Summary of Strategy

Strategy
MSc Engineering and Management – Politecnico di Torino
March- June 2016, Prof. Neirotti course

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Elisabetta Ruscalla
elisabettaruscalla@gmail.com
1. INTRODUCTION .............................................................................................................................. 4
2. WHAT STRATEGY IS......................................................................................................................... 5
2.1 WHAT IS STRATEGY? .................................................................................................................................... 5
2.2 VALUE CREATION AND COMPETITIVE ADVANGAGE .............................................................................................. 7
2.3 THE STRATEGIC PLANNING PROCESS ................................................................................................................. 7
2.4 COMPETITIVE ADVANTAGE AND METRICS ........................................................................................................ 10
3. EXTERNAL ENVIRONMENT: INDUSTRY ANALYSIS ........................................................................... 11
3.1 ASSESSING THE EXTERNAL ENVIRONMENT ....................................................................................................... 11
3.2 PORTER’S FIVE FORCES ................................................................................................................................ 11
3.2 INDUSTRY BOUNDARIES, SEGMENTATION ANALYSIS AND KEY SUCCESS FACTORS..................................................... 15
CASE: GENZYME’S FOCUS ON “ORPHAN DRUGS” ................................................................................................. 18
CASE: THE US AIRLINE INDUSTRY IN 2012 .......................................................................................................... 18
4. INTERNAL ANALYSIS ..................................................................................................................... 19
4.1 THE ROLE OF RESOURCES AND CAPABILITY IN STRATEGY FORMULATION................................................................ 19
4.2 ASSESSING RESOURCES AND CAPABILITIES: THE VRIO FRAMEWORK .................................................................... 22
4.3 DEFEND AND LEVERAGE ON CAPABILITIES........................................................................................................ 23
4.4 THE ROLE OF THE LOCAL ENVIRONMENT IN CAPABILITY FORMATION .................................................................... 25
CASE: LAND’S END .......................................................................................................................................... 26
CASE: KODAK AND THE DIGITAL REVOLUTION ....................................................................................................... 27
5. VERTICAL INTEGRATION ................................................................................................................ 29
5.1 INTRODUCTION: TRANSACTIONS COSTS AND THE SCOPE OF THE FIRM  ................................................................ 29
5.2 THE COSTS AND BENEFITS OF VERTICAL INTEGRATION   ..................................................................................... 30
5.3 MAKE‐OR‐BUY CHOICES: TRANSACTION COSTS THEORY   ............................................................................... 32
5.4 DESIGNING VERTICAL RELATIONSHIPS   .......................................................................................................... 33
5.5 THE ROLE OF TRUST AND VALUE IN MARKET TRANSACTIONS: THE CLAN THEORY .................................................... 34
5.6 SOME RECENT TRENDS ................................................................................................................................ 34
CASE: IT VENDOR PARTNERING .......................................................................................................................... 36
CASE: DISNEY AND PIXAR ................................................................................................................................. 37
6. ORGANIZATION ............................................................................................................................ 38
6.1 WHY ORGANIZATION DESIGN MATTERS .......................................................................................................... 38
6.2 THE FUNDAMENTALS .................................................................................................................................. 39
6.3 DESIGN OF POSITION ................................................................................................................................... 41
6.4 DESIGN OF DECISION-MAKING SYSTEMS ......................................................................................................... 43
6.5 DESIGN OF STRUCTURE ................................................................................................................................ 43
CASE: MCDONALD AND BURGER KING ............................................................................................................... 46
CASE: P&G .................................................................................................................................................... 47
7. BUSINESS STRATEGY ..................................................................................................................... 50
CASE: IKEA, “LOW PRICE WITH MEANING” .......................................................................................................... 55
CASE: ZARA, IT FOR FAST FASHION ..................................................................................................................... 57
8. INNOVATION, INDUSTRY AND STRATEGIC CHANGE ....................................................................... 59
8.1 INDUSTRY LIFE-CYCLE .................................................................................................................................. 59
8.2 MANAGEMENT OF TECHNOLOGICAL INNOVATION ............................................................................................ 61
8.3 APPROPRIABILITY REGIMES........................................................................................................................... 62
CASE: APPLE INC. ............................................................................................................................................ 65
CASE: ABGENIX............................................................................................................................................... 67
9. MATURE INDUSTRIES, DECLINING INDUSTRIES AND DIVERSIFICATION ........................................... 68
10. GLOBAL STRATEGIES AND THE MULTINATIONAL CORPORATION ................................................ 69
11. STRATEGIC CORPORATE SOCIAL RESPONSIBILITY ....................................................................... 71
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SUMMARY
Mancano
- Summary F10/06
- Abgenix Th09/06
- Capitolo Th09/06
- US airline industries case F0x/03
3
02/03/2016
1. Introduction
Why Strategy and Organization?
• How a firm is organized determines its capacity for action.
• Organization design is about selecting structures, systems and management styles that can best implement
Main attributes of strategic choices
the firm’s strategy.
• Problems of organizing:
1. Specialization and division of Labor
• A simple and consistent focus on long‐term
2. Integrating and controlling the efforts  Cooperation and Coordination
goals (non necessarily an explicit plan).
• Strategic choices require:
Thus:
– – a continuing and profound understanding of the
– Organization design environment
competitive (and strategy) (threats/opportunities)
depends on the firm’s size, age, geographical and product scope,
 CONTINGENCY APPROACH.
– an objective appraisal of the firm’s resources and
competencies (strenghts/weaknesses)
Course Goals. Why Technology matters?
• They
• Because may require
technological significant
innovation (either inchanges
products orinoperations)
firms’ often change the rules of the game:
- resources and competencies
In competition among firms (e.g. Blockbuster, Eastman Kodak)
- In the ways firms may bring new economic value to costumers  (e.g. e‐commerce; e‐books)  
• For managing technological innovation firms need :
- technical competencies (how to design and engineer a product based on a new technology? Etc.)
- competencies on strategy (how to build a unique product compared to customers and sell it at a02/03/2016
profitable price? How to foster its diffusion in the target market?)  
Innovation Management is a fundamental and distinguishing trait in the cultural and professional background
of the Managerial Engineer.
The strategic management process
Strategy Implementation as a Stool
Long‐term purpose that defines
Threats and what the firm wants to be.
Vision ‐ Mission
Opportunities?
• Strategy implementation Sustained
entails: Resources and capabilities Performance
External Internal available and needed.
INPUTS Appraisal – New product development
Appraisal Strengths? Weaknesses?
(NPD) ability
ACTIONS – Operations excellence: Opera‐
Organizational design
capability to industrialize
follows and constrains
Strategy tions
Strategy Strategy
Formulation manufacturing (delivery) of
Implementation strategy
new products (services) Vertical
e.g., rapidity in lead time, in
Effective control systems? Coordination
inventory turnover, high (along the hierarchy)
product quality, high NPD
OUTCOMES Value creation and value
capacity utilization,
appropriation? How value is Horizontal integration
Performance flexibility. Across R&D, marketing
divided along the chain?
impact manufacturing, purchasing, logistics
3
Strategy and
Operational
4
excellence (OE)
high
Constant
tomer
improvement in
2. What strategy is
2.1 What is strategy?
Definition and attributes 02/03/2016
• A Strategy is a long‐term plan of commitments and actions designed to achieve a particular goal.  
• The goal of strategy is superior profitability  
• Strategy is different from tactics
- Strategy is the overall plan for deploying resources to establish a favourable position  
- Tactic is a scheme for a specific manoeuvre  
•Characteristics of strategic decisions
Three layers of Strategic Choices
- Involve a significant commitment of resources  
- Not easily reversible  
simple and consistent focus on long‐term goals (non necessarily an explicit plan).  
• •A
Corporate Strategy
•Strategic choices require:
– In which industries should we be
– a continuing
in? In which and profound understanding of the  competitive environment (threats/opportunities)
countries? How
– anfinancial
many objective do weof the firm’s resources and  competencies (strenghts/weaknesses)  
appraisal
resources
• They may require significantwe
invest in the industries where changes in firms’ resources and competencies  
compete?
– What level of Vertical
Layers of strategic choices
Integration? Strategic Alliances?
Mergers & Acquisition?
1. Corporate strategy: where a firm competes, i.e. the scope of its activities.
• Functional areas Strategy
• InBusiness Unit
which industry Strategy
should be in? In which countries?
• Given Howchoices
the strategic many taken
financial resources do we
invest in the industries
– How should where we compete?
we compete? On at the corporate and business
Cost ? On product
The dimensions of the scope are: unit level, what goals and actions
differentiation? On both?
- Vertical scope (to make or to buy?)for HR, Product Development,
 what range of vertically linked activities
Operations, Marketing?
should the firm encompass? Strategic alliances? M&A?
- Geographical scope  what is the optimal geographical spread of activities for the firm?
- Product scope  how specialized should the firm be in terms of the range of products it supplies?
2. Business strategy: how a firm competes within a particular market.

How should we compete? On cost? On product differentiation? On both?
3. Functional strategy: given the strategic choices taken at the corporate and business unit level, what goals
and actions for HR, Product Development, Operations, Marketing, IT management, operations, ….?
Static and dynamic views of Strategy
Static and dynamic view of strategy
© 2013 Robert M. Grant
www.contemporarystrategyanalysis.com 8
5
Operational Excellence
• Operational excellence is not strategy.

• Operational excellence is often based on weak appropriability regimes, due to:
02/03/20
– competition
– imitation and observability of best practices in the shop floor, and logistics
• Strategy also regards the firm’s bargaining power with customers and suppliers.
Strategy and the strategic positioning How sustainable are competitive

advantages?
• It reflects a firm’s capability of defending a
competitive advantage over the time, despite the
competitors’ attempt of imitation or despite the
changes in the environment (i.e. discontinuous
innovations, new industry regulations, changes in
customers’ preferences)
• “Even fools can churn out good results (for a

while)”. Rumelt, 1984
Attributes of a good strategy

• External consistency (alignment with the environment and with market’s critical success factors)
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• Internal internal fit (consistency between corporate and functional strategies)
• Dynamic  “In the change remember to
be yourself”
How sustainable are competitive
HowHow sustainable are competitive
sustainable are competitive advantages? advantages? The Resource‐Based View
advantages? • A firm outperforms its rivals if it owns resources
• It reflects a firm’s capability of defending a with the following attributes:
competitive advantage over the time, despite the
competitors’ attempt of imitation or despite the – Valuable They explain a
changes in the environment (i.e. discontinuous competitive
– Rare
advantage in
innovations, new industry regulations, changes in – Able to generate appropriable returns the short term
customers’ preferences)
– Inimitable They explain the sustainability
• “Even fools can churn out good results (for a – Non‐substitutable of the advantage on the long
while)”. Rumelt, 1984 – Imperfectly mobile term
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Takeaways
1. Strategic choices affect the long‐term, they are taken based on an analysis of the external environment
and an appraisal of the firm’s internal resources
2. A good strategy...is based on:
- uniqueness in resources or in market positioning  
- Fit among a firm’s activities  
3. Static and dynamic view of strategy (what do we want to become? How do we get there?)
2.2 Value creation and competitive advangage
Takeaways
• Strategy as a matter of value creation and how value is divided among the focal firm, its customers and
suppliers  
• Competitive advantage as a matter of:
– Superior value creation
– Value appropriation  
•Due different ways of creating superior value (=> generic strategies)  – Cost leadership – Benefit
differentiation: COST LEADERSHIP and BENEFIT DIFFERENTIATION.
2.3 The strategic planning process

Strategic thinking involves asking two questions:
– what is the structure of your industry and how is it likely to  evolve over time?
– what is your own company’s relative position in the industry?  
Posture
What type of posture firms have in setting their strategy?
• Proactive: “first movers”, with new products, technologies and markets.
E.g. Apple, Google, Toyota, Amazon (new ways of imaging the future).
• Analyser (hybrid): “cautions fast followers” with a more efficient or innovative product. Moderate
emphasis on “exploration” of new markets.
E.g. Microsoft, Dell, IBM. Established markets (e.g. business analytics, outsourcing) + new disruptive
technologies: Watson in healthcare (for diagnostic automation), banking, etc.  
• Defensive: “followers”  “wait and see”  focus on established markets and current custumers. They
don’t change the rules of the game in an industru; quite conservative in adopting innovation.
E.g. FCA, TomTom, HP
• Reactor: no clear strategy. confused and inconsistent reaction to competitors’ move, when required by
external pressures.
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Evolution of strategic planning • Today
• 100 years ago.... - Demand Saturation (“a car in every garage, a
- High vertical integration chicken in every pot”)  
- High product standardization  the Ford T “give - More global competition and sourcing  
it to them in any color so long as it’s black” - Lower degree of vertical integration (more
(Henry Ford, 1914) outsourcing)  
- High focus on cost cutting innovation in - Increasing product complexity  
production processes and technologies - Faster product life cycles  
• Strategic planning as the idea(illusion?) of forecasting • In many sectors
02/03/2016 Emergent Strategies
the strategic planning process is:
the environment  I.Ansoff (1979) -STRATEGY AS DESIGN
Less formalized STRATEGY AS PROCESS
- How to forecast discontinuities? - Less based on forecasts on environmental trends
-Planning and rational choice
Based on shorter planning horizons Many decision makers
responding to multitude of
external and internal forces
Emergent strategies INTENDED STRATEGY EMERGENT STRATEGY
Emergent Strategies
You realize you have to change your strategy on the way  you have to be flexible.REALIZED STRATEGY
STRATEGY AS DESIGN STRATEGY AS PROCESS Mintzberg’s Critique of Formal Strategic Planning
Planning and rational choice Many decision makers
responding to multitude of
• The fallacy of prediction – The future is unknown. Experimentation,
external and internal forces luck, learning and adaptation are important!
• The fallacy of detachment – Impossible to divorce formulation from
INTENDED STRATEGY EMERGENT STRATEGY implementation
• The fallacy of formalization – Inhibits flexibility, spontaneity,
REALIZED STRATEGY
intuition and learning 37
Mintzberg’s Critique of Formal Strategic Planning
The fallacy of prediction – The future is unknown. Experimentation,
Honda is an example of emergent strategy. All’inizio il target era il ciccione Americano, poi è venuto fuori che
luck, learning and adaptation are important!
il prodotto che vendeva di più era una specie di Vespa  in a couple of years Honda abandoned the idea of
The fallacy of detachment – Impossible to divorce formulation from
the other motorbike.
implementation
It’s not a story of forecasting or analysis, but of having an emergent strategy.
The fallacy of formalization – Inhibits flexibility, spontaneity, Emergent Strategies: some examples [1]
intuition and learning
The actors 37
• Honda and the entry in the US motorcycle market in

1959.
BoD: external
• the failing launch of a fast,stakeholders
powerful 305 cc
motorcycle designed for the US market
(people …
not
• ….And the unexpected success ofinvolved
the 50 in
ccthe
Supercub,
management
Emergent Strategies: some examples [1] apparently unsuitable for the US market (large and
of the
luxurious motorbikes)
company).
• Honda and the entry in the US motorcycle market in Strategic
1959. planning
• the failing launch of a fast, powerful 305 cc department:
could also be
motorcycle designed for the US market … consulting
• ….And the unexpected success of the 50 cc Supercub, companies.
apparently unsuitable for the US market (large and
luxurious motorbikes)
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• Importance of politics in strategic decision 02/03
Attributes of strategic planning (1)
Attributes
• Strategic thinking (e.g. scenario planning)
• Planning horizon (short‐term vs. long‐term) Attributes of strategic planning (2)
• Type of orientation: internal (i.e. towards
exploitation of internal resources) vs. external • Formalization of the process
(i.e. threats and opportunities) • Level of Decentralization (i.e. line employees
• Deliberate vs. emergent strategy and middle managers involved? how?)
• Control on performance • Shared vision vs. cognitive conflict within the
• Speed of strategic decisions and of their top management team
The role of strategic planning
implementation (agility) • Importance of politics in strategic decision
The role
Strategy as Decision Improves the quality
Support of decision making
Strategy as 23
Creates consistency
Coordination & and unity
Communication
The role of strategic planning
Improves performance
Strategy as Target by setting high
aspirations
Strategy as Decision Improves the quality
Support of decision making
The role of the analysis in strategic management:

- Analytic tools based on concepts and theories are complements Strategy as and not substitutes for managers’
Creates consistency
Coordination &
experience,
intuition
www.contemporarystrategyanalysis.com
and creativity.   Communication 48
and unity
- The purpose of strategy analysis is not to provide answers but to help us understand the issues.
Improves performance
 �Strategic Analysis is not a science (no algorithms, no formulae to determine
Strategy as Target the optimal
by setting high
strategy), but rather a set of techniques to identify, classify and understand theaspirations
principal factors
relevant to strategic decisions.  
Takeaways © 2013 Robert M. Grant
48
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1. Strategic choices often “emerge” on the way.  
2. Strategic Planners (they analyze, provide the strategic inputs) ≠ Top Management Team and
the CEO (they take strategic actions)  
3. Differences among firms in the way they organize strategic planning  
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2.4 Competitive advantage and metrics
The ratios by themselves say very little about a firm. Performance must be compared with a standard�e.g.
the average of the accounting ratio of the other firms in the same industry  
 performance is meaningfully measured only on a business‐by‐business basis because this is where
competitive forces and competitive advantage is won or lost.  
Accounting rations
Operating Income: OI = revenues – cogs – sga [the financial part is not included]
Net Income: NI = OI – finalcial expeses – plus or minus valenza – other expenses – tax
Which ones?
1. Return on Sale: ROS = Operating Income / Revenue)
It ignores the capital invested poor measure of how well resources have been used  
2. Return on invested assets: ROA = Operating Income / Total Assets)

-it considers the capital invested
-It can be compared with the firm’s cost of capital
3. Shareholder value (measured by stock price). Unreliable on the short‐medium term, despite the fact
that is often drives managers’ strategic decisions.
OSS: ROA è più importante ROE = NI/E, che è oggettivo, infatti se E ,ROE, ma basso E vuol dire situazione
di debolezza.
Looking just at one of those factors is not enough:

it should be a strategy in the long term but it can
be dangerous at measuring strategy (they just look
at revenues ant not at profits).
Economic measures of competitive advantage

• The ≠ between Return on capital and cost of capital reflects the idea of economic extra profits (≠ from
accounting profit)  
• Economic Value Added (EVA) = Net Operating Profit after Tax / Capital Invested. EVA measures economic
profits  really good for strategy (≠ traditional accounting bc here opportunity costs are taken into account).
• Weighted Average Cost of Capital (WACC), it includes:
· The cost for equity and the premium for risk (estimated through models,CAPM for public companies)
· The cost for debt capital  
Accounting ratios look at very short term; I’m not able to say anything about the future (R&D) or customer
satisfaction (present)  it’s very important to combine different metrics and perspectives (operating
efficiency, customer satisfaction, learning new things…
Takeaways
1. An effective strategy can lead to a competitive advantage� higher (accounting) profit ratios than
competitors and extra economic profits
2. Beyond financial performance:
- Importance of holistic approaches (e.g. balance scorecard) for monitoring performance with a
look at operations, customers, and learning.  
- Shared economic value (for the firm and society)  
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3. External environment: industry analysis
3.1 Assessing the external environment
Objectives: To understand how industry structure drives competition, which determines the level of industry
profitability, to assess industry attractiveness, to formulate strategies to change industry structure to
improve industry profitability, to identify Key Success Factors for competition,… .
Attractiveness for who? investors.

