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Ch2-1
The External Environment:Opportunities, Threats, Industry
Competition, and Competitor Analysis
The External Environment:Opportunities, Threats, Industry
Competition, and Competitor Analysis
Ch2-2
Political/Legal
Political/Legal
EconomicEconomic
TechnologicalTechnological
GlobalGlobal
DemographicDemographicSocioculturalSociocultural
CompetitiveCompetitiveEnvironmentEnvironment
Industry Environment
Industry Environment
Components of the General EnvironmentComponents of the General Environment
Ch2-3
SWOT Analysis
• Strengths
• Weaknesses
• Opportunities
• Threats
Ch2-4
The purpose of SWOT Analysis
• It is an easy-to-use tool for developing an overview of a company’s strategic situation– It forms a basis for matching your
company’s strategy to its situation
Ch2-5
The purpose of Five-Forces Analysis
• The five forces are environmental forces that impact on a company’s ability to compete in a given market.
• The purpose of five-forces analysis is to diagnose the principal competitive pressures in a market and assess how strong and important each one is.
Ch2-6
Threat of New
Entrants
Threat of New
Entrants
Threat of New
Entrants
Threat of New
Entrants
Porter’s Five Forces Model of CompetitionPorter’s Five Forces Model of Competition
Ch2-7
Threat of New EntrantsThreat of New Entrants
Barriers to Entry
Barriers to Entry
Expected RetaliationExpected Retaliation
Government PolicyGovernment Policy
Economies of ScaleEconomies of Scale
Product DifferentiationProduct Differentiation
Capital RequirementsCapital Requirements
Switching CostsSwitching Costs
Access to Distribution ChannelsAccess to Distribution Channels
Cost Disadvantages Independent Cost Disadvantages Independent of Scaleof Scale
Ch2-8
Bargaining Power of Suppliers
Bargaining Power of Suppliers
Threat of New
Entrants
Threat of New
Entrants
Threat of New
Entrants
Porter’s Five Forces Model of CompetitionPorter’s Five Forces Model of Competition
Ch2-9
Bargaining Power of SuppliersBargaining Power of Suppliers
Suppliers exert power in the industry by:Suppliers exert power in the industry by:
* Threatening to raise* Threatening to raiseprices or to reduce qualityprices or to reduce quality
Powerful suppliers can squeeze industry profitability if firms are unable to recover cost increases
Powerful suppliers can squeeze industry profitability if firms are unable to recover cost increases
Suppliers are likely to be powerful if:Suppliers are likely to be powerful if:
Supplier industry is dominated by a Supplier industry is dominated by a few firmsfew firms
Suppliers’ products have few substitutesSuppliers’ products have few substitutes
Buyer is not an important customer to Buyer is not an important customer to suppliersupplier
Suppliers’ product is an important Suppliers’ product is an important input to buyers’ productinput to buyers’ product
Suppliers’ products are differentiatedSuppliers’ products are differentiated
Suppliers’ products have high Suppliers’ products have high switching costsswitching costs
Supplier poses credible threat of Supplier poses credible threat of forward integrationforward integration
Ch2-10
Bargaining Power of Buyers
Bargaining Power of Buyers
Threat of New
Entrants
Threat of New
Entrants
Threat of New
Entrants
Bargaining Power of Suppliers
Bargaining Power of Suppliers
Porter’s Five Forces Model of CompetitionPorter’s Five Forces Model of Competition
Ch2-11
Bargaining Power of BuyersBargaining Power of Buyers
Buyers compete with the supplying
industry by:
Buyers compete with the supplying
industry by:
* Bargaining down prices* Bargaining down prices
* Forcing higher quality* Forcing higher quality
* Playing firms off of* Playing firms off ofeach othereach other
Buyer groups are likely to be powerful if:Buyer groups are likely to be powerful if:
Buyers are concentrated or purchases Buyers are concentrated or purchases are large relative to seller’s salesare large relative to seller’s sales
Purchase accounts for a significant Purchase accounts for a significant fraction of supplier’s salesfraction of supplier’s sales
Products are undifferentiatedProducts are undifferentiated
Buyers face few switching costsBuyers face few switching costs
Buyers’ industry earns low profitsBuyers’ industry earns low profits
Buyer presents a credible threat of Buyer presents a credible threat of backward integrationbackward integration
Product unimportant to qualityProduct unimportant to quality
Buyer has full informationBuyer has full information
Ch2-12
Threat of Substitute Products
Threat of Substitute Products
Threat of New
Entrants
Threat of New
Entrants
Threat of New
Entrants
Bargaining Power of Buyers
Bargaining Power of Buyers
Bargaining Power of Suppliers
Bargaining Power of Suppliers
Porter’s Five Forces Model of CompetitionPorter’s Five Forces Model of Competition
Ch2-13
