MANAGEMENT FIRST PARTIAL NOTES PDF

**[LESSON 1 -- GLOBALIZATION TRENDS ]** **[(DE) Globalization Trends]** - Globalization refers to the shift toward a more **integrated** and **interdependent** world economy **[The 4 facets of globalization ]** 1. **Markets** - This facet refers to the **global integration of markets**...

**[LESSON 1 -- GLOBALIZATION TRENDS ]** **[(DE) Globalization Trends]** - Globalization refers to the shift toward a more **integrated** and **interdependent** world economy **[The 4 facets of globalization ]** 1. **Markets** - This facet refers to the **global integration of markets** for goods and services. It involves the increasing **cross-border exchange of products**, which enables business to access international customers and compete in foreign markets - Key indicators here would include the volume of international trade, market penetration of multinational companies, and the global flow of consumer goods - Companies are no longer constrained by domestic market size, and consumers gain access to a **broader range of products and services**. However, it also means that local firms face greater competition from global players - **KEY DRIVERS OF MARKET GLOBALIZATION** → Organizations like the **World Trade Organization (WTO)** and regional **trade agreements (e.g., NAFTA, EU)** have worked to lower **tariffs, quotas, and restrictions**, making it easier for companies to export and import goods. The **internet**, **digital marketing, and e-commerce** have made it possible for companies to reach customers worldwide without having a **physical presence in every market** 2. **Production** - Globalization has led to the **fragmentation** and **global distribution** of production processes. It involves the **integration of supply chains across multiple countries**, where different components of a product are manufactured in different regions to capitalize on **cost advantages, resource availability, or specialized skills.** - Instead of producing everything domestically, firms locate their **manufacturing processes** in regions where **costs** (e.g. labor, raw materials, regulatory costs) **are lower**, **efficiency is higher**, or **specific expertise is available** - **EXAMPLE** → Apple is a prime example of how globalization has influenced production. The **design and innovation** of Apple products primarily take place in the US, but the **manufacturing and assembly** of its products, such as iPhone and MacBook, are done **globally**: - Apple sources components from multiple countries: screens from South Korea, processors from Taiwan, and batteries from China. The final assembly of the iPhone happens primarily in China - **Challenge** → This type of production creates complex supply chains that can e disrupted by geopolitical tensions, natural disasters, or pandemics (e.g., COVID-19 lockdowns in China disrupted iPhone production) 3. **People** - This dimension captures the movement of people across borders, whether for **work, education, or migration**. As globalization progresses, the workforce becomes more mobile, and companies can tap into a global pool of talent - The graph related to this facet may show **migration patterns, remittances**, or the number of people working in foreign countries. This could also include the number of students studying abroad or professionals relocating for employment opportunities - People's mobility enables talent to flow to where it is most needed, contributing to skill sharing and economic growth. **However**, it can also result in **"brain drain"** from developing countries, where highly skilled workers leave for better opportunities abroad 4. **Information** - Globalization of information reflects the increasing ease with which **information, ideas, and technologies flow across borders**. The internet, social media, and global communication networks have drastically reduced barriers to information sharing - A graph here might demonstrate the **growth of internet connectivity**, the volume of international data flows, or the **cross-border spread of innovation**. This illustrate how **knowledge, culture, and ideas** are no longer confined to geographic boundaries - The free flow of **information fosters innovation and accelerates technological development**. It allows businesses to operate more efficiently, access knowledge globally, and collaborate internationally. However, it also raises concerns about privacy, misinformation, and **unequal access to information** in different parts of the world **[The Watershed Moment ]** **[China's Accession into the WTO ]** - In 2001 China's accession into the WTO is known as the **"China stock"** due to its profound impact on global trade - By joining the WTO, China gained greater access to international markets. It rapidly became a **global manufacturing hub**, leading to a surge in exports. This transformation was beneficial for both China and multinational companies that sought **low-cost manufacturing options** - Initially, there were expectations that China's integration would lead to greater economic reforms, liberalization, and openness. However, things turned out **differently.** Although China became an economic powerhouse, it **maintained its political and economic control**, and its rise triggered various reactions globally. **EXAMPLE** → In the U.S. and Europe, it led to significant job losses in manufacturing as production shifted to China **[Russia v. Ukraine ]** - Geopolitical disruptions caused by the war that began in 2022 - Over 1000 businesses curtailed their operations in Russia due to **sanctions and ethical considerations** following Russia's invasion of Ukraine. Many multinational corporations withdrew from Russia or suspended their activities, signaling how political conflicts can disrupt the global economic order - The war accelerated **the fragmentation of the global economy** into competing blocs. Countries were forced to rethink their supply chains, energy dependencies (especially in Europe), and political alliances. This event also raised concern about **energy security**, as Russia is a major supplier of natural gas to Europe, and the war caused significant disruptions in energy markets **[Is globalization dead? ]** **"We're no longer in a world were producing most efficiently wherever it can be done is the primary goal" (Ray Dalio)** - Historically, during the height of globalization in the late 20^th^ and early 21^st^ centuries, companies and economies focused heavily on **producing goods and services in the most efficient and cost-effective way possible**. This typically meant → - **Offshoring production** to countries where labor was cheaper (e.g., moving manufacturing from the U.S. or Europe to China, Southeast Asia, or Mexico) - **Maximizing economies of scale,** producing goods in large quantities to minimize costs - **Creating** global **supply chains** where different stages of production happened in different countries to capitalize on each country's competitive advantage - Ray Dalio's statement signals that this approach -- **prioritizing efficiency** -- has become less desirable **due to recent global events** that exposed risks associated with over-reliance on globalized, just-in-time supply chains. The shift is being driven by factors like: - **Supply Chain Disruptions** (COVID-19, Semiconductor shortage) - **Geopolitical Tensions** (U.S. -- China Trade War, Russia-Ukraine) - **National Security Concerns** (Pushed countries to prioritize self-sufficiency in critical industries, e.g., the U.S. and Europe are now investing heavily in domestic semiconductor production to reduce reliance on Taiwan and China) **Other opinions** → - ***"Globalization isn't dead, but it is certainly changing"*** - ***"Globalization is not over, nor should anyone wish for it to be. But it needs to be improved and reimagined for the age ahead"*** - ***"We are witnessing a fragmentation on the global economy into competing blocs, with each bloc trying to pull as much of the rest of the world closer to its respective strategic interests and shared values"*** **"Globalization has always been an uneven process, with cross-country differences and international conflicts significantly dampening international flows"** **[What is special about international? ]** 1. Countries are different 2. The range of problems confronted by a manager in an international business is wider and the problems themselves more complex than those confronted by a manager in a domestic business 3. An international business must find ways to work within the limits imposed by government intervention in the international trade and investment system 4. International transactions involve converting money into different currencies **[LESSON 2 -- A PRIMER ON MANAGEMENT AND STRATEGY -- GENERIC STRATEGY ]** **[A primer on strategy and management ]** - Apple overtook Samsung and Huawei to become the smartphone **market leader** by shape of units shipped, accounting for 23,4% of the overall in the fourth quarter of 2020 **[What is Strategy? ]** - Strategy is different from goals and aims - A lot of people say they "my strategy is to internationalize", "my strategy is to consolidate my industry". **THESE ARE NOT STRATEGIES** - The word strategy is related to **what unique position can we achieve**, **what is our advantage comparing to others** - **STRATEGY** → The set of **goal-directed actions** a firm takes to gain and sustain **superior performance** relative to competitors **[How to think about competition? ]** - **Competing to be the best** → - This concept refers to businesses competing in the same market space by trying to **outperform** each other. It's a direct competition where companies try to **do the same thing better** than their competitors - If two companies are both selling similar products, they might try to win offering a **better version of the same product, lowering prices, or improving customer service**. Essentially, they are **running the same race** and trying to outpace each other by being faster, cheaper, or more efficient - Competing to be the best in the same space often leads to **price wars** and reduced profitability because companies are constantly trying to undercut one another. This can be an **unsustainable strategy** in the long term - **Competing to be unique** → - This approach emphasizes **differentiation**, where a company focuses on offering something that is **different from competitors**. Instead of competing directly, the company creates a unique market position or value proposition that appeals to specific customers - A luxury brand like Balenciaga is not trying to compete with Zara in terms of price. Instead, it creates a completely different product **(luxury fashion)** that appeals to a different audience. Both companies succeed by **targeting** different market segments with distinct products, running **different races** - Competing to be unique allows a company to **avoid direct competition** and establish a niche or premium market position. This can result in higher profitability since the company is not forced to engage in price competition **[Good Strategy vs. Bad Strategy ]** - **Good strategy** → - Involves focus, and therefore choice - **Make clear choices** about what it will and won't do. Need to focus on the areas where it can succeed - The company must identify the **main problem or challenge it is facing**. This means understanding what the real issue is in the market or within the company - After understanding the challenge, the company needs to come up with an overall **plan or policy** that guides its decisions. This policy should help the company gain **advantage** or **leverage** over its