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Strategy. Marketing and organization

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Sandra Lopez

on 29 June 2015

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Transcript of Strategy. Marketing and organization

Strategy. Marketing and organization
1. Introduction
Strategy and the Strategic Management Process
Strategic Planning
Competitive advantage
Sustainable strategy
Accounting ratios
Strategy characteristics
Emergent Strategies
Operational Excellence OE
MARKETING
SUCCESSFUL STRATEGY CHARACTERISTICS
The goal is SUPERIOR PROFITABILITY
EXTERNAL APPRAISAL
INTERNAL APPRAISAL
LONG TERM GOALS
COMPETITIVE ENVIRONMENT
RESOURCES AND CAPABILITIES
Understanding
Relevant changes in
EXTERNAL ENVIRONMENT AND INDUSTRY ANALYSIS
.. To Industry analysis
From Environmental analysis..
STRATEGIC PLANNING
PROFITABILITY
OBJECTIVES OF THE INDUSTRY ANALYSIS
Understand how industry structure drives
competition
, which determines the level of industry
profitability
Assess industry attractiveness
Use evidence on changes in industry structure to
forecast future profitability
Formulate strategies to
change industry
structure to
improve

industry
profitability
Identify
Key Success Factors
for
competition
The Industry Environment lies at the core of the Macro environment
Industry Structures
PROFITABILITY DETERMINANTS
Value of the product to customers
Intensity of competition
Bargaining power in the value chain
Porter's Five Forces
Threat of substitutes
We're threaten by the substitutes depending on:
Buyer's propensity to substitute
Price-Performance comparison ex: Low-priced perfumes imitations
Threat of entry
Entrants' threat to industry profitability depends on:
Height of BARRIERS TO ENTER
1. Capital requirements
2. Economies of scale

incumbents = old in the market
3. Learning economies:
incumbents have more experience
4. Product differentiation and customers loyalty
e.g: additional advertising costs for new entrants
5. Proprietary technologies
6. Favorable access to raw materials
(e.g. Gazprom: the gas company in Russia)
7. Access to channels of distribution
8. Regulatory barriers
(e.g. licences from a public authority)
9. Risks of retaliation from incumbents
Industry Rivalry
The degree of Rivalry in an industry increases price competition
What increases the degree of RIVALRY?
What increases the price competition?
1.
Market concentration
:
number and size distribution of firms
2. The lower the
diversity
of competitors:
difference in goal, cost strategies
3. The lower the
product differentiation
4. The lower the
industry growth
5. The higher the
excess capacity
and the
exit barriers
6. The higher
scale economies
7. The higher the ratio of
fixed to variable costs
What's product differentiation?
Vertically differentiated
Horizontally differentiated
If it's always better (or worse) than competing products.
If it were sold at the same price of competing products, it would capture all the market share
eg: sea-view or back-view room in a hotel
When
only some consumers
prefer it to competing products --> because of idiosyncratic preferences
Customers have different indifference curve
e.g: hotels. Soft drinks and food.
Five or Six Forces?
Once we know, what
supports/depress profitability
We can choose a favorable positioning in the industry.
HOW?
Choose market segment
.
e.g: Genzyme and orphan drugs
Change 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.
Choose industry forces
Review the variables that are depressing profitability
What explains profit dispersion?

Technologically progressive and fast growing industries (non mature)
Markets with opportunities for product differentiation
Industries with little union presence
Markets with many product classes
....
Genzyme Case

Adopted a very unusual strategy of developing drugs for rare diseases rather than “blockbuster” drugs.
Developing a drug takes 10‐14 years at an average cost of $800 million to perform the research, run the clinical trials, get FDA approval and bring the drug to market
Blockbuster drugs earn revenues of $1 billion or more and are sold to millions of people with chronic illnesses
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
In 1983, the FDA established the “Orphan Drug Act,” giving seven years market exclusivity to developers of drugs for rare (<200,000 patients) diseases.
By 2006, Genzyme was the world’s third largest biotech company proving that a profitable business could be built around small disease populations
Their first drug, Cerezyme, was sold to 4,500 patients at a yearly cost of $170,000 (annual revenue of $800 million). The drug is required to be taken for the lifetime of the patient.
Internet Case
The Internet: value creator or destroyer for firms?
Industry Rivalry
(increased):
– Internet reduce marginal costs (and contribute to increase fixed costs) --> pressure for hard price competition are increasing.
– Internet widens the scope of the geographic market --> increasing the number of competitors

• Threat of Entry
(increased):
– Low barriers to entry --> negative effects for incumbents
positive for new entrants
negative for the industry attractiveness

• Threat of Substitutes (increased)
– New distribution channels, digital carriers of information (e.g., digital streaming vs. DVD supports)

Buyer Power (increased):
– The power of traditional distributing channels is dampened by the availability of a direct channel (positive effect)
– Lower switching costs and greater price transparency, when they can effectively compare the price proposed by different sellers (negative effects)

• Supplier power (it depends)
– market places improve the power over supplier (though it can also give suppliers access to more customers, thereby decreasing their dependence on large customers)
– Re‐intermediation on internet can be costly due to a very concentrated market for the “info‐mediation” that is necessary to firms for having an adequate Internet presence (e.g. just one Expedia/Tripadvisor, Facebook, Google)
If we can forecast changes in industry structure; we can predict likely impact on..
COMPETITION
Industry boundaries
How to draw Industry Boundaries?
The key criterion is:
SUBSTITUTABILITY
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?
Boundaries change according to:
Price for customers and
capability to enter a market for suppliers
are criterion for identifying the geographical boundaries of a market.
Key Success Factors
What do we have to do well in order to achieve success?
Examples:
What is Strategy? - Porter
Porter:
Operational Effectiveness
is
Not strategy
! Is necessary but not sufficient
Strategy is perform activities differently than rivals do =
unique activities
Strategy positioning
STRATEGIC DECISIONS
Can be related to:
MARKET POSITIONING
TECHNOLOGY RESOURCES
ORGANIZATIONAL DESIGN
Investments in
Forecasting Profitability

Past profitability a
poor indicator
of future profitability
We can predict likely impact on competition and profitability If we can forecast changes in industry structure
MARKET SEGMENTATION
BLUE OCEAN MARKET SEGMENTATION
Red ocean
Blue ocean
Hard competition


Demand must be divided, often shrunken.
Red oceans
: represent all the industries in existence today. Industry boundaries are defined and accepted.
As the market space gets crowded, prospects for profits and growth are reduced.
Make a choice between differentiation and low cost.
Create uncontested market space that makes competition irrelevant.
Is about growing demand and breaking away from the competition
Blue oceans
: all the industries NOT in existence today.
Untapped market space, demand creation, opportunity for highly profitable growth.
Pursue differentiation and low cost simultaneously.
The only way to beat the competition is to stop trying to beat the competition.
Segment:

group of customers within a broader market who possess a common set of characteristics.

