Monday, 6 February 2023

Corporate Strategy

06/02 - Course Introduction: What is Strategy

Competitive advantage: superior performance, economic or financial performance

People, Planet and Profit

Corporate perspective means headquarters and corporate strategy means

headquarters strategy. Top-down approach on business.

Organization: if you want to manage a company you have to manage people.

Finance: capital budgeting it’s part of strategy.

Strategy: pattern, set of behaviour over time. It’s an overall plan to reach
competitive advantage, set of actions to reach it. The plan is needed for deploying
resources to establish a favourable position.

Tactic is a scheme for a specific manoeuvre.

Characteristic of strategy: important, involve a significant commitment of

resources, not easily reversible.

1
A successful strategy means that there is an effective implementation in the long
term, simple and with agreed objectives, a profound understanding of the
competitive environment and an objective appraisal of resources,

The basic framework of strategy: link between firm and its environment

There are differences

also in terms of
corporate strategy and
business strategy
because of the sources
of superior profitability.

2
There are two different path in order to have a realized strategy.

- Strategy as Decision Support (improves the quality of decision making)

- Strategy as Coordination and Communication (creates consistency and unity)
- Strategy as Target (improves performance by setting high aspirations)

Strategy is a key set of elements and one important point is the implementation.

Only entrepreneur are able to compare plan and behaviour at the same time. They
know details about company and people and the risk is to be distant to the people.

3
A firm works well if you know the people and the context.

If you run, you have to remember that someone can run faster.

In this case you have to check resources, money invested to generate value
(Harvard). 40 billion to generate value in the university.

In fact, the role of analysis means that:

- Strategy analysis improves decision processes, but doesn’t give answers.
- Strategy analysis assists us to identify and understand the main issues.
- Strategy analysis helps us to manage complexity.
- Strategy analysis can enhance flexibility and innovation by supporting learning
and fellow students.

4
10/02 - Competitive Strategy: competitive advantage
Strategy is a bridge between the firm and the industry environment.

The firms have resources & capabilities, goals & value, structure & systems while the
industry has competitors, customers and suppliers.

Strategic decision ex ante are between firm and industry.

How can assest the quality of strategy? Ex post through performance.

It’s very difficult to make it really profitable in terms of strategy. We have to consider
where to compete and how to compete.

Framework that assest and guide competitive strategy.

Assessing competitive industry: the strategic analysis can avoid mistakes and
give a set of alternatives but it’s not enough to ensure success because we are
uncertain about the future. It’s important to have an idea on future but we have to
identify and understand the main issues. It’s important to analyze main costs in
order to manage complexity.

Every decision is quite complex and we need to be flexible and, at the end, the
decision it’s important and strategy analysis is fundamental to analyze and
understand problem but it’s not sure that you can success.

Even if you try to plan everything, something can go wrong.

Competitive strategy: industry analysis analyse the external environment where the
firms compete.

5
Industry analysis also is needed to:

- 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.
There is a debate on the most important variable: competitive strategy or industry.

6
We try to learn the impact of policy trough five forces. The idea is to try to see the
effect on five forces which are important due to structural differences in terms of
industry. The company is attractive when is profitable according to Porter. In the last
40 years pharmaceutical profitability was about 80% and utility about 6%. Every
industry in fact has structural profitability. Of course, in order to see companies
we have to analyze also other aspects as the number of competitors that give you
the possibility to make a high or low amount of profit.
- Industry structure that give you an overall view of the environment
- Industry strategy
- ROI of the industry: depends if you are in the average or not
Porter’s Five Forces Framework

- Rivalry among competitors: the extent to which industry profitability is depressed

by aggressive price competition depends upon: concentration (number and size
distribution of firms); diversity of competitors (differences in goals, cost structure,
etc.); product differentiation; excess capacity and exit barriers; cost conditions
(extent of scale economies, ratio of fixed to variable costs).
- Threats of new entrants: they have to overcome entry barriers. Es.
Pharmaceutical industry has high barrier to entry because you need investments.
- Threats of substitutes: are different industry that can satisfy the same need.
Extent of competitive pressure from producers of substitutes depends upon:

7
 buyers’ propensity to substitute; price -performance characteristics of
substitutes.

- Bargaining power of buyer: it depends on buyer’s price sensitivity and relative

bargaining power.

- Bargaining power of suppliers

In any industries there are forces that are more important and problematic than
others so we have to create a strategy that lead to protect from that forces in
order to survive. All this it’s necessary in order to protect positioning from that
threats. In food industry, for example, you have to pay attention to supermarket and
sometimes you can also produce own label in order to protect you from the
destruction of value. There are some clauses which can lead you out of the market.

The differentiation is important in order to avoid competition. The main driver of

competition is price and if you are a competitor you have to avoid to reduce it too
much otherwise you reduce margin; so, you have to work on differentiation and
innovation. The number is important, for example, having only one suppliers it’s
difficult while having more there is more competition and it’s easier. There is also the
possibility of vertically integration because if buyers and suppliers are the same
there’s no competition in that market for the others.

Another big issues is asymmetry of information because if you don’t have an

understanding of quality of the service, it’s difficult to bargain.

8
The rivalry between established competitors it’s fundamental because if they only
compete on price, soon or later the winner is the consumers while if they compete
in differentiation, the competition will be different. The fashion industry is so
profitable because each other try to avoid competition, they try to characterised the
brand so much and at the end is a different product; this is why they make it so
unique and this is the best strategy because if you convince people that you’re
unique, no one is going to see prices.

The scale economy is fundamental to reduce costs when the small producer with
small plant are inefficient when there are big company with big plant.

Applying five forces you can:

Forecast evolution of the business: if you can foresee in the future about discount
can increase market share, you can predict what is going to happen into the market.
Another solution is to try to improve profitability or change the industry profitability.

In which industry is competing Ferrari? Is the same of BMW? Probably considering

Ferrari, Twingo etc there are different segments. The point is: are they in the same
industry? Maybe yes or not but surely there’s a separation in terms of industry and
above all in terms of segments.

9
If we have to drawing industry boundaries, we need to identify the relevant
market and see in which industry the firm act and the key success factors.

Competitor Analysis

In every business you have to do in order to understand who and how it affects
your competition. If you’re Telecom you have to know everything about
competitors. The most classic example are the duopoly, as Coca Cola and Pepsi,
because you have to know everything about the other. They have to perceive a
difference. They try to make a different story about the same product because
people have to understand that are different product and make it profitable.

10
Segmenting it’s fundamental because there are segment which are global and
other not. The pick up track segment, for example, is specific and important in USA
while in other country it’s not. Ferrari for example has a segment which is global but
smaller than others. The globalisation effect, in fact, is very clear because the
shops in different countries, for example, are much more similar everywhere.

The implication when segments are global is that competition also is global.

Having different products

and geography, surely the
competition is different.

11
Strategic group: competitors with the same strategy in an industry and, typically,
they need to have same performance.

Using as dimension the product range and geographical scope, we can see that
there are national focused more producer, global broad-line producers, etc. in order
to pass from the first situation to the last it’s very very difficult because you have to
make investment profitable efficient.

How does
competitive
advantage emerge?
From external and
internal sources

12
We also have to pay attention to
competitive advantage against
imitation.

In the case, we have to consider

identification, incentives for
imitation, diagnosis and resource
acquisition.

Competitive advantage

It is composed about cost advantage and differentiation advantage.

- The cost advantage means that you can have economies of scale and economies
of scope and they try to cut costs in the best way possible. For example, Ryanair
try to cut cost with turnover etc. there’s an obsession about.
- The differentiation advantage means that you use a different decision, you make
something to perceive unique so surely you have higher costs than other and
something that lead you unique. Sometimes even with differentiation, there’s a
bankrupt. This try to have price premium from unique product.

It’s important to focus on the fact that

having innovation you can find the way to
reduce cost and this lead to an absence
(for competitors) of the competitive
advantage. Clearly the cost advantage
can be critical because if you’re an early
adopter you can be out of the market. If
everybody try to be unique, it’s better.

13
Porter says that there are two main strategies:

- Cost leadership: companies as Zara, H&M etc. are obsessed with costs and
despite they have same prices they always try to have lower prices.
- Differentiation: big companies as Gucci, Prada etc. pursue a strategy trying to
have different products and uniques one.

- Focus: there are companies that are unique in their industry but are not global.
Cucinelli want to be perceive as unique in the world, even more unique than
Gucci or others that want to be unique. Focus means that you make strategy, in
terms of cost or differentiation, even more accentuated than the others.

A company can't follow a cost leadership or differentiation at the same time,

because sooner or later you will be passed by a company with a clear strategy.

The differentiation can be tangible or intangible. The nature of differentiation:

14
Differentiation: is concerned with how a firm distinguishes its offering from those of
its competitors (How the firm competes).

Segmentation: is concerned with which customers, needs, localities a firm targets

(Where the firm competes).

Does differentiation imply segmentation? Not necessarily

Porter Value Chain

Then, Porter developed the value chain understanding how perform activities can
give me an advantage. Considering primary activities we need support activities.

There are goods that if the object

is broken, they give you another.

For example, Patagonia is

different even in terms of product
that in terms of purpose, they
focus on environment and planet;
they try to find a good product
with a clear and precise purpose.

15
Cost Advantage

There are drivers of cost advantage: economies of scale, economies of learning,

product design, techniques, input costs, capacity utilization and residual efficiency.

Economies of scale and Experience curve

16
Applying the Value Chain to Cost Analysis: 1) identify the principle activities, 2)
Allocate total costs, 3) Identity cost drivers, 4) Identify linkages, 5)
Recommendations for cost reduction

Rationale for the Resources-based Approach to Strategy

When the external environment is subject to rapid change, internal resources and
capabilities offer a more secure basis for strategy than market focus.

Resources and capabilities are the primary sources of profitability.

Resources and capabilities vs value chain: according Porter value chain is a key
to understand less cost etc. but then others though that it is explained by the
rational for the resources based approach.

There are three abilities:

The idea of resources and capabilities is that the competitive advantage depends
on the uniqueness of resources and capabilities. There are company in the world
that operate different product and system developing competitive advantage thanks
to resources and capabilities.

17
The driver of competition and competitive advantage are resources. This
competencies can explain where to compete and how to compete having
competitive advantage.

18
19
17/02 - Corporate Strategy: Vertical Integration and scope of the firm
Vertical integration means increasing the company size by doing some activities
performed by customers or suppliers.

Transaction costs: scope of the firm which explain vertical integration; high
transaction costs, high vertical integration. It’s a form of market failure due to
information asymmetry.

Considering Barilla, we have the headquarter and the layers with specification
among products. The layer relative to produce lead to the business strategy while in
the headquarters there’s the corporate strategy. In this last case we have to
consider where to compete and above all the fact that each departments need
finance, how to control everything, how to exploit synergies. Corporate strategy
means that all this aspects have to survive together and the headquarter need to
organized all this.

Business strategy is concerned with how to compete whining a particular market.

Corporate strategy is concerned where a firm competes, the scope of its activities.

Dimensions of scope are: vertical scope, geographical scope and product scope.

- Vertical scope: what I should produce within the company and what I should
outsource. The choice is about transaction costs.

- Geographical scope: should I go to one country or to another one? It depends

on the transportation costs, cultural dimensions, political risks, etc. How to
analyze is about where to go in terms of country (is better to be closer or not? We
have to consider dimension and cultural problem). Where to produce is an
important aspect, how to organize the structure all over the world?
- Product scope: different business in terms of strategy business of products.
The size can be expanded geographically, in terms of products or etc.

20
Firm vs market transactions

Coase is the writer who made the article about transaction costs and the related
theory. Coase during the Ph.D. visited 4 motor companies with kilometers of
buildings that produce cars. There is a hierarchy: managers allocate resources, not
the market. this is the basis of the theory developed. There are two basic form of
economic organization:

- Market: where transactions are coordinated by market mechanism (price -

invisible hand). In market you have high economic incentives to take good
decision.
- Firm: where transactions are coordinate through administrative mechanism
(hierarchy - visible hand). There is a hierarchy for which managers take decisions.
In the firm you lose incentives but you control more the situation.

