Nike Case Due Next Tuesday Guest Speaker Thursday Randy Conrads of Classmates and Red WeekRandy...

Nike Case Due Next TuesdayNike Case Due Next Tuesday Guest Speaker ThursdayGuest Speaker Thursday

• Randy Conrads of Classmates and Red Randy Conrads of Classmates and Red WeekWeek

Cancelling Group Presentation Cancelling Group Presentation Requirement (was to be worth 15%)Requirement (was to be worth 15%)

Exam 1Exam 1 2020 23.523.5 Exam 2Exam 2 2020 23.523.5 PaperPaper 2020 23.523.5 Strategic IssueStrategic Issue 1010 11.7611.76 CasesCases 1010 11.7611.76 Group CaseGroup Case 5 5 5.885.88

Entrepreneurship & Entrepreneurship & IntrapreneurshipIntrapreneurship

EntrepreneurshipEntrepreneurship

The process of uncovering and The process of uncovering and developing an opportunity to create developing an opportunity to create value through innovation and seizing value through innovation and seizing that opportunity without regard to that opportunity without regard to either resources (human and capital) either resources (human and capital) or the location of the entrepreneur—or the location of the entrepreneur—in a new or existing company in a new or existing company (Churchill, 1992: 586).(Churchill, 1992: 586).

Entrepreneurship Entrepreneurship CharacteristicsCharacteristics

Commercial leaningsCommercial leanings Lack of structure/self-controlLack of structure/self-control Visionary tendenciesVisionary tendencies Risk-taking/appetite for uncertaintyRisk-taking/appetite for uncertainty PersistencePersistence Doer/high initiativeDoer/high initiative Charisma and extroversionCharisma and extroversion

Entrepreneurship Entrepreneurship CharacteristicsCharacteristics

High-energy levelHigh-energy level Strong self-imageStrong self-image Team building skills/uses contacts Team building skills/uses contacts

and connections and connections Views failure as learningViews failure as learning Commitment and funCommitment and fun

Entrepreneurs vs ManagersEntrepreneurs vs Managers

EntrepreneursEntrepreneurs ManagersManagers

RewardsRewards Doing what they like. Doing what they like. IndependentIndependent

Corporate rewards. Promotion, Corporate rewards. Promotion, staff, office, moneystaff, office, money

ActivityActivity Direct involvementDirect involvement DelegationDelegation

RiskRisk Moderate risk takerModerate risk taker Avoids riskAvoids risk

StatusStatus Not concerned about status Not concerned about status symbolssymbols

Represents power and positionRepresents power and position

RelationshiRelationshipsps

Deal-making and Deal-making and reciprocityreciprocity

Relies upon the hierarchyRelies upon the hierarchy

Time Time orientation orientation

Time orientation - 5 - 10 Time orientation - 5 - 10 years.years.

Short termShort term

Decisions Decisions Follows dreams with Follows dreams with decisionsdecisions

Follows directivesFollows directives

Intrapreneurship Intrapreneurship CharacteristicsCharacteristics

Understands the environmentUnderstands the environment Visionary and flexibleVisionary and flexible Creates management optionsCreates management options Encourages teamworkEncourages teamwork Encourages open discussionEncourages open discussion Builds a coalition of supportersBuilds a coalition of supporters PersistsPersists

Intrapreneurship EnvironmentIntrapreneurship Environment

New ideas encouragedNew ideas encouraged Trial and error encouraged. Failure Trial and error encouraged. Failure

ok!ok! Resources available and accessibleResources available and accessible Long time horizonLong time horizon Appropriate reward systemAppropriate reward system Sponsors and champions availableSponsors and champions available Support of top managementSupport of top management

