At the core of a resource based advantage is the need to acquire strategic inputs at a bargain. Factor market success is either driven by superior information or expectations. Expectations, in turn, can arise from a creative entrepreneurial vision and/or unique complementary assets (see Barney 86). Brent McKnight created this experiential exercise to bring this dynamic out. Like the Egg Drop Auction exercise, teams bid for inputs, create a product, and compete to generate value based on accessing valuable inputs cheaply and engaging in entrepreneurial creativity as a team (see Coff & Perry-Smith, 2011). This exercise excels since is that it is greatly streamlined (less class time and mess) and it is very compatible with online teaching.Continue reading
Category Archives: Cost advantages
Teaching the Zoom Case Online
The Zoom live case is provided in an earlier post. Most instructors are all or partially online now so I’m sharing some online tips for teaching the case. The key task here is to use some asynchronous learning before a synchronous session so you can hit the ground running. One really important tip: Use worksheet assignments and Google docs for group breakouts in synchronous sessions. Here’s how:
Asynchronous Zoom Assignments. I’ve created “worksheets” using essay questions in the Canvas survey/quiz tool. These questions are structured so the answers need not be long and are easy to grade. I have two worksheet assignments.
- Strategy Diamond Worksheet. I use Hambrick & Fredrickson’s strategy diamond framework to answer the question “what is strategy?” I entered the worksheet as a quiz/survey in canvas but the link is the answer key in MS Word. Specifically, the prompt is: Zoom recently entered conferencing hardware, describe the strategy using the framework (e.g., Arena, Differentiator, Staging/Pacing, Vehicles, Economic Logic). While these are short essay questions, it is easy to see if they are able to understand the framework and allows synchronous sessions to move faster.
- 5 Forces Worksheet. The 5 forces worksheet is also entered as a canvas survey. For each force, students list 3 actors ordered by their impact on industry profitability. Then they explain their ordering briefly. For buyer power: List several types of buyers in the video conferencing industry (at least 3) where each might be thought of as a market niche. Put them in order reflecting their willingness to pay (high to low). Then indicate a few factors that drive the differences in willingness to pay. Again, it is easy to grade since it is clear whether they understand from the order.
Synchronous Activities. Here, I rely on group breakouts with Google docs. Here are two such activities.
- Industry evolution. The link goes to a 5 forces worksheet for before, during and after the pandemic (3 tables in the doc). As a breakout exercise, I assigned 2 teams to each page of the worksheet and told them to start at different places in the framework. Then, after 10 minutes, I brought them to the main room, shared the Google Doc and asked the teams to describe their analysis to predict how the industry will develop (post pandemic) – rivalry, growth, willingness to pay, etc. These are used to develop assumptions in the next exercise.
- Financial Scenario Analysis. This link goes to a Google sheet with 8 Zoom financial models based on: 1) Rival product quality 2) Rival price competition, and 3) Zoom’s continued innovation/quality. Varying these 3 sources of uncertainty (H/L) generates 8 scenarios. I assigned each team to a scenario and at breakout, sent them all to the Google sheet to predict profit margins and revenue growth in that scenario. We then discussed the probabilities associated with each scenario. the bottom line was that the market capitalization was so high that selling the company should probably be considered as a very real alternative (e.g., what problem are you trying to solve?).
Contributed by Russ Coff
Zoom Wars Live Case
I like to start the semester with a “ripped from the headlines” case. This is especially helpful if some of one’s cases are older. This semester, Zoom is a great alternative. The current market capitalization is about $80B which puts it well above many more established companies (including the combined value of the 7 largest airlines). I have compiled a short packet of news articles for the case. In addition, I have created a spreadsheet that guides students through key scenarios and how they would affect the value of the company (Do rivals match on quality? Is there a price war, Does Zoom keep innovating?). This highlights how qualitative analysis affects assumptions in quantitative models. It is also an introduction to decision trees as a simple tool for modeling complex sources of uncertainty (this is available in a separate instructor spreadsheet that uses PrecisionTree to model the uncertainty). The Zoom context hits just about every key aspect of a strategy course so you can circle back to it repeatedly:
- What is Zoom’s strategy? I use the strategy diamond framework (arena, vehicles differentiators, staging/pacing…) but one can use a standard set of questions to explore this.
