Activities for Today

1. Activities for Today • Attendance • Simulation Decision # 4 Due • Fast-Cycle Capability for Competitive Power • Chapter 9 • Mergers and Acquisitions • Alliances and Networks (does not follow textbook fully) • Prisoners Dilemma Exercise • Break (7.30 to 7.40 pm) • Review Case (7.40 – 7.45 pm) • ShurgardSelf-Storage • Homework • Chapter 10 • Clayton Industries • Strategic Intent

2. Fast Cycle Capability for Competitive Power – Bower & Hout • Discussion Questions How can speed be used to gain competitive advantage? How do fast cycle companies differ from traditional organizations? What suggestions the authors offer to “get the clock started”? • Active Learning Exercise How can we apply this concept to the simulation teams?

3. Fast Cycle Capability for Competitive Power – Bower & Hout • Discussion Question How can speed be used to gain competitive advantage? • Quality • Cost • Innovation • Reduced Wastage • An Organization Geared for Performance

4. Fast Cycle Capability for Competitive Power – Bower & Hout • Discussion Question How do fast cycle companies differ from traditional organizations? • Company in multifunctional units • Track cycle times throughout the organization • Building learning loops into the organization • Understand that every company is a system

5. Fast Cycle Capability for Competitive Power – Bower & Hout • Discussion Question What suggestions the authors offer to “get the clock started”? • Examine Cycle Times and Raise Standards • Set up unusual organization mechanisms to focus on cycle time • Develop information system to track value adding activities • Make time count in managing employees • Accelerate Learning • Key –-> BALANCE – OTHERWISE CONFUSION AND DISRUPTION WILL BE THE RESULT

6. Risks of Fast Cycle Competition • Cost may actually increase • Stress • Lack of Focus • Temporary Breakdowns

7. Fast Cycle Capability for Competitive Power – Bower & Hout • HOW CAN WE USE THIS CONCEPT FOR THE SIMULATION (Fast Cycle Teams???) or your own life?

8. Active Learning Exercise*** • Importance of a Choice to Outcomes • High risk Vs Low Risk • Critical Vs Non-Critical • Important Vs Less Important • Who leads & takes Initiative • How to communicate new learning across the team • What issues are routine/operational issues that can be delegated to various team mates • Failure to do will result in • High Cost in Making Decisions and after a while BURN OUT Occurs

9. Part 2 Strategy Formulation

10. Integrating Companies: Mergers and Acquisitions • Merger: combining two companies • Friendly approach • Ex: Disney & Pixar • Generally similar in size • Acquisition: purchase or takeover a company • Can be friendly or unfriendly • Hostile takeover • Ex: Vodafone buys Mannesmann Dell Makeover Video

11. Horizontal Integration: Merging with Competitors Horizontal integration: process of merging and acquiring competitors HP buys Compaq in 2002 Pfizer buys Wyeth in 2009 Live Nation buys Ticketmaster in 2010 Benefits: Reduce competitive intensity Lower costs Boost differentiation Access to new markets and distribution channels 9–11

12. Reduction in Competitive Intensity Changes underlying industry structure Taking out excessive capacity from rivals Increased industry consolidation Ex: U.S. airlines in recent years Increasing bargaining power vis-à-vis suppliers and buyers Stable industry and more profits Usually need government’s approval Ex: FTC rejected Office Depot & Staples merger 9–12

13. Horizontal Integration: Lower Costs How? Through economies of scale Enhancing economic value creation Crucial to the industries with high fixed costs Ex: pharmaceutical industry Large sales force = fixed cost Need $1billion in drug revenues to cover these costs 9–13

14. Horizontal Integration (cont'd) Increased differentiation Strengthen competitive positions Differentiation of products and services Ex: Oracle buys PeopleSoft ($10B in 2005) Joined enterprise software with HR management software Access to new markets and distribution channel Enter new markets by M&A Ex: Kraft buys Cadbury New distribution in emerging markets & domestically 9–14