““It is the customer who, in the end, It is the customer who, in the end,

determines how many people are determines how many people are employed and what sort of wages employed and what sort of wages

companies can afford.” Lord companies can afford.” Lord RobensRobens

Strategy in High Strategy in High Technology IndustriesTechnology Industries

High Technology IndustriesHigh Technology Industries

Rapidly changing scientific Rapidly changing scientific knowledge underlying attribute for knowledge underlying attribute for competitioncompetition

R&D/SalesR&D/Sales Battle over technical standard, Battle over technical standard,

format, and dominant designformat, and dominant design• Set by decree, cooperation, public Set by decree, cooperation, public

domain, but mostly through consumer domain, but mostly through consumer choiceschoices

Benefits for StandardsBenefits for Standards

CompatibilityCompatibility Reduce consumer uncertaintyReduce consumer uncertainty Reduce production costsReduce production costs Increase in complementary products Increase in complementary products

– Network effects – which greatly – Network effects – which greatly enhances sustainabilityenhances sustainability• Lock outs and switching costsLock outs and switching costs

Wining Format WarsWining Format Wars

Ensure complementary productsEnsure complementary products Killer applicationsKiller applications Razor and blade strategyRazor and blade strategy

• Cell phones, printers, satellite TV/radio, Cell phones, printers, satellite TV/radio, video gamesvideo games

Cooperative competitionCooperative competition LicensingLicensing

Technological ChangeTechnological Change

If the automobile had developed at If the automobile had developed at the same rate as the microchip, a the same rate as the microchip, a Roll Royce would:Roll Royce would:

Cost $2.75Cost $2.75 Go 3 Million miles on a gallon of gasGo 3 Million miles on a gallon of gas

TV Industry – Paradigm ShiftsTV Industry – Paradigm Shifts

Black & White TV

Black & White TV

Color TV

Black & White TV

Color TV

Black & White TV

Color TV

Big Screen TV

Black & White TV

Color TV

Big Screen TV

Black & White TV

Color TV

Big Screen TV

HDTV

Black & White TV

Color TV

Big Screen TV

HDTVIncremental evolution included remote controls,cable ready tuners, stereo sound systems, screen-in-a-screen, etc

Competitive DynamicsCompetitive Dynamics

Competitive action within an Competitive action within an industry. industry.

Strategic and tactical action does not Strategic and tactical action does not occur within a vacuumoccur within a vacuum

What industries have high What industries have high competitive dynamics?competitive dynamics?

What sort of actions/tactics are What sort of actions/tactics are taken?taken?

Drivers of Competitive DynamicsDrivers of Competitive Dynamics

numerous/equally balanced competitorsnumerous/equally balanced competitors slow growthslow growth high fixed/storage costshigh fixed/storage costs lack of differentiation/switching costslack of differentiation/switching costs high exit barriershigh exit barriers Etc…Etc…

RivalryCompetitive

Dynamics

Competition in the Pharmaceutical IndustryCompetition in the Pharmaceutical Industry

Reps tripled to 90K last 10 yearsReps tripled to 90K last 10 years 12B on sales force, 2.76B on ads12B on sales force, 2.76B on ads Managed care bet – Pfizer from 14Managed care bet – Pfizer from 14thth to 1 to 1stst

529 visits yearly, average length – 2.5 min529 visits yearly, average length – 2.5 min• 8% remember8% remember

Glaxo can reach 80% of the Drs in a weekGlaxo can reach 80% of the Drs in a week ““Is this necessary. No, but if my Is this necessary. No, but if my

competitors do it and I can’t, then I’m at a competitors do it and I can’t, then I’m at a disadvantage. This has been an arms race disadvantage. This has been an arms race in the worst possible manner.”in the worst possible manner.”

