Strategy definitions

domenica 12 settembre 2021 20:31

Strategy and its origins

Strategy is multi-dimensional and multifaced

• Analyzing the competitive arena

• Planning and acting
• Being flexible, creative and innovative
• Partnering
• Creating alliances

Strategy born in the military context

Military parallelism

• Competitive arena -> battlefield

• Competitors -> enemies
• Company -> army
• Assets and resources -> weapons
• Entrepreneur/manager -> general

As a result of this parallelism strategy was referred to as “strategic management”

which couples strategy with the roles of the executives who are charge of
formulating, planning and driving it.

How to operationally define strategy

In order to give an answer to this question we have to put ourselves in the realm of
decisions.

We should start from the assumption that strategy is defined and made of a set of
strategic decisions.

Strategic decision:
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Strategic decision:

• It acts on the long term

• It requires a significant amount of resources
• It has multi-dimensional, transversal and deep impacts on the individual level
• It’s hardly reversible

Tactics

Opposite to strategic decisions and are place in the realm of more operational
decisions

There’s a connection between strategy and tactics:

While in strategy you set long term objectives and you plan to achieve such
objectives, tactics reference to how you concretize and implement your strategy by
means of actions performed on a daily basis.

Operational definition of strategic decision: A strategic decision is a decision that

has long term, significant, multi-dimensional and non reversible effects on the final
goal of the organization; it usually requires large amount of resources; and it usually
requires top management involvement

Strategy is an integrated, comprehensive plan which:

• Identifies the scope and the direction of the organization
• Aims at obtaining long term performance superior to competitors (with
reference to the goals identified)
• Integrates a consistent set of strategic decisions

The military way of looking at strategy is to view it as a space between politics and
tactics:

Politics is derived from a purpose or cause, strategic y incorporate this purpose and is
concerned with how to achieve the policy or goal with the means available ,
Tactics are the particular movements and actions while engaged in battle

In business, strategy maintains the majority of these characteristics, and further

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In business, strategy maintains the majority of these characteristics, and further
explores their company and management -related aspects (like those of competition
and advantage)

Ken Ohmae , in “the mind of strategist” , 1983, tells us that

“ what business strategy is all about is “competitive advantage”

“The Sole purpose of strategic planning is to enable a company to gain, as efficiently

as possible, a sustainable edge over its competitors “

“Strategy thus implies an attempt to alter a company’s strength relative to that of its
competitors the most efficient way”

Bruce Anderson - the origin of strategy - 1989

“ strategy is a deliberate search for a plan of action that will develop a business’
competitive advantage and compound it “

“The difference between you and your competitors are the basis for your advantage
“

“The objective is to enlarge the scope of your advantage , which can only happen
At someone else’s expenses”

Business strategy does not aim any more at crunching your opponents , but it
assumes that you have some goal, you have resources to reach the goal, and are
operating in a context where other entities may have their own goals that overlap
and compete with yours .

Hence, strategy reflects on how to formulate a plan (made of consistent strategic

decisions) to establish and maintain an advantage on such entities that we call
competitors.

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The levels of strategy
giovedì 16 settembre 2021 11:37

STRATEGY, PERFORMANCE AND COMPETITIVE ADVANTAGE

Strategy is a long-term plan made of a consistent set of strategic decisions that aims at identify a scope and directions for the
company as well as achieving and sustaining performance superior than competitors

The original question behind strategy is:

Why do firms competing in the same industry enjoy different performance ?

Why firms that are in similar context can be successful or fail ?

Because they make different strategic decisions and employ a different strategy.

Success is creating and sustaining performance

Competitive advantage is creating and sustaining a superior performance compared to your competitors

Only firms whose performance is superior than competitors may actually claim that are leaders in the market

What kind of performance is strategy related to?

How can strategic performance be measured?

By creating economic and financial value.

Strategic results can be measured by a simple economic notion:

margin = price - cost

If your margin is superior to your competitors you have a competitive advantage

STRATEGY AND VALUE CREATION

CREATING VALUE

Value proposition It’s a selected bundle of products and/or services targeting a group of customers and satisfying well-
defined needs

It’s how you create value for your target customers

We could define 3 approaches that may lead to value creation:

1. Technology driven-approach: innovation is driven by a scientific breakthrough or a technological opportunity; this is

followed by product design and manufacturing; and in turn the product is presented to customers and sold;

Its efficient and is a good way to leverage internal sources of innovation

Criticalities: the market doesn’t directly affect the value generation process. The product is presented to the customers
only after its realization: customers are seen as passive objects and Marketing is involved only in the last steps of value

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 only after its realization: customers are seen as passive objects and Marketing is involved only in the last steps of value
generation.

2. Market driven approach: The first step of value generation requires the identification of customers' needs; value is
hence defined on the basis of the target market’s characteristics, and products/services design and manufacturing are
driven by customers' needs. Value communication by means of marketing levers plays a major role in this approach.
Market and customers have a paramount role for strategy , as they provide inputs for the company : they are the first
sources of ideas and innovation. In this approach a strong relationship between strategy and marketing is established.

3. Customer co-creation approach: an evolution of market driven approach where customers become a functional source of
innovation, in the sense that not only companies identify customers' needs but also work together with them to co-
create the value proposition that will address their needs

WHERE TO CREATE VALUE: BUSINESS AREA (BA) AND STRATEGIC BUSINESS UNIT (SBU)

The BA is the strategic interpretation of a market, an industry, and is defined by a homogeneous and defined set of
competitors offering similar value propositions to satisfy a homogeneous set of customers’ needs . The BA is where a
company operates

The SBU is the part of the company that operates in and serves a given business area. It's how the company organizes and
structures itself to serve a market or industry.

THREE LEVELS OF STRATEGY

There are 3 distinct levels of strategy:

1. Corporate strategy level

Strategy defines in which industries and markets the company is going to compete.
So the company is seen as a bundle, or portfolio, of different markets and SBUs

Ex: Virgin group: music , gyms, telecommunications etc

At this level the corporate management looks at the overall portfolio to evaluate whether it’s balanced or not in terms of:
the presence of cash absorbing strategic business units that must be balanced by cash generating SBUs by considering the
different SBUs lifecycle and the correlation among different SBUs

SBUs lifecycle:
Emerging business
Fast growing business
Mature business
Declining business

Considering correlation we’re looking for synergies among SBUs so the value of two SBUs together is more than the sum
of the value of such activities kept separate.

Synergies can create CORPORATE COMPETITIVE ADVANTAGE

An advantage that doesn’t come from the single business, but from the combination of different business’s

Corporate management defines 2 major aspects which represents the objectives of Corporate strategy:

1. the general strategic objectives and guidelines to provide to each SBU

2. the resources or constraints to achieve such general objectives

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 2. the resources or constraints to achieve such general objectives

These aspects are passed on to the second level of strategy : the business level

2. Business strategy level:

Here general managers receive general goals and a budget from the corporate level, and specify them into business
specific objectives. The overall aim spins to create and sustain a business competitive advantage when compared to
competitors

All the decisions made at this level lead to the formulation of a business strategy (which follows and shall be consistent
with the corporate strategy)

3. Functional or operational level

Business strategy is translated into functional and operational objectives for each SBUs function (and this is where we
talk about strategy execution)

Example

Grow in the market and make investments is a corporate objective that may be set
At a business level such objective can be translated as “achieve +10% in 2 years”.
At a functional level concerning the marketing and sales function the business objective can be further specified as
increasing marketing and sales effort thanks to a given amount of investment.

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Business strategy formulation
venerdì 17 settembre 2021 09:56

Business strategy: vision and mission

Business strategy aims at creating a sustainable competitive advantage that is a performance superior than competitors,
within a give industry or business area

As such, business strategy formulates the objectives and a strategic plan that a SBU will follow and implement within the BA

Strategy formulation at a business level follows a sequence of logical steps and building blocks, referred as business strategy
formulation process.

As a whole, such process is made of a number of steps belonging to 5 micro phases:

1. Orientation (or direction setting)

2. Analysis or diagnosis
3. Decision making
4. Implementation
5. Control

Each SBU receive general goals and resources or a budget to reach those goals by the Corporate strategy, and formulates its
business strategy accordingly.

The process starts with a first step that translates corporate goals and directions into the specific business area: this happens
by means of three key concepts in strategy :

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 • The vision
• The mission
• The strategic objectives

The vision and the mission are often unclearly defined by companies: sometimes you find one and not the other, or they are
overlapped and their boundaries become blurred

However they’re both essential for strategy, and they play a complementary role in its formulation.

The vision is the long term view on the best possible evolution of the business area the company operates in. It describes how
the industry will positively evolve and draws a path that the company (as well as other competitors ) may follow .

The vision is also known as industry foresight.

Example

Microsoft’s vision in the late ‘80 was:

“A chicken in every oven, a computer in every house”

Although funny and generic, it implies a few important ideas:

1. Wealth will be more and more widespread , allowing more and more people to satisfy their basic needs (food, get
something to eat)
2. Such people might have a wealth surplus that they may wish to use for more refined needs satisfied by means of other
products and services like the personal computer

The idea about the future was different from the one held by other competitors, who believed computers would find their way
in the corporate world , rather than becoming something single individual would use in their own homes.

This vision set a path for Microsoft’s strategy , a path that led to the evolution of computers for end users and consumers.

MISSION

A mission is the strategic role a given company wishes to play within the path set by the vision.

It is also known as strategic intent

For instance, Microsoft’s mission, according to its vision, might have been “to become the leader in the personal computers
area “

Vision is industry-specific, as it embraces your business area’s evolution (and might be shared by other competitors too), your
mission is firm-specific, as it tells the company how it should develop its strategy according to the trends foreseen by the
vision.

