Cochlear LtdGlobal leader in profound

hearing implants

Prepared by: Jack Ng

NOTE to Students

• This is my effort to guide you to prepare for the exam case

• It is by no means a complete analysis• You MUST prepare your own to differentiate

from others and achieve competitive advantage.

What is Cochlear implants

• Cochlear implants are surgically placed electrical device that receive sound and transmit the resulting electrical signals to electrodes implanted in the cochlea of the ear.

• The signals stimulate cochlea, allowing patient to hear.

• It is also known as Bionic ear.

Parts of cochlear implant

• External– Microphone– Speech processor– Transmitter

• Internal– Receiver and stimulator– An array of up to 22 electrodes

Cochlear implant hearing solutions• Unlike hearing aids which merely amplify sound, a cochlear

implant bypasses the damaged part of the ear and stimulates the auditory nerve directly.

• A sound processor is worn outside the body and uses microphones to pick up sounds.

• The sound processor converts sounds into coded signals that are sent to the implant inside the body.

• The implant receives the coded signals from the processor and sends the signals to electrodes that are in the cochlea.

• The electrodes simulate the hearing nerve which carries the signals to the brain creating the perception of sound – just as it would for someone with normal hearing.

Cochlear’s vision is to connect the hearing impaired to a world of sound by offering life-enhancing hearing solutions.

Cochlear Corporation’s vision

Cochlear Corporation’s valuesCustomer satisfactionWe meet or exceed customer expectations by actively seeking to understand their requirements, responding to their needs in a timely manner and continuously improving our processes and offerings.

Mutual respectWe work in a supportive and cooperative manner, respecting diverse opinions, personalities and styles.

PerformanceWe are committed to achieving Cochlear’s overarching goals through high-performing individuals and teams.

Continual improvement and innovationWe monitor the quality and reliability of our products and services and take the initiative in optimising work methods, systems, processes and designs.

ProfessionalismWe act with integrity and in the wider interests of Cochlear.

An important hearing loss segment

Hearing Aids

Cochlear Implants

Large group of people with high-frequency hearing loss using hearing

aids that are not effective

Hearing Aids

The Solution – Cochlear’s Hybrid system

Even with a hearing aid…

They suffer from:

• Major communication difficulties

– Speech comprehension especially in noise

– Environmental sounds: doorbells, birds, sirens etc

• High levels of dissatisfaction in their performance with hearing aids

Hybrid = the best of both

• Use a hearing aid where it is most effective (ACOUSTIC)

• Use a cochlear implant only where it is absolutely necessary (ELECTRIC)

• Hybrid = Acoustic + Electric

Hearing Aid CI

Hearing with the Cochlear Hybrid System

Normal

Moderate

Severe

Profound

Mild

Moderateto Severe

Pitch in Hertz (Hz)

125 250 500 1000 2000 4000 8000

Loud

ness

in D

ecib

els

(dB

)

0

20

40

60

80

100

120

Hybrid – completing your hearing experience

Hybrid hearing aid Hybrid cochlear implant

• Cochlear has received approval to start selling its hybrid hearing implant in the US, opening up the medical device maker’s market to adults with partial hearing loss, as opposed to only the profoundly deaf. 21 Mar 2014

Hearing with the Cochlear Hybrid System

Benefits of Cochlear Implants

• Most perceive loud, medium and soft sounds. • Many understand speech without lip-reading.• Many can make telephone calls and

understand familiar voices over the telephone• Some can enjoy music

Source: www.indicure.com.ng

Potential Growth

• Medical device maker Cochlear will begin selling in Europe a re-approved version of its hearing implant that was recalled in September 2011 after the product began failing in a small number of recipients. 02 JUN 2014

Concentric Growth

• Cochlear has opened a new Melbourne clinic, moving into post-surgery care of implant recipients for the first time, which its CEO hopes will enable medical teams to focus on new patients and test new ideas. 28 May JUN 2014

Critical Competitive Issues

• Medical device maker Cochlear is losing market share to Swiss rival Sonova, analysis of a strong yearly result from Sonova has said, reporting more than 50 per cent revenue growth in its hearing implant division. 22 May JUN 2014

What can Cochlear do? Strategy?

Cochlear Ltd Facts

• Cochlear estimates it has a market leading share of implantable hearing solutions, including approximately 65% share of cochlear implants.

• 250,000 customers to date. • Cochlear’s business model includes supporting

these customers with innovative and compatible products, through the sale of sound processor upgrades and accessories and ongoing product support.

