All Cases For Strategic Management Text and Cases, 10th Edition By Gregory Dess, Gerry McNamara, Alan Eisner, Seung-Hyun Lee and G.T. (Tom) Lumpkin Cases 1-38 Teaching Note Case 1 — Robin Hood Case Objectives 1. To provide an introduction to the conceptual framework of strategic management using a non-business situation. 2. To introduce students to the process of problem identification and potential solution analysis that will be used in case discussions throughout the semester. See the table below to determine where to use this case: CASE OBJECTIVES TABLE Chapter Use Key Concepts 1: Strategy Concept Leadership for strategic management; sustainable competitive advantage; vision, mission, strategic objectives; external environment; internal environment; efficiency vs. effectiveness; stakeholder management Case Synopsis Robin Hood and his Merry Men are now in trouble because wealthy travelers (their source of revenue) are avoiding the forest. As is often common in an entrepreneurial organization, the Merry Men were highly motivated by Robin Hood‘s leadership. Therefore, Robin had previously relied on informal communication to organize and implement operations. Robin is pleased with the growing size and influence of his organization. However, growth has meant that specialized duties have begun taking up most of the men‘s time, leaving a command vacuum between Robin and the first line recruits. In addition, they are now all located in a large encampment that can be seen for miles. This creates the probability of a surprise attack on their position. Growth has also put great pressures on resources, so now they must harvest the forest more thoroughly. Where will additional revenue come from? Rich travelers are avoiding the forest, so in desperation Robin is considering robbing the poorer travelers, which means his lieutenants must now tell their men to rob their brothers and fathers. What started as a rebellion is in danger of being routinized into banditry. Robin must therefore begin to evaluate the Merry Men‘s mission in view of the changing environment. Should it still be an extension of his private grudges and aspirations? Has the organization acquired a new mission, if so what is it? Who are the key stakeholders here? On whose behalf should the organization formulate its mission?!
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Teaching Note
Case 1: Robin Hood
Teaching Plan Most students are familiar with the Robin Hood story, so it‘s possible to ask them to read this short case in class during the first or second class meeting. Either use the PowerPoint slides or ask the discussion questions directly. As students respond, either write answers on the board or refer to the PowerPoint slide answers. It‘s up to the instructor whether or not to assign Chapter 1 prior to discussing the case. If the case is read before the chapter is read, then the instructor has the option to ask students, when they do read the chapter, to identify the concepts in the chapter that they recognize from the case discussion and come to the next class prepared to share what they recognized. If the case is discussed after students have read Chapter 1, the instructor can ask students to identify what concepts apply from the chapter. Summary of Discussion Questions Below is a list of the suggested discussion questions. You can decide which questions to assign and which additional readings or exercises to include to augment each discussion. Refer back to the Case Objectives Table at the beginning of this Teaching Note to identify any additional readings and/or exercises so they can be assigned in advance. 1. What is the purpose of strategy? 2. What strategic problems does Robin Hood have? 3. What is the role of the organizational leader as strategist and articulator of global goals? 4. What are some issues in this organization‘s external environment? 5. What is the relationship of the organization‘s internal structure to its environment? 6. How do stakeholder values or culture influence strategy making? 7. What strategy can Robin Hood implement? Discussion Questions and Responses Chapter 1: Introduction and Analyzing Goals and Objectives 1. What is the purpose of strategy? Strategy is all about the ideas, decisions, and actions that enable a firm to succeed. See Chapter 1, Exhibit 1.1: Strategic management consists of the analyses, decisions, and actions an organization undertakes in order to create and sustain competitive advantages: ● strategy directs the organization toward overall goals and objectives; ● includes multiple stakeholders in decision making; ● needs to incorporate both short-term and long-term perspectives; TN1-2 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
● recognizes tradeoffs between efficiency and effectiveness.
Strategic management involves: ● Analysis of strategic goals (vision, mission, strategic objectives), and of the internal and external environment; ● Decisions – Formulation about what industries to compete in and how to compete in those industries; and ● Actions – Implementation to allocate necessary resources and design the organization to bring intended strategies to reality. An interesting question that the instructor can ask at this point is: What business is Robin Hood’s organization in? Some students might say philanthropy, some might say robbery. The answers to this question will help students understand the importance of vision and mission: the leader must have a clear idea of the purpose of the business, and with whom it competes, in order to craft strategy. If the business is robbery, there are different competitors, like highwaymen. 2. What strategic problems does Robin Hood have? If strategy is all about the ideas, decisions, and actions that enable a firm to succeed, what might Robin Hood need to assess as he ponders his likelihood of future success? As Robin Hood‘s organization has grown, food resources are becoming scarce and it has encountered a profit squeeze: revenue is down, and costs are rising. In addition, there are cracks in the culture of the organization; as the organizational membership has increased, discipline problems have emerged. The original business model of ―robbing the rich and giving to the poor‖ appears to be no longer viable, and the ―competition‖ from the Sheriff is growing stronger as the Sheriff increasingly uses his ―alliances‖ and connections with Prince John to get better organized. In addition, ―new entrants‖ into the Sherwood Forest environment, the barons, are proposing that Robin join with them to restore King Richard. If this happens, Robin Hood‘s mission may no longer be relevant because the need to restore ―justice‖ may no longer exist. Issues that need to be addressed include: ● Has Sherwood Forest become too small to sustain operations? ● How to avoid detection of the now ―major encampment‖? ● What to do about the growing strength of the Sheriff‘s forces? ● How to address organizational communications and redefine the leadership focus? Decisions that need to be made include: ● Should Robin Hood impose a fixed transit tax in order to increase revenue? ● Should Robin Hood kill the Sheriff? ● Should Robin Hood accept the barons‘ offer to join in freeing King Richard? Consequences to be considered include: ● What might happen if Robin expanded operations beyond Sherwood Forest? ● Does the change in the external environment mean that the original mission is no longer valid? TN1-3 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
● If Robin Hood decides to kill the Sheriff, accept the barons‘ offer or impose a tax on travelers, how do each of those actions link to the original mission? ● If the mission changes, to what degree does Robin Hood have to worry about the loyalty of stakeholders? If Robin Hood expands operations beyond Sherwood Forest, that may solve his revenue and resource problems, but it will create issues with organizational communications – he can‘t keep track of his men now, so what will happen if the physical environment changes even further? Would his existing organizational structure still work with a larger group? It appears as if the changing conditions might also mean a shift in the original mission, especially if Robin decides to impose a fixed transit tax. Killing the Sheriff might satisfy Robin‘s ―personal thirst for revenge,‖ but it wouldn‘t improve the situation, especially because someone else might take up the Sheriff‘s role. Likewise, if Robin decided to align with the barons, his group would have to accept amnesty, and how many of his ―men‖ would feel good about this? There was no assurance that the barons‘ plan would work, plus this would require a real shift in overall mission from banditry to court political intrigue, and multiple stakeholders might object (how would the poor people feel?). The major issue concerns the rapid growth of the organization and the changing external environmental conditions. In the space of two years the organization grew from fragmentation and obscurity to a strong regional presence. Competitive strategy is about sustaining a position in the industry. Growth implies that strategy has to be flexible enough to adapt. Does Robin have a sustainable strategy? 3. What is the role of the organizational leader as strategist and articulator of global goals? Leaders face a large number of complex challenges. Leaders must be proactive, anticipate change and continually refine changes to their strategies. This requires a certain level of ―ambidextrous behavior‖, where leaders are alert to opportunities beyond the confines of their own jobs and are also cooperative and seek out opportunities to combine their efforts with others. Leaders must make strategic management both a process and a way of thinking throughout the organization. See Chapter 1, Exhibit 1.6. The primary role of the organizational leader is to articulate vision, mission, and strategic objectives. Robin Hood needs to evaluate his initial vision of the organization‘s purpose: what was the original goal that evokes a powerful and compelling mental image of a shared future, one that would be massively inspiring, overarching, and long-term, that represented a destination that is driven by and evokes passion? Is the original vision irreconcilable with the present circumstances? Robin Hood‘s organizational mission may have to change: a mission encompasses both the purpose of the company as well as the basis for competition and competitive advantages. Organizations must respond to multiple constituencies—multiple stakeholders—if they are to survive and prosper, and the mission provides a means of communicating to these diverse organizational stakeholders. TN1-4 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
If the vision and mission have to change, Robin Hood must establish strategic objectives to operationalize the mission statement. That is, objectives help to operationalize the mission statement with specific yardsticks, and they provide guidance on how the organization can fulfill or move toward the ―higher goals‖ in the goal hierarchy—the mission and vision. Therefore, Robin Hood needs to redefine the organizational vision and mission because it may have changed—rebellion may have become routinized into banditry. He must also identify the key stakeholders, broadening his focus beyond his own private grudge to include the needs of the district, the region, or the nation. And he must establish new goals and strategic objectives. Depending on the stakeholders, these new goals may include replacing the Sheriff or changing the political order. Robin should remember that short-term objectives can become essential components of a firm‘s ―action plan‖ and therefore can be critical in implementing the firm‘s chosen strategy. 4. What are some issues in this organization’s external environment? Strategy analysis is the first step in the strategic management process. It precedes effective formulation and implementation of strategies, involves careful analysis of the overarching goals of the organization, and requires a thorough analysis of the organization‘s external and internal environment. To begin with, Robin must take a look at the issues in the organization‘s external environment. There are obvious resource constraints. Sherwood Forest has finite resources: the inputs into the organization (travelers to rob) have dwindled, especially because the rich travelers have started avoiding it. Robin Hood‘s band is spending past gains on present problems in the assumption that future revenues will continue to grow at the same pace as in the past. This assumption, one that is often pervasive in successful organizations, may be unwarranted. The Merry Men are reduced to robbing poorer travelers. The poor travelers are their mainstay of political support. Here is a common pitfall of success, the tendency of organizations to take their best and most important customers for granted, to extract from them the highest return for least effort in the belief that they have no practical alternative. In addition, trained manpower is scarce. Regarding the physical environment, the current growth of the organization has created a large encampment that can be seen for miles and is therefore now a target for attack. The nature of the Merry Men‘s environment and operations requires stealth and flexibility. The current physical facility does not provide for this.
5. What is the relationship of the organization’s internal structure to its environment? See the Chapter discussion of the tradeoffs between effectiveness and efficiency. Given the growth of the operation and other changes in the external environment, Robin Hood‘s previous structure may no longer be effective. He may no longer be able to achieve the goals of the organization. He might need to make tradeoffs. TN1-5 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
His current structure is functional, with each lieutenant a specialist. Communication has been informal, and Robin currently has no direct link to his first line recruits. This structure performed well in the early days of the band. However, with the growth of the organization, this has become problematic, resulting in lack of coordination. Robin might want to consider a possible new structure: his lieutenants could do double time as staff and line personnel, fulfilling their staff duties in off-peak periods, but available for line duty during field operations. Robin might also want to consider creating a decentralized regional operation, with sub-bands who can operate out of smaller regional headquarters and better coordinate movements. This will increase flexibility of the total organization by moving the organizing of operations closer to those who undertake them. This will also reduce the chance of attack because then only part of the band might be detected and surprised. Decentralization also pushes food gathering down the line, thereby eliminating food distribution problems. Small-scale operations can be carried out with greater economy. 6. How do stakeholder values or culture influence strategy making? During strategic analysis, the leader does ―advance work‖ to anticipate unforeseen environmental developments, identify unanticipated resource constraints, assess changes in his or her preferences for how to manage. During strategy formation, depending on the type of organization structure, the leader might include key individuals in a discussion around selecting which strategies might be best to implement at which level within the organization. In strategy implementation, the leader must ensure proper strategic controls and organizational design and establish effective means to coordinate and integrate activities within the firm, as well as with suppliers, customers and alliance partners. Therefore, leaders must pay attention to all stakeholder needs, including the group‘s values and the organizational culture. See Chapter 1, Exhibit 1.5 for the diverse stakeholder groups and the claims they make on the organization. Regarding the organizational culture, it was based on founding values that embraced a missionary outreach to the community. The original purpose created unity and a spirit of daring among the Merry Men. Robin is considering abandoning the higher (more affluent) segment of his market for a deeper exploitation of a very large segment with limited resources. Here he runs up against organizational traditions and values. If Robin pursues profit maximization now (robbing all travelers, including the poor), the group will become thieves. Group members will resist stealing from their brothers and fathers. The larger community of poor people, who originally supported the Merry Men, will now feel abandoned. Loyalty will be eroded. Robin needs to restore the group members‘ and larger stakeholders‘ need for order and purpose. The Merry Men might need to feel that their participation is quasi-voluntary. They may need to feel more involved in strategic decision making so they can see shared value in the organizational efforts. 7. What strategy can Robin Hood implement?
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Teaching Note
Case 1: Robin Hood
The basic question strategic management tries to answer is: How can we create competitive advantages in the marketplace that are not only unique and valuable but also difficult for competitors to copy or substitute? Robin Hood must assess how functional areas and activities ―fit together‖ to achieve goals and objectives. If the organization is still Robin‘s extension of a personal grudge, then displacing the Sheriff should be the primary mission of the Merry Men. If the organization is acting on behalf of the district then replacing the Sheriff with a more benign administration should be the priority. If, however, the Merry Men‘s existence is an expression of widespread dissatisfaction with the present political order, then Robin should consider his potential contributions on a national scale. An analysis of the options confronting Robin ought to lead the students to question the criteria by which strategy is judged. Who is the lead actor in strategy? The chief executive officer? Top management? A coalition of stakeholders? There is clearly no theoretical answer to these questions. A discussion ought to set the ground for an appreciation of the political and structural forces under which strategy emerges. Robin should have a meeting with the Merry Men to explain the strategic dilemma and long-term issues. He needs to increase organizational discipline, which could be done by creating a clearer organizational structure with strategic controls that enforce the mission. To do this, he needs to recruit qualified leaders for the new decentralized structure and involve lieutenants in the solution. It is always an issue—which functions should be decentralized and which retained at the corporate level. In this case intelligence gathering and finance should probably be kept centralized. It is crucial for students to appreciate the contradictory pressures that implementation generates. The new decentralized structure will call for more intricate communication and command systems. It increases flexibility but also increases the probability of breakdown and mismanagement. Currently, individual runners must keep the various sub-bands in communication. This is a primitive technology that may be insufficient to ensure coordination. An opportunity exists here for the students to appreciate to what extent sophisticated organizational forms are made possible by modern technologies, such as instant messaging systems, which are ordinarily taken for granted. While restructuring is going on, Robin must begin to consider other aspects of his strategy. He should examine the possibility of diversifying beyond the confines of his traditional forest territory. This is viable if he is decentralized. Operations can be carried on in the countryside by the autonomous sub-bands. He must also resolve the issue of the proposed transit tax. What should be his relationship to the local population? Should he increase their burden of taxation, or not? Robin must also prepare for the possibility of ceasing operations by providing outplacement training. He should pursue alliances beyond the current band of Merry Men, negotiating a possible change in the political order, negotiating amnesty, returning the band to legality. He should probably avoid contact with the Sheriff!
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Teaching Note
Case 1: Robin Hood
Finally, Robin should recognize that mistakes will occur. Therefore he should anticipate the costs of implementation, especially the problems of extended communication. Robin must familiarize his lieutenants with his intentions and the projected problems. They must actively become involved in the evolving implementation. Ultimately, however, Robin Hood must consider the long-term course of action. If the Merry Men were a profit-maximizing organization in the classic sense they would be satisfied with keeping the Sheriff off balance, or perhaps work toward his replacement with a more inexperienced man. They are, however, a missionary organization. To pursue profit maximizing would eventually lead them to thievery. It would also undermine their unity and spirit of daring and affect their relationship with their key community stakeholders. Robin Hood has little choice but to increase his involvement in issues that lie beyond his immediate task environment. One final question Robin Hood must be prepared to answer: has this organization accomplished its mission so the need for the organization no longer exists? Is it time to disband and reallocate the assets in pursuit of a completely new venture?
Teaching Note Case 2 — The Global Casino Industry in 2019 Case Objectives 1. To examine industry dynamics and how the structure of an industry has implications for competition. See the table below to determine where to use this case: CASE OBJECTIVES TABLE Chapter Use Key Concepts 2: External Environment
Porter‘s five forces model; strategic groups
Additional Readings or Exercises NOTE additional Web-linked reading, view embedded videos about the current state of the industry.
Case Synopsis For well over fifty years the casino business has been on a roll, on its way to becoming a $150 billion–a-year global industry. For much of that period, the United States has been leading the charge, accounting for nearly half the global gambling revenues as recently as 2010. Most of these revenues have come from Las Vegas and Atlantic City, magnets for gamblers from around the world. However, Las Vegas and Atlantic City have had to deal with increased competition from other locales. Revenues in other parts of the United States, from waterfront casinos in over TN1-8 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
a dozen states and Native American gambling locations, have exceeded those generated in Las Vegas and Atlantic City. More recently, the dominance of Las Vegas and Atlantic City in the global market had been challenged by overseas casino development in places like Macau, Singapore, Australia, South Korea, Malaysia, and Philippines. Other sites in Asia, such as Japan, Vietnam, Taiwan, and Sri Lanka, were in development as well. In the United States there was a growing tendency to regard casino gambling as an acceptable form of entertainment for a night out. A large part of the growth in casino revenues came from the growing popularity of slot machines, yet facilities in Las Vegas, especially, had spent billions on extravagant and luxurious properties meant to attract the ―high rollers‖ who came often and spent large amounts of money. Las Vegas casinos had tried to move beyond gambling and offer visitors many choices for fine dining, great shopping, and top-notch entertainment. This allowed higher-end casinos to generate revenues from activities other than gambling. Las Vegas, the city, was trying to brand itself as a tourist destination, but would that be enough to stem the flow of Chinese high rollers to Asian destinations? U.S. casino operators were expanding to open facilities in Asia or engage in mergers and acquisitions in an attempt to cash in on this local business, but would it be enough to return significant revenue to U.S. firms? Casinos were also eager to embrace new types of gaming experiences that would attract Millennials who grew up playing video and mobile phone games. Was there enough demand to go around?
Teaching Plan Most students know what a casino is, and they probably haven‘t thought much about the industry beyond the glitz and the gambling. Therefore, this case becomes a good way to introduce the importance of defining the industry and examining the dynamics of competition in the industry from the point of view of certain clusters of companies—companies that are part of ―strategic groups‖ who compete in the same way for the same customers. The structure of the casino industry has changed in recent years due to new forms of competition and the presence of substitutes. Students may have not considered this. Therefore, this case can be positioned early in the course, right after discussion of the strategic concept, to alert students to these issues. Because companies are not passive as far as industry structure goes but can take steps to influence the structure to their advantage, this case can be reintroduced during the discussion of competitive strategy, later in the course, to remind students how external environmental analysis is very relevant to strategic formulation. ICEBREAKER This case can start with an icebreaker. Starting from the perspective of a customer may make it easier for students to transition to a strategic analysis. Have you ever visited a casino? If so, where was it located, and what type of casino was it? Why were you there? What did you think of the casino experience? It is possible that some students may have visited a Las Vegas or an Atlantic City casino, perhaps on a family vacation. Others may have been to a riverboat or Native American casino venue. It TN1-9 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
might be interesting to see students‘ responses regarding the purpose of their visit to a casino location—it might not have been for gambling purposes. Reasons for the visit might include the following: because it was part of my vacation trip; because a convention was held there; to see a sports event; to eat out; to see a show; just to see it, period! The casino industry competes for the family entertainment dollar. If so, it competes with a family trip to, say, Disneyworld. Are the two experiences the same? Might some conservative families not even consider Las Vegas or Atlantic City as a vacation place for their family, because of the gaming or risqué entertainment elements? The instructor may want to put a chart on the board: Where the casino was, and Why the visit was made. If there is diversity among responses, it may make it easier for the instructor to then ask: so if you were the owner of a casino, how would you respond to these diverse reasons for visiting? What strategic issues do you need to consider? Who is competing against whom? This flows straight into a discussion of the external environment. Before engaging in discussion, you might want to test students’ basic knowledge regarding the case and the major concepts. Here are some multiple-choice questions to use. (This will get the student‘s attention—they can‘t answer these if they haven‘t read the case!) Which statement is most true? a. A large part of growth in casino revenues comes from slot machines. b. In the United States, Las Vegas and Atlantic City casinos generate more revenue than all other gambling locations combined. c. Macau, the gambling ―capital‖ of Asia, is located in Malaysia. d. At some Las Vegas casinos, revenue from non-gaming activities could account for over 70 percent of net revenues. ANSWER: See Case Exhibits. a. TRUE. A large part of the growth in casino revenues came from the growing popularity of slot machines. Coin-operated slot machines typically accounted for almost two-thirds of all casino gaming revenues. b. FALSE. When combined with Native American casinos, gambling revenues in other parts of the United States now exceed the amount that is generated by casinos in Las Vegas and Atlantic City. c. FALSE. Macau is a former Portuguese colony, a special administrative region of China, currently under autonomous rule, similar to Hong Kong prior to 1997. d. FALSE. Non-gaming activity at MGM Mirage in recent years accounted for almost 60 percent of net revenue. Worldwide, the Las Vegas strip generates more casino revenue than anywhere else. a. Yes b. No ANSWER: b. At over $40 billion, Macau generates six times more casino revenue than the U.S. Las Vegas strip. Also see Case Exhibit 2. Summary of Discussion Questions Here is a list of the suggested discussion questions. You can decide which questions to assign, and which additional readings or exercises to include to augment each discussion. Refer back to TN1-10 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
the Case Objectives Table to identify any additional readings and/or exercises so they can be assigned in advance. Discussion Questions: 1. Examine the structure of the casino industry. What has been the effect of the changing industry structure on U.S. casinos? Discussion Questions and Responses 1. Examine the structure of the casino industry.
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Teaching Note
Case 1: Robin Hood
Referencing Chapter 2: Analyzing the External Environment of the Firm If you recall, strategy is all about the ideas, decisions, and actions that enable a firm to succeed. See Chapter 1, Exhibit 1.1: Strategic management consists of the analyses, decisions, and actions an organization undertakes in order to create and sustain competitive advantages: ● strategy directs the organization toward overall goals and objectives ● includes multiple stakeholders in decision making ● needs to incorporate both short-term and long-term perspectives; ● recognizes tradeoffs between efficiency and effectiveness The basic question strategic management tries to answer is: How can we create a sustainable competitive advantage in the marketplace that is not only unique and valuable but also difficult for competitors to copy or substitute? However, an interesting and fundamental question is How do we define the ―marketplace‖? Just what business are we in? Ask students to fill in the blank: Casinos are in the ________________ industry. Some students may say ―gambling,‖ but some may also say ―entertainment.‖ The various answers to this question will help students understand that a firm must have a clear idea of the purpose of its business, and who it competes with, in order to craft strategy. During strategic analysis, the firm does ―advance work‖ through external scanning and monitoring of the external environment to anticipate unforeseen environmental developments, identify unanticipated resource constraints, assess changes in his or her preferences for how to manage. Evaluating the evolution of environmental trends may be critical to crafting a strategic response. In addition, firms must gather competitive intelligence on their rivals in order to anticipate competitor‘s moves and avoid surprises. In order to formulate a competitive strategy, it‘s necessary to assess the segments of the external competitive environment that include competitors, customers or buyers, and suppliers, substitutes and new entrants. Porter‘s five forces model allows strategists to anticipate where the industry might be most vulnerable to competition. The model also helps decide where profits might be best made, or whether there is any chance of further dividing up the profit pie: how attractive is this industry? To answer this question, it is very important to correctly define the industry even further. If we define the casino industry broadly to include any organization that allows people to wager money on events of chance, then we must include Native American casinos, waterborne casinos, and Internet gambling places as incumbents in the industry, along with casinos in Las Vegas and Atlantic City. However, if we define it narrowly to include traditional casinos in Las Vegas and Atlantic City, those that also provide enhanced entertainment, then most Native American casinos, etc. would be substitutes. Either way, the five forces model will capture the impact of all these gambling establishments.