Why segmentation?
Because some market segments can be
more attractive
than others
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
Bargaining power:

capacity of one party to dominate (exert influence) the other due to its influence, power, size, or status
EXAMPLES BLUE OCEAN
EVALUATING A FIRM'S INTERNAL RESOURCES AND CAPABILITIES
What the company is able to do the best?
ASSESSING RESOURCES & CAPABILITIES
Resources are not productive on their own --> To perform a task, a team of
resources must work together
FROM RESOURCES TO CAPABILITIES
Ricardian rent
Generated by RARE and VALUABLE
resources.
Fertile lands for Ricardo
formulated in 1809 by David Ricardo
"The Law of Rent states that the rent of a land site is equal to the economic advantage obtained by using the site in its most productive use"
we have 4 lands, each one with a better quality than the other, if all are free, everyone chooses the best quality until it's crowded. So you have to ask for a rent for the best quality, and people will start using the others with lower quality but free/cheaper.
Other examples:
Expertise of the human resources applied to Product design in
Apple
Barolo
vineyard for few wine makers
STRATEGY
Matches (internal)
resources and capabilities
with market opportunities (external)
What is more stable? resources and capabilities or the environment?
So
Strategic planning
focus on having more
stable resources and capabilities
in order to face the unstable environment.
2 TYPES OF STRATEGY
Resource/competence
ex: Microsoft, Canon, Fujifilm, Honda
Customer/product
ex: Eastman,
Kodak
Fujifilm
* Created cosmetics to facial skin because it has experience in the chemical and industrial materials
Market power
Monopoly rents
Superior value resources
Ricardian Rent
2 SOURCES OF PROFITS
Resources and capabilities
are the primary determinant of firm's profitability
Res&Cap as source of profitability
RESOURCES
CAPABILITIES/COMPETENCES
are productive assets owned by the firmç
A single resource is not a "competitive advantage", but an input factor
It is very difficult to list resources of a firm
describe "what a firm is good at"
capacity to deploy resources for an end
based on
organizational routines:
are repetitive, recognizable patterns of interdependent actions
are the essence of superior performance
identification of capabilities is a very hard task

CORE COMPETENCES
(CC)
What are?
Firm's ability to use multiple resources and skills to realize some
CORE PRODUCTS
Can be reused for different products or markets (DIVERSIFICATION)

Difficult to imitate
What matter for performance is:
1.
The firm's capacity to
acquire/develop resources at lower price
than rivals in a competitive market for resources. eg: Barcelona FC and "La Cantera" for young players
2.
The firm's capacity to
combine resources
and deploy them effectively.
eg: Honda lower budget for R&D, but higher growth rates
Organizational routine
If you want to see if a company has good or bad capabilities, you should see at its organizational routines
Routines reflect procedural knowledge eg: process templates in
McDonald's
Routines create discipline in the organization
establish coordination
reduce uncertainty and variance of behaviours

Replication of routines from one firm's unit to another one is difficult. eg: Which details make a
Starbusck's
store unique? music? ingredients? furniture?
Examples:
Toyota
lean production



kanban, quality circles, job rotation within the team, etc

Japanease culture based upon trust and job-for-life


Main capability:


Important routines:




Important resources:
Apple
new product development and the many routines on "agile" development

weekly product reviews, frequent iterations among product and process engineering, etc

Steve Jobs' leadership and vision
Patents
Google




In a week 20% time must dedicated to R&D projects.
Polito




Clean blackboards all mornings and change microphones batteries
Failing examples:
Marine in the North Korean war
They don't have discipline routines, so they were no read when Chinese forces unexpectedly intervened.
How to pass FROM RESOURCES TO CAPABILITIES?
Processes:
sequence of actions that formalize routines

Organizational structure:

A capability require the team commitment,
Motivation:
top/middle management should be aligned.

Organizational alignment:

of how resources are being used.
1. VRIO FRAMEWORK
Why has Eataly a better performance over the average of the industry?

Answering applying VRIO..





Example Eataly
VRIO Framework
Value
Create a significant economic value?

Rarity
Is the Res/Cap common or rare among competitors?

Imitability
Could competitors develop the Res/Cap? at what cost?

Organization
Do processes, culture, incentives, organizational structure allow the explotion of the Res/Cap?


EATALY
Resource:

food
Capabilities:
teach how to buy and appreciate rare food
Value
Yes

Rarity
Yes, product are specialized,you make exclusive menu.

Imitability
No, is not easy to find the products that Eataly offers

Organization
Yes
Will you lend money to your friend to open the pizza resturant in Turin with the characterisits.. ?