The activities are administered by market or firm based on relative costs of

organizing them, i.e. transaction versus administrative costs.

Over time companies become bigger and bigger up to 1980. Firms developed the
first industrial revolution, technology improvement, and the second industrial
revolution, expanding the size and scope of corporations; in 1980 we reach the
peak of what can be done by managers but after that become the phase of
restructuring, refocusing, and downsizing among large corporations. This means
that exists an economy of scale but after a certain point, there are also
diseconomies of scale. This is really related to diversification: according to new
markets or new products (differentiation is about being perceived as unique to
charge a premium price and gain a competitive advantage that allows me to

21
increase costs and remain sustainable). 1980 was the decade of M&A and the value
exploited was huge.

There are economist to increase the company size and there are de-economist that
lead companies to be smaller. We will see this topic talking about diversification.
Diversification: where to compete in terms of market and product. It is related to a
corporate strategy. Differentiation: you want to perceive as unique to increase the
price and gain a competitive advantage. The premium price should not be destroy.
It’s related to a business strategy.

Dimension of the scope: why does it make sense to combine 3 stages in one firm?

- Vertical integration: combine all 3 stages; is basically explaining with layers and
the combination of three stage of production into one firm.
- Product scope: create 3 different units; there are companies that produce all the
three product and others not.
- Geographical scope: create 3 different units, one for each country in order to
spread the value chain all over the world and exploit synergies and advantages. It
means that you can operate in more country and operating in that you can be
more efficient. An advantage in being global is spread supply chain all over the
world where costs are less. Another important aspect is to consider the
acquisition of other firms in different country.

Vertical specialization: there can be a furniture company in an upstream level

which refers to the firm and there can be distributor in a downstream level. Then,
surely consumers with final consumers. If the firm integrates one of the suppliers
(backward) and one of the distributors (downstream), the company is vertically
integrated. There can be also a plastic production in my company and, for example,

22
you can integrate in plastic production or something like this. This is vertical
integrated because they rely on the previous layer.

You can focus on one stage of the production or be part of all the stages.

Example – VI in the entertainment industry – Harry Potter vs Frozen

For example, considering Harry Potter and Frozen, we can see that Disney had a
vertical integration for Frozen while for Harry Potter they decide to outsource. The
first situation means that you decide to prefer specialization while for Frozen you
have more control and higher risk because is a compounding risk, if one decline,
you loss huge amount of revenue. In harry potter, there is a risk of exploiting.

The advantages of outsourcing:

- Rely on specialized companies
- Exploitation by suppliers
The advantages of vertical integration:
- More control
- Don’t rely on companies that you don’t trust
Disadvantage: compounding risks => if one activity goes wrong, the whole
company loses.

It is better to be vertical integrated (make) or not, being specialized (buy)?

Vertical integration is firm’s ownership of and control of several vertical stages of the
supply of a product (i.e. number of stages or value added to sales).

23
Vertical integration can be: backwards (upstream) to material and we buy raw
materials or, otherwise, it can be forward (downstream) when you have more
customers. Vertical integration can be partial (I increase the sales of 15% and I rely
on distributors for that part; there is a trade off; also in terms of distribution there
can be someone who only have a part of products) or full - when all production is
vertically integrated.
- Backward or upstream: into suppliers’ activities
- Forward or downstream: into customers’ activities.

Why be vertically integrated or not? The Benefit?

It’s important to have a continuous production? Not necessarily. You can have
different type of owner which control different stage of the production. It’s not a big
issue in terms of technology but it is in terms of transaction costs.

For example, imagine that a company use minerals to produce the final product:
there are different way to bring the mineral to the firm (thanks to a tunnel and a train
- faster and easier - or over the mountain with a track - slower and more complex).
But who should invest in the tunnel project? Clearly, no one will build the train
because it’s too risky: once I did the investment and build the train, I have some
sunk costs => if the customers don’t buy, you are failed. Transaction costs are the
cost you need to pay: other buyers don’t have the incentive (it’s impossible to
regulate everything with a contract) to pay and they exploit all the margin – hold up
problems. Who should invest in the railways system? Clearly no one will built the
train because is to risky to do it. There is a high cost to create it and there are
maintaining cost; there are sunk cost which can be a risk because company A and
B can influence too much into the decision and they surely are going to re-contract.
Company A and B are the only two possible sellers and there is a huge problem in
terms of transaction costs. If company C don’t have A and B, are out of the market.
Solution? A single company can decide to do everything because otherwise no one
is going to make the investment. To make this investment it’s impossible to regulate
everything with a contract and the only solution is to regulate everything according
to a company, vertically integrated.

24
Avoids transactions costs of market contracts in situations where there are:

- Small number of firms

- Transaction - specific investments
- Opportunism and strategic misrepresentation (in our example the other
companies were friendly at the beginning but then they change their behavior)
- Taxes and regulation on market transaction
Another benefit of vertical integration is the superior coordination.

Hold-ups and bargaining losses

It’s an article based on the risk of the supplier to produce cart parts and once you
do the investment nobody buys it. this creates a hold–up problem. If the firm
produces it directly, it avoids the risk of opportunism.

VI serves to limit the danger of hold-ups. But VI doesn’t cure agency problems: it’s
the diverge in the interest of managers and owners. In a big company, you are
plenty of opportunism too that may end up with inefficiencies.

Holdup problems in terms of opportunism is due to the fact that if they can only
produce to one single company, there is too much risk and you can lose value.

Vertical integration sold holdup problem but, unfortunately, doesn’t solve agency
problems. It is the problem related to every manager inside the company, upstream
and downstream.

In a big company you have plenty opportunity to exploit value. One of the literature
in corporate governance is to manage this aspect, one mechanism is to control and
incentive relative to profit.

Vertical integration is a solution for the transactions cost and hold-up problem, it
isn’t for the agency problem.

Once you made the investment, how can you move to another supplier? How can
you cover the sunk cost? It’s complex to manage a vertically integrated company

25
since you made the VI and you solve some problems but if you chose to outsource
you may choose more efficient options. Es. Enel has invested in coal but this does
not represent the future. You are basically blocked in the transaction and this may
represent a disadvantage of vertical integration. Especially the long term investment
is complex because you may change ideas, so you need to be careful and aware of
the market, industry, and future environment.

The cost of vertical integration:

- There are differences in the optimal scale of operation between different stages of
production to prevent balanced vertical integration => outsourced suppliers are
more efficient to do so
- Inhibits the development of distinctive capabilities => this is a lack of incentive,
especially in innovation. You are not incentivised to invest in the future.
- Difficulties of managing strategically different businesses => you can’t be the best
in all segments.
- Incentive problems: lack of high-powered incentives => incentives are not so
powerful as in the market. The market is the most incentive solution, in a
company you have a salary, you’re protected etc. the market mechanism is the
most important.
- Limits flexibility: we have just fixed costs and this lets the firm less flexible.
Sometimes is better to rely on a supplier since you don’t have the cost and you
can choose the best one.

In responding to demand fluctuations; demand collapse and if you’re

vertical integrated you lose a lot.

In responding to changes in technology, customers’ preferences, etc. if you

rely on a supplier and you bought one of the suppliers and this became un-
efficient, this can be a problem.

(but maybe conducive to system-wide flexibility = it’s easier to fix everything since
you can impose orders)
- Investing in an unattractive business => you should invest in something attractive
and unique (es. Minerals)
- Compounding risk => (es. Disney case and attraction parcs: one business units
affect all the other business units)

BUT, the vertical integrated company, in theory, can be better in system

innovator. When you develop a new type of car, airplane etc. you need a new
system activity. It is more difficult to develop a new airplane and you have to rely on

26
100 suppliers because everyone have their own opinions; also the size or shape of
air conditioning, everything change and it’s a mess.

The value chain for steel cans: in the clothes industry or technology industry, they
design, control the marketing and distribution, and then delegate the production.
They try to control the most profitable units of the business and then delegate the
less profitable ones. They have internal designer, delegate the production to
another, it’s nothing that you can control in subsequences stages, you can control
only some stages and it’s quite difficult to control only one or two. The labour costs
also are quite important and they rely on producers.

27
Long-term contracts and quasi-vertical integration

An intermediate or hybrid has some characteristics of the market and some of the
hierarchy.
- Market => I produce everything
- Firm => I outsource everything

We can divide them according to formalisation and degree of commitment.

Long-term contract: you want to invest in order to build a relation

Recent trends in vertical relationships

In the past, people are really concerned about cost cutting but now they are
concerned about offering better quality. Today they tend to outsource the majority of
their activities. Inter-firm networks. System integrator and architectural capabilities.

28
Until now, we talked about make and buy but in the reality is different because is full
of intermediate form or hybrid. It is something between market and hierarchy. On
the left, we have the market and on the right we have the hierarchy.

What is going on today in vertical integration? Today there is a quite different

approach. In cars sector, today company outsource everything. Also Franchising
became very popular because you can control in some way the agent.

General conclusion: literature and companies in the past where thinking about
black and white while today they are using blurred firm. Do you consider the
franchisee part of the company? Partly yes because it can be a view to understand
how to consider agreements.

In fact, boundaries between firms and markets are becoming increasingly blurred.

29
30
24/02 - Global strategy and the multinational corporation
A firm has an upstream and downstream layer but we have to consider the
possibility to go abroad and have a process in terms of internalization.

The internalization means to have an expansion in terms of market, access to

resources and learning and also in terms of manufacture in order to reduce cost.
When we go abroad there are different decision, for example which country (where)
to go and start and clearly the answer is different depending on the objective we
have. How to go? There are different reason and that’s why.

International Drivers

31
There are difference through country in terms of consumer, regulation etc. but in
terms of performance can be fundamental.

There are two theory: comparative advantage and porter’s theory.

If you want to go abroad you have two ways: international trade or enter into
another country. If you take this two dimension, you can see industry which are not
international, very local and typically industry in which you sell to people. There are
some industry which are so local.
- Sheltered industries: with low foreign direct investment and low international
trade; this are for example the taxi services, laundries, hairdressing etc. The

32
 remaining sheltered industries tend to be fragmented service industries (dry
cleaning, hairdressing, auto repair), some small-scale production industries.

- Trading Industries: high international trade and low foreign direct investment so
industries where you can trade internationally but not for a direct investment; for
example Fincantieri, they produce only to that plant because there is a huge
process behind and clearly you need to do in one proper place and then you re-
place it somewhere else. Exporting from a single location is the most efficient
means to exploit overseas markets for products that are transportable, subject to
substantial scale economies, and are not nationally differentiated.
- Multi-domestic Industries: with high foreign investment and low international
trade; for example Hotel, need to have an hotel otherwise you cannot sell in other
country. Still today is very multi domestic and each country is on business. Either
because trade is not feasible (e.g., service industries such as banking, consulting)
or because products are nationally differentiated (e.g., book publishing).
- Global Industries: both high foreign direct investment and international trade, are
clearly global and everybody is competing with everybody and the competition
become stream. These include most major manufacturing and extractive
industries that are populated by multinational corporations.

Porter said that internationalization basically destroy the attractively of an

industry and the main aspect of the internalization is the entering of new company
into an industry. The winner are the consumers.

33
The framework for analyzing competitive advantage

Two idea: competitive advantage and diamond of porter.

If you’re in a country with a lot of resource, you clearly have a comparative

advantage because the abundant of resources.

Diamond: idea that is not about naturally resource, how much the fact condition
and different industry compete. Porter develop this idea for which industrial industry
are cluster of an industry.

The theory of comparative advantage

Having a low base cost of labour, you can be number 1 in assembling something.
But the theory tells something about international specialization of production:
every country has a comparative advantage on that product in which there is

34
an intensive use or where resources are abundant. There can be very
sophisticated product that can come from USA, Italy etc. the Made in Italy is to
protect the Italian production from the exploitation of emerging economies. Today,
for example, china can be consider as more expensive than other and can export
production somewhere else.

