Business Strategy Notes

Lecture 1:

Introduction to strategy

-What is strategy?

The etymology of “strategy” comes from the Ancient Greek

“Stratos”: army; ”agein”: lead
“Strategos”: army leader
The practices and theories of strategy take their roots from the military domain
A famous inspiration of strategists is Sun Tzu (孫子, 544–496 BC) ’s “The Art of War”
Sun Tzu defines strategy as “the great work of the organization. In situations of life or death, it is
the Tao of survival or extinction.”

-Definition of strategy -> Strategy is the determination of the long-run goals and objectives of an
enterprise, and the adoption of courses of action and the allocation of resources necessary for
carrying out these goals (Alfred Chandler, 1962)

What is strategy by Michael Porter (1996)

• Operational effectiveness is not Strategy

• Strategy is fundamentally about differentiation and uniqueness
• Trade-offs are essential to strategy • Need for choice
• Limit what a company offers
• Sustainable strategy requires fit between combined activities

Formulating a strategy

• Efficient strategy statements have three main parts

[Why] Purpose (fundamental goals and “raison d’être”): mission and vision (expected future to
create), values (moral principles), objectives (outcomes to achieve)

[Where] Industry & Scope -> Corporate Strategy

• Customers’ segment
• Geography
• Activities (vertical integration)

[How] Resources & Capabilities -> Business Strategy

Example of a Strategy Formulation Jean-Paul Agon, CEO of L’Oréal (2020)

Key factors of market dynamism

• Heavy trends

• More recent trends

”Clear strategy”: targeting 6 segments:

• 3 industries

• 1 geography

• 2 channels

Example of a new technology

• Vision
• Corporate social responsibility

• Future: 6 assets

Levels of strategy

What are “strategies” ?

Top Decision-Makers: Leaders / Managers • CEOs

• Top executives

Advisors
• Strategic consulting firms (e.g.: McKinsey, BCG, Bain...)
• External analysts
• Right-hand person, coaches...

Everyone
• Within organizations: employees’ participation to decision-making...
• Outside organizations (e.g.: personal development)

The emergence of strategy as a practice

Emergence of management & strategy consultants in the 1930s

1920s-1930s, rapidly changing business and competitive

environment
 Growing complexity of firms (size, structures, regulations...)
 Accelerated rate of change within firms (competitive dynamics, accelerated
technological change, increased turnover...)

Higher complexity of the business environment necessitated to:

• anticipate change in an increasingly uncertain environment,
• identify and seizing new opportunities,
• take timely action

The emergence of strategy as an academic discipline

First course of “Business Policy” at the Harvard Business School(1912)

Untilthe1960s-1970s,thedisciplinewascalled“businesspolicy”, mostly based on case studies and

analytical framework, sometimes in partnership with consulting firms (McKinsey, BCG...)

Increased robustness of research methods (quantitative and qualitative)

Strong links with the other social sciences: economics, psychology, sociology, political science,
history...

Strategy as an academic discipline

Strategy can be approached through various disciplinary angles

Economics
• How do markets work, how might they be exploited to the benefit of the firm?

Psychology
• What do managers want and how do they behave, form mental models of the world, and act on
those beliefs?
Sociology
• How do firms’ strategic decisions influence each other, how do ideas and technologies diffuse,
how do firms and individuals display conformity or differentiation, what are the industries’ social
norms?

Political science, history, philosophy, mathematics ...

Key question:
Why are some organizations more successful than others?

What are the sources of competitive advantage ?

When two or more firms compete in the same market, one firm possesses a competitive
advantage over its rivals when it earns (or has the potential to earn) a persistently higher profit.

Various factors:

• Cost structure
• Product quality
• Branding

What are the causes of performance?

Causation is the most difficult problem to address in the social sciences

Correlation does not imply causation.

Sources of “endogeneity” (inability to claim causality)

Findings are endogenous when we cannot say that the factors cause the outcome. These factors
are not truly “independent”, exogenous, variables.

4 main sources of “endogeneity”

• Simultaneity and reverse causation: A causes B or B causes A?
• Omitted variable: C might impact both A and B, thus creating a spurious correlation between A
and B
• Measurement error: A or B are not well measured, so we don’t “capture” the real phenomenon
• Selection bias: when the levels of A or B vary due to the sampling (e.g.: non- random sample).
Survivorship bias

Term was coined by statistician Abraham Wald

• During WWII, Wald and his research group attempted to determine how war airplanes could be
better protected

Initial approach:

• 1) assess which parts of the aircraft had incurred the most damage

• 2) Reinforce the areas that were in the worst condition

Problem:

 They only studied the aircrafts that had returned from battle, and ignored those that

o didn’t survive

 Aircrafts that were destroyed may have been impacted in other locations

 These locations are the ones that should be reinforced!

“What does predict firm success?”

= ”what are the independent variables that make the binary dependent variable of success takes 1
instead of 0?”

To answer this question, you need to observe BOTH

 successful firms (success=1), those that survive and that are observable at time t
  unsuccessful firms (success=0), those that didn’t survive and that are unobservable at time
t

You cannot learn the predictors of success if you observe only successful cases

The complexity of strategy

• In sum, economies and societies are increasingly complex systems

• Causation is hard to determine

• Organizations do not pursue a unique form of performance (or value) but multiple types of
performance (or values)

• Paradox: while we never had so much data available, the world seems more and more complex
to understand and to predict
Lecture 2:

External Analysis: Macro-Enviroment, Industries & Market

Layers of the business environment

PESTEL analysis

 PESTEL is a mnemotechnic tool to identify key variables and heavy trends that impact
organisations and industries
 Thinking about the current state and possible evolution of these variables allows
anticipating threats and opportunities for the organisations
 Consider: Increasing awareness of environmental issues on fast fashion industry
Industry

Industry: group of firms producing products and services that are similar to each other

Problems:
What are the boundaries of the industry?
What does happen when a firm belongs to more than one industry?

Challenge: What does it mean to be “similar” to others? To what extent? According to which
criteria? Then, what is an industry?

Porter’s FIve Forces Model

Objective of this framework is to determine the underlying principles of industry’s profitability

 Is the industry profitable for the firm? Is it a good one to compete in?
 What are the sources of economic value in an industry?
 How important are they?

In other words, this framework enables to understand

 Where the economic value is located within the industry

 What strategies to manage the forces that favor or impede the capture of the economic
value
Force n°1: Competitive rivalry among existing incumbents

Competitive rivals: organizations aiming at the same demand group and with similar products and
services (not substitutes)

Examples
• Asian airline industry: Cathay Pacific vs Singapore Airlines Group
• European airline industry: Air France vs British Airways

Factors that increase the degree of competitive rivalry

• Low concentration of resources (equal distribution of power among rivals)
• Low industry growth rate (price competition)
• Low differentiation (price competition)
• High fixed costs (price competition due to high-volume production)

Force n°2: The threat of entry

Threat of entry: how difficult it is for newcomers to enter the industry

Example: pharmaceutical industry

Factors that increase the degree of threat of entry

• Scale and experience (economies of scale)

• Access to supply or distribution channels

• Incumbents’ formal control: direct ownership (vertical integration), property rights (patents)

•Incumbents’ informal control: demand loyalty, informal networks, brand identity...

• Capital requirements (e.g.: guitar teachers vs restaurant chains vs pharmaceuticals) • Legislation

(e.g.: pharmaceuticals, pension selling, taxis,...)

Force n°3: The threat of substitutes

Substitutes: products or services that offer similar function and benefit to an industry’s own
products or services, but have a different nature

Examples:
• tablet vs computer, bus vs train, aluminum vs steel
• Substitutes come from “outside” the incumbent’s industry: pay attention to “distant” threats

Main factor that increases the threat of substitutes

• Low switching costs: customers’ costs to use go from incumbents’ offers to substitutes. ”Cost” is
the value for money
Force n°4: The bargaining power of buyers

Buyers: the organization’s “immediate” customers, not necessarily the ultimate consumers

Example:
• Supermarket chains (buyer) vs local suppliers (seller)

Factors that increase the bargaining power of buyers

• High concentration of buyers (negotiation power regarding prices, volume, quality...)
supermarkets buying milk to local producers

• Low switching costs (buyers can switch easily from one supplier to another)

Milk is relatively standardized and undifferentiated

•High competition threat from buyers

backward vertical integration: supermarket chain can decide to produce their own milk in-house

Force n°5: The bargaining power of suppliers

Suppliers: those who supply the organization with what it needs to produce the product or service

Examples:
• Petroleum companies
• Operating system companies (Microsoft)

Factors that increase the bargaining power of suppliers

 High concentration of suppliers (e.g.: petroleum)

 High switching costs for buyers (e.g.: Microsoft’s operating system)
 High competition threat from suppliers
Forward vertical integration: the suppliers integrate the activity of the buyer
 High product differentiation (e.g.: Strong brands are more powerful suppliers than milk
producers, that have a lower differentiation)
Drawing industry boundaries

Key criterion: substitutability

Demand side: Are buyers willing to substitute between types of

products?

Supply side: Are manufacturers able to switch production between types of products?

