Business and Corporate Strategy EDHEC 2024-2025 PDF

Business and Corporate Strategy MSC IN CORPORATE FINANCE & BANKING Oct. – Dec. 2024  Welcome to Business and Corporate Strategy ! Claus HIRZMANN Strategic-Finance SAS [email protected]...

Business and Corporate Strategy MSC IN CORPORATE FINANCE & BANKING Oct. – Dec. 2024  Welcome to Business and Corporate Strategy ! Claus HIRZMANN Strategic-Finance SAS [email protected] Strategic-Finance Sparking Innovation & Agility  Business and Corporate Strategy Class Schedule Date Session Activity Oct. 28 - 29 Session 1 Introduction, Lecturing & Real Options preview, Case study: ZARA vs. ASPHALTE.COM Nov. 07 - 08 Session 2 Case study: The Dollar Shave Club, Lecturing, Instruction for Simulation Game Nov. 07 - 12 Asynchronous Simulation Game: Back Bay Battery, read case and play round #1 Nov. 12 - 13 Session 3 Simulation Game: Review of round #1, instructions for round 2, Lecturing Nov. 12 - 18 Asynchronous Simulation Game: Back Bay Battery, read advanced case and play round #2 Nov. 18 Online exam Continuous assessment (15%), 08h30 – 08h45 (15’), MCQ (12 questions) Nov. 18 - 19 Session 4 Simulation Game: Review of round #2 Strategy implementation – Agility & Real Options: Lecturing and exercises 3  Business and Corporate Strategy Class Schedule Date Session Activity Nov. 21 - 22 Session 5 Strategy implementation – Agility & Real Options: Lecturing and exercises Nov. 27 Online exam Simulation Game (30%) (final exam part 1) : advanced case (round #3), 10h00 – 12h00 (120’) Nov. 28 - 29 Session 6 Strategy implementation – Agility & Real Options: Lecturing and exercises Dec. 05 - 06 Session 7 Strategy implementation – Design-to-Cost: Lecturing Wrap-up Dec. 09 Q&A Online Q&A sessions on Collaborate, one for each group A, B, C, D, 1.5h each. Dec. 18 On-campus exam Final exam part 2 (55%), 14h00 – 16h00 (120’), Real Options Case study + MCQ (20) 4 Business and Corporate Strategy The Key Role of Finance in Strategy 01. Introduction What is strategy, The Role of Finance in Strategy, Heavy trends 02. Business Value requires a Consistent Strategy The Strategic Thinking Process, Digitalization breaks-up Value Chains, Managing Disruption and the Technology Adoption Cycle. Cases: ZARA vs ASPHALTE, The Dollar Shave Club, Bay Back Battery, GDS. 03. Key Financial Methods for Strategy Implementation Agility & Real Options, Design-To-Cost 04. Wrap-up Reading Recommendations 5 01. Introduction What is Strategy ? Conceptual Background The Role of Finance in Strategy Heavy Trends 6 What is Strategy ? Company fundamentals: the Guidelines for Strategy Vision ambition Strategy = A plan to be successful: Firm’s objective: Value Creation How to setup a company such that it produces what customers want & prefer ? Conceptual Background Mission purpose 1. Understand what customers want. 2. Satisfy customers by delivering according products/services. Values identity 3. Achieve customer preference vs similar offers through a better (competitive) or differentiated (innovative) offer. Objectives goals & priorities 4. Sustain profits & growth through competitive advantages / entry barriers. 5. Produce today’s performance AND create Strategy the conditions for future success. → a plan to be successful Observe Heavy Trends / Foresight ! 7 What is Strategy ? Company fundamentals: the Guidelines for Strategy Vision ambition Firm’s objective: Value Creation Conceptual Background Mission purpose Strategy Values identity Finance Leadership Objectives goals & priorities Strategy Jointly drive transformation a plan to be successful and innovation 8  The Role of Finance in Strategy ? Jointly drive transformation & innovation Change: Make the market dream Conceptual Background Strategy Choices: Courage: Decisions for Value Creation Lead change despite of resistance Investment Go/NoGo, Finance Leadership AND deliver results at present. Budgeting & funding, Cost optimization. Jointly drive transformation and innovation “SPEED of CHANGE is the main/only competitive advantage” Rita Gunther-McGrath, The End of Competitive Advantage 9  Heavy Trends: Technological Innovation for the Financial Sector 2021 by Laurent MAROCHINI, Head of Innovation at Société Générale Securities Services in Luxembourg slide 1/7 Digital acceleration Who led the digital transformation of your company in 2020 ? (1) CEO (2) COO Digital onboarding (3) CTO Electronic signatures (4) Shareholders Digital interactions (5) Clients New ways of working (6) COVID 10  Heavy Trends: Technological Innovation for the Financial Sector 2021 by Laurent MAROCHINI, Head of Innovation at Société Générale Securities Services in Luxembourg slide 2/7 Data, Big Data and AI Cloud infrastructure IoT 5G AI: Detect, Predict, Complete/Generate 11  Heavy Trends: Technological Innovation for the Financial Sector 2021 by Laurent MAROCHINI, Head of Innovation at Société Générale Securities Services in Luxembourg slide 3/7 Tokenization and digital currencies coming out of Lab DEFI (decentralized finance) Token economy CBDC and stable coins Crypto assets and institutional investors 12  Heavy Trends: Technological Innovation for the Financial Sector 2021 by Laurent MAROCHINI, Head of Innovation at Société Générale Securities Services in Luxembourg slide 4/7 An open ecosystem to benefit innovation Rise of fintech and tech companies (data exploitation) Business model strategy / innovation dilemma Open Banking: PSD2 13  Heavy Trends: Technological Innovation for the Financial Sector 2021 by Laurent MAROCHINI, Head of Innovation at Société Générale Securities Services in Luxembourg slide 5/7 Hyper client-centricity Societal revolution ATAWAD (mobile, instantaneous, self-service) UX “Less is more” Co-creation 14  Heavy Trends: Technological Innovation for the Financial Sector 2021 by Laurent MAROCHINI, Head of Innovation at Société Générale Securities Services in Luxembourg slide 6/7 Data: an asset that must be protected Cost of cyber attack Digital assets … but not only 15  Heavy Trends: Technological Innovation for the Financial Sector 2021 by Laurent MAROCHINI, Head of Innovation at Société Générale Securities Services in Luxembourg slide 7/7 The future of Environment, Social and Corporate Governance (ESG) Client behavior Regulation (must keep pace to secure national competitiveness) Jean-Marc Jancovici: Doing business while disregarding energy and climate ? GDP = Energy = CO2 16  Heavy Trends: The Role of Finance evolves ! KPMG: “As traditional, historical analysis becomes fully automated, analytics capabilities will shift from descriptive to prescriptive.” Descriptive Diagnostic Predictive Prescriptive What happened ? Why did it happen ? What will happen ? What should we do about it ? 