competitors - The company then takes specific actions and allocates its resources in a way that follows the guiding policy. All the actions must work together towards the same goal - Honestly **acknowledge** the challenges being faced - Provides a cohesive response to challenges - Helps staff to make choices as they strive to deliver the strategic intent - Include statements of what will **NOT be done** - **Bad strategy** → - Bad strategy is long on goals and short on policy or action. It puts forward strategic objectives that are incoherent and sometimes totally impracticable. It uses high sounding words and phrases to hide these failings - **Mistaking goals for strategy** → Many bad strategies are just statements of desire rather than plans for overcoming obstacles - **Bad strategic objectives** → Are bad when they fail to address **critical issues** or when they are **impracticable** - **Fluff** → a form of gibberish masquerading as strategic concepts or arguments - **Failure to face the challenge** → Bad strategy fails to recognize or define the challenge **[The 3 elements that consist a good strategy ]** - **Diagnosis** - Diagnose the main problems. Understanding the **external** and **internal** environment → - **External environment** → This includes analyzing market conditions, **competitors, customer needs, and industry trends**. For example, a company might identify new competitors entering the market or shifts in consumer preferences - **Internal environment** → This involves looking at the company's **resources, capabilities, strengths, and weaknesses**. For instance, a company may have strong brand loyalty but may struggle with outdated technology - The diagnosis pinpoints the **core issue** the company needs to address. Without a clear understanding of the problem, the company cannot effectively plan how to compete or overcome challenges - **Guiding Policy** - Once the challenge is identified, the next step is to formulate a **guiding policy**. This is the **overall approach** the company will take to address the challenge and improve its position - The guiding policy involves creating a broad plan that directs the company's efforts. It sets the **direction** for action and outlines **corporate, business, and functional strategies** - **Corporate Strategy** → Deals with decisions about the company's **overall scope**, such as whether to enter new **markets or industries** - **Business Strategy** → Focuses on **how the company competes** in a specific market (e.g. through cost leadership or product differentiation) - **Functional Strategy** → Involves specific departments like **marketing** or **operation,** guiding how these units should support the overall strategy - The guiding policy should be **focused and achievable**. It should avoid vague or overly ambitious goals and instead offer a **clear direction** on how the company can address its challenges - **EXAMPLE** → For the retail company struggling with online sales, the guiding policy might be to invest in a better e-commerce platform and enhance digital marketing efforts to attract more online customers. This guiding policy provides a clear approach to solving the identified problem - The guiding policy to **invest in a better e-commerce platform** and enhance **digital marketing efforts** is primarily a business-level strategy because it focuses on **how the company will compete** more effectively in the **online retail market**. It addresses specific competitive actions to improve market performance rather than broad corporate decisions or functional department-level actions - **Coherent Actions** - The final element is to translate the guiding policy into coherent actions -- specific, well-coordinated steps that will bring the strategy to life. **Coherent actions** are → - **Coordinated efforts** → The actions needed to align with the guiding policy and be consistent across the company. Different departments (like marketing, operations, and R&D) must work together to ensure that all efforts are supporting the overall strategy - **Effective use of resources** → Coherent actions require the allocation of resources -- **such as budget, personnel, and time** -- in ways that maximize the company's chances of success. Poor resources allocation can undermine the effectiveness of even the best strategies - **Implementation of strategy** → This stage involves putting the plan into action. It's not just about having a great policy on paper but about taking practical steps to achieve the desired outcome **[What strategy is not]** - Grandiose statements - Failure to face a competitive challenge - Operational, effectiveness, competitive benchmarking or other tactical tools **[Competitive advantage and Five Force Model ]** - **Competitive advantage** → **Superior performance** relative to other competitors in the same industry or the industry average. Can be achieved both through **business-level strategies or corporate ones** - **Five Force Model** → Is a business analysis model that helps to explain **why various industries are able to sustain different levels of profitability**. The model identifies an **industry's profit potential**. Moreover, the model determines the **intensity of competition**. Understand how firms can be positioned within an industry to gain and sustain **competitive advantage** 1. **Threat of Entry** → - This force refers to the risk of new competitors entering the industry. If an industry is profitable, it will attract new entrants, which can reduce profitability for all players - Barriers to entry, such as **economies of scale**, **customer loyalty**, **capital requirements**, or **regulatory hurdles**, help protect established companies from new competition - **EXAMPLE** → Facebook benefits from **network effects**, making it hard for new social media platforms to compete, though platforms like TikTok have managed to break through 2. **Power of Suppliers** → - Suppliers can reduce a firm's profitability by charging higher prices or reducing the quality of the inputs they provide - Supplier power is high when there are **few alternatives** or when they offer **highly differentiated products**. Also, if switching costs are high or suppliers can threaten to enter the buyer's industry, they gain more leverage - **EXAMPLE** → A **supplier of aluminum** **cans** has power if there are no alternative suppliers and if switching to another input would disrupt production for companies like Coca-Cola 3. **Power of Buyers** → - Buyers (customers) exert power when they demand lower prices or higher product quality, squeezing the margins of producers - This power is high when there are few buyers, when products are commoditized, or when buyers face low switching costs - Additionally, if buyers can **integrate backward** and start producing the product themselves, their power increases - **EXAMPLE** → **Coca-Cola** has significant power over its aluminum can supplier because it could potentially produce its own cans 4. **Threat of Substitutes** → - Substitutes refer to products or services from other industries that satisfy the same need. If substitutes are readily available and affordable, they can cap the prices firms in an industry can charge - The threat is high if switching to a substitute is easy for customers and if the substitute offers a better **price-performance ratio** - **EXAMPLE** → **Email** services are a substitute for traditional **express mail services**, offering faster and cheaper communication 5. **Rivalry Among Existing Competitors** → - This force measures how fiercely companies within an industry compete against each other for market share. Intense rivalry can reduce profitability by forcing firms to cut prices or increase spending on marketing and innovation - Rivalry is **intense** when there are many competitors, when growth is slow, or when companies have made heavy investments that tie them to the industry - **EXAMPLE** → In fragmented industries where firms compete on price, rivalry can be especially fierce, reducing profits for everyone - **Profit potential** in an industry is affected by the strength of these five forces. The stronger the forces, the lower the **profit potential**. The model helps firms understand how they can position themselves in an industry to mitigate the impact of strong forces (e.g., by building barriers to entry) and leverage weak forces to their advantage **[Key insights underlying Five Force Model ]** - It includes other forces in an industry, such as buyers, suppliers, potential new entrants and substitutes - All these forces attempt to extract value from the industry away from the local firm - **The stronger the Five Forces, the lower the industry's profit potential**, and vice versa - Firm's ideal position in an industry should relax constraints of strong forces and leverage weak forces **[LESSON 3 -- DECISION ANALYSIS -- UNDERSTANDING UNCERTAINTY ]** - In this class we will learn how to make predictions using probability and updating our beliefs to make better decisions **[3 main goals ]** - **Be less certain** → In decision analysis, overconfidence can lead to errors because it causes us to **underestimate risks** or ignore alternative outcomes. A decision-maker who "is less certain" does not assume that they know all the variables at play or that they can predict outcomes with complete accuracy. This aligns with what is known as ***epistemic humility***, the awareness that there are unknowns -- both known and unknown -- that could impact the situation - **Learn to make predictions** → **Prediction** is a critical part of decision analysis, and learning to predict outcomes more effectively helps in dealing with uncertainty. This goal is likely connected to using **probabilistic** thinking, where instead of being fixated on one outcome, you evaluate the range of possible outcomes and their likelihoods. The process of making predictions is not just about guessing, but about forming **a structured approach**, often involving **past data or theoretical models**, to estimate future outcomes - **Think Probabilistically** → Probabilistic thinking means considering the **likelihood** of different events rather than assuming one definitive outcome. This approach is fundamental in decision analysis because it allows decision-makers to evaluate multiple scenarios and weigh the risks and benefits associated with each one. For example, instead of assuming a business strategy will "definitely" success, thinking probabilistically means **assigning probabilities** to various success and failure scenarios and making more **informed choices** based on those probabilities **[Basic probabilities and distributions ]** - A random variable is a variable that can take on some values (x1, x2,..., xN). Each value is assigned a probability (p1, p2,..., pN) **[Random variables -- values ]** - **Continuous Random Variables** → Continuous random variables can take on any value within a specified range. This means that the set of possible values is uncountable, typically represented by **real numbers**. In decision analysis, continuous random variables often represent phenomena like **time, distance, or financial outcome** (e.g. stock prices), where there is an infinite range of possible values within the limits of measurement **EXAMPLE** → Think of the temperature in a city over a day. It could be **20.5, 21.345** degrees, or any value within a **range**. The exact number is not limited to whole numbers, making it continuous - **Qualitative Random Variables** → These variables represent categories or qualities that are **not based on numeric measurements**. They don't represent quantities that can be counted or measured but instead refer to descriptive characteristics. In **decision-making**, qualitative variables help classify outcomes that don't have a numerical scale. **EXAMPLE** → For example, in a marketing study, customer responses might be categorized as **"satisfied"** or **"dissatisfied"**, which informs how companies tailor their strategies without relying on specific numerical data - **Binary Random Variables** → A binary variable is a special type of categorical variable that can take on only two possible values. Typically, these values are represented as **0 or 1, "yes" or "no", or "true" or "false"**. In decision analysis, binary variables are often used to model **yes/no** decisions, **success/failure** outcomes, or the **presence/absence** of a particular condition. Binary outcomes are key to evaluating simple, clear-cut scenarios. **EXAMPLE** → An example of a binary variable could be the outcome of flipping a coin, which can be either **heads (1) or tails (0).