The number in itself doesn’t tell us much but it allows us to make comparisons
between countries. For example, Switzerland is concerned with high-quality
watches and chocolate; USA for aerospace having nasa etc.

Porter, with the diamond seen, try to explain this with a different view, why company
has competitive advantage and not why country have. There are four factor which
are important and they support the development of resources and capabilities; the
idea is a dynamic view and not static, which are the four component:

- Factor condition: In Italy for example, a major point and force is the made in
Italy, also with artisans.

- Demand condition: Italian customers are highly sophisticated, so considering

the factor, there can be demand condition. Culture is a fundamental aspect and
no one have to lose it.

- Relating and supporting industry: if you want to do something in Italy, a lot of

designer are working in Italy because there is a culture of design.

- Strategy, structure and rivalry: rivalry try to see and copy the others. Even
German company are buying Lamborghini etc they keep there because there is a
culture and the “motor valley” is based on culture so no one want to change it.

35
Porter model is going beyond low production, is about knowledge, interconnection.
It’s difficult to replicate our industry and that’s way French maintain it.

If you want to produce and compete in a sophisticated way, it’s not only about
labour, design etc. looking at the Hermes’ bags there is a part of storytelling and
you have to maintain otherwise sales and prices collapse.

Basically there are three different types of reason to where locate production.

- National resource condition: what are the main resources that the product
requires? (cheap labour, raw material, high specialized labour etc) where are
these resources available at a relatively low cost?

- Firm-specific advantage: to what extent company’s competitive advantage

based upon specific resources and capabilities? And can those R&D be
transferred abroad?. Based that when the company has a firm specific, they can
decide where to produce.

- Tradability issues: can the final product be transported at a relatively economic

cost? If the product can’t be transported, for its own characteristics or because it
is expensive, clearly production close to the final market is the preferred option.
For example, big barrier are an issues as the Parmesan cheese. Sometimes there
are very high tariffs to have that product; today we have a big debate because US
want to protect national economy and they cannot anymore buy technology from
Europe etc. There a fight between US and China for production.

Global sourcing refers to purchasing services and components from the most
appropriate suppliers around the world, regardless of their location.

Advantages of global sourcing: cost advantages: e.g. labour costs, transportation

and communications costs, taxation and investment incentives; unique local
capabilities: e.g. centres of excellence in R&D clusters globally; national market
characteristics and national reputation for a particular product.

36
Off-shoring: product abroad when it costs less

Re-offshoring: relocate the production respect to where we are.

When you go the final phase of production, they move to another country and they
are labour intensive fire production.

Hourly Labor Cost Manufacturing

Another example of internalization and how

the company decided to allocate production:
clearly the design of the iPhone and the
development of the operative system is based
in the US because it requires a high intensity
of knowledge and skills (silicon-valley).

The US is the place where those skills are the best developed. The assembly is
made in china because of is low intensity of skilled labour. It’s something high tech
and only some phases are located in US.

Another example is the production of aircraft: it is located globally between Asia,

America and Europe.

Where to locate an activity?

1. The optimal location of activity X considered independently:

- We have to take into account obv costs and the availability of resources.
- Then we have to consider incentives or penalties imposed by governments:
multinational companies are not completely free to choose locations because
they are influenced by the government’s policies, there are a lot of imposition.

37
- Finally, company has to consider what type of internal resources and capabilities
possess in a particular location. It’s too difficult to change product, some product
are produced in some places and there’s no reason to produce all in a single
place.

2. The importance of links between activity X and other activities of the firm:
- When you’re differentiated you have extra cost because also your labour costs
more.
- Coordination: you cannot separate too much R&D, design and the operational
phone, you can have resemble in another part but not the three mentioned
before.

What are the different modalities for entry into a foreign market?

38
This table of the different modalities for entry into a foreign market shows
something that we have already said: we can use trade or direct investment. They
both have different forms based on the level of resource commitment.

- First, we talk about export and import, so we talk about commercial

transactions which are divided into exporting and licensing. Exporting can be a
spot sale or a long-term contract or you can set an agreement with a foreign
distributor that will sell to the final market. You can also have an agent in specific
geographic area. Licensing is based on license on intellectual property (ex.
patents), this is just a form of contract; they give the right to produce the
sunglasses around the world (in the case of Luxottica). Another form of contract
which involves more commitment is franchising: is a long term contract and it
implies not just sales but also the transfer of knowledge and skills. The
franchising means a lot of regulations, such as McDonalds.

Exporting:

Licensing / Franchising:

- Direct investment revels higher levels of resource commitment. It is divided into

joint venture and wholly-owned subsidiary. A joint venture can concern only
specific activities (ex. distribution as Danone in china which made a joint venture
because China forced them in order to give them capabilities) or can be fully
integrated involving all activities of the value chain. The most important
investment is when you control completely the production and distribution of the
wholly integrated subsidiary. Then obviously there is the internalization in terms of
total vertical integration: I open a subsidiary that I owned and also this can be
fully integrated or can concern only some activities.

39
In some cases, there is also a quite temporal phases of these framework because
you can start from sale spots and then expand your activity.

Joint Venture and Alliances:

Foreign Direct Investment:

What is globalization?

The world is becoming more flat. It implies increasing interdependence and

homogeneity among countries and we have seen that during pandemics and war.

40
Over the years, consumers have become more similar to each other. There are
some industry which are more global and other industry which are domestic.

Global strategy means treating the whole globe as a unique market. This strategy
recognizes linkages and differences in resources in terms of availability and costs in
different countries and it is based on exploiting these differences. You can have a
global strategy even without a global integrated business. For example, coca cola is
a global strategy and you can have the same product in the world. It’s difficult to
have a global strategy with firm as McDonalds.

Glocal: global approach local

Forces for globalization

- Cost benefits of scale and replication

- Serving global customers
- Exploiting arbitrage: being powerful in competitive advantage
- Learning in multiple national environments: Chinese want to buy company in Italy
and learn about.
- Competing strategically - cross subsidisation: this is a kind of grey area and you
need to cover to make a margin. This is done by multinational.

What are the benefits of national differentiation?

The main benefits are communication costs and transportation costs that increase
with the distance.

41
The second point is based on differences in customer needs, preferences,
conventions, and habits that translated into differences in political orientations of
government. Cultural tastes also is important; also movies which are very local.

The third one is market and infrastructure differences. Different countries have
different levels of development which can be a limit to reaching global customers.
To do some business you have to do market and infrastructure. How can you trade
if infrastructure are quite important.

The CAGE framework is based on 4 elements:

- Cultural distance: different languages, religions, social norms etc. Cultural

difference is specific to the industry with high linguistic content like TV, in fact,
when we see Netflix we lose something in the language.

- Administrative and political distance: absence of shared political or monetary

association (EU), political hostility and war. The industry most affected are those
more strategic for a country as energy or defence. If you interrupt energy, can be
a problem (es. Energy from Russia).

- Geographical distance: it impacts communication and transportation costs. It is

true that we have Skype but there are problems like getting lag etc. It affects the
industry with perishable products or fragile products or industries where
communication is crucial. It’s very easy to do business with country which are
close to us. There is a mutual respect in businesses.
- Economic differences: it is based on different incomes, information knowledge
and resources. it impacts the luxury industry because they export only to
countries where people can afford them. It’s difficult to make the same business
of existing firms.

42
Power distance: there are country that like hierarchy as China and Hong Kong.

Individualism: emphasis of individuals: Italy like individualism.

Masculinity / : in Italy we are very much for achievement.

Uncertainty /avoid: ?? (Slide mancanti)

Development of multinational corporation

At the beginning of the 20th century the configuration, there was no internet,
differences were higher, and the cost of communication and transportation are
higher so the company was forced to give complete independence to its subsidiary
because it was very difficult to control.
- The European model means having national subsidiaries, self-sufficient &
autonomous. Also the control in through appointing subsidiaries senior
management.

43
- Then in the second part of the 20th, the American multinational corporation
emerged as a prototype; the headquarters had a dominant role in strategy and
innovation.

- The Japanese type of multinational is even more centralized: the global

strategy is pursued by corporate headquarter, and the subsidiary is going to
implement distribution and sales.

These are three different model and the future will be the transnational corporation
with a corporate that is able to built resource and people that work and build
something together in other to make the company more powerful.

You need to have only one culture and you have to change local different type, with
a global company, you need a global mindset.

Ghemawat’s AAA

It’s a sort of trade off, if I have one, I can’t have the

other. The difficulty for a global company is to be very
good in something but not in the other activities.

Adaptation: Advertising to-

sales ratio relative to rivals

Aggregation: R&D-to-sales
ratio relative to rivals

Arbitrage: Labor cost to sales

ratio relative to rivals

44
45
3/03 - Diversification Strategy
Important topic in corporate strategy. Within any industry, there are segments. With
segment company can grow in similar and adjacent segment which means growth
within the business. While differentiation means producing different product respect
competitors, producing a totally different object which is totally unique respect to
the others and everybody not ask for a discount. Uniqueness means something
different from competitor. Differentiation is being distinctive to escape market price.

Diversification means to exploit synergies and economy of scope. The reason for
diversification can be mite or good reasons.

Relatedness means synergies and similar aspects and in this way you can share
resources.

Some example: barilla was a past producers and they wanted to grow, making
something even better, becoming a global leader and start making product of
Mulino Bianco; they think to remain in Italy and find something that is closer to their
business with a potential to get a competitive advantage. Luxottica listed shares for
the first time in NY because it was a big market.

Philip Morris decided to buy Kraft (food industry) but why? Soon or later that are
going to block the production of cigarettes because in terms of regulation there can
be a lot of problem. It’a a declining industry and try to make the business alive. No
manager want to be in a company that is declining. But, apart it, why food? For
branding and marketing, they have to market a product that you can’t advertise.
They cannot make adv on tobacco so they have to you use other way to make it.

Apple also started producing pc, iPhone, iTunes, music etc thanks to the software.
There’s an important aspect in conversion cost because it takes day etc for
adaptability and conversion in terms of cost. All product around us are Apple and
we’ll never go out. Another element is design, the brand is different.

Coca Cola and Pepsi cola: they always diversify in bottling, going downstream and
selling it on the market. They can buy food retail. There are different problem
according to the idea of develop operational routine of the business. They sell in
fact because they didn’t have the capabilities.

Finally, amazon started selling books with a marketplace in USA and then became
the biggest marketplace, largest store in the world. You can find everything at good
prices and is difficult to avoid. They also have tv, grocery store, cloud, amazon fresh
etc. maybe the reason is the producing of cash flow, they need other business
where to invest.

46
Porter said that you should diversify if you enter in a competitive advantage industry
which is also attractive. If you want to create value, the return on capital should be
higher than the cost of capital which can be 5-6% and so clearly you should create
value. It payoff more going to a same business or to a totally different one? Going
international and start thinking about new product it’s not always easy to build this
two condition.

Looking at diversification over time, we can see from the graph that especially in
UK, single business companies where the dominant companies as diversifying
company and then they are not so much attractive so they changed.

47
The dominant business are business where one business is more important than all
the others in terms of revenues. The dominant tent to increase and then decrease.
The related business are company that compete in more than one business which
should be closer. Each industry has a code according to where firm compete: two
digit or four digit. If you compete in several code which are close each other, you
have a related diversification. Typically people try to understand if related is better
than unrelated.

The figure show the diversification is growing over time. This means that all
diversification operation create value and there are period in which company tent to
refocus and other period in which people do not.

Evolution:

First phase is growth in order to start new business to company of other business,
in fact we can see conglomerates. In this period, they tough that the manager can
manage each type of business. To become a good manager I have to become
intimate with the business and the idea is to avoid destroy. It’s very difficult to make
it profitable, in fact they need to think about synergies or economies of scope.

