Management PDF

**Chapter 1** *Business* is a broad term that refers to any activity or organization aimed at providing goods (tangible products) or services (like banks or e-commerce platforms). Entrepreneurs who start businesses take risks, betting that there is a need for their goods or services. An *entrepren...

**Chapter 1** *Business* is a broad term that refers to any activity or organization aimed at providing goods (tangible products) or services (like banks or e-commerce platforms). Entrepreneurs who start businesses take risks, betting that there is a need for their goods or services. An *entrepreneur* is someone who risks their time and money to start a new business. They take on the uncertainty of whether the business will succeed or fail. Entrepreneurs play a vital role in wealth creation. They enjoy the freedom to succeed and make decisions, but they also face risks, including the possibility of failure and the lack of benefits like paid vacations or health insurance. - - *Revenue* ⇨ the total money a business earns from selling goods or services. - *Profit* ⇨ the amount left after subtracting all expenses from revenue. The goal of leaders is to try to recognize and respond to the needs of stakeholders and still make a profit. - *Loss* ⇨ when expenses exceed revenue, resulting in negative earnings. - *Risk* ⇨ the chance that an entrepreneur may lose time and money if the business fails. - *Cash* ⇨ total amount of money going in and out a business *Stakeholders* are individuals or entities impacted by a business\'s operations. They include shareholders, employees, banks, suppliers, customers, and even the media. Companies must address the concerns of all these stakeholders to ensure smooth operations. - *Shareholders* ⇨ the ultimate owners of the company, holding shares. - *Customers* ⇨ expect evolving needs to be met, such as environmental sustainability. - *Employees* ⇨ have expectations like work-life balance, flexibility, and personal growth. *Are stockholders considered stakeholders?* Yes, because a two-way relationship exists between them and the company. - Stakeholders ⇨ people or entities with whom a company has a reciprocal relationship. They can be employees, customers, suppliers, or anyone else with an interest in the company\'s activities and outcomes - Stockholders ⇨ individuals or entities that own shares in a company. As partial owners, they hold a financial stake and expect returns in the form of dividends (a share of profits) or capital gains (profits made by selling stocks at a higher price). Stockholders have clear expectations from the company---primarily financial rewards for their investment. If stockholders are dissatisfied, they may sell their shares, causing the stock price to drop and potentially leading the company to struggle in attracting investors. To avoid this, companies often strive to keep stockholders happy. *Outsourcing* is the practice of hiring third parties to perform tasks or services for the company. This often involves relocating operations outside the company\'s boundaries, such as Apple manufacturing products outside the U.S. Employee Expectations ⇨ employees today expect more than just compensation. They seek: 1. Connection = feeling valued beyond just work relationships. 2. Flexibility = autonomy and options like remote work. 3. Personal Growth = development as both a person and a professional. 4. Well-being = companies offering holistic wellness support, like relaxation areas. 5. Shared Purpose = companies acting with a clear purpose that aligns with employees\' values. Meeting these expectations leads to better performance and profitability, while failure to do so can damage a company's reputation. Factors of Production ⇨ there are five key resources businesses need to create wealth: 1. Land ⇨ natural resources used in production. 2. Labor ⇨ workers who contribute to the production process. 3. Capital ⇨ money that is used to invest in the business. 4. Entrepreneurship ⇨ the willingness to take risks and innovate. 5. Knowledge ⇨ intangible know-how that can be legally protected, such as a proprietary formula. The Business Environment ⇨ businesses operate within an environment made up of several factors that can help or hinder their growth. These include: 1. *Economic and Legal Environment*: Governments play a role by allowing private ownership, enabling the enforcement of contracts, and minimizing corruption. Governments can support entrepreneurship by: a. 1\. Allowing private ownership of businesses. b. 2\. Reducing interference in the free exchange of goods. c. 3\. Passing laws that enforce contracts. d. 4\. Creating a stable and tradable currency. e. 5\. Minimizing corruption, which discourages investment 2. *Technological Environment*: Technology enhances business productivity, making operations more efficient through devices like computers, smartphones, and robots. Technology also helps companies gather data on customers and improve responsiveness, but it raises concerns such as identity theft, where personal information is stolen for illegal purposes. 3. *Competitive Environment*: Businesses must understand and anticipate customer needs to stay competitive. This often involves adapting products to specific demographics, such as single-parent families or global consumers. 4. *Social Environment*: Societal trends and demographics impact business strategies. 5. *Global Business Environment*: External factors like wars or economic crises can influence operations. Global challenges, such as wars, can disrupt supply chains, while ecological concerns like climate change are pushing companies toward green production. +-----------------------------------------------------------------------+ | Productivity: The output generated per unit of input, such as hours | | worked. | | | | E-commerce: The online buying and selling of goods, either | | business-to-consumer (B2C) or business-to-business (B2B). | +-----------------------------------------------------------------------+ E.g.: KFC developed the \"Chizza\" to cater to new customer preferences, adapting its product lineup to meet the demands of a broader, global audience. **Chapter 5** *Since we know that there is different legal environment, you will meet around the world different kind off partnerships and corporations depending on the local law. The importance is to understand the basics of them.* **Sole proprietorship** It's the easiest kind of business. Advantages: 1. Ease of starting and ending the business 2. Ability to be your own boss 3. Pride of ownership (they deserve all the credit for taking the risks and providing needed goods and services) 4. Leaving a legacy (for future generations) 5. No special taxes (all the profits are taxed as the personal income of the owner) Disadvantages: 1. Unlimited liability -- the risk of personal losses 2. Limited financial resources 3. Management difficulties (it's difficult to attract employees since sole proprietorships cannot compete with the salary and benefits offered by larger companies) 4. Overwhelming time commitment 5. Few fringe benefits (no paid health insurance, no paid disability insurane, no pension plan,...) 