Help students apply Porter‘s five forces of competition by drawing a diagram on the board similar to the following, and having students fill in the details: TN1-12 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Suggested: New casinos increase the fight for customers’ dollars. Also, the investment required has gone up significantly.
Suppliers’ Power Low
Case 1: Robin Hood
Substitutes’ Threat High
Rivalry High
Suggested: No dominant suppliers for casino equipment. Switching costs and threat of forward integration are low.
Suggested: For traditional casinos, capital requirements and regulatory hurdles suggest that entry is not that easy.
Suggested: If gambling is a form of leisure time entertainment, substitutes in the form of theme parks, shows, etc. abound.
Buyers’ Power Med
Threat of New Entrants
Suggested: Ample choices; low switching costs despite attempts by casinos to provide incentives for loyalty; big spenders can bargain for prices.
Med-Low
The following key points emerge from a structural analysis of the casino industry: ● There was industry growth in the United States up until 2010. This should typically decrease the intensity of rivalry as the potential profit pie grows larger. However, intensity of rivalry had increased due to new investment by industry players—the entrance of Native American gambling resorts and waterborne casinos—as well as the overseas development of casinos in places such as Macau. There were more players to compete for the bigger pie. ● Industry players realized that, typically, customer switching cost was low, in that a gambler could switch from one casino to another and shop for the ―best‖ deal. This would typically increase the intensity of rivalry. However, casinos tried to maintain the business of customers by providing complimentary rooms, food, beverage, shows, and other perks. Loyalty programs also provided a means to hold on to gamblers. ● The international rivalry from places such as Macau may have been muted among the big players such as Sands and Wynn, as they used this as an opportunity for international TN1-13 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
expansion. A good deal of consolidation was also occurring in the industry among these big players as they pursued acquisition targets. ● All of Asia-Pacific was under development, with multiple firms hoping to grab a share of the gambling revenues worldwide. Based on the external environmental factor analysis, the casino business is not that attractive an industry, although opportunities for diversification into other forms of entertainment and tourism may be a way to increase profits among the larger players. NOTE — ADDITIONAL READING, VIDEO VIEWING: Regarding sociocultural and demographic trends affecting the industry, read this article about the ―what happens here‖ advertising campaign for Las Vegas, first launched in 2003: http://www.usatoday.com/money/advertising/adtrack/2005-04-11-track-vegas_x.htm. What are the positives and negatives of the campaign for Las Vegas casinos? If you were the manager of a Las Vegas casino, would you be in favor of the campaign? Why or why not? Gaming continues to be big business, as explained in a report from the American Gaming Association: a 2018 study measures the economic impact of every facet of the casino gaming industry—commercial casinos and manufacturers and Native American casinos—as well as the industry‘s significant ripple effect on the supply chain, including local businesses. The American Gaming Association ―State of Play‖ study found that the U.S. gaming industry: ● Contributes $260 billion—nearly a quarter-trillion—to the U.S. economy ● Supports more than 1.8 million jobs and generates over $73 billion in gross revenue ● Generates over $40 billion in tax revenues to local, state and federal governments In addition, a 2019 national survey found that 67% of American adults think the gaming industry provides high-quality entertainment, and 63 percent say casino entertainment options are innovative. The share of American adults that visited a casino jumped to 44 percent in 2019, up nine percentage points from 2018. This trend will likely continue, as almost 124 million American adults—49 percent of the U.S. adult population—say they will visit a casino to gamble over the next 12 months, up 20 million from 2018. This research is being used to encourage policymakers to partner with the industry to create more economic growth for all. See https://www.americangaming.org/state-of-play/. Consultants have suggestions for firms, reporting trends from 2019: Cryptocurrency plays an increasing role, reflecting the opinion people have about its security and anonymity. Online gaming is being done on phones, with the free-to-play feature becoming an entry point for many players. Growing popularity of other online options, including virtual reality experiences, means people don‘t have to leave their homes. This, coupled with the travel time and expense, means land-based casinos may face ongoing decline unless they can innovate. Such innovations include slot machines with a skill component, interactive gaming systems, and new table games. See https://linchpinseo.com/trends-in-the-gambling-casino-industry/. Increasingly, it appears that the industry doesn‘t get its revenue from gaming—much of industry revenue comes from non-gaming activity such as lodging, food, retail shopping, shows, and spas. TN1-14 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
See a two-minute video snapshot of the industry in 2010 at https://www.youtube.com/watch?v=71oEugGTfVo. Things haven‘t changed much since then. What implications might that have for the ―players‖ in this industry? Where should they expect real profits to come from? And in 2014 a video report explains the macroeconomic environment of the Asia-Pacific gaming industry, and that although activity from China regarding anti-corruption efforts is reducing VIP traffic in Macau, the environment remains supportive of the sector‘s growth and credit quality, underpinning a stable outlook on the sector: https://www.youtube.com/watch?v=ZpeKMZLnoPk. Here‘s one report of the differences between Las Vegas and Macau: Macau has half the casinos of Las Vegas but more than twice the gambling revenue. When you get to Las Vegas or Macau, you‘ll probably want to enjoy some time gambling. In Las Vegas, of the 42.9 million people who visit each year, 69% of them ended up gambling, even if that wasn‘t the primary reason for the trip. In comparison, Macau attracts over 30 million visitors, of which 74% gamble. Strangely, the average gambling budget in Las Vegas is $619 compared to Macau‘s $250, yet the gaming revenue in Las Vegas per year is $11.1 billion, which is easily dwarfed by Macau‘s $28 billion. Yet in Las Vegas you can drink and see lots of other entertainment not always available in Macau casinos. See https://www.casino.org/blog/las-vegas-vs-macau-comparing-the-worldsplaygrounds/ Since 2013 the biggest competitors, MGM, Wynn Resorts, and Sands, have all created very successful operations in Macau (Caesars did not enter the market initially, and has now been frozen out due to the lack of available gaming licenses). Although there are widespread allegations of fraud and connections to Chinese organized crime, the financial benefits from this global expansion means these major competitors won‘t back off. According to I. Nelson Rose, a professor at Whittier Law School in California who writes a blog called Gambling and the Law, ―Macau forced the casinos to see that they could become like other large U.S. corporations: set up their plants and operations in other nations and make far more than they can being stuck just in Las Vegas.‖ Sheldon Adelson, CEO of Las Vegas Sands, has described Sands as ―an Asian company‖ with a presence in America. He makes far more in China, where a culture in which notions of luck and fate play integral roles, than in Las Vegas. As MGM CEO Jim Murren points out, ―The Macau market is now larger than the entire U.S. gaming market. Unfortunately for Atlantic City, it‘s gone the other way. It‘s smaller now than when we entered it. The fortunes of the two couldn‘t be more different.‖ Las Vegas would have to attract six times more gamblers each year than it does now—essentially every adult in America—in order to match the amount of money being taken in via casinos in Macau. Based on estimated numbers from 2012, Wynn Resorts now makes nearly three-quarters of its revenue in Macau. Sands, which owns the Venetian and Palazzo, earns two-thirds of its revenue there. In the United States, companies are tweaking their flagship Las Vegas casinos to look and operate more like Macau-style properties. This is because an increasing number of Asians come to Las Vegas, especially, because of the reduced tax on earnings compared to China. Asian visitors now account for 9 percent of tourists to Las Vegas, up from 2 percent in 2008. See the AP report, ―Tiny Chinese enclave remakes gambling world, Vegas‖ by Hannah Dreier, July 8, 2013. http://lasvegassun.com/news/2013/jul/06/us-casinos-macau-headache-abridged/. TN1-15 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
How can you use the above information to do an analysis of the industry? If you were in the casino business, wouldn‘t you want to keep abreast of this kind of information? 1. Continued: What has been the effect of the changing industry structure on U.S. casinos? The concept of Strategic Groups involves two unassailable assumptions in industry analysis, based on the belief that no two firms are totally different, and no two firms are exactly the same. Strategic groups are clusters of firms that share similar strategies in their: ● Breadth of product and geographic scope ● Price/quality ● Degree of vertical integration ● Type of distribution system The value of strategic groups as an analytical tool is that they identify barriers to mobility that protect a group from attacks by other groups; identify groups whose competitive position may be marginal or tenuous; chart the future direction of firms‘ strategies; and allow strategists to think through the implications of each industry trend for the strategic group as a whole. The casino industry can be used to illustrate the existence of strategic groups. To begin with, casino firms that had a large presence in Las Vegas or Atlantic City were more likely to compete with each other. These firms operated larger resorts, which offered a broad range of entertainment that catered to customers from around the country and even other parts of the world. By contrast, the smaller casinos, such as those on the water and on Native American lands, were more focused on gambling and catered more to local and regional customers. As such, these were less likely to compete with the larger casinos that were based in Las Vegas and Atlantic City. Each of these—the LV and AC large resorts vs. the local waterborne and Native American casinos—could therefore be considered to fall into different strategic groups. What might Las Vegas casinos do to craft a sustainable competitive advantage, given the industry they‘re in? In general, the gambling companies in Las Vegas embarked on an aggressive strategy in light of the competition from various sources. They did a number of things: ● Promoted Las Vegas as the destination gambling city—in contrast to Atlantic City where gamblers made day trips from cities in the northeast. Las Vegas positioned itself as a magnet for both the overnight casino gambler, and weeklong vacationer, offering more hotel rooms, myriad dining choices, shopping, and top-notch entertainment. The infrastructure also helped in that Las Vegas was linked by air to major U.S. cities and also to countries outside the United States. ● Casinos in Las Vegas positioned themselves as resorts for families by offering circus performances, etc. However, casinos in Las Vegas did continue to conform to their original ―sinful‖ roots by offering adult-oriented entertainment, further differentiating Las Vegas casinos from casinos in other competing areas. This differentiation strategy was helped by the promotion slogan, ―What happens in Vegas, stays in Vegas!‖ ● Las Vegas casinos constantly invested in refitting and renewal to continue to offer new TN1-16 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
attractions to customers. This meant that Las Vegas convention facilities competed successfully with Orlando and New York for the corporate meeting business. Las Vegas remained the top destination for overnight visitors looking for a casino experience. By differentiating its properties, the Las Vegas casinos attracted visitors and retained their business. Not in the case: On the other hand, casinos in Atlantic City played catch-up with Las Vegas casinos partly because LV had a head start—gambling was legalized in New Jersey a full 45 years after Nevada. From the start, Atlantic City casinos realized that they could not compete with Las Vegas‘s broad range of dining, shopping, and entertainment choices. In addition, AC‘s location in the Northeast highway corridor meant that the majority of customers could easily come as ―day trippers.‖ By promoting its proximity to the beach and the fact that most casinos were located on a boardwalk, AC was originally able to carve out a competitive position in the industry. However, that competitive position eroded. Atlantic City casinos tried to mimic their Las Vegas competitors by sprucing up their establishments. The city attempted a makeover, with the Borgata leading the charge. Casinos added wings to attract overnight customers, and some added outdoor bars to take advantage of the beachfront, but additional expansion was on hold during 2009 and most of 2010, waiting for a change in economic conditions. Then, reports of hurricane damage in 2012 kept visitors away. In short, Atlantic City casinos had been trying to move toward a strategy of differentiation by providing a more attractive ambience, but overall environmental conditions were making this difficult to achieve. The main threats Atlantic City casinos faced (as did Las Vegas casinos) were Native American casinos, slot machines at local racetracks, and Internet gambling. Two of the biggest Native American casinos were in Connecticut, within driving distance of Atlantic City. In addition, several states passed legislation allowing racetracks to provide slot machines for their visitors. Internet gambling had a cost advantage—operators did not have high infrastructure costs, and offshore Web sites were immune to legislation regulating their operation. In addition, competition had grown internationally, especially in the South China Sea city of Macau where casino developers had begun to grow their portfolios. To combat these threats, both Las Vegas and Atlantic City casinos had to continue to try to differentiate themselves. Many industry observers believed that the proliferation of local casinos and the availability of Internet gambling might even be an opportunity for LV and AC, because people who developed a taste for gambling at the local and home venue would probably want to visit LV or AC eventually, to experience the real thing. Challenges AND opportunities for all major competitors remain. See the additional reading and updates below. The major question is which of these firms, and which of these locations or strategic groups do you believe is better positioned for the future? Wynn Resorts, Las Vegas Sands, and MGM are some of the major players mentioned. Does their diversification into Macao and other world markets give them an edge? NOTE – ADDITIONAL READING AND VIDEO VIEWING: TN1-17 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
In addition to Asia-Pacific, the move to legalize online gaming offers another challenge AND opportunity to the big U.S. casino competitors. Online gambling will be licensed state by state, with New Jersey one of the first to allow this in 2013. As one analyst reported, ―Casinos are already positioned to capitalize on the industry‘s paradigm shift and face the least amount of red tape in doing so. It‘s not often that you hear the United States associated with any ―emerging‖ opportunity, but in fact this is how online gambling can be characterized. In Boyd Gaming‘s 2012 annual report, the company (which trades as BYD, and is part owner of Atlantic City‘s Borgata Hotel Casino) boasts of how it‘s well positioned to capitalize on the ―emerging domestic online gaming industry.‖ http://www.newstimes.com/business/fool/article/Why-OnlineGambling-Will-Crush-the-Candy-4480839.php. From 2015 here‘s a report and video about mobile gaming. Although not truly gambling, in-app purchases have become a big business, with the heaviest users spending up to $400 per person per transaction on these online games: http://www.cnbc.com/2015/08/03/the-shocking-truthabout-mobile-gaming.html Regarding the major competitors, on January 28, 2008, Harrah‘s Entertainment was acquired by affiliates of private-equity firms TPG Capital and Apollo Global Management. As the article below points out, this was a bad time to go private. Harrah‘s was ―drowning in debt‖: http://www.fool.com/investing/general/2009/06/24/for-casino-companies-this-is-nopanacea.aspx. So to what degree might mergers and acquisitions really help? Harrah‘s resurfaced as the public company Caesars Entertainment Group (CZR) in 2010. It operated over 47 casinos, hotels and 4 golf courses under several brands, and held rights to the World Series of Poker tournament. See more at http://caesarscorporate.com/about-caesars/. Compare the financial status of competitors MGM (MGM), Las Vegas Sands (LVS), Penn National Gaming (PENN), Wynn Resorts (WYNN), Boyd Gaming (BYD), and Caesar‘s Entertainment (CZR) using these links: http://finance.yahoo.com/q?s=mgm http://finance.yahoo.com/q?s=lvs http://finance.yahoo.com/q?s=PENN http://finance.yahoo.com/q?s=wynn http://finance.yahoo.com/q?s=BYD http://finance.yahoo.com/q?s=CZR&ql=0 During FY 2019, there were 290 casinos in Nevada that grossed $1 million or more in gaming revenue. Together, these casinos generated net income of $2,055,525,922 from total revenues of $24,546,009,009. These results are improved compared to FY18 when a net loss of $1,168,224,369 was recorded on total revenues of $27,107,879,852. ―Total revenue‖ is the money spent by patrons on gaming, rooms, food, beverages, and other attractions. ―Net income/loss‖ is the money retained by casinos after expenses have been paid but prior to deducting federal income taxes and prior to accounting for extraordinary expenses. Gaming revenue accounted for $8,757,658,013 or 35.7% of total revenue. These 290 casinos paid $892,294,136 in gaming taxes and fees, equating to 10.2% of their gaming revenue. Data from the Nevada State Gaming Control Board at https://gaming.nv.gov/Modules/ShowDocument.aspx?documentid=16547. Teaching Note TN1-18 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood Case 3 — Southwest: Is ―LUV‖ at the Limit?
Case Objectives 1. To discuss the choice of competitive strategy, and options for growth. 2. To examine how external and internal forces affect competitive strategy. See the table below to determine where to use this case: NOTE: There are both PRIMARY and SECONDARY chapters that can be used for this case. The Teaching Note gives guidance for the PRIMARY use chapters, and provides suggestions if the instructor wants to use the case to illustrate concepts from the optional SECONDARY chapters. CASE OBJECTIVES TABLE Chapter Use Key Concepts PRIMARY CONCEPT Competitive strategy; 5: Business-Level generic strategies Strategy SECONDARY Industry competition CONCEPTS five forces; general 2: External Environment environmental factors 3: Internal Analysis Value-chain analysis; resource-based view of the firm; VRIN 4: Intellectual Assets Intellectual and human capital
Additional Reading and/or Exercises See optional advanced reading, Porter, 1996; additional reading, embedded video
See optional advanced reading, Freiberg & Freiberg, 1996.
NOTE: At the end of this Teaching Note is an additional OPTIONAL discussion question which instructors can use for advanced students that addresses concepts from Chapter 11: Strategic Leadership, and Chapter 9: Strategic Control. Case Synopsis At the beginning of 2019, Southwest Airlines fared third in the rankings of the best U.S. airlines released by The Wall Street Journal. Delta Airlines ranked first and Alaska Airlines ranked second. These rankings were based on a composite set of parameters forming a scorecard. Southwest did best on two-hour tarmac delays and worst on mishandled baggage. Southwest was beginning to face other challenges: safety violations, fines for flying planes that needed repairs, incidents where the roofs of Southwest planes opened up inflight, killing a passenger in 2018. Although this was the first plane-related death in the airline‘s 48-year history, the signs were there of trust eroding from both employees and the public. Southwest Airlines was the pioneer of the highly efficient ―low-cost‖ strategy. From its beginnings in 1971, the company had become one of the world‘s most consistently profitable major airlines. The company was known for its unique cost-conscious yet fun-friendly culture and subsequent high employee loyalty. Its former chief executive officer and founder, Herb TN1-19 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Kelleher, was a celebrated leader who created a strong company culture and incentives focused on tight cost-control, making Southwest a legendary airline. Gary C. Kelly, the former chief financial officer of Southwest, and CEO since July 2004, had grown Southwest into a company with a net income of over $2 billion by making some bold moves. Southwest had established itself based on its low-cost operations and unique corporate culture, and had flourished with organic growth. However, as opportunities for this kind of growth had disappeared in recent years, Southwest was forced to rethink its strategy. In September of 2010, Southwest announced it was acquiring AirTran. Although this would give Southwest its desired foothold in Atlanta and flight access to Mexico and the Caribbean, this acquisition was a major change in Southwest‘s growth strategy. Although it made Southwest an international airline, the AirTran acquisition made Southwest Airlines a much larger carrier. It now had access to more potentially lucrative markets, but a stagnant air travel market and consolidation among the more dominant competitors meant Southwest had to find additional ways to boost profits—with possible options such as increased fees that might challenge its low-cost perception among air travelers. In addition, as Southwest grew, so did the human resources and operational costs: Its unionized labor force was negotiating more aggressively for increased pay and benefits, and increasing fuel costs and maintenance on different aircraft, including AirTran‘s Boeing 717 aircraft and the new Boeing 737 MAX, would need careful monitoring. Of even more concern was the emergence of new competition from the ultra-low cost carriers (ULCCs) such as Frontier, Spirit, and Allegiant. Similar to what Southwest did in its initial stages, these ULCCs had developed a different sort of disruptively innovative business model, with core revenue coming from ancillary products like hotel and tour packages rather than air tickets. Was Southwest growing too big and ignoring the focus that had made the airline so successful for so long? Would the success saga continue under Kelly when the core elements of the company‘s original strategy—low-cost, organic, and domestic point-to-point short-haul growth and customer-centric culture—were all simultaneously changing? Was this low-cost business model, which put its planes through frequent takeoffs and landings, putting passengers at risk? Would Southwest be able to remain profitable in 2019 and beyond? Teaching Plan The Southwest case is a good example of what a firm has to do to sustain a competitive strategy. It also provides an opportunity to discuss how competitive and growth strategies are chosen and how options are dependent on resources available. Therefore, this case can be positioned in the middle part of the course, just after a discussion of the components of strategic analysis and formulation. For more advanced students, it can also serve as an example of the nuances of strategic implementation. The instructor can also position this case discussion with a sole PRIMARY focus on Chapter 5: Business Level Strategy, contrasting Southwest to the JetBlue and Emirates cases—in discussing choice of competitive strategy, students are encouraged to choose between low-cost leadership and differentiation, but in the airline industry there is really no choice but competition based on TN1-20 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
controlling costs. Although students may try to explain how service amenities and features such as leather seats can create a differentiated advantage, customers rarely are willing to pay a premium for these things. This means the differences between carriers‘ successes often revolve around operational choices and strategic implementation. Uncovering those sometimes subtle differences between airlines can be a challenging yet fruitful discussion. For advanced students, the instructor may wish to assign Michael Porter‘s 1996 article ―What Is Strategy?‖ (Harvard Business Review, November–December, pp. 60–79) as companion reading to the case. Southwest is used as an example in this article of how tight linkages across its value chain activities give it a valuable, rare, inimitable, and non-substitutable competitive advantage. Southwest also demonstrates how human capital can be essential to competitive strategy. The book Nuts!: Southwest Airlines’ Crazy Recipe for Business and Personal Success by Kevin Freiberg and Jackie Frieberg (1996, Bard Press, Austin Texas) will be a useful source in this regard and could be assigned to advanced students as optional reading. ICEBREAKER Because Southwest is well-known for its ―fun‖ activities, even while flying, ask students if they‘ve ever flown Southwest, and whether they had a ―fun‖ experience. Have any of you ever flown Southwest? If so, what was the experience like? Was it fun? How did this differ from other flight experiences you’ve had? Based on this, would you fly Southwest? Many Southwest customers, and maybe some students, are loyal fans of the airline, not so much because of its low-cost, but because of the customer service experience. It might be interesting to students that Southwest does NOT base its competitive strategy on creating this unique customer service culture—the point is not to differentiate itself from its competitors based on how the customer values the experience, but on being able to DELIVER that experience as cheaply as possible—that‘s how Southwest had been able to achieve profitability for 47 straight years! (See its press release from January 2020 http://investors.southwest.com/news-and-events/newsreleases/2020/01-23-2020-112908345.) It‘s also good to reflect back on this discussion when answering the case question about choice of competitive strategy, and the need for Southwest to achieve parity in differentiation. If it can‘t offer in-flight movies and social networking on all flights, or provide a roomy leather seat (the original JetBlue differentiators), Southwest‘s ―fun‖ aspects of travel, from the customer‘s point of view, may be a way for Southwest to achieve this parity. As an optional exercise, regarding Southwest culture as portrayed by founder Herb Kelleher, show students this video of a Southwest Airlines television advertisement from 1988: http://www.youtube.com/watch?v=LcT_VsHqXmU.
