The External Environment:
Opportunities, Threats, Industry Competition, and Competitor Analysis
Ch2-1
Components of the General Environment
Economic
Demographic Industry Environment Competitive Environment Political/ Legal Technological
Ch2-2
Sociocultural
Global
SWOT Analysis
Strengths Weaknesses Opportunities Threats
Ch2-3
The purpose of SWOT Analysis
It is an easy-to-use tool for developing an overview of a companys strategic situation
It forms a basis for matching your companys strategy to its situation
Ch2-4
The purpose of Five-Forces Analysis
The five forces are environmental forces that impact on a companys ability to compete in a given market. The purpose of five-forces analysis is to diagnose the principal competitive pressures in a market and assess how strong and important each one is.
Ch2-5
Porters Five Forces Model of Competition
Threat of Threat of New New Entrants Entrants
Ch2-6
Threat of New Entrants
Economies of Scale
Barriers to Entry
Product Differentiation Capital Requirements
Switching Costs
Access to Distribution Channels Cost Disadvantages Independent of Scale Government Policy
Expected Retaliation
Ch2-7
Porters Five Forces Model of Competition
Threat of Threat of New New Entrants Entrants
Bargaining Power of Suppliers
Ch2-8
Bargaining Power of Suppliers
Suppliers are likely to be powerful if:
Suppliers exert power in the industry by: * Threatening to raise prices or to reduce quality
Supplier industry is dominated by a few firms Suppliers products have few substitutes Buyer is not an important customer to supplier Suppliers product is an important input to buyers product
Powerful suppliers can squeeze industry profitability if firms are unable to recover cost increases
Suppliers products are differentiated
Suppliers products have high switching costs Supplier poses credible threat of forward integration
Ch2-9
Porters Five Forces Model of Competition
Threat of Threat of New New Entrants Entrants
Bargaining Power of Suppliers
Bargaining Power of Buyers
Ch2-10
Bargaining Power of Buyers
Buyer groups are likely to be powerful if: Buyers are concentrated or purchases are large relative to sellers sales Purchase accounts for a significant fraction of suppliers sales Products are undifferentiated Buyers face few switching costs Buyers industry earns low profits Buyer presents a credible threat of backward integration Product unimportant to quality
Buyers compete with the supplying industry by:
* Bargaining down prices * Forcing higher quality * Playing firms off of each other
Buyer has full information
Ch2-11
Porters Five Forces Model of Competition
Threat of Threat of New New Entrants Entrants
Bargaining Power of Suppliers
Bargaining Power of Buyers
Threat of Substitute Products
Ch2-12
Threat of Substitute Products
Keys to evaluate substitute products: Products with similar function limit the prices firms can charge Products with improving price/performance tradeoffs relative to present industry products Example: Electronic security systems in place of security guards Fax machines in place of overnight mail delivery
Ch2-13
Porters Five Forces Model of Competition
Threat of Threat of New New Entrants Entrants
Bargaining Power of Suppliers
Rivalry Among Competing Firms in Industry
Bargaining Power of Buyers
Threat of Substitute Products
Ch2-14
Rivalry Among Existing Competitors
Intense rivalry often plays out in the following ways:
Jockeying for strategic position Using price competition
Staging advertising battles Increasing consumer warranties or service Making new product introductions
Occurs when a firm is pressured or sees an opportunity
Price competition often leaves the entire industry worse off Advertising battles may increase total industry demand, but may be costly to smaller competitors
Ch2-15
Rivalry Among Existing Competitors
Cutthroat competition is more likely to occur when: Numerous or equally balanced competitors Slow growth industry
High fixed costs High storage costs
Lack of differentiation or switching costs Capacity added in large increments Diverse competitors High strategic stakes
High exit barriers
Ch2-16
The Five Forces are Unique to Your Industry
Five-Forces Analysis is a framework for analyzing a particular industry.
Yet, the five forces affect all the other businesses in that industry.
Ch2-17
The auto manufacturing industry is considered to be highly capital and labor intensive. The major costs for producing and selling automobiles include: 1. Labor 2. Materials 3. Advertising 4. Original Equipment Manufacturers (OEMs) 5. Replacement Parts Production and Distribution 6. Rubber Fabrication
Ch2-18
Key Players In North America, the automobile production market is dominated by what's known as the Big Three:
1.General Motors - Produces Chevrolet, Pontiac, Buick and Cadillac, among others. 2.Chrysler - Chrysler, Jeep and Dodge. 3.Ford Motor Co - Ford, Lincoln and Volvo.