6. Limited growth 7. Limited life span **Partnership** It is a legal form of business with two or more owners. There are several types of partnerships: 1. [general partnership] = all owners share in operating the business and in assuming liability for the business's debts. The weight of the responsibilities is very heavy. Both the owners can operate, contracting, buying. They have unlimited legal and financial liability. They share the profits (E.g.: law firms, doctors,...) 2. [Limited partnership] = (E.g.: real estate businesses) there are two kinds of partner: 1. general partner (owner who has unlimited liability and is active in managing the firm; at least one) 2. limited partner (owner who invests money in the business but doesn't have any management responsibility or liability). 1. *Limited liability* means that the limited partners' liability for the debts of the business is limited to the amount of money the invested (they lose only up to the amount they invest, the owners suffer all the consequences. The responsibility is limited, there is a boundary. It stands up to the investment that owners made) Advantages of partnerships: 1. More financial resources 2. Shared management and pooled/complementary skills and knowledge 3. Longer survival (rather than sole proprietorships) 4. No special taxes (as sole proprietorships) Disadvantages of partnerships: 1. Unlimited liability (each general partner is liable for the debts of the firm, no matter who was responsible for causing them) 2. Division of profits (sharing risk means sharing profits, and that can cause conflicts) 3. Disagreements among partners (potential conflicts: money, authority,...) 4. Difficulty of termination (it is not easy to step out) It's not hard to form a partnership. For your protection, be sure to put your partnership agreement in writing. The Model Business Corporation Act recommends including some of the following in a written partnership agreement: - the name of the business - The names and addresses of all partners - The purpose and nature of the business - The management responsibilities - Provision for sharing of profits and losses Corporation ⇨ It is a state-charted legal entity (legally recognized) with authority to act and have liability separate from its stockholders. Stockholders are liable only for the investment they made. The state needs to recognize corporation, for fiscal reasons e.g.: State-chartered legal identity. There are different types of corporations: domestic and alien corporations (in the country they are charted or not), private corporations, public corporations, non-profit corporations,... Advantages: 1. Limited liability (owners of a business are responsible for its losses only up to the amount they invest in it) 2. Ability to raise more money for investment (to raise money, a corporation can sell shares of its stock to anyone who is interested) 3. Size (one key advantage of a corporation is its size, which makes it more appealing and secure to other investors, allowing it to grow more easily. The size of a corporation can be measured by various factors, including total assets, revenue, number of employees, and market capitalization, which are key metrics found on the balance sheet) 4. Perpetual life (since corporations are separated from those who own them, the death of one or more owners does not terminate the corporation) 5. Ease of ownership change (it's easy to change the owners since all that is necessary is to sell the stock to someone else) 6. Ease of attracting talented employees (offering benefits) 7. Separation of ownership from management (corporations can raise money from many different owners-stockholders without getting them involved in management) Disadvantages: 1. Initial cost 2. Extensive paperwork 3. Double taxation (corporate income is taxed twice: first the corporation pays on its income and then stockholders pay income tax on the dividends they receive) 4. Size 5. Difficulty of termination 6. Possible conflict with stockholders and board of directors (ex. Steve Jobs) **The corporation has its own equity**, which consists of the sum of all investments made by its owners or investors. This equity serves as the capital that the corporation uses to operate, and it is also the source from which any potential losses are absorbed. The corporation, rather than its owners, is liable for any debts or obligations, such as those owed to a bank. Anyone can incorporate, but when individuals form a corporation, they usually do not issue stock to outsiders. Not all corporations are created to be publicly traded; many start as private entities. For a private corporation to go public, it must be listed on the stock market. This process involves regulatory checks by the state. Once listed, stocks can be bought and sold on the capital market, and investors will seek information about the company, which is typically provided in the annual report. There are also different types of business structures, including partnerships and various forms of corporations. For example, limited liability companies (LLCs) do not have tradable stocks, and ownership is non-transferable in such entities. Corporate expansion A business can expand beyond the legal entities' boundaries: - *Merger* the result of two firms forming one company. E.g.: two players, no one is bigger than the other (Stellantis = Fiat + Peugeot). Merge between two different banks (UniCredit merging with Commerzbank), it is common for companies to expand in different ways (even geographically). - *Vertical merger* joints two companies operating at different stages of related business (e.g.: drink industry, soft drink companies that to produce soft drinks buys a sugar's company, different stages in the supply chain- production lane) - *Horizontal merger* joints two firms in the same industry (e.g.: Stellantis), it is usually down by competitors to diversify and expand their products. Merger between competitors must prove to the federal trade commission (FTC) that the new combined company does not limit competition unfairly (there are other authorities in different countries doing the same), to prevent one company to become the only player (monopoly), to promote business. - *Conglomerate merger* joints together two firms in completely unrelated industries (e.g.: Asian industries). This decision is made for size, potential synergy, diversification, explore new markets. Diversifying risks = being in different business helps me to being in different markets if they fall, one can compensate the other one. They usually occur in markets with opposite trends. The main goal is to differentiate the risk, to satisfy different products and services. - *Acquisitions* ⇨ a company's purchase of the property and obligations of another company. E.g.: Pepsi and KFC. The acquirer became the investor in the acquiree. Market capitalization ⇨ based on stock price. It is calculable by multiplying the number of the shares outstanding by the current price of each share Market value ⇨ based on valuations or multiples accorded by investors to companies. There are other types of expansions, for example: - *Taking a firm private* ⇨ public companies which becomes private - *Leveraged buyout (LBO)* ⇨ the group of people trying to take control of the stocks are employees, private investors,... (using money to try taking control over the company, they need to have enough shares to express their