Resource:

sawdust on the wood floor, imported beers and a late-night delivery service
Example Pizza in Torino
Identify the part of the value chain that generates more value.
Identify the
RES & CAP
of each stage of the chain.
Objectives of the value chain
2. VALUE CHAIN
How to make an analysis with the Value chain
?
1. Lay out the industry value chain
3. Compare with competitor's value chain
2. Lay out the firm's value chain
What are making different? Who has a cost advantage/disadvantage?
Examples of successful capabilities
Honda
success because its
capabilities
:
manufacturing of quality engines (not manufacturing on cars)


Canon

3M
STRATEGY
Amazon (article)
Which advantages has Amazon over banks?
Resource
: Information
Advantage:
better info or better capability to process it


Examples
Sony
in miniaturization
Honda
in engines
Casio
in miniaturization, micro-processor design, material science
Swatch
(from watches to bijoux)
Geox
in breathing systems for the footwear and the apparel sectors
MARKETING LEVERS
PRODUCT
PRICE
PROMOTION
DISTRIBUTION
What if it's not a Core Competence?
it can be outsourced
CC are difficult to imitate
examples:
ESPN
with extreme sports in the XGames
Barolo
land for Barolo wine's product.
When are difficult to imitate?
Causal ambiguity:

tacit knowledge can not be transferred
eg:
McDonald's
going abroad
Social complexity:
eg: Japanese culture based on trust and job for life
Patents:
But after the patent period, it's easier to imitate
Patent info is public
APPRAISING RESOURCES & CAPABILITIES
Example:
Framework for appraisal Res&Cap
Porter's DIAMOND model
ROLE OF THE LOCAL ENVIRONMENT IN CAPABILITY FORMATION
Factor conditions:
The nation/region position in factors such as skilled labor or infrastructure. Could be:
Factor endowment
Factor disadvantage
Local demand conditions.
eg:
"free speed buyers"
Rapid demand groth in the home market

Related and supporting industry
: they provide input or complementary goods
Structure and rivalry in the home market
: Competition in the home market is important to accelerate technological development
Some capabilities can be embedded in the unique combination of condition of geographical cluster
in some industries competitive advantages are concentrated in one or few nations (Porter, 1980)
Article
:
Food market
Founded by Oscar Farinetti in 2007 at Lingotto, Turin
He is a fully paid-up member of the Slow Food
Manhattan in 2010: huge queues
Tokio too
Information cards tell shoppers who produced what and how
EBITDA are almost 20% of revenue in New York and 15% in Turin

Objectives:
eat with awareness
choosing high-quality products
Barolo vineyard
A rare and valuable resource
Cantine dei Marchesi di Barolo:
One of the main producer of Barolo wine.
founded in 1929
Family firms at the third generation.
BUY OR MAKE?
APPLE
VERTICAL INTEGRATION
Apple outsources a lot of production to Asian companies:
US starts outsourcing in 80's


Reasons to BUY:
A supplier can have a better
scale economy
and better
capabilities
,
so it's better to exploit it.

eg: Audi and antilock brakes
purchased by Bosch.
-> Audi creates low # of cars in comparison at the number of brakes created by Bosch.
-> it'd be so costly to Audi to create the brake system
When vertical integration:
would imply the retaliation from customers and/or suppliers. eg: Disney producing contents becomes a competitor of his own customer.
limits flexibility
Compounding of risk = avoiding propagation of mistakes
3M
CORPORATE STRATEGY: VERTICAL INTEGRATION
GENERIC BUSINESS STRATEGIES
BUSINESS STRATEGIES
= Is concerned with
how
a firm
competes
within a
particular market
Corporate strategy
= Is concerned with
where
a firm
competes

=
the scope of its activities
From
Business Strategy
to
Corporate Strategy
:
The 3 dimensions of the
scope
:
1
VERTICAL SCOPE
(to make or to buy?)
3. GEOGRAPHICAL SCOPE
2. PRODUCT SCOPE
Single
Integrated Firm
Several specialized firms
vs
Which situation is more efficient?
Depends:
costs of the integrated firm
<
transaction costs of markets?
Article Apple: "The real reasons the US doesn't make iPhones|Forbes":
iPod city in a southern Chinese city --> locating the same iPhone factory in America, Apple would add more than $25 billion in labor costs a year
Americans are not willing to work assembling iPhones
For technology companies,
the cost of labor is minimal
compared with the expense of buying parts and managing supply chains.



Real reason:
Factories in Asia "can scale up and down faster"
Flexible, 24/7, fast for changes
Value added = revenues - external costs
Value added = internal cost + profits (value created/added)
After 1978, the value added starts decreasing because outsourcing increased.
more outsourcing
increases vertical integration
increase efficiency
Transaction costs
:
costs to use market transaction (
"to buy"
)
"to make"
Fallacy 1
Firms should make an asset, rather than buy it, if that asset is source of a competitive advantage?
FALSE. Only
rare assets
should not be outsourced.
Fallacy 2
Firms should buy, rather than make, to avoid the costs of making the product?
FALSE. Firms pay a
service cost.
Although the manufacturer is so specialized and its costs is lower than making costs.
Fallacy 3
Our firm should backward integrate to capture the profit of our suppliers for ourselves = why not to doing also what my supplier is doing in order to earn that profit?
FALSE. It's not about considering just accounting profit and not economic profit.