- Trends/PEST. The industry was growing at about 10% — what were the drivers of this and how will this change in the future?
- Industry analysis:
- Why was the videoconferencing market attractive (pre-COVID)? (e.g., network effects, value produced)
- How did COVID change the market attractiveness?
- Rivalry: Competitors like Microsoft and Cisco are putting substantial resources into their products. Will they match the quality? Will there be a price war?
- Evolution: How will the industry change going forward?
- Resources and Capabilities:
- Why has Zoom been so successful even before the COVID pandemic?
- Why has Zoom been more effective than rivals during the pandemic?
- Will they be able to keep up the rate of innovation after COVID?
- Corporate strategies. Do business portfolios confer an advantage to rivals?
- Consider Microsoft’s complementary assets (e.g., MS Office) – Why might they be important?
- Consider Cisco’s complementary assets (e.g., enterprise networks) – Why might they be important?
- Zoom has entered the hardware industry through multiple alliances with DTEN, Poly, NEAT and others. Evaluate both the strategy to enter the hardware arena and the vehicle (alliances).
- Zoom’s global strategy? Zoom has operations all over the world. What is their global strategy? Is it sound?
- Technology/Entrepreneurship. Of course, these are key aspects of the context. Why did Zoom CEO, Eric Yuan, leave WebEx? Why did his nascent company do so well against established, well-resourced, rivals.
There are many videos you can bring into this including (Thanks to Rich Makadok for suggestions):
- How Microsoft Ruined Skype (11 min)
- Zoom company story: How Eric Yuan defeated Skype (11 min)
- Lots of zoom humor on youtube…
Contributed by Russ Coff
Melissa’s Marvelous Movies: The Strategy Collection
As many of us prepare to move our strategy courses online, we need video “shorts” that introduce core strategy principles to go along with key readings. By now, you may have already seen collections by David Kryscynski, Shad Morris, and others in the toolbox. Melissa Schilling has graciously made a new set of videos available that address core strategy principles not found in the other collections. See also her related collection focused around innovation strategy (note that there is some overlap). Below is her video introducing agency problems as a sample.
In addition, she covers the following topics that may be useful for a strategy course:
- Ratios Made Easy
- Vertical Integration
- Value chains and VRIO Analysis
- Network Externalities
- Platform Ecosystems
- Leveraging Technology into New Markets
- Collaboration types
- Collaboration partners and governance
Contributed by Melissa Schilling
MicroTech: Negotiating Online Teaching
How can we make online courses more interactive? Often people create videos of their PPT lectures as the basis of an online course. We know we can do better. It turns out that negotiation exercises can work surprisingly well online. My MicroTech negotiation exercise is described in a previous post. Here, I describe a simple adaptation to use it in an online course. The negotiation focuses on the problems promoting cooperation across divisions (for example to achieve synergies). In the exercise, two general managers negotiate over the terms to transfer a technology to take advantage of a market opportunity. Sub-optimal agreements (money left on the table) represent transaction costs and inefficiencies that must be overcome to create corporate value. The debrief can also focus on alignment of activities/units to achieve a strategy. The discussion focuses on how to achieve requisite cooperation. This is hard to achieve in a competitive culture. How, then, can the firm create a cooperative culture? This, it turns out, may be a VRIO resource…
To conduct this exercise online, follow these steps
- Assign roles and negotiation partners from the class list (1/2 of the class in each role). The roles can be emailed to the individuals with their assigned negotiating partners. I would try to pair them with people they may be less likely to know well to simulate negotiating across divisions (usually not someone on the same project team, etc.).
- Students conduct the negotiation (outside of class) at a time of their choosing. It can be done through video conference, email, or in person.
- Collect agreements (have them emailed back) by the night before class. Better yet, you might want to set up a simple poll to collect the agreements (like this one which will allow you to download the results and copy them into the spreadsheet that is used to summarize/analyze the results).