Threat of Substitute ProductsThreat of Substitute Products
Products with similar function limit the prices firms can charge
Products with similar function limit the prices firms can charge
Keys to evaluate substitute products:Keys to evaluate substitute products:
Products with improving Products with improving price/performance tradeoffs price/performance tradeoffs relative to present industry relative to present industry productsproducts
Example:Example:
Electronic security systems in Electronic security systems in place of security guardsplace of security guards
Fax machines in place of Fax machines in place of overnight mail deliveryovernight mail delivery
Ch2-14
Threat of Substitute Products
Threat of Substitute Products
Threat of New
Entrants
Threat of New
Entrants
Threat of New
Entrants
Rivalry Among Competing Firms
in Industry
Rivalry Among Competing Firms
in Industry
Bargaining Power of Buyers
Bargaining Power of Buyers
Bargaining Power of Suppliers
Bargaining Power of Suppliers
Porter’s Five Forces Model of CompetitionPorter’s Five Forces Model of Competition
Ch2-15
Rivalry Among Existing CompetitorsRivalry Among Existing Competitors
Intense rivalry often plays out in the following ways:Intense rivalry often plays out in the following ways:
Jockeying for strategic positionJockeying for strategic position
Using price competitionUsing price competition
Staging advertising battlesStaging advertising battles
Making new product introductionsMaking new product introductions
Increasing consumer warranties or serviceIncreasing consumer warranties or service
Occurs when a firm is pressured or sees an opportunityOccurs when a firm is pressured or sees an opportunity
Price competition often leaves the entire industry worse offPrice competition often leaves the entire industry worse off
Advertising battles may increase total industry demand, but Advertising battles may increase total industry demand, but may be costly to smaller competitorsmay be costly to smaller competitors
Ch2-16
CutthroatCutthroat competitioncompetition is more likely to occur when: is more likely to occur when:
Rivalry Among Existing CompetitorsRivalry Among Existing Competitors
Numerous or equally balanced competitorsNumerous or equally balanced competitors
Slow growth industrySlow growth industry
High fixed costsHigh fixed costs
Lack of differentiation or switching costsLack of differentiation or switching costs
High storage costsHigh storage costs
Capacity added in large incrementsCapacity added in large increments
High strategic stakesHigh strategic stakes
High exit barriersHigh exit barriers
Diverse competitorsDiverse competitors
Ch2-17
The Five Forces are Unique to Your Industry
• Five-Forces Analysis is a framework for analyzing a particular industry.– Yet, the five forces affect all the other
businesses in that industry.
Ch2-18
The auto manufacturing industry is considered to be highly capital and labor intensive. The major costs for producing and selling automobiles include:1.Labor2.Materials3.Advertising 4.Original Equipment Manufacturers (OEMs) 5.Replacement Parts Production and Distribution 6.Rubber Fabrication
Ch2-19
Key Players In North America, the automobile production market is dominated by what's known as the Big Three:
1.General Motors - Produces Chevrolet, Pontiac, Buick and Cadillac, among others. 2.Chrysler - Chrysler, Jeep and Dodge.
3.Ford Motor Co - Ford, Lincoln and Volvo.
Ch2-20
Two of the largest foreign car manufacturers are:
1.Toyota Motor Co 2.Honda Motor Co
Ch2-21
Porter's 5 Forces Analysis
1.Threat of New Entrants. It's true that the average person can't come along and start manufacturing automobiles. Historically, it was thought that the American automobile industry and the Big Three were safe. But this did not hold true when Honda Motor Co. opened its first plant in Ohio. The emergence of foreign competitors with the capital, required technologies and management skills began to undermine the market share of North American companies.
Ch2-22
2. Power of Suppliers The automobile supply business is quite
fragmented (there are many firms). Many suppliers rely on one or two automakers to buy a majority of their products. If an automaker decided to switch suppliers, it could be devastating to the previous supplier's business. As a result, suppliers are extremely susceptible to the demands and requirements of the automobile manufacturer and hold very little power.
Ch2-23
3.Power of Buyers. Historically, the bargaining power of automakers went
unchallenged. The American consumer, however, became disenchanted with many of the products being offered by certain automakers and began looking for alternatives, namely foreign cars. On the other hand, while consumers are very price sensitive, they don't have much buying power as they never purchase huge volumes of cars.
Ch2-24
4.Availability of Substitutes.