In the
economic profit
, you have to take into account the
opportunity cost.
If could seem that the accounting profit is high but if I earn that profit: i need time, resources... and what if I dedicate that time to something that I do better, will not win more?
service cost = supplier's production costs + suppliers' accounting profit margin
Fallacy 4
Firms should make, rather than buy to avoiding peak prices (due to high demand or scarce supply)
FALSE. Higher fixed costs. Firms may mitigate risks of unfavorable fluctuations in prices of the inputs through future contracts.
Example Steel Cans
Because of economies of scale
Reasons to MAKE:
Avoids transactions and contracts costs
Technological complexity or turbulence make incomplete contracting likely
Superior coordination of production flows
Leakage of private information = difficulties to protect intellectual properties
ECONOMIC FOUNDATIONS OF
MAKE-OR-BUY CHOICES
TRANSACTION COSTS THEORY
Foreign corporations (eg: General Electric) bilding power plants in developing nations (Eg: Ghana, Haiti, Kenya)
Incomplete contract expose parties to opportunistic renegotiations
Transaction-specific investments
a. Your rent?
b. Your second-best option profit?
c. Your "Quasi-rent" ?
d. In case of incomplete contracts:
* What if Ford asks you for a price renegotiation to a price equal to 8$?
* What is Ford's capability to appropriate your quasi-rent?
a.
Rent = (Price - UVC)*Q - I
= (12$-3$)*1M - 8,5$ = 0,5M$
b. (4$-3$)*1M - 8,5$ = - 7,5M$
c.
Quasi-rent = Rent - Second-best option profit
= 0,5M$ - (-7,5M$) = 8M$
d. In case of
incomplete contracts:
* What if Ford asks you for a price renegotiation to a price equal to 8$? Rent = (8$-3$)*1M - 8,5$ = - 3,5M$
Quasi-rent = -3,5M$ - (-7,5M$) = 4M$
* What is Ford's capability to appropriate your quasi-rent?
Holdup problem: retención/asalto
Holdup problems
Holdup problems arise:
Under circumstances of high-specific investments
Large quasi-rents
Holdup risks can lead to:
More difficult contract negotiations and more frequent renegotiations
Distrust
Reduced ex ante investments in relationship-specific investment
Reduced ex post cooperation
Vertical integration
:
a firm’s ownership of vertically related activities
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 supplier and customer's information systems, improving the coordination and collaboration.
The impact of IT on make-or-buy decisions
MARKET OR VERTICAL INTEGRATION?
TYPES OF VERTICAL RELATIONSHIP
HOW TO MITIGATE TRANSACTIONS COST
Trust among the parties
Clans of firms
Clans create commonality of purposes, values and beliefs
eg: Catholic church, open source computing, Barcelona FC
Recent trends in Make-or.buy decisions:
Unbundling of value chain
NEW TRENDS:
UNBUNDLING OF VALUE CHAIN
Unbundling the value chain in 3 macro-activities:
Product innovation
: "faster" -> Speed
Infrastructure
: "cheaper" -> Scale
C
ustomer Relationship Management
: "better" -> Scope
NEW TRENDS: OFFSHORING
Offshoring
:
describes the relocation by a company of a business process from one country to another. Captive offshoring may exist.
Occurs for
ICT: Information, Communication, Technology services
manufacturing
R&D services
legal services

3M
When to redesign an organization?
Strategic shifts
Introduction of new technologies that redefine work
Cultural/political change
Growth
Staffing changes
Ineffective organization design
Why is an ineffective organization design?
Lack of coordination
Excessive conflict among internal groups
Unclear roles
3 CORE ISSUES IN ORGANIZATION DESIGN
THE TECHNOLOGICAL ISSUE
THE BUREAUCRATIC ISSUE
THE DECISION-MAKING ISSUE
How are decisions rights distributed within organizations? who participate to the decision‐making process?
How many rules and norms should drive the formalization of work and behaviors within the organization?
The MANAGERIAL perspective
2 PERSPECTIVES IN ORGANIZATION THEORY
The SOCIOLOGICAL perspective
Organizational
effectiveness =
how to use resources at best
The
individual
in the organization = What
drives his/her motivation, behavior, attitude, etc
CRITERIA TO DESIGN A COMPANY?
The external environment
uncertainty (turbulence
complexity
Business strategy
SIZE
AGE
AGE
Organizational culture
FUNDAMENTALS ORGANIZATION DESIGN
THE 5 COORDINATION MECHANISMS
THE INTERDEPENDENCIES OF WORK
THE 5 BASIC PARTS OF THE ORGANIZATION
Behind the coordination problem
Strategic vs Operational design
a. Design of POSITIONS
How is the distribution power in the organization?
VARIABLES OF THE ORGANIZATION DESIGN
b. Design of DECISION-MAKING SYSTEMS
2. Design of
LATERAL LINKAGES
c. Design of STRUCTURE
Company can use more than one type of coordination
When the number of people is >6, the mutual
adjustment will not be so efficient
For bigger organizations:
Every employee knows what to do because the process are standardized
Reduce the need to talk between employees
3 TYPES OF STANDARDIZATION:

1) of
work processes
:
– The contents of work are specified or programmed.
- e.g. Workers on an automobile assembly line.

2) of
outputs
:
– The dimensions of the product or the performance (objectives of the group) are specified.
- e.g. a store manager in Zara with the headquarter)

3) of
skills:
– training required to perform the work is specified.
1. Pooled (bank)

2. Sequential (assembly line)

3. Reciprocal (hospital):

in a hospital doctors
attending a patient
must communicate
to know what is happening
and also in an orchestra
Employees in the
operating core:
• secure the inputs for production
• transform the inputs into outputs
• Distribute the outputs
Support staff:
support to the organization outside the operating flow. eg: cafeteria or IT at Polito
Strategic apex:
The CEO, any other top‐level managers, executive committee
They develop the strategy = Long-term decisions

Middle line:

It joins the operating core and the strategic apex
eg: sales managers and the regional sales manager

Techonostructure:
Analysts that design, plan, standardize, change the operating work flow
industrial engineers
Planning and control analysts (budget analysts, accountants)
HRM: Personnel analysts
1. Job Specialization
2. Behavior formalization
3. Training and Indoctrination
Horizontal:
Operators perform a narrow set of repetitive tasks.
The more you have horizontal job specialization, the more you reduce the skill requirement.
Vertical:

Evident separation of operational and administrative part.
The degree of formalization depends on each company. Some have
an ethic code
policy manuals
rules for approval of processes
More used in the operating core
Strategic apex is the least formalized
reduce variances
= formalization of workflows and rules
Indoctrination examples
Initial job rotation programs
social corporate events
top managers' speeches

Indoctrination objectives
promote values and norms more soft than the training
aimed to transfer organizational norms and to reinforce core values of the company
allow "clan-based forms"
Centralized structure
vs
Decentralized structure
all the power of decision rests at a single point => CEO
the power is dispersed among many individuals
VERTICAL
dispersal of formal power down the hierarchical chain
Power decentralized by function. Power goes to:
technostructure: those that design business processes.
experts (support staff specialists) by virtue of their knowledge
HORIZONTAL
Why
decentralizing
?