Example: online educational programmes

Competition: Industry & Strategic Groups

Defining the firm’s industry can be challenging

• Must not be defined too broadly or too narrowly
• Different criteria: geographies, product segment, position in the value chain
• Eg: Airline industry: Asia, Europe, North America; leisure, business, freight...
• Industries may change over time
• Industries may converge and combine with each others (e.g.: FinTech, EdTech...)

Strategic groups

Strategic groups: set of organizations that share similar strategic characteristics

Competitive dynamics are more intense and consequential within strategic groups

Two main dimensions to define strategic groups

• Scope of activities - Product range

- Geographical coverage
- Number of market segments - Distribution channels

• Resourcecommitment
- Branding & marketing effort
- Vertical integration
- Quality
- R&D and technological leadership - Size
Why considering “strategic groups” rather than industry?

Competition:

With whom do you actually compete with? On what basis, on which strategic dimension?

Strategic opportunities:
Which strategic space is unoccupied? Are they white spaces (opportunities) or black holes
(deadlock)?

Mobility barriers:

Can you move from a strategic group to another? (“barriers-to-entry” between strategic groups)

Nintendo Switch case study

Blue Ocean strategy

Red Ocean: an existing market space where competition is maximized

Blue Ocean: a new market space where competition is minimized

Risk of failure
• Google Glass launched in 2012, one of the “Best inventions of the year” (Time Magazine)

 New market: weareable computers

 From excitement to disappointment: • High-end toy (USD 1,500)

• Weird, rather than fashionable
• Privacy issues

 January 2015: Google announced the suspension of the production of Google Glass

6 traps to avoid

Lecture 3:

Introduction:

Previously, we emphasized the importance of the external environment as a source of strategic

opportunities and threats.

However, the external analysis omits the differences of performance within an industry, that is
between the organizations of a same industry.

Why Focus on resources rather than markets?

Because firm-level influences are the largest systematic drivers of firm performance

Because markets are volatile and uncertain

Because firms can change their markets

SWOT Framework

Traps to avoid

• Weight and Prioritize: score the importance of each factor (-5 to +5) and focus on the main
industrial and resources factors (requires a thorough analysis before and some experience)

 Focus on SWOTs that are relevant to create value • Valuable to demand

• Different from the competitors

 Avoid using ambiguous, overlapping concepts

 SWOT is a very simple, heuristic tool, but it does not replace a precise analysis of the
industry and the organizational resources. The risk is to have a biased perception of the
real SWOTs

Resource based view (RBV)

• Concept developed by B. Wernerfelt (1984) and J. Barney (1991)

Critique of the “Industrial Organization” (IO) approach of competitive advantage for which
organizations’ performance is explained mostly by the features of their industries
Against this “top-down” approach of competitive, the Resource-based view (RBV) uses a “bottom-
up” approach

• the competitive advantage and superior performance of an organization are explained by the
distinctiveness of its resources and capabilities

4 key questions

What are resources and capabilities?

What type of resources and capabilities can contribute to competitive advantage and superior
performance?
How can resources and capabilities be evaluated?
How can resources and capabilities be developed and managed?

Heterogeneity & Imperfect mobility of resources

The “environmental models of competitive advantage” (example: Porter, 1980) have implicitly
used two simplifying assumptions

• 1) firms within an industry are identical in terms of the strategically relevant resources they
control and the strategies they pursue

• 2) resource heterogeneity will be very short lived because the resources that firms use to
implement their strategies are highly mobile (i.e. they can be bought and sold in factor markets)

Resources and capabilities

• Why are they important to consider? The resources and capabilities of an organization

contribute to its long-term survival and potentially to competitive advantage

• Definitions:
• Resources: the assets that organizations have or can call uponè“What we have” (nouns) •
Capabilities: the ways in which those assets are deployedè“What we do” (verbs)
Resources: Tangible Intangible

Threshold and distinctive

• Threshold resources and capabilities: those that are necessary in order to compete and to
achieve parity with competitors = minimal resources

• Example: video games with sufficient technological specifications (see Nintendo case) •
Distinctive resources and capabilities: those required to achieve competitive advantage =
superior resources

• Challenges

 Threshold and distinctive resources and capabilities change as industries change

 Hard to predict what will be the threshold and distinctive resources and capabilities in the
future
Value chain and Value system

• Value chain: the set of activities within an organization which,

together, create a product or service

• Value system: the set of inter-organizational links and relationships that are necessary to create
a product or service

Value chain

Diagnosis of organizational resources

Understand the organization’s value chain

 Understand the importance of coordination of activities within an organization

 Every part of the value chain brings a value for the demand and every part needs to be

optimized to create margins for the organization and to respond appropriately to this
demand

Identify the resources and capabilities of the organization

Locate those resources and capabilities within the value chain

 Among primary activities and/or support activities, which ones can potentially create a

higher value for the demand?

 Which ones are more performant and creates higher margins for the organization?
Value system

• Value system: the set of inter-organizational links and relationships that

are necessary to create a product or service

• A single organization does not necessarily (actually, it rarely does) undertakes in-house all the
value activities from design to the delivery of the product or service to the final consumer

• What can we learn about analyzing the value system? • ”Where” quality can be maximized?
• “Where” cost can be minimized?
è“Make or buy” decision (see session on Corporate Strategy)

Resources and capabilities VRIO Model

• V: VALUE

• Do resources and capabilities exist that are valued by customers and enable the organization to
respond to environmental opportunities or threats?

• R: RARITY
• Are resources and capabilities rare? Do resources and capabilities

exist that no (or few) competitors possess?

• I: INIMITABILITY
• Are resources and capabilities difficult and costly to imitate?
• O: ORGANIZATIONAL SUPPORT

• Is the organization appropriately organized to exploit the resources and capabilities?

Value of resources and capabilities

Resources and capacities are valuable when they create a product or a service that is of value

The stakeholders, often the customers, qualify the resource as “valuable”, not the producers
themselves. Furthermore, value is not an absolute attribute of the product or service

Rarity of resources and capabilities

Rare resources and capabilities are those possessed uniquely by one organization or few others

If resources and capabilities were not rare then competitors could respond quickly to strategic
initiatives

Remember that competitive advantage is about being “superior”: relative level of performance,
not an absolute one

Iniitability of resources and capabilities

Inimitable resources and capabilities are those that competitors find costly to imitate, obtain or
substitute

Sources of inimitability
• Ambiguity regarding how the resources are linked together (“recipe”)

• Culture and history: tacit knowledge

Organizational support of resources and capabilities

Organizational support is a “complementary capability”, the ability of the organization to use

efficiently these resources and capabilities through appropriate organizational processes and
systems

Example
• A company has a patent for an invention (resources)

• It knows how to implement it within the production process (capability)

• It has the sales forces and distribution channels to sell the product (organizational support,
complementary capability)
Dyson case study:

Dynamic capabilities

• Definition: dynamic capabilities designate the organization’s ability to renew and recreate its
resources and capabilities to meet the needs of changing environments

• Resources that were the basis of competitive advantage can over time be imitated, become
common practice, redundant

 Resources and capabilities are likely to produce sustainable competitive advantage (see
VRIO framework)... but assuming that industries and markets are stable! Yet, over the long
term, industries and markets change

 Hence the need of building “dynamic” capabilities

• Create, extend or modify an organization’s existing resources and capabilities
• E.g.: new product development, outlet expansion, recruitment of skilled people

3 types of strategic practices

Sensing: ability to scan, search, explore opportunities to anticipate change from the environments

• Microsoft sensed the threats & opportunities in the tablets and cloud computing services
Seizing: ability to decide to take the opportunity

• Microsoft seized opportunities by launching their own tablets and cloud computing services

Reconfiguring: ability to discard old capabilities and acquire / build new ones

• Microsoft made major changes in its existing PC and game consoles to adapt to the new
environments (tablets and cloud computing industries)

Summary
  Beyond the industry’s characteristics, organizations’ resources and capabilities are
important determinant of performance

 An organization needs ”threshold” resources and capabilities to be able to compete...

 ...but to achieve sustained competitive advantage, these resources and capabilities need
to be Valuable, Rare, Inimitable and supported by the Organization (VRIO)

 However, resources are VRIO in an industry but not necessarily in another one

 Hence the necessity of conducting both external and internal analyses to understand the
potential sources of performance for an organization

Lecture 4:

What is strategy ? Levels of strategy

What is business strategy?

• Business Strategy: How to compete in a market or an industry?

• Corporate Strategy: Where to compete? In which market or industry?

• Business strategy matters for

• Individual businesses

• or Strategic Business Unites (SBUs) within broader organizations • Eg: Samsung has a SBU in
electronics and a SBU in insurance

• Business strategy is a choice about how the organization will perform the value chain’s primary
and support activities to create value.

Competitive positioning
Business model and value

Business model: An arrangement of activities that describes a value proposition and the ways of
achieving this value proposition

Value proposition has 3 components

• Value creation: What is offered to what customer segment?

• What customer segment, what needs, what solution to offer

• Value configuration: How is the value proposition structured?

• How the different elements of the value chain are organized to address the value proposition

• Value capture: Why does the model generate a margin?

• Where are the sources of revenues and costs in the value proposition?

