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Provide an example to explain further of the management skills.

there are total 17 questions. Provide an example and explain a little bit for each one

Final Study guide Chapter 7-12 Winter 21

Chapter 7 – Innovation

1. Understand the stages of innovation process. The 4 I’s…

2. Understand industry life cycles from intro to decline

3. Understand the “crossing the chasm” framework and how that impact strategy with each market and stage in the industry life cycle.

4. Understand the 4 different types of innovations in the markets-and-technology framework. (incremental, radical, architectural, disruptive)

Chapter 8- Vertical Integration and Diversification

5. Know the difference between Business Strategy, (how) and Corporate Strategy, (where). Define the three “boundaries” or dimensions of which it is accessed; (1) industry value chain, (2) products and services, and (3) geography (regional, national, or global markets). And understand which of those dimensions is addressed by either Vertical Integration or Diversification

6. Understand the purpose of the Value Chain and how it is used in vertical integration

7. Describe and evaluate different types of corporate diversification, (Single business, dominant, related and unrelated)

8. Understand the BCG matrix and how the tool is used to determine a firm’s SBU’s and portfolio of products. Invest/Build, Harvest/Divest, Hold

Chapter 9 – Mergers/Acquisitions

9. Understand the difference between mergers and acquisitions, and explain why firms would use either as a vehicle for corporate strategy. There are 3 main reasons.

10. Understand the Build, Borrow or Buy framework and how it impacts decisions for firms.

11. Understand the difference between the Strategic Alliance options, (Non-equity, Equity, Joint Venture)

Chapter 10 – Globalization

12. Explain why companies compete abroad, and evaluate the advantages and disadvantages of a global strategy

13. Understand the 4 strategies MNEs can pursue when competing globally.

14. Understand the 4 components that make up the CAGE framework in determining whether or not a company should expand globally. CAGE helps determine the attractiveness of foreign target. Most of the costs and risks involved in expanding beyond the domestic market are created by distance.

Chapter 11-Organizational Design

15. Organizational design is the process of creating, implementing, monitoring, and modifying the structure, processes, and procedures of an organization. Understand and explain the three key components (Structure, Culture and Control)

Chapter 12-Ethics and Governance

16. Understand the shared value framework as identified by Michael Porter.

17. Understand how ethics impact a company

Chapter

Organizational Design: Structure, Culture, and Control

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Learning Objectives
Define organizational design and list its three components.
Explain how organizational inertia can lead established firms to failure.
Define organizational structure and describe its four elements.
Compare and contrast mechanistic versus organic organizations.
Describe different organizational structures and match them with appropriate strategies.
Evaluate closed and open innovation, and derive implications for organizational structure.
Describe the elements of organizational culture, and explain where organizational cultures can come from and how they can be changed.
Compare and contrast different strategic control-and-reward systems.

Case Study

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Zappos 10 Core Values
Deliver WOW Through Service
Embrace and Drive Change
Create Fun and A Little Weirdness
Be Adventurous, Creative, and Open-Minded
Pursue Growth and Learning
Build Open and Honest Relationships With Communication
Build a Positive Team and Family Spirit
Do More With Less
Be Passionate and Determined
Be Humble

© McGraw Hill
How specifically do these values support the strategy? Do they think that these values would be helpful in attracting the type of employee that Zappos needs to gain and sustain a competitive advantage?

Zappos
Designed to Deliver Happiness
Exceptional Customer Service → Core Competency
All customer service is done in-house.
No scripts or timed calls in the call centers
Keep its own stocked products… no drop-shipment
Flat Organizational Structure = Flexibility
Job rotation = widely trained talent
Internal promotion opportunities
Reorganized into 10 business units to manage growth

© McGraw Hill
Founder Tony Hsieh, (shay) created a culture of making customers and employees happy which helps drive success.
Acquired by Amazon in 2009 for $1.2B and acts as a separate business unit.
To achieve the strategic objective, Zappos developed a set of values and integrated them into the company’s culture. This culture can provide behavior guidelines once the employees internalize the culture. How does Zappos deliver WOW to customers? Zappos has a 365-day no-hassle return policy, free upgrades to express shipping, and courteous and helpful customer representatives, all of which help make customers very happy.
Flexibility…Unlike other online retailers, Zappos stocks everything it sells in its own warehouses—this is the only way to get the merchandise as quickly as possible with 100 percent accuracy to the customer. Strategy, therefore, is as much about deciding what to do as it is about deciding what not to do.
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Organizational Design
The process of:
Creating, implementing, monitoring, and modifying the structure, processes, and procedures of an organization.

Key components:
Structure.
Culture.
Control.

© McGraw Hill
Google changed its organizational structure from functional (organized according to domain expertise) to multidivisional or M-form (composed of a number of independent strategic business units). Alphabet’s strategic leaders hope this new structure will allow them to drive future radical innovation. Moreover, since each SBU has profit and loss responsibility, the new structure allows Alphabet to provide leadership development opportunities for a number of its executives as they are being groomed for larger roles in the future.
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Organizational Inertia and the Failure of Established Firms to Respond to Shifts in the External or Internal Environments
Exhibit 11.2
Access the text alternate for slide image.

Organizational Structure
Determines how efforts of individuals and teams are orchestrated.
How resources are distributed.

Includes four building blocks:
Specialization.
Formalization.
Centralization.
Hierarchy.

Specialization
Describes the degree to which a task is divided into separate jobs, (aka as Division of Labor).
Larger firms: high degree of specialization.
Smaller ventures: low degree of specialization.
Requires a tradeoff between depth and breadth of knowledge.

© McGraw Hill
An accountant for a large firm may specialize in only one area (e.g., internal audit), whereas an accountant in a small firm needs to be more of a generalist and take on many different things (e.g., internal auditing, plus payroll, accounts receivable, financial planning, and taxes).
U.S. military can be used as an example here because it has the Air Force, Army, Navy, and Marines, and all of them have their own specialties
https://www.nascar.com/video/franchise/monster-energy-nascar-cup-highlights/no-4-team-setting-new-standard-pit-stops/
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Formalization
The extent to which employee behavior is guided by rules and procedures.

Pros:
Ensures consistent and predictable results.
Safety and reliability.
Cons:
Slower decision making.
Reduced innovation.
Hindered customer service.

© McGraw Hill
Airlines, for instance, must rely on a high degree of formalization to instruct pilots on how to fly their airplanes to ensure safety and reliability. Yet a high degree of formalization can slow decision making, reduce creativity and innovation, and hinder customer service. Most customer service reps in call centers, for example, follow a detailed script. This is especially true when call centers are outsourced to overseas locations. Zappos deliberately avoided this approach when it made customer service its core competency.
McDonald’s as the example for formalization because of the standardized operation process.
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Centralization
The degree to which decision making is concentrated at the top of the organization.
Correlates to slow response time and reduced customer satisfaction.
Affects strategic planning:
Top-down strategic planning takes place in highly centralized organizations.
Planned emergence is found in more decentralized organizations.

© McGraw Hill
Whether centralization or decentralization is more effective depends on the specific situation. During the Gulf of Mexico oil spill in 2010, BP’s response was slow and cumbersome because key decisions were initially made in its UK headquarters and not onsite. In this case, centralization reduced response time and led to a prolonged crisis.
In contrast, the FBI and the CIA were faulted in the 9/11 Commission report for not being centralized enough.1 The report concluded that although each agency had different types of evidence that a terrorist strike in the United States was imminent, their decentralization made them unable to put together the pieces to prevent the 9/11 attacks.
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Hierarchy
The formal, position-based reporting lines:
Who reports to whom.

Span of control:
The number of employees who directly report to a manager.

© McGraw Hill
In tall organizational structures, the span of control is narrow. In flat structures, the span of control is wide, meaning one manager supervises many employees. In recent years, firms have de-layered by reducing the headcount (often middle managers), making the organizations flatter and more nimble.
Verizon many, many layers. CMS is flat. Direct reports, owners. Which is most responsive?
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Hierarchy reality on chain of command

© McGraw Hill
Mechanistic vs. Organic Organizations
Mechanistic Organization:
Much specialization and formalization.
Tall hierarchies.
Centralized decision making.

Organic Organization:
Little specialization and formalization.
Flat organizational structure.
Decentralized decision making.

© McGraw Hill
Within one industry Google is an organic organization, while Microsoft is more mechanistic.
Pixar is a more organic structure than the theme park organization is, both within Disney.
McDonald’s fits this description quite well. Each step of every job such as deep-frying fries is documented in minute detail (e.g., what kind of vat, the quantity of oil, how many fries, what temperature, how long, and so on). Decision power is centralized at the top of the organization: McDonald’s headquarters provides detailed instructions to each of its franchisees so that they provide comparable quality and service across the board although with some local menu variations. Communication and authority lines are top-down and well defined. To ensure standardized operating procedures and consistent food quality throughout the world, McDonald’s operates Hamburger University, a state-of-the-art teaching facility in a Chicago suburb, where 50 full-time instructors teach courses in chemistry, food preparation, and marketing. In 2010, McDonald’s opened a second Hamburger University campus in Shanghai, China.

Exhibit 11.3 summarizes the key features of mechanistic and organic structures.
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Firm Strategy and Structure
The relationship between these is interdependent and dynamic.
Strategy and structure impact a firm’s performance.
Changes over time as the firm grows in size and complexity.
Different firm stages require different structures.

© McGraw Hill
Successful new ventures generally grow first by increasing sales, then by obtaining larger geographic reach, and finally by diversifying through vertical integration and entering into related and unrelated businesses.
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Simple Structure
Used by small firms with low organizational complexity.
The founders usually:
Make all the strategic decisions.
Run day-to-day operations.
Professional managers and sophisticated systems are not usually in place.
Low degree of formalization and specialization.

© McGraw Hill
Examples include entrepreneurial ventures such as Facebook in 2004, when the startup operated out of Mark Zuckerberg’s dorm room, and professional service firms such as smaller advertising, consulting, accounting, and law firms, as well as family-owned businesses.
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Functional Structure
Employees are grouped into functional areas:
Based on domain expertise.
Often correspond to distinct stages in the value chain.
Leaders of functional areas report to the CEO.
The CEO coordinates and integrates the work of each function.

Benefits of Functional Structure and Business Strategy
A functional structure works when a firm has a narrow focus and small geographic footprint.
Cost Leadership Strategy:
Nurturing and upgrading core competencies.
Differentiation Strategy:
Incorporate decentralized decision making.
Foster innovation and creativity.
Blue Ocean Strategy:
Firm should be efficient and flexible.
Focus is on controlling costs and fostering creativity.

Multidivisional Structure
1. Used as a firm diversifies products and geography.
2. Each strategic business unit (SBU):
Has profit-and-loss (P&L) responsibility.
Operated independently.
Led by a unique CEO who is responsible for SBU strategy and operations.
3. Widely adopted organizational structure.

© McGraw Hill
Zappos is an SBU under Amazon, which employs a multidivisional structure.
W.L. Gore uses a multidivisional structure to administer its differentiation and related diversification strategies. It has four product divisions (electronic products, industrial products, medical products, and fabrics division) with manufacturing facilities in the United States, China, Germany, Japan, and Scotland, and business activities in 30 countries across the globe.
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Typical Multidivisional (M-Form) Structure
Exhibit 11.7

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M-Form and Corporate Strategy
Related Diversification:
Cooperative M-Form.
Centralized decision making.
Integrated at corporate headquarters.
Co-opetition among SBUs.

Unrelated Diversification:
Competitive M-Form.
Decentralized decision making.
Low level of integration at corporate headquarters.
Competition among SBUs for resources.

Disadvantages of the Multidivisional Structure
Adds another layer of corporate hierarchy.
Bureaucracy, red tape, & duplication of efforts.
Slower decision making.

SBUs competing.
Politics and turf wars over resources.
Cooperation is still needed at the same time.

© McGraw Hill
In some instances, spinning out SBUs to make them independent companies is beneficial. The BCG growth-share matrix helps corporate executives when making these types of decisions. In the last few years when owned by eBay, PayPal outperformed its parent company. PayPal’s executives (and investors) were tired of subsidizing eBay’s stagnant business. Investors also liked separating eBay and PayPal, giving it a valuation that is estimated to be as high as $100 billion; eBay’s standalone valuation is about $35 billion.
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Matrix Structure
Leverages SBU (M-form) benefits:
Domain expertise.
Economies of scale.
Efficient processing of information.

Also leverages organizational structure benefits:
Responsiveness.
Decentralized focus.

Typical Matrix Structure with Geographic and SBU Divisions
Exhibit 11.9
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Matrix Structure and Global Strategy
This structure fits well with a transnational strategy.
International: functional structure.
Multi-domestic: multi-divisional structure.
Global standardization: multi-divisional structure.
Transnational: global matrix structure.

© McGraw Hill
Exhibit 11.11 shows how different global strategies best match with different organizational structures.
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Disadvantages of the Matrix Structure
Difficult to implement.
Organizational complexity.
Administrative costs.
Unclear reporting structures, (reporting to 2 bosses)

Accountability can be undermined.
Employees can have trouble reconciling goals.
Principal-agent problems.
Slower decision-making.

Formal and Informal Building Blocks of Organizational Design
Exhibit 11.14

Culture

© McGraw Hill
Organizational Culture
Defined as…the shared values and norms of an organization’s members and expressed through artifacts.
Values: what is considered important.

Norms: appropriate attitudes and behaviors in day-to-day work and interactions.

© McGraw Hill
Artifacts include elements such as the design and layout of physical space (e.g., cubicles or private offices),
symbols (pink car, Brown)
what events are celebrated and highlighted, and how they are celebrated (Zappos trivia nites, nerf gun battles, foosball, karaoke).
vocabulary, what stories are told (Nord returning tires, call me Walt)…Zappos pizza-ordering example in section 11.4)

Artifacts include elements such as the design and layout of physical space (e.g., cubicles or private offices), symbols (e.g., the type of clothing worn by employees), vocabulary, what stories are told, what events are celebrated and highlighted, and how they are celebrated (e.g., a formal dinner versus a casual barbecue when the firm reaches its sales target).
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Organizational Culture – Artifacts

Physical space (cubicles).
Symbols (clothing).
Events (celebrations).
Vocabulary (stories that are told).

What do others perceive your culture to be through the artifacts you display?

Where Do Organizational Cultures Come From?
1. Founder imprinting
Founders defined and shaped the culture

2. Company values
Values are usually linked to a reward system, which can also lead to a bad culture
Uber, Wells Fargo, MCI, etc…

Recruit people that fit the culture
Zappos pays new hires if they want to quit!