17  Heavy Trends: AI learning paradigms Supervised Reinforced Unsupervised Input and Expected Iterations of trial, Learning statistical output are provided evaluation and relationships from vast adjustment amounts of text / content (1) Try experiment (3) Learn and update (2) Evaluate 18  Heavy Trends: AI applications: Completion/Generation, Detection, Prediction Constraint Generation by stochastic and combinatorial optimization. E.g.: Text, music, voice, image and video Page content by courtesy of Guillaume PEREZ generation Text with rhymes Product line scheduling Product line scheduling Image with particular style 19  Heavy Trends: AI applications: Completion/Generation, Detection, Prediction Properties Correlation using generative models. E.g.: Matrix completion, incomplete Page content by courtesy of Guillaume PEREZ experiment analysis Preference elicitation, recommendations & advertisement Product design / configuration Pierre Paul Marion Julie Die Hard Avatar ? Game of Thrones ? Simpsons ? ? 20  Heavy Trends: AI applications: Completion/Generation, Detection, Prediction Image Recognition, using neural networks and Page content by courtesy of Guillaume PEREZ segmentation. E.g.: Cancer detection in MRI Anatomic anomaly detection Data Analysis. E.g.: Fraud / anomaly detection 21  Heavy Trends: AI applications: Completion/Generation, Detection, Prediction Data / Event Prediction using Reinforced Learning, by iterations of properties from prior data. E.g.: trial, evaluation and learning. E.g.: House Pricing, Properties of Page content by courtesy of Guillaume PEREZ Motor controller inorganic substances Autonomous Experimental Protocol Maintenance requirement (1) Try experiment (3) Learn and update (2) Evaluate 22  The Role of Finance in Strategy and a VUCA world: A Real Case Example TelCoSat company, a global satellite operator, receives a promotional offer from one of its major satellite suppliers. While this offer is attractive, TelCoSat hesitates because it is uncertain about the demand level for transmission capacity in the projected target market: If the demand was strong, then TelCoSat would need a big transmission capacity to address it. The relating investment would be 100. TelCoSat estimates that there is a 40% chance for a strong market demand. Exercise / Case Study If the demand was just fair, then a small transmission capacity would be sufficient to address it. The relating investment would be 70. TelCoSat estimates that there is a 60% chance for a fair market demand. Building the satellite and putting it in service takes 2 years. It then starts generating financial returns: If there was a strong demand for transmission capacity, the return would be PV(t=2) = 150 if TelCoSat had invested in the big satellite, and PV(t=2) = 90 if the small satellite was in place. If there was a fair demand for transmission capacity, then the big or small satellite would generate a return of PV(t=2) = 90. The capital costs for TelCoSat are: WACC = 9%, risk-free rate = 3%. Please take 15’ and work in groups of 2 or 3 to answer this question: What is your investment advice to TelCoSat ? (Hint: Be as smart as TelCoSat !) 23  Business Valuation per Real Options – Definition of a stock option The deal: A Call Option on Stock is the right but not the obligation to buy that Stock at an Exercise Price. This right is valid at maturity date (European Option) or also before (American Option). The value of a Call Option is the risk-adjusted present value of its future payoffs. Conceptual Background Stock Price V Call Payoff C Call Option is a flexible deal: buy underling Stock only if it is worth it (observable through stock ticker). C = MAX(V–EX; 0) Uncertainty about future Stock Price V Time Stock Price V Maturity date Exercise Price EX 24 Business Valuation per Real Options – preview Call Payoff C Call Option is a flexible deal: buy underling Stock only if it is worth it (observable through stock ticker). Exercise / Case Study US Treasury C = MAX(V–EX; 0) Bond Stock Price V Exercise Price EX If both assets have the same Present Value and require the same Investment,. What investment do you prefer ? Why ? 25 Business Value requires a Consistent Strategy The Lean Startup Approach Conceptual Background 26 The BIG picture: Finance has a key role to play … … for turning Strategy in Reality and thus to … 27 Business and Corporate Strategy The Key Role of Finance in Strategy 01. Introduction What is strategy, The Role of Finance in Strategy, Heavy trends 02. Business Value requires a Consistent Strategy The Strategic Thinking Process, Digitalization breaks-up Value Chains, Managing Disruption and the Technology Adoption Cycle. Cases: ZARA vs ASPHALTE, The Dollar Shave Club, Bay Back Battery, GDS. 03. Key Financial Methods for Strategy Implementation Agility & Real Options, Design-To-Cost 04. Wrap-up Reading Recommendations 28 02. Business Value requires a Consistent Strategy The Strategic Thinking Process Conceptual Background Conceptual Background Digitalization breaks-up Value Chains 1O110 Case Study: ZARA vs. ASPHALTE Managing Disruption and the Technology Adoption Cycle Case study: The Dollar Shave Club, Simulation Game: The Bay Back Battery company The Platform business model Case discussion: GDS for airline tickets 29  Business Value requires a Consistent Strategy The Strategic Thinking Process: How to setup a company such that it produces what customers want & prefer ? (A) Assessment of the situation: The homogeneous Strategic Unit of Analysis (SUA) Conceptual Background 1. Understand what customers want. 2. Satisfy customers by delivering according products/services. (B) Understand the rules of the game, Assess environment & capabilities, Build & implement strategy 3. Achieve customer preference vs similar offers through a better (competitive) or differentiated (innovative) offer. 