13/04/2021

Business Strategy
Class 7

Marco Tortoriello
marco.tortoriello@unibocconi.it

Today

• Welcome Back!
• Little house‐keeping to organize next few classes (only 3 weeks
until class is done!) :‐(
• Little re‐cap of what seen so far
• Debriefing of the Warby Parker case
• Venturing into corporate growth: Vertical Integration

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Next Few Classes

• Today  Debriefing of Warby Parker +

Vertical Integration
• Fri April 16 Diversification Corporate
Strategy
• Tue April 20  Internationalization
• Tue April 27  Pressure test!
• April 30/May 5  Final Presentations
 Final Presentations

List of final presentations by team (Class 32)

Group # Topic
1 Ferrari
2 Square Inc.
3 AMD
4 Burgez
5 De Longhi
6 Revolut
7 Netflix
8 Ikea
9 Monster Beverage Corporation
10 BeyondMeat
11 Red Bull
12 EssilorLuxottica
13 Spotify
14 Starbucks'
15 Cameco Corporation
16 Hermes
17 Paypal
18 Energica Motor
19 Moncler
20 Beretta Holding

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Final Presentations: Objectives

• Primary objective  Learn something interesting about the

strategy of interesting companies
• Secondary objectives:
• Practice your case analysis skills on a domain/company of your
choice
• Apply strategic thinking
• Assess current positioning/make recommendation about
challenges ahead
BE ANALYTICAL NOT DESCRIPTIVE

Final Presentations: rules of engagement

• Presentations will take place on May 4th and 5th for class 18
• Presentations will take place on April 30th and May 4th for class 32
• Presentation consists of 12 slides max (excluding title slide)
• Slide‐deck could be in ppt or pdf format
• Slide‐deck to be uploaded on blackboard (folder “Session 11 & 12 – Final projects)
by 5pm the day before the first day of presentation

• Which teams presents when  https://www.random.org/sequences/

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Final Presentations: rules of engagement

• The day of presentation:

• Attendance is mandatory for presenting teams

• Attendance is not mandatory for non‐presenting teams
• While all the members of presenting teams will have to be there, you
can choose who will present
• Each team will have 12 minutes sharp to present their slides

Final Presentations: rules of engagement

• Presentations will be graded on a 30 point scale and will count toward

30% of final grade
• Teams will also evaluate each other by writing a short report on each
presenting team and providing constructive criticism on their work:
• I will not take into account team evaluations of other teams to determine
the grade of the presenting team but…
• …I will assign points to teams based on the quality of the feedback they
provide to others
• Overall grade for the presentation will depend on the quality of your
presentation and on the quality of the feedback you give to others
• This feedback will have to be sent to me by 10pm on the day of the
presentation

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For a good final project keep to what we have seen in class…

• Industry analysis –> 5 + 1 Forces (structural attractiveness)

• Strategic groups Analysis / Scope analysis (positioning)
• Competitive Advantage and firms’ strategies (types and
levers)
• Cost leadership
• Differentiation
• Sustaining Competitive Advantage
• Industry dynamics and evolution

Questions about final presentations?

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If nothing else from last class you should remember….

• Industry Dynamics: changes in rules of competition
• 4 Main stages:
• Introduction
• Growth
• Maturity
• Decline

• Can be identified by changes in 2 main dimensions:

• Changes in demand
• Changes in firm knowledge
• Dynamics  Strategy: challenges of anticipating trends (externally)
and implementing change (internally)

Industry Life‐Cycle and Strategy

Very difficult for firms to anticipate trends and implement change:

1. Myopic Inertia
• Firms do not anticipate change (un‐expected crisis or disruptive
innovations by competitors)
2. Procedural Inertia
• Firms can anticipate change, but they cannot easily adapt to it
(changing routines is hard)
3. Size & Growth
• Bigger the firm, the greater the inertia  harder to change;
coordination, communication challenges

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INDUSTRY ANALYSIS

ATTRACTIVENESS

1 COMPETITION The industry is quite attractive, but

The industry is controlled by few leading players its benefits are mostly restricted to
– primarily by Luxottica and Essilor
large incumbents
BUYER POWER
2 Retailers and distribution, in particular, are very
important (vertical integration)

NEW ENTRANTS
3 High margins may attract niche players to enter

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INDUSTRY LIFE CYCLE MODEL

Intro Growth Maturity Decline

GLOBAL & US
Constant growth is expected in the future – low rates
Forecasted values in Forecasted values in
2017 2019
Global: 3,77% CAGR Global: 2,86% CAGR
US: 1,58% CAGR US: 1,41% CAGR

STRATEGIC GROUP ANALYSIS

High
PRICE

Innovating on the
distribution strategy
(online, try‐at‐home,
etc.) gave WB a spot in a
Low

highly concentrated
Low DISTRIBUTION STRATEGY High industry
(Services to Customers)

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COMPETITIVE ADVANTAGE

COST BUT ALSO...