Airbnb Example

Competitive positioning: Cost and Value

Two dimensions of competitive positioning • Cost vs Value (Differentiation)

• Costadvantage:beingabletohavestructurallylower costs than competitors

• Lower prices => higher margins or higher market shares • Value advantage through
differentiation: being able to

provide a unique source of value

• Higher WTP => higher margins or higher market shares
• Broad vs Narrow Scope
• Market size in terms of age, wealth, geography

Cost leadership

Low Cost and Broad Market

• The whole process of production systematically involves lower costs

• Significant portions of total costs are in inbound logistics (materials, handling, warehousing,
inventory control) and outbound logistics (collecting, storing, distributing)

• Standardization of goods, services and/or production price

• 3 main sources of lower costs

• Costs of input resources • Rawmaterials

• Labor
• Economies of scale

• Economies of learning from experience

Economies of scale

• Evolution of costs per unit due to a higher amount of production

Economies of learning from experience

“Experience curve”

• A decrease of costs per unit due to a higher amount of experience • Capital productivity (e.g.:
more efficient logistics)
• Labor productivity (e.g.: higher skills)
• Typical functional structure to implement a cost leadership strategy • Simple reporting
relationships, few layers

 Centralized corporate staff that focus on process improvements and emphasize cost
reductions within each organizational function (engineering, marketing...)

 Jobs are highly specialized, subgroups are homogenous

 Operations in the main function

Challenges for cost leadership strategy

• Sustaining lower costs over time and across spaces

• Labor: changes in qualification, in demography, in labor regulations (see Uber & other gig
economy platforms)...

• Capital: rarity of resources (e.g.: smartphones and rare resources) • Maintaining an acceptable
level of quality

• Acceptable as defined by the demand but also as an ethical standard (e.g.: Food quality, safety
norms...)

• Preserving human rights

• Labor costs: labor is not a “resource” like capital.

Differentiation

• High Differentiation and Broad Market

• Differentiation is about displaying uniqueness along some

dimension that is valued by customers

 Innovation is often critical to successful use of the differentiation

strategy (e.g. Apple, Netflix...)

  Value created to the customers increases their “willingness-to-pay” (WTP), which allows
increasing prices

Two main sources of differentiation

• Product and service material attributes

Value of unique technological solutions

 Product and service non-material attributes
 customer service, reputation and brand effect...

• Typical functional structure to implement a differentiation strategy

 Complex and flexible reporting relationships

 Focus on marketing and product R&D (rather than manufacturing and process R&D)

 Jobs are less specialized, subgroups are heterogenous

 Marketing is the main function

• Challenges for differentiation strategies

• Innovation is costly and risky

• Costs and pricing still need to be controlled

• Competitors may deliver the same value while having relatively lower costs

(cf: Dyson’s failure in EVs)

• Customers have a higher WTP than for standard offerings, but WTP is not

unlimited (cf: Google Glasses) • Risk of being “too” different

• The consumers don’t pay attention to the company (lack of attention) and/or they don’t like its
offering because it is too different from what they usually like (lack of value) (cf: studies on the
success of music)

Competitive positioning: Broad versus narrow scope

Two dimensions of competitive positioning • Cost vs Value (Differentiation)

• Costadvantage:beingabletohavestructurallylower costs than competitors, which provide higher

margins or higher market shares through lower prices

• Value advantage through differentiation: being able to provide a unique source of value, which
provides higher market shares or higher margins through higher prices
• Broad vs Narrow Scope
• Market size in terms of age, wealth, geography

Focused Cost Leadership

• Focused cost leadership strategy consists in lowering costs and targeting a narrow market

 Specific geography (e.g.: local restaurant, Fu Wah Café in Hong Kong)

 Specific customer type (e.g.: young people, urban...)

 Specific activity (e.g.: low-cost raw materials and commodities, like fruit market)

Focused differentiation

Focused differentiation strategy consists in increasing differentiation and a narrow market

(generally high-end)

 Specific geography (e.g.: local restaurant with a differentiated menu compared to local
competitors)

 Specific customer type (e.g.: high-end macaron store)

 Specific activity (e.g.: rare-disease medicine, professional extreme sports...)

Trade-off between cost leadership and differentiation: “Stuck in the middle”

• Organizations are “stuck in the middle” when they have an unclear positioning between cost
leadership and differentiation

• ...and when it results into a bad performance

Trade-off between cost leadership and differentiation: “Stuck in the middle”

Example of a firm recently stuck in the middle:

• JCPenney, American department store founded in

1902, and claimed risking bankruptcy in 2020

• Low cost strategy: reduced pricing of most goods in its stores

• But hard to compete on costs with Walmart • Differentiation strategy: created specialized

stores for name-brand goods within each store • But hard to compete on value with Macy’s

Trade-off between cost leadership and differentiation: “Stuck in the middle” or Blue Ocean
Strategy?
Blue Ocean Strategy aims at combining both cost leadership and differentiation

• Innovativeness and new market spaces

• Such advantage is usually limited in time

Category spanning

■ Innovators are in the periphery of established categories because they intersect with other
categories

■ Innovations often occur when borrowing and combining elements from various domains

■ However, empirical studies found that individuals, products or organizations that span
(combine) multiple categories tend to be penalized in markets

Optimal Distinctiveness Theory

• Optimal distinctiveness (OD) theory has been

developed in psychology by Marilynn Brewer (1991)

• Individuals (or groups) have both competing needs:

• Inclusion: identifying to a group (or to other groups)

• Uniqueness: differentiating from the other individuals (or groups)

• Optimal distinctiveness is the point where both needs of inclusion and uniqueness are satisfied

Problem N1: How to both conform and differ?

• Optimal distinctiveness theory has been applied in strategic

management
• To acquire legitimacy and competitive advantage, organizations

face a tension between differentiation and conformity • On the one hand, organizations are
expected to differentiate

themselves to gain a competitive advantage

• On the other hand, organizations are expected to conform to their industry’s history, norms,
standards and institutions to gain legitimacy

Problem N2: Multiple dimensions of differentiation

• Berger & Packard (2018) collected Billboard ranking data of songs • 1,879 unique songs, 2014-
2016
• Role of lyrical differentiation on the success of songs

• Lyrical differentiation is overall associated with higher chances of success • But the effect varies
across music genres!

Optimal Distinctivness Theory

 In strategic management, optimal distinctiveness can be about differentiating ”up to a

certain extent” on a given dimension

• Songs differ on their sonic attributes (Askin & Mauskapf 2017)

 Optimal distinctiveness can also be about “orchestrating” conformity and differentiation

on multiple dimensions

• Songs differ on their lyrical attributes (Berger & Packard 2018)

 Differentiation vs conformity should be analyzed on N dimensions

Case study: Coursera

Competitive dynamics

 Competitive rivalry: on going set of competitive actions and competitive responses that
occur among firms as they maneuver for an advantageous market position

 Rivals: the main competitors in an industry or market • Apple vs Samsung in smartphones

• Apple vs Microsoft in operating systems

 Mutual interdependence: results when companies recognize that their strategies are not
implemented in isolation from their competitors’ actions and responses.

 Competitive dynamics: all competitive behaviors, i.e. the total set of actions and responses
taken by all organizations competing within a market
Competitior Analysis

• Market similarity: overlap of markets between the focal organization and its competitors

• Resource similarity: overlap of resources between the focal organization and its competitors
(type and amount of resources)

Drivers of competitive behaviour

 Adopting a competitive behavior depends first on competitive similarity (overlap of

markets and resources) which then impacts

 Awareness of competitors

• Importance of understanding the competitors to “see them coming”

• Established firms may not be aware of new entrants. Why?

• Sudden change that enables competition (new technology, new law...) • Organizational
“routines” (creates blindness)
• Success (creates blindness and/or overconfidence)

 Motivation to compete
• Gain / loss analysis (or irrational decision-making: rivalry can be for

personal reasons or even pathological)

 Ability to compete

First mover (dis)advantage

• An attack is a tactical move that impacts competitors; a response is the competitors’ attack
• First mover: an actor that takes an initial competitive action

A dynamic view

Competitive dynamics: The velocity of markets

• Slow-cycle markets
• Standard-cycle markets

• Fast-cycle markets

Slow cycle markets

• Slow-cycle markets: market players are shielded from imitation for long periods of time, and
imitation is costly

• Source of competitive advantage: High barriers-to-entry

• High fixed costs, complex processes, patents, history...

• Hence a slow response from competitors

• e.g.: space industry

Fast cycle markets

Fast-cycle markets: market players are NOT shielded from imitation, or only for short periods of
time, and imitation is cheap

• Low barriers-to-entry
• Source of competitive advantage:
adaptation and quickness

 Adaptation: ability to explore, awareness of competition, flexibility of production processes

 Quickness of decision-making and the implementation of the decisions

• E.g.: smartphone industry

Summary

 ”There are still two ways to compete” (Martin, 2015): Cost leadership or Differentiation

• The risk is to be “stuck in the middle”

• Unless the activities are well compartmentalized, or the offering is innovative enough to
enable to combine cost leadership and differentiation

 Targeted markets are either broad or narrow (focused strategies)

 From a business strategy, we elaborate a business model that formulates a value

proposition:

How to create, configure and capture value?

