Strategic Management Jeff Dyer Second Edition Chapter 6 Corporate Strategy MGMT 567: Managing the Multi-Business Firm Wontae Son, Ph.D. Cisco Systems ✓ ✓ ✓ ✓ ✓ ✓ Founded in 1984 Network Hardware Revenue: $48 B Operating Income: $12 B Employees: 7,300 Market Cap: $200 B • Developed and commercialized the first multi-protocol router • IPO in 1990 with $60 M revenue and $224 M market cap • First acquisition in 1993, and continued growth by acquisitions - 200 + deals: NW training, VOIP technology, Wireless technology - Clear and consistent process of acquisitions: Integration Specialists Copyright ©2018 John Wiley & Sons, Inc. 2 CORPORATE VS. BUSINESS UNIT STRATEGY Business Unit Strategy- The search for competitive advantage within a single industry, market, or line of business. Corporate Strategy- The search for value and competitive advantages through participation in several different industries and markets. Vertical Integration- Movement into adjacent markets by a firm along its own value chain. Movement in the direction of raw materials is backward integration. Movement in the direction of sales, service, or warranty operations is forward integration. Horizontal Diversification- The movement into an adjacent, or unrelated, market that is not along a firm’s own value chain. Copyright ©2018 John Wiley & Sons, Inc. 3 VALUE CHAIN Value Chain - The steps required to turn raw materials into finished products and/or services. The value chain also describes key functions of the firm linked to each stage and functions that span the productive activities of the firm. Copyright ©2018 John Wiley & Sons, Inc. 4 MOVING ALONG THE VALUE CHAIN • Vertical Integration (Ch. 7) - Backward integration (Apple OS development) - Forward integration (Apple Store) • Horizontal Diversification - Diversification (Cisco from router into phones) - Alliances (Ch. 8) Copyright ©2018 John Wiley & Sons, Inc. 5 TWO WAYS TO DIVERSIFY 1. Go at it alone—Greenfield Apple’s entrance into music player and phone markets Apple opened its own stores, Apple Store 2. Buy your way in—Acquisition Cisco’s growth strategy Copyright ©2018 John Wiley & Sons, Inc. 6 Levels of Diversification: Single Business- A firm earning more than 95 percent of the revenues from a single line of business. Dominant Vertical Business- A firm that earns more than 70 percent of its revenue from its main line of business and the rest from businesses located along the value chain. Dominant Business- A firm that earns more than 70 percent of revenue from its main line of business and the remainder from other lines across different value chains. Related-constrained Diversification- A firm that earns less than 70 percent of its revenue from its main line of business and its other lines of business share product, technological, and distribution linkages with the main business. (ex: Amazon) Related-linked Diversification- A firm that operates in related markets, but fewer linkages exist between the new and existing markets than the elements create separately. (ex: Amazon Fresh) Unrelated Diversified Firm- Competes in product categories and markets with few, if any, links between them. (ex: conglomerates such as GM, 3M and Samsung) Copyright ©2018 John Wiley & Sons, Inc. 7 WHY DIVERSIFICATION – ADDING VALUE Critical Questions 1) Why will the existing businesses be more valuable by entering an adjacent market? 2) Why will the new business be more valuable inside the company than operating alone? 1) Exploiting current resources & capabilities *GE: Entry into the finance business Entry into a new, high-tech market 2) Expanding new resources & capabilities *Cisco: Expand IP phone businesses by acquisitions Copyright ©2018 John Wiley & Sons, Inc. 8 ADDING VALUE THROUGH DIVERSIFICATION Copyright ©2018 John Wiley & Sons, Inc. 9 MECHANISMS TO CREATE VALUE Slack Similar Business Models Synergy Spreading Capital Shared Knowledge Stepping stone Stopping Competitors Staying ahead Copyright ©2018 John Wiley & Sons, Inc. 10 THE 6 S’S (1/3) Slack- Unused resource capacity. • Economies of Scope- Activities where the average cost of producing two different products is less when delivered together than separately. (ex. Delta’s cargo freight business) • Management Skills- The individual and collective abilities of a firm’s management team to engage in value-creating activities. (ex. Marriot’s portfolio of brands) Synergy- Action between different elements of a system that creates more value together than the elements create separately. (ex. Disney, P&G) Copyright ©2018 John Wiley & Sons, Inc. 11 THE 6 S’S (2/3) Shared Knowledge- Collective knowledge that can be distributed throughout the organization to create value. (ex. Honda, ESPN) “Competitive advantages come from the common roots, processes or knowledge (that is, core competence).” Similar Business Model- Business model is a method to enable the creation and exchange of value between companies and their customers. (ex. Sumitomo, Newell Rubbermaid) • Dominant Logic- A conceptualization of a business, or a set of rules for competition, that applies to seemingly unrelated product markets or industries. Some businesses have common elements or keys to success. Copyright ©2018 John Wiley & Sons, Inc. 12 THE 6 S’S (3/3) Spreading Capital • Internal Capital Market- The movement of funds, talent, or knowledge from unit to unit directed by the leaders of the firm. (ex. GE, Samsung) Stepping Stones- Works to enhance capabilities through “long leaps” and “short leaps”, and “short hops” (ex. Safeguard Scientific) Safeguard Scientific shifted from computer peripherals to optical instruments business. It migrated through adjacent industries to acquire skills and capabilities. 1991 computer peripherals 1993 moved into telephone equipment 1995 moved into electrical instruments Copyright ©2018 John Wiley & Sons, Inc. 1996 exited computer and entered optical instruments 1999 exited telephone business 13 THE 6 S’S + 2S’S: 8 S’S Stopping Competitors- A method to diversify to forestall a competitor from entering, rather than to clearly exploit or expand a current resource or capability. • Google’s purchase of Waze (2003, $1 Billion) Staying Ahead of Technology- Diversification, primarily through acquisitions, can shorten lead times and reduce the overall costs of tech ology development. (ex. Cisco Systems) • Corporate Venture Capital- A venture capital fund owned and managed by a corporation instead of independent investors. Can the technology be transferred to the corporate parent? Copyright ©2018 John Wiley & Sons, Inc. 14 DESTROYING VALUE THROUGH DIVERSIFICATION Hubris • Excessive pride, arrogance, or overconfidence • Decisions based on gut-feelings or experience? • Need solid data and research as well Imitation Sunk-Cost Fallacy • Hurry to mimic competitors acquisitions • UPS Mailbox acquisition vs. FedEx Kinko acquisition Poor Governance and Incentives • Risky beliefs that investment in a failed acquisition must continue because significant investment already made Lack of Resources • Managers in diversified firms