- Debrief can be synchronous or asynchronous
- Synchronous. In a synchronous session, you can present the results of the negotiation and engage in a rich discussion of organizational design and strategy. What levers would students suggest changing to increase coordination between units? (focus on things like incentives, structure, people, processes/routines, etc.). But this takes a lot of class time to do it right.
- Asynchronous debrief of outcome. I recommend recording or posting an overview of the results and conduct the discussion asynchronously (here is an example of a recorded debrief). This allows you focus the synchronous debrief on organizational design solutions for the company (to promote cooperation across divisions). That is the essence of the problem and it is best to devote as much class time to it as possible.
- Synchronous discussion of organizational design. The key learning objective for me is to get them to understand how hard cooperation can be to achieve. It is critical to get to this in the debrief. I assigned teams (4-6 students) to make recommendations to improve coordination (less $ left on the table). Each team focused on a lever (of Galbraith’s Star Framework) such as incentives, org structure, people (hiring/firing), or processes/routines. I had each team work in breakout groups (or offline) in a shared Google worksheet. The asynchronous approach may work better as teams can think through their recommendations.
Click here are all of the required materials (roles, spreadsheet, PowerPoint, etc.).
Contributed by Russ Coff
Extreme Ironing as a Capability
In conducting internal analysis, managers often point to things they do well as critical strengths. However, for it to be an important strength, it would be important to know: 1) How it relates to value creation (e.g., does it lower costs or increase willingness to pay), and 2) Do rivals have similar or substitute capabilities. In the end, many things that managers report as strengths may not be relevant in determining whether the firm has a competitive advantage. Take this video on extreme ironing, for example. One might ask their class if it depicts valuable capabilities? It might if you consider promotional expertise (video has over a million views)…
Contributed by Russ Coff
Amazon’s New Spin
Amazon is encouraging employee spinouts. They are offering employees $10,000 plus 3 months salary to quit and form entrepreneurial ventures in their Delivery Service Partner Program. This makes for an excellent “ripped from the headlines” case. I ask students to read a brief packet of news articles on the program and complete a poll before class (here is the poll I used). Since the program started, Amazon has shifted 30-50% of its delivery needs away from big vendors (USPS, UPS, FedEx, etc.) in favor of internal and small external service providers. It brings out multiple strategic issues and can be used to frame a semesters worth of strategy issues:
- Market structure: How does this alter the market structure for Amazon? On the other side, what is the market structure that employee entrepreneurs face?
- Competitive dynamics: How will players respond? (FedEx has now declined to serve Amazon)
- Internal analysis: How might this move enhance Amazon’s competitive advantage? Do the entrepreneurial ventures enjoy any competitive advantages?
- Entrepreneurship: Is the opportunity for employee entrepreneurs attractive?
- Corporate: Should Amazon vertically integrate into the delivery business? How does their tapered integration affect the market?
- Alliances: How do the collaborative relationships between Amazon and its partners differ between big and small partners?
I have created a student spreadsheet that allows students to analyze the proposal from the perspective of an employee. It helps them consider two key sources of uncertainty: 1) how much help will Amazon provide on an ongoing basis? and 2) how smoothly will their implementation go? This is then compared against buying a FedEx route since there is an active market for these businesses. This is shown in the decision tree above. In addition, this is a final spreadsheet with the scenarios and decision tree completed.
Contributed by Russ Coff
Netflix Sequel: Bidding Wars the Movie
As Netflix’s strategy unfolds it becomes clearer the extent to which it threatens traditional media companies. Initially, Netflix was a welcome partner who paid for access to older entertainment assets – new income streams for studios. More recently they have developed new content and lure top talent away from traditional media companies. Now, by offering a compelling portfolio of options, they compete more directly against traditional media companies. AT&T, Comcast, Fox, and Disney have taken notice of Netflix’s increasingly vertically integrated business model that bypasses traditional distributors (cable, DSL, satellite) and doesn’t rely on advertising revenue. The new model is driving mega mergers & bidding wars as rivals try to build compelling portfolios to offer streaming services. This is a great live case to frame many strategic management course topics including:
- What is strategy? I use the Strategy Diamond and Netflix is a great case to look at things like staging and pacing, vehicles, and arenas.