 Business strategies are dynamic: actors respond strategically to competitors’ strategic

actions

 Competitive dynamics depend on similarities between players (market, resource)

 Competitive behaviors are driven by awareness, motivation and ability to compete

 Competitors can benefit from a first-mover advantage, but such strategy has important
risks. First- movers advantages appear more often in fast-cycle markets than in slow-cycle
markets (where it is better to be a fast second)

Lecture 5:

Corporate Governance

• Corporate governance is concerned with the structures and systems of control by which
managers are held accountable to those who have a legitimate stake in an organization

• Governance chain: the roles and relationships of different groups involved in the governance of
an organization

• Governance chains’ forms vary across firms and depend on their ownership
Roles

The roles of corporate governance are:

• To provide mechanisms to direct and control an enterprise

• Ensure that it pursues strategic goals successfully and legally

• To offer “checks and balances”: a separation and balance of powers • To address the principal-
agent problem

Agency Theory: The Principal- Agent problem

Problem: the Principal and the Agent may have divergent interests

 Shareholders (Principal) want to increase the firm’s performance and value

 Managers (Agent) want to increase their revenues and working conditions

 Without any control, the Agency relationship would be sub-optimal: The Principal or the
Agent may act in an opportunistic way to the detriment of the other’s interest

•
“ifbothpartiestotherelationshipareutilitymaximizersthereisgoodreasontobelievethattheage
ntwill not always act in the best interest of the principal” (Jensen & Meckling 1976: 308)

Key assumptions:

• Individuals are viewed as utility maximizers, individualistic and opportunistic • Firms

are conceived as “nexus of legal contracts”

• Therefore, conflicts that arise should be resolved legally

• The firm needs to formally design work tasks, incentives, and contracts to minimize
opportunism by agents

How to align the interests of the Principal and the Agent?

Governance mechanisms should be put in place to overcome two agency problems caused by
information asymmetry:

Adverse selection: A situation in which a party in a transaction has information that the other
does not have, or vice versa, about some aspect of product quality.
• Ex-ante information asymmetry (before the contract is signed)
• The car repairer (agent) knows better than the customer (principal) if a car needs

maintenance or not
• The CEO (agent) knows better than the shareholders (principal) if s/he is good

Governance mechanisms should be put in place to overcome two agency problems caused by
information asymmetry:

Moral hazard: It occurs when a party in a transaction has incentives to increase risk-taking
because it does not bear the full costs of that risk

• Ex-post information asymmetry (after the contract is signed)

• After signing the repairment contract with the customer (principal), the car repairer

(agent) may conduct additional unnecessary maintenance

• After being nominated by the shareholders (principal), the CEO (agent) may avoid working

Agency cost

• The firm should implement governance mechanisms to solve the agency problem. Such
governance mechanisms increase the “agency costs”.

• Agency costs are the sum of

• incentive costs,
• monitoring costs, ` • enforcement costs,

• other individual financial losses incurred by principals (due to the impossibility of guaranteeing
total compliance by the agent)

Governance mechanisms

Corporate governance mechanisms to lessen the agency problem

1) Executive compensation
2) Board of directors
3) Market for corporate control
4) Financial statement auditors, government regulators, and industry analysts

Executive compensation

Typical CEO compensation package:

• Salary & Bonuses

• Long-term incentives such as stock awards and options:

• Alignment of interest mechanism: now, like the shareholders, the CEO has an interest in
increasing the firm’s value (i.e. the value of its stocks)

• An increasingly important share of the CEOs’ compensation package

• In 2023, median FTSE 100 CEO pay (excluding pension) stands at £3.81 million, 109 times the
median full-time worker’s pay of £34,963.

• Research has found mixed results regarding the effect of executive compensation on firm
performance (positive, negative or no effect)

Board of directors

• Shareholders elect the members of a firm’s board of directors

• Primary responsibility is to act in the shareholders’ best interests by formally

monitoring and controlling the firm’s CEO / managers èHelps overcome the principal-agent
problem

• Main tasks:
• Strategic oversight and guidance
• CEO Selection, evaluation, compensation, and succession
• Provide guidance for executive compensation
• Review, monitor, evaluate, and approve strategic initiatives • Risk assessment and mitigation
• Ensure financial statements are accurate

 Research questions the effectiveness of board of directors in monitoring and controlling

CEO and managers’ decisions and actions

 To be effective, board members (also called ”directors”) should:

• Be independent from the management
• Be competent to scrutinize the activities of the management: Skills? Time?

 Research found mixed results regarding the effectiveness of board of directors as a

governance mechanism

 Problem of board composition:

• Outsiders: individuals from other companies

 Related outsiders: individuals from other companies who have (formal or informal)
relationships with the company’s top managers

 Insiders: company’s top managers (CEO, COO, CFO) — valuable source of

information about the company’s day-to-day operations

Market for corporate control

• External governance mechanism
• Consists of activist investors who seek to gain control of an underperforming

corporation by buying shares of its stock in the open market

• Whenacompanyisfinanciallyundervalued,thereisthreatofbeingtakenover (often through a hostile

takeover). When this happens, there is often a new management team and strategy put into place.

disciplinary mechanism for CEO / managers, incentive to perform well

Poison Pill

 Allows shareholders (other than acquirer) to convert their shares into a large number of
common shares in event of attempted takeover

 To dissuade any outside takeover attempt by either making the company less desirable or
by putting current shareholders at a higher point of power

 Raises the cost of the deal to the acquiring firm

Golden Parachute

• Lump-sum payments of cash distributed to a select group of senior

• Golden parachute clauses can be used to define the lucrative benefits that an employee would
receive if they are terminated

 May include severance pay in the form of cash, a special bonus, stock options, or vesting of
previously awarded compensation

 Meg Whitman, chief executive officer (CEO) of Hewlett-Packard Enterprise, stood to

receive almost $9 million if there is a change of control at the company, and more than $51
million if she was terminated

Litigation

• Lawsuits that helps the target firm stall hostile takeover attempts
• Examples: antitrust charges, inadequate disclosure
• Effectiveness is low

Green Mail

• The repurchase of shares of a stock that have been acquired at a premium in exchange for an
agreement to no takeover

• Effectiveness is medium

Financial statement auditors, regulators, and industry analysts

• External governance mechanisms

• To avoid misrepresentation of financial results:

 Public financial statements must follow standards (e.g.: in the US, the “generally accepted
accounting principles”, GAAP)

 Financial statements must be audited by certified public accountants • Industry analysts

base their buy, hold, or sell recommendations on:

 Financial statements filed with authorities (e.g.: in the US, the Securities and Exchange
Commission, the SEC)

 Business news

Stakeholder model of governance

• Definition: those individuals or groups that depend on an organization to fulfil their own goals
and on whom, in turn, the organization depends i.e. those who have a ”stake” in the organization

 This notion is a reference to “stockholders” or “shareholders”, i.e. those who have a stock
or a share of the organization.
 In the “stakeholder approach”, shareholders are stakeholders... among others

• Most common stakeholders: shareholders, employees, suppliers, customers,

competitors, Government, banks (creditors)...

• Premise: economic value is created by a variety of stakeholders (shareholders but

also employees, suppliers, customers, State, citizens, etc.)

 Corporate governance is concerned with the structures and systems of control by which
managers are held accountable to those who have a legitimate stake in an organization

 Do stakeholders have a legitimate stake in an organization? If so, which ones?

 Stakeholder approach is not a unified and legally established model of governance

 • models that distinguish from the shareholder model and that aim at involving a broader
set of stakeholders in the governance

Stakeholder Mapping

Two things need to be considered

• Do those stakeholders really want to impact the firm’s activity? Are they likely to show interest
in supporting or opposing a particular strategy?

• Do they have the power to do so?

Volkswagen Case Study

Lecture 6:

The levels of strategy

What is corporate strategy

As organizations add new units and capabilities, their strategies may no longer be solely concerned
with business- level strategies in one market space at the business unit level, but with choices
concerning different businesses or markets.

Corporate strategy is about:

■What business areas to be active in: e.g. which business unit(s) to acquire and/or divest

■The direction(s) an organization might pursue

■How resources can be allocated efficiently across multiple business units

■Organizational Scope (Organizational Boundaries): The breadth of an organization in terms of the

products it offers and the markets it operates in

Corporate strategy is concerned with decisions of the corporate parent about:

■The product and market scope
■How it seeks to add value to its business units
What does adding corporate value mean?

