Strategy PGE M1 Lecture 1 PDF

STRATEGY (PGE M1) Lecture 1 Course Coordinators: Course Instructor: Bruno Cirillo Saverio Favaron Associate Professor Assistant Professor SK...

STRATEGY (PGE M1) Lecture 1 Course Coordinators: Course Instructor: Bruno Cirillo Saverio Favaron Associate Professor Assistant Professor SKEMA Business School SKEMA Business School Sophia Antipolis Campus Sophia Antipolis Campus Ambra Mazzelli Associate Professor SKEMA Business School Grand Paris Campus © Cirillo & Mazzelli, 2024  Who (lectures)? Saverio Favaron □ Assistant Professor of Strategy (SKEMA) □ Ph.D. in Strategy and Management, HEC Paris (June 2020) □ Research Assistant (Italy, Università di Padova) □ Teaching responsibilities: Strategy (2020-2024) Business Transformation (2020-2024) Entrepreneurship (2020-2022) PhD Level Courses □ Research on creative and cultural industries □ Rankings and Online ratings □ Firm reputation and strategy 2 © Cirillo & Mazzelli, 2024  Agenda 1. Why a Strategy Course 2. Pedagogical Approach 3. Course Content and Organization 4. Grading 5. Learning Environment 6. Course Materials 7. Q&As 3 © Cirillo & Mazzelli, 2024  1. Why a Strategy Course 4 © Cirillo & Mazzelli, 2022-2023 A continuously changing world… Technological progress Political and macroeconomic forces Evolving socio-cultural norms Evolving consumer preferences and stakeholder demands © Cirillo & Mazzelli, 2022-2023  Why a strategy course? ► The decline of many firms is caused by failure to renew their product-market in a continuously changing world. ► All managers and entrepreneurs, all kinds of firms and organizations are concerned with strategy □ Reach objectives and meet constraints ► Strategy has a fundamental role in successful decision making 6 © Cirillo & Mazzelli, 2022-2023 How can firms create and sustain a competitive advantage in today’s hyperconnected and fast-changing world? © Cirillo & Mazzelli, 2022-2023  The objectives of this course ► Master fundamental concepts in strategic management □ Strategy identification and evaluation □ Industry analysis and evolution □ Sources of competitive advantage □ Challenges to competition □ How and where to compete ► Understand the impact of strategic actions on business and corporate strategy ► Become proficient in analytical and critical strategic thinking and develop skills in reporting strategic recommendations. 8 © Cirillo & Mazzelli, 2022-2023  2. Pedagogical Approach 9 © Cirillo & Mazzelli, 2024  Teaching philosophy Traditional teaching Teaching philosophy of this philosophy course The instructors are the only experts The instructors are knowledge managers They tell students what’s right and what’s wrong. Students memorize They manage their knowledge and the their teachings and what is in the knowledge of the class to create an textbook engaging learning environment 10 © Cirillo & Mazzelli, 2024  Course’s core components Theory ► Explore theory and strategic tools (“tell me”) (increase awareness of managerially relevant problems and analyze solutions through readings, videos, in-class discussions, and exercises) Cases ► Explore empirical contexts (“show me”) (show application of strategic tools with four detailed case studies) Project ► Consultancy project (“involve me”) (apply the strategic frameworks and tools to analyze the strategy of a chosen firm) 11 © Cirillo & Mazzelli, 2024  3. Course Content and Organization 12 © Cirillo & Mazzelli, 2024 The Syllabus © Cirillo & Mazzelli, 2024  Course’s core components Theory ► Explore theory and strategic tools (“tell me”) CM (increase awareness of managerially relevant problems Lecture halls and analyze solutions through readings, videos, in-class discussions, and exercises) Cases CM ► Explore empirical contexts (“show me”) Lecture halls (show application of strategic tools