© McGraw Hill
Walmart founder Sam Walton personified the retailer’s cost-leadership strategy. At one time the richest man in America, Sam Walton drove a beat-up Ford pickup truck, got $5 haircuts, went camping for vacations, and lived in a modest ranch home in Bentonville, Arkansas. Everything Walton did was consistent with the low-cost strategy.

How Does Organizational Culture Change?
Culture can be a strong asset, yet also a great liability.
When the environment changes:
A firm must hone, refine, and upgrade to ensure a core rigidity doesn’t emerge.
New leadership changes in strategy and structure.
When the original core competencies turn into a liability.

© McGraw Hill
GM’s bureaucratic culture, combined with its innovative M-form structure, was once hailed as the key to superior efficiency and management. However, that culture became a liability when the external environment changed following the oil-price shocks in the 1970s and the entry of Japanese carmakers into the United States. As a consequence, GM’s strong culture led to organizational inertia. This resulted in a failure to adapt to changing customer preferences for more fuel-efficient cars, and it prevented higher quality and more innovative designs. GM lost customers to foreign competitors that offered these features. Mary Barra
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Culture Can Help a Firm’s Competitive Advantage If…
It makes a positive contribution to economic value creation.
It passes the VRIO principles:
Valuable, rare, difficult to imitate, the firm must be organized to capture value.
It can adapt as the business evolves.

© McGraw Hill
It is best to develop a strong and strategically relevant culture in the first few years of a firm’s existence. Strategy scholars have documented that the initial structure, culture, and control mechanisms established in a new firm can be a significant predictor of later success.
SWA’s unique culture helps it keep costs low by turning around its planes faster, thus keeping them flying longer hours.
Zappos’ “WOW” customer experience is accomplished by “going the extra mile.” Long-term superior experience does increase the company’s perceived value and its economic value creation.
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A view from two companies

Strategic Control and Reward Systems

Strategic Control and Reward Systems
Internal-governance mechanisms are put in place to align the incentives of:
Principals (shareholders).
Agents (employees).
Allow managers to:
Specify goals.
Measure progress.
Provide performance feedback.

Input Controls
Seeks to define and direct employee behavior through:
Explicit, codified rules.
Standard operating procedures.

Considered before employees make business decisions.
Example: The use of budgets is the key to input controls
Managers allocate money to R&D projects before they begin.

© McGraw Hill
In diversified companies using the M-form, corporate headquarters determines the budgets for each division. Public institutions, like some universities, also operate on budgets that must be balanced each year. Their funding often depends to a large extent on state appropriations and thus fluctuates depending on the economic cycle. During recessions, budgets tend to be cut, and they expand during boom periods.
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Output Controls
Guide employee behavior by:
Defining expected results (outputs), but:
Leaving the means to those results open to individual employees, groups, or SBUs.
Intrinsic motivation is highest when an employee has:
Autonomy (about what to do).
Mastery (how to do it).
Purpose (why to do it).

© McGraw Hill
Today, 3M is best known for its adhesives and other consumer and industrial products. But its full name reflects its origins: 3M stands for Minnesota Mining and Manufacturing Company. Over time, 3M has relied on the ROWE framework and has morphed into a highly science-driven innovation company. At 3M, employees are encouraged to spend 15 percent of their time on projects of their own choosing. If any of these projects look promising, 3M provides financing through an internal venture capital fund and other resources to further develop their commercial potential. In fact, several of 3M’s flagship products, including Post-it Notes and Scotch Tape, were the results of serendipity. To foster continued innovation, moreover, 3M requires each of its divisions to derive at least 30 percent of their revenues from products introduced in the past four years.
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Zappos walking the walk
What would you do if a programming error cost your firm $1.6 million?
Zappos put their money where their “WOW” is.
Zappos accidentally capped the price at $49.95 for all products sold on its subsidiary site at midnight, and the mistake was not discovered until 6 a.m.
Consistent with their “WOW” philosophy, Zappos honored all sales during this time period.

© McGraw Hill
Which strategic control-and-reward system discussed in the chapter would be most appropriate for Zappos? Output control seems to be the appropriate control mechanism for Zappos in this case. Customer satisfaction can be maximized, especially for a service-oriented company, by offering fast delivery, no-hassle returns, friendly and reasonable customer service, and product packaging.
Do you think Zappos’ decision to honor every sale, despite its explicit business terms and conditions that would allow it not to do so, was a sound one? Why or why not?
Apparently Zappos was able to transform this minor crisis (mislabeling the price tag) into a huge opportunity to maximize customer satisfaction and secure returning customers. Simply ask the students what they think about the way Zappos handled the situation. Do they like it or not? That said, posting a $1.6 million dollar sales loss from six hours (from midnight to 6 a.m.!) of sales is a major financial hit for any firm. What if the mistake had not been discovered for a full 24 hours?
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Group Exercise
Your team has been brought in to analyze a business unit. You find significant excess headcount in accounting and purchasing.
Develop a plan to lay off 25% of those employees
You have 6 months to identify “who” and get the job done.
How do you downsize without hurting the morale of those remaining?
What steps will you take to treat with dignity those employees forced to leave?

© McGraw Hill
(If you have no personal experience with work-force reductions, use an Internet search engine and look up “successful layoffs” for some guidance.)
Make sure there is strong leadership and frequent communication with (and education of) the employees so the concept and message will be delivered clearly. One tendency is for senior leadership to hide or “circle the wagons” during times of layoffs. This sends a very poor signal to those remaining workers. As tough as it is, managers must be especially visible and walking the halls to look their employees in the eye and be honest with them on their future and the future of the organization. Even if that future is uncertain…
What steps do you take to treat with dignity those employees forced to leave?
Well-designed benefit packages, courteous communication from top management, and using a face-to-face approach.
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Chapter 9

Corporate Strategy: Strategic Alliances, Mergers and Acquisitions

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The AFI Strategy Framework

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Learning Objectives
Apply the build-borrow-or-buy framework to guide corporate strategy.
Define strategic alliances, and explain why they are important to implement corporate strategy and why firms enter into them.
Describe three alliance governance mechanisms and evaluate their pros and cons.
Differentiate between mergers and acquisitions, and explain why firms would use either to execute corporate strategy.
Define horizontal integration and evaluate the advantages and disadvantages of this option to execute corporate-level strategy.
Explain why firms engage in acquisitions.
Evaluate whether mergers and acquisitions lead to competitive advantage.

© McGraw Hill
What you had was a combination of Mergers and Acquisitions, as well as Joint Ventures to build this Fortune 50 company.
5

How Firms Achieve Growth
A strategist has three options to drive firm growth:
Organic growth through internal development
External growth through alliances
External growth through acquisition
The build-borrow-or-buy framework:
Aids strategists in deciding whether to pursue internal development (build)
Enter a contract arrangement or strategic alliance (borrow)
Acquire new resources, capabilities, and competencies (buy)

© McGraw Hill
When acquiring a firm, you buy an entire “resource bundle,” not just a specific resource. This resource bundle, if obeying VRIO principles and successfully integrated, can then form the basis of competitive advantage.
6

Guiding Corporate Strategy:
The Build-Borrow-or-Buy Framework

Main Issues in the Build-Borrow-Buy Framework
Relevancy:
Can the firm’s existing internal resources solve the resource gap?
Tradability:
How tradable are the targeted resources that may be available externally?
Closeness:
How close do you need to be to your external resource partner?
Integration:
How well can you integrate the targeted firm into your firm?

© McGraw Hill
As shown in Exhibit 9.1, the answers to these questions lead to a recommended action or the next question.
8

Relevance/Tradability
Relevance…Are the firm’s internal resources highly relevant?
If so, the firm should develop internally.
Internal resources are relevant if:
They are similar to those the firm needs.
They are superior to those of competitors.
They pass the VRIO Framework
Tradability…The firm creates a contract to:
Transfer ownership
Allow use of the resource
Contracts support borrowing resources
Ex. Licensing and franchising

© McGraw Hill
If a resource is highly tradable, then the resource should be borrowed via a licensing agreement or other contractual agreement. If the resource in question is not easily tradable, then the firm needs to consider either a deeper strategic alliance through an equity alliance or a joint venture, or an outright acquisition
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Closeness/Integration
Closeness…M&As are complex and costly.
Used only when extreme closeness is needed
Closeness can be achieved through alliances.
Equity alliances
Joint ventures
This enables resource borrowing
Integration…Conditions for integrating the target firm:
Low relevancy, low tradability, high need for closeness
Consider other options first
Examples of post integration failures abound

© McGraw Hill
Mergers and acquisitions are the most costly, complex, and difficult to reverse strategic option. This implies that only if extreme closeness to the resource partner is necessary to understand and obtain its underlying knowledge should M&A be considered the buy option. Regardless, the firm should always first consider borrowing the necessary resources through integrated strategic alliances before looking at M&A.
Multibillion-dollar failures include the Daimler-Chrysler integration, AOL and Time Warner, HP and Autonomy, and Bank of America and Merrill Lynch. More than cultural differences were involved in Microsoft’s 2015 decision to write down $7.6 billion in losses (or more than 80 percent) on its $9.4 billion acquisition of Nokia some 15 months earlier.
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Strategic Alliances

9-‹#›

© McGraw Hill
A strategic alliance has the potential to help a firm gain and sustain a competitive advantage when it joins together resources and knowledge in a combination that obeys the VRIO principles.
Next slide explains why SA’s are attractive.
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STRATEGIC ALLIANCE

STRATEGIC CRITERIA

RATIONAL VIEW OF COMPETITIVE ADVANTAGE

A voluntary arrangement between firms that involves the sharing of knowledge, resources, and capabilities with the intent of developing processes, products, or services

An alliance qualifies as strategic only if it has the potential to affect a firm’s competitive advantage.

Framework where critical resources and capabilities are embedded in strategic alliances that span firm boundaries

Why Do Firms Enter Strategic Alliances?
1. Strengthen competitive position
Change industry structure, influence standards
2. Enter new markets
Product, service, or geographic markets
3. Hedge against uncertainty
Real options perspective
Breaks down investment into smaller decisions
Staged sequentially over time
4. Access critical complementary assets
Marketing, manufacturing, after-sale service
Helps complete the value chain
5. Learn new capabilities
Co-opetition: cooperation among competitors
Learning curve races: getting up to speed as fast as possible to exit the alliance quickly

Why Strategic Alliances Are Attractive
Firm goals can be achieved faster and at lower costs.
Complement or augment the value chain
Less complex legally
Can help a firm gain and sustain a competitive advantage
Valuable
Rare
Difficult to imitate
Organized to capture the value

© McGraw Hill
In support of this perspective, over 80 percent of Fortune 1000 CEOs indicated in a survey that more than one-quarter of their firm’s revenues were derived from strategic alliances.
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Strategic Alliances with
Tesla alliance with Panasonic was to gain access to critical complementary assets…batteries
Tesla alliance with Daimler was to strengthen competitive position thru cash and engineering expertise. Daimler wanted to hedge against uncertainty of all-electric cars.
Tesla alliance with Toyota provided a manufacturing plant and expertise thru NUMMI site.

© McGraw Hill
Strategic Alliances Can Be Governed By:
Non-Equity Alliances:
Partnerships based on contracts.
IBM/Microsoft licensing agreement
Equity Alliances:
One partner takes partial ownership in the other.
GM invested $500M in Lyft
Joint Ventures:
A standalone organization which is jointly owned by two or more companies.
Hulu is jointly owned by Comcast and Disney

Exhibit 9.2 provides an overview of the key characteristics of the three alliance types, including their advantages and disadvantages.
Examples of non-equity alliances: supply agreements, distribution agreements, and licensing agreements
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Alliance Management Capability
Exhibit 9.3

Partner Selection and Alliance Formation
Expected benefits must exceed the costs.
Five reasons for alliance formation:
Strengthen competitive position.
Enter new markets.
Hedge against uncertainty.
Access critical complementary resources.
Learn new capabilities.
Partners must be compatible and committed.

© McGraw Hill
Partner compatibility captures aspects of cultural fit between different firms. Partner commitment concerns the willingness to make available necessary resources and to accept short-term sacrifices to ensure long-term rewards.
GM invested $500M into Lyft
GM and Waymo partnerships strengthen competitive position of Lyft compared to Uber for self driving cars
GM taps into the 2nd largest mobile transportation network globally
Lyft is number 2, so GM is hitching their wagon to them
Lyft may need to manage a fleet of cars that they may own, GM has that experience with rentals.

Alliance Design and Governance
Governance mechanisms:
Contractual agreement.
Equity alliances.
Joint venture.

Inter-organizational trust is a critical dimension of alliance success.

© McGraw Hill
In a study of over 640 alliances, researchers found that the joining of specialized complementary assets increases the likelihood that the alliance is governed hierarchically. This effect is stronger in the presence of uncertainties concerning the alliance partner as well as the envisioned tasks.
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Post Formation Alliance Management
To be a source of competitive advantage, the partnership has to create VRIO resource combinations:
Make relation-specific investments.
Establish knowledge-sharing routines.
Build interfirm trust.
Build capability through repeated experiences over time.

How to Make Alliances Work
Exhibit 9.4
Source:. Adapted from J.H. Dyer and H. Singh (1998), “The relational view: Cooperative strategy and the sources of intraorganizational advantage,” Academy of Management Review 23: 660–679.

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Mergers and Acquisitions
Merger:
The joining of two independent companies.
Forms a combined entity.
Tends to be friendly. (Bell Atlantic/GTE, “merger of equals”)
Acquisition:
Purchase of one company by another.
Can be friendly…Disney buying Pixar
Can be unfriendly…RJ Reynolds buying Nabisco.
Considered a hostile takeover when the target firm does not wish to be acquired.

© McGraw Hill
Ernst and Whinney merged with Arthur Young, GTE/Bell Atlantic Mergers of equals
RJReynolds tobacco buys Nabisco, Barbarians at the gate. LBO.
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Why Do Firms Merge?
Horizontal integration is the process of merging with a competitor, (who’s at same stage of the value chain)
HP buys Compaq in 2002.
Pfizer buys Wyeth in 2009.
Live Nation buys Ticketmaster in 2010.
Sirius buys XM in 2007
Three main benefits:
Reduction in competitive intensity
Lower costs
Increased differentiation

© McGraw Hill
In particular, competitors in the same industry such as airlines, banking, telecommunications, pharmaceuticals, or health insurance frequently merge to respond to changes in their external environment and to change the underlying industry structure in their favor.
22

Why Do Firms Acquire Other Firms?
To access new markets & distribution channels.
To overcome entry barriers which allows you access to a new customer set.
Kraft bought Cadbury for entry into European markets via their distribution network
Access to a new capability or competency
Intel bought Altera to gain access to mobile chipsets
To preempt rivals.