Adding value means that the long-run profits of the multi- business firm are greater than the
summed profits its

businesses would earn if they were independent firms (Saloner et al., 2001)

Parenting Advantage: “Multi-business companies create value by influencing—or parenting—the

businesses they own. The best parent companies create more value than any of their rivals would
if they owned the same businesses”

Corporate Strategy Directions: Ansoff’s Growth Matrix

Market penetration strategy

Market penetration refers to a strategy of increasing the market share of current markets with the
current product range

This strategy:
■ Builds on established strategic capabilities
■ Means the organisation’s scope is unchanged
■ Leads to greater market share and bargaining power with buyers/suppliers (increased market
power)
■ Provides greater experience (or learning) curve benefits (economies of scale and experience)

Market penetration refers to a strategy of increasing the market share of current markets with the
current product range

Risks could be:

■ Retaliation from competitors; ■ Legal constraints ■Economic constraints (e.g. recession or
funding crisis)

Corporate Strategy Directions: Ansoff’s Growth Matrix

■ Related diversification: A corporate development beyond current products and markets but
within the current scope of the organisation

Product development strategy

Product development refers to a strategy by which an organisation delivers modified or new

products/services to existing markets

This strategy involves varying degrees of related diversification (in terms of products):
■ It can be expensive and high risk
■ It may require new strategic capabilities (e.g. online banking)

■ It typically involves project management risks (e.g. Boeing’s Dreamliner 787 – e.g. lithium-ion
battery problems, fires on board)

Market development strategy

Market development refers to a strategy by which an organisation offers existing products to new
markets

This strategy involves varying degrees of related diversification (in terms of markets):

■ It may also entail some product development

■ It can take the form of attracting new users
■ It can take the form of new geographies
■ It must meet the critical (key) success factors of the new market if it is to succeed
■ It may require new strategic capabilities, e.g. marketing & sales

Conglomerate Diversification

■ Unrelated diversification (Conglomerate): A corporate development of products or services that

takes the organisation beyond both its existing markets and its existing products and radically
increases the organisation’s scope

Drivers of Diversification

■ Exploiting economies of scope

■ Stretching corporate management capabilities
■ Exploiting superior internal processes (e.g. internal labour market)
■ Increasing market power (e.g. mutual forbearance and cross-

■ Some drivers for diversification which may involve value destruction (negative synergies):

■ Managerial ambition or managerial hubris

Vertical Integration

Vertical integration describes entering activities where the organisation is its own supplier or
customer. It is a special type of related diversification.

■ Backward integration refers to development into activities concerned with the inputs into the
company’s current business

■ Forward integration refers to development into activities concerned with the outputs of a
company’s current business
Example of Diversification and integration Options

Vertical Value Chain

■ Backward integration refers to development into activities concerned with the inputs into the
company’s current business

■ Forward integration refers to development into activities concerned with the outputs of a
company’s current business

A Note on Outsourcing

Outsourcing is the process by which activities previously carried out internally are subcontracted
to external suppliers

To outsource or not? The decision to integrate or subcontract rests on the balance between two
distinct factors:

■ Relative strategic capabilities: Does the subcontractor have the potential to do the work
significantly better?
■ Risk of opportunism: Is the subcontractor likely to take advantage of the relationship over time?

Relatedness and Firm Performance

BCG Growth/Share Matrix

■A tool for corporate management to reassert control of its many divisions:

Classify business units

Implement the recommended strategy

Parenting Advantage

■ “Companies that create more value than any of their rivals would if they owned the same
business (...) have [a] parenting advantage”
■“Fit between a parent and its businesses is a two-edged sword: a good fit can create value; a bad
one can destroy it”

1. How well do the parent’s characteristics fit the businesses’ parenting opportunities? [“benefit”]

■ This indicates the potential for value creation

■ Considers the parent’s capabilities (including its primary value creation logic) and the parenting
opportunities for the business unit

2. How well do the parent’s characteristics fit with the businesses’ critical success factors? [“feel”]

■ A lack of “feel” indicates potential for value destruction

■ Consider the parent’s corporate culture and that required for the
business unit’s success

■ Heartland businesses are ones to which the parent can add value without danger of doing harm.
They should be at the core of future strategy

■ Edge of heartland businesses are ones where making clear judgments is difficult. The goal is to
transform them into heartland businesses, yet their net contribution is currently not clear-cut.
There is a risk of consuming too much attention and resources in the process

■ Ballast businesses are ones the parent understands well but can do little for. They would
probably be just as successful as independent companies and may be worth more to other
corporate parents who could add value to them

■ Value trap businesses are dangerous. They appear attractive because there are opportunities for
the parent to add value, but the parent’s characteristics do not fit well with the SBUs critical
success factors.
■ Alien businesses are clear misfits. They offer little opportunity to add value and they do not fit
with the parent’s characteristics. Exit is the best strategy before value in the SBU is destroyed

Lecture 7:

Definitions of merges and acquisitions

Mergers and Acquisitions (M&As) are essentially corporate-level strategies

A merger is a strategy through which two firms agree to integrate their operations on a relatively
co-equal basis

► British Airways and Iberia merged to form IAG (2010)

► Glaxo Wellcome and SmithKline Beecham merged to form

GSK (2000)

► Heinz company and Kraft Foods merged to form The Kraft Heinz Company (2015)

Mergers and Acquisitions (M&As) are essentially corporate-level strategies

An acquisition is a strategy through which one firm buys a controlling, or 100%, interest in another
firm with the intention of making the acquired firm a subsidiary business within its portfolio

►Once the acquisition is completed, the management of the acquired firm reports to the
management of the acquiring firm

► Apple acquired Beats Music for $3 billion (2014)

► Microsoft acquired LinkedIn for $26 billion (2016)
st
► Disney acquired 21 Century Fox for $71.3 billion (2019)

Mergers and acquisition

A hostile takeover is a special type of acquisition strategy wherein the target firm does not solicit
the acquiring firm’s bid. Hostile takeovers often deliver significantly higher shareholder value than
friendly acquirers for the acquired firm.

► A bidder may initiate a hostile takeover through a tender offer, which means that the bidder
proposes to purchase the target company's stock from shareholders at a fixed price above the
current market price.

► Another method of hostile takeover is acquiring a majority interest in the stock of the company
on the open market.

An example of hostile takeover

► In 1999, the UK-based Vodafone AirTouch announced a takeover bid for the German
telecommunications and engineering
group Mannesmann AG, on the basis of an exchange of shares between the two corporations.
► The Mannesmann executive board, however, immediately rejected the acquisition proposal,
calling it an "inferior offer" which is "extremely unattractive for Mannesmann shareholders".

► According to Mannesmann management, a merger with Vodafone is not strategically

reasonable since both companies have very different structures and economic growth prospects.
While Vodafone concentrates its business mainly on mobile phones, Mannesmann is much more
diversified, with main business divisions operating in engineering, automotive,
telecommunications, etc.

► The Mannesmann supervisory board confirmed the management's position and officially
rejected Vodafone’s offer.

► At the same time, Vodafone came forward with a new improved proposal, it quickly rose to
almost 125 billion euros – a record sum at the time.

 ► Since the Mannesmann management and supervisory board continued to argue against
the takeover, the Vodafone offer represented the world's largest-ever unsolicited bid.

 ► Finally, Mannesmann's largest shareholder, Hong Kong-based company, Hutchison

Whampoa, urged Mannesmann’s CEO to accept Vodafone's offer. They sealed the deal in
2000.
Reasons for acquisition

1) Increased market power

• Sources of market power include

Size of the firm, resources and capabilities to compete in the

market, and share of the market

• Horizontal Acquisitions
Acquirer and acquired companies compete in

the same industry

e.g. McDonald’s acquisition of Boston Market

• Vertical Acquisitions

A firm acquires a supplier or distributor of one or more of its goods or services; leads to additional
controls over parts of the value chain

e.g. Tecan, provider of laboratory instruments, acquires a supplier of key, precision-machined

parts

• Related Acquisitions
A firm acquires another company in a highly related industry

E.g. The target companies bring different types of assets to Cisco, including great talent and
technology, mature products and solutions, or new go-to-market and business models.

2) Overcoming entry barriers (e.g. entry to BRIC countries)

3) Cost of new product development and increased speed to market (e.g. AOL’s acquisition of two
media companies, Patch Media Corp. and Going Inc. to enter into the fast growing local online and
advertising market)

4) Lower risk compared to developing new products (e.g. typical in the pharma industry)

5) Increased diversification (e.g. United Technology Corp. which created since the mid-1970s a
portfolio of businesses including Otis (elevators and escalators); Carrier (heating and air
conditioning); to decrease its dependence on the volatile aerospace industry. Also acquired Pratt
& Whitney (aircraft engines); Hamilton Sundstrand (aerospace and industrial systems); Sikorsky
(helicopters); UTC Fire & Security (fire safety); UTC Power (fuel cells and power systems); etc).

6) Reshaping firm’s competitive scope (e.g. P&G’s acquisition of Gillette and Duracell through
which the company entered the male FMCG sector. Also recently, Unilever’s acquisition of Dollar
Shave Club).

7) Learning and developing new capabilities (e.g. again typical in the pharma and hightech
industries).

In general, with respect to global M&As, they can all be categorized as either market-, resource-,
or competitive-driven.

The due diligence process

Due diligence is a process through which a potential acquirer evaluates a target firm for
acquisition.
DO M&As CREATE VALUE?

► A large majority of acquisitions essentially fail.

► Research shows that M&A activity creates value, on average, as follows:

► No value creation for the acquiring firm

► +25% in value creation for the acquired firm

► Related M&A activity creates more value than unrelated M&A activity

► M&A activity creates value, but target firms capture it!

Failure of M&As, What are the options ?

Restructuring

Definition: Restructuring is a strategy through which a firm changes its set of businesses or
financial structure.