Be careful and thorough when analyzing this factor: we are not just talking about the threat of someone buying a different car. You need to also look at the likelihood of people taking the bus, train or airplane to their destination. The higher the cost of operating a vehicle, the more likely people will seek alternative transportation options
Ch2-25
5.Competitive Rivalry. Highly competitive industries generally earn low
returns because the cost of competition is high. The auto industry is considered to be an oligopoly, which helps to minimize the effects of price-based competition. The automakers understand that price-based competition does not necessarily lead to increases in the size of the marketplace; historically they have tried to avoid price-based competition, but more recently the competition has intensified - rebates, preferred financing and long-term warranties have helped to lure in customers, but they also put pressure on the profit margins for vehicle sales.
Ch2-26
BOSTON CONSULTING GROUP MATRIX
Ch2-27
INTRODUCTIONBOSTON CONSULTING GROUP (BCG)
MATRIX is developed by BRUCE HENDERSON of the BOSTON CONSULTING GROUP IN THE EARLY 1970’s.
According to this technique, businesses or products are classified as low or high performers depending upon their market growth rate and relative market share.
Ch2-28
Relative Market Share and Market Growth
To understand the Boston Matrix you need to understand how
market share and market growth interrelate.
Ch2-29
MARKET SHARE
• Market share is the percentage of the total market that is being serviced by your company, measured either in revenue terms or unit volume terms.
• RELATIVE MARKET SHARE
• RMS = Business unit sales this year Leading rival sales this year
• The higher your market share, the higher proportion of the market you control.
Ch2-30
MARKET GROWTHRATE
• Market growth is used as a measure of a market’s attractiveness.
• MGR = Individual sales - individual sales this year last year Individual sales last year • Markets experiencing high growth are ones where the
total market share available is expanding, and there’s plenty of opportunity for everyone to make money.
Ch2-31
THE BCG GROWTH-SHARE MATRIX
• It is a portfolio planning model which is based on the observation that a company’s business units can be classified in to four categories:
Stars Question marks Cash cows Dogs
• It is based on the combination of market growth and market share relative to the next best competitor.
Ch2-32
Ch2-33
STARSHigh growth, High market share
• Stars are leaders in business.
• They also require heavy investment, to maintain its large market share.
• It leads to large amount of cash consumption and cash generation.
• Attempts should be made to hold the market share otherwise the star will become a CASH COW.
Ch2-34
CASH COWS Low growth , High market share
• They are foundation of the company and often the stars of yesterday.
• They generate more cash than required.
• They extract the profits by investing as little cash as possible
• They are located in an industry that is mature, not growing or declining.
Ch2-35
DOGSLow growth, Low market share
• Dogs are the cash traps.
• Dogs do not have potential to bring in much cash.
• Number of dogs in the company should be minimized.
• Business is situated at a declining stage.
Ch2-36
QUESTION MARKSHigh growth , Low market share
• Most businesses start of as question marks.• They will absorb great amounts of cash if the
market share remains unchanged, (low).• Why question marks?• Question marks have potential to become star
and eventually cash cow but can also become a dog.
• Investments should be high for question marks.
Ch2-37
WHY BCG MATRIX ?
To assess : Profiles of products/businesses The cash demands of products The development cycles of products Resource allocation and divestment
decisions
Ch2-38
MAIN STEPS OF BCG MATRIX
• Identifying and dividing a company into SBU.• Assessing and comparing the prospects of each
SBU according to two criteria :
1. SBU’S relative market share.
2. Growth rate OF SBU’S industry.• Classifying the SBU’S on the basis of BCG
matrix.• Developing strategic objectives for each SBU.
Ch2-39
BCG MATRIX WITH CASH FLOW
Ch2-40
BENEFITS
• BCG MATRIX is simple and easy to understand.
• It helps you to quickly and simply screen the opportunities open to you, and helps you think about how you can make the most of them.
• It is used to identify how corporate cash resources can best be used to maximize a company’s future growth and profitability.
Ch2-41
LIMITATIONS
• BCG MATRIX uses only two dimensions, Relative market share and market growth rate.
• Problems of getting data on market share and market growth.
• High market share does not mean profits all the time.
• Business with low market share can be profitable too.