One brain capacity is limited
To respond quickly to local conditions
motivation for employees: empowerment
2 types of organization:
Mechanistic

vs

Organizational
Organization that works as machines
More flexible organization
How resources (human, technological, financial) are grouped together?
Grouping by:
knowledge and skills
work processes and function
time
output (product)
client
place
Grouping:
mutual adjustment
"local" direct supervision
Functional
vs
Divisional
structure
PROS
encourages specialization
economies of scale => cost efficiency
promoting learning and capability building
successful
examples:

Wal‐Mart,
Apple in 1984 (Scully's age)
FUNCTIONAL STRUCTURE
eg:
P&G
Works for
COST LEADERSHIP
CONs
Individuals focus on their own means, not the firm’s broader ends.
Performance cannot easily be measured. Sales drop? Who is at fault? Operations? Marketing?
Coordination problems rise to higher level unit in the hierarchy => High degree of centralized control
more bureaucratic
PROS
decentralized decision-making
enhance cross-functional coordination within each unit
performance easily measured
mutual adjustement and limited formalization
greater flexibility to market changes => lower time-to.market for product INNOVATION
DIVISIONAL STRUCTURE

Used when
INNOVATION
is very important. Used for:
CONs
Not take full advantage of scale economies.
Less communication with employees in the same function
repetition of simple tasks
DIVERSIFICATION
Broad Geographical scope (country unit instead of product unit)
Uncertainty (Market dynamism)
Example GE:
Supports coordination horizontally, no vertically
When standardization and direct supervision are not sufficient to achieve coordination among units, need of
“formal” mutual adjustment
through
lateral linkages connecting different units
:
1. Liaison roles
Facilitates communication among two units by passing the hierarchy.
Low authority to impose decisions
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

2. Cross-unit groups
Provide a forum (more extensive than the one created by liaison roles) for coordinating and resolving problems
3. Integrator managers
They are liaison position with
formal authority over a horizontal group
He/she manages a proper budget, negotiates with functional departments for resources
Negotiation and persuasion skills are crucial
eg: Project managers in aerospace agencies or in Apple
4. Matrix structures
Dual structure
one line: formal authority to decide
other staff: to advise
Used when firms need:
Frequent product changes and specialization
multinational: by product lines and by regions
(papeles de enlace)
Task forces
: temporary group to accomplish a particular task
==> Low‐medium level of formalizatione.g.: foreman, process engineer, product engineer, quality control, purchasing,
Standing committee
= permanent interdepartmental grouping
e.g: Product development teams, Committee of students at Polito
PROs:
Dual goals: product innovation and technical specialization => needed in complex and dynamic environments
Flexible sharing of human resources across products
Suited to complex decisions and frequent changes in unstable environment
multiple products
CONs:
Dual authority:Who is my boss
Intensive and time consuming coordination and communication
ORGANIZATION DESING AND CONTEXT
The characteristics of the environment affect how to make the strategy of a company
UNCERTAINTY (TURBULENCE)
CONTINGENT VARIABLES
STRATEGY
SIZE
AGE
CULTURAL
EXTERNAL ENVIRONMENT
COMPLEXITY
Instability and continuous change in market and technology conditions
The graph compares 2 kinds of uncertainty:
- demand uncertainty
- technology uncertainty
Key dimensions of complexity:

1) Marketing and distribution
2) Product and Production process
3) Inbound logistics
4) Other complexity dimensions
# customers
geographical dispersion of customers
# distribution channels
variety of product technology
# components (BOM)
# suppliers
geographical dispersion of supplies
degree of outsourcing
professional and cultural variety in the workforce
complexity of contracts
1. Unit grouping
EXERCISES
Blue Bell Creameries, Inc
.
• Started in 1907, more than 800 employees
• Sales and operations are concentrated in Texas.
• Focus on quality and employee training in the art of ice cream making
• Reputation as a small‐town creamery making homemade ice cream
• 60% Market share in San Antonio, Houston, Dallas
• The company cannot meet the demand for ice cream. It doesn’t even try.
• Management refuses to compromise quality by expanding into regions that cannot be adequately serviced.
• Product changes are infrequent. Customers loyal to the “traditional formula”
• Is the functional structure right for Blue Bell Creameries?
• How would you describe the firm strategy?
Solution
• Is the functional structure right for Blue Bell Creameries?
Functional structure: you separate people base on their specialization.

The structure is working so we don’t need to change it. It works as a functional structure.

• How would you describe the firm strategy?
Not complex. It’s a regional company, just in texas. Not for example as Zara that’s all over the world.
Karolinska Hospital
• 47 separate functional departments
• The CEO then cut the departments to 11
• Patients had to make multiple all‐day visits to Karolinska for tests and procedures
– Only 2% of the time spent at the hospital involved actual treatment
• The CEO decided to reorganize workflow at the hospital around patient care, instead of bouncing a patient from ward to ward.
• Karolinska now envisions the illness to recovery period as a process with pit stops in admissions, Xray, surgery, etc.
• A patient now meets a surgeon and a doctor of internal medicine together rather than separately.
• A new position was created, i.e. the nurse coordinator
• Nurse coordinators look for situations where the baton is dropped in the handoff between or within wards
• Now doctors report to nurse coordinator.

How are connected all the departments? Which is the system integrator?
What was the new liason road propose by the hospital?
How do you think that doctors have accepted the introduction of this new role?
What type of organizational structure does the Karolinska Hospital use?
What are critical success factors in a hospital? How would you measure the firm’s capability to meet these CSFs?

Solution Karolinska Hospital
• How are connected all the departments? Which is the system integrator?
The client is the liason road that connects the hospital. Because he’s the one that brings all the exams and diagnostics from one department to the other.

Liason roads
= the horizontal connections

• What was the new liason road propose by the hospital?
A new role called the nurse coordinator. Now doctors report to nurse coordinator.