Cochlear Ltd Facts

• Cochlear has a deep geographical reach, selling in over 100 countries.

• Cochlear has a direct presence in approximately 20 countries and uses distributors and agents in the balance.

• The proportion of Cochlear’s sales to end customers by region is approximately: Americas 40%, EMEA (Europe, Middle East and Africa),40% and Asia Pacific 20%.

• Can increase the share of Asia Pac?

Cochlear Ltd Facts

• In the United States, medical costs run from US$45,000 to US$125,000; this includes evaluation, the surgery itself, hardware (device), hospitalization and rehabilitation

Cochlear Ltd Revenue 2013

• Sales of cochlear implant units were up 16% to 26,674.• Sales revenue was up 1% from that for last year to

$715.0 million. In constant currency terms (ie restating F12 at F13 foreign exchange rates), sales revenue was up 3%. (It seems the price is lowering, competition?)

• Americas sales revenue of $284.4 million declined 4%• EMEA sales revenue of $283.0 million decreased 1%• Asia Pacific sales revenue of $147.6 million increased

20% (i.e. growing market!)

Cochlear Ltd products

• Cochlear offers a range of advanced solutions to address different types of hearing loss such as:

• cochlear implants, designed to help those people with moderate to profound sensorineural hearing loss; and

• bone conduction implants, designed to help those people with conductive hearing loss, mixed hearing loss or single-sided deafness.

Cochlear Ltd Sale

• For the financial year ended 30 June 2013 (F13), 89% of Cochlear’s sales revenue was from cochlear implant (Nucleus) products and 11% from bone conduction (Baha) products.

Take a break, Let me play you a song

Define Industry

• NOT anymore just severe-to-profound sensorineural deafness

• Cochlear has received approval to start selling its hybrid hearing implant in the US, opening up the medical device maker’s market to adults with partial hearing loss, as opposed to only the profoundly deaf. 21 Mar 2014

Define Industry

• What is the implication of the approval to sell hybrid hearing implant in the USA?

• One it is approved by the US Food and Drug Administration (FDA) in USA, it will be used as a reference of approval for other agencies e.g. Europe (CE), Australia (TGA), Singapore (HSA), Japan (PMDA) i.e. high chance and faster approval by other countries.

Define Industry

• Define Industry: A cochlear implant that helps partial hearing loss, severe and profound profoundly (completely) deaf person to have a sense of sound.

• It is different from a hearing aid because it helps to compensate for damaged or non functional parts of the ear, while a hearing aid Amplifies sound.

Customers

• 50% children (12 months - 17 years); • 50% adults *

* FDA survey of venders 11/2001 http://www.nidcd.nih.gov/health/pubs_hb/coch.htm#c

Potential Customers

• 16 in 1,000 people are severely to profoundly deaf

• 80 in 1,000 elderly adults (>70 years) are severely to profoundly deaf.

• New market for adults with partial hearing loss, as opposed to only the profoundly deaf. (21 Mar 2014)

Sales Barriers

• The barriers to increasing the penetration of the candidate base include:

• awareness of implantable solutions as a viable option;

• patient motivation;• lack of clear referral paths;• affordability and funding availability; and• clinic capacity.

PEST - Political

• Cochlear sales hit as US government tries to limit health costs, 07 JUL 2014.

• The US regulatory body that administers Public Healthcare for the Poor and Elderly may stop paying for bone anchored hearing aids, in a potential blow to medical device company’s growing Baha division.

The political/legal environment

• Regulation is significant. Cochlear implants are considered as medical devices and must be approved for use by each country health authorities: the US Food and Drug Administration (FDA), Europe (CE), Australia (TGA), Singapore (HSA), Japan (PMDA)

The political/legal environment

• Example: On 24 July 2002 the FDA issued a notification that it had reports of a link between cochlear implants and bacterial meningitis (a potentially fatal infection of the lining of the surface of the brain).

• Cochlear responded to the crisis quickly and claimed that the infection was related to a design change by their competitor, Advanced Bionics, that created ‘dead space’ within the ear, thus providing a home for bacteria.

The political/legal environment

• In the United Kingdom, the NHS covers cochlear implants in full, as does Medicare in Australia, and the Department of Health[54] in Ireland, Seguridad Social in Spain and Israel, and the Ministry of Health or ACC (depending on the cause of deafness) in New Zealand.