with four detailed case studies) TD ► Consultancy project (“involve me”) Team-project Project tutorials (apply the strategic frameworks and tools to analyze the strategy of a chosen firm) 14 © Cirillo & Mazzelli, 2024  Course’s core components [cont’d] CM Lecture Halls (Theory focused) 6hr [4 x 1.5h sessions] of lectures CM Lecture Halls (Case focused) 6hr [4 x 1.5h sessions] of case study discussions Large audience (80-200 students)* 9hr [6 x 1.5h sessions]of strategic tool application 5 pre-recorded video tutorials on Team-based Generally, we give TD strategic analysis in Excel students the freedom to [(i) Online search and data collection; (ii) Industry analysis; (iii) form their own teams by Team-Project Tutorials Internal analysis; (iv) Strategic positioning; (v) Corporate strategy the week before the first (Application focused) analysis; (vi) Effective communication] tutorial, passed the deadline assignments 6hr [2 x 3h sessions] of student project are at the instructor’s discretion presentations Small groups (30-50 students)* 15 *Numbers vary by Campus © Cirillo & Mazzelli, 2024  CM CM Course Lecture hall Case Study TD outline Team Project © Cirillo & Mazzelli, 2024  4. Grading 18 © Cirillo & Mazzelli, 2024  Assessment criteria 1. Class preparation and participation [10%] ► CONNECT Smart Book statistics (End of semester) 2. Mid-Term exam [20%] ► 5 multiple-choice questions Theory ► 1 open-ended question based on a selected company (data analysis required) 3. Final-Exam [30%] ► 5 multiple-choice questions ► 1 open-ended question based on a selected company (data analysis required) 4. Mid-term Consultancy Report Presentation [20%] Cases ► Grading criteria (from 0 to 20 points each): □ Relevance and reliability of the data sources (0-5) □ Appropriateness of analysis (0-5) □ Result interpretation (0-5) □ Clarity of the presentation (0-5) 5. Final Consultancy Report Presentation [20%] Project ► Grading criteria (from 0 to 20 points each): □ Relevance and reliability of the data sources (0-5) □ Appropriateness of analysis (0-5) □ Result interpretation (0-5) □ Clarity of the presentation (0-5) 5. Bonus/Malus (Ad-hoc) ► Quality of case study submissions 19 © Cirillo & Mazzelli, 2024  What do you look for? Conclusions 5. Pro vid recom e critical a nalytical mend s s es s m 4. Provide an a strateg ations on h ent and cl of strategic ic issu o w to e understanding es. A v addre ar erently oid cl ss issues that coh ichés! builds on facts, d theory benchmarks an Interpretation Data c t and a e oll d dat. C 1 an s n d erst y issue u g s t rate on 3. Focus o 2. Select and properly n what is use the right model to and impo r rtant to u elevant analyze the data a strategic nderstand problem Logic Model 20 © Cirillo & Mazzelli, 2024  5. Learning Environment 21 © Cirillo & Mazzelli, 2024  Punctuality, respect, and open-mindedness Be on time Be respectful Of others’ opinions and the School’s rules 22 © Cirillo & Mazzelli, 2024  Plagiarism (a review on global statistics from different business schools) Did you know that… ► 80% of students admit to cheating at least once. ► 36% of students admit to plagiarizing written material from the internet. ► 16% of students admit to having signed as present a non-present fellow student at a course where obligatory attendance is asked for. ► 90% of students believe that cheaters are either never caught or are never appropriately disciplined. ► Actually, cheating is detected and sanctioned in PGE and M1 every year 23 © Cirillo & Mazzelli, 2024  Free riding ► You are expected to remain engaged and contribute to the team assignments throughout the course ► Free riding will be sanctioned by your instructor, who reserves the right to apply grade penalties shall free riding be detected 24 © Cirillo & Mazzelli, 2024  Use of electronic