4. Sustain profits & growth through competitive advantages / entry barriers. (C) Observe Heavy Trends, Invest today to prepare for the future 5. Produce today’s performance AND create the conditions for future success. 30 (A) Situation: Thinking in homogeneous Strategic Units of Analysis (SUA) Key idea: Define and analyse market from a customer focused perspective ! Satisfy customers, not managers ! WHAT ? Function provided by Product / Service Conceptual Background Value proposition SUA by WHAT + HOW WHO ? Needs / Key Success Factors per Customer Segment HOW ? The way a Product / Service is made available from a customer perspective: How to shop, pay, receive, use, dispose. 31  (A) Situation: Thinking in homogeneous Strategic Units of Analysis (SUA) WHO ? Needs / Key Success Factors per Customer Segment Conceptual Background Find homogeneous needs / expectations / situations. This defines a Customer Segment. If well defined, key success factors become obvious. 32  (A) Situation: Thinking in homogeneous Strategic Units of Analysis (SUA) WHO ? Needs / Key Success Factors per Customer Segment Page content by courtesy of Karin KOLLENZ-QUÉTARD Beware: Do not conclude from same demographics on homogeneous needs / customer segments ! Conceptual Background Example of demographics: Male Born in 1948 Raised in the UK Married twice Practicing Christian Lives in a castle Wealthy and famous King Charles III Ozzy Osbourne 33  (A) Situation: Thinking in homogeneous Strategic Units of Analysis (SUA) WHO ? Needs / Key Success Factors per Customer Segment Conceptual Background Find homogeneous needs / expectations / situations. This defines a Customer Segment. If well defined, key success factors become obvious. Beware: Do not conclude from same demographics on homogeneous needs / customer segments ! Important to identify latent needs (market push, see Ford-T, iPhone, Blue Ocean Strategy) vs. expressed needs (market pull). The needs of customers relate to their own “job to be done”, see STRATEGIZER canvas. As the provided products / services help them to achieve their goals and to create value, customers are ready to pay for them. 34  (A) Situation: Thinking in homogeneous Strategic Units of Analysis (SUA) WHO ? Needs / Key Success Factors per Customer Segment Careful: Do not only account for the needs of your direct customer but also for the needs of your customer’s customers Conceptual Background all along the value chain ! Engine Manufacturer OEM Installer Shopping mall Store Consumers In this example, the engine’s safety unlock feature is important to all. Thus, Somfy should not only account for the needs of the OEM who integrates its products, but also the needs of all subsequent customers in the value chain ! 35  (A) Situation: Thinking in homogeneous Strategic Units of Analysis (SUA) WHO ? Needs / Key Success Factors per Customer Segment Conceptual Background Find homogeneous needs / expectations / situations. This defines a Customer Segment. If well defined, key success factors become obvious. Beware: Do not conclude from same demographics on homogeneous needs / customer segments ! Important to identify latent needs (market push, see Ford-T, iPhone, Blue Ocean Strategy) vs. expressed needs (market pull). The needs of customers relate to their own “job to be done”, see STRATEGIZER canvas. As the provided products / services help them to achieve their goals and to create value, customers are ready to pay for them. Thus, in a B2B setting, remember that the needs of you customers include the needs of their own customers (see SOMFY example). Account for all needs along the value chain ! Dual- or N-sided-markets (platforms): All sides of the market are your customers, as you have to cater for the needs of all. A customer is not necessary the party that pays. 36  (A) Situation: Thinking in homogeneous Strategic Units of Analysis (SUA) Points of Sales WHO ? Providers Common Needs / Key Success Factors per Customer Segment When operating Dual- or N-sided-markets (platforms): Conceptual Background All sides of the market are your customers, as you have to cater for the needs of all. A customer is not necessary the party that pays. For the Global Distribution System (GDS), both sides of its dual-sided market have to be taken care of ; both are customers. In contrast, the Revenue Model is asymmetric: When a Point of Sales books an e-ticket through the GDS, the providers pay a booking fee to the GDS, and the GDS uses part of it to pay an incentive to the Point of Sales. 37  (A) Situation: Thinking in homogeneous Strategic Units of Analysis (SUA) WHO ? Needs / Key Success Factors per Customer Segment Conceptual Background Find homogeneous needs / expectations / situations. This defines a Customer Segment. If well defined, key success factors become obvious. Beware: Do not conclude from same demographics on homogeneous needs / customer segments ! Important to identify latent needs (market push, see Ford-T, iPhone, Blue Ocean Strategy) vs. expressed needs (market pull). The needs of customers relate to their own “job to be done”, see STRATEGIZER canvas. As the provided products / services help them to achieve their goals and to create value, customers are ready to pay for them. Thus, in a B2B setting, remember that the needs of you customers include the needs of their own customers (see SOMFY example). Account for all needs along the value chain ! Dual- or N-sided-markets (platforms): All sides of the market are your customers, as you have to cater for the needs of all. A customer is not necessary the party that pays. As per the Technology Adoption Cycle, several discrete customer categories can be distinguished (see Crossing The Chasm). 38  (A) Situation: Thinking in homogeneous Strategic Units of Analysis (SUA) WHO ? 