Sessions 11 - 12
Sessions 11 - 12
Sessions 11 - 12
• Avoid overcommitting
• Brave shame and despair
• Pivot quickly
• Transfer knowledge
• Need not be the right first time
Challenges of Innovation
• Seeds vs. weeds – filter from the abundance of innovative ideas
• Experience vs. initiative – who will lead an innovation project
• Internal vs. external staffing – more social capital, but may hinder
thinking out of the box. Increased cost of hiring, training, relationship
building
• Building capabilities vs. collaborating –within a firm or external
partners
• Incremental vs. preemptive launch – managing timing and scale of
innovation
Winners and Losers from Innovation
Leaders Followers
First Mover Advantages and Disadvantages
Advantages Disadvantages
• Learning curve • Uncertainty resolution
• R&D and patents • Technological shifts
• Preemption • Ecosystem development
• Switching costs • Inertia
• Choice under uncertainty • Pioneering costs
• Regulatory approval
• Standards formation
• Consumer education
• Brand image • Early inputs costly
• Corporate Strategy
• Diversification
Levels of Strategy
Why do we have this portfolio of businesses?
How do we manage a portfolio of businesses?
Corporate How doe we develop a distinctive
competence that acts a source of competitive
advantage in multiple industries?
Functional Strategy
How to build capabilities in
each function?
Corporate vs. Business Strategy
High
Question marks Stars
Strategy: Invest? Strategy: Invest
Low
Low High
Relative Market Share
Corporate Level Strategy
• Corporate strategy is the way a company
creates value through the configuration
and coordination of multi-market
activities.
2. The Cost of Entry Test: the cost of entry must not capitalize all future profits.
3. The Better-Off Test: either the new unit must gain competitive advantage from its
link with the company, or vice-versa. (i.e. some form of “synergy” must be
present)
Diversification
Motives for diversification
Types of diversification
Mode of diversification
Diversification Motives
• Financial Economies
• Risk reduction
• Efficient internal capital allocation & restructuring
• Tax advantages
• Economies of scope
• Transferring competencies
• Sharing activities
• Utilizing excess capacity
• Brand-name that is exportable
• R&D and new product development
Diversification Motives
• Managerial motives (that devaluate firm)
• Managerial capitalism/agency problem
• Increase managerial compensation
• Diversify managerial employment risk
Diversification and Stockholders
• Issue #1: There may be no value to stockholders in diversification moves since
stockholders are free to diversify by holding a portfolio of stocks.
• Issue #2: When there is a reduction in managerial (employment) risk, then there
is upside and downside effects for stockholders.
• On the upside, managers will be more willing to learn firm-specific skills that will
improve the productivity and long-run success of the company (to the benefit of
stockholders).
• On the downside, top-level managers may have the incentive to diversify to a
point that is detrimental to stockholders.
Limits of Diversification
• Unrelated Diversification
• Parenting
• Restructuring
• Portfolio Management
Determinants of relatedness based on three
corporate management tasks
• Resource Allocation
• Similar size of capital investment projects
• Similar time span
• Similar sources of risk
• Similar general management skills required by managers
• Strategy Formulation
• Similar key success factors
• Similar stages of the industry life cycle
• Similar competitive positions
• Performance Management and Control
• Targets defined in terms of similar performance variables
• Similar time horizons for performance targets
Related Diversification
Economies of Scope: Leveraging core competencies
• The core competence must enhance competitive advantage by creating superior
customer value
e.g. Core competence of Gillette lies in developing razors, for which customers are ready to pay more.
• Different businesses in the corporation must be similar in at least one way in
relation to the core competence
e.g. Fujifilm had developed expertise on collagen, a component of both photo film and human skin,
which it utilized to develop a skin care product, called Astalift
• The core competence must be inimitable and non substitutable
e.g. Amazon’s competence in internet retailing, website infrastructure, warehousing developed during days of
the online book industry could be used in a range of other online industries.
Related Diversification
Economies of Scope: Sharing activities
• Cost savings due to economies of scale and scope
• Sharing should not have a negative effect on a given business’s differentiation
e.g. Ford’s owning of Jaguar, which lowered perceived value and differentiation of Jaguar
• Benefits must outweigh greater coordination required to manage a shared
activity
e.g. Sharing manufacturing facilities, distribution channels, sales force
Related Diversification
Market Power: Pooled negotiating
• Enhanced bargaining power with customers and suppliers
• Enhanced position vis a vis competitors
• Access to parent’s deep pockets and new entrants
• Effect of combined business with potential customers, suppliers
Related Diversification
Market Power: Vertical integration
• Backward integration: When Home Box Office began producing its own
movies for screening on the HBO Cable Channel.
Vertical Integration
• In order to avoid confusion on the vertical coordination problem it is
important for the manager to separate two distinct issues:
• Issue #2: What organizational form (e.g., vertical contracts, equity joint
ventures, mergers & acquisitions) best achieves the desired objective(s)?
Unrelated Diversification
• Corporate Parenting
• Create value through management expertise
• Competent central functions like legal, HRM, financial, procurement
• Change in strategy, infusion of new technology and processes
• Restructuring
• Insight to detect undervalued companies to reduce cost of acquisition
• Asset restructuring – selling unproductive assets
• Capital restructuring – changing the debt-equity mix
• Management restructuring – change in top management, reporting
relationships, organizational structure
• Portfolio Management – to achieve a balanced portfolio of business
Pitfalls of portfolio approach