Tobacco industry are attractive because those companies makes a lot of money (oligopoly). We also have to
consider that for tobacco and drugs the loyalty of customers is high. It’s very difficult for other companies to
enter the industry.
Instead, airplanes does not have loyal customers (they only look at the lowest price), and they can not
differentiate the product (at least, not very effective). Hotels could be very differentiated.
profitability of tobacco > crude oil: it’s because
· higher investments are needed to enter the industry: oil industry is more capital intensive (bigger plant
needed)
· no substitute products for cigarettes and tobacco, while solar/electrical/etc vehicle exist
The steel industry can’t be very differentiated and the need of big plants implicated large fixed costs → high
exit barriers; buyers have very high bargaining power.
The effect of price due to many companies in perfect competition exiting the industry is that the supply curve
shifts lefts; an increase in price then corresponds to an increase in attractiveness.
An example of how interned changed the value created is trip advisor or expedia: they get 30% of the profits
but they are only intermediaries, they don’t create more value.
07/03/2016
The Industry Environment (suppliers, competitors, customers) lies at the core of the Macro environment
(general economic trends, social or political rends, demographics, technology…).  The Macro Environment
impacts the firm through its effect on the Industry Environment.  
3.2 Porter’s five forces

Porter’s Five Forces
The keys influence industry profitability (economic attractiveness) are explicable in five industry forces.
Competition Framework
Threats from substitutes
Substitutes are products or services that
are not considered competitors, but fulfill
a strategically equivalent role for the
customer. e.g, traditional radio stations vs.
music streaming service (e.g. Spotify).
[ex:internet for travel agencies].
OSS not the same product or market, but
satisfy the same needs of customers.
Extent of competitive pressure from
Horizontal forces procedures substitutes depends on:
(related to the scope of the - Buyers’ propensity to substitute
relevant market and to the
- Relative prices and performance of
intensity of com petition)
Vertical forces substitutes, i.e. easiness in detecting the
(related to the value chain price‐performance characteristics of
structure) substitutes (airline/trains turin-rome).
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The threat of entry
Entrants’ threat to industry profitability depends upon the height of barriers to entry.
- Capital requirements (e.g. the retail banking industry)
- Economies of scale; the MinimumEfficientScale is the minimum quantity you have to produce to be
competitive (for automotive: ≈ 6 millions cars per year).
ex: 5 incumbents in an industry offering a homogenous product. Total demand is 22,000 units per year.
The minimum efficient scale is 4,000 units for each firm. ...thus, there is still room for entry.
What can potential entrants do? → despite the presence of demand, you are not going to enter, bc for
you it’s very hard to arrive to produce 4000 units per year. The other firms just don’t want to grow up
(so lowering price): for them is enough.
- Learning economies: Cumulative volume of production gives advantages in average costs to incumbent
firms (e.g. electronic industry); unexperienced manufactures has a cost disadvantages (ex: surgeon,
teaching…).
Differences:
· economies of scale depends on the quantities you produce each year (bigger plant=more efficiency)
· learning economy depends on time (more time you have done it = more efficiency)
- Product differentiation and customers loyalty (e.g. consumer goods→late entrants incur additional
advertising costs amounting 2.12% of sales compared to incumbents); in general product differentiation
often means customization, it often implies loyalty.
- Proprietary technologies (e.g. patents and industrial secrets)m
- Favourable access to raw materials (e.g. De Beers conrols all of the diamonds mines over the world;
Aramco w.r.t. oil reserves; Gazprom)
- Access to channels of distribution (e.g. shelf space in stores for consumer goods)
- Regulatory barriers (e.g. licences from a public authority, ex taxicabs)
- Risks of retaliation from incumbents (ex the major airlines have a long history of retaliation against low-
cost entrants); to avoid retaliation by incumbents, new entrants may seek initial small-scale entry into
less visible market segments. When Toyota, Nissan and Honda first entered the US auto market, they
targeted the small-car segments, partly because this was a segment that had been written off by the
Detroit Big Three as inherently unprofitable.
-
Rivalry between established competitors

The degree of Rivalry in an industry increases price competition. More aggressive price competition:
- The lower the market concentration (number and size distribution of firms); the four-firm
concentration ratio (CR4) is the market share of the four largest producers. As the number of firm
increases, coordination of prices becomes more difficult
- The lower the diversity of competitors (difference in goal, cost strategies, etc.)
- The lower the product differentiation; where the products of rival firms are virtually indistinguishable,
the price is the sole base for competition;
· a product is vertically differentiated when it is unambiguously better (or worse) than competing
products (if it were sold at the same price of competing products, it would capture all the market
share): ex Sea‐view or back‐view room in a hotel.
· a product is horizontally differentiated when only some consumers prefer it to competing
products (holding price equal). (=> because of idiosyncratic preferences).
ex: hotels for availability of complimentary services such as laundry, amenities for kinds, gym,
restaurant,.
ex: Soft drinks, and food
- The higher the excess capacity and the exit barriers; excess capacity is more likely when large
increments are needed to expand production capacity. If your workers/plants (high fixed cost) etc
can produce 3 million cars per year but you only sell 1.5, what do you do? reduce the price. Industries
where the market demand is growing have higher profitability, the higher the market growth, the
lower the ratio of cash flow over investment: this is because you don’t need cash.
Ex: Apple has more cash than American government
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- The higher scale economies
- The higher the ratio of fixed to variable costs. if you have lower VC but high FC, what can you do to
achieve your BEP (break even point) ? ex whatsapp . companies are more willing to lower price in
order to lower fixed costs. BEP = FC/(p-uvc) where uvc is the unit variable cost. So what about airline
industry? there are a lot of fixed costs (manteinance,fuel …) but the price of having one person more
on board (MC) is zero (the fuel is still the same).
Bargaining power of buyers

The lower the weight that your product has on the buyers product, the lower the buyer sensitivity.
The extent to which buyers are able to depress profitability depends on:
1. Buyer’s price sensitivity
- cost of product relative to total cost → Does the item comprise a big percentage of the buyer’s total
costs? (e.g. can producers for beverage manufacturers)
- product differentiation→ Whether purchased item is a commodity or differentiated? (e.g. water bottle
producers vs. perfumes or soaps)
- competition between buyers
- Is the item critical to the quality of the buyer’s own output?
2. Relative bargaining power
- size and concentration of buyers relative to sellers (ex large health maintenance organizations in US)
- Buyer’s information on price, costs, competitors’ performance, quality. (e.g. cost and quality of
specialist doctors, plumbers, etc.)
- Ability to backward integrate (e.g. Campbell Soup produce cans)
Bargaining power of suppliers

Analysis of supplier power is symmetric (e.g.cartelization in the OPEC case, Lega Calcio for selling
broadcasting rights for serie A events to media).
Because raw materials, semi-finished products, and components are often commodities supplied by small
companies to large manufacturing companies, their suppliers usually lack bargaining power. Hence,
commodity suppliers often seek to boost their bargaining power through cartelization). Conversely, the
suppliers of complex, technically sophisticated components may be able to exert considerable bargaining
power.
Labour union are important sources of supplier power: when union are strong it leads lower profitability.
Examples: airlines, automobiles. In airlines suppliers are very powerful.
US industries where over 60% of employees are unionized earned a ROI that is 5% lower than industries
where less tan 35% are unionized.
EX of supplier power: the case of online travel agencies (Expedia/booking.com)
Other comments
• Five forces or six? Introducing complements. (as a <— force): the suppliers of complements create value
for the industry and can exercise bargaining power.
While substitutes reduce the value of an industry’s product, complements increase it.
• (Some) drivers of profit dispersion:

- Technologically progressive and fast growing industries (non mature)
- Markets with opportunities for product differentiation (leads to a lot of dispersion in profits)
- Industries with little union presence
- Markets with many product classes
Ex: pharmaceutical industry, it’s a really technologically progressive industry → high
Ex: steel industry, really mature from a technological point of view (technology and raw material are the
same since 100 years) → low 
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• The internet: value creator or destroyer for firms?
Oss: the effects are considered from a company point of view (in the attractiveness of an industry customers
are not taken into account).
Ex of threat of entry: for ING is very difficult to enter the Italian market.
Applying five-forces analysis - takeaways

(1) Forecasting industry profitability
ast profitability a poor indicator of future profitability
if we can forecast changes in industry structure we can predict likely impact on competition and
profitability
(2) Strategic planning
Once we know which structural features of the industry support profitability and which depress profitability,
we can choose a favorable positioning within the industry:
- In terms of market segment (e.g. Genzyme and orphan drugs)
- In terms of the vertical stage in the value chain. Firms can control and change the structure and the
value chain of the industry: e.g. Google in the mobile phone industry with the OS Google Android;
Ikea, by furniture manufacturing rather than assembling.
Strategies to improve industry profitability:

· What structural variables are depressing profitability? Can firm change industry forces? Which can be
changed by individual or collective strategies?
· Market Positioning in segments with favourable industry forces (e.g. Genzyme and the orphan drug market)
· Changes in the macro‐environment can modify the industry structure over the long‐run (e.g. technological
change in steel manufacturing, ICT in call centers and retail banking; the Internet in the hospitality industry).
ex: concorde paris-ny in 4 hours, developed in ‘60s, aim speed; the project was abandoned because the price
of fuel/oil has increased a lot after ‘70s.
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3.2 Industry boundaries, segmentation analysis and key success factors
Defining industries
It’s a group of firms that supplies a market. The industry analysis (5 forces) looks at industry profitability being
determined by competition in two markets: product markets and input markets.
Ex: industry = packaging, markets in which it competes = glass containers, aluminium cans, … .
Similar issues arise in relation to geographic boundaries.
The central issue in defining industries is to establish who is competing with whom. To do this we need to
draw upon the principle of substitutability, on both:
- demand side: are buyers willing to substitute between types of cars and across countries
- supply side: Are manufacturers able to switch production between types of cars and across countries
Price for customers and capability to enter a market for suppliers as a criterion for identifying the
geographical boundaries of a market.
We may need to draw industry boundaries differently for different types of decision (the longer‐term the
decision the broader the geographical market).
Key Success Factors

Starting point for the analysis of competitive advantage.
What you need to do to survive competition in your market/industry.
15
How much does industry matter?
•Structure‐Conduct‐Performance (SCP)
- by defining the range of options and constraints facing a firm, industry structure determines firm’s
strategic conduct and long‐run performance (at the firm and the society level)
- Low emphasis on the heterogeneity of firm’s resources and strategies conducts
• Resource‐Based View (RBV)  Heterogeneity in the firms’ endowment of resources matters. Those firms
with rare, valuable, inimitable and appropriable resources enjoy higher economic profits→strategy is
important!  • Empirical research indicates that Firm‐specific effects are more important than industry
effects. Consistent with RBV, rather than with SCP.
Segmentation Analysis:
The Principal Stages
The objectives of industry analysis
1. Identify key variables and categories
• Identify segmentation variables
• Reduce to 2 or 3 variables
• Identify discrete categories for each variable
2. Construct a segmentation matrix
3. Analyze segment attractiveness
4. Identify KSFs in each segment
5. Analyze benefits of broad vs. narrow scope
• Potential for economics of scope across segments
Market segment • Similarity of KSFs
A market segment refers to a group of customers within a •broaderProduct differentiation benefits of segment focus
market who possess a common set of
characteristics:
– they have similar needs
– they reference each other when buying www.contemporarystrategyanalysis.com
– they are alike in the way they:

· View and evaluate products
· Perceive value
· Purchase products
Why segmentation is important in strategic analysis? Because some market segments can be more attractive
than others (in the five forces and in some macro‐environment The Basis for Segmentation: Customer an
conditions) → price differentials across
market segments. Product Characteristics as Segmentation
Ex: Dell «We cut the market and then cut it again, looking fro the most profitable customers to serve». Who
is the most profitable customer?
Variables
Segmentation Analysis: the principal stages (!!!!)

1. Identify key variables and categories
• Identify segmentation variables
• Reduce to 2 or 3 variables
• Identify discrete categories for each variable
2. Construct a segmentation matrix.
3. Analyze segment attractiveness.
4. Identify KSFs in each segment
5. Analyze benefits of broad vs. narrow scope
• Potential for economics of scope across segments  
• Similarity of KSFs
• Product differentiation benefits of segment focus  
Each segments entails specific success factors.
16
The most appropriate segmentation variables are those that partition the market most distinctly in terms of
limits to substitution by customers and by producers. Price differentials are a good guide to market segments:
distinct market segments tend to display sustained price differentials.
Ex of segmentation matrix: rows products (luxury cars, minivans, …) and columns regions.
Segmentation is usually horizontal: markets are disaggregated according to products, geography, and
customers group. However, we can also segment an industry vertically by identifying value chain activity. In
the US automobile industry, downstream activities such as finance, leasing, insurance and service and repair
are much more profitable than manufacturing.
So also vertical segmentation is important:
- the stages of the value chain are different in terms of value creation opportunity
- the way value is created along the value chain depends on the industry → depends on the technology
and the skills required (e.g. assembly in car manufacturing and forniture)
Profitable market segments in the industry of personal navigation assistants: Garmin has less volatility of
profitability than tom-tom, because it has different segments in the market (boats, run, smart watches,…).
“Blue ocean” market segments

• Invent a new uncontested market space from within an existing industry by modifying an established
product/service. How?
- Cost savings (eliminate/reduce the factors that rivals in other segments compete on)
- Increase buyer value by raising/creating elements that the industry has never offered
• Benefits: Avoid overcrowded and unattractive market segments (no profit, no growth!) → they are red
oceans (bloody water)
Examples: cirque du solei, southwest/Ryanair, Ford T.
Two-columns table: reduce costs (eliminate, reduce) and increase buyer value (raise,create).
Empty segments can be more attractive if:

- The industry forces are potentially favorable (e.g. Genzyme case)
- Firms are able to rethink the way they bring economic value to the customers (blue ocean strategies)
Summary: where is more convenient? Where 5 forces are stronger and where more competition
 lo scopo è quello di rendersi piu unici sul mercato.
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CASE: Genzyme’s focus on “Orphan Drugs”
By 2006, Genzyme was the world’s third largest biotech company proving that a profitable business could be
built around small disease populations.
Genzyme was founded in 1981 by scientists studying genetically inherited enzyme diseases. It adopted a
very unusual strategy of developing drugs for rare diseases rather than “blockbuster” drugs  Genzyme
concentrated on the “orphan drug” market that had a market of only a few thousand people
· Requires smaller clinical trials, less advertising, smaller sales force, less competition
· Insurance companies would be willing to cover the drugs due to the severity of the diseases and a limited
number of patients for the drug.
· the drug is required to be taken for the lifetime of the patient.
- In 1983, the FDA established the “Orphan Drug Act”, giving seven years market exclusivity to developers of
drugs for rare (<200,000 patients) diseases
- Also chose unusual strategy of doing its own manufacturing and sales rather than licensing to a large
pharmaceutical company
- Diversified into side businesses to fund its R&D: Chemical supplies, Genetic counseling, Diagnostic testing
Strong barriers: to develop a new drug much time (10-14 years) and resources needed on R&D; patents;
expertize on rare disease A is not useful for B.
It’s a nieche market: servono dottori specializzati (magari 2-3 nel mondo o comunque qualche decina), con
loro sei a posto.
You do not have substitute products at all with orphan drugs.
CASE: The US Airline Industry in 2012
What can airline companies do to reverse the situation? The main reason of negative profits is: FUEL.
Different possible solutions:
- Long-term contracts: aging contracts
- Buy refinery company: vertical integration
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4. Internal analysis
4.1 The role of resources and capability in strategy formulation
Basing strategy on resources and capabilities
They are the primary determinants of firm’s profitability.
Strategy matches (internal) resources and capabilities with market opportunities (external).
Two logics for strategy thinking:

(1) Who are our customers? Which of their needs are we seeking to serve? → customer/product-based
strategy. ex: Eastman Kodak, Olivetti
(2) What are we good at? what can we do? in which
markets? → resource/capability-based view
ex: Honda, wide range of gasoline-engine products (not
only motorcycle producer)
ex: Canon, not only cameras but application of three areas
of technological capabilities: precision
mechanics, microelectronics and fine optics (printers,
calculators,…).
ex: Microsoft
ex: Fujifilm’s expertise in nanotechnology for placing
chemicals applied to cosmetics
Those companies that when faced with radical technological
change attempted to maintain their market focus have often
experienced huge difficulties in building new technological
capabilities needed to serve their customers.
The growing focus on resources and capabilities depends on:
more unstable environments makes them more stable
foundation for strategic planning. Resource-based strategic analysis as a way for dynamic consistency.
Resources and capabilities as sources of profits

• Industry factors only account for a small proportion of inter-firm profit differential → Distinction between
superior profits coming from INDUSTRY ATTRACTIVENESS and COMPETITIVE ADVANTAGE
• The distinction between industry attractiveness and competitive advantage (based on superior resources)
as a sources of a firm’s profitability corresponds to economists’ distinction between profit, arising from: 
- market power (MONOPOLY RENTS) or from abuse of it
- superior valuable resources (RICARDIAN RENTS)
Emphasis on differences among firms
Leverage on a specific bundle of Res&Cap (i.e. Disney) (one vs bundle)
• Role of managers and organizations with respect to strategy: identification of both Res&Cap
• What are “underutilized” resources?
19
The importance of resources
Resources are tangible and intangible assets (ex company reputation) that a firm controls and can use to
conceive and implement its strategy. A single resource is not a “competitive advantage”, but an input factor.
It’s very difficult to list resources of a firm.
The difference between assets and resources is that assets are measurable; resources are like assets from an
accounting point of view but considering also HR, brand, the fact to be in a good position in the city like Zara,
customers databases, … .
The primary goal of resource analysis is not to value a company’s asset, but to understand their potential for
creating competitive advantage.
The acquisition/internal development of Resources at lower cost than competitors is crucial for a competitive
advantage; importance of:
- Foresight (i.e. better information than competitors). Also thanks to complementarity with other
resources, firms can extract greater value from acquired resources. Ex quelli che hanno capito
subito che le terre di Barolo erano fertili
- Luck
- Financial backing; ex Google che ha fatto tante prove e anche tanti fallimenti; FCA criticata
perché non può permettersi di affrontare progetti lunghi e rischiosi come ad es le machine
elettriche.
For a resources or capability to establish a competitive advantage, two conditions must be present: relevance
(to the KSFs in the market) and scarcity (in oil and gas exploration, technologies such as directional drilling
are widely available, hence
they are “needed to play” but
are not “sufficient to win”).
Resources heterogeneity and

immobility may explain
performance heterogeneity
within an industry.
Rare and valuable resources
provide “Ricardian rents”:
fertile lands for Ricardo,
expertise of human resources
applied to Product design in
Apple, Barolo vineyard for few
wine makers (free heritage of
the local marquis family). ROS
and ROA for Cantine dei
Marchesi di Barolo are many
percentage points higher than
median value for Italian firms
in wine industry.
For tangible assets, we can create additional value in two ways: by economizing on their use of by employing
them in a more profitable way.
From resources to capabilities