1 2 3 4 5 Needs / Key Success Factors per Customer Segment Page content by courtesy of Karin KOLLENZ-QUÉTARD Discrete customer categories / segments as per the Technology Adoption Cycle by Moore: Conceptual Background 1. Innovators: Technology 5. Laggards: enthusiasts (2.5%) Sceptics (16%) 2. Early Adopters: 3. Early Majority: 4. Late Majority: Visionaries (13.5%) Pragmatists (34%) Conservatives (34%) 39  (A) Situation: Thinking in homogeneous Strategic Units of Analysis (SUA) WHAT ? Function provided by Product / Service Conceptual Background First, think in terms of functions that fulfill needs. Then, think about products / services that implement these functions. This ensures to consider all possible solutions for implementing a function as product / service. Moreover, it ensures to consider all relevant competitors. Indeed, a competitor provides same or similar functions to the same customer segment. Example: Fast travelling between Paris and Marseille can be provided by air travel or by high speed trains. Airlines and the SNCF are competitors in this segment. Remember: An industry is not defined by products / services ! Industries are defined by offers of SIMILAR FUNCTIONS as per customer perception. 40  (A) Situation: Thinking in homogeneous Strategic Units of Analysis (SUA) HOW ? Conceptual Background The way a Product / Service is made available from a customer perspective: How to shop, pay, receive, use, dispose. The HOW takes a customer perspective: How is a product/service made available to customers, i.e. how do they shop and pay for it, how do they receive it, how are they supported in its use and disposal ? 41  (A) Situation: Thinking in homogeneous Strategic Units of Analysis (SUA) The Value Proposition strives for satisfying customer needs. It is the combined result of WHAT function is provided through products / services, AND HOW those products / services are made available to customers. Conceptual Background The way you choose to operationally implement this Value Proposition is called the Business Model = How to create, deliver and capture value ? → Supply Chain, Technology, Value added, Sales & Distribution channels, Customer Support, Revenue model. Recommendation of internet site about Business Models: https://businessmodelnavigator.com/network 42  (A) Situation: The Value Proposition Canvas Page content by courtesy of Karin KOLLENZ-QUÉTARD Step 3: Describe GAINS, i.e., benefits, Step 1: Describe the jobs that customers expected / desired / surprising: want to fulfill: Conceptual Background Functional utility (quality, quantity, Functional (perform, solve, …) performance, speed, accessibility) Social (look good, gain power or status, …) Social gains Emotional (esthetics, feel good, security, …) Positive emotions Basic needs (communication, news, …) Savings (cost, time, effort, …) Consider also ancillary jobs in roles of Buyer, Step 2: Describe customer PAINS while Co-creator, Transferrer (resell, …) trying to get the job done: Outline in which specific context a job is done, Negative emotions because that may impose constraints (e.g. while Undesired costs and situations driving, outside, …) Risks before, during and after getting the job done (financial, social, technical, social, …) Watch video on: https://www.strategyzer.com/canvas/value-proposition-canvas 43  (A) Situation: The Value Proposition Canvas Page content by courtesy of Karin KOLLENZ-QUÉTARD Step 4: List the products & services the Value Proposition builds on, check fit Conceptual Background Describe in which way they are PAIN relievers and/or GAIN creators address customer’s PAINS / GAINS. Check fit ! Step 5: Reiterate step 4 and optimize Focus on most important customer needs and adjust/optimize. Goal is to be able address the selected set of needs EXTREMELY well. Advice: Keep steps 1-3 separate from 4-5, i.e., first observe needs, then design proposition. Emotional & social jobs are at least as important as functional ones ! 44 02. Business Value requires a Consistent Strategy The Strategic Thinking Process Conceptual Background Conceptual Background Digitalization breaks-up Value Chains 1O110 Case Study: ZARA vs. ASPHALTE Managing Disruption and the Technology Adoption Cycle Case study: The Dollar Shave Club, Simulation Game: The Bay Back Battery company The Platform business model Case discussion: GDS for airline tickets 45 1O110 How Digitalization Breaks-Up Value Chains Case study: ZARA vs. ASPHALTE.COM Exercise / Case Study vs. 46 1O110 Traditional Fashion Business Cash-Flow viewCase study: ZARA vs. ASPHALTE.COM Exercise / Case Study 47  1O110 How Digitalization Breaks-Up Value Chains Case study: ZARA vs. ASPHALTE.COM Analysis of ZARA, a brand of INDITEX: Questions of interest: 1. WHO are ZARA’s target customers, i.e., what needs do they have ? 2. WHAT kind of products does ZARA deliver, and HOW does ZARA make them available to its customers ? Distinguish Exercise / Case Study produced and perceived quality. 3. What is the Value Chain of INDITEX (see Annual Report 2021, pages 176 - 178) ? 4. How does INDITEXT manage forecasting uncertainty of fashion preferences (see Annual Report 2021, page 178- 179) ? 5. What is the price point for a Jeans ? 6. Does INDITEX (ZARA) create LOYALTY ? How ? Resources: WEB Sites: https://www.zara.com/us/ (EN) or https://www.zara.com/fr/ (FR) www.inditex.com Annual Report 2021: annual_report_2021.pdf, available on BlackBoard. 48 1O110 How Digitalization Breaks-Up Value Chains Case study: ZARA vs. ASPHALTE.COM Analysis of ZARA, a brand of INDITEX: Answers: 1. ZARA’s target customers are: WOMEN, MEN and KIDs, “… people looking for responsible, sustainable, and quality fashions”. Exercise / Case Study Accessible / affordable products Enjoyable buying experience 2. The kind of products that ZARA delivers, and how ZARA delivers them. Clothes, Shoes & Bags, Accessories, Perfumes & Beauty Produced Quality Product quality: fairly good Responsible and sustainable products: not strongly communicated to / perceived by customers Perceived Quality Fashion level: Fairly fashionable / trendy Stores / Online: Enjoyable buying experience Satisfied or money back (Store and Online: Try-on, touch, feel, return/exchange, Online Size guide) Image / Brand equity / Made in … 49 1O110 How Digitalization Breaks-Up Value Chains Case study: ZARA vs. ASPHALTE.COM Analysis of ZARA, a brand of INDITEX: Answers: 3. What is the Value Chain of INDITEX ? Exercise / Case Study Logistics to Shipment Online Online Online to Store: commerce Mfg: Raw Finished Warehouse Consumers Reporting Design of Sales material, Goods collection Forecasting Production Inventory Logistics to Retail Retail Retail Store: Mktg Store: Stores & Sales Reporting 2x per week 4. How does INDITEXT manage forecasting uncertainty of fashion preferences ? INDITEX adapts very quickly to customer preferences as observable from the actual sales success: at the Design stage, collections are updated constantly through the seasons. Manufacturing is highly flexible and adapts to customer demand, thereby minimizing surplus. Logistics are constantly fine-tuned to adapt to sales decisions. They distribute twice per week to stores and online warehouses, keeping inventories small. Stores/Online report back on customer preferences in real-time. 50 1O110 How Digitalization Breaks-Up Value Chains Case study: ZARA vs. ASPHALTE.COM Analysis of ZARA, a brand of INDITEX: Answers: 5. What is the price point for a “premium” Jeans ? As per the ZARA online store, a Jeans is priced 29.95 € to 49.95 € Exercise / Case Study INDITEX achieves this very good price point through: Quick adaption to customer preferences and highly effective inventory management (see value chain), Economies of scale (multi-brands, volume) & scope (cross-selling) Vertical integration of design, logistics and distribution, stores/online 6. Does INDITEX (ZARA) create LOYALTY ? How ? Yes, they create LOYALTY through these levers: Consumers get consistently very good VALUE for money. Consumer preferences are constantly tracked to serve them best. Logic of continuity: New articles arrive frequently (~weekly basis), which is an incentive for consumers to get back for shopping. Moreover, this drives consumers to take immediate purchasing decisions, as the articles may be available for a few weeks only. 51 1O110 How Digitalization Breaks-Up Value Chains – Financial view Case study:view Cash-Flow ZARA vs. ASPHALTE.COM Exercise / Case Study 52 1O110 How Digitalization Breaks-Up Value Chains Case study: ZARA vs. ASPHALTE.COM Analysis of ASPHALTE.COM: Questions of interest: 1. WHO are ASPHALTE’s target customers, i.e. what needs do they have ? 2. WHAT kind of products does ASPHALTE deliver, and HOW does ASPHALTE make them available to its customers ? Exercise / Case Study Distinguish produced and perceived quality. 3. What is the Value Chain of ASPHALTE ? 4. How does ASPHALTE manage forecasting uncertainty of fashion preferences ? 5. What is the price point for a “premium” Jeans ? 6. Does ASPHALTE create LOYALTY ? How ? Resources: WEB Sites: www.asphalte.com/en-us/h (EN) or www.asphalte.com (FR) www.asphalte.com/en-US/h/pages/about (EN) or https://www.asphalte.com/f/pages/notre-mission-f (FR) 53 1O110 How Digitalization Breaks-Up Value Chains Case study: ZARA vs. ASPHALTE.COM Analysis of ASPHALTE.COM: Answers: 1. WHO are ASPHALTE’s target customers, i.e. what needs do they have ? Men and women who are looking for durable, classic, quality clothes, produced in a sustainable and cost- Exercise / Case Study effective manner. 2. WHAT kind of products does ASPHALTE deliver, and HOW does ASPHALTE make them available to its customers ? Distinguish delivered and perceived quality. Clothes, Shoes and Accessories Produced Quality Outstanding product quality: Comfort and long lasting Responsible and sustainable products (environmental, social) Outstanding value for money: cost effective (pre-order, no intermediary, no shop), long lasting usage Perceived Quality Classic style, does not easily become unfashionable Online Co-creation with customers --> Customers get exactly what they want Satisfied or money back (Try-on, touch, feel, return/exchange, Online Size guide) Pre-ordering --> No over production, intrinsically eco-friendly and cost effective Sense of community 54 1O110 How Digitalization Breaks-Up Value Chains Case study: ZARA vs. ASPHALTE.COM Analysis of ASPHALTE.COM: Answers: 3. What is the Value Chain of ASPHALTE ? Exercise / Case Study Co-creation Pre-order Mfg: Raw of Few campaign Shipment to Design material, Products (Mktg & Consumers Production ( & Mktg) Sales) 4. How does ASPHALTE manage forecasting uncertainty of fashion preferences ? There is intrinsically no uncertainty about the desired products and the sales volumes, thanks to co-creation and pre-ordering. 55 1O110 How Digitalization Breaks-Up Value Chains Case study: ZARA vs. ASPHALTE.COM Analysis of ASPHALTE.COM: Answers: 5. What is the price point for a “premium” Jeans ? As per the ASPHALTE.COM site, the “Ultimate Jeans” is priced 139 € (99 €), comparable to Hugo BOSS Exercise / Case Study ASPHALTE.COM achieves outstanding value through: co-creation and pre-ordering: 100% avoidance of surplus and unsolds no intermediary: no inventories, no mark-ups no physical shops long lasting usage (produced quality, classic style) intrinsically eco-friendly and cost effective (resources, manufacturing) 6. Does ASPHALTE create LOYALTY ? How ? Yes, they create LOYALTY through these levers: Consumer gets consistently outstanding VALUE for money. Consumer identifies with sustainability goals of ASPHALTE. Logic of continuity: Get back to ASPHALTE, over time you build your complete wardrobe. 56 1O110 How Digitalization Breaks-Up Value Chains – Financial view Case study: ZARA vs. ASPHALTE.COM Cash-Flow view Exercise / Case Study 57  1O110 How Digitalization Breaks-Up Value Chains Case study: ZARA vs. ASPHALTE.COM Comparison of INDITEX (ZARA) and ASPHALTE.COM: Comparison of value chains INDITEX (ZARA) Logistics to Shipment Online Online Online to Store: Exercise / Case Study commerce Mfg: Raw Finished Warehouse Consumers Reporting Design of Sales material, Goods collection Forecasting Production Inventory Logistics to Retail Retail Retail Store: Mktg Store: Stores & Sales Reporting 2x per week ASPHALTE.COM Co-creation Advantages: Co-creation ensures match with customer Pre-order Mfg: Raw Shipment preferences, Pre-ordering avoids surplus, Direct shipment of Few Design campaign material, to Products avoids intermediaries, inventories and physical shops. → (Mktg & Sales) Production Consumers ( & Mktg) Intrinsically cost effective and eco-friendly. Digitalization enables ASPHALTE.COM to focus on value Consistency ! (1) Classic fashion → Co-creation feasible added activities and to change the rules of the game ! (customers can tell), waiting for delivery ok (pre-ordering), (2) High quality & lifespan → worth to take the time for co- creation, co-creation allows to set quality level right. 