• How do you think that doctors have accepted the introduction of this new role?
Pros:
- Doctor can concentrate in making its job and not administrative job that should make the nurse, as filling clinic historic.
- Better information of the product

• What type of organizational structure does the Karolinska Hospital use?
Originally this hospital:
- 47 separate functional departments. --> So it’s a big functional division
- The CEO then cut the department to 11 --> Example of
Functional structure

• What are critical success factors in a hospital? How would you measure the firm’s capability to meet these CSFs?
Critical success factors:
- Specialization scales
- Customer satisfaction → Waiting times
Which type of organizational structure should use:
RCS, Times Inc., Gruppo L’Espresso (newspaper/magazine publishing)?
Endemol?
Johnson & Johnson (band‐aids, pharmaceutical, shampoos, medical products)?
Apple?
Which type of organizational structure should use:
RCS, Times Inc., Gruppo L’Espresso (newspaper/magazine publishing)?
Gruppo L’espresso is a group with newspapers and magazines in Italy. Each newspaper and magazine has his own team group. → Divisional

Endemol?
Divisional structure.

Johnson & Johnson (band‐aids, pharmaceutical, shampoos, medical products)?
Consumption company. Consumer goods you find different sections. Grouping around product divisions (ex: band-aids, pharmaceutical, shampoos), and there’s very poor coordination between sections.

If you want to cross-sell: send products of the same company but different sections…divisional

Apple?
Apple is not divisional at sells. Apple changed from a functional to a divisional structure because their devices were not compatible

Pittsburgh Steel Compnay
• The steel‐making industry had been stable for years.
• Reduced consumption of auto, inflation, frequent downturns in economic cycles have made the industry less stable.
– Increases in material and energy costs
• Many steelmakers have shifted to specialized steel
products. CSFs are:
– Efficiency and economies of scale
– Improvements in the use of state‐of‐the art technology for making steel
– Aggressive marketing
– Flexibility to rapid changes
• Pittsburgh Steel Company (PSC) decided to specialize in a few high‐value added products tailored to separate markets
• Four product lines
– Open‐die forgings
– Ring‐mill products
– Wheels and axles
– steelmaking
 20,000 recipes for specialty steel
• Hundred new recipes ordered each month

• A business manager was given authority of each line. ‐> preparing a business plan for a product, developing targets for production costs, product inventory, shipping dates and gross profit.
• Functional VPs were responsible for technical decisions relating to their function
– Keep personnel trained in new technologies that could be applied to product lines
– Stay abreast of the latest techniques
• Field sales and industrial relations worked as independent functions (no formal report to a product manager)

• What type of organizational structure does PSC use?
• How would you describe the environment in regard to:
– Complexity?
– Dynamism (stable vs. uncertain)?
– Munificence (increasing vs. decreasing demand)
SolutionPittsburgh Steel Compnay
• What type of organizational structure does PSC use?
This is an example of the matrix, because it’s not divisional and it’s not functional.

Why is not sales in the matrix?
Because sales depend on the customer so it’d be the problem of Johnson y Johnson that there’s an specific sales department for each product and customer doesn’t want to have for sellers.

Function deals with complexity.
Horizontal lines deal with dynamism.

• How would you describe the environment in regard to:
– Complexity?
– Dynamism (stable vs. uncertain)?
– Munificence (increasing vs. decreasing demand)
COST LEADERSHIP
PRODUCT DIFFERENTIATION
VALUE CREATED: CONCEPTUAL FOUNDATIONS
B: Perceived benefit (= reserve price)
P: Price
C: Firm cost

Consumer’s Surplus = B - P
Firm’s Profit = P-C

If B>C => “win‐win” business opportunity for the firm and the customer
If C>B => no value created

INDIFFERENCE CURVE
EXAMPLE
How to calculate the value created?
Firms that create more value than its competitors by:
Benefit parity
: Offering the same benefit as its rivals at lower cost
Benefit proximity
: offering benefit not too much less than competitors but a greater cost advantage that allow lowering price
Creating more value than its competitors by offering a product with
higher benefit
B for the same ‐ or perhaps higher cost C. Two ways:

Cost parity
: higher quality (= higher benefits) than rivals with the same cost C (with nearly the same price)􏰀=>
no price premium

Benefit superiority
(and cost proximity): much higher quality (=higher benefits) at higher cost than rivals (and higher price).􏰀=>
Price Premium.
C decreases a lot Q decreases P decreases
COST LEADERSHIP
vs.
DIFFERENTIATION
Q increases a lot C increases P increases
Many products can be object of both a horizontal and a vertical differentiation
eg: Notebook A, high power of the microprocessor, heavy weight
Notebook B, low power of the microprocessor, light weight
Despite the fact that all costumers appreciate the attributes of power and weight, there may some customers that prefer notebook A and others notebook B
When to use Cost Leadership?
Product is hardly differentiable =>
commodity products
Consumers have a
flat indifference curve
(price sensitive and quality insensitive)
Product is a
search good
= objective quality can be assessed prior to the point of purchase
When to use Product differentiation?

Economies of learning and scale are significant and firms are already exploiting them =>
mature market
Consumers have a
steep indifference curve
(quality sensitive)
Product is an
experience good =
quality can be assessed only when the customer has purchase it and used it for a while)
Reputation is important.
Sources of cost advantage
Size differences and
economies of scale
Experience differences and
learning‐curve economies
low‐cost access to inputs
Technological advantage
TECHNIQUES FOR ANALYZING PRODUCT ATTRIBUTES AND POSITIONING
1. HEDONIC Price Analysis
2. PERCEPTUAL MAPS
3. RESERVATION Price method
4. Attribute-rating method
Competitive advantage: giving a higher benefit B at a lower cost of production C
How technological innovation change the structure of the industry
Industry Life Cycle and Technological Innovation

HOW VALUE IS GENERATED IN THE INDUSTRY
Value appropriation
Patents
Life cycle: S-curve
Discontinuous technologies
How to deal with discontinuous innovation?
DIVERSIFIED PORTFOLIO
BCG MATRIX (Growth-Share matrix)
Boston Consulting group
STAR product:
You already have high market share and high growth
? product:
As you have low market share, you have to invest more than competitors
DOG product:
Go out of the market because you’re losing.
Exit, leave it
CASH COW:
You have the control of the market (high market share), but it’s a market that’s not growing more.