Ch2-19
Two of the largest foreign car manufacturers are:
1.Toyota Motor Co 2.Honda Motor Co
Ch2-20
Porter's 5 Forces Analysis
1. Threat of New Entrants.
It's true that the average person can't come along and start manufacturing automobiles. Historically, it was thought that the American automobile industry and the Big Three were safe. But this did not hold true when Honda Motor Co. opened its first plant in Ohio. The emergence of foreign competitors with the capital, required technologies and management skills began to undermine the market share of North American companies.
Ch2-21
2. Power of Suppliers
The automobile supply business is quite fragmented (there are many firms). Many suppliers rely on one or two automakers to buy a majority of their products. If an automaker decided to switch suppliers, it could be devastating to the previous supplier's business. As a result, suppliers are extremely susceptible to the demands and requirements of the automobile manufacturer and hold very little power.
Ch2-22
3.Power of Buyers.
Historically, the bargaining power of automakers went unchallenged. The American consumer, however, became disenchanted with many of the products being offered by certain automakers and began looking for alternatives, namely foreign cars. On the other hand, while consumers are very price sensitive, they don't have much buying power as they never purchase huge volumes of cars.
Ch2-23
4.Availability of Substitutes.
Be careful and thorough when analyzing this factor: we are not just talking about the threat of someone buying a different car. You need to also look at the likelihood of people taking the bus, train or airplane to their destination. The higher the cost of operating a vehicle, the more likely people will seek alternative transportation options
Ch2-24
5.Competitive Rivalry.
Highly competitive industries generally earn low returns because the cost of competition is high. The auto industry is considered to be an oligopoly, which helps to minimize the effects of price-based competition. The automakers understand that pricebased competition does not necessarily lead to increases in the size of the marketplace; historically they have tried to avoid price-based competition, but more recently the competition has intensified rebates, preferred financing and long-term warranties have helped to lure in customers, but they also put pressure on the profit margins for vehicle sales.
Ch2-25
BOSTON CONSULTING GROUP MATRIX
Ch2-26
BOSTON CONSULTING GROUP (BCG) MATRIX is developed by BRUCE HENDERSON of the BOSTON CONSULTING GROUP IN THE EARLY 1970s. According to this technique, businesses or products are classified as low or high performers depending upon their market growth rate and relative market share.
Ch2-27
INTRODUCTION
Relative Market Share and Market Growth
To understand the Boston Matrix you need to understand how market share and market growth interrelate.
Ch2-28
MARKET SHARE
Market share is the percentage of the total market that is being serviced by your company, measured either in revenue terms or unit volume terms.
RELATIVE MARKET SHARE
RMS = Business unit sales this year Leading rival sales this year
The higher your market share, the higher proportion of the market you control.
Ch2-29
Market growth is used as a measure of a markets attractiveness. MGR = Individual sales - individual sales this year last year Individual sales last year Markets experiencing high growth are ones where the total market share available is expanding, and theres plenty of opportunity for everyone to make money.
MARKET GROWTH RATE
Ch2-30
THE BCG GROWTH-SHARE MATRIX
It is a portfolio planning model which is based on the observation that a companys business units can be classified in to four categories: Stars Question marks Cash cows Dogs
It is based on the combination of market growth and market share relative to the next best competitor.
Ch2-31
Ch2-32
STARS
High growth, High market share
Stars are leaders in business. They also require heavy investment, to maintain its large market share. It leads to large amount of cash consumption and cash generation. Attempts should be made to hold the market share otherwise the star will become a CASH COW.
Ch2-33
CASH COWS
Low growth , High market share
They are foundation of the company and often the stars of yesterday. They generate more cash than required. They extract the profits by investing as little cash as possible They are located in an industry that is mature, not growing or declining.
Ch2-34
DOGS
Low growth, Low market share
Dogs are the cash traps. Dogs do not have potential to bring in much cash. Number of dogs in the company should be minimized. Business is situated at a declining stage.