Economies of scope means that the cost for producing pasta and bakery together is
smaller than the cost to produce pasta + cost of producing bakery + cost of
producing sauce etc. in three different companies. If you have three different
product in the same corporation, the cost will be smaller and it because you can
share competences and resources. Otherwise, you can transfer capabilities from
competences or skills and you create value. Clearly, with this view the idea is that to
manage something like this, you need a headquarters where you have pasta, sauce

48
etc. you need to have the M-form, multidivisional form or business unit. The big idea
is that the corporate can create value only if there are synergies, creation of value.

In 80’ the idea became totally different and became important to understand
diversification but in 90’ are unfortunately the year of shareholder value. Basically,
with the idea of shareholder value, most of the company became thinner and more
focus. Especially, at the end of the ’80 and ’90, the private equity bought
conglomerate making huge amount of money respect to independent companies
which have diseconomies. There are also diseconomies where putting together
different thing it destroy value. This leverage buyouts means that they don’t care
about economies, they sell on market and increase profit.

The core competence idea is the one for which there can be a tree with a lot of
product but which product can be stay together? Are product that can have same
rules and core competences. In other words you cannot do something that it’s
unrelated but you need core competences. The dominant logic is that if you want to
be diversify you need to have under valuable companies investing to become the
leader and have a diversity. This logic was applied to news paper in US.

The final part is the parentis advantage means what headquarters can do for the
subsidiaries, can it create value for pasta, sauce and bakery in the same time?
Sometimes different product need different logic. Even when it seems to be simple
and close, sometimes there are subsidiaries. If you don’t knew all the details of a
business you make mistakes.

Three reason to diversify:

49
- Growth: some companies diversified only to find new profit when maybe the
industry in which it operates is in decline. In the absence of diversification, firms
are prisoners of their industry. For firms in stagnant or declining industries, this is
a daunting prospect. The urge to achieve corporate growth that outstrips that of a
firm’s primary industry is especially appealing to senior executives (ex. Tobacco
industry: from the traditional cigarette to electronic cigarette). Diversification is
typically very successful in generating revenue growth - especially when it is
achieved through acquisition. But what about profitability? If diversification efforts
become a cash drain for companies in declining industries - as they did for
Eastman Kodak and Blockbuster - then diversification may well hasten rather
than stave off bankruptcy.
- Risk spreading: but is not for the benefit of shareholders. The notion that risk
spreading is a legitimate goal for the value-creating firm has become a casualty
of modern financial theory. If the cash flows of two different businesses are
imperfectly correlated then bringing them together under common ownership
certainly reduces the variance of the combined cash flow. But, does a more
stable cash flow benefit shareholders? Shareholders can diversify risk by
holding diversified portfolios. Hence, what advantage can there be in
companies diversifying for them? The only possible advantage could be if firms
can diversify at a lower cost than individual investors. In fact, the reverse is true:
the transaction costs to shareholders of diversifying their portfolios are far less
than the transaction costs to firms diversifying through acquisition. Not only do
acquiring firms incur the heavy costs of using investment banks and legal
advisers, they must also pay an acquisition premium to gain control of an
independent company.

Thinking about green, yellow and blue lined of the graph, it’s better to have a
diversification of the risk with cyclical and un-cyclical firms. At the same time, which
are the core competences and synergies? They are to different and performance
can be not so good becoming negative and even in bankrupt. The best way to
diversify the risk is to buy ETF of Index, buying the market you clearly you can
diversify the risk. Buying a company, it looks to be diversificate but there can be
political costs and agency costs that destroy value. The best view is not about
buying company because you need to manage it. So it’s not a good idea to
diversify.

These 2 are not good reasons to diversify, are just a strategy of the managers.

- Value creation: the only good reason to diversify: you need to be sure that your
profitability will increase.

50
Porter said that you need to make three test:

1. How attractive is an industry: 5 forces of Porter to analyze the market

attractiveness. A critical realization in Porter’s “essential tests” is that industry
attractiveness on its own is insufficient to justify diversification. Diversification
may allow firm access to more attractive investment opportunities that are
available in its own industry, yet it faces the challenge of entering a new industry.
After your entrance, the industry can become attractive so the attraction test
means, before or after, the industry should become attractive.

2. The cost of entry test: eg. Sunk cost, estimation of all future profit and
calculate a hypothetical net future profit and compare it with the cost of entering
a market. The cost of entry test, recognizes that, for outsiders, the cost of entry
may counteract the attractiveness of the industry. The cost of entry must not
capitalise all future profits.

3. The better off test: Porter’s third criterion for value creation from diversification
- the better-off test - addresses the issue of competitive advantage. If two
different businesses are brought together under the ownership and control of a
single enterprise, is there any reason why they should become any more
profitable? The issue here is one of synergy: what is the potential for
interactions between the two businesses that can enhance the competitive
advantage of either business? In most diversification decisions, it is the better-
off test that takes centre stage. In the first place, industry attractiveness is rarely
a source of value from diversification - in most cases, cost-of-entry cancels
out the advantages of industry attractiveness. Second, the better-off test
can often counteract the disadvantages is an unattractive industry. If a
diversifying company can establish a strong competitive advantage in an
industry, the low profitability of the industry as a whole may be immaterial.

If you combine the two business together can you combine value? You have to be
able to share resources or combine synergies. It means to share activities,
resources and capabilities.

51
If the primary source of value creation from diversification is exploiting linkages
between different businesses, what are these linkages and how are they exploited?
The key linkages are those that permit the sharing of resources and capabilities
across different businesses.

Economies of scope

The most general argument concerning the benefits of diversification focuses on

the presence of economies of scope in common resources: “Economies of scope
exist when using a resource across multiple activities uses less of that resource than
when the activities are carried out independently.” Economies of scope exist for
similar reasons as economies of scale. The key difference is that economies of scale
relate to cost economies from increasing output of a single product; economies of
scope are cost economies from increasing the output of multiple products. The
nature of economies of scope varies between different types of resources and
capabilities. There should be a fit trough the combination of the brands: you need to
change core competencies etc. there must be a link between the diversification
strategy pursued by the company.

- Tangible resources: such as distribution networks, information technology

systems, sales forces, and research laboratories - confer economies of scope by
eliminating duplication - a single facility can be shared among several
businesses. The greater the fixed costs of these items, the greater the associated
economies of scope are likely to be.
- Intangible resources: such as brands, corporate reputation, and technology -
offer economies of scope from the ability to extend them to additional businesses
at a low marginal cost. Exploiting a strong brand across additional products is
called brand extension.

52
Economies from internalising transactions

Economies of scope not a sufficient basis for diversification - must be supported by

transaction costs in market for resources. Diversified firm can avoid external
transactions by operating internal capital and labor market. Diversified firm has
better information on resources characteristics than external markets.

Imagine to have a brand with a value and you can use it for bags clothes,
sunglasses etc. a huge amount of different business. Should I make it or delegate
the production and distribution of the business? The idea is about transaction costs.

I can even delegate the business as Gucci that can diversify in sunglasses or giving
the production to someone else. Make or buy? Make means vertical integration, buy
means outsourcing. The economies of scale are totally different so, at the end, it’s
better to delegate to Luxottica or someone else. For perfumes it can be different
and the key element is packaging. In other words, sometimes you diversify but not
necessarily control everything and you can have a licences and focus on a core
business. You can keep the resources and sell it on the market.

53
Three approaches to diversification:

1. + diversification, better it is

2. U-shape

3. At a certain point diversification do not increase more the value

The study do not present a clear pattern according to diversification that create
value because you seem to create value at the beginning and then you destroy
value. It can be a u-shape but there is also another big issue, looking at Amazon,
they diversify but are they diversify for profitable or they are profitable so diversify?

It’s better to be related or unrelated? With synergies it’s always better to be related
but what is related? LVMH have a lot of product and what is linking it ? Luxury with
high spending customers (status) with a luxury experience so, they are related
despite the production is different. They share the idea of uniqueness.

Diversification:

- Operational relatedness: goods, plants, brands etc.

- Strategic relatedness: dominant logic into different businesses.

Ex. Tata Group from India, is a group that operates in emerging economies as India
and have companies in USA. The Indian market is a disaster so you tent to vertical
integrated and control everything. Institution in India doesn’t work so, if you
internalise the market, you can internalises the business. The market cannot trust
profitable market so if you are in an internal market you can allocate resources.
Another aspect are manager that can move according to different companies. You
can share resources and capabilities into each sector in which there are similar
companies. You can change and adapt. Business group are so common in India Us
etc because they can create internal value respect to external value. The market
doesn’t work, so brand as Starbucks can be internalise to work into groups as Tata.

54
The Sources of Strategic Relatedness Between Businesses

55
56
10/03 - Social cultural foundation: Norms, Values, Beliefs
Corporate governance is the context of managing stakeholders.

The corporations from a governance perspective is a bundle of relationship with

different stakeholders. The stakeholders can be quite closely to the firms,
managers, consumers and they can also be located remotely. The government in
the country where the county has its host, headquarters etc. there are all kind of
relationship between corporation and environment.

The relationship can be formal or informal. Governance basically study how

relationship looks like.

Large investments dominate corporations. Nowadays, actually we still have the idea
that the US market is characterised by minority investors.

How people make decisions? People rationally behave as decision-makers having

sentiments, emotions etc. different modalities to make decisions and this influence
the corporation.

Looking at the nature of the firm, what are the changes and positions of the firm in
society? The main objectives of the firm… the current time, the idea of profit first is
no longer the most important thing, maybe also the environment is not anymore and
there can be other objectives. That perspective takes profit in a different way, profits
are expectable, they reward in a different way. You can study how corporations
operate in a different way, there are four ways of handling this:
- We do good with something that is like greenwashing
- We do good taking profits and putting it in a foundation => charity
- Sustainability and profitability are two side of the same thins, win win situation so
you do well in order to be perceived well and the opposite. Every sustainable
activity is a win win situation and there is a group of corporation increasingly
interest in the corporations.
- Social contribution above all for some companies.
IKEA purpose driven corporation which want to lead to consumers a type of living
with activities that are benchmark to their goals. They have to be profitable
otherwise the corporation cannot survive. Maximise the profit cannot be the centre
of IKEA business. The implications for the power of the investors; investors also in
IKEA they care about sustainability but of course also to returns. In the organisation
and governance of IKEA there is an arrange for which the investors does not have
rights to corporations, simple to prevent that financial return can be dominated.

57
You can arrange corporate governance in different way; so as to benefit different
stakeholders outside the corporation.

We also have cooperatives where employees have vote rights and corporate
governance is interesting also in this sustainable sectors.

Implementing corporate strategy

We discuss why firms are successful and the relatives ingredients. What determines
profit? The drivers of profit are:
- Industry where you’re in: environment. The industry attractiveness is a
fundamental aspect
- Position in the business, the competitive advantage and where are you in terms
of capabilities respect to others.

How can we define or leverage upon our uniqueness? Decision that come next are
scope decisions. Scope decisions are that type of decisions that we bundling in the
corporations and then there are other with are no bundle. We can bundle within our
value chain and we discuss the case of America apparel, corporation based active
in production and specialised in high-quality garments. Also Zara bundle, they are
vertical integrated different types of the value chain. Then there are two ways to
bundle in horizontal way, as Virgin that bundle all the activities of the group (why it’s
beneficial? Which synergies there are?); we can bundle about product scope or
geographic scope. All this decision led to the scope pf the corporation.

58
What’s make attractive bundling decision?

Economic: marginal benefits of bundling should be higher than marginal costs of

administration (collaboration, coordination costs).

Parenting: net benefits should not only be positive, it should be greater than that
which could be achieved by any other company. You define that you’re the best
corporation to bundle this activities.