tend to prefer salary-based compensation • Decisions based on internal politics, resource allocations constraints, or mandatory transfers with other divisions. • Lack of ability to understand and respond to unique strategic needs of each market, customer group, and line of business Copyright ©2018 John Wiley & Sons, Inc. 15 BCG MATRIX Copyright ©2018 John Wiley & Sons, Inc. 16 ENTRY MODE Greenfield Acquisition • Existing resources move from existing to new business - Brand - Customer knowledge - Technology overlap • Speed not essential • Scale economy less important Coke: Zero GE: medical products financial services • Resources don’t move from existing to new business - No brand equity - New customers - New technology • Speed essential • Scale economy important Coke: Zico GE: acquisition of AVIO Copyright ©2018 John Wiley & Sons, Inc. 17 Greenfield vs. Acquisition Copyright ©2018 John Wiley & Sons, Inc. 18 ACQUISITION AND INTEGRATION PROCESS Making the Acquisition Integrating the Target 1) Acquisition Process Searching for targets • Understand the value creating needs • Focus on resources and capabilities (both firms) Due Diligence Negotiation and Deal Close • Examine closely the target • Hire experts for valuation firm to understand its core processes, strengths, • Consider the right premium – roughly 30% and weaknesses Copyright ©2018 John Wiley & Sons, Inc. 19 2) Integration of the Target Running as ONE single business vs. TWO distinct ones Copyright ©2018 John Wiley & Sons, Inc. 20 INTEGRATION STRATEGIES completely absorb target a new entity, best of breed loose coupling, leverage target two firms, one owner takeover merger blended acquisition cash and profit contributions Apple’s acquisitions of start-up firms Daimler-Chrysler merger “Newellize” ITT’s diversifications Copyright ©2018 John Wiley & Sons, Inc. 21 INTEGRATION MATTERS “You are only acquiring employees.”– integrity, respect for individuals, and open communications (John Chamber, Cisco) Integration team- a group of individuals from different functional areas of an acquiring firm that coordinate and manage the integration of the target company after the acquisition has closed (fully dedicated). Principles of Integration – How GE integrates acquisitions 1. Acquisition is a process, not an event. 2. Successful integration requires a committed team of talented professionals whose only job is integration. 3. Communication about important matters such as who will lose their jobs and how compensation systems will change must be clear, forceful, and immediate. 4. Real and significant integration happens best when people work together on real, mission critical tasks. Copyright ©2018 John Wiley & Sons, Inc. 22 END Copyright ©2018 John Wiley & Sons, Inc. 23 Strategic Management Jeff Dyer Second Edition Chapter 7 Vertical Integration and Outsourcing MGMT 567: Managing the Multi-Business Firm Wontae Son, Ph.D. Dell and ASUS A Tale of Two Companies Dell ASUS • Founded in 1984 by Michael Dell • “Create & Deliver custom PCs within 48 hours” • High profits with a few assets by outsourcing most components and operations • Outsourcing extended to much of supply chain & final assembly • Supplied components for Dell: circuits & motherboards • The largest motherboard producer with cost advantage • Expanded capabilities in supply chain and computer assembly • Successful launch of Eee PC, the low-priced PC in the market Copyright ©2018 John Wiley & Sons, Inc. 2 WHAT IS VERTICAL INTEGRATION? Outsourcing- The process where a firm contracts out a business process or activity to an external supplier. Vertical Integration (or insourcing)- Bringing business processes or activities previously conducted by outside companies in-house. Make (ASUS) vs. Buy (DELL) Copyright ©2018 John Wiley & Sons, Inc. 3 WHAT IS VERTICAL INTEGRATION? Value Chain- The sequence of all activities that are performed by a firm to turn raw materials into the finished product that is sold to a buyer. Industry Value Chain vs. Company Value Chain Vertically Integrated vs. Vertically Specialized Upstream Activities vs. Downstream Activities Copyright ©2018 John Wiley & Sons, Inc. 4 VERTICAL INTEGRATION Forward Integration– Growth by moving forward in the value chain, that is, downstream activities (ex. Becoming a buyer or a distributor) Backward Integration– Growth by moving backward in the value chain, that is, upstream activities (ex. Becoming a supplier) Disney is vertically integrated Disney produces movies and TV shows with its own studios and subsidiaries (Pixar) and it distributes them through its own TV networks (ABC, Disney Channels) and through a world wide networks Nike is vertically specialized Nike designs and markets its products and outsource many activities. It forward integrated when started selling thru its own Niketown stores. Copyright ©2018 John Wiley & Sons, Inc. 5 REASONS FOR VERTICAL INTEGRATION: 3C’S Capabilities Coordination Control 1) Capabilities (Competence) • Conduct the activity internally when the firm has or can develop capabilities to perform it better than other firms • Nike focuses on design and marketing to differentiate - Saves large capital by not building plants and manufacturing capabilities - Marketing capabilities become core competence to build brand to 1) differentiate and 2) create barriers to imitation to prevent suppliers becoming competitors Copyright ©2018 John Wiley & Sons, Inc. 6 REASONS FOR VERTICAL INTEGRATION: 3C’S 2) Coordination • Conduct the activity internally when effective coordination and tight integration of the activities of other firms improve work performance (that is, high coordination cost) • “The greater the interdependence, the more likely you want to conduct both activities inside due to higher coordination needs.” • Apple backward integrated a chip design function - Lower coordination cost - Enhance the speed of new product development - Create barriers to imitations - difficult for competitors to imitate Copyright ©2018 John Wiley & Sons, Inc. 7 How Interdependence Influences Vertical Integration and Outsourcing Golf Team Baseball Team Copyright ©2018 John Wiley & Sons, Inc. Basketball Team 8 REASONS FOR VERTICAL INTEGRATION: 3C’S 3) Control • Conduct the activity internally to control scarce inputs or to control over investments in specialized asset or equipment - Alcoa integrates back into bauxite to secure raw material - Oil refinery controlling the pipeline - Apple forward integrated with Apple Stores to control customer experiences • Integrate the operations involved with transaction-specific asset or investment. (e.g., gas pipeline, bowling alley) → avoid hold-up Copyright ©2018 John Wiley & Sons, Inc. 9 DANGERS OF VERTICAL INTEGRATION: 2 Fs (=) Advantages of Outsourcing Loss of Flexibility to move the activity to a company or supplier that offers lower costs or better technology. • Valuable when technologies are being developed or changed (e.g., DEC & Data General) • Significant effect if the cost can change quickly (e.g., Nike) Loss of Focus associated with managing too