Resources themselves are not enough (not productive on their own) => To perform a task, a team of
resources must work together => importance of capabilities/competences
Capabilities describes “what a firm is good at”, and are the essence of superior performance → identification
of capabilities is a very hard task. Capability is a firm’s capacity to deploy resources for an end.
20
Thus what matter for performance is:
- The firm’s capacity to acquire/develop resources at lower price than rivals in a competitive market for
resources (e.g. Barcelona FC and “La Cantera” school for young players)
- The firm’s capacity to combine resources and deploy them effectively (e.g. Honda lower budget for R&D,
but higher growth rates) => the relevance of routines, capabilities and organizational design.
Ex: Fiat injection system ‘90s, but no capability to develop it (especially money) so it had to sell it to Bosh.
Routines
Capabilities are based upon many organizational routines, “repetitive, recognizable patterns of
interdependent actions, carried out by multiple actors”, developed through learning-by-doing.
- Routines reflect procedural knowledge (i.e. “how things are done here”) that can lie in the formalization of
organizational processes (e.g. process templates in McDonald’s → in that case routines are often called
“practices”) or in mindlessness behaviors.
- Routines are a way for creating and storing organizational knowledge.
- Firms adopt routines to: 1)establish coordination 2)reduce uncertainty and variance of behavior
- Operations follow routines and managerial processes too (e.g. allocating budget for R&D projects in the
capital budgeting process)
- Replication of routines from one firm’s unit to another one is difficult
- It is through the adaptation and replication of routines that firms develop and change their capabilities.
Routines give efficiency, but not adaptability and flexibility to change (rigid to unforeseen event, ex
technological changes). They are the reason why companies are resistant to changes (not bc they’re myopes).
Examples
• Toyota  -Main capability: lean production.
-Important routines: kanban, quality circles, direct employees involved in maintenance of
machineries, job rotation within the team, quality control, and many others
- Important resources: Japanese culture based upon trust and ob‐ for‐life  
• Apple -Main capability: new product development and the many routines on “agile” development
(e.g. weekly product reviews, frequent iterations among product and process
engineering, etc.)
-Importance “resources”: Steve Jobs’ leadership and vision..and many patents
• Google’s R&D development capability and “20% time” rule
• Zara and the ordering routines for store managers
There tend to be a tradeoff between efficiency and flexibility.  
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4.2 Assessing resources and capabilities: the VRIO framework
VRIO framework
• The question of Value
- Does a resource/capability create a significant economic value in the industry/market segment?
- Is it exploitable in strategic terms (to neutralize a threat or to seize an opportunity in the
environment?)
• The question of Rarity
- Is the resource/capability commonplace or rare among competitors?
• The question of Imitability
- Is it possible for competitors to obtain or develop the resource/capabilities? At what cost?
• The question of Organization
- Do processes, culture, incentives, organizational structure within the firm allow to support the
development or the exploitation of value/rare and costly-to-imitate resources?
Oss: it has to be not imitable, but it’s not a black-or-white condition: it’s also a matter of how much will a
competitor pay for that resource.
Value Chain
Porter, 1985. Sequence of activities a firm performs to design, produce, sell, deliver and support its products.
It may embrace activities performed by partners.
It’s especially important to analyse the value created (detecting differences in value creation compared to
competitors).
The goal of the value chain: What resources and capabilities in each stage? Especially important to analyse
the Value created, and to detect differences in value creation compared to competitors. Should we outsource
some stage? should we develop new activities? Do we have the resources and capabilities for the new
activity?(GM vs. Ford and customer finance in the 1920s)
Benefits of value chain thinking: look at the activities in the value chain as value drivers, not just as cost
generators. Firms must look beyond the boundaries of their own organization → look at the overall industry
architecture (L9). Are these activities that the firm should insource or manage more carefully even outside
its boundaries (e.g. cork closures for wine makers)? Concept of design attributes (L5).
 
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4.3 Defend and leverage on capabilities
Ex canon visto prima.
Ex Amazon that is better than banks in small business because through big data it can control if they sell
products everyday and not just at the end of the year through financial statements that can always be full of
financial tricks.
Innovation and core competencies

Innovation and core competencies
In Prahalad and Hamel’s view, core competency refer to a firm’s ability to use multiple resources and skills
to realize some core products → coordinate diverse production skills and multiple streams of technologies.
Specialization on few distinctive competencies and their reapplication as smart way for diversification
• Core competencies as a pattern of technological
(efficiency of the R&D process and absorptive capacity).
specialization. Areas of the firm that do not provide core
A core competences:
competencies can be outsourced.
- provides a potential access to a wide variety of markets (diversification
- makes a significant contribution to the perceived customer benefits of the end product.
• Few companies are likely to build world leadership in more
- is difficult for competitors to imitate because it is a complex harmonization of individual
than five or six core competencies.
technologies and production skills.
Examples: Sony in miniaturization; Honda in engines; Casio in minaturization, micro-processor design,
• A firm that maintains world manufacturing dominance in core
material science; Swatch (from watches to bijoux) and Alessi in industrial design; Geox in breathing systems
products, it would reserve the power to shape the evolution
for the footwear and the apparel sectors.
of end products
Core competences as a pattern of technological specialization. Areas of the firm that not provide core
competences can be outsourced. 57
Few companies are likely to build world leadership in more than five or six core competencies.
A firm that maintains world manufacturing dominance in core products, it would reserve the power to shape
the evolution of end products.
Core Competencies (CC) and Core Products
End products The tree is the company.
Leaves
CC are like the roots in a tree: they provide nourishment,
sustenance and stability (they must be very strong!). The core
Limbs
products are the trunk, and the end products (leaves) are a
CC are like the
recombination of CC in a different way.
roots in a tree:
they provide
Trunk By exploiting
nourishm ent, (=re-using) their CC, firms can develop new
products, enter new markets and define a strategic roadmap →
sustenance and
they explain firms’ product diversification strategies.
stability.
Roots
Ri-applications of CC entails that firms are able to 1) re-apply

By exploiting (=re‐using) their CC, firm s can develop new products,
resources (ex HRs and their know-how) across business units, 2) orchestrate HRs among business units
enter new m arkets and define a strategic roadm ap. ‐‐> they explain
(importance of corporate-level planning) 3) absorb the technologies by their internal R&D labs (avoiding the
firm s’ product diversification strategies
case of Xerox with computer technologies in the 1970s).
Benchmarking for observing competitors or firms in other industries (but contextual conditions are important
and may not be replicated).
23
The framework for appraising Res&Cap
In alto a sx: ex bookstores, how can

they compete with Amazon? for
example with relax area, not lower
price but instant gratification and
relax.
Exploitation of core competencies

may not encourage exploration
projects on other
technological/scientific fields. Ex
Organizational routines may create
inertia. OSS core competence as
an element for rigidity for
technological change (ex: kodak)
Outsourcing finds its root in strategic analysis and in the focus of resources on core capabilities.
When resources and competencies are difficult to imitate

(1) Unique historical conditions
a. Gaining a low‐cost access to resources as a first mover (e.g. ESPN with extreme sports in the
XGames, Barolo land for Barolo wine’s producers)
b. path dependence, which may impede rivals to apply the same routines and resources of the
firm(s) with a competitive advantage (e.g. Southwest in applying low‐cost philosophy in the airline
industry). It’s not inertia, but it’s impossible to do that.
(2) Causal ambiguity: tacit knowledge can’t be codified and transferred. Replication of routines become
difficult even for the firm that has developed them → managers may not even be able to descrive
persuasively what they do better than rivals. Ex: cooking; McDonald’s going abroad; Toyota in the
US (NUMMI plant)  ineffective for many years, the same lean production worked very well in Japan
but not in the US, it’s difficult to exactly transfer things at operating units
(3) Social complexity, e.g. Japanese culture based on trust and job for life at the origin of the successful
application of lean production and just-in-time
(4) Patents; but they may decrease cost of imitation for rivals, as the firm is forced to reveal a significant
amount of information (public) about the product. Patented technology is not immune from low cost
imitation (patent around the innovation).
Even when replication is possible, incumbents firms benefit from the fact that res.&cap. can be replicated at
disproportionate costs by would‐be imitator → Dynamic view of the competitive advantage for first‐movers.
Two mechanisms can reinforce a first mover’s advantage:
- Asset mass efficiencies (“the more you have, the faster you can get more”). A strong initial
position in technology development or reputation facilitates the subsequent accumulation of
resources. Ex google mapsstreet viewnews about traffic and public transport. Ok che è
rischioso essere il first mover, ma se hai successo hai un grosso vantaggio.
- Time compression diseconomies (“It takes time to accumulate resources”). Crash programs of
R&D and “Blitz” advertising campaigns are less effective than similar expenses made over a
long period (e.g. Amazon and its huge distribution centers across EU and US).
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4.4 The role of the local environment in capability formation
Some capabilities can be

embedded in the unique
combination of condition of a
geographical cluster → in some
industries competitive
advantages are concentrated in
one or few nations (Porter, 1980)
 
Factor conditions
the nation/region position in factors such as skilled labor or infrastructure.
factor endowment: e.g. India’s education system (software engineers), low wage and linguistic heritage of
the British Empire. Venture capital industry for Silicon Valley in the US
a factor disadvantage: low flexibility in the labor market, explaining the Italian excellence in the industrial
machinery industry, Swedish excellence in slalom skiing, the glass house growing technique for the Dutch cut
flower industry → trying to compensate a factor disadvantage sometimes brings a competitive advantage
Local demand conditions

sophisticated buyers in the home market: e.g.“free speed for free people” and the German car industry, the
watch industry and the sharpness of the Swiss, the apparel industry in Italy
rapid demand growth in the home market (the Italian appliance industry after the WWII, quindi sono dovuti
diventare super efficienti)
Related and supporting industry

They provide input or complementary goods.
Lighting and forniture in Italy; footwear in Italy and leather/leather working machinery.
Structure and rivalry in the home market

Competition in the home market is important to accelerate the technological development. The risk of the
industrial policy of “national champions” → see PAS and Fiat in France and Italy, respectively (Protectionism
for Fiat from Italy in ‘80s, it wasn't trained to deal with global competition); 1998 deregulation (USA, airlines)
while european union removed barrier to entry in 1992.
Is it better to protect the company to the local market or make it face a local competition? It’s better the
competition.
Examples:
L’aria condizionata è migliore in Japan, infatti lì è importante che siano silent&small (gli appartamenti sono
piccolissimi e attaccati, non puoi dare fastidio ai vicini) e inoltre il clima è umido. Oppure gli steel makers in
Italy che sono al sud, dove ci sono grandi porti (vantaggio logistico); però la domanda è nel nord, quindi ce
n’è anche uno vicino a Brescia (dove maggiore efficienza energetica e più vicini alla demand).
Tourism in Italy: factor advantages (question of chances, lucky). What the government do? We can think
about related industries that support tourism: high speed trains, restaurant, hotels and hospitality (but they
doesn't support here), tripadvisor (it could help but their % doesn't go to Italy).
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CASE: Land’s End
Topics: VRIO framework, sustainability of competitive advantages in Internet-related markets, unbundling of
the value chain
Value
• customers: più customized, non devi farti misurare da qualcuno, ti sta meglio addosso; invece il fatto di
avere tantissime scelte può non essere un valore aggiunto.
Sei disposto a pagare di più perché è qualcosa che fits your body. Non devi andare fino al negozio… .
Confidence in re-orders: se era giusto, riordini e quindi rendi i customers loyal.
• company: less operating expenses, ex no printed catalogues, non servono più tante persone.
 verifichiamo se sui financial statements notiamo queste cose. Not that much increase of profitability!
Gross profit margins remained pretty constant  concetto di value chain.
Architecht Solution Integrated (ASI): how does it make money? It charges retailers (land’s end) but not
manufacturers.
Fixed annual fee (not that high) + variable commission fee (10-12%) to every customized apparel  ok che
la company è valuable ma non tutto il valore va a lei.
Cash increases, but it’s mainly the consequence of new shareholders investing in the equity (accounting, T).
Moreover, reducing the time of credits (it’s a +): you pay in advance (good for the company).
#inventory days: decreased, and also credit days.
Rare
At that time, it was rare. It’s not appropriable, because the value it’s not captured by land’s end but by ASI.
OSS: customers data are under the property of land’s end  it creates a switching cost for the customers.
Tactic (≠strategy) to preserve an innovation advantage: decidere quando lanciare un’implementazione di e-

commerce, di sicuro non vicino al Black Friday perché non avrei tempo di provare e serve che i consumatori
si abituino alla user interface.
The sustainability pf product differentiation advantage: product customization.

Land's end supplier and technology was imitable, but what was not imitable was the first-move and
customers' data.
What allows imitation? Zara che copia da burberry dopo la presentazione alla fashion week di Milano e
riproduce a costo basso. Allora ha deciso di non presentare più i propri prodotti lì —> I compete on velocity.
For Burberry you have to became very good in forecasting demand instead of waiting and then have the
product after one year.
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CASE: Kodak and the digital revolution
Topics: strategies based on resources and capabilities; strategic decisions under technological discontinuities.
Role of analogy, conflict and cognitive biases in strategic thinking.
Simlilar case of online education, Blockbuster and electric cars.
The main profit driver was film. Holy trinity, very profitable: films – papers – chemicals.
The first customers, the others retailers.
Main performance target was quality, resolution.
It’s not important today: ex pictures of food or socials; similar for airplanes that before was speed and then
fuel efficiency.
Good relationship with retailes and chemicals  become not so relevant anymore.
Paradigm: there is a lot of ambiguity  Kodak understood digital picture was important, but they dit
not understand how to manage it; they were not myoped, they invested a lot in R&D.
Strategy: product differentiation.

Marketing point of view: price was quite high, they tried to collaborate with Microsoft but it failed.
They looked at it more like a “threat” than opportunity. It’s been proved that when you feel like this you
tend to over-react and you over-invest in it  they invested in digital industry more than 5% systematically
and more than 9% some years.
S-shaped technological improvement curve: they are at the point it’s becoming flat.
They lost retailers (big mistake!) and also customers because they became more sensitive to prices
(became more a commodity).
Mistakes (problems of inertia):

1. They lost their leadership in kios&printing: not invested more on still improve performance (not
only digital)
2. Lost distributors: not enough resources on maintain retailers (ex Fuji LA Olympics)
3. Invest in wrong things (not enough efforts on improving the process, more R&D in films)
performance
No conflicts = no innovation (new visions are needed).

Kodak: all people from the same city, education, view  Fiat very similar (that’s why
Marchionne took 30 top-medium managers from outside).
conflicts
They tried to make everything, but not so aggressively in none of those fields.
Low velocity to changes  bankruptcy in 2012.

What does Kodak do today? Things related to printing. They tried to go back, but those are small business
nieche markets; what Kodak did resemples page 19.
Porters’ 5 forces
- barriers to entry: NO because it’s a competitive market, many suppliers in Asia can do it
- competition: FujiFilm (digital printers, collaboration with Wal-Mart), HP for printers,
Webservices (hundreds of companies)
- many substitute products like smartphone
From the five forces’ point of view, the digital industry is not profitable.
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Blockbuster
This case is really similar to the blockbuster one.
Problems: you have to go there physically and to pay if you are late, limited variety linked to logistic problems
(difficult to face peaks like Sunday afternoon).
OSS: Netflix 10 years ago you could order DVD via email
What would you have done if you were Blockbuster CEO?
- Reconverting to videogame selling (broadcast connection slow)
- Organize talks to animate community and try to share experience
Main lessons learned

• Harder to change strategic beliefs (i.e.the centrality of the “razor‐and‐blade” business model) in
times of technological/market discontinuities  
• Cognitive inertia in top or middle management can be an issue  
• Change of paradigm is slow to arrive at completion. In that phase confirmation bias and anchoring
effects can lead managers to make wrong strategic decisions.  
Inertia = resistance to change

- cognitive inertia: generation and selection of strategic alternatives  local search and the
lamppost, you look where you have the light…stop doing local search!
- action intertia: in stragety execution
Strategic decisions can be faced in three ways:

1) top-down deduction (from data processing, theory application)  it works best for modular
problems in information rich setting
2) trial-and-error (fast fail)
3) Analogical reason, good under ambiguity and lack of data. Avoiding superficial analogies 
identigy relevant differences between the analog case and the target problem. Risk of
a. Anchoring to past experience, even when it is not relevant
b. Confitmation bias: people better equipped to confirm belifs than to challenge them
28
5. Vertical Integration
5.1 Introduction: transactions costs and the scope of the firm  
The vertical integration of firms combines corporate strategy with organization.
Issue of choosing how to organize value chain (not a decision of eliminating or keeping a step, but how to
specialize labor). Consumers choose finished products/services produced by the most efficient value chain.
Does vertical integration improve or reduce the value created at the level of the whole value chain? 
Examples:
- FCA that has Magneti Marelli (and Pirelli?); motori fatti da un’altra parte ma da loro.
- Polito canteens: sono del poli non sono la struttura ma anche I più importanti equipment, il che
rende il gruppo che ci lavora più forte perchè gli investimenti per lavorarci come bar sono molto
piu specifici e quindi le entry barriers sono maggiori.
- Trenitalia/Italo dobrebbero comprare Rete Ferroviaria Italiana?
- Perchè le companies vendono tramite Amazon? Brand repiutation, ma anche
sales/logistics/warehousing
- Banks outsource some part to specialized companies (ex mortage, che sono I mutui, per vedere
se hai problem di salute ad esempio)
Point Q: specialized companies on mortage, that does the service for many banks
Point U: ex UniCredit economy for mortgage
Amazon: in what position is it on the value chain? It just makes the retail (resells books). Then why is there
value for Amazon to control the business of e-books (Kindle) that can cannibalize traditional books and so
their retail? Kindle is:
- Vertical integration upwards
- Locking-in customers (they have a switching cost because they have the device)
- Amazon is starting publishing the books, and to do it on kindle has mc=0  can increase the
variety of books. Authors can skip one step in the value chain.
- Land’s end nonha comprato Architecht perché gli agency costs sarebbero stati troppo alti.
Apple: low level of vertical integration, you have many suppliers specialized in different parts.
But why Apple assembles in China? For technology companies, the cost of labour is minimal compared with
the expense of buying parts and managing supply chains that brings together components and services from
hundreds of companies (while the assembly cost is really low, 8$ for iPhone; for cars is only 5% of the price).
The reason for Apple came down to two things:
a. Factories in Asia can scale up and down faster; more flexibility. If you want to double the
production, you have more people and you can easily teach them to assembly it, so you can easily
double works, workers and production, and there are also less Unions (they can work on the night).
b. Specialization; Asian supply chains have surpassed what’s in the US.
The weight of labour cost for cars is really marginal: the main cost is technology. In Italy labour cost and
energy cost are higher than in Poland, but it’s not so important and the production of Panda has been moved
to Italy (there was also vandalism during the transportation from there).
𝑉𝑎𝑙𝑢𝑒 𝑎𝑑𝑑𝑒𝑑 𝑅𝑒𝑣𝑒𝑛𝑢𝑒𝑠 − 𝐸𝑥𝑡𝑒𝑟𝑛𝑎𝑙 𝑐𝑜𝑠𝑡𝑠