Cost reduction through Selling and distribution
vertical integration  strategies to increase
lower prices to consumers customer/geographical
scope

ADAPTATION
is more likely than protection

WARBY PARKER TODAY

NEW CATEGORY NEW LOCATIONS VALUATION

2018, Jan 2018-20 2020, Dec

WP entered a new product FUNDINGS
category: Kids’ frames. Until
current date (2019) they are 2018, Mar
sold only in stores, not online,
WP raised $75m in a funding
to ensure an appropriate
round, led by the private equity
experience for kids.
firm T. Rowe Price.
The company has been valued
at $1.75 billion.
1 new store in Jan 2019; VIRTUAL TRY ON WP raised $245m in a funding
28 new stores in 2018; round, led by the private equity
Total today: 138 stores in 2019, Feb firm D1 Capital.
the US, 3 in Canada The company has been valued at
WP Virtual try-on uses an in-
$ 3 billion. IPO on the horizon?
house placement algorithm
that mimics unique 3D facial
curvatures, resulting in a lifelike
fitting room experience that
reflects realistic frame color,
texture, size and fit

2018 COMPETITIVE LANDSCAPE 2021

EssilorLuxottica merger;
Changes in the licensing model: luxury players increasingly bring their eyewear in-house

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Implications
• Highly concentrated industries in which there is a high common net‐
value creation (i.e. no commodities), it is possible to enter
successfully and claim important competitive spaces (large niches).
• Examples: craft beer movement, eyewear industry, fashion industry in
general, creative industries, platform‐based industries
• Mostly done through differentiation (Arrogant Bastard), can also be
done through cost advantage (Warby Parker)
• In the case of Warby Parker we have a business model innovation that
disrupted (part) of the industry in which they entered
• What you notice is, most of the times, there is no direct reaction from
incumbents which gives you time and resources to invest in your
move

Introducing Corporate Strategy: the

importance of Growth

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Why Care about Growth?

• Growth considered a primary outcome for most firms
• Most firms are small and entrepreneurial
• Growth correlated with many important outcomes
• Need to achieve certain amount of growth to consider long‐term
strategic choices
• At the same time, growth/size inhibits change, innovation,
reorganization etc.
• Fundamental tension in corporate strategy!

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Growth Structure

• Big firms uncommon  most firms are small

• Old firms uncommon  most firms die young

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Growth Strategies

• Survival and size are positively correlated

• Firms that have lived longer also tend to be bigger
• Why do firms grow?
• easier to survive unexpected shocks
• one way to invest cash
• behavioral motivations (both managers and shareholders are happy to grow)
• How can a firm grow?
• Monopolist in one market (Microsoft OS in 1990s)
• Need for scale (whenever fixed costs are large)
• Presence in multiple markets (Virgin, Tata) or in the same markets in multiple
countries (Starbucks)
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Stages of Growth

1. Entrepreneurial Stage
• Firm forms and starts competing; most firms never make it to the next stage
• Liability of newness: new roles, new business models, new routines, unproven
systems, thin resources make it so that the vast majority of firms “die young”
2. Organizational Stage
• Large enough to successfully compete in a given industry
• E.g.: Ferrari, Ryanair, Walmart US
3. Corporate Stage
• Expansion into multiple businesses
• E.g.: LVMH (Luis Vuitton, Sephora, Hennessy, TAG Heuer, Hublot, Fendi, Celine,
Guerlain, Bulgari, De Beers Diamonds Jewelry, Veuve Clicquot, Loewe, etc. etc.)

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Directions of Growth
1.Growth in the same business (e.g. Walmart, Ryanair)
2.Vertical Integration
• Ownership across the value chain
• E.g.: De Beers
3. Horizontal Expansion ‐ Diversification
• Ownership across different industries
• E.g.: Google
4. International Expansion aka Internationalization
• Ownership across different geographies
• E.g.: Vodafone, Telefonica, Walmart
Firms can exploit combinations of these
• E.g. TATA is present in multiple markets in multiple geographies
• E.g. Philips Medicals, GE Health
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Modes of Growth
1.Organic/Internal Growth
• E.g.: McDonald’s, Dunkin Donuts, Walmart, Ryanair, Facebook
up to 2010, etc.
2.Acquisition
• E.g.: GE Health (100 acquisitions under Immelt)
3.Alliances and Contracts
• E.g.: Renault & Nissan

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Transaction Costs

• Costs of making an economic exchange

• Search and information costs
• Bargaining costs
• Monitoring and enforcement costs
• In a perfect market transaction costs are negligible
• In real life transaction costs are critical to inform make‐or‐buy
decisions (more on that later)

Vertical Integration

• Definition: degree of firm’s control along the value chain (upstream

 downstream)
• Value Chain (or chain of activities) considers primary and supporting
activities necessary to create and capture value
• Inbound logistic
• Operations
• Outbound Logistic
• Marketing and Sales
• Services