Types of Competitive Types of Competitive ResponsesResponses

First Movers - initial competitive First Movers - initial competitive actionaction advantages and disadvantagesadvantages and disadvantages

Fast Followers or Capable Fast Followers or Capable Competitors- respond quickly to first Competitors- respond quickly to first moversmovers

Late Entrants - day late and a dollar Late Entrants - day late and a dollar shortshort

Chapter 9-10Chapter 9-10

Corporate Level StrategyCorporate Level Strategy

Snack Foods Beverages

Foods

Frito-Lay North AmericaFrito-Lay International

Pepsi-Cola North AmericaGatorade/Tropicana North AmericaPepsiCo Beverages International

Quaker North America

Snack Foods

Frito-Lay North America

Lay’sRuffles DoritosSantitasFritos CheetosRold Gold

Funyuns Sunchips Cracker Jack Chester’s popcornGrandma’s cookiesMunchos Smartfood Baken-ets fried pork skinsOberto meat snacks

Snack Foods

Frito-Lay International

Bocabits wheat snacksCrujitos corn snacksFandangos corn snacksHamkas snacksNiknaks cheese sticksQuavers potato snacksSabritas potato chips Twisties cheese snacks

Walkers potato crispsWalkers Square potato snacksWalkers Monster Munch Corn snacks Miss Vickie’s potato chipsGamesa cookiesDippasSonric’s sweet snacks

Snack Foods

Frito-Lay International

Bocabits wheat snacksCrujitos corn snacksFandangos corn snacksHamkas snacksNiknaks cheese sticksQuavers potato snacksSabritas potato chips Twisties cheese snacks

Walkers potato crispsWalkers Square potato snacksWalkers Monster Munch Corn snacks Miss Vickie’s potato chipsGamesa cookiesDippasSonric’s sweet snacks

Beverages

Pepsi-Cola North America

Pepsi-ColaMountain DewSliceMugSierra MistFruitWorks

Lipton Dole Aquafina Frappuccino SoBe AMP

Beverages

Gatorade/Tropicana North America

GatoradePropelTropicanaDole juices

Beverages

PepsiCo Beverages International

Loóza juices and nectarsCopella juicesFrui’Vita juicesTropicana 100 juices

Foods

Quaker North America

Quaker OatsCap’n Crunch cerealLife cerealQuisp cerealKing Vitaman cerealMother’s cereal

Quaker rice cakes and granola barsRice-A-Roni side dishesNear East couscous/pilafsAunt Jemima mixes & syrupsQuaker grits

Foods

Quaker North America

Quaker OatsCap’n Crunch cerealLife cerealQuisp cerealKing Vitaman cerealMother’s cereal

Quaker rice cakes and granola barsRice-A-Roni side dishesNear East couscous/pilafsAunt Jemima mixes & syrupsQuaker grits

Business Level Strategies

How are we going to compete and gain a competitive advantage in each of our businesses?

Snack Foods Beverages

Foods

Corporate Level Strategy1) What businesses do we want to compete in?2) How do manage effectively across businesses

Where did they go?Where did they go?

Goals of Corporate StrategyGoals of Corporate Strategy

Moves to enter new businessesMoves to enter new businesses

Boosting combined performance of the Boosting combined performance of the businessesbusinesses

Capturing Capturing synergiessynergies and turning them and turning them into competitive advantagesinto competitive advantages

Establishing investment priorities and Establishing investment priorities and steering resources into business steering resources into business unitsunits

4 Corporate Level Strategies 4 Corporate Level Strategies

• 1) Vertical Integration1) Vertical Integration• 2) Strategic Outsourcing2) Strategic Outsourcing• 3) Horizontal Integration3) Horizontal Integration• 4) Diversification – two or more 4) Diversification – two or more

different businesses with distinct different businesses with distinct operationsoperations

1) Vertical Integration1) Vertical Integration Forward or backwardsForward or backwards

• Full integrationFull integration• Taper integrationTaper integration

BenefitsBenefits• Build barriers to entryBuild barriers to entry• Facilitates investment in specialized assetsFacilitates investment in specialized assets• Protecting product qualityProtecting product quality• Improved schedulingImproved scheduling

RisksRisks• CostsCosts• Rapid technological changesRapid technological changes• Demand predictabilityDemand predictability