= = 𝑀𝑒𝑎𝑠𝑢𝑟𝑒 𝑜𝑓 𝑉. 𝐼.
𝑅𝑒𝑣𝑒𝑛𝑢𝑒𝑠 𝑅𝑒𝑣𝑒𝑛𝑢𝑒𝑠
When this ratio is 1, the company is completely vertical integrated.
External costs are costs of materials and services (i.e. costs for thing you didn’t produce internally).
If to the value added we sum up cost of labour and depreciation, amortization : operating income.
• Future contracts = call option (you fix today the price that you will pay for raw material in the future).
29
The Shifting Boundary Between
Firms and Markets
Time Main Trend Factors Changing the Relative Efficiency of Why companies are becoming less integrated?
Period Firms and Markets Cost of communication with suppliers has
1800‐ Expanding the scale Administrative costs of firms fall due to: decreased really much, so it’s not convenient
1975 and scope of firms • Advancing technology in transport,
communication, and IT
anymore.
• Advances in management—accounting
systems, scientific management,
organizational innovations 4/13/2016
Offshoring = moving activities above. Apple does
1976‐ Biggest firms • More turbulent external environment it. When you offshore, especially in Italy, you save
1995 downsize: increases administrative costs of big firms.
outsourcing; • New digital technologies available to small energy. The main driver to move is often
refocusing on core firms and individuals as well as big flexibility. Ex Foxcom is better than any American
business corporations factory in wreaking up production. They are very
1996‐ Global consolidation • Globalization of markets able in moving things all alround the world.
2007 of many industries: • Big corporations more effective at
Some make‐or‐buy fallacies [2]
(e.g. steel, oil, beer, reconciling complexity with responsiveness The main reason is again not the cost of labour.
banking)
• Our firm should backward integrate to capture
16
the profit of our suppliers for ourselves
5.2 The costs and benefits of vertical integration  
– WRONG. Firms should take into account their
economic profit in backward integration (what
Some make-or-buy fallacies
opportunity costs?)
• Firms should make an asset, rather than buy it, if that asset is source of competitive advantage
• Firms should make, rather than buy to
 WRONG. Only rare assets provide a competitive advantage; are rare assets tradable?
avoiding peak prices (due to high demand or
• Firms should buy, rather than to make, to avoid the costs of making the product
8
scarce supply)
 WRONG. Firms pay a service cost (supplier’s production costs + supplier’s accounting profit margin)
– WRONG. Higher fixed costs. Firms may mitigate
• Our firm should backward integrate to capture the profit of our suppliers for ourselves
 WRONG. Firms should take into account their economic profit (what opportunity costs?)
risks of unfavorable fluctuations in prices of the
inputs through future contracts.
• Firms should make, rather then buy to avoiding 19
peak prices (due to high demand or scarce supply)
 WRONG. Higher fixed costs. Firms may mitigate risks of unfavourable fluctuations in prices of the
inputs through future contracts.
Ex: the value chain for steel cans

What factors explain why some stages are vertically integrated, while others are linked by market transactions?
The Value Chain for Steel Cans
-market contracts: because the transaction costs in the market for steel strip are low: there are many buyers and sellers,
information is readily available, and the switching cost for buyers and suppliers are low. The same is true for many other
Bilateral monopolies commodity products (few jewelry companies own gold mines;
few flour-milling companies own wheat farms).
-vertical integration: because there are technical economies from
hot-rolling steel as soon as it is poured from the furnace, steel
makers and strip producers must invest in integrated facilities and
a competitive market between the two stages is impossible 
the market would become a series of bilateral monopolies
(buyers and sellers are locked together in close bilateral
relationship) and so the efficiencies of competitive markets are
lost.
OSS for Coca-Cola and Campbell it’s different: they are so big that have economies of scale in producing the cans too.
What factors explain why some stages are vertically
integrated, while others are linked by market transactions?
• Likelihood of vertical integration where transaction-specific investments are required (among
automakers, specialized components are more likely to be manufactured in-house than commodity items
such as tires).
• Given uncertainty, it is impossible to anticipate every eventuality, and contracts are inevitably incomplete
Market contracts are also frequently indicated as “Arm’s length transaction” = a transaction in which the
buyers and sellers of a product act independently and have no10relationship to each other. The concept of an
arm’s length transaction is to ensure that both parties in the deal are acting in their own self interest and are
not subject to any pressure or duress from the other party (you don’t need a contract).
30
Reasons to Buy
1. Differences in optimal scale of operation between different stages of production.
Exploiting a supplier’s scale economies (e.g. Audi and antilock brakes; brewers and cans-making)
2. Activities that do not entail distinctive capabilities.
Tires for automakers, cafeteria for Polito, IT management for GM vs for Wal-Mart.
3. When vertical integration would imply the retaliation from customers and/or suppliers.
E.g. Disney: when it forward integrate by acquiring the ABC TV network, this adversely affected
Disney’s relationship with other TV networks that were customers for Disney’s TV production, and
made other studios (e.g. DreamWorks) more reluctant to collaborate with ABC.
4. When vertical integration limits flexibility:
- in responding to demand fluctuations (e.g. construction industry; Apple, Foxconn and the myth of
“tea, biscuits and dorms” for the iPhone’s production ramp-up);
- in responding to changes in technology, customer preferences, etc. (new combinations of
technologies require alliances or outsourcing); extensive outsourcing has been a key-feature of fast-
cycle product development throughout the electronics sector.
5. Compounding of risk, i.e. avoiding propagation of mistakes or problems.
E.g. Disney and GM (strike in brake plant).
6. Difficulties of managing strategically different businesses.
Ex Coca-Cola and bottling activities, Marriot International and Host Marriot (owing hotels is very
different from operating them); also usually lack of vertical integration between manufacturing and
retailing.
7. Incentive problems.
Contestable markets provide more powerful incentives for delivering efficient and effective
services/products (best source)
8. Avoid Bureaucracy effects and internal coordination costs.
It’s costly for a principal (i.e. managers/owners) to control an agent (i.e. subordinates). Incentives may
not be aligned. Coordination costs:
- Agency costs: monitoring costs, bonding costs, residual loss
- Decision making costs: documentation costs, communication costs, opportunity costs
Reasons to make
1. Technical economies from integrating processes e.g. iron and steel production  BUT doesn’t
necessarily require common ownership.
2. Avoids transactions costs when market contracts are ineffective at preventing shirking  factors that
prevent complete contracting:
- Bounded rationality  incomplete contracting; very long contracts are for sure incomplete.
- Difficulties specifying or measuring a supplier’s performance (e.g. high for forginh steel-made
components?)
- Asymmetric information between supplier and customer
 technological complexity or turbulence make incomplete contracting likely
Example of bounded rationality and incomplete contracting: Deltona vs. Cook
3. Superior coordination of production flows through the vertical chain to ensure adequate coordination
of “design attributes”. Timing fit (e.g. timely delivery of part necessary for manufacturing process to
begin; case study copies in a MBA semester), sequence fit (e.g. sequencing of courses in MBA
curriculum). technical specification fit (e.g. car’s sun roof and roof opening), colour fit and dyeing
(match for Benetton’s top and the bottoms)- When coordination with supplier is very complicated and
could led to a poor quality on the end product (ex fare lezione a economia ok che è meglio ma è un
casino incastrare gli schedule)
4. Leakage of Private Information / difficulties to protect intellectual properties such as patents, brands.
Amazon and data processing (control is a relevant issue); counterfeiting in the luxury industry- The
more you let a vendor to know what you product and the more you have to coordinate with the vendor
in the design process and manufacturing, the more is probable they copy (ex Ferrero is really close).
31
5.3 Make‐or‐Buy Choices: Transaction Costs Theory  
Make-or-buy decision: in accounting it’s only related to the cost of production. But in reality it’s more
difficult: transactional costs, know if the supplier is cheating on you,… .
COST OF PROD. FOR MAKING + AGENCY COST VS COST OF BUYING + TRANSACTION COSTS.
Agency costs
Internal control costs. “the principal agents theory”. Cost to bare to make an activity internally,
monitoring costs. incentives among departments could not aligned with incentives among the
company to maximize profit. also problem of bureaucracy.
Market transaction costs

Ronald Coase nobel price, “the nature of the firm” 1937 on transaction costs.
Costs to use market transactions (i.e. “buy”) rather than hierarchical mechanisms (i.e. “make”).
a. “operational” costs:
- search costs = cost you have for finding a supplier; the internet reduced search costs.
- costs of communication/coordination, especially when suppliers are involved in designing
- transportation costs (Zara to be fast : vertical integration, very close to the Zara headquarter)
- inventory holding costs
b. “contractual” costs:
- costs of writing the contract
- costs of enforcing the contract
- cost of switching supplier (ex lend’s end)
The more you have incomplete contracts, the higher transaction costs.
Market exchanges entail high transaction costs under circumstances of:

- relationship-specific assets. The more the product is standardized (a commodity), the lower
transaction costs (easy contracts). Ex steel, cigarettes, gold.
- “small numbers” bargaining situations = low number of supplier who can support you; you don’t want
it because you became very weak in bargaining.
- high-specific investments
 these circumstances can generate a “hold-up” problem.
Holdup risks can lead to: more difficult contract negotiations and more frequent renegotiations, investment
to improve ex post bargaining positions, distrust, reduced ex post coopertation and ex ante investments in
relation-specific investment
Transaction-specific investments
- foreign corporation (e.g. in GE) building power plants in developing nations (e.g. Ghana, Haiti, Kenya).
What if the purchasing government default on its payments? Power plants on floating barges
- management education provided by business schools vs. program delivered in firm’s training programs
(e.g. corporate universities).
- High assets specificity; efficient bauxite refining requires that the bauxite refinery be designed
specifically around the characteristics of the ore.
- Incomplete contracts expose parties to opportunistic renegotiations.
Building a power plan in developing countries like Kenya is really risky (problem with the government, golpe,
war) like GE does. In these situations companies like it are very weak in the transaction because the
investment is very specific and you can’t move your plant, it’s a long-term investment, it requires several
years. In order to reduce specific investment, you can build floating power plants.
Ex non far pagare a GM l’affitto al poli è stata un’ottima scelta perché per aprire quel centro R&D hanno fatto
investimenti specifici e quindi diventerebbe un casino per loro spostarsi.
Transaction specific investment require high transaction costs  the more specific is the investment, the
better is to make it on your own.
32
Importance High Best source Insource
for (vertical integration)
Operational Low Outsource Eliminate
effectiveness (“market”) (or standardize)
TAKEAWAYS
Standard Unique and rare
- with few companies, VI is more attractive activity activity
- if transaction-specific are needed, VI is more attractive (commodity)
Strategic role of the activity
- if limited information permit cheating, VI can4/13/2016
limit opportunism
- if there are taxes or regulation imposed on transactions, VI can avoid them
- if future market conditions are uncertain, it favours VI
- the more similar optimal size of operations on the different stages, the more attractive is VI
- if entrepreneurial initiative is required, VI may blunt high-powered profit incentives
- the greater the unpredictability of market demand, the more costly VI
Market or vertical integration
- Market or vertical integration?
VI increases risks compounded by linkages between vertical stages
Importance High Best source Insource

for (vertical integration)
Process high Best source Keep inside
Operational Low Outsource Eliminate quality (“insource”)
effectiveness (“market”) (or standardize) (technology,
Low Outsource compete
human
resources,
Standard Unique and rare managerial Low High
activity activity practices) (No scale economies) (scale economies)
(commodity)
Strategic role of the activity Output Volume
Back office in the retail banking industry
Ex Poli, ok che una segreteria unica con psicologia, medicina ecc produce economies of scale, ma hai più alti coordination cost.
‐ Check clearing,
‐ Loan origination and processing
5.4 Designing vertical relationships  

Ex lean production. Culture-based, the way of production invented by Toyota. Suppliers place their plants
very close to you: it’s an advantage in term of efficiency, lower transportation costs and less inventory costs.
Market or vertical integration? 23
Suppliers hardly accept this because it makes them weak, high specific investments. It’s typical of Asian
country to take into account long-term.
The other specific investment is human asset, involving suppliers in the design phase.
Process of high
Benefits using more specific equipments:
Best source Keep inside less defects, more quality in the product.
quality (“insource”)
Lean production
(technology,
Low
is more than just-in-time.
Outsource compete
Trust is very important and it reduces transaction cost, there is a
human
projection
resources, of long term that reduces transaction cost.
managerial Low High
practices) (No scale economies) (scale economies)
• Choices not limited to vertical integration or arms’‐ length contracts: Several intermediate types of vertical
Output Volume
relationship  these may combine benefits of both market transactions and internalization.
Back office in the retail banking industry Different types of vertical relationships:
‐ Check clearing,
‐ Loan origination and processing – From competitive contracting to supplier
partnerships, e.g. in autos (when suppliers are
involved in design, Magneti Marelli for FCA). Those
are complex contracts, high transaction costs.
Technology partnerships (e.g. IBM‐ Apple; Canon‐
HP)  23
– Diffusion of franchising (works for standardized
products and culture => Macbun vs McDonald’s)  
– Licencing, ex Ferrari.
– Joint Ventures: the two parties (customer
and supplier) decide to invest together; it’s very
close to VI.
Grom is not franchising but it’s the same company: the same raw material from Piedmont arises to Tokyo or
Malibu.
General conclusion: Boundaries between firms and markets becoming increasingly blurred.
33
5.5 The role of trust and value in market transactions: the clan theory
Trust among the parties can mitigate the problems that generate transaction costs: bounded rationality
(=difficile preverere tutti I possibili casi imprevisti), information asymmetry, difficult and ambiguity in
measuring performance.
Clans of firms are important. Within a clan, tradition and a continuity in market transactions among the same
firms create commonality of purposes, values and beliefs  traditions provide a set of implicit rules that
govern behaviours.
Clans and long‐standing relationships also reduce the goal incongruence among the parties
Clans make sense especially in situations of small numbers and ambiguity of performance evaluation.
Examples: catholic church, online communities for “social computing” (open source communities, Wikipedia
community), Barcelona FC and the Catalan pride.
In market: reciprocity as a normative requirements, informal requirement=price.
In organization: legitimate authority is added; explicit rules.
In clans: common values and beliefs (harmonization of interests) is added; traditions.
5.6 Some recent trends

How value chains are changing
Falling Market transaction costs lead to an unbundling of value chain in three macro‐activities...
 Product innovation (“the atelier”): “faster” (velocity)
 Infrastructure (“the factory”): “cheaper” (scale)
 Customer Relationship Management (“the store”): “better” (variety or customization)
...in order to grasp specialization advantages in each stage.
Infrastructure = operations and activity, production, manufacturing… .
The only way to have all three is to have a specialized company.  Scope, scale and speed in product
innovation cannot be optimized simultaneously!!!  
The more the activity is done by the same person, the lower is the quality.
•Ex for this course about strategy: CRM is everything related to the lesson, emails to prof, … ; infrastructure
are the slides and teaching material, and product innovation is trying to update the contents. The quality
would be higher with a power point designer.
•Ex Why does Poste Italiane sells insurance? Their business is CRM. They have many stores in different part
of the country and customers enters there often. So they allied with an insurance company.
Ex newspaper industry, vertical integration:

a. Product innovation (news, editorials, columns, magazines intserts)
– Kept in house the concept of the newspaper (bundling of news, inserts, etc.)  
– Independent journalists and columnists: are they progressively disintermediating newspapers?
b. Infrastructure business (printing and distributing newspaper)
– Outsorced to specialized printers (in order to exploit larger economies of scale)  The business is
becoming less capital intensive.
– Still necessary? Depends on the diffusion of e‐book devices (i.e. Kindle)  
OSS: printing and delivering to store; it’s not a differentiating activity: you don’t sell more only because
you have a good printer but you have to be cheaper. Now less scale (online). A solution could be a merge:
outgoing attempt to merge LaStampa and Repubblica. You can merge the printing and so you are better
in scale economies.
c. CRM (attract and build relationship with readers and advertisers)
– Keptin‐house  
– Los Angeles Times is personalizing the newspaper with sections  geared to particular regions or
interests, which enable advertisers to better target specific sets of readers
34
IT
The more specific is the asset, the more you need vertical integration.
IT reduces the needs of specific assets and investments (so lower transaction cost).
The impact of IT on make-or-buy decisions:

- electronic brokerage effect: IT allows the reduction of market search costs
- electronic communication effect: IT reduces communication costs
- electronic integration effect: IT allows the integration of suppliers and customer’s ISs, improving the
possibility of coordination and collaboration.
ex: Robotics in manufacturing plants, low set-up time to do another operation.

ex: 3D printers, reducee specific investments. The longer the time horizon of the contract, the less easy is
likely to write a completely contract. 3d printing can dramatically reduce the cost of transactions.
ICT and modularization of product architectures have allowed a reduction of market transaction costs
- Less coordination costs and less specific investments  
- Unbundling of value chains  
- More offshoring or outsourcing even in service industries. The heritage of the Colonialism  
35
CASE: IT vendor partnering
Technology: data in the cloud or in the company server?
IT solution, customized vs. standard software package, standardized.
One relevant part is integration with the other systems you have (inter-operability).
ServoLith: they control my data, I’m kind of locked-in. and they have strong bargaining power.
VerxaWeb: they have to do a specific investment. Plus, story about appropriability: with VW you have the
control on the feature they develop for you. But the disadvantage is related to small scale and risk of
financial liabilities (no guarantee).
The more likely to be accepted by the CEO and board of directors is the market leader, but reduced control
on our data, you are very weak. If VerxaWeb fails, we need to have a B plan: it can be to hire the people.
Culture and affinity matters. But also reputation matters. So it’s really hard to build things like that in an
algorithm.
HiOSoft maybe is the most desirable option. You can keep control of the integration. You have your IT
specialists, maybe you have to hire higher people but it doesn’t generate high transaction costs and you
can have the control. Appropriability and control (on software improvement, data, HR) matters.
Competitive differentiation: ServoLith can also sell to my competitors.
Soft factors matters.
HiOSoft no reaction on the market, negative for SL and positive for VW.
Arm’s length transaction = transaction for which you no longer need a contract (HiOSoft, because you are
buying a software package, very low transaction cost).
36
CASE: Disney and Pixar
It’s a good example of market transaction costs: they don’t like each other and Pixar wants to renegotiate
the contract.
Strategic alternative fot both is more vertical integration: how?
- Dreamwork  for adults and the adults part inside of children (very≠from Disney vision)
- Pixar  for children and the children part inside of adults
≠ Stages of the value chain:

• Pixar: √ animation (and production by using company technology)
• Disney: √ distribution (also thematic parks, stores, toys…)
Nemo è un personaggio inventato da Pixar, ma è stato poi peluche più venduto di tutti nella storia Disney, la
quale quindi ha guadagnato più revenues.
Takeaways- for both would be very ineffective to become vertically integrated:

• Pixar: don’t have stores, TV network, parks… (capital intensive)
• Disney: difficult also because hiring Pixar employees is impossible, they are really loyal
The brand “finding nemo” is an intangible asset; if the sequel is bad, it’s a loss in the brand value.
Pixar si concentra di più sulla storia: ad es Up, ma per Disney non va bene il vecchi perchè farebbe schifo il
peluche e quindi non vendono merchandise  misalignment incentives.
Now the point is: new contract or acquisition? (make-or-buy decision).