Ch2-42
Snack Foods Beverages
Foods
Frito-Lay North AmericaFrito-Lay International
Pepsi-Cola North AmericaGatorade/Tropicana North AmericaPepsiCo Beverages International
Quaker North America
Ch2-43
Snack Foods
Frito-Lay North America
Lay’sRuffles DoritosSantitasFritos CheetosRold Gold
Funyuns Sunchips Cracker Jack Chester’s popcornGrandma’s cookiesMunchos Smartfood Baken-ets fried pork skinsOberto meat snacks
Ch2-44
Snack Foods
Frito-Lay International
Bocabits wheat snacksCrujitos corn snacksFandangos corn snacksHamkas snacksNiknaks cheese sticksQuavers potato snacksSabritas potato chips Twisties cheese snacks
Walkers potato crispsWalkers Square potato snacksWalkers Monster Munch Corn snacks Miss Vickie’s potato chipsGamesa cookiesDippasSonric’s sweet snacks
Ch2-45
Snack Foods
Frito-Lay International
Bocabits wheat snacksCrujitos corn snacksFandangos corn snacksHamkas snacksNiknaks cheese sticksQuavers potato snacksSabritas potato chips Twisties cheese snacks
Walkers potato crispsWalkers Square potato snacksWalkers Monster Munch Corn snacks Miss Vickie’s potato chipsGamesa cookiesDippasSonric’s sweet snacks
Ch2-46
Beverages
Pepsi-Cola North America
Pepsi-ColaMountain DewSliceMugSierra MistFruitWorks
Lipton Dole Aquafina Frappuccino SoBe AMP
Ch2-47
Beverages
Gatorade/Tropicana North America
GatoradePropelTropicanaDole juices
Ch2-48
Beverages
PepsiCo Beverages International
Loóza juices and nectarsCopella juicesFrui’Vita juicesTropicana 100 juices
Ch2-49
Foods
Quaker North America
Quaker OatsCap’n Crunch cerealLife cerealQuisp cerealKing Vitaman cerealMother’s cereal
Quaker rice cakes and granola barsRice-A-Roni side dishesNear East couscous/pilafsAunt Jemima mixes & syrupsQuaker grits
Ch2-50
Foods
Quaker North America
Quaker OatsCap’n Crunch cerealLife cerealQuisp cerealKing Vitaman cerealMother’s cereal
Quaker rice cakes and granola barsRice-A-Roni side dishesNear East couscous/pilafsAunt Jemima mixes & syrupsQuaker grits
Business Level Strategies
How are we going to compete and gain a competitive advantage in each of our businesses?
Ch2-51
Snack Foods Beverages
Foods
Corporate Level Strategy1) What businesses do we want to compete in?2) How do manage effectively across businesses
Ch2-52
Ch2-53
Ch2-54
54
Learning Outline
• Understand organizational strengths and weaknesses
• Understand the relationship between organizational resources, organizational capabilities, core competencies, and distinctive organizational capabilities
• Understand the Value Chain– Outsourcing
• How to do an Internal Analysis
• How to evaluate S&Ws
Ch2-55
55
SWOT Analysis
OrganizationStrengthsWeaknesses
Opportunities
Threats
Ch2-56
56
The Road to Competitive Advantage
OrganizationalResources
Financial assetsPhysical assetsHuman resourcesIntangible assetsStructural-cultural assets
OrganizationalCapabilities
Organizational processes and routines
Accumulated knowledgeActual work activities
CoreCompetencies
Distinctive OrganizationalCapabilities
Competitive Advantage
Performance Results
Ch2-57
57
The road to distinctive organizational capabilities
OrganizationalCapabilities
Organizational Capabilities •Fundamental building block for
developing core competencies • Organizational processes and
routines to get the work done
CoreCompetencies
Distinctive OrganizationalCapabilities
ResourcesTangible
Intangible
Ch2-58
58
The road to distinctive organizational capabilities
OrganizationalCapabilities
Organizational Capabilities •Fundamental building block for
developing core competencies •Organizational processes and
routines to get the work done
CoreCompetencies
Core Competencies•Fundamental skills and capabilities•Exploitable by organization•Major value-creating capabilities•Not a source of competitive advantage
Distinctive OrganizationalCapabilities
Ch2-59
59
Types of Core Competencies
• After-sale service capability• Skills in manufacturing a high quality
product (BMW)• System to fill customer orders accurately
and swiftly (Amazon; Dell)• Expertise in integrating multiple
technologies to create families of new products (W.L. Gore)
Ch2-60
60
The road to distinctive organizational capabilities
OrganizationalCapabilities
CoreCompetencies
Core Competencies •Not a source of competitive advantage •Fundamental skills and capabilities •Exploitable by organization •Major value-creating capabilities
Distinctive OrganizationalCapabilities
Distinctive Organizational Capabilities
•Special and unique capabilities •Distinguish from competitors •Sustainable competitive advantage •Outperform competition
Ch2-61
61
Honda’s Distinctive Capability
Expertise in gasoline engine
technology and small engine
design
Ch2-62
62
Procter & Gamble’s Distinctive Capabilities
Superb marketing-distribution skills
and R&D capabilities in five core
technologies - fats, oils, skin
chemistry, surfactants, emulsifiers
Ch2-63
Company Countryof Origin
Original core Business Key skills
Growth path
Honda Japan Motor cycles Piston engine designand development
Cars, lawnmowers, smallgenerators
Gillette USA Shaving products
Advertisingeffectiveness
Other toiletries, e.g. deodorants
McDonald's USA Hamburger restaurants
Site selection; Quality
standardization
Extension of openinghours to includebreakfast; productinnovation (fish, pizza,salads)
Ch2-64
United does offer more space in its Economy Plus seats. But only travelers who pay full fare or who are elite members of the miles program can get them. Its regular economy-class seats measure in at 31 inches of seat pitch.