many activities may result in poor performance because the firm can’t do them all well • GM: made 70% of its parts internally → increased the overall cost • Toyota: makes 25%, outsource the rest to the specialized companies → leads to reduced costs Copyright ©2018 John Wiley & Sons, Inc. 10 ADVANTAGES OF OUTSOURCING Flexibility to move to new suppliers that offer lower costs or better technology. Lower costs or better performance from a company that specializes in that activity and benefits from economies of scale. Focus: Keeps the firm focused on a narrower set of core competencies Minimizes capital investment Copyright ©2018 John Wiley & Sons, Inc. 11 DANGERS OF OUTSOURCING Example IBM’s PC - Microprocessors outsourced to Intel Operating Systems outsourced to Microsoft IBM failed to replace Intel’s microprocessors and Windows OS with its own products developed later. Why? Outsourcing isn’t always the answer Copyright ©2018 John Wiley & Sons, Inc. 12 DANGERS OF OUTSOURCING Loss of Control May give an outside supplier undue power or control if the outsourced activity is critical to success. Ex) IBM’s Outsourcing Strategy for PC business Loss of Capabilities May set in motion the loss of capabilities that may be important for the future—and create a future competitor. Ex) Dell’s Outsourcing Strategy • Low-cost production capabilities given to ASUS • Difficulty in designing and building differentiated products Copyright ©2018 John Wiley & Sons, Inc. 13 Outsourcing can cause the loss of capabilities and the creation of a competitor Dell vs. AsusTek HOW TO PREVENT A SUBCONTRACTOR A COMPETITOR FROM BECOMING Build barriers to imitation Take an equity stake in the supplier Limit knowledge of the full product Use multiple contractors Copyright ©2018 John Wiley & Sons, Inc. 14 Mini-Case: Should you Make or Buy? You have to decide whether to make or buy a component (part) that is an input for a product that costs $50 to manufacture. Your analysis shows that based upon the estimated volume of parts you will require, your variable costs per unit will be $.50 and given estimated volumes, your fixed (plant and equipment) cost per unit is $.48 per unit. A quick bid in the market suggests that you can currently buy the same part from two suppliers for $1.00 (another supplier bid $1.01). You should: Choose the best answer given the information above and explain your choice. a) Make the part and capture the profits b) Buy the part on the market c) Make some parts and buy some parts to keep leverage over your suppliers d) None of the above Copyright ©2018 John Wiley & Sons, Inc. 15 STRATEGY TOOL: MAKE VERSUS BUY ASSESSMENT 1. To what extent are you, or could you be, the best in the world at conducting this activity? A. We are, or fairly easily could be, as good as the best in the world at conducting this activity. B. We are not, and are not likely to become, as good as the best in the world at conducting this activity. 2. To what extent does this activity differentiate your offering (product or service) in the mind of the customer? A. This activity does provide some differentiation in the mind of the customer (it provides unique value and influences the purchase decision). B. This activity provides little differentiation in the mind of the customer (it doesn't really provide unique value). 5. To what extent is this activity highly interdependent and requires coordination with other activities performed in the firm? A. Highly interdependent (reciprocal interdependence), meaning that in order to do this and other activities well, we need to tightly coordinate this activity with other activities (simultaneously iterate when conducting the activities). B. Somewhat interdependent (sequential interdependence), meaning that this activity must be done before (or after) we conduct our other activities; we don't need to work on this simultaneously and iterate. C. Not interdependent at all. We merely pool our processes/products with those of other suppliers. 3. What is your cost of performing the activity (with similar quality) compared to an outside supplier? A. 5% or more lower. B. About the same or higher. 6. Does performing this activity allow you to maintain control over information or resources that are important for either offering unique value or preventing imitation of what you do? A. Yes B. No 4. How many outside suppliers can conduct the activity (with similar quality) at a cost that is about the same or lower than your firm? A. 0 or 1 B. 2 or more 7. Does performing this activity create a barrier to competitors imitating the unique value you are attempting to offer? A. Yes B. No Copyright ©2018 John Wiley & Sons, Inc. 16 CONSIDERATIONS IN OUTSOURCING Ethical Issues Crowdsourcing • Levi Strauss in Bangladesh • Crowdtasking • Child Labor • Crowdcreating • Keep them working in the factory, or eliminate a viable option for their survival? • Crowdvoting • Crowdinnovation Copyright ©2018 John Wiley & Sons, Inc. 17 END Copyright ©2018 John Wiley & Sons, Inc. 18 Strategic Management Jeff Dyer Second Edition Chapter 8 Strategic Alliances MGMT 567: Managing the Multi-Business Firm Wontae Son, Ph.D. WHAT IS A STRATEGIC ALLIANCE? Strategic Alliance- A cooperative arrangement in which two or more firms combine their resources and capabilities to create new value, sometimes referred to as a partnership. Referred also as cooperative strategy or relational advantage. Alliance Target Activity or Input Copyright ©2018 John Wiley & Sons, Inc. 2 Historic Vision Partnership Vision INTERNAL FOCUS Copyright ©2018 John Wiley & Sons, Inc. 3 CREATING VALUE BY FOCUSING ON THE SYSTEM TRADITIONAL RELATIONSHIP VALUE TO CUSTOMER STRATEGIC PARTNERSHIP VALUE TO CUSTOMER VALUE TO SUPPLIER Distributive Negotiation VALUE TO SUPPLIER Integrative Negotiation Copyright ©2018 John Wiley & Sons, Inc. 4 STRATEGIC INPUTS 4 types of inputs and activities might qualify as “strategic inputs” that merit forming an alliance relationship. 1. Inputs that can differentiate your product in the minds of customers. (e.g., car engine and key components) 2. Inputs that influence your brand or reputation. (e.g., Volvo worked with Autolive for safety components) 3. High value inputs or activities that make up a high percentage of your total costs. (e.g., refrigerator compressor) 4. Inputs or activities that require significant coordination in order to achieve the desired fit, quality, or performance. (e.g., car HVAC system) Copyright ©2018 John Wiley & Sons, Inc. 5 TOKYO DISNEYLAND DISNEY - ORIENTAL LAND ALLIANCE Disney Resources/Capabilities OLC Resources/Capabilities • Disney brand • Disney theme park rides and designs • Park management processes • Ongoing stream of Disney characters from movies • Disney consumer products to sell at the park • Land for the park near Tokyo • Financial resources to build the park • Relationships with construction firms to build the park • Knowledge of Japanese culture and how to manage Japanese workers Disney is not involved in the day-to-day operations of the park. It simply collects a licensing