** Another example is a customer's decision to buy a product: the variable could represent "purchased" (1) or "not purchased" (0). **Probabilities** → Probabilities indicate the likelihood of the occurrence of a random event. Probabilities are a sequence of numbers \[0,1\] that have to sum up to 1 (i.e. the probability of getting a value of X=10 is 0.2 or 20%) **Uniform Distribution** → A uniform distribution is a type of probability distribution where each outcome is **equally likely**. In a discrete uniform distribution, all the values that a random variable can take have the same probability of occurring. This is different from other distributions where some outcomes are more probable than others. **(am o multime de 8 numere, care este probabilitatea ca numarul din multime sa fie 10? 1/8 = 0.125 = 12.5%)** **Normal distribution** → A normal distribution is a probability distribution where most of the data points tend to distribute around a **central value (mean)** with a **symmetric pattern**. The farther you move from the center, the less likely the outcomes become. This shape resembles a bell, where the middle of the curve represents the most likely values, and the tails represent less likely values - **Left-Skewed Distribution** → A **left-skewed** distribution (also called negatively skewed distribution) occurs when the values **cluster** more on the **right side** and the left side (the tail) stretches out longer. In such a distribution, there are fewer extreme low values, but these values "drag" the **mean to the left, making it less than the median** - **Right skewed** → A **right-skewed** distribution (also known as positively skewed distribution) is one where the values cluster on the left side of the distribution, and the tail stretches out toward the right (higher values). In this distribution, the **mean is greater than the median**, and there are fewer extreme high values that stretch the distribution to the right **!!!Skewed represents a sudden change in direction or position!!!** **[Mean and standard deviation ]** - **Summary Statistics (or Moments)** → In probability theory and statistics, moments are a set of descriptive measures that help us understand the shape and behavior of a probability distribution. These are numerical values that summarize specific characteristics of a data set or probability distribution - **Moments** describe various aspects of the distribution → - The **first moment** is the **mean**, which gives the central location of the distribution - The **second moment** is the **variance** (or its square root, the **standard deviation**), which measures the spread of the distribution - **Summary statistics** are crucial because they provide a way to describe a dataset concisely, making it easier to understand large amounts of data by focusing on its key features. In the context of **probability distributions**, summary statistics help quantify the central tendency and dispersion (how spread out the data is) - **Mean** → Represents the average value of the data - **Standard Deviation** → Reflects how much the values of the data vary from the mean  - **Mean formula** →  where xi is the value of an observation, and pi is the probability of whether that value occurs. The mean of the distribution set is 10\*0.20 + 20\*0.10 + 30\*0.20 + 40\*0.20 + 50\*0.10 + 60\*0.05 + 70\*0.10 + 80\*0.05 = **37** - **Variance formula** → where xi is the value of an observation, and pi is the probability of whether that value occurs. The variance of the distribution in the table is:  **[LESSON 4 -- A PRIMER ON MANAGEMENT AND STRATEGY -- CORPORATE STRATEGY AND DECISION-MAKING]** **[How do you measure concentration? ]** - Concentration is an important dimension in understanding **competition** in an industry. The **more concentrated an industry is, the fewer players dominate the market**, which can reduce competition and give more power to the dominant firms - In a **concentrated industry** where a few large firms control the majority of the market, there is **less incentive for aggressive competition**, such as price wars, because the big players are content with their dominant positions. This leads to higher profitability for those larger firms - When an industry is concentrated, the large companies have a greater **bargaining power** over both suppliers and buyers. They can negotiate better terms with suppliers because they **buy in bulk**, and they have more control over buyers because customers have fewer alternative choices. This is called **relative concentration** → the idea that a company's power is **relative** to its market **dominance and size** compared to **suppliers and buyers** - Concentration is typically measures using market shares (MS) of the companies in an industry. Two common methods are the **a) Concentration ratio (CRn)** and **b) Herfindahl-Hirschman Index (HHI)** - **Concentration Ratio** → is a simple measure that sums up the market shares of the largest n companies in an industry to see how concentrated it is. The **n** usually refers to the **top 4 or 5 firms**, but it can vary depending on the industry. The formula is **CRn = MS1 + MS2 +... + MSn.** Higher values of concentration indicate a more concentrated industry, which means fewer firms control most of the market, leading to less competition - **Herfindahl-Hirschman Index (HHI)** → This is a more refined measures of concentration because it considers **all companies** in the industry and gives more weight to larger firms by **squaring their market shares**. Squaring the market shares gives **disproportionate** importance to larger firms, reflecting how their dominance influences industry dynamics. The formula is **HHI=MS1(squared) + MS2(squared) + \... + MSn(squared).** A higher HHI indicates a more concentrated market. **If the HHI is close to 10,000** (which happens when one firm controls the entire market), the industry is highly concentrated. If the HHI is low (close to), the market is more competitive **[Business-Level Strategy ]** - The concept of business-level strategy refers to the specific **actions** and **approaches** that managers within a company implement to achieve a **competitive advantage** when operating in a **single product market** - What is a **SINGLE PRODUCT MARKET** → Unlike **corporate-level strategies**, which might span multiple industries or product lines, business-level strategy focuses on one specific market. This means the strategy is tailored to the competitive dynamics, customer preferences, and conditions within that particular market. For instance, in the **smartphone industry**, a company like **Apple** focuses its business-level strategy on providing high-end, innovative devices that appeal to a particular customer segment. Meanwhile, a company like **Xiaomi** might focus on providing affordable devices with good functionality, catering to a different market segment **EXAMPLE EXAPLAINED** → **Apple (Single Product Market Strategy in Smartphones)** focuses on a high-end, premium market segment. The company's **business-level strategy** for smartphones is to offer **innovative, high-quality devices with cutting-edge features**. This appeals to a **specific segment of customers** who are willing to pay more for superior design, brand prestige, and seamless integration with other Apple products (like MacBooks and iPad). Even though Apple operates in other markets (e.g. laptops, tablets), its business-level strategy in the **smartphone market** is distinct. It focuses heavily on **premium quality and innovation** to differentiate from competitors. **Xiaomi (Single Product Market Strategy in Smartphones)** follows a different business-level strategy in the same smartphone industry. **Xiaomi** focuses on delivering affordable devices that offer good functionality and features at a much lower price than Apple. This appeals to a more price-sensitive market segment that wants a reliable smartphone without paying for the premium design or brand name. Xiaomi's business-level strategy revolves around **cost leadership** -- offering **good value for money** by maintaining low production costs and focusing on market share in developing countries **Apple** competes in the **premium segment**, with an emphasis on differentiation **Xiaomi** competes in the **affordable segment**, with a focus on cost leadership **[Managers need to answer 4 questions ]** - **WHO** are the customers? - **WHAT** customers needs/wishes/desires will we satisfy? - **WHY** do we want to satisfy them? - **HOW** will we satisfy them? **[Generic Business-Level Strategies ]** - **Differentiation Strategy** → Companies using a differentiation strategy focus on delivering **unique features** that set their product apart from others. This can be through **innovation, superior quality, design, branding, customer service, or any other aspect that add value from the customer's perspective**. While the **costs of production might be similar** to competitors, the ability to **charge a higher price** because of the perceived added value allows companies to achieve higher profitability **EXAMPLE** → Tesla uses a differentiation strategy by offering highly differentiated products -- electric vehicles (EVs) that combine cutting-edge technology, sleek design, and strong performance. Tesla's focus is on **innovation, autonomous driving, and environmental sustainability**, appealing to a specific **small market segment** that values these features. This allows Tesla to **charge premium prices**, positioning itself as a unique player in the auto industry - **Cost-Leadership Strategy** → The cost-leadership strategy seeks to create the **same or similar value** for customers as competitors but at a **lower cost**. This strategy aims to **minimize operational expenses and maximize efficiency**, allowing companies to offer products at lower prices, attracting price-sensitive customers. Companies using this strategy achieve cost leadership by **streamlining production processes, optimizing supply chains, and achieving economies of scale to reduce costs.