Are the
mature markets
where I get all my daily/continuous money
But cash cows are not always profitable
These products require more investments. Stars and Questions need money!!! because the markets are growing so you have to innovate
How overcoming Organizational inertia?
1. Reorganization and new blood
Changing the organizational structure :
breaks down existing power bases
creates openings for external hires.
2. Ambidextrous Organization
Ambidextrous =
need to:
a)
Exploitation
of existing resources and capabilities and market positions
b)
Exploration
new opportunities for the future

Type of Ambidexterity
Structural Ambidexterity
: different organizational units.
Contextual Ambidexterity
: Same organizational units and people perform both exploration and exploitation
e.g.
Google
rule of 20% of time allocated to conceive new businesses; awards for experimentation)
are a "wind of creative destruction"
They may may change industry structures and industry leaders
Why a firm may fail in dealing with TECHNOLOGICAL DISCONTINUITY?
1. Organizational inertia/myopia
2. Limited cash availability (no cash cows)
3. Unfit with the existing
core competencies
4. Wrong market selection choices
How are the benefits from
INNOVATION
distributed?
Who controls the value in the industry?
1. The

least replaceable

player􏰀=> system integrators, most of the time.
2. The
guardian of quality
(and legal liability)
eg: Eataly, TripAdvisor, shipper for port wines
3. Who

follows customers
in value migration
eg:
Google and specialized components of the self-driving car
Google Wallet for mobile payments
Industry Architecture
Appropriability regimes
examples
Integrated architecture
vs
Modular architecture
(e.g. cars). Cars are made by interdependent sub‐systems that are not “plug‐compatible” with those of a rival car maker.
Who has the greatest part of the value?
Who controls the product and process architecture (Car makers)
Who has the greatest part of the value?
The component or subsystem level who has the focus of innovation
"plug-and-play" architectures
eg: PC industry, movie industry
Appropriability regimes for
INNOVATION
1. Legal instruments
2. Natural barriers
Patents

– Exclusive rights (with a fixed life time) to a new product process, substance or design
Copyrights
– Exclusive rights to artistic, dramatic and musical works. Duration may go from 70 to 120 years
Trademarks
– Exclusive rights (no fixed life time) to words, symbols or other marks to distinguish goods and services
Trade Secrets
– Protection of chemical formulate, recipes and industrial processes with no fixed life time (if firms are able to protect it from espionage and knowledge spill‐over)
Private contracts
(e.g. non‐disclosure agreements) between firms and between a firm and its employees can restrict the transfer of technology and know‐how.
Nature of the technology may provide
"natural barriers"
to imitation:
Complexity in the technology
(e.g. low in luxury, high for products in electronics)
Tacitness
(i.e. low codifiability) of relevant technology:
tacit knowledge is difficult to transmit and receive, and is less exposed to industrial espionage
Network externalities
: Easier for the innovator to persuade customers (and suppliers of complementary products) to buy the product
Legal and natural barriers may only give a temporary competitive advantage.
LEAD TIME
LEAD TIME:
the time it takes to imitators to catch‐up their delay and asset mass efficiencies (due to continuous innovation)

Lead Time
reduces the negative effects due to weak appropriability regimes:
– The innovator is able to introduce products with superior performance before than competitors/imitators
- Lead time important in electronics and software
WHAT IS MARKETING?
CUSTOMER BEHAVIOR
MEASURING THE MARKET POTENTIAL
MARKET SEGMENTATION
MARKETING is not SALES
FINALLYYYY....
IS THE END
COST LEADERSHIP
vs.
DIFFERENTIATION
economies of scale (
the average cost of producing something to fall as the volume of its output increases) in small markets
Pre-emption
: right to offer before the opportunity is offered to others
Unique organizational culture and routines (but over the long term can be object of imitation)
Hard to duplicate advantages are based on:
Timing of introduction
Locations
Reputation
Service and support
May be hard to duplicate advantages are based on:
Product mix
Links with other firms
Product customization
Product complexity
SUSTAINABILITY OF THE ADVANTAGES
Multiple regression analysis to estimate the impact of product attributes on product’s price
Y = a +b1X1+b2X2+.......+ bnXn + e
Each coefficient bi represents an
hedonic price:
the elasticity of the market price with respect to the i‐th attribute

Useful to understand which features
can differentiate the product.
EXAMPLE
Price =a1+b1(Stereo) +b2(Large Engine) + b3 (AC)
a1 = depicts the base price (no stereo, no Air Conditioning, no Large Engine)
b1, b2, b3 are dummy variables (1 if the condition occurs, else 0)

The estimated regression model is:
Price=7,800$+300$(stereo)+500$(largeengine)+ 200 $ (AC)
To understand how to differentiate the product in an unique way
The maximum monetary price that customers are willing to pay
• Ask customers in market research
• Limitation:very perceptual estimates.
To compare competitor products

Method:
1. Customers are given a fixed number of points to allocate among each product
2. Each product is then assigned an “importance weight”
3. Perceived benefits are determined by calculating the weighted average of product ratings
Organizational inertia
: the tendency of a mature organization to continue on its current trajectory
depends on:
– Scientific knowledge is a public good (non exclusive, non rival) --->􏰀free‐riding problem

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

So how to trade scientific knowledge?
With PATENTS


Stimulate innovation by:
Creating a market framework for invention and scientific knowledge
Favor disclosure of innovation
PATENTS
BENEFITS
COSTS
create temporary monopolist rents
They give
exclusive rights
to a new product process, substance or design for a limited amount of time (e.g. 20 years in EU)
HOW PATENTS WORK?
give the patent‐holder the right to stop others from producing, selling or using his or her invention
Information
about patents granted and patents application filed is
public and free
(after 18 months from the application)
Patents can be
sold or licensed‐out
: a licensee pay the patent holder (i.e. the licensor) to rent or lease the patent (e.g. a Lump sum + Royalty fees on sales). ex: case Abgenix
The entire
patenting process
can take anywhere
from a year to five years
. The
life of the patent actually begins at the application date, not the approval date
, so few inventors wait around for final patent approval before selling their invention
Novelty
:
the invention must not have been disclosed or offered for sale before.