PEST - Economic

• Asia is the fastest growing economic region and the largest continental economy by GDP PPP in the world. China is the largest economy in Asia and the second largest economy in the world.

• GDP growth Per capita: 7.9% (2010)• Asia Pacific sales revenue of $147.6 million

increased 20%

PEST - Economic

PEST - Social

• Companies to benefit from an ageing population• There is a silver lining to Australia’s rapidly growing

ageing public profile, part of a trend that could be worth up to $US15 trillion ($16 trillion) worldwide, and includes locally listed names such as AMP, Challenger and Cochlear, a new report by Bank of America-Merrill Lynch has found. 11 JUN 2014

• The new lifestyle of watching movie and listening music on smart phone, MP3 players, tablets on the go….

PEST – Social - Ethical Dilemmas

Imagine that you and your spouse are deaf. Your child is born without hearing. Would you go forward with the implant? What are all the issues you would consider?

Would your reasoning change if you both could hear?

PEST – Social - Deaf Culture

• Deaf Culture is linguistically unified through American Sign Language (ASL)– ASL is not a manual translation of English– ASL has its own syntax, morphology, and vocabulary– ASL does not have a written correlate

• Deaf individuals share an identity based on a culture rather than a medical diagnosis

• “Deafness, particularly when early in onset, confers a life experience that is radically different owing to a systematically different language base not shared by the majority of hearing culture” (Niparko, 2009).

Deaf Culture and Cochlear ImplantsConflict of Cross-Cultural Values

Child as Recipient Impact on Deaf Culture• Parental Authority- Hearing

parents who implant deaf children are viewed as “ill-founded” and “ill-fated” in their decision

• Deaf do not view deafness as a disease, and it is unethical to operate on a healthy child

• CIs fail to foster language acquisition in children born deaf (Lane & Bahan, 1998).

• Socio-cultural genocide• Undermines the survival of

Deaf culture

Deaf Culture and Cochlear Implants

• Advocates for Deaf individuals– The National Association of the Deaf– The World Federation of the Deaf– This cross-cultural conflict is without a resolution that is morally valid

(Lane & Bahan, 1998)– Research is needed to determine why some children with CIs are

successful in the hearing world and other are not• Clinical trials• High quality, generalizable results

PEST - TechnologyCountries by smartphone penetration

PEST - Technology

• The artificial regeneration of hair cells within the cochlea seemed to be a long way away

• Clearance by FDA for the implant of hybrid hearing solution.

• High speed mobile internet and coverage, enabling the use of connected mobile devices for watching of movies and music on the go.

• U.S. sales of premium stereo headphones ($100+) grew 25 percent in units in Q1 2013 year-over-year, accounting for 95 percent of the revenue growth for the total headphone market

Five forces• Threat of new entrants (Low)

• Threat of substitute products or services (Low/moderate?)- Hearing Aid, Hearing Amplifier or “Personal Sound Amplification Products” (PSAPs). (re: attached notes), Sign language, Interpreter (Human, voice to text software)

• Bargaining power of customers (buyers) - Doctors & Clinics (high), end customers (moderate?)- e.g. IndiCure (Slide#137) offers special discounted prices to customers.

• Bargaining power of suppliers (low?)

• Intensity of competitive rivalry (high?)

Threats of new entrants (low)

• Even if a new drug is found, it is a lengthy process for any approval by authority.

• The artificial regeneration of hair cells within the cochlea seemed to be a long way away

Industry Analysis- Rivals (High)• (USA) FDA approved:

– Cochlear Corporation: Nucleus– Advanced Bionics: Clarion– Med-EL: Combi-40+– AllHear: AllHear single channel

• Antwerp Bionic Systems: Laura (now owned by Cochlear)• MXM Laboratories: Digisonic• (In Europe, Africa, Asia, South America, and Canada): Neurelec (France, a division of William

Demant)• (some parts of the world ): Nurotron (China)• (India): The Defence Research and Development Organisation• (South Korea): The Seoul National University Hospital

• Each manufacturer has adapted some of the successful innovations of the other companies to its own devices. There is no clear-cut consensus that any one of these implants is superior to the others. Users of all four devices display a wide range of performance after implantation.