Business strategy: objectives, boundary & strategy analysis

The strategic formulation process at a Business level starts with the Orientation macro-phase, which encompasses our
strategic direction or path, embodied in the vision, as well as our expected strategic role within such path, that comes with the
mission.

However, while both the vision and the mission have a long-term motivational role, they are not enough to set the boundaries

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However, while both the vision and the mission have a long-term motivational role, they are not enough to set the boundaries
and targets for strategy formulations.

A third concept should hence be introduced, that is, strategic objectives.

Strategic objectives or goals steer the whole strategy formulation process, in its analysis or diagnosis, decision-making,
implementation and, above all, control macro-phases.

To be strategic, objectives shall have some key features:

1. Specific: they shall be relatable to what they are focused on and they shall convey a clear message on what’s to achieve;
2. Measurable: there has to be one or more clear indicator, since you can't improve what you can't measure;
3. Appropriate: they must be consistent with the company’s overarching vision and mission;
4. Realistic: goal setting theory tells managers to set objectives that are challenging, but not perceived as neither impossible
nor too easy (because both ways lead to demotivation);
5. Timely: they must be related to a clear deadline to achieve them

Strategic objectives with these features are called “SMART”

Once the vision, mission and strategic objectives are defined,

it’s important to further clarify the boundaries of the business area the SBU will cover.

These boundaries will represent an input for the analysis or diagnosis macro-step of the process.

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A possible way to define a business area’s boundaries is to employ the so called Abell Cube or Abell Space, which gives a three
dimensional definition of the business in terms of three key factors:

• customer groups, which answers to the question “who do competitors in the industry serve?”
• customer functions, so the “what?” customer needs are satisfied by the offer;
• alternative technologies available to provide such customer functions, by means of different products and services.

The intersection of these 3 axes X, Y and Z creates a space or cube that delimits the business area boundaries

With the business area definition, we conclude the “orientation” macro-phase.

ANALYSIS OR DIAGNOSIS MACRO-PHASE

This macro-phase is the core of the strategy formulation process at a business level, since it aims at deeply investigating the
context and environment the company operates in, and which will influence, in turn:

• the possibility to achieve its strategic objectives;

• the business strategies to reach such objectives;
• the chances to create and sustain a competitive advantage.

The analysis or diagnosis macro-phase results from the combination of two complementary perspectives:

• An external perspective, which is called external strategy analysis;

• An internal perspective, which is labeled as internal strategy analysis

External strategy analysis considers the external environment a given company operates in
by means of its Strategic Business Unit. it analyzes the industry and business area.

Within such external environment, we have to look for the overall trends and phenomena
that may constitute an opportunity or, vice versa, a threat for all competitors operating in the industry.

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In the external strategy analysis, the point of view is hence that of the average generic player
in the business area (not our own company’s standpoint).

So, the considerations we’ll draw on external opportunities and threats are industry-wise,
not firm-wise, and should apply to the average player in the industry, not just to a specific company.

The internal strategy analysis focuses on a specific company operating in the business area, and aims at comparing it to its
main direct competitors to underscore its key strengths and weaknesses, that is, the possible sources of competitive
advantage or disadvantage it may have.

Within this step, the company analyzed is compared to its competitors by means of benchmarking, and the firm-specific
characteristics that give it an edge on competition (or, on the contrary, create some negative gaps to be filled) are disclosed.

The thoughtful combination of an external perspective with an internal one will disclose insights
that will feed and inform the subsequent steps of strategy formulation at a Business level.

Business strategy: strategic alternatives

The strategy formulation process at a Business level starts with the Orientation phase, which sets the company’s direction, or
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The strategy formulation process at a Business level starts with the Orientation phase, which sets the company’s direction, or
vision, declares its role, or mission, and puts forward a list of objectives strategy should help achieving.

Orientation is followed by the Analysis or Diagnosis macro-phase.

Within such phase, the company analyzes both its external environment (that is, its industry) and its internal one (that is, its
own structure and inner dynamics) to gather data and insight that should
inform its strategy.

The combination of an external and internal strategy analysis creates the basis for a matching between opportunities and
threats coming from the outside with strengths and weaknesses emerging from the inside.

This matching goes under the pretty well-known name of SWOT Analysis, nothing but an acronym for Strengths and
Weaknesses stemming from the inside, and Opportunities and Threats coming from the outside.

SWOT is used in many contexts due to the fact that it’s quite an easy and straightforward tool.

Notwithstanding this, the SWOT analysis is the core of the strategy formulation process at a Business level, since it is from
such combined perspectives that the business strategy of the company arises.

More specifically, by crossing external Opportunities and Threats with internal Strengths and Weaknesses, the company may
understand, for instance: what are its Strengths to leverage to exploit opportunities; what are its Strengths it may use to
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understand, for instance: what are its Strengths to leverage to exploit opportunities; what are its Strengths it may use to
defend itself from a Threat; and what are its Weaknesses that do not allow it to properly take advantage of an Opportunity,
or maybe that intensify the negative effect of a Threat.

Performing wise and insightful combinations of these four elements allows us to enter the Decision-making phase of the
process, whose first step refers to Strategic Alternatives Generation.

In this step, the SWOT analysis allows the company, and the decision maker, to formulate a set of possible strategic
alternatives or strategic decisions at a business strategy level.

Exploiting an Opportunity with a Strength is indeed a strategic decision, since it is long term, it requires lots of investments and
resources, it is cross-functional and hardly reversible.

So the overall set of strategic decisions that will constitute a company’s business strategy
basically emerges from the SWOT.

Of course, not all strategic alternatives can be implemented, because of the lack of resources or a possible mutual
exclusivity.

The strategic alternatives must hence be assessed and evaluated in terms of their consistency with the vision, mission and
goals, the resources available in terms of budget and their possible contribution to achieve and sustain the company’s
ultimate goal, that is, value creation by means of competitive advantage.

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ultimate goal, that is, value creation by means of competitive advantage.

This assessment could be done by means of scenario analysis and economic and financial forecasts, and sensitivity analysis.

However, since this constitutes the heart of the entrepreneur’s or manager’s decision-making role,
it will be her or his strategic and entrepreneurial acumen to determine 1.

This decision-making step is labeled Strategic alternatives assessment and selection.

After one or more strategic alternatives are selected, they are embodied in the company’s business strategy.

The decision-making macro-phase ends, and is followed by the strategy implementation one.

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Here, the strategy is executed by means of a number of consistent tactical choices that are chained to one another and
should lead to achieving the overall strategic objectives.

Strategy execution gets strategy down to the basics, and encompasses decisions in each given function or unit.

In order to support strategy execution managers may resort to different models: the framework that is widely employed to
support strategy implementation is the so called «business model», which considers the implications of a company’s
business strategy on a unified set of building blocks and parameters.

Once the strategy is implemented, it is time to Monitor and assess whether such implementation was successful or not, in
terms of achieving the overall strategic objectives.

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This is the monitoring macro-phase, where the results obtained are confronted with the goals planned.

Usually, the monitoring macro-phase is executed through a control step that corresponds to the budgeting variance analysis,
to quantify any delta between the expected and achieved performance and understand what was the cause of such positive
or negative variance.

The Monitoring macro-phase is usually run annually, and may lead to confirm the long-term goals
set in the orientation phase, or trigger a review of such objectives.

In the latter case, a strategic re-planning starts, involving new objectives, but maybe even requiring a new vision, mission
and a new SWOT.

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The Monitoring macro-phase closes the Business Strategy formulation process.

Although we presented strategy formulation at a business level as a linear, waterfall process, it is far from being that
straightforward.

This only happens in ideal conditions, where no feedback or feedforward is needed.

However, in the real cases we may have to go back to one step, to jump another, and so on.

The most important thing is that all steps are considered at least once, and lead to the formulation
and planning of a strategy to achieve competitive advantage within the company’s given business.

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SWOT Analysis
sabato 25 settembre 2021 01:03

EXTERNAL AND INTERNAL STRATEGY ANALYSIS

Formulating a strategy at a Business level requires obtaining a deeper understanding of the overall environment the
company operates in.

Such environment involves two perspectives: the external and the internal ones.

The external perspective considers the set of competitors populating a business area, as well as all the determinants of
industry structure. For industry structure, I mean the inner characteristics and defining elements an industry is built on.

For Instance, let’s consider the number of players operating in a market as a determinant of its structure: if the market is
populated by only one company, we call it a Monopoly, which will have given characteristics like no competition and
significant attractiveness; as the number of competitors grows, the structure of the industry changes and aligns to the ideal
notion of perfect competition, where all players operate at zero economic surplus and attractiveness drops dramatically.

Beyond the market structure, the external environment may hide a number of political, economic, social and technological
macro-trends that may affect the industry and the way firms compete in it.

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Both the industry structure and the environmental macro-trends identified may impact the companies operating in the
industry investigated, with impacts that are either positive or negative.

Should the expected impact be positive, we’d consider it an Opportunity; should it be negative, we would label it a Threat.

The internal perspective, instead, refers to the company’s values, goals, as well as its organizational structure, systems and
activities; and its resources and competencies.

All of these elements may constitute a company’s key strengths and weaknesses, that is, the possible sources of
competitive advantage or disadvantage it may have.

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So, the core of the strategy formulation process at a business level lies in the strategy analysis steps, which considers and
matches both the external and the internal environment.

• At an external level, we have to identify Opportunities and Threats, as well as assessing Market attractiveness (that is,
whether the market is averagely profitable or not).

• At an internal level, by means of a comparison with competitors that is called benchmarking,

we have to disclose our company’s strengths and weaknesses, which may represent the sources
of competitive advantage (or disadvantage).