In this case Pixar is the weakest part (Microsoft that acquired Skype is a similar case).
Do you prefer to control alone a small pier or to have a small slice of a certain pie?
Golden rule about positioning: the closer you are to the cusomers, the more market power you have.
Incentives:
1) relesase: with a contract Disney could behave opportunistically
2) media coverage: a new contract would become incompleate because how you can predict new media
3) sequels: Disney push sequels while Pixar could delete intangible assets (too risky)  disaligned
• better-off test: there is more value in having this partnership because thet have complementary capabilities
• ownership test: it’s better to have 2 companies under the same roof; otherwise high transaction costs. Ex:
col contratto devi mandare la Disney a controllare
To cover all the events that could cause disalignment would be too costly.
Separation (√) or integration? There are not pure vertical integration; more integration = more risk.
37
6. Organization
6.1 Why organization design matters
At a glance:
- Specialization of labour: how firms group resources
- The coordination problem
- Agency problems, which exist throughout the hierarchy: control mechanisms, performance incentives,
shared values
Why organization design is a relevant issue in strategic management:

- Integrating routines to create organizational capabilities
- Strategy follows structure
- A firm’s capability to execute a strategy depends on the consistency that its organization design choices
have with the strategy (when you change strategy, you have to change organization)
- Organization design is an important lens to understand internal consistency of strategy
Our perspective
- What really goes inside the organizational structure: work, information flows and decision processes
- How the environment and other contextual conditions (i.e. age and size of the firm, type of strategy)
affects organization design (contingency approach)
- How organization design leads to: good vs poor strategic planning , good vs poor strategic execution
No “one best way” for organization design “contingent” factors that affect how firms should design their
organizational structure
- Environment: stable vs dynamic/uncertain in market and technology conditions
- Firm’s structural variables: age and size  product scope (diversification), geographical scope
- Technology and type of production process (process production, large batches and small-batch
production in manufacturing).
An example of organizational effectiveness: 64% Luxottica employees work in retail area.
Five organization traits of firms strong in strategic execution

Strategic and operational design
1. Everyone has a good idea of the decisions and actions for which he or she is responsible
2. Important information about the competitive environment gets to headquarters quickly
3. Once made, decisions are rarely second‐guessed
4. Information flows freely across
strategic operational
organizational boundaries
5. Line employees usually have the What type of decision? Basic architecture/shape of Management and
the organization operational processes,
information they need to understand the workflows, jobs, measures
bottom‐line impact of their day‐to‐day What part of the top‐ 2‐4 levels All levels as necessary
choices organization?
Direction? Top‐down bottom‐up
Driven by? strategy Operational concerns
organizational pyramid: at the top of the (costs/quality/time)
pyramid there is strategy management, at Case studies under analysis Procter and Gamble: Zara: IT for fast fashion
the bottom operations management. in this course Organization 2005
38
25
When to redesign an organization?
- Strategic shifts
- Introduction of new technologies that redefine work
- Cultural/political change (e.g. lean production for western automakers in the 1980s)
- Growth
- Staffing changes (e.g. BMW and “friendly work” for over 50 blue-collar workers)
- Ineffective organization design
Symptoms of ineffective organization design: lack of coordination, excessive conflict among internal groups,
unclear roles, misused resources, poor work flow, reduced responsiveness to change environment,
proliferation of extra-organizational units.
The three core issues in organization design:

- The technological issue
How should firm use technology to shape, substitute and enhance the work of individuals?
- The bureaucratic issue
How many rules and norms should drive the formalization of work and behaviours within the
organization?
- The decision-making issue
How decisions rights distributed within the organizations? Who participates to the decision-making
process? Does the framework of accountability, rewards, information flows ensure effectiveness?
Organization design: the outline
The perspectives in organization theory
• The fundamentals
– The five coordination mechanisms
- The managerial perspective
– Behind the coordination problem: the interdependencies
of work
– The five parts of the organization
• Focus: organizational effectiveness. How to use resources at best, considering firm’s strategic goals
The organization design variables:
– Design of positions
- The sociological perspective
• Job specialization
• Behavior formalization
• Indoctrination
Focus: the individual in the organization. What drives his/her motivation, behaviour, attitude, etc.
– Design of decision‐making systems
– Design of structure
• Unit Grouping
– Design of lateral linkages
33
6.2 The fundamentals

Mutual adjustment
The five coordination mechanisms
• Control of the work
1. mutual adjustment
rests in the hands of
Manager
control
operators
of the work rests in the hands of operators. Effective in case of
• Effective in case of:
Analyst - small and

– small and informal
teams
informal teams
– high uncertainty  new product development team (i.e. no one can be sure exactly what needs
- product development
high uncertainty => new
Operator Operator toteam (i.e. no one can be

be done)
sure exactly what needs
to be done)
Informal communication
2. direct supervision
34
Coordination by having one individual who takes responsibility for the others  one
brain coordinates several hands.
Complementary to mutual adaptation: e.g. managers for handling exceptions.
3. Standardization
Work can be coordinated by being standardized  need for continuing communication is reduced
Standardization
- Standardization of work processes: the contents of work are specified or
programmed. E.g. workers on an automobile assembly line Manager
- Standardization of outputs: The dimensions of the product or the performance Analyst
are specified (e.g. taxi drivers; a store manager in Zara with the headquarter)
- Standardization of skills: The kind of training required to perform the work is
Operator Operator Output
specified. The worker is standardized! (e.g. kings and governors of distant Input
colonies) skills
Work processes
37
39
• The fundamentals
Forms of interdependence among
work
Forms of interdependence among work The fiveThebasic parts
five parts of organization
of organization
Strategic
apex
Techno- Middle Line

Support staff
structure
Support staff
• It provides support to the organization outside Operating Core
the operating flow Fonte: basato su Henry Mintzberg, The Structuring of Organizations (Englewood Cliffs, N. J.: Prentice-Hall, 1979) 215-297; and 41
Henry Mintzberg, “Organization Design: Fashion or Fit?” Harvard Business Review 59 (Jan. – Feb. 1981): 103-116.
• The “make” of the serviced provided by
support staff is aimed at reducing uncertainty 39
or guaranteeing sequential interdependence
• The of work with the operating core (e.g. cafeteria
operating core are the operators, i.e. people that physically
The five to the job parts of organization
basic
• Techno-structure: analysts that design plan, standardize, change the operating work flow
- vs. some IT services at PoliTO)
Work study analysts (e.g. industrial engineers): standardize work processes
- Planning and control analysts (budget analysts, accountants, production scheduler): standardize
outputs (management engineers)
- Personnel analysts (e.g. HRM): standardize skills
• Middle line: middle managers, e.g. regional sales managers. The51number of operators any one manager
can supervise is the span of control.
The fundamentals
• Support staff: e.g. R&D, PR, Cafeteria. It provides support to the organization outside the operating flow.
The “make” of the serviced provided by support staff is aimed at reducing uncertainty or guaranteeing
sequential interdependence of work with operating core
Formal and informal communication
of workFor the exam: it is better not to outsource a support activity that has reciprocal interdependence with other
flows
– The five parts of the organization
support staff.
• Strategic apex: CEO and other top-level managers, executive committee; they handle critical exceptions.
The organization design variables:
– Design of positions Example for the exam: find the problems 42
• Job specialization • Operators don’t report any feedback

• Behavior formalization
• Indoctrination
to the middle managers (disturbance
problems)
S
– Design of structure • The top manager is overwhelmed, f
• Unit Grouping everybody reports directly to him. The
– Design of lateral linkages more information you have, the less
– Design of decision‐making systems you are able to cross information and o
take decision. Probably in this
40
organization decision processes are (k
very long. Operational decisions are locked
•Informal
Only one arrow going down fro the vs.
communication system
CEO: heFormal
must be very powerful
communication system
52
Size and the five part of the organization: key personnel ratios
The larger the sixe, the lower you need mutual adjustment, the more you
need direct supervision OR standardization of work.
PoliTo support staff: 51%. Small Large
SIZE
(number of employees)
40
6.3 Design of position
Job specialization
- horizontal job specialization
Operators perform a narrow set of repetitive tasks  to reduce skill requirements.
The more you ask for a specialized job, the more repetitive it is: less motivation.
Absenteeism was a real problem when specialized work (ex “modern times”, eating machine because
lunch break is idle capacity).
- vertical job specialization
The performance of the work is separated from the administration and control of it.
Taylorism and the “Scientific management” of work (1911): times and motion “separation of hands and
Managing tradeoffs in job specialization
brain”.
Learning
economies
Operational
“Alienation threshold” Managing tradeoffs in job specialization

(motivation decreases)
costs
By getting specializing in a task, you reduce the

Total costs
Horizontal operational cost (scale economies) below a certain level

specialization
of alienation. In the end, you have to take into account
Standardization both operational and coordination costs, which have
A vicious circle in Taylorism
Coordination
Effect
Horizontal different trends.
specialization
costs
“Optimal” level of
Efficiency
and quality
requires
A vicious circle in Taylorism
More process
Standardization
Less intrinsic
interest in the job
specialization
Horizontal
Lower product quality specialization 57
Lower efficiency
requires
Efficiency High employee turnover
More process
Less motivation
Less intrinsic
A vicious cycle in Taylorism
High absenteeism
and quality Union belligerenceStandardization interest in the job
Modern Times  lean production (trying to solve this cycle).
(1936) Ex GM plant really bad efficiency and quality, so
Lower product quality
Lower efficiency
59 they started in 1992 in that plant a joint
Job enrichment
Less motivation venture with Toyota. Some roles of supervision
High employee turnover
High absenteeism How can you raise the interest and motivation
are eliminated or redesigned
Job enlargement Union belligerence in job maintain efficiency and quality in the

product? Cont r ol Cont r ol
Task N Task N+1 - Job rotation.

Ta sk Ta sk
Job - Kaizen = continuous improvement; employees are N asked about
N+ 1
1 1’ specialization
59
improvement
Ex Pomigliano Fiat, manufacturing most efficient Ope
of rEurope,
a t ion s engineers
Ope r a t ion s
61
1 1’ working with blue collars and supervisors; and second, people involved
Job
enlargement
in job rotation give more suggestion.
58
1
Job enlargement
1’
Job specialization
60
In this matrix, professor is left (because he’s really specialized) and down horizontal
(because he’s not controlled). high low

Task N Task N+1
Low‐level
EXAMPLE: Starbucks. High level of specialization (one takes the order, High
Unskilled
middle
jobs
another gives you the beverage,… . The coordination Job mechanism used is managers
1 1’
standardization of output. There can’t be specialization
many customization of the Vertical
product. High level of (horizontal) specialization reduces flexibility. Professional

All other
Low managerial
Often the job is really specialized, a high level of vertical integration is jobs
jobs
needed1because he’s not able1to’ see the system in its whole.
62
Job
41
enlargement
1 1’
60
Behaviour formalization
• Aimed at regulating behaviors and reducing variances (rules are aimed to reduce agency costs).
- Formalization by job
Behavioral specifications are attached on the job (formal job description). Ok for repetitive tasks
- Formalization by work flow
Behavioral specifications are attached on the work itself (ex policy underwriting in an insurance firm)
- Formalization by (written) rules
Rules for all situations (policy manuals): “expenditure over $1000 must be approved by the area
manager”.
• Modern information systems (e.g ERP systems) enable a formalization of workflows and rules; ex al poli il
livello di specializzazione è alto così il prof può concentrarsi sull’insegnamento e vedere se una persona è
ammissibile o no all’esame lo fa un sistema informativo.
• Used to:
- reduce variances (i.e. everyone knows exactly what to do in every event)
- ensure fairness to clients (e.g. university) or employees (public administration offices)
• Behavior formalization is most common in the operating core of the organization, At the strategic apex, the
work is the least formalized
Unintended dysfunctional results:

- difficult in handling client’s special requests (mistreatment of clients)
- ossification of behaviors (rejection on innovative ideas)
- increased discretionary power for constellations of workers whose job cannot be regulated (typically
in technostructure; maintenance specialists have a lot of discretionary power)
- employees’ demotivation
Training and indoctrination

Training is aimed to transfer job-related skills or knowledge; especially for professionals part of training takes
place outside the organization and before employees assume position
Indoctrination (initial job rotation programs, social corporate events or top managers’ inspiring speeches) is
aimed to transfer organizational norms and to reinforce employees’ allegiance to the firm (Gesuits)
 important for creating «clans». Pursue socialization among employees with different seniority (informal
networks); important for firms that are geographical dispersed; important for transfering managerial (soft)
skills and knowledge, that cannot be object of formal training.
Other goals of indoctrination: belief systems (e.g firm’s mission) that communicate core values (
motivation and direction to search for new opportunities); and define boundary systems (e.g. code of
conduct) delineating the acceptable domains of organizational activity  
Training and indoctrination allow «clan‐based forms» of organizational control (alternative to the
standardization that is typical of «bureaucracies») .
Formalization and control systems
Formalization and control sysyems
Are tasks programmable? ex behaviour: quality; number of units produced
YES NO per hour
YES Use behavior and/or Use output control
output control (e.g. research in a
Are (e.g. product university; professor
outcomes assembly; consulting towards students)
Measu project)
‐rable? NO Use behavior control (use input, clan or self
(e.g. professor in control)
university teaching) e.g. strategic planning
department
73
42
6.4 Design of decision-making systems
1) Centralized structure: when all the power for decision making rests at a single point in the organization
(ex team that forecasts what will be the demand and so the production)
2) Decentralized structure: the power is dispersed among many individuals (ex Zara). To avoid “information
overload” and to respond quickly to local conditions. Stimulus for motivation for employees 
empowerment (giving employees the skills and capabilities that are needed to act more autonomously)  
Decentralization can be
- vertical: dispersal of formal power down the hierarchical chain
- horizontal: power shifts (from middle-managers) to few analysts of technostructure (by virtue of the
influence their systems of standardization have on the decisions of others) or to the experts (support staff
specialists) by virtue of their knowledge.
Ex: sales representative for Dell, entrers customer’s requirements into the ERP systems, that doesn’t allow
to record the sales order at the condition requested by the customers (credit limit)  what is the level of
- vertical decentralization: high, that employee has not to ask his boss
- horizontal decentralization: low????, most of the decisions are in the hand of the department that
implemented the software
If you want to standardize the output and you

don’t want or organic
Mechanistic customization (ex poste italiane,
approaches in
steel makers) burocracy is good.
designing
FCA isjobs. A task‐based classification
moving to or ganic organization.
low
- Performing arts University - Strategic planning
- Trades teaching - Social science research
- Fine goods General - Applied research
manufacturing Management
Non routine.
ANALYZABI LI TY
organic
«CRAFT» Organic
configuration
- Sales - Law consulting
- Clerical - Engineering
- Auditing - Tax accounting
- General accounting
Routine.
ENGINEERING
In basso a sx Accenture, in basso a dx McKinsey (molto
Bureaucratic
high organization «professional maggiore revenue/employee).
bureaucracy»
Low VARI ETY high n83
6.5 Design of structure

GroupingQuestions [1]
Grouping = how resources (human, technological, financial) are grouped together �fundamental means to
• What type of organization was the team of
coordinate work in the organization and to foster specialization.  
firefighters that died in Mann Gulch?
Four effects of grouping :
• How would you describe the external
– Establishes a systems of common supervision among  position and units  
environment that the team faced in the gulch?
– Requires/allows positions and units to share common resources  
• Was its internal organization consistent with
– Creates common measures of performance  
– Encourages mutual adjustment  
the external environment?
 Unit grouping encourages intragroup coordination at the expense of intergroup coordination
• What would have been the characteristics of a
Base for grouping: by knowledge and skills, work processes and function, time, output, client, place…
team that had survived (organizational
Advancement in information systems (workflow technologies) have reduced the need to group resources
effectiveness)?
based on natural flows interdependencies. Scale or social interdependencies.
84
43
control
• Tend to be more bureaucratic (especially where
operating work is unskilled)
93
Functional structure
When you group group people around the type of task, a superior level of specialization; if one of the A is
Functional structure
more senior, he can teach the others.
PROs: Grouping by function
CEO - it encourages specialization at the micro operational level
- adequate for managing scale, social and process interdependence 
STAFF economies of scale, cost efficiency, promoting learning and capab. Building
ex: Scully’s reorganization of Apple in 1984 to foster product standardization
Marketing
Engineering Operations
and Sales
CONs:
- individuals focus on their own means, not on the firm’s broader ends
- performance cannot easily be measured. Sales drop? Who is at fault? Op, mktg?
94
Divisional structure: an examp
you can always blame somebody else!!!
- Coordination of workflows could be problematic (coordination problems rise to higher-òevelScale and/or social interdependencies are
unit in the
hierarchy)  high degree of centralized control contained within each unit (S1, S2, S3)
- Tend to be more bureaucracy (especially where operating work is unskilled)
Divisional structure
Lateral Linkages
Divisional
Divisional is used for structure
dealing with broad product scope (diversification), broad geographical scope (country
unit instead of product unit), technological and market dynamism. When standardization and direct supervision are
not sufficient to achieve coordination among uni
PROs > need of “formal” mutual adjustment through
CEO
lateral linkages connecting different units:
- Self-contained units to deal with workflows (enhanced cross-
• Liaison roles
STAFF functional coordination within each unit,
© 2013 Robert M. Grant performance
• Cross‐unit groups
measured, mutual adjustment…) – task forces

Product Product Product
division 1 division 2 division3 - decentralized decision-making. The – Standing committees
corporate level just
• Integrator managers
Marketing concentrates on corporate planning, budgeting and providing
Grouping by product
Operations
Engineering Engineering Operations
and Sales
Engineering • Matrix structures
some common servces (e.g. some R&D activities, IT services,…)
Marketing
and sales
Operations
at the micro operational leve
- Greater flexibility to market changes (lower time-to-market for
Marketing
product innovation)
and sales
95
CONs:
- less communication with employees in the same function (critical flaw for the
contexts where operational work is highly specialized)
- cannot take full advantag e of scale economies
Divisional
 by choosingstructurethe market basis ‐ Pros for grouping, the organization opts for workflow
coordination at the expense of process and scale specialization
• Self‐contained units to deal with workflows
GE: functional structure would not have sense because product divisions have nothing
– > enhanced cross‐functional coordination within each unit in commons.
A, B, C = processes Workflow interdependencies are contain
– > Sequential and reciprocal interdependencies are managed within each unit (S1, S2, S3)
within a unit
Comments
– > Performance can be easily measured and assessed within each
unit
– > mutual adjustment and limited formalization
What about R&D? in the divisional better coordination and reduced time to market, but you have less
• specialization and the risk is that you waste resources researching on the same field. If the r&d is centralized
Decentralized decision‐making. The corporate level just
concentrates on corporate planning, budgeting and
you have more chances to grow, but there is more beurocracy.
providing some common services (e.g. some R&D activities,
IT services, payroll)
For a company like Apple, the risk of making a divisional structure is to make non-compatible products. You
• Greater flexibility to market changes (lower time‐to‐market
need a sort of coordination among any product division.
for product innovation) 96
It’s similar to the healthcare system: it’s better to have a centralized procurement that procures inputs
(medical devices, computers,…) at a corporate level it’s better (you also have economies of scale). If you let
the procurement for any hospital you are very inefficient. You don’t have a single database among customers,
no integrated information —> problem of information management.
If you decentralize product divisions, you are effective but you need some horizontal coordination across
groups.
44
• Not a full‐tie responsibility, but done in conjunction
with other activities
• Used when intensive problem solving involves two or
more units
• Examples:
– “junior” project managers for non critical projects
– Safety manager in a factory
– Business process analyst in a process reengineering project
103
Lateral linkages
When standardization and direct supervision are not sufficient to achieve coordination among units ‐ > need
Cross unit groups**
Liason Roles
of “formal” mutual adjustment through lateral linkages connecting different units:
Manager Manager
Unit A Unit B Unit C Unit A Matrix structures