Ch2-65
65
From Distinctive capabilities to competitive advantage
DistinctiveOrganizational
Capabilities
• Contributes toSuperior CustomerValue
• Can Be Usedin a Varietyof Ways
• Is Difficultfor Competitorsto Imitate
Ch2-66
66
Capabilities vs. Core Competenciesvs. Distinctive Capabilities
• A company capability is the product of organizational learning and experience and represents real proficiency in performing an internal activity
• A core competence is a well-performed internal activity that is central (not peripheral or incidental) to a company’s competitiveness and profitability
• A distinctive Capability is a competitively valuable activity that a company performs better than its rivals
Ch2-67
67
Value Chain Analysis
MARG
IN
MARGIN
SupportActivities{
Procurement
Technological Development
Human Resource Management
Firm Infrastructure
Primary Activities{Inbo
und
Logi
stic
s
Ope
ratio
ns
Out
boun
d Lo
gist
ics
Mar
ketin
g an
d Sa
les
Serv
ice
Ch2-68
68
From Value Chain Analysisto Competitive Advantage
Sustainable competitive advantage can be created by
1.Managing value chain activities better than rivals and/or
2.Developing distinctive value chain capabilities to serve customers!
Ch2-69
69
Other types of Internal Analysis
• Internal audit– Look at all functional areas and see which are
performing well
• Capabilities assessment profile– Analyze capabilities to identify potential
sources of competitive advantage
Ch2-70
70
Appeal of Outsourcing
• Outsourcing non-critical activities allows a firm to concentrate its energies and resources on those value-chain activities where it– Can create unique value
– Can be best in the industry
• Advantages to outsourcing– Decrease internal bureaucracies
– Flatten organization structure
– Provide firm with heightened strategic focus
Ch2-71
71
How do you do an internal analysis?
Step 1
Step 2
Step 3
Step 4
Step 5
Prepare current product-market profile.
Identify sources of competitiveadvantage and disadvantage inthe main product-market segments.
Describe all the organizationalcapabilities and competencies.
Sort the core capabilities andcompetencies according tostrategic importance.
Identify and agree onthe key capabilitiesand competencies.
Ch2-72
72
Identify Strategy-Critical Activities
• Which activities are strategy-critical depends – Particulars of a firm’s strategy– Value-chain make-up– Competitive requirements– External market conditions
• Identify strategy-critical activities– What business processes have to be performed extra well
or in timely fashion to achieve competitive advantage?– In what value-chain activities would poor work performance
impair strategic success?
Ch2-73
73
Criteria to Judge Organizational Strengths and Weaknesses
Are organizational resources and capabilitiesstrengths or weaknesses?
Past Performance Trends
Specific Goals or Targets
Comparison Against Competitors
Personal Opinions of StrategicDecision Makers or Consultants
Ch2-74
PRACTICAL USE
• MAHINDRA & MAHINDRA
• HLL
• IES
Ch2-75
BCG MATRIX
scorpio
Jeepbalero
Ch2-76
CONCLUSION
Though BCG MATRIX has its limitations it is one of the most FAMOUS AND SIMPLE portfolio planning matrix ,used by large companies having multi-products.