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To understand why the external and internal environments play such a paramount role for strategy, let’s go back to its
original issue: strategy is inherently related to the notion of performance, since a different strategy may lead companies
operating in the same industry to success or failure.

• Economically, performance can be assessed in terms of: Margin, that is Price – Cost.

• Market attractiveness can be measured as the average margin (or profitability) enjoyed by the players operating in it.

So, from an external standpoint, the industry will affect a company’s performance since industry determinants will drive
the attractiveness (that is, average profitability of players) up or down.

From an internal perspective, the company’s inner structure and dynamics will affect its ability to achieve and sustain
competitive advantage, that is, a differential margin compared to your competitors.

Analyzing the external and internal environments hence allows strategists to uncover the sources of profitability and
performance.
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performance.

The strategy analysis step that encompasses both external strategy analysis and internal strategy analysis hence goes under
the name of SWOT Analysis.

This is the acronym for Strengths, Weaknesses, Opportunities and Threats.

SWOT analysis is one of the earliest strategy frameworks.

About its history, SWOT wasn’t born as we know it today. It was developed back in the 60s starting from the work by Albert
Humphrey at Stanford: Humphrey was investigating why corporate planning failed, so he came up with the SOFT model,
where the elements he used were: “What is good in the present is Satisfactory, good in the future is an Opportunity; bad in
the present is a Fault and bad in the future is a Threat”.

This model was later modified by Urick and Orr during a seminar held in Zurich in 1964, as they replaced Satisfactory with
Strength and Fault with Weakness, giving rise to the SWOT framework we currently use.

SWOT’s goal is to give strategic directions for structuring strategic analysis.

The underlying theory is that assessment of a company’s competitive position should combine both an external and an
internal analysis.

SWOT is widely used by executives and managers as an analytical tool to support strategy formulation, because it’s
considered a simple, compact and unified tool, which provides a good strategic summary and is also efficient for expository
and communication purposes. Indeed, by means of a SWOT, strategic decision-makers may formulate a set of different
strategic alternatives (or strategic decisions) that will be built in their business strategy.

HOW TO BUILD A SWOT ANALYSIS MATRIX

SWOT is a framework to support the strategy formulation process at a Business level.

But how does the SWOT tool work?

To operationally apply it, we should build up the so called SWOT analysis matrix.

The SWOT matrix is a 2X2 table whose four cells report a list of the external opportunities and threats a company is facing,
as well as the strengths and weaknesses the company shows compared to its competitors.

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This matrix hence couples two different perspectives: the external one, which requires to consider industry determinants
and trends assessed from the point of view of the average competitor in the business area; and the internal one, which
takes the point of view of the specific company and compares its distinctive characteristics with those of competitors.

Following these complementary perspectives, we should now fill these four cells: how to do so?

Os, Ts, Ss and Ws may result from a brainstorming activity, where managers or experts assess the industry and the
company according to their professional expertise, without any specific template or guideline driving the process.

However, though this is a common approach due to its relative simplicity, it may also end up being simplistic and overly
unstructured, as in complex and kaleidoscopic business environments, key elements may be simply forgotten or
underestimated even by skilled executives.

So I propose the SWOT analysis matrix is not just filled in through brainstorming, but each cell is fed by the application of
structured strategy analysis models.

For instance, external strategy analysis could be informed by the Five Competitive Forces model and the PEST Analysis.

While internal strategy analysis could be supported by the Value Chain model and the Resource-based view of the
company, which looks for its core resources and competencies.

These structured models deserve a detailed description, and will be covered in the next lectures.

Now that we know how to fill the matrix, how should we use it?

We should ask ourselves some wise questions that may reveal useful insights about the strategic alternatives we have at
hand, by mixing and matching strengths and weaknesses with opportunities and threats.

The SWOT analysis is a critical step of the strategy formulation process since it is from the combined external and internal
perspectives that the business strategy of the company arises.

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More specifically, by crossing external O-T with internal S-W, the company may understand, for instance: what are its
Strengths it may leverage to exploit Opportunities; what are the Strengths it may use to defend itself from a Threat; and
what are the Weaknesses that do not allow it to properly take advantage of an Opportunity, or maybe that amplify the
negative effect of a Threat.

As a result, the SWOT analysis allows the company, and the decision maker, to formulate a set of possible strategic
alternatives or strategic decisions at a business strategy level.

Exploiting an Opportunity with a Strength is indeed a strategic decision, since it is: long term, it requires investments and
resources, it is cross-functional and hardly reversible.

So the overall set of strategic decisions that will constitute a company’s business strategy basically emerges from the
SWOT.

Let’s build up a general example: a generic player operating in a given business area may apply the SWOT analysis and come
up with this result.

The Opportunities arising from the external environment are:

• new markets emerging;
• demand increase;
• a new patent or license;

while the threats are:

• New restrictive regulations;

• Aggressive national competitors;
• Competition from emerging markets;
• Substitute products.

Moving to the inside of the company, its Strengths lie in:

• strong Brand awareness

• high Product Quality
• high Perceived value
• customer Loyalty
• Effective distribution
• significant Scale

The company also has weaknesses compared to competitors, like:

• Limited geographical coverage

• Little cash flow
• Lack of management leadership
• Low flexibility
• Low operations effectiveness.

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By thoughtfully and creatively considering these elements, some strategic alternatives to pursue may emerge, like:

• Launch new products in new markets based on high quality;

• Strengthen the brand to protect the company’s offer from substitutes;
• Use perceived value to increase premium price and make cash flows grow.

Some of these alternatives may be mutually exclusive, while others may be synergistic
and consistent with one another.

Managers have the task to properly formulate, select and balance these strategic alternatives
stemming from the SWOT analysis, which adds up to constitute their company’s Business Strategy.

EXAMPLES OF SWOT APPLICATION

SWOT Analysis allows strategic decision makers to systematize the analysis of the external and internal environments their
companies compete in.
Now that we know how to create and use the matrix, let’s work on it with a real-world example.

Let’s consider the food industry and let’s focus on a leading player operating as an international fast food chain.
How would you formulate a SWOT for such player?
Applying the SWOT Matrix requires to first identify the business area (in order to define external strategy analysis’
boundaries), and then a player of reference. In this case, we select the fast food business area and a leading international
fast food chain.
A SWOT based on brainstorming (rather than a structured approach) applied to this company may provide the following
result.

As Opportunities, we could identify:

• Increasing demand for varied food,

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• Increasing demand for varied food,
• Home meal delivery,
• Hectic lifestyle,
• Changing customer habits, and
• New customer groups.

The trends representing Threats are:

• Saturated fast food markets in the developed economies
• Trend towards healthy eating (since we are focusing on fast food, rather that the food industry in general)
• Local fast food restaurant chains
• Currency fluctuations
• Lawsuits against big players

Moving down to the internal analysis, a leading player’s Strengths could be:
• having the largest fast food market share in the world;
• showing a Brand recognition valued dozens of billion $;
• A few billion dollars advertising budget;
• Locally adapted food menus;
• Partnerships with best brands;
• a large share of restaurants owned by independent franchisees;
• Children targeting

Concerning its Weaknesses, we may underscore:

• Negative publicity and bad press;
• the Unhealthy food menu;
• high employee turnover;
• Low differentiation.

The company could hence formulate strategic alternatives such as:

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The company could hence formulate strategic alternatives such as:
1) include an healthier diet (salads);
2) Launch home delivery based on its strong distribution network and brand;
3) Be more transparent about its food properties (calories, fats).

1.

These strategic alternatives can be assessed, selected and bundled together to create an overall business strategy.

We could make many other examples of SWOT application in different industries.

Notwithstanding the specific case we select, a key principle should always stand:

the perspective and standpoint should change from the external to the internal analysis, and should be that of the
average industry player concerning external analysis, while it should consider the specific company of reference
compared to its competitors, when it comes to internal analysis.

Let me stress again why SWOT is so important for strategy: since strategy is a link between the internal and the external
environments, SWOT supports strategy in playing this fundamental role.

According to Grant, successful strategies have some common traits:

1) they start from clear, consistent, long term goals,

2) bundled with a deep understanding of the external competitive environment
3) and show an objective appraisal of internal resources.

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These elements (where the last explicitly stem from a SWOT), coupled with an effective strategy implementation, may lead
to a sustainable competitive advantage.

The relationship existing between strategy, performance and value is :

strategy is ultimately related to performance and value creation, its goal being pursuing and sustaining competitive
advantage (that is, a profitability higher than competitors).

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The Value Chain model
giovedì 14 ottobre 2021 09:37

COMPETITIVE ADVANTAGE AND COMPETITIVE DIFFERENTIALS

Strategy formulation at a business level starts with the definition of vision, mission and strategic objectives, in line with
the general orientation of strategy that is linked to the creation of value.

After this, decision makers perform an analysis of the external and internal environments, called strategy analysis.

At the level of a strategic business unit, strategy analysis is made up of two main components: an external analysis and
an internal one.

The external analysis is used to evaluate the attractiveness and the average profitability of the business area
examined, by detecting environmental opportunities and threats influencing the definition of strategies and their
performances.

Internal strategy analysis, which is essential to complete the information that we obtained from an external
environment assessment done with models like the five competitive forces and PEST analysis.

Once we have defined the average industry attractiveness, we need to evaluate the ability of a single company,
operating in that industry, to create and sustain a competitive advantage.

The concept of competitive advantage, from a strategic point of view, is linked to the chance the company will obtain
performances and profitability that are higher than those of competitors.

This definition highlights the key role of performance in strategy analysis, and closely links competitive advantage to the
notion of margin, measured as price minus cost.

The goal of internal analysis is that of detecting competitive differentials of cost and of value for our strategic
business unit, compared to competitors, also identifying the company’s strengths and weaknesses.