vote) - *Franchises agreement* ⇨ distribution to expand globally. E.g.: fast foods. Franchising is an agreement-contract between two subjects: franchisor (the main company, the original start of the business) open different stores around the world through franchisees which can use the franchise (menus, name, logo,...). - The advantages are for the franchisees you don't have to start from scratch (you are operating in a famous brand), you are provided for the knowledge, you are provided with the local furniture's style attracting customers, marketing and management knowledge come from the franchisor, financial advice and assistance, lower failure rate. - The disadvantages are the cost of starting, you need to share the profits (franchisor is granting you the right to use their name, in return you must pay), management regulation is set up from the top, coattail effects, restrictions on selling, the risk of fraudulent franchisor **Chapter 12** **Corporate governance** ⇨ Corporate governance concerns the mechanisms to direct and control an enterprise to ensure that it pursues its strategic goals successfully and legally. Public stock companies, four benefits: - Limited liability for investors ⇨ manager acting on behalf of the owners (not active in daily live) - Transferability of investor ownership through stock - Legal personality, with rights and obligations - Separation of legal ownership and management control Hierarchy: State charter ⇨ shareholders ⇨ board of directors (group of people elected by the shareholders, link between owners and managers) ⇨ management (taking decisions to organize) ⇨ employees In publicly traded companies, shareholders own the enterprise but hire managers to run the business which creates the *principal-agent problem* ⇨ this problem can arise whenever a principal delegates decision making and control over resources to agents, with the expectation that they will act in the principal's best interest. The risk of opportunism on behalf of agents is exacerbated by *information asymmetry*: the agents are generally better informed than the principals. - E.g.: there's a manager (research and development manager) who is supposably manage people to develop a new formula to treat headache. Who is controlling that he is working on such formula and not on another to open his factory. It is hard to control because investors are not in the company, investors cannot watch out what managers are doing (*information* *asymmetry*). The board has not the technical knowledge to know if that specifical test is or not for that formula. The *principal agent problem* is the before presented. Principals are those people that hire and monitor and compensations to get the job done. Agents here are the managers acting on behalf of the principal. - *Insider trading cases* offer a clear example of information asymmetry. The *agency theory* views the firm as a nexus of legal contracts. In this perspective, corporations are viewed as a set of legal contracts between different parties. Conflicts may arise are to be addressed in the legal realm. This theory finds its everyday application in employment contracts. The ability to prepare contract that can be solve peacefully is the best option that the company has. Minimizing the opportunism since they won't be tented by having other jobs (if not the company is not getting the maximum profits so shareholders won't be happy, shareholders will suffer). The mechanism is to make everyone work to achieve goals. Adverse selection and moral hazard ⇨ the main problems from *information asymmetry* (E.g.: insider trading) - *Adverse selection* ⇨ an increased likelihood of selecting inferior alternatives. E.g.: selecting people for a job, you present yourself as the best, is the company able to watch and verify whether you are the best. In principle-agent relationships adverse selection refers to a situation in which agents misrepresent their ability to do the job. Such misrepresentation is common during the recruiting process. - *Moral hazard* ⇨ doing something on its purpose and not for the profitability of the company. Moral hazard occurs when one party (the agents) takes on risk because they do not bear the full consequences of their actions, often leading to misaligned incentives. In this case, the financial institutions may engage in risky behavior knowing that the public will bear the losses if things go wrong. The shareholders of public stock companies appoint a board of directors to represent their interests. It is at the center of corporate governance in such companies. In the past, most board members were managers because they could make decisions. However, that is no longer the case. Today, boards consist not only of top managers but also individuals trusted by shareholders. The capital market now offers a premium for board members with specific qualifications, such as a background in business, strategic decision-making, and specialized expertise\... The board of directors is composed of inside and outside directors who are elected (entrusted) by the shareholders: - *Insiders* ⇨ board members who are generally part of the company's senior management team providing with the necessary information pertaining the company's internal working and performance. E.g.: CFO (chief financial officer) or COO (chief operating officer). - *Outsiders* ⇨ board members who are not employees of the firm, but they are appointed to a board and serve on several boards simultaneously. Given their independence, they are more likely to watch out for shareholders' interests. The board of directors is elected by the shareholders to represent their interests. All the directors have a *fiduciary responsibility* (a legal duty to act solely in another party's interests) toward the shareholders because of the trust placed in them. In addition to general strategic oversight and guidance, the board of directors has other functions, including: - Selecting, evaluating and compensating the CEO (the board may fire that CEO if it loses the board's confidence) - Overseeing the company's CEO succession plan - Providing guidance to the CEO in the selection, evaluation and compensation of other senior executives - Evaluating any strategic decisions and corporate actions - Ensure financial statements (financial performance) are accurate ⇨ the accountant soul of the board (along strategy, we need to make sure that financial statements are accurate) - Ensure compliance with laws and regulations ⇨ responsibility of the board of directors *Board independence* is critical to effectively fulfilling a board's governance responsibilities. Given that board members are directly responsible to shareholders, they have an incentive to ensure that the shareholders' interest are pursued. CEO = top managers, supervising. Duality = CEO is at the same time the top manager and the chairperson of the board (being at the same time with two roles) [Other governance mechanisms:] - *Executive compensations* ⇨ offering stock options (compensated partially in money and with stock options -buying in the future at a certain stick price stocks of a company or you can sell them in the market-). Allying managers' interests with shareholders' interests. There's a window of time when you can exercise the right or in the future. Advantage