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.
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.
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.
This isn’t the first time polls have been wrong. The election of Donald Trump was a shock to many college students (as well as the press) and this may warrant some class time. Some instructors responded by providing space for students to express their feelings and this may be within the scope of the educational objectives for some classes. For a strategy class, a more relevant focus might be to examine the implications of the outcome for business strategies or to examine the campaigns from a strategic perspective. This might be considered as a template for how to discuss other sudden world events in the strategy classroom. Here are some takes on how to bring the election in while still emphasizing the pedagogical objectives of a strategy course:
Project case scenario analyses (Aya Chacar). Scenario analysis is designed to unearth factors that affect the efficacy of a given strategy. In a global context, country risk is a central factor in assessing strategic alternatives. In class, students discussed the likely impact of the election on the companies their teams are studying. Can you help the company? What do you think “could” be the impact on the companies under the new American administration -based on stated positions or past behavior? The companies they chose to study in this class are Amazon, Auchan, Didi Chuxing, General Motors, Naver, Uber, Volkswagen, and Walmart. All already have major international presence with some but not all having significant operations in China, Europe, India, Japan, Mexico, South Korea, SouthEast Asia and the US.
Entrepreneurship/Opportunity Recognition. The pollsters were all wrong. Often businesses and whole industries miss critical trends in consumer preferences and this probably means that there is unserved market space. Given trends that are now unearthed by the election, what market opportunities might there be for firms in various industries? One could use the project firms, cases you have done or specific firms that you think might be affected.
SWOT on campaigns (Peter Klein). While this framework is not preferred by most strategy scholars, it may raise some good points. A few examples from the Clinton campaign: O: demographics (e.g., increased Hispanic population, more socially tolerant electorate), unpopular opponent,chance to make history. T: middle-class concerns about economic inequality, backlash against political correctness, Clinton fatigue, incumbent fatigue, WikiLeaks. S: experience; support from major media, Wall Street, large corporations; ties to Obama and WJ Clinton; large staff of handlers; polish. W: experience; support from major media, Wall Street, large corporations; ties to Obama and WJ Clinton; large staff of handlers; polish.
Resources/Capabilities. Many of the campaign strengths turn out to be weaknesses depending on the context (experience, polish, support from corporations, etc.). What resources give a party a sustained advantage? What does “sustained” mean in this context? This might bring in a discussion of core rigidities and how once valuable resources can become critical weaknesses over time.
Disruptive Innovation (David Burkus). Clay Christensen described disruptive innovations as an innovation (typically from an outsider) that creates a new market and value network that eventually disrupts an existing market and value network, displacing established market leading firms, products and alliances. The Trump campaign might be viewed in this light as a disruptive strategy that overtook the conventional establishment.
PESTEL. Of course, this demonstrates the value/importance of looking outside of the industry for trends that may influence whether a given strategy will be effective or not. The PESTEL framework is a simple tool for bringing this in to the analysis (Political, Economic, Social Technological, Environmental, and Legal).
Why isn’t the BCG matrix dead as a framework? I still consistently find that my students have been exposed to it (generally in Marketing). They don’t even understand that it is a framework for internal capital markets (where firms add value by serving as a source of funding) or that it is hopelessly flawed. It’s a dog, divest right away. If the sale generates cash, funnel it to any other management framework (even SWOT) and I’m sure it will create value.
Internal capital markets only create value when they perform better than external capital markets. Generally, this is because the parent company has better information than external markets about the business. I often describe how Big Pharma companies fund biotech startups — their inside knowledge of the science and downstream capabilities help them understand the potential. As such, their expertise and private information allows them to invest much more efficiently than external capital markets.