devices The use of electronic devices is allowed in class only for taking notes, participating in polls, and working on assignments. Source: http://technologyin21stcenturyclassrooms.weebly.com/ 25 © Cirillo & Mazzelli, 2024  6. Course Materials 26 © Cirillo & Mazzelli, 2024  Course materials (CONNECT & K2 platforms) ► Compulsory readings (CONNECT) Rothaermel FT. 2024. Strategic Management, 6th Edition. McGraw-Hill. The SmartBook is available on the McGraw-Hill CONNECT learning platform. Thompson et al. 2021. Crafting & Executing Strategy: Concepts & Cases, 23rd Edition. McGraw-Hill. The PDFs of the cases are available on the McGraw-Hill CONNECT learning platform. The e-books are available on the CONNECT learning platform. Ø Book chapters and related quizzes are to be read by the end of the course. ► Course pack (K2) Course syllabus Video tutorials on strategic analysis in Excel (necessary for consultancy project) Case study materials and questions Lectures slides (posted after each class) Instructions for consultancy project An example of a final exam questions Assignment submission 27 © Cirillo & Mazzelli, 2024  Data collection for strategy analysis and formulation Data sources ► Financial data from BVD Orbis (company news; press releases; trade articles; …) Sources at students’ disposal on Kcenter (https://kcenter.skema.edu/find/access- database) ► Dow Jones Factiva (company news; press releases; trade articles; …) ► Marketline (intelligence reports and analysis; industry and company data) ► ProQuest (company, financial and banking data) ► Statista (industry, country and company data) Other public sources ► Public company data: Google Finance; Yahoo Finance; … 28 © Cirillo & Mazzelli, 2024  What is Strategy? Value Creation, Value Capture, and Strategic Positioning © Cirillo & Mazzelli, 2024  Learning objectives ► Understand what strategy is about ► Understand the difference between value capture and value creation ► Learn the prominent frameworks for strategy formulation ► Understand some barriers to strategy 31 © Cirillo & Mazzelli, 2024  Agenda 1. What is `Strategy`? 2. Value Creation and Value Capture 3. Strategy Formulation: Business-level Strategy 4. Plotting Strategic Positioning 5. Barriers to Strategy 32 © Cirillo & Mazzelli, 2024  1. What is Strategy? 33 © Cirillo & Mazzelli, 2024  What is your strategy? How is your strategy effective? id t he ghosts! Avo Do we know the rules of the game? The gho the we p sts move Eat all r ! mob edict th Can dots! ility ei patte r rn? Ah! W e can at t he ghosts! E go fast not er! Which sc we tar ore are geting? e r e an optimal Is t h o move? t e rn t pat y? it rt un po Op ed ime is a limit T resourc e s t ag e 1 ; move Win 2… to stage Value maximization 34 ce s © Cirillo & Mazzelli, 2024 Resour  Not a vision or mission statement 36 © Cirillo & Mazzelli, 2024  Not a financial projection 37 © Cirillo & Mazzelli, 2024  Not a string of buzzwords 38 © Cirillo & Mazzelli, 2024  Not a "laundry list" 39 © Cirillo & Mazzelli, 2024  Not a thick report 40 © Cirillo & Mazzelli, 2024  What strategy is and is not ► Goals are not strategy “We want to be number one or two in the market” ► Strategy is not what you were doing anyway. ► Strategy is not secret “A strategy is only really strategy if alters the behavior of the people in your organization” ► Strategy is about making choices “who is our chosen customer; what are we going to sell; and how are we going to deliver that value proposition” 42 © Cirillo & Mazzelli, 2024  Effective strategies rest on three foundations Value Creation Value Value Delivery Capture 45 © Cirillo & Mazzelli, 2024  Or answering three fundamental questions… WHAT? (value will we create) HOW? (will we WHY? organize to (will it make deliver what money) we promised) 46 © Cirillo & Mazzelli, 