15. Mergers and Acquisitions Many M&As actually destroy shareholder value! When there is value, it often goes to the acquiree Acquirers tend to pay a premium Why still desire M&As? Overcome competitive disadvantage Superior acquisition and integration capability Principal–agent problems 9–15

16. EXHIBIT 9.3 Value Destruction in M&A: The Worst Offenders Shareholder value destroyed based on up to 3 years post-merger analysis compared to overall stock market

17. Desire to Overcome Competitive Disadvantage Adidas acquired Reebok in 2006 Benefits from economies of scale and scope Compete more effectively with #1 Nike Superior Acquisition & Integration Capability Some firms have superior M&A abilities They identify, acquire, and integrate target companies Ex: Cisco Systems Sought complementary assets Bought over 130 firms since 2001, including large firms: Linksys, Scientific Atlanta, & WebEx Mergers and Acquisitions (cont'd) 9–17

18. Mergers and Acquisitions (cont'd) • Principal–agent problems • Managers have incentives to diversify through M&As to receive more prestige, power, and pay. • Not for shareholder value appreciation • This is principal—agent problem • Managerial hubris • Self-delusion • Beliefs in their own capability despite evidence to the contrary • “Exception to the rule” • Ex: Quaker Oats purchase of Snapple • Sony purchase of Columbia Pictures 9–18

19. Global Logic of Strategic Alliances-Kenichi Ohmae • Uncertain world with dangerous opponents • Risk Reduction • Best not to go alone -- N0 Shame in that • Alliance means sharing control • Time, luck and money is always in short supply • Need not be permanent • Customer’s will not wait for you – to built in one market and move to other (cascade strategy) • Quality, Price, Design, Value

20. Global Logic of Strategic Alliances-Kenichi Ohmae • Fixed Costs Environment Vs. Variable Cost Environment • FCE: Focus towards maximizing contribution to fixed costs • VCE: Focus towards reducing variable cost like raw materials, wages, labor, etc. • The Dispersion of Technology • No one can master everything • Faster life cycle (nothing is proprietary for ever)

21. Collaborate with Competitors-Hamel, Doz, Prahalad • Cooperation becomes a low cost route for new competitors to gain technology and market access -- Yet the case for collaboration is higher than ever. • Collaboration should be looked at how long it lasted but at shifts in competitive strengths over time.

22. Collaborate with Competitors-Hamel, Doz, Prahalad Principles • Collaboration is competition in different form. • Harmony is not the most important measure of success. • Cooperation has limits. • Learning from partners is paramount.

23. Collaborate with Competitors-Hamel, Doz, Prahalad Competition for Competence • Competitive product not the same competitive organization. • Rethink the make or buy decision. • Watch out for deepening dependence. • Replenish core competencies.

24. Collaborate with Competitors-Hamel, Doz, Prahalad Why Collaborate? • Learning new technologies or skills are not devious. • “Strategic Intent” should direct commitment to learning. • Alliances should not become outsourcing arrangements. • Too much distrust and conflict will also kill any alliance.

25. Collaborate with Competitors-Hamel, Doz, Prahalad How to Build Defenses • Select the technology you want to share with competitors - type of skill company contributes. • Safeguard against unintended technologies. • Distinguish between technology and competence. • Limit the scope of formal agreement. • Employee Loyalty and self-discipline. • “Wall off” critical technologies. • Control the contact employees (e.g. engineers) • Don’t allow host firm to become the “Home Base”

26. Collaborate with Competitors-Hamel, Doz, Prahalad Mutual Gain is Possible • Strategic Goals Converge while Competitive Goals Diverge. • Size and Market Power are modest. • They Believe They can Learn from One Another but Limit Access to Proprietary Skills.

27. Collaborate with Competitors-Hamel, Doz, Prahalad Enhance the Capacity to Learn • To learn-- “one must want to learn” • Senior management should convey the alliance is not just to share financial risk but also learn. • Once knowledge is acquired -- this should be diffused with the company. • Ability to Learn is Critical • Obsession from legal agreements to be better learners.