58 1O110 Your investment advice ? Imagine Asphalte had great ambitions for GROWTH, and their plan was to double sales each year for the next 4 years. Please take 15’ and work in groups of 2 or 3 to answer these questions: What aspects would you consider for reaching an investment Exercise / Case Study recommendation ? What would be your investment strategy ? Market potential: Demonstrated demand. Chances of sales success. Operations: Ramp-up capability Financials: Required investment amount, Return Cash-Flows. Strategy: Risk of provoking imitation, also by incumbents to counter-act disruption. Investment Strategy: Invest step-wise, i.e., continue only when observing doubled sales, else stop. → Real Options valuation. 59  1O110 Your investment advice ? - Real Options valuation Cash-Flow view Exercise / Case Study 60  1O110 Your investment advice ? - Real Options valuation RO values Exercise / Case Study 61 1O110 Your investment advice ? - Real Options valuation Exercise / Case Study Even if the Real Options valuation is positive, can we accept possible losses ? 62 Business and Corporate Strategy The Key Role of Finance in Strategy 01. Introduction What is strategy, The Role of Finance in Strategy, Heavy trends 02. Business Value requires a Consistent Strategy (continued) The Strategic Thinking Process, Digitalization breaks-up Value Chains, Managing Disruption and the Technology Adoption Cycle. Cases: ZARA vs ASPHALTE, The Dollar Shave Club, Bay Back Battery, GDS. 03. Key Financial Methods for Strategy Implementation Agility & Real Options, Design-To-Cost 04. Wrap-up Reading Recommendations 63 02. Business Value requires a Consistent Strategy The Strategic Thinking Process (continued) Conceptual Background Conceptual Background Digitalization breaks-up Value Chains 1O110 Case Study: ZARA vs. ASPHALTE Managing Disruption and the Technology Adoption Cycle Case study: The Dollar Shave Club, Simulation Game: The Bay Back Battery company The Platform business model Case discussion: GDS for airline tickets 64  Business Value requires a Consistent Strategy The Strategic Thinking Process (A) Assessment of the situation: The homogeneous Strategic Unit of Analysis (SUA) 1. Understand what customers want. Conceptual Background 2. Satisfy customers by delivering according products/services. (B) Understand the rules of the game, Assess environment & capabilities, Build & implement strategy 3. Achieve customer preference vs similar offers through a better (competitive) or differentiated (innovative) offer. 4. Sustain profits & growth through competitive advantages / entry barriers. (C) Observe Heavy Trends, Invest today to prepare for the future 5. Produce today’s performance AND create the conditions for future success. 65  (B) Rules of the Game: Types of markets as per customer sensitivity Customer segment is sensitive to … QUALITY Yes No Conceptual Background VALUE VOLUME Differentiation Commodity, no LOYALTY, Yes e.g., Mercedes Class A Quality is just a constraint, PRICE e.g., pasta, Windows PCs PREMIUM not informed Niche at high-end, No e.g., Bugatti Chiron PREMIUM / VOLUME: Price = Cost + Margin VALUE: Price = Target Price = Target Cost + Target Margin (at target quality) → Design-to-Cost method 66  (B) Rules of the Game: General strategies per market type PREMIUM strategy Strategy for uniqueness / monopoly situation. Bypassing competition. Assumptions: Customer is QUALITY sensitive. There is a demand for any price level. Conceptual Background Strategy: 1. Be perceived unique and remain so. Systematically exceed customer expectations (LOYALTY). Just communicate on QUALITY, never on PRICE. High price and margin. 2. Maximize (short term) profit, “Skimming / milking the market” Demand Increase Increase “Skimming the market” profit quality Increase prices 3rd 2nd 1st Price 67  (B) Rules of the Game: General strategies per market type VOLUME strategy Frontal competition (on price). Use this strategy only if you can be #1 in your market. “Winner is the one who is able to lose most”. Assumptions: Customer is PRICE sensitive; demand strongly depends on low price. Quality is just a constraint of a commodity – but not to be neglected, quality requirement is constant. Conceptual Background There is an EXPERIENCE effect: The more a product gets produced, the more efficient production can become. Strategy: Increase Produce Costs profit more EXPERIENCE effect enables Reduce Sell more costs Σ Production Volume Note: The maximum possible growth rate depends on the supported financial leverage L = D / E Decrease prices 68  (B) Rules of the Game: General strategies per market type VALUE strategy This strategy requires to understand what is valued by customers. Bypassing competition. Assumptions: There is a (historical) relation between produced QUALITY and PRICE. “You get what you pay for” Customers balance PRICE and perceived QUALITY. Conceptual Background Strategy: Create VALUE by exceeding QUALITY and/or PRICE expectation. Higher QUALITY: Increase produced quality as per company’s strengths, Increase perceived quality e.g., stylish design, add services, longer opening hours, branding / image, customization, TTM/speed, … Lower costs and PRICE: Invest in aspects that are valued by the customers, divest otherwise. Design-to-Cost. QUALITY PREMIUM Systematically exceed VALUE “You get what you pay for” “You get what you pay for” → Creates LOYALTY VOLUME PRICE 69  (B) VALUE Strategy: Change the Game Better satisfy customers: Be better than competition on Relative Quality score of competitors most important criteria, but for each decision criteria difficult as everybody Conceptual Background 100 focusses on that. 90 80 Competitive hole, everybody 70 is bad on that. You can easily create a huge difference here 60 → will become important to 50 customers (e.g. Citicorp Bank). 