Ch2-35
QUESTION MARKS
High growth , Low market share
Most businesses start of as question marks. They will absorb great amounts of cash if the market share remains unchanged, (low). Why question marks? Question marks have potential to become star and eventually cash cow but can also become a dog. Investments should be high for question marks.
Ch2-36
WHY BCG MATRIX ?
To assess : Profiles of products/businesses The cash demands of products The development cycles of products Resource allocation and divestment decisions
Ch2-37
MAIN STEPS OF BCG MATRIX
Identifying and dividing a company into SBU. Assessing and comparing the prospects of each SBU according to two criteria : 1. SBUS relative market share. 2. Growth rate OF SBUS industry. Classifying the SBUS on the basis of BCG matrix. Developing strategic objectives for each SBU.
Ch2-38
BCG MATRIX WITH CASH FLOW
Ch2-39
BENEFITS
BCG MATRIX is simple and easy to understand. It helps you to quickly and simply screen the opportunities open to you, and helps you think about how you can make the most of them. It is used to identify how corporate cash resources can best be used to maximize a companys future growth and profitability.
Ch2-40
LIMITATIONS
BCG MATRIX uses only two dimensions, Relative market share and market growth rate. Problems of getting data on market share and market growth. High market share does not mean profits all the time. Business with low market share can be profitable too.
Ch2-41
Snack Foods
Beverage s
Foods
Frito-Lay North America Frito-Lay International
Quaker North America
Pepsi-Cola North America Gatorade/Tropicana North America PepsiCo Beverages International
Ch2-42
Snack Foods
Frito-Lay North America
Lays Ruffles Doritos Santitas Fritos Cheetos Rold Gold
Funyuns Sunchips Cracker Jack Chesters popcorn Grandmas cookies Munchos Smartfood Baken-ets fried pork skins Oberto meat snacks
Ch2-43
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 Vickies potato chips Gamesa cookies Dippas Sonrics sweet snacks
Ch2-44
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 Vickies potato chips Gamesa cookies Dippas Sonrics sweet snacks
Ch2-45
Beverage s
Pepsi-Cola North America
Pepsi-Cola Mountain Dew Slice Mug Sierra Mist FruitWorks
Lipton Dole Aquafina Frappuccino SoBe AMP
Ch2-46
Beverage s
Gatorade/Tropicana North America
Gatorade Propel Tropicana Dole juices
Ch2-47
Beverage s
PepsiCo Beverages International
Loza juices and nectars Copella juices FruiVita juices Tropicana 100 juices
Ch2-48
Foods
Quaker North America
Quaker Oats Capn Crunch cereal Life cereal Quisp cereal King Vitaman cereal Mothers cereal
Quaker rice cakes and granola bars Rice-A-Roni side dishes Near East couscous/pilafs Aunt Jemima mixes & syrups Quaker grits
Ch2-49
Foods
Business Level Strategies
How are we going to compete and gain a competitive advantage in each of our businesses?
Quaker North America
Quaker Oats Capn Crunch cereal Life cereal Quisp cereal King Vitaman cereal Mothers cereal
Quaker rice cakes and granola bars Rice-A-Roni side dishes Near East couscous/pilafs Aunt Jemima mixes & syrups Quaker grits
Ch2-50
Snack Foods
Beverage s
Foods
Corporate Level Strategy
1) What businesses do we want to compete in? 2) How do manage effectively across businesses
Ch2-51
Ch2-52
Ch2-53
Learning Outline
Understand organizational strengths and weaknesses Understand the relationship between organizational resources, organizational capabilities, core competencies, and distinctive organizational capabilities Understand the Value Chain
Outsourcing
How to do an Internal Analysis How to evaluate S&Ws
54 Ch2-54
SWOT Analysis
Threats
Weaknesses
Organization
Strengths
55
Opportunities
Ch2-55
The Road to Competitive Advantage
Performance Results Competitive Advantage Distinctive Organizational Capabilities Organizational Resources Financial assets Physical assets Human resources Intangible assets 56 Structural-cultural assets Organizational Capabilities Organizational processes and routines Accumulated knowledge Actual work activities
Ch2-56
Core Competencies
The road to distinctive organizational capabilities
Distinctive Organizational Capabilities
Organizational Capabilities
Core Competencies
Organizational Capabilities
Resources Tangible Intangible
57 Ch2-57
Fundamental building block for
developing core competencies Organizational processes and routines to get the work done
The road to distinctive organizational capabilities
Distinctive Organizational Capabilities
Organizational Capabilities
Core Competencies
Organizational Capabilities