© McGraw Hill
Example: Facebook acquired: Instagram (photo & video sharing), WhatsApp (text messaging service), Oculus (virtual reality headsets).
Example: Google acquired: YouTube (video sharing), Motorola (mobile technology), Waze (interactive mobile maps).
23

M&A and Competitive Advantage
Many M&As actually destroy shareholder value! (Due to anticipated synergies never materializing)
Value creation generally accrues to the shareholders of the firm that is taken over, (acquirers often pay a premium when buying the target company).
M&A’s are a popular vehicle for corporate-level strategy implementation for three reasons:
because of principal–agent problems
the desire to overcome competitive disadvantage
the quest for superior acquisition and integration capability.

© McGraw Hill
Examples of mergers that destroyed significant shareholder value (as measured one year after the deal closed) include: Bayer – Monsanto (down 47 percent); Bank of America – Countrywide (down 45 percent); Alcatel – Lucent (down 39 percent); AOL – Time Warner (down 37 percent), and Sprint – Nextel (down 30 percent).
24

Motives for Mergers and Acquisitions
Managerial
C-level compensation based on size vs. profitability
C-level ego, (MA confers power and celebrity)
FOMO, imitation, everyone else is doing it
Financial
Stock market inefficiencies, undervalued or overvalued manipulation. (Berkshire Hathaway/Heinz)
Tax savings by moving HQ offshore (Burger King/Tim Hortons)
Strategic
Horizontal: EOS, competition and market power, (Sirius/XM)
Geographic: access to overseas market, (Kraft/Cadbury)
Vertical: acquire a supplier or customer, (Apple/Corning)
Diversification: enter a new area of business, (Kering/Puma)

© McGraw Hill
BH saw that Heinz was undervalued and bought to help grow the business
BK moved HQ to Canada for better taxes than UK
Sirius bought out the only other competitor of Satellite based radio.
Kraft bought Cadbury Candies solely for European distribution channel
Apple needs Corning for Gorilla glass, (largest investor)
Kering owns various luxury goods brands, including Gucci, Yves Saint Laurent, Balenciaga, Alexander McQueen, Bottega Veneta, Boucheron and Brioni, as well as Puma and Volcom in its Sport & Lifestyle portfolio.
25

Principal-Agent Problems with M&A
Managers incentives to acquire:
To build a larger empire
To receive prestige, power, and pay
Managerial hubris:
A form of self-delusion
Managers convince themselves of their superior skills
They see themselves as exceptions to the rule

© McGraw Hill
Quaker Oats Co. acquired Snapple because its managers thought Snapple was another Gatorade, which was a successful previous acquisition. The difference was that Gatorade had been a standalone company and was easily integrated, but Snapple relied on a decentralized network of independent distributors and retailers who did not want Snapple to be taken over and who made it difficult and costly for Quaker Oats to integrate Snapple. The acquisition failed—and Quaker Oats itself was taken over by PepsiCo. Snapple was spun out and eventually ended up being part of the Dr. Pepper Snapple Group.
26

Small Group Exercise

© McGraw Hill
End of Main Content
© 2021 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom.
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Chapter 7

Business Strategy: Innovation, Entrepreneurship, and Platforms

No reproduction or further distribution permitted without the prior written consent of McGraw Hill.

Because learning changes everything.®

Learning Objectives

Outline the four-step innovation process from idea to imitation.

Apply strategic management concepts to entrepreneurship and innovation.

Describe the competitive implications of different stages in the industry life cycle.

Derive strategic implications of the crossing-the-chasm framework.

Categorize different types of innovations in the markets-and-technology framework.

Explain why and how platform businesses can outperform pipeline businesses.

The AFI Strategy Framework

© McGraw Hill
Innovation Is a Competitive Weapon
Innovation can create and destroy value.
Innovation often comes in waves:
Many firms dominated an early wave of innovation and are challenged by the next wave.
Traditional networks vs. cable providers.
Cable providers vs. streaming content.
Typewriters to PC’s to mobile devices.

“Creative destruction” – Joseph Schumpeter

© McGraw Hill
Initial innovations are foundational for other rapid innovation.
Disruption video: https://hbr.org/video/2688242135001/the-explainer-disruptive-innovation
4

Case Study: Netflix – Disrupter of Cable TV
Founded in 1997 by Reed Hastings with online rentals of DVD’s via the mail, (because Blockbuster pissed him off over $40 in late fees).
1999: moved to unlimited DVD rental for one monthly rate
2000 approached BB to become their online partner, BB declined
2002 Netflix turned profitable, went public
2004 4M subscribers, (BB started online, but lost 75% of market share, Bk by 2010)
2007: Streaming content over the internet,12M subscribers
2010: Not viewed as a threat by TV, “rerun TV”…Hulu
2013: Started streaming online original content: (House of Card, Orange is the New Black, The Crown)
2017: 100M worldwide subscribers, $9B in Revenue, $60B Market Cap, Stock up 4200%
2020: Market Cap $230B, 73M US subscribers, 167M worldwide, (Covid related?)

© McGraw Hill
Case Study: Netflix – Disrupter of Cable TV
How did they disrupt?
Delivery of content streamed online, bypassing networks/cable, less $$$
Access created “binge watching”, create demand and buzz, older movies/TV shows
Management via algorithms, no “pilots” needed

© McGraw Hill
Users build movie queues, which allowed future demand.
Personalized recommendation engine allows for “older” content to be requested, lowering demand on new, but providing fresh revenues to other studios, (until everyone else wants into the game).
6

Case Study: vs.
Disney enters streaming services with intro price of $6.99/mo, undercutting Netflix, (free for VzW customers).
Removes Disney content from Netflix, (Disney movie library, Marvel, Star Wars, etc…)
Adds 20th Century Fox library, (Simpsons) and own Hulu and ESPN
Disney+ has 60M subscribers and doing well…

© McGraw Hill
Aug 2020 – Disney stock soared as much as 10% on Wednesday as investors cheered strong growth at Disney Plus last quarter, boosting the entertainment giant’s market cap by about $21 billion to $234 billion. Theme parks crashing, but streaming huge. Disney+ has 60M subscribers.
7

Cable vs. Streaming, where is the future?

Accelerating Speed of Technological Change
Exhibit 7.1
Source:. Depiction of data from the U.S. Census Bureau, the Consumer Electronics Association, Forbes, and the National Cable and Telecommunications Association.

Access the text alternate for the slide image.

© McGraw Hill
This image shows how many years it took for different technological innovations to reach 50 percent of the U.S. population (either through ownership or usage). For example, it took 84 years for half of the U.S. population to own a car, but only 28 years for half the population to own a TV. The pace of the adoption rate of recent innovations continues to accelerate. It took 19 years for the PC to reach 50 percent ownership, but only 6 years for MP3 players to accomplish the same diffusion rate.
9

The Four I’s: Idea, Invention, Innovation, and Imitation
Exhibit 7.2

Idea, Invention, Innovation and Imitation
Idea:
Abstract concepts or research findings.
Invention:
Transformation of an idea into a product.
The modification and recombination of products.
Innovation:
Commercialization of an invention.
Imitation:
Copying a successful innovation.

© McGraw Hill
Idea: basic research to discover new knowledge. Wireless technology today was first talked about in WWII with Albert Einstein and actress Heddy Lamar
Invention: Patents are for useful, novel and non-obvious inventions, Intellectual Property
Innovation: this is where entrepreneurs come into play. They bring the products to life. Think Shark Tank. Quirky.
Imitation: If your product is successful, others will copy. (scholarpedia is competitor to Wiki, but strict quality control by scholars), Samsung to Apple.
11

What is Innovation?

A Novel and Useful Idea That Is Successfully Implemented

Entrepreneurs
The process by which change agents undertake economic risk to innovate.
Create new products, processes, and organizations.
Create value for society.
Commercialize ideas and inventions.

Reed Hastings: Netflix.

Elon Musk: Tesla Motors, Solar City, SpaceX, PayPal.

© McGraw Hill
Reed Hastings – Netflix.
Volunteered in the Peace Corps for 2 years.
Educated at Stanford where he first learned about the entrepreneurial model, net worth is now $1B.
Elon Musk – Tesla Motors, Solar City, SpaceX, PayPal.
An engineer and serial entrepreneur.
Deep passion to solve environmental, social, and economic challenges.
13

Strategic and Social Entrepreneurship
Strategic Entrepreneurship:
Pursuit of innovation using strategic tools and concepts.
Combining entrepreneurial actions.
Creating new opportunities.
Exploiting existing opportunities.

Social Entrepreneurship:
The pursuit of social goals while creating profitable businesses.
Evaluate performance by financial, ecological and social contribution metrics.

The Industry Lifecycle
Over time:
The number and size of competitors change.
Different types of consumers enter the market.
The supply and demand sides of the market change.
Different competencies are needed for the firm to perform well.

The stages:
Introduction.
Growth.
Shakeout.
Maturity.
Decline.

Industry Life Cycle: The Smartphone Industry in Emerging and Developed Economies
Exhibit 7.4

Access the text alternate for slide image.

Introduction Stage
Core competency: research and development.
Necessary to create a product category that will attract customers.
Can be very capital-intensive (high costs).
Barriers to entry are high.
Strategic objective: market acceptance & future growth.

© McGraw Hill
The emphasis is on uniqueness and performance in this stage. The initial market size is small, growth is slow, and barriers to entry are high.
17

Leveraging Network Effects to Drive Demand: Apple’s iPhone
Network effects: The more people use the product or service, the more the demand

Access the text alternate for slide image.

© McGraw Hill
Increased value creation is positively related to demand, which in turn increases the installed base, meaning the number of people using an iPhone. As the installed base of iPhone users further increases, this incentivizes software developers to write even more apps. Making apps widely available strengthened Apple’s position in the smartphone industry. Based on positive feedback loops, a virtuous cycle emerges where one factor positively reinforces another.
18

Growth Stage
Demand increases rapidly.
First-time buyers rush to purchase.
Proof of concept has been demonstrated.
Product / service standards emerge.
A common set of features and design choices.
Can emerge from competition or imposed by government or agencies.
Product innovation:
New / recombined aspects of a product.
Process innovation:
New ways to produce a product.

© McGraw Hill
Core competencies of focus during this stage are in manufacturing and marketing.
Process innovations are made possible through advances such as the internet, lean manufacturing, Six Sigma, biotechnology, nanotechnology, and so on.
19

Product and Process Innovation throughout an Industry Life Cycle
Exhibit 7.7

Access the text alternate for slide image.

Shakeout Stage
The rate of growth declines.
Firms begin to intensely compete.
Weaker firms forced out.
Industry consolidation.
Only the strongest competitors survive.
Price is an important competitive weapon.

© McGraw Hill
The winners in this increasingly competitive environment are often firms that stake out a strong position as cost leaders. Key success factors at this stage are the manufacturing and process engineering capabilities that can be used to drive costs down. The importance of process innovation further increases (albeit at diminishing marginal returns), while the importance of product innovation further declines.
21

Maturity Stage
Only a few large firms remain.
They enjoy economies of scale.
Process innovation has reached a maximum.
Demand: replacement or repeat purchases.
Market has reached maximum size.
Industry growth is zero or negative.

© McGraw Hill
The domestic airline industry has been in the maturity stage for a long time. The large number of bankruptcies as well as the wave of mega-mergers, such as those of Delta and Northwest, United and Continental, and American Airlines and US Airways, are a consequence of low or zero growth in a mature market characterized by significant excess capacity.
22

Decline Stage
Demand falls rapidly.
Innovation efforts cease.
If a breakthrough emerges, it leads to a new industry or resets the life cycle.
Strong pressure on prices.

Four strategic options to pursue:
Exit: bankruptcy / liquidation.
Harvest: reduce further investments.
Maintain: support at a given level.
Consolidate: buy rivals.

© McGraw Hill
Exit. Some firms are forced to exit the industry by bankruptcy or liquidation.
Harvest. In pursuing a harvest strategy, the firm reduces investments in product support and allocates only a minimum of human and other resources.
Maintain. Philip Morris, on the other hand, is following a maintain strategy with its Marlboro brand, continuing to support marketing efforts at a given level despite the fact that U.S. cigarette consumption has been declining.
Consolidate. Although market size shrinks in a declining industry, some firms may choose to consolidate the industry by buying rivals.
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The Crossing-the-Chasm Framework
Exhibit 7.8
Source: Adapted from G.A. Moore (1991), Crossing the Chasm: Marketing and Selling Disruptive Products to Mainstream Customers (New York: HarperCollins), 17.

Access the text alternate for slide image.

© McGraw Hill
There is a big gulf or chasm into which companies and their innovations frequently fall. Only companies that recognize these differences and are able to apply the appropriate competencies at each stage of the industry life cycle will have a chance to transition successfully from stage to stage.
24

Technology Enthusiasts
Enter the market during the introductory stage.
Smallest market segment, 2.5% of the total market potential.
Have an engineering mind.
Proactively pursue new technology.
Enjoy using beta versions.
Tinker with product imperfections.
Provide free feedback and suggestions.

© McGraw Hill
A recent example of an innovation that appeals to technology enthusiasts is Google Glass, a mobile computer that is worn like a pair of regular glasses. Instead of a lens, one side displays a small, high-definition computer screen. Google Glass allows the wearer to use the Internet and smartphone-like application. However, the company was never able to close the gap between technology enthusiasts (who rushed to sign up for testing the glasses) and early adopters.
25

Early Adopters
Enter the market during the growth stage.
13.5% of the total market potential.
Demand is driven by imagination and creativity.
Ask themselves, “What can this new product do for me or my business?”
To capture these customers:
Directly communicate the product’s potential.

© McGraw Hill
For instance, early adopters are the people that put down thousands of dollars in deposits to reserve a new Tesla Model S or Model X when first introduced, without having been able to test-drive the vehicle or even seen it other than on the internet. They then often needed to wait a significant amount of time before receiving the new vehicle.
26

Early Majority
Enter the market during the shakeout stage.
34% of the total market potential.
Decision criteria, a strong sense of practicality.
“What Can This Do For Me?”
Weigh the benefits and costs carefully.
Rely on endorsements of others.
This group is key to catching the growth wave.