Ch2-77
Section 5
Corporate Level Strategy: Creating Value through
Diversification
Ch2-78
Vertical Integration
• Forward or backwards– Full integration– Taper integration
• Benefits– Barrier to entry– Specialized assets– Protecting product quality– Improved scheduling
• Risks– Costs– Rapid technological changes– Demand predictability
Ch2-79
Alternatives to Vertical Integration
• Competitive bidding
• Long term contracts or strategic alliances– Hostage taking– Credible commitments– Maintaining market discipline
Ch2-80
Outsourcing
• Cost reduction and differentiation
• Hold-ups, scheduling and hallowing out
Ch2-81
Snack Foods Beverages Foods
Frito-Lay North AmericaFrito-Lay International
Pepsi-Cola North AmericaGatorade/Tropicana North AmericaPepsiCo Beverages International
Quaker North America
Ch2-82
Snack Foods
Frito-Lay North America
Lay’sRuffles DoritosSantitasFritos CheetosRold Gold
Funyuns Sunchips Cracker Jack Chester’s popcornGrandma’s cookiesMunchos Smartfood Baken-ets fried pork skinsOberto meat snacks
Ch2-83
Snack Foods
Frito-Lay International
Bocabits wheat snacksCrujitos corn snacksFandangos corn snacksHamkas snacksNiknaks cheese sticksQuavers potato snacksSabritas potato chips Twisties cheese snacks
Walkers potato crispsWalkers Square potato snacksWalkers Monster Munch Corn snacks Miss Vickie’s potato chipsGamesa cookiesDippasSonric’s sweet snacks
Ch2-84
Snack Foods
Frito-Lay International
Bocabits wheat snacksCrujitos corn snacksFandangos corn snacksHamkas snacksNiknaks cheese sticksQuavers potato snacksSabritas potato chips Twisties cheese snacks
Walkers potato crispsWalkers Square potato snacksWalkers Monster Munch Corn snacks Miss Vickie’s potato chipsGamesa cookiesDippasSonric’s sweet snacks
Ch2-85
Beverages
Pepsi-Cola North America
Pepsi-ColaMountain DewSliceMugSierra MistFruitWorks
Lipton Dole Aquafina Frappuccino SoBe AMP
Ch2-86
Beverages
Gatorade/Tropicana North America
GatoradePropelTropicanaDole juices
Ch2-87
Beverages
PepsiCo Beverages International
Loóza juices and nectarsCopella juicesFrui’Vita juicesTropicana 100 juices
Ch2-88
Foods
Quaker North America
Quaker OatsCap’n Crunch cerealLife cerealQuisp cerealKing Vitaman cerealMother’s cereal
Quaker rice cakes and granola barsRice-A-Roni side dishesNear East couscous/pilafsAunt Jemima mixes & syrupsQuaker grits
Ch2-89
Foods
Quaker North America
Quaker OatsCap’n Crunch cerealLife cerealQuisp cerealKing Vitaman cerealMother’s cereal
Quaker rice cakes and granola barsRice-A-Roni side dishesNear East couscous/pilafsAunt Jemima mixes & syrupsQuaker grits
Business Level Strategies
How are we going to compete and gain a competitive advantage in each of our businesses?
Ch2-90
Snack Foods Beverages Foods
Corporate Level Strategy1) What businesses do we want to compete in?2) How do manage effectively across businesses
Ch2-91
Where did they go?
Ch2-92
Crafting Corporate Strategy
Moves to enter new businesses
Boosting combined performance of the businesses
Capturing synergies and turning them into competitive advantages
Establishing investment priorities and steering resources into business units
Ch2-93
How to Diversify?
1) Internal Development - corporate entrepreneurship– able to appropriate a larger portion of wealth– avoids complexities of multiple partners– time consuming and requires diversity of
organizational capabilities
Ch2-94
How to Diversify?
2) Strategic Alliances and Joint Ventures– entering a new market via the combination of
complementary resources - do more together– cost reduction– development/diffusion of technology
Problems with– appropriate partners - skills and compatibility– trust and commitment– communication
Ch2-95
Who Makes a Geo?
Geo Storm was actually manufactured by Isuzu. The Storm is the Isuzu Impulse.
Geo Prizm = Toyota Corolla
Geo Tracker = Suzuki Sidekick
Geo Metro = Suzuki Esteem or Swift w/hatchback
No Geo cars were actually made by General Motors. They were all imported from foreign manufacturers.
Ch2-96
Ch2-97
Ch2-98
How to Diversify?
3) Merger & Acquisition - acquisition of assets and capabilities of another company– high tech & technology intensive– access to products– consolidation– access to segments
Ch2-99
Alternative 10 point option
• In lieu of making a donation, you may write a 5 page, double spaced paper on how a specific company proactively pursues corporate responsible activities.
Ch2-100
Extra Credit – 10 points
• Girls’ and Boys’ Town, the original Father Flanagan's Boys' Home, is a leader in the treatment and care of abused, abandoned and neglected girls and boys. Throughout its 86-year history, the nonprofit, nonsectarian organization has provided these children with a safe, caring, loving environment where they gain confidence to get better and learn skills to become productive citizens.
