2.  Nike Case Due Next Tuesday  Guest Speaker Thursday Randy Conrads of Classmates and Red WeekRandy Conrads of Classmates and Red Week

3.  Cancelling Group Presentation Requirement (was to be worth 15%)  Exam 12023.5  Exam 22023.5  Paper2023.5  Strategic Issue1011.76  Cases1011.76  Group Case 55.88

4. Entrepreneurship & Intrapreneurship

5. Entrepreneurship  The process of uncovering and developing an opportunity to create value through innovation and seizing that opportunity without regard to either resources (human and capital) or the location of the entrepreneur— in a new or existing company (Churchill, 1992: 586).

6. Entrepreneurship Characteristics  Commercial leanings  Lack of structure/self-control  Visionary tendencies  Risk-taking/appetite for uncertainty  Persistence  Doer/high initiative  Charisma and extroversion

7. Entrepreneurship Characteristics  High-energy level  Strong self-image  Team building skills/uses contacts and connections  Views failure as learning  Commitment and fun

8. Entrepreneurs vs Managers EntrepreneursManagers Rewards Doing what they like. Independent Corporate rewards. Promotion, staff, office, money Activity Direct involvement Delegation Risk Moderate risk taker Avoids risk Status Not concerned about status symbols Represents power and position Relationshi ps Deal-making and reciprocity Relies upon the hierarchy Time orientation Time orientation - 5 - 10 years. Short term Decisions Follows dreams with decisions Follows directives

9. Intrapreneurship Characteristics  Understands the environment  Visionary and flexible  Creates management options  Encourages teamwork  Encourages open discussion  Builds a coalition of supporters  Persists

10. Intrapreneurship Environment  New ideas encouraged  Trial and error encouraged. Failure ok!  Resources available and accessible  Long time horizon  Appropriate reward system  Sponsors and champions available  Support of top management

11. “It is the customer who, in the end, determines how many people are employed and what sort of wages companies can afford.” Lord Robens

12. Strategy in High Technology Industries

13. High Technology Industries  Rapidly changing scientific knowledge underlying attribute for competition  R&D/Sales  Battle over technical standard, format, and dominant design Set by decree, cooperation, public domain, but mostly through consumer choicesSet by decree, cooperation, public domain, but mostly through consumer choices

14. Benefits for Standards  Compatibility  Reduce consumer uncertainty  Reduce production costs  Increase in complementary products – Network effects – which greatly enhances sustainability Lock outs and switching costsLock outs and switching costs

15. Wining Format Wars  Ensure complementary products  Killer applications  Razor and blade strategy Cell phones, printers, satellite TV/radio, video gamesCell phones, printers, satellite TV/radio, video games  Cooperative competition  Licensing

16. Technological Change  If the automobile had developed at the same rate as the microchip, a Roll Royce would:  Cost $2.75  Go 3 Million miles on a gallon of gas

17. TV Industry – Paradigm Shifts Black & White TV

18. Color TV

19. Black & White TV Color TV

20. Black & White TV Color TV Big Screen TV

21. Black & White TV Color TV Big Screen TV

22. Black & White TV Color TV Big Screen TV HDTV

23. Black & White TV Color TV Big Screen TV HDTV Incremental evolution included remote controls,cable ready tuners, stereo sound systems, screen-in-a- screen, etc

24. Competitive Dynamics  Competitive action within an industry.  Strategic and tactical action does not occur within a vacuum  What industries have high competitive dynamics?  What sort of actions/tactics are taken?

25. Drivers of Competitive Dynamics  numerous/equally balanced competitors  slow growth  high fixed/storage costs  lack of differentiation/switching costs  high exit barriers  Etc… Rivalry Competitive Dynamics

26. Competition in the Pharmaceutical Industry  Reps tripled to 90K last 10 years  12B on sales force, 2.76B on ads  Managed care bet – Pfizer from 14 th to 1 st  529 visits yearly, average length – 2.5 min 8% remember8% remember  Glaxo can reach 80% of the Drs in a week  “Is this necessary. No, but if my competitors do it and I can’t, then I’m at a disadvantage. This has been an arms race in the worst possible manner.”