© McGraw Hill
Fisker Automotive, a California-based designer and manufacturer of premium plug-in hybrid vehicles, fell into the chasm because it was unable to transition to early adopters, let alone the mass market. Between its founding in 2007 and 2012, Fisker sold some 1,800 of its Karma model, a $100K sports car, to technology enthusiasts. It was unable, however, to follow up with a lower-cost model to attract the early adopters into the market. In addition, technology and reliability issues for the Karma could not be overcome. By 2013, Fisker had crashed into a chasm, filing for bankruptcy. The assets of Fisker Automotive were purchased by Wanxiang, a Chinese auto parts maker.
In contrast, Tesla Motors, the maker of all-electric vehicles, and a fierce rival of Fisker at one time, was able to overcome some of the early chasms.
27

Late Majority
Enter the market during the maturity stage.
34% of the total market potential.
Not as confident in their ability to master the technology:
Wait until standards have emerged.
Do not like uncertainty.
Represent the majority of the market.
Buy from well-established firms with a strong brand.

Laggards
Enter the market during the decline stage.
16% of total market potential.
Adopt a new product only if necessary (reluctant).
Generally don’t want new technology.
Typically not pursued as future customers.
Demand is small.
Early and late majority are at this time moving on to different products and services.

Crossing the Chasm: The Mobile Phone Industry
Exhibit 7.9

Access the text alternate for slide image.

Crossing the Chasm Illustrated

© McGraw Hill
Dancing man Sasquatch 2009
No voiceover version https://www.youtube.com/watch?v=GA8z7f7a2Pk&t=114s
:55 Tech Enthusiasts
1:15 Early Adopters
1:35 CHASM JUMPED Early Majority
2:00 Late Majority
2:40 Laggards, (some people may never join)
Dancing man – “Crossing the Chasm in Consumer Markets: A Visual Example by Geoffrey Moore” is an engaging and humorous 4 minute video to illustrate the concept of the industry life cycle and crossing the chasm. The video link is here: https://www.youtube.com/watch?v=izP5n1SBEaI
31

Types of Innovation: Combining Markets and Technologies
Exhibit 7.11

Access the text alternate for slide image.

© McGraw Hill
Incremental: Established knowledge base with steady improvement of a product or service. Incumbent firms…Examples: Gillette now 6-bladed razors, Intel 386, 486, x86 processors
Radical: Novel methods or materials targeting new markets with new technology. New firms. …Examples: Mass production, (Ford Model T), Genetic engineering
Architectural: Reconfigure known components to create new markets…Example: Canon user-friendly copiers vs. Xerox Pro Svcs , GPS to handheld consumer devices like Garmin
Disruptive: Novel technologies serving existing markets from bottom up. Captures current customers typically with initially lower cost & performance…Examples: Uber, Japanese autos, Digital photography, Dollar shave club. Stealthy and sometimes you need to disrupt yourself,

Incremental vs. Radical Innovation
Incremental Innovation:
Builds on established knowledge.
Results from steady improvement.
Radical Innovation:
Novel methods & materials.
Entirely new knowledge base or recombination of existing knowledge.
Targets new markets and technology.

© McGraw Hill
In 1903, entrepreneur King C. Gillette invented and began selling the safety razor with a disposable blade. This radical innovation launched the Gillette Co. (now a brand of Procter & Gamble). To sustain its competitive advantage, Gillette not only made sure that its razors were inexpensive and widely available by introducing the “razor and razor blade” business model, but also continually improved its blades.
In a classic example of a string of incremental innovations, Gillette kept adding an additional blade with each new version of its razor until the number had gone from one to six! Though this innovation strategy seems predictable, it worked. Gillette’s newest razor, the Fusion ProGlide with Flexball technology, a razor handle that features a swiveling ball hinge, costs $11.49 (and $12.59 for a battery-operated one) per razor!
Examples of radical innovation: the iPhone, the Ford Model T, the x-ray machine, the airplane, genetic engineering, and decoding of the human genome.
33

Why Incumbent Firms Tend to Focus on Incremental Innovation
Economic Incentives:
They must defend their position.
Organizational Inertia:
They have formalized processes and structures.
Innovation Ecosystem:
They rely on certain suppliers, buyers, complementors.

Architectural vs. Disruptive Innovation
Architectural Innovation:
Existing technology leveraged into a new market.
Known components, existing technology, used in a novel way.

Disruptive Innovation:
Leverages new technologies in existing markets.
New product / process meets existing customer needs.

© McGraw Hill
Examples of Disruptive Innovation include digital photography (which has improved over time to result in higher definition pictures, and has largely replaced film photography) and laptops, (which disrupted desktops…although now tablets and large screen phones are disrupting laptops).
35

How to Respond to Disruptive Innovation
Continue to innovate to stay ahead of the competition.
Guard against disruptive innovation by protecting the low end of the market.
Disrupt yourself rather than wait for others to disrupt you.
“Reverse innovation”

© McGraw Hill
Reverse Innovation: An innovation that was developed for emerging economies before being introduced in developed economies. Sometimes also called frugal innovation. Apple is xlnt at this process. The next thing.
36

Pipeline vs. Platform Businesses
Platform Business:
Enables interaction between producers and consumers.
Its overarching purpose is to enable matches among users.
Provides infrastructure and sets governance conditions.
Pipeline Business:
Linear transformation through the value chain.
Research and development, then design, then manufacture, then sell.

© McGraw Hill
The five most valuable companies globally (Apple, Alphabet, Microsoft, Amazon, and Facebook) all run platform business models.
37

Advantages of the Platform Business Model
They scale more efficiently by eliminating gatekeepers.
They unlock new sources of value creation and supply.
They benefit from community feedback.

© McGraw Hill
New sources of value creation and supply—To grow, traditional competitors such as Marriott or Hilton would need to add additional rooms to their existing stock. To add new hotel room inventory to their chains, they would need to find suitable real estate, develop and build a new hotel, furnish all the rooms, and hire and train staff to run the new hotel. This often takes years, not to mention the multimillion-dollar upfront investments required and the risks involved. In contrast, Airbnb faces no such constraints because it does not own any real estate, nor does it manage any hotels. Just like Marriott or Hilton, however, it uses sophisticated pricing and booking systems to allow guests to find a large variety of rooms pretty much anywhere in the world to suit their needs.
Community feedback: TripAdvisor, a travel website, derives significant value from the large amount of quality reviews (including pictures) by its users of hotels, restaurants, and so on. This enables TripAdvisor to consummate more effective matches between hotels and guests via its website, thus creating more value for all participants.
Network effects: Growing its user base is critical for Netflix to sustain its competitive advantage. Netflix has been hugely successful in attracting new users: As of 2017 it had some 95 million subscribers worldwide. Yet, while providing a large selection of high-quality streaming content is a necessity of the Netflix business model, this element can and has been easily duplicated by others such as Amazon, Hulu, and premium services on Google’s YouTube. To lock in its large installed base of users, however, Netflix has begun producing and distributing original content such as the hugely popular shows House of Cards and Orange Is the New Black. To sustain its competitive advantage going forward, Netflix needs to rely on its core competencies, including its proprietary recommendation engine, data-driven content investments, and network infrastructure management.
38

The Players in a Platform Ecosystem
Exhibit 7.13
Access the text alternate for slide image.

© McGraw Hill
From a value chain perspective, producers create or make available a product or service that consumers use. The owner of the platform controls the platform IP address and controls who may participate and in what ways. The providers offer the interfaces for the platform, enabling its accessibility online.
39

Netflix Business Model: Leveraging Network Effects to Drive Demand
Network effect: a phenomenon whereby a product or service gains additional value as more people use it.

© McGraw Hill
As Netflix acquires additional streaming content, it increases the value of its subscription service to customers, resulting in more people signing up. With more customers, Netflix could then afford to provide more and higher-quality content, further increasing the value of the subscription to its users. This created a virtuous cycle that increased the value of a Netflix subscription as more subscribers signed up.
40

Uber’s Business Model: Leveraging Network Effects to Increase Demand

Access the text alternate for slide image.

© McGraw Hill
Uber provides incentives for drivers to sign up (such as extending credit so that potential drivers can purchase vehicles) and also charges lower than market rates for its rides. As more and more drivers sign up in each city and thus coverage density rises accordingly, the service becomes more convenient. This drives more demand for its services as more riders choose Uber, which in turn brings in more drivers.
41

Uber’s Network Effects with Feedback Loop
Exhibit 7.16

Access the text alternate for slide image.

© McGraw Hill
To entice more drivers to work during this time, Uber has to pay them more. Higher pay will bring more drivers onto the platform. Some users complain about surge pricing, but it allows Uber to match supply and demand in a dynamic fashion. As surge pricing kicks in, fewer people will demand rides, eventually bringing supply and demand back into an equilibrium.
42

Breakout Room Exercise
You will be assigned a “problem area” for discussion.
Identify what you see as an issue in that area.
What sort of creative ideas can you come up with to solve that problem?.
Brainstorm within your group and make sure everyone gets an opportunity to share.
Present your solution to the class.

End of Main Content
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No reproduction or further distribution permitted without the prior written consent of McGraw Hill.

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Chapter 8

Corporate Strategy: Vertical Integration and Diversification

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The AFI Strategy Framework

Because learning changes everything.®

Learning Objectives
Define corporate strategy and describe the three dimensions along which it is assessed.
Describe the two types of vertical integration along the industry value chain: backward and forward vertical integration.
Identify and evaluate benefits and risks of vertical integration.
Describe and evaluate different types of corporate diversification.
Apply the core competence-market matrix to derive different diversification strategies.
Explain when a diversification strategy creates a competitive advantage and when it does not.

Case Study – Amazon

© McGraw Hill
The Chapter Case discusses Amazon’s diversification over time. Bezos also decided to customize certain country-specific websites despite the instant global reach of ecommerce firms. With this strategic decision, he decided where to compete globally in terms of different geographies beyond the United States. In short, Bezos determined where Amazon competes geographically (question 3).
4

Amazon’s Corporate Strategy
Originally was an online book seller:
Started in a garage in a Seattle suburb.
Then entered strategic alliances to expand products offered.
Is now a widely diversified technology company.
Amazon has diversified:
Prime Air uses drones to drop off packages.
Amazon Campus, co-branded University websites.
Electronics such as Echo, Alexa.
Continues to innovate:
In a competitive battle with Apple, Facebook, Alphabet, Walmart, and Alibaba.
2017 acquisition of Whole Foods.
Streaming content.
Amazon Web Services.

What’s next?

Why Firms Need to Grow
To increase profits and shareholder returns.
To lower costs and achieve economies of scale.
To increase market power.
To reduce risk through diversification.
To motivate management.

© McGraw Hill
Increase profits – results in shareholder returns.
Lower costs – growth enables efficiency.
Increase market power – fewer competitors, more bargaining power, higher profitability.
Reduce risk – low performance in one SBU can be compensated by another.
Motivate management – job security.
7

Corporate Strategy
The decisions and goal-directed actions that leaders make to address the quest for competitive advantage while competing in multiple markets and industries simultaneously…whew!
It answers the question: where to compete?
It addressed the boundaries of the firm:
Vertical integration.
Diversification.
Geographic scope.

© McGraw Hill
Vertical integration: In what stages of the industry value chain should the company participate? The industry value chain describes the transformation of raw materials into finished goods and services along distinct vertical stages.
Diversification: What range of products and services should the company offer?
Geographic scope: Where should the company compete geographically in terms of regional, national, or international markets?
8

Three Dimensions of Corporate Strategy
Vertical integration, (where in the value chain should the company participate)
Diversification, (what range of products/services offered)
Geographic scope, (regional, national, international)
Underlying concepts that guide these:
Core Competencies – unique strengths that differentiate and create value
Economies of Scale – avg cost per unit decreases
Economies of Scope – savings producing two or more outputs
Transaction Costs – cost effectiveness of vertical integration vs. diversification.

Transaction Costs
Associated with an economic exchange.
External transaction costs:
Searching for contractors.
Negotiating, monitoring, and enforcing contracts.
Internal transaction costs:
Recruiting and retaining employees.
Setting up a shop floor.

© McGraw Hill
Internal transaction costs include costs pertaining to organizing an economic exchange within a firm—for example, the costs of recruiting and retaining employees; paying salaries and benefits; setting up a shop floor; providing office space and computers; and organizing, monitoring, and supervising work. Internal transaction costs also include administrative costs associated with coordinating economic activity between different business units of the same corporation such as transfer pricing for input factors, and between business units and corporate headquarters including important decisions pertaining to resource allocation, among others. Internal transaction costs tend to increase with organizational size and complexity.
10

Transaction Costs

© McGraw Hill
In many ways, we face make-or-buy decisions all the time and choose based on our often unexpressed understanding of the trade-offs. “I will stop to buy fast food on the way home from school because I want to spend my time at home making study cards for my upcoming exam.” In essence, “It is a better use of my time and resources to buy my dinner vs. buying the groceries and making my dinner for this one task, (studying), which will produce a better outcome, (exam score).
11

Make or Buy?
If Cin-house < Cmarket…then vertically integrate (make) by owning production of the needed inputs or the channels for the distribution of outputs. If firms are more efficient in organizing economic activity than the markets, which rely on contracts from many independent players, firms should vertically integrate. If Cin-house > Cmarket…then outsource, (buy).

© McGraw Hill
Google does mostly in house due to 1. captured costs, 2. economies of scale and 3. IP protection.
Ford outsources its tires and windshields because it can determine the quality better and more cost efficiently vs. making them in-house.

Alternatives on the Make-or-Buy Continuum
Exhibit 8.4

Access the text alternate for slide image.

© McGraw Hill
This just illustrates how involved you are in the make or buy continuum:
Short-term contacts: Competitive bidding process: RFP, Less than one-year term, Lower prices = cost advantages
Strategic alliances: Facilitate investment without administrative costs, Ex: Short term contracts, (somewhat risky as there is no buy-in for long term performance), Long-term contacts, (franchising or licensing) and equity alliances or joint ventures, (construction projects)
Parent–subsidiary relationship: Most integrated alternative, Parent companies have command and control, Ex: GM owns Opel and Vauxhall in Europe
13

Vertical Integration
The ownership of inputs or distribution channels.
“What percentage of a firm’s sales is generated within the firm’s boundaries?”
Backward Vertical Integration:
Owning inputs of the value chain.
Forward Vertical Integration:
Owning activities closer to the customer.
————————————————————
Full Vertical Integration:
Owns forests, mills, and distribution to retailers

© McGraw Hill
Ford created subsidiaries that produced glass, rubber and metal to ensure supply. Ford helped eliminate shortages or stoppages in materials by owning the plants that produced. They feed the manufacturer to make a product.
Disney opened their own retail stores to capture revenues from merchandise sales.
“Disney designed” to create value added stores to help capture more revenues from the tie in promos and merchandise-retail They feed the consumer from the parent.