- Market structure – How attractive is the media industry and how has this streaming model affected industry profitability
- Resources/Capabilities – Rivals lack some resources and some of their substantial existing resources have become “core rigidities” that hinder adaptation
- Competitive dynamics – What strategic moves can we observe? How will Netflix respond?
- Disruptive innovation – Netflix started as a limited low-cost alternative but added features that eventually made it a significant threat to incumbents.
- Corporate strategy – The billions rivals spent on M&A are another critical angle. This also provides a vehicle to discuss when vertical integration creates value.
I have assembled some useful materials to frame a discussion of this case. First, the case can be taught using a series of recent news articles (sample article pack). In addition, I have prepared a spreadsheet to explore scenarios for how various events might affect the value of Netflix. For instance, what would happen to its business model if the market started to value the company as a traditional media company as opposed to a tech firm? Similarly, what will happen if rivals’ M&A strategies succeed and pose a critical challenge? Finally, here is a link to a sample pre-class survey to help students think about the strategic issues before class.
Contributed by Russ Coff
How Shipping Stays Afloat
As the container shipping industry continues to boom, companies are adopting new technologies to move cargo faster and shifting to crewless ships. But it’s not all been smooth sailing and the future will see fewer players stay above water. This WSJ video takes students through the history and shows how the industry structure has changed with new innovations. Excellent for teaching industry analysis and innovation (architectural/systemic innovation).
Heard through Nicolai Foss
Exercise: Building a Strategy
Generic strategies are easy enough to explain and students typically feel that they understand. But do they really? Could they develop and implement a sound strategy? Sometimes it’s worth a bit of additional hands-on experience to make sure the lessons stick. Probably the most important message is alignment — the need to design the organization and product to fit the strategy. In other words, to make the appropriate tradeoffs. Lee Bolman offers a very simple house building exercise (out of index cards) that makes these points very nicely. Teams plan what kind of houses they will build and organize their production. Strategies naturally fall into more low cost (simple one story house) or differentiation (complex two story). The 20% quality bonus and 20% first mover bonus help to highlight these competing objectives. This one-page handout describes the rules and process for running the exercise. The debrief focuses on the teams’ strategies and how they organized:
- Planning process — How did they frame the problem and explore solutions?
- Competitive Dynamics — A strategy is more likely to be successful if few firms (teams) adopt it. How do they anticipate what rivals will do?
- Implementation — Plans often don’t unfold as expected. A common problem is that when the time is up, they are stuck with inventories of unfinished products.
Overall, this is a simple and easy to implement exercise that drives home basic strategy and organization issues nicely. The exercise can be run in a little as 75 minutes, though 90 to 120 minutes provides more time for both the exercise and debriefing. The steps to run the exercise are:
- Provide materials to teams (2 packs of 3-5 cards, 2-3 rolls of tape, 2-3 markers).
- Distribute the Quality Housing Instructions. Briefly introduce the exercise and announce how much time is available for planning (10 min). At the end of the production period, do a count-down from 5 and firmly announce “Stop!”. Teams may be startled when the time is up.
- Once teams have produced, have them calculate their expenses, revenue, and net income. You can check houses against the specifications either immediately after a team produces, or after all teams have produced. If a team produces multiple houses, test a few to see if they can be dropped 12 inches without damage.
- Collect the financial results from all teams (revenue, costs, net), and award the bonuses for quality and first-to-market.
Contributed by Lee Bolman
Print the Legend: A multidimensional case
Print the Legend (2014) is a documentary about the 3-D printing industry, that offers an engaging case study covering industry, firm & technology life cycles, disruptive technologies, and strategy in emerging firms & industries. This industry was established in the 1980s focusing on large expensive printers for industrial use – Two key players dominated using different technologies. The market was seriously shaken by startups in the 2010s that drastically reduced pricing created a consumer market. As such, we see two distinct market segments (industrial & consumer) and two technologies (stereolithography & fused-deposition) all battling it out.