From the 1970s into the 2000s, divesting businesses from company portfolios and downsizing
accounted for a large percentage of firms’ restructuring strategies. Restructuring is a global
phenomenon.

Three main types of restructuring:

► Downsizing
► Downscoping

► Leveraged Buy-Outs (LBOs) – more like a financial strategy than a pure restructuring

RESTRUCTURING THROUGH DOWNSIZING

It involves a reduction in the number of firms’ employees (and possibly number of operating units)
that may or may not change the composition of businesses in the company's portfolio

Motives: Reduced costs (mostly labor costs) Ethical questions: What would be fair?

 What actions would you take to be fair to both shareholders and employees if they were
charged with downsizing a firm’s employment ranks?

 What ethical base would you employ to make decisions regarding downsizing?

In the first instance, it may lead to reduced labor costs but down the line:

 Loss of human capital

 Lower performance

 Negative effects on corporate reputation

RESTRUCTURING THROUGH DOWNSCOPING

It involves the elimination of businesses unrelated to firms’ core businesses through divestiture,
spin-off, or some other means.

Main motives:

 Reduced debt costs

 Emphasis on strategic controls

 Higher performance (avoids over-diversification, better understanding of core/related

business)

Examples:

 General Motors’ successful spin-off of EDS, then bought by HP

 PepsiCo’s spin-off of its fast-food businesses (Taco Bell, Pizza Hut and KFC) to Tricon Global
Restaurants

 GSK’s divestment of OTC drugs (“non-core brands”) to Belgium’s Omega

RESTRUCTURING THROUGH LBOs

A Leveraged Buy-Out (LBO) is a hybrid between M&As and Restructuring. One party buys all of a
firm's assets in order to take the firm private (or no longer trade the firm's shares publicly).

Often undertaken by private equity firms, specialized firms that facilitate or engage in taking a
public firm private.

Motives:

 Protection against a capricious financial market

 Allows owners to focus on developing innovations/bring them to market

 A form of firm rebirth to facilitate entrepreneurial efforts

Potential problems:

 Resulting in large debt: Increases the financial risk of the firm

 Intent of the owners to increase the efficiency of the bought-out firm and then sell it within
five to eight years can create a short-term and risk- averse managerial focus

 These firms may fail to invest adequately in R&D or take other major actions designed to
maintain or improve the
company’s core competence

RESEARCH ON M&As
Zollo & Singh (2004)

Deliberate Learning in Corporate Acquisitions

► Acquisition Experience
► Knowledge Codification
► Post-acquisition Integration

► 228 acquisitions in the U.S. banking industry

Findings:
► Knowledge codification enhances acquisition performance:

► Firms develop collective competence by not only accumulating experience but also investing
time and effort in activities that require greater cognitive effort in order to produce enhanced
awareness of action-performance linkages

► Post-acquisition integration phase is relevant to consider in understanding the performance of

the entire acquisition process

Puranam & Srikanth (2007)

Post-acquisition Integration trade-off in Technology Acquisitions

► Integration helps acquirers use the acquired firm’s existing knowledge as an input to their own
innovation processes (leveraging what they know)

► Integration hinders the acquirer’s reliance on the acquired firm as an independent source of
ongoing innovation (leveraging what they do)

Post-acquisition Integration trade-off in Technology Acquisitions

► The management of technology acquisitions is far from simple; although they provide quick
access to technologies and innovation streams, problems of implementation frequently beset
them, and they are prone to high failure (Chaudhuri & Tabrizi, 1999; Hagedoorn & Duysters, 2002;
Steensma& Corley, 2000)
► Conflicting demands of autonomy and coordination

Post-acquisition Integration trade-off in Technology Acquisitions Findings:

► Acquirers can leverage technology acquisitions in two qualitatively distinct ways:

► They may leverage the existing knowledge of the acquired firm (what they know)

► Its capabilities for ongoing innovation (what they do)

► Structural integration has a negative impact on the acquirer’s attempts to leverage innovative
capabilities, but has a positive impact on the leveraging of existing knowledge

Lecture 8:

■Identifying International Opportunities

■International Strategies (Business- and Corporate-level
Strategies)
■Modes of Entry
■Risks of International Expansion

International Strategy

How can international strategies be a source of competitive advantage for firms competing in
global markets?
► Definition: An international strategy is a strategy through which a firm sells its goods and
services outside its domestic market
► One of the primary reasons for implementing an international strategy (as opposed to a
strategy focused on the domestic market) is that international markets yield potential new
opportunities
► Level of internationalization

Incentives to use international strategy

► Extend a product’s life-cycle:

► An innovation developed in the domestic market may attract demand from other countries

► The increase in demand is an opportunity for the firm to establish its international operations

► Gain easier access to raw materials

► Secure needed (scarce) resources (e.g. minerals and energy) (e.g. Chinese companies in Brazil)
► Lower production costs (e.g. clothing, electronics)
► Opportunities to integrate operations on a global scale

 ► With increased industrialization, the demand for products and commodities become
more similar

 ► Universal product demand

 ► Growing similarities in life-style

 ► Increase in global communications

► Opportunities to better use rapidly developing technologies (e.g. electronics sector)

 ► Economies of scale necessary to reduce the cost of production

 ► Pressure for cost reductions (e.g. procurement from global

suppliers)

 ► Higher global integration of trade, capital, and labor (e.g.

Internet)

 ► Technology helps organize global operations seamlessly

► Gain access to consumers in emerging markets

 ► Emerging markets, such as China and India, provide strong internationalization

incentive based on their high potential for consumer products and services

 ► Reduced currency fluctuations through distributed operations across countries

 ► Cultural differences may pose challenges

Increased Market Size

 ► Expand the size of potential market (e.g. pharmaceutical companies internationalize to

seize the opportunity to increase the size of the market for their drugs)

 ► International strategy is attractive for firms that face limited domestic growth (e.g. Coca
Cola)

 ► Larger markets offer higher potential returns and pose less risk

Return on Investment

 ► Large markets are essential for earning a return on significant investments, such as
production facilities, equipment, R&D, etc (e.g. electronics)

 ► New products become obsolete more rapidly. The investments need to be recouped
more quickly

 ► Imitation by competitors is more likely

Economies of Scale and Learning

 ► By expanding the number of markets, firms achieve economies of scale (e.g.

manufacturing)
  ► Standardization in products and manufacturing helps attain optimal economies of scale
(e.g. automobile industry)

 ► Exploit core competences in international markets

 ► Learning opportunities through resource- and knowledge-sharing

across country borders (e.g. best practices)

 ► Synergyhigher quality goods & services at a lower cost

Location Advantages

 ► Firms may locate facilities in other countries to lower the cost of products and services
they provide

 ► Easy access to low-cost labor, energy, and natural resources ► Access to new
customers

International Business-level Strategies

 ► In an international business-level strategy, the home country of operation is often the

most important source of competitive advantage

 ► The resources and capabilities established in the home country allow the firm to
pursue the strategy into international markets

 ► However, as the firm continues to grow, the country of origin becomes less important
for competitive advantage

International business – level strategies

Determinants of National Advantage (Porter, 1990)

Factor Conditions: The nation’s position in factors of production, such as skilled labor or
infrastructure, necessary to compete in a given industry

Demand Conditions: The nature of home-market demand for the industry’s product or service

Related and Supporting Industries: The presence or absence in the nation of supplier industries
and other related industries that are internationally competitive

Firm Strategy, Structure, and Rivalry: The conditions in the nation governing how companies are
created, organized, and managed, as well as the nature of domestic rivalry

► The determinants of national advantage influence the firm’s selection of a business-level

strategy

Other factors:

► Culture
► Legal environment

► Political environment

International corporate – Levevl strategies

Multidomestic Strategy

 ► Strategic and operating decisions are decentralized to the SBUs in each country

 ► SBUs customize their products to the local market

 ► Focus is on competition within each country

 ► Managers have an autonomy

 ► This strategy maximizes the firm’s competitive response to the idiosyncratic
requirements of each market

► Expands market share

► Less knowledge sharing
► Does not allow economies of scale

Global Strategy

 ► More standardization of products across country markets

 ► Global strategy is centralized, controlled by the home country

HQs

 ► SBUs operating in each country are interdependent, the HQs is

responsible from integration across businesses

 ► This strategy achieves economies of scale

► The firm may forego growth opportunities in the local

markets
► Not very responsive to local markets
► Efficient operations require sharing resources and

facilitating coordination/cooperation across country boundaries

Transnational Strategy

► It is an international strategy through which a firm seeks to achieve both global efficiency and
local responsiveness

► Difficult to implement!!

 ► It requires close global coordination and local flexibility at the

same time
► Flexible coordination

 ► This strategy allows better connections with customers, suppliers, partners, etc.

 ► Higher performance attained if effectively implemented

Exporting

 ► It is the trade of goods and services shipped from an exporting company to an

importing company in another country

 ► Industrial firms typically begin international expansion by exporting

 ► No need for establishing operations in the host country

 ► Contractual agreements with the host-country firms

 ► Suitable for small firms

 ► High cost of transportation and tariffs

► Less control over the marketing and distribution
► Difficult to customize the product to each market

Licensing

► Licensing agreement allows a foreign firm to purchase the right to manufacture and sell the
firm’s products in a host country

 ► Common among small firms

 ► The licensor is paid a royalty

 ► The licensee makes the investment in manufacturing,

marketing, distribution, etc.

