E-Business, Entrepreneurship, and Digital Transformation I - Part II 2024 PDF

E-BUSINESS, ENTREPRENEURSHIP AND DIGITAL TRANSFORMATION I Prof. Andreas Hinterhuber Roncade, 19 September 2024 STRATEGY DEVELOPMENT Emp...

E-BUSINESS, ENTREPRENEURSHIP AND DIGITAL TRANSFORMATION I Prof. Andreas Hinterhuber Roncade, 19 September 2024 STRATEGY DEVELOPMENT Empowering different levels within an organization can How much empowerment of middle and lower influence how strategies are Top vs. middle formed and implemented. Top vs. bottom roles levels is beneficial for the organization? management often sets the vision and high-level strategy, but middle and lower levels can provide valuable insights and execute plans effectively. Line vs. Which of this two groups should be responsible for staff roles the strategy formation process? Line Roles: Typically involve core business functions (e.g., production, sales) directly tied to the company’s primary goals.Staff Roles: Support functions (e.g., HR, finance) that provide expertise and assistance.Consideration: Both roles can contribute to strategy formation, but line roles often have more direct insights into operational challenges and opportunities. Should the strategy formation activities be carried Internal vs. out by members of the organization or should they external roles be outsourced? Internal Roles: Employees within the organization who understand its culture and operations.External Roles: Consultants or external experts who can provide objective perspectives and specialized knowledge.Consideration: Using internal resources can leverage existing knowledge, while external resources can offer fresh insights and expertise. Source: De Wit, B., Meyer, R., Strategy Synthesis, 2e, London, 2005 2 © Prof. A Hinterhuber Università Ca’ Foscari 2024. Proprietary. All rights reserved. Intended Strategy: This is the original plan or set of intentions devised by top DELIBERATE VS. EMERGENT STRATEGY management. It includes specific goals, initiatives, and detailed plans to achieve them. Deliberate Strategy Execution: This involves the systematic implementation of the intended strategy. It requires disciplined execution, monitoring, and adjustment to stay on track. Realized Strategy: The actual outcome after the strategy has been implemented. Ideally, this matches the intended strategy, but in practice, there might be deviations due to unforeseen circumstances or changes in the environment. Unrealized Strategy: Parts of the intended strategy that are not implemented. This could be due to changing priorities, resource constraints, or new information. Emergent Strategy: Patterns of behavior or decisions that emerge organically without a formal plan. These are often identified retrospectively and reflect the organization's adaptive responses to real-world conditions. Realized Strategy: The outcome of both deliberate and emergent strategies. It represents what the organization actually did, combining planned initiatives with adaptive responses. Source: Mintzberg, H. and Waters J., Of Strategies, Deliberate and Emergent, Strategic Management Journal, 1985 Source: Mintzberg, H., Waters J., Of strategies, deliberate and emergent, Strategic Management Journal, 6(3), 257-272, 1985 3 © Prof. A Hinterhuber Università Ca’ Foscari 2024. Proprietary. All rights reserved. DELIBERATE VS. EMERGENT STRATEGY We’re not necessarily great overall strategists [at Virgin] … we often do things and then work out afterwards what the overall strategy was. ¾Sir Richard Branson ¾Chairman, Virgin Group 4 © Prof. A Hinterhuber Università Ca’ Foscari 2024. Proprietary. All rights reserved. DELIBERATE STRATEGY Direction Without plans and objectives organizations would be adrift Commitment Plans enable early commitment to a course of action Advantages:Provides clear direction and Plans have the benefit of coordinating all strategic focus.Enables resource allocation and Coordination prioritization.Facilitates performance measurement initiatives within a firm to cohesive pattern and control. Disadvantages:Can be rigid and inflexible.May not adapt quickly to changes or unexpected Optimization Plans facilitate optimal resource allocation challenges.Relies heavily on accurate forecasting and planning. Plans are a means for programming all Programming organizational activities in advance Source: De Wit, B and Meyer, R., Strategy Synthesis, 2e, London, 2005 Source: De Wit, B., Meyer, R., Strategy Synthesis, 2e, London, 2005 5 © Prof. A Hinterhuber Università Ca’ Foscari 2024. Proprietary. All rights reserved. Advantages:Highly flexible and adaptive.Responds well to real-time changes and new information.Encourages innovation and creative problem-solving. EMERGENT STRATEGY Disadvantages:Can lack clear direction and focus.May lead to resource misallocation.Harder to measure and control performance. Organizations must keep an open mind to Opportunism grab unforeseen opportunities Organizations must keep their options open Flexibility and not commit themselves to early Learning The best way to find out what works is to give it a try Entrepreneurship Different people in the