Unit B Unit C
1. Integrating Managers 2.
104
107
General
Manager Integrating managers
• They are liaison position with formal authority
Manu‐ over a horizontal group
Engineering Marketing
facturing – He/she manages a proper budget, negotiates with
functional departments for resources
Program – Negotiation and persuasion skills are crucial (manage
Manager decision processes that involve many actors)
3. 109
4. • Examples
– Brand/product managers in consumer goods firms
– Project managers in aerospace agencies or in Apple 111
1) Liaison roles  facilitate communitcation among two units bypassing the hierarchy (ex: junior project
managers) 108
Integrating managers –
2) Cross‐unit an example
groups (task forces, standing committees)
3) Integrator managers
4) Matrix structures Matrix structure: the logic
When firms need with frequent product changes and specialization.
In multinational enterprises: by product lines and regions.
• A dual structure
People have 2 bosses: role ambiguity. You try to integrate functional and divisional structure. But it’s really
– one line with the formal authority to decide (it
contains the main interdependencies)
impossible to have a perfect balanced matrix. Proliferation of the managers
– The other staff with only the right to advise (it
contains the residual interdependencies)
- Blue bell creameries: functional is right; no need of frequent product changes
• Examples:
- nurse coordination = oriented to the customer (she crosses across departments).
– Matrix structures by product divisions and functional
- Pittsburgh Steel Company: KSFs efficient in scale economies and improvement in the state of art, and
110
departments. When firms need with Frequent product
flexibility to rapid changes; here matrix works very well. changes and specialization.
Industrial Relationship Management: only vertical bc you – Matrix structures in multinational enterprises: by
have just one department bc the negotiation bw
product lines and regions.
unions and workers is unique for the whole company.
Pure structures are unlikely, but matrix is “botte piena moglie ubriaca”. the more you need scale you go left,
112
the more you need innovation or customer orientation the more you go right.
Contingent variables
External environment (uncertainty and complexity), strategy, size, age, culture.
The more the company invest in R&D the more uncertain is the technology.
The higher the uncertainty in the company, the more you need product division.
45
CASE: McDonald and Burger King
• Strategy
Same quality.
BK: more customization and special orders (20%)
McD: more speed of service, less expensive (10%)
• Operations
Matching production with demand.
McD: more push theory.
Differences in inventory management? BK get orders and assembly hamburger (ATO), McD stocks (MTS) and
throw away after 10mins. Pull vs Push.
BK doesn’t serve breakfast bc with its technology it can’t cook eggs —> technology constraints the product
line.
• Organization
Remember the 5 coordination mechanisms.
McD: more direct supervision; for producing the same flow, you need mutual adjustment when you have
different people that do part of the process. Teamwork is very important. More managers (=more direct
supervision) in McD. Dual structure based on both.
BK is more automation bc you have a standard technology that cooks, and you need less persons.
McD: more flexible technology degree —> the more you have to train people; more focus on team and
culture, bc there is the need for mutual adjustment and so skills of people.
But BK is more noisy bc of the microphone for sends special orders to the kitchen —> from an operational
management point of view it’s not effective, but from a marketing point of view it is (so more people are
attracted by special orders that are more expensive).
Fresher: BK.
Which is more able to maintain a sustainable output rate with an increase in volume: McD bc they have
inventory.
Importance of inside appearance: more for McD.
McD management style: responsibility, deployability, work intensity.
BK has more turnover and part-time and has to train people less.
How the way you organize work affects performance:

grafico productivity
McD: connected systems, the separate

components must work at the same rate
BK: disconnected system, the separate
components can work at ≠ rates
Technology implications: flexibility, labour

intensity, direct supervision, information
requirements.
46
CASE: P&G
Innovation in consumer goods

companies like this is usually more
technology push  R&D needs to
be centralized.
Invece quando è market pull, è
meglio decentralizzata così R&D
sta con sales.
The more mature the market is, the
more you have to do cost
leadership.
US 1950
Strategy: cost leadership was not a priority. So the product
dimension structure doesn’t care so much about exploiting
scale economies (non importa se R&D un po’ ridondante).
Product division and brand managers as a liason. This is a
role invented by P&G in 1931; they have to act like
enterpreneurs, introducing new products is really hard
because customers are loyal and so you need a brand managers to push in the new product introduction.
Strategy: diversification.
For example toilet papers and detetgent have nothing in common, so you don’t achieve any economies of
scale if you manufacture them togheter; no commonalities in R&D and manufacturing, BUT yes in sales (they
are sold in the same supermarket). You could afford to have many managers because cost was not an issue.
15 brand mangers in soap&detergents… too many? They are like 15 enterprenueurs fighting with each other
 “product cannibalization”.
Brand manageres focused on: better and faster.
Europe ‘50-‘90
Decentralized structure, country managers; pro and cons:
+ culture and also distribution (supply chain)
+ to have market penetration in each country (ex Spain and Italy where situations where really ≠)
– huge duplications of efforts: each country with its own R&D, IT,…
– slow rollout of processes (ex Pampers)
– unnecessary product customization
In corporate R&D hai più possibilità di carrier
US 1987
Now more competitors  more competition on cost.
Ex: sales laundry director, you have two bosses; the most
powerful was detergent GM (it’s impossible to have a
perfect balance between categoty and functions,
companies have to choose). Moreover, probably same manufacturing on those highlited in yellow, but they
are separated  stil more attention on category (better and faster).
47
Matrix 1995
From country division to functions: more centralized.
Detergent R&D  his boss is still detergent

GM. If you want to develop a product, you
have to explain everything and be
approved by both country manager and
Cincinnati (the same thing twice).
CGS/net sales decreased  the matrix

produced cost efficiency (you start
grouping resources together: economies
of scale).
Revenue growth  it measures being
effective in bringing innovation in the market. It’s flat after the matrix introduction, even if the expenditure
in R&D was high. Not effective in the global rollout of products: limited product innovation capability.
For corporate finance market, that looks at short term always, it’s better not to push many products.
In order of importance: geography  product  function.
Path dependence: history matters. The pattern you took in the 50s influence the one you take in the 90s.
Strategy and structure:
Organization 2005
NOTE: difference between:

- marketing: more strategical, they have to decide price, place, people, product
- sales: each transaction with each customer; more operational and day-by-day
In this structure, thet are separated. Customers (ex Carrefour) prefer that P&G has this organization so they
can talk with just 1 person. It helps sellers to be more like a taylor, and GBU (where also marketing is) more
like a factory.
Problem: who determines the price? There can be a combative approach (the disputes gets escalated, but
there would be too many) or an integrative/collaborative approach (but need of prerequisite to make sure
cooperation between GBU and MDO).
For accounting, IT etc more centralization (for standardize things like these you gave more scale economy).
Reason why at the beginning it was not successful: you physically have to move people, completely to have
to change routines, the way you approce budget, … .
The revival
Lafley: “our new organization remains fundamentally right”. Consolidate GBU (to cut costs and hierarchy
duplication) & Outsourcing and consolidation in GBS (IT systems) Focus on growth in core brands (the largest,
the most profitable). Two moments of truth articulation: when consumer sees product in store (MDO) and
when consumer uses product (GBU)
48
TAKEAWAYS
• Organization designs need to follow strategy
• Simple designs are easier to manage
– Buy maybe insufficient to achieve the strategic goal
– Dotted lines often used to make up for shortcomings of one design
• Informal communication flows and social networks can substitute for formal architectures
– Requires careful design to encourage appropriate social relationships
– Requires cultural changes and symbolic changes in the organization
• Organization design as a non-imitable capability
– Social complexity
– Learning effects and time compression diseconomies exist
49
7. Business strategy
Types of competitive advantage
In the 70s it was though not to be possible
Benefit “ambidexteri
differentiation ty”
to combine both advantages.
Cost
“Ambidexterity”
Ex Burger King competes
leadership - at the last point on customization
- on costs trying to keep standardized
process efficient in all the first part of value
chain
IKEA works in the same way. The product
is standard, the service is better,
customization (kids area, restaurant,...).
• Zara is a similar
Perceived benefit B story: cheap product, but
Value created: conceptual
the value comes from the fact that you
(= reserve price)
• Price P foundations
have a broad variety
• Firm Cost C
of product.
Consumer’s Surplus = B‐P
Firm’s Profit = P‐C
If B>C “win-
If B>C “win‐win” business
win”. opportunity for the firm and
the customer.
If C>B, => no value created
Within a market with homogeneous products firms with the highest B‐C can
(there would be no profitable
price (for the firm) that
capture the entire market (as they can bid the highest consumer surplus).
customers would be willing to
pay)
Within a market with
Indifference curve (same CS) and the tradeoff bw price (=benefit) and quality.
homogeneous products firms
with the highest B‐C can
capture the entire market (as
Value maps: If in the market consumers have identical preferences (same
they can bid the highest
5
consumer surplus )
indifference curve), market shares are stable among products positione along the same indifference curve.
The steeper the indifference, the more customers are willing to  pay for quality (the product is
differentiable).. Value created: conceptual
Inverse flatter = commodity. foundations
• What is the
Cost advantage Differentiation advantage
total value
created in
the supply
chain?
50
Differentiation
Horizontal and vertical
Definition: “Providing something unique that is valuable to the buyer beyond simply offering a low price”
(M. Portet). Key Issue: creating value for the customer.
differentiation: an example
• Tangible differentiation, observable products characteristics:
• Intangible differentiation
- product features and complexity Unobservable and subjective
- timing of product introduction (e.g. Zara) characteristics that appeal to the
customer’s image, status,
- product customization (e.g. Land’s end)
- location identity and desire for exclusivity
and/or to the reputation of the
- packaging
firm .
- service support (e.g. Onstar)
- product mix (e.g. Amazon)
Total customer responsiveness: differentiation no just about the product, it embraces the whole
relationship between the supplier and the customer (e.g. importance of distribution firms, linkages with
other firms).
Many products can be object of both a horizontal and a vertical differentiation. Positioning choice important
(to apply monopoly-like pricing).
• Horizontal differentiation: only some customers prefer it to competing products (holding price equal);
because of idiosyncratic preferences, consumers do not have the same indifference curve. Many attributes
that costumers weigh in assessing B. The degree of horizontal differentiation a firm can apply depend on:
If consumption were not relevant, the products would be differentiable only vertically
- The number of performance attributes of products other than the price (e.g. cars  w.r.t. to size,
(the retired men would not buy a Porsche just for his limited willingness to pay) 23
consumption, speed, capacity of the boot, maneuverability, etc.)  
- The magnitude of consumer search costs (how easy is for them to learn about alternatives)
• Vertical differentiation: it is unambiguously better (or worse) than competing products (if it were sold at
the same price of competing products, it would capture all the market share): Sea‐view or back‐view room
in a hotel.
Exploiting a cost or benefit advantage through
Pricing decisions
Exploiting a cost or benefit advantage through Pricing decisions
Type of advantage
Cost advantage Benefit advantage (differ.)
High price Modest Price cuts gain lots of Most price hikes lose lots of
elasticity market share market share
of demand Strategy: underprice Strategy: maintain price parity
(Weak competitors to gain market with competitors (let benefit
horizontal shares advantage drive share increases)
Firm’s differentiation) (e.g. Ryanair) (e.g. Fly Emirates)
Price Strategic goal: increase market Strategic goal: increase market
ela‐ share share
sticity Low price Big Price cuts gain little Big price hikes lose little market
of elasticity of market share share
deman demand Strategy: maintain price parity Strategy: charge price premium
d (strong with competitors (let lower (let lower costs drive margin increases)
horizontal costs drive margin increases) (e.g. Diesel for jeans, Bocconi for
differentiation) (e.g. Carrefour in Crocetta) MBA in Milan; Caorunn for Gin)
Strategic goal: increase profit Strategic goal: increase profit
margin margin
In basso a sx: since you can't increase market share (like bars in the beach) you allign your prices to your24neighbors
(higher price in crocetta, also for carrefour).
51
Sources of cost advantage
Focus strategies
Based on:
• Size differences and economies of scale
- achieving a specialization advantage respect to more generalist competitors that serve multiple
• Size differences and diseconomies of scale (larger
market segments with a “good‐enough” product.
firms may face greater organizational complexity)
- Focus on underserved buyers that need something more than the “good enough” product
• Experience differences and learning‐curve economies
Way for small businesses to exert market control in a small niche (build reputation with customers, control
• Differential low‐cost access to productive inputs
distribution  “It’s Easier to be a big fish in a small pond”.
• Technological advantage independent of scale
• Business model innovation
Sources of cost advantage
– Ryanair/Southwest, Dell.
- Size differences and economies of scale
– in two‐sided markets (e.g. free press for a 20‐minute
- Size differences and diseconomies of scale(larger firms may face greater organizational complexity)  
commute: what’s new?)
- Differential low‐cost access to productive
29
inputs
- Technological advantage in dependent of scale
- Business model innovation
· Ryanair/Southwest, Dell.
Learning (“Experience”) Curve
· in two‐sided markets. E.g. free press for a 20‐minute commute: what’s new?) It’s free and you
gain from advergising, different distribution channel, new HR management (young)
The “Law of Experience”
2000
The unit cost of value added for a standard product The more units you have produced, the more you are able
declines by a constant proportion (typically 20‐
2002
30%) each time cumulative output doubles. to save costs.
Cost per Different from scale economies that considers output
unit of
output (in 2004 instead of cumulative output.
real $)
2006 In the electronic goods there is a lot of learning economies.
2008
2010 2012
Cumulative Output
52
The sustainability of cost advantage
Cost to imitate strategy based on cost leadership.
• Economies of scale in small markets  
• Pre‐emption (WalMart’s positioning in rural areas)
• Uniqueorganizational culture and routines (but over the long term can be object of imitation. See lean
production in the automobile industry)   33
• Offshoring as asource of non‐sustainable and

implication at the social level (i.e. race to the bottom)  
Exam: does offshoring produce a source of competitive advantage? NO BECAUSE EVERYBODY CAN DO IT.
Implications of cost leadership position Implications of cost leadership position
for functional area strategies (1)
Implication of coast leadership positioning for functionalfor functional area strategies (2)
area strategies:
• Product and marketing strategies • R&D
– Standardized products (no customization) – Projects emphasis on innovation in production process
– advertising focused on emphasizing value, reliability and price (e.g. lean production in Fiat or Toyota)
Perceptual maps
– Modest post‐sale servicing or maintenance
• Purchasing
• Production operations strategies – Cost control
– Large mass production facilities and full capacity utilization
– Lean production with tight inventory controls
• HR
– Reduce product variety – Tough bargaining power with unions and workers
– Outsourcing/offshoring – Administrative systems emphasizing cost control and
• Engineering and design reward for cost reduction (for all the employees)
– Product design for manufacturability – Few layers in the reporting structure and small staff
35
34
The sustainability of product differentiation advantage

• Easy to duplicate advantages are the ones based on: The sustainability of product
• Hard to duplicate are the advantaged based on:
– Product features  
based on: differentiation advantage
– Timing of introduction
• May be costly to duplicate are the advantages
41
– Locations
• Implications of product differentiation
– Productmix Easy to duplicate advantages are the ones based on:
– Product features – Reputation(e.g.cars,perfumes)
– Links with other firms for functional area strategies (1)
– Service and support
• May be costly to duplicate are the advantages based on:
– Product customization (see Lands’End)
Attribute rating method
– Product complexity • Product and marketing strategies
– Product mix
– Links with other firms
– Customize products
– Product customization
• Three competing brands of washing machines. What is the
Hedonic Price Analysis: linear regression, each coefficient
most important attribute for differentiating the product? ––Product complexity
Extensive after‐sales services (e.g. generous
bi represents an hedonic price, the elastivity of the
• warranties, trade‐credit)
Hard to duplicate are the advantaged based on:
marketprice wrt the i-th attribute. Useful to understand which
From market research From market research
Or from hedonic price estimation • –Operations
additional Timing of introduction
features can successfully differentiate the product.
– Locations
– Willingness to sacrifice scale in favor of
Attribute rating method: three competing brands of washing
– Reputation (e.g. cars, perfumes)
machines.–Whatcustomization and flexible response to
is the most important attribute to differentiate
Service and support
unpredictable customer demand
the product? 36
– Products made‐to‐order
– Capacity slacks to minimize chances of stockouts
37.5/34.5 = 110 %  I can apply 10% more on price for firm 1 43
wrt firm 2.
• Who is more able to differentiate the product? Why?
• how much does the reservation price of product I exceed the
Implications of product differentiation Implications of product differentiation
Implications of product differentiation for functional
reservation price of the other brands? area strategies:
42
• Purchasing
• Product and marketing strategies – High‐quality raw materials
– Customize products • R&D
– Extensive after‐sales services (e.g. generous – Fast product development cycle (to anticipate competitors in dealing with
warranties, trade‐credit) new market trends)
– Develop New innovative materials
• Operations • Engineering and design
– Willingness to sacrifice scale in favor of – Focus on product performance variables other than the cost (e.g.
customization and flexible response to usability)
unpredictable customer demand • HR
– Rewards for experimentation.
– Products made‐to‐order
– Higher than average pay to attract talents
– Capacity slacks to minimize chances of stockouts 43
53
• top‐management team
44
– Multidimensional performance measurement
The risk of being “stuck in the middle”
• Can firm simultaneously build low‐cost/high‐quality (=differentiated) products?  
• Difficult to combine the routines, functional capabilities (processes, culture, organizational structure), of
cost leadership and product differentiation within the same four walls, even if today in many industries low
costs are a competitive necessity and firms search differentiation to avoid product commoditization.
– E.g.furniture(IKEA)
– Apparel (Zara and online firms selling customized clothing)
– Car industry (lean production)
• Ways to avoid being stuck in the middle
- Standardization and economies of scale upwards in the  value chain and differentiation
downwards
- Organizational separation (e.g. Nescafè and Nespresso)  
- Through high‐quality products a product differentiator is able to increase market share, which then
improves favorable scale or learning effects on the average unit cost  
- The rate at which accumulated experience reduces costs is greater for higher‐quality products than
for lower‐quality products (see the troubles of Tata in the car industry)  
-Ex Nespresso: variety, limited edition, brand, proprietary stores in the main streets.
-Ex FCA: you can't have in the same plant Maserati and panda. Each single task 1 min panda, 6 min Maserati,
24 min Ferrari.
• Effect of scale economies and learning economies: in the long term you learn high quality and also cost
leadership. In the long term a product differentiation to became a cost leader too !!!!! But the opposite is
very hard (Tata).
• The slope of the learning curve is stealer than the one of the cost leader.
Takeaways
• Competitive advantage: giving a higher benefit B at a lower cost of production C  
• Two way to build a competitive advantage
–  competition risk is
more likely  
– Product differentiation (good in mature markets, for experience goods, for qualitive
sensitive customers): successful firms offer superior quality applying a price premium (If
no horizontal differentiation)  
• Non‐necessarily a cost leader focuses its strategy on market share and a product
differentiator on profit margin. It depends on the price elasticity  
•Risk of being stuck in the middle  
54
CASE: IKEA, “low price with meaning”
Ambidextrous company.
Segmentation variables (must be measurable): price (y axis), that is correlated with income and quality, and
variety (x axis), that includes also after sales services, types of styles, number of product, … .
IKEA is really in the middle; in this sense is similar to Zara.