  ► It is the least costly form of international expansion

 ► Possibility to earn greater returns from innovation

 ► Little control over manufacture, distribution and sales

 ► Revenue is shared between the licensor and licensee ► Licensees may imitate the
licensed technology and become competitors

Strategic Alliances

 ► Alliances allow firms to share the risk and resources required to enter international
markets

 ► It can facilitate the development of new core competences

 ► Strategic alliances are formed with a host-country firm that

knows the competitive conditions, legal and social norms, and cultural idiosyncrasies

 ► Partners often enter an alliance with the purpose of learning

new capabilities (e.g. technological skills)

 ► Not all alliances are successful!

 ► Trust issues

 ► Incompatibility and conflict

 ► Difficult to manage

Acquisitions

 ► Cross-border acquisitions can provide quick access to a new market

 ► Acquisitions are the fastest and largest international expansions (e.g. Walmart’s
acquisition of Asda for £6.7 billion)

 ► Expensive deals
► Complex negotiations
► Problems with legal and regulatory requirements
► Post-acquisition integration is a problem ► Difficult to achieve synergy

New Wholly Owned Subsidiary

 ► Greenfield venture – establishment of a new wholly owned subsidiary

 ► Complex and costly

  ► Maximum control over the operations

 ► Highest potential for the firm’s competitiveness

 ► High risk initiative due to cost

 ► Requires development of knowledge and expertise of the host market

International Expansion and Innovation

 ► International diversification provides the potential for firms to achieve greater returns
on their innovations through a larger market

 ► It also reduces the risk of R&D investments

 ► It incentivizes firms to innovate

 ► International diversification helps generate the resources

required to sustain large-scale R&D operations (e.g. faster

recoup)

 ► Firms learn from exposure to new products and processes

Lecture 9:

Cooperative Strategy
How can cooperative strategies be a source of competitive advantage for the partnering firms?

► Definition: A cooperative strategy is a strategy in which firms work together to achieve a

shared objective (e.g., create value, firm growth)

► One of the primary reasons for implementing a cooperative strategy is that individual firms
sometimes identify opportunities they cannot pursue because they lack the type of resources
and capabilities needed to do so

► A competitive advantage developed through a cooperative strategy is called collaborative or

relational advantage

► Successful implementation of cooperative strategies can enable a firm to outcompete its rivals
and attain strategic competitiveness and higher performance

Types of strategic alliances

Joint Ventures

► A strategic alliance in which two or more firms create a legally independent company to share
some of their resources and capabilities to develop a competitive advantage

► These are often formed to improve firms’ abilities to compete in uncertain competitive
environments

► They are beneficial in establishing long-term relationships with the partners and transferring
tacit knowledge (e.g. experience)

► Partners in a joint venture have equal ownership and they contribute equally

► An example: Siemens AG (Germany) and Fujitsu Ltd (Japan) formed a

joint venture called Fujitsu Siemens Computers

► Founded in 1999 with 50/50 ownership, it was seen as an ambitious attempt to take on the
biggest names in enterprise computing

► The new entity was formed to develop, manufacture and market a full range of information
products

► An example: Ocado Retail Ltd is a joint venture between Marks & Spencer Group and Ocado
Group

► Created in 2019, it is a joint venture that aimed at customer growth, quality, value and service
to create the UK’s market leading online food retailer

► It is responsible for Ocado.com and two other retail brands: Ocado Zoom, a one-hour grocery
service, and Fetch, an online pet store

Equity Strategic Alliance

► An equity strategic alliance occurs when one company purchases

equity in another business (partial acquisition)

► Companies form equity alliances to ensure that they have control over

assets that they commit to the alliance

► In 2009, Panasonic entered into an agreement to supply Tesla Motors with lithium-ion battery
cells to use in its cars, with an investment of $30 million in Tesla

Panasonic –Tesla

 ► The agreement supplies Tesla with Panasonic’s lithium-ion battery cells to build more
than 80,000 vehicles and meet Tesla’s aggressive production ramp-up and fulfilment of
more than 6,000 existing Model S reservations.

 ► This agreement builds upon a multi-year collaboration between Panasonic and Tesla to
develop next-generation automotive-grade battery cells and accelerate the market
expansion of electric vehicles.

Nonequity Strategic Alliance

► An alliance in which two or more firms develop a contractual relationship to share some of
their resources and capabilities to create a competitive advantage

► Firms do not establish a separate independent company or take equity positions

► Less formal, demand fewer partner commitments

► It can create value for the involved firms
► E.g. Outsourcing, distribution agreements, supply contracts
► Outsourcing: is organized in the form of nonequity strategic alliance

► Definition: It is the purchase of a value-chain activity or a support function activity from

another firm

Apple’s Outsourcing Strategy

► Apple uses nonequity strategic alliances

► Outsource manufacturing to Chinese companies

► Cost efficiencies

► Scale economies

Collusive strategies

► Explicit collusion

► Illegal unless sanctioned by government policies

► Reduced by the increase in globalization (e.g., OPEC)

► Tacit collusion

► A cooperative strategy through which firms tacitly cooperate to reduce industry output below
the potential competitive output level, thereby raising prices above the competitive level

Reasons for Strategic Alliances

► Cooperative strategies are an integral part of the

competitive landscape

► Partnerships can be formed among for-profit organizations as well as among universities and
companies

► Competition can be shifted towards rivalry among strategic alliances (e.g. OneWorld, Star
Alliance, and SkyTeam)

► Cooperative strategies make it possible for firms to create value they could not generate by
acting independently
► Cooperative strategies make it possible to enter markets more rapidly
► Companies lack the necessary resources to pursue all identified opportunities

► Partnerships increase the probability of reaching firm- specific performance objectives (e.g.
reach new customers, broaden product offering, product distribution)
Slow-Cycle

► Markets where firms sustain their competitive advantages for a long period of time due to the
cost of imitation (e.g. rail roads, utilities, financial services)

► Gain access to a restricted market (e.g. Chinese market)

► Establish a franchise in a new market

► Maintain market stability (e.g. establishing standards)

Fast-Cycle

► Markets where the firms’ competitive advantages are not shielded from imitation, preventing
long-term sustainability (e.g. electronics, computer)

► Unstable, unpredictable, complex, hypercompetitive ►Collaboration mindset

► Speed up development of new goods or services

► Speed up new market entry

► Maintain market leadership
► Form an industry technology standard

► Share risky R&D expenses

► Overcome uncertainty

Standard-Cycle

► Competitive advantages are moderately shielded from imitation in a standard-cycle, allowing

firms to sustain their competitive advantages for a longer period of time than fast-cycle markets,
but shorter than in slow-cycle markets (e.g. airline industry)

► Gain complementary resources

► Airline alliances: cost control, joint purchase, shared facilities (gates, service centers, lounges)
► Gain economies of scale
► Meet competitive challenges

► Gain market power (reduce industry overcapacity)

► Gain access to complementary resources
► Establish better economies of scale
► Overcome trade barriers

► Meet competitive challenges from other competitors

► Pool resources for very large capital projects

► Learn new business techniques

Complementary Strategic Alliances

► Business level alliances in which firms share some of their resources in complementary ways to
create competitive advantage

► Vertical
These include distribution, supplier or outsourcing alliances where firms rely on upstream or
downstream partners to build competitive advantage

► Business level alliances in which firms share some of their resources in complementary ways to
create competitive advantage

► Horizontal
An alliance in which firms share some of their resources from the same stage of the value chain

► Complementary strategic alliances can focus on joint long-term product development and
distribution opportunities

Competition Response Strategy

► Strategic alliances can be used at the business level to respond to competitors’ attacks

Uncertainty-Reducing Strategy
► Strategic alliances can be used to hedge against risk and uncertainty (typical in fast-cycle
markets)

► In entering into new product markets ► In developing technology standards

Competition-Reducing Strategy

► Strategic alliances can also be used to reduce competition (e.g. collusive strategies).
Competition-reducing strategic alliances may be created to avoid destructive or excessive
competition

► Explicit
► Firms jointly agree on the amount of output and price

►Tacit

► Firms indirectly coordinate their production and pricing decisions by observing each other’s
competitive actions and responses

Corporate level cooperative strategy

► Definition: A strategy through which a firm collaborates with one or more companies to expand
its operations.

► Firms use diversifying and synergistic alliances to improve their performance by replacing or in
addition to organic growth or M&As

► Corporate-level strategic alliances require fewer resource commitment and permit greater
flexibility than M&As

Diversifying Strategic Alliance

► Definition: A strategy in which firms share some of their resources to engage in product and/or
geographic diversification

► To enter new markets (e.g. domestic or international)

► To introduce new products

Synergistic Strategic Alliance

► Definition: A strategy in which firms share some of their

resources to create economies of scope

► Similar to horizontal complementary strategic alliance ► Synergies across multiple functions

and/or businesses

(e.g. sharing resources to develop manufacturing platforms)

Franchising

► Definition: A strategy in which a firm (the franchisor) uses a contractual relationship (i.e.
franchise) to control the sharing of its resources with its partners (franchisees)

► Franchise is a form of business organization in which a firm that already has a successful
product/service licenses its trademark and business methods to other businesses in exchange of a
lump sum payment and royalty fees

CASE STUDY:
NOVARTIS – GOOGLE HEALTHCARE ALLIANCE

Lecture 10:

What do we know about platforms?