The Role of Corporate Management in implementing corporate strategy

- Managing the Corporate Portfolio
- Managing Linkages across Businesses
- Managing Individual Businesses
- Managing Change in the Multi-business corporations
- Managing stakeholders of Multi-business corporations (Corporate Governance)
Three corporate management perspectives (parenting advantage)
- Portfolio management
- Synergy manager: focus on creating linkages in
the corporation, fostering collaboration into
different units.
- Parental developer
The portfolio planner have to allocate resources
according to the strategy.

The Use of Portfolio Planning Models in Corporate Strategy

- Allocating resources: indicating both the investment requirements of different

businesses and their likely returns.
- Formulating business-unit strategy: offering generic strategy recommendations
(e.g.: “build”, “hold”, or “harvest”).
- Setting performance targets: indicating likely performance outcomes in terms of
cash flow and ROI.
- Portfolio balance: guiding business portfolio changes in order to achieve
corporate goals such as a balanced cash flow by combining mature and growing
businesses.

59
The BCG Growth-Share Matrix

The general electrics McKinsey matrix

Not only market growth, size and profitability but also complications because with
this indicators there are additional decisions to be taken in order to build a matrix
which is composed by activities and its divided into the decision making that you
plan with the portfolio making.

GE is a large player in this and organized it in a way in order to frame and

restructured the whole corporations. There is a huge conglomerate and they have to
find a way to capture all the business unit.

60
It’s good because they provide an overall picture and we can use it for different
aspects but, of course, has disadvantages because is too simple and there have to
be different capabilities to manage it.

How can I define industry?

Late 1960’s: GE encounters problems of direction, coordination, control, and

profitability.

Corporate planning innovations include:

- Portfolio Planning Models: matrix frameworks for evaluating business unit
performance, formulating business strategies, and allocating resources;
- Strategic Business Units: GE organizes its strategic planning system around
SBUs. A SBU is a business that comprises a strategically - distinct group of
closely - related products;
- PIMS: a database which quantifies the impact of strategy on performance. Used
to appraise SBU performance and guide business strategy formulation.

61
In the case of a diversified leisure company

Managing linkages

- Shared corporate services: Centralized provision of admin. services (strategic

planning, control, audit risk, stakeholder governance) and business services (IT,
HR, purchasing, research, facilities, SSCs) management exploits cost economies
and develops capabilities;

- Transferring skills between businesses: E.g., LVMH transfers brand

management and distribution capabilities; P&G transfers technologies and
product development skills across product sectors and across countries;

- Accessing/Sharing resources and activities: E.g., GE shares its brand across

its businesses; P&G marketing and distribution; Samsung Electronics’ globally
dispersed design centers serve all its.

BUT, Exploiting synergies is not costless: businesses Transferring skills and sharing
resources and activities tends to involve the corporate HQ in managing relationships
between the businesses and complicates the appraisal of business performance

There are a couple of services that can be shared as businesses units: audit,
financial controller, etc. It’s a matter of economic of scope.

Implications for HQ:

- Relatedness among businesses: the more closely related are the businesses, the
greater are potential gains from managing linkages and greater is the need for an
active role of HQ: P&G or HP vs Berkshire Hathaway.

62
- Sharing resources and capabilities: when there are shared resources or
capabilities the HQ is closely involved in developing and deploying them.
- Knowledge management: it plays a key role in developing and sharing
organizational capabilities and innovations among national subsidiaries.
- Benefits vs costs: exploiting linkages implies HQ strat. coordination and admin
costs which should not outweigh the benefits generated.

Managing individual businesses (parental developer)

Multi-business companies can add value by:

- Making acquisitions, divestments and allocating funds among different
businesses (portfolio management);
- Coordinating and orchestrating the synergies between businesses (managing
linkages);
- Improving management of those individual businesses by:
- Appointing or removing top managers;
- Approving or rejecting budget, plans or capital expenditures;
- Imposing performance targets;
- Making available relationships with key stakeholders;
- Providing advice and guidance;
- Managing corporate culture.
Direct corporate involvement in business-level decisions has a serious downside: it
undermines the autonomy and motivation of the general managers of those
businesses.

If you interfere managing individual businesses, you always interfere with managers
autonomy and losing autonomy means de-motivation. The balance of autonomy
and authority in the business unit at headquarter level.

The extreme variety of manager in business. Restructuring business unit take

place inside corporations and means something that is done by investors in
financial markets.

The normal routine is the routine of collaboration because managing internal

businesses you have to develop and design routines of comunication, coordination
and information within the organization.

63
The McKinsey Restructuring Pentagon

The strategic planning and control means implementing corporate strategies,

routines heuristic and procedures. The routine have particular characteristics and
there are different example of how they are organized.

Financial decisions comes with budget allocations, etc.

Strategic planning and financial control

Multi-business companies have a dual planning process:

- Strategic planning: medium and long term
- Financial planning: short-term

64
The two are closely linked. Strategic plan is a basis for:
- Operating budget
- Capital expenditure budget
- Annual performance plans
- Strategic milestones
Balance between strategic and financial control:
- Varies by firm and sector
- There’s a trade-off between the two - more of one means less of the other

65
HQ is more centralised, HQ basically looks only at performance and not activities.
The controlling in strategic planning is on activities whereas financial control is more
shorter, related to shorter task. Is more intensive ins quarterly monitory that is
something fundamental in financial markets.

In terms of advantages, strategic planning and finical control.

.. decentralized corporations in order to allow business development.

Develop capabilities in order to handle the change. Dynamics capabilities by

experimental learnings and this prepare computation to change.

Fundamental uncertainty is something I don’t know how future is going. You can
see that managing change means allowing to include change. HQ task that is not in
business unit but HQ.

Critiques of strategic planning:

- Strategic planning systems don't make strategy - strategic planning a ritualistic
process, but most strategic decisions are made outside the system
- Weak execution - procedures for converting plans into actions are weak (no
integration). Proposals for improving execution include:
- Strategic milestones: specific actions or intermediate goals
- Balanced scorecard: from high-level strategic plans to functional and
operational targets
- Strategy maps: plot actions between actions and goals
- Replacing strategic planning units by “offices of strategy management”:
managing planning and execution

66
Drivers of Corporate Change

- 1980s, The dominant concern was growth (conglomorates)

- Mid-1980s -2000, restructuring diversified corporate empires to create
shareholder value.
- From 2008, responsiveness to external change (digital technology), dynamic
capabilities
- Now: Disillusion with Shareholder Primacy; Sustainanibility, Climate change;
Societal Challenges; Diversity & Inclusion, …

67
Some examples leaders of change
- Jack Welch - GE
- Delayering hierarchy levels (from nine to five)
- Changing the strategic planning system (from documents to people)
- Redefining the role of HQ (from inquisitor to supporter)
- Work out (offsite meetings)
- Gerstner and Palmisano - IBM
- Technology team - technologies
- Strategy team - BU
- Integration and values team - company wide initiatives
- “Deep dives” - specific opportunities
- Lee family - Samsung
- Top down commitments of large resources to technology
- Samsung

Seeing the beginning of the lesson:

68
Managing shareholders/stakeholders: The Challenges of Corporate Governance

What are the residual rights of stakeholders/shareholders?

- To transfer shares, access company information, elect directors, share in the

profits of the firm, vote on key strategic decisions and top management
compensation
- Despite potential for divisions to develop distinctive strategies and structures -
corporate systems may impose uniformity.

What are the responsibilities of company boards?

- To act in the best long-term interests of the company and its shareholders/
stakeholders
- To oversee and ratify strategy, budgets, management performance, etc.
What’s gone wrong?

- Failure by boards to prevent managers pursuing their own interests at the

expense of the corporation (e.g. excessive compensation).
- Failure by boards to take account of all stakeholder interests (e.g. workers/
societal/global interests

69
70
17/03 - External Growth Strategy
There are strategy to dis-bundling and make a successful strategy. The approach is
to reality, if you loose credibility to re-bundle resource, you loose.

Why is difficult to people to collaborate? We born as individual with different interest

People simply move and living around what’s available. Some point in history,
people started to make settlement. What’s the different between moving around and
settling? It’s private property. Property is something that you want to protect.

Idea about private interest or property rights, create man that are much more
sociable and build on collaborations.

Strategies for growth: bundle resources from outside.

71
M&A means that you have complete control of the company ant not the only share
control. If you don’t have that control, the specific assets will be stolen. Entering in a
collaboration, specific assets will move in a competitor with something that happen.

You need to realise synergies. The drivers are always the same because there are
one three way to compete for competitive advantage.

Alphabet: holding of google and others activities. Usually large corporation use a
mixture of internal and external strategies. Alphabet was originally google and then
changed the structure. Android, google and google maps were internally developed
and not acquired internally. There are also others in health and energy, they build
investment and funding capabilities. YouTube was acquired by Google, not
developed by. There’s a huge portfolio of resources that are bundled.

Motorola was a relatively large acquisition of Google, they developed technologies

because they buy into different market and technologies to get access to market
and bundle and leverage resources in order to create comparative advantage.

Merger and Acquisition is basically the combination of two separate organisation.

Every activity is take in place with the exchange of the share and the ownership of
corporations. How does an acquisition started? How you acquire a corporation?

Mergers and acquisitions are concerned with the combination (bundling) of two (or
more) organisations. An acquisition is achieved by purchasing a majority of shares
in a target company.

- “Friendly”acquisitions are where the target’s management recommend accepting

the acquirer’s deal (Google/Youtube).

72
- “Hostile” acquisitions are where the target’s management refuse the acquirer’s
offer (AOL/Time Warner; KKR/Royal Nabisco; Unilever/Kraft Heinz, Musk-Twitter)

A merger is the combination of two previously separate organisations in order to

form a new company.

Controlling vote is something basically define that you determine what is happening
in this country. What to emphasise is that the controlling vote is based by the
majority of the shares (+50%). How large you think the controlling vote is around?
More or less 20% of shares to have the controlling vote.

If you have a controlling vote and minority investors they have to may cost and have
similar controlling vote. When you have a small share in corporation you would not
take this activity. This is the collective actions problem (lot of people with
controlling vote).

Kraft wanted to buy Unilever and competition with P&G but this didn’t work
because Unilever didn’t want due to defences. What kind of defences the
management time have? Poison pill that is a large issue of new shares preferably to
friendly shareholders. Another defence line is to have A and B shares, different
types of shares in order to have voting rights and not voting rights. In order to have
control you need voting rights shares. You can defend yourself and in Unilever it
didn’t work.

With Elon Musk last year we had another not friendly situation. When you have
more than 5% of shares of the company it’s not anymore due to a financial purpose
but for a strategic purpose. Twitter management become a little bit hostile despite
initially it was a friendly acquisition. At the end he was forced to buy and now he has

73
twitter. How we classify it? Related or unrelated diversification? It’s a strategic or
not move? It’s unrelated diversification in terms of business but surely a strategic
move.

How important M&A are? The associated in ended value is associated and in the
graph we can see trillion US dollar. What’s going around M&A is really important.
Also in terms of years there are distortion due to historical relations and this are
related to situation outside corporations. Corporations had to buy different
companies that during covid were going drastically.

Huge amount of money that deal with M&A in a global scope. The top -10 mergers
in terms of value are huge in terms of money. Large companies lose a lot of
investment funds for this kind of activities.

74
It’s fundamental to study how M&A is beneficial and also the rationales behind
M&As. They go in cycle and occurs in waves. Not only isolated corporate activity
but we have imitation effects not drive by corporation scopes.

Emerging market and increasingly and also participating in the market. Trends after
war world 2 were better but before M&A was not something important, it has to do
with globalisation and de-regulation of financial markets. It is connected with
conglomerates.

M&A activity has existed for over 100 years. It occurs in waves (high peaks and
deep troughs). Cycles are affected by the state of the global economy, new
regulations, finance availability, stock market performance, technological
disturbances and the supply of available target firms. Traditionally dominated by
the US and Western European companies, but China and India (e.g. TATA, but also
see HAIER) are now very active acquirers.