** The focus is on maintaining low production costs while still delivering products that meet customer expectations. Unlike the differentiation strategy, cost leadership relies on offering products at lower prices, which can lead to a larger market share **EXAMPLE** → **General Motors (GM)** uses a **cost leadership strategy** with its **Chevy brand**. Chevy targets a **broad market** by offering vehicles that provide value for money. GM achieves this by focusing on efficiency and producing cars at a lower cost, allowing them to price Chevy vehicles more competitively. Chevy's affordability appeals to a broad segment of price-sensitive consumers. **[Combined Example of General Motors (GM)]** - GM serves a wide range of market segments and uses both **cost leadership and differentiation** strategies, depending on the brand. - **Chevy (Cost-Leadership)** → Chevy is positioned as a low-cost brand that competes in the mass market by offering reliable and affordable vehicles, which appeals to **budget-conscious consumers** - **Cadillac (Differentiation)** → On the other hand, GM's Cadillac brand is positioned as a differentiated luxury brand. Cadillac cars are equipped with premium features, advanced technology, and high-end designs. This allows Cadillac to charge a higher price, as customers perceive greater value in its luxury offerings **[Differentiation Strategy ]** - Add **unique features** that will increase the **perceived** **value** of goods and services in the minds of consumers so they are willing to pay a higher price **[Cost-Leadership Strategy ]** - Reduce the firm's cost to manufacture a product or to deliver a service below that of its competitors while offering **adequate value** - **COST DRIVERS TO IMPROVE FIRM'S STRATEGIC POSITION** → These drivers help a firm improve its **strategic position** (how a company positions itself within the market, relative to its competitors in order to achieve and sustain a competitive advantage) under a **cost-leadership strategy** - **Cost of Input Factors** → Company's ability to gain access to lower-cost input factors such as **raw materials, labor, capital, or utilities**. By reducing the cost of the basic inputs needed for production, the firm can lower overall production costs. Companies may reduce costs by securing **more favorable contracts with suppliers**, **sourcing cheaper materials**, benefiting from **geographic advantages** (such as proximity to raw material sources), or through **bulk purchasing**. **EXAMPLE** → Many companies source raw materials from countries where labor and resources are cheaper. For instance, a clothing manufacturer may move its operations to countries like Bangladesh or Vietnam to take advantage of lower labor costs, which reduces the overall cost of production - **Economies of Scale** → Economies of scale refer to the **decrease in cost per unit as output increases.** As a firm produces more of a product, the average cost per unit declines because fixed costs (like factories, equipment, and administration) are spread over more units of output. **EXAMPLE** → If you are making just a few T-shirts, each one has to "pay" more toward the **fixed costs (sewing machine, rent),** making them expensive. But if you make a lot of T-shirts, each one only pays a small part of the fixed costs, making them cheaper to produce. This is the essence of **economies of scale**: the more you produce, the cheaper it gets per unit because your fixed costs are spread over more items - **Learning-Curve Effects** → Learning-curve effects refer to cost reductions that occur as a firm becomes more efficient with **repeated production of the same product**. As workers **gain experience** and processes become more **refined**, production becomes **faster and less error-prone**, even when the **technology remains constant**. As companies **produce more of the same product**, they get better at it. Workers become more skilled, machines are used more efficiently, and the process becomes smoother. This leads to **fewer mistakes, faster production times**, and **lower labor costs** because workers take less time to complete the same task. **EXAMPLE** → In aircraft manufacturing, companies like Boeing or Airbus see learning-curve effects. The first units of a new plane model take longer and cost more to produce because of initial challenges, but as production continues, the workforce and engineers become more adept, reducing costs over time - **Experience Curve** → The experience curve reflects cost reductions that occur as firms become more efficient over time, but here, **technology changes**, and cumulative **output remains constant** (total amount of products or services being produced does not increase). This means that the firm uses new or better technologies to further reduce costs. Unlike the learning curve, where improvements come from **repetitive** tasks, the experience curve involves adopting new, more advanced technologies or production techniques to **reduce costs**. Over time, companies may replace outdated machinery with more automated systems or invest in more energy-efficient technology, which allows them to **produce the same quantity of goods at lower costs** **EXAMPLE** → In the semiconductor industry, companies like Intel benefit from the experience curve. Even if they **produce the same number of microchips**, newer technologies allow them to make chips more efficiently, reducing the size of transistors on a chip allows for more performance with **lower production costs**. **[Economies of scope ]** - **Economies of scope** refer to the **cost savings or efficiencies** that a company experiences when it produces multiple products or services together using the same **resources, technology, or capabilities**, instead of producing each one individually. In simple terms, it means that producing two (or more) product together it cheaper than producing them separately **[Economies of scope drivers]** - **Drivers** → Are the key factors or mechanisms that allow a company to lower costs and improve efficiency by producing a variety of products or services together rather than separately [ ] - **Complementarities in the production and distribution of products/services (shared inputs)** → This refers to the ability to produce multiple products more efficiently by sharing resources, whether they are **physical inputs or processes**. Complementarities can occur in manufacturing, logistics, and even administrative tasks - **EXAMPLE** → A car manufacturer like **Toyota** uses the same assembly line to produce different car models. Many components, such as engines or chassis, can be shared across multiple car lines. This **reduces production costs per unit** because the fixed costs of machinery and labor are spread over a large number of products - Sharing resources means the company can scale production more easily and reduce unit costs, leading to a **competitive advantage**. The more products share these inputs, the more efficiently they can be produced - **Deployment of Unique Assets and Capabilities Across Several Products (e.g. Brand Reputation)** → Here, a company uses intangible assets (like a strong brand, technical expertise, or customer trust) across different product lines. These unique assets don't need to be recreated for each product, allowing a company to enter new markets or expand its product offering without significant new investments - **EXAMPLE** → Apple's brand is known for **innovation and high-quality** technology. When they introduce a new product, such as Air Pods or the Apple Watch, they can rely on their existing reputation to encourage customers to buy these new items without needing to **build trust from scratch** - Brand reputation and similar unique assets are valuable because they provide a platform to introduce new products **without the costs associated with building credibility**. The more products a company can associate with its strong reputation, the more efficiently it can diversify - **Use of Same Advertising Campaign for Multiple Products** → Advertising is expensive, but economies of scope can be achieved by promoting multiple products in a single campaign. This is possible when products are complementary or belong to the category, allowing the company to target the same audience effectively - **EXAMPLE** → **Procter & Gamble (P&G)**, a large consumer goods company, often promotes multiple cleaning products (like detergents and soaps) together. A single TV commercial might feature multiple P&G products, thus lowering the marketing expense per product - By bundling advertising efforts for several products, a company reduces the per-product advertising costs. The overall marketing budget is used more efficiently, and the company strengthens brand visibility across its entire product range - **Amortizing Expenses Related to Generic R&D** → **R&D (Research and Development)** costs can be significant, especially in industries like pharmaceuticals, technology, or aerospace. When a company invests in **developing new knowledge, technologies, or processes**, it can apply these innovations to **multiple products,** spreading the R&D costs across a broader base - **EXAMPLE** → A pharmaceutical company like Pfizer might invest billions in R&D for a new drug delivery technology. Once developed, the company can use this technology not only for a specific drug but across its entire range of medications. This spreads the high R&D cost over a larger number of products - By sharing R&D across multiple products, companies can reduce the cost burden per product, which makes them more competitive. New innovations can also speed up the time to market for future products because the foundational work is already done - **Creation of Exit Barriers and Lock-in Effects for Consumers (e.g., Apple's Product Ecosystem)** → Lock-in effects occur when a company creates a system where its customers find it **costly, inconvenient, or undesirable** to switch to a competitor's product. This happens when products work best in conjunction with each other, creating a self-reinforcing ecosystem. - EXAMPLE → **Apple's ecosystem** is one of the clearest examples of this strategy. Once a customer owns an iPhone, they might be tempted to buy **a MacBook or an iPad** because all these devices are seamlessly integrated. Features like **iMessage**, **AirDrop, and iCloud** only work best when all devices are Apple products. The more Apple products a consumer owns, the harder it becomes to switch to other brands because they'd lose this integration - By creating **strong interdependencies** between its products, a company can retain customers for long and discourage them from switching to competitors. This increases the lifetime value of each customer, further lowering costs as the company spends less on **acquiring new customers** - A **cost-leadership strategy** focuses on becoming the **lowest-cost producer** in an industry. Economies of scope play a key role in this by allowing a company to reduce costs across its operations by **offering multiple products that benefit from shared resources. EXAMPLE** → **Walmart** is a classic example of a cost leader. The company operates on thin profit margins but makes up for this by offering a vast range of products. They can keep costs low because their massive scale allows them to negotiate lower prices from suppliers, and they have highly efficient logistics and supply chain management **[Armani -- EXAMPLE ]** - **Armani** uses a **cost-leadership strategy** by offering a **broad array of products** across different categories -- **clothing, shoes, watches, jewelry, cosmetics, and even home interior products**. Despite being a **luxury brand**, Armani manages its costs efficiently across all these product lines, making it competitive in different market segments. Here's how these ties into economies of scope: - **Selling multiple product categories** → Armani sells a diverse range of products, from fashion to home interior items. Producing these multiple product categories under one brand helps Armani leverage economies of scope because: - **Shared Inputs** → Many of Armani's products, such as **fabrics, design expertise, and production facilities**, can be used across different lines. For instance, the expertise in designing luxury clothing can extend to designing high-end furniture or accessories, lowering