TN1-21 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
And this short video clip shows one of the newer specialty-themed planes, the most recent one honoring the state of Louisiana. As of this unveiling in 2018, Southwest had 23 planes with specialty livery: https://www.youtube.com/watch?v=-odCi424eik. And, as an example of how Southwest employees are known for having fun, see this safety announcement video taken by a passenger on a Southwest flight in 2019. https://www.youtube.com/watch?v=1AE_hjOLDtU&t=16s. And a video of diverse Southwest pilots in 2019 explaining why they prefer flying for Southwest. https://www.youtube.com/watch?v=jBgc1IsUrMw. Ask students if the playful sprit of the ―sack‖ ad, the distinctive look of the airplanes, and the obvious appreciation and enjoyment of at least one Southwest employee might make them more or less likely to fly on Southwest Airlines? Why? Some students may also want to talk about horrific airline experiences, especially the April 2018 incident where catastrophic failure of an engine on a Boeing 737-700 caused the death of a passenger on a Southwest flight from LaGuardia to Dallas. The failure occurred when one of the engine‘s 24 titanium alloy fan blades snapped off mid-flight. The violent event caused the front cowling of the engine to disintegrate, firing shrapnel into the cabin of the aircraft. The resulting loss of engine power and depressurization meant the crew had to make an emergency landing in Philadelphia using the plane‘s remaining engine. An initial examination found evidence of metal fatigue at the point where the engine blade failed. This was not the first time. In August 2016, Southwest Airlines Flight 3472, another Boeing 737-700, also suffered an uncontained failure of its left engine that ripped off its front cowling. In this case, shrapnel also pierced the fuselage causing decompression, forcing the flight to make an emergency landing in Pensacola, Florida. No one was injured in that incident. Investigators have determined that the failure was not the result of lax inspections, but rather was based on the design of the engine and the previously unknown stress on the blades, which did not have a mandated age at which to be pulled from service. The engine was manufactured by CFM International, a joint venture of General Electric and France‘s Safran Aircraft Engines. (See https://www.inquirer.com/philly/health/science/southwest-flight-1380-engine-blade-ntsb20181120.html for the full story about the engine blade issue, which is from a common engine, used by some 6,700 aircraft at about 300 different airlines worldwide. The findings of the NTSB investigation could have far-reaching consequences for the airline industry.) Other safety incidents include the July 2009 problem with a Southwest plane (a hole in the fuselage that opened up during flight), and the fuselage hole that appeared in April 2011 (see http://www.bloomberg.com/news/2011-04-25/southwest-jet-with-hole-in-fuselage-hadmisaligned-rivets-u-s-board-says.html ). In addition, Southwest has paid millions over the past decade to settle safety violations, including fines for flying planes that didn't have required repairs (see https://www.chicagotribune.com/business/ct-southwest-airlines-safety-investigation20180424-story.html). TN1-22 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Southwest may have had maintenance incidents, but they also have a very large fleet of planes— more than 700 Boeing 737s, the largest 737 fleet in the world. Southwest Airlines also runs its planes hard. They make many short hops and more trips per day than other U.S. airliners, which adds to the wear and tear on parts, including the engines. This raises questions about whether the company‘s low-cost business model—which puts its planes through frequent takeoffs and landings—is putting passengers at risk. These incidents might make students worried about safety. Explain that this is part of what makes the airline industry such a challenging one. Point out that in 47+ years, up until April 2018, Southwest had never had a passenger or crew fatality, although one person did die on the ground when a Southwest plane skidded off the runway at Chicago‘s Midway airport due to winter conditions in 2005. In 2013, a Southwest plane crash-landed on a runway at New York‘s La Guardia Airport as a result of pilot error. Nine people sustained minor injuries, but the accident seriously damaged the aircraft and delayed traffic at the airport for hours. The captain, who was 49 years old at the time of the incident and had more than 7,500 hours behind the controls of a 737, was fired by Southwest about two months later. The NTSB‘s final report suggested an examination of Southwest‘s training and pilot-oversight programs. See http://www.wsj.com/articles/southwest-airlines-captain-broke-safety-rules-prior-to-2013accident-in-new-york-1415508923 for more information. (These incidents are not in the case.) If the instructor has also assigned the JetBlue case, reference to the general external industry environment and management of human assets is appropriate to make here. NOTE: To get up-to-date news and information about Southwest and various other air carriers, the instructor can visit https://www.travelpulse.com/news/airlines/ and https://www.swamedia.com/releases prior to discussing the case. Finish up the icebreaker exercise by focusing student attention on the issue of operational choices, and how firms, and leadership, need to provide a CONSISTENT customer experience in order to succeed. Before engaging in discussion, you might want to test student‘s basic knowledge regarding the case and the major concepts. Here are some multiple-choice questions to use. (This will get the student‘s attention—they can‘t answer these if they haven‘t read the case!) Southwest uses the following operational model: a. Discount carrier b. Point-to-point c. Hub-and-spoke d. Base of operations ANSWER: b. Yes, Southwest is a discount carrier, but the correct operational designation is ―point-to-point.‖ This is one of the main operational differences between Southwest and many of its competitors. The largest contributors to Southwest‘s expenses are: a. Salaries, wages, and benefits TN1-23 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
b. Jet fuel c. New planes ANSWER: a. Salaries, wages, and benefits were Southwest‘s largest operating costs, accounting for 41% of total operating expenses as of 2019. Jet fuel and oil expenses were the second largest at 22%. As of 2018 Southwest had placed firm orders for 197 of 737 MAX 8 aircraft and 30 of 737 MAX 7 aircraft, but these had not been delivered. Summary of Discussion Questions Here is a list of the suggested discussion questions. You can decide which questions to assign, and also which additional readings or exercises to include to augment each discussion. Refer back to the case objectives table on the first page of these teaching notes to identify any additional readings and/or exercises that can be assigned in advance. 1. PRIMARY QUESTION: Discuss the basis of Southwest‘s competitive advantage and the potential challenges to its strategy. 2. SECONDARY QUESTIONS: What internal resources and assets does Southwest have that may give it a competitive advantage? 3. What are key forces in the general and industry environments that affect Southwest‘s choice of strategy? 4. OPTIONAL QUESTION: What growth strategies might Southwest pursue? 5. OPTIONAL EXPANDED DISCUSSION: Assess the effectiveness of Southwest Airlines‘ leadership, and the use of strategic controls. Discussion Questions and Responses 1. Discuss the basis of Southwest’s competitive advantage and the potential challenges to its strategy. Referencing Chapter 5: Business-Level Strategy How firms compete with each other and how they attain and sustain competitive advantages go to the heart of strategic management. In short, the key issue becomes: Why do some firms outperform others and enjoy such advantages over time? The viability of a firm‘s success is driven by both the internal operations of the firm and the desires and preferences of the market. Firms that succeed have the appropriate resources and cost structure to meet the needs of the industry and general environment. They also have a strategy… A business-level strategy is a strategy designed for a firm or a division of the firm that competes within a single business. Within the firm‘s industry environment generic strategies include basic types of business-level strategies based on breadth of target market (industrywide versus narrowmarket segment) and type of competitive advantage (low-cost versus uniqueness). Here are the three generic strategies that are used to overcome industry forces and achieve a competitive advantage: 1. Overall cost leadership TN1-24 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Low-cost-position relative to a firm‘s peers Manage relationships throughout the entire value chain
2. Differentiation Create products and/or services that are unique and valued Non-price attributes for which customers will pay a premium 3. Focus strategy Narrow product lines, buyer segments, or targeted geographic markets Attain advantages either through differentiation or cost leadership Generic strategies are plotted on two dimensions: competitive advantage and strategic target. The overall cost leadership and differentiation strategies strive to attain advantages industrywide, while focusers have a narrow target market in mind. Both casual observation and research supports the notion that firms that identify with one or more of the forms of competitive advantage outperform those that do not. The strategy that Southwest adopted was overall cost leadership. The company was successful in implementing this low-cost strategy by aligning its structure and systems with the strategy. This low-cost strategy was the reason why the company remained profitable even in the worst of times in its industry. Southwest was the pioneer of ―low-cost, no-frills‖ strategy, using low-wage yet productive employees. In order to succeed, however, Southwest needed to achieve competitive parity on differentiation. As explained in the chapter, competitive parity means a firm‘s achievement of similarity or being ―on par‖ with competitors with respect to low-cost, differentiation, or other strategic product characteristics. Competitive parity on the basis of differentiation permits the cost leader to translate cost advantages directly into higher profits than competitors. Thus, the cost leader earns above-average returns. A business that strives for a low-cost advantage must attain an absolute cost advantage relative to its rivals. This is typically accomplished by offering a no-frills product or service to a broad target market using standardization to derive the greatest benefits from economies of scale and experience. However, such a strategy may fail if the firm is unable to attain parity on important dimensions of differentiation such as quick responses to customer requests for services or design changes. Southwest had been able to offer low-cost services to its customers because it offered no-frills whatsoever. However, in view of the changing competitive scenario, the emergence of competitors such as JetBlue forced Southwest to achieve some degree of competitive parity on differentiation. Companies like JetBlue were at an advantage because differentiation was built into their low-cost model. In the case of Southwest, achieving such parity on differentiation could prove to be expensive and have significant impact on its ability to maintain the low-cost position. The reason why Southwest‘s chief executive officer, Gary C. Kelly, might not have been very keen, initially, on implementing an in-flight entertainment system was because it would be costly for Southwest to have such a system. Southwest‘s ability to balance low-cost and differentiation was important for it to consider into the future. In an attempt at parity, Southwest had finally TN1-25 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
introduced an in-flight entertainment portal with free live and on-demand television, offering 20 live channels and 75 television episodes from popular series. It also introduced Internet access for $8 a day per device on Wi-Fi-enabled aircraft. (In November 2018, Southwest Airlines finally eliminated its $5 fee for in-flight movies, joining other airlines in offering more free entertainment. Southwest, the nation‘s largest domestic carrier, doesn‘t have seat-back screens or overhead screens on its planes. Passengers watch the movies on their smartphones, laptops, tablets, and other Wi-Fi enabled devices. See https://www.usatoday.com/story/travel/flights/2018/11/01/southwest-airlines-freemovies/1844555002/). Here‘s also where the instructor can remind students about the ―fun‖ culture in the air and whether humor can be a differentiating factor. Instructors can ask students if it‘s possible to compete on differentiation in the airline industry. In discussing choice of competitive strategy, students are encouraged to choose between low-cost leadership and differentiation, but in the airline industry there is really no choice but competition based on controlling costs. Although students may try to explain how service amenities and features such as leather seats can create a differentiated advantage, customers rarely are willing to pay a premium for these things. This means the differences between carriers‘ success often revolve around operational choices and strategic implementation. One operational difference that Southwest had made obvious to customers was the decision that ―bags fly free.‖ On the surface this might be seen as a differentiated advantage, but it was actually firmly based in the cost control discipline Southwest had always had: on short-haul flights, which Southwest primarily offered, passengers checked fewer or lighter bags, therefore Southwest incurred no extra fuel demands on these flights. The extra cost most airlines charged for bags was directly based on the higher cost of fuel needed to carry that extra weight. Therefore, what appeared to be a differentiation tactic was actually based on Southwest‘s lowcost strategic choice. A competitive strategy is linked to the value chain, and supported by intangible assets. Southwest had great strengths in its operations and its human capital. Tight links among its activities and assets allowed Southwest to create a service that was unique and valuable to customers. From a resource-based perspective, it was not any single activity but the strong coordination across the various value chain activities (i.e., the tightly linked activity system) that was the source of a sustainable competitive advantage for Southwest Airlines. Let‘s see how that might be so. 2. What internal resources and assets does Southwest have that may give it a competitive advantage? Referencing Chapter 3: Assessing the Internal Environment of the Firm When one firm outperforms others by a wide margin over a long period of time, it‘s important to figure out how this could be. The answer may lie in how that firm arranges its activities and creates unique bundles of resources that allow it to sustain a competitive advantage. Students should assess the relationships between the elements in Southwest‘s value chain. TN1-26 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Remember, value-chain analysis is a strategic analysis of an organization that uses value-creating activities. Value is the amount that buyers are willing to pay for what a firm provides them and is measured by total revenue, a reflection of the price a firm‘s product commands, and the quantity it can sell. A firm is profitable when the value it receives exceeds the total costs involved in creating its product or service. Creating value for buyers that exceeds the costs of production (i.e. margin) is a key concept used in analyzing a firm‘s competitive position. Every activity should add value. Take a look at Exhibit 3.1 to see the value chain activities. Based on the relationships between these elements, Southwest can make a choice of how to proceed to craft a competitive advantage. See the suggestions below: Value chain activity Primary: Inbound logistics (distribution facilities, material control systems, warehouse layouts) Operations (efficient work-flow design, quality control systems) Outbound logistics (consolidation of goods, efficient scheduling, finished goods processing) Marketing and Sales (motivated sales people, innovative advertising and promotion, effective pricing, proper ID of customer segments and distribution channels) Service (ability to solicit customer feedback and respond) Secondary (or support): Procurement (win-win relationships with suppliers, reduced dependence on single supplier) Technology development (state of the art hardware and software, innovative culture and qualified personnel) Human resource management (effective recruitment, incentive and retention mechanisms) General administration (effective planning systems to establish
How does Southwest create value for the customer? Web-based booking gives greater control on managing seat sales. Customers won‘t get bumped. No assigned seating, no meals served, choice of smaller airport—all reduce time and costs. Using only one type of aircraft keeps operational costs low. Less congested airports help create quicker and ontime flight departures. Using its own website for ticketing as a distribution channel. Market segment properly identified, i.e., business travelers flying point-to-point. Effective pricing so far, but may have to start charging fees for extras. Excellent record of communication with customer to keep them informed of changes or inconveniences. Aircraft procurement plan to support growth. Acquisition of AirTran increases bargaining power.
Investments in technology, website fully integrated into operations.
Originally good, relationships starting to erode due to dissatisfaction with union contracts. CEO Gary Kelly was able to continue the strategic vision started by Kelleher. Top management with TN1-27
Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note goals and strategies, access to capital, effective top management communication, relationships with diverse stakeholders)
Case 1: Robin Hood expertise in airline business, ability to coordinate and integrate activities across the value system, and highly visible to inculcate organizational culture, reputation and values. See Southwest Mission Statement, Case Exhibit 2.
Primary Activities In terms of primary activities, the key to Southwest‘s ability to successfully compete in the market appeared to reside primarily in its operations. From the very beginning, Southwest was able to effectively control costs.
Support Activities In regard to support activities, a competitive advantage can be achieved by developing a strong general administration that is built around visionary leadership and a supportive human resource management strategy. Southwest‘s historically positive relationship with its employees was a major strength, as was its well-known sense of fun. But this was starting to erode as the unionized workforce identified inequities between different positions—pilots and flight attendants had different agreements than the mechanics and material specialists—and concerns that the contract didn‘t measure up to the higher historical rates Southwest mechanics earned relative to the rest of the industry, and it did not do enough to compensate members for their industry-leading productivity. Any changes to the contract terms could put an additional burden on Southwest‘s ―low-cost‖ competitive position. In addition, see the concept of the resource-based view of the firm, and the three key types of resources: tangible resources, intangible resources, and organizational capabilities. A firm‘s strengths and capabilities—no matter how unique or impressive—do NOT necessarily lead to a competitive advantage. The resource-based view of the firm takes the perspective that a firms‘ competitive advantages are due to its endowment of strategic resources that are valuable, rare, costly to imitate, and costly to substitute. Without these unique resources, the firm can only attain competitive parity. RBV goes beyond a SWOT analysis to integrate internal and external perspectives in a broader competitive context. RBV can reveal how core competencies embedded in a firm can help it exploit new product and market opportunities. An important issue to focus on here is the importance of intangible resources like innovation and reputation. Especially in mature brands, sustaining reputation is essential. Look at resources that are controlled by Southwest that might enable it to develop and implement value-creating strategies. Based on their reading of the case, students might identify those resources to include: Tangible Resources:
TN1-28 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Financial: Although cost fluctuations in fuel and fees are hard to anticipate, Southwest has historically done an excellent job here, making it the only U.S. airline to be consistently profitable. Physical: New orders for Boeing MAX aircraft, refurbishment of the fleet after the AirTran acquisition might raise questions about financing and increased capital expenditures. Technological: Doesn‘t appear that these resources are any more developed than any other airline with the exception of the new reservation system that could improve flight scheduling and inventory management. Organizational: Historically good relationships with the management hierarchy means there is someone always available to negotiate issues. Intangible Resources: Human: Originally, this was a major strength. Now union troubles, financial, and service concerns might have eroded willingness of employees to step up. Innovation and creativity: Kelleher‘s original idea and vision for the airline was innovative and creative. Kelly appears to be continuing this tradition. Reputation: Southwest enjoys a strong reputation for operational efficiency, although this is starting to slip based on the 2018 rankings. See Case Exhibit 1. (On the WalletHub list of 2019, Southwest ranked 9th out of 12, beat out by Alaskan and Delta, of course. But the airline was also bested by SkyWest, Spirit, and ExpressJet. Part of Southwest‘s low score was because it rated least safe, probably because of the recent death. On the other hand, Southwest had the least customer complaints. See https://www.forbes.com/sites/laurabegleybloom/2019/05/02/rankedthe-best-and-worst-airlines-in-america-in-2019/#4380e3175342). Determining whether the internal resources are valuable, rare, difficult to imitate, or difficult to substitute (VRIN) can help a firm sustain a competitive advantage. See Exhibit 3.6. Applying the VRIN concept, in case of Southwest, an argument may be made that its resources are inimitable. This is because there was some path dependency, causal ambiguity, and social complexity in its operational history. That these elements provided a competitive edge was evident when competitors such as JetBlue had been unable to fully copy Southwest‘s operational model. As has been noted, with its efficient low-cost operations, Southwest had an interlocking system of mutually reinforcing competencies that made its resources simultaneously valuable, rare, inimitable, and non-substitutable, reinforcing its low-cost leadership strategy, thereby providing a competitive advantage. For advanced students, the instructor may wish to assign Michael Porter‘s 1996 article ―What Is Strategy?‖ (Harvard Business Review, November–December, pp. 60–79) as companion reading to the case. Southwest is used as an example in this article of how tight linkages across its value chain activities give it a valuable, rare, inimitable, and non-substitutable competitive advantage. TN1-29 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Referencing Chapter 4: Recognizing a Firm’s Intellectual Assets Although not discussed in the case, Southwest was originally known for its human relations. The human resources department was called the ―People Department‖ to reflect the emphasis placed on its employees, i.e., the human capital. Traditionally, Southwest paid a lot of attention to attracting and retaining human capital, as well as to maintaining its culture. The instructor is encouraged to do his/her own research if training needs to be emphasized. The book Nuts!: Southwest Airlines’ Crazy Recipe for Business and Personal Success by Kevin Freiberg and Jackie Frieberg (1996, Bard Press, Austin Texas) will be a useful source in this regard, and could be assigned to advanced students as optional reading. See the concepts of intellectual capital, human capital and social capital, all of which are intangible assets that a company such as Southwest needs to have in order to compete successfully. Intellectual capital is a measure of the value of a firm‘s intangible assets, its reputation, employee loyalty and commitment, customer relationships, company values, brand names, and the experience and skills of employees. Human capital involves the individual capabilities, knowledge, skills, and experience of the company‘s employees and managers. Social capital is a function of the network of relationships that individuals have throughout the organization. Human capital is the foundation of intellectual capital. Intellectual capital is developed through attracting, developing, and retaining human capital. See Chapter 4, Exhibit 4.2. Southwest was one of those organizations that recognized the importance of both intellectual and human capital for organizational success. The importance it placed on its human capital was clear from the fact that its mission statement made a commitment to its employees of providing a supportive environment. (The instructor can have students read the mission statement in detail at this point, see Case Exhibit 2). Although not discussed in the case, Southwest had been successful in attracting and retaining human capital. Its recruitment philosophy was to ―hire for attitudes, and train for skills.‖ The organization did not compromise on this philosophy even if it meant interviewing several applicants for a low-level job in the organization. The fun culture, reward systems and ―no furlough‖ policy helped retain employees. The culture and rewards created an enhanced identification with the mission and values of the organization, and over the years Southwest experienced less employee turnover rates than its rivals. This had the additional positive effect of reducing costs relative to replacing this human capital. The company‘s employees were more productive than employees at competitor organizations (As indicated earlier, the instructor may refer to Nuts!: Southwest Airlines’ Crazy Recipe for Business and Personal Success by Kevin Freiberg and Jackie Frieberg [1996, Bard Press, Austin Texas] for additional information). Union unrest in recent years was a sign that Southwest‘s lack of attention to labor negotiations had begun to erode employee satisfaction. While Southwest described the pay rates and retirement benefits in the proposed contract as industry leading, union leaders had other opinions. According to the union leaders, the contract didn‘t measure up to the higher historical rates Southwest mechanics earned relative to the rest of the industry, and it did not do enough to TN1-30 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
compensate members for their industry-leading productivity. This illustrated how, in the past, Southwest had been able to increase its intellectual capital, the value of its intangible assets, through its focus on developing human capital, the capabilities of its employees. Attention would now need to be paid to this important resource. Southwest‘s success in retaining its human capital could also be attributed to the nurturing of the ―social ties,‖ or social capital. Although not in the case, in the past there had been great emphasis on teamwork. Employees recognized the contribution and importance of one another‘s work towards the achievement of organizational goals; the ―fun-and-frolic‖ environment, the parties and celebrations, all fostered camaraderie that enriched the social relationships within the organization. Employees felt that they were cared for, were in a family environment. Evidence of this was in the freedom employees felt to be individuals on the job, for example, the funny flight attendants. This had benefits when attracting prospective employees as well, since the extended personal social network could encourage talented people to apply. In 2016, CEO Kelly talked about the culture and how Southwest has never laid off an employee, although hundreds of Southwest workers had protested outside of a shareholder meeting. Some employees said they were ―required to work unreasonably long hours of overtime‖ when the company was short-staffed, according to employee reviews on Glassdoor. Others said that the pay is low. See https://www.cnbc.com/2016/12/09/4-reasons-people-love-working-at-southwestwhich-has-never-laid-off-a-single-employee.html. Through the development of social capital (attracting, developing, and retaining human capital), Southwest increased the value of its intellectual capital, thereby increasing the value of its intangible assets. Not in the case: Although Southwest traditionally had positive relationships with various unions, as of 2015 contract talks with ground crew workers (ramp and ground operations employees) had stalled: The Transport Workers Union Local 555 had been in talks with Southwest since July 2011, but the two sides had been unable to reach a deal. A Southwest representative responded by saying Southwest would continue to actively participate in negotiations by making every effort to reach agreements with unions that are rewarding, flexible, and secure—ones that provide wage and benefit levels that are fair to employees, and allow Southwest to be competitive, and ensure long-term success. See https://www.dallasnews.com/business/airlines/2015/12/18/tensions-rise-between-southwestairlines-and-its-ground-workers-union-over-suspensions/. In addition, from 2017 comes a report of poor working conditions. Union leaders were ready to fight Southwest on working conditions that they say were now entrenched. An antiquated labor relations model designed to drive production, instead was driving morale down across Southwest properties. ―Groundworkers are flagrantly mistreated and abused by management,‖ wrote John Samuelsen, president of the New York-based union that represents 12,000 Southwest groundworkers, as well as 15,000 flight attendants. The letter refers to the ground workers who were members of TWU Local 555. In 2017, Samuelsen said, ―Southwest is writing up nearly three workers per day and firing one worker every other day. The outright hostility to the workforce has obliterated morale, which can only have a negative impact on the passenger TN1-31 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
experience,‖ he wrote. ―The TWU finds it hard to believe that Southwest finds this to be an ideal business model.‖ See https://www.thestreet.com/investing/transport-workers-union-leaderdecries-termination-rate-at-southwest-airlines-14238377. Certainly, resolution of any ongoing unrest in Southwest‘s human capital required attention. 3. What are the key forces in the general and industry environments that affect Southwest’s choice of strategy? Referencing Chapter 2: Analyzing the External Environment of the Firm Organizational leaders must become aware of factors in the overall environment that might affect their ability to create a competitive advantage. So how do managers become environmentally aware? By scanning, monitoring, and gathering competitive intelligence, and using these inputs to develop forecasts. This prepares the firm to do more extensive analysis of the forces in the general environment and the industry or competitive environment. Environmental scanning involves surveillance of a firm‘s external environment to predict environmental changes and detect changes already under way. It is a BIG PICTURE viewpoint of the industry/competition, looking for key indicators of emerging trends—what catches your eye? This alerts the firm to critical trends before changes have developed a discernible pattern and before competitors recognize them. Environmental monitoring is a firm‘s analysis of the external environment that tracks the evolution of environmental trends, sequences of events, or streams of activities. Leaders need to monitor the trends that have the potential to change the competitive landscape—what do you want to track? Firms need to CHOOSE the trends identified via the scanning activity, and regularly monitor or track these specific trends to evaluate the impact of these trends on their strategy process. What factors or trends might be most important to Southwest? To assess how the external environment might affect Southwest‘s strategy, it‘s necessary to take a look at the factors in the general external environment. Southwest must consider the political/legal, economic and global, sociocultural and demographic, and technological forces that might affect the ability of the firm to deliver its service and sustain its business. See which factors in the general environment students might pick that have a significant impact on the airline business. Political-Legal: Under the legal factors, the deregulation of the airline industry in 1978 provided an opportunity to several players to enter the market. It allowed new market segments such as that of the low cost, point-to-point services to emerge. It thus changed the industry landscape. Also, the bankruptcy laws have a significant role to play as they allow even nonprofitable operators to continue in the industry when they are protected. One major change that affected the low-cost carriers such as Southwest was the expiration of the Wright Amendment, allowing airlines operating out of Dallas Love Field, like Southwest, to offer unrestricted nonstop flights to destinations in Texas and elsewhere. TN1-32 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Economic: The airline industry is susceptible to upturns and downturns with the trends in the economy. A growing economy and a booming business mean greater demand for air travel, and a slow-down in the economy means reduced demand, consequent unutilized capacity, and intensified competition. The availability of venture capital, and other capital sources, has an impact on the number of new entrants into the industry. Interest rate fluctuations have an impact on the cost of operations for companies that have high levels of debt. Furthermore, wars with other nations and increases in fuel prices strongly impact the air industry. Sociocultural: The airline industry is highly susceptible to the extreme events such as the September 11, 2001 attacks on the World Trade Center, and publicity surrounding any air accidents such as the one that recently caused a fatality on a Southwest Airlines flight. These create fears in the minds of customers toward air travel and have a severe adverse impact on the industry and on the individual carrier. It also means increased security concerns, delayed flights, increased turnaround times—all these have an impact on customer perception of value, and therefore affect airline profitability. Technological: The Internet and other technological breakthroughs have had an impact on the way the airlines conduct their businesses. For example, most of the low-fare airlines sell tickets directly through their websites rather than through ticket agencies. Customer service is being extended by personnel working from their homes. Online reservations systems like the one implemented by Southwest lead to improvements in flight scheduling and inventory management. All this has made it possible to reduce the costs of operations, making it favorable for the low-cost airlines to operate. Also, customers can now search and compare prices of air tickets much more easily than previously, and this accentuates the price competition. It‘s also necessary to assess the segments of the external competitive environment that include competitors, customers, and suppliers, substitutes and new entrants. Porter‘s five forces model allows strategists to anticipate where the industry might be most vulnerable. Help students apply Porter‘s five forces of competition to the airline industry by drawing a diagram on the board similar to the following, and having students fill in the details:
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Teaching Note
Suggested: there are numerous competitors; low switching costs for consumers.