Competitive differentials are simply elements characterizing the performances of the company and influencing
margin.

Since margin is calculated as price minus cost, competitive differentials will, on the one hand, influence the ability of
the company to work with lower costs, so increasing efficiency, and on the other hand, determine the chance to

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the company to work with lower costs, so increasing efficiency, and on the other hand, determine the chance to
increase the output’s added value, thus making the product and the service offered more attractive to the customer.

Value differentials, also called attractiveness differentials, represent effectiveness drivers,

and they have a positive effect on the price that the customer is willing to pay to get a given product or service.

A combination of positive differentials of cost or value will determine the strengths and the sources of competitive
advantage for the company if compared to competitors, whereas negative differentials will represent disadvantages
or a source of competitive disadvantage.

Strategic competitive differentials are created by the possibility and ability of companies
to make use of specific characteristics of the economic system, like for example:

the non-linearity in the relations between economic variables, like economies of scale or the cost of capital; the inertia
and the difficulties in reversing the dynamics of those economic variables; the inequality in accessing markets outlets,
specific resources, knowledge or information and cost asymmetries, and finally, the so-called stretch, or variability in
commitment, productivity and creativity of people on the basis of their motivation.

Companies can leverage these asymmetries and unbalances and disequilibria to outperform their rivals and create
competitive advantage.

THE VALUE CHAIN MODEL

Internal strategy analysis aims at identifying and analyzing the sources of companies’ competitive advantage.
A methodological tool to support such process is the so called value chain model.

The value chain model, proposed by Michael Porter from Harvard Business School in his 1985 book “Competitive
advantage”, is based on the idea that we cannot analyze competitive differentials if we consider the company in an
aggregated way, as a black box, separated by the company’s customers and suppliers.

What we have to do is to break up the company into single activities or sub-activities, contributing to the process of
transformation of inputs (like raw materials or know-how), into outputs (that is, products or services).

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The value chain model offers a fine-grained representation of all the activities carried out within the company, and
also of the internal and external links among the activities themselves.

The idea at the basis of it is that the strengths and weaknesses of a company are linked to the way the value chain is
designed, structured and run.

More specifically, the model tries to identify the differentials of cost and value through an analysis that considers
three levels.

First, the way single activities are designed and carried out; second the links between the internal activities and such
internal activities with those of the customers and suppliers; and third, the overall system of activities, also called
level of vertical integration.

The original value chain model, developed by Porter for manufacturing companies, is shown in this figure.

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The value chain is made up of five basic activities called primary activities, and of four crosscutting activities called
support activities.

Primary activities are those directly contributing to the transformation of inputs into outputs and to the creation of a
value perceived by the client.

More in detail, among primary activities, we have:

inbound logistics, that is the activities associated to the receiving, storing, transporting and delivering the inputs used in
the transformation process; operations, that is the activities leading to the transformation of inputs into finished
products or services;
outbound logistics, that is activities required to store the finished product and physically distribute it to customers;
marketing and sales, that is all those activities aimed at informing the customer about a product, so that the costumer
will then buy it, through advertisement, promotion, managing of selling channels and so on; and finally pre-and after
sale service, that is installation, technical assistance, provision of spare parts and so on.

Support activities, conversely, have no direct impact on the transformation of inputs into outputs or on the creation
of the value perceived by the client, but they represent crosscutting and enabling processes needed to constantly
carry out primary activities.

They provide the inputs, human resources, technologies and other functions.

Among these activities, the model highlights procurement, that is, every activity linked to input acquisition, like raw
materials, components, machines, technologies and services, needed for the good functioning of the company, like
supplier selection, negotiation & rating.

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A second activity refers to managing human resources in terms of scouting, selection, hiring, training, appraisal and
empowerment of personnel.

A third support activity is research and development, related to technology development, engineering and the
management of the company’s technological portfolio.

Finally, the model considers those infrastructural activities that constitute the company’s backbone, like management,
administration, strategic planning, finance, legal services, but also activities which might look less relevant, like
managing of the company’s canteen.

As anticipated, acquired inputs brought into the company thanks to inbound logistics, go through the transformation
process activities and are turned into a final output, either physical or intangible.

If we want to show this process in a general way through a graph, we can take a generic value chain where we identify
primary activities at its basis, and the crosscutting or support activities at the top.

We associate to this generic value chain the positive quadrant of a Cartesian coordinate system; we mark on the X axis
the time factor, so that we take into account the input passing through the chain activities. On the Y axis, we mark on
the one side, the cost factor on the other side the value factor.

Now, through the graph, we can underline the fact that, as the input goes through the different activities (starting from
the cost of buying raw materials), it increasingly includes a growing set of costs: logistic, production, marketing and
selling costs, service costs, and costs linked to crosscutting activities.

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At the same time though, activities play a role in increasing the value of input.
What happens is that activities have a role in creating value, and are therefore called value-added activities.

At the end of the transformation of inputs into outputs, there will be an output whose value will be higher than the
cost. The delta that is created in the difference between cost and value is actually the margin.

This is how performance, driven by its determinants of cost and value, builds up as we move along the company’s value
chain.

VALUE CHAIN MODEL'S APPLICATION PRINCIPLES

The value chain model supports the identification of a company’s cost and value differentials, which in turn determine
its strengths and weaknesses that sustain or hinder its ability to create competitive advantage.

Before getting into the details of this analysis of competitive differentials, I will briefly
state the principles that should be used when adopting this framework.

Unlike external analysis, where the models of the five competitive forces and PEST are
applied to a generic company,

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applied to a generic company,

1.the point of view of the value chain is that of the specific company analyzed.

2.value chain is both firm and industry specific, so it refers to a specific strategic business unit working in a specific
business area.

Companies having a diversified portfolio and operating in different markets, will have to develop as many value
chains as the number of SBUs they control.

The last application principle is based on the fact that the model is

3.relatively flexible: it was first developed for manufacturing companies, but it can be adapted to other sectors like the
service one.

So, as a consequence, primary and support activities proposed in the model can be reviewed and the value chain can
be remodeled on the basis of specific activities carried out by the company analyzed and influencing its cost and
value.

When remodeling the value chain, however, keep in mind that no matter how deeply you modify the traditional
template, the following features of the model will always hold true.

There will always be a distinction between primary and support activities. You will always be looking for cost and
value differentials determining competitive advantage and you should always carry out an internal analysis identifying
positive and negative differentials of cost or value within three levels.

1) the level of the single activity,

2) the level of the links among internal and external activities
3) the level of the overall system of activities.

VALUE CHAIN & SINGLE ACTIVITIES: COST COMPETITIVE ADVANTAGE

Internal strategy analysis carried out through the value chain model is aimed at identifying the competitive advantage
of the company compared to competitors.

That competitive advantage can depend on positive differentials of cost and of value or attractiveness.

Let’s now focus on the sources of cost competitive advantage.

These sources will depend on the way the value chain is structured in terms of single activities, links among activities
and on the basis of the overall value system, also called level of vertical integration.
If we consider the first level (that is, single activities), cost competitive advantage (or disadvantage) can depend on the
way the company organizes and carries out specific primary or support activities.

The analysis of single activities is carried out following a specific set of steps.

The first step requires identifying significant activities in terms of:

• high incidence on total cost;

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 • high incidence on total cost;
• causes of cost and opportunities for real improvement. For example, if the origin of costs is exogenous, as in a costs
linked to the fulfilment of legal obligations, there are basically few levers to modify it. Conversely, if the causes of
costs are endogenous and linked to the way the business is structured and managed, there are possible chances of
improvement.
• competitors’ different behaviors in performing the given activity (since a comparative evaluation of competitor’s
choices in the activity can indeed help detecting new opportunities and sources of competitive differentials).

The second step refers to the evaluation and the quantification of costs of specific activities considered as significant,
and also their benchmarking with costs covered by major competitors in carrying out the same activities.

When applying the value chain model, this is when the main operational issues may arise.
As we evaluate internal costs covered to perform the business activity, we can face problems linked to inconsistent or
inaccurate internal accounting or to the difficulty in assessing shared activities, like administration.

We can solve these problems by implementing a more sophisticated overall accounting, management control system
based on state-of-the-art cost allocation methods, like the so called activity-based costing.

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Nevertheless, improving and innovating internal accounting can be expensive in terms of time and money.

Now, if simply collecting information within the company is complex, we may wonder how
difficult it could be to collect detailed information on the costs covered by competitors.

Information on competitors is nevertheless essential, given the mainly comparative nature

of internal analysis, which is based on the comparison with competitors’ costs and revenue
in order to deduce the existence of positive or negative differentials.

Managers carrying out an internal strategy analysis can rely on a set of primary and
secondary sources which are complementary when trying to obtain information on competitors’ costs.

Among primary sources, we can mention the so-called “knowledge spillover”, which
is the collection of information from direct sources by hiring competitors’ employees.
These human resources, formerly employed by competitors, can describe methods and costs of the activities carried
out in the companies they were working for.

This data collection model entails a set of problems, like: the protection of competitors’
information, which could be covered by non-disclosure agreements (or NDAs) signed by
former employees; the costs of hiring competitors’ employees, who are probably expecting
an wage higher than the one they earned before; and the chance that competitors might
one day do the exact same thing to the company, by hiring its own key employees.

Another primary source for data collection is represented by the so-called benchmarking
clubs, that is, associations organized around a trusted third party, which collects data
and information on a specific market by contacting all the main players working in it, in order to elaborate aggregated

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and information on a specific market by contacting all the main players working in it, in order to elaborate aggregated
and comparative industry studies.

These studies are then shared among the companies taking part in the research project:
data are often anonymous and represent a basis to carry out comparative analysis on
competitors’ costs and revenues.