firm will have different ideas Getting things done in firms includes Support understanding political and cultural dynamics Source: De Wit, B and Meyer, R., Strategy Synthesis, 2e, London, 2005 Source: De Wit, B., Meyer, R., Strategy Synthesis, 2e, London, 2005 6 © Prof. A Hinterhuber Università Ca’ Foscari 2024. Proprietary. All rights reserved. STRATEGIA DELIBERATA E STRATEGIA EMERGENTE Deliberate Strategy Strategizing Emergence The ability of acting The ability of thinking and intentionally; so thinking acting at the same time and before acting letting strategy emerge entrepreneurship Source: De Wit, B and Meyer, R., Strategy Synthesis, 2e, London, 2005 Source: De Wit, B., Meyer, R., Strategy Synthesis, 2e, London, 2005 7 © Prof. A Hinterhuber Università Ca’ Foscari 2024. Proprietary. All rights reserved. STRATEGIAPERSPECTIVES STRATEGY DELIBERATA E STRATEGIA EMERGENTE STRATEGIC PLANNING STRATEGIC INCREMENTALISM PERSPECTIVE PERSPECTIVE Deliberateness over emergence Emergence over deliberateness Intentionally designed Gradually shaped Figuring out Finding out Forecast and anticipate Partially unknown and unpredictable Make commitments, prepare Postpone commitments, stay flexible Formally structured and comprehensive Unstructured and fragmented First think, then act Thinking and acting intertwined Hierarchical Dispersed Optimal resource allocation and coordination Experimentation and parallel initiatives Programming Learning Implemented top-down Requires broad cultural and cognitive shifts Source: De Wit, B and Meyer, R., Strategy Synthesis, 2e, London, 2005 Source: De Wit, B., Meyer, R., Strategy Synthesis, 2e, London, 2005 8 © Prof. A Hinterhuber Università Ca’ Foscari 2024. Proprietary. All rights reserved. JUDGEMENT AND DECISION MAKING – BIASES Source: Hinterhuber, A., Violations of rational choice principles in pricing decisions, Industrial Marketing Management, 47, 65-74, 2015 9 © Prof. A Hinterhuber Università Ca’ Foscari 2024. Proprietary. All rights reserved.  COGNITIVE BIAS IN DECISION (AND THUS STRATEGY) MAKING Cognitive bias Definition of bias Advice Confirmation bias Seeking out information Actively seek disconfirming which support own arguments, evidence neglecting (or regarding as irrelevant) all other information Sunk cost bias Factoring in un-recoverable Use zero-based budgeting Loss Aversion:Concept: People prefer to avoid losses rather than acquiring equivalent gains. The pain of costs when making a decision; Look only at incremental costs losing something already invested can drive further continuing to invest additional and revenues investment to avoid realizing the loss.Example: resources even when failure Investing more in a failing project to avoid the is likely emotional discomfort of acknowledging the loss. Overconfidence Tendency to over-estimate Use objective benchmarks of own own abilities and to abilities underestimate future Test assumptions on a variety of challenges scenarios Illusion of knowledge, illusion Improve learning by frequent of control (e.g. 80% of drivers feedback believe to be in the top 5%) 10 © Prof. A Hinterhuber Università Ca’ Foscari 2024. Proprietary. All rights reserved. COGNITIVE BIAS IN DECISION (AND THUS STRATEGY) MAKING Cognitive bias Definition of bias Advice Status quo bias Preference for keeping Analyze risk of failing to status-quo even though change change may lead to Quantify gains and losses significant gain (risk aversion) objectively The herding instinct Desire to conform to the Be prepared to deal with behavior and opinions of skepticism when developing other people new ideas E.g. trends and fashion in Evaluate ideas on their strategic management merits, not whether others (core/diversification/lean) follow them Self-attribution bias Good outcomes are results of Be willing to learn from own efforts, bad outcomes success and failure are sheer bad luck Revise your assumptions when proven wrong – frequent reality checks 11 © Prof. A Hinterhuber Università Ca’ Foscari 2024. Proprietary. All rights reserved. COGNITIVE BIAS IN DECISION (AND THUS STRATEGY) MAKING Cognitive bias Definition of bias Advice Anchoring Tendency to adjust estimates Do not take information at face insufficiently from an initial value, think how it was presented value to you In a sales situation, a high Use 2nd or 3rd opinions initial selling price can be powerful anchor Authority bias Tendency to trust/follow Challenge authority (boss!) people perceived to be in 2nd or 3rd independent advice position of authority Allow a culture of dissent Group think Tendency to examine too few Devil’s advocate alternatives, to examine each Allow and encourage culture of other ideas too uncritically; dissent and open debate tendency to maintain illusion of shared morality, of group invulnerability 12 © Prof. A Hinterhuber Università Ca’ Foscari 2024. Proprietary. All rights reserved.  Let us assume we play a little game. I throw a coin and you give me 100 € if head comes up. How much do you want to participate? 13 ©©Prof. Prof.AAHinterhuber HinterhuberUniversità UniversitàCa’ Ca’Foscari Foscari2024. 