Seeing an emerging market, we can see China and the Chinese market. We are
talking about multinational activity and the concept of liability of foreignness was
introduce and it means to entry in foreign markets. The corporation by definition had
a disadvantage because does not know the local market and comparing the
domestic corporation that have the local expertise of the market, this is called the
liability of foreignness. The only explanation in mainstream theory, you can
overcome the advantage of foreignness. If you have something that allows to
compete with local firms in your foreign firm. The existing theory about how
corporation move to other country is due to the emerging markets.

75
Transactions with Chinese Acquirer and Non-Chinese Target

In the Haier case we saw that the successful was due to because they go out for
technology and a lot of subsidiary to buy existing technology. The entered the niche
market for student fridge by using technology from General Electrics. This is
something new, we didn’t observe it until the M&A procedure become usual. We
can use also M&A to buy new technologies.

Technologies M&A are not only economic interesting but also politic interesting, as
in Netherlands are doing with micro-chips with USA.

There can be successes and failure of M&As; in case of success it’s due to they can
have a better position in the markets and a market power. On the other hand,
Disney and Pixar was unrelated (3D and entreatment) and this prove out a new way
that was successful. There are also others which are failures as Chrysler & Daimler.

76
The failures lead to fail or hypothetical new acquisition with other companies.

The failure rate is about 70%; why? Motives for mergers and acquisitions?

- Managerial motives: top management remuneration depends more on firm size

than profitability; psychological rewards - M&As project power, confer CEO
celebrity status; imitation: the fear of not participating (Bandwagon effect);

- Financial motives: stock market inefficiencies - acquire undervalued companies

(Berkshire Hathaway-Heinz): use overvalued equity to acquire (AOL-Time Warner)
-; quest for tax savings - cross-border acquisitions to relocate to lower tax regime
(Burger King-Tim Horton); financial re-engineering: debt-financed acquisitions
that reduce the acquired company’s cost of capital (KKR-RJR Nabisco;

Golden parachute is there as huge amount of money in the case manager is fired.
- Strategic motives: horizontal M&A - economies of scale and market power
(Sirius-XM); geographical extension M&A - to enter overseas market (ENEL-
Endesa); Vertical M&A - to acquire supplier or customer (Gencore-Xstrata);
Diversifying M&A - to enter a new area of business (Kering-Puma); Capabilities -
enhancing technological know-how or other capabilities. (Tesla - Maxwell).

What are the drivers of success? The target choice in M&A are two:

- Strategic fit: the possibility to generate scope and scale advantages. Does target
firm strengthen or complement the acquiring firm’s strategy? (N.B. It is easy to
over-estimate potential synergy as negative synergies are often neglected).

- Organisational fit: with a match between management practises, cultural

practices, in systems and this takes time in fact the strategy implementation is
something long time and is not incorporating the success and that’s why
corporation fail. The culture of Daimer and Chrysler were completely different and
they didn’t understand that was impossible to create an organisational fit. Is there
a match between the management practices, cultural practices and staff
characteristics of the target firm and the acquiring firm?

Also implementation is a fundamental aspect, what takes M&A difficult is that you
have to buy something in which you’re not the expert and more familiar person.
There’s need to be a premium, two driver that can explain why the premium is
usually higher than good for acquisitions. The first driver is about asymmetric
information, lack of knowledge by the buyer about the conditions of the object and
only the seller is completely aware of the true value of the object and then the buyer
is going to buy it too much. Only the target firm is completely aware of the
characteristic of the target corporations. This are outside experts and not inside.
The winner curse.

77
Negotiation in M&A; Managements need to agree on both the price and the terms
and conditions in M&A:
- Offer the target too little, and the bid will be unsuccessful.
- Pay too much and the acquisition is unlikely to make a profit net of the original
acquisition price (‘the winner’s curse’).
- Acquirers do not simply pay the current market value of the target, but also pay a
premium for control.

The latter aspect is that if it is objective and you want to control corporations, you
need to pay extra premium for control. There are arguments for which in M&A the
price is more generally too high and too low.

Other challenges: difficult to identify target, estimate the benefit for M&A, there are
problems for integration, difficult to built synergies you’re planning for and it’s
difficult to implement corporate strategies. It’s difficult to match post mergers
management to strategic goals of the firm. The management of the actual firms can
be not in line with the goals. There are a lot of challenges related to M&A that can
occur in a too high payment of the company that lead to a hypothetical failure
because you paid too much respect of how you had to pay it.

Are M&A successful?

- Evidence from Shareholder Returns:

- Small increase in the combined value of the 2 companies involved
- Gains flow (almost) entirely to shareholders of targets.

78
 - Returns to shareholders of acquiring companies break even on average
- Evidence from Accounting Profits
- Diverse findings: “…the results from these accounting-based studies are all
over the map”
- Key problem: separating the effects of the merger from the many other
factors that influence firms’ profitability
- Diversity of M&A
- Lack of consistent findings reflects the vast diversity in types of mergers and
characteristics of the firms involved
- Even when mergers categorised (e.g. horizontal, vertical, conglomerate) no
consistent performance differences

To conclude, 70% fail in expectation; financial market stuff suggest that the aim
fails with the owner.

Evidence from event studies does confirm substantial gains to the owners of target
firms, the evidence for significant gain to target and bidder together is thin.

Theoretical bases exist for synergistic gains from mergers for related related firms,
but little evidence connects the empirical achievement of these gains to merger
transactions. Ex post profitability of mergers is that the average acquiring firm at
best realises no net profit on its consolidated assets.

Business units that have been through changes in control on average suffer
substantial declines in profitability and losses in market share.

Target managers gain from M&As. Managers who make acquisitions that destroy
wealth for their shareholders are those in a position to pursue goals other than their
shareholders’ welfare.

M&As do not count as macroeconomic investment and do not contribute to

economic growth. Business units usually have a more difficult time after the merger.

Mangers that makes acquisition destroy profit for shareholders and they are
not punish and this because a lack of control by shareholders.

Merger and acquisition is a merger by another corporation but is also a

disinvestment by the firm that is bought and the net investment from a
macroeconomic point of view is zero. Economy grow with net investment so the
economy is no growing through M&A activities because scope and scale does not
emerge. For managers M&A are great due to more money, for corporations M&A
are break even, for countries M&A are destroying value because from a

79
macroeconomic point of view, they don’t have value and that money are better if
used for technology or other aspects. The suggestion is that M&A is a particular
activity peculiar and good for manager and corporation but, surely not for the entire
world because destroy value and not create value. In fact, there are other way to
create scope and scale and are alliance. The usually use equity or simply contract.
Even in strategic alliances, the failure rate is very high and apparently within
corporations, the crucial thing is how to coordinate and cooperate. We do have to
invest a lot of effort to facilitate and make effort. The crucial thing for success
corporations is to create a culture of trust, collaboration and coordination. No
hierarchy, incentives etc. thinking about people can work together.

A strategic alliance is where two or more organisations share resources and

activities to pursue a common strategy.

• Collective strategy is about how the whole network of alliances, of which an

organisation is a member, competes against rival networks of alliances.

• Collaborative advantage is about managing alliances better than competitors.

Examples as Samsung

80
General Motors’

Equity alliances:

The most common form of equity alliance is the

- joint venture, where two organisations remain independent but set up a new
organisation jointly owned by the parents. (An example is Ethihad Airways has
many equity alliances including Alitalia, Air Berlin, Air Serbia, Air Seychelles,
India’s Jet Airways)

- A consortium alliance involves several partners setting up a venture together.

(An example is Sematech research consortium set up by IBM, HP, Toshiba and
Samsung).

Non-equity alliance:

Non-equity alliances are often based on contracts. Such alliances are also common
in both the private and the public and not-for-profit sectors. Three common forms of
non-equity alliance:

• Franchising (Subway).

• Licensing (common in beer brewing).

• Long-term subcontracting (common in supplying parts for automobile

manufacture (tier 1. tier 2 suppliers etc).

81
There are strategic alliance motives:

Motives for alliances:

Scale alliances - lower costs, more bargaining power and sharing risks. (Molson
Coors – SAB Miller)

Access alliances - partners provide needed capabilities (e.g. distribution outlets or

licenses to brands, dealerships (BMW – Brilliance Auto).

Complementary alliances - bringing together complementary strengths to offset

the other partner’s weaknesses. (Starbucks- Barnes & Noble)

Collusive alliances - to increase market power. Might be kept secret to evade

competition regulations (Cartel, OPEC).

Two themes are vital to success in alliances:

- Co-evolution - the need for flexibility and change as the environment, competition
and strategies of the partners evolve (LEGO – SHELL)
- Trust - partners need to behave in a trustworthy fashion throughout the alliance.
(Kraft–Starbucks)

Motives: to exploit complementarities among the resources and capabilities of

different companies, e.g. airline alliances allow access to members’ route networks;
Bulgari and Marriott combine to operate luxury hotels.

Challenges:

• Need for relational capability: building trust, developing knowledge-sharing and

coordination mechanisms

• Managing the relationship: greatest benefits often involve greatest management

challenges - e.g. cross-border alliances

• Sharing of benefits: determined by

82
 a) strategic intent of the partners (which partner is clearer about what it
wants from the alliance?)

b) appropriability of the contribution (Which partner’s resources and

capabilities are easier to capture)

c) absorptive capacity (Which partner is the faster learner?

When contemplating an acquisition, carefully consider the alternatives.

Internal growth through innovation or scaling.

Strategic alliances (less risky, less expensive).

A successful acquisition requires clarity about how it will create more value and
improve one’s competitive position.

When to choose acquisitions, alliances or organic development

Key factors in choosing the method of strategy development:

- Urgency: organic development is slowest, alliances accelerate the process but

acquisitions are quickest.

- Uncertainty: an alliance means risks and costs are shared and thus a failure
means these costs are shared.
- Type of capabilities: acquisitions work best with ‘hard’ resources (e.g.
production units) rather than ‘soft’ resources (e.g. people). Culture clash is the big
issue.

- Modularity of capabilities: if the needed capabilities can be clearly separated

from the rest of the organisation an alliance may be best.

83
Why M&A:

- Strategic motives can be categorised in three ways:

• SCOPE – of the firm in terms of geography, products or markets (P&G – Gillette)
• Consolidation – increasing scale, efficiency and market power (Exxon – Mobil)
• Capabilities – enhancing technological know-how or other capabilities. (Tesla -
Maxwell Technologies).
- Financial motives:
• Financial efficiency - a company with a strong balance sheet (cash rich) may
acquire/merge with a company with a weak balance sheet (high debt) to benefit
from leverage

• Tax efficiency - reducing the combined tax burden.

• Asset stripping or unbundling - selling off bits of the acquired company to
maximise asset values.
- Managerial motives for M&A
M&A may serve managerial self-interest for one of two reasons:

• Personal ambition - financial incentives tied to short-term growth or share price

targets; boosting personal reputations; giving friends and colleagues greater
responsibility or better jobs (and thus helping to cement their loyalty).

• Bandwagon effects - managers may be branded as conservative if they don’t

follow an M&A trend; shareholder pressure to merge or acquire; the company may
itself become a takeover target.

84
85
24/03 - Organization structure and management system
From strategy to execution

Strategic management has been viewed as a two-stage top-down process: first

formulation and then implementation. In this view, “structure follows strategy”.

However, this view is wrong as strategy formulation and implementation are

interdependent. And so sometimes “strategy follows structure”.

Strategy formulation determines the intentional behaviour and should take into
account the conditions of implementation.

Strategy formulation is linked to implementation through systems of:

- Operational planning;
- Performance management;
- Resource allocation.
Engage your stakeholders, because of the urgency stakeholders needs were
surpassed and some will go to court and fight the decision.

This ends in the strategic plan, setting strategic priorities at the corporate
(corporate strategy) and business level (more market-related issues).

Large companies adopt a systematic strategic planning to establish capital

expenditures budgets for its different functions and teams; to link strategy to day-
to-day decision making.

Strategic planning systems play an important role in: building consensus;

communicating the strategy; allocating resources; establishing performance goals.