28. Strategic Alliances: Causes and Consequences of Partnering Strategic alliances: voluntary arrangements between firms Sharing knowledge, resources, and capabilities Leading to gaining & sustaining competitive advantage Relational view of competitive advantage VRI resources are embedded in alliances HP’s alliance with DreamWorks SKG Resulted in Halo Collaboration conferencing 9–28

29. Why Do Firms Enter Strategic Alliances? Strengthen competitive position Apple vs. Amazon Enter new markets Local partner for global growth Microsoft partners with Yahoo on search Hedge against uncertainty Real options approach Roche invests in Genentech 1990 & buys it in 2009 Access critical complementary assets Pixar partners with Disney Learn new capabilities GM & Toyota (NUMMI) – formed in1984 9–29

30. Governing Strategic Alliances Governing mechanisms: Contractual agreements for non-equity alliances Based on contracts Equity alliances One firm takes partial ownership in the other Joint ventures Standalone organization owned by 2 or more firms 9–30

31. Non-Equity Alliances Most common forms of contracts Supply agreements Distribution agreements Licensing agreements Vertical strategic alliances Firms tend to share explicit knowledge that are codified Licensing agreements, partners exchange codified knowledge regularly Ex: Genentech & Eli Lilly Genentech R&D focused Eli Lilly manufacturing & FDA approvals 9–31

32. Equity Alliances At least one partner takes partial ownership position Stronger commitment toward the relationship Allow the sharing of tacit knowledge Tacit knowledge concerns the “know how” Partners exchange personnel to acquire tacit knowledge 1984 Toyota + GM = NUMMI (New United Motor Manufacturing Inc.) 2010 Toyota + Tesla to use the NUMMI plant Corporate venture capital is another equity source Established firms invest in new startups Tends to produce stronger ties and greater trust 9–32

33. Joint Ventures Created and owned by two or more companies Hulu owned by NBC, ABC, and Fox Long-term commitment Exchange both tacit and explicit knowledge Frequent interaction of personnel Stepping stone toward full integration of the partnership “Try before you buy” concept Used to enter foreign markets Least common of the 3 types of alliances 9–33

34. Key Characteristics of Different Alliance Types EXHIBIT 9.5

35. Alliance Management Capability A firm’s ability to effectively manage three alliance related tasks concurrently. 30 to 70% of all alliances yield disappointing results Partner selection and alliance formation Alliance design and governance Post-formation alliance management 9–35

36. Alliance Management Capability • Partner selection and alliance formation • Ascertain that expected benefits exceeds costs • Must select the best possible alliance partner • Partner compatibility • Partner commitment • Willingness to share resources & long-term view • Alliance design and governance • Choose and agree upon governance structure • Non-equity contractual agreement • Equity alliances • Joint venture • Inter-organizational trust is critical 9–36

37. Alliance Management Capability (cont’d) Post-formation alliance management To effectively manage the ongoing relationship Tips: Make relationship-specific investments Establish knowledge-sharing routines Build interfirm trust Ex: HP’s dense network of alliances vs. DEC Dedicated alliance function Coordinate alliance-related tasks – at corporate level Knowledge base about how to manage alliance Ex: Eli Lilly is a clear leader in alliance management Best to develop a relational capability 9–37

38. How to Make Alliances Work EXHIBIT 9.7

39. Strategic Networks Social structure with multiple organizations Network nodes – the organizations Network ties – the links between organizations Network achieves goals that cannot be done by only one firm Example - Star Alliance 1st global airline network Air Canada, Air China, Continental Airlines, Lufthansa, Singapore Airlines, United Airlines, etc. Seamless travel on 25 international airlines 9–39

40. Analyzing Strategic Networks Enable us to understand the benefits and costs of a network Quality of the tie: strong or weak? Firm’s position in a network Network centrality Knowledge broker Ex: IDEO design consultancy Structural holes Small-world phenomenon Network in local cluster High degree of centrality of each firm 9–40

41. Firms Embedded in Strategic Networks EXHIBIT 9.8 A hypothetical strategic network. Firm B is in a key position - knowledge broker