of managers because of information asymmetry - Incentives can negatively affect performance ⇨ managers can manipulate in the accounting to show the results to gain compensation. Long term incentive (designed in a way in which the horizon expands) the vs the short-term incentive. - *Market for corporate control* ⇨ investors need to be happy. If the performances are not good, owners are going to sell. Managers are not working in the interests of the investors and investors understand that. They are buying the most stock they can. They can change the managers (if investors change, they can change the managers). - *Auditors, regulators and industry analysts* ⇨ the focus is over the misrepresentation of financial results: generally accepted accounting principles (guidelines), financial statements must be audited (their job is consulting and auditing the financial statements, verifying that what is represented in the financial statement is accurate and corresponds to the operations of that year). In short, an LBO changes the ownership structure of a company from public to private (because private companies enjoy certain benefits). **Chapter 9** **Corporate strategy** *(What are the choices that a company can do?)* Strategy is a name referring to a set of actions, choices that the business is carrying out and makes the business going beyond the boundaries. E.g.: Walt Disney = new geographies, new capabilities (should I develop by myself new skills, or should I buy another company that already has that), new products and services (from animations to films, tv, parks,...) Why do firms enter strategic alliances? An alliance must promise a positive effect on the firm's economic value creation through increasing value or lowering costs. Firms join alliances to: 1. Strengthen competitive position, 2. Enter new markets, 3. Hedge against uncertainty, 4. Access critical complementary assets, 5. Learn new capabilities. The decisions that the leaders make (board of directors) ⇨ how to apply them is a management issue Goal-directed action is taken in the quest for competitive advantage (to be winner in the market) ⇨ being able to be competitive ⇨ expanding beyond the boundaries is the starting point Boundaries of the firm: - Vertical integration - Diversification - Geographic scope (integration with the locals) Underlying concepts that guide these: - Core competencies can guide the choices - Economies of scale (the concept is that growing means that a business is producing a greater number of products-services, the bigger the better: if I produce sandwich and I buy meat just one piece because I'm not sure of my sales, this obliges me to stay small. Thanks to the bigger size, I'm able to reduce costs. The bigger the number of products produce, the lower the unit costs) - Economies of scope (focusing on the quality) ⇨ average total cost of a company's production decreases when an increasing variety of goods is produced. E.g.: rail transportation provides an easy example. A single train can carry both passengers and freight more cheaply than separating them. - Transaction costs (they are ghosts, something you cannot measure) - Externals = we are talking with someone else - Internals = efforts we need to make -within the business- there are all the resources we need to run the business, recruiting, retaining and training the employees Given we have all these costs, is easier to make ourselves what we need? Make or buy? This question comes directly from the transaction costs. The buy option means that I buy something from other companies. In the Walt Disney example, before the acquisition of Marvel,... it has bought the knowledge from them. If I realize that the external transaction costs are too much (higher than the inhouse costs) then I decide to make rather than to buy. This is the vertical integration choice (we need some factors of production, and our suppliers is providing with them, so I decide to expand-enlarge my business vertically, so I will be able to cover more stages in the value chain). [Alternatives on the make-or-buy continuum] ⇨ decision between manufacturing a product in-house or purchasing it from an external supplier. This decision requires a comparison of the costs and advantages of producing in-house versus buying elsewhere. There are many factors at play that may tilt a company toward outsourcing, such as labor costs, lack of expertise, storage costs,.... *Outsourcing* ⇨ hiring another company to provide products or services that a company might otherwise produce with its own internal resources (it is related to offshoring) *Insourcing* ⇨ opposite of outsourcing, companies do tasks internally that they might otherwise farm out to an outside supplier *Reshoring/onshoring/inshoring* ⇨ it happens when a company brings certain tasks back to its native country that it had formerly outsourced to another country. +---------+---------+---------+---------+---------+---------+---------+ | **Buy** | **Strat | **Make* | | | | | | | egic | * | | | | | | | allianc | | | | | | | | es** | | | | | | +=========+=========+=========+=========+=========+=========+=========+ | Arm's-l | Short-t | Long-te | Equity | Joint | Parent- | Activit | | ength | erm | rm | allianc | venture | subsidi | ies | | market | contrac | contrac | es | s | ary | perform | | transac | ts | ts | | | relatio | ed | | tions | | | | | nship | in-hous | | | | | | | | e | +---------+---------+---------+---------+---------+---------+---------+ | | | - Lic | | | | | | | | ensing | | | | | | | | | | | | | | | | - Fra | | | | | | | | nchisin | | | | | | | | g | | | | | +---------+---------+---------+---------+---------+---------+---------+ | | *\< | | | | | | | | less | | | | | | | | integra | | | | | | | | tion | | | | | | | | more | | | | | | | | \>* | | | | | | +---------+---------+---------+---------+---------+---------+---------+ Contracts ⇨ non-equity alliances (contracts between firms that remain independent while achieving a common goal) - In contracts, firms tend to share explicit knowledge (patents, user manuals, fact sheets,...) ⇨ *knowing about a certain process or product* - The most common forms are *supply agreements, distribution agreements, licensing agreements* - Pros: flexible, fast and easy to initiate and terminate. Cons: weak tie, lack of trust and commitment - Example: BioNTech and Pfizer licensing agreement for Covid-19 vaccine Equity alliances ⇨ partnership in which at least one partner takes partial ownership in the other - Sharing of tacit knowledge ⇨ concerns knowing how to do a certain task and can be acquired only through active participation in that task - Pros: stronger tie, trust and commitment can emerge, window into new technology. Cons: less flexible, slower, can entail significant investments - Example: Coca-Cola's equity investments in monster and Body Armor energy drinks Joint Venture ⇨ a combination of two or more parties that seek the development of a single enterprise or project for profit, sharing the risks associated with its development - Pros: strongest tie, trust and commitment likely to emerge, may be required by institutional setting. Cons: can entail long negotiations and significant investments, long-term solution - Example: Hulu, owned by Denzey and Comcast +-----------------------------------------------------------------------+ | *Vertical integration* ⇨ taking ownership of various stages of its | | production process (it often requires a significant initial capital | | investment) ⇨ it is achieved through mergers or acquisitions or | | establishing suppliers, manufactures, distributors,... | | | | - The supply chain or sales process typically begins with raw | | materials from a supplier and ends with the final product to the | | customer | | | | - Vertical integration requires a company to buy or recreate a part | | of the production, distribution, or retail sales process that was | | previously outsourced | | | | Types of vertical integration: | | | | - Backward integration ⇨ a company seeks to acquire a raw material | | distributor or provider at the beginning of a supply chain ⇨ it | | moves the ownership control of its products a point earlier in | | the supply chain (E.g.: a bakery purchasing a wheat farm) | | | | - Forward integration ⇨ a company expands control of the | | distribution process and sale of its finished products ⇨ owning | | activities closer to the customer (E.g.: vehicle manufacturer | | buys a car retail business) | | | | Benefits of vertical integration: | | | | - Lowering costs | | | | - Improving quality | | | | - Facilitating scheduling and planning | | | | - Facilitating investments in specialized assets | | | | - Securing critical supplies and distribution channels | | | | Risks of vertical integration: | | | | - Increasing costs | | | | - Reducing quality | | | | - Reducing flexibility ⇨ you cannot longer choose between | | competitors | | | | - Increasing the potential for legal repercussion | | | | When all activities of the value chain are conducted within the | | boundaries of the firm, the firm is said to be wholly value chain | | integrated | | | | Corporate Strategy 4 Alternatives to Vertical Integration | +-----------------------------------------------------------------------+ When is diversification a good idea? Market saturation, risk management, increased competitiveness, improved stability. Types of diversification (expansion; a company tries to satisfy new needs and expectations in its costumers): - *Product diversification:* - Increase in variety of products/services - Active in several product markets - E.g.: Amazon (not anymore just a bookseller) - *Geographic diversification:* - Increase in variety of markets-geographic regions - Regional, national or international markets - E.g.: McDonald's - *Product-market diversification:* - Product and geographic diversification - E.g.: Coca-Cola (not only sodas but also other types of beverages) Types of corporate diversification: - *Single business* - Low level of diversification - The company focuses primarily on one product or service, with minimal additions to its operations - *Dominant business* - Pursues additional business activities - A company expands to include different portions of the manufacturing process under one corporate structure (moving up or down the supply chain) - *Related diversification* - A company develops a new, improved product related to its existing product - Types: - Constrained: all businesses share competencies - Linked: some business share competencies - *Unrelated diversification (conglomerate)* - No shared competencies between the businesses - E.g.: Disney is the largest media conglomerate Restructuring means that a company realize it is covering too many stages of productions or business somehow related that it is not able to manage it in a profitable way ⇨ a step back This choice must be made even if it's not easy. What are the criteria that made the restructuring necessary? The aim is refocusing the business. **BSG (Boston consulting group) = matrix**, framework helps to realize if there is the need to cut off. It is summarizing how things can look like. There are four boxes, two axes: relative market share (how much my product has conquered and is shared in the market; market is total amount of sell, potential selling ability), market growth (a way to capture the future opportunities in terms of market) - *Cash cow* = earnings are high and stable because the relative market share is high (E.g.: MacBook, people are not willing to shift to another pc) ⇨ strategy should be hold - *Dog* = product where the relative market share is low (not winners in the market) and market growth is low (no future, it's not going to evolve), cash cow can evolve toward dog for technological evolution or preferences in the customers ⇨ (E.g.: iPod, products that can be preferred by other products and no farther option in the future) - *Star* = the strategy is hold or investing for growth (E.g.: apple watch, iPad, iPhone) - *Question mark* = products with relative market share low but there's an opportunity in the future, cash flow is negative because the company is still spending money to promote the product (E.g.: apple tv) How firms achieve growth: - *Build* (internal organic growth through development) - *Borrow* (external growth through a contract-strategic alliance) - *Buy* (external growth through acquiring new resources, capabilities and competences) The **build-borrow-buy framework** provides a conceptual model that aids firms in deciding whether to pursue internal development (build), enter a contractual arrangement or strategic alliance (borrow), or acquire new resources, capabilities, and competences (buy). In this approach strategic leaders must determine the degree to which certain conditions apply by responding to up to four questions sequentially before choosing the best course of action: - *How relevant are the firm's existing internal resources to solving the resource gap?* The leaders start by asking whether the firm's internal resources are high or low in relevance. If the firm's internal resources are highly relevant to closing the identified gap, then the firm should build the new resources needed through internal development. Firms evaluate the relevance of internal resources in two ways: 1. They test if the resources are like those the firm needs to develop and 2. If they are superior to those of competitors in the targeted area. If both conditions are met, then the firm's internal resources are relevant, and the firm should pursue internal development. E.g.: *the New York Times* might think that the resources used to produce printed newspapers are the same as publishing online newspapers (they are not. Online requires technology, managing online interactions, every day and every minute reports). - *How tradable are the targeted resources that may be available externally?* A tradable resource is one that the firm can source externally through a contract that allows for the transfer of ownership or use of the resource. E.g.: long-short term contracts, franchising, licensing. E.g.: Pfizer commercialized BioNTech's Covid-19 vaccine by using a licensing contract. If the resource is highly tradable, then the resource should be borrowed. If not, the firm needs to consider either a deeper strategic alliance or an outright acquisition. - *How close do you need to be to your external resource partner?