fee from Oriental Lands Company(OLC), a Japanese real estate firm. Copyright ©2018 John Wiley & Sons, Inc. 6 DISNEY AND OLC: WHY ALLY? Tokyo Disney Performance (opened in 1983) • 17M visitors (1997, never below 10M), 2nd largest leisure firm • $4.15B Revenue, $690M Operating Income, $300M Licensing Fees to Disney Why Disney didn’t just build Tokyo Disneyland on its own? • Do we have the resources and capabilities to build a park in Japan on our own? • Risks of building a theme park in foreign environment - “warm weather”, “vacation destination”? - No experience in hiring, training, and managing a Japanese workforce. • Would OLC have sold to Disney the 115 acres of land? If so, at what price? • Did Disney have the $2 billion capital investment required? • If it chose to invest, what other opportunities would it have to forgo? • How confident was Disney that Tokyo Disneyland would succeed? When faced an opportunity with risks, they may look to a partner to share or mitigate the risks. That is what Disney did in Japan. Copyright ©2018 John Wiley & Sons, Inc. 7 TYPES OF STRATEGIC ALLIANCES Contractual Alliance Cooperation between firms is managed directly through contracts Equity Alliance Cooperative contracts are supplemented by equity investments by one or both partners into the other partner. Joint Venture Cooperating firms combine resources to form an independent firm in which they invest. Preferred when: • Interdependence between partners is low (e.g., pooled) • It is easy to measure the contributions of each partner and write it in a contract. • Apple-AT&T • Interdependence between firms is moderate (e.g., sequential). • Firms bring knowledge or difficult to measure contributions, but each can perform the roles separately. • Toyota’s shares in suppliers, Pharmaceutical’s investments in biotech start-ups Copyright ©2018 John Wiley & Sons, Inc. • Interdependence between firms is very high (e.g., reciprocal). • Firms bring knowledge or difficult-to-measure contributions that must be combined into a single organization to coordinate effectively. • IM Flash, Shanghai-GM 8 VERTICAL AND HORIZONTAL ALLIANCES Vertical Alliance- An alliance between firms who are positioned at different stages along the value chain, such as a supplier and a buyer. (See JIT II Partnership of Bose) Horizontal Alliance- An alliance between two firms that do not have a supplier-buyer relationship and are typically positioned at a common stage of the value chain. Copyright ©2018 John Wiley & Sons, Inc. 9 WAYS TO CREATE VALUE IN ALLIANCES 1 Combine Unique Resources 2 Pool Similar Resources 3 Create New Alliance-Specific Resources 4 Lower Transaction Costs (Build Trust) Copyright ©2018 John Wiley & Sons, Inc. 10 COMBINE UNIQUE RESOURCES Pixar Disney • Computer-generated animation (CGA) • Story-writing skills • Toy Story, Finding Nemo, Cars, and The Incredibles. • Worldwide film distribution • Exclusively sold Pixar’s character products (e.g., Woody and Buzz Lightyear) at Disney stores and theme parks. Combined unique resources and created synergy that increased profits for both. Learning Alliance- When the unique resources to combine are intangible resources, the goal is to learn something that will be a valuable to its capabilities. Ex) GM-Toyota (NUMMI): GM to learn Toyota Production System , lean manufacturing Copyright ©2018 John Wiley & Sons, Inc. 11 WAYS TO CREATE VALUE IN ALLIANCES 1 Combine Unique Resources 2 Pool Similar Resources 3 Create New Alliance-specific Resources 4 Lower Transaction Costs (Build Trust) Copyright ©2018 John Wiley & Sons, Inc. 12 POOL SIMILAR RESOURCES Why pooling similar resources? • To achieve economies of scale - IM Flash: Intel and Micron to achieve economies of scale in R&D and productions by pooling similar resources • To share the risks of a particular activity - BP and Statoil formed a JV, pooling their financial resources and knowledge to share the expense and lower the risks Copyright ©2018 John Wiley & Sons, Inc. 13 WAYS TO CREATE VALUE IN ALLIANCES 1 Combine Unique Resources 2 Pool Similar Resources 3 Create New Alliance-Specific Resources 4 Lower Transaction Costs (Build Trust) Copyright ©2018 John Wiley & Sons, Inc. 14 TYPES OF ALLIANCE-SPECIFIC RESOURCES DEDICATED ASSETS THAT CREATE VALUE Dedicated Site Investments - locating plants in close proximity to economize on inventory, transportation, coordination costs (e.g.) Bashoku’s built a factor next to Toyota assembly plant Dedicated Physical/Process Investments - making relationspecific capital investments in machinery, tools, processes (less value for other uses) (e.g.) Bashoku’s conveyer belt to Toyota assembly plant Dedicated Human Investments - dedicating personnel to develop relation-specific know-how and improve communication & coordination (e.g.) Bose JIT II Partnership requires supplier’s “in-plant representative” Copyright ©2018 John Wiley & Sons, Inc. 15 TOYOTA’S SUPPLIER-CUSTOMER INTERFACE Surface Contact vs. Multiple-Point Contact Copyright ©2018 John Wiley & Sons, Inc. 16 EXAMPLE : TOYOTA PLANT CONFIGURATION IN JAPAN* Motamachi, TC Honsha, TC 3 miles 1 mile Tahara, Nagoya Headquarters & Technical Center Takaoka, TC Tsutsumi, TC 6 miles 3 miles Affiliated Supplier Plants • Avg. distance of 30 miles vs 427 GM • 43.5 weekly deliveries vs 7.5 GM • 10,635 man days of face-to-face contact (1,107 GM) • 12.5 guest engineers vs 0.17 GM Independent Supplier Plants •Avg. distance of 87 miles •40.5 weekly deliveries •3,764 man-days of face-to-face contact •2.6 guest engineers * Excludes more recently build Kyushu plant making small cars Copyright ©2018 John Wiley & Sons, Inc. for export to Asia. 17 EXAMPLE : GM PLANT CONFIGURATION IN THE US Flint, MI 55 miles Hamtramck, MI 51 miles Lansing, MI 650 miles 2400 miles Ypsilanti, MI Fremont, CA (Nummi) Internal Supplier Plants 387 miles North Tarrytown, NY • Avg. distance of 350 miles 200 miles External Supplier Plants Linden, NJ • Avg. distance of 427 miles Lordstown, OH • 7.5 Weekly deliveries • 1,107 man days of face-toface contact • 0.17 guest engineers Van Nuys, CA Bowling Green, KY Kansas City, KS 1400 miles Wentzville, MO Wilmington, DE 900 miles Spring Hill, TN 455 miles Arlington, TX Copyright ©2018 John Wiley & Sons, Inc. 18 Copyright ©2018 John Wiley & Sons, Inc. 19 WAYS TO CREATE VALUE IN ALLIANCES Copyright ©2018 John Wiley & Sons, Inc. 20 THE RISKS OF ALLIANCES THAT INCREASE TRANSACTION COSTS Hold-Up It happens when one partner tries to exploit the alliance-specific investments made by another partner (e.g.) When Toyota tries to negotiate the lower prices after Bashoku built its factory nearby (Toyota invested in 49% shares.) Misrepresentation It happens when one partner in an alliance creates false expectations about the resources it brings to the relationship or fails to deliver what it originally promised (e.g.) The intangible resources such as local market knowledge or relationships with key political figures must be thoroughly researched before. Copyright ©2018 John Wiley & Sons, Inc. 21 HOW TO BUILDING TRUST • Personal Trust