Suppliers’ Power High
Case 1: Robin Hood
Substitutes Threat High
Suggested: the threat of substitutes such as car, limo, bus, train, is high, especially when distances traveled are short.
Rivalry Very High
Buyers’ Power Low
Suggested: there are only two major suppliers: Boeing and Airbus
Suggested: there are low barriers to entry, especially for the low-cost airlines, with low switching costs, therefore a medium threat of new entrants into the industry.
Suggested: buyers are not concentrated; there is no threat of backward integration.
Threat of New Entrants Med-Low
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Teaching Note
Case 1: Robin Hood
Based on the external environmental factor analysis, the airline industry has many competitors trying to carve out a piece of the ―profit‖ pie. Here are some details: Threat of new entrants. The extent of threat due to new entrants is determined by how high or low the barriers are to entry into an industry. In the airline industry, deregulation and availability of alternate sources of funding reduced the barriers to entry. Competitors such as ultra-low cost carrier Allegiant Air did not have the expense of a base of operations. They moved their fleet around the country when opportunities were spotted. ULCC flight schedules fitted their fleet availability and not necessarily in timings that were most preferred by customers. Unlike Southwest, the ULCCs were not in the business of connecting people and destinations. The stimulant of demand in the ULCC model was ―fares‖ and not the ―need‖ to get to a destination. Typically, a ULCC entered markets which it thought had latent potential, offered several flights, and then monitored the results. If the expectations about traffic materialized, it offered more services at that airport. If expectations did not materialize or the traffic was less productive than at other points, the ULCC moved out quickly. Economies of scale. This did not work out well for the players in the airline industry. The huband-spoke model developed by the major players led to more of diseconomies of scale than economies. However, the large investments already made by the major airlines and their established networks do pose a significant threat to new entrants unless they counter it with highly efficient operations. Product differentiation. Airlines try to create strong brand identification and customer loyalty by using the frequent flyer programs. When there is strong brand identification, it forces the new entrants to spend heavily on weaning away customers from the existing players, thus discouraging their entry. However, in the airline industry the brand identification has not proved to be so strong as to prevent people from switching to other airlines. Some low-cost players had tried to achieve some product differentiation (e.g., JetBlue providing leather seats, Southwest emphasizing commitment to customer service). However, these are not very strong barriers to entry as the other entrants are imitating them rather easily. Switching costs. There are virtually no switching costs for customers. The frequent flier programs attempt to create switching costs. However, when the customers are presented with low-cost options, there is nothing strong enough that could prevent them from switching to other airlines. Thus, the airline industry faces a high threat of new entrants particularly in the low-cost segment. The barriers can be heightened only when there are ultra-efficient routes or operational routes closely linked across the value chain that competitors find it difficult to copy or imitate. Bargaining power of suppliers is high when 1) there are few suppliers in the industry, 2) there are no easy substitutes to supplier‘s products, 3) when the buyer industry is not an important customer of the supplier group, 4) the supplier‘s product is an important input to the buyer‘s business, 5) the supplier products are differentiated or built up switching costs, 6) or the supplier group poses a credible threat of forward integration. There are only two major suppliers—Boeing and Airbus—to the industry and when the airline trains its pilots on either Boeing or Airbus, TN1-35 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
switching costs are built into the terms of pilots‘ training should the airline decide to change the supplier. Thus, the supplier does enjoy considerable bargaining power. However, there is no credible threat of forward integration by the suppliers such as Boeing or Airbus. Bargaining power of buyers is low as the buyers are not concentrated. While the buyer does not have any switching costs, and there are several choices available, they still lack concentration. The Internet is impacted in increasing the buyer bargaining power because the buyers can compare the prices more easily and in view of no switching costs, they could choose whichever airline offers a low price. Thus, the buyers may be able to influence the airlines to reduce their prices over time. There is no threat of backward integration from the buyers. Threat from substitutes is high when the distances traveled are shorter. In such cases, the customer can choose to travel by land (by car/limo/bus/rail) as they might prove to be cheaper alternatives. However, for longer distances and for more hurried customers, the airlines do not face significant threat from substitute modes of travel. The intensity of rivalry among existing competitors in the airline industry is very high. There are numerous competitors, and in times of low or moderate industry growth, the competition gets fiercer as each one tries to nab customers from the other in order to keep their capacity utilizations at acceptable levels. The exit barriers are high because it is difficult to dispose of grounded planes, as there would be few buyers. Also, due to the bankruptcy laws, even the lossmaking companies might still be around for a long time, thus intensifying competition. So, it is easier to get into the industry, but it might be difficult to get out. The only solution for many companies is to merge, which is why there has been so much consolidation in this industry over the years. (See http://www.investopedia.com/features/industryhandbook/airline.asp#axzz1VjKetXz3 for one source of information on the industry.) Given such a tough industry environment, Southwest should be admired for its ability to not only survive, but, unlike almost all other U.S. carriers, to remain profitable throughout its history, so far. Given that it was now much larger and facing competition in new markets, for instance in the international cities where it was an unknown, could Southwest continue with its excellent track record? Instructors can leave students with this question and possibly move on to discuss other airline cases (JetBlue, Emirates), or can ask students for ideas, and then transition into the following optional discussion. 4. OPTIONAL QUESTION: What growth strategies might Southwest pursue? NOTE: there are no PowerPoint slides to accompany the following. Referencing Chapter 6: Corporate-Level Strategy Southwest was facing growth challenges. Back in 2005, then ex-CEO Kelleher said, ―I think the airline business is fundamentally an opportunistic business. . . . We suddenly have some opportunities materializing that are new to us.‖ Up to that point, most of Southwest‘s growth had TN1-36 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
been organic, that is, it occurred by adding more flights on its existing routes, and by adding more cities. Since then, in addition to its first-ever code share agreement with ATA, CEO Kelly had linked with WestJet at one time, to provide Southwest customers flight bookings into Canada, and had applied for permission to fly Southwest planes to Canadian cities. This was Southwest‘s first attempt to expand outside the United States until its acquisition of AirTran in 2011, which would give it access to coveted gates in Atlanta, GA and flights to Puerto Rico, Mexico, Central America, and the Caribbean. What else could Southwest do to expand? See the concept of diversification. Some possibilities include: Mergers and acquisitions Strategic alliances Joint ventures Internal development Whatever the choice, it should create value for all stakeholders—employees, suppliers, distributors, and the company itself. The choice of diversification strategy should create synergy so that all parties gain something they would not have had on their own. Companies can achieve synergy through diversification in two ways: 1. Through related businesses (horizontal relationships) Sharing tangible resources Sharing intangible resources Leveraging core competencies 2. Or through unrelated businesses (hierarchical relationships) Value creation derives from corporate office Leveraging support activities Core competencies reflect the collective learning in organizations—how to coordinate diverse production skills, integrate multiple streams of technologies, and market diverse products and services to create value. Core competencies must create superior customer value; the different businesses must all have similar elements in the value chain that require similar skills; and these activities or skills must be difficult for competitors to imitate. Southwest‘s core competency was in its operational activities, including the controls it put in place to insure consistency across its business functions. Because of this consistency, Southwest had the potential to diversify into other related service areas if it chose to do so. Sharing activities means that value chain elements are shared across business units, so that two or more activities are done by one of the businesses. This allows for cost savings, but businesses need to make sure to keep control over quality and customer perception. Again, Southwest had an operational activity, which, as already discussed, was one of its strengths. Taking the lessons learned and applying its low-cost strategy to flight operations, Southwest could potentially expand this capability into other areas. From an interview in 2009 (not in the case), Kelly said Southwest was no longer a ―niche‖ player. It could use what it‘s learned over the years to open up a new market quickly and successfully—it was now a tactical question rather than a strategic one, same strategy, just adjusting the tactic to the market. TN1-37 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Southwest could also choose to focus on well-planned strategic alliances or acquisition. Southwest‘s alliances had included the codeshare agreement with Westjet, for flights into Canada (subsequently terminated in 2010), and a codeshare with Mexican carrier Volaris to begin in 2011 (not in the case). These alliances could allow Southwest to expand internationally. (The following is not in the case: The current limitations of the 737 airplane meant Southwest could only travel 3,365 nautical miles without refueling. This meant that only Canada, Mexico, certain destinations in Central America, the Caribbean, Ireland, and England were within reach, although on westbound flights from London‘s Heathrow Airport the aircraft would probably have to stop for fuel.) (Not in the case: Regarding acquisition, in July 2009 Southwest had announced a $113.6 million bid for bankrupt Frontier Airline, formerly based in Denver. Southwest would operate Frontier as a wholly owned subsidiary, and planned to gradually fold Frontier‘s resources into Southwest‘s operating assets—Frontier had Airbus airplanes that would be retired and replaced with Boeing 737s. Frontier‘s employees would have been absorbed into the Southwest culture, but this culture clash proved to be the death of the deal. Southwest employees, specifically the pilots, were concerned about seniority battles, and a Southwest spokesperson said the risk to the culture ―would likely not be worth the reward of marginally better financial performance from the Denver market.‖ See https://lasvegassun.com/news/2009/aug/13/southwest-airlines-bid-frontierstalls-over-disput/ for more details. If approved, this would have been Southwest‘s first major acquisition.) Southwest had established its strategy based on its low-cost operations and unique corporate culture, and had flourished with organic growth, but as opportunities for this kind of growth had disappeared in recent years, Southwest had been forced to rethink this strategy. In September of 2010, Southwest had announced it was acquiring AirTran, formerly known as ValuJet. Although this would give Southwest its desired foothold in Atlanta and flight access to Puerto Rico, Mexico, Central America, and the Caribbean, this acquisition was a major change in Southwest‘s growth strategy. Although the AirTran acquisition would give Southwest flight slots at Atlanta, Charlotte, and Reagan National in the Baltimore-Washington region, as well as additional slots at New York‘s LaGuardia, and access to international destinations, it would also pit Southwest directly against Delta in Atlanta. In addition, Southwest would have to absorb an additional 8,000 employees into its workforce and culture, plus add another type of plane, the Boeing 717, to its maintenance and operational lineup. (Not in the case: However, these planes were being retired and replaced with 737s, and even older 737s were being replaced with newer 737–800s and the newest 737MAX, while some existing 737s were being outfitted with new lighter seats, adding an extra row of seats to the planes in some cases. See http://en.wikipedia.org/wiki/Southwest_Airlines, the Evolve Interior.) Southwest didn‘t have expertise in international operations, so would be depending heavily on AirTran‘s reservation and logistics expertise here. Not in the case: By 2013, AirTran still hadn‘t been fully integrated into all Southwest operations. There were still changes being made to flight schedules, and adaptations being made to service operations at the new destinations. As Gary Kelly said there were ―a lot more new markets under development right now than I think any of us would like. But we want to get this TN1-38 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
transition done obviously and get to a point with the route network that is productive. So if they don‘t perform, we‘ll simply continue to make those adjustments and eliminate the flights that don't perform in lieu of better market opportunities. And what that also ties directly into is that we need to be very mindful of our capacity plans for 2014, and we do have a more cautious outlook for 2014 based on current results.‖ In other words, in the two years since the initial acquisition, the synergies from shared activities expected from the acquisition had not yet been realized. See the 2013 second quarter earning call transcript at https://seekingalpha.com/article/1573732-southwest-airlines-co-luv-management-discusses-q22013-results-earnings-call-transcript?part=single. By the second quarter of 2015 the acquisition of AirTran was complete, and Kelly was announcing a record return on invested capital, with excellent load factors and profit margins, primarily due to continued cost controls. Regarding expansion, Kelly acknowledged there were less opportunities in the United States now, but the new AirTran routes still offered opportunity for development, including in the higher risk international markets. Regarding future growth, Kelly said, ―Southwest Airlines has competitive strength and we want to take forward advantage of those. We‘re a low-cost carrier. We have substantially lower cost than our legacy competitors do. And I think, what people miss is that, we have opportunities to grow that many of our competitors do not and Dallas Love Field is a perfect example of that [adding gates to achieve load factors of 94%]. Houston Hobby International is another perfect example of that [building an international terminal expansion]. So we have not grown Southwest Airlines in three or four years. So we have a history of being prudent and measured and how we approach our business. And certainly, would want to continue that into the future. But we have opportunities to grow like we haven‘t had in years and we absolutely will grow this airline, that is in the best interest of our shareholders.‖ (See https://seekingalpha.com/article/3352505-southwest-airlines-luv-ceogary-kelly-on-q2-2015-results-earnings-call-transcript for details.) The changes over the last six years had been the most drastic in Southwest‘s history. Although it is a known fact that most mergers and acquisitions end up destroying value for the acquiring company‘s shareholders, Southwest had taken its time to manage the AirTran acquisition slowly, and it appeared that the transition had worked. If Southwest‘s growth is going to be driven by international or other route expansion, or by additional M&As going forward, are there enough opportunities left for this growth to be profitable and will it be sustainable? Not in the case: For an interesting overview of Southwest‘s business model, and how it no longer seems to fit any of the three models used among its competitors (Southwest is not ultralow cost like an Allegiant Air or Spirit, nor is it a hybrid like Alaskan Airlines or Jet Blue, and it certainly isn‘t a full-service carrier like Delta/Northwest or United/Continental), see ―Southwest Airlines, the US‘ fourth force, does not neatly fit the emerging US business models‖ at http://centreforaviation.com/analysis/southwest-airlines-the-us-fourth-force-does-not-neatly-fitthe-emerging-us-business-models-101176. Gary Kelly will have to pay close attention to ―shared activities‖ going forward, especially after the planned 2013 merger of American and US Airways will make American Airlines the largest U.S. carrier. TN1-39 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
OPTIONAL EXPANDED DISCUSSION: Assess the effectiveness of Southwest Airlines’ leadership, and the use of strategic controls. Southwest is a great case to use to demonstrate the importance of strategic leadership, and how decisions about how to ―control‖ operational elements can make a great difference in the success of a given strategy. Although not every point is covered in the case, the following is an optional expanded discussion that instructors can use to investigate these issues. For instance, emphasis can be placed on the importance of understanding and managing company culture. See the external web links included below. These can be used to augment the case and expand the information available to decide these issues. Referencing Chapter 11: Strategic Leadership: Creating a Learning Organization and an Ethical Organization In the case of Southwest, as with most companies, implementation issues such as strategic leadership and strategic controls are important for organizational effectiveness. Ask students to discuss how Kelleher and Kelly illustrated the activities of strategic leadership. See the concept of leadership, the process of transforming organizations from what they are to what the leader would have them become. This involves: Setting a direction Designing the organization Nurturing a culture dedicated to excellence and ethical behavior Southwest Airlines had the advantage of strong leadership right from its beginning. The choice of Lamar Muse, an airline veteran who knew the airline business, laid the initial foundation. While Muse was shaping the organization‘s strategy, Herb Kelleher on the other hand, was defending the organization from external regulatory and competitive threats in the courts. Kelleher‘s credibility as a leader was thus established from the very beginning. The three critical activities of strategic leadership—setting the direction, designing the organization and nurturing a culture dedicated to excellence—were well balanced at Southwest and that was an important reason for the success of the organization. Setting direction. As outlined in the case, the direction for Southwest was very clear. It aspired to be a low-cost airline providing point-to-point services. The leadership at Southwest ensured that the organization did not digress from this core business and kept the focus on profitability of operations. However, the importance of providing appropriate direction to employees, while stressing the importance of employee behavior to organizational success, was evident in Southwest‘s mission statement (see Case Exhibit 1.) Organizational design. Herb Kelleher believed in being accessible to the employees to not only maintain their morale but also to ensure that the right information and advice flowed through the organization at the right time. That belief manifested itself in open-communication and an organizational culture that was not bureaucratic. This, however, did not mean that there were no controls. Kelleher ensured that there was tight cost control for the low-cost strategy to be TN1-40 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
successful. (Not in the case: As an example, for a long-time, he personally signed off checks greater than $1,000.) The organization was designed to ensure employee participation at all levels. Employees were made partners in the progress of the firm, and stock options enabled them to share in the company‘s financial success. Thus, Kelleher created a sense of ownership among employees that helped in the implementation of Southwest‘s strategy. Nurturing a culture dedicated to excellence. At Southwest, a culture dedicated to excellence was nurtured by making ―excellence in customer service‖ an explicit goal and aligning the reward systems toward that end. Also, the leadership at Southwest was successful in realizing that in order to have excellent customer service, the organization needed happy and satisfied employees. Therefore, the organization openly committed itself to the fact that ―employees come first.‖ Herb Kelleher, with his personality and style, walked the talk of culture at Southwest. Colleen Barrett, as an important person in nurturing this culture, continued this tradition after Kelleher retired—a sign of a successful leadership transition. Another important aspect to be highlighted is that Kelleher took a very proactive approach toward managing the leadership transition. In 2001, he decided to pass authority into the hands of Colleen Barrett and James Parker, while he still played a role in the strategy process of the organization as the chairman of the board. This gave time for the organization and its people to adapt to the new leaders and thus help smooth the transition. Unfortunately, being a quiet diplomat, James Parker could not fill the gap created by Kelleher‘s departure. Strained by the extensive labor negotiations, Parker resigned as CEO of Southwest in July 2004. Since then, his successor, Gary C. Kelly, has demonstrated he has the energy and enthusiasm to build on Kelleher‘s success in establishing a strong corporate culture and employee loyalty. Although both Kelleher and Barrett had formally retired by 2009, they both remained available to help as needed. NOTE — ADDITIONAL VIDEO INTERVIEWS WITH BARRETT AND KELLY: Colleen Barrett, employee at SWA since 1971 and president from 2001 until stepping down at age 63 in July, 2008, commented on her old boss Herb Kelleher‘s collaborative management style, and how she describes herself as a ―servant leader‖ (a term coined by Robert Greenleaf in the 1950s) in this 25-minute video from Knowledge @ Wharton: http://knowledge.wharton.upenn.edu/article.cfm?articleid=2006. In this video, CEO Gary Kelly talks about the acquisition of AirTran in 2011: http://www.youtube.com/watch?v=5EKybZaPjUA. Would you feel comfortable working for him? If you‘re a shareholder or customer, does his message about the acquisition allay any fears you may have had at the time? Visit the Southwest Airlines website at http://www.southwest.com/html/southwestdifference/southwest-citizenship/index.html and take a look around. Think about what they mean by the ―Southwest Difference.‖ TN1-41 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Then view the video of Southwest CEO Gary Kelly at https://www.youtube.com/watch?v=1tKIt2kRfu0. Southwest Airlines CEO Gary Kelly is a 6'3" Texan who wears jeans and cowboy boots and considers himself "just someone who works in the office." When he flies, he always chooses to sit in the noisiest, most cramped last row of the airplane. Kelly makes sure he remembers employees‘ names and takes time to talk with customers. Kelly came up through the ranks with a rich finance background serving as a former accountant with Arthur Young and Co. and then as CFO (chief financial officer) of SWA. Kelly never had aspirations to become a CEO, but since assuming the position he has helped Southwest maintain its enviable position as the only airline earning profits every year since its founding in 1972. Kelly is credited with locking up fuel hedging contracts, resulting in Southwest paying less for jet fuel than competing airlines. Southwest continues to focus on its founding principles: Keep costs down through fast turnaround time at the gate, try to fly all the same planes (737s) so that parts and maintenance costs are reduced, and treat customers like queens and kings. Oh yes, and one other principle: Treat employees even better than the customers. Do you think Kelly effectively sustains and models the Southwest culture? What traits and skills do you think Kelly possesses that make him an effective leader, an effective strategic manager? Referencing Chapter 9: Strategic Control and Corporate Governance Regarding the importance of strategic controls, students could be asked to identify what difficulties Kelleher and Kelly encountered in balancing rewards, culture, and boundaries. Strategic control involves the process of monitoring and correcting a firm‘s strategy and performance. Students can discuss the differences between a ―traditional‖ and a ―contemporary‖ approach to establishing control systems. In a traditional control system, top management formulates strategies and sets goals. These strategies are implemented, and then performance is measured against the predetermined goals. In a contemporary control system, managers continually monitor both the internal and external environments and identify trends and events that signal the need to revise strategies, goals, and objectives. Students should therefore recognize the importance of involving all levels of operating managers in setting performance goals based on continuous monitoring of the internal and external environment (for instance employee surveys and customer feedback). Because Southwest‘s leadership emphasized employee involvement, Southwest used a contemporary control system to monitor both internal and external environments. Relying on employee and customer feedback, Southwest could make adjustments where needed, and do so in a timely manner. An example of this was evident in Southwest‘s use of company blogs, where dialogue between management, employees, customers, and other interested parties helped identify and resolve important issues. See https://www.southwestaircommunity.com/t5/Blog/bgp/stories. TN1-42 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Strategic control focuses especially on the roles of informational and behavioral control in the formulation and implementation of strategies. See Chapter 9, Exhibit 9.2. Informational control is concerned with whether or not the organization is ―doing the right things,‖ while behavioral control is concerned with whether or not the organization is ―doing things right‖ in the implementation of its strategy. The leadership at Southwest is keenly involved in informational control. The focus on low-cost strategy was so clear that the organization consciously nurtured this by ensuring that it didn‘t diverge from the core business of providing low-cost, point-to-point flight services as an alternative to ground transport. The organization was very conservative in its expansion strategy, i.e., connecting the dots. The company studied the demand conditions of new markets very thoroughly before it decided to enter the markets. Profitability was its prime focus and not just growth. Such an approach helped the company maintain its profitability. Thus, the organization had been effective in ―doing the right things.‖ Chapter 9 emphasizes the importance of aligning both informational and behavioral control systems with organizational strategy. The information gained from the internal and external environment is reviewed against the firm‘s strategy and goals. If the results are not what was expected, then behavioral controls can be utilized to encourage employees to ―do things right‖— employee actions can be influenced through building or maintaining a strong positive culture, creating effective reward and incentive programs, and setting boundaries and constraints to minimize improper and unethical conduct (see Chapter 9, Exhibit 9.3). Regarding behavioral controls, Southwest had been lucky, in a way, for having faced a survival crisis in the initial years. The threat to survival helped forge the original ―Southwest spirit‖ or the underdog warrior mentality. That formed the basis of Southwest‘s culture. Southwest had recognized the importance of a culture that focused on excellence in customer service and that valued employees who could foster such customer service. The culture had thrived on openness, communication, fun, and celebration that kept employees happy and motivated, as well as helping them deliver excellent customer service. Storytelling and pep talks by top executives were used effectively to reinforce such culture. Stories of Southwest employees going out of their way to help customers were given wide publicity by featuring such employees as the ―Star of the month‖ in their Spirit magazine. Top executives used such stories to help reinforce the importance placed on such behaviors. As for pep talks, Herb Kelleher would personally step in at times of difficulty to keep up the employees‘ motivation and morale. The organization had used a personal touch to communicate to employees that it cared for them. This included, among others, sending birthday cards signed by Colleen Barrett, helping employees cope with any personal crises, and also recognizing their contributions and honoring them. The emphasis on teams and appreciation of one another‘s efforts towards organizational goals came in the form of employee recognition programs where members from one department took over others‘ duties for a day and honored them. There was a ―culture committee‖ to take care of these aspects. See https://www.youtube.com/watch?v=SC1OA5jELTs Creating such a strong culture, decreased the need for boundaries and close monitoring. However, the intensified competition, further growth, and labor restructuring agreements among other airlines were making it very difficult for Southwest to maintain this strong, employee-centered culture. TN1-43 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Another component of behavioral control is motivating with rewards and incentives. At Southwest, rewards were directly linked to contribution to bottom line. By giving employees a share in the profits, stock option plans, etc., Southwest effectively made employees responsible for the company‘s, and their own, fortunes. Employees‘ goals were closely aligned with that of the company and they exercised close control on costs and operational excellence so that they gained from sharing the bounty. A ―no furlough‖ policy that gave job security further helped in making employees work for less as compared to the wages at competitive organizations, and helped in the implementation of the low-cost strategy. The third component is boundaries. At Southwest, there were no elaborate rules and regulations. The principle of business was to keep it simple. Cost control, focus on core operations, valuing customers and employees were the fundamentals. This did not mean a lack of control. By making employees a part of its strategy, the company exercised effective control with minimal rules and regulations. With the balancing of informational and behavioral controls, the organization succeeded in exercising effective strategic control. Southwest experienced loyalty of its employees, evidenced by reduced employee turnover rates, even during the downturn in the industry. The effective strategic controls were further reflected in Southwest‘s continued profitability. This chapter discusses the importance of a strong, positive culture and reward systems that rely more on achievement of jointly created and internalized goals and objectives than on constraints imposed by rules and regulations. Behavioral controls involve a system of rewards and incentives coupled with a strong culture. Managers need to understand the need to hire the right people, that training plays a key role, managerial role models are vital, and reward systems need to be clearly aligned with organizational goals and objectives. An organization can get into problems when it uses one component of behavioral control as a substitute for the other. In case of Southwest, some problems with employees existed because, in the changed circumstances, the employees believed that Southwest was trying to substitute culture for rewards (we‘re such a wonderful place you should be willing to make any sacrifice to keep it this way). Southwest would need to devise an effective response to this concern. Southwest‘s example demonstrates clearly that these three levers—culture, rewards, and boundaries—need to be effectively balanced, and that one lever of control cannot take the place of another. While a strong organizational culture can help substitute for other forms such as rewards or boundaries, organizations can get into problems when they try to substitute culture completely for rewards. Instead, rewards and incentives need to be coupled with a strong culture. The Southwest example demonstrates how difficult it is to balance these elements. NOTE — ADDITIONAL READING, VIDEO INTERVIEWS, COMMERCIALS: The price-earnings ratio (P/E) reflects the cost of a company‘s stock relative to its earnings per share. A lower ratio is thought to reflect more of a bargain. Compare Southwest‘s price-earnings ratio to that of its direct competitors and the industry as a whole using this link: http://finance.yahoo.com/q/co?s=LUV TN1-44 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