The degree of vertical integration tends to correspond to the number of industry value chain stages in which a firm directly participates.
14

Backward and Forward Vertical Integration along an Industry Value Chain
Exhibit 8.5
Access the text alternate for slide image.

The Vertical Value Chain of Your Cell Phone
Raw materials:
Chemicals, ceramics, metals, oil for plastic.
Intermediate goods and components:
Integrated circuits, displays, touchscreens, cameras, and batteries.
Final Assembly and manufacturing:
Assembly.
Marketing, sales, after-sales service and support:
Pick a service provider.
Get wireless data and voice service.

© McGraw Hill
1. Raw materials, (chemicals, ceramics, metals, oil for plastic are commodities). Commodity businesses such as Dupont, BASF, Kyocera and Exxon Mobile, respectively.
2. Intermediate goods/Components such as integrated circuits, displays, touchscreens, cameras and batteries are provided by ARM Holdings, Jabil Circuit, Intel, LG, Altek and BYD
3. OEM’s such as Flextronics and Foxconn assemble the phones under contract from Consumer Electronics firms such as Nokia, Motorola, Samsung and Apple.
4..Wireless carriers are the final piece as service providers to enable the cell phone to work.
16

Benefits and Risk of Vertical Integration
Benefits:
Securing critical supplies
Lowering costs & improving quality
Facilitating investments in specialized assets
Risks:
Increasing costs & reducing quality
Reducing flexibility
Increasing the potential for legal repercussions

© McGraw Hill
Specialized assets have a high opportunity cost: They have significantly more value in their intended use than in their next-best use. They can come in several forms:
▪ Site specificity—assets required to be co-located, such as the equipment necessary for mining bauxite and aluminum smelting.
▪ Physical-asset specificity—assets whose physical and engineering properties are designed to satisfy a particular customer. Examples include the bottling machinery for E&J Gallo. Given the many brands of wine offered by E&J Gallo, unique equipment, such as molds and a specific production process, is required to produce the different and trademarked bottle shapes.
▪ Human-asset specificity—investments made in human capital to acquire unique knowledge and skills, such as mastering the routines and procedures of a specific organization, which are not transferable to a different employer.
Amazon, featured in the Chapter Case, is facing potential legal repercussions because of its increasing scale and scope. Amazon now accounts for roughly one-half of all internet retail spending in the United States. In addition, with AWS, physical retail stores, and drone deliveries, Amazon is increasingly becoming a fully vertically integrated enterprise. Many argue that Amazon is much like a utility, providing the backbone for internet commerce, both in the business-to-consumer (B2C) as well as in the business-to-business (B2B) space. This paints a future picture in which rivals are depending more and more on Amazon’s products and services to conduct their own business. Amazon’s tremendous scale and scope can bring it increasingly into conflict with governments. Antitrust enforcers such as the Department of Justice might train their sights on Amazon.
17

When Does Vertical Integration Make Sense?
When there are issues with raw materials.
Example: Henry Ford ran mining operations.
To enhance the customer experience.
Eliminate annoyances and poor interfaces.
Vertical market failure: when transactions are too risky or costly.

© McGraw Hill
In the early days of automobile manufacturing, Ford Motor Co. was frustrated by shortages of raw materials and the limited delivery of parts suppliers. In response, Henry Ford decided to own the whole supply chain, so his company soon ran mining operations, rubber plantations, freighters, blast furnaces, glassworks, and its own parts manufacturer…Unfortunately, he did not own the railroad to ship it!
China tries to close the market on rare earth materials as they become more and more important for electronics.
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Alternatives to Vertical Integration
Taper Integration:
Backward or forward integrated.
Plus reliance on outside firms such as suppliers or distributors.

Strategic Outsourcing:
Moving internal value chain activities.
To other firms.
Example: HR management system.

© McGraw Hill
Taper integration has several benefits:
▪ It exposes in-house suppliers and distributors to market competition so that performance comparisons are possible. Rather than hollowing out its competencies by relying too much on outsourcing, taper integration allows a firm to retain and fine-tune its competencies in upstream and downstream value chain activities.
▪ Taper integration also enhances a firm’s flexibility. For example, when adjusting to fluctuations in demand, a firm could cut back on the finished goods it delivers to external retailers while continuing to stock its own stores.
▪ Using taper integration, firms can combine internal and external knowledge, possibly paving the path for innovation.
19

Vertical Integration in Entertainment

Frozen all inhouse with Disney, (movie, theme parks, merchandise, live theatre
HP: Warner Bros, Electronic Arts games, Comcast theme park, licenses for Mattel, Lego, Hasbro.

Diversification and Geographic Scope
Diversification is one of the strategies pursued by firms wishing to grow in newer markets and by launching newer products…
…Diversification addresses what range of products/services are to be offered
…Geographic scope determines where we are going to market those products/services; regional, national or international.

Diversification at Disney

Types of Diversification
Product Diversification:
Increase in variety of products / services.
Active in several product markets.
Geographic Diversification:
Increase in variety of markets / geographic regions.
Regional, national, or international markets.
Product-Market Diversification:
Product and geographic diversification.

© McGraw Hill
product–market diversification strategy
Corporate strategy in which a firm is active in several different product markets and several different countries.
23

Diversification: Tale of two companies

© McGraw Hill
Coca-Cola, for example, focuses on soft drinks and thus on a single product market. Its archrival PepsiCo competes directly with Coca-Cola by selling a wide variety of soft drinks and other beverages, and also offering different types of chips such as Lay’s, Doritos, and Cheetos, as well as Quaker Oats products such as oatmeal and granola bars. Although PepsiCo is more diversified than Coca-Cola, it has reduced its level of diversification in recent years. Used to own TacoBell/KFC/PizzaHut.

Types of Corporate Diversification
Single business: low level of diversification.
Dominant business: additional business activity pursued.
Related diversification:
Constrained: all businesses share competencies.
Linked: some businesses share competencies.
Unrelated diversification (conglomerate): no businesses share competencies.

© McGraw Hill
Examples of the four main types of diversification:
Single business – Coca-Cola, Google, Facebook
Dominant business – Harley Davidson, Nestle, UPS
Related diversification – Related Constrained: ExxonMobile, Nike; Related Linked: Amazon, Disney
Unrelated diversification: (conglomerate) – Berkshire Hathaway (BNSF, Heinz, Geico, Sees Candies, DQ)
A related-diversification strategy entails two types of costs: coordination and influence costs. Coordination costs are a function of the number, size, and types of businesses that are linked. Influence costs occur due to political maneuvering by managers to influence capital and resource allocation and the resulting inefficiencies stemming from suboptimal allocation of scarce resource.
25

The Core Competence–Market Matrix

Access the text alternate for slide image.

© McGraw Hill
To survive and prosper, companies need to grow. This mantra holds especially true for publicly owned companies because they create shareholder value through profitable growth. Strategic leaders respond to this relentless growth imperative by leveraging their existing core competencies to find future growth opportunities. Gary Hamel and C.K. Prahalad advanced the core competence–market matrix, depicted in Exhibit 8.9, as a way to guide managerial decisions in regard to diversification strategies. The first task for managers is to identify their existing core competencies and understand the firm’s current market situation. When applying an existing or new dimension to core competencies and markets, four quadrants emerge, each with distinct strategic implications.
Nations Bank CC was selecting, acquiring and integrating commercial banks to grow geographically
BofA leveraged CC of acquiring and moving into wealth management.
Coke competed with Pepsi’s Gatorade, (75% markshare)…tried with Powerade, (17) and moved into Body Armor (3+)
Salesforce leveraged leading CRM cloud based into PaaS to allow people to build own platforms.
26

How Diversification Can Enhance Firm Performance
Provides economies of scale (reduces costs).
Exploits economies of scope (increases value).
Reduces costs and increase value.

Restructuring
Reorganizing and divesting business units and activities.
Helps refocus a company.
Helps leverage core competencies more fully.
Helpful restructuring tool: BCG growth-share matrix.
Guides portfolio planning.
Each category warrants a different strategy.

© McGraw Hill
Corporate executives can restructure the portfolio of their firm’s businesses, much like an investor can change a portfolio of stocks.
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Restructuring
The process of reorganizing and divesting business units and activities to help refocus a company and leverage core competencies more fully:
GE, (General Electric), exited TV, Appliances and Electronics and moved more into services.
InBev sold Busch Gardens and SeaWorld to focus on core business of beverages/beer.
Verizon sold off landline business to focus on Wireless.
Wall Street loves “restructuring” as it means layoffs, which equate to financial savings.

© McGraw Hill
Corporate executives can restructure the portfolio of their firm’s businesses, much like an investor can change a portfolio of stocks.
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Boston Consulting Group Matrix
A tool to determine growth vs. market share
Exhibit 8.13

Access the text alternate for slide image.

© McGraw Hill
Corporate executives can restructure the portfolio of their firm’s businesses, much like an investor can change a portfolio of stocks. One helpful tool to guide corporate portfolio planning is the Boston Consulting Group (BCG) growth–share matrix. The firm plots its SBUs into one of four categories in the matrix: dog, cash cow, star, and question mark. Each category warrants a different investment strategy. All four categories shape the firm’s corporate strategy.
SBUs identified as dogs are relatively easy to identify: They are the underperforming businesses. Dogs hold a small market share in a low-growth market; they have low and unstable earnings or negative cash flows. The strategic recommendations are either to divest the business or to harvest it.
Cash cows are SBUs that compete in a low-growth market but hold considerable market share. Their earnings and cash flows are high and stable. The recommendation is to invest enough into cash cows to hold their current position and to avoid having them turn into dogs.
Stars hold a high market share in a fast-growing market. Their earnings are high and either stable or growing. The recommendation is to invest sufficient resources to hold the star’s position or even increase investments for future growth.
Question marks: It is not clear whether they will turn into dogs or stars. Their earnings are low and unstable, but they might be growing. The cash flow is negative. Ideally, corporate executives want to invest in question marks to increase their relative market share so they turn into stars.
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BCG in real life…
In small groups, identify the BCG model for the Apple product portfolio:
Macbook
iPhone
iPad
iPod
Watch
Apple TV
iTunes
Apple Music

Apple Products

32
Apple TV
iTunes

© McGraw Hill
Internal Capital Markets
Can be a source of value creation in diversification strategy.
A way to allocate capital at a lower cost, if more efficient than external markets.
A related-diversification strategy can enhance corporate performance.
Consider coordination and influence costs.

© McGraw Hill
Coordination costs are a function of the number, size, and types of businesses that are linked. Influence costs occur due to political maneuvering by managers to influence capital and resource allocation and the resulting inefficiencies stemming from suboptimal allocation of scarce resources.
Until recently, GE Capital brought in close to $70 billion in annual revenues and generated more than half of GE’s profits. In combination with GE’s triple-A debt rating, having access to such a large finance arm allowed GE to benefit from a lower cost of capital, which in turn was a source of value creation in itself. In 2009, at the height of the global financial crises, GE lost its AAA debt rating. The lower debt rating and the smaller finance unit are likely to result in a higher cost of capital, and thus a potential loss in value creation through internal capital markets. GE subsequently sold its GE Capital business unit.
As of 2018, the company operates through the following segments: aviation, healthcare, power, renewable energy, digital industry, additive manufacturing, venture capital and finance, lighting, and oil and gas. GE was once a power house but is now retrenching. Formerly the poster child for diversification.

The Diversification-Performance Relationship

Access the text alternate for slide image.

© McGraw Hill
High and low levels of diversification are generally associated with lower overall performance, while moderate levels of diversification are associated with higher firm performance. This implies that companies that focus on a single business, as well as companies that pursue unrelated diversification, often fail to achieve additional value creation. Firms that compete in single markets could potentially benefit from economies of scope by leveraging their core competencies into adjacent markets.
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Does Diversification Lead to Superior Performance?
The critical question to ask…are the individual businesses worth more under the company’s management than if each were managed in separate firms? (history says…“not much”)

Diversification is like sex…attractions are obvious, often irresistible, yet the experience is often disappointing.

© McGraw Hill
Many times the reason for diversification is not related to improving the business, but more into CEO ego or “me-too” beliefs that everyone else is doing it, so I don’t want to get left behind.
35

Team Exercise???

Because learning changes everything.®
www.mheducation.com

Chapter

Corporate Governance and Business Ethics

No reproduction or further distribution permitted without the prior written consent of McGraw Hill.

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The AFI Strategy Framework

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Learning Objectives
Describe the shared value creation framework and its relationship to competitive advantage.
Explain the role of corporate governance.
Apply agency theory to explain why and how companies use governance mechanisms to align interests of principals and agents.
Evaluate the board of directors as the central governance mechanism for public stock companies.
Evaluate other governance mechanisms.
Explain the relationship between strategy and business ethics.

© McGraw Hill
Case Study-Uber
Travis Kalanick founded the company in 2009 in SF
Disrupted taxi service as “ride hailing”
Market cap of $70B in 2017
Hertz w/ 500M cars, 150k employees = 1% of that value
Avoids the taxes of other cab companies
Gig economy job = freedom, but not benefits
Forced to resign in 2017 after fallout from investigation and video of him going off on Uber driver.

Case Study -Uber
Ethically Challenged?
Early disregard for laws, rules and regulations
Dynamic pricing
Punking the competition
Punking their own drivers
Attacking critics
Culture of sexual harassment/gender discrimination
Waymo lawsuit

© McGraw Hill
Flaunting local laws and ignoring injunctions
Surge pricing vs. price gouging, (snowstorms, etc)…matching supply with demand.
Uber ordered Lyft rides and then cancelled, causing lost business from legitimate customers
Lied to their drivers about laws preventing drivers from working for both Lyft and Uber
Poached/targeted Lyft drivers
Google’s sued Uber for trade secret theft. Waymo alleged one of its former engineers stole confidential trade secrets before leaving to form his own startup, Otto, in 2016. Waymo alleged Uber used that information to help advance Uber’s self-driving tech once Otto was acquired in August 2016.
5

Public Stock Company: Four Benefits
Limited liability for investors.
Transferability of investor ownership through stock.
Legal personality, with rights and obligations.
Separation of legal ownership and management control.

© McGraw Hill
Only liable for what you invest
Easily transfer of stocks
Public domain vs. family run…public firms has rights and obligations
Stockholders are owners who delegate authority.
For publicly held firms, in particular, it is important for management to keep in mind that it is acting as stewards for other people’s money and has public responsibilities.