2024.Proprietary. Proprietary.All Allrights rightsreserved. reserved. DECISION MAKING – PROSPECT THEORY Psychological utility (+) Value function Value Function:Shape: The value function is concave for gains and convex for losses, indicating diminishing sensitivity. Loss Aversion: The function is steeper for Losses Gains losses than for gains, reflecting that losses cause greater dissatisfaction than gains of the same amount cause satisfaction. Psychological Utility: Psychological utility represents the subjective value or satisfaction derived from outcomes. Asymmetry: The negative impact of a loss is psychologically greater than the positive impact of an equivalent gain. Psychological utility (-) Losses cause greater dissatisfaction than gains of the same amount. Source Thaler R., Mental Accounting and Consumer Choice, Marketing Science, 1985 14 © Prof. A Hinterhuber Università Ca’ Foscari 2024. Proprietary. All rights reserved. DECISION MAKING – PROSPECT THEORY Risk Preferences:People are generally risk- … an 80% chance averse when it comes to gains (preferring Would you rather have ….. … $ 3000 or … a certain outcome over a gamble). of $ 4000? People become risk-seeking when dealing with losses (preferring a gamble over a certain loss). Framing Effects:The way choices are framed can significantly impact decisions. … a sure loss of … an 80% chance For example, presenting the same Would you rather settle for …. outcome as a loss rather than a gain can $ 3000 or … of $ 4000 loss? lead to different decisions. Loss Aversion impact on Decision Making: Loss aversion can lead to irrational decisions, such as holding onto losing investments longer than justified (sunk cost bias). A bet. Tails you lose $100, How high does X About $ 200 Certainty Effect:People tend to heads you win $ X. have to be? overweight certain outcomes relative to probable outcomes, impacting financial and investment decisions. Source Thaler R., Mental Accounting and Consumer Choice, Marketing Science, 4(3), 199-214, 1985 15 © Prof. A Hinterhuber Università Ca’ Foscari 2024. Proprietary. All rights reserved. DECISION MAKING – PROSPECT THEORY Prospect theory is a theory of consumer decision making in situations of risk and uncertainty. It argues that people evaluate purchases as combinations of gains and losses, and that how products and prices are framed, in terms of gains or losses, influences the attractiveness of the purchase. ¾ outcomes are expressed as gains or losses from a neutral reference point ¾ consumers evaluate losses and gains of similar amount differently: loses produce a greater negative utility than gains of a similar amount would produce positive utility. ¾ certainty is over-weighted, and uncertainty is underweighted. Source Thaler R., Mental Accounting and Consumer Choice, Marketing Science, 1985 16 © Prof. A Hinterhuber Università Ca’ Foscari 2024. Proprietary. All rights reserved. DECISION MAKING – PROSPECT THEORY AND FRAMING Likely events Unlikely events Risk averse Risk seeking behavior behavior Gains (“bird in the hand”) (“no guts, no accept less than glory”) fair value gamble Risk seeking Risk averse behavior behavior Losses (“go for broke” (“safe than sorry”) “double or quit”), accept less than accept fair value unfavorable terms If the same outcome is framed as a loss, individuals become risk-seeking. Source: Kahneman, D., Tversky, A., Prospect theory: An analysis of decision under risk, Econometrica, 1979 17 © Prof. A Hinterhuber Università Ca’ Foscari 2024. Proprietary. All rights reserved. AUTHORITY BIAS – THE MILGRAM EXPERIMENTS Milgram wanted to investigate why so many ordinary people either simply said nothing about their leaders clearly abhorrent policies, or even worse chose to follow their example. He set up the following experiment at the University of Yale in 1961: Participants were recruited by newspaper ad inviting them to participate in a study about the effects of punishment on memory (participants ranged from all backgrounds, from elementary school dropouts to PhD graduates). In the experiment, there were three subjects: a supervisor, a teacher and a student. The supervisor was presented as part of the experimentation team, the teachers were casually recruited and made to believe that also the students were casually recruited – in reality the students were actors and also part of the experimentation team. The teacher began by reading the list of word pairs to the student, which the student had to memorize. If the answer was incorrect, the student would receive a shock, with the voltage increasing with each wrong answer. If correct, the teacher read the next word pair. The teachers believed that for each wrong answer, the student was receiving actual shocks. In reality, there were no shocks. Teachers could not see “students”, but could clearly hear them. Source: Milgram, S., Obedience to authority: An experimental view. New York, NY, 1974. 