86
Seeing what is a Strategic Plan, we can analyse component of strategic plan:

Strategic plans at Shell, profits were in part created by the energy crisis,
environmental changes created windfall profits for Shell, coming from an external
environmental change. There were critiqued because a large part of those profits
was given to the shareholders, after announcing to be buying back shares from
them, causing an immediate increased of the share price and benefitting
shareholders. Large US corporations do not invest that much in sustainability as
there isn’t as much pressure and they have much higher profits, they were afraid
that the competitive position of Shell in the market was in danger.

Confindustria is the most important stakeholder at LUISS, the university’s president

is the ex-president of Confindustria. There is a support staff at other locations.

87
Emergence of the Modern Corporation

With specialization, we allow people to have higher productivity and

consequently abnormal profits, building expertise and enhancing capabilities.

Organisational design

Strategy implementation includes also the entire design of the organization.

- Strategic management is a quest for unique solutions to the matching of

internal resources and capabilities to external business opportunities.

- Organization design is about selecting structures, systems, and management

styles that can best implement the strategy

The principal forms of organisational design are cooperation and coordination. We

have to convince that collaboration is a good thing, one can try to persuade people.

88
Hierarchy as Control: Weber’s Principles of Bureaucracy

- Rational-legal authority
- Specialization of labor
- Hierarchical structure
- Coordination and control through rules and standard operating procedures
- Standardisation of employment practices
- Separation of positions and people: authority assigned to a position, not a person
- Formalization of administrative acts, decisions, and rules
Hierarchical structures have two advantages:

- Economise on coordination: the larger the number of members, the larger the
efficiency benefits from organizing hierarchically.

- Adaptability: hierarchical, modular systems can evolve more rapidly than

unitary systems.

European economies are driven my markets but also by coordination. If you take the
basis exchange, markets organise the exchange within agents, then most of our
economies are more hierarchically organised than markets, as most exchange
within an organisation take place through hierarchies. Why do we use so much
hierarchy in our exchange, hierarchy is a loss of autonomy. However, hierarchy is
cheaper, there is a saving on coordination costs, the advantage of hierarchy is
efficient and requires more straightforward interactions. In terms of adaptability,
hierarchies are more easily adaptable, a part can be taken and moved or switched.
It also makes it better in terms of rapidity of decision-making, in the military one
doesn’t one self-organising groups but lines of command. What about
effectiveness? Centralisation allows knowledge in order to make a decision to all be
in one specific person, if knowledge is dispersed and it is important to combine
different perspectives then a hierarchy will not be effective, a dispersed will be.

In hierarchies, we identify people by what we do and the functions that they have,
they are all similars; disregard the fact that human being all have different
characteristics and perspectives. Everyone dislikes bureaucracy but it is very
popular, its characteristic is being very resilient, people know how it operates and
know what they get which is an advantage, predictability is a very important
characteristic of well-functioning organisations.

Independent activities are in separated units, interdependent are in the same units.

89
What makes the product successful is what makes the product appreciated by
customers, once there are bundles within the single department one can allow
specialisation.

Contingencies approaches to organisational design: mechanistic and organic forms

In a holding structure there isn’t a depending division but independent corporation,

the holding which is the top has a controlling share in what is an independent
separate corporation.

90
Designing the hierarchy: defining organisational units on the basis of the
coordination intensity

The advantage of a global functional structure is that it is vey coherent,

everything comes top down, allows for economies of scale and socialisation and
rapid transfer of functional knowledge. Everything is top-down, therefore essential
bottom-up information doesn’t find its way as easily. It can be locally dysfunctional,
impractical, it is difficult to create teams. There is a global, more uniform consumer
who is attracted to the product, there is no need to differentiate the product as it is
a global customers.

Healthcare and energy have not so much to do with each other, they have their own
divisional department.

The geographical model, the organisation is clustered around different countries,

the country organization are most important in order to accommodate courtly

91
specific preferences in cleaning services. Multi-business geographical model, one
wants to make specific knowledge available for all units.

The matrix structure combines the divisional and the functional, the financial
regulatory environment is very complex, there are differences in such environments
between the US and Europe, in the US banking services are much more complex
than in Europe, there are geographical differences which dictate financial innovation.

An example can be General Motors Corporation

Operating companies are national companies, the structure is a tridimensional

structure. The sectors is the organisation of the headquarters, the regions are more
than 200 nationally operating cooperation which are quite independent from
corporate control. It is what shell looked like in 1994, decentralised operations
controlled by a centralised headquarter.

92
Liberalisation, deregulation and intense, increasing competition, for the first time
American giants were doing better than Shell.

What has changed and has been wiped out is the regional and functional structure,
which means reducing costs, they have redesigned saying it was a global business,
we don’t need regions anymore, all the functions related to a particular oil product,
they adopted a divisional structure focus on providing a global product. What they
kept is all the national operating companies, which is to some extent a political
issue as the layers collect political power. It did help, but shell is still a corporation
which is in term of comparativeness running behind larger American companies.

Recent Trends in Organizational Design

- Limited evidence of a “revolution in organizational design” - basic features of

organizations (e.g. hierarchy, financial control mechanisms, strategic planning) are
still present

Major trends of past two decades:

- Delayering - organizational hierarchies becoming flatter.
- Adhocracy and team-based organization - emphasis on shared values, high
participation, flexible roles and communication, lack of authority.
- Project-based organizations - dynamic structures with time-limited project teams.
- Network structures—organizations and groups of organizations where
coordination based upon informal social linkages.

93
94
31/03 - Current Trends in strategic management
Mega trends: companies use more and more. Mega trends are clearly long term
changing in economy, society, culture value etc. that affect the way business is
develop. It’s important because they reshape industry.

Mega trends are global and macro economic forces that impacts economy, society,
cultures and personal lives thereby defining our future world. Mega trends have
different meaning and impacts for different industries, companies and individuals.

Each firm should analyse mega trends as their implications can shape the
company’s future strategy.

Mega trend can have impact on different industries and business model as the
ageing of population; producing game for kids, you need to go out of Italy, in
another market. Producing earring product for listening, it’s perfect in Italy.

There are also physiological issues for which one don’t want to admit that there is a
problem and, in fact, the big issue is the non-acceptance.

The idea behind mega trends is based on the behind evolution of business and the
society. The world development there are different views about that:

- Linear: based on previous knowledge => everything

linear
- Stepwise: distinct stages => with internet technologies
averaging change and there is the idea that everything
is not linear but there are jumps.

- In waves: business cycles => cycles where inflation

increasing or decreasing, demand increase and
decreased etc.
- Stimulus driven: Chernobyl or 9/11 => big issues that
reshape everything

- Chaotic: no structure is predictable => future as chaos,

unpredictable

Ten trends that we need to map:

1. Demographic and social change

2. Globalization: impressive, a sort of big market without barriers. There was the
idea that with a unique market and openness, there will be democratic world but
this was not in this way because the “exportation of democracy” in countries as

95
 Russia or China is not really applicable. It’s clear that China want to have Taiwan
but America cannot leave it due to production of microchips. Today, in western
world, Russia is out, China is there but there can be a reduction. There is a sort
of political war, much than previous years. If cost of energy explode, it is better
to remain local instead of export.

3. Urbanisation: in Italy we don’t have this perception but in countries as Mexico,

Tokyo etc. we can see it. In terms of security, quality of transport, pollution etc.
is a totally different way to manage it.

4. Climate change: big issue unfortunately because probably we’ll have big
platform in artic sea with irreversible consequences. Most of the country will
disappear as Netherlands and Maldive.

5. Resource scarcity: it happen with cars with resources as batteries (due to raw
materials) and energy. If we think about it, it is becoming 40 years ago with pole
that tell that “the new water will become oil” because water in oceans, in fact,
now is plenty of micro-plastics. The big issue is not only energy but also water.

6. Technological breakthrough: really something positive in according to future as

digitalisation, machine learning, AI; with AI can be a problem the spreading of
false informations.

7. Global Knowledge society: society is a fundamental aspect in order to share

knowledges and understand globally aspects.

8. Sharing global responsibility: another big issue because most of the topic as
climate change are handle at global level.

9. Individual power: we are in a generation in which everything should be possible

and seems that can do everything. Individual power is clear and sometimes
individual power is manipulated by someone that have power.

10. Health, wellness and wellbeing: today each of us can have check of hearth
breath with phone, watches etc. people can control the injection of medicine
from devices, there are different view of surgical product and operations.

Demographic and social change

Looking about the graphic, we can see that we reach a billion around 1800. In 1969
we doubled and then doubling always at the high speed and this is an issue
because if resources are limited we continue and people in emerging economy want
a better social standard of life: it is possible for everybody? Imaging 8 billion of
Australian, how many planets we need? There is a day we’ll going to destroy more
resources respect to the one we have and that day is always more close.

96
In terms of generations, we have quality and quantity. Asking to our grandparents,
their dream was a radio etc. then the cars with freedom, tv with social status,
computers for interactions, phones that lead people crazy. The idea is not only the
culture but also generations. Parents don’t like e-book but they prefer book paper.

97
In terms of changes and results we have demographic changes and results.

Dealing birthrates is a disaster, the world population growth is a big issues for
resources. The migration increase and it will happen, people are living countries.

Implications:
- To target market that growing population as China and India. There are countries
that are exploding.
- There are simple products and high services intensive people.
- For professor generation, they just want to be challenge by a company, learn
better competences, skills, career or reputation. They don’t ask about
environment and social aspect.

98
Key lesson for mega trends:

- It’s impossible to predict the future but is important to understand more general
aspects of future. Future is impossible to predict but we cannot wait until arrives.
- People and companies should develop a deal strategy, the one for present is the
business model while the one for the future is developing business model for the
future starting thinking about what can be the business model for the future. So,
there is a strategy for the present: improve current performance; and a strategy
for the future: cope with mega trends.
- We have to take future opportunities and understand future needs. They need to
foresee future events and invest in resources and competences to be better
positioned than their competitors to: take future opportunities and meet future
threats.

From mega trends to strategic decision-making

1. Identify mega trends

2. Build a scenario

3. Analyze the impact of the scenario on industries and business models

4. Choose industries that meet mega trends or strategies to meet mega trends.

The new environment of business

The first two decades of the 21th century has been a period of intense turbulence
and uncertainty:
- Technological innovation: digital revolution, internet of things, driverless vehicles,
coordination by machines, etc.;
- Competition: becoming very tuff, government. In silicon valley bank collapse they
invest too much in treasury bonds and they were putting all cash of startups in
major silicon valley bank, they then invest. In particular with: uncertain growth,
government budget deficits, excess capacity, emerging markets competition,
disruptive digital technologies, etc.;
- Market volatility: commodity, currency, stock volatility due to interconnectivity and
unexpected political and economic events, etc.;
- Social forces and the crisis of capitalism: loss of legitimacy after financial crisis,
anti-business sentiment, wealth distribution, cooperatives, social enterprises,
etc..

99
Turbulent 21th

- In 2000 there was the collapse of new economy: in this case, soon or later, the
bubble collapse and there was a huge loss.
- 11 September 2001: something unpredictable
- Nov. 2001 Corporate collapse and scandals with Enron and Parmalat
- 2008-09: financial crisis
- 2011: euro crisis with the collapse of Europe (Portugal, Greece, Ireland and Italy)
- 2011: Arab spring
- Volatile markets: report of Goldman Sachs that oil prices is stable but then it
changes always and how can we based business on something as such volatile?
- Decline of US world influence: emergence of a multi-polar world; the idea of
America as ideal country but then they are not dominating anymore as before.
Russia is playing a role, India in future, China is such as US.
- Third industrial revolution: good but with a lot of implications. Digital
technologies, intelligent system, disintermediation of human being.
- Natural disaster: Indian ocean tsunami, hurricane Katrina, earthquakes.
- Demands of society: social and environmental responsibility; ethics and fairness;
quest for meaning.
- International competitions intensifies
- Covid 19
- War in Ukraine

100
Financial Times’ Disruptors of 2014

Rethinking strategy:

- Reorienting corporate objectives

- Seeing more complex sources of competitive advantage
- Managing options
- Understanding strategic fit

Everybody is going digital but we much more. CD and vinyl were much more
profitable for Sony and musicians because now the value moved to distributors.