In October 2007, a tiny item appeared in an online newsletter aimed at industrial designers, who
planned to attend the upcoming joint convention of two industrial design organizations
Airbnb Today

►The company was valued $ 31 billion in financing rounds in 2016 and 2017

►$ 2.6 billion revenues, 3,100 employees ►Active in 119 countries

►Does not own one single room

th
►Airbnb is one of the several unicorns that have filed for IPO in 2020 (Dec 10 ), following the
private tech giants that went public in 2019: Uber (May 10th), Lyft (March 29th) and Pinterest
(April 18th)

The power of the platform

►A new business model that uses technology to connect people, organizations, and resources in
an interactive ecosystem

►Each platform is unique and focused on a distinctive industry and market

►Any industry in which information is an important ingredient is a candidate for the platform
revolution

►Where information is the product→education, media

►Where access to information has value → customer needs, price fluctuations, supply and
demand

Economies of scale

th
►In 20 century era, monopolies were created based on supply economies of scale

▪ Production efficiencies reduce costs, which may be difficult to overcome

▪ The bigger the business, the cheaper the costs of production, marketing, and distribution

st
► In 21 century era, monopolies are created based on demand economies of scale

▪ Efficiencies in social networks, demand aggregation, app development, and other phenomena
make bigger networks more valuable to their users

▪ Demand economies of scale became the most important differentiating factor

Basic definitions

►A platform is a business based on enabling value-creating interactions between external

producers and consumers

►A platform provides an open, participative infrastructure and sets governance conditions

►A platform’s purpose is to consummate matches among users and facilitate the exchange of
goods, services, or social currency, thereby enabling value creation

Advantages of the platforms

►Platforms scale more efficiently by eliminating gatekeepers ▪ Editorial pipeline vs. Amazon self-
publishing platform

• Gatekeepers replaced by signals (e.g., feedback) provided by the community

►Platforms unlock new sources of value creation and supply ▪ Hotel industry vs. Airbnb

• Growth does not need physical capital: from just-in-time to not-even-mine

• Expose new supply to the market more promptly

– Rationale of the sharing economy: many items sit idle most of the time

►Platforms use data-based tools to create community feedback loops

▪ Wikipedia vs. Encyclopaedia Britannica ▪ Feedback loops allow for quality signals

►Platforms invert the firm

▪ Focus shifts from inside to outside the firm

• E.g., from broadcasting to segmentation (marketing), from control to orchestration (strategy,

operations), from labs to crowdsourcing (innovation, R&D)

Network Effects
►Impact of the number of users of a platform on the value created for each user

►Positive network effects: Ability of a large, well-managed platform community to produce

significant value for each user on the platform

►Negative network effects: Possibility that the growth in numbers of a poorly-managed platform
community can reduce the value produced for each user

►Main source of value creation and competitive advantage in a platform business

►Growth via network effects leads to market expansion. New buyers enter the market, affected
by the growing number of friends who are part of the network. If prices also fall, the network
effects drive massive market adoption

Two sided network effects

►Network effects are so important that platforms subsidize participants on one side of the
market

 E.g., Uber subsidized new users on its platform with $30 coupons

 Each coupon buys market share and attracts a virtuous cycle of drivers that will later pay
full price to participate

Scaling network effects

►Effective platforms are able to expand in size quickly, scaling the value from network effects

►Google vs. Yahoo

▪ Yahoo, the established platform for web search, ranked

webpages by employees in the same way of librarians

▪ Google used the well-known page rank algorithm

▪ As the number of web pages grew exponentially, Google gained an advantage over Yahoo

▪ Google allowed frictionless entry

►Effective platforms are able to expand in size quickly, scaling the value from network effects

►Network growth on two sided markets has to be proportional ▪ Does it make sense to have
1000 drivers and 10 riders on Uber?

▪ When one side grows too much, subsidize the other side

▪ Encourage side switching → recruit drivers from riders, and hosts from guests
Negative network effects

►Growth of a network may also lead to platform failure

▪ The larger the pool on one side of the market, the harder

the chance of a match

▪ Negative network effects may drive away participants ▪ Solution to negative network effects is
curation

Curation: This is the process by which a platform filters, controls, and limits the access of users to
the platform, the activities they participate in, and the connections they form with other users.

OkCupid, Chatroulette and curation

►OkCupid solved the issue by matching on information:

▪ People fill questionnaires and the platform delivers an algorithm ▪ This process eliminates
unsuitable matches
▪ Users see only people “in their league”

►Good curation turns negative network effects into positive network effects:

 ▪ Reduces the noise

 ▪ The larger the network, the more accurate the matches, data-driven network effects

►Bad curation turns positive network effects into negative network effects: ▪ Chatroulette (pairs
random people around the world for webcam

 conversations) - grew from 20 people to 1.5 million users in late 2009 ▪ No registration
requirement and no controls on the platform
▪ Undesirable behaviors by some users
How to design a platform ?

►Hard to find a logical starting point

►Platforms connect producers with consumers allowing them to exchange value

►Three components of value:

 information – as a product (e.g., Reddit and Quora) or as

enabler (e.g., Uber and Yelp)

 goods or services – both within or outside the platform. Each item is a value unit

 exchange of currency – money, attention, reputation. Key for monetization

Core interaction

►Core interaction is the most important activity

▪ Core interactionparticipants + value unit + filter

►First step in platform design is the definition of a core interaction and its components

►Platforms do not produce value units (participants do) ▪ Information factories creating the
infrastructure
▪ Control quality and develop filters

How to make core interactions possible ?

►Pull producers and consumers through feedback loops ▪ Feedback loops → stream of self-
reinforcing activity

►Facilitate their interaction through curation

 ▪ Lower barriers to usage→uploading a photo on Instagram

vs. uploading a photo on Facebook

 ▪ Increase barriers to usage → prevent undesirable participants on the platform

►Match producers and consumers through data

▪ The more the data, the better the match
▪ Platforms should develop a data acquisition strategy

Strategies for getting both sides on board in the right proposition

►Sequential Entry: getting one group of users on board over time and then making this group
available to the other side (e.g. ad- supported media)

►Entry with Significant Pre-commitment Investment: one group of users needs to make
investments over time to participate in the platform (e.g. video-game developers)

►Simultaneous Entry of Sides: Sides have to join the platform about the same time to create
value for the platform (e.g. dating apps)

►The Basic Zig-zag: build participation on both sides incrementally (e.g. Uber)

►Pre-commitment to Both Sides: Persuading a minimum number of early adopters on both side
(e.g. Diners Club)

►Single or Double-sided Marquee Strategy: Acquiring an influential or prestige member on one

or two sides (e.g. shopping malls, nightclubs)

►The Two-step Strategy: Getting enough number of members on one side and then getting other
side of the users on board (e.g. Google)

►Zig-zag with Self-supply: providing one of the sides by themselves, at least initially (e.g.
YouTube)

Smart home market

The term “smart home” was introduced in 1984 by the National Association of Home Builders
(NAHB)

• Smart house, home automation, domotique, intelligent home, adaptive home, aware house
(Alam et.al., 2012)

Internet of Things (IoT)

 A network of internet-connected objects able to collect and

exchange data using embedded sensors

 Wearable devices, connected cars, smart cities, agriculture,

healthcare

Open innovation

►“A paradigm that assumes that firms can and should use external ideas as well as internal ideas,
and internal and external paths to market, as the firms look to advance their technology”
(Chesbrough, 2003)
►The decision to open a product to external innovation means that it will be transformed into a
platform

Collaboratives Markets vs Collaborative communities

►Competitive Markets:
►Multiple competing varieties of complementary goods,

components, or services
►Formal governance
►(some) innovators focused on the profit

►E.g., videogame developers

Two critical issues to consider

►Type of innovation

►Motivation of the individuals

Type of innovation

 ► Well understood technology and consumer preferences →

internal development ‘pipeline’ style

 ► When technology is yet to be established and customer needs are highly varied and not
fully understood→open innovation approach

►When innovation requires cumulative knowledge → collaborative communities

►When innovation requires broad experimentation→ competitive markets

Two categories of motivation:

► Extrinsic motivation. Relates to economic gain. ►Money

►Personal solution

►Signaling skills for career advancement

► Intrinsic motivation. Relates to personal enjoyment and

identity.
►Fun ►Autonomy ►Reputation

Two Critical issues to consider

►The platform business models work well with both communities and markets

►But less control might be desirable:

▪ External innovators prefer freedom to experiment in a market

▪ Community members can find control conflicting with their social norms

►TopCoder example
▪ 180,000 members compete fiercely to win the prize associated to

a particular challenge
▪ After competition is over, they teach one another the particular aspects of the innovation

►The more open the better? (Laursen & Salter, 2006)

▪ Too many ideas to process
▪ Lack of right amount of attention to any single idea