Industry Analysis- Rivals

Industry Analysis- Rivals

Industry Analysis- Rivals

value chain analysisPlease construct one

Core Competencies

• 65% share of cochlear implants with 250,000 customers • Cochlear has a deep geographical reach, selling in over 100

countries.• Cochlear has a direct presence in approximately 20

countries and uses distributors and agents in the balance.• Cochlear offers a range of advanced solutions to address

different types of hearing loss• Cochlear has received approval to start selling its hybrid

hearing implant in the US, opening up the medical device maker’s market to adults with partial hearing loss, as opposed to only the profoundly deaf

Core Competencies

• Cochlear has started post-surgery care of implant recipients , enable medical teams to focus on new patients and test new ideas

Core Competencies

• COCHLEAR LAUNCHES NUCLEUS® PROFILE™ IMPLANT SERIES IN EUROPE 2 June 2014

• The thinnest implant body on the market.• It has CE (for Europe) approval, waiting for

regulatory approval from other markets.

Core Competencies

• Strong presence in EMEA (Europe, the Middle East and Africa), Cochlear Academy in Mechelen, Belgium, established in 2004, provides training for external customers and internal staff so that Cochlear products can be used optimally and with best results.

Market Potential

• TechNavio's analysts forecast the Global Cochlear Implants market to grow at a CAGR (compound annual growth rate) of 13.6 % over the period 2011-2015

Corporate Growth Strategy

• Concentration Vertical Growth Strategy with Forward Integration

• Cochlear purchased distributors in many countries

Offices

Generic Business Strategies

• How broad is your market? (Scope)• What is your competitive basis? (CA)• What timing?• How will you confront competitors? (Cost,

Differentiation or Focus?)

60

Three Generic Strategies

5-61

Cost Structure

Mar

ket S

cope

(Seg

men

tatio

n)

Narro

w(a

seg

men

t)Br

oad

(Indu

stry

wid

e)Low CostUniqueness perceived by

Customers (Higher Cost)

CostLeadership(Operationaleffectiveness)

Differentiation(StrategicPositioning)

CostFocus

DifferentiationFocus

Competitive Advantage

Remember, everything a firm does to practice these generic strategies takes place in the value chain

1. Overall Cost Leadership

Tight set of interrelated tactics that includes:

• Tight cost and overhead control• Avoidance of marginal customer accounts• Cost minimization (not cost-cutting) in all

activities in the firm’s value chain– Not at the expense of delivering value– Process perspective

• Primarily defensive

5-62

Cost leadership• Danger, danger …someone will undercut

you. Why? How?• Price, quality: Value proposition- A balancing act• Aldi;

• Mass market– Seek benefits from economies of scale,

experience curve (& if relevant economies of scope) e.g. Heinz and baked beans

• Cost leadership is a footing, a means, not an end, to good strategy

Competitive Advantage Based on Low-Cost Leadership

Infrastructure

Human Resource Management

Technology Development

Procurement

PRIMARY ACTIVITIES

SU

PP

OR

T A

CT

IVIT

IES

Centralized cost controls

Intensive training to emphasize cost savings means; encourage employees to look for new ways to improve methods

Economies of scale of R&D and technology development; learning and experience amortized over large volume

Purchasing from numerous sources; strong bargaining power with suppliers

Large shipments; massive warehouses

Economies of scale in plants; experience effects

Mass marketing; mass distribution; national ad campaigns

Bulk or large order shipment

Centralized service facilities in region

Inbound Logistics

Operations Outbound Logistics

Marketing / Sales

Service

Reprinted/Adapted with the permission of The Free Press, a division of Simon & Shuster, Inc., from COMPETITIVE ADVANTAGE: Creating and Sustaining Superior Performance, by Michael E. Porter. Copyright ©1985 by Michael E. Porter.

(It takes place in the value chain)

• Remember: Cost is cost, price is price• Make achievement of meaningful lower costs

than rivals the theme of firm’s strategy: “I am reducing cost so that ...”

• Include features and services in product offering that buyers consider essential

• Find approaches to achieve a cost advantage in ways difficult for rivals to copy or match

Experience curve & learning

• Every time total output (all that is produced in the life time of the company), costs drop by a certain percentage, depending on industry

• Typically 25% or so for a manufacturing• Impact on cost:

– Why do OEMs exists?