* Firms can obtain the required resources to fill the strategic gap through more integrated strategic alliances such as equity alliances or joint ventures rather than through outright acquisition. The firm should always consider borrowing the necessary resources through strategic alliance before looking for M&A (costly, complex, difficult to reverse) - *Hot well can you integrate the targeted firm, if you determine you need to acquire the resource partner?* the list of post-integration failures include the integration of Bayer and Monsanto, Hp and Autonomy,.... Only if the three prior conditions (*low relevancy, low tradability and high need for closeness*) are met, should the firm's strategic leaders consider M&A. in all other cases, the firms should consider finding a less costly borrow arrangement when building is not an option. **Chapter 6** **Business strategy** ⇨ What is strategy? From military term. The goal is how performing competitors. The market is conceptually though as a battlefield. There are many ways to measure outperformance (E.g.: market share, profitability, share price,...). *Goal-directed actions* ⇨ to achieve competitive advantage in a single product market ⇨ *"how should we compete?"*: - *Which customer segments?* - *Customer needs will we satisfy?* - *Do we want to satisfy them?* - *Will we satisfy our customers' needs?* Industry and firm effects jointly determine competitive advantage  ***Porter's five competitive forces*** ⇨ It's a fundamental tool for strategic analysts plotting the competitive landscape of an industry, determining the weaknesses and the strengths. The five forces are competition, the threat of new entrants to the industry, supplier bargaining power, customer bargaining power, the ability of customers to find substitutes for the sector's products. The model guides businesses in determining the intensity of competition and potential profitability in their market. - E.g.: soft drinks and airlines (two different business). It is a conceptual framework that helps you to decide in which business you are going to compete. In the airline industry the suppliers have a strong power, it is hard to compete there, the opposite in the soft drinks. In the airlines, customers are people who want a discount. In the soft drinks costumers buy in small quantities and they can't negotiate. Substitute products are other products different to the one we are going to produce, that can satisfy the same need. Substitutes products in the drink example is a weak force, the threat of new entrance depend on the barrier costs: the aircraft (it's not really the case, you can rent the craft and hire some pilots). *Strategic trade-offs* ⇨ choices between a cost or value position. They are the choices leaders make to create sustainable and differentiated value for costumers There are two fundamental generic business strategies: differentiation and cost leadership. They are called *generic*, because they can be applied by any organization-manufacturing or service, large or small, nonprofit or pro profit. - **Differentiation strategy** ⇨ creation of higher values for customers than the value that competitors create. These companies attempt to deliver products or services with unique features while keeping costs at the same or similar levels, allowing them to charge higher prices to their products. - Differentiation strategy ⇨ unique features that increase value, so that consumers pay a higher price. The focus of competition: 1. Unique product features, 2. Service, 3. New product launches, 4. Marketing and promotion. Competitive advantage achieved when: Value -- cost \> competitors - *Focused differentiation strategy* ⇨ same as the differentiation strategy except with a narrow focus on a niche market (E.g.: Mont Blanc) - **Cost leadership strategy** ⇨ creation of the same or similar value for customers by delivering products or services at a lower cost than competitors, enabling the firm to offer lower prices its customers. - Goals: 1. Reduce cost below competitors, 2. Offer adequate value, 3. Reduce prices for customers, 4. Optimize the value chain for low cost. A cost leader could achieve a competitive advantage if its economic value created (V-C) is greater than that of the competitors - *Focused cost-leadership strategy* ⇨ same as the cost-leadership strategy except with a narrow focus on a niche market (E.g.: Bic) While considering different business strategies, strategic leaders must define the scope of competition (the size, narrow or broad, of the market in which a firm chooses to compete). - E.g.: the automobile industry ⇨ Sloan (CEO of GM) defined the carmaker's mission as providing a car for every purpose and purse. GM was one of the first companies to implement a multidivisional structure to separate the brands into strategic business units, allowing each brand to create its own unique strategic position. In contrast, Tesla offers a highly differentiated product and pursues only a small market segment. It uses a focused differentiation strategy. +-----------------------------------------------------------------------+ | DIFFERENTIATION STRATEGIES (summary) | | | | Focused on adding value: | | | | 1. Unique features | | | | 2. Customer service | | | | 3. Effective marketing | | | | Can increase costs | | | | Customers are willing to pay a premium | +=======================================================================+ | COST LEADERSHIP (summary) | | | | Focus on: | | | | 1. Offering lower costs than competitors | | | | 2. Maintaining acceptable quality | | | | Appeals to the bargain-conscious buyer ⇨ attract increased sales | | | | It can be profitable over a long period of time | +-----------------------------------------------------------------------+ They are two examples of methods used by a company to cut costs: +-----------------------------------+-----------------------------------+ | **ECONOMIES OF SCALE** (volume) | **ECONOMIES OF SCOPE** (variety) | | | | | - Economies of scale are cost | - Economies of scope are when | | advantages realized by | the production of one good | | companies when production | reduces the cost of producing | | becomes more efficient | another related good | | | (producing a wider variety of | | - Production rises at a rate | goods/services in tandem is | | faster than costs, with costs | more cost-effective for a | | then being spread over a | firm than producing less of a | | larger amount of goods | variety) | | | | | E.g.: a parking garage is the | - a way to achieve this is | | best example of economies of | through mergers and | | scale. Building a larger garage | acquisitions | | requires a larger upfront | | | investment. However, once built, | E.g.: rail transportation | | the incremental cost to serve | provides an example of economies | | another customer is negligible | of scope. A single train can | | | carry both passengers and freight | | Economies of scale: | more cheaply than separate trains | | | can. Joint production reduces | | 1. Spreads fixed costs over a | total input costs | | larger output | | | | | | 2. Employs specialized systems | | | and equipment | | | | | | 3. Takes advantage of certain | | | physical properties | | | | | | Diseconomies of scale: | | | | | | 1. Firms too big | | | | | | 2. Complexities of too much | | | coordination | | | | | | 3. Inflexib | | | le | | | and slow | | +-----------------------------------+-----------------------------------+ There are three drivers that keep costs low: 1. Cost of input factors ⇨ E.g.: lower cost raw materials, capital, labor... 