2024  What is strategy? ► Strategy is a pattern in a stream of decisions that gives coherence, direction and scope to the actions of an organization to create and capture value over an extended period of time. ► It involves not only choices that allow the firm to create and capture value, but also contains a logic as to why competitive advantage can be sustained in the face of competitive pressure, and how value will be delivered on an ongoing basis. Strategy as direction Strategy as positioning □ Performance objectives □ Quantity vs. margins □ Price, Quality, features, services □ Benchmarking □ R&D expenditures □ Customer47value, producer’s rent □ Advertising expenditures □ … □ … (this list is non-exhaustive) (this list is non-exhaustive) 47 47 © Cirillo & Mazzelli, 2024  Commonly used financial indicators INDICATOR FORMULA DESCRIPTION Returns on Sales Net Income/Sales Operating effectiveness, commercial margin, nature (ROS) of the firm competitive system Asset Turnover (AT) Sales/Total assets Global effectiveness, capital intensity Returns on Assets Net Income/Total Assets Efficiency at using its assets to generate earnings (ROA) Returns on Equity Net income/Total equity Earnings per unit of equity owned by the stockholders (ROE) Inventory Turnover Sales/Inventory It measures how many times the inventory is sold during a year Debt to equity Total liabilities/Total equity It measures the company’s leverage Quick ratio (Cash + Marketable Securities + It measures the ability of the firm to pay its debts with Net receivables)/ Current its more liquid assets. liabilities Current ratio Current assets/current liabilities It measures short-term liquidity. … … … 48 © Cirillo & Mazzelli, 2024  2. Value Creation and Value Capture 49 © Cirillo & Mazzelli, 2024  What do we mean by “value”? ► A firm gains a competitive advantage if it creates value for its customers both greater than the costs of supplying them and superior to that of rivals Willingness to pay (or benefit B) B Consumer surplus (B-P > 0) Actual market price of your product (P) P Value created (B-C > 0) Producer surplus, rent, or value captured (P-C > 0) Total cost of production (C) C Costs € 50 © Cirillo & Mazzelli, 2024  Determinants of relative performance ► A firm gains a competitive advantage if it creates value for its customers both greater than the costs of supplying them and superior to that of rivals Firm 1 Firm 2 B1 B21 Value proposition to the customer (Customer surplus) P1 P12 Value captured by the firm (Producer’s rent) C1 C12 € € 52 © Cirillo & Mazzelli, 2024  Is it the case that Great Ideas = Lots of Money? Value captured (P-C) Eli Lilly & Prozac Ford & the Model T Steve Jobs & Macintosh Philo Farnsworth & TV Vince Cerf and the Internet Value created (B-C) 53 © Cirillo & Mazzelli, 2024  What determines the level of profit in an industry? Three key external influences: 1. The value perceived by max price ↕ customers actual price ↕ 2. The intensity of competition break-even ↕ 3. Relative bargaining power at different levels within the value chain € 54 © Cirillo & Mazzelli, 2024  Maximize value creation and capture The shareholder approach: The stakeholder approach: The firm exists to maximize the wealth of its The firm is a coalition of interest groups—it owners (i.e., max. present value of profits seeks to balance their different objectives. over the life of the firm). For the purposes of strategy analysis, we assume that the primary goal of the firm is profit maximization. Rationale: 1) Boards of directors legally obliged to pursue shareholder interest 2) To replace assets firm must earn return on capital > cost of capital (difficult when competition is strong) 3) Firms that do not maximize stock-market value will be acquired Hence: Strategy analysis is concerned with identifying and