Useful
(e.g. no unproven ideas, no illegal/immoral practices)

non‐obvious
(e.g. you can't patent the concept of making a toaster that can handle more pieces of bread at once, because that is only taking an existing invention and making it bigger).
ATTRIBUTES OF PATENTS
Risk that competitors legally
“invent around”
at modest costs – Substitute inventions.
Technically different
from the core patented inventions but with the
same functionality

Why PATENTS may not be effective in VALUE APPROPIATION?
Substitute inventions with lower cost
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
High costs of application
WHY DO FIRMS PATENT?
1. Prevent copying
: Increasing the cost and the time for rivals of imitation
2. For licensing revenues
3. To prevent lawsuit
:Once the patent is filed, the law is on your side!
4, Block others
5. For use in negotiation:
ex:
Cross‐licensing negotiation
allow two firms holding patents on two complementary inventions to grant a license to each other.
6. To gain reputation
: in hi‐tech industries SMEs with patented innovations can more easily acquire financing or alliance partners
7. To measure performance
of the R&D process
In general, when the technology is more observable (reverse engineering is doable) and
when the infringement is demonstrable
More effective in
chemical industries and drugs
, since the uniqueness of a molecule and infringements can more easily demonstrated.
Uncomplicated Mechanical equipment
When patents are more effective in the industry appropriability regimes?
For
SMEs
(Small medium enterprises)
and startups
(despite the lower affordability) given the lack of control on complementary products in large‐scale manufacturing and distribution
Analysis of
needs and wishes
of the market and definition of the “optimal” plan for the company.
TYPES OF MARKETING
STRATEGIC MARKETING
Thinking the idea of how to arrive to the customers

TACTICAL MARKETING
organizing the campaigns, the operating part
POSITIONING
Is asking for each
potential segment
:
– Who are the customers?
– What is the set of needs?
– Why is the product the best option to satisfy those needs?
And define the ways of vertical and horizontal differentiation
The
worst enemy of marketing
are
commodities
.
Commodities are cheap, so you don’t need marketing, you sell it just because is cheap
Sales
are just the transaction
Focus on the operative part
Marketing
focus on the marketing mix. Analysis on potential market, segmentation.
Close to R&D, because Marketing collects the info.
CUSTOMER's JOURNEY IN THE DIGITAL ERA
Maslow's hierarchy of needs:
This explains the behavior for a
final customer.

But the behavior of
producer/distributor
is different.
Actual product: Brand
The brand is one of the most important things of the actual product.

Consumers often perceive it to be a mean to increase price (e.g., no logo)
Benefits of the brand for the producer:
It increases
market power
both upstream and downstream
Improves
loyalty
􏰂􏰂higher average price
It facilitates
market segmentations
(e.g., P&G)
It facilitates entry in new markets as it
provides “credibility
” (e.g. Virgin, Microsoft, Apple)
Is the one Marketing lever that can be changed "instantaneously"
Economics approach:
Fix price maximizing profits
Companies often set the price with heuristics
But this is hardly viable because the information required of demand and competitors...so in the real life?
How to set the price?
PRICE = COST + MARK-UP
1st method:
p = (UVC + FC/Q) / (1 - ROS)
UVC: unit variable cost
FC: Fixed cost
Q: quantity
ROS%: target return on sales
TP: Target profit
Pros
Cons
Easy to compute
Reduces price competition
Avoids “predatory pricing when demand increases”.
Does not take into account the external variables
With this method, the demand is not affected by the price. Demand is an input rather than an output.
Break-even or Target Profit
2nd method:
Example:
FC: 300 K€
CI: 1000 K€
ROA = 20%
UVC = 10€

TP: (p-10)q - FC
TP = 20%* 1000K€ = 220 K€

p = 20€
2 APPROACHES IN PRICING
Cost-based pricing
Value-based pricing
1. Design a good product
2. Determine
product costs
3.
Set price
based on cost
4. Convince buyers of product’s value
1. Assess
customer needs and value perceptions
2.
Set target price
to match customer perceived value
3, Determine
costs
that can be incurred
4. Design product to deliver desired value at target price
First cost, then price
First price, then cost
PRICING:Variations
Promotional discounts
Quantity discounts
Price discrimination
– different customers (e.g., movie theaters)
– different versions of the product (e.g., Iphone)
– different locati􏰃on (e.g., Zara and supermarkets)
– different points in time (London subway, hotels, flights)
Has the objective of communicating the
value of the product to the consumer.
Is important for segmentation
4 KINDS OF PROMOTION
1. ADVERTISING
2. PERSONAL SALES
– Customization
3. PR: PUBLIC PARTNERSHIP
– Third party statements that can be believed to be more objective
4. PRICE PROMOTION
– Stimulus for immediate action
1. DIRECT SALES
Use direct distribution channels:
Internet
TV
Catalogues
Owned stores
2. WHOLESALERS
Produce big quantities for retailers
Bulk breaking (i.e. buying large carload lots and breaking the bulk into smaller units)
Warehousing (reducing inventory costs and risks to suppliers and customers)
Transportation
Financing (finance customers by granting credit, finance suppliers by ordering early)
DISTRIBUTORS
HOW DISTRIBUTORS ADD VALUE?
Market penetrated=N*Q*P*􏰆
alpha
N =number of buyers
Q =quantity purchased by the average customer
P =average price
alpha 􏰆 = market share
1. Understand the benefits that customer seek
2. Segment the market and
develop customer profiles
based on the customer benefits
3. Find the
observable variables
(e.g. demographic characteristics) most likely to discriminate among the benefit segments
SEGMENTATION METHODS
Ex-ante
Ex-post
Descriptive variables
identify segments
We choose among various sub‐sets (segments) based on differences in actual buying behavior
Identify sub‐sets based on
buying behavior
And check whether there is any difference in terms of descriptive variables.
Observable characteristics
That are relevant to the way the customer perceives value from the product
Geography (e.g., white goods; Coca‐cola; food)
Demography
– Age
– Stage of the lifecycle (e.g., holidays)
– Gender (e.g., Y)
– Income (e.g., watches)
– Ethnic groups
Marketing

is more operational than

strategy
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