and
expensive product launches and failures.

Customer development model

The meaning of this method is to create a

validation point before starting execution.
Once found a business model that can maybe
work, this idea is presented to customers. If
feedbacks are good you continue, if not you
pivot and restart.

The four phases:

- Customer discovery. Understanding customer problems and needs. Translate ideas into business
model. Create a Minimum Viable Product. This phase has four sub-steps: state you hypothesis;
test the problem; test the solution; pivot or proceed.
- Customer validation. Developing a repeatable sales model. If doesn’t work, pivot and iterate the
process. If the business model is validated, execute. This phase has four sub-steps: get ready to
sell; sell to early customers; develop positioning; pivot or proceed.
- Customer creation. Product refined enough to sell. Build demand through marketing & sales.
Scale up the business.
- Company building. Transition from startup mode. Customer development team. Function
departments.

Recap and problems

A startup is an organization formed to search for a repeatable and scalable business model. The goal of
your early business model can be revenue, or profits, or users, or click-troughs–whatever you and your
investors have agreed upon. Customer Development is the way for startups to quickly iterate and test
their hypotheses about their business model. Most startups change their business model multiple times.

Lean startup method has a hypothesis drive strategy. It develop products by looking at the market, testing
with customers and valuating or pivoting hypothesis. Product engineering is made iteratively,
incrementally and nimbly. Resources are organized in agile teams, with hiring to increase knowing and
learning. Failures are expected and fixed or pivoted. Speed is high. The focus is to get big; startup is just
something temporary, the beginning of something new.
Problems at seed stage:

- Building a talent and motivated team;

- Getting initial validation and traction;
- Executing fast.

Problems at growth stage:

- Hiring and retain talents;

- Bringing on a good management team;
- Putting a stable and efficient process in place.

Metrics

In the short term, the most important metric is retention.

In the long term, things are a bit more complicated:

- Financial metrics. Monthly revenue growth (leveraged by company’s dimension). Revenue run
rate (last month revenue x 12). Margins (gross margin, EBIT, depends on competition). Cash burn
rate (negative CF). Runaway (how long your cash will last).
- User metrics. Daily active users (very used, not necessarily daily). K-Value (users growing, measure
virality). Proportion of mobile traffic (how main signs visits from mobile). Churn rate (how many
leave the product). Cohort analysis (for engagement).
- Acquisition and marketing metrics. Customer acquisition cost (promotion costs / new customers).
Pay-back period (time or orders to cover cost of acquisitions). Net promoter score (Ask a sample of
clients if they would suggest the product (scale 1-10). Score: 1-2 are detractors. Score 9-10 are
promoters. The difference of the proportion is the Net Promoter Score).
- Sales metrics. Magic number (indicator about revenue growth and M&S expenditures). Average
size & order velocity. Customer long term value (discounted value of revenue streams generated
by an acquired customer).
- Market metrics. TAM total addressable market. Average wallet size (money spent by a medium
customer in a given period in a market).

21. Funding rounds for startups

How much money do I really need? The most useful indicators are cash burn rate (negative average
monthly cash flow) and runaway (linked to cash burn rate, months covered by existing funds).

When collecting funds? In general, the late the better. Every stage of a startup is different in funds need
and type of investors. Investors always try to delay their funding.

Pre-seeds: funds from savings or

crowdfunding, team made by
founders. Goal is to develop the
product without squander.

Seed: first finished prototypes,

first revenues but need of higher
funds.

Startup round A: try to pass

breakeven, first real funders.
Round B: board is enlarged, make profits.

Expansion: funds become equity, startup becomes corporate organization. Founders and early funders
may exit the company.

Which type of funds and investors exist?

- Commercial debt: having payables bigger than receivables. Often no related costs. Typical of B2C
where customers pay immediately but suppliers permit delays. Impossible to reach in first phase of
a startup because you don’t have revenues.
- Financial debt: like loans. They have interests and they are difficult to achieve for a startup with
no history. Banks requires collaterals to secure their investments.
- Operating activity: funding by earning, proving that the company works well.
- Grants: external entities reward good ideas and starting business by helping them with their
possibilities. These entities expect repayments if the project goes well but founders don’t lose their
control on the startup.
- Equity: not good to sell shares in the first phases. During company development founders can’t sell
and exit, they have to stay in.

Typologies of equity:

- Savings  seed: founders keep the complete ownership and have to maintain it until product is
developed, without searching for external funds. (10/20 k€)
- Family and friends  seed: cheap money without pressure and results asked. (20/50 k€)
- A consulting job  seed: useful but limited and risky.
- Angel investors  early stages and round A: people with money and resources (knowledge,
networks) which fall in love with your idea. They are risky because they know something about
business and may want to extort founders’ leadership.
- Seed funding firms  seed & early stage: companies that operate like angels, with some
additional rule or procedure.
- Venture capital funds  rounds A/B: companies with standard strategies to invest. They invest
millions and become part of the board.
- Private equity, stock exchange, private sales  Exit: founders sell their shares and exit the
company, which is not anymore a startup, but with some restrictions of time before definitively go.

What’s the impact of startups in the economy? Very strong in US, medium in Europe, low in Italy, very low
in far east.

What’s the value of my startup and how can I assess it?

- Always start from previous financing rounds. This is the starting point of your valuation.
- Check whether your investor has fixed terms to invest (e.g.: they invest €50K for 10% of the
startup in seed stage); basically, they invest in the team.
- Check what is the value of comparables recently funded by VC’s or BA’s and some indicators
coherent with their and your business.
- Valuate your startup through comparables.
- Perform analytical valuation with DCF.
- Valuate your startup through DCF.
- Match your stage with the right BA or VC.
- Get information about potential investor.
- Get in touch with potential investor.
- Present your Deck (or Elevator Pitch) with your valuation and financial need.
 - If they are interested they require Business Plan, where you explain your valuation and need
- If they are interested, they make a due diligence.
- Start from your valuation.
- Negotiate the price.
- Make your Deal!

What is the role of Accelerators and Incubators?

Usually they offer:

- Spaces, offices, meeting rooms for free or for a rate usually below market standards.
- Technical services like phone and internet connection, print service, meeting.
- Tutoring / Mentoring, as startuppers could need assistance to create a BP, or to organize a
salesforce, etc.
- Networking and business opportunities with other startups, established companies (potential
partners or acquirer), business angels, institutional investors, etc.

Incubators: physically locating your business in one central workspace with many other startup companies.

Accelerators: they give you some months and some k€ to jump into a bigger dimension.

How to present your business to investors?

The Elevator Pitch is brief presentation to introduce your business idea, your product, your service, to
summarize who you are, what you do and why an investor should invest in your venture. It has to
summarize a more detailed business plan.

Here an example of structure, divided into slides:

1. Introduction, name (startup), slogan, history, activity, contact;

2. Market need, client’s pain, current non-solvers;
3. Product, benefits, needs satisfied, competitive advantage;
4. Team, resources, roles, organization, capitalization;
5. What’s done so far?
6. Market & competitors;
7. Forecasts of sales, costs and market share;
8. Cash burn rate / runaway;
9. Valuation and exit;
10. Call to action, needs to reach results, contact details.