The film follows two startups from emergence through VC funding, and shows their diverging paths as one is acquired and one remains independent. MakerBot, hires an experienced Strategy Director who (with the VC) radically shifts the founding strategy. This leads to high turnover and eventually, founder exit and acquisition by a leading industrial 3-D printing incumbent. In contrast, FormLabs, takes a more emergent approach to strategizing and positioning. The award-winning film is very well-made and fun to watch – Students love it and learn from it. It features a prominent VC (Brad Feld) and startups that students may be aware of.
Teaching notes: The film (available on Netflix) runs 100 minutes, so with discussion, it takes a full 3-hour class. It is helpful toward the end of the semester as a “movie day” with popcorn and snacks – students appreciate a break the week before their big final project is due. It is helpful to spend about 20 minutes at the start of class giving a mini-lecture on firm & industry life cycles and disruptive technologies, to set up the film, as well as about 10 minutes at the end for a debrief. One can show the film in 10-20 minute segments, pausing to discuss what has happened so far. This case has been a big hit over the 2 years it has been in use. It’s a little logistically complex, and requires strict adherence to a schedule, but once you have it down, it’s a very easy class and case to teach. Full teaching notes, assigned pre-reading, slides, and film segments are available on Gina’s shared teaching site.
Contributed by Gina Dokko
Does the Term “Core Competence” Destroy Value?
The term “core competence” has taken hold in the business world. Not many academic terms break through to common usage so this might be viewed as a tremendous success. Unfortunately, it isn’t clear that it is particularly useful with the modified practitioner definition. As it is commonly used, it seems to mean “stuff the firm is pretty good at.” Unlike Prahalad and Hamel’s original article, common usage does not suggest that these capabilities: necessarily confer value in the eyes of customers over what rivals can produce, are hard to imitate, or that they are especially relevant in a corporate (multi-business) context.
Stripped of these defining characteristics, is the term useful?
As it is commonly used, the term can help firms distinguish what they are relatively good at from things that they are not. This is akin to a simple business unit-level internal analysis that identifies strengths and weaknesses. While it is important for firms to be aware of their strengths and weaknesses, by not comparing the strengths to rivals, we cannot infer whether the firm has a competitive advantage or how long such an advantage might last. It could even reflect a competitive disadvantage if rivals are superior in those areas. As a mode of internal analysis, the common usage doesn’t really go beyond SWOT analysis, which itself is woefully inadequate as a form of analysis.
When practitioners use the term core competence, it is often preceded by the words “stick to your…” That is, the firm should understand what they are good at and avoid straying from strengths. Of course, acquiring a new competence should be an important strategic decision – not to be taken lightly. However, the traditional advice seems to miss the mark if it implies that firms should avoid such decisions altogether. Classic examples of railroads, radio broadcasting, or, more recently, Toys ‘R’ Us illustrate how sticking to one’s knitting is not always the best strategy.
In short, as an internal analysis tool, the common usage of the term core competence does not add much value – certainly not relative to other internal analysis tools like value chain and VRIO analysis.
How do multi-business firms create value? Continue reading
Amazon Eats Whole Foods
With its $13.7B bid, Amazon agreed to pay a 27% premium over Whole Foods’ previous market valuation. This makes for a nice live case case in your strategy classroom. Was this a sound business decision? The market rewarded Amazon with an increase in its stock price. While some opportunities are apparent, it remains unclear exactly how Whole Foods will be worth 27% more to Amazon (and that’s just to break even). A five forces analysis will reveal that the grocery market is highly competitive with exceptionally thin margins — not an especially attractive industry to enter. So how can they win in this game? There are many possibilities that may come up in a discussion. For example, Amazon may:
- Build online grocery sales, a tiny but growing portion of the industry.
- Lower costs by applying automation technology and their supply chain expertise.
- Use customer data to build sales through Amazon or to sell some higher margin “impulse” items at Whole Foods.
- Leverage the market’s expectations that Amazon won’t pay dividends or post significant profit to lower prices and invest in the business.