The augmented reality (AR) game, Pokémon Go, has taken the world by storm as players roam the real world catching Pokémon and battling in Pokémon gyms. The game has set 5 records since its launch in July 2016 — including the most revenue by a mobile game in its first month ($206.5 million). Nintendo’s stock doubled 15 days into the release, adding $7.5B in value, but then settled back into a mere 50% increase when it became clear that Nintendo was a partner with limited ownership in the company that developed the game (Niantic, a Google spinoff). Although the game is free, users can make purchases in the app store to support their Pokémon ‘hunting’. The bewildering success must clearly be keeping Niantic’s CEO, John Hanke, and his crew awake at night. Besides the operational issues related to scaling up, intellectual property (IP) had become a big issue. A slew of imitators were emerging as well as a number of companies trying to steal the game’s data content and algorithm. In addition, the formidable international expansion faces roadblocks in the most populous Asian countries while potential users were impatient. There were many additional potential revenue sources to be tapped and explored such as the recent win-win partnership with McDonalds Japan. Moreover, while getting gamers out and about was good, there were a number of unintended consequences. On the plus side, many entrepreneurs were finding ways to make money from the game — for example restaurants could lure in customers if there was a Pokestop nearby. At the same time, users and non-users worried about possible injuries, trespassing, and invasion of privacy among other things. Naturally, this makes an outstanding ripped-from-the-headlines case for strategy courses. It is a great vehicle to cover key topics such as entrepreneurship, strategic alliances, internal analysis/capabilities, and external analysis. The following are some materials that are useful for the case:
Mattel just lost to Hasbro on producing Disney princess dolls — a $500M a year business. This brings to an end a 60+ year strategic alliance. A recent Bloomberg article tells the story of what happened and makes a nice start to a mini case. There are many facets to this that might be of interest in the classroom. Bargaining power is probably front and center. Mattel wanted to have their own princess line that they didn’t have to pay the substantial licensing fees to Disney. Once they were a competitor, Disney started to consider other options (an alliance or coopetition story). By seeking out Hasbro, Disney increased their options (BATNA to you negotiation buffs) and thus gained even more bargaining power. In the end, Hasbro had to work hard to present a fresh vision (including substantial firm-specific investments) but Disney still retains the power in the relationship. This also sends a signal to other Disney partners about reducing their commitment to Disney. Of course, Disney’s power is rooted in strategic assets (characters) and capabilities (to create more characters) so this brings in the resource based view (RBV) nicely. If you are in need of related comic relief, there are ample videos. Here are hipster princesses to get you started.
Discipline. As a stand-alone business, you might start with what needs “fixing”? Why hasn’t Disney fixed it already and is there another company better positioned to fix it?
Potential Synergies? Digging further, as a part of Disney’s portfolio, you might ask why ESPN would be worth more as a part of Disney than it would be as a stand-alone company or as part of another company. For the most part, Disney can’t leverage it’s content, characters, or brand to enhance the value of ESPN. What can they bring to the game?
Should they sell it off? If Disney doesn’t add much here, who do you think could create more value with ESPN? What would be the next steps?
Lego profits have more than doubled in the last five years. The company has sold non-core businesses and doubled down on the core building block products. They are the undisputed king of building toys. A recent New York Times article describes the lay of the land brick by brick. Lego has focused on more wholesome building themes (Star Wars, etc.) while rivals have sought space where they don’t have to directly compete. For example, Mattel’s MEGA unit has a series of much more realistic building sets (Sponge Bob, Terminator, and Star Trek). Similarly, McFarlane toys has a very successful series of “Walk Dead” building sets that deviate from the image Lego prefers to maintain. In addition to competitors seeking to differentiate, many complementors have emerged such as Pley which offers Lego set rentals (the “Netlix” of the Lego world) or numerous used Lego trading businesses (here is one in Madison). Interestingly, research suggests that these Lego sets may actually reduce creativity — especially compared to the older version that involved a simple bucket of bricks rather than a kit to build a specific thing. Of course, their move into Lego films brings in an interesting discussion of diversification.
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).
There is no shortage of business combination humor to stimulate discussion of corporate diversification. Below are a couple of videos depicting some unlikely combinations (mild language). You can also find Delta Dental commercials posted here as another great example. Of course, truth can be stranger than fiction and you might want to check out the real examples listed under the business combination scavenger hunt exercise…
Chrome has been sucking power from your laptop batteries. Google has been playing catch up to Apple’s Safari in terms of power consumption on Mac computers for some time. Apple’s product is optimized to be more efficient to their own proprietary operating system while Google is optimizing development efforts across platforms. Indeed, Microsoft’s Internet Explorer also enjoys a power consumption advantage on Windows machines. Of course, this could just be a flaw in Chrome but it does seem like it might be linked to specialization on a single platform as opposed to cross-platform compatibility. Strategy classes might explore more deeply how valuable the advantage of vertical integration might be in this case. Also, what type of organization must be in place to realize this potential value. Of course, the ad revenue gleaned from these products may justify vertical integration but it is less clear how this would create value for users. Power consumption, on the other hand, would be important to users.
Complementarities drive so many aspects of strategy — particularly in the context of corporate strategy. M&A, Alliances, diversification and global strategy are fundamentally about complementarities between businesses and regions. On the video below, Will Mitchell notes that it would , “get a conversation started about one of the 3 additional forces I use in industry analysis – Porter 5, plus social factors, new strategies, and complementary organizations. The video is short enough to make the point about complementation, then to spark discussion of what this would mean in business strategy (e.g., software upgrades for hardware).” The video is also valuable in exploring how a narrow product can expand its market appeal or find new markets. See also the classic complementarities video here.
