Category Archives: Multi-business/Diversification

Disintegrating Target: Inviting retail rivals as partners

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Target has agreed to sell their Pharmacy business to CVS for $1.9B. CVS is a retail rival for many items that Target sells. Why invite them to share space in Target stores? A USA Today article identifies five likely reasons: 1) Complexity of the healthcare business, 2) Profitability was lacking, 3) Scale (since CVS can leverage many more locations), 4) It allows Target to focus on other businesses and 5) Foot traffic from CVS will increase other sales (complementarities). These factors tip the scales from integration to creating value through a strategic alliance — an opportunity, perhaps to apply the “Four C” alliance framework or the Resource Pathways framework to assess the opportunities and risks. This might also stimulate a nice discussion of Nalebuff and Brandenburger’s Coopetition framework. To what extent do the cited reasons (in the USA Today article) dovetail with the issues identified in the frameworks? What is left out of the more naive analysis?

Contributed by Russ Coff

Chrome Goes on Safari: Vertical integration advantage realized?

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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.

Contributed by Russ Coff

Strategic Complementarities at Steak

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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.

Contributed by Will Mitchell

Auctioning eBay?

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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?

Contributed by Russ Coff

Dr. K Prescribes Strategy Videos

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David Kryscynski (Dr. K) 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. Dr. K’s newest collection can be found on his free web page at LearnStrategy.org.

More Videos (below) Accompany Text

The videos below are also available but are designed to accompany the textbook: Strategic Management 1e by Jeff Dyer, Paul Godfrey, Robert Jensen and David Bryce (BYU Marriott School of Business). Contact your local Wiley sales representative or Executive Editor, Lise Johnson, at lise.johnson@wiley.com to receive additional information about class-testing or possibly using the videos without the text. For information on how to utilize these animations for non-academic use please send an email to ols_dept@byu.edu.

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Boeing’s Self-Destructing Android

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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?

 

Contributed by Russ Coff

Negotiating Coordination Costs

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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). Caucasian mid-adult businessman and woman staring at each other with hostile expressions.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…

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Business Combination Scavenger Hunt

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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 →

Teaching Tips @ SMS Madrid

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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 @ 8-9:15. Teaching Corporate Strategy: Insights & Opportunities. Panelists will share experiences teaching corporate strategy topics related to their research: vertical integration, M&A, industry consolidation, and diversification.
  • 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.
  • Sun 9/21 @ 15:45-17:00. Alternatives Takes on Teaching Strategy: Balancing the (ex)Tensions. Strategy is a complex subject with multiple teaching approaches. This interactive session will provide insights from experienced educators on the methods that work, as well as addressing moves to online content.
  • Mon 9/22 @ 11:00-12:15. Challenging the Way We Teach and Practice Strategy. This is a common ground session comprised of submissions to the teaching community track.
  • 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.

Contributed by Russ Coff

Vertical Integration with Style!

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Andrew Shipilov offers a nice case (with video) of Louis Vuitton’s strategy for vertical integration and alliances. He documents how Vuitton vertically integrated into distribution when the rest of the fashion industry relied only on partnerships. This allowed them to gain access to important market information (customer preferences) on a more timely basis — a source of advantage in the industry. Shipilov notes: “The more unique your assets are and the greater the control you need to exercise over the value chain to extract competitive advantage from these assets, the more vertical integration makes sense. However, the higher the uncertainty and complexity in your markets, the more you should think about partnerships.”

Contributed by Andrew Shipilov

Strategic Mgt of Job Interviews

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RecruiterQuestion-GoogleThis Onion video illustrates some … um … interesting strategies one might apply in job interviews. While the strategies portrayed are entertaining, there is a key point hidden behind the humor: Analyzing a company’s strategy might help students ask questions that set them apart from other job candidates. Here is a 6-step “listicle” by Google’s HR executive on how to prepare for an interview. Getting a job could be turned into a class exercise that helps students see how the strategy content might be useful right away (as opposed to waiting until they are CEOs). For any case, consider a range of recruiter questions that convey a deeper understanding of a company’s strategy. For example, a good question for Apple might reveal an understanding of the nature and extent of their competitive advantage as well as strategic challenges: “How does Apple’s culture of creative product design extend to less creative jobs like sales and service?” or “How does Apple create a sense of urgency among employees to respond to rivals like Samsung?” Many of the key strategy frameworks can be applied to generate such probing questions:

  • 5 forces/Industry analysis might help you understand the market position & efforts to increase buyer switching costs. This might include marketing or operations efforts to get closer to customers (customer intimacy). Probing questions along these lines convey that you understand strategic issues in the industry.
  • VRINE/Internal analysis might help identify key resources to leverage (e.g., Apple example above). If culture is a critical resource, one might ask questions about how they develop and maintain it.
  • STAR framework might help to identify levers to develop and maintain a valuable culture or, for example, coordination across units (e.g., MicroTech negotiation). Thus, one could probe into hiring, reward systems, structure, and processes to understand how they achieve these capabilities.
  • “Four C” framework might be useful if alliances are a key component of the firm’s strategy (outsourcing, R&D, etc.). How do they find partners with congruent goals? How do they managing the changing relationship over time? End game?