How does Southwest compare to the competitors listed? Here‘s more information on the AirTran acquisition: http://www.bloomberg.com/news/2010-0927/southwest-airlines-agrees-to-buy-airtran-for-1-4-billion-in-cash-shares.html And a summary of the three major challenges facing Southwest: operating a multi-aircraft fleet, serving international destinations, attracting more business travelers, at least in the Northeast: https://seekingalpha.com/article/227366-airtran-acquisition-offers-glimpse-of-a-new-southwest On the announcement of a profitable quarter in July of 2013, in this video, CEO Gary Kelly talked again about how Southwest could remain profitable in the future, and was asked about whether he would consider adding bag fees to become more competitive—which he will not consider doing at this time. He also commented on how almost all other airlines have had to declare bankruptcy in order to survive, or have expanded through consolidation/mergers or acquisitions. Southwest, however, continues to be profitable: http://video.foxbusiness.com/v/2566005512001/southwest-ceo-on-earnings-added-baggagefees/. Southwest is famous for using hedging to try to lock in energy savings. United/Continental and AMR (American Airlines) have also been successful here. The industry issue, trying to move revenues along in the face of a difficult economic environment—consumer travel spending down—affects Southwest as well as anyone else. Kelly suggests that the Southwest‘s brand and its culture are some of those rare and inimitable assets that sets his airline apart. Do you agree with his comments? Southwest has several operational differences from other airlines. Currently, SWA does not charge fees for the first or second bag checked, one of the only airlines with no fees. Another operational difference is the concept of ―open seating‖ where customers are not assigned seats, but can choose their favorite seating location once on the airplane. In 2006, customers challenged Southwest to improve the way it handled boarding. By 2013, Southwest had changed this to allow customers to choose their seats by being the first to board—which they could elect to do, for a fee! However, the point is that Southwest DID appear to listen to its customers‘ feedback. See the Southwest blog https://www.southwestaircommunity.com/. CEO Gary Kelly commented that he wished to do two things: improve the customer experience and increase customer productivity. Do you think he will be able to do both? And will this sustain Southwest‘s differentiated competitive advantage in this area? Regarding Southwest culture as portrayed by founder Herb Kelleher, watch this video of a Southwest Airlines television advertisement from 1988: http://www.youtube.com/watch?v=LcT_VsHqXmU. And this short video clip shows one of the newer ―specialty‖ themed planes, the most recent one honoring the state of Louisiana. As of this unveiling in 2018, Southwest had 23 planes with specialty livery: https://www.youtube.com/watch?v=-odCi424eik. And, as an example of how Southwest employees are known for having fun, see this safety announcement video taken by a passenger on a Southwest flight in 2019. TN1-45 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
https://www.youtube.com/watch?v=1AE_hjOLDtU&t=16s. And a video of diverse Southwest pilots in 2019 explaining why they prefer flying for Southwest. https://www.youtube.com/watch?v=jBgc1IsUrMw. Would the playful sprit of the ―sack‖ ad, the distinctive look of the airplanes, and the obvious appreciation and enjoyment of at least one Southwest employee might make them more or less likely to fly on Southwest Airlines? Why? Read this article about the emergence of another low-cost airline, Independence Air: http://money.cnn.com/2004/06/09/news/midcaps/independenceair/index.htm and then the further history of Independence Air, including its bankruptcy announcement in January 2006 after only two years of service: http://en.wikipedia.org/wiki/Independence_Air. Another low-cost no-frills airline that HAS been successful is Allegiant Air. This small airline operates scheduled and chartered flights from small towns to vacation destinations such as Las Vegas, lowering costs by flying used aircraft with minimal staff, and charges fees in flight for things like food and beverages, souvenirs, and bookings partnerships with hotels, car rental companies, and tourist attractions at its destinations. For more information on this airline‘s business model, see http://en.wikipedia.org/wiki/Allegiant_Air. Since it is fairly easy for an airline to start up, how serious of a threat are newer discount airlines such as JetBlue to Southwest Airlines? What steps, if any, should Southwest executives take to combat this threat? References Freiberg, K & Freiberg J. 1996. Nuts!: Southwest Airlines’ Crazy Recipe for Business and Personal Success. Austin, TX: Bard Press. Porter, M.E. 1996. ―What Is Strategy?‖ Harvard Business Review, 74(6): 61–78. Teaching Note Case 4 — Zynga: Is the Game Over? Case Objectives 1. To investigate how human capital assets can be used to craft a strategic advantage. 2. To examine the role of strategic controls and leadership in implementing strategy. See the table below to determine where to use this case: NOTE: There are both PRIMARY and SECONDARY chapters that can be used for this case. The Teaching Note gives guidance for the PRIMARY use chapters and provides suggestions if the instructor wants to use the case to illustrate concepts from the optional SECONDARY chapters. TN1-46 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
CASE OBJECTIVES TABLE Chapter Use Key Concepts PRIMARY CONCEPTS 4: Intellectual Assets 8: Entrepreneurial Strategies 9: Strategic Control 11: Strategic Leadership SECONDARY CONCEPTS 5: Business Level Strategy 12: Managing Innovation
Intellectual and human capital; dynamic capabilities Opportunity recognition
Additional Reading and/or Exercises NOTE web links NOTE web links
Informational vs. behavioral control Leadership; learning NOTE updated news, video organization; ethical orientation Competitive strategy; generic strategies
Innovation; scope of innovation; entrepreneurial orientation (optional)
NOTE optional advanced reading, Lumpkin & Dess, 1996
Case Synopsis Zynga, incorporated in 2007 and located in San Francisco, California, had become a dominant player in the online gaming field, almost entirely through the use of social media platforms. Games like FarmVille, Words With Friends, and Texas HoldEm Poker had been among the most popular games on Facebook. To exemplify Zynga‘s prominence, Facebook was reported to have earned roughly 12 percent of its 2011 revenue from the operations of Zynga‘s virtual merchandise sales. Zynga had been a dominant force but lost market share in recent years due to the absence of an innovative product pipeline. Lack of new product-driven growth had led to uneven revenues, with significant losses—over $108 million in 2016. Even though Zynga made some strong acquisitions, this was not enough to completely reverse declines from the existing product lineup, and 2018 ended with a net income of only $15 million. Zynga‘s long-term viability had been put at risk because of questionable decision making. Many of Zynga‘s competitors, and even some partners, had been displeased with the company‘s actions and had shown it in the form of litigation. Agincourt, a plaintiff of a lawsuit brought against Zynga, was quoted as saying, ―Zynga‘s remarkable growth has not been driven by its own ingenuity. Rather it has been widely reported that Zynga‘s business model is to copy creative ideas and game designs from other game developers and then use its market power to bulldoze the games‘ originators.‖ Zynga had been accused of copyright infringement, breach of written contract, and, internally, it had a reputation for a risk-averse company culture that failed to reward innovation and creativity. Regarding its users, complaint resolution consisted of emailonly support, and there was concern that customer information was not being properly protected against unauthorized access. TN1-47 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
To make matters worse, Zynga had had four CEO changes since 2013, with the most recent one, Frank Gibeau from Electronic Arts, installed in March of 2016, now expected to turn the company around. Although Zynga had once been a dominant force on Facebook, by 2019 it had only one game, Texas HoldEm Poker, in the top five virtual-gaming rankings, with users increasingly choosing to play King Company‘s Candy Crush Saga and others. As Zynga looks to its optimistic future, where will its next big hit come from? With all the criticism aimed at Zynga‘s past behavior, will the company be able to change its approach, acquiring new titles and rights, developing new games and showing its capabilities as a leader in the industry rather than a follower? Teaching Plan The Zynga case is a good example of the role of entrepreneurship in maintaining the pace of innovation within an industry with a volatile product life cycle. This case can be used toward the end of the semester to review strategy formulation and implementation in a fast-moving environment. Used to encourage more advanced analysis among exceptional students, the instructor may suggest possible external research sources, and possible supplemental assigned reading. It may be especially interesting to initiate a discussion among advanced students to consider the lengths to which an entrepreneur might go to establish and maintain a competitive advantage by assigning Lumpkin & Dess‘s 1996 ―Clarifying the entrepreneurial orientation construct.‖ This can help students get a fuller picture of the challenges facing Zynga‘s leadership. ICEBREAKER It‘s possible that some students might have been enticed to play Zynga‘s Farmville, Words with Friends or other games as part of their Facebook activities. If so, students may be able to comment on how these online games attract users, and how the gaming companies might be able to make money from this activity. It might be interesting to ask the following: How many of you have played Farmville, Words with Friends, Zynga Poker or any other online game? What is the attraction? How many of you have spent actual money on virtual merchandise? Why? The answers to these questions can provide insight into Zynga‘s strategy, especially its business model. The instructor can also visit Zynga‘s website at http://zynga.com/ to show students how the company markets its products, or visit http://investor.zynga.com/ to learn more about the company, including news, career opportunities, and investor relations. Summary of Discussion Questions Below is a list of the suggested discussion questions. You can decide which questions to assign, and also which additional readings or exercises to include to augment each discussion. Refer TN1-48 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
back to the Case Objectives Table at the beginning of this Teaching Note to identify any additional readings and/or exercises so they can be assigned in advance. 1. What internal resources and assets does Zynga have that may give it a competitive advantage? 2. What issues did Zynga face in formulating its initial strategy? 3. What challenges did Zynga face as it implemented strategy, and what choices does leadership have to make now in order to attain and sustain a competitive advantage? 4. OPTIONAL QUESTION: How did Zynga choose to compete and what innovation is left for it to pursue? Discussion Questions and Responses 1. What internal resources and assets does Zynga have that may give it a competitive advantage? To start with, the instructor might want to position the discussion by reviewing what strategic management really is: Referencing Chapter 1: Strategic Management Strategy is all about the ideas, decisions, and actions that enable a firm to succeed. See Chapter 1, Exhibit 1.1: Strategic management consists of the analyses, decisions, and actions an organization undertakes in order to create and sustain competitive advantages: ● strategy directs the organization toward overall goals and objectives ● includes multiple stakeholders in decision making ● need to incorporate both short-term and long-term perspectives ● recognizes tradeoffs between efficiency (cost) and effectiveness (performance) Leaders face a large number of complex challenges. Leaders must be proactive, anticipate change, and continually refine changes to their strategies. This requires a certain level of ―ambidextrous behavior,‖ where leaders are alert to opportunities beyond the confines of their own jobs and are also cooperative and seek out opportunities to combine their efforts with others. Leaders must make strategic management both a process and a way of thinking throughout the organization. The basic question strategic management tries to answer is: How can we create competitive advantages in the marketplace that are not only unique and valuable but also difficult for competitors to copy or substitute? When formulating strategy, a decision must be made about the firm‘s strengths and capabilities—what assets does the firm have that can help it create this competitive advantage? These assets can reside in tangible resources such as the components of the firm‘s operations and infrastructure, or there can be intangible assets that help the firm create dynamic capabilities to support its choice of competitive strategy. TN1-49 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Referencing Chapter 4: Recognizing a Firm’s Intellectual Assets See the concepts of intellectual capital, human capital and social capital, all of which are intangible assets that a company such as Zynga needs to have in order to compete successfully. Intellectual capital is a measure of the value of a firm‘s intangible assets, its reputation, employee loyalty and commitment, customer relationships, company values, brand names, and the experience and skills of employees. How do companies create value in a knowledge— intensive economy? The general answer is to attract and leverage human capital (intangible assets) effectively through mechanisms that create products and services of value over time. Human capital involves the individual capabilities, knowledge, skills, and experience of the company‘s employees and managers. This knowledge is relevant to the task at hand, as is the capacity to add to this reservoir of knowledge, skills, and experience through learning. Human capital is the foundation of intellectual capital. Intellectual capital is developed through attracting, developing, and retaining human capital. See Chapter 4, Exhibit 4.2. Success in retaining human capital could also be attributed to the nurturing of the ―social ties‖ or social capital. Social capital is a function of the network of relationships that individuals have throughout the organization and beyond. Relationships are critical in sharing and leveraging knowledge and in acquiring resources. Social capital can extend beyond the organizational boundaries to include relationships between the firm and its suppliers, customers, and alliance partners. If employees are working effectively in teams, across business divisions, and sharing their knowledge and learning from each other, not only will they be more likely to add value to the firm, but they also will be less likely to leave the organization. Dynamic capabilities involve a firm‘s capacity to build and protect a competitive advantage, which rests on knowledge, assets, competencies, complementary assets, and technologies. Dynamic capabilities include the ability to sense and seize new opportunities, generate new knowledge, and reconfigure existing assets and capabilities. These capabilities are related to the entrepreneurial side of the firm and are built within a firm through its environmental and technological sensing apparatus, its choices of organizational form, and its collective ability to strategize. Dynamic capabilities are about the ability of an organization to challenge the conventional wisdom within its industry and market, learn and innovate, adapt to the changing world, and continuously adopt new ways to serve the evolving needs of the market. Intellectual assets or intangible resources are critical to organizational success. The growing importance of knowledge, coupled with the move by labor markets to reward knowledge work, tells us that investing in a company is, in essence, buying a set of talents, capabilities, skills, and ideas—intellectual capital—not physical and financial resources. Here are some questions organizations should ask. Human capital: does the organization effectively attract, develop, and retain talent? Does the organization value diversity? Social capital: does the organization have positive personal and professional relationships among employees and alliance partners?
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Teaching Note
Case 1: Robin Hood
Technology: does the organization effectively use technology to transfer best practices across the organization, codify knowledge, and develop dynamic capabilities for competitive advantage? Presence of Organizational Capabilities/Specific Competencies or Skills: Developing social capital through relationships with alliance partners: Zynga was one of the first companies to partner with Facebook in developing online games. With Facebook as an alliance partner, Zynga‘s social capital grew through the participation of Facebook users, and this partnership and participation led to a substantial portion of Zynga‘s profits. Attracting, developing and retaining human capital: Initially, Zynga seemed to be able to take advantage of the newfound ―abundance of software developers.‖ Probably these developers were eager to investigate the creative possibilities of the social network environment, but it appears then CEO Pincus did not appreciate this creativity, instead telling his employees to ―just copy‖ what others did. This approach could not lead to retention of talented employees who wanted to exercise their creativity. This implies that the initial human capital advantage would not be sustainable. However, there is still an ―abundance‖ of software developers, so new hires or contractors are probably easy to find. Dynamic capabilities: Since dynamic capabilities are derived from the ability to learn, innovate and adapt to changing conditions using technology, existing competencies and assets, it‘s unlikely Zynga will be able to see any real competitive advantage here. Although the technology is there, it didn‘t appear to originate with Zynga, and the historic reluctance of Pincus to ―attempt a new idea that didn‘t fit the ‗tired-and-true‘ mold of other successes‖ meant any real new opportunities might have been missed. This might have changed under Frank Gibeau‘s leadership. CEO since 2016, Gibeau has shown an ability to locate potentially lucrative properties for acquisition, and the announcement of a multi-year agreement with Disney to develop a mobile Star Wars game speaks to Gibeau‘s negotiating skills and his ability to adapt to changing conditions. Intellectual capital: Since intellectual capital comes from reputation, employee loyalty and commitment, customer relationships, company values, brand names, and the experience and skills of employees, Zynga doesn‘t appear to have much to show here. The reputation of the company has suffered because of the recurring concerns over intellectual property violations, and potential lack of safeguards surrounding consumer information. Employee loyalty and commitment are suspect because of Pincus‘ poor past support for creativity and initiative—why would anyone want to stick around in a company that was known for ―bulldoze‖ tactics? Therefore, there was no opportunity to learn from the accumulated experience and skills that resided in talented employees. Again, Pincus‘ actions spoke to the company‘s values (or lack thereof), which were also reflected in its relationships with customers—there was no access to support staff when customers needed service. All this implies that the company brand could be considered tarnished, resulting in not only a loss of intellectual capital, but financial capital as well, in the form of dissatisfied shareholders! New CEO Frank Gibeau was trying to put Zynga on the comeback trail but might still face resistance from multiple stakeholders. TN1-51 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
NOTE — ADDITIONAL WEB LINKS: Regarding intellectual capital, here‘s an article about the quote attributed to Mark Pincus, ―I don‘t f***ing want innovation. ―You‘re not smarter than your competitor. Just copy what they do and do it until you get their numbers.‖ This story from 2012 talks about Zynga‘s copycat strategy, and quotes Pincus justifying the company‘s actions by pointing out, ―Google didn‘t create the first search engine. Apple didn‘t create the first mp3 player or tablet. And, Facebook didn‘t create the first social network. But these companies have evolved products and categories in revolutionary ways. They are all internet treasures because they all have specific and broad missions to change the world. We don‘t need to be first to market. We need to be the best in market. There are genres that we‘re going to enter because we know our players are interested in them and because we want and need to be where players are. We evolve genres by making games free, social, accessible and highest quality. … [Farmville, CityVille, Words with Friends], none of these games were the first to market in their category but we made them the most fun and social, and the most popular. Our teams continue to build and improve these games every week which has been an important part of our success model. We run our games as a live service and we continue to iterate, innovate and improve on them to give our players the best possible experience.‖ However, this article‘s author doesn‘t buy it— ―Yes, every product and IP on the market is generally a derivative of some other concept in almost all cases, but what Zynga‘s doing is a step beyond. The company scavenges through the most popular titles on the social market and harvests them for their own…. Pincus would have us believe he‘s just continuing in the great tradition of all tech pioneers, drawing on past products to make future ones, but there‘s something different with Zynga. Something wrong. And to have a brand that is this creatively bankrupt does not bode well for its long term prospects.‖ See https://www.reddit.com/r/gamingnews/comments/p7s8y/leaked_zynga_memo_justifies_copycat _strategy/ and click on the header ―Leaked Zynga Memo Justifies Copycat Strategy.‖
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Teaching Note
Case 1: Robin Hood
2. What issues did Zynga face in formulating its initial strategy? Referencing Chapter 8: Entrepreneurial Strategy and Competitive Dynamics When formulating strategy, entrepreneurship involves the creation of new value by an existing organization or new venture that involves the assumption of risk. For an entrepreneurial venture to create new value, three factors must be present—an entrepreneurial opportunity, the resources to pursue the opportunity, and an entrepreneur or entrepreneurial team willing and able to undertake the opportunity. Entrepreneurs must go through a process of identifying, selecting, and developing potential opportunities. See Chapter 8, Exhibit 8.1 and the opportunity analysis framework: the relationship between an entrepreneur, the firm‘s resources, and the opportunities available in the firm‘s environment. Entrepreneurs need to understand the concept of opportunity recognition: the process of discovering and evaluating changes in the business environment, such as a new technology, socio-cultural trends, or shifts in consumer demand, that can be exploited. Changes in the external environment can lead to new business creation, but the discovery of these new ideas is not enough. They then need to be evaluated to find out if they‘re strong enough to become new ventures. Good entrepreneurial opportunities are those that are attractive to the marketplace (there must be demand for the new product or service), achievable (it must be practical and physically possible to do), durable (the window of opportunity must be open long enough for it to have a chance for success), and value creating (it must be profitable—the benefits must surpass the cost of development by a significant margin). Resources are an essential component of a successful entrepreneurial launch. The most important resource is usually money, but human resources, strong and skilled management, is also an essential asset. Social capital, or entrepreneurs who have extensive social networks or wellconnected key contacts, allows the new venture to gain exposure and build legitimacy faster. Strategic alliances represent a type of social capital that can be especially important to young and small firms. Launching a competitive venture requires a special kind of leadership involving courage, belief in one‘s convictions, and having the energy to work hard. Three characteristics of entrepreneurial leaders are: ● Vision ● Dedication and drive ● Commitment to excellence To achieve excellence, venture founders must understand the customer, provide quality products and services, pay attention to details, continuously learn, and surround themselves with good people. With Mark Pincus as the founding entrepreneur, the competitive advantage offered by the resources he acquired and developed, and the opportunities present in the external environment, how did Zynga exploit those factors to achieve a sustainable competitive advantage? Certainly Pincus saw an opportunity based on the growth of social networking, and he tested his skills via TN1-53 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
his initial startups, Freeloader and Tribe.net. As with most entrepreneurs, he exhibited vision, drive, and dedication. He also seemed to utilize his social capital to form a strategic alliance with Facebook and attract the initial human capital needed in order to develop the games. However, as previously stated, this human capital did not appear to be retained in a way that might benefit the firm as it grew. Therefore, some key resources, in the form of human resources, might not be available to Zynga as it tried to implement future strategies. Although the new venture took advantage of an opportunity where there was demand (the interest in easily accessible, fun, and interactive online games), where the product development was easily achievable (talented individuals could write code in the newly available Facebook environment), where the demand was durable (Facebook membership was growing), and where the opportunity was value-creating (Farmville generated a lot of profit from sale of virtual merchandise), there was no real commitment to excellence, except in making games that made money. This element of entrepreneurial leadership seemed lacking, at least in the person of Mark Pincus. New entry into markets, whether by start-ups or by incumbent firms, nearly always threatens existing competitors. This will likely provoke a competitive response. Competitive dynamics— intense rivalry among similar competitors—has the potential to alter a company‘s strategy. New entrants may be forced to change their strategies or develop new ones to survive competitive challenges by incumbent rivals. Companies launch competitive responses to: ● Improve market position ● Capitalize on growing demand ● Expand production capacity ● Provide an innovative new solution ● Obtain first mover advantages When Zynga began, it obtained a first mover advantage. However, the firm was unable to protect that advantage. Certainly the online gaming industry creates very few barriers to entry for new competitors, but sustainable growth may be difficult without additional innovation. Zynga appeared to copy the innovation of others rather than develop any itself. Resources, especially human ones, appeared to be available, but financial resources might be lacking too—which is probably why firms such as GameHouse and Playfish allowed themselves to be acquired by others. Zynga is a public firm, which limits expansion except through internal development, or perhaps Zynga might try more acquisitions or seek out buyout offers itself. In any event, its entrepreneurial strategy appeared to be at a standstill, until CEO Gibeau came aboard. NOTE – ADDITIONAL WEB LINKS: As of 2011 Zynga had made 14 acquisitions, many of which were dubbed ―acqui-hires,‖ acquisitions of only a company's team and not its assets. See http://mashable.com/2011/05/18/zynga-dna-games/. One more recent acquisition, of Spooky Cool Labs in June 2013, brought talent in the person of Joe Kaminkow, who brought a ―vast knowledge of real money gaming‖ to Zynga. As the analyst says, ―Who better to design online slot games based on Zynga games than one of the most recognizable names in the history of slots? Kaminkow holds patents and contacts that will help Zynga get a leg up on the TN1-54 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
competition.‖ See https://seekingalpha.com/article/1528402-zyngas-latest-acquisition-of-spookycool-labs-all-about-talent. This came after Zynga shut down the acquisition it made in 2012, OMGPOP, which Zynga had acquired in order to get the game Draw Something. According to this article, the game quickly lost users ―shortly after the Zynga acquisition. The game might have been a huge hit for the first couple of weeks, but as with a lot of games, they start to lose their lasting appeal after a while, and that‘s probably what happened with Draw Something.‖ This illustrates how acquisitions need to be carefully assessed for their durability and ability to generate profit instead of just adding cost. See http://www.slashgear.com/zyngas-omgpop-studio-shut-down-14-months-afteracquisition-04284917/. Zynga also tried to develop something in the online gambling market (real money gaming) by filing an application for a Nevada gaming license in December 2012. The company started offering online gambling in the U.K. in April 2013, but by July 2013 Zynga ―made the focus choice‖ not to pursue online gambling in the United States. See http://money.cnn.com/2013/07/26/technology/zynga-online-gambling/index.html. After Frank Gibeau became CEO in 2016, he embarked on a quest to bring the company back from the ―long descent into insignificance into which once-mighty tech businesses sometimes stagger.‖ He did this by looking at the financial picture, selling the company‘s ―cavernous‖ headquarters for $580 million and raising money through a convertible debt offering. He also renegotiated acquisition deals, making payouts contingent on hitting profit targets rather than just revenue. These new deals allowed Gibeau to build cash, making it possible to make thoughtful future acquisitions. See https://www.theinformation.com/articles/zynga-no-longer-a-game-hasbeen-hunts-for-acquisitions An article from 2020 confirms that Gibeau‘s turnaround strategy may be working; Gibeau seems to have reinvented Zynga. It now makes only a sliver of its money from Facebook-based games, which had given the company a poor reputation for delivering endless requests and notifications to social media users. Instead, Zynga now focuses on stand-alone titles that consumers play on their phones. They include Words With Friends, Zynga Poker, and Merge Dragons!, which lets players combine dragon eggs and treasures to produce skills and objects. Acquisitions of smaller firms such as Small Giant Games and Gram games, and potential investments in licensing for titles such as Harry Potter and Star Wars, means Zynga might have content it can develop for multiple platforms, not just Facebook. In addition, Gibeau has succeeded at a turnaround of company culture: ―Frank and his management just reset the culture and what the market perceives Zynga to be. You stop worrying about losing your job and start getting excited about the bonus you make because you‘ve hit your goals. That‘s the biggest step in a turnaround.‖ See https://www.bloomberg.com/news/articles/2020-01-03/zynga-is-booming-again-afterwilderness-years-at-farmville-maker. In an article from 2019, Gibeau talks about how Zynga is focusing on mobile, and is using a new criteria for choosing games: ―When we greenlight new games, like the nine games we‘ve been talking about, we look at the potential in each game and ask ourselves, ―Can this last for five years or more? Does it reach a global audience? Does it have a potential to do more than $100 TN1-55 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
million in a year?‖ Maybe not the first year, because in mobile you have to grow into it, but it‘s definitely not a buzzword. We use it as a decision-making point to classify the games and the investments we make at Zynga.‖ Gibeau also notes that he‘s sourcing talent from international sources: ―We‘ve been growing internationally, because mobile has so much talent in terms of developers and franchises everywhere.‖ See more at https://venturebeat.com/2020/02/23/nomans-sky-adds-living-ships-and-vr-improvements/. See financial news about Zynga (ZNGA) at http://finance.yahoo.com/q?s=ZNGA, and visit the company‘s Web site at http://zynga.com/ to see the current game offerings. Visit http://investor.zynga.com/ to find out more about the business.