Paradox of Trust • Alliances are fraught with risk even though they look good on paper. • Things often don’t work out because of the issue of trust and equity - Initiate partnerships only with trustworthy people (family, friends, classmates, etc.) – Goodwill Trust - Still need to be accurate at evaluating their character - Japanese firms rely more on personal trust • Legal Contracts - substitutes of personal trust - Spell out obligations and expectations of partners - Protect the interests of partners - 3 issues to be clarified: Governance, Operation, and Exit & Terminations • Stock Ownership and Collateral Bonds - Own stocks to align the incentives of both partners - Collateral bond to guarantee partner performance Copyright ©2018 John Wiley & Sons, Inc. 22 EXAMPLE: THE COST OF MISTURST 50% 47% Negotiating price/contract Assigning blame for problems 40% Percent of faceto-face contact time with suppliers 28% 30% 21% 21% 20% 10% 0% GM Ford Copyright ©2018 John Wiley & Sons, Inc. Chrysler Toyota 23 BUILDING ALLIANCE CAPABILITIES A Dedicated Strategic Alliance Function A dedicated strategic alliance coordinates all alliance-related activities within the firm and is charged with creating processes to share and leverage prior alliance experiences. (25% higher success rates when a firm has this function) Increases External Visibility Establishes routine processes of key phases of alliance life-cycle and creates guidelines & manuals HP’s 60 different tools and templates Keeps market apprised of company’s alliances activities, and provides visible point of contacts Oracle’s “Alliance Online” website. Provides Internal Coordination Legitimacy to request the resources from the firm’s different units. Also develops networks of contacts. Facilitates Intervention and Accountability Assess & monitors alliance performance by using formal metrics. Improve Knowledge Management Copyright ©2018 John Wiley & Sons, Inc. 24 BUILDING ALLIANCE CAPABILITIES Tools to Use Across the Alliance Lifecycle * Needs Analysis Checklist * Make vs. buy vs. ally analysis *List of possible alliance partners with resources to meet needs. Alliance Business Case * Partner Screening Form * Technology and patent domain maps * Cultural Fit Evaluation Form * Due Diligence Team * Negotiations guidelines * Needs v/s wants checklist * Alliance Contract Template * Alliance Structure Guidelines * Alliance Metrics Framework Partner Assessment & Selection Alliance Negotiation & Governance * Decision making template * Trust-building worksheet * Work planning worksheet * Alliance Communication Infrastructure * Relationship Evaluation Form * Yearly Status Report * Termination Checklist * Termination Planning Worksheet Alliance Management Assessment & Termination ALLIANCE LIFECYCLE Copyright ©2018 John Wiley & Sons, Inc. 25 STRATEGY TOOL CHOOSING TO ALLY OR ACQUIRE: KEY FACTORS TO CONSIDER Alliance Equity Alliance Acquire Degree of Resource Interdependence Low High Relative value of “soft” to “hard” resources High Low Proportion of synergies from redundant resources Low High High Low Low High Degree of market uncertainty Importance of exclusive access to target firm’s resources Copyright ©2018 John Wiley & Sons, Inc. 26 STRATEGY TOOL CHOOSING BETWEEN ALLIANCES AND ACQUISITIONS Alliances Low Joint Ventures Acquisitions Degree of resource/activity interdependence Pooled/modular Interdependence Low Sequential Interdependence Degree of mutual customization Low Investments in Customized Assets -Site (locations) -Physical (Plant & Equip.) -Human High Reciprocal Interdependence High High Investments in Customized Assets -Site (locations) -Physical (Plant & Equip.) -Human Copyright ©2018 John Wiley & Sons, Inc. 27 STRATEGY TOOL TYPES OF RESOURCES GENERATING VALUE IN ALLIANCES & ACQUISITIONS “Soft” Resources Human Resources “Hard” Resources Intangible Resources (relationships; brands) Technological Resources (e.g. Patents) Physical Plant & Equipment Difficult to Value Financial Resources Easy to Value Copyright ©2018 John Wiley & Sons, Inc. 28 THE FUTURE • Teams of companies (ecosystems) will increasingly compete with other teams. • Leveraging the full resources of the partners to create competitive advantage will be critical for success. • Value is created through: - Combining unique resources Pooling similar resources Creating new alliance-specific resources Lowering transaction costs Copyright ©2018 John Wiley & Sons, Inc. 29 END Copyright ©2018 John Wiley & Sons, Inc. 30 Strategic Management Jeff Dyer Second Edition Chapter 9 International Strategy MGMT 567: Managing the Multi-Business Firm Wontae Son, Ph.D. WHAT IS AN “INTERNATIONAL” STRATEGY • Strategy - A strategy is a goal and set of policies designed to achieve competitive advantage in a particular marketplace • Global Strategy - A global strategy is a goal and set of policies to achieve competitive advantage by leveraging resources, assets, and knowledge across geographic markets 2 GLOBALIZATION OF BUSINESS Foreign Direct Investment - Direct investment in production or business in one country by a business from another country. Multinational Firms- Firms that sell or produce in multiple countries. Some of the differences between countries that increase complexity and affect the success of international strategies include variations in: • • • • • Customer tastes, needs and income levels Government regulations Legal systems Public tolerance for foreign firms Reliability, and even existence, of basic infrastructure, such as roads and electricity 3 WHY FIRMS EXPAND INTERNATIONALLY Strategic Objectives of International Expansion Growth Efficiency Managing Risk • Market and Customers (Harley-Davidson) • Low-cost resources • Longer product life (Nokia phones) • Economies of scale and scope (Unilever) • Diversify macroeconomic risks • Diversify geographical risks (GM) 4 WHY FIRMS EXPAND INTERNATIONALLY Strategic Objectives of International Expansion Knowledge & Learning Response To Players • Local customer needs (GE’s ultrasound machine) • Local market dynamics • Response to customers (Accounting Big 4) • Response to competitors (Lincoln Electric) 5 WHERE FIRMS SHOULD EXPAND: CAGE CAGE Model Risks Cultural Distance Market Risk Political Risk Economic Risk Economic Distance Determinants of Success Administrative Distance Geographic Distance The smaller the distance the better 6 1) Cultural Distance The degree of difference between the cultures of two nations. Attributes 1. Ethnicity and Language 2. Religions 3. Social norms 4. Individual vs. collective 5. Perception on ambiguity 6. Respect for or attitude to rules and laws Products and Industries Affected 1. High linguistic content (e.g., TV shows, movies, music, textbooks) 2. Affects consumers’ religious or national identity (e.g., pork in Middle East) 3. Carries country specific associations 4. Product features vary easily - differences in size, packaging, standards, etc. 7 2) Administrative Distance The degree of difference between the legal and regulatory frameworks of two nations. Products and Industries Affected Attributes 1. Absence of colonial ties 2. Absence of shared monetary system (e.g. common currency) 3. Political hostility 4. Government policies 5. Lack of regional trading blocks 1. Producers of staple goods 2. Products/services critical to national security (e.g., steel, telecomm.) 