Netflix Sequel: Bidding Wars the Movie

disney-leaves-netflixAs 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

Tom Petty & the Perils of Strategic Alliances

AllianceFourCStrategic Alliances don’t make the news the way M&A do so some may struggle for examples. It is especially helpful to make students aware that, while Alliances may be less risky than M&A, there are still risks that need to be analyzed. Tom Petty provided a useful example to apply the “Four C” alliance framework. Like many musicians, he signed a contract with a record label before he made it. He and ABC had Complementary capabilities needed to develop and promote hits. Initially, they had Congruent Goals in that their interests were aligned to make the band a hit. Organizationally, they were Compatible in that they were able to coordinate effectively. What Petty failed to anticipate was how things would Change over the course of their agreement. By their 3rd album, he felt that the arrangement was so unfair that he tried to back out of the agreement claiming that ABC had no right to sell the contract to MCA. Ultimately, he only got out of it by declaring bankruptcy. The song, Refugee captures the anger he felt over how he was treated by the record companies and offers a nice lead in to the discussion. This also brings out a discussion of bargaining power and how it may change over time.

Contributed by Russ Coff

Submarines, Electric Cars and Corporate Scope

SubIt’s been a red letter week in terms of the business combination scavenger hunt. In addition to Dyson entering electric cars, now we see Aston Martin going into the submarine business. These are both serious ventures. Dyson has had 400 staff members working on this project for over two years and expects to bring a product to market in 2020. One can’t resist wondering if it will really suck (I know, vacuum humor isn’t in vogue — if it ever was)…

More seriously, Dyson is a private company and so won’t face as much market pressure to explain why/how the business portfolio creates value. Also, while most of us are more familiar with their vacuum business, they are a diversified manufacturing company. This includes supplying inputs for the automobile industry among others. One might argue that they have more complementary assets to produce electric cars than Tesla had when they first started. But still…

Aston Martin’s effort is also serious. It’s worth noting that, unlike Dyson, they plan to do this with a partner, Triton Submarines, that is already a player in the luxury submarine market.

Drawing on the Strategy Diamond framework, a vehicle is the mode used to acquire resources needed to enter a new market. In this context, why would Dyson use organic growth to enter electric cars while Aston Martin forms a strategic alliance to enter submarines? In each case, the firm lacks important resources needed to enter. One might apply Capron & Mitchell’s Resource Pathway’s Framework. This could lead one to conclude that Dyson is overestimating the relevance of its internal resources (to go without a partner). In the case of Aston Martin, since their partner has all the capabilities needed to produce the product, the main asset that Aston Martin brings is their brand. This may be useful to court customers who are James Bond fans — Perhaps not the largest market segment among those seeking submarines.

Meanwhile, Ikea just acquired TaskRabbit — presumably a bid to vertically integrate into assembling the furniture they sell in kits.

These efforts do not necessarily restore one’s confidence in managers’ abilities to make reasoned decisions about the scope of the firm.

Contributed by Russ Coff

Get Out the Vote … In Class

VotingArrows-smWhen leading a case discussion, wouldn’t it be nice to know exactly what positions students were prepared to defend? You want to bring people into the conversation who you know will have diverse perspectives to bring about a balanced discussion. Idie Kesner has a great low tech solution to your problem. Create arrow tents that can be reversed so they can display either up or down arrows (see the picture to the right). You can see instantly who is in favor or opposed to the strategic move proposed in a case. The instructor can call on people with an idea of what perspective they will bring in and/or encourage debate between students who have different positions. Here is a a template for the Student Voting Arrows (2 arrows/page).

IMG_20170915_171852A related innovation is tents that display the letters A through D. This can be used for cases that offer up to 5 alternatives that students might vote for (a,b,c,d, and no tent). Here is a template for the “a through d” student voting table tent. This must be folded lengthwise first to select the appropriate letter and then widthwise so the letter is displayed as a table tent (visible from both sides).