Ch2-101
Extra Credit – 10 points
Bring one of the items listed below:
New/gently used backpacks or suitcases
Socks - 5 pairs
Shampoo and Conditioner – 3 pints
New/gently used sporting equipment
Refill bottle of 409/All purpose cleaner
Laundry detergent
Ch2-102
Extra Credit Drop off
BA1 Building - Room 307 Times: Wednesday 3/30 4:00 pm – 6:30 pm
Thursday 3/31 8:30 am – 9:30 am11:30 am – 8:00 pm
Friday 4/1 8:30 am – 11:00 amMonday 4/4 1:00 pm – 6:00 pmTuesday 4/5 8:30 am – 9:00 am
2:30 pm – 5:00 pmWednesday 4/6 4:00 pm – 6:30 pmThursday 4/7 8:30 am – 9:30 am
11:30 am – 8:00 pm
Ch2-103
Ch2-104
Ch2-105
Acquisitions
Reasons of Acquisitions
Increase Market Power
Overcome Entry Barriers
Increased Speed
Lower Risk
Avoid Competition
Ch2-106
Acquisitions
Reasons of Acquisitions
Increase Market Power
Overcome Entry Barriers
Increased Speed
Lower Risk
Avoid Competition
Problems with Acquisitions
Integration of two firms
Overpayment/Debt
Overestimation of Synergy
Overdiversification
Managerial energy absorption
Become too large
Substitute for innovation
Ch2-107
Acquisitions
Reasons of Acquisitions
Increase Market Power
Overcome Entry Barriers
Increased Speed
Lower Risk
Avoid Competition
Problems with Acquisitions
Integration of two firms
Overpayment/Debt
Overestimation of Synergy
Overdiversification
Managerial energy absorption
Become too large
Substitute for innovation
Results
Poor Performance
Who Wins?
Acquired FirmShareholders
Ch2-108
Monday October 27th WSJ
• Bank of American – Boston Fleet Financial– BoA down $8.29, or 10%, BFF rose 23%
• Anthem – WellPoint Health Networks– Anthem down 8.2%, WellPoint up 8.8%
• United Health – MidAtlantic Med Services– UH down 4.9%, MAMS up 9.7%
Ch2-109
Failures of Acquisitions
30 - 40% average acquisition premium
Acquiring firm’s value drops 4% in the 3 months following acquisitions
30 - 50% of acquisitions are later divested
Acquirers underperform S&P by 14%, peers by 4%
3 month performance before and after– 30% substantial losses, 20% some losses, 33%
marginal returns, 17% substantial returns
Ch2-110
Why, then, do executives acquire?
Often, for personal reasons
Firm size and executive compensation are related
When do executives loss their jobs?– 1) Acquired - larger firms harder to acquire– 2) Performing poorly - employment risk is
reduced as returns are less volatile
Ch2-111
Levels of Diversification
Single Business Unit - vast majority of sales comes from a single business
Less ambiguity
Ear to the ground re: industry and competition
Eggs in one basket
Ch2-112
Ch2-113
Ch2-114
Related Diversification at Disney
Entertainment/Production
Theme Parks
Resorts
Entertainment/Broadcasting
Cruise Lines
Retailing
Ch2-115
Levels of Diversification (cont.)
Related Diversification - entering product markets that share some resource or capability requirements with the current business – horizonal relationships across businesses
Advantages of related diversification include: Leveraging Core Competencies Sharing Activities Market Power Vertical Integration - integration of preceding or
successive productive processes - Shaw Industries buying a fiber company or floor covering retailer.
Ch2-116
Vertical Integration
Benefits
– can not be held hostage – reduces buyer/supplier power
– greater control over operations
– access to new business/technologies
– reduce procurement and sales efforts
Risks
– increased overhead, capital and administrative costs
– loss of flexibility
– unbalanced capacities
– reaction of competitors
Ch2-117
Ch2-118
Tyco ElectronicsTyco TelecommunicationsTyco Fire and SecurityTyco Safety ProductsTyco HealthcareTyco PlasticsTyco AdhesivesTyco Flow ControlTyco Electrical and Metal ProductsTyco Fire and Building ProductsTyco Infrastructure Services
Ch2-119
Tyco
Limits itself to businesses that can be held strictly accountable for a few key financial measures
Mature, stable, low-tech industries which face certain environments and little R&D investments
Ch2-120
Levels of Diversification (cont.)
Unrelated Diversification - few similarities in the resources and capabilities required among the firm’s businesses
Conglomerate Diversification - no relatedness between businesses
Ch2-121
Unrelated/Conglomerate Diversification
Attempts to create value through the management of vertical relationships among the businesses
Approve plans and budgets, competent legal, financial, accounting, HR or other support function
Effective control systems
Restructuring - buy low, sell high– spinoffs– turnaround
Ch2-122
Creating Value through Restructuring
Good, consistent job of making good investments
Favorable negotiations
Shrewd selling at the top
Shifting investment to high growth/return businesses
Ch2-123
When/Why to Diversify?