the per-unit cost for each product - **Shared distribution and marketing** → Armani can distribute these products using the **same stores, online platforms, and marketing campaigns**, lowering costs for **advertising, logistics, and store management**. This is a classic example of using the same advertising or retail infrastructure for multiple products, saving costs that would otherwise be incurred if each product had separate distribution and marketing systems - **Specialized Labels and Marketing** → Armani markets its products under several specialized labels (e.g. Armani Exchange, Emporio Armani, Giorgio Armani), each targeting different customer segments. By doing this, Armani can cater to different tastes and price ranges while still benefiting from its **core brand reputation**. These labels offer specific types of products under the same Armani umbrella, but because they share brand value, design resources, and corporate knowledge, Armani achieves cost savings. EXAMPLE → Although Armani Exchange is a more affordable line compared to Giorgio Armani, both lines benefit from the same **brand reputation, suppliers, and design studios, spreading the costs over many products lines** - **Sources of Scope Economies: Intangible Assets** → Armani's **intangible assets** play a major role in achieving economies of scope - **Brand advantage** → The strong Armani brand is recognized globally for luxury and quality. This brand power allows Armani to extend into new product categories (e.g., home interiors, cosmetics) without having to build credibility from scratch. This spreads the costs of brand-building across various product lines - **Corporate Image** → Armani's image as a prestigious brand enables it to market products across various categories without needing to reinvent its image for each. For instance, when launching a new product line like home interiors, Armani doesn't need to invest heavily in building trust -- it already has a reputation for high quality - **Know-how** → Armani's expertise in design, fashion, and luxury markets is transferable across multiple product categories. This knowledge (e.g., understanding luxury customers, product design aesthetics, high-quality manufacturing processes) applies to all its products, reducing the **cost and effort** of launching new product lines **[Corporate Strategy ]** - **CORPORATE STRATEGY** → The decisions that senior management makes and the **goal-directed actions** it takes to gain and sustain **competitive advantage** across the industries and markets where they operate - Is the **overarching** plan and **decision-making** process that guides a company's actions across multiple industries and markets. It focuses on how a company **as a whole** can create value by managing its different businesses, and it aims to gain and sustain a **competitive advantage** at the organizational level - Corporate strategy **looks beyond individual business units or products** and instead deals with the **big picture** of where the company is heading and how its diverse operations fit together **[Difference between an industry and markets]** - **INDUSTRY** → An industry refers to a **group of companies** or organizations that produce similar products or services. It is typically defined by the type of goods or services the businesses provide and the processes they use to create value. Industries are broader and encompass all companies involved in the production, distribution, and sale of a particular product or service category **EXAMPLE** → **Automotive industry** includes all companies involved in the design, manufacturing, and selling of motor vehicles, such as Ford, Toyota, and Tesla. This refers to companies that produce hardware, software, and digital services, like Apple, Google, and Microsoft - **MARKET** → A market refers to the place or environment where buyers and sellers come together to exchange **goods, services, or information**. A market can be defined by the demand side -- that is, the needs and preferences of the consumers. Markets are more concerned with the exchange and transactions between buyers (consumers) and sellers (producers or service providers) **CORPORAT STRATEGY ANSWERS THE QUESTION → WHERE TO COMPETE?!?!?! (but not only)** **[Why do firms need to grow?]** - Corporate strategy is closely tied to a **company's growth**, and firms pursue growth for several strategic reasons - **To increase profitability** → When firms grow, especially by expanding into new markets, launching new products, or acquiring other businesses, they generate additional revenues streams. This allows them to increase their overall profitability by either entering new **lucrative markets** or selling more to their existing customer base. **Growth** is a key objective in **corporate strategy** because it directly impacts a company's ability to deliver higher returns to **shareholders or owners**. For example, when a company like **Amazon** expands into new areas (like cloud computing through Amazon Web Services), it creates new opportunities for profit, diversifies its revenue, and boosts shareholder value **EXAMPLE** → **Apple** has expanded its portfolio from computers to smartphones, wearables (Apple Watch), and services (Apple Music, iCloud), each contributing to its increased profitability and delivering more value to shareholders - **To lower costs** → As firms grow larger, they often experience **economies of scale**. This means they can produce goods or provide services at **a lower average cost** because their fixed costs (like equipment, R&D, or administrative expenses) are spread over a larger volume of output. By increasing their **production or scale of operations**, firms can drive down costs. A **corporate strategy** focused on growth through **horizontal integration (buying out competitors)** or expanding capacity can help firms take advantage of economies of scale. This lowers per-unit production costs, making the firm more competitive in its market **EXAMPLE** → Walmart uses its large size and buying power to negotiate lower prices with suppliers, enabling it to offer lower prices to customers while maintaining profitability. Its growth allows it to achieve economies of scale that smaller competitors cannot match - **To increase market power** → As firms grow larger, especially through **mergers and acquisitions**, they gain **market power** -- the ability to influence prices, supply chains, and even industry regulations. Larger firms can reshape the structure of the industry in their favor, reducing competition and creating barriers to entry for new players. Growth through **acquisitions and vertical integration** allows companies to control a larger share of the market and sometimes monopolize parts of their industry. Corporate strategies focus on gaining market power are designed to change the competitive dynamics by eliminating or outcompeting rivals **EXAMPLE** → **Facebook (now Meta)** increased its market power in the social media and messaging space by acquiring competitors like **Instagram and WhatsApp**. This not only reduced competition but also helped Meta consolidate user data across platforms, creating a stronger presence in the digital advertising space - **To reduce risk** → Growing into new markets or industries can help companies diversify their revenue streams, reducing their overall business risk. If one part of the business underperforms, growth in another sector can compensate for the loss. Firms use **diversification strategies** to expand into different industries or geographic regions, balancing risks across various parts of the business. By **not relying solely on one industry** or product, companies can protect themselves from downturns in specific markets **EXAMPLE** → General Electric (GE) diversified its business portfolio across multiple industries, including **aviation, healthcare, and energy**. This diversification helped GE balance its financial performance even when sector (e.g., its energy division) underperformed - **To motivate management** → As companies grow, they can offer more **career opportunities** and **incentives for employees**, including management. This can help attract and retain talented employees by offering paths for professional development, promotions, and increased responsibilities. A **corporate strategy** that emphasizes growth often involves expanding teams, entering new markets, or creating new business units, all of which offer more career development opportunities. Companies focused on growth tend to have more **dynamic, evolving corporate cultures, which can motivate employees to stay and grow with the company** **EXAMPLE** → **Google (now Alphabet)** has consistently pursued growth in various sectors like autonomous vehicles, healthcare, an artificial intelligence. This growth offers employees and management new challenges and opportunities, keeping the company innovative and attracting top talent **[Difference between vertical integration and horizontal integration ]** - **Horizontal integration** → Occurs when a company expands its operations by acquiring or merging with competitors that operate at the same level of the value chain or in the same industry. This means that the company **buys out, merges with, or forms strategic alliances** with other companies that provide similar products or services - **Vertical integration** → Occurs when a company expands by acquiring or merging with companies at different stages of its **supply chain**. This means that a company may take over businesses that supply its **raw materials** (upstream), **distribute its products** (downstream), or are involved in other steps of the **production and distribution** process - **Backward Integration** → When a company acquires or merges with suppliers or producers of **raw materials and components**. This allows the company to control the supply of essential inputs, secure lower costs, and ensure reliable supply **EXAMPLE** → IKEA purchasing forests and raw material suppliers to control the production of the wood and other materials it needs to make its furniture - **Forward Integration** → When a company acquires or merges with businesses further along the supply chain, such as **distributors or retailers**. This allows the company to control distribution, gain better access to customers, and improve its market reach **EXAMPLE** → A clothing manufacturer opening its own retail stores to sell directly to consumers, bypassing third-party retailers  **[Firms can grow along 3 dimensions ]** - **Vertical Integration** → Refers to the expansion of a firm's operations along different stages of the **industry value chain**. It involves a company taking control of either its **suppliers** (backward integration) or its distribution channels (forward integration), or both, to gain more control over the production and delivery of its products. The **industry value chain** includes all the stages a product or service goes through, from sourcing raw materials to production, distribution, and ultimately reaching the end customer - **Diversification** → Refers to a firm's expansion into new **products** and **services** that are either related or unrelated to its current business operations. **Diversification** allows companies to reduce their **dependency** on a single product or market and spread their risks by entering **new industries** or offering a broader range of products - **Geographic Scope** → Refers to the expansion of a company's operations into new **regional, national, or global markets**. This dimension of growth involves extending the company's reach beyond its current geographic boundaries, often to increase market share, access