40 See also Blue Ocean Strategy. 30 20 10 0 KSF 100 KSF 80 KSF 50 KSF 30 KSF 25 Compet 1 Compet 2 Compet 3 Me “The average customer does not exist. An average strategy satisfies nobody”. M. Montebello → It is better to be outstanding on some decision criteria than average on all. 70  (B) VALUE Strategy: Choose your Strategic Positioning Market … grows doesn’t grow (contested) Conceptual Background Compete Compete for NEW Grab existing customers from competitors. customers Beware of price war ! Choice Create NEW, uncontested market space, see Value Strategy / Blue Ocean Strategy. competition Key is to have a better customer perception, i.e. better perceived quality: Bypass Satisfy customer needs – expressed and/or latent. Differentiate, consider the integrated solution Product + Services. Optimize price, reduce costs. 71  (B) VALUE Strategy: The Blue Ocean Strategy Red Ocean strategy Blue Ocean strategy Compete in existing market space. Create uncontested market space. Additional Conceptual Background Beat the competition. Make the competition irrelevant. Exploit existing demand. Create and capture new demand. Trade-off: Price vs. quality Create value: Better price & quality Make competition irrelevant by creating a New Product Category. Operate in your uncontested market, expand and dominate. 1. Customer focus: Needs & frustrations 2. Value Innovation: a. Quality innovation (improve) i. Raise specific quality features ii. Create new features b. Lower cost & price i. Eliminate costs ii. Reduce costs Watch video on: https://www.youtube.com/watch?v=5Xd5lvyWMe8 72  (B) Competitiveness: Reduce costs throughout the internal Value Chain PORTER’s generic value chain, Additional Conceptual Background also useful for M&A analysis. Activity creates Activity contributes to Activity is Advice value to customer ? core competencies ? compulsory ? YES YES don’t care Key activity, invest ! No outsourcing. YES NO don’t care Key activity, invest ! Can be outsourced. NO YES YES Invest for the future. NO YES NO Maintain if important contribution. NO NO YES Maintain and make it NOT compulsory. NO NO NO Eliminate or otherwise justify ! 73  (B) Pressure & Trends: Assessment of External Environment by player PORTER’s 5 (+1) Forces Barriers for New entrants Conceptual Background Suppliers bargaining power Intensity of Competition Customers bargaining power Competitor = similar value proposition to same customer segment Threat from Substitutes Regulatory requirements Also note competition for share of wallet (e.g. Apple) The Competitive Pressure depresses margin. Therefore, measure it by giving a rating for now and the future. Only the evolution is important. The relevant question is: How much have you changed compared to your BEST competitor ?” Check for consistency of performance target ! 74  (B) Pressure & Trends: Assessment of External Environment by theme The 10 (+1) Macro Sources of Disruption Because technology is so intertwined with everyday life, it is shown as intersecting with all the other Conceptual Background sources. Reference to original article: A. Webb, The 11 Sources of Disruption Every Company Must Monitor, Disruption 2020, MIT Sloan Management Review Spring 2020, (see 202003_Disruption2020_MITSloan.pdf, pages 43 to 48). 75 (B) Pressure & Trends: Assessment of External Environment Forecasting – Assessment of the future Projection: Future is presumed to be like the past. Additional Conceptual Background Prospection: Future is unlike the past: Scenario Technique: 1. Look at heavy trends 2. Build pessimistic / optimistic / plausible scenarios Note: For a better forecast, reduce the period of forecasting. E.g.: ASPHALTE / DELL with build-to-order, no need for forecasting 76  (B) Competitive Advantages: Assessment of Internal Capabilities Competitive Advantages arise from Core Competencies / Core resources and allow to deliver solutions that customers value as they address their needs/requirements, and perceive as making the difference to competitors. Types of competitive advantages: Conceptual Background (1) From Research Size (economies of scale, experience effect) → not applicable to starting products. A privileged access to resources / pre-emption of scarce resources A privileged access to customers ! A possibility to limit competitors’ moves, e.g., patent, customer LOYALTY, switching VITAL TO CHECK costs, network effect (2) From Theory Cost for VOLUME / VALUE situation Differentiation for PREMIUM / VALUE situation Speed to market Sustainable Competitive Advantages are costly to imitate, takes time to imitate. 77  (B) Competitive Advantages: Assessment of Internal Capabilities Validate your Competitive Advantages: Check consistency of your specific advantages and the customer expectations. Additional Conceptual Background How do you compare to competitors ? Importance of advantage You have a You have a HIGH Avoid war and weakness on a key significant improve. variable ! strength ! to customer Improve it, it’s your Use it, it’s your MED weakness. strength. Don’t LOW Don’t care. Don’t count on it. care. Worse Same Better Your position relative to main competitor 78  (B) Competitive Advantages: Long-term vs. Short term Advantages How long last your Competitive Advantages ? – Imitation takes some time. Strategy must be consistent: Advantage should last long enough to get at least your money back. FCF Conceptual Background t tBE Beware: Direct-To-Consumer models are easy to create and easy to imitate! Supply-Chain & Production outsourced, web-only retail, direct distribution, social media marketing. Examples: Everlane (clothes), Casper (mattresses), Warby Parker (eyeglasses), Gemmyo (jewelry). “It’s never been cheaper to start a business, although I think it’s never been harder to scale a business.” – Neil Blumenthal, co-founder of Warby Parker “SPEED of CHANGE is the main/only competitive advantage” Rita Gunther-McGrath, The End of Competitive Advantage 79  (B) Competitiveness: Creating Competitive Advantages Objective of a competitive strategy is to gain significant advantage over competitors at an acceptable cost. Competitive advantages come from: Superior positioning: use existing capabilities to perform, be able to adapt (flexibility) Additional Conceptual Background Superior (use of) resources: invest in capacities, create the conditions for future performance. 