Politecnico di Milano’s School of Management itself, and its applied research group of
the Digital Innovation Observatories I collaborate with, often performed this role of trusted- third party, which collected
data among the main operators of several markets and then presented data both in an aggregated way and offering a
high level of detail on specific activities.

It is also possible to collect relevant information on competitors’ costs and revenues by

talking to their supply chains partners, that is with their customers and suppliers.

Secondary sources of information on competitors are represented by public documents, like

the financial statement, public tenders or company’s profiles.

The third and last step of costs analysis focuses on identifying specific cost drivers,
that is, those factors explaining the origins of costs. Every activity has a specific cost structure, therefore costs drivers
can be different from one activity to another, as well as from one player to another.

VALUE CHAIN & SINGLE ACTIVITIES: COST DRIVERS - PART 1

The value chain analysis of a company’s cost competitive advantage requires to identify
cost drivers, that is, the causes or origins behind primary and support activities’ costs differentials.

Let’s consider the main cost drivers.

First of all, we can analyze the level of saturation of production capacity of what is called the technology and
organizational configuration of the company.

The underlying idea is that every company defines the technology and organizational method it will use to plan, develop
and coordinate those activities needed to put products on the market.
These methods are called technology and organizational configuration.
Within this configuration, each functioning activity can be carried out by using assets or facilities, which can be
represented by a plant, a machine or even an information system.
The asset is planned and sized on the basis of the so-called “target capacity” that is the yearly output capacity enabling
the company to use production factors in the most efficient way possible.

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the company to use production factors in the most efficient way possible.

So, if the actual production is set at the target capacity, such production capacity is saturated, and the average cost per
unit is minimum.

However, whenever we produce less than the asset’s target capacity, under-saturation
may occur; in under-saturation, fixed costs like firm infrastructure and fixed assets cannot be spread on the maximum
possible volume, so average cost per unit increases.

To give an example, should fixed costs be 1 million dollars per year, and target capacity
1 million units or transactions per year, by placing our actual production at target
capacity we would spread fixed costs and obtain an impact of 1 dollar per unit produced or
transaction performed; if under-saturation occurs, and actual production is 800,000 units per year, fixed costs impact
on a single unit or transaction is 1.25 dollars, and average cost per unit increases.

Conversely, in oversaturation, we have higher costs due to assets overstretch, waste, overtimes, and malfunctioning;
these additional costs still determine an increase in average cost per unit. So, given that both over or under saturation
conditions are suboptimal, why do they occur?

The answer is in the complexity of real situations companies face:

Under-saturation can be a consequence of a mistake in forecasting demand, leading to

an oversizing of the production system, but it can also be a deliberate strategic choice
the company makes in order to create surplus resources that raise entry barriers to the business area, thus preventing
or reducing the threat posed by new entrants considered in the five forces model.

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Even over-saturation can stem from a mistake in forecasting demand, in this case leading
to an under-sized technology and organizational configuration.
The asset can nevertheless get over-saturated to face contingent events, like meeting an
unplanned order by an important customer, whose strong bargaining power can force the
company to accept the order even though the costs are high.

Let’s now mention a second cost driver, linked to the level of saturation; let’s talk about the so-called scale economies.

The level of saturation has a short-term impact and concerns already functioning companies.
We can expect that in the long term a generic company constantly finding itself in under or over saturation, will choose
a different asset by selecting one with a target capacity that is designed to meet the real market demand.

A consequence of this is the assumption that the same activity can be carried out with
different infrastructural and organizational models of the activity itself, which means,
different technology and organizational configurations, on the basis of the scale and volumes to be produced.

The idea at the basis of scale economies is that scale and average cost per unit are inversely
related, so when the production volumes per year increase, the average cost per unit drops.

This happens because in the long term, given a certain scale, the company can select the
technology and organizational configuration that best suits that scale, aiming at reducing
the average cost per unit and at improving performances.

When the scale grows, the company takes advantage of a set of non-linear events, like the advantages of
standardization, specialization of labor and critical mass, in order to design and create a more effective plant, if
compared to plants with lower scale.

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compared to plants with lower scale.

Naturally, adopting a bigger and better asset will require investments.

Still, investments in an asset that is closer to the state-of-the-art, both from a technological
and an organizational point of view, is justified by an increase in the scale it has to produce.

Just to consider a trivial example, if you need to produce one car per year, you can do that in your garage with basic
technologies in a workshop fashion (since your scale does
not justify additional investments), and that car will have a high cost per unit.
But if you need to manufacture 1 million cars per year, such volume will justify an investment in automation, which
represents another technological and organizational configuration with a much lower cost per unit.

As a whole, the cost drivers of scale economies and saturation level have combined effects, since costs per unit of
activities depend both on long-term choices of sizing the technology and organizational configuration, on the basis of
the scale for which the company was conceived, and on the actual level of saturation of the chosen plant in the short-
term.

VALUE CHAIN & SINGLE ACTIVITIES: COST DRIVERS - PART 2

A similar trend with synergistic effects on scale economies is that of a further determinant,
called experience and learning economies, according to which average cost per unit drops
when the cumulative volumes produced by a company throughout its history increase.

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This was empirically proven, as it is a result of the experience and learning effect acquired
by operators who are increasingly able to improve the efficiency of processes developed
thanks to a growingly increased comprehension, repetition and rationalization.

Experience economies have a dynamic origin, linked to irreversibility and timing:

the first movers in a market can have a cost advantage linked to the only fact that they have accumulated production
over time, and therefore they acquired more experience on the activity connected to it, compared to competitors who
entered the market later.

The positive effect of experience and learning on cost differentials can be defended if the
experience is shared inside the company, but tacit outside of it.
Learning has to be collective among employees and managers, but the company shouldn’t hire suppliers or consultants
to formalize the experience and reuse it in its activities.

On the contrary, the learning effect is weak in case of relevant changes in context and
radical innovations introduced by competitors or by new entrants, which substantially disrupt the way the activity is
carried out and reset the curve of experience, thus forcing all
players to start from zero and acquire experience in the new process.

Localization of activities is also a possible cost determinant, as it has an effect on a

series of elements such as supply and transportation costs and it is affected by the choice’s timing.

Whenever localization is strategically relevant, and there is a natural or regulatory limit

to the maximum number of actors entering the most favorable markets, localization becomes a significant source of
cost competitive advantage, as well as a barrier to new entrants.

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Preferential access to distribution channels is partly linked to the topic of localization and considers how the actual
access to distribution channels can determine outbound logistic costs of competitors.

For instance, competitors can bear different costs to access existing channels, or set
up their own proprietary channels.

Costs can also be determined by institutional factors: in some industries, public administration and authorities define
which and how many actors can compete in the market (for instance, by providing specific licenses), they approve
regulations (for instance, environmental regulations), they establishing duties, incentives and disincentives.

When the role of public institutions is key, a company’s or an companies group’s political ability to obtain government
contacts and state aid through activities traditionally called lobbying or advocacy, can be a source of competitive
differentials from an internal point of view, or an entry barrier from an external point of view.

As a whole, the full list of cost drivers I discussed should be assessed to determine
the origins of a company’s cost competitive advantage or disadvantage compared to its rivals.

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VALUE CHAIN & SINGLE ACTIVITIES: VALUE DRIVERS

The value chain is the internal strategy analysis tool to assess the competitive advantage of a strategic business unit,
that is, the SBU’s ability to obtain higher margins than direct competitors.

These higher margins can be achieved by aiming at efficiency, so at cost reduction, or by

focusing on effectiveness, that is, the creation of value for the customer.

Whenever value for customer is created, the company’s offer is differentiated from the one of competitors and
appears as unique, thus escaping a competition based merely on price (and the related price wars).

To assess a company’s value competitive advantage based on effectiveness at the level of single value chain activities,
we should follow the same steps described to disclose a cost-based advantage:

1. we start by identifying value-significant activities;

2. we then proceed by evaluating and quantifying value contribution of specific activities considered as significant;
3. and by benchmarking with value created by major competitors in carrying out the same activities;
4. and eventually we conclude the process by identifying specific value drivers.

Within a company’s value chain, effectiveness can be driven by value drivers or value differentials residing in both
primary and support activities.
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primary and support activities.

Value drivers translate into the higher price that customers will be willing to pay due
to increased product performances, either tangible (based on real functions), or intangible
(linked to the brand-induced perceptions or emotions).

These value competitive advantages can depend on key elements of uniqueness in the company.

Quality is a major factor influencing the ability of the company to differentiate itself; in order to avoid a generic
interpretation, we will define quality both as the nominal product performance, that is the so-called compliance
quality with project requirements (or in-house quality), and the quality of actual performances when the product or
service is used on the field and determines a given customer experience (referred to as in-field quality).

Time also has an influence on value differentials, both in terms of delivery time, punctuality and time-to-market.

For example, a fast and on-time delivery can have a higher mark-up price, both in transactions between companies and
between companies and the final customer.

Flexibility in accepting adjustments to what was previously agreed upon or planned, and the ability to carry out those
unplanned adjustments in a short time can be another differentiating element for a company.

The same is true for the service level associated to the offer, considering both services incorporated in the product and
services complementary or ancillary to it.

Variety and customization of the offer, in terms of wide product range and the ability
to customize products according to the customers’ special needs, can have a positive effect on the price charged.

And finally, brand and company reputation can strengthen the perception of uniqueness of products. This is the aim of
marketing campaigns and experience-based customer journeys, which can be sometimes very expensive to set up and
orchestrate, but improve both brand awareness and brand image.

A combination of the value drivers reported here can explain a company’s ability (or
inability) to create and sustain a competitive advantage based on value and differentiation.