The Public Stock Company: Hierarchy of Authority
Exhibit 12.1

Access the text alternate for slide image.

Two Viewpoints
Traditional View: (Friedman)
Shareholder capitalism: shareholders – the providers of the necessary risk capital and the legal owners of public companies – have the most legitimate claim on profits.
Shared Value View: (Porter)
Creating Shared Value, (CSV): obligations extend beyond the economic responsibility and include legal, ethical, and philanthropic societal expectations

© McGraw Hill
Freidman-”There is one and only one social responsibility of business-to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competitions without deception of fraud.”
Porter-”The purpose of the corporation must be redefined as creating shared value, not just profit per se. This will drive the next wave of innovation and productivity growth in the global economy.”
Discuss in your group the contrasting perspectives of “shareholder versus stakeholder” governance. What benefits and drawbacks can you find in each view? Students need to understand the difference between shareholders and stakeholders. Shareholders focus on self-interest and profitability, while stakeholders emphasize responsibilities and all the parties involved. They must also realize that national and cultural differences play a role when designing the governance structure. What are the differences within countries in regards to layoffs?
8

“The social responsibility of business is to increase its profits.”
A survey was created:
For the (degreed) top 25% of income earners.
To assess various countries.
To inquire whether they agree with Friedman.
The results…

Global Survey of Attitudes toward Business Responsibility

Access the text alternate for slide image.

The Shared Value Creation Framework
Provides guidance to managers.
Helps reconcile gaining and sustaining competitive advantage with corporate social responsibility.
Creates a larger “pie” to benefit shareholders and stakeholders.

Creating Shared Value
Executives shouldn’t concentrate only on increasing firm profits.
Rather, they should focus on creating shared value.
– Economic value (for shareholders).
– Social value (address society’s needs and challenges).

© McGraw Hill
Video on CSV image
The shared value creation framework provides help in making connections between economic needs and social needs in a way that transforms into a business opportunity.
What does this sound like?
Starbucks had the vet program 25k hires, refugee 10k hires, youth 10k hires. Rust proof plants for farmers
GE, for example, has strengthened its competitiveness by creating a profitable business with its “green” Ecomagination initiative. Ecomagination is GE’s strategic initiative to provide cleaner and more efficient sources of energy, provide abundant sources of clean water anywhere in the world, and reduce emissions. Jeffrey Immelt, GE’s former CEO, would often say, “Green is green,” meaning that addressing ecological needs offers the potential of gaining and sustaining a competitive advantage for GE.
12

Reconnecting Economic and Societal Needs
Reconceiving products and markets. Expand the customer base to bring in nonconsumers, (the largest and poorest groups).
Companies can meet customer needs while better serving society, within existing markets, accessing new ones, or lowering costs through innovation
Redefining productivity in your value chain. Expand traditional internal firm value chains to include more nontraditional partners.
For example, nongovernmental organizations (NGOs)
Companies can improve the quality, quantity, cost, and reliability of inputs and distribution while they simultaneously act as a steward for essential natural resources and drive economic and social development.
Focus on creating new regional clusters.
Look at ways to support industries related to your own
Chilecon Valley and Bangalore

© McGraw Hill
Porter argues that these strategic actions will lead to a larger pie of revenues and profits that can be distributed among a company’s stakeholders.
CSV is about creating new business opportunities that create new markets, improve profitability and strengthen competitive positioning….Value
CSR is about responsibility…they overlap.
CSR is viewed more as a cost center, not a profit center, Porter’s is identify the profit capability in CSV.
13

One firm’s view

© McGraw Hill
Corporate Governance
The mechanisms to:
Direct and control an enterprise.
Ensure that it pursues strategic goals successfully and legally.
Offers checks and balances.
Attempts to address the principal-agent problem, (next slide)

© McGraw Hill
The separation of ownership and control is one of the major advantages of the public stock companies. This benefit, however, is also the source of the principal–agent problem. In publicly traded companies, the stockholders are the legal owners of the company, but they delegate decision-making authority to professional managers. The conflict arises if the agents pursue their own personal interests, which can be at odds with the principals’ goals. For their part, agents may be more interested in maximizing their total compensation, including benefits, job security, status, and power. Principals desire maximization of total returns to shareholders.

The Principal-Agent Problem

© McGraw Hill
Managers, executives, and board members tend to have access to private information concerning important company developments that outsiders, especially investors, are not privy to. Often this informational advantage is based on timing—insiders are the first to learn about important developments before the information is released to the public. Although possessing insider information is not illegal and indeed is part of an executive’s job, what is illegal is acting upon it through trading stocks or passing on the information to others who might do so…this is known as information asymmetry.
The company’s officers and board of directors, including Chairman Kenneth Lay, CEO Jeffrey Skilling and CFO Andy Fastow, were selling their Enron stock at higher prices due to false accounting reports that made the stock seem more valuable than it truly was.
Goldman Sachs and Real estate bubble. Another agency problem occurs when financial analysts invest against the best interests of their clients.
16

The Principal-Agent Problem

While the stockholders call on the managers to take care of the company, the managers may look to their own needs first.

© McGraw Hill
P-A problem occurs when one person or entity (the “agent”) is able to make decisions and/or take actions on behalf of, or that impact, another person or entity: the “principal”. This dilemma exists in circumstances where agents are motivated to act in their own best interests, which are contrary to those of their principals

Agency Theory
A theory that views the firm as a nexus of legal contracts.
Conflicts that arise should be resolved legally.
The firm needs to design work tasks, incentives, and employment contracts…
To minimize opportunism by agents.
18

© McGraw Hill
Senior executives, such as the CEO, face agency problems when they delegate authority. Employees who perform the actual operational labor are agents who work on behalf of the managers. Such frontline employees often enjoy an informational advantage over management. They may tell their supervisor that it took longer to complete a project or serve a customer than it actually did, for example. Some employees may be tempted to use such informational advantage for their own self-interest (e.g., spending time on Facebook during work hours, watching YouTube videos, or using the company’s computer and internet connection for personal business).
18

Adverse Selection and Moral Hazard
Both caused by information asymmetry.
Adverse Selection
An increased likelihood of selecting inferior alternatives.
Moral Hazard
When one party is incentivized to take undue risks or shirk responsibilities,
The costs are incurred to the other party.

The Board of Directors
Centerpiece of corporate governance.
Represent the interests of shareholders.
Tasked with providing oversight.
Consist of inside and outside directors.
Inside directors: usually consist of CEO, COO, CFO.
Outside directors: senior execs from other firms.
Are elected by the shareholders.
Shareholders vote to determine who is elected.

Responsibilities of the Board of Directors
Strategic oversight and guidance.
CEO selection, evaluation, compensation, succession.
Guide executive compensation.
Review, monitor, evaluate, and approve strategic initiatives.
Risk assessment and mitigation.
Ensuring financial statements are accurate.
Ensuring compliance with laws and regulations.

© McGraw Hill
When Facebook acquired Instagram, the CEO, Mark Zuckerberg, did not even inform the board about the deal until it was done. Working on his own was undoubtedly faster than engaging the board and seeking their advice and approval, and speed may have made the difference in gaining the target. On the other hand, how well were the shareholders served in the absence of board oversight in the negotiations process? Ask students to debate the pros and cons of Mr. Z’s actions.
The practice of CEO/chairperson duality—holding both the role of CEO and chairperson of the board—has been declining somewhat in recent years. Among the largest 500 publicly traded companies in the United States, about 70 percent of firms had the dual CEO-chair arrangement in 2005 (before the global financial crisis), but this number had declined to some 50 percent of companies in 2018 (post global financial crisis). High-profile examples of the same person serving as CEO and chair of the board include Jeff Bezos (Amazon), Mark Zuckerberg (Facebook), Robert Iger (Disney), Mary Barra (GM), and Virginia Rometty (IBM).
21

Boys Club?

© McGraw Hill
Why has representation by women on U.S. boards not increased over the past 10 years? What actions could be taken by companies to increase participation? What actions could be taken by women who seek to be directors?
Part of the problem is that women continue to be under-represented in the C-Suite executive offices.
22

Other Governance Mechanisms
Used to align incentives between principals and agents:
Executive compensation.
The market for corporate control.
Financial statement auditors, government regulators, and industry analysts.

1. Executive Compensation
Stock options are often part of compensation.
2019 Average CEO pay was about $21M.
The avg ratio of CEO to employee pay is 280:1
In 1980 it was 40:1
About 2/3 of CEO pay is linked to firm performance.
Incentives can negatively affect performance
Overall pay has gone up, but not necessarily performance

© McGraw Hill
CEO pay has increased 940% since 1978
What are the potentially negative effects of this increasing disparity in CEO pay? Do you believe that current executive pay packages are justified? Why or why not?
Based on a survey of CEOs in the S&P 500 by The Wall Street Journal, the median annual compensation was about $11 million. The five highest paid CEOs were Thomas Rutledge of Charter Communications ($98.5 million), Fabrizio Freda of Estée Lauder ($48.4 million), Mark Parker of Nike ($47.6 million), Alex Molinaroli of Johnson Controls ($46.4 million), and Robert Iger of Disney ($43.9 million). Noteworthy are also the two lowest paid CEOs in the S&P 500: Warren Buffett of Berkshire Hathaway ($470,000) and Larry Page of Alphabet ($1, the minimum payment required).
24

CEO Pay 2019
Highest in 2019:
Elon Musk – Tesla, SpaceX ($2.2B) Patrick Smith – Axon Enterprise ($248M) David Zaslav – Discovery Comm ($128M) John Legere – T-Mobile ($66M) Robert Iger of Disney ($65M)
Lowest in 2019
Warren Buffet of Berkshire Hathaway ($100k)
Larry Page of Alphabet ($1.00)
Jeff Bezos of Amazon ($1.7M)
Craig Jelinek of Costco, ($934,000)

2. The Market for Corporate Control
An external corporate-governance mechanism.
Activist investors who:
Seek to gain control of an underperforming corporation.
Buy shares of its stock in the open market through buy-outs.
Defended by poison pill

© McGraw Hill
In a leveraged buyout (LBO), a single investor or group of investors buys, with the help of borrowed money (leveraged against the company’s assets), the outstanding shares of a publicly traded company in order to take it private. In short, an LBO changes the ownership structure of a company from public to private. The expectation is often that the private owners will restructure the company and eventually take it public again through an initial public offering (IPO).
To avoid being taken over against their consent, some firms put in place a poison pill. These are defensive provisions that kick in should a buyer reach a certain level of share ownership without top management approval.
(Carl Icahn, Daniel Loeb, Wm. Ackman)
Whole foods was one such target and chose to “merge” with Amazon vs. investor driven change.
26

3. Auditors, Regulators and Industry Analysts
External-governance mechanisms.
To avoid misrepresentation of financial results:
Public financial statements must follow GAAP:
Generally accepted accounting principles.
Financial statements must be audited.
Industry analysts often base their buy, hold, or sell recommendations on:
Financial statements filed with the SEC.
Business news (WSJ, Forbes, CNBC, etc.)

© McGraw Hill
Corporate-governance mechanisms play an important part in aligning the interests of principals and agents. They enable closer monitoring and controlling, as well as provide incentives to align interests of principals and agents. An industry has sprung up around assessing the effectiveness of corporate governance in individual firms. Research outfits, such as GMI Ratings, provide independent corporate governance ratings. The ratings from these external watchdog organizations inform a wide range of stakeholders, including investors, insurers, auditors, regulators, and others.
27

Ethics Scandals

© McGraw Hill
Ethical decision making depends on the organization
Enron-Power Utilities – creating an inflated share price at any cost, employees observed and followed the behavior set by leaders. Ken Lay died weeks before entering prison, other C-levels imprisoned
Worldcom-Telecom – Bernie Ebbers imprisoned
Tyco-Security systems – Dennis Kowsloski imprisoned
Valeant/Turin – Pharma, CEO believed its sole purpose was to the shareholder, orphan drugs. Shreli in prison, Thompson free
HSBC – The drug cartel’s bank, money laundering. Paid a $2B fine, make 38B/yr.
Payday loan – legal loan shark, Scott Tucker in prison
28

Apology tours

© McGraw Hill
Why are these ads being run? Unethical behavior
Has it changed your mind about using any of these companies?
WF https://www.youtube.com/watch?v=CjWnHmFYbEg
Fb https://youtu.be/Q4zd7X98eOs
Uber https://www.youtube.com/watch?v=WMZyw5lPKgE
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Two Questions
Why does this unethical behavior happen repeatedly in the business world?

Is there a difference between Ethics and Business Ethics?

© McGraw Hill
Does crime pay?
How many people go to jail for destroying trust, companies and people? Very few if any
Just because it is legal, does it make it right? Valeant buys smaller monopolistic drug companies to raise the price.
How to you rectify “business ethics”.
30

Business Ethics
An agreed-upon code of conduct in business
Provides training for:
Behavior that is consistent with the principles, norms, and standards of business practice that have been agreed upon by society.
Can differ in various cultures around the globe.
Universal norms include fairness, honesty, and reciprocity.

© McGraw Hill
Law and ethics, however, are not synonymous. This distinction is important and not always understood by the general public. Staying within the law is a minimum acceptable standard. A note of caution is therefore in order: A manager’s actions can be completely legal, but ethically questionable.
31

When Facing an Ethical Dilemma
Is the action within acceptable norms of professional behavior?
As outlined in the organization’s code of conduct.
As defined by the profession at large.

Would you feel comfortable explaining and defending the decision in public?
How would the media react?
How would the company’s stakeholders feel about it?

Bad Apples vs. Bad Barrels
Bad Apples.
Individuals who act opportunistically.

Bad Barrels.
An unethical organizational climate.
To set the ethical tone, leaders must:
Set clear ethical expectations.
Put structure, culture and control systems in place.
Formal and informal culture must be aligned.
Executive behavior must adhere to the company vision and values.

The MBA Oath
As a business leader I recognize my role in society.
My purpose is to lead people and manage resources to create value that no single individual can create alone.
My decisions affect the well-being of individuals inside and outside my enterprise, today and tomorrow.

Therefore, I promise that:
I will manage my enterprise with loyalty and care, and will not advance my personal interests at the expense of my enterprise or society.
I will understand and uphold, in letter and spirit, the laws and contracts governing my conduct and that of my enterprise.
I will refrain from corruption, unfair competition, or business practices harmful to society.
I will protect the human rights and dignity of all people affected by my enterprise, and I will oppose discrimination and exploitation.
I will protect the right of future generations to advance their standard of living and enjoy a healthy planet.
I will report the performance and risks of my enterprise accurately and honestly.
I will invest in developing myself and others, helping the management profession continue to advance and create sustainable and inclusive prosperity.