Fundamental building block for developing core competencies Organizational processes and routines to get the work done
58
Core Competencies
Fundamental skills and capabilities Exploitable by organization Major value-creating capabilities Not a source of competitive advantage
Ch2-58
Types of Core Competencies
After-sale service capability Skills in manufacturing a high quality product (BMW) System to fill customer orders accurately and swiftly (Amazon; Dell) Expertise in integrating multiple technologies to create families of new products (W.L. Gore)
59 Ch2-59
The road to distinctive organizational capabilities
Distinctive Organizational Capabilities
Special and unique capabilities Distinguish from competitors Sustainable competitive advantage Outperform competition
Distinctive Organizational Capabilities
Organizational Capabilities
Core Competencies
Core Competencies
Not a source of competitive advantage Fundamental skills and capabilities Exploitable by organization Major value-creating capabilities
60 Ch2-60
Hondas Distinctive Capability
Expertise in gasoline engine technology and small engine design
61 Ch2-61
Procter & Gambles Distinctive Capabilities
Superb marketing-distribution skills and R&D capabilities in five core technologies - fats, oils, skin chemistry, surfactants, emulsifiers
62 Ch2-62
Company
Country of Origin Japan
Original core Business
Growth path Key skills
Honda
Motor cycles
Piston engine design and development
Cars, lawnmowers, small generators
Gillette
USA
Shaving products
Advertising effectiveness
Other toiletries, e.g. deodorants Extension of opening hours to include breakfast; product innovation (fish, pizza, salads)
Ch2-63
McDonald's
USA
Hamburger restaurants
Site selection; Quality standardizatio n
United does offer more space in its Economy Plus seats. But only travelers who pay full fare or who are elite members of the miles program can get them. Its regular economyclass seats measure in at 31 inches of seat pitch.
Ch2-64
From Distinctive capabilities to competitive advantage
Contributes to Superior Customer Value
Can Be Used in a Variety of Ways
65
Is Difficult Distinctive for Competitors Organizational to Imitate Capabilities
Ch2-65
Capabilities vs. Core Competencies vs. Distinctive Capabilities
A company capability is the product of organizational learning and experience and represents real proficiency in performing an internal activity A core competence is a well-performed internal activity that is central (not peripheral or incidental) to a companys competitiveness and profitability A distinctive Capability is a competitively valuable activity that a company performs better than its rivals
66 Ch2-66
Value Chain Analysis
Support Activities
Firm Infrastructure Human Resource Management Technological Development Procurement Marketing and Sales Inbound Logistics
Outbound Logistics
Operations
67
Primary Activities
Ch2-67
Service
From Value Chain Analysis to Competitive Advantage
Sustainable competitive advantage can be created by 1.Managing value chain activities better than rivals and/or
2.Developing distinctive value chain capabilities to serve customers!
68 Ch2-68
Other types of Internal Analysis
Internal audit
Look at all functional areas and see which are performing well
Capabilities assessment profile
Analyze capabilities to identify potential sources of competitive advantage
69 Ch2-69
Appeal of Outsourcing
Outsourcing non-critical activities allows a firm to concentrate its energies and resources on those value-chain activities where it
Can create unique value Can be best in the industry
Advantages to outsourcing
Decrease internal bureaucracies Flatten organization structure Provide firm with heightened strategic focus
70 Ch2-70
How do you do an internal analysis?
Step 1
Prepare current product-market profile. Identify sources of competitive advantage and disadvantage in the main product-market segments. Describe all the organizational capabilities and competencies.
Step 2
Step 3
Step 4
Sort the core capabilities and competencies according to strategic importance.
Identify and agree on the key capabilities and competencies.
Ch2-71
Step 5
71
Identify Strategy-Critical Activities
Which activities are strategy-critical depends
Particulars of a firms strategy Value-chain make-up Competitive requirements External market conditions
Identify strategy-critical activities
What business processes have to be performed extra well or in timely fashion to achieve competitive advantage? In what value-chain activities would poor work performance impair strategic success?