Contributed by Idie Kesner

Amazon Eats Whole Foods

amazonwholefoodsWith 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

Failure: The sequel

learning-failuretosuccessThis is another in our series of explorations in learning from failure (and learning from success). The Swedish Museum of Failures reminds us of some of the most spectacular product failures. Interestingly, most of them can be closely linked to some spectacular product successes. A complete failure may be a near miss. Perhaps a slight pivot away from extreme success. This video offers a window into some of the more interesting exhibits in the museum. One might ask students to review the video and imagine how a well-placed pivot might have helped each failure turn the corner. This might also fit with some of the toolbox posts on pivoting.

Contributed by Russ Coff

Hollywood Breaks Into China

20151017_wbc183.pngHow do firms modify their products so they will be well-received in the most promising global markets? Case in point: Hollywood’s biggest movies are being subtly reworked to appeal to Chinese audiences. Since, that market may soon outstrip the U.S. to become the most lucrative movie audience in the world (see chart). Movies like Warcraft and Now You See Me 2 have been huge successes in China even though their domestic performance has lagged. Why? The Warcraft cast features Daniel Wu, a very bright star in China, who may have been unrecognizable as the orc Gul’dan, but his promotional efforts were important to the film’s success. Similarly, Now You See Me director, Jon M. Chu, cast star Jay Chou and filmed a portion of the movie in the Chinese region of Macau. The movie industry is a great example of product design for market entry. The following video frames it nicely for students interested in addressing barriers to market entry.

Contributed by Russ Coff

Angry Shareholders Sacrifice Donkey

StockholderFluDartShareholder activism is often identified as a mechanism to discipline managers and keep them focused on value creation for investors. An NPR story reports that shareholders in a zoo near Shanghai, frustrated that they weren’t making a profit on their investment, fed a live donkey to zoo tigers as a form of protest. At a shareholders meeting they voted in favor of feeding the donkey to the tigers to express their anger. Their objections center on the zoo’s debts and legal troubles. For two years, the investors said the venture has not been profitable. The video of the event has stoked public outrage and condemnation. While this is a rather unusual example of shareholder activism, it may spur some fruitful discussion in class. One of the interesting elements of this action is that the Corporate Social Responsibility literature would lead us to expect that investors have idiosyncratic preferences and will make trade-offs on returns (see this article by Mackey, Mackey & Barney). For example, one might expect that investors in a zoo would be willing to trade off financial returns to care for animals. A protest of poor profitability that hurts an animal seems especially unlikely. Yet there is is. As the cartoon implies, there are other ways for investors to protest…

Contributed by Russ Coff

Bride of Frankenwatch: An RBV story

WatchThe Financial Times reports that in 2010, a Heuer Autavia Reference 2446, a popular driver’s chronograph of the 1960s, was sold for £5,400. But late in 2016, Christie’s achieved $125,000 for an identical watch. Valuable and rare resources are heavily sought after. This also creates a strong incentive to imitate. Enter “Frankenwatches.” Enterprising individuals have been able to cobble together watches from vintage spare parts that can be convincing. This has bread mistrust in the market and increased the value of market mechanisms (e.g., prim auction houses) that can certify authenticity. Then, there is also a market for known fakes (if they are done well). Ultimately, this demonstrates valuable and rare resources as well as imperfect imitation. Perfect for watch affectionados and students of the resource based view. The Financial Times article is a good (and timely) reading to prime a classroom discussion of strategic resources and attempts to imitate.

Contributed by Russ Coff (H/T Nicolai Foss)

Will Pokémon Keep GOing?

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:

Contributed by Aya Chacar and Russ Coff

K-Cosmetics: Covering the Globe

Successful strategy is often a combination of luck firm specific skills and favorable conditions. AmorePacfic makes a great ripped-from-the-headlines case since it rose to be the #1 South Korean firm buoyed by a growing and large domestic demand from a growing population. Hallyu – the Korean equivalent of Hollywood was also a driving factor as South Koreans want to look like their favorite stars and use the same cosmetic products and that includes men. In fact, it is estimated that a whopping 20% of South Korean men use cosmetic products on a regular basis. AmorPacific capitalized on this growing trend by building up its brand and investing in R&D and ultimately riding the popularity of K-pop and K-movies to expand internationally. At a time that demand is softening, K-cosmetics are still growing with exports increasingly exceeding imports and Korean cosmetics brands now more popular than European brands in China and increasing their penetration in many countries including China, Hong Kong, Japan, the US, Vietnam, and in a surprising list of other countries such as Poland where their addition to Sephora’s product line and other large retailers will ensure broad distribution. How has a $150 1.7 oz managed to gain global popularity? Some materials for the case might include:

Contributed by Aya Chacar

Cost Advantage & Org Alignment: Aldi mini case

w11uzAldi 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

Disney Wields its Princess Power

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.

Contributed by Russ Coff (HT Virgina Postrel)

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

Is ESPN the Right Toon for Disney?

Between the Football games, you may have seen that ESPN is losing subscribers in droves (7M lost in the last 2 years — about 7%). Not only is it dragging down Disney’s stock price, its a weight on the whole industry. This is an interesting problem to discuss in class. Of course, Disney’s corporate strategy always provides fodder for discussion (see our discussion of the multi-business strategy around Frozen). I have asked my class the following questions:

  • 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?

Contributed by Russ Coff

Lego Industry Ecosystem

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.

Contributed by Russ Coff

Smartphone Scavenger Hunt

Of course there are a spate of Chinese entrants into the Smartphone space. This probably comes as no surprise since many of them have been manufacturing phones for other firms and have large local markets that help to incubate their capabilities to become global players. In addition, there are some players that seek to leverage very different capabilities into the smartphone space. For example, I have reported here on Boeing’s efforts to leverage their defense contracting capabilities — now, it would appear that the U.S. government is interested in Boeing’s self-destructing Black phone. More recently, Pepsico is entering the fray with a branded Android phone. These examples fit nicely with the business combination scavenger hunt exercise. Of course, it is worth noting that Pepsi and Boeing are entering via strategic alliances with key players who have significant capabilities. Given these very different approaches, capabilities, and entry modes, one might have a fruitful class discussion of the emergent competitive dynamics in the industry.

Contributed by Russ Coff

Discussing Terrorism in a Strategy Class

I started my class last Saturday with words of hope that my students’ friends and family were safe. Since I teach in Madison Wisconsin, it was a fair bet that they were not heavily touched. This first response is probably a good starting point. However, where does the discussion in a strategy class go then? Here are a few brief thoughts:

  • Responding to the humanitarian crisis. From there, one might explore how firms can respond to the humanitarian crisis. Do the Syrian refugees and terror victims all over the world pose an imperative to which businesses must respond? How can they help? What types of businesses can make a real difference?
  • Responsibility to shareholders. Should firms help even if this hurts shareholder returns? Of course, helping people can build a firm’s reputation. When would this come into play and how can firms position such actions to help firm performance (eliminating any conflict with shareholders)? If it does hurt profitability, when is that justifiable? When is it an imperative?
  • Global strategy. How should firms develop and execute international strategies in a more uncertain business environment? How should they balance this type of risk in their portfolio?
  • Employee Welfare. What steps should be taken to assure employee welfare and/or help employees in need?
  • Opportunity. Some firms may see economic opportunities amid the uncertainty. Of course, defense contractors and security-related firms may win. What other types of firms might see opportunity? See, for example, the video below about Ikea’s refugee shelters or bulletproof blankets for kids in response to school shootings.
  • Exploitation & Fraud. One of my students pointed out that some firms may take advantage the situation and play off of people’s fears. This might be considered the unethical side of opportunity and is certainly important to discuss as well.
  • Broader economic impactAndrew Ross Sorkin offers a brief discussion of this. Conventional wisdom (from studies of the economic impact) is that attacks cause only small blips in GDP and stock markets. However, the political impact and the diversion of resources to agencies like homeland security and defense contractors show up positively in GDP and so understate the impact. Isolationism also may impact global trade well beyond the initial shock.

You may notice that I offer questions rather than answers. I think this topic is fruitful for class discussion and I would hope to learn from the students. I only wish I had answers…

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.ABInbevTree 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