In exercising my professional duties according to these principles, I recognize that my behavior must set an example of integrity, eliciting trust and esteem from those I serve. I will remain accountable to my peers and to society for my actions and for upholding these standards.
This oath I make freely, and upon my honor.

Exhibit 12.4
Developed by Harvard Business School students:
Helps anchor future managers to professional values.
A guideline for integrity in business.
Source: MBA Oath and Max Anderson.

© McGraw Hill
The MBA Oath
As a business leader I recognize my role in society. My purpose is to lead people and manage resources to create value that no single individual can create alone.
My decisions affect the well-being of individuals inside and outside my enterprise, today and tomorrow.
Therefore, I promise that: I will manage my enterprise with loyalty and care, and will not advance my personal interests at the expense of my enterprise or society.
I will understand and uphold, in letter and spirit, the laws and contracts governing my conduct and that of my enterprise.
I will refrain from corruption, unfair competition, or business practices harmful to society.
I will protect the human rights and dignity of all people affected by my enterprise, and I will oppose discrimination and exploitation.
I will protect the right of future generations to advance their standard of living and enjoy a healthy planet.
I will report the performance and risks of my enterprise accurately and honestly.
I will invest in developing myself and others, helping the management profession continue to advance and create sustainable and inclusive prosperity.
In exercising my professional duties according to these principles, I recognize that my behavior must set an example of integrity, eliciting trust and esteem from those I serve. I will remain accountable to my peers and to society for my actions and for upholding these standards.
This oath I make freely, and upon my honor.
34

Because learning changes everything.®
www.mheducation.com

The Paradox of Business Ethics:
Nailing Jello to a Wall
or Just Plain Common Sense?

Ethics on campus
“Pressure to succeed leading more students to cheat”
“Social Deviance Among Students”
“3 ways cheaters have scammed the college admissions game”
“86 percent of college students say they’ve cheated”
“Why Paying Bribes to Get Your Child Into College Is a Crime”

https://www.10tv.com/article/pressure-succeed-leading-more-students-cheat
37

Midterms 2017 Spring-Seattle Univ
Two classes of 4890
What is the purpose of a midterm?

To determine how the class is tracking on the lessons and to provide feedback to the teacher that they are able to correctly communicate the information
Canvas – Decided to use the technology

None of the other teachers were using this tool, hmmmm
38

Exam results
Scores came in and they were awesome. Some had perfect scores. (I am a great teacher!)
I started re-reading the answers and discovered things were not looking correct in the answers.
Students using words like thus, therefore, and hence. Not words I found in their other course work.
Some of the answers were verbatim to the Power point and textbooks, including punctuation and fonts
Reached out to Canvas and learned you can activate “Quiz logs”.
Verified students were leaving Canvas numerous times.
Validated students were cutting and pasting answers directly from the textbook and other sources via the 7 sec screen shots views

to see when students were leaving Canvas, (why would you need to leave Canvas?). This showed that people were leaving the exam numerous times. I was also able to verify that people were cutting and pasting answers directly from the textbook and other sources via the 7 sec screen shots views, (apparently some people can type 60 words a minute, but…)
39

Response
Share findings with Class
Written spot quiz, (5 questions)
End class
a. Grade quizzes and compared to mid-term
b. Performed forensics on who/what/how
c. Discovered 35% of each class was cheating
d. Get pissed
Discuss with Dept head
– Cheating is apparently common, who knew? Rossen
reports

Rethink my desire to teach

No one was aware that Canvas has the quiz log feature, so that was eye-opening.
I then performed a written spot quiz of 5 questions to see how they compared with the Canvas results. I dismissed the class so I could grade them immediately. The spot quiz results were not the same as Canvas exam for about 35% of the class.
I spent a lot of time on the validation.
https://www.today.com/video/rossen-reports-underground-world-of-college-cheating-31797315879
At this point I was feeling very depressed and disillusioned. Oh, this happened in both Spr classes.
40

Questions
Was there any value to my midterm feedback?
How important are grades to these students?
Is it more important to learn stuff than get the grade?
Are we creating a nation of cheaters?
What is the impact on society?, (Is this the new “sign of times”?)
If this is so prevalent, is Seattle U part of the problem?
How damaging is groupthink?

It is more important to me that you are getting the information than getting the grades. I believe I am allowing you the opportunity to get a good grade, but now I am worried about what type of people are graduating into this world.
What are you going to be doing in your careers? Look, the real world is not fair, but if we are grooming a society of cheaters and unethical people, where will that lead us? Some of you will succeed as cheaters, yes. Some of you have grown up with an unethical culture and those are the life lessons you have accepted as normal. You believe it is OK. You pay people to write your papers, you use pirated textbooks and the school turns a blind eye, why? Cuz they want your money…
41

Seattle U Academic Integrity Policy
A student found to have violated the Academic Integrity Policy shall be subject to penalties imposed by the faculty member reporting the violation and any additional penalties that may be imposed by the dean or the provost. Penalties include:
No class credit
Reprimand
Probation
Suspension
Expulsion
Denial of Recommendation

Options for Joe?
Let everything ride. (This allows the cheaters to succeed at the expense of the students who did their own work).
Ask for confessions and provide immunity, (0 points for midterm vs. failing class)
Throw the whole thing out and move the points to the final.
Redo the midterm in handwritten form
Retake on Canvas with observers, no one sits in the back. (How would that make you feel?)
The only person who’s test results I was sure were accurate is the student who took the test in the proctor center.

Options for Joe?
Let everything ride. (This allows the cheaters to succeed at the expense of the students who did their own work).
Ask for confessions and provide immunity, (0 points for midterm vs. failing class)
Throw the whole thing out and move the points to the final.
Redo the midterm in handwritten form
Retake on Canvas with observers, no one sits in the back. (How would that make you feel?)
I had spent too much time doing detective work and we needed to move forward.

Results
28 Students from both classes “confessed” and apologized.
Phone calls
Meetings
We wiped the slate clean and moved on, (0 was given as the grade).
Groupthink was a big factor in “why?” Students saw others cheating and didn’t want to be penalized for doing their own work.
Student reaction:
Some were mad at the cheaters who caused all this chaos
Some got away with it, (jerks will always be jerks).
Most realized it as a teachable moment because this occurred during Ethics Week
Trust was not an issue moving forward, but the final was on paper =)

I was thoroughly heartened by the student reaction. It impressed me, as the meetings with tears and smiles showed they truly cared. “You did not deserve this”
45

Business Ethics in a Nutshell
“The really creative part of business ethics is discovering ways to do what is morally right and socially responsible without ruining your career and company.”
Joanne B. Ciulla, Business Ethics as Moral Imagination in Business Ethics: The State of the Art

Vehicles
Expenses
Theft
Winning Business
The continual saga of well-paid people who make poor choices…and lose their jobs.

The continual saga of well paid people who make poor choices.
Cars, (Sheppard, Brazille, Hicks, Carozza, Cross)
Expenses, (Eccard, Spriggs)
Stealing, (Dumaines, Hester)
Winning Business, (Dreamworks, UCSF/Karl)
So due to a few bad apples, everyone gets punished. Company cars, corporate credit cards, customer entertainment—all lost due to the stupidity of selfish employees. Unethical behavior override ethical
47

5 Simple Rules for Business Ethics
Thomas Hoolihan
What would your Mother say? (or Google, YouTube or the NY Times)
Tell the Truth – its Easier to Remember
It’s not the Crime – it’s the Cover-up
Be Nice and Respect Others, (sexual harassment, discrimination)
Don’t be a Whore, (what is your price?)

Story/Joke Everyone would agree to do anything for money, if the price was high enough. `Surely not, she said.’ `Oh yes,’ he said. `Well, I wouldn’t,’ she said. `Oh yes you would,’ he said. `For instance,’ he said, `would you sleep with me for… for a million pounds?’ `Well,’ she said, `maybe for a million I would, yes.’ `Would you do it for ten shillings?’ said Bernard Shaw. `Certainly not!’ said the woman `What do you take me for? A prostitute?’ `We’ve established that already,’ said Bernard Shaw. `We’re just trying to fix your price now!’ “
The bottom line is “you aren’t that smart, most everyone gets caught”
48

There are a few things you own in life:
your choices…and the consequences that come about from those choices
your attitude…on how you deal with the challenges thrown at you in life
your integrity… is who you are, the person you present to the world.

Ethics Exercise
Scenario: You see someone in the class remove another student’s wallet from their backpack and put it into their own.

1. Do you report it to professor?
2. What it is one of your friends, do you
report it?
3. What if it is your sister/brother or
significant other, do you report it?

Close you eyes and raise your hands. Tally up on the board.
…or poll
50

Chapter 10

Global Strategy: Competing Around the World

No reproduction or further distribution permitted without the prior written consent of McGraw Hill.

Because learning changes everything.®

The AFI Strategy Framework

Because learning changes everything.®

Learning Objectives
Define globalization, multinational enterprise (MNE), foreign direct investment (FDI), and global strategy.
Explain why companies compete abroad and evaluate the advantages and disadvantages of going global.
Apply the CAGE distance framework to guide MNE decisions on which countries to enter.
Compare and contrast the different options MNEs have to enter foreign markets.
Apply the integration-responsiveness framework to evaluate the four different strategies MNEs can pursue when competing globally.
Apply Porter’s diamond framework to explain why certain industries are more competitive in specific nations than in others.

© McGraw Hill
Hollywood and Globalization
Hollywood movie: The quintessential American product
However, non-U.S. sales increased: 50% in 2000, 70% in 2012, but slowing in 2016, (accounted for $39B in sales)
Altered global strategic focus
Movies that fit the global market by adapting foreign scripts, hiring international actors/actresses
Two versions of Iron Man 3 in 2013 (one just for China)
Treat emerging markets as focal targets
Not just filmmaking industries, but also electronics industry (ex: Korea, China), and auto industry (ex: India)

© McGraw Hill
2018 Operation Red Sea $1.5M in US, $579M in China
Avenger End Game, Domestic: $858,373,000 30.7%+ Foreign: $1,937,901,401 69.3%= Worldwide: $2,796,274,401
5

What is Globalization?
A process…
…that provides closer integration and exchange…
…between countries and peoples worldwide.
Made possible by:
Falling trade and investment barriers.
Advances in telecommunications.
Reductions in transportation costs.
Importance of MNEs and FDIs

© McGraw Hill
Combined, these factors reduce the costs of doing business around the world, opening the doors to a much larger market than any one home country. Globalization also allows companies to source supplies at lower costs, to learn new competencies, and to further differentiate products. Consequently, the world’s market economies are becoming more integrated and interdependent.
6

Global Strategy
Part of a firm’s corporate strategy to:
Gain and sustain a competitive advantage.
Compete against foreign and domestic companies.
Foreign direct investment:
Investments in value chain activities abroad.
Multinational enterprise:
Deploys resources and capabilities in two countries or more.

© McGraw Hill
Instructors can ask students where their sneakers (especially Nike) are being made. The answer will highly likely be a place outside the U.S., and most probably in Asia. Then ask students why the sneakers are made in Asia.

Global Strategy
Multi-National Enterprises, (MNE’s) – make up less than 1% of the number of total U.S. companies, but they:
Account for 11 percent of private-sector employment growth since 1990.
Employ 19 percent of the work force.
Pay 25 percent of the wages.
Provide for 31 percent of the U.S. gross domestic product (GDP).
Make up 74 percent of private-sector
R&D spending.

Stages of Globalization
Globalization 1.0: 1900 to 1941:
Sales, operations, and some procurement.
Strategy flowed from headquarters to international sites.
Globalization 2.0: 1945 to 2000:
To reconstruct damage from the war.
Focus on European countries, Japan, and Australia.
Greater local responsiveness.
Headquarters set goals and international sites influenced tactics.
Globalization 3.0: 21st Century:
Business function locations are based on costs, capabilities, and PESTEL factors.
Companies can operate 24/7, 365 days a year.

The Current State of Globalization
The world only semi-globalized:
The level of globalization is at 10-25% total.
Evidence:
2% of all voice-calling minutes are cross-border.
3% of world’s population are immigrants.
9% of investments are foreign direct investments.
15% of patents list at least one foreign inventor.
18% of Internet traffic crosses national borders.
Retrenchment may occur in the future:
There has been a rise of nationalism.

© McGraw Hill
Continued economic development across the globe has two consequences for MNEs. First, rising wages and other costs are likely to negate any benefits of access to low-cost input factors. Second, as the standard of living rises in emerging economies, MNEs are hoping that increased purchasing power will enable workers to purchase the products they used to make for export only.
10

Globalization has two consequences for MNE’s
Rising wages and other costs…may negate any benefits of access to low-cost input factors, (but someone is always willing to go lower).
As the standard of living rises in emerging economies…MNEs are hoping that increased purchasing power will enable workers to purchase the products they used to make for export only.

© McGraw Hill
China’s labor costs are steadily rising in tandem with improved standard of living. Wages have increased 50% since 2005. Rising wages and fewer workers, (due to one-child-per–family) along with China’s currency appreciation will lessen the economic advantage.
China is now using Africans for manufacturing.
The people making the iphone want to own the iphone. They probably care less about…
11

And they probably don’t care about…

© McGraw Hill
And they probably care less about…whoopee cushions, Halloween stuff, metal chickens and all the other crap we buy…
Home Goods motto should be “Nothing you need to own”
12

MAGA realities

Advantages and Disadvantages of International Expansion
Exhibit 10.5

Access the text alternate for slide image.

Advantages of Going Global
Gain access to a larger market.
Gain access to low-cost input factors.
Develop new competencies.

Advantage #1: Gain Access to a Larger Market
Helps multinational enterprises with economies of scale and scope.
Participating in a much larger market.
Opportunities to outcompete local rivals.
Helps firms in smaller economies:
Achieve growth.
Gain and sustain competitive advantage.

Advantage #2: Access to Low-Cost Input Factors
Helps multinational enterprises that pursue a low-cost leadership strategy.
Examples of low-cost raw materials: lumber, iron ore, oil, and coal.
Has been a key driver of globalization:
Lower labor costs is the main focus now.
India provides well-educated English-speaking young people.
China provides low labor costs and an efficient infrastructure.