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VALUE CHAIN & LINKS BETWEEN ACTIVITIES

So far we have discussed how to face the first level of analysis in the value chain,
that is, the one of single activities.

Let’s now focus on the second level of analysis: the links between activities.
These links concern both internal relationships among value chain activities in a specific
company - like the link between inbound logistics, production and outbound logistics - and external relationships with
value chains of suppliers upstream, and customers downstream.

Some of the costs coming from internal links among activities are inventory costs for stock
the different phases of the production process, and costs of internal movements.

Value can also be affected by internal links, as quality can be preserved or deteriorate
as materials move from one activity to another (like operations and distribution); or adequate actions on support
activities like investments in R&D can benefit a company’s brand and the way it’s perceived as innovative by customers.

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External link costs and value may depend, again, on raw material inventory management
(also influenced by the input’s packaging), or on the relationship between the company’s
and the supplier’s production system, or on in-house quality control costs (that is on internal quality control), or on in-
field control (to check how the product performs on the market), or even the definition of incentivizing service level
agreements between the company and its’ suppliers and customers to align the whole supply chain on the same
objectives of value creation.

Since optimizing links among activities can reduce costs and maintain or increase the
value of the product or service, in recent years new management techniques and approaches were introduced to
improve such links among activities, like for instance lean manufacturing, “just in time” and “concurrent engineering”.

VALUE CHAIN & SYSTEM OF ACTIVITIES: VERTICAL INTEGRATION - PART 1

In the value chain analysis, after cost and value determinants are identified and analyzed at the level of single activities
and of links between activities, they have to be detected at the overall system of activities level, thus evaluating the
cost and value advantages or disadvantages coming from a company’s decisions on which activities should be
performed internally or should be outsourced.

This is the third and last level of analysis, and considers the overall value system, in order to evaluate the level of
vertical integration.

To define vertical integration, let’s consider a company internalizing and therefore integrating every activity, from the
gathering of raw material to the selling of a product or service to final consumers in a business-to-consumer approach.

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gathering of raw material to the selling of a product or service to final consumers in a business-to-consumer approach.

Such a company is said to have a full vertical integration, as it performs all the activities in the supply chain.

A classic example of a completely integrated company is Ford in the ‘20s, which took care of the collection of raw
materials like wood, iron and rubber, up to the distribution of vehicles to the final customer.

The opposite alternative to vertical integration is the so-called hollow corporation, only performing coordination and
financial control activities within the company, thus delegating all the other activities to outside suppliers through
outsourcing.

These two alternatives are the ends of the continuum of solutions available for companies, which can decide to perform
some activities internally, choosing hierarchy (that is, I perform inside and I am structured consequently), or give other
activities in outsourcing, thus turning to the market.

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Vertical integration means hierarchic system, whereas outsourcing means turning to the external market.

Why does the level of vertical integration pertain to the discussion on the value chain?

Because competitive advantage can depend on these strategic make-or-buy-choices, as the

costs or value associated to carrying out an activity can be different depending on whether the activity is integrated or
externalized. These choices also have an influence on the structure of the value chain, that will include more or less
activities.

And we know that strengths and weaknesses of the company depend on the structure of the value chain.

VALUE CHAIN & SYSTEM OF ACTIVITIES: VERTICAL INTEGRATION - PART 2

Let’s consider the pros and cons of the make choice, which means carrying out activities within the company, in turn
increasing the company’s vertical integration level.

A first advantage will be the dropping or disappearing of transaction costs: but what are transaction costs?

They are the costs to be borne in order to work with the external market, to carry out
a commercial transaction with one or more third-party suppliers.

If I can perform an activity within the company, I will not need a supplier and I will eliminate
costs for scouting, evaluation and selection of suppliers (let’s consider, for example the vendor-rating process) as well as
administration and legal costs (like costs to draft a contract) and potential logistic costs.

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A second advantage, at the same time, is that I will internalize the supplier’s margin,
as I will have to pay no margin to third parties. The only costs borne in this make option are internal costs for
performing and managing activities.

Other advantages are the increased control on activities’ costs, guaranteed by direct execution, together with better
control and development of potential core resources and skills linked to the internalized activity itself, like know-how
or adopted procedures, which over time, will be otherwise acquired and covered only by suppliers.

A last advantage of the make-option is the elimination of the problem of reliance on the supplier, which often leads to
the company losing sight of real costs of the activity and to weakening control of resources that are possibly key for
competitive advantage.

The make-option has nevertheless also a number of disadvantages, which also dually represent the advantages of the
buying or outsourcing option.

First of all, our company could be less efficient than a given external supplier in carrying out the activity, due to the
effect of “scale economies” and “experience economies”. Suppliers are likely to carry out the same activity for a
number of customers and will therefore have a higher scale and learning speed than the single company can achieve
alone. They will have higher production levels, quickly running down the experience curve, with positive effects on
average cost per unit.

Another obvious disadvantage of the make option is the higher investment in fixed capital, since in order to carry out
the activity within the company, the need in capital can be high and expenses include long term assets representing
fixed costs, which are not related to production volumes.

Indeed, contrarily to making, the buying option is a way to turn fixed costs into variable costs depending on the actual
volumes the company supplies from the external market.
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volumes the company supplies from the external market.

The make-option also requires costs linked to hierarchic coordination of the activity,
which becomes part of the company itself; it is important to underline, though, that even outsourcing partially entails
coordination costs, as the company changes its role from
executor to coordinator, thus controlling the supplier’s work.

Another problem linked to the make-option is the lack of motivation that could arise
in highly integrated companies, as human resources performing non-core activities can feel poorly motivated, or low
incentives to efficiency and effectiveness may be present when captive market conditions arise, that is, a company or
SBU is forced by corporate rules to acquire as inputs the outputs of another SBU belonging to the same corporate
portfolio.

The combined assessment of these pros and cons should drive a company’s strategic
decision favoring vertical integration or outsourcing.

VALUE CHAIN: MODEL'S LIMITATIONS

The Value chain model, as a whole, is extremely useful to support the strategy decision process for internal analysis, in
order to identify and make use of sustainable competitive advantage sources of cost and value.

Nevertheless, just like any model trying to identify and describe the complexity of real-life
situations, this framework has a set of limitations:

• it is very manufacture-oriented as it was designed for manufacturing companies in the first place. In order to solve
this problem we need to modify and customize Porter’s original value chain and redefine activities to help them
better suit the needs of a specific company analyzed

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 • traditional approach to the value chain sees it as a mainly sequential, linear set of activities thanks to which input
is turned into output.

• The value chain approach may imply that business-to-business relationships among companies to create an
industry’s products and services are also fundamentally linear.

This linear vision of company’s internal processes and industry relationships was recently
questioned by research on value networks, which claims that the link between activities
creating or destroying value in a market is not always linear: overlapping, circular or
vertical links can appear among different layers of activities covered by the same or different companies.

• The last limitation refers to the value chain’s alleged poor ability to focus on the so called internal resources and
competencies that drive a company’s competitive advantage. This criticism led to the rise of a stand-alone stream
on strategy research and practice focusing on internal analysis: the so-called resource-based view of the firm.

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MOOCS Pagina 54
Generic Strategies
lunedì 18 ottobre 2021 12:16

GENERIC STRATEGIES: COST LEADERSHIP, DIFFERENTIATION, FOCUS

A company’s business strategy is formulated through a set of intertwined logical steps.

After defining the vision, mission and objectives for the company (that stem from the general objectives at a
Corporate level), we carry out an external analysis of the market in order to identify the main threats and
opportunities.

This step is supported by models such as the Five Forces model and PEST Analysis.

We should also carry out an internal analysis to understand what are the company’s strengths and
weaknesses as opposed to competitors.

This time, we leverage the value chain model (possibly supported by a resource-based view).

Strategic analysis is not over, though, since we need to match results of the two analyses, external and
internal, to draw to important conclusions guiding us in formulating our business strategy.

This critical matching process is summarized by the SWOT analysis, where the acronym stands for strengths,
weaknesses, opportunities and threats.
The goal of the SWOT analysis is that of helping the decision-maker to tap strengths in order to seize
opportunities, and at the same time carry out defensive actions aimed at improving weaknesses and at
protecting the company from threats.

Indications coming from the SWOT analysis are used in devising strategic alternatives available to
companies.

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Michael Porter proposes a generic classification of these alternatives, called generic competitive strategies.

In order to create and sustain a competitive advantage, the company has to choose among a limited number
of generic strategies, distinguishing themselves for type of advantage and competitive scope.

Companies can try and achieve a cost advantage, if aiming at efficiency, or the advantage can be
uniqueness and value, when pursuing effectiveness.

As for scope, the company can work both on the overall market and on one or more target segments,
identified through the choice of adequate demand segmentation variables, like gender, age, education level,
or other more sophisticated elements like attitude and behavior.

Operating on an overall market and trying to obtain cost advantages leads to the adoption of a cost
leadership strategy.

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A cost leader aims at being the producer with the lowest costs on the market, by leveraging cost drivers like
scale economies, learning or localization.

The opposite generic strategy is that of differentiation, where you still work with a broad scope of action,
but tap value drivers with a positive effect on price, like quality, timing and service level; the company
aims therefore at presenting its product or service as unique, if compared to the one offered by
competitors, thus avoiding a competition based solely on price pressure.

If we identify different clusters of customers, whose needs are homogenous within the cluster but different
across different clusters, we pursue a focus strategy on one or more target segments.

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Focusing can rely on cost or value, leading to a focused cost leadership or a focused differentiation.

When it comes to generic competitive strategies, Porter has quite a draconian approach; he believes that
these strategy cannot be pursued at the same time.

So those who follow more than one generic strategy have a profitability below the average and risk to get
“stuck in the middle”, as he writes.