3. Large employers 4. Large suppliers to government 5. Firms competing with national/local champions (e.g., Airbus in EU, Gazprom in Russia) 8 3) Geographic Distance The distance in miles, or kilometers, between two countries. Products/Industries Affected Attributes 1. 2. 3. 4. 5. 6. Physical remoteness Lack of common border Lack of sea or river access Size of country Weak transportation infrastructure Differences in climate 1. Heavy, bulky products (Google not much affected) 2. Fragile or perishable products 3. Products for which communication or connectivity is important 4. Products for which local supervision important 9 4) Economic Distance The degree of difference between the average income of people in two different countries. Attributes 1. Differences in consumer income 2. Differences in cost or quality of: a. Natural, financial, human resources b. Infrastructure c. Intermediate outputs d. Information or knowledge Products/Industries Affected 1. Nature of demand varies with income (e.g., elastic products) 2. Economies of scale important 3. Factor cost differences important 4. Different distribution systems 10 HOW FIRMS COMPETE INTERNATIONALLY A FRAMEWORK: GLOBAL INTEGRATION - LOCAL RESPONSIVENESS Pressures for Standardization High Global Strategy (aggregation) • • • • Economies of scale High R&D Expense Steep Experience Curve Need to control quality & experience Multi-Domestic Strategy • Differences in customer needs & gov’t regulations • Differences in marketing & distribution channels (adaptation) Low Low Pressures for Local Responsiveness High 11 TYPES of International Strategy Pressures for Standardization Hi Global Strategy (Cost) Transnational (Mass Customization) Strategy (Some functions are global, some are local) Arbitrage Strategy: Multi-Domestic Strategy A strategy involving buying where costs are low and selling where prices are high (Differentiation) Lo Same Pressures for Local Responsiveness Different 12 TYPES OF INTERNATIONAL STRATEGY 1) MULTI-DOMESTIC STRATEGY Differentiation (adaptation) • • • • Product/service is customized in each country. Decentralized organizational structure and local decision making Effective when differences between countries are large. Sources of Advantage: - Differentiation - Local responsiveness - Minimize political & exchange rate risks • Unilever, Philips • Disadvantages: High Cost, Redundancies 13 TYPES OF INTERNATIONAL STRATEGY 2) GLOBAL STRATEGY Cost (aggregation) • Product/service is standardized worldwide • Centralized organization structure. National subsidiaries possess little decision-making authority. • Effective when differences between countries are small. • Sources of Advantage: - Cost - Ability to coordinate activities - Speedy new product development • Sony, Panasonic, Red Bull, OTIS 14 Example: International Strategy MULTI-DOMESTIC STRATEGY GLOBAL STRATEGY Philips KPMG FedEx Unilever Carrefour Nestle BASF GM PWC Panasonic HP Toyota American Express Coca-Cola Boeing Sony IBM Intel CAT These companies have “country heads” so that the company may not look exactly the same in each nation These are global in the sense that there is a head and each country strives to be the same 15 TYPES OF INTERNATIONAL STRATEGY 3) TRANSNATIONAL STRATEGY STRATEGY: • Create “best value” by differentiating where you have to (e.g., product design) but standardizing in all other activities (e.g., R&D, components) POLICIES: • Break the world into regions where customers have similar needs/similar demographics • Develop products for each region depending on needs • Break down value chain and exploit low cost locations around the world when possible • Balance needs of global operations vs. local demands 16 TRANSNATIONAL STRATEGY: SAMSUNG Achieving Both Integration and Differentiation 17 Example: International Strategy TRANSNATIONAL STRATEGY Samsung McDonald’s P&G Merck Whirlpool Hyundai 18 INTERNATIONAL STRATEGY: WHERE NEXT ? ? High Forces for Global Integration Samsung Panasonic Panasonic Phillips Low Low Forces for Local Responsiveness High 19 INTERNATIONAL STRATEGY COMPARISON (1/2) Multi-Domestic Competitive Advantage Configuration Coordination Controls Achieve local relevance through national focus while achieving some economies of scale Global Achieve scale & scope economies through international standardization Mainly in foreign countries that are similar to home base (limit effects of distance) Arbitrage Achieve absolute economies through international specialization In a more diverse set of countries (exploit distance) By country (emphasis on local presence) By business, region, or customer with emphasis on horizontal relationships for cross-border economies of scale By function, with emphasis on vertical relationships, even across org. boundaries Excessive variety or complexity Excessive standardization Narrowing spreads 20 INTERNATIONAL STRATEGY COMPARISON (2/2) Multi-Domestic Change Blockers Global Arbitrage Entrenched country chiefs All-powerful, regional, unit, or account heads Heads of key functions Corporate Diplomacy Address issues of concern with discretion, emphasis on cultivating local presence Avoid appearance of homogeneity or hegemonism (especially if US firm) Address exploitation or displacement of suppliers, channels, or intermediaries Corporate Strategy Scope selection Variation Decentralization Partitioning Modularization Flexibility Partnership Recombination Innovation Regions and other country groupings Product or business Function Platform Competence Client Industry Exploiting Distance 21 MODES OF ENTRY Exporting Minimal Investment (Low Risk) Licensing and Franchising Alliances and Joint Ventures Wholly Owned Subsidiaries Significant Investment (High Risk) 22 1) Exporting Conditions Favoring Exporting ▪ ▪ ▪ ▪ ▪ Limited sales potential in target country; little product adaptation required Good available distribution channels; close to existing production plants High target country production costs Liberal import policies (low tariffs); Hi political risk; Hi administrative distance Favorable exchange rate – more profits when home nation’s currency weakens Advantages • Minimizes risk and investment • Speed in entering market • Maximizes scale, utilization of existing facilities Disadvantages • • • • Trade barriers, tariffs (5%+) Transportation costs Limits access to local information Company viewed as outsider 23 2) Licensing/Franchising Conditions Favoring Licensing/Franchising ▪ ▪ ▪ ▪ ▪ Import and investment barriers that increase cost, limit FDI (high tariffs) Institutional environment that secures legal protection Tangible or intangible assets can be fairly priced Low sales potential in target country; large cultural distance Licensee lacks ability/resources to become competitor Advantages • Minimizes risk, investment • Speed in entering market – easier and faster entrance • Able to circumvent trade barriers • High ROI; average license royalty was 8.5% of the revenues (2002). Disadvantages • Lack control over use of assets • Licensee may become competitor • Potential for knowledge spillovers (e.g., RCA) • Return is for limited period 24 3) Wholly Owned Operations Conditions Favoring Sole Ownership ▪ Import barriers that increase import costs (e.g., tariffs) ▪ Tangible or intangible assets can’t be fairly priced; a unique product or service; want to minimize spillover and exploit the unique product ▪ Cultural distance between home/host countries is small ▪ High sales potential in target country Advantages Disadvantages • Greater knowledge on local market and customer • Increases ability to appropriate specialized skills • Minimizes knowledge transfers • Can be viewed as insider • Most risky and expensive way to enter a market (investment, resources, commitment) • Inability to manage local resources in local market 25 4) Joint Ventures and Alliances Conditions Favoring JVs and Alliances ▪ ▪ ▪ ▪ Similar to sole ownership plus: cultural distance is large Government restrictions on foreign ownership Local company can provide complementary skills Local knowledge, resources, distribution, brand name, etc. Advantages • Overcome ownership restrictions and cultural distance • Combines resources of two companies, potential for learning • Viewed as insider • Reduces investment; can spread faster into more markets and not be as constrained by funds Disadvantages • • • • Difficulties in managing JV Dilution of management control Greater risk (than export, license) Partner may become competitor; potential for knowledge spillovers 26 CHOOSING BETWEEN GREENFIELD, ACQUISITION, AND JV Greenfield Acquisition Joint Venture • Company owns proprietary product/ process technology • Foreign company owns or controls scarce resources • Foreign company owns or controls scarce resources. • Cultural Distance between home and target country is small. • Cultural Distance between home and target country is small. • Cultural Distance between home and target country is large. • Low political risk, neutral or positive attitude toward foreign owners. • Low political risk, neutral or positive attitude toward foreign owners. • High degree of political risk; negative attitude toward foreign acquirers • Important to achieve high level of integration/ coordination with home country operations. • Important to achieve high level of integration/ coordination with home country operations. • Important to reduce rivalry, eliminate a competitor • Need to reduce rivalry, eliminate a competitor • Need local autonomy and flexibility to succeed (not high level of coordination) --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Global Strategy (Integration) More control and integration Firm capabilities are most important Multi-domestic Strategy (Differentiation) Less control but more autonomy Local resources/knowledge are most important 27 EVOLUTION OF ENTRY MODE DECISIONS Control Branch Export/Subsidiary Licensing Joint Venture Wholly Owned (Greenfield, Acquisition) Time Agent Distributor/Export Indirect Export Source: Root, Entry Strategies for International Markets Risk 28 ENTRY MODES: A BRIEF Exporting Licensing / Franchising Alliance / Joint Venture Wholly Owned Subsidiary Investment required Low Low Medium High Level of risk Low Low Medium High Overcome trade barriers? No Yes Yes Yes Speed of entry Fast Fast Medium Acquire local resources, including knowledge? Viewed as insider or outsider? No No Yes Slow (faster for acquisition than greenfield) Yes Outsider Insider Possibly Insider Possibly Insider Degree of control Low Low Medium High 29 END 30 Strategic Management Jeff Dyer Second Edition Chapter 10 Innovative Strategies that Change the Nature of Competition MGMT 567: Managing the Multi-Business Firm Wontae Son, Ph.D. DEFINITION OF INNOVATION Invention - the creation of an idea or method; a novel concept Innovation - the conversion of a novel concept (an invention) into a product, process, or business model that generates revenues and profits. ex) - Mouse vs. Apple - Wright Brothers vs. Boeing Incremental vs. Radical (Disruptive) Copyright ©2018 John Wiley & Sons, Inc. 2 INCREMENTAL INNOVATIONS Building on a firm’s established knowledge base to create minor improvements to the product or service a firm offers. • • • • Generate better profits from current customers Add new features Replace existing products, so they do not create growth Sustain current product offerings & revenues - sustaining innovations Flat TV Screen Innovations Plasma LCD LED Copyright ©2018 John Wiley & Sons, Inc. 3D 3 RADICAL INNOVATIONS Innovation that draws on a different technologies, knowledge base, or methods to deliver value in a truly unique way. • Computer vs. Typewriter; CT vs. X-Ray; MP3 vs. CD player • Processes Innovations – Toyota TPS (lean or flexible manufacturing) • Disruptive - rivals find it so disruptive that they can no longer do businesses because 1) it is attractive to the incumbent’s customers, and 2) it is difficult to imitate. Copyright ©2018 John Wiley & Sons, Inc. 4 INNOVATIVE STRATEGY (Based on Radical Innovations) Innovative Strategy - a strategy that introduces a new technology or a fundamentally different business model than rivals. Business model - the rationale of how an organization delivers and captures values in terms of: 1) customer segment & unique value , 2) activities & resources, and 3) revenue model. Copyright ©2018 John Wiley & Sons, Inc. 5 CATEGORIES OF INNOVATIVE STRATEGIES (RADICAL INNOVATIONS) 1) Reconfigure the Value Chain to Eliminate Activities 2) Low End Disruptive Innovations 3) High End Disruptive Innovations 4) Reconfigure the Value Chain to Allow for Mass Customization 5) Blue Ocean Strategy – Targeting Non-Consumers to Create New Market 6) Create a Platform to Coordinate and Share Private Assets 7) Free Business Models Copyright ©2018 John Wiley & Sons, Inc. 6 1) Reconfigure Value Chain to Eliminate Activities (Disintermediation) The typical pattern is to eliminate a step in the channel to the customer, such as a store, which also eliminates salespeople and inventory. It allows the company to offer similar products & services at much lower prices. • Amazon vs. Barnes & Noble Netflix vs. Blockbuster 1-800-Mattres Charles Schwab → eliminate stores, labor, and inventory • Southwest vs. Hub & Spoke carriers → eliminate meals, seat reservations, baggage transfer, etc. Copyright ©2018 John Wiley & Sons, Inc. 7 Example: Different Value Chains Copyright ©2018 John Wiley & Sons, Inc. 8 2) Low End Disruptive Innovations Using new technologies to produce and launch a product at the “low end”, the most price-sensitive segment, and then gradually moves upmarket as it improves its technology and processes. (Calyton at Harvard) • Nucor vs. U.S. Steel Conditions: • Customers’ needs over-served (price is more important than features) • Product performance is “good enough” on basic features • Entrant uses a new low cost business model; performs different activities to earn profits even at deeply discounted prices • Apple & IBM vs. DEC or Data General • Skype vs. AT&T • Honda vs. Harley or Mercedes Copyright ©2018 John Wiley & Sons, Inc. 9 Example: Leaders Fail and New Growth Disruptive technologies are a driver of leadership failure and the source of new growth opportunities Performance Incumbents nearly always win Entrants nearly always win Time Copyright ©2018 John Wiley & Sons, Inc. 10 Steel Quality Example: Nucor Moves Up-Market to Beat Competitors % of tons 55% 25–30% margins 22% 18% margins 8% 12% margins 4% 7% margins 1975 1980 1985 Copyright ©2018 John Wiley & Sons, Inc. 1990 11 Example: Personal Computers Disrupt Mini-computers Entire product categories can be disrupted. Performance 60% margins on $500,000 computer 45% margins on $250,000 computer 20% margins on $2,000 computer Disruptive technology: personal computers Time Copyright ©2018 John Wiley & Sons, Inc. 12 Example: Mufacturing Companies Can be Disrupted Performance (e.g., in specific products like microwaves.) Panasonic Samsung LG Galanz Group Time Copyright ©2018 John Wiley & Sons, Inc. 13 3) High-End/Top-Down Disruptive Innovations These innovations typically rely on “radical” technologies and outperform existing products. They sell for a premium price, and then the costs gradually decline as companies make improvements in production technology. • Apple iPod vs. Sony Walkman and Discman • Starbuck’s coffee beans and atmosphere • Flash drives vs. Floppy disks and Zip drive • PCs vs. Typewriters • Electronic Fuel Injection (EFI) • Cell phones vs. Landlines Copyright ©2018 John Wiley & Sons, Inc. 14 Example: The High End Disruptive Innovation Model* Copyright ©2018 John Wiley & Sons, Inc. 15 4) Reconfigure the Value Chain to allow for Mass Customization Mass production or customization - new technologies and processes have allowed for the mass production of individually customized goods or services. • Build-A-Bear - mass produce components of stuffed animals and customize them at stores • Dell Direct - customized computers • Timbuk2 - customize and design your own handbags • Nike ID - customize and design your own shoes • My Twinn - customize your own doll, etc. Copyright ©2018 John Wiley & Sons, Inc. 16 Conflicts In Mass Customization Conflicts in Name: Economies of Scale Mass- Aggregation Customization- ‘one-of-a-kind’ Mass Production Hand-crafted Craft Production Conflicts in Operability: Customers’ demands are diverse and irregular which calls for leads to high component variety, large numbers of suppliers, and high administrative complexity Optimized set-up, manufacturing lines Small, on demand factories Mass Customization Copyright ©2018 John Wiley & Sons, Inc. 17 5) Blue Ocean Strategy - Creating New Markets by Targeting Nonconsumers Creating new demand in an uncontested market space. Sharks competing for the same scarce food create a “Red Ocean” of blood. Blue Ocean success relies on offering very different value from anything on the market. • Cirque de Soleil - combination of circus, acrobatic troupe, music, street performers and Broadway show • Federal Express - met uncontested demand for secure overnight delivery • ChotuKool - $49 refrigerator that runs on a battery and uses solid state thermo electric cooling) Copyright ©2018 John Wiley & Sons, Inc. 18 Example: Blue Ocean Strategy - Chotukool over 70% of Indian households have no refrigerator Refrigerators ChotuKool • Expensive • Affordable • Large • Small • Requires electricity • Requires no electricity • Difficult to service • Easy to service Copyright ©2018 John Wiley & Sons, Inc. 19 6) Create a Platform to Coordinate and Share Private Assets A company can best succeed in the sharing economy by creating platforms (e.g., apps) to help consumers coordinate and share private assets. 3 keys to success: - sharing solution works best when asset value is high but usage rate is low - build scale in the network itself - fueled by the uniqueness of Millennial culture and attitudes • Uber - use personal car as a taxi • Airbnb - rent our spare rooms to guests Copyright ©2018 John Wiley & Sons, Inc. 20 7) Free Business/Revenue Models ▪ Free Cross Sell (Freemium) Strategy ▪ Free 3rd Party Pay Strategy ▪ Free Bundling Strategy Copyright ©2018 John Wiley & Sons, Inc. 21 COMPETING WITH FREE 1. Free Up-Sell (“Freemium”) & Cross-Sell Strategy Offers a free version to gain attention and widespread use; then offer a premium product (Up-Sell, “Freemium”) with advanced features or other products (Cross Sell) for customers willing to pay. Skype Flickr Ryanair mint.com Requirements: • A large user base of free products - even a low conversion rate will generate substantial revenues • A high percentage of users willing to pay for the premium version • A broad product line - preferably complementary with the free product Copyright ©2018 John Wiley & Sons, Inc. 22 COMPETING WITH FREE 2. Free Third Party Pay (Advertising) Strategy Make the product or service free to generate a community (network externality) for which you get paid by a third party company who desires access to that community. Google Hulu Craigslist Blyk Ryanair Requirements: • A free offering that attracts either many users who can be segmented for advertisers or a targeted group that comprises a customer segment • Third parties willing to pay to reach these customers Copyright ©2018 John Wiley & Sons, Inc. 23 Competing with FREE 3. Free Bundling Strategy (Direct cross subsidy) Bundle the free product with non-free products and derive revenues from non-free products; can’t get the one without the other. HP Printer Better Place Requirements: • Products or services that can be bundled with the free offering • A free product that needs regular maintenance or complementary products (e.g., free printer but costly ink). Copyright ©2018 John Wiley & Sons, Inc. 24 HYPERCOMPETITION Hypercompetition- A term coined by Professor Rich D’Aveni to refer to his argument that competitive intensity has increased and that periods of competitive advantage have decreased. A firm stayed in the Fortune 500 for 12 years in 1950, but a firm stayed there only for 7 years by 2000. Copyright ©2018 John Wiley & Sons, Inc. 25 INNOVATION AND THE PRODUCT/BUSINESS/INDUSTRY LIFE CYCLE (S-CURVE) Growth Maturity Decline Introduction Copyright ©2018 John Wiley & Sons, Inc. 26 Product/Business/Industry Life Cycle (S-Curve) Introduction Customer Early adopters Industry Focus Growth Early majority Maturity Late majority Decline Falling demand Get reference customers Accelerated sales Limited growth Increased rivalry New product entered and market shrunken Focus on product innovation than process innovation Continue to refine products Use innovative way to reach customers Minimize competition Consolidate by buying rivals Focus on process innovation & operational efficiency Copyright ©2018 John Wiley & Sons, Inc. 27 END Copyright ©2018 John Wiley & Sons, Inc. 28 
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