Business Strategy & Policy PSU MGMT #562

Business Strategy & Policy PSU MGMT #562 Diversification Tacit Collusion, Government & Strategy Dave Garten daveoutside@alum.mit.edu

Boeing Case – Key Learnings • Risk can be financially evaluated • Key risk factors and assumptions can be used to focus decision-making • Key risk factors can be identified with specific actions, repentances or contingencies • Government can have a huge effect on Strategy. Dave Garten - Business Strategy

A380 Launch • Key focal issue: should Airbus proceed? • Critical uncertainties • EU Loans. Can we get low interest loans? Will the GATT affect this? • Boeing. What will Boeing do with the 747? Update it? Drop price? • Launch customers. Can we get enough launch customers to mitigates risk? • Fuel price. What if fuel prices go way up or way down? • Technology. Will the cost be higher than planned? Will development time be longer? • Airport acceptance. Will enough airports make the changes to accommodate the A380? • Market for aircraft. How large will the market be? • Which will drive the scenarios? Dave Garten - Business Strategy

Diversification (<1%) Step 3 (7%) Step 2 (26%) Step 1 (38%) Core Core Competency and Growth Unrelated Related Source: Bain, October 2003 Dave Garten- Business Strategy

Adjacency and Success New business Forward/backward integration <10% New channel 10-30% New customer segment 30-50% New geography New product & services Step 4 Step 3 Step 2 Step 1 Steps from Core Dave Garten- Business Strategy

Diversification NPV (together) > NPV(A) + NPV(B). • “Barneyspeak” • (related) Concentric diversification = new but related products • (related) Horizontal integration = increased control over competitors • (related) Horizontal diversification = unrelated products, related customers • (unrelated) Conglomerate diversification Dave Garten- Business Strategy

Diversification (Related) • Driven by operational economies • Shared activities: sales/marketing/channels, manufacturing, R&D, support functions • Core competency • Growth and/or consolidation • Driven by financial & mgt economies • Risk management, capital allocation, tax • Core competency to manage a business • Motivated by market power • Market share (antitrust issues) • Multipoint diversification (conglomerate) Dave Garten- Business Strategy

Diversification - “Disagregation” • Harder to derive value from unrelated diversification or vertical integration • Innovation of IT, efficiency of information • More specialization • Deregulation, globalization of markets • Efficiency of capital markets • Increasing customer sophistication… Presumption: focus -> improved competitive position -> improved profitability X Dave Garten- Business Strategy

HPQ Source: UBS, 3/05 Source: WSJ, 3/05 Dave Garten- Business Strategy

Collusion • Collusion as a business strategy • What is collusion? • Why do companies collude? • Why is tacit collusion? Why use it? • Under what conditions does collusion tend to occur? • Alliance vs. collusion Dave Garten- Business Strategy

Collusion – Game Theory • Stakes, positions & interests can be modeled • People (or organizations) have “stakes” in the game • They will behave in their own self interest, i.e. their stake • Prediction requires thinking strategically about others’ problems/goals…however…don’t assume the competitor thinks the way you do (check your cognitive biases) • There is ultimately a winner and a loser • In general, a good (but not perfect) predictor of a competitor’s future behavior is their past behavior, but… • If the situation has changed materially, then follow the money (i.e., their self interest) Dave Garten- Business Strategy

Collusion – Game Theory • What does signaling accomplish? • Matching, threatening, non-threatening • Examples • Matching - airlines • Tough vs. soft – Nutrasweet/Hollander • Top dog, Lean & hungry – DRAM • Puppy Dog, Fat Cat – IKEA Dave Garten- Business Strategy

Government & Strategy Big picture: Encourage change, domestic rivalry, innovation. Tools: X 8/17/2014 Dave Garten- Business Strategy 13

Government & Strategy “Government's proper role is as a catalyst and challenger; it is to encourage, promote even push companies to raise their aspirations and move to higher levels of competitive performance.” Porter doesn’t like: Trade barriers, forced JV & tech transfer, subsidies, local content laws, spending (defense & domestic) Derived from Michael Porter, Competitive Advantage of Nations Dave Garten- Business Strategy

Joint Venture: Int’l Entry Volkswagen-Shanghai JV Dave Garten- Business Strategy

Antitrust • What is the goal of antitrust regulation? • Laws-> Sherman (1890), Clayton (1914) • Reliance on court system • “Per se” vs. “rule of reason” violations • Can DOJ reach across borders? When? • Actions: Price, non-price and leveraging • Predatory pricing, price fixing, dividing markets, exclusive dealing (e.g., tying) Dave Garten- Business Strategy

Antitrust • Acquisitions • Implications for managers • Proposed actions legal? • Will a lawsuit be brought? • What are “costs” of a lawsuit? • Some antitrust examples • DRAMs, Cingular/AT&T wireless • Lysine cartel Dave Garten- Business Strategy

Business Strategy & Policy PSU MGMT #562