© McGraw Hill
Example: INDIA
India carved out a competitive advantage in business process outsourcing (BPO), not only because of low-cost labor but because of an abundance of well-educated, English-speaking young people. Infosys, TCS, and Wipro are some of the more well-known Indian IT service companies. Taken together, these companies employ more than 250,000 people and provide services to many of the Global Fortune 500. Many MNEs have close business ties with Indian IT firms. Some, such as IBM, are engaged in foreign direct investment through equity alliances or building their own IT and customer service centers in India. More than a quarter of Accenture’s work force, a consultancy specializing in technology and outsourcing, is now in Bangalore, India.
17

Advantage #3: Develop New Competencies
Helps multinational enterprises that pursue a differentiation strategy.
Access to:
Communities of learning.
Specific geographic regions.
Location economies.
Locating value chain activities in optimal geographies.

© McGraw Hill
AstraZeneca, a Swiss-based pharmaceutical company, relocated its research facility to Cambridge, Massachusetts, to be part of the Boston biotech cluster, in hopes of developing new R&D competencies in biotechnology. Cisco invested more than $1.6 billion to create an Asian headquarters in Bangalore and support other locations in India, in order to be in the middle of India’s top IT location. Unilever’s new-concept center is located in downtown Shanghai, China, attracting hundreds of eager volunteers to test the firm’s latest product innovations on-site, while Unilever researchers monitor consumer reactions.
Many MNEs now are replacing the one-way innovation flow from Western economies to developing markets with a polycentric innovation strategy—a strategy in which MNEs now draw on multiple, equally important innovation hubs throughout the world characteristic of Globalization 3.0; see Exhibit 10.3.
18

Disadvantages of Going Global
Liability of foreignness.
Loss of reputation.
Loss of intellectual property.

Disadvantage #1: Liability of Foreignness
Unfamiliar cultural environment.
Unfamiliar economic environment.
Coordinating across geographic distances.
All can result in additional costs.

© McGraw Hill
What works in US does not mean it will work in other countries…and viceversa…Fresh and Easy
Walmart’s problems in several international markets are in large part because of the liability of foreignness. In particular, Walmart failed in Germany and experienced a similar fate in South Korea, where it also exited in 2006. In addition, Walmart has tried for many years to successfully enter the fast-growing markets in Russia and India, but with little or no success. Walmart’s success recipe that worked so well domestically didn’t work in Germany, South Korea, Russia, or India.
Walmart underestimated its liability of foreignness when entering and competing in Germany, and how it is now facing the German grocery industry disruptors, Aldi and Lidl, on its home turf.
20

Disadvantage #2: Loss of Reputation
Reputation is one of the most valuable resources.
Reputation dimensions can include innovation, customer service, brand reputation.
Loss of reputation can diminish competitiveness.
Low wages, long hours, and poor conditions.
Local government may be corrupt.
Safety standards may not be enforceable.

© McGraw Hill
Apple’s brand, for example, stands for innovation and superior customer experience. Apple’s brand reputation is also one of its most important resources. Apple’s brand is valued at $230 billion, making it the most valuable in the world.
However, low wages, long hours, and poor working and living conditions contributed to a spate of suicides at Foxconn, Apple’s main supplier in China. The Taiwanese company, which employs more than a million people, manufactures computers, tablets, smartphones, and other consumer electronics for Apple and other leading consumer electronics companies. The backlash against alleged sweatshop conditions in Foxconn prompted Apple to work with its main supplier to improve working conditions and wages. Tim Cook, Apple’s CEO, visited Foxconn in China to personally inspect its manufacturing facility and workers’ living conditions. Although conditions at Foxconn have been improving, Apple started to diversify its supplier base by adding Pegatron, another Taiwanese original equipment manufacturer (OEM).
21

Disadvantage #3: Loss of Intellectual Property
It can be difficult to protect IP in foreign markets.
Particularly software, movies, and music.
Copyright infringements can occur.
Some countries are known for partnering initially, but then reverse-engineering capabilities.
Intellectual property exposure.
How many of you use a pirated textbook?

© McGraw Hill
Theft and reverse engineered to then compete. China is biggest abuser. That is why they release movies simultaneously now. Trumps’s trade war is part of this discussion.
1 in 5 CEO’s say there company has experience IP theft from China in 2019.
22

The CAGE Distance Framework
Distance is the main cost and risk of expansion.
CAGE is an acronym for different types of distance:
Cultural.
Administrative and political.
Geographic.
Economic.
Guides multinational enterprise decisions on which countries to enter.

© McGraw Hill
Although absolute metrics such as country wealth or market size matter to some extent—as we know, for example, that a 1 percent increase in country wealth leads to a 0.8 percent increase in international trade—the relative factors captured by the CAGE distance model matter more. For instance, countries that are 5,000 miles apart trade only 20 percent of the amount traded among countries that are 1,000 miles apart. Cultural distance matters even more. A common language increases trade between two countries by 200 percent over country pairs without one.
23

Cultural Distance
Disparity between a firm’s home and host country, specifically social norms and morals, beliefs, and values.
Made up of:
Power distance.
Individualism.
Masculinity–femininity.
Uncertainty avoidance.
Long-term orientation.
Indulgence.

© McGraw Hill
Cultural differences find their expression in language, ethnicity, religion, and social norms. They directly affect customer preferences (see Exhibit 10.5). Because of religious beliefs, for example, Hindus do not eat beef, while Muslims do not eat pork. In terms of content-intensive service, cultural and language differences are also the reason global internet companies such as Amazon or Google offer country-specific variations of their sites.
Bribery is acceptable in other countries…are you willing to play?
24

Administrative and Political Distance
Captured in factors such as:
Shared monetary or political associations.
Political hostilities.
Weak or strong legal and financial institutions.
Political and administrative barriers include:
Tariffs, quotas and restrictions.

© McGraw Hill
Many foreign (target) countries also erect other political and administrative barriers, such as tariffs, trade quotas, FDI restrictions, and so forth, to protect domestic competitors. In many instances, China, for example, requests the sharing of technology in a joint venture when entering the country.
The 19 European countries in the eurozone not only share the same currency but also integrate politically to some extent. It should come as no surprise then that most cross-border trade between European countries takes place within the EU. Germany, one of the world’s largest exporters, conducts roughly 75 percent of its cross-border business within the EU.
25

Geographic Distance
More than just physical distance.
Measured by:
Physical size (Canada versus Singapore).
Within-country distances to its borders.
Topography.
Time zones.
Whether the countries are contiguous.
Access to waterways and the ocean.
Infrastructure
Roads, power, and telecommunications.

© McGraw Hill
Geographic distance is particularly relevant when trading products with low value-to-weight ratios, such as steel, cement, or other bulk products, and fragile and perishable products, such as glass or fresh meats and fruits.
26

Economic Distance
Wealth and per capita income of consumers.
Wealthy countries engage in more cross-border trade.
Wealthy countries trade with wealthy countries.
Economies of experience, scale, scope, and standardization
Similar infrastructure and resources.
Wealthy countries trade with poor countries.
Access to low-cost input factors (economic arbitrage).

© McGraw Hill
Although Walmart in Canada is a virtual carbon copy of the Walmart in the United States, Walmart in China is quite different.
27

Modes of Foreign-Market Entry along the Investment and Control Continuum
Exhibit 10.7

Access the text alternate for slide image.

© McGraw Hill
Exporting—producing goods in one country to sell in another—is one of the oldest forms of internationalization (part of Globalization 1.0).
It is often used to test whether a foreign market is ready for a firm’s products. When studying vertical integration and diversification (in Chapter 8), there are different forms along the make-or-buy continuum. Chapter 9 outlined how strategic alliances (including licensing, franchising, and joint ventures) and acquisitions are popular vehicles for entry into foreign markets. These organizational arrangements were discussed in detail in previous chapters.
Vz-Vodaphone
28

Cost Reductions vs. Local Responsiveness
Two opposing forces in global competition:
Cost reductions: key competitive weapon.
Local responsiveness: tailoring to specific preferences.

Globalization hypothesis:
Consumer needs and preferences are converging.
Food, music, movies, clothing.
Examples: McDonalds, Coca-Cola, rock music, Greek salad, Hollywood movies, Levi jeans.

The Integration-Responsiveness Framework: Global Strategy Positions and Representative MNEs

Access the text alternate for slide image.

International Strategy
Sells the same products or services in both domestic and foreign markets.
Low-cost reductions / low-local responsiveness:
Leverages home-based core competencies.
Sells the same products domestically and abroad.

Often used successfully by MNE’s with:
Large domestic markets.
Strong reputations and brand names.

© McGraw Hill
A strength of the international strategy—its limited local responsiveness—is also a weakness in many industries. For example, when an MNE sells its products in foreign markets with little or no change, it leaves itself open to the expropriation of intellectual property (IP). Looking at the MNE’s products and services, pirates can reverse-engineer the products to discover the intellectual property embedded in them.
Harley, Rolex. Selling the same products or services in both domestic and foreign markets
Starbucks would probably be international, but could also fit into multidomestic. Low pressure for cost reduction and local support
31

Multidomestic Strategy
Low-cost reductions / high-local responsiveness:
Local consumers ideally perceive products as local.
Can be costly and inefficient:
Duplication of business functions across countries.
Common in:
Consumer products industry.
Food industry.

© McGraw Hill
Nestle, Bridgestone, Philips, (Swiss, Japanese, Dutch). Consumers will perceive them to be domestic companies. Differentiation but local…
32

Global-Standardization Strategy
High-cost reductions / low-local responsiveness:
Economies of scale and location economies.
Achieved through global division of labor.
Based on wherever capabilities have lowest cost.
Price, the main competitive weapon:
Minimal local adaptation.

© McGraw Hill
Lenovo, the Chinese computer manufacturer, is the maker of the ThinkPad line of laptops, which it acquired from IBM in 2005. To keep track of the latest developments in computing, Lenovo’s research centers are located in Beijing and Shanghai in China, in Raleigh, North Carolina (in the Research Triangle Park), and in Japan. To benefit from low-cost labor and to be close to its main markets to reduce shipping costs, Lenovo’s manufacturing facilities are in Mexico, India, and China. The company describes the benefits of its global-standardization strategy insightfully: “Lenovo organizes its worldwide operations with the view that a truly global company must be able to quickly capitalize on new ideas and opportunities from anywhere. By forgoing a traditional headquarters model and focusing on centers of excellence around the world, Lenovo makes the maximum use of its resources to create the best products in the most efficient and effective way possible.”
33

Transnational Strategy
High-cost reductions / high-local responsiveness:
“Think globally, act locally.”
Best practices, ideas, and innovations used everywhere.
Used by multinational enterprises that pursue a blue ocean strategy.
Difficult to implement:
Duplication of efforts.
Organizational complexity.

Dynamic Strategic Positioning: Google’s YouTube

Access the text alternate for slide image.

© McGraw Hill
Intl -Red was available in US and select English speaking countries, (Aus, NZ), but kept the content US-based.
Multidomestic-Premium launch allowed search engines to customize to country and culture preferences.
Trans – Will allow search engine to find content for you WHEREVER your are…
35

National Competitive Advantage
High-performing firms for certain industries are concentrated in specific countries.
United States: biotechnology, software, internet
China and Taiwan: computer manufacturing
South Korea and Japan: consumer electronics
Australia: mining
India: business process outsourcing
Germany: engineering and cars
Italy: fashion
France: wine

© McGraw Hill
The Death of Distance Hypothesis is the assumption that geographic location shouldn’t lead to firm-level competitive advantage because firms are able to source inputs globally, and this assumption is inaccurate.
36

Porter’s Diamond of National Competitive Advantage
Exhibit 10.11
Source:. Adapted from M.E. Porter (1990, March–April), “The competitive advantage of nations,” Harvard Business Review: 78.

Factor Conditions
A country’s endowments:
Natural, human, and other resources.
Resource-rich: focus on commerce.
Resource-lacking: focus on human capital.

Other important factors:
Capital markets, institutional frameworks,
research universities, public infrastructure.
Airports, roads, schools, health care system, etc.

© McGraw Hill
Resource-rich countries: Afghanistan, Iran, Iraq, Russia, Saudi Arabia, and Venezuela…but not home to any world’s leading companies.
Countries that lack natural resources: Denmark, Finland, Israel, Japan, Singapore, South Korea, Switzerland, Taiwan, and the Netherlands…but have large corps in country
Natural resources are not needed because competitive advantage is often based on human capital and know how.

Demand Conditions
Characteristics of demand in a firm’s domestic market.
Customers hold companies to standards of value creation:
Developments in research.
Cost containment.
New commercial applications for the market.

© McGraw Hill
For example, due to dense urban living conditions, hot and humid summers, and high energy costs, it is not surprising that Japanese customers demand small, quiet, and energy-efficient air conditioners. In contrast to the Japanese, Finns have a sparse population living in a more remote countryside. A lack of landlines for telephone service has resulted in the Finnish demand for high-quality wireless services, combined with reliable handsets (and long-life batteries) that can be operated in remote, often hostile, environments. Cell phones have long been a necessity for survival in rural areas of Finland. This situation enabled Nokia to become an early leader in cell phones.
39

Competitive Intensity in a Focal Industry
Competitive environments lead to better performance.

Example: German car industry:
Fierce domestic competition,
Demanding customers,
Results in top-notch engineering.

Related and Supporting Industries/Complementors
Leadership in related and supporting industries fosters complementors in downstream industries:
Firms that provide an additional good or service.
Combined with the primary product.
Leads customers to value the firm’s offering more.
Further strengthens national competitive advantage.

© McGraw Hill
Toyota’s global success in the 1990s and early 2000s was based to a large extent on a network of world-class suppliers in Japan. This tightly knit network allowed for fast two-way knowledge sharing—this in turn improved Toyota’s quality and lowered its cost, which it leveraged into a successful blue ocean strategy at the business level.
41

The World’s Most Profitable Retailer

IKEA
Sweden based
28 Countries
$35B
CSR firm
Core competency: Designing and offering modern and functional home furnishings in a unique retail experience resulting in a low cost structure.

What type of business is IKEA?

© McGraw Hill
Started as Global but moved to Transnational…
Adapted to countries need for smaller locations
Click and collect stores, more online
Redesigns for more urban…customization.
Adding delivery and installation services as some people are less inclined to self build with minimal instructions
Localization aka Multidomestic…
45

Are you what you eat?
In your groups, interview each other about your experiences with ethnic food. Answer the following:
What is your favorite ethnic food?
How often do you eat it?
Is it part of your family heritage or did someone else introduce it to you?
Was it through social media or a personal recommendation? (who?)

Are you what you eat? – Debrief
What specific connections between food and culture have you found in your daily lives?
How do you see food and culture as it impacts your workplace/school life?
Have you learned anything about cultures through food related traditions or beliefs?
Do you feel diversity in the workplace/school have impacted the types of food you seek to enjoy?