Translating a Low-Cost Advantage into Higher Profits:

• earn high profits because its costs are lower than competitors charging a similar price (Woolworths)

• charge a lower price than competitors so increasing sales and market share (Red Dot / rugs a million)

• enter new markets charging a lower price than competitors (Aldi / Kao)

• Boost profits by reducing unit costs (Heinz baked beans)

Pitfalls of Overall Cost Leadership Strategies

• Too much focus on one or a few value-chain activities

• All rivals share a common input or raw material• The strategy is imitated too easily• A lack of parity on differentiation• Erosion of cost advantages when the pricing

information available to customers increases• Remember cost leadership is only a means to

an end

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•Technology broadly shared

•Marketing myopia, losing sight of the customers’ needs

Pitfalls of Overall Cost Leadership Strategies

2. Differentiation

• Prestige or brand image• Technology• Innovation• Features• Customer service• Dealer (channel) network

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Which parts of the value chain give you these differentiation opportunities?

Differentiation Strategies• Incorporate differentiating features that

cause buyers to prefer firm’s product or service over brands of rivals

• Find ways to differentiate that create value for buyers and are not easily matched or cheaply copied by rivals: Competitive Advantage

Differentiation

• Firms may differentiate along several dimensions at once

• Successful differentiation requires integration with all parts of a firm’s value chain

• An important aspect of differentiation is speed or quick response

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Competitive Advantage Based on Differentiation

PRIMARY ACTIVITIES

Inbound Logistics

Operations Outbound Logistics

Marketing / Sales

Service

SU

PP

OR

T A

CT

IVIT

IES

Reprinted/Adapted with the permission of The Free Press, a division of Simon & Shuster, Inc., from COMPETITIVE ADVANTAGE: Creating and Sustaining Superior Performance, by Michael E. Porter. Copyright ©1985 by Michael E. Porter.

Infrastructure

Human Resource Management

Technology Development

Procurement

Try to coordinate activities tightly among functions; build quality into organizational practices

Heavy R&D expenditures to make distinctive or even unique products; refinement of high quality manufacturing and technology processes;

emphasis on excellence, world class quality

Treat employees as special team members; emphasize design incentives to promote quality

Selective purchasing from best or world-class suppliers.

Use of best materials, parts and components

Extremely fine quality manufactured workmanship emphasized

Fast delivery to distributors; extra care in packaging and transport

Special, distinctive ads; Technical sales and know-how

High emphasis on treating customer as special individual; fast, special service

Differentiation: Improving Competitive Position (5 forces)

• Creates higher entry barriers due to customer loyalty

• Reduces buyer power because buyers lack suitable alternative

• Provides higher margins that enable the firm to deal with supplier power

• Establishes customer loyalty and hence less threat from substitutes

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Potential Pitfalls of Differentiation Strategies

• Uniqueness that is not valuable (Mkt determines Value)

• Too much differentiation• Too high a price premium• Differentiation that is easily imitated• Not spending more to achieve differentiation

than the price premium that can be charged

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3. Focus

• Focus is based on the choice of a narrow competitive scope within an industry– Firm selects a segment or group of segments

(niche) and tailors its strategy to serve them– Firm achieves competitive advantages by

dedicating itself to these segments exclusively– 3a Cost focus or 3b differentiation focus

5-77

Focus / Niche Strategies• Involve concentrated attention on a

narrow piece of the total market– Serve niche buyers better than rivals (Morgan Car)

• Choose a market niche where buyers have distinctive preferences, special requirements, or unique needs and develop unique capabilities to serve them

Morgan +4: 100% hand-made, traditional yet modern (powerful engine); bygone era

Approaches to Defining a Market Niche

• Geographic uniqueness: mountain, snow

• Specialized requirements inusing product/service: surgical equipment– Cochlear implants

• Special product attributes appealing only to niche buyers:– Spitfire

Handcrafted in Australia; retails:-DIY: ~$200000-Assembled: $250,000

What Makes a NicheAttractive for Focusing?

• Big enough to be profitable and offers good growth potential

• Not crucial to success of industry leaders otherwise …: GM Volt vs Tesla

• Costly or difficult for multi-segment competitors to meet specialized needs of niche members: barrier to entry– Focuser has resources and capabilities to effectively serve an

attractive niche: B & B’s

• Few other rivals are specializing in same niche• Focuser can defend against challengers via superior

ability to serve niche members

3(a) Focus – low cost

5-81

Can be similar to overall cost leadership, but on a narrow segment-based approach

Chosen segment’s needs are less than the average needs

Operate at a substantially lower cost than competitors

Better profitability, combining segment focus and cost management

3(b) Focus – differentiation

5-82

When the needs of the chosen segment are above the average

Customers willing to pay a premium priceHigher cost structures Substantial profits

Pitfalls of Focus Strategies

• Erosion of cost advantages within the narrow segment

• Focused products and services still subject to competition from new entrants and from imitation

• Focusers can become too focused to satisfy buyer needs

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Pitfalls of Focus Strategies

5-84

Size does matterHigher cost structuresSuppliers generally have more powerTechnology changes may reduce barriers to

entry, e.g. web design using Joomla CMS, Word Press

Macro-environmental changes, e.g. bloggers offering new advertising media.