accessing the sources of profit available to the firm 55 © Cirillo & Mazzelli, 2024  Value capture B1 P1 Profit arising from Profit arising superior resources from (ricardian rents) market power C1 (monopoly rents) € The The Firm-Strategy Environment-Strategy Interface Interface 56 © Cirillo & Mazzelli, 2024  Levels of strategy Corporate- Concerned with the overall purpose and scope of an level organization and how to add value to business units. Where do we compete? strategy Concerned with the way a business seeks to Business-level compete successfully in its particular industry & strategy and market. How do we compete? Concerned with how different parts of the Operational strategy organization deliver the strategy in terms of managing resources, processes and people. 57 © Cirillo & Mazzelli, 2024  3. Strategy Formulation: Business-level Strategy 58 © Cirillo & Mazzelli, 2024  Strategy analysis and formulation SUSTAINABLE iz e s trategic fi t! Max im COMPETITIVE ADVANTAGE INDUSTRY KEY SUCCESS FACTORS STRATEGY FORMULATION ORGANIZATIONAL CAPABILITIES Resources & Competencies S W O T 59 © Cirillo & Mazzelli, 2024  Sources of competitive advantage Strategy is about tradeoffs Should we be unique? ΔB B DIFFERENTIATION ADVANTAGE m ium uct d ice e pr e pro ΔP P Pr uniqu m COMPETITIVE fro ADVANTAGE Sim at ilar p Should we be the best? low rod er u co ct ΔC C st COST ADVANTAGE € Can we do both? Who decides and how? 60 © Cirillo & Mazzelli, 2024  How can Firm 1 gain a competitive advantage over Firm 2? ► A strategic business unit gains a competitive advantage if it creates value for its customers both greater than the costs of supplying them and superior to that of rivals Firm 1 Firm 2 B1 B2 Value proposition to the customer (Customer surplus) P1 P2 Value captured by the firm (Producer rent) C1 C2 € € 61 !B ? !P ? !C ? © Cirillo & Mazzelli, 2024  Golden rules ► How can Firm 1 gain a competitive advantage on Firm 2? Firm 1 Firm 2 B1 B2 Value proposition to the customer (Customer surplus) P1 P2 Value captured by the firm (Producer rent) C1 C2 € !B ? !P ? !C ? € 62 © Cirillo & Mazzelli, 2024  Scenario 1 ► Does Firm 1 gain a sustainable competitive advantage over Firm 2? Firm 1 ? Firm 2 B1 B2 P1 P2 P1 ’ C1 C2 C1 ’ Firm 1 has a cost-based advantage on Firm 2 € (or cost leadership) € 63 © Cirillo & Mazzelli, 2024  Scenario 2 ► Does Firm 1 gain a competitive advantage over Firm 2? Firm 1 B1’ Firm 2 B1’ > B2 B1 B2 P1 ’ P1’ > P2 P1 P2 C1 ’ C1’ > C2 C1 C2 Firm 1 has a differentiation € advantage € 64 © Cirillo & Mazzelli, 2024  4. Plotting Strategic Positioning 65 © Cirillo & Mazzelli, 2024  Plotting Strategic Positioning Return on Sales (Net Income/Sales) Differentiation ROS1 strategy Mixed strategy RO Ac urv “Stuck in the e middle” Cost-leadership ROS2 AT1 AT2 Asset Turnover (Sales/Total Assets) 66 © Cirillo & Mazzelli, 2024  3. Barriers to Strategy 67 © Cirillo & Mazzelli, 2024  ► Assume that you work for a company that currently, after accounting for the cost of capital, has a current return of investment (ROI) of 10% on a 10 million euros of invested capital. You are asked to make a recommendation on whether the company should invest in Project A, in Project B, in both, or in neither. What would you recommend? Would you invest in: □ Project A has an expected ROI of 10% on a 1 million euros investment. Result of Shapira and Shaver’s (2014) study □ Project B has an expected ROI of 5% on a 1 million euros investment. 