Alternatives to Vertical IntegrationAlternatives to Vertical Integration

Competitive biddingCompetitive bidding Long term contracts or strategic Long term contracts or strategic

alliancesalliances

VerticalIntegration

Markets &Competitive Bidding

Hybrid &Contracts/Alliances

Form of Relationship

2) Outsourcing2) Outsourcing

Cost reduction and differentiationCost reduction and differentiation Hold-ups, scheduling and hallowing Hold-ups, scheduling and hallowing

outout

3) Horizontal Integration3) Horizontal Integration

Acquiring or merging with industry Acquiring or merging with industry competitorscompetitors• Reduce cost and economies of scaleReduce cost and economies of scale• Increasing value through wider product Increasing value through wider product

line or product bundlingline or product bundling• Manage industry rivalryManage industry rivalry• Increase buyer and supplier powerIncrease buyer and supplier power

4) How to Diversify?4) How to Diversify?

1) Internal Development - corporate 1) Internal Development - corporate entrepreneurship or internal entrepreneurship or internal venturingventuring• able to appropriate a larger portion of able to appropriate a larger portion of

wealthwealth• avoids complexities of multiple partnersavoids complexities of multiple partners• time consuming and requires diversity time consuming and requires diversity

of organizational capabilitiesof organizational capabilities

4) How to Diversify?4) How to Diversify?2) Strategic Alliances and Joint Ventures2) Strategic Alliances and Joint Ventures

• entering a new market via the combination entering a new market via the combination of complementary resources - do more of complementary resources - do more togethertogether

• cost reduction & sharingcost reduction & sharing• development/diffusion of technologydevelopment/diffusion of technology

ProblemsProblems• appropriate partners - skills and compatibilityappropriate partners - skills and compatibility• trust and commitmenttrust and commitment• communicationcommunication

Who Makes a Geo?Who Makes a Geo?

Geo Storm was actually manufactured by Geo Storm was actually manufactured by Isuzu. The Storm is the Isuzu Impulse.Isuzu. The Storm is the Isuzu Impulse.

Geo Prizm = Toyota Corolla Geo Prizm = Toyota Corolla

Geo Tracker = Suzuki Sidekick Geo Tracker = Suzuki Sidekick

Geo Metro = Suzuki Esteem or Swift Geo Metro = Suzuki Esteem or Swift w/hatchbackw/hatchback

No Geo cars were actually made by No Geo cars were actually made by General Motors. They were all imported General Motors. They were all imported from foreign manufacturers.from foreign manufacturers.

4) How to Diversify?4) How to Diversify?

3) Mergers & Acquisition3) Mergers & Acquisition

Mergers & Acquisitions

Reasons of Acquisitions

Increase Market Power

Overcome Entry Barriers

Increased Speed

Lower Risk

Avoid Competition

Acquisitions

Reasons of Acquisitions

Increase Market Power

Overcome Entry Barriers

Increased Speed

Lower Risk

Avoid Competition

Problems with Acquisitions

Integration of two firms

Overpayment/Debt

Overestimation of Synergy

Overdiversification

Managerial energy absorption

Become too large

Substitute for innovation

Acquisitions

Reasons of Acquisitions

Increase Market Power

Overcome Entry Barriers

Increased Speed

Lower Risk

Avoid Competition

Problems with Acquisitions

Integration of two firms

Overpayment/Debt

Overestimation of Synergy

Overdiversification

Managerial energy absorption

Become too large

Substitute for innovation

Results

Poor Performance

Who Wins?

