Managing the Established Enterprise: Strategy Module

Corporate Strategy Session 7

Natalya Vinokurova

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Competitive Interactions Takeaways

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• A strategist’s most important job is to choose the right game. • The value of the first-mover advantage depends on the game. • In some games, the winning strategy is to not enter the game. • Competing head-on rarely ends well.

• The best use of understanding the firm’s competitors is to leverage that information to NOT play the same game they do. • Progressive went after the non-standard auto insurance

segment. • Pepsi targeted youth and suburban customers.

• The judo approach allows the focal firm to enter an industry without inviting retaliation from established firms. • Judo strategy allows the firm’s competitors to save face and

remain profitable. • The job of a strategist is to look for win-win scenarios.

1. Industry Positioning

2. Complementors

3. Value Creation and Capture

4. Activity Systems

6. Corporate Strategy

5. Competitive interactions

7. Strategic Planning

Industry Factors

Firm Factors

Corporate Strategy

Strategic Planning

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Division A in industry a

Corporate Scope

The average U.S. Fortune 500 company operates in four different industries

Diversification is even more prominent in other parts of the world • Grupos, chaebol, business houses, keiretsu, and so on

Poor corporate strategy is common “Excite, one of the leading Internet services companies, yesterday [received a] takeover

offer from Zapata, a Texas-based group with holdings in marine protein and food packaging companies.

Citing the “excellent fit with Zapata’s new strategic direction,” Avram Glazer, Zapata’s chief executive officer, said the proposed transaction “makes sense for Excite’s shareholders because of the capital resources that Zapata can bring to Excite.”

Financial Times, May 22, 1998

Corporate center

Division B in industry b

Division C in industry c

Division D in industry d

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What diversified corporation did this become?

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Year2% Industry

18%

Business segment

30%

Transient46%

Corporate parent

4%

Decomposition of Variance in Profitability: Evidence from the United States

Note: Ignores covariance terms; based on 58,132 observations of 12,296 business segments in 628 industries in the United States Source: Anita M. McGahan and Michael E. Porter, “How Much Does Industry Matter Really?” Strategic Management Journal, 1997

• In the U.S., corporate strategy is typically the icing on the cake, not the cake itself

– Business units must be competitive on their own merits

– …in attractive industries

• But the icing can make the decisive difference between a good cake and a bad one

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Decomposition of Variance in Profitability: Evidence from 14 Emerging Economies

Source: Tarun Khanna and Jan W. Rivkin, “Estimating the Performance Effects of Business Groups in Emerging Markets,” Strategic Management Journal, 2000 Countries: Argentina, Brazil, Chile, India, Indonesia, Israel, Mexico, Peru, the Philippines, South Africa, South Korea, Taiwan, Thailand, and Turkey

• In much of the rest of the world, corporate strategy is more prominent

• Membership in a diversified entity has a larger effect on profitability

• The effect on profitability is more likely to be positive

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Litmus Test for Corporate Strategy

• Is the combination of all businesses of the firm worth more or less than the sum of how much each business could be sold for individually? In the early 2000s, the telemarketing division of JC Penney

was valued at $12B, all of JC Penney including the telemarketing division was worth $4B.

• In deciding whether or not to acquire a business, you must have a compelling case for BOTH: 1. whether you have a competitive advantage running another

business 2. AND how the acquisition would affect the fit among the

other businesses you are running

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Acrobat Document

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The Walt Disney Company: Stock Price vs. S&P 500, 1984-1994

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The Walt Disney Company: Stock Price vs. S&P 500, 1995-2005

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Two big problems

Growth at all costs: • This is an example of what happens when a solid corporate strategy

meets an aggressive growth goal Mismatch between strategy and organizational structure:

• You can have a corporation with businesses that are closely connected like the classic Disney businesses and then run the businesses together in a tightly integrated way. That can work.

• You can have a corporation with the broader scope of later Disney and run them in a loosely coupled way. That can work.

• But if you have a corporation with the broader scope of later Disney and run them like the classic Disney, with heavy-handed management from the top, searching for synergy that doesn’t really exist…then you get into trouble.

In 2005, ABC President Robert Iger replaces Eisner

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The Walt Disney Company: Stock Price vs. S&P 500, 2005-2012

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The Walt Disney Company: Take-aways

Core lessons of corporate-level strategy • Competition occurs at the level of the business unit • Corporate strategy is a success or failure to the extent that it enhances business unit

competitive advantage Is the relative gap between WTP and cost larger than it would be otherwise?

• Two tests: Better-off: Does the presence of the corporation in a given market improve the total

competitive advantage of business units over and above what they could achieve on their own? (What’s the added value of the corporation?)

Ownership: Does ownership of the business unit produce a greater competitive advantage than an alternative arrangement would produce?

• A corporation is more likely to pass the tests when it has some shared resource that (a) creates competitive advantage for the business units and (b) is difficult to trade efficiently via the market

E.g., access to animated characters

Making business units “better off” sounds easy, but it typically requires sophisticated structures, systems, and processes, plus cultural supports

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Corporate strategy entails trade-offs

Either focus on… or focus on…

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Strategy Memo

• Details – Due on September 27th at NOON. – Word limit: 1,000 words (~ 3 pages, with one additional page

depicting the activity system). • Assignment

– Conduct an industry analysis of the last industry you worked in from the perspective of an incumbent firm (you can use either the Five Forces or the Value Net framework)

– Draw the activity system for your last employer. – Discuss 2 or 3 interactions within the activity system you drew (i.e.,

the reasoning behind why you have connected 2 elements in the activity system).

• Grading – Each of the three parts of the paper will have an equal weight for

grading purposes

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Next Class: Strategic Planning

Reading: Gavetti, Giovanni, and Jan Rivkin. “The Use and Abuse of Analogies” (9-703-429).

Case: Gavetti, Giovanni, and Jan Rivkin. “Analogical reasoning at Lycos”

• What are the pitfalls of analogical reasoning? • Do you buy the analogy to traditional media Lycos’s

management team used to arrive at their decision? • Does this analogy provide Lycos’s managers with valid

guidance?

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