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Value Chain
General Administration (Firm Infrastructure)

Human Resource Management

Supporting
Activities
Technology Development

Procurement
Final
Activities

Outbound Logistics

Marketing & Sales

Inbound Logistics

Operations

Service
Primary
Activities

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Value Chain: Retail

Management • Frugal culture (sharing hotel • No regional offices • Saturday meetings
rooms, calling collect) • Lots of management visits • Fun working environment
SUPPORT ACTIVITIES

• Associates, not • Managers compensation • Promotion from within

Human employees tied to store • Associated compensation
resources • Not unionized • Stock ownership plant tied to company
• Store manager • Decentralized training in • Shrink incentive plan
autonomy DC
• POS • Store performance tracking • Real time‐market research
Technology • Satellite system • UPC

• Hard‐nosed negotiation • No‐frills meeting rooms • EFT electronic invoicing

Procurement • Centralized buying • Partnerships with some • Planning packets
vendors
• Frequent • Big stores in small • Traiting: • Easy returns
replenishment towns => local tailoring
• Automated DCs monopolies, low rental merchandise to
cross docking costs locale
pick‐to‐light • Pricing that reflects • EDLP
• EDI local monopoly • Low prices
• Hub and spoke • Concentric expansion • Store manager
system • Brand‐name latitude on
merchandise pricing
• Private labels • Little
• Little space for advertising
inventory • Merchandise
• Suggestion program meeting
• Store within store
Inbound Operations Outbound
Marketing After‐Sales
Logistics Logistics &
Sales Service PRIMARY ACTIVITIES

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Make or buy: Theoretical approach

• Market mechanism vs. Administrative mechanism

• Market mechanism: invisible hand
• Assumes efficiency, information transfer, lack of asymmetry
etc.
• Administrative mechanism: visible hand
• Requires coordination, planning, and internal routines

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Make or buy: Example

General GM manufactures
Motors cars

Buy Make

Fisher auto-body provides GM could make auto

frame components to GM body parts themselves

GM is buying parts from Fisher, but Fisher refuses to modify

production to match GM’s changing designs.

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Make or buy: Example

General
Motors

Buy Make

Fisher autobody provides GM could make auto

auto frame components to body parts
GM themselves

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Make or buy: Example

General
Motors

Buy Make

Acquisitio Organic
n growth

GM could acquire GM could start

an existing producing autoframe
company components

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Make or buy: Example

General
Motors GM acquired
Fisher in 1919
internalizing the
Buy Make transaction.

Acquisitio Organic
n growth

GM could acquire GM could start an

an existing entity producing
company autoframe
components

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Why Vertically Integrate?

• Superior coordination
• Quality
• More control over high quality inputs
• Cost Reductions
• Lower costs of interacting across value chain
• Scale & scope economies from integrating processes under common
ownership
• E.g.: Cement production, Apple owning physical stores
• Easier to build barriers to entry (minimize competitors’ access to
market resources – upstream, or distribution ‐ downstream)

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Costs of Vertical Integration

• Difficult to develop and integrate capabilities for many activities
• Managing strategically different businesses with different goals and
incentives
• Insulation from market
• Competitors are more focused and interact with multiple partners
• Insulation from technology
• Lack of flexibility
• Risk

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Example: Pepsi and Fast‐food business

Consider the following information:

• About 24% of CSDs are sold through fast food chains
• Pepsi acquired Pizza Hut (1978) Taco Bell, and Kentucky Fried Chicken
(1986)
• Was this a good or a bad idea from a vertical integration standpoint?

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Example: Pepsi and Fast‐food business

(Possible) Logic:
• Prevent Coke from having the account, however…
Q: if I am Pepsi, what price do I charge my fast‐food chains?
• High price?  increase my profitability at the expenses of fast‐food’s profitability
(but these are my fast‐food restaurants anyway!)
• Low price?  increase the profitability of my fast foods but reduce my profitability
(besides, if I can charge a low price I can win the account anyway and don’t have to
own it…)
Pepsi spun off its restaurant business in 1997…

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When to Vertically Integrate?

• Fundamental Issue: Does cost of governing new business outweigh
benefits of Vertical Integration?
• What stage is the industry in?
• How big is the industry? Are there firms specializing in different aspects of the
value chain?
• What about input costs?
• But it’s not all about the industry and Transaction Costs
• Is the resource or capability strategic for the firm?
• What capabilities are necessary for managing Vertical Integration value chain?
What capabilities does firm have?

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Break (20 min)

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Questions for Delta/Refinery case

•Describe the position in the value chain in which Delta is situated (suggestion:
use a figure). What kind of move would the investment in Trainer represent?

•Why does Delta envision to buy the Trainer refinery? Provide a cost/benefit
analysis.
•Would you recommend Delta to invest in Trainer? Why?
•Why do you think Delta prefer to use an acquisition compared to other tools
(alliances, joint venture, etc…)?

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