72 Ch2-72
Criteria to Judge Organizational Strengths and Weaknesses
Past Performance Trends Comparison Against Competitors
Are organizational resources and capabilities strengths or weaknesses?
Specific Goals or Targets
Personal Opinions of Strategic Decision Makers or Consultants
73 Ch2-73
PRACTICAL USE
MAHINDRA & MAHINDRA HLL IES
Ch2-74
BCG MATRIX
scorpio
Jeep
balero
Ch2-75
CONCLUSION
Though BCG MATRIX has its limitations it is one of the most FAMOUS AND SIMPLE portfolio planning matrix ,used by large companies having multiproducts.
Ch2-76
Section 5
Corporate Level Strategy: Creating Value through Diversification
Ch2-77
Vertical Integration
Forward or backwards
Full integration Taper integration
Benefits
Barrier to entry Specialized assets Protecting product quality Improved scheduling
Risks
Costs Rapid technological changes Demand predictability
Ch2-78
Alternatives to Vertical Integration
Competitive bidding Long term contracts or strategic alliances
Hostage taking Credible commitments Maintaining market discipline
Ch2-79
Outsourcing
Cost reduction and differentiation Hold-ups, scheduling and hallowing out
Ch2-80
Snack Foods
Beverages
Foods
Frito-Lay North America Frito-Lay International
Quaker North America
Pepsi-Cola North America Gatorade/Tropicana North America PepsiCo Beverages International
Ch2-81
Snack Foods
Frito-Lay North America Lays Ruffles Doritos Santitas Fritos Cheetos Rold Gold
Funyuns Sunchips Cracker Jack Chesters popcorn Grandmas cookies Munchos Smartfood Baken-ets fried pork skins Oberto meat snacks
Ch2-82
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 Vickies potato chips Gamesa cookies Dippas Sonrics sweet snacks
Ch2-83
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 Vickies potato chips Gamesa cookies Dippas Sonrics sweet snacks
Ch2-84
Beverages
Pepsi-Cola North America Pepsi-Cola Mountain Dew Slice Mug Sierra Mist FruitWorks Lipton Dole Aquafina Frappuccino SoBe AMP
Ch2-85
Beverages
Gatorade/Tropicana North America Gatorade Propel Tropicana Dole juices
Ch2-86
Beverages
PepsiCo Beverages International Loza juices and nectars Copella juices FruiVita juices Tropicana 100 juices
Ch2-87
Foods
Quaker North America Quaker Oats Capn Crunch cereal Life cereal Quisp cereal King Vitaman cereal Mothers cereal Quaker rice cakes and granola bars Rice-A-Roni side dishes Near East couscous/pilafs Aunt Jemima mixes & syrups Quaker grits
Ch2-88
Foods
Business Level Strategies
How are we going to compete and gain a competitive advantage in each of our businesses?
Quaker North America Quaker rice cakes and granola bars Rice-A-Roni side dishes Near East couscous/pilafs Aunt Jemima mixes & syrups Quaker grits
Quaker Oats Capn Crunch cereal Life cereal Quisp cereal King Vitaman cereal Mothers cereal
Ch2-89
Snack Foods
Beverages
Foods
Corporate Level Strategy
1) What businesses do we want to compete in? 2) How do manage effectively across businesses
Ch2-90
Where did they go?
Ch2-91
Crafting 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
Ch2-92
How to Diversify?
1) Internal Development - corporate entrepreneurship
able to appropriate a larger portion of wealth avoids complexities of multiple partners time consuming and requires diversity of organizational capabilities
Ch2-93
How to Diversify?
2) Strategic Alliances and Joint Ventures
entering a new market via the combination of complementary resources - do more together cost reduction development/diffusion of technology
Problems with
appropriate partners - skills and compatibility trust and commitment communication
Ch2-94
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.
Ch2-95
Ch2-96
Ch2-97
How to Diversify?
3) Merger & Acquisition - acquisition of assets and capabilities of another company
high tech & technology intensive access to products consolidation access to segments
Ch2-98
Alternative 10 point option
In lieu of making a donation, you may write a 5 page, double spaced paper on how a specific company proactively pursues corporate responsible activities.