Of course, these are highly speculative and carry significant risks. What is the likelihood that any of these will be achieved? Can Amazon manage change in such a large acquisition? Will other grocers make similar changes (or be bought out by tech companies with similar capabilities)? There is lots of fodder to discuss. Here is a packet of news articles that may be helpful. Also, I have prepared a spreadsheet to explore different scenarios for how this might play out where the starting point is Whole Foods’ recent financial performance (note that the decision tree requires the PrecisionTree Excel Add-in). Finally, here is a very brief poll to help assure that students come to class prepared and with an opinion on the deal.
Contributed by Russ Coff
Cost Advantage & Org Alignment: Aldi mini case
Aldi has been crushing the competition for years and makes an excellent case of how organizational alignment can deliver a strategic advantage (cost in this case). Here is the version of the case for Madison Wisconsin but it would be easy to customize to almost any location since Aldi has spread far and wide. I divide the students into groups reflecting segments of the market (Whole Foods/Kroger/Wal-Mart/Stop-n-go, etc.) and have them assess the competitive threat as Aldi expands in their market. The Whole Foods group typically concludes that there is no threat. However, the threat becomes more apparent once the other rivals decide to add services since they can’t compete with Aldi’s prices. This Bloomberg article shows that Aldi has been a much more direct threat to Whole foods. Ultimately, none of the rivals can duplicate Aldi’s cost structure because their assets are not aligned toward that strategy. Here are a few very funny ads demonstrating the simple principle — why pay more than you have to?
To see a few more Aldi commercials, Continue reading
Capabilities in the Rough
Would your students recognize a capability if they saw one? Which of the following examples seem to fit the bill? What would be required?
Contributed by Russ Coff
Fun and Game Theory
Economics-games.com is a free educational games site for teaching microeconomics, industrial organization and game theory. This site includes some simple (short) simulations designed to demonstrate specific principles. This should not be confused with longer simulations that extend across many class sessions. Instructors set up user IDs & passwords for their class and students are paired with others in the class (or even across universities if desired). These are really nice interactive online exercises that can be done between classes. In this sense, they are an excellent online complement beyond the usual readings and talking head videos. Here are some of the games:
- Cournot and Stackelberg games
- Public good financing game
- Common-pool resources game
- Prisoner’s dilemma
- Asymmetric matching penny game
- An air transport economics simulation covering price discrimination, vertical differentiation and peak-load pricing.
In addition, you may wish to check out some of their longer, commercial games (http://aireconsim.com).
Contributed by Nicolas Gruyer
Bring Me Your Confusions!
Presenting material clearly and concisely may not be the best way to help students learn. In fact, presenting ambiguous information that leverages common sources of confusion may be a much better route to learning. This post is intended to serve as a BLEG to solicit examples of confusions that students experience. Accordingly, this is a starting point for developing new material that draws on confusion to teach strategy. We begin by understanding what confuses students. Here are some examples that come to mind (please add your own examples in the comments):
- What does 5 Forces tell us about the firm’s advantage? Students often put a focal firm in the center and consider rivals to be substitutes. They don’t understand that the framework addresses the industry and not the firm.
- What industry to choose for 5 forces? Students often choose an umbrella industry instead of the specific segment they are considering entering (e.g., beer instead of micro brews in South Africa). The result, then, is almost useless for making decisions and the analysis is not used to make recommendations.
- Some resources are valuable while others are Inimitable (VRIO): Students think they are looking for some resources that fit in each bucket (V,R,I, & O) instead of a few resources that meet all of the criteria. They don’t understand that VRIO is a filter to evaluate all strengths in the value chain.
- What is that “O” for anyway (in VRIO)? It seems to make sense but students often don’t really understand how a firm can have all of the pieces and still not execute. I use Xerox PARC as an example.
- How do we make decisions using VRIO? Students often think they understand but don’t really know how to use it to make a decision. For example, how are capabilities relevant to decisions like entering new markets or fending off rivals?