Attracting larger, better-resourced competitors.

In practice• Competitors find effective ways to match a focuser’s

capabilities in serving niche (YHA vs Base (owned by Accor)). Will we see a B & B chain?

• Niche buyers’ preferences shift towards product attributes desired by majority of buyers – niche becomes part of overall market i.e. niche becomes mainstream: greywater, solar power, skateboarding

• Segment becomes so attractive it becomes crowded with rivals, causing segment profits to be splintered

• With the advent of technology and with bigger providers taking over smaller providers to grow and gain market share, a focus strategy is fraught with danger. The niches become smaller and smaller

Combination Approaches (stuck in the middle)

• Automated and flexible manufacturing systems• Exploiting the profit pool concept for competitive

advantage• Coordinating the “extended” value chain by way

of information technology

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Combination Approaches (stuck in the middle)

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Cost Structure

Mar

ket S

cope

(Seg

men

tatio

n)

Narro

wBr

oad

Low CostHigher Cost

CostLeadership(Operationaleffectiveness)

Differentiation(StrategicPositioning)

Combination Approaches

CostFocus

DifferentiationFocus

Combination Strategies: Improving Competitive Position

• Combination strategies– High entry barriers– Bargaining power over suppliers– Reduces power of buyers (fewer competitors)– Value position reduces threat from substitute

products– Reduces the possibility of head-to-head

rivalry

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Pitfalls of Combination Strategies

• Firms that fail to attain both strategies may end up with neither and become “stuck in the middle”

• Miscalculating sources of revenue and profit pools in the firm’s industry

5-89

Timing

• 1st mover or late mover?– Risk factors– Barriers to entry? E.g. patent, proprietary

knowledge

Advantages:– Pioneering helps build firm’s image and reputation: Apple: iPod,

iphone; switching costs are high. First Mover Advantage.

• Mercedes Hydrogen car

– Early commitments to new technologies, new-style components, and distribution channels can produce cost advantage: experience curve, economies of scope, economies of scale:

• amazon

– Loyalty of first time buyers is high:

• On-going commitment?

• Element of self-image?

– Moving first can be a preemptive strike: Just before Gillette launched the G3 in Australia, Schick blitzed the market with its 2-blade product touting enhanced nick protection

5-91

Location tactics:

• Frontal (head-on): Coles and Woolworths supermarkets

• Flanking (attack on the sides): 7-up vs Colas• Bypass: Dyson• Guerrilla: Aldi• Encirclement/Multi-front: Woolworths and

Wesfarmers• Pre-emptive

Based on your analysis of the external environment (general and the industry), this is the anticipated trajectory the environment will take Based on your

analysis of the organisation (capabilities, competencies, current business strategy and corporate strategy (next week)), this is the anticipated trajectory your organisation is taking

Closing the gap

• 2 choices:– Change the environment:

• Disruptive innovations• Lobbying

– Change the company:• Change your corporate strategy

– Change the growth direction– Change your portfolio– Change the parenting skills

• And/or Change your business strategy:– Reconstruct your value chain

All of these require you to change your organisation’s capabilities. You will rarely close the gap by choosing only 1 of these options

Directional strategy

• Directional strategy is concerned with the firm’s orientation towards growth

• What’s driving your direction?• 3 options :

1.Growth Strategies (expand activities)2.Stability Strategy (no change to activities)3.Retrenchment Strategy (reduce activities)

Corporate Directional Strategies

Corporate directional strategies

Growth

Stability

Retrenchment

Growth and use of funds: how much do you have?

• Index of Sustainable Growth Robert L. Higgins, this index helps determine the level of growth of sales beyond which external capital will be needed. In other words, when planning for a specific growth in sales, one must be aware of whether external financing will be needed.