Ch2-99
Extra Credit 10 points
Girls and Boys Town, the original Father Flanagan's Boys' Home, is a leader in the treatment and care of abused, abandoned and neglected girls and boys. Throughout its 86-year history, the nonprofit, nonsectarian organization has provided these children with a safe, caring, loving environment where they gain confidence to get better and learn skills to become productive citizens.
Ch2-100
Extra Credit 10 points
Bring one of the items listed below: New/gently used backpacks or suitcases Socks - 5 pairs Shampoo and Conditioner 3 pints New/gently used sporting equipment Refill bottle of 409/All purpose cleaner Laundry detergent
Ch2-101
Extra Credit Drop off
BA1 Building - Room 307 Times: Wednesday 3/30 4:00 pm 6:30 pm Thursday 3/31 8:30 am 9:30 am 11:30 am 8:00 pm Friday 4/1 8:30 am 11:00 am Monday 4/4 1:00 pm 6:00 pm Tuesday 4/5 8:30 am 9:00 am 2:30 pm 5:00 pm Wednesday 4/6 4:00 pm 6:30 pm Thursday 4/7 8:30 am 9:30 am 11:30 am 8:00 pm
Ch2-102
Ch2-103
Ch2-104
Acquisitions
Reasons of Acquisitions Increase Market Power
Overcome Entry Barriers
Increased Speed Lower Risk
Avoid Competition
Ch2-105
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
Ch2-106
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
Ch2-107
Monday October 27th WSJ
Bank of American Boston Fleet Financial
BoA down $8.29, or 10%, BFF rose 23%
Anthem WellPoint Health Networks
Anthem down 8.2%, WellPoint up 8.8%
United Health MidAtlantic Med Services
UH down 4.9%, MAMS up 9.7%
Ch2-108
Failures of Acquisitions
30 - 40% average acquisition premium Acquiring firms 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 returns Ch2-109
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 acquire 2) Performing poorly - employment risk is reduced as returns are less volatile
Ch2-110
Levels of Diversification
Single Business Unit - vast majority of sales comes from a single business Less ambiguity Ear to the ground re: industry and competition Eggs in one basket
Ch2-111
Ch2-112
Ch2-113
Related Diversification at Disney
Entertainment/Production Theme Parks Resorts Entertainment/Broadcasting Retailing Cruise Lines
Ch2-114
Levels of Diversification (cont.)
Related Diversification - entering product markets that share some resource or capability requirements with the current business horizonal relationships across businesses
Advantages of related diversification include: Leveraging Core Competencies Sharing Activities Market Power Vertical Integration - integration of preceding or successive productive processes - Shaw Industries buying a fiber company or floor covering retailer.
Ch2-115
Vertical Integration
Benefits can not be held hostage reduces buyer/supplier power greater control over operations access to new business/technologies reduce procurement and sales efforts Risks increased overhead, capital and administrative costs loss of flexibility unbalanced capacities reaction of competitors
Ch2-116
Ch2-117
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
Ch2-118
Tyco
Limits itself to businesses that can be held strictly accountable for a few key financial measures Mature, stable, low-tech industries which face certain environments and little R&D investments
Ch2-119
Levels of Diversification (cont.)
Unrelated Diversification - few similarities in the resources and capabilities required among the firms businesses Conglomerate Diversification - no relatedness between businesses
Ch2-120
Unrelated/Conglomerate Diversification
Attempts to create value through the management of vertical relationships among the businesses Approve plans and budgets, competent legal, financial, accounting, HR or other support function Effective control systems Restructuring - buy low, sell high spinoffs turnaround
Ch2-121
Creating Value through Restructuring
Good, consistent job of making good investments Favorable negotiations Shrewd selling at the top Shifting investment to high growth/return businesses
Ch2-122
When/Why to Diversify?