new customers, or reduce dependency on a single market - **Regional Expansion** → A company expands its operations to neighboring regions or markets within the same country - **National Expansion** → A company moves from a regional to a national presence, distributing its products or services across the entire country - **Global/International Expansion** → A company expands beyond its home country and enters international markets, either by setting up operations abroad or exporting its products to foreign markets **[Combined Growth Dimensions in Corporate Strategy]** - When companies incorporate all three dimensions -- **vertical integration, diversification, and geographic scope** -- into their **corporate strategy**, they can create a well-rounded and sustainable growth plan. This multidimensional approach allows them to **strengthen their presence in their current market, expand into new product areas, and reach new customers in other regions or countries** - **EXAMPLE AMAZON** → - **Vertical integration** → Amazon has vertically integrated by developing its own logistics and delivery network **(backward integration)** and by offering cloud services through Amazon Web Services (AWS), making it less reliant on third-party services. It also directly reaches consumers through its retail platform **(forward integration)** - **Diversification** → Amazon has diversified from being an online retailer into several other areas, including **cloud computing (AWS),** **video streaming (Amazon Prime)**, **grocery stores (Whole Foods)** and **smart devices (Echo)** - **Geographic Scope** → Amazon has expanded globally, serving customers in numerous countries through localized websites and delivery services. It operates in North America, Europe, Asia, and other regions **[Concepts that guide corporate strategic decisions ]** - **Core competencies** → Core competencies are the **unique strengths or capabilities** that are embedded within a firm, allowing it to differentiate its products and services from those of competitors. These strengths give the company a competitive advantage by enabling it to offer better value to customers. Core competencies are what the company does exceptionally well. These capabilities are difficult for competitors to replicate. They can a combination of **skills, technologies, expertise or resources**. A firm's **corporate strategy** is often built around **leveraging and expanding** its core competencies. For example, if a company has a core competency in product design, its corporate strategy might focus on expanding into new product categories that rely on this strength - **Economies of Scope** → Occurs when a company can produce **two or more outputs** at a lower cost than producing them separately. This arises because the company can share **resources, processes, or technologies** across different products or services, reducing costs. Using the same **machinery, expertise, or marketing efforts** for multiple products reduces overall costs. The more products a company can produce using shared inputs, the cheaper each product becomes. Companies that diversify into related products often achieve economies of scope. **Corporate strategies** often aim to expand a company's product or service offerings to take advantage of economies of scope. By leveraging shared resources across different products, firms can **reduce costs and increase profitability.** - **Economies of scale** → Occur when a firm's **average cost per unit decreases as its output increases**. This happens because fixed costs (such as equipment, facilities, and administrative costs) are spread over a larger number of units, reducing the per-unit cost. Larger firms can often negotiate better prices with suppliers, further reducing costs. Higher production levels often lead to operational efficiencies, such as more streamlined manufacturing processes. **Corporate strategy** often involves expanding production capacity or entering new markets to achieve economies of scale. The larger the scale of operations, the lower the average cost per unit, which enables firms to compete on price and improve profitability - **Transaction Costs** → Transaction costs are the **costs associated with an economic exchange**, including the costs of searching for **information, negotiating contracts, monitoring agreements, and enforcing contracts**. These costs arise in interactions between firms or between firms and consumers. Costs incurred from organizing and managing interactions with other firms (e.g., suppliers or distributors). Ensuring that contracts or agreements are followed through. Higher transaction costs can arise from uncertainties in external transactions, such as **outsourcing or third-party services. Corporate strategies** often aim to maximize transaction costs. This can be achieved through **vertical integration**, where a company takes control of more stages of production and distribution, thus reducing its reliance on external transactions. By doing so, companies can improve efficiency and reduce risk. **[AMAZON CORPORATE STRATEGY EXAMPLE ]** - **Core competencies** → - Artificial intelligence capabilities are a core competency and source of sustainable competitive advantage - Amazon's AI capabilities provide **product enhancement** and **improved customer experience**, thereby making the company a desirable platform for customers - This condition strengthens the company's strategic position as a major technology business and influencer in the global market - **Economies of scale** → - The development and maintenance of Amazon's web shopping platform (its search engine, recommendation algorithms, payment systems, etc.) require a **massive upfront investment**. However, once this system is developed, Amazon can spread the costs of the platform over millions of transactions, product categories, and users. As Amazon adds more **product categories** **(e.g., electronics, groceries, books, clothing)**, the cost of running and maintaining the web platform doesn't increase much, but the revenue generated increases significantly - As the number of transactions and categories Amazon handles increases, the **average cost per transaction or per category decreases** because the initial investment in the technology platform is spread over a much larger volume of scale. Smaller competitors who don't have the same scale struggle because they have fewer transactions to spread these costs over, making it more expensive per transaction for them to maintain a similar platform - Cloud services → Amazon benefits from economies of scale through its cloud computing division, Amazon Web Services (AWS). AWS allows companies to rent computing power, storage, and database services on an as-needed basis instead of buying, owning, and maintaining physical data centers and servers - Amazon's ability to build and maintain a user-friendly online shopping platform is another source of economies of scale. Developing a platform that is **efficient, secure, and capable of handling millions of users** simultaneously is a costly endeavor. Amazon has invested heavily in developing features such as **recommendation algorithms, efficient payment systems, search functionality**. These features are **expensive to develop**, but **once in place**, they scale effortlessly as Amazon's user base grows. In contrast, competitors who do not have the same resources to develop such systems face higher per-unit costs, especially if their platforms don't generate the same **volume of traffic and sales** - **Economies of scope** → - Amazon's distribution network ranks among the largest networks for fulfilling direct orders. Amazon is using the same infrastructure (its distribution network) to **fulfill orders across a broad range of product categories**, rather than specializing in just one type of product or service - Amazon's **fulfillment centers** are designed to store, pack, and ship a wide variety of products -- ranging from books and electronics to clothing, household goods, groceries, and even furniture. These centers are not specialized for any single product category; instead, they are multi-functional hubs that handle products from many different industries. This ability to use the same facility for a diverse array or products is a prime example of **economy of scope** - Shipping a **range of products is more efficient than shipping a single product** and Amazon sells an extremely broad range of products. As a result, it can negotiate favorable deals with freight companies (cargo deliveries) - **Transaction costs** → - Through **one-click purchasing** and **Prime subscription**, Amazon reduces the cost of finding what you want, the time it takes to get it into your hands, the effort it would take to return it, the added cost of shipping (Prime), the payments process (One-Click) and many other subtleties that are all part of how their extremely efficient e-commerce market works - These innovations dramatically lower consumers' cost of engaging with their markets and thereby transaction costs **[Boundaries of the Firm ]** - **Transaction costs** -- All internal and external costs associated with an economic exchange, whether it takes place within the boundaries of a firm or in markets - **Internal costs** → Internal costs refer to the expenses incurred in organizing economic exchanges **within the firm**. These include the resources required to coordinate activities between **departments, divisions, or employees**. When a firm grows, internal costs often increase due to the complexities of managing a larger workforce, more **extensive operations**, or integrating new business units. As these costs rise, firms may face diminishing returns from internal growth **EXAMPLE** → - **Recruitment and retention costs** → Expenses associated with finding, hiring, and retaining employees, including HR management and training. Although activities like **funding, advertising for, and hiring employees** do involve some external interactions (such as posting job advertisements or using recruitment agencies), the ultimate purpose of these activities is to organize the firm's **internal operations** - **Administrative and coordination costs** → The cost of managing internal teams, ensuring that production, logistics, sales, and other activities function smoothly together - **Monitoring and compliance** → Ensuring employees meet performance standards and follow company policies - **External costs** → External costs are the costs engaging in economic exchanges **outside the firm**, specifically when the firm interacts with external parties such as **suppliers, customers, or partners in the open market**. Firms may encounter high external costs when the market is competitive, suppliers are **unreliable**, or enforcing contracts become difficult. In such cases, firms might opt to internalize these activities to reduce reliance on the market **EXAMPLE** → - **Search costs** → The effort and resources spent identifying suitable suppliers, partners, or customers in the marketplace - **Negotiation costs** → Time and legal expenses involved in negotiating the terms of contracts, prices, and conditions for products or services - **Enforcement costs** → The costs incurred to ensure that external parties comply with the agreed-upon terms, including costs related to monitoring or legal enforcement if disputes arise **[Alternatives on the make-or-buy continuum ]** - The continuum represents a spectrum of choices between two **extremes**: **producing goods or services in-house** ***(make)*** versus **purchasing them from external suppliers** ***(buy).