3. What challenges did Zynga face as it implemented strategy, and what choices does leadership have to make now in order to attain and sustain a competitive advantage? Referencing Chapter 9: Strategic Control and Corporate Governance Once strategy is formulated, the firm must implement it and monitor its effectiveness. Strategic control involves the process of monitoring and correcting a firm‘s strategy and performance. In a traditional control system, top management formulates strategies and sets goals. These strategies are implemented, and then performance is measured against the predetermined goals. In a contemporary control system, managers continually monitor both the internal and external environments, and identify trends and events that signal the need to revise strategies, goals and objectives. The relationships between strategy formulation, implementation, and control are highly interactive. This approach utilizes two different types of strategic control: informational control and behavioral control. These two types of control play a role in the formulation and implementation of strategies. Informational control is a method of organizational control in which a firm gathers and analyzes information from the internal and external environment in order to obtain the best fit between the organization‘s goals and strategies and the strategic environment. Behavioral control is a method of organizational control in which a firm influences the actions of employees through culture, rewards, and boundaries. See Chapter 9, Exhibit 9.2. Informational control is concerned with whether or not the organization is ―doing the right things,‖ while behavioral control is concerned with whether or not the organization is ―doing things right‖ in the implementation of its strategy. Organizations need to make sure enough information of the right kind is available to monitor activities—this is where financial audits and customer feedback are essential, and where appropriate role models and rewards should be available to keep employees motivated. Chapter 9 emphasizes the importance of aligning both informational and behavioral control systems with organizational strategy. The information gained from the internal and external environment is reviewed against the firm‘s strategy and goals. If the results are not what was expected, then behavioral controls can be utilized to encourage employees to ―do things right‖— TN1-56 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
employee actions can be influenced through building or maintaining a strong positive culture, creating effective reward and incentive programs, and setting boundaries and constraints to minimize improper and unethical conduct (see Chapter 9, Exhibit 9.3). Both the informational and behavioral components of strategic control are necessary, but not sufficient, conditions for success. What good is a well-conceived strategy that cannot be implemented? Or what use is an energetic and committed workforce if it is focused on the wrong strategic target? Zynga appears to practice a contemporary control system using informational control via feedback from the marketplace. Although not stated specifically in the case, it‘s assumed that Zynga tracks data on user activity to gauge interest in specific components of its business model—which virtual merchandise is most attractive, which game tweaks create more play time and subsequent purchase activity. Regarding behavioral controls, especially under Pincus, it‘s obvious that employees, specifically game developers, were punished, rather than rewarded, for not copying code from other successful games. Therefore, there were controls, but no motivation via rewards and incentives, except perhaps to get development done quickly so Zynga could start making money from game players. It appears there were clear boundaries around behavior at Zynga, with, once again, clear direction NOT to be innovative, but instead, copy others‘ successes. Even though the presence of these strategic controls, both informational and behavioral, led to Zynga‘s profitability, it‘s hard to say these controls were effective. Chapter 9 discusses the importance of a strong, positive culture and reward systems that rely more on achievement of jointly created and internalized goals and objectives than on constraints imposed by rules and regulations. Behavioral controls involve a system of rewards and incentives coupled with a strong culture. Managers need to understand the need to hire the right people, that training plays a key role, managerial role models are vital, and reward systems need to be clearly aligned with organizational goals and objectives. An organization can get into trouble when it uses one component of behavioral control as a substitute for the other. In case of Zynga, there WAS a strong culture—one that emphasized the need to pursue profit above all else—and the role model was there in the person of Mark Pincus (after all, he DID win an award for his entrepreneurial activities), but the rewards and incentives, instead of providing motivation, led to the awareness of the boundaries around creative activity (due to the punishment or lack of reward when these boundaries were violated). Zynga‘s example demonstrates clearly that these three levers—culture, rewards, and boundaries—need to be effectively balanced, and that one lever of control cannot take the place of another. While a strong organizational culture can help substitute for other forms like rewards or boundaries, organizations can get into trouble when they try to completely substitute culture for rewards. Instead, a strong culture needs to be coupled with clear rewards and incentives.
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Teaching Note
Case 1: Robin Hood
Referencing Chapter 11: Strategic Leadership Part of implementation requires leadership to make sure the firm is staying true to its original vision, mission, and strategic objectives. See the concept of leadership, the process of transforming organizations from what they are to what the leader would have them become. Leadership is proactive, goal oriented, and focused on the creation and implementation of the creative vision. This definition implies dissatisfaction with the status quo, a vision of what should be, and process for bringing about change. Leaders are change agents whose success is measured by how effectively they formulate and implement a strategic vision and mission. See Chapter 11, Exhibit 11.1. This involves: ● Setting a direction ● Designing the organization ● Nurturing a culture dedicated to excellence and ethical behavior The interdependent nature of these three activities is self-evident. Consider an organization with a great mission and a superb organizational structure, but a culture that implicitly encourages shirking and unethical behavior. Often, failure of today‘s organizations can be attributed to a lack of equal consideration of these three activities. The imagery of the three-legged stool is instructive; it will collapse if one leg is missing or broken. Leaders need to set the direction for the organization by continually scanning the environment to develop knowledge of all stakeholders and salient environmental trends and events. Then leaders must integrate that knowledge into a vision of what the organization could become. Leaders require the capacity to solve increasingly complex problems and must be proactive in their approach so they can develop viable strategic options. Leaders are responsible for designing the organization: a strategic leadership activity of building structures, teams, systems, and organizational processes that facilitate the implementation of the leader‘s vision and strategies. Leaders have an important role in creating systems and structures to achieve desired ends. Leaders play a key role in changing, developing, and sustaining an organization‘s culture. An excellent and ethical organizational culture is an organizational culture focused on core competencies and high ethical standards. Organizational culture can be an effective means of organizational control. In nurturing a culture dedicated to excellence and ethical behavior, managers and top executives must accept personal responsibility for developing and strengthening appropriate behavior; consistently demonstrate that such behavior is central to the vision and mission; and develop and reinforce role models, corporate credos, codes of conduct, reward and evaluation systems, and policies and procedures. This requires leaders to overcome barriers to change and effectively use their power. Through Mark Pincus‘ vision and the example he set for his firm, he set a direction for the firm that was proactive. He also designed a process that appeared to get the product to the customer quickly, therefore achieving the desired end of maximizing profitability. It seems likely he was TN1-58 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
able to nurture a culture dedicated to profit, especially in the behavioral controls he established— the focus on a ―tried-and-true‖ mold based on others‘ success—but this was not a culture dedicated to excellence and ethical behavior. Leaders, especially those who have responsibility for some degree of public trust, must also maintain at least the outward appearance of an ethical business culture. See the definition of organizational ethics toward the end of Chapter 11: organizational ethics are the values, attitudes, and behavioral patterns that define an organization‘s operating culture and that determine what an organization holds as acceptable behavior. The ethical organization is characterized by a conception of ethical values and integrity as a driving force of the enterprise. Ethical values shape the search for opportunities, the design of organizational systems, and the decision-making process used by individuals and groups. These values provide a common frame of reference that serves as a unifying force across different functions, lines of business, and employee groups. Organizational ethics helps to define what a company is and what it stands for. The ethical orientation of the leader is a key factor in promoting ethical behavior, promoting an ethical orientation. A strong ethical orientation can have a positive effect on the organization‘s commitment and motivation to excel. Ethical orientation involves the practices that firms use to promote an ethical business culture, including ethical role models, corporate credos and codes of conduct, ethically-based reward and evaluation systems, and consistently enforced ethical policies and procedures. Ethical leaders must take personal, ethical responsibility for their actions and decision making. Leaders who exhibit high ethical standards become role models for others and raise an organization‘s overall level of ethical behavior. The ethical organization is characterized by a conception of ethical values and integrity as a driving force of the enterprise. Ethical values shape the search for opportunities, the design of organizational systems, and the decision-making process used by individuals and groups. They provide a common frame of reference that serves as a unifying force across different functions, lines of business, and employee groups. The advantages of a strong ethical orientation can have a positive effect on employee commitment and motivation to excel. This is particularly important in today‘s knowledge-intensive organizations, where human capital is critical in creating value and competitive advantages. As evidenced by the multiple legal challenges and bad press, Mark Pincus did not demonstrate an ethical orientation. This was also evident in the firm‘s poor human capital. Ethical values and integrity appeared to be lacking, so much so that the board of directors made it clear that proper corporate governance would be a priority going forward. Zynga was a public company and had obligations to not only stakeholders such as consumers and the broader online community but to its shareholders as well. CEO Gibeau had a challenge ahead of him, but appeared to be turning things around, as witnessed by the willingness of new acquisitions to do business with him.
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Teaching Note
Case 1: Robin Hood
NOTE — CASE UPDATES, ADDITIONAL WEB LINKS, EMBEDDED VIDEO: See a video from 2009, ―Inside Zynga‖ about how the company works, from people who work there, including Mark Pincus—note that this is a positive spin on the working environment…‖ relaxed, but focused on getting things done,‖ a ―meritocracy,‖ ―all about performance, all about what works‖: https://www.youtube.com/watch?v=MeRfnXbKbko For an explanation of how addictive game play can be on a Zynga game such as Farmville, see the following story from 2011 about Mark Pincus and his secret to success. As detailed in the article, ―Facebook‘s success, on a business level, owes something to Pincus, although most people don‘t realize it. The dirty little secret of Facebook is that there isn‘t really much to do there once you‘ve finished looking at pictures of your friends‘ babies and your crush and signed up for a few pages run by political causes. ―Is Facebook a success because of Zynga or is Zynga a success because of Facebook?‖ asks Michael Pachter, a video-game analyst at Wedbush Securities. ―The answer is both. But the truth is that it‘s a delicate eco-system.‖ And in a section describing how Pincus came up with the idea for his game business model, it says the following (this is a direct quote from the article): [Pincus] started to think about what would happen in games if you could, essentially, pay for a coach. Why couldn‘t you gain an advantage in games by paying for them? ―I was addicted to this online game, Rise of Nations, where you move your nation through civilizations, to the point that it really hurt a relationship I was in,‖ he says. ―These kids online were just destroying me—they were coming in with tanks, and I was throwing spears at their tanks. And I thought to myself, Wow, I would really pay some money to not have it be this way.‖ Most of us would think of this as cheating. ―It‘s breaking the rules of the Western ways of gaming to buy your way ahead, but so what?‖ he says. He‘s got a point: why do games have to be fair? After all, in life, everything is easier if you throw money at it. It‘s all easier then. You knew that already. And in another section, the article describes how Mark Pincus‘s personal relationship with Mark Zuckerberg was critical to the two company‘s continued business relationship (the importance of social capital): ―Zynga truly has an insurmountable competitive advantage so long as they don‘t anger Facebook.‖ See http://www.vanityfair.com/business/features/2011/06/mark-pincusfarmville-201106. Regarding the essentially ―unethical‖ nature of online social gaming, see the article from 2009, making the point that ―game developers who monetize the best (and that‘s Zynga) make the most money and can spend the most on advertising. Those that won‘t touch this stuff (Slide and others) fall further and further behind. Other game developers have to either get in on the monetization or fall behind as well. Companies like Playdom and Playfish seem to be struggling with their conscience and are constantly shifting their policies on lead gen (lead generation, or how to get new players). The games that scam the most, win.‖ See http://techcrunch.com/2009/10/31/scamville-the-social-gaming-ecosystem-of-hell/, with a video at the end of the article of a discussion about the ethics (or lack thereof) of providing ―virtual goods.‖ TN1-60 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
In October 2012, Zynga‘s third-quarter results reported a net loss of between $90 million and $105 million, a new all-time low for the company. At that time, analysts suggested shareholders would be better served if the company offered itself up for a buyout, but Pincus remained optimistic, saying the focus would shift to an emphasis on developing mobile business, and that planned cost reductions would ―support our strategy to transition from being a first party web game developer to a multiplatform game network.‖ See http://www.pcmag.com/article2/0,2817,2410638,00.asp. Shareholders subsequently sued, alleging ―that Zynga failed to warn them about declining revenue ahead of the company‘s earnings report.‖ See http://www.pcmag.com/article2/0,2817,2407931,00.asp. By 2013, Zynga had taken steps to correct its slumping business by laying off 18 percent of its staff (520 employees in June 2013) with the action taken reportedly to reduce costs. The move was planned to result in savings of about $70 million to $80 million in pre-tax annualized cash expenses. See http://www.pcmag.com/article2/0,2817,2419871,00.asp. See a video overview of Zynga‘s troubles, including a description of Zynga‘s ―creative bankruptcy,‖ at https://www.youtube.com/watch?v=XcRWOP1u-cE, and read the comments. In July of 2013, Mark Pincus was replaced as CEO by Don Mattrick, formerly president of Microsoft‘s Interactive Entertainment unit, responsible for X-Box gaming at Microsoft. Pincus was to remain chief product officer and chairman of the board. See http://www.pcmag.com/article2/0,2817,2421253,00.asp. In August 2013, Mattrick announced some significant structural changes and executive departures—three former executives were let go in an effort to take ―layers out of the executive rank to get senior leaders closer to important product initiatives.‖ In addition: ―Mattrick also said the changes should embolden studio leads to take more initiative on product and game decisions. There are now three overall divisions: 1) studios, 2) technology, live ops and publishing, and 3) functional areas covering legal, finance and human resources. One observer said that the changes with studio leadership effectively put everyone in a horse race where they‘re more transparently and directly responsible for the performance of their units. In about two quarters, it should be obvious who is underperforming and who is not.‖ See http://techcrunch.com/2013/08/13/zynga-shakeup/. However, in April 2015 Mattrick resigned and Mark Pincus was back in charge, even though there were reports that the company was ―beginning to move in the right direction under Mattrick.‖ See http://www.reuters.com/article/2015/04/09/us-zynga-ceoidUSKBN0MZ28B20150409. In May Pincus announced he was laying off 18 percent of Zynga‘s staff, in an attempt to ―return Zynga to its more nimble roots: I‘ve been encouraged in my first few weeks by the level of talent and commitment throughout our company. But, I‘ve also heard teams express frustration. They want to move faster and take more shots on goal. In order to win, we need to return to our entrepreneurial roots with leaders and teams empowered to drive outcomes. We‘ve seen that across our industry—and in the early days at Zynga—tighter, more nimble teams can drive faster innovation and deliver more valuable experiences for players....We need to be more resourceful in how we manage our costs in order to fund our investments in great new games, people and data analytics. We‘ve over-burdened our game teams with complexity and centralized expenditure.‖ http://www.businessinsider.com/zyngaceo-marc-pincus-explains-staff-reductions-on-earnings-call-2015-5.