18 © Prof. A Hinterhuber Università Ca’ Foscari 2024. Proprietary. All rights reserved. AUTHORITY BIAS – THE MILGRAM EXPERIMENTS Shocks started with 15 volt “slight shock”, at 135 volt “strong shock”, 195 volt “very strong shock”, 315 volt “ extreme intensity shock”, 375 volt “danger: severe shock”; maximum is 450 volt “XXX” Students starts to complain verbally at 120 volt, at 150 he demands to be released, at 285 volts he makes an “agonized scream” If at any time the “teachers” (=subjects) wanted to halt the experiment, they were told by the supervisor, in this order: (1) Please continue; (2) The experiment requires you to continue, please go on (3) It is essential that you continue. (4) You have no choice, you must continue. If the subject still wished to stop after all four successive verbal prods, the experiment was halted. Otherwise, it was halted after the subject had given the maximum 450-volt shock three times in succession Before conducting the experiment, Milgram consulted 40 psychiatrists: they thought that on average less than 1% of subjects would give the full 450 volt shock treatment. Question to you: what percentage of subjects actually gave the full 450 volt treatment? Source: Milgram, S., Obedience to authority: An experimental view. New York, NY, 1974. 19 © Prof. A Hinterhuber Università Ca’ Foscari 2024. Proprietary. All rights reserved. AUTHORITY BIAS – THE MILGRAM EXPERIMENTS 62%. Source: Milgram, S., Obedience to authority: An experimental view. New York, NY, 1974. 20 © Prof. A Hinterhuber Università Ca’ Foscari 2024. Proprietary. All rights reserved. DEALING WITH BIASES IN STRATEGIC DECISION MAKING Recognize and name the biases influencing an important decision. Then, find ways to de-bias the decision process. ¾ Develop critical thinking skills. ¾ Ask how an outsider would deal with the issue at stake: Separate the decision from the decision maker – and yourself. ¾ Recognize uncertainty, examine alternative scenarios and assign probabilities to outcomes. ¾ Listen to those who do not agree with you; do not take information at face value, challenge assumptions; if everybody seems to agree on something, look especially hard for any leaks/weak spots in the argumentation; questions those in authority. ¾ Try to consciously defend an idea you do not at all agree with – you might find some hidden merits. ¾ Use structured decision-making frameworks that are based on empirical evidence. Use decision trees and algorithms.. Source: Lovallo, D., & Sibony, O., The case for behavioral strategy. McKinsey Quarterly, 2(1), 30-43, 2010. 21 © Prof. A Hinterhuber Università Ca’ Foscari 2024. Proprietary. All rights reserved.  Strategy is the determination of the basic long-term goals and objectives of an enterprise, and the adoption of courses of action and the allocation of resources necessary for carrying out these goals. ¾Alfred Chandler ¾Professor emeritus Harvard Business School 22 © Prof. A Hinterhuber Università Ca’ Foscari 2024. Proprietary. All rights reserved. IL DIAMANTE BUSINESS DELLA BUSINESS STRATEGY DIAMONDSTRATEGY STRATEGY: The central, integrated, externally oriented concept of how a firm will achieve its objectives Where will we be active? Which product categories? Which channels? ARENAS Which market segments? Testing the quality of a strategy How will returns Which geographic areas? 9 Does your strategy fit with what's going on In the be obtained? Which core technologies? environment? Lowest costs? Premium prices? 9 Does your strategy exploit your key resources? 9 Will the differentiators be sustainable? What will be our 9 Are the elements oi your strategy internally How will STAGING ECONOMIC VEHICLES speed and sequence consistent? LOGIC we get there? of moves? 9 Do you have enough resources to pursue this Internal development? Speed of expansion? strategy? Experimentation? M&A, JV? Sequence of initiatives? 9 Is your strategy implementable? DIFFEREN- How will we win? TIATORS Quality? Price? Speed? Example Application:Let’s use Tesla as an example to see how the Strategy Diamond could apply: Arenas: Electric vehicles, energy solutions, battery storage. Geographic presence in Source: Hambrick, D., Fredrickson, J., Are you sure you have a strategy?, Academy of Management Executive, 2001 Source: Hambrick, D., Fredrickson, J., Are you sure you have a strategy? Academy of Management Executive, 15(4), 48-59, 2001 23 North America, Europe, and Asia. © Prof. A Hinterhuber Università Ca’ Foscari 2024. Proprietary. All rights reserved. Vehicles: Primarily internal development and some strategic partnerships (e.g., with Panasonic for batteries). Differentiators: Cutting-edge technology, sustainability, brand reputation, and innovation in electric mobility. Staging: Initially focused on high-end luxury electric cars (Tesla Roadster), then moved to more affordable models (Model 3), and now expanding to energy solutions. Economic Logic: Profitability through premium pricing for innovation, cost-efficiency from scaling production, and future expansion into mass markets. Competitive strategy is about being different. It means deliberately choosing a different set of activities to deliver a unique mix of value. ¾Michael Porter ¾Professor Harvard Business School 24 © Prof. A Hinterhuber Università Ca’ Foscari 2024. Proprietary. All rights reserved. Strategy is revolution, everything