101
The emerging share of business enterprise:

- Ambidexterity means that companies need to work for future business model
- With projects based organisation is more efficient
- Self organisation is most of the jobs that become entrepreneurial with a reshape
of work
- Open innovation means that not anymore a company control the overall situation:
each companies work with other to make innovation possible

New model of leadership

The future will need different leader respect to the past with hierarchical situations.
People like us don’t like arrogant people and leader should be someone that listen
and give you a vision for better future and someone that inspire you trust and
positive emotion.

102
Illustrations: GE Adjustment to the 21st Century Business Environment

Immelt was considered the best of the best in GE but he was authority and this is
true because is always more true because there are ways to create idol and way to
destroy idol. The complexity of the person lead to like or dislike people and you get
negative comment. The final comment is that if you want to built the future you need
to built on the past and it is not the projection of the future.

When we have to decide the work, speak to people and ask about their future job,
not their past job. We have to try to look at the new shape of work, learning before
getting the carrier. Predict the business culture of the company, organisation etc.

103
104
12/04 - Corporate governance and corporate strategy
Considering corporate strategy changes of the last periods, corporate governance
has to deal with a lot of aspects.

For several decades we run corporate with company that share value creation. The
idea is increasingly attached.

Ownership, control and theories of the firm

According to classical finance studies, “corporate governance deals with the ways
in which suppliers of finance to corporations assure themselves of getting a return
on their investment” (Shleifer and Vishny, 1997).

This definition assumes a “property conception” of the corporation (corporation as

a “nexus of contracts”), according to which assets of the corporation are property of
shareholders, and managers and boards are viewed as agents of shareholders.

A competing view assumes a “social entity conception” of the corporation. In

this conception, the “suppliers of finance” (shareholders and creditors) must be
rewarded properly, but the corporation has other purposes of equal dignity

According to Milton Friedman’s “business is business”, if you’re a shareholder you

have to maximise the value. «In a free-enterprise, private-property system, a
corporate executive is an employee of the owners of the business. He has direct
responsibility to his employers. That responsibility is to conduct the business in
accordance with their desires, which generally will be to make as much money as
possible while conforming to the basic rules of the society, both those embodied in
law and those embodied in ethical custom. Of course, in some cases his employers
may have a different objective. A group of persons might establish a corporation for
an eleemosynary purpose - for example, a hospital or school. The manager of such
a corporation will not have money profit as his objective but the rendering of certain
services». (1970)

There are three main aspect attached this view.

Business ethics: its not correct because if you are a manger is not clearly
important to maximise value but it’s fundamental to have fair and ethical decision
being an ethical person. Business ethics criticises the «business is business»
philosophy according to which managers should maximize the shareholder value
even when this may imply negative externalities for the stakeholders. It encourages
managers to take right and fair decisions based on sound moral principles: i.e.,
managers have moral obligations towards stakeholders. It challenges both an
amoral view (there is no right and wrong) and a moral subjectivism (there is no
shared hierarchy of values) of business. It underlines that managers should manage

105
properly the ethical dilemmas, i.e. the tension between two positive values (e.g.,
profit and ethic) supporting different decision outcomes. Examples of ethical
dilemmas: to offer side payments in order to win a large contract; to increase
pollution in order to minimize production costs.

Corporate social responsability (CSR) refers to the obligations of the firm to

society or firms’ stakeholders. Traces of CSR can be found in Britain in the second
part of XIX century, when some business leaders built factory towns to provide
workers and their families with housing. It developed in the late ’60s and early ’70s,
when business organizations call business to give greater attention to CSR.

CSR has been one of the leading topic at:

- World Economic Forum (WEF), World Business Council for Sustainable

Development (WBCSD), International Business Leaders Forum (IBLF), Business
for Social Responsibility (BSR), and Business in the Community (BITC);
- British Government, that appointed a Minister for CSR;
- European Commission, that published a paper on CSR.
EU is pushing on reporting, being accountable and show what you do for planet,
people etc. Stakeholder have to see report of corporations.

Freeman (1984) publishes the first work on the stakeholder theory: i.e., firms have
stakeholders who have legitimate rights and consequently companies must comply
with their moral obligations towards their stakeholders. Stakeholder theory argues
that the board and the top management must consider the interests of all
stakeholders “who affect or are affected by company’s business”.

Stakeholder theory basically is a theory arguing that there are not only shareholder
but also stakeholder which affected and are affected by the company.

From this perspective everybody can be a stakeholder of the company. The idea of
stakeholder theory is that the company have to understand who are stakeholder
and their interest, what they want from a company and what develop from nuclear
plant. You need to manager relationship between the company and its
stakeholders at three different levels:

- Rational level: they could understand who the firm’s stakeholder are and what
expectations they have;
- Process level: they should analyze the business processes used to interact,
explicitly or implicitly, with the stakeholders and assess their consistency with
stakeholders’ expectations;

106
- Transactional level: they should analyze both the interactions with stakeholders,
and their consistency with the results of the previous analysis.

Years ago, some companies of fashion have been caught to use kids.

Shareholders, board of directors, top managers

Understand three actor at the top of the company: shareholder, board direct and top
managers. Shareholder have powerful control and elect the board of directors. The
red line means to go from top to bottom.

Top managers are powerful not only due to the delegation but for the knowledge
that they know.

Shareholders and corporate strategy

Shareholders may have a different power to influence corporate strategy (e.g., large
vs small investors, controlling vs minority shareholders). Shareholders identity may
influence their views on corporate objectives and strategy: family, state, bank,
company, private equity, pensions funds, hedge funds, etc. Shareholders may
influence corporate strategy by voting at the assembly meetings, or by making
some pressure to influence board and top management team’s strategic decision
making (e.g., sending letters to the board, meeting with the board, publishing their
view, etc.). A key question in widely-held companies is how much influence should
shareholder activists have, what do they know about the company and its business,
which interests do they represent, which temporal orientation do they have, etc.?

107
Board of directors and top managers involvement in corporate strategy

2. Approving strategic decisions

4. Controlling implementation of strategic

decisions and results

Board of directors

Top management team

1. Formulating strategic proposals

3. Implementing strategic decisions

They need the board to approach and they can not approve, modify or approve. If
they approve, they can implement the decision and managing. Then again, it move
to board and they have to see how top management implement the decision.

Larry Fink’s letter to CEOs: profits and purpose (2018)

- I wrote last year that every company needs a framework to navigate this difficult
landscape, and that it must begin with a clear embodiment of your company’s
purpose in your business model and corporate strategy. Purpose is not a mere
tagline or marketing campaign; it is a company’s fundamental reason for
being - what it does every day to create value for its stakeholders. Purpose
is not the sole pursuit of profits but the animating force for achieving them.

- Profits are in no way inconsistent with purpose - in fact, profits and purpose
are inextricably linked. Profits are essential if a company is to effectively serve
all of its stakeholders over time - not only shareholders, but also employees,
customers, and communities. Similarly, when a company truly understands and
expresses its purpose, it functions with the focus and strategic discipline that
drive long-term profitability. Purpose unifies management, employees, and
communities. It drives ethical behavior and creates an essential check on
actions that go against the best interests of stakeholders. Purpose guides culture,
provides a framework for consistent decision-making, and, ultimately, helps
sustain long-term financial returns for the shareholders of your company.

The growing pressure to change capitalism

On august 19, 2019, the Business Roundtable published the new definition of the
Purpose of a Corporation which emphasises - for the first time - a deep
commitment towards stakeholders (i.e., customers, collaborators, suppliers, the
community, shareholders). In the encyclical "Fratelli Tutti" (2020), Pope Francis
contrasted the liberal economy - founded on "a mere sum of coexisting interests", a

108
culture of "economic interests without rules", the belief that "the market alone
solves everything", the "easy profit as a fundamental goal" - to "an economy more
attentive to ethical principles" and founded on charity and brotherhood. The new
Italian Corporate Governance Code (2020) introduce the concept of “sustainable
success”, defined as “the objective that guides the action of the board of directors
and which consists in the creation of long-term value for the benefit of shareholders,
taking into account the interests of other stakeholders relevant to the company”. In
January 2021, during the World Economic Forum, Klaus Schwab launched the
Davos manifesto, which states that: «The purpose of a company is to engage all its
stakeholders in shared and sustained value creation».

The good governance code is a code for which companies need to comply with.
They new Italian corporate governance code need to see interest of shareholder
and stakeholder, it’s revolutionary that they have to see also all the stakeholder.

The key point is that there is a revolution around us and share more and more the
idea that to have profit we need to share or sustained value creation, sustainable
profit, purpose and profits etc. as mottos.

The emergence of new and old corporate forms

Board of direction can take decision that balance shareholder interest with
community interest and balance interest; for example, they have to benefit and
balance to create incentives, if you are a benefit corporation you create value taking
consideration of social, environment etc.

Benefit corporations status allows corporations to opt-out of shareholder primacy

and opt into stakeholder governance. In other words, the company is required to
take into consideration anyone that is materially affected by that company’s
decision-making, like workers, customers, local communities, wider society and the
environment).

B corp have scores, at least 80 to 200 in order to be a B corp, otherwise you don’t
get the certification. There are company that both are benefit corporation and b
corp. B Corp Certification designates that a company is meeting high standards of
verified performance, accountability, and transparency on factors from employee
benefits and charitable giving to supply chain practices and input materials. In order
to achieve certification, a company must demonstrate high social and environmental
performance by achieving a B Impact Assessment score of 80 out of 200 on the
following dimensions: governance, workers, community, environment, customers.

Employee or Worker cooperatives are owned and operated by employees that

can have different views about profits and decision. This allows worker-members to

109
directly benefit from the business’s success. Profit distribution to worker-members
is based on a combination of job position, hours worked, seniority, and salary.

Today is more and more a pressure to have employee in board director, you may
have in Italy but there is no a legislation. In Germany, after second world war, have a
law that need to have employees in board director, the supervisory board are non
executive director. In large companies you can elect respectively 1/3 or 1/5 elected
by employees. Employees in the board can have different opinions.

Top managers are getting more and more on the profitability of the company.

110
What does it mean ESG?

- ESG criteria measure three different aspects:

- Environment - measures the company's environmental impact considering, for
example, CO2 emissions, the use of raw materials, packaging consumption,
the use of renewable energy;

- Social - measures the quality of the relationship with collaborators, the

community and stakeholders considering, for example, the development of
human capital, labor standards in the supply chain, product quality and safety,
data security and privacy, quality the relationship with the community;

- Governance - measures quality of governance consider, for example, board,

compliance with regulations, top manager compensation, business ethics.
- ESG investments amounted to $30 trillion in 2019 (+68% vs 2014).
- Sustainable investments exceeded 35% of the total in 2021.
The link between compensation and ESG

- 73% of S&P companies link manager compensation to ESG metrics.

- Companies use ESG criteria to evaluate both qualitative and quantitative
performance.
- The link to ESG parameters is intended to underline their relevance, the desire to
meet investors' expectations, the will to achieve ESG objectives.
- The metrics most used by short term incentives concern the customers, the
environment, ESG, and health and safety; the metrics most used by long term
incentives concern the environment, the customers, the diversity and inclusion.
- A recent work by Bebchuk and Tallarita (2022) highlights two structural problems
regarding this link: ESG metrics link compensation to a few dimensions of the
welfare of a few categories of stakeholders; ESG metrics can be used to promote
top managers’ interests.

111
How to design and implement sustainable corporate strategies

Last point is about “what have to do?”

It show the link of radical transformation of capitalism system to a system that

should take into account purpose and profit and this is the “new capitalism”.

It cannot stop, climate change is arriving so this is going.

112
113