As evidenced by the business combination scavenger hunt exercise, corporate strategy is always a slippery slope. eBay is in the process of splitting into 3 parts: auctions, Paypal, and the enterprise unit that helps brick and mortar retailers gain an online presence. Their conclusion: these businesses don’t fit together well and are worth more apart than together. Here is a back of the napkin sum of the parts valuation to back that up. This may be a tired story but it won’t go away. In this case, there is no compelling reason that Paypal must be integrated with eBay to be used as a payment mode in auctions. In fact, other marketplaces (like Amazon) may consider Paypal to be a rival instead of a potential partner because it is tied to eBay — more business opportunities if they are separate businesses. Of course, eBay shouldn’t be surprised that an auction would allow one to capture the most value. This might be a nice starting point for corporate strategy. Why do firms have so much trouble determining what combinations will create value?
Dave Kryscynski has provided an excellent series of online videos to supplement your course or to help move portions of it online. These are very well produced and may allow you to spend class time on more experiential activities found elsewhere on this site. Below is the video on Porter’s generic strategies but I have provided links to all of the available videos below and listed others that you can gain access to through Wiley.
In a torrent of irony, Boeing is partnering with Blackberry to deliver a more secure line of smartphones. Do their capabilities transfer? Does their brand transfer? Did they pick the right partner to imbue confidence? This is almost an entry for the business combination scavenger hunt. Whether the business model makes sense or not, one might think Sony’s experience will help to create demand for this type of enhanced security. If asked to do a testimonial, will Sony byte?
The MicroTech negotiation is a slightly simpler version of another exercise in the Toolbox. It focuses on the problems promoting cooperation across divisions (for example to achieve synergies). MicroTech is a negotiation over the terms to transfer a technology between 2 divisions of a company to take advantage of a market opportunity. Sub-optimal agreements (money left on the table) represent transaction costs and inefficiencies that must be overcome in order to create corporate value. There are two roles (Gant and Coleman). One division, Household Appliances (HA), has developed a new technology that has value if sold outside of the company. However, the division does not have a charter to sell chips. In order to take advantage, the technology must be transferred to the Chips & components (CC) division. In the process, about 20-40% of the potential value is typically left on the table. The discussion focuses on how to align objectives and achieve cooperation across divisions. It turns out that such cooperation 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…
Rich Makadok invites his students to send pictures of strange business combinations. The sequence of Delta Dental commercials offer humorous combinations of businesses that drive home the topic of corporate strategy. However, these pale when compared to many real world combinations. One of my favorites is when the CEO of Occidental Petroleum (Armand Hammer) purchased a significant interest in the company that makes Arm & Hammer Baking Soda because he liked the name. The scavenger hunt exercise involves asking students to search for real life examples of strange business combinations and bring pictures to class. Once you are looking for them, you realize the examples are everywhere. For example, Boeing plans to produce a new smartphone (really, not a joke). The restaurant above offers family planning advice and products. The exercise will help students realize how rare a sound corporate strategy really is. Click <Continue Reading> to see additional examples (in many cases, you can click the picture to go to the company’s web page): Continue reading →
The Strategic Management Society always has excellent teaching sessions incorporated in their conferences. Here are some sessions to check out at the Madrid conference September 20-23, 2014:
Sat, 9/20 @ 13-16:00. Competitive Strategy Interest Group Teaching Workshop. Building on last year’s workshop on innovation & education, the 2014 theme is “The Impact of New Technologies on Teaching and Higher Education.” The education industry is abuzz with talk of MOOCs, distance learning, computer-based instruction, and other innovations. How are these best incorporated into the curriculum? (Co-sponsored by the Teaching Community).
Sun 9/21 @ 9:15-10:45. Researchers Hooked on Teaching / Teachers Hooked on Research. Most academics polarize teaching and research into separate worlds. Building on last year’s very popular session we bring together world-class scholars who have successfully bridged this apparent divide. This engaging session will showcase their experiences in “translating” their research into teachable moments and their teachable moments into research.
Mon 9/22 @ 14:45 – 16:00. Teaching Strategy Philosophically. Ethics applies different theories to address Socrates’s question of how we should act. The application of philosophical principles in teaching strategy has multiple advantages including a better appreciation of underlying values and motivation, and increasing tolerance of ambiguity. Join us in this highly interactive session in how great scholars teach strategy philosophically.