else is tactics. ¾Gary Hamel ¾Management guru and author 25 © Prof. A Hinterhuber Università Ca’ Foscari 2024. Proprietary. All rights reserved. WHAT NORMALLY KILLS STRATEGY Typical features Consequences strategy is bureaucratic Inward looking, closed to the outside world strategy is banal “Our strategy is to increase profitability” strategy is political Taboos on some issues, personal agendas strategy is incremental Marginal improvement on past performance strategy is confirmatory Previous decisions “confirmed” by strat analysis strategy is over-analytical Paper exercise without real action 26 © Prof. A Hinterhuber Università Ca’ Foscari 2024. Proprietary. All rights reserved. WHAT NORMALLY KILLS STRATEGY Typical features Consequences strategy is complacent Companies drift along without changing strategy is short-term Limited investment in long-term projects strategy is dictated Not CEO’s, but analysts are creators of strategy strategy is exclusive Seniority principle, not quality of ideas determines strategy strategy is democracy Too much participation of line/middle management strategy is wishful thinking Strategy is disconnected from reality: hockey-stick effects strategy is budgeting Strategy is confused with yearly budgeting and performance review 27 © Prof. A Hinterhuber Università Ca’ Foscari 2024. Proprietary. All rights reserved. STRATEGY FALLACIES IN PRACTICE Case study Intel The initial strategy making process at Intel (until the late 80s) Andy Grove, CEO Intel “Our strategy process turned into an embarrassment. Top management did not really have the guts to call the shots, so we tried to get middle management to come up with strategies. … It wasn’t clear whether middle management had either positional or informational power. In addition of being unpleasant, the system resulted in unrealistically high projections. One year someone had the idea to put the previous forecast for unit sales on one chart along with the actual growth rate for the same period. The result was a series of “hockey sticks” which demonstrated the ineffectiveness of the process.“ Source: Burgelman, R., Grove, A., Let chaos reign, then rein in chaos - repeatedly: Managing strategic dynamics for corporate longevity. Strategic Management Journal, 28(10), 965-979, 2007 28 © Prof. A Hinterhuber Università Ca’ Foscari 2024. Proprietary. All rights reserved. STRATEGY FALLACIES IN PRACTICE Case study Intel The new strategy making process at Intel (from the early 90s) Andy Grove, CEO Intel “In 1987, we blew up the [traditional strategy process]. Formerly it had been a very bottom-up process …. I was so frustrated with the whole thing that I started the process.. On its head. I said “I am going to tell you what the strategy is”. I started with a series of environmental issues, which lead to a series of strategic mandates. I did not consult the organization. I did this myself. I became very directive at prescribing the strategic direction from top down. This defined the strategy for all the groups, and it provided a strategic framework for different groups at different levels of management. It’s very hard to reach through different levels of management to communicate the strategy and vision. The new strategy process became a tool for doing that.” Source: Burgelman, R., Grove, A., Let chaos reign, then rein in chaos - repeatedly: Managing strategic dynamics for corporate longevity. Strategic Management Journal, 28(10), 965-979, 2007 29 © Prof. A Hinterhuber Università Ca’ Foscari 2024. Proprietary. All rights reserved. As an entrepreneur, you always kind of want what you’re pitching to sound somewhat off the wall. You’re trying to pitch the future that doesn’t exist, and you want it to be — it needs to be — a little bit of a stretch. ¾Logan Green, ¾CEO Lyft Source: Isaac, M., The No. 2 of Ride-Hailing Makes Its Move, New York Times, 28 Jan 2020 30 © Prof. A Hinterhuber Università Ca’ Foscari 2024. Proprietary. All rights reserved. ENTREPRENEURIAL FAILURE – CAUSES Analysis of 101 start-up post mortems Source: Source: CB Insights, The Top 20 Reasons Startups Fail, 2 February 2018 31 © Prof. A Hinterhuber Università Ca’ Foscari 2024. Proprietary. All rights reserved. Startups fail when they are not solving a market problem. We were not solving a large enough problem that we could universally serve with a scalable solution. We had great technology, great data on shopping behavior, great reputation as a though leader, great expertise, great advisors, etc, but what we didn’t have was technology or business model that solved a pain point in a scalable way. ¾Dave Sloan ¾CEO, Treehouse logic Source: Sloan, D., Why do customization startups fail? Quora, November 2013 32 © Prof. A Hinterhuber Università Ca’ Foscari 2024. Proprietary. All rights reserved. LEFT AND RIGHT BRAIN THINKING IN STRATEGY 33 © Prof. A Hinterhuber Università Ca’ Foscari 2024. Proprietary. All rights reserved. ANALYTICAL THINKING PROCESSES IN STRATEGY To cut or not to cut? Suppose that you are working as Marketing Head for the component company COMPONEXT. Suddenly your boss, the President, storms in your office and asks you if you would agree to drop the price from currently 10 €/unit to 8,5 €/unit (-15%). What do you do? You need additional information ¾ total sales volume today: 1,000 000 units/year ¾ variable costs: 5 €/unit ¾ fixed costs: 2 mill € (personnel costs, depreciation, overhead) Under which circumstances does the proposed price cut increase profits? 