68 © Cirillo & Mazzelli, 2024  Anchoring bias in strategic decisions Shapira and Shaver (2014) How anchoring can destroy economic value in strategic investment assessments ► More than 50% of managers in their experiment made a nonprofit-maximizing decision (i.e., invest only in project A) ► However, the positive (albeit lower) return is a sufficient reason to invest in project B too. ► Practicing managers are often anchored on their firms’ average profits so strongly that they tend to ignore the fact that positive NPV projects can increase total profits. ► “Average” profitability measures such as ROI play an important and legitimate role in managerial decision-making because they facilitate the comparison of investment alternatives ► However, changes in average profit measures are not marginal effects, and attention to changes in averages can lead to systematic deviations from profit maximization 69 © Cirillo & Mazzelli, 2024  Bounded Rationality ► We suppose that we make decisions rationally but are limited (bounded) by our ability to process information. ► We rarely seek out or have knowledge of all alternatives. ► We satisfice (i.e., choose the first alternative encountered that satisfactorily solves the problem) rather than maximize the outcome of our decision by considering all alternatives and choosing the best. 70 © Cirillo & Mazzelli, 2024  In sum, what creates a successful (=profit maximization) strategy? ► The right set of objectives ► A unique value proposition compared to other organizations ► Clear trade-offs, and choosing what not to do ► Tailored activities ► Activities that fit together in an integrated system ► Strategic continuity with improvements in execution ► Consideration of possible biases and decision-making flexibility 72 © Cirillo & Mazzelli, 2024  What’s Next? ►Get ready for the next session □ The next session is a lecture where we will analyze the case of UBER □ Watch the online tutorials on data collection and strategic positioning in Excel □ Anticipate our case study discussion by reading and/or watching the materials on K2 □ Try to answer the case study questions (find them into the dedicated space on K2) 73 © Cirillo & Mazzelli, 2024  STRATEGY PGE M1 What is Strategy? The UBER Case (Lecture 2) © Cirillo & Mazzelli, 2024  …In the previous lecture ► Understand what strategy is about ► Understand the difference between value capture and value creation ► First look at generic business-level strategy (Differentiation and Cost-Leadership) ► Understand some barriers to strategy 75 © Cirillo & Mazzelli, 2024  What do we mean by “value”? ► A firm gains a competitive advantage if it creates value for its customers both greater than the costs of supplying them and superior to that of rivals Willingness to pay (or benefit B) B Consumer surplus (B-P > 0) Actual market price of your product (P) P Value created (B-C > 0) Producer surplus, rent, or value captured (P-C > 0) Total cost of production (C) C Costs € 76 © Cirillo & Mazzelli, 2024  Case Study Discussion 1. What is Uber’s business strategy? 2. What is Uber’s strategic positioning? 3. Is Uber’s business strategy effective? 4. What is Uber’s future? 77 © Cirillo & Mazzelli, 2024  Case Study Discussion 1. What is Uber’s strategy? 78 © Cirillo & Mazzelli, 2024  Case Study Discussion: UBER Interview with Uber’s CEO Dara Khosrowshahi 79 © Cirillo & Mazzelli, 2024  UBER’s promise: The Amazon of transportation ► To become the Amazon of transportation (not an app but a platform) ► Global provider of multi-modal Mobility as a Service (MaaS) ► Uber’s platform to incorporate multiple modes and product line extensions ► $8.5 trillion addressable market (10% of the world’s GDP) ► Big goal for Uber to replace car ownership 80 © Cirillo & Mazzelli, 2024  UBER’s value creation and capture Uber Taxi Buber Btaxi Puber Ptaxi Cuber Ctaxi $ $ Buber > Btaxi ? Source: toddwschneider.com Puber > Ptaxi ? Cuber < Ctaxi ? 