- Motivation for diversification: guilty until proven innocent. Students often suggest that a firm should acquire a successful target. They fail to see that future success is built into the acquisition price and don’t ask why the buyer could create unique value over other bidders.
- Technology advantages erode rapidly. People see technology as key but miss that it can be easy to reverse engineer (leading to a temporary advantage). While the iPhone confers an advantage to Apple, Samsung has more market share.
- Core competence is not what a firm does well if rivals can do it better. Core competence must refer to VRIO resources in order to create value.
Again, please add your own examples in the comments below. The following TED talk by Derek Muller describes the technique in teaching science.
You can find a string of educational videos that leverage this “confusion” technique to teach principles of science here.
Contributed by Rich Makadok and David Kryscynski
Princess Bride, Nonsubstitutability & the RBV
Nonsubstitutability is a critical resource attribute for sustaining a competitive advantage. Otherwise, a rival may find a different resource that can nullify an advantage without actually imitating the focal firm’s resource or capability. An example might be Apple’s iPhone patent for the “screen bounce” when the user scrolls to the bottom of a page or list. Early Android phones had the same feature but, more recent phones, work around this patent by displaying a blue tinge at the edge of the screen (see picture) when one has scrolled to the end. In this way, many patents do not confer an advantage as rivals find ways to work around them and customers don’t perceive a significant difference in the product. In class, one might give this example coupled with the video below which depicts a battle between Fezzik and Westley in the Princess Bride — agility and size can be discussed as substitutes in determining competitive advantage (of course, Westley wins though he at first seems to be at a disadvantage).
PrincessBride-Nonsubstitutability (click to download)
Contributed by Russ Coff
Not Your 父亲 (Father’s) Buick
Buick will begin selling the Chinese-made Envision crossover in the U.S. next summer despite resistance from the UAW, which would prefer that it be produced in the U.S. The car is produced through a joint venture with China’s largest auto maker SAIC Motor Corp. Rather than produce the car in the U.S., GM plans to import the Envision from Yantai, China, where the joint venture has produced the vehicle for about a year. Through the first 11 months of 2015 it sold 127,000 of them in China. This example brings out several key points with respect to strategic alliances. Certainly the UAW viewpoint brings in a stakeholder perspective. However, SAIC is also potentially a competitor. It’s home market has sheltered it while it gained capabilities to produce on a very large scale. Recently, growth in the Chinese auto market has slowed which may push SAIC to seek other growth opportunities. This venture with GM may help it gain capabilities that allow it to enter U.S. and other world markets. In sort, this is a nice case to apply the “Four C” alliance framework (or other alliance tools) to identify whether the alliance is likely to create value for both sides (and for how long).
Contributed by Russ Coff
MegaBrew: M&A value or flat beer?
The $104B merger between AB InBev and SABMiller makes a great holiday addition to your classroom. While it is largely a corporate strategy question, I used this discussion to kick off my course and I plan to come back to it as we hit various topics. Here is a packet of news articles that I used as the basis of the case. I also had students complete a brief online poll in advance of the class. This allowed me to start by summarizing their positions and to call on people who I knew had relatively unusual opinions. I used the case to show them how to draw a decision tree (click the image to enlarge) reflecting the uncertainty associated with the acquisition. Of course, it also frames topics throughout the course. Here are a few examples:
- Internal capabilities. AB InBev’s capability to conduct acquisitions and to cut costs.
- External analysis. Market structure for beer in different countries (namely Africa and China which drive this deal). Also, we compared the market structure for micro- and macro-brews. Of course, these mega-brews act to control distribution channels so barriers to entry are a key part of the game.
- Competitive dynamics. Of course this is a game among the rivals but it also includes adjacent industries (like spirits).
- Corporate. What are the logics for value creation? For example, to what extent does scale lower manufacturing costs as opposed to purchasing power or other mechanisms. At what point is a larger scale no longer an advantage?
- Strategic factor markets: The M&A context makes it clear that most of the synergies go to the target (especially at the 50% bid premium).
- Global. As indicated above, this is mostly about entry into new markets (China and Africa, among others).
Contributed by Russ Coff