34 © Prof. A Hinterhuber Università Ca’ Foscari 2024. Proprietary. All rights reserved. CASE STUDY Some elements for solving the problem: Ask yourself: which costs are relevant when analyzing price changes? ¾ Full costs, variable costs, fixed costs? ¾ Answer: variable costs Which measure of profitability is relevant when analyzing price changes? ¾ Revenues, contribution margin (=revenues less variable costs), or profits before taxes (=revenues less variable costs less fixed costs)? ¾ Answer: contribution margin 35 © Prof. A Hinterhuber Università Ca’ Foscari 2024. Proprietary. All rights reserved. CONTRIBUTION MARGIN Contribution margin measure of operating leverage, measures the extent to which growth in sales leads to growth in profits; measured on a unit basis (unit CM), percentage basis (%CM) and in total (total CM): ¾ unit contribution margin= price – variable costs ¾ percent contribution margin= (price – variable costs)/price ¾ total contribution margin= (price – variable costs) x volume 36 © Prof. A Hinterhuber Università Ca’ Foscari 2024. Proprietary. All rights reserved. CASE STUDY Total contribution margin (CM): 5 € x 1 mill = 5 mill € unit CM after price change 3,5 € (8,5 € - 5 €) required volume to maintain profitability after price change: 5 Mill €/3,5 € = 1,427 mill (+43%) Generally: െઢ‫(۾‬%) ࢤ‫(ۿ‬%) = ۱‫ ۻ‬% + ઢ‫(۾‬%) The proposed price cut is profitable if volumes increase by 43%. 37 © Prof. A Hinterhuber Università Ca’ Foscari 2024. Proprietary. All rights reserved. THE IMPACT OF PRICE CHANGES ON VOLUME Contribution margin (%) 10% 20% 30% 40% 50% 60% 70% 80% 90% Required volume increase to maintain same level of profit -30% ь ь ь 300% 150% 100% 75% 60% 50% Price decrease -25% ь ь 500% 167% 100% 71% 56% 45% 38% -20% ь ь 200% 100% 67% 50% 40% 33% 29% -15% ь 300% 100% 60% 43% 33% 27% 23% 20% -10% ь 100% 50% 33% 25% 20% 17% 14% 13% -5% 100% 33% 20% 14% 11% 9% 8% 7% 6% Affordable volume loss to maintain same level of profit 5% -33% -20% -14% -11% -9% -8% -7% -6% -5% Price increase 10% -50% -33% -25% -20% -17% -14% -13% -11% -10% 15% -60% -43% -33% -27% -23% -20% -18% -16% -14% 20% -67% -50% -40% -33% -29% -25% -22% -20% -18% 25% -71% -56% -45% -38% -33% -29% -26% -24% -22% 30% -75% -60% -50% -43% -38% -33% -30% -27% -25% The table quantifies volume implications (max affordable loss, min req increase) of price changes. 38 © Prof. A Hinterhuber Università Ca’ Foscari 2024. Proprietary. All rights reserved. STRATEGY – SCIENCE AND ART Strategy as science Strategy as art ¾ analytical, quantitative ¾ creative ¾ verifiable explanations and falsifiable predictions ¾ search for uniqueness, differentiation ¾ scientific method: hypothesis, data/experiments, statistical analysis, verification ¾ disciplines: statistics, psychology, economics ¾ optimization of input-output relationships 39 © Prof. A Hinterhuber Università Ca’ Foscari 2024. Proprietary. All rights reserved. STRATEGY – SCIENCE AND ART Cost of campaign 22,5 mio € New customers 1100 Acquisition cost/cust 20 450 € Annual profit/customer 16 € Time to break even (anni) >1200 Source: EON Der Mix ging in die Hose, Manager Magazin, 17 February 2002; assumption: 44 € of monthly electricity bill/new customer, 3% profit margin 40 © Prof. A Hinterhuber Università Ca’ Foscari 2024. Proprietary. All rights reserved. STEPS IN STRATEGY DEVELOPMENT Source: Hinterhuber, A., 2018 41 © Prof. A Hinterhuber Università Ca’ Foscari 2024. Proprietary. All rights reserved. STEPS IN STRATEGY DEVELOPMENT Vision, Strategy Strategic Controlling mission Goals development, analysis learning values implementation Aspirational Specific mid and External analysis Identify growth Adapt strategy to statement about short term goals opportunities changing role of the Internal analysis Actions to capture circumstances company, its key opportunities Check key contribution to Build/defend assumptions society and its competitive against reality long-term goals advantage Learn from Build operational, mistakes financial plan Examine key sensitivities 42 © Prof. A Hinterhuber Università Ca’ Foscari 2024. Proprietary. All rights reserved. VISION, MISSION, VALUES Vision „Who we want to be“ Identity Company’s contribution „What we want to Mission achieve“ Strategic intent, priorities Obligations to stakeholders Rules for individual and collective Values „How we act“ behaviour; expectations on what constitutes “excellence” 43 © Prof. A Hinterhuber Università Ca’ Foscari 2024. Proprietary. All rights reserved. VISION, MISSION, VALUES To be the world's best quick service restaurant experience. Being the Vision best means providing outstanding quality, service, cleanliness, and value, so that we make every customer in every restaurant smile. To organize the world's information and make it