To create shareholder value
Porter’s Three Point Test
1) Attractiveness Test
2) Cost of Entry Test
3) Better off Test
Should pass all 3
Ch2-124
Portfolio analysis
• BCG Growth-Share Matrix– question marks, dogs, cash cows, stars
• GE- Nine Cell Matrix
Ch2-125
Gro
wth
Rat
eRelative Market Share
StarsQuestionMarks
CashCows
Dogs
Boston Consulting Group Matrix
Ch2-126
Gro
wth
Rat
e
Relative Market Share
1.0High Low
Soft Drinks
FritoLay
KFC
PizzaHut
TacoBell
Low
High
10%
BCG Matrix for PepsiCo - Early 1990s
Ch2-127
Gro
wth
Rat
e
Relative Market Share
.75High Low
Soft Drinks
FritoLay
KFC
PizzaHutTaco
Bell
Low
High
5%
BCG Matrix for PepsiCo - Early 1990s
Ch2-128
Competitive StrengthsA
ttra
ctiv
enes
s
Invest Grow
Low
High
LowHigh
HarvestDivest
Hold
GE 9 Cell Matrix
Ch2-129
Competitive StrengthsA
ttra
ctiv
enes
s
Low
High
LowHigh
GE 9 Cell Matrix for Pepsico
Soft Drinks
Snack Foods
Ch2-130
GM provides health care for 1.1 million workers and retirees, which adds about $1,500 to the average cost of every vehicle it sells in the U.S.
For 2005, GM has forecast $5.6 billion in health-care costs, up about $1 billion from 2004. It has blamed its recent fall in profit on the rising cost of providing medical care for workers and retirees.
Ch2-131
United does offer more space in its Economy Plus seats. But only travelers who pay full fare or who are elite members of the miles program can get them. Its regular economy-class seats measure in at 31 inches of seat pitch.
Ch2-132
Board of Directors
Governance mechanism of owners to oversee, evaluate and ratify the actions of management– setting corporate strategy, direction, mission,
values– hire/fire CEO/TMT– control, monitor, supervise TMT– review/approve resource allocations– protect shareholders interests
Ch2-133
Board of Directors
Sam Nunn- ex-Senator from Georgia sits on Coke’s and Dell’s Board
Nancy Reagan sat on Revlon’s board
Hank Aaron sat on Coke’s board
Sally Ride sat on three boards
Martha Stewart and Kim Alexis sat on Drugstore.com
Al Haig and Colin Powell sat on AOL’s board
Ch2-134
Board Involvement
Mostly little or no involvement
Boards tend to be dominated by management
Keys to board power– CEO/Chairman duality– insiders vs. outsiders
• outsiders often weak, unknowledgeable
– effective board process
Ch2-135
Trends in Governance
Institutional investors becoming increasingly powerful
Special interests groups and social institutional owners
Internationalization of board composition
Presiding and Lead Directors – 1/3 of S&P 500 – Presiding run meetings sans CEOs, Leads are actively involved
Ch2-136
Median CEO pay rose 14% to $13.2 million is a year when S&P was down over 22%
One company’s stock slides 71%, CEO compensation falls 12%
….. to only $82 million
….. Dennis Kozlowski – Tyco’s frequently indicted CEO
….. which is not as bad as what the CFO made - $136 million
Bob Nardelli at HD has a “target bonus” minimum of $3 million and could get as much as $82 million upon his exit.
James McNerney – “cause shall not include any one or more of the following: bad judgment or negligence.”
Executive Compensation - 2002
Ch2-137
Steve Jobs, Apple 78.1M -34.6
David Cote, Honeywell
68.5M -27.3%
John Chamber, Cisco 54.8M -27.7
Pat Russo, Lucent 38.2M -75.4%
Scott McNealy, Sun Microsystems
31.7M -74.7%
Ch2-138
Executive Compensation
Aligning the interests of shareholders and managers by rewarding them for pursuing their interests
Peter Drucker - “There are only bad and worse executive compensation packages. Most encourage the top management to milk the company”
Warren Buffett - “...mediocre CEOs are getting incredibly overpaid”
Top execs make over 200 times the average worker, up from 44 only 30 years ago.
Ch2-139
Executive Compensation
Bonuses, incentives and stock ownership– difficulty in evaluating decision making
• financial objectives used– lengthy feedback period– beyond managerial control– managerial manipulation
Stock Options– riding the stock market wave– strike period is too long– growth, not cost-cutting, should be rewarded– require holding the stock after exercise– make exercise conditional on certain criteria
Ch2-140
Corporate Social Performance
• Friedman – “The Social Responsibility of Business Is to Increase Its Profits“
• Corporations as Citizens• Corporations dependent upon its stakeholders• Corporations that are attentive to its
stakeholders can gain competitive advantages• Corporations, which control resources beyond
those held by individuals, have an even greater responsibility to be “good citizens”