To create shareholder value Porters Three Point Test 1) Attractiveness Test 2) Cost of Entry Test 3) Better off Test Should pass all 3
Ch2-123
Portfolio analysis
BCG Growth-Share Matrix question marks, dogs, cash cows, stars
GE- Nine Cell Matrix
Ch2-124
Boston Consulting Group Matrix
Relative Market Share
Stars
Growth Rate
Question Marks Dogs
Cash Cows
Ch2-125
BCG Matrix for PepsiCo - Early 1990s
Relative Market Share
High Growth Rate 10%
Taco Bell
Pizza Hut Frito Lay KFC
Low
Soft Drinks
High
1.0
Low
Ch2-126
BCG Matrix for PepsiCo - Early 1990s
Relative Market Share
Pizza Hut
High Growth Rate 5%
Taco Bell
Frito Lay KFC
Low
Soft Drinks
High
.75
Low
Ch2-127
GE 9 Cell Matrix
High
Competitive Strengths
Low
High
Invest Grow
Attractiveness
Hold
Harvest Divest
Low Ch2-128
GE 9 Cell Matrix for Pepsico
High
Competitive Strengths
Low
High Snack Foods
Attractiveness
Soft Drinks
Low Ch2-129
GM provides health care for 1.1 million workers and retirees, which adds about $1,500 to the average cost of every vehicle it sells in the U.S. For 2005, GM has forecast $5.6 billion in healthcare costs, up about $1 billion from 2004. It has blamed its recent fall in profit on the rising cost of providing medical care for workers and retirees.
Ch2-130
United does offer more space in its Economy Plus seats. But only travelers who pay full fare or who are elite members of the miles program can get them. Its regular economy-class seats measure in at 31 inches of seat pitch.
Ch2-131
Board of Directors
Governance mechanism of owners to oversee, evaluate and ratify the actions of management
setting corporate strategy, direction, mission, values hire/fire CEO/TMT control, monitor, supervise TMT review/approve resource allocations protect shareholders interests
Ch2-132
Board of Directors
Sam Nunn- ex-Senator from Georgia sits on Cokes and Dells Board Nancy Reagan sat on Revlons board Hank Aaron sat on Cokes board Sally Ride sat on three boards Martha Stewart and Kim Alexis sat on Drugstore.com Al Haig and Colin Powell sat on AOLs board
Ch2-133
Board Involvement
Mostly little or no involvement Boards tend to be dominated by management Keys to board power
CEO/Chairman duality insiders vs. outsiders
outsiders often weak, unknowledgeable
effective board process
Ch2-134
Trends in Governance
Institutional investors becoming increasingly powerful Special interests groups and social institutional owners Internationalization of board composition Presiding and Lead Directors 1/3 of S&P 500 Presiding run meetings sans CEOs, Leads are actively involved
Ch2-135
Executive Compensation - 2002
Median CEO pay rose 14% to $13.2 million is a year when S&P was down over 22% One companys stock slides 71%, CEO compensation falls 12% .. to only $82 million .. Dennis Kozlowski Tycos frequently indicted CEO .. which is not as bad as what the CFO made - $136 million Bob Nardelli at HD has a target bonus minimum of $3 million and could get as much as $82 million upon his exit. James McNerney cause shall not include any one or more of the following: bad judgment or negligence.
Ch2-136
Steve Jobs, Apple
78.1M
-34.6
-27.3% -27.7 -75.4%
David Cote, 68.5M Honeywell John Chamber, Cisco 54.8M Pat Russo, Lucent 38.2M
Scott McNealy, Sun Microsystems
31.7M
-74.7%
Ch2-137
Executive Compensation
Aligning the interests of shareholders and managers by rewarding them for pursuing their interests Peter Drucker - There are only bad and worse executive compensation packages. Most encourage the top management to milk the company Warren Buffett - ...mediocre CEOs are getting incredibly overpaid Top execs make over 200 times the average worker, up from 44 only 30 years ago.
Ch2-138
Executive Compensation
Bonuses, incentives and stock ownership difficulty in evaluating decision making financial objectives used lengthy feedback period beyond managerial control managerial manipulation Stock Options riding the stock market wave strike period is too long growth, not cost-cutting, should be rewarded require holding the stock after exercise make exercise conditional on certain criteria
Ch2-139
Corporate Social Performance
Friedman The Social Responsibility of Business Is to Increase Its Profits Corporations as Citizens Corporations dependent upon its stakeholders Corporations that are attentive to its stakeholders can gain competitive advantages Corporations, which control resources beyond those held by individuals, have an even greater responsibility to be good citizens
Ch2-140