*** This decision is crucial in determining a firm's boundaries and reflects how a company manages its internal and external **transaction costs** - **Short-Term Contracts** → Short-term contracts refer to agreements with external suppliers that are typically for **less than 1 year**. These contracts allow firms to source products or services without long-term commitment. They offer flexibility to the firm as it can switch suppliers relatively easily - **Long-Term Contracts** → These contracts extend beyond **1 year** and are typically used for more strategic partnerships where specific investments or reliability are required. Helps **facilitate transaction-specific investments**, meaning the supplier may invest in specialized equipment or processes to serve the firm's needs. Useful for goods or services that are important to the firm's operations, where **reliability is crucial**. - **Equity alliances** → In an equity alliance, one company takes a **partial ownership stake** in another. This creates a closer and more aligned relationship compared to typical market transactions. It provides stronger incentives for both parties to **collaborate and invest** in the relationship since both have a **financial stake** in the success of the partnership. Firms can gain more influence or control over a partner's decisions without fully integrating them. This can be particularly useful for gaining access to proprietary technologies or capabilities that are crucial but **too costly to develop internally** - **Joint ventures** → A joint venture involves **two or more companies** creating and jointly owning a new entity to pursue a particular business objective. Allows firms to **pool resources and share risks**, which is particularly useful for entering new markets or developing new technologies. Both parties have a **vested interest** in the success of the joint venture, which aligns incentives. It can open up new opportunities that might be too expensive or risky for a single firm to pursue alone - **Parent-Subsidiary Relationship** → This is the most **integrated** form of make on the continuum, where the parent company fully owns and controls a subsidiary. The subsidiary can either **produce inputs or handle distribution**, depending on the firm's needs. The parent company has full control over the subsidiary's operations and strategic direction, which reduces the risks associated with dealing with external suppliers. Enables the firm to protect proprietary knowledge and ensure consistency in quality and supply. Can be used to capture more value along the value chain through vertical integration - The ***"make-or-buy continuum"*** offers a range of strategic alternatives between the extremes of fully making a product or service in-house and completely outsourcing it. Firms must weight the internal and external transaction costs, the level of control they desire, and the strategic importance of the activity when choosing where to position themselves on this spectrum. The alternatives such as a **short-term and long-term contract, equity alliances, joint ventures, and parent-subsidiary relationships** offer varying degrees of control, cost, and flexibility, allowing firms to tailor their approach based on their specific needs and market conditions **[Short-term contracts ]** - Describes contracts to be awarded with a **short duration** between a **firm and an external supplier or service provider** that are limited in time, generally less than one year - When a firm seeks to engage in short-term contracts, it usually sends out **Requests for Proposals (RFPs)** to several potential suppliers. This process initiates **competitive bidding**, where suppliers submit proposals outlining how they can fulfill the firm's needs, including their pricing and terms - In contrast to short-term contracts, individual market transactions are typically **ad-hoc**, one-time exchanges between a firm and an external supplier. These transactions are usually spot purchases made in real-time, without much prior planning or commitment. While short-term contracts are still relatively brief, they offer **slightly more stability** and **planning flexibility** than individual transactions. With a short-term contract in place, the firm knows it has a secured supply of goods or services for a few months, allowing better operational planning - In short-term contracts, since multiple **suppliers are competing for the same contract,** the buying firm has leverage in driving prices down. Suppliers often undercut each other in their bids to secure the contract, which benefits the firm by lowering procurement costs **[Strategic alliances ]** - Are voluntary arrangements between firms that involve the sharing of knowledge, resources, and capabilities with the intent of developing processes, products, or services **[Long-term contracts ]** - Formal agreements between two or more firms that typically last for longer than a year. They establish the terms under which the firms will collaborate over an extended period - In a strategic alliance based on a long-term contract, companies agree to cooperate for a specific duration to achieve mutual goals, such as sharing technology, entering new markets, or jointly developing products. Long-term contracts provide stability and security for both parties because they lay out a clear, structured collaboration over time - **EXAMPLE** → **McDonald's** has had a long-standing contract with **Coca-Cola** since 1955, where Coca-Cola has been the exclusive provider of beverages for McDonald's globally. This long-term contract ensures a stable supply of Coca-Cola products in all McDonald's outlets around the world. **[Equity Alliances ]** - An **equity alliance** is a type of partnership in which at least one partner takes a **partial ownership stake** in the other partner - In an equity alliance, a firm purchases **shares** in another firm, aligning their interests and fostering deeper collaboration. By owning part of the partner's business, the firm gains more **influence and potentially more control** over key decisions, without fully acquiring or merging with the partner. Equity alliances are often used when the partners want to develop closer ties but maintain **separate identities and operations** - **EXAMPLE** → **Renault** and **Nissan** formed a strategic equity alliance in 1999, where Renault took a significant **equity stake** in Nissan, and Nissan later took a smaller stake in Renault. Both companies remain independent but collaborate closely in terms of platform sharing, technology, and global market strategies. While Renault and Nissan operate i**ndependently**, they collaborate on vehicle development, manufacturing, and technology sharing, leveraging each other's strengths. This alliance became known as the **Renault-Nissan-Mitsubishi Alliance** when Mitsubishi joined later, further strengthening their cooperation **[Joint Ventures ]** - Occurs when **two or more** partners create and jointly own a **new organization** to pursue a shared business objective - In a JV, the parent companies combine their resources, expertise, and capital to form a new entity with a specific focus. The joint venture operates as a **separate legal entity**, with both parent companies sharing ownership, risks, and profits. This structure is common in projects that require **significant investment and long-term commitment**, such as developing new technologies, entering new geographic market, or building new infrastructure. - **EXAMPLE** → In 2001, Sony and Ericsson formed a joint venture to create Sony Ericsson, combining Ericsson's telecommunications expertise with Sony's computer electronics strengths. The JV was aimed at producing mobile phones that could compete in the fast-growing mobile market. Both companies shared **resources, expertise**, and ownership in the joint venture. The partnership enabled both to leverage their respective strengths in telecommunications and electronics to produce innovative mobile phones. The JV lasted until 2012 when Sony bought Ericsson's stake - **EXAMPLE** → Opel and Vauxhall were historically owned by **General Motors**, but both were acquired by **PSA Group (now Stellantis)** in 2017. Although Opel and Vauxhall operate under **different** brand names, they share **platforms, designs, and technologies** and are essentially managed as **sibling brands** under the Stellantis umbrella. Opel and Vauxhall are subsidiaries of Stellantis. Stellantis owns and controls both brands, determining their strategic decision direction while allowing them to retain distinct market identities **(Opel in Europe and Vauxhall in the UK)** **[Vertical Integration -- Fuel Supply Chain (Chevron)]** 1. **Exploration and Production *(Upstream)*** → In this first stage, Chevron is engaged in **exploration and drilling** to extract **crude oil and natural gas** from the ground. This involves finding new oil and gas reserves, developing these fields, and bringing the **raw materials** to the surface. Chevron **owns and operates** the infrastructure needed for exploration and extraction, such as drilling rigs and platforms. **Owning** the exploration process allows Chevron to control the **quality and quantity** of its raw materials and ensures a **reliable supply** of crude oil, which is essential for refining and further downstream processes 2. **Transportation and Storage** → After crude oil and natural gas are extracted, they need to be **transported** to **refineries**. Chevron manages **pipelines, tankers, and other means of transportation to move these raw materials.** The company also owns **storage facilities**, such as **large tanks or terminals**, to store crude oil before it is processed. By owning transportation and storage infrastructure, Chevron ensures timely delivery of raw materials to its refineries and mitigates risks related to supply chain disruptions, such as delays caused by third-party transporters 3. **Refining *(Midstream)*** → The crude oil is then sent to refineries, which Chevron owns and operates. At this stage, the crude oil is processed into various **refined products**, including **gasoline, diesel, jet fuel, and lubricants**. Refining transforms raw materials into valuable products that can be sold on the market. By controlling the refining process, Chevron **captures value** by converting raw materials into finished products. Owning refineries allows them to manage the cost and quality of the refined products they sell, giving the company more control over profit margins 4. **Distribution and Marketing *(Downstream)*** → Once refined, the products are distributed to various markets, including Chevron-owned or affiliated retail gas stations. Chevron manages the logistics of getting gasoline and other products to retail outlets, ensuring a smooth supply to customers. Controlling the distribution and marketing channels ensures Chevron has direct access to consumers, allowing the company to control pricing and customer experience. This stage is essential for securing market share and building brand loyalty 5. **Retail Sales** → Chevron's products, such as **gasoline,** are sold directly to consumers through **Chevron-branded gas stations**. Chevron either **owns or franchises** these gas stations, giving the company control over the final stage of the fuel supply chain. By owning the retail outlets, Chevron captures value at the point of sale and has a direct connection to customer. This level of control allows Chevron to manage pricing, service quality, and brand positioning more effectively Chevron's fuel supply chain showcases vertical integration at its finest. The company controls each stage of the process -- **upstream, midstream, and downstream** -- ensuring that it maximizes efficiency, controls