Index of Sustainable Growth

g = (X1 (1 - X2) (1 + X3)) / (X4 - (X1 (1 - X2) (1 + X3)))

X1 = Profit Margin = (Income before Taxes / Sales) * 100

X2 = Dividend Payout Ratio = Total Dividends / Net Income

X3 = Leverage = Liabilities / Equity

X4 = (Assets / Sales) * 100

• If Sales growth forecast are above g:– External financing (equity or debt) should be

sought after,– or the profit margin should be improved,– or the distribution of dividends should be lower,– or the level of assets should be lower (lease

instead of buy)• Use of funds to grow organically or externally

Decision 1 Decision 2 Decision 3VerticalHorizontal

ConcentricRelated Industry Value Chain

ConglomerateUnrelated industry value chain

Same industry value chain

Inte

rnal

or E

xter

nal

Concentration

Growth options

Growth Strategies: Internal/External

• Internal: Corporation can grow internally (aka organic growth) by expansion of operations globally and domestically:

• External: OR through Mergers, Acquisitions and Strategic Alliances (external growth)

Decision 1 Decision 2 Decision 3VerticalHorizontal

ConcentricRelated Industry Value Chain

ConglomerateUnrelated industry value chain

Same industry value chain

Inte

rnal

or E

xter

nal

Concentration

Growth optionsVertical growth or Horizontal growth

Diversification

Growth Strategies

Basic Concentration Strategies:

–Vertical growth

–Horizontal growth

Growth Strategies– Concentration

• Vertical Growth: integrating forwards or backwards on the same industry value chain– Reasons:

» Reduce power of suppliers/buyers» Maintain a channel to buyer» Access to raw materials

– Issue of costs– Carter Holt Harvey:

» Forestry - sawmilling- paper products

• Horizontal Growth: Same point on same industry value chain– More products within the industry to same

market or same product in different (usually geographic) markets

– E.g. bank sells mortgages plus credit cards, insurance (more products to same market)

– Wizard Home loans expansion to WA (same product in diff mkt)

Growth Strategies

Basic Diversification Strategies:

– Concentric Diversification

– Conglomerate Diversification

By Concentric Growth– Growth via related industries

• Leverage off distinctive competencies that can be applied in different industries: Search for synergies

• useful when firm holds strong competitive position but industry attractiveness is low

• McCafe– Potential economies of scope

Conglomerate Diversification: When?

By Conglomerate diversificationExample: Wesfarmers and Coles

growth in unrelated industries Unattractive current industry: Lack of product skills to transfer to other related

industries – use conglomerate diversification Focus is on financial considerations $rich company with limited opportunities in current

industry moves into industry with big opportunities but sparse cash

Mergers, Acquisitions, Takeovers

• External growth strategies • External growth strategies can take the same form as

internal : in the form concentration (horizontal/vertical) or diversification (concentric/conglomerate) via mergers, acquisitions and takeovers

Mergers Transaction involving 2 or more companies in which

stock is exchanged However, only 1 company survives Usually occur between firms of a similar size and are

“friendly” Resulting firm likely to have a name derived from its

composite firms e.g. Pricewaterhouse Coopers

Reasons for Acquisitions

Increased market power – size of the firm and its resources and capabilities to compete in the marketplace: Invocare and Bledisloe Holdings

Overcoming entry barriersinternational entry/market segment entry SAB Miller (no. 2) wants to enter Australia via Foster’s

Cost of new product development Microsoft

Increased speed to market: Volvo and Geely Lower risk than new product development

Increased diversification: blessing and curse Avoid excessive competition: takeover competitor: Wild

Oats+ and Whole Foods

Acquisitions

Problems in achieving success

Adapted from Figure 7.1

Integration difficulties

Inadequate evaluation of target

Large or extraordinary debt

Inability to achieve synergy

Too much diversification

Managers overly focused on acquisitions

Too large

Problems in achieving acquisition success (cont’d)Integration difficulties

Melding two disparate corporate cultures: Daimler Chrylser

Linking different financial and control systemsBuilding effective working relationships (particularly

when management styles differ)Resolving problems regarding the status of the

newly acquired firm’s executivesRetaining key personnel: which CEO stays?

Problems in achieving acquisition success (cont’d)Inadequate evaluation of the target

Due diligenceThe process of evaluating a target firm for

acquisition• Ineffective due diligence may result in the

acquirer paying an excessive premium One of the issues behind the failure of

HIH Insurance Group

Problems in achieving acquisition success (cont’d)Inadequate evaluation of the target

Evaluation requires examining the:Financing of the intended transactionDifferences in culture between acquiring

and target firmsTax consequences of the transactionActions necessary to meld two

workforcesHuman capital aspects: knowledge and

experience

Problems in achieving acquisition success (cont’d)

Large or extraordinary debtHigh debt taken on by the firm can:

Increase the likelihood of bankruptcy: z-score?