Acquired FirmShareholders

Monday October 27Monday October 27thth WSJ WSJ

Bank of American – Boston Fleet Bank of American – Boston Fleet FinancialFinancial• BoA down $8.29, or 10%, BFF rose 23%BoA down $8.29, or 10%, BFF rose 23%

Anthem – WellPoint Health NetworksAnthem – WellPoint Health Networks• Anthem down 8.2%, WellPoint up 8.8%Anthem down 8.2%, WellPoint up 8.8%

United Health – MidAtlantic Med United Health – MidAtlantic Med ServicesServices• UH down 4.9%, MAMS up 9.7%UH down 4.9%, MAMS up 9.7%

Failures of AcquisitionsFailures of Acquisitions

30 - 40% average acquisition premium30 - 40% average acquisition premium

Acquiring firm’s value drops 4% in the 3 Acquiring firm’s value drops 4% in the 3 months following acquisitionsmonths following acquisitions

30 - 50% of acquisitions are later divested30 - 50% of acquisitions are later divested

Acquirers underperform S&P by 14%, peers by Acquirers underperform S&P by 14%, peers by 4%4%

3 month performance before and after3 month performance before and after• 30% substantial losses, 20% some losses, 30% substantial losses, 20% some losses,

33% marginal returns, 17% substantial 33% marginal returns, 17% substantial returnsreturns

Why, then, do executives acquire?Why, then, do executives acquire?

Often, for personal reasonsOften, for personal reasons

Firm size and executive compensation Firm size and executive compensation are relatedare related

When do executives loss their jobs?When do executives loss their jobs?• 1) Acquired - larger firms harder to 1) Acquired - larger firms harder to

acquireacquire• 2) Performing poorly - employment risk 2) Performing poorly - employment risk

is reduced as returns are less volatileis reduced as returns are less volatile

Related Diversification at Related Diversification at DisneyDisney

Entertainment/Production

Theme Parks

Resorts

Entertainment/Broadcasting

Cruise Lines

Retailing

Levels of Diversification

Related Diversification - entering product markets that share some resource or capability requirements with the current business – horizontal relationships across businesses - synergies

Advantages of related diversification include: Leveraging Core Competencies Sharing Activities Market Power

Tyco ElectronicsTyco Telecommunications

Tyco Fire and SecurityTyco Safety Products

Tyco HealthcareTyco Plastics

Tyco AdhesivesTyco Flow Control

Tyco Electrical and Metal ProductsTyco Fire and Building Products

Tyco Infrastructure Services

Levels of Diversification (cont.)

Unrelated Diversification - few similarities in the resources and capabilities required among the firm’s businesses

Conglomerate Diversification - no relatedness between businesses

When/Why to Diversify?When/Why to Diversify?

To create shareholder valueTo create shareholder value

Porter’s Three Point TestPorter’s Three Point Test

1) Attractiveness Test1) Attractiveness Test

2) Cost of Entry Test2) Cost of Entry Test

3) Better off Test3) Better off Test

Should pass all 3Should pass all 3

Portfolio analysisPortfolio analysis

BCG Growth-Share MatrixBCG Growth-Share Matrix• question marks, dogs, cash cows, starsquestion marks, dogs, cash cows, stars

GE- Nine Cell MatrixGE- Nine Cell Matrix

Gro

wth

Rat

eRelative Market Share

StarsQuestion

Marks

CashCows

Dogs

Boston Consulting Group Matrix

Gro

wth

Rat

e

Relative Market Share

1.0High Low

Soft Drinks

FritoLay

KFC

PizzaHut

TacoBell

Low

High

10%

BCG Matrix for PepsiCo - Early 1990s

Gro

wth

Rat

e

Relative Market Share

.75High Low

Soft Drinks

FritoLay

KFC

PizzaHutTaco

Bell

Low

High

5%

BCG Matrix for PepsiCo - Early 1990s

Competitive StrengthsA

ttra

ctiv

enes

s

Invest Grow

Low

High

LowHigh

HarvestDivest

Hold

GE 9 Cell Matrix

Competitive StrengthsA

ttra

ctiv

enes

s

Low

High

LowHigh

GE 9 Cell Matrix for Pepsico

Soft Drinks

Snack Foods