universally accessible and useful. Mission The right to be beautiful day after day: L’Oréal strives to make this a reality within the reach of every woman and every man” Speed, simplicity, self confidence. Values Innovation, quality, community, storytelling, optimism., decency 44 © Prof. A Hinterhuber Università Ca’ Foscari 2024. Proprietary. All rights reserved. VISION, MISSION, VALUES Case study FedEx 45 © Prof. A Hinterhuber Università Ca’ Foscari 2024. Proprietary. All rights reserved. GOALS Attention: 9 ethical standards 9 measurability vs relevance 9 intrinsic motivation 9 performance standards ¾ market conditions ¾ performance of competitors ¾ core competencies/skills ¾ corporate culture ¾ expectations of shareholders, stakeholders Source: Ordóñez, L. et al., Goals gone wild, Academy of Management Perspectives, 23(1), 6-16, 2009 46 The text emphasizes that sustainability requires companies to give © Prof. A Hinterhuber Università Ca’ Foscari 2024. Proprietary. All rights reserved. equal importance to social and environmental performance alongside economic performance. This often involves making choices that benefit SUSTAINABILITY society or the environment, even if they do not directly or immediately lead to higher profits. Sustainability – three dimensions of performance goals ¾ economic: maintaining economic viability (profitability, cash generation, customer satisfaction/loyalty) ¾ social: contribution to employees (wellbeing, salaries) and to community (philanthropy, community engagement) ¾ environmental: reducing/eliminating damages and contributing to regenerate environment. At its core, sustainability requires that companies treat their social and environmental performance as equally valid as their economic performance. This may require the adoption of practices that are not always synergistic. Sustainability is thus frequently referred to as managing the “triple bottom line”. Synergistic: In this context, practices are "synergistic" if Triple Bottom Line: they positively impact more than one area at the same This refers to a business framework that considers three time, such as benefiting both the environment and performance dimensions: profit, people, and planet. The idea profitability. The passage notes that some sustainable is that a company should measure its success not only by its practices may not always create synergy; that is, a practice economic profitability but also by its social contributions and might help the environment but be costly for the company its environmental impact. The term encourages a more financially in the short term. holistic view of business success, ensuring balance between economic, social, and environmental goals. Source: Pagell, M. and Shevchenko, A., Why Research in Sustainable Supply Chain Management Should Have no Future, Journal of Supply Chain Management, 50 (1), 44–55, 2014. 47 © Prof. A Hinterhuber Università Ca’ Foscari 2024. Proprietary. All rights reserved. SUSTAINABILITY – A KEY REQUIREMENT Case study AB Inbev Source: Edgecliffe Johnson, A., ABInBev taps into demand for sustainability, Financial Times, 22 March 2018 48 © Prof. A Hinterhuber Università Ca’ Ca’ Foscari Foscari 2024. 2024. Proprietary. Proprietary. All rights All rights reserved. reserved. SUSTAINABILITY – FROM NICE TO HAVE TO MUST ESG stands for Environmental, Social, and Governance. An ESG target refers to specific goals or BE objectives that a company sets to improve its performance in these three areas: Environmental (E): Targets related to minimizing the company’s impact on the environment. This could include goals such as: Reducing carbon emissions Increasing energy efficiency Using more renewable energy Reducing waste or improving water management Social (S): Targets focused on how a company treats its employees, customers, and communities. Examples include: Improving employee diversity and inclusion Enhancing labor practices and working conditions Promoting customer health and safety Engaging in charitable or community-focused activities Governance (G): Goals related to the company’s leadership, business ethics, and shareholder rights. Common governance targets include: Improving transparency in reporting and disclosures Strengthening board diversity and independence Reducing executive compensation that isn't aligned with company performance Ensuring compliance with laws and ethical standards Companies set ESG targets to demonstrate their commitment to sustainable and ethical practices, which can enhance their reputation, attract socially conscious investors, and mitigate risks associated with environmental damage, poor labor practices, or governance failures. These targets are often integrated into the broader corporate strategy and are monitored and reported on through sustainability or ESG reports. 50% of institutional investment is with firms that have ESG targets Source: Khan, A., Ingraining sustainability in the next era of ESG investing, Deloitte Insights, 2022 49 © Prof. A Hinterhuber Università Ca’ Ca’ Foscari Foscari 2024. 