Impact on profitability, ability to raise additional debt

Lead to downgrading of its credit ratingPreclude investment in:

• Research and development• Human resource training• Marketing

Problems in achieving acquisition success (cont’d)Inability to achieve synergy

Synergy exists when assets create more value working together than they do independentlyPepsi and food holdings

Firms experience transaction costs when using acquisition strategies to create synergyFirms may underestimate costs:

• Direct – such as bank charges• Indirect – such as investment of managerial time

Problems in achieving acquisition success (cont’d)Too much diversification

Firms must process more informationBroad scope may cause managers to rely too much

on financial rather than strategic controlsReinforcing cycle of acquisitions becomes a

substitute for internal innovation. Over time, the firm becomes increasingly reliant on other companies’ innovations

Point of diminishing utilityPepsiCo: Used to own KFC, Taco Bell, Pizza Hut,

Wilson Sporting Goods;

Problems in achieving acquisition success (cont’d)Too large

Additional costs of controls may exceed the benefits of the economies of scale and additional market power: e.g. Saatchi and Saatchi

More bureaucratic controls due to large size:Formalised controls often lead to relatively rigid and

standardised managerial behaviourFirm may become less flexible and then produce

less innovationChallenge of becoming big while retaining the

flexibility of being small: 3M

Defensive strategies

• Especially relevant in a mature market• Continually dictate terms to the market:

• Maintain the Blue ocean - create new demand in an uncontested market • Structural barriers:

• See Porter’s Barriers to entry• Retaliation:

• Proctor and Gamble’s fighting brand• HP introduced Apollo (<$100) in 1999. Brand withdrawn in 2002.

– (what would happen if Hoyts opened North of the river?)

• Lower inducement to attack– This is what Woolworths might end up doing in the supermarket segment– Beware a defense based on cost-cutting– Someone will ALWAYS undercut you

• Why?

Some ideas• Block Avenues Open to Challengers:

– Participate in alternative technologies that deliver the same value

– Introduce new features, add new models, or broaden product line to close gaps rivals may pursue

– Maintain economy-priced models– Increase warranty coverage– Offer free training and support services– Reduce delivery times for spare parts– Make early announcements about new products or

price changes– Challenge quality or safety of rivals’ products using

legal tactics– Sign exclusive agreements with distributors

Growth Strategies: Internal/External

• Internal: Corporation can grow internally (aka organic growth) by expansion of operations globally and domestically:

• External: OR through Mergers, Acquisitions and Strategic Alliances (external growth)

Decision 1 Decision 2 Decision 3VerticalHorizontal

ConcentricRelated Industry Value Chain

ConglomerateUnrelated industry value chain

Same industry value chain

Inte

rnal

or E

xter

nal

Concentration

Growth optionsVertical growth or Horizontal growth

Diversification

Cost of Cochlear Implant Surgery

• Cochlear Implants and surgery cost much higher in western countries as compared to developing countries

• The cost of cochlear implant surgery at NHS is approximately £40,000 and the device itself costs approximately £18,000 thus totaling to £58,000 or approximately 90,000 USD.

• In India, the cost of Pre Surgery Tests –is about $1000, Implantation - $5000 US Dollars, Cost of cochlear Instrumentation - $15000 to 25000

• It is more economical to get the surgery done in India as compared to UK or USA.

www.indicure.com.ng

Cochlear Implant Surgery in India

• Excellent health care facilities• State-of-the art hospitals• Best of cochlear implant surgeons• Affordable Cost• English speaking hospital staff• Peaceful recovery• Scenic locations

www.indicure.com.ng

Cochlear Implants in India with IndiCure

• The most trusted medical tourism company• Round the clock assistance• Offers special discounted prices• Prompt services• Visa assistance and travel planning• Complete transparency

www.indicure.com.ng

Stay Hungry, Stay Foolish

• Stay Hungry - Never be satisfied, and always push yourself further.

• Stay Foolish - Do the things people say cannot be done.

One last video

“Don’t ever let someone tell you, you can’t do something. Not even me.”~ Chris Gardner – On Pursuits Of Happyness

Jack Ng

Thank you for being so wonderful!

Slide 132