A company will have to select a single generic strategy, and that choice will have to be consistent with the
value chain structure and the competitive drivers characterizing it.

Cost leadership will then be based on delta efficiency and differentiation on delta effectiveness.

This rigid stance was criticized and reviewed by many scholars, underling the fact that there are exceptions
to the general rule, leading to hybrid strategies of cost leadership and differentiation.

For example, there can be strong cost advantages enabling the company to have surplus resources for
differentiation.

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Or, again the company can carry out radical changes in technology or organization, modifying the internal
structure and offering opportunities in terms of efficiency and effectiveness.

Once the company has formulated its whole business strategy, based on one or more strategic alternatives
coming from the SWOT and aligned with an overall orientation provided by Porter’s generic strategy, this
strategy should be implemented in a business model through an adequate execution.

Sometimes this is a very challenging step, as planning gets tested against reality, and misalignments may
emerge.

Considering these misalignments and the differences between performances expected and the performance
obtained pertains to the control phase, ending the strategy formulation process and starting a feedback
cycle that feeds future planning.

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Corporate Strategy and portfolio analysis
lunedì 18 ottobre 2021 12:16

CORPORATE STRATEGY & DIVERSIFICATION STRATEGY: DEFINITIONS

Strategy, that is the quest towards a sustained performance higher than competitors, is formulated and planned on distinct
though intertwined levels.

More specifically, the level of Strategy are three:

1. Corporate Strategy level,

2. Business Strategy level
3. Functional or operational level.

Let’s focus on the Corporate level, so as to define Corporate Strategy.

The main goal of Corporate Strategy is to manage financial resources allocation to the portfolio of different Strategic
Business Units the overall company is made of.

At this level, strategy defines in which industries and markets the company is going to compete.

So the company is seen from an helicopter view as a bundle, or portfolio, of different markets and Strategic Business Units.

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The key issues to deal with at this level are:

1. first, to analyze and compare the competitive positioning of each business, and of the overall business portfolio;

2. second, to suggest a generic strategic orientation to each business (that will be further specified at a Business Strategy
level);

3. and third, to define criteria and priorities for financial resources allocation to each business (cash generating vs. cash
absorbing SBUs), looking for an overall portfolio’s financial equilibrium.

In terms of scope, Corporate Strategy considers a Product Scope and a Geographical Scope.

About the Product scope, they key question to address is how focalized or specialized should the company be in terms of
the range of product it supplies. For instance, a company like Coca-Cola is specialized in the beverages industry, while
General Electric is diversified and it operates in multiple industries. Concerning the Geographical scope, the corporate
management shall consider what is the geographical spread of activities for the company: on the one hand, we have global
companies, such as Procter&Gamble or Toyota. On the other hand, we may find some companies which have decided to
focus on one country only.

Also, the definition of the level of vertical integration may be achieved by adding or removing streamlined SBUs to or from
the overall portfolio is another scope decision taken at the Corporate level. Here we find both highly integrated companies,
such as Samsung, and companies that outsource several activities of their value chain, like Apple.

So, as a whole, corporate strategy focuses on some fundamental topics that lead back to product range, geographical
coverage and level of vertical integration.

All of these corporate strategies that aim at changing the scope of a company’s portfolio go under the name of
“diversification strategies”.

Diversification is a Corporate level strategy aimed at entering new business areas which the corporation is not currently
serving (and creating new SBUs to serve such new business areas).

Considering the transaction costs theory, which compares the hierarchy vs market alternatives, diversification is hence a
choice of “hierarchy”, that is, internalizing a new business within the corporate portfolio, rather than externalizing or
outsourcing the activity and related business to the market.

However, diversification is not the only option:

when should we decide to diversify rather than, for instance, go for brand franchising, that is, selling our brand to third
parties to receive royalties in return?

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As we said, brand franchising is not a diversification strategy
since the company does not create an internal organization (that is, a SBU) to cover the industry. So, this represent an
example of the “market” option.

To investigate the issue, Robert Grant, in his book “Contemporary Strategy Analysis”, makes the example of Harley Davidson.
That brand is not only associated to motorbikes, but also to a broad range of gadgets like T-shirts and so on. However, Harley
Davidson does not own the companies that produce and sell those gadgets,
it only rents its brand to them. Why?
To understand it, we should consider two parameters: scope economies, and transaction costs.

Scope economies are scale economies applied to a wider range or family of activities performed:
the higher the aggregated volume per year of the products range the company produces (by adding up different products),
the lower the average cost per unit.

Transaction costs are the costs to bear to set up an agreement with the “market”.

By combining the effects of scope economies and transaction costs, we learn a fundamental rule about diversification.

Diversification is more favorable than other alternatives (e.g. brand franchising) when the following criteria are met: scope
economies are present, so aggregating the production of more activities within the company’s boundaries lowers average
cost per unit. And transaction costs are high, so internally performing a new activity is more convenient than outsourcing it
to an external party.

This rule should guide Corporate management’s decision concerning diversification strategies.

CORPORATE COMPETITIVE ADVANTAGE: CORRELATED VS NON-CORRELATED PORTFOLIOS

As Business strategy has the ultimate goal of creating a business competitive advantage, based on cost or value positive
differentials in the industry, corporate strategy pursues a corporate competitive advantage.

The sources of such advantage vary on the basis of the kind of portfolio that results from the diversification strategies put
in place.

Basically, two main typologies of business portfolios exist: a Correlated portfolio and a Non-correlated (or conglomeral)
portfolio.

In a correlated portfolio, the business areas show similarities in the customer needs satisfied, and the products and
services sold are operationally related.

In a non-correlated portfolio, such correlation becomes blurred, and products and services offered are apparently
unrelated. Usually, real-world cases of business portfolios do not strictly belong to one of these categories.

Real portfolios are a mix of the two extreme solutions.

Then, what are the pros and cons of these two kinds of portfolios?
And how are they related to the notion of corporate competitive advantage?

In a correlated portfolio, the following advantages emerge:

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In a correlated portfolio, the following advantages emerge:

• operational synergies (like economies of scale, economies of scope, and critical mass), sharing of resources and
competencies and similarities in markets and customers.

The disadvantages refer to: higher risk, related to the fact that all markets are somewhat similar and will enjoy the same
positive or negative trends at the same time; and high managerial complexity, due to the need to rethink, redesign and
aggregate activities and processes to merge different SBUs and actually make scale and scope economies happen.

In a non-correlated portfolio, the following advantages emerge:

• risk diversification, since different business will experience different performances and trends;
• the so-called bank effect, as cash-generating SBUs will be used as an internal bank to feed cash-absorbing SBUs within
the corporate portfolio;
• better use of top human resources, since the presence of highly skilled and specialized professionals will be justified by
the chance to make them move from one SBU, market or country to another whenever they are needed, also creating
diversified career paths;
• sharing of infrastructural activities common to all SBUs, like planning, administration, finance and control.

On the contrary, there are some disadvantages, determined by:

• organizational complexity, due to merging companies speaking different languages and traditionally covering unrelated
markets and customers;
• cultural heterogeneity, as different companies bundled in the same portfolio could not share the same key values;
• and few operational synergies, limiting the ability to purse scale and scope advantages.

To wrap it all up, corporate competitive advantage (that is, the ability to outperform competitors thanks to different
strategies at a corporate level) stems from: operational synergies within correlated portfolios
and/or financial synergies within non correlated portfolios (related to the bank effect).

Corporate managers should use both these levers wisely to formulate an effective Corporate strategy.

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Corporate portfolio matrixes
lunedì 18 ottobre 2021 12:17

CORPORATE PORTFOLIO MATRIXES: AN INTRODUCTION

Corporate strategy’s main goals are to manage financial resources allocation to the portfolio of different
Strategic Business Units the overall company is made of, while at the same time driving the decisions on
whether to enter new business areas and or grow, hold position or divest from the business areas already
covered.

Corporate strategy’s formulation should hence start with the analysis of the current company’s portfolio,
that is, the mapping of the products of a company, which allows to understand if such portfolio is balanced or
not from a financial and strategic perspective.

In order to support this process, the most widespread tools used by corporate managers are the so called
portfolio matrixes.

The basic idea behind such matrixes is to represent a diversified company’s BA in a simple visual model to
support Corporate Strategy definition.

These tools start from the following Key assumption: Long-term profitability of each SBU in the portfolio
depends on: Business Area attractiveness, and SBU competitive positioning in the Business Area.

But eventually, what does this mean?

Well, this is nothing but a synthesis of external and internal strategy analysis: for each SBU in the portfolio,
we are evaluating market attractiveness (which results from external analysis) and competitive positioning
and advantage (coming from internal analysis).

Portfolio matrixes are hence a sort of SWOT analysis in brief where we map not a single strategic business
unit, but the corporate portfolio as a whole. Hence, the main objectives of a portfolio matrix are: to analyze
the competitive advantage coming from the managing of a SBU’s portfolio; to support the choice of a
business portfolio (Corporate Strategy definition); to provide some guidelines to SBUs for the definition of
their own business strategy; and to analyze the corporate strategies of competitors.

THE BCG MATRIX - PART 1

Corporate portfolio matrixes support strategic decision makers in their choices of financial allocation and
general strategic direction for the strategic business units they control.

Over the years, several consulting companies have created their version of the portfolio analysis.

The most popular ones are the BCG matrix, elaborated by the Boston Consulting Group, and the GE-
Mckinsey matrix, designed by McKinsey consultancy firm for the General Electric corporation.
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Mckinsey matrix, designed by McKinsey consultancy firm for the General Electric corporation.

The BCG matrix, also known as the growth-share matrix, was developed by The Boston Consulting Group in
1968 and has these main goals: to verify the bank effect; to shape a business portfolio
that is well balanced from a financial point of view; to define a virtuous cycle strategy; and to analyze the
strategies of competitors.