Obstacles of typical furniture retail and how they tried to respond:
- Search for distinctiveness --> offering more variety and style
- Visualizing the product in their home --> in-store sales assistance (3)
- Getting the product home/get rid of --> delivery services
- Search for durable products --> quality of materials
Reduce cost Increase buyer value

Eliminate Raise
- Assembly costs - Unique design (“Scandinavian”)
- Credit delivered - Variety of things available
- Consulting on interior design - Easiness of transportation and assembling
- Exposition area
Reduce Create
- Sales assistance/customer ratio - New customers’ experience: restaurants
- Transportation costs and kids area
- Material quality in some parts - Online preview of products
- Delivery service - High turnover of furniture
- Longevity (not a lifetime sofa) - Efficiency in buying from warehouse
- Number of suppliers - Instant gratification
- Style selection - Catalog
- Low distance from city center
Marketing message: don't be emotionally attached to your furniture.

What is “the product”?
1. Essential product (a sofa where to seat)
2. Actual expected product
3. Extended product (assistance delivery etc)
Ikea reverted this (“extended positioning”): it focuses on different extended products instead of traditional
ones which don't create particularly added value to the customer and are expensive.
55
Maslow’s hierarchy of needs --> pyramid, from primary (the first two on the
base) to secondary needs. The cost leader works on the firsts, the
differentiation leader works also on the others.
Swatch is similar to ikea; product came across different groups.

IKEA: rare and non imitable?
Takeaways
- Reverse positioning and blue-ocean approach to enter an empty
segment (neither low-end or high-end)
- Change definition of quality in the sector
- Strategic fit/internal consistency --> difficult to imitate (like ryanair)
- Strong brand identity
56
CASE: Zara, IT for fast fashion
This is a case about functional strategy (IT is a function). Should the company upgrade to the new POS? They
are becoming obsolete in the technology used. Reasons for having wifi in the store? Direct flow of
information between PDA and POS (making information flows easier).
By giving information about if the item is in the back or in the other store you can retain customers.
4 problems (what to do). Remember you can't do 3&4 without 1&2: Upgrade POS terminals to a new
Operating System, Build in-store Wi-Fi networks, look up inventory balances for items in their own stores,
look up inventory balances for items in other store.
A point against upgrading is that the technology is more secure (not connected).
The right approach is “outside-in”: first look at the market and environment, that at the business strategy
and then at the functional strategy (opposite of “inside-out” that is very risky, you don't care about the
business strategy).
If you change the infrastructures you have to change the application systems too and it's a cost; the
application was developed internally, you have to hire more persons or external consultants. Zara uses less
resources for IT, both spending and HR (see notes at the end of pages 8).
What's the business strategy of Zara? “Fast-fashion”:
- huge variety (11000 garments per years vs 3000 of competitors)
- responsiveness to the demand (3 weeks from idea to store)
- not durability of the goods (similar to IKEA)
- vertical integration (to reduce time to market and coordination costs that can be very critical for
the speed)
- centralized design process
- no advertising
- no sell on the Internet at that time
- don't forecast the demand; it’s the store managers that places the orders. In fact, the forecast in
this industry is really difficult, it's typical to make errors --> it leads to the fact that you have to sell
at discount factors. Zara usually don't have a huge number of discounted items (bc you don't have
many items in the inventory you want to get rid of): higher profitability.
Benetton is totally different: a lot of advertising and outsourcing, not owned stores.
IT strategy:
- Simple IT (both in the infrastructure and in IS portfolio)
- Proprietary ERP system (business processes are different from the one of competitors)
- No CRM system (store managers are the CRM system!)  
-
robust to errors respect to demand forectasting  
- No CIO  
- Easy to install and maintain IT infrastructure in stores requires limited assistance
- In stores Business processes are standardized also without use of IS (e.g. orders)  
- Limited benefits due to the use of more IS features in stores
· No need for automated Inventory look up  no need for WI‐FI in stores
·Accompany a customer to the appropriate section of the store is the best way to help
him/her in finding a garment
· Inventory look up across stores would be useful.... but very hard to have reliable data on
quantity of each SKU
- More IT would reduce flexibility in business processes...and would generate more overhead costs
57
- Business process standardization and monitoring are based on ex‐post compliance in lieu of ex‐
ante compliance
· Ex ante compliance: making it impossible (or very difficult) to ignore the process or execute it
any other way  
· E.g.: the IS “obliges” the store manager to place an order by the required deadline  
· ex.‐post compliance: make it easy for managers to detect non compliance and take corrective
action  
· E.g. the store manager who does not place the weekly order receive a standard
replenishment order and will be amended by the headquarter  
Important data for business model:

- Theoretical inventory for each store (not required 100% control)
- Qualitative information about local market trends
IT MEANS COMPLEXITY, AND IF YOU WANT TO GROW 1 stores per day YOU WANT TO KEEP IT SIMPLE.
Scalability = possibility to go on with the growth.

Option creating investment : if you have a poor infrastructure you can't do anything. Financial investors
appreciate that you communicate in new infrastructure like IT or retailing (that is the stock price increase,
for Fortune 500).
What could stop the Zara’s growth? Threats:

- Natural market saturation effect
- You need smart store managers; in this sense IT can give more scalability. Maybe competitors want
to hire them
Lessons learned
- «Outside‐in» rather than «inside‐out» approaches in the planning of IS strategies  
- Consistency and internal fit between IS strategy and business strategy  
- No «one best way» for IS and business strategies in the same sector.  
58
Strategy & Performance Across the Industry
8. Innovation, industry and strategic change
Life Cycle
8.1 Industry life-cycle
This industry life-cycle fits well in electronic
products, cars, computers,…; not very well
for motorcycles for example.
Performance of innovation slow at the

beginning: you have to spend a lot in R&D.
Ex of performance for cars: speed,
emission, safety, acceleration time, … . For
aircraft, until ‘70s it was speed, then
consumption and clearness.
Why when industry approaches maturity,

the number of firm decreases?
You have lower profitability, products become more standard  it’s more difficult to play a game of product
differentiation. To make your product more attractive, you have to make it cheaper  outsourcing increases:
the more mature is the industry, the lower the ratio value added/revenue is.
↑ maturity = ↓ sales of new products, ↓investments/sales, ↓budget for advertising.
economies are very important. Internalization  emerging market let you: 21
In this scenario scalewww.contemporarystrategyanalysis.com
- face the demand
- have lower cost (energy, labour, real estate,…)
7-8% of profitability: car as a commodity. Even if cars have a lot of innovation!
Evolution of Industry Structure over the Life Cycle
Evolution of industry structure over the life cycle
Introduction Growth Maturity Decline
Demand Early adopters Rapid increase in Replacement/ Obsolescence

market penetration repeat buying;
price sensitive
customers
Technology Competing Standardization; rapid Diffused know Little innovation

technologies; rapid process innovation how; incremental
product innovation knowledge
Products Wide variety of Design & quality Commoditization; Differentiation

features and improve; dominant brand difficult but it can
designs design emerges differentiation bring extra returns
Manufacturing Short‐runs, skill Capacity shortage; Over‐capacity Overcapacity

intensive (craft mass production emerges, deskilling
based)
Trade Production shifts from advanced to emerging countries

Competition Few companies Entry, mergers exist Shakeout and Price wars and exit
consolidation
KSFs Product innovation Design for Cost efficiency Low overheads;
manufacture; process (scale economics rationalization
innovation low cost inputs) 22
59
Cars: high investments in R&D and low ROA  try new mergers (Marchionne).
If we look at the capacity, in maturity you have overcapacity and it’s another driver for M&A.
Computer: mature industry  instead of letting distributor earn a lot, Apple created proprietary stores (to
revert the trend).
Golden rule: on the early phase R&D is concentrated in

Product and process innovation over making the product better; once you have understood the
the time (for assembled goods) formula, you want to make it cheaper.
A dominant design emerges as a de-facto
technical standard in product architecture Dominant design: once they emerge, they become technical
Rate of (e.g. all-closed steel body and internal
Product
innovation Innovation combustion engine in the car industry)
standards adopted by the entire industry because of:
Curve - Switching costs in the supply chain (customers, suppliers):
e.g. Underwood model in type writer and QWERTY keyboard
S‐curves and discontinuities –
- Network effects for users (“Wintel” platform, Facebook disk
in
Process
Innovation
social networks) drives
Curve - Industry specialization and economies of scale in
production of components
Hard diskand complementarySolid
drive goods
disk drive
Dominant design can also emerge in business models (e.g
banks with the e‐banking and branch channels) or in
TIME
production processes.
What may impede new design to come out and become dominant?
- Complementary products
coach (ex clean energy, batteries that recharge faster,…)
- Learning economies: developing electric cars require different competence and you may not be
familiar with them. You need to have a lot of cash and agile managers (Kodak), so you can make
investments in emerging markets.
Ford T Model
(1908) Discontinuous innovations
Wooden body • Whether switching to a new technology will benefit an incumbent
depends on:
– The new technology’s fit with the firm’s core competencies
All-closed steel body – The new technology’s fit with the firm’s position in complementary resources.
Citroën Traction – The advantages offered by the new technology (more economic value
Avant (1934) created?)
– The expected rate of diffusion of the new technology (small or large market?)
• Incumbent firms may fail to develop discontinuous technologies

because:
– It is competence‐destroying for them
– Exploration on new prospect paradigm may be difficult (strategic myopia and
competency traps)
– They switch too early to the new technology (the importance of cash
availability)
– They switch too late to the new technology and they cannot exploit learning
effects as much as first movers can.
Example: from hard disk drive to solid disk drive.
You need to have cash cows so you don’t have to ask cash
investment in new product development. They are
mature products but with high market share (that often
means profitability), you are stronger than competitors
 they don’t need a lot of investments.
Cash cow for Apple: Mac.
Tesla doesn’t have cash cows but has a lot of investors.
60
How overcoming organizational inertia (≈Kodak).
- Reorganization and new blood
- Ambidextrous organization, 2 kinds of ambidexterity:
· Structural: Exploration and exploitation allocated to different organizational units (ex corp venture capital)
· Contextual: Same organizational units and people perform both exploration and exploitation (Google)
Structural separation: ad es puoi dividere Kodak in due sezioni molto lontane anche geograficamente tra loro
(una nella silicon valley per esempio).
Oppure Nespresso (superstore) e Nescaffè (supermarket): you need to separate them.
Takeaways
• The industry life cycle is related to the rate of technology development  
• Discontinuous technologies as a “wind of creative destruction” they may change industry structures and
industry leaders.  
• Main reasons why a firm may fail in dealing with technological discontinuity:
- Organizational inertia/myopia
- Limited cash availability (no cash cows)
- unfit with the existing core competencies
- wrong market selection choices  
8.2 Management of technological innovation

Who gets the value?
• The least replaceable player  system integrators, most of the time.
- plexity
of the assembly process. ROA Intel: 30%! It’s Intel that captures the value, not PC makers. Usual ROA ≈5%.
- nd reputation  
- Apple atomized supply chain (e.g., I‐phone)  
• The guardian of quality (and legal liability)

E.g. Eataly (but also Carrefour), TripAdvisor, shippers for port wines, Taxi drivers vs. UberPop
Ex Port wine: English distributors capture value (even if it’s produced in Portugal). Similar story for Fb that
capture value for digital picture  new “industry architecture”.
• Who follows customers in value migration

- E.g. Google and specialized components of the self‐driving car  
- Google  
- Amazon and mortgages to small affiliates
• Who is capable to manage growth at the  expense of losing part of the strategy control
E.g. Google (Android) in the mobile phone industry  
An example of value control for electric car

New entrants (e.g. Tesla, BYD) vs. incumbents OEM (GM, Toyota, Nissan‐Renault)
· Replaceability. Car makers putting pressure on multiple battery suppliers to build to OEM‐specific
specifications (avoid the “Intel‐inside” effect)
· Quality guarantors. GM recall of batteries when a damaged battery caught fire. GM endured the press and
undertook the remedy, not battery manufacturer LG Chem.
61
Appropriation of Value: How are the Benefits from Innovation Distributed?
Who takes the lion’s share? The innovator must defend itself by imitators and suppliers of
complementary resources  Appropriation of value from innovation depends on:
 Appropriability regimes (i.e. legal and natural barriers to
imitation)
2. Industry Architecture (locus of innovation and rent appropriation).
Examples of when the innovator does not capture the lion’s share: Netscape with the internet
browser (Microsoft succeed, because it controls complementary goods), Merck in cholesterol (Pfizer), … .
8.3 Appropriability regimes

Mechanical and electronic products can be subject to reverse engineering, so they need patents.
For food it’s different, but with industrial secrets you have to be totally vertical integrated (Nutella).
Brand is also a way to protect innovation (Louis Vuitton and proprietary stores).
Geox: at the beginning you are not able to exploit the value of your invention: no reputation, no product
capacity, no capability for design but yes money and entrepreneurial mind.
Appropriability regimes for innovation:

1.A Legal instruments provide a legal protection to imitation:
- patents: exclusive rights with a fixed life time Three different appropriability
- copyrights: exclusive rights to artistic works; 70 to 120 years
- trademarks: no fixed life time, for words, symbols etc (Nike, Coca-Cola)
regimes
- trade secrets
- private contracts
Different appropriability regimes: in smartphone the followers are

those who get more value, while for aspartame it’s the company
(innovator) that captures more value because of patents.
1.B Nature of technology products may provide “natural barriers” to imitation

Product and process
• observability of the technology  degree of difficulty in reverse engineering in the product.
Ex: Lands’end proposed an innovation on the website just before of Christmas so competitors couldn't copy
• Complexity in the technology (e.g. low in luxury, high for products in electronics)
• tacitness (i.e. low codifiaility) of relevant technology. difficult to transmitSome IP found in a mobile phone
and receive, less exposed to
industrial espionage (e.g. glassmakers in Murano); it’s really important to educate
Trade marks: the customers about
• Made by "Nokia"
why to pay more • Product "N95"
• Software "Symbian", "Java"
• Learning advantages (the innovator exploits lower manufacturing cost and shorter time‐to‐market in
introducing product improvements)   Patents:
• Data-processing methods
© Nokia
• Network externalities. Easier for the innovator to persuade customers (and suppliers
• Semiconductor circuitsof complementary
Trade secrets:
• Chemical compounds
products) to buy the product (search for product compatibility)   •…
?
Designs (some of them registered):

Copyrights:
• Form of overall phone
Legal and natural barriers may only give a temporary competitive advantage  lead time (i.e. the time it
• Software code
• Instruction manual
• Arrangement of buttons in oval shape
• Three-dimensional wave form of buttons
takes to imitators catch‐up their delay) and asset mass efficiencies (due to continuous innovation) reduce
• Ringtone
•…
•…
the negative effects due to weak appropriability regimes.
The innovator is able to introduce products with superior performance before than competitors/imitators.
EX How does Burberry responds to Zara? Not putting its product on fashion weeks so they can't be imitable
Lead time important in electronics and software.
EX In 2007 Microsoft completely reengineered office (risky, customers have learning economies): it was a
way to respond strategically to google docs and open office, showing that word has much much more
commands (but in the previous versions many commands were hidden)  it's a way to differentiate from
low cost imitators, a reaction to the commoditization of software automation packages.
62
2. Bargaining power towards the owners of complementary resources, which depends upon whether
complementary resources are:
- generic assets: they do not need to be tailored to the innovation in question. When a company
needs a commodity product, no need for be vertical Integrated. JKR doesn't need to own a
publishing company (that can be really generic).
Bargaining power of the innovator: high
- specialized assets: there is a unilateral dependence between the innovation and the
complementary asset. If you sell complex biomedical devices, to distribute or to assist physician to
use it, you need a KSF: knowing well the product and how it works, because the investment is high.
If you make the product specific, low bargaining power, risk of not capturing value.
Most of the value captured now by Ge but the innovator was emi.
Bargaining power of the innovator: low
- co-specialized assets: the “value is shared” among the innovators and the supplier of complementary
goods. Both specifically designed for each other (bilateral dependence).
E.g. Lufthansa and Frankfurt airport; Windows and Intel.
EX SAP and Accenture: how value is shared? It’s in the middle between specialized and co-specialized, and
it’s similar of emi. Fact on data: similar market capitalization.
Without patents invention and scientific knowledge could hardly be traded since  Arrow’s Information
paradox: to sell valuable information to a customer you have to disclose it (=“give it for free”) in order to
allow the customer to assess its value.
Patents are both benefits and costs at the society level, because they stimulate innovation but they create
temporary monopolist rents.
Key attributes: novelty, useful, non-obvious. Cannot be patented in Europe Business methods, sw, …
Ex: Amazon’s 1-click shopping patent in 1999 in US (denied by Europe); licensed to Apple.
The life of the patent actually begins at the application date, not the approval date (and it may take 5 years,
and under patent application cannot be traded).
Why patents may not be effective in value appropriation?

• High costs (for applying, defending,…)  not always affordable for SMEs
• Risk that competirors legally “invent around” at modest costs.
Substitute inventions: technically different from the core  patented inventions but with the same
functionality
EX: Edison’s use of a thin carbon “filament” of high resistance over the prior art of Swan’s patent of a thick
carbon burners. The patenting surges in filaments after Edison’s patent  
• Costs of patents can increase because of the need of building “patent fence” for protecting a core invention
from substitute products (you don't infringe the law and the patent. Your patent uses a different technology)
 "nani sulle spalle dei giganti”.
EX: in order to avoid it, Dupont patenting over 200 substitutes for nylon. If you can't afford this like Doupont,
you have to think about something else over patent.
Why do firm patent?