81 © Cirillo & Mazzelli, 2024 © Cirillo & Mazzelli, 2024  UBER’s resources Capital raised (million USD – histogram scaled using log values) Capital raised in: 7700 8600 Seed funds 3150 Series A-E financing Private Equity 364.2 IPO 200 107.3 57.9 29.9 4.2 1.6 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Ubercab Uber Technologies, Inc. new CEO IPO 83 Garrett Camp, Travis Kalanick, © Cirillo & Mazzelli, 2024 Dara Khosrowshahi Ryan Graves (ex Expedia Group)  84 2009 2010 Ubercab Ryan Graves 2011 Garrett Camp, Travis Kalanick, 2012 ► Target name (technology) 2013 Uber Technologies, Inc. UBER’s acquisitions 2014 ► DeCarta (Geospatial) 2015 © Cirillo & Mazzelli, 2024 ► Otto (Robotics) 2016 ► Geometric Intelligence (Machine Learning) ► Complex Polygon (Analytics) 2017 ► Swipe Labs (Enterprise Software) new CEO (ex Expedia Group) Dara Khosrowshahi ► JUMP Bikes (e-Bikes) 2018 ► Careem (Ride Sharing) ► Mighty AI (Artificial Intelligence) IPO 2019 ► Cornershop (Grocery Delivery) ► Postmates (Delivery) ► Routematch Software (Information Technology) 2020 ► Autocab (SaaS) ► Drizly (Alcohol e-Commerce) Monthly number of Uber's active users worldwide from 2017 to 2023 (in millions) © Cirillo & Mazzelli, 2024  UBER’s performance (actual) Net Revenues (billion USD) Cumulative number of patents applied for and/or acquired worldwide 37.3 3053 2697 31.9 1784 Patented technologies: ► Call interactions 1037 ► Guided routes ► Geosearch 17.5 476 ► Rideshare 13 ► Autonomous vehicles 11.3 11.1 172 6.5 7.5 79 48 0.5 1.5 11 18 0.1 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Ubercab Uber Technologies, Inc.’s new CEO IPO Garrett Camp, Travis Kalanick, Dara Khosrowshahi Ryan Graves (ex Expedia Group) 86 © Cirillo & Mazzelli, 2024  Case Study Discussion 2. What is Uber’s positioning? 87 © Cirillo & Mazzelli, 2024  UBER’s strategic positioning UBER? B’2 Rival B1 B’’2 B2 P’2 P1 P’’2 P’’’2 C’2 C1 C’’2 C’’’2 € € € € DIFFERENTIATION COST-BASED CREATIVE LEADERSHIP DISRUPTION 88 © Cirillo & Mazzelli, 2024  UBER’s strategic positioning Return on Sales (Net Income/Sales) Differentiation ROS1 strategy Mixed strategy RO Ac urv “Stuck in the e middle” Cost-leadership ROS2 AT1 AT2 Asset Turnover (Sales/Total Assets) 89 © Cirillo & Mazzelli, 2024  UBER’s strategic positioning evolution Ride-hailing Strategic Positioning (2021-2023) 0,60 Uber 0,50 Lyft 0,40 DiDi 0,30 0,20 2023 ROS 0,10 0,00 2021 -0,10 2023 2022 DiDi 2023 UBER -0,20 2022 -0,30 2021 2021 Lyft -0,40 2022 0,00 0,20 0,40 0,60 0,80 1,00 1,20 1,40 AT 90 © Cirillo & Mazzelli, 2024  UBER’s strategy for value creation and capture (intended) B ► Fundraising success may give ample Superior service Shorter wait times reserves to drive competition from the Low fares >> B-P market and establish global monopoly control and pricing power. Superior resources (ricardian rents) P Market power (monopoly rents) Sophisticated AI Strong network ► Asset-light business model and strong algorithms network effects may yield huge economies Patented technologies >> P-C effects First-mover and intangible assets of scale and first-mover advantage. (Tangible) asset-light advantage Economies of scale business model C and entry barriers ► Scale advantage and sophisticated AI Monopoly control algorithms would power a superior service, translating into shorter wait times for passengers and drivers. € ► Over the longer term, the combination of available funds from capital markets and The The Firm-Strategy Environment-Strategy retained corporate earnings would fund a Interface Interface seamless transition to autonomous vehicle operations. Superior and reliable service, low fares, attractive driver compensation, and corporate profitability! 91 https://www.forbes.com/sites/lensherman/2019/05/06/uber-should-be-judged-on-its-own-merits-not-amazons/?sh=3213fe8d1fc3 © Cirillo & Mazzelli, 2024  Case Study Discussion 3. Is Uber’s business strategy effective? 