80  (B) Create Strategy: Consistency: Environment vs. Capabilities SWOT analysis Opportunities / Threats: External evolutions that may have a positive / negative future impact on your business. Strength / Weakness: Internal characteristics that may have a positive / negative future impact on your business. S/W to be assessed in relation to O/T. → First list O/T, then assess S/W. Conceptual Background S/W to be assessed vs. competition and importance to customer segment. Analysis: “Criss-Cross” S/W with O/T to identify an action plan for meeting your objectives – your strategy: S+O: Matching strategy, S+T: Neutralisation strategy, W+O: Transformation strategy, W+T: Defence strategy Positive impact Negative impact Strengths Weaknesses Internal origin ! Opportunities Threats COMPULSORY External in business creation origin 81  (B) Create Strategy: Consistency: Environment vs. Capabilities SWOT analysis – Attention points Define quantified objective (S.M.A.R.T.), otherwise the SWOT analysis ends up with wishful thinking. Additional Conceptual Background Competitive analysis myopia: Analyses … Focus on existing resources, existing competitors and past strategies, “Take only a snapshot of a moving car” Are more focussed on results (financial indicators) than causes (competitors’ strategies). “All men can see the tactics whereby I conquer, but what none can see is the strategy out of which great victory is evolved”. Sun Tzu The Assessment Traps: The NO ANALYSIS trap: “I know it all, I have seen the business for years”. The SELF-JUSTIFICATION trap: “Tell me why I am right, and let me accept anything that validates my (already reached) conclusions (anyway I won’t listen when it does not)”. The ANALYSIS-PARALYSIS trap: “Let’s make another analysis to reach perfect information”. The FAKE ANALYSIS trap: “We have decided what our customers want, we have done our analysis”. 82  (B) Market Level: General Growth Strategies Key idea: By growing along one axis, one can reduce risks as the other two axis remain constant. WHAT ? WHAT ? WHAT ? Additional Conceptual Background SUA SUA SUA SUA SUA SUA SUA SUA SUA WHO ? WHO ? WHO ? HOW ? HOW ? HOW ? Product based strategy: Find new buyers Customer based strategy: Find new Channel based strategy: Find new (Market Development). Increase VOLUME, products (Product Development). sales & distribution channels (Market reduce costs. Give lower costs to buyers, SPECIALZATION on one customer group, Penetration). Address one group of otherwise dissatisfaction / competition. Be build a strong PLATFORM* of products and customers through several channels your own cannibal on PRICE. Not a profit add further products to have customers (DISTRIBUTION strategy). margin game. buying more. Create LOYALTY by exceeding expectations; be your own cannibal on * PLATFORM in the sense of a basis that QUALITY. Competitors will attack one slice allows the efficient creation of multiple where they are best. (similar) products. 83  (B) Corporate Level: Growth Strategies through M&A Key ideas: Synergies, Economies of scale / scope, Control, Risk diversification. WHAT ? WHAT ? Additional Conceptual Background SUA SUA SUA SUA SUA SUA WHO ? WHO ? Business Model: SUA Supply Chain, Sales & Distribution channels … HOW ? HOW ? Unrelated diversification: M&A to Related diversification: M&A to achieve diversify business risks. synergies / economies of scale or scope by acquiring Forward / Backward integration: new buyers, Integrate your neighbors in the value new products (or technology) and/or chain, thereby creating synergies and new sales & distribution channels. control. 84 Business and Corporate Strategy The Key Role of Finance in Strategy 01. Introduction What is strategy, The Role of Finance in Strategy, Heavy trends 02. Business Value requires a Consistent Strategy (continued) The Strategic Thinking Process, Digitalization breaks-up Value Chains, Managing Disruption and the Technology Adoption Cycle. Cases: ZARA vs ASPHALTE, The Dollar Shave Club, Bay Back Battery, GDS. 03. Key Financial Methods for Strategy Implementation Agility & Real Options, Design-To-Cost 04. Wrap-up Reading Recommendations 85 02. Business Value requires a Consistent Strategy The Strategic Thinking Process (continued) Conceptual Background Conceptual Background Digitalization breaks-up Value Chains 1O110 Case Study: ZARA vs. ASPHALTE Managing Disruption and the Technology Adoption Cycle Case study: The Dollar Shave Club, Simulation Game: The Bay Back Battery company The Platform business model Case discussion: GDS for airline tickets 86  Managing Innovation and Disruption: Business Rejuvenation Simulation game: Back Bay Batteries Page content by courtesy of Karin KOLLENZ-QUÉTARD Instructions for ‘Back Bay Batteries’ Simulation, available as of Nov. 07, 2024: 1. Follow this link: https://hbsp.harvard.edu/import/1226592 Exercise / Case Study 2. Log-In to Harvard Business Publishing (HBP) Please use your EDHEC e-mail address as username. If first-time user, click Forgot Password on the login screen. 3. Click ‘Run simulation’ 4. Read ‘Foreground Reading’ available on Blackboard and in the Prepare Section of the simulation 5. View ‘How to Play’ Video available in the Prepare Section of the simulation 6. You can perform up to 2 plays. 87  Managing Innovation and Disruption: Responding to Disruption Case study: Gillette vs. Dollar Shave Club Page content by courtesy of Karin KOLLENZ-QUÉTARD Exercise / Case Study vs. DOLLAR SHAVE CLUB 88  Managing Innovation and Disruption: Responding to Disruption Case study: Gillette vs. Dollar Shave Club Page content by courtesy of Karin KOLLENZ-QUÉTARD 1. Why has Gillette been successful for so long? Exercise / Case Study 2. What is DSC’s value proposition ? 3. What are the main differences between Gillette’s and DSC’s business model ? 4. What are the strategic options open to Gillette in responding to DSC ? Which of these options should Gillette pursue ? Why ? 89  Managing Innovation and Disruption: Responding to Disruption Case study: Gillette vs. Dollar