Patents are in general less effective for process
technologies. Process technologies are less subject to
public scrutiny (secrecy is more effective and
infringements are more difficult to detect). Patents
would disclose unique details of a process innovation.
Usually, you patent to prefent copying, to prevent
lawsuits, for licensing revenues, to use in negoriations,
to block others (ex Amazon), or to gain reputation (in
hi‐tech industries SMEs with patented innovations can
more easily acquire financing or alliance partners 
Abgenix).
63
manufacturing and distribution
EX: Estathé, ferrero "non avrei mai avuto successo fossimo stati nello stock exchange market; […] I was
patient" (he was the inventor) . You financial strategy influences your business strategy. If you are sant'anna
you are a follower. Money on advertising and free sample. But the problems is having space in supermarkets.
Strong Weak legal/technical appropriability
legal/technical Position of the
appropriability
Innovator vs. imitators
in the access to complementary assets
Strong Weak
Strategy: Contract Strategy: Contract Strategy: Contract
Outcome: the Outcome: the
Innovators /imitators vs. owners of
innovator should innovator will win Outcome: the innovator

win or the imitator will win
Strong
complementary resources
Example: star e.g. OEM producers
Example: Emi vs. GE for
writers (e.g. of disk drives for the
CAT scanners.
Markret power of
Stephen King) PC industry; SAP AG
Blackberry. Apple vs IBM
vs Accenture,
for PC
Pharmas vs. generic
Appropriability regimes at a glance (1)
drugs
Legal barriers to Product/ Strategy:Complementary
Contract Strategy: Integrate
Appropriability Strategy: Contract
imitation process
complexity
Outcome: value is
goods Outcome: the
regimes Outcome: imitator or
shared among innovator should owners of
Weak
Writers High protection High – Generic and High. No

from Copyright complementors
imitability no offered in a win
integration (e.g. complementary assets
possible for competitive Rowling and
and the innovator will win
paper books. market (publishing E.g. Luxury firms
Harry Potter’s
E.g. producer of
Possible for e‐ companies; movie saga)
Software
Patents Invent around Specialized (OS Medium‐high .
books studios)
application for Copyright
Legal barriers to is possible
Product/ producers)
Complementary No integration
Appropriability
PC or Industrial Secret
imitation process goods regimes
smartphones (closed source) complexity
Music bands Copyright, Low in the Generic Medium‐low for
Takeaways
Writers High protection High – Generic and High. No
process of Internet
from Copyright imitability no
broadcasting
offered in a integration (e.g.
distribution. • Strategy is contingent on the appropriability
possible for competitive Rowling and
(internet Higher for live
paper books.
piracy)
market (publishing Harry Potter’s
performances.
regime, which depends on the type of industry  
Possible for e‐ companies; movie saga)
High for live
books studios) No integration • Complementarity among different legal barriers to
performance
Software Patents Invent around Specialized (OS Medium‐high .
application for Copyright is possible producers) No integration
imitation  
PC or Industrial Secret • When legal/technical barriers to imitation are
smartphones (closed source)
Music bands Copyright,
Low in the Generic Medium‐low for weak, the control of “complementary” assets
process of
broadcasting
Internet
distribution. matter! => vertical integration.  
(internet Higher for live
piracy) performances.
• If the innovation requires specialized
Legal instruments Product/process Complementary Appropriability
High for live goods
complexity No integration
regimes complementary assets (in manufacturing or
performance
distribution), the innovator may not appropriate the
Luxury Trademarks Low (a lot of The distribution Medium‐low.
goods outsourcing) channel Integration of value of innovation  “complementors” as a sixth
(proprietary stores) the sales force in industry analysis.  
Appropriability regimes at a glance (2) network is
needed. • Better to ally with a partner and share a bigger pie
Drugs Patents (but High in the Resources used for High.
limited duration process, industrialization Integration or than “going solo” and having control on a smaller pie.
Legal instruments Product/process Complementary Appropriability
from when the especially for
complexity and distribution to
goods strategic
regimes • firms may weaken appropriability regimes for
drug clinical tests . physician are alliances (e.g.
commercializatio highly co‐ JV) among getting a fast diffusion of complementary products
Luxury n is allowed by
Trademarks Low (a lot of specialized to the
The distribution biotech firms
Medium‐low.
goods authorities). outsourcing) one of the R&D
channel and pharma
Integration of • The industry architecture (that reflects product
drug trademarks (proprietary stores) firms
the sales
when patents network is architecture) contributes to explain how economic
expire needed. value flows
Drugs Patents (but High in the Resources used for High.
limited duration process, industrialization Integration or
from when the especially for and distribution to strategic 64
drug clinical tests . physician are alliances (e.g.
commercializatio highly co‐ JV) among
n is allowed by specialized to the biotech firms
authorities). one of the R&D and pharma
CASE: Apple Inc.
The first two decades: troubles. It makes sense that it changes name from Apple computer to Apple inc.
Joint venture with IBM (that then failed). 1993-97 reduced R&D efforts.
Strategy beyond IBM making clones: it means that you have invented your computer, but you license out the
technology, i.e. give the possibility to any other party to assemble a computer --> it's a story of diffusion, to
make your product a dominant design (it's like Ferrari letting third party to produce with its logo). It's also a
matter of compatibility, and network externalities, network economics.
What was the reason behind licensing out the Mac operating system and fostering compatibility with other
software?
You have a sort of vicious circle in the computer industry: it's not only the product that matters, but also the
software and compatibility.
OS Application sw (complementary to pc or Mac)
Positive feedback
7.1mln Apple Proportional to the number of os, especially on b2b
261mln Wintel
For developing and distributing sw: almost flat (really low mc, only f).
Gli altri con l'apice sono quelli di ora rispetto a vent’anni fa (quindi sw più complessi), quindi more costa;
pirate software, that is more substitute products, but also Google docs, openoffice, ... --> higher breakeven.
It means also less and less incentive to make an application compatible with Apple.
Than strategy for addressing the compatibility problems. TC TR
In the end, did Apple embrace the dominant design? Yes, in 1997 TR’
compatibility with Microsoft suite. Motivation to insert Intel
microprocessors: you could switch to windows with the virtual machine
because those were faster; also to raise the autonomy of the battery. TC’
Higher spend of Apple on R&D: differentiation in part, but it's because
they make the application software on their own. TC
Adobe refused : recall transaction cost economics --> when the q

investment is specific, and contract are complex, the better is VI. BEP BEP’
Apple sources of competitive advantage on the computer business (without
including other products), superior:
- Security and stability
- easiness of use (+- until 1991  low regime of appropriability in computer industry, things can be
imitated without infringing patents)
- design
- Branding and customer loyalty
- Many sw for creativity
On one hand superior product, but on the other hand the company was not able to turn it into superior
performance: the product was not compatible with the dominant design, you could not control the
availability on complementary goods (the vicious circle).
They tried at a certain point to pursue a cost leadership strategy while they were differentiator.
Three attributes of strategy: external consistency, internal consistency (with you functional and business
strategy), dynamic consistency.
65
Attractiveness = possibility to make high profitability (mature not so attractive). 5 forces:
- Supplier BP: high. Intel, Microsoft. Computer is a commodity, but “Intel inside” as their logo says.
- Customers BP: medium-high. The internet gives a lot of information and this gives power to
customers. It's a commodity = no particular switching costs. The majority of the revenues of Dell is
b2b; the strategy of dell for distribution is no at stores and only online.
- Internal rivalry: high (price competition). Lot of people able to assemble especially desktop
computers. Market share of independent small assemblers: 37%, very high.
- Threat from substitutes: high (increasing); smartphone, tablet, consoles for games, …
- Low barriers of entry --> Threat of entry: high. Everybody can make it, simple technology. Scale
economy is not so important because the key asset is the microprocessor, cpu.
Modular products. Golden rule: if you let the product modular, you let the supplier appropriate the
value. (Ex Johnson control che fa sedili per le macchine, ma i carmakers sono stati furbi a farli specifici
per ognuno).
Why Apple and IBM gave up in the “go-to-market” of the new OS? There was already a dominant design:
once established, one company can embrace it or focus on a nieche of the market, as Apple (it's too late
to change the rules of the game!).
High market capitalization = high expectation of growth.
iPod: halo effect --> positive correlation bw sales of iPod and sales of Mac. The company learned from its
mistakes letting iTunes compatible with normal computers too. Moreover, in the same period:
proprietary store, that are basically showrooms and it increments halo effect.
Unit contribution margin = price – VC (basically it's the contribution of fixed costs).
In the case of iPod, the company was able to capture value. Let's think about complementary goods: you
need iTunes (and you make it compatible with the dominant design windows), another is music and in it
you can make contracts with music distribution company; Jobs proposed them to
Another good think they did is that they offered a big range of product, an iPod costed from 50$ to 400$
--> cover different segments of the market.
Apple hasn't been good in establishing a dominant design in music  music streaming services now.
iPhone 1.0 strategy (July 2007): full price  people willing to pay a lot when new product on the market.
iPhone 2.0 strategy (July 2008): subsidy from AT&T. This is a different segment of the market: more normal
people like students.
Yellow : high willingness to pay. Green : those waiting for more features.
For acquiring customers no fixed costs for AT&T and then Apple added variable costs.
Sculley : successful in dealing with the competition with coca cola, but he's a marketing guy : that industry
doesn't have to deal with compatibility and so on.
66
CASE: Abgenix
67
9. Mature industries, declining industries and
diversification
kkds
68
10. Global strategies and the Multinational
Corporation
ICATIONS OF INTERNATIONAL COMPETITION FOR INDUSTRY ANALYSIS
It’s a topic linked to P&G also: adapt global product to local market.
Alliances: maybe abroad the production/distributions is different and you need them.
Patterns oftheInternationalization
Here we can see pattern of internalization: industries are not subject to the same level of globalization.
IMPLICATIONS OF INTERNATIONAL COMPETITION FOR INDUSTRY ANALYSIS
- In basso a sx: Local services are not touched
HIGH
TRADING GLOBAL by globalization: laundry, dry cleaning,

INDUSTRIES INDUSTRIES
Patterns
• shipbuilding
of Internationalization
• automobiles
restaurants, pilates… Jobs for providing local
services in Italy, France, UK etc increased in the
• military hardware • oil
International Trade
past years.
HIGH
• diamond mining TRADING• semiconductors GLOBAL

INDUSTRIES
- In alto a dx: For cars, a global market is needed
• agriculture INDUSTRIES • alcoholic beverages
• shipbuilding • automobiles because of high fixed costs and difficult product
• military hardware • oil (high technology).
International Trade
SHELTERED • diamond mining MULTIDOMESTIC

• semiconductors - In alto a sx: Ferrero for Italy need the same
INDUSTRIES
• agriculture INDUSTRIES
• alcoholic beverages cocoa as Nestlé in Swiss, and it is produced only
• taxi services • frozen foods in countries in Africa  it’s a commodity. You
• laundries/dry cleaning
SHELTERED • retail bankingMULTIDOMESTIC don’t need to go there (remotely is ok) but you
• hairdressing INDUSTRIES • hotels INDUSTRIES
LO W
need a global supply chain.

• fresh milk • taxi services • wireless •telephony
frozen foods
• laundries/dry cleaning • retail banking
- In basso a dx: for bank, instead, you need a
• hairdressing • hotels global presence: foreign direct investments.
LO W
LOW Foreign HIGH

Direct Investment• wireless telephony
• fresh milk
Ex: where would you LOWput McD? In basso

Foreign metà, perchè: HIGH
DirectaInvestment
- un po’ a sinistra, perché fa il franchising (gli employees non sono propriamente suoi)
- un po’ a destra, perché non c’è bisogno di centralizzare il procurement (raw materials a volte possono
essere comprati localmente)
Ex: is it more difficult to expand McDonald’s or Starbacks? Replicating the experience of Starbucks is more
LICATIONS OF INTERNATIONAL
difficult COMPETITION
 causal ambiguity, FOR
it’s difficult toINDUSTRY
understandANALYSIS
how to replicate.
IMPLICATIONS OF INTERNATIONAL COMPETITION FOR INDUSTRY ANALYSIS
What Internationalization Means
What Internationalization Means
for Industry Analysis
for Industry Analysis
PROFITABILITY
PROFITABILITY
Other things• remaining equal,
Other things internationalization
remaining tends to
equal, internationalization tends to
reduce an industry’s margins
reduce an and
industry’s returnand
margins on return
capital
on capital
COMPETITION
COMPETITION
• Increased intensity of competition
Increased intensity of competition
INDUSTRY STRUCTURE
• LowerINDUSTRY STRUCTURE
entry barriers into national markets
Lower entry• barriers into
Increased national
industry markets
rivalry —lower seller concentration
—greater diversity of competitors
Increased industry rivalry —lower seller concentration
• Increased buyer power
—greater —buyers
diversityhave more potential
of competitors
suppliers to choose from
Increased buyer power —buyers have more potential
suppliers to choose from
© 2016 Robert M. Grant, www.contemporarystrategyanalysis.com
6 Robert M. Grant, www.contemporarystrategyanalysis.com

69
- industries more open to globalization are less attractive
- google cultural institute  in Paris because the demand from museums there was more ready
- electronic industry is very global (at the top): you also need direct investments (people working at Apple
stores for example)
- Airplanes: huge bill of materials, and there are also small suppliers locally
- IT reduces transaction coordination costs: it’s also why we see more globalization now.
- Investments can be direct (in equity) or indirect (licencing, agreements,…); in the last case the
appropriability is lower (but you share fixed costs)
The distance is really important: CAGE framework (Cultural distance, Administrative and Political distance,
Geographical distance and Economic differences).
- Ex EuroDisney, it’s really good to choose Paris because many people visit it, but French people don’t like
MULTINATIONAL STRATEGIES
USA (there were troubles at the beginning).
- Washing machines: the rising of middle class in Russia Global Integration v. National Differentiation
opened a market there; but not before even if it was near
Development
geographically
of the Multinational Corporation Jet engines
(according to Bartlett & Ghoshal) Autos
Consumer
electronics Telecom
1970s and 1980s The
1900-39: every country 1945-1970:
Ex TLC:European American
have standard, but the product is Benefits
Japanese MNC as
equipment
MNCs as Decentralized MNCs as Coordinated
complex and you need to go global.
Federations Centralized
of
Hub
Federations global
In this graph, McD is in the middle (ex in Israel you can’t integration
sell pork). Investment
banking
Development of the Multinational Corporation Retail

Cement
(according to Bartlett & Ghoshal) Auto
banking
Funeral
repair services
1900-39: •1945-1970: American 1970s and 1980s The

• NationalEuropean
subsidiaries Dominant role of U.S. • Global strategy pursued from Benefits of national differentiation
MNCs as Decentralized
self-sufficient & MNCs
parentas
in Coordinated
developing Japanese
home base MNC as
Federations
autonomous Federations
technology and products Centralized Hub
• Strategy, R&D and production
• HQ control through • Foreign subsidiaries home based Development of the Multinational
appointing subsidiaries autonomous in operations Corporation (according
• Foreign subsidiaries conduct to Bartlett &
senior management and marketing sales and distribution
EXAMPLEGhoshal).
Note: Density of shading indicates extent of decision making authority
McDonald's menus include a number of globally standardized
items—the Big Mac and potato fries are international
1) you decentralize
features—however,  you
in most countries loose scale
McDonald's menus
• National subsidiaries • Dominant role of U.S. • Global strategy pursued from aneconomies
feature increasing number of locally developed items.
(P&G); it’s typical of Europe
self-sufficient & parent in developing home base These include:
autonomous technology and products • Strategy, R&D and production
2) Federal  typical of USA (it’s in their
– Australia: A range of wraps including Seared Chicken, Tandoori
• HQ • Foreign subsidiaries
control through STRATEGIES
MULTINATIONAL home based culture)
Chicken, and Chicken and Aioli McWrap;
appointing subsidiaries autonomous in operations Decentralize
• Foreign subsidiaries conduct
– France: Croque McDo (asales&mktg, centralize
Reconciling Global Integration with National
and marketing toasted ham and cheese sandwich);
senior management sales and distribution
– HongR&D.
Kong: Grilled Pork Twisty Pasta and Fresh Corn Cup;
Differentiation: The Transnational Corporation
Note: Density of shading indicates extent of decision making authority – India: McSpicy Paneer and McAloo Tikki
– Saudi Arabia: McArabia Kofta, McArabia Chicken;
– Switzerland: Shrimp Cocktail, Royal Jalapeno;
Tight complex Heavy flows of
controls and – UK: Oatso Simple Porridge, Spicy Veggie Wrap, Peri Peri Snack
technology,
coordination and a finances, people, Reconciling
Wrap, Cadbury Creme EggGlobal Integration with
McFlurry;
shared strategic and materials National
– US: Sausage Burrito, BBQDifferentiation: The
Ranch Burger, McRib, Fruit and
decision process. between Yogurt Parfait.
MULTINATIONAL STRATEGIES interdependent Transnational Corporation.
units.
Reconciling Global Integration with National
Differentiation: The Transnational Corporation
Tight The
complex Heavy flows of
Transnational: an integrated network of distributed, interdependent
controlsYou
and leaveand
resources thecapabilities.
leadership and freedom of some product in some countries, where there is excellence;
technology,
coordination and a
identification through finances, people,
– Each national
shared strategic
unit a Porter’s
source ofdiamond.
ideas and capabilities that can benefit
and materials
the them
You let
decision process. whole innovate
corporation.the product, and than you sharebetweenknowledge and innovation at the global level.
Ex:– Swiffer
Each national unit becomes world source for a specific
in Japan (they
component, or activity=. are obsessed with dust). product,
interdependent
units.
– Corporate center orchestrates collaboration through creating the right
organizational context.
70
The Transnational: an integrated network of distributed, interdependent

resources and capabilities.
– Each national unit a source of ideas and capabilities that can benefit
11. Strategic Corporate Social Responsibility
Corporate Social Responsibility = “the responsibility of enterprises for their impacts on society”
(European Commission, 2011).
From responsibe to strategic CSR
Commercio equosolidale: non stai creando più valore, stai spostando il valore.
Investire nella salute degli employees (ex smettere di fumare) aumenta labour productivity e reduce
insurance cost.
“How BMW is defeasing demographic Bomb” (HBR)  per gli operai di 50+ anni programmi speciali.
All of those things are not in contrast with creating economic value for shareholders.
AdamSmith: “it is not from the benevolence of the butcher, the brewer, or the baker, that we expect our
dinner, but from their regard to their own interest”.  
71

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Strategy

MSc Engineering and Management – Politecnico di Torino

March- June 2016, Prof. Neirotti course

2. Business strategy: how a firm competes within a particular market.

• Operational excellence is not strategy.

Strategy and the strategic positioning How sustainable are competitive

• “Even fools can churn out good results (for a

Attributes of a good strategy

2.2 Value creation and competitive advangage

2.3 The strategic planning process

Emergent strategies INTENDED STRATEGY EMERGENT STRATEGY

• Honda and the entry in the US motorcycle market in

The role of the analysis in strategic management:

2. Return on invested assets: ROA = Operating Income / Total Assets)

Looking just at one of those factors is not enough:

Economic measures of competitive advantage

Attractiveness for who? investors.

3.2 Porter’s five forces

Rivalry between established competitors

Bargaining power of buyers

Bargaining power of suppliers

• (Some) drivers of profit dispersion:

Applying five-forces analysis - takeaways

Strategies to improve industry profitability:

Key Success Factors

– they are alike in the way they:

Segmentation Analysis: the principal stages (!!!!)

“Blue ocean” market segments

Empty segments can be more attractive if:

CASE: The US Airline Industry in 2012

Two logics for strategy thinking:

Resources and capabilities as sources of profits

Resources heterogeneity and

From resources to capabilities

There tend to be a tradeoff between efficiency and flexibility.

Innovation and core competencies

Ri-applications of CC entails that firms are able to 1) re-apply

In alto a sx: ex bookstores, how can

Exploitation of core competencies

When resources and competencies are difficult to imitate

Some capabilities can be

Local demand conditions

Related and supporting industry

Structure and rivalry in the home market

#inventory days: decreased, and also credit days.

Tactic (≠strategy) to preserve an innovation advantage: decidere quando lanciare un’implementazione di e-

The sustainability pf product differentiation advantage: product customization.

Strategy: product differentiation.

Mistakes (problems of inertia):

No conflicts = no innovation (new visions are needed).

Low velocity to changes  bankruptcy in 2012.

Main lessons learned

Inertia = resistance to change

Strategic decisions can be faced in three ways:

𝑉𝑎𝑙𝑢𝑒 𝑎𝑑𝑑𝑒𝑑 𝑅𝑒𝑣𝑒𝑛𝑢𝑒𝑠 − 𝐸𝑥𝑡𝑒𝑟𝑛𝑎𝑙 𝑐𝑜𝑠𝑡𝑠

Ex: the value chain for steel cans

Market transaction costs

Market exchanges entail high transaction costs under circumstances of:

Importance High Best source Insource

5.4 Designing vertical relationships

5.6 Some recent trends

Ex newspaper industry, vertical integration:

The impact of IT on make-or-buy decisions:

There tend to be a tradeoff between efficiency and flexibility.  

5.4 Designing vertical relationships  