costs, and improves quality at every step. By owning and managing exploration, transportation, refining, distribution, and retailing, Chevron reduces dependency on external suppliers or distributors, secures critical inputs, and enhances profitability by controlling the entire value chain from raw material extraction to end-customer sales **[Vertical Integration ]** - The firm's ownership of its **production** of needed inputs or of the channels by which it **distributes** its **outputs** **[Industry Value Chain ]** - Represents the entire **process** a product or service undergoes from **initial production to final delivery** to the customer. It consists of multiple vertical stages, each representing a different phase in the production or delivery process - Stages in the Value Chain → 1. **Raw Materials** → This is the upstream portion of the value chain, involving the extraction or procurement of raw materials. For example, in the automotive industry, raw materials could include steel, aluminum, rubber, and plastic used to manufacture vehicle components 2. **Components and Intermediate Goods** → In this stage, raw materials are processed into components or intermediate goods. For example, steel may be turned into car body panels, and rubber may be processes into tires 3. **Final Assembly and Manufacturing** → This stage involves assembling the intermediate components into a finished product. For a car manufacturer, this would be the point where components like engines, body panels, and electronic systems are assembled into a complete vehicle 4. **Marketing and Sales** → Once the product is manufactured, it needs to be marketed and sold to customers. This involves branding, advertising, pricing strategies, and distribution to retail outlets or directly to consumers 5. **After-Sales Service and Support** → After the product is sold, companies may offer support services such as warranties, repairs, and customer service. This stage helps maintain customer satisfaction and brand loyalty **Vertical Integration in the Value Chain** → Refers to a company's **strategy of expanding its control over multiple stages of the value chain**, either by moving **upstream** (backward integration) or **downstream** (forward integration) - **Backward Vertical Integration** → This occurs when a company moves upstream by acquiring or controlling suppliers of raw materials or intermediate goods. For example, an automotive company might acquire a steel manufacturing company to secure its supply of raw materials - **Forward Vertical Integration** → This occurs when a company moves downstream, closer to the end customer, by acquiring or controlling activities related to distribution, marketing, or after-sales services. For instance, a car manufacturer might acquire a car dealership network to sell its vehicles directly to consumers **[Benefits and Risks in the Vertical Integration in the Value Chain ]** **Benefits** → - **Cost savings** → By controlling more stages of the value chain, companies can reduce dependency on external suppliers and intermediaries, which can result in cost savings - **Improved Quality Control** → Vertical integration allows a company to oversee quality at multiple stages, from raw materials to the final product, ensuring consistency and reducing defects - **Increased Market Power** → Companies with more control over key stages of the value chain can exert more influence over pricing, distribution, and supply chain efficiency - **Risk Mitigation** → By controlling the critical inputs or distribution channels, companies can mitigate risks such as supply chain disruptions or fluctuations in input prices **Risks** → - **Increasing costs** → Vertical integration often involves substantial upfront investments in acquiring or developing new stages of the value chain, such as purchasing suppliers (upstream) or distributors (downstream). Managing more stages of production or distribution can increase overall operational complexity, leading to rising costs over time - **Reducing quality** → When a firm integrates vertically, it may lack the specialized expertise required in the newly acquired stages of the value chain. This can lead to a decline in product or service quality - **Reducing flexibility** → Vertical integration can reduce a company's **ability to adapt quickly to changes** in the market or the competitive landscape because the firm is now committed to maintaining its own supply chain or distribution channels. Once a firm has **vertically integrated** and owns its suppliers or distribution channels, it may no longer be able to switch easily to more **cost-effective** or innovative external providers. This limits the firm's ability to adapt to new technologies or changes in the market, which might offer better sourcing options or more efficient delivery methods - **Increasing the potential for legal repercussions** → Vertical integration can expose a company to regulatory scrutiny and legal challenges, especially if it starts to dominate multiple stages of the value chain. Antitrust laws are designed to prevent monopolistic behavior, and vertically integrated firms can sometimes fall under suspicion of anti-competitive practices **[Latest thinking in Strategy ]** - Strategy is a form of ***problem solving*** and you cannot solve a problem that you do not comprehend - The most effective leaders become strategists by ***focusing on the way forward promising the greatest achievable progress*** -- the path whose crux was judged to be solvable - You cannot deduce a good strategy from theory. Much of design is a ***combination of imagination and knowing about many other designs***, copying some elements of each - To be a strategist you will have to ***keep your actions and policies coherent with each other***, not nullifying your efforts by having too many different initiatives or conflicting purposes **[Prediction of Events ]** **[Why is probability relevant to management? ]** - **Predicting Events** → In management, uncertainty is a constant factor. Whether it's predicting customer demand, market trends, or potential disruptions, managers face situations where outcomes are not certain. Probability helps quantify this uncertainty. Instead of making decisions blindly, managers can assign a likelihood to various outcomes - **Making decisions** → Probability enables managers to make decisions that are not purely based on intuition or past experience but rather on statistical analysis and data-driven insights. This is crucial in scenarios where the future is uncertain and multiple possible outcomes exist **[Why is the new robot failing? ]** - Your company has recently bought a new robot for the factory, which has shown signs of malfunction. The robot starts regularly but after a few hours, on certain days, it comes to halt all of a sudden. After thinking about why this may be the case, you hypothesize that the robot fails **when the temperature in the factory is low**. So, you ask your engineers to have a look at the factory record and collect the temperatures of the days the robot failed - Your theory is an if-then statement → **If the temperature in the factory is low, then the robot fails** - How do you test this theory? By looking at **all the days** in which the temperature **is low**, and then checking whether the robot fails on those days **[Definition of a theory ]** - A series of logical steps linking antecedents to consequences - If P then Q, if Q then R, if R then S,..., if V then Z... You eventually show if P then Z **[Why are theories important? ]** - Serve as frameworks that guide us in identifying which data or factors to examine. They act as roadmaps, telling us what elements are important for predicting an outcome - By focusing on the factors that affect an outcome, theories improve our ability to predict events accurately. They highlight key variables that have significant influence on what we want to predict - How this works in practice → - **Theorize "If A, then B"** → You start with a hypothesis on theory. If A, then B. This forms the foundation of your investigation - **Collect Cases with "A" and Measure "B"** → Next, you gather all instances where "A" occurred and observe if "B" happened in those cases. This step involves real-world data collection or observation - **Calculate P(B\|A)** → You can calculate the conditional probability of B happening, given A. This is expressed as P(B\|A). It answers the questions, "What is the probability that B (the ground if wet) will happen if A (rain) happens?" In practice, it helps - **Repeat with Adjusted Theories** → If necessary, you repeat this process with refined or different theories. You may text another factor related to A or propose a new hypothesis if the results aren't clear - **Prior probability** → Prior probability is **the predicted probability of an event before fata is collected**. It is the best assessment of the probability of an outcome based on the current knowledge - **Steps for predicting an event** → 1. **Theory** → You look at the class (100 students) with a theory in mind. You set a prior probability 2. **Look for more information** → Then you ask friends (experts and collect data). Based on what your friends told you update your prior probability (multiple times), generating **posterior probabilities** 3. **Define your expectations** → You decide when to stop collecting data/signals and to finalize your probability, that is, a **posterior probability that you cannot improve further** **[How to predict events ]** - You have a target and want to predict whether it will occur - Based on your theory, you envision a certain probability (e.g. 60%) that there can be at least 10 supporters of Inter Milan in the class (Prior Probability) - Now that you have a prior probability you decide whether to continue with this probability or to **look for more information/goals** - Signals are costly and you usually cannot collect too many of them. At least wo ways to collect signals: - **Ask others** - **Collect data** - Try to improve your probability by asking the classmates sitting next to you what they think the probability of having at least 10 students supporting Inter Milan is - **They say 80%\...**In this case you might consider updating your prior probability of 60% to a higher one 70% which becomes the **posterior probability** - **They say 40%\...**In this case you might consider updating your posterior probability of 60% to a lower one 50% which becomes a **posterior probability** - Let's collect data now. Take a sample of 20 students in the class and check how many of them are supporters of Inter Milan. If they are at least 2 (10%), update your posterior probability **upward**. If not, update your posterior probability **downward** **[Technically ]** - P(Y) = 60% (Prior Probability) - P(Y\|S) = Probability of event Y given the observed signals S, S = what the data of your friends told you - If S = 80% → P (Y\|S = 80%) = 70% - If S = 40% → P (Y\|S = 40%) = 50% - There could be a series or **priors, signals, posteriors**, in which each posterior becomes the prior before the next signal - **P(Y) → P (Y\|S1) → P (Y\|S1, S2) → P (Y\|S1, S2, S3)** - For example: - P(Y) = 60% - Data tell you S1 = 40%, you update P (Y\|S1 = 40%) = 50% - New data collection tells you S2 = 45%, you update P (Y\|S1 = 40%, S2 = 45%) = 48% - And so, on **[LESSON 5 -- A PRIMER ON MANAGEMENT AND STRATEGY -- CORPORATE STRATEGY AND DECISION-MAKING ]** **[Making decisions ]** **[Why do we need to predict events? ]** - In decision-making, predicting events is essential because the outcomes of actions are uncertain. The goal is to estimate what could happen in the future based on current