27. Types of Competitive Responses  First Movers - initial competitive action  advantages and disadvantages  Fast Followers or Capable Competitors- respond quickly to first movers  Late Entrants - day late and a dollar short

30. Chapter 9-10 Corporate Level Strategy

31. Snack Foods BeveragesFoods Frito-Lay North America Frito-Lay International Pepsi-Cola North America Gatorade/Tropicana North America PepsiCo Beverages International Quaker North America

32. Snack Foods Frito-Lay North America Lay’s Ruffles Doritos Santitas Fritos Cheetos Rold Gold Funyuns Sunchips Cracker Jack Chester’s popcorn Grandma’s cookies Munchos Smartfood Baken-ets fried pork skins Oberto meat snacks

33. Snack Foods Frito-Lay International Bocabits wheat snacks Crujitos corn snacks Fandangos corn snacks Hamkas snacks Niknaks cheese sticks Quavers potato snacks Sabritas potato chips Twisties cheese snacks Walkers potato crisps Walkers Square potato snacks Walkers Monster Munch Corn snacks Miss Vickie’s potato chips Gamesa cookies Dippas Sonric’s sweet snacks

34. Snack Foods Frito-Lay International Bocabits wheat snacks Crujitos corn snacks Fandangos corn snacks Hamkas snacks Niknaks cheese sticks Quavers potato snacks Sabritas potato chips Twisties cheese snacks Walkers potato crisps Walkers Square potato snacks Walkers Monster Munch Corn snacks Miss Vickie’s potato chips Gamesa cookies Dippas Sonric’s sweet snacks

35. Beverages Pepsi-Cola North America Pepsi-Cola Mountain Dew Slice Mug Sierra Mist FruitWorks Lipton Dole Aquafina Frappuccino SoBe AMP

36. Beverages Gatorade/Tropicana North America Gatorade Propel Tropicana Dole juices

37. Beverages PepsiCo Beverages International Loóza juices and nectars Copella juices Frui’Vita juices Tropicana 100 juices

38. Foods Quaker North America Quaker Oats Cap’n Crunch cereal Life cereal Quisp cereal King Vitaman cereal Mother’s cereal Quaker rice cakes and granola bars Rice-A-Roni side dishes Near East couscous/pilafs Aunt Jemima mixes & syrups Quaker grits

39. Foods Quaker North America Quaker Oats Cap’n Crunch cereal Life cereal Quisp cereal King Vitaman cereal Mother’s cereal Quaker rice cakes and granola bars Rice-A-Roni side dishes Near East couscous/pilafs Aunt Jemima mixes & syrups Quaker grits Business Level Strategies How are we going to compete and gain a competitive advantage in each of our businesses?

40. Snack FoodsBeveragesFoods Corporate Level Strategy 1) What businesses do we want to compete in? 2) How do manage effectively across businesses

41. Where did they go?

42. Goals of Corporate Strategy Moves to enter new businesses Boosting combined performance of the businesses Capturing synergies and turning them into competitive advantages Establishing investment priorities and steering resources into business units

43. 4 Corporate Level Strategies 1) Vertical Integration 1) Vertical Integration 2) Strategic Outsourcing 2) Strategic Outsourcing 3) Horizontal Integration 3) Horizontal Integration 4) Diversification – two or more different businesses with distinct operations 4) Diversification – two or more different businesses with distinct operations

44. 1) Vertical Integration  Forward or backwards Full integrationFull integration Taper integrationTaper integration  Benefits Build barriers to entryBuild barriers to entry Facilitates investment in specialized assetsFacilitates investment in specialized assets Protecting product qualityProtecting product quality Improved schedulingImproved scheduling  Risks CostsCosts Rapid technological changesRapid technological changes Demand predictabilityDemand predictability

45. Alternatives to Vertical Integration  Competitive bidding  Long term contracts or strategic alliances Vertical Integration Markets & Competitive Bidding Hybrid & Contracts/Alliances Form of Relationship

46. 2) Outsourcing  Cost reduction and differentiation  Hold-ups, scheduling and hallowing out

47. 3) Horizontal Integration  Acquiring or merging with industry competitors Reduce cost and economies of scaleReduce cost and economies of scale Increasing value through wider product line or product bundlingIncreasing value through wider product line or product bundling Manage industry rivalryManage industry rivalry Increase buyer and supplier powerIncrease buyer and supplier power

48. 4) How to Diversify? 1) Internal Development - corporate entrepreneurship or internal venturing able to appropriate a larger portion of wealthable to appropriate a larger portion of wealth avoids complexities of multiple partnersavoids complexities of multiple partners time consuming and requires diversity of organizational capabilitiestime consuming and requires diversity of organizational capabilities

49. 4) How to Diversify? 2) Strategic Alliances and Joint Ventures entering a new market via the combination of complementary resources - do more togetherentering a new market via the combination of complementary resources - do more together cost reduction & sharingcost reduction & sharing development/diffusion of technologydevelopment/diffusion of technologyProblems appropriate partners - skills and compatibilityappropriate partners - skills and compatibility trust and commitmenttrust and commitment communicationcommunication

50. Who Makes a Geo? Geo Storm was actually manufactured by Isuzu. The Storm is the Isuzu Impulse. Geo Prizm = Toyota Corolla Geo Tracker = Suzuki Sidekick Geo Metro = Suzuki Esteem or Swift w/hatchback No Geo cars were actually made by General Motors. They were all imported from foreign manufacturers.