Contributed by Russ Coff

Frozen Corporate Strategy

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Disney’s Frozen is now the top grossing animated film of all time (almost $800 million in revenue so far). But that is only the box office proceeds. FrozenThe Lion King brought in over 2 billion and the box office was just a small part (see the HBS Lion King case for a breakdown). Of course, they will leverage the characters across their entertainment assets (frozen cruises, stage shows, theme parks, broadcasting, etc.). This might make one think that the bulk of the additional returns stem form their diversification strategy. In fact, most of the revenue will come from merchandise sales where the manufacturing is outsourced. Because Disney owns the rights to the characters, they have bargaining power to appropriate most of the profit — no need to vertically integrate. For a rare discussion of management policies to maximize cross-business opportunities, see the Lion King B case (The Synergy Group). Interestingly, Disney has loosened their copyright grip to allow the many spoofs that have overtaken YouTube (click here for a listing). They now see this as free advertising that pumps up the demand for merchandise. This all makes for a nice classroom discussion as well as a host of entertaining videos (like the one below).

Contributed by Russ Coff

Google/Apple vs. Their Employees?

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Google and Apple must pay a total of $324 Million to current and former employees in a class action lawsuit that they lost. This highlights the multiple arenas on which competition and cooperation play out. Is it surprising that strategic alliance partners might agree not to actively poach employees from each other? Such trust seems like a prerequisite to a productive alliance. And yet, fierce competition in product and intellectual property markets makes it hard to imagine close coordination to collude in strategic factor (human capital) markets. This brings together a nice discussion at the intersection of factor markets, alliances, diversification, game theory, and rent appropriation. The video below gives an idea what Google employees do all day…

Contributed by Russ Coff and Aya Chacar

The Bear Necessities…

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There are several nice Samsung cases that describe how the company has tried to merge Western practices (and managers) with Korean/Japanese practices (and managers), to become the truly global firm. It leads to a nice discussion of how a firm can transcend national identity and become a global player. The advertisement below exemplifies this: 1. Bears aren’t identified with a single region (a global species), and probably considered “cute” just about everywhere; 2. The advertisement is easily dubbed in any language as you never see the people talking; and 3. The creative/fun aspect of the ad is probably not what students think of when they think about Samsung tech products — it exemplifies that Samsung has achieved a sophisticated level of global infotainment expertise. Or has a great ad agency. Or you could just do something simpler by using it in an intro about how diversified Samsung is. (e.g., “What industries do you think Samsung is in?” (put answers on board) If someone gets to washing/drying machines, pause for a moment, smile, run the ad. If no one gets to washing/drying machines, pause, smile, ask “What about major appliances?” and run the ad. Fun fun fun.

If you have other ideas for how to use this, please post them as comments below.

Contributed by Melissa Schilling

Softer Side of Sears: Its stock price…

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Hoping to unlock value, Sears has spun off its Lands’ End unit. Unfortunately, both the new unit and Sears’ parent company stock have dropped on the first day of trading. When do spin outs create value? When do related diversified firms create value? Here, the units are quite closely related and still the company could not create value together. For some recent studies of market reactions to spinouts, see Emilie Feldman’s work. The Sears commercial below foreshadows their need for better vision. This might also go nicely with the business combination scavenger hunt.

Contributed by Russ Coff

 

CEO Pay vs. Iron Man & LeBron

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CEO pay is back in the news. Harvard Economics professor Greg Mankiw offers a NYT piece on executive compensation and income distribution suggesting that the public is ok with large incomes of sports stars or actors (like Robert Downey Jr in Iron Man) because they understand how these people contribute. In contrast, understanding what executives add is much more complex. Paul Krugman responds, with an angry rant arguing that few of the top earners are stars or athletes and maintaining his position that executives are greedy and overpaid. This seems like a nice point to debate in a strategy classroom. Are executives overpaid? You might want to conclude the discussion with Alison Mackey’s SMJ article that applies actual data analysis to the question (instead of angry rhetoric). She found that “in certain settings the ‘CEO effect’ on corporate-parent performance is substantially more important than that of industry and firm effects, but only moderately more important than industry and firm effects on business-segment performance.” That is, in some cases, up to 29% of the variance in firm performance can be attributed to the CEO. In the case of a Fortune 500 firm, that could easily amount to billions.

Contributed by Peter Klein and Russ Coff

Letterman Sends Fruit to GE Board

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When GE acquired NBC, there was much doubt that they could create value with the highly unrelated acquisition. This very funny video of Letterman delivering a fruit basket to GE headquarters illustrates the cultural differences (see especially the GE handshake ;-). However, business segment data reveal that NBC’s operating margin was doubled and revenue was up 60% after GE’s ownership. Did they actually make money? Maybe. It took them 10 years to accomplish this (and everything tanked the 1st 5 years) — a time factor that may reduce the value created by as much as $3 billion depending on their initial assumptions. This can be used to demonstrate hard numbers behind the acquisition integration process (spreadsheet available on request).

Contributed by Russ Coff

MicroDesign Negotiation: Cross-business coordination

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This exercise focuses on the problems with designing incentives and structures to promote the cooperation across divisions needed to achieve synergies. MicroDesign is a negotiation to transfer a technology between 2 divisions of a corporation in order 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. Continue reading →

Diversification into Heroin?

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This clip from the Godfather shows the mafia bosses discussing pros and cons of entering the heroine business. They talk about it as a portfolio move (to go with gambling) and as a growth industry. This is a nice starter for a discussion of corporate diversification and entry choices.

Contributed by Elisa Operti

Boycotting HBR? Some Alternatives…

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You may have followed the debate about HBR’s policy prohibiting professors from linking suggested HBR readings to their own library’s paid subscriptions (see Joshua Gans’ blog posts on this and his Financial Times article on HBR and their journal list). I have increasingly used McKinsey Quarterly which makes their articles available for free (you need to register but that’s free). Here are some HBR alternatives that seem to work well (often by authors you know well):

Strategy process & org change

Internal Analysis and Competitive Advantage

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