2024. Proprietary. Proprietary. All rights All rights reserved. reserved. SUSTAINABILITY IMPLEMENTATION Case study Mercedes Benz Sustainability governance (example) ¾ sustainability competencies for key executives ¾ sustainability targets, linked to executive compensation ¾ new roles (Chief sustainability officer), steering committee ¾ sustainability practices integrated into day-to-day decision making Source: Mercedes Benz Governance Roadshow Presentation, Annual General Meeting, 13. Apr 2023 50 ©P Prof. Prof r f. A Hi H Hinterhuber int nterh nterhu terhu errh erhu hu hub ber er Università U iv Univer iversi versità à Ca’ Ca Ca’ Foscari Foscca Fosca Foscari arii 2024. 202 2024 4. 2024.. Proprietary. Pro Pr pri prie prieta pProprietary. etary. etary y Al A Alll rights Allhts rights reser reserv reserved. ese ereserved. rved rv ed ed. SUSTAINABILITY IMPLEMENTATION – SETTING TARGETS Case study Schneider Electric Source: Schneider Electric Q2 2024 Schneider Sustainability Impact Report, Rueil-Malmaison, July 31, 2024 51 © Prof. A Hinterhuber Università Ca’ Foscari 2024. Proprietary. All rights reserved.  SUSTAINABILITY IMPLEMENTATION – CIRCULAR ECONOMY PRACTICES Source: Kirchherr, J., Reike, D., Hekkert, M., Conceptualizing the circular economy: An analysis of 114 definitions, Resources, Conservation and Recycling,127, 221-232, 2017. 52 © Prof. A Hinterhuber Università Ca’ Foscari 2024. Proprietary. All rights reserved. ECONOMIC GOALS – THE THREE HORIZONS Connection between Thought Leadership and Future Market Share Dominance: Thought leadership refers to positioning a company as an expert or pioneer in its field. This long-term strategy helps build future Marketing outcome market share dominance by: Setting Industry Standards: Thought leaders often introduce new ideas, innovations, and best practices that competitors and the market follow, giving them a head start in emerging areas. Shaping Consumer Preferences: Through thought leadership, companies can influence consumer perceptions and preferences, making their brand more desirable and recognized as the leading authority in the field. Creating and Shaping New Markets: By identifying and developing new market spaces, thought leaders can capture and dominate them before competitors. This gives them a competitive edge and establishes early market leadership. Building Trust and Credibility: Thought leadership fosters trust, which can translate into long-term customer loyalty, contributing to Thought sustained revenue and market share growth. Leadership Create & shape new markets Asset Leadership Build customer & brand equity Revenue Generate Leadership demand Time Short Medium Long Source: adapted from M Sawhney, B2B Marketing, presentation at the ISBM meeting, 2007 53 © Prof. A Hinterhuber Università Ca’ Foscari 2024. Proprietary. All rights reserved. BRAND EQUITY AND CUSTOMER EQUITY Brand equity/customer-based brand equity: monetary value of the brand to consumers, i.e. differential effect of brand awareness on consumer response, two dimensions: consumer awareness/familiarity and strength/durability of brand associations. Example: Young & Rubicam Brand Asset Evaluator (BAV) model: differentiation (D), relevance (R), esteem, (E), Knowledge (K). Quantifiable, for example, with price delta brand vs. no-name product. Customer equity (customer lifetime value; CLV, CLTV) The present value of the future cash flows attributed to the customer relationship. ୫ ۱‫= ܄܂ۺ‬ - AC ଵ ି୰ା୧ Example: mobile phone operator; margin 100 €, i = 10%, AC = 100 €. Calculate effect of increasing loyalty (retention rate) from 60% to 70%. m margin (annual) r retention rate CLTVt0 = 100/50%-100 = 100 € i interest rate CLTVt1 = 100/40%-100 = 150 € Higher Retention Rate (r): If a company increases customer retention, the AC acquisition cost ǻ&/79  CLTV will rise because the customer is likely to stay longer, contributing more revenue over time. Lower Discount Rate (i): A lower discount rate will increase CLTV since Importance of CLTV: future cash flows are worth more. This is favorable when calculating long- Strategic Marketing: Companies use CLTV to decide how much they should spend on acquiring new customers and to optimize their marketing term customer value.of Marketing, 47-48, Hoboken, NJ, 2009 budget. If the CLTV is greater than the acquisition cost, the customer is profitable. Source: Fahy, J., Jobber, D., Fondamenti di marketing, 2019; Keller, K. Customer-based brand equity, Journal of Marketing, 57(1), 1-22, 1993; Lemon, K., Customer Lifetime Value (CLV), in: Sheth, J, Malhorta N., Wiley International Encyclopedia Lower Acquisition Costs (AC): Reducing acquisition 54 costs increases CLTV Customer Retention: By understanding how retention rate affects CLTV, businesses can focus on keeping customers longer to increase profitability. © Prof. A Hinterhuber Università Ca’ Foscari 2024. Proprietary. All rights reserved. because the company needs to spend less upfront to acquire customers, Long-term Planning: CLTV helps companies forecast future revenue and profitability, which is crucial for long-term planning and investment leaving more room for profit. decisions. ECONOMIC GOALS – KPIS FOR THE THREE HORIZONS Generate Build