TN1-61 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
In November 2017, current CEO Frank Gibeau was able to report Zynga‘s second consecutive quarter of net income, the first time it has done so since going public in 2011. In addition, Gibeau announced the release of Words with Friends 2, adding a modernized user interface and new ways to play. However, Gibeau noted he was making clear to the developer teams ―that if it isn‘t broke, don‘t fix it.‖ Zynga also entered into an agreement to acquire Peak Games‘ card and board game group, including the spades and rummy games, to expand its mobile card game options. Finally, Gibeau pointed out his interest in chat-based games and augmented reality. See https://venturebeat.com/2017/11/11/zynga-ceo-how-the-company-is-staying-on-the-comebacktrail/. Although reports from 2020 are positive, whether these initiatives will contribute to sustainable positive revenue and growth that delights shareholders remains to be seen. Market news from September 2019 points out that recent financial measures show positive momentum, indicating ―that Zynga is healthy and has repositioned itself into a lean and fast-moving company focused on strategic acquisitions and optimal user engagement. Daily and monthly active users are currently in a holding pattern, however, bookings per user are increasing each quarter.‖ See https://www.fool.com/investing/2019/09/26/this-mobile-gaming-stock-is-a-sleeping-giant.aspx. 4. OPTIONAL QUESTION: How did Zynga choose to compete and what innovation is left for it to pursue? NOTE: There are no PowerPoint slides to accompany the following. Referencing Chapter 5: Business-Level Strategy A competitive strategy is supported by intangible assets. Zynga had great strengths initially in its intellectual and social capital. These human resources and alliance partners allowed Zynga to create products that were unique and valuable to customers, at least in the beginning. In order to achieve a sustainable competitive advantage, Zynga had to assess its ability to contend with other game developers. The question of how to compete in a given business to attain competitive advantage requires an assessment of the types of competitive strategies, including the three generic strategies that are used to overcome the five forces and achieve a competitive advantage: 4. Overall cost leadership Low-cost-position relative to a firm‘s peers Manage relationships throughout the entire value chain 5. Differentiation Create products and/or services that are unique and valued Non-price attributes for which customers will pay a premium 6. Focus strategy Narrow product lines, buyer segments, or targeted geographic markets Attain advantages either through differentiation or cost leadership Generic strategies are plotted on two dimensions: competitive advantage and strategic target. The overall cost leadership and differentiation strategies strive to attain advantages industrywide, while focusers have a narrow target market in mind. TN1-62 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Zynga adopted a focus strategy, by targeting buyer segments that were composed of heavy social networkers, specifically Facebook users. As a first mover in this market, Zynga was able to create a unique product that quickly became valued for its ease of play yet was challenging enough to sustain interest—a differentiation advantage. Because of the addictive nature of the gameplay, users were willing to pay a premium for the ability to advance in the game quickly, therefore valuing ―fast progression‖ (a non-price attribute) over the price paid for needed virtual merchandise. Referencing Chapter 12: Managing Innovation and Fostering Corporate Entrepreneurship Innovation involves using new knowledge to transform organizational processes or create commercially viable products and services using the latest technology, experimentation, creative insights, and information from competitors. However it comes about, innovation occurs when new combinations of ideas and information bring about positive change. In fact, the root of the word innovation is the Latin novus, which means new. Innovation involves introducing or changing to something new. It is a critical part of strategic implementation. For instance: There are ―five disciplines‖ for creating what customers want: ● Identify important customer needs ● Create solutions that fill those needs ● Build innovation teams ● Empower ―innovation champions‖ who keep the effort on track ● Align the entire enterprise around creating value for customers Zynga appeared to be able to do the first two, and certainly the last one (value as in profitability), but it did not demonstrate the innovation discipline. (Source: ―Getting to ‗Aha!‘,‖ Business Week. September 4, 2006.) Before proceeding, firms must first define the scope of the innovation efforts and must ensure that their innovation efforts are not wasted on projects that are outside the firm‘s domain of interest. Firms must have the means to focus their innovation efforts. A strategic envelope defines the range of acceptable projects. Strategic envelope means a firmspecific view of innovation that defines how a firm can create new knowledge and learn from an innovation initiative even if the project fails. The strategic envelope also gives direction to a firm‘s innovation efforts, which helps separate seeds from weeds and builds internal capabilities. One way to determine which projects to work on is to focus on a common technology. Then, innovation efforts across the firm can aim at developing skills and expertise in a given technical area. Another potential focus is on a market theme. Companies must be clear not only about the kinds of innovation they are looking for but also the expected results. However a firm envisions its innovation goals, it needs to develop a systematic approach to evaluating its results and learning from its innovation initiatives. It needs to develop a set of questions to ask itself about its innovation efforts. In defining the innovation scope, a firm should answer several questions: ● How much will the innovation cost? ● How likely is it to actually become commercially viable? TN1-63 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
● How much value will it add; that is, what will it be worth if it works? ● What will be learned if it does not pan out? Referring back to Mark Pincus‘s statement about innovation, one of the most important things he wanted Zynga to do was to copy the success of others. It could be argued that Pincus did give direction to the firm‘s innovation efforts, separating the ―seeds from the weeds‖ by focusing only on duplication rather than true innovation. That way he did not waste resources re-inventing the wheel. Therefore, the scope of Zynga‘s innovation was clear—he certainly focused on a common technology and market theme and learned not to waste resources on projects that were truly innovative! The challenges of innovation involve: ● Choosing when and how to continue to innovate ● The scope and pace of future innovation ● Whether or not to collaborate with innovation partners ● Requires resources such as financial, human and social capital ● Requires the leadership team to have adequate vision, dedication and drive In addition, it helps if leadership can embrace the entrepreneurial orientation—autonomy, innovativeness, proactiveness, competitive aggressiveness, and risk taking—necessary to sustain the pace of innovation. A culture of entrepreneurship means a search for venture opportunities permeates every part of the organization. Strategic leaders and the culture generate a strong impetus to innovate, take risks, and seek out new venture opportunities. Students should assess the vision, dedication and drive, and commitment to excellence demonstrated by the management team; the degree of entrepreneurial orientation—autonomy, innovativeness, proactiveness, competitive aggressiveness and risk taking—and the implications of this for the organization‘s culture. The interesting thing about this case is that Pincus appeared to ―embrace the entrepreneurial orientation‖—he took risks by ignoring intellectual property boundaries, he was competitively aggressive and proactive in sustaining his company‘s profitable product design and quick release of new games, he established a clear culture of search for new venture opportunities and processes—although those opportunities resided in the property of other companies—and he believed in taking autonomous action, so much so that he looked for someone else to take over his CEO position. It remains to be seen what Zynga will become under CEO Gibeau. Will Zynga truly be able to innovate into the future? For advanced students, the instructor might want to assign the 1996 article by Lumpkin & Dess, which gives more information about the entrepreneurial orientation.
References Lumpkin, G.T. & Dess, G.G. 1996. ―Clarifying the entrepreneurial orientation construct and linking it to performance.‖ The Academy of Management Review, 21(1): 135–172. Teaching Note TN1-64 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood Case 5 — World Wrestling Entertainment 2019
Case Objectives 1. To discuss corporate strategy choices and how to apply the concepts of innovation to a firm in the entertainment industry. 2. To examine how tangible and intangible resources are tied to a firm‘s success. See the table below to determine where to use this case: NOTE: There are both PRIMARY and SECONDARY chapters that can be used for this case. The Teaching Note gives guidance for the PRIMARY use chapters and provides suggestions if the instructor wants to use the case to illustrate concepts from the optional SECONDARY chapters. CASE OBJECTIVES TABLE Chapter Use Key Concepts PRIMARY CONCEPTS 12: Managing Innovation 6: CorporateLevel Strategy
3: Internal Analysis SECONDARY CONCEPTS 4: Intellectual Assets 5: Business Strategy
Innovation; scope of innovation; entrepreneurial orientation
Additional Readings or Exercises See NOTE additional reading, VIDEO of how Vince McMahon created WWE
Corporate strategy; diversification; synergy; related and unrelated diversification; growth for growth‘s sake Resource-based view of the firm Intellectual and human capital; dynamic capabilities
See additional eb links.
Competitive strategy; generic strategies
Case Synopsis At its annual WrestleMania event in 2019, World Wrestling Entertainment featured female wrestlers for the first time. The move represented yet another attempt by WWE to deal with the growing competition from different forms of mixed martial arts, but even given the growth in other markets, the consensus was that WWE didn‘t have much to worry about in the short run. WWE‘s goal of coupling its live wrestling matches with programming on television, on the web and on mobile devices, had allowed it to become one of the world‘s most social brands. Vince McMahon had taken over a small wrestling business from his father and built it into a large national business. For years, the firm managed to show consistent growth by attracting more and more fans. In an effort to diversify, shortly after going public in 1999, WWE launched TN1-65 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
a football league called the XFL. Unfortunately, the football venture did not prove successful and folded after just one season. Subsequently, WWE had struggled with its efforts to build new wrestling stars and introduce new characters. An attempt to become involved with movie production using its wrestling stars wasn‘t as successful as hoped, and some of its most valuable younger viewers were turning to reality-based shows on television. Therefore, the firm tried to seek growth opportunities that were driven by its core wrestling business. CEO Vince McMahon turned pro wrestling into a perpetual traveling road show. WWE used wrestling‘s popularity to build up a stronger ad-supported Internet presence, where content can be watched 24/7. The firm also staged over 330 live events a year, and by 2014 had produced almost 70 live shows outside the United States, helping to boost the worldwide revenues that the firm was able to generate from its merchandise. Regarding competition, the firm has had to face a challenge from mixed martial arts (MMA). Because of its similarity to wrestling, this combat sport is likely to pull away some of WWE‘s fans. In addition, in 2019 Vince McMahon was over 70 years old. The firm had relied on his leadership from the beginning. What would be WWE‘s future without him? The question remained: could WWE continue to identify opportunities for further diversification and expansion to maintain its current success? Teaching Plan This can be a fun case. While not all students have seen a WWE wrestling match, there is usually at least one fan in a class. This person‘s enthusiasm seems to energize the room. Although the focus is primarily on how to grow a business with an innovative business model, the importance of identifying and leveraging both tangible and intangible resources is key to the discussion. Therefore, this case can be positioned fairly early in the course to prepare students for the more formal (and boring) corporate strategy discussions to follow. Summary of Discussion Questions Here is a list of the suggested discussion questions. You can decide which questions to assign, and also which additional readings or exercises to include to augment each discussion. Refer back to the Case Objectives Table to identify any additional readings and/or exercises so they can be assigned in advance. This case can start with an icebreaker. Ask students how many of them have seen a professional wrestling match, and whether this was on TV or in person. Ask students who are fans of WWE why they are fans. The answers may be more about the entertainment value, the story lines about good and evil, the ―feuds‖ between players and between players and management, and the ―bodies‖ (pumped-up muscled hunks and buxom, scantily-clad beauties), rather than the athleticism or the sport. Here‘s where a quick visit to the WWE website at http://www.wwe.com/worldwide/ and a look at video highlights at http://www.youtube.com/user/WWEFanNation can get the class excited. TN1-66 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Before engaging in discussion, you might want to test student’s basic knowledge regarding the case and the major concepts. Here are some multiple-choice questions to use. (This will get the student‘s attention—they can‘t answer these if they haven‘t read the case!) Which statement is most true? a. WWE used to own a football team. b. WWE has a line of toys. c. CEO Vince McMahon was a juvenile delinquent. d. Each WWE ―performance‖ is scripted, and sometimes the script changes in the middle of the show. e. All these statements are true. ANSWER: e. In 1999, shortly after going public, WWE launched an eight-team football league called the XFL. WWE has a licensing agreement with toymaker Mattel to sell DVDs, video games, toys, and trading cards. Vince McMahon was a self-described juvenile delinquent who went to military school as a teenager to avoid being sent to a reformatory institution. Vince broke a taboo by admitting to the public that wrestling matches were scripted. The script for each performance was not set until the day of the show and sometimes changes were even made in the middle of a show. Was WWE successful at exporting this very violent, very American content to the predominantly Muslim countries of Egypt and UAE? a. Yes b. No ANSWER: a. Over the past few years, WWE introduced live performances in six new countries, such as UAE and Egypt. Discussion Questions: 1. What corporate innovation strategies did Vince McMahon use to grow World Wrestling Entertainment? 2. What resources does WWE have and how valuable are they? 3. What are the future prospects for WWE? What should be done to expand or grow the business? Discussion Questions and Responses 1. What corporate innovation strategies did Vince McMahon use to grow World Wrestling Entertainment? Referencing Chapter 12: Managing Innovation and Fostering Corporate Entrepreneurship Innovation involves using new knowledge to transform organizational processes or create commercially viable products and services using the latest technology, experimentation, creative insights, and information from competitors.
TN1-67 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Some of the challenges of innovation involve choosing when and how to continue to innovate, the scope of future innovation and the pace, as well as whether or not to collaborate with innovation partners. The innovation of new ventures requires resources such as financial, human, and social capital; requires the leadership team to have adequate vision, dedication and drive. Before proceeding, firms must first define the scope of the innovation efforts, and they must ensure that their innovation efforts are not wasted on projects that are outside the firm‘s domain of interest. In defining the innovation scope, a firm should answer several questions: ● How much will the innovation cost? ● How likely is it to actually become commercially viable? ● How much value will it add; that is, what will it be worth if it works? ● What will be learned if it does not pan out? Vince McMahon needs to make sure the above questions are answered before committing the organization‘s resources. Vince took after a small wrestling operation and turned it into a large and growing national business by taking several steps: he began to challenge the existing regional structure of the wrestling business. This was accomplished in part by taking his matches around the country to various large and medium sized cities. He also began to sign up local television stations around the country to broadcast his matches. Through such moves, co-opting local partners, he began to build a national audience. He broke with established tradition by admitting to the public that wrestling matches were scripted. He had the creative insight to use the storylines and characters to build up an audience for his matches. Vince was good at applying this soap opera style to the wrestling business. Vince kept up the pace, gradually driving out most of his smaller competitors though his aggressive expansion. Eventually, he bought out his last remaining major competitor, Ted Turner‘s World Championship Wrestling for a bargain price of $5 million. Even though McMahon took risks, he also was quick to learn from his mistakes. Once he learned, he showed an almost uncanny ability to turn his various enterprises into commercially viable businesses. Organizations must have the entrepreneurial orientation necessary to succeed in a new venture. Students should assess the vision, dedication and drive, and commitment to excellence demonstrated by the management team; the degree of autonomy, innovativeness, proactiveness, competitive aggressiveness, and risk taking, and the implications of this for the organization‘s culture. See Chapter 12, Exhibit 12.3. Interestingly, Vince McMahon has exhibited each of these dimensions in making WWE what it is today. In short, he has used his autonomy (first buying the firm from his father and then running the firm as a family business), innovation (pay-per-view, scripted matches, etc.), was proactive (looking for the same content to be distributed in multiple channels), competitively aggressive (reacting to Ted Turner‘s World Championship Wrestling), and took risks (the XFL, etc.). TN1-68 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
NOTE — ADDITIONAL READING ASSIGNMENT, VIDEO: This link offers quotes from Vince McMahon discussing WWE‘s rebranding in April of 2011— WWE will no longer stand for World Wrestling Entertainment. It will just be WWE, plain and simple: http://articles.latimes.com/2011/apr/07/business/la-fi-ct-wwe-20110407. McMahon discusses several potential new WWE ventures, some of which may require them to expand beyond their core, move them ―beyond the wrestling mat.‖ However, as one analyst says, ―Clearly, their prospects in terms of growth are limited if they stick to their knitting.‖ Which of these ventures offers the highest profit potential in your opinion? Which ones might be most successful? Before Vince McMahon and his company (WWF, now WWE) ruled the world of professional wrestling, the landscape looked completely different. Professional wrestling was characterized by territorial fiefdoms which fiercely valued their independence in a live-and-let-live world. Vince McMahon changed this world when he bought out his father‘s stake in WWF‘s northeast region in 1982, as reported by Business Insider. Since McMahon took WWF nationwide in 1993 through cable and public in 1999, the firm has steadily grown through related diversification to include merchandise, movies, and online streaming. These examples of economies of scope and scale have helped WWE and Vince McMahon to keep their place at the top of the professional wrestling universe. See the VIDEO at https://www.youtube.com/watch?v=g9gIyjo8HNA. Look at the current portrayal of the organization, especially the WWE ―Universe,‖ as it presents itself to potential investors. The company is headquartered in Stamford, CT., with offices in New York, Los Angeles, London, Mexico City, Mumbai, Shanghai, Singapore, Dubai, Munich and Tokyo. WWE‘s operations are organized around the following three principal activities: Media Division (consisting of WWE Network and pay-per-view, Television, Home Entertainment and Digital Media Segments), Live Events Segment, and Consumer Products Division (consisting of Licensing, Venue Merchandise and WWEShop Segments): http://corporate.wwe.com/who-weare/company-overview. Referencing Chapter 6: Corporate-Level Strategy Corporate strategy focuses discussion on the questions of what businesses a corporation should compete in, and how the businesses should be managed so they can create ―synergy‖—creating value through entering new markets or developing new technologies, either through related or unrelated diversification. Diversification is the process of firms expanding their operations by entering new businesses. When achieving synergy through diversification, a firm has two choices: related diversification through horizontal relationships with related businesses, sharing tangible and intangible resources, and leveraging core competencies; and unrelated diversification through hierarchical relationships with unrelated businesses. In this case, value creation derives from the corporate office by leveraging support activities. TN1-69 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Vince‘s efforts to diversify have not always been well thought out. He appears to have had difficulty in following a path of related diversification. As the chapter in the text indicates, related diversification enables a firm to benefit from horizontal relationships across different businesses in the diversified corporation by leveraging core competencies and sharing activities. WWE‘s expansion into books, music, and merchandise has been relatively successful as a method of leveraging its core competencies in wrestling. However, WWE‘s success with other ventures that were based on sharing activities has been more questionable. Although WWE‘s moves into online entertainment have fared quite well, efforts to make movies using some if its wrestlers were not so successful. WWE‘s boldest effort at diversification in the form of XFL suffered from a lack of links to the wrestling base. Football is already established as a spectator sport with its own rules and procedures. Vince was not able to sufficiently differentiate his form of football from what had already been offered. In particular, football relied less on characters because it is more of a team sport and was not scripted in a way that could allow for the development of a storyline. WWE‘s core competency in combining athletic prowess with mass entertainment did not match the requirements of a professional football league. The plans to push for more investments into television shows and motion pictures would draw from some of the entertainment aspects of the wrestling operation. But these were very expensive and highly risky ventures. Vince was being smart by partnering up with established firms in these businesses. It is important to emphasize that WWE is not large enough to be able to gain any significant advantages from unrelated diversification of the sorts that are described in Chapter 6. A question that should be raised is this: what effect has McMahon‘s diversification effort had on WWE? It is likely that the McMahon‘s diversification efforts in the pasts (into the XFL and other ventures) had taken the firm‘s eyes off of its core business. During the time of significant diversification, WWE faced a number of challenges. A British court ruled that the WWF acronym belong to the World Wildlife Fund and not to the McMahon‘s operations. This necessitated a rebranding of the company as WWE. The name change cost money to the company. However, the company believed that the market would react favorably to the ―E‖ in WWE, which stands for entertainment. It appears that this has been the case. WWE faces growing competition from new sources, such as reality based television shows. These shows attract the same demographic (the 12 to 34 age group) that watches WWE shows. The McMahons have to continue to differentiate WWE‘s shows so that the audience remains attracted, even toning down the sex and violence to make their shows more family friendly. This might help WWE compete with the growth of mixed martial arts in the form of the Ultimate Fighting Championship (UFC) and International Fight League. When organizations grow, it‘s important to be aware of possible detrimental managerial behaviors that indicate managerial self-interest, such as egotism or growth for growth’s sake. These can erode the creation of a firm‘s value. Vince McMahon‘s public persona appears to be highly driven by his ego. His daughter, Stephanie, was at one time heavily inserted into the character line-up as both a wrestler and a good vs. evil figure in the continuing struggle for TN1-70 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
control between family members (part of the story line). She is married to Triple H (Paul Levesque), one of the wrestling superstars, and both hold positions at a corporate level. Does this pose a problem for the firm‘s future growth? CASE UPDATE: Stephanie McMahon Levesque is on the management team, as Chief Brand Officer. Her husband, Paul Levesque, (Triple H) in turn, is the Executive Vice President for Talent and Live Events. See the WWE leadership lineup at https://corporate.wwe.com/who-we-are/leadership. 2. What resources does WWE have and how valuable are they? Referencing Chapter 3: Analyzing the Internal Environment It‘s important to consider the concept of the resource-based view of the firm, and the three key types of resources: tangible resources, intangible resources, and organizational capabilities that can help a firm sustain a competitive advantage. WWE‘s profile might look like this: Tangible Resources: Financial Resources: High cash flow, low capital expenditures, almost no debt Technological: Rights to characters — VERY VALUABLE Organizational: Tight family-run business — VERY VALUABLE Intangible Resources: Human: Wrestlers with acting capabilities, good script writers Innovation: Capabilities for developing compelling characters and storylines — VERY VALUABLE Reputation: Strong brand name, relationships with sporting arenas, relationships with television networks. In the context of where WWE competes, these resources provide a valuable competitive advantage to WWE. The characters created by WWE (John Cena, Triple-H, etc.) differentiate WWE‘s offerings from those of the competition. The characters also provide continuity in the sense the audience is interested in knowing what is happening to these characters and so tune into WWE. When McMahon announced that wrestling was scripted, it took away from the ability to sell it as athletic entertainment. McMahon was able to position it as mass entertainment that featured some athleticism. WWE‘s innovation resources helped in this effort. Running WWE as a family organization gave the McMahons the ability to quickly adapt to market changes. They capitalized on the proliferation of cable channels quickly by telecasting Smackdown! on UPN, used live shows to sell merchandise, etc. Their demonstrated success in TN1-71 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
multiple media markets made it easier to create deals with other video providers such as Hulu Plus. They could make quick decisions because of the way the organization was structured and run. Referencing Chapter 4: Assessing Intellectual Capital Consider the concepts of intellectual capital and human capital, both of which are intangible assets that a company such as WWE needs to have in order to compete successfully. Intellectual capital is a measure of the value of a firm‘s intangible assets, its reputation, employee loyalty and commitment, customer relationships, company values, brand names, and the experience and skills of employees. Human capital involves the individual capabilities, knowledge, skills, and experience of the company‘s employees and managers. These intangible resources can be built on to produce new ideas, increasing the firm‘s competitive advantage. Dynamic capabilities are a firm‘s capacity to build and protect a competitive advantage, which rests on knowledge, assets, competencies, complementary assets, and technologies. Dynamic capabilities are about the ability of an organization to sense and seize new opportunities, generate new knowledge, and reconfigure existing assets and capabilities. An organization that can learn and innovate, adapting to the changing world, can challenge the conventional wisdom within its industry and market, and make it superior in its market. NOTE: Check out how WWE markets one of their personality superstars John Cena: http://www.wwe.com/superstars/raw/johncena/. The athletes seem to be the primary competitive resource WWE has. Would Vince McMahon agree? 3. What are the future prospects for WWE? What should be done to expand or grow the business? The McMahons seem to have reacted well to the challenges the company faced following the unsuccessful diversification moves. The company is now looking at more focused related diversification that plays to WWE‘s core competence, such as the YouTube channel original programming and the relationship with HuluPlus. They may also increase the number of road shows to provide more content. The firm is also looking at multiple distribution channels for the content. The McMahons have turned pro wrestling into a perpetual traveling road show. They built up a stronger ad-supported Internet presence and even expanded into film production with wrestling superstars. Moreover, WWE has been increasing the number of live shows, including more in overseas locations. The company seems to have learned its lesson from unprofitable diversification and is now better focused on its core business. Not in the case: The succession issue is important for this tightly controlled business. At present, Vince McMahon runs the company. Wife Linda was heavily involved until she left to run for Senate in 2009 and 2012 (in Connecticut—she was not successful). In 2017 she became administrator of the Small Business Administration under the Trump administration. Daughter Stephanie is immersed in the business. Son Shane was involved but has left to pursue his own TN1-72 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
interests, including becoming a wrestler personality and an on-screen WWE character. The point here is whether Shane and Stephanie will have the experience to run the company when their parents step down. Shane has experience with the company‘s international business, and is a winning wrestler, while Stephanie works on the creative side. Their parents have given them managerial responsibilities to ensure that they have the necessary exposure to hold senior positions. Hopefully this will ensure that the transition is smooth. While WWE is a publicly owned company, the McMahons control it. It is debatable whether the company would be better off if the family did not control it. After all, Vince is the creative force behind it and Linda used to provide the day-to-day management. If their children can take over and provide the same creative and administrative spark that their parents bring to the company, there is no reason to look outside the family. NOTE — VIDEO VIEWING POSSIBILITY: Watch the video of Stephanie McMahon Levesque and her husband Paul ―Triple H‖ Levesque talking about the future of WWE, comparing its business to Disney, as a ―massive entertainment juggernaut‖: https://www.youtube.com/watch?time_continue=42&v=pY0JyR2GzmE&feature=emb_title. To what extent do you believe WWE will be successful in their diversified entertainment venues? More generally, after listening to Stephanie discuss WWE, would you be more or less likely to invest in WWE stock yourself? Why? ADDITIONAL CASE INFORMATION: One other issue facing the wrestling entertainment industry threatens its continued viability: the use of steroids and other risky lifestyle choices has contributed to the early deaths of dozens of wrestlers. Read the article from 2004: http://www.usatoday.com/sports/2004-03-12-pro-wrestling_x.htm. In 2007, after the deaths of several more wrestlers, including the double-murder/suicide of WWE wrestler Chris Benoit, the WWE announced the suspension of 10 of its wrestlers for violation of its ―wellness policy‖: http://sports.espn.go.com/espn/news/story?id=2998062. The WWE will continue to come under scrutiny for this, specifically by the U.S. House Committee on Oversight and Government Reform regarding their talent wellness policy. (See WWE‘s code of business at http://corporate.wwe.com/governance/code-of-business-conduct and full drug testing policy here: http://corporate.wwe.com/wellness/substance-abuse-drug-testingpolicy.) What is WWE‘s responsibility, and is there anything further WWE should do here? Does this threaten WWE‘s growth prospects internationally? WWE seems to be taking steps to continue to develop its key talent: In 2013, in collaboration with Florida‘s Full Sail University, WWE opened the World Wrestling Entertainment Performance Center. WWE executive Paul Triple H Levesque pointed to the seven professional wrestling rings, new TV production studios, a sports medicine clinic and a workout gym to be provided at the facility. The facility gives students access to a hands-on educational opportunity, providing them with real world experience in television tapings. Levesque says building the TN1-73 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
facility represents the future of WWE, providing the next generation of superstars with a worldclass facility to call their own. See the story at https://www.orlandosentinel.com/news/os-xpm2013-04-18-os-wwe-training-center-orlando-20130417-story.html and the facility at https://www.wweperformancecenter.com/#!/. Teaching Note Case 6 — Microfinance: Going Global … and Going Public? Case Objectives 1. To encourage discussion of the importance of stakeholder management and the implications of a firm‘s vision, mission and goals for coherence in values and direction of organizational strategy. 2. To demonstrate the effect of industry or product life cycles on competitive strategies. 3. To help students understand how strategic leadership is a key factor in organizational success. 4. To help students understand the role of strategic control, especially governance control mechanisms, in aligning the interests of all organizational stakeholders. See the table below to determine where to use this case: NOTE: There are both PRIMARY and SECONDARY chapters that can be used for this case. The Teaching Note gives guidance for the PRIMARY use chapters and provides suggestions if the instructor wants to use the case to illustrate concepts from the optional SECONDARY chapters. CASE OBJECTIVES TABLE PRIMARY Key Concepts Chapter Use 1: Strategy Concept Leadership for strategic management; vision, mission, strategic objectives; stakeholders 5: Business-Level Generic strategies; industry or Strategy product life cycles 11: Strategic Leadership; integrative Leadership thinking; ethical orientation SECONDARY Chapter Use 9: Strategic Control and Governance
Additional Readings or Exercises NOTE – see optional EXERCISE, news stories, web links embedded in this section. NOTE – see Video NOTE – see optional news stories, web links embedded in this section.