53. 4) How to Diversify? 3) Mergers & Acquisition

54. Mergers & Acquisitions Reasons of Acquisitions Increase Market Power Overcome Entry Barriers Increased Speed Lower Risk Avoid Competition

55. Acquisitions Reasons of Acquisitions Increase Market Power Overcome Entry Barriers Increased Speed Lower Risk Avoid Competition Problems with Acquisitions Integration of two firms Overpayment/Debt Overestimation of Synergy Overdiversification Managerial energy absorption Become too large Substitute for innovation

56. Acquisitions Reasons of Acquisitions Increase Market Power Overcome Entry Barriers Increased Speed Lower Risk Avoid Competition Problems with Acquisitions Integration of two firms Overpayment/Debt Overestimation of Synergy Overdiversification Managerial energy absorption Become too large Substitute for innovation Results Poor Performance Who Wins? Acquired Firm Shareholders

57. Monday October 27 th WSJ  Bank of American – Boston Fleet Financial BoA down $8.29, or 10%, BFF rose 23%BoA down $8.29, or 10%, BFF rose 23%  Anthem – WellPoint Health Networks Anthem down 8.2%, WellPoint up 8.8%Anthem down 8.2%, WellPoint up 8.8%  United Health – MidAtlantic Med Services UH down 4.9%, MAMS up 9.7%UH down 4.9%, MAMS up 9.7%

58. Failures of Acquisitions 30 - 40% average acquisition premium Acquiring firm’s value drops 4% in the 3 months following acquisitions 30 - 50% of acquisitions are later divested Acquirers underperform S&P by 14%, peers by 4% 3 month performance before and after 30% substantial losses, 20% some losses, 33% marginal returns, 17% substantial returns30% substantial losses, 20% some losses, 33% marginal returns, 17% substantial returns

59. Why, then, do executives acquire? Often, for personal reasons Firm size and executive compensation are related When do executives loss their jobs? 1) Acquired - larger firms harder to acquire1) Acquired - larger firms harder to acquire 2) Performing poorly - employment risk is reduced as returns are less volatile2) Performing poorly - employment risk is reduced as returns are less volatile

62. Related Diversification at Disney Entertainment/Production Theme Parks Resorts Entertainment/Broadcasting Cruise Lines Retailing

63. Levels of Diversification Related Diversification - entering product markets that share some resource or capability requirements with the current business – horizontal relationships across businesses - synergies Advantages of related diversification include: ä Leveraging Core Competencies ä Sharing Activities ä Market Power

65. Tyco Electronics Tyco Telecommunications Tyco Fire and Security Tyco Safety Products Tyco Healthcare Tyco Plastics Tyco Adhesives Tyco Flow Control Tyco Electrical and Metal Products Tyco Fire and Building Products Tyco Infrastructure Services

66. Levels of Diversification (cont.) Unrelated Diversification - few similarities in the resources and capabilities required among the firm’s businesses Conglomerate Diversification - no relatedness between businesses

67. When/Why to Diversify? To create shareholder value Porter’s Three Point Test 1) Attractiveness Test 2) Cost of Entry Test 3) Better off Test Should pass all 3

68. Portfolio analysis  BCG Growth-Share Matrix question marks, dogs, cash cows, stars question marks, dogs, cash cows, stars  GE- Nine Cell Matrix

69. Growth Rate Relative Market Share Stars Question Marks Cash Cows Dogs Boston Consulting Group Matrix

70. Growth Rate Relative Market Share 1.0High Low Soft Drinks Frito Lay KFC Pizza Hut Taco Bell Low High 10% BCG Matrix for PepsiCo - Early 1990s

71. Growth Rate Relative Market Share.75High Low Soft Drinks Frito Lay KFC Pizza Hut Taco Bell Low High 5% BCG Matrix for PepsiCo - Early 1990s

72. Competitive Strengths Attractiveness Invest Grow Low High LowHigh Harvest Divest Hold GE 9 Cell Matrix

73. Competitive Strengths Attractiveness Low High LowHigh GE 9 Cell Matrix for Pepsico Soft Drinks Snack Foods