As all portfolio matrixes, the BCG describes products and SBUs in terms of just two factors: business area
attractiveness and competitive positioning of the SBU.

However, two basic assumptions are made: First, Business Area attractiveness can be measured through
“Market growth rate”.
Market growths implies that price wars are less likely, and as customer base expands, offer can catch up with
demand.

Second, SBU competitive positioning can be measured through “Relative market share”: a company having a
relative market share higher than its main competitors can benefit from cost advantages
depending on size (economies of scale and experience, production capacity saturation, and so on).

How to calculate relative market share?

We should consider our company’s total market share (let’s say, 30%) and divide it by our biggest
competitor’s market share.
Should we assume our biggest competitor’s market share is 20%, our relative market share would be 1.5.
Being higher than 1, we know our SBU is the market leader in terms of share, so it benefits from the
abovementioned advantaged.
Should we change our assumption and claim the competitor’s total share is 60%, our relative market share is
then 0.5, so it’s smaller than 1. This means our SBU is a follower in the market.
Less strict applications of relative market share calculation do not require our company to necessarily be the
market share leader to be deemed “strong” in the market, and consider the average of our 3, 5 or maybe 10
best competitors’ total market shares as a benchmark. This tends to lower the denominator and increase our
likelihood to have a relative share above 1.

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Now that we know about its assumptions , I can show you how the BCG Matrix looks like.

On the X axis, we consider SBUs competitive positioning and we chart it through the relative market share.
As we know, the mathematical threshold to be considered market leader is 1, so from right to left, our SBU
will be either a follower or a leader.

On the Y axis, we consider market attractiveness we approximate through market growth rate.
There is not mathematical threshold here, since the definition of a growth level to label a market as
promising is partly subjective.

Back in the ’60, an astounding 10% growth rate was considered a good level to discriminate between
promising and shrinking markets; now, we should probably lower the bar, considering
4 to 5% (or sometimes even zero) as a growth threshold.

An SBU positioned at the bottom of the matrix operates in an unattractive market, while at the top of the
matrix we find growing (and attractive) business area.

The BCG matrix crosses the relative market share and the market growth rate, to obtain 4 different cells, that
correspond to 4 different SBUs positions from a static perspective.

A strong SBU in a growing market is called a star.

A strong SBU in a market that’s not growing more that the threshold set (or is even shrinking) is labeled a
cash cow.
A weak SBU in a fast growing market, instead, is a question mark.
While a weak SBU in an unattractive market is called a dog.

THE BCG MATRIX - PART 2

These 4 positioning are easy to memorize, but still don’t tell us much about the strategic and financial
dynamics occurring within them: we hence need to move from a static to dynamic perspective to get the

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dynamics occurring within them: we hence need to move from a static to dynamic perspective to get the
most out of the matrix.

More specifically, we should consider two interplaying dynamics:

The Bank effect (or financial dynamics) and the SBUs and market lifecycle (or lifecycle dynamics).

Let’s start considering the financial dynamics.

Statically, a star apparently seems the best place to be: but financially speaking, although a high relative
market share guarantees high revenues, market growth requires high investments to catch up with it and
protect SBU’s leadership from possible competitors. As a result, net cash flows (that is, the financial measure
of performance) for stars is approximately zero.
Stars are not generating cash, or they might even need to absorb some.

Following this logic, it’s easier to understand what a cash cow positioning implies: cash cows enjoy high
revenues thanks to a large customer base, while require low investments thanks to the market’s maturity:
the resulting net cash flows will be high.
These SBUs are hence strong cash generators, which should be “milked” for cash.

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Question marks don’t show high revenues due to a low market share, and contemporarily require heavy
investments to follow growth and challenge competitor’s leadership.
This leads to high cash absorption, a typical condition startup companies face.

Dogs are businesses where both competitive positioning and attractiveness are low, so low revenues match
low need for investments, and net cash flow are approximately zero.

Following a financial dynamic, net cash flows should be taken from cash cows are redirected to a selection of
question marks the corporation wants to bet on, and to those stars financially in need; following the strict
guidelines from the matrix, dogs should be divested, unless they show strong synergies with cash cows,
stars or selected question marks.

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The financial dynamics combines with the business lifecycle dynamics, possibly triggering a virtuous cycle.
A startup SBU is born as a question mark with uncertain fate, but if properly managed and supplied with
financial resources, it becomes a star; a star market, sooner or later, will stop growing, thus turning into a
cash cow or mature market; and a mature market in the long run will either disappear, thus leaving the
matrix, or become a dog to be divested from.

So, to wrap it all up:

• Stars are high-growth, high-share products which may or may not be self-sufficient in cash flow.

• Cash Cows are products with high market share and slow growth, which characteristically generate
large amounts of cash.

• Question Marks are products with high growth but low share. They require large amounts of cash to
maintain market share, and still larger amounts to gain share.

• Dogs are products with low market share and slow growth, which neither generate nor require
significant amounts of cash.

Maintaining share usually requires the reinvestment of any profits as well as additional capital.

These products are often called «cash traps».

The recommended corporate strategies for each SBU positioning are summarized here.

All products eventually become either cash-cows or dogs.

The value of a product is completely dependent upon obtaining a leading share of its market before growth
slows.

The balanced portfolio has: stars whose high shares and high growth assure the future; cash-cows that supply
funds for that future growth; and question marks to be converted into stars.
Dogs need dedicated strategies, mostly concerned with exploitation of synergies with other SBUs, or
divestiture.

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THE GE-MCKINSEY MATRIX

The GE-McKinsey matrix was developed in 1971 by McKinsey at the request of General Electric, to support
the management its diversified corporate portfolio.

This matrix adopts two dimensions, similarly to the BCG matrix approach: market segment attractiveness;
and business strength.

Contrarily to the BCG matrix, which employs two simple indicators (market growth and relative market share)
as proxies of attractiveness and competitive positioning, each of the GE-McKinsey dimensions is built up
from a large number of variables.

This leads to the multi-attributes approach characterizing this strategic tool.

By systematically weighting those variables, each business (or product) is classified into one of nine cells in
a 3 x 3 matrix.

Like the BCG matrix, this approach aims to compare investment opportunities.
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Like the BCG matrix, this approach aims to compare investment opportunities.

As stated above, the difference lies in the fact that multiple measures are used to assess market
attractiveness and competitive position.

GE-McKinsey’s main goals are: to allocate resources correctly; to choose the businesses to invest in; to
maintain and to divest; and to analyze the strategies of competitors.

So the GE-McKinsey matrix uses a multi-attribute approach to position SBUs into 9 cells, coming from the
crossing of the axes «industry attractiveness» and «SBU competitive positioning».

Such multi attribute approach works as follows.

Industry attractiveness is measured by several parameters, such as:

Market size, Growth rate, Profit margin potentials, Competitive intensity, Cyclical or seasonal sales,
Position on learning curve.

Those parameters are assigned a weighting factor by the decision maker, on the basis of their relative
importance. After that, the decision maker assigns each parameter a rating from 1 to 10.
The final score for each parameter is calculated by multiplying the weight by the rating.

The weighted average resulting from the sum of all scores provides an indication about industry

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The weighted average resulting from the sum of all scores provides an indication about industry
attractiveness.

Similarly, relative SBU positioning and its strengths are calculated as a weighted average of the following
parameters: Relative market share, Price competitiveness, Product or service quality perception,
Marketer’s knowledge of customers and the market, Sales effectiveness, and Geographical coverage.

The crossing of industry attractiveness and business strengths allows to position a given SBU in one of 9 cells,
for which specific guidelines or recommended strategies are provided.

SBUs whose positioning is deemed desirable are placed in cells 1, 2 and 3 at the top-left corner of the
matrix: here, the tool suggests an Invest/Grow strategy.

SBUs with an undesirable positioning (from 7 to 9) should be treated with a Harvest/Divest strategy.

While SBUs with an in-between positioning (from 4 to 6) should be managed with a selective strategy mostly
aimed at generating earnings.

After having analyzed these matrixes in detail, what are their main pros and cons when we compare them?
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After having analyzed these matrixes in detail, what are their main pros and cons when we compare them?

The BCG tool is simple but simplistic.

In fact, growth may not mean attractiveness, since attractiveness is driven by many structural determinants
beyond growth, as the five forces teach us; moreover, relative market share may not mean competitive
advantage, since niche strategies may prevail.

On the contrary, GE-McKinsey is extremely detailed, but it requires expensive analyses to be completed.

Also, it becomes subjective as decision makers have to decide the weighting factors and the rating.

Usually, the two matrixes are used in a combined way when assessing a company’s portfolio and
formulating a corporate strategy.

CONCLUSIONS

In the fourth and concluding week of this course we tackled strategy formulation at a Corporate level.

We defined what Corporate strategy is, we identified its main goals and connections with the Business
Strategy level; we also learnt how to, make decision about diversification strategies based on the notions of
scope economies and transaction costs; we identified the pros and cons of Correlated vs Non -correlated
Corporate portfolios of Strategic Business Units; we applied Corporate Portfolio matrixes to formulate a
Corporate Strategy, with specific references to the tools of the BCG Matrix and the GE-McKinsey matrix. And
eventually we discussed about the overarching issue of creating Corporate competitive advantage through
consistent Corporate portfolio choices.

I’m aware that some of the traditional theories, models, concepts and approaches we discussed
are and might even seem pretty old: however, I warmly encourage you not to disregard their
descriptive, methodological and sometimes normative power.

These strategy analysis and formulation models are still widely employed in today’s companies, and they
provide the foundations for more recent innovative approaches in strategy.

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