2. Economies of scale ⇨ decreases in cost per unit as output increases 3. Learning-curve effects ⇨ less time to produce output with experience 4. Experience-curve effects ⇨ improvements to technology and producing processes There are three drivers that increase perceived value: 1. Product features ⇨ increase the perceived value of the product/service offering 2. Customer service 3. Complements ⇨ add value to a product/service when they are consumed in tandem **Learning curve** ⇨ it describes the production cost reduction of a technology as a function of cumulative experience in terms of units produced A successful strategy: - Leverages *(sfrutta)* the firm internal strengths - Mitigates internal firm weaknesses - Exploits external opportunities - Avoids external threats There is no single correct business strategy for a specific industry Choose a strategy that: - Provides a string position that attempts to maximize economic value creation - It's effectively implemented **Blue Ocean strategy** ⇨ mix of the two. It's very hard to make it work, everything is about innovating. It's the combination that use value innovation, tacking a new market space (blue ocean = something unexplored). There are some needs of the customers that are still not explored. Blue ocean can become a red ocean (=blood, if I fail, I will die). Once you explored something new, you can create a new demand. Being pioneer is a key point for success. Red ocean are spaces already taken by other businesses. - E.g.: Ikea, offering something innovative making innovation in the way in which the company in offering the product. How to successful perform a blue ocean? Lowering costs (combination of the two strategies -differentiation and cost leadership-) and increasing or creating something new. Lower costs: - Eliminate ⇨ the build costs - Reduce ⇨ the cost of warehouse (bigger and located outside the city, reducing the cost) Increase perceived consumer benefits: - Raise ⇨ making customers happy, offering something new - Create ⇨ [Renee Mauborgne] ⇨ red oceans are focused on known markets, stealing customers from other companies. Blue ocean = new market and new demand. Putting yourself in customers' shoes. If I want to maximize the value it will cost a lot, I won't be a differentiator. Value proposition, reducing costs, engaging people making them want to work with us, it's strategy not marketing. **The strategy canvas** ⇨ graphical depiction of a company's performance: - Relative to its competitors - Shows focus or divergence E.g.: Consider three companies each pursuing different strategies. You can compare whichever factors are most relevant. A company focused on differentiation may offer services at a higher price---this doesn't mean it\'s performing worse. Offering the same product at a higher price isn\'t wrong if customers perceive additional value in it. It's not just about costs. Reducing costs doesn't necessarily mean selling at a lower price; it can be a strategy to increase profits. Customers are often willing to pay more if they perceive greater value. Competition is shaped by these factors, which are based on the companies\' capabilities---what they can offer. There are multiple metrics and scales to measure success, and it's not about one winner or loser. Both companies can succeed by distinguishing themselves in different ways. **Chapter 7** Management ⇨ the process used to accomplish organizational goals through planning, organizing, leading, controlling people and other organizational resources +-----------------------------------------------------------------------+ | **Planning** | | | | - setting organizational goals | | | | - developing strategies | | | | - determining resources | | | | - setting precise standards -that goes with the goal- ⇨ it will | | serve in the controlling to understand if there's a difference | | (controlling) | | | | setting the organization's vision (more than a goal), goals | | (long-term accomplishments an org wishes to attend), objectives | | (specific, short-term statements) ⇨ strategic plan (long term), | | business plan (shorter term, more detailed goals, | | income-assets-balance sheets), budget (short term, one year horizon) | | | | mission statement ⇨ philosophy | | | | SWOT analysis ⇨ internal (strength, weakness), external | | (opportunities, threats) = it helps my company in planning. | | | | The **SWOT matrix**: | | | | 1. **S**trength (internal and helpful) ⇨ factors that support an | | opportunity or overcome a threat to give you advantage. E.g.: | | customer service advantages in marketing, talented employees | | | | 2. **W**eakness (internal and harmful) ⇨ factors of the business | | that mean you are unable to take advantage of an opportunity or | | are vulnerable to a threat. E.g.: high debt ratios, skills | | shortages | | | | 3. **O**pportunities (external and helpful) ⇨ they can arise from | | many sources: for example, competitors withdrawing from the | | market, new social trends, technological innovations. | | Opportunities may be tangible (products and features) or | | intangible such as enhancing reputation or extending your | | influence | | | | 4. **T**hreats (external and harmful) ⇨ they may be a new | | competitor, restrictive regulation, hostile takeovers. They might | | be tangible (restrictive legislation,...) or intangible | | (potential loss of reputation,...) | | | | 4 different times horizons (they are not occurring at the same time): | | | | - strategic planning ⇨ (top managers) long term (10years span or | | even more), defining the major goals in the future (E.g.: | | Stellantis, for example *purpose and values, effective governance | | and leadership, operational and geographic topics, numbers of | | products, differentiation, software strategy,* the big goal is | | *carbon net zero by 2038*) | | | | - tactical planning ⇨ developing detailed, short-term | | | | - operational planning ⇨ setting work standards (E.g.: how many | | hours you are going to work or setting a certain point of | | efficiency) and schedules necessary to achieve the tactical | | planning, short term (1-5 years) | | | | - contingency planning ⇨ alternatives, plan b, if something goes | | wrong then we have an option, preparing in advance for some | | alternatives | | | | KPI = key performance indicator | | | | Decision making: finding the best alternative ⇨ define the situation, | | develop alternatives, decide between alternatives, do what is | | indicated, determine whether the decision was a good one | | | | Problem solving, brainstorming, PMI (one way to summarize the pro/con | | and consequences of your choices) | +=======================================================================+ | **Organizing** | | | | Management levels: | | | | - top managers ⇨ they are the highest level in the organization | | hierarchy, often being part of or accountable to the board of | | directors (they may sit in the board themselves). Their role | | involves long-term planning, making crucial decisions, setting | | the company's vision and goals | | | | - middle management (general managers, division managers, branch | | and plant managers ⇨ you should know the organizational | | structure[^1^](#fn1){#fnref1.footnote-ref}) ⇨ they serve as link | | between the top managers and the lower managers, ensuring that | | the strategies and policies formulated by the top managers are | | implemented effectively at the operational level | | | | - supervisory management (first line) ⇨ they operate directly | | overseeing the day-to-day operations and non-managerial | | employees. They are often divided into: Operational managers | | (directly involved in production or operations) and staff | | managers (experts who support the organization by providing | | advice and services across departments. They don't have direct | | authority, so they are called *helpers*) | | | | Skills desirable at every of these levels: | | | | - technical skills ⇨ ability to be practical in tasks in a specific | | discipline (E.g.: engineers) = lower levels of management | | | | - human relations skills ⇨ communication and | | motivation = highest levels of management | | | | - conceptual skills ⇨ = ability to have a vision = top managers | | | | skills needed at various levels of management | | | | staffing ⇨ hiring, motivating, choosing the right people preventing | | them to walk away ⇨ a management duty | | | | organizational chart ⇨ hierarchical relationship, span of control | | (how high your responsibility is covering other people) | +-----------------------------------------------------------------------+ | **Leading** | | | | One of the skills between conceptual and human relationship | | | | There are many ways to be a leader (different leadership's styles, | | e.g.: Steve Jobs was famous for being autocratic): | | | | - communicating a vision, make people participating to your idea ⇨ | | communication with people | | | | - establish corporate values | | | | - promote corporate ethics | | | | - embrace change | | | | Some examples of leaderships: autocratic -- participative or | | democratic -- free rain (it doesn't mean no leadership at all, e.g.: | | Patagonia ⇨ for making them happy, the other reason was to inspire | | them having new ideas = additional benefits for the company's | | success) | | | | Various leadership styles (there are various middle ways): | | | | - depending on the level of authority (how an organization's | | structure looks like) | | | | Two keywords: empowering ⇨ giving some degrees of freedom to people | | (they are accountable for what they are doing, reporting to the | | managers but they are part of decision, they are involved), enabling | | ⇨ education/training that is making them able to face with these | | situations | | | | - waiting for approval makes the process longer = internal | | transactions | | | | knowledge management ⇨ finding the right information, keeping | | information in a readily accessible place, making the information | | known to everyone in the firm ⇨ duplicate the knowledge, it's hard to | | transfer knowledge (there are people jealous). A technique is the | | community of practice = group of people working together having | | complementary abilities and knowledge themselves. Tacit knowledge | | transfer (small group), explicit-formalized knowledge transfer | | (writing down instructions, everybody can add a piece of it, e.g.: | | forum) | +-----------------------------------------------------------------------+ | **Controlling** | | | | It measures performance relative to the planned objectives and | | standards and take necessary actions. There are 5 steps: | | | | 1. establishing clear performance standards (which are specific, | | attainable and measurable) | | | | 2. monitoring/recording data (record what you observe) | | | | 3. comparing results against standards/plan | | | | 4. communicating the results to the appropriate employees | | | | 5. taking corrective actions or giving positive feedback | | | | CFO = three areas of actions (1. Providing the company with the | | needed financial resources, 2. Administrative-accounting, 3. | | Controlling) ⇨ they usually involve three different people as | | supervisor of these three areas of activities | | | | A key criterion of measurement ⇨ customer satisfaction (qualitative | | standard) ⇨ external customers and internal customers | +-----------------------------------------------------------------------+ *Functions* = (in management) refers to these four functions, task activities. Functions in terms of duties. There's another meaning of function = unite of people, division or department that is dealing with something *Just in time* = it is everything about minimizing the time for which the inventories are sitting in your warehouse. This allows you to get track of your raw material consumption, to order the new materials when you don't have them anymore Different types of organizational structures: 1. *simple structure* ⇨ flexible relations with low complexity. The duties are done by mutual agreement and coordination and supervision is informal 2. *functional structure* ⇨ increased complexity based on a simple structure. It is used as a tool to fulfill the increasing needs of separation 3. *multidivisional structure* ⇨ if the functional structure is developed, it is turned into multidivisional structure, as a tool to reduce the decision responsibility by top manager. It is characterized by a set of separate functional structures reporting a central center 4. *matrix structure* ⇨ it is created with the aim of creating a type of structure composed of functional and multidivisional structures. The aim of matrix is combining the efficiency of functional structure with the flexibility of multidivisional structure. Case study: Freshii ⇨ there are different organizational charts ⇨ the freshii organizational structure is flat (which means there are not many layers of managers) because it is a fresh fast restaurant franchising. Strategic alliance. Everyone has ownership (accountability) of their area of expertise. There are no juniors' employees, everyone is considered a partner. Case study: annual report of MERCK ⇨ from 10-K (SEC, required for companies listed in US). Information used by investors to avoid information asymmetry because they prevent opportunistic behaviors, minority expropriations (manager acting not in the best interests for owners, but for its own interests). The table of content. Information regarding acquisitions, license or agreement, diversification. Reduce cost doesn't mean cost leadership (cost compared to the value perceived). Coca cola ⇨ growth strategy ⇨ execution (providing the results, how the strategy they are applying allowed coca cola company to get to these results) !! Unicorn companies are defined as startups that reach a valuation of \$1 billion and are not listed on the stock market ::: {.section.footnotes} ------------------------------------------------------------------------ 1. ::: {#fn1} Organizational structure = how the structure is organized working. General managers = responsible for overseeing the operations of an entire unit, business division. Division managers = they are head of a specific division (product line, market segment or geographical area). Branch managers = responsible for running a local office or branch of the organization. Plant managers = responsible of a manufacturing plant or production facility.[↩](#fnref1){.footnote-back} ::: :::