92 © Cirillo & Mazzelli, 2024  37.3 UBER’s profits (actual) 31.9 Net Revenues (billion USD) Net Profit/Loss (billion USD) 17.5 13 11.3 11.1 6.5 7.5 0.5 1.5 0.1 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 -2.0 -1 +2.3 -3.0 -3.0 -4.1 93 -6.7 -8.6 -9.4 Ubercab Uber Technologies, Inc.’s new CEO IPO Garrett Camp, Travis Kalanick, Dara Khosrowshahi Ryan Graves (ex Expedia Group) © Cirillo & Mazzelli, 2024  Uber’s first-ever operating profit “[…] Many observers over the years boldly claimed that we would never make any money…But we knew they were wrong”. Dara Khosrowshahi, Uber CEO In August 2023, Uber posted its first-ever operating profit. The results were driven by a growth in the number of rides in the U.S. and Canada, surpassing pre- pandemic levels for the first time, and stable demand for delivery. https://www.wsj.com/articles/uber-q2-earnings-report-2023-453c335a 94 © Cirillo & Mazzelli, 2024  UBER’s stock at NYSE 95 © Cirillo & Mazzelli, 2024  Case Study Discussion 4. Will Uber Continue to Grow? 96 © Cirillo & Mazzelli, 2024  Will Uber continue to grow? ► Amazon (second-highest valued publicly ► Uber faces important growth constraints traded company in the world) has not Business model is relatively easy to imitate been making significant profits for almost (threats from a vertically-integrated 20 years competitor with integrated fleet management (Tesla?)) ► BUT… Scalability constraints in major metro areas Amazon’s focus was on cash flow (rather (limits on available road space and driver than accounting profit maximization) supply) Resources to invest aggressively in capital Regulatory threats due to Uber’s negative expenditures and R&D to fuel growth externalities (congestion, emissions) Built enormous barriers to entry by Municipal governments might be unwilling to investing in extensive physical assets subordinate their public transportation (superior order-to-fulfilment cost- services to Uber’s MaaS platform effectiveness and cloud services scale City transit agencies have statutory economies) restrictions against paying a booking or Prime program for customer loyalty agency fee on transit fares https://www.economist.com/business/2019/04/27/can-uber-ever-make-money?utm_medium=cpc.adword.pd&utm_source=google&ppccampaignI… 97 https://www.forbes.com/sites/lensherman/2019/06/02/can-uber-ever-be-profitable/?sh=29e324665785 © Cirillo & Mazzelli, 2024  UBER’s value creation and capture (actual) ► Undifferentiated service (despite B diversified acquisition portfolio) Superior service? Shorter wait times? ► Ride-hailing as a commodity service Low fares? >> B-P? making customers flip between apps to find the cheapest or fastest alternative Superior resources P Market power ► Uber does not own its distribution assets Sophisticated AI >>P-C? Weak network effects Limited economies of (vehicles or drivers) algorithms scale and low entry Patented technologies Intense competition to attract riders and need barriers for sizable incentives/bonus payments to and intangible assets High operating costs C Fierce competition (Didi in China (exit), Grab in recruit and retain drivers SEA (exit), Lyft in the US and Canada, Cabify and 99 in Brazil) ► Weak network effects due to the absence € of customer lock-in mechanisms (low switching costs) ► Low barriers to entry (also due to relatively The The abundant access to capital) Firm-Strategy Environment-Strategy Interface Interface ► Competition against public transportation https://www.forbes.com/sites/lensherman/2019/05/06/uber-should-be-judged-on-its-own-merits-not-amazons/?sh=3213fe8d1fc3 that is inherently cheaper and heavily https://www.forbes.com/sites/lensherman/2019/06/02/can-uber-ever-be-profitable/?sh=29e324665785 98 subsidized © Cirillo & Mazzelli, 2024  What’s Next? ►Get ready for the next session □ The next session is a lecture on Industry Analysis □ Read the book chapters on the CONNECT platform 99 © Cirillo & Mazzelli, 2024