Strategic control; corporate governance mechanisms; stakeholder management
Case Synopsis More than 2.5 billion people live on less than $2.50 a day. Traditional banking does not provide an adequate means for serving this ―bottom of the pyramid.‖ Microfinance is a non-traditional TN1-74 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
banking system designed to help the extremely poor. Dr. Muhammad Yunus‘s training at Vanderbilt did not prepare him for the destitution he observed outside Chittagong University in Bangladesh, where he taught economics. The theories of developmental economics and the traditional banking institutions, he concluded, were completely ineffectual for lessening the hunger and homelessness among the very poor of that region. He began the microfinance trend in 1976 by wondering whether he could directly help in some way. He started by giving $27 to a group of 42 men and women in the village of Jobra, Bangladesh. This simple act of generosity was the beginning of a global revolution in microfinance. Microfinance involves small loans ($20 – $750) with high interest rates (up to 200 percent), with short payback periods (1 day to 2 months), and without physical collateral. However, many microfinance lenders give loans to groups, creating a very effective type of ―social collateral‖— when one person is unable to pay back the loan, the group is held accountable. Interest rates are high for several reasons: (1) cost of administering the loan (transaction costs), (2) uncertainty in lending money to the poor and homeless, and (3) the need to make some margin on each loan for bank growth and returns on deposits. When a bank is public, however, the bank margins are split among bank growth, returns on deposits for bank members, and (typically foreign) investors. There are two general models for modern microfinance banks. There are three major differences between these models: (1) how the margins are split, (2) how the bank funds growth and lending, and (3) whose interests are paramount for the bank‘s decisions. The first model is the Grameen Bank, which relies only on member deposits for all loans. Margins are divided among bank growth and bank member returns on deposits, and the bank continues to promote the welfare of its members (the very poor). The second model is Banco Compartamos (Banco), which relies on the combination of member deposits and external investors. For this reason, Banco is able to aggressively pursue growth opportunities and increase available loans for bank members. However, Banco is also responsible for cultivating shareholder value (for foreign investors) and has a lower return on deposits for bank members (for the poor). One of the unanticipated pressures on Banco and other public microfinance banks is nongovernmental organizations (NGOs) pushing for lower interest rates. Banco has successfully lowered many of its interest rates by improving the efficiency of the loan process (reducing transaction costs). However, these pressures create a falling interest rate that will cut into the (currently) large profit margins. The broad question then becomes: how do public microfinance banks balance growth, returns on deposits (for the poor members), and returns on investment (for the foreign investors) without undermining its fiduciary duties to stockholders? Teaching Plan This case was written to provide a forum for discussing the issues of strategic leadership in an industry (microfinance) entering a new stage of its life cycle, and what this means for competitive strategy. However, fundamental to the case is the examination of stakeholders, both internal and external, and to what extent differing stakeholder claims can affect strategic choice. Because of the focus on finance, this case can also be used to illustrate alternative models for funding and handling transaction costs. TN1-75 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
TN1-76 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Summary of Discussion Questions Here is a list of the suggested discussion questions. You can decide which questions to assign, and also which additional readings or exercises to include to augment each discussion. Refer back to the Case Objectives Table at the beginning of this Teaching Note to identify any additional readings and/or exercises so you can integrate them into your lesson plan if you wish. 1. Who are the major stakeholders in the case? What are these stakeholders‘ concerns, and is one stakeholder group more important than another? 2. The banks need resources to grow. What competitive strategy does microfinance appear to use, and what options do the banks have for dealing with life cycle issues? 3. What are some of the challenges faced by the leadership of both Grameen and Banco? 4. OPTIONAL: What corporate governance mechanisms may be involved in the case of microfinance? Discussion Questions and Responses 1. Who are the major stakeholders in the case? What are these stakeholders’ concerns, and is one stakeholder group more important than another? Strategy is all about the ideas, decisions, and actions that enable a firm to succeed. See Chapter 1, Exhibit 1.1: Strategic management consists of the analyses, decisions, and actions an organization undertakes in order to create and sustain competitive advantages: ● strategy directs the organization toward overall goals and objectives; ● includes multiple stakeholders in decision making; ● incorporates both short-term and long-term perspectives; ● recognizes tradeoffs between efficiency and effectiveness. Leaders face a large number of complex challenges. Leaders must be proactive, anticipate change and continually refine changes to their strategies. This requires a certain level of ―ambidextrous behavior,‖ where leaders are alert to opportunities beyond the confines of their own jobs, and are also cooperative and seek out opportunities to combine their efforts with others. Leaders must make strategic management both a process and a way of thinking throughout the organization. An interesting question that the instructor can ask at this point is: what business is Grameen Bank in? Some students might say finance, some might say community banking, and some might say the organization approaches social activism. The answers to this question will help students understand the importance of vision and mission: the leader must have a clear idea of the purpose of the business, and who it competes with, in order to craft strategy. If the business is finance, the focus might be on creating new, and profitable, financial models; if the business is community banking, the focus might be on developing products and services for a specific customer need; if TN1-77 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
the purpose is social activism, the focus might be on demonstrating how a for-profit activity can also serve the needs of those at the very bottom of the pyramid. See Chapter 1, Exhibit 1.6: The primary role of the organizational leader is to articulate vision, mission and strategic objectives. Leaders must communicate their initial vision of the organization‘s purpose: what was the original goal that was ―massively inspiring, overarching, and long-term,‖ that represented a destination that is driven by and evokes passion? How well does microfinance seem to do this? It appears from the case that the concept, as originally articulated by Dr. Muhammad Yunus, has not only been financially successful, but has inspired others to emulate Grameen Bank‘s success. Receiving the Nobel Peace Prize certainly is an indicator of success here! Strategy also requires that multiple stakeholders be included in decision-making. Stakeholder symbiosis implies that stakeholders are dependent upon each other for their success and wellbeing; and that there is a need for organizations to consider the needs of the larger community, and act in a socially responsible manner. For more clarification regarding stakeholder identification, see Chapter 1, Exhibit 1.5 for the diverse stakeholder groups and the claims they make on the organization. Multiple stakeholders were dependent on each other in this instance. See if students can identify the various dependencies here, similar to the answers below. An interesting EXERCISE might be to divide the students into groups and ask them to ―champion‖ their stakeholder. Which group is most important, and why? The Bank The bank, in this case, is the most important for at least three reasons. First, the bank must attract investors to go public. This is challenging because some may see the obligations created by outside investment as a misappropriation of value from the poor to the investors. However, many banks suffer from capital flows that allow growth. For instance, the bank may need outside capital for growth opportunities to serve the poor, particularly in regions outside major settlements. Second, many of these banks are attractive to talented managers and employees because of the bank‘s mission to serve the poor. If the bank were to compromise its mission by catering to wealthy, foreign investors, this may diminish its ability to retain and develop talented management. Third, the bank must avoid the appearance of exploiting the poor. This is particularly vital for a microfinance institution. With the rising pressures from NGOs and governments to reduce interest rates, the margins on the microfinance loans begin to shrink. If the bank reduces its return on deposits it is seen as exploiting the poor. If the bank reduces its return on investment to investors it may have difficulty raising capital in the future. A very serious strategy question emerges: How should banks cope with this emerging trend? Bank Members (The Poor) The banks members are the most important for at least two reasons. First, many of these banks rely on the deposits of the poor. In the 1990‘s and 2000‘s the poor bank members enjoyed returns TN1-78 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
on deposits between 20 percent and 100 percent per year. That is, if a poor member deposited $1 on Jan 1, 1990 the bank would return an additional $1 by the year‘s end. On Jan 1, 1991 the account would have $2 assuming no other transactions within the account. The Grameen bank is able to support its loans completely from poor bank member deposits. Second, in addition to poor bank member deposits, loans to the poor bank members create margins for the bank to redistribute or reinvest. The bank creates returns for potential investors through the margins created by loans given to poor bank members. This emphasizes that most of the microfinance process (whether public or not) relies on the poor bank members. For these reasons, the poor banks members should take priority over the wealth investors and the bank. In this sense, banks should attract philanthropic investment rather than return-oriented investors seeking to inflate their portfolios. Investors (The Wealthy) The investors are the most important for at least three reasons. First, many banks reach a point where donations, bank member deposits and loans, and government assistance cannot support steady growth. This, in turn, limits the bank‘s ability to serve the poor. Investors provide an infusion of capital that may allow the bank to continue its growth. Second, the bank may have limited resources to respond to an increase in loan demands. For instance, when the global economy crashed in 2008, many poor bank members needed additional support to get through the downturn. Banco is an example of microfinance bank that was able to leverage outside investment to increase loans and continue to expand. Third, outside investment increases the potential loan volume. As loan volume increases, economies of scale for the administration of microfinance loans may be reached. If administration costs drop, margins on the loans may increase. Given the recent trend to force banks to lower interest rates, efficiencies in the administration of loans may be important for the microfinance bank. In this way, outside investment may help the bank maintain margins as interest rates are forced to drop. During strategic analysis, the leader does ―advance work‖ to anticipate unforeseen environmental developments, identify unanticipated resource constraints, assess changes in his or her preferences for how to manage. During strategy formation, depending on the type of organization structure, the leader might include key individuals in a discussion around selecting which strategies might be best to implement at which level within the organization. In strategy implementation, the leader must ensure proper strategic controls and organizational design, and establish effective means to coordinate and integrate activities within the firm as well as with suppliers, customers and possible alliance partners. The basic question strategic management tries to answer is: How can we create competitive advantages in the marketplace that are not only unique and valuable but also difficult for competitors to copy or substitute? Microfinance institutions must assess how functional areas and activities ―fit together‖ to achieve goals and objectives, and whether past policies are still appropriate. This requires choosing a strategy that adapts to changing conditions.
TN1-79 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
NOTE — WEB LINKS AND ADDITIONAL READING: Students may be interested to see what Muhammad Yunus is currently up to. See the website of Grameen Bank‘s American operation at http://grameenamerica.org/. Yunus said, at the Grand Opening of Grameen America‘s Manhattan branch in May 2010, ―New York City is the world capital of banking. In these skyscrapers that New York built, they control world finance. What I pointed out is that they do the banking with the world but they don‘t do the banking with their neighbors. We are here to show that there is nothing wrong with doing banking with neighbors. So we hope we will create some confidence in them. If we change the banks' mind, the whole world will change.‖ For more on Dr. Yunus, see http://www.gdrc.org/icm/grameen-info.html. For more information on microfinance, or microcredit, see what Grameen Bank‘s website has to say: https://www.grameen-info.org/faq/. From 2012, microcredit expert David Roodman discusses why providing loans to the world‘s poor isn‘t always in their best interest: https://www.washingtonpost.com/opinions/microcredit-doesnt-end-poverty-despite-all-thehype/2012/01/20/gIQAtrfqzR_story.html. For information on whether microcredit really does ―deliver on its promises,‖ see a report on research reported in 2013: http://www.npr.org/blogs/money/2013/05/29/187079088/doesmicrocredit-deliver-on-its-promises. The paper itself is available at http://nber.org/papers/w18950.
2. The banks need resources to grow. What competitive strategy does microfinance appear to use, and what options do the banks have for dealing with life cycle issues? Referencing Chapter 5: Business-Level Strategy In order to achieve a sustainable competitive advantage, microfinance institutions need to assess their ability to contend with other lenders, especially large, publicly held commercial banks. The question of how to compete in a given business to attain competitive advantage requires an assessment of the types of competitive strategies, including the three generic strategies that are used to overcome the five forces and achieve a competitive advantage: 7. Overall cost leadership Low-cost-position relative to a firm‘s peers Manage relationships throughout the entire value chain 8. Differentiation Create products and/or services that are unique and valued Non-price attributes for which customers will pay a premium TN1-80 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
9. Focus strategy Narrow product lines, buyer segments, or targeted geographic markets Attain advantages either through differentiation or cost leadership From the case, it appears that microfinance institutions, in general, have adopted a focus strategy. They have selected a segment of the banking industry—loans—and have differentiated this service to exploit a particular market niche—the very poor. However, as mentioned in the textbook, there are pitfalls of the focus strategy. For microfinance, one of the main problems has become erosion of cost advantages within the narrow segment. As illustrated in the case, the transaction costs of making these loans are very high, necessitating correspondingly higher interest rates and repayment terms. And as the microfinance industry matures, there may be another pitfall: too narrow a service offering. Clients may begin to want more than just loans. What about savings accounts or access to other investment opportunities? As the ―very poor‖ migrate to become the ―poor,‖ have the organizations within the industry consider who else might emerge to enter this service segment? Life cycle issues are important to consider when firms must make decisions about the optimal business-level strategies and the relative emphasis to place on functional capabilities and valuecreating activities. At times, firms must find ways to revitalize their competitive positions. Life cycles include the stages of introduction, growth, maturity, and decline that typically occur over the life of an industry or product. Exhibit 5.6 illustrates the four stages of the life cycle and how factors such as generic strategies, market growth rate, intensity of competition, and overall objectives change over time. Managers must strive to emphasize the key functional areas and value-creating activities that can help an organization sustain its health. It‘s important to note that there can be many cycles of innovation and renewal. Even a ―mature‖ industry can be ―transformed‖ and engage in a new stage of rapid growth through changes in consumer tastes, innovation or other new developments. In the microfinance case, an argument might be made that the industry has reached maturity and must focus on refining the process of making loans that are profitable for all parties. This involves the functional areas of ―production,‖ which, in the case of the banking industry, also means general management and finance, and requires a strategic emphasis on efficient operations. A key challenge in the case is whether or not microfinance institutions should pursue public financing. Going public is necessary for three reasons: 1. The bank needs outside capital resources to grow and continue to develop its loan process. With pressures to reduce interest rates, the margins on the loans are shrinking. As margins shrink, the bank must reduce margin contributions to either growth, returns on deposits, or investors. 2. The bank may improve transparency in the loan process by going public, which may attract more philanthropic investment. Transparency is important to the bank because it TN1-81 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
can help reinforce its commitment to help the poor while demonstrating that it does not exploit its poor bank members. 3. By continuing its growth strategy, the bank maintains its commitment to the poor, while providing jobs in areas outside large cities. This could be particularly important for rural areas where individuals must travel for a day or more (potentially) to bank or draw their wages. However, going public will force the bank to take what would be returns on deposits and give it to foreign, wealthy investors. This defeats the purpose of microfinance based on the tenet that it should serve the poor, not create value for the wealthy. The Grameen Bank example suggests that many of its members (over time) mature from small depositors and large loan takers to large depositors and smaller loan takers. In this sense, many poor bank members may have come to rely on the high returns on deposits, using the returns on deposits in place of loans. Assuming the bank continues to pursue a growth strategy, returns to investors will come from the pool originally designated for returns on deposits. As returns on deposits fall, poor bank members may be unable to deposit as much in the bank, and reasonably may be ―forced‖ to take out loans. In the extreme, if most of the margins go to investors (and not poor bank members) going public may provide a way for the ―less poor to drive out the very poor,‖ as noted by Dr. Yunus. The major concern is that the local generation of wealth from returns on deposits that facilitates success in entrepreneurial ventures in poor areas may stall or stop completely. If this were to happen, the bank is no longer supporting the poor, but is instead exploiting them by misappropriating wealth for foreign investors. This poses a challenge for leadership‘s strategic vision. NOTE — VIDEO The Wall Street Journal reports on an Indian startup called Vaya that uses technology to bring financial services to millions of remote villagers in Asia‘s third largest economy. Founder Vikram Akula, who also started SKS Microfinance in the late 1990s, takes advantage of advancements in communications technology to allow villagers to borrow or deposit money in the bank without ever leaving the village. Shashikala used to be a day laborer on a farm, yet a $400 loan allowed her to become an entrepreneur and she now has four animals. Rather than launch a microcredit bank himself, Akula this time around started a type of brokerage that connects rural villagers with banks in larger towns and earns a commission on each loan. Like most entrepreneurs, Vaya is pursuing a differentiation strategy to set it apart from others in the microcredit space. Vaya only requires capital for the tablets and software (relatively inexpensive in India), not for capitalizing the loans. See the video from 2015 at https://www.youtube.com/watch?v=Epf_YBYv_Hw. What are some of the challenges faced by the leadership of both Grameen and Banco?
TN1-82 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Referencing Chapter 11: Strategic Leadership: Creating a Learning Organization and an Ethical Organization The concept of leadership involves the process of transforming organizations from what they are to what the leader would have them become. See Chapter 11, Exhibit 11.1. This involves: ● Setting a direction ● Designing the organization ● Nurturing a culture dedicated to excellence and ethical behavior Leaders need to set the direction for the organization by continually scanning the environment to develop knowledge of all stakeholders, and knowledge of salient environmental trends and events. Then leaders must integrate that knowledge into a vision of what the organization could become. Leaders require the capacity to solve increasingly complex problems and must be proactive in their approach so they can develop viable strategic options. Muhammad Yunus demonstrated these leadership activities when he first noticed the need in his home country of Bangladesh. He saw an opportunity to use his training in developmental economics to serve a need. His initial experience of distributing $27 to 42 people, and seeing the results, convinced him that a nontraditional approach to financing was a way to help the very poor help themselves. Leaders are responsible for designing the organization: a strategic leadership activity of building structures, teams, systems, and organizational processes that facilitate the implementation of the leader‘s vision and strategies. Yunus established Grameen Bank. This structure, and the systems and organizational processes that allow for the delivery of loan services, has been profitable every year since 1976 except three years, and pays returns on deposits up to 100 percent to its members. This success lead to Dr. Yunus and Grameen Bank receiving the Nobel Peace Prize in 2006. Difficulties in implementing the leader‘s vision and strategies include a lack of understanding of responsibility and accountability among managers, reward systems that do not motivate individuals and groups toward desired organizational goals, inadequate or inappropriate budgeting and control systems, and insufficient mechanisms to coordinate and integrate activities across the organization. As the case mentions, developmental economists (other than Dr. Yunus) are questioning how these microfinance institutions can continue to grow their economic base without going public, and if they DO go public, how will these institutions reward investors? Leaders, especially those who have responsibility for some degree of public trust, must also maintain at least the outward appearance of an ethical business culture. See the definition of organizational ethics toward the end of the chapter: organizational ethics are the values, attitudes, and behavioral patterns that define an organization‘s operating culture and that determine what an organization holds as acceptable behavior. TN1-83 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
The ethical organization is characterized by a conception of ethical values and integrity as a driving force of the enterprise. Ethical values shape the search for opportunities, the design of organizational systems, and the decision-making process used by individuals and groups. These values provide a common frame of reference that serves as a unifying force across different functions, lines of business, and employee groups. Organizational ethics helps to define what a company is and what it stands for. The ethical orientation of the leader is a key factor in promoting ethical behavior, and promoting an ethical orientation. A strong ethical orientation can have a positive effect on the organization‘s commitment and motivation to excel. In the case of microfinance, there appears to be a conflict between stakeholders—especially between the bank members and the bank itself—about the need and wisdom of seeking public capital. Which behavior is ethically acceptable, and to whom? From the bank members’ position, the bank should not go public. Going public will provide a mechanism for reducing wealth generating activities in poor areas while increasing wealth generation for foreign investors. In addition, poor bank members may be forced to rely more heavily on loans and less on returns on deposits. This increases their exposure to risk and likelihood of default. Default, for many of these loans rely on social collateral, could have devastating economic and social consequences for poor bank members. From the bank’s position, the main objective for going public is to increase capital for bank growth. With pressure to reduce loan interest rates, the bank has less resources for growth and returns on deposits. Without an increase in capital, growth could stall and/or returns on deposits could shrink. Low bank growth means that the bank is limited to serving existing customers, excluding potential poor bank members from these loans that facilitate economic independence and wealth creation. Institutional leaders must somehow develop a more optimal solution. Alone, these two positions do not appear to provide a solution. If the bank does not have external investment it could slow growth and reduce returns on deposits. On the other hand, if the bank does have external investment, it would facilitate growth but could still reduce returns on deposits. In either case, it appears that the wealth creation will be stymied. To overcome such polarized alternatives while still supporting both positions leadership could do three things: 1. As the bank, you could make a commitment to attract both philanthropic and returnoriented investors. Because going public is a new phenomenon for microfinance institutions, the outcomes and process are unclear. It is certain, however, that going public will increase transparency. This is attractive to return-oriented investors but is also an interest of NGOs and other investors who may be attracted to the socialemotional wealth created by the investment. By actively engaging the socially motivated investors, the bank will confirm its commitment to the poor while still pursuing external capital sources.
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Teaching Note
Case 1: Robin Hood
2. Because the primary concern of bank members is returns on deposits and access to loans, the bank could make a commitment to maintaining (or improving) these. One argument for raising external capital is that it allows the bank to provide more loans and increase overall loan volume. This may be particularly important given recent economic volatility. But, more importantly, increasing total loan volume may help the bank reach economies of scale for loan administration. Consider that a loan‘s cost may be broken down as such: risk + administration + margin (growth, returns on deposits, returns to investors). If risk and margins remain the same, reduction in administration will free up resources for other areas. This may be particularly important as interest rates are forced down by external pressures. Banco was able to reduce its administrative costs while continuing to grow and provide returns to both investors and bank members (as returns on deposits). 3. The bank could aggressively pursue management talent. One of the major sources of advantage may be the social element of going public, making the bank more attractive for managerial talent. Attracting and retaining talent is inherently tied to the social and ethical aspects of the firm. The managers driven by the social aspects of the firm may be highly motivated by the challenge to maintain the bank‘s pursuit of serving the poor while generating value for investors. In this way, going public to facilitate the growth strategy but maintaining the social commitment to the poor may provide a source of social value for the firm to leverage in terms of managerial talent. Whatever strategy is chosen, some method of evaluating results is necessary. Interesting follow up questions to students might be the following: 1. As an individual, would you invest in a microfinance institution? Why? Would your answer be the same if you were investing on behalf of your firm? 2. Dr. Yunus has suggested that a separate, social marketplace is needed for microfinance institutions to raise external capital. Is this reasonable? Is it necessary? NOTE — WEB LINKS AND ADDITIONAL READING: There is growing concern that the claims by microfinance institutions, especially those of Muhammad Yunus, regarding the benefits of loaning to the poor may not be fully substantiated. One 2011 report from the UK Department for International Development concludes, ―No clear evidence exists that microfinance programmes have positive impacts.‖ See http://www.guardian.co.uk/global-development/poverty-matters/2011/aug/18/microfinancesober-reckoning-studies-question. And in another 2011 report, questioning the government‘s role in microfinance, the UK AllParliamentary Group on Microfinance said, ―The strongest message we want to send with this report is that in many (though not all) regions, the sector is currently unbalanced. While access to loans has expanded massively, other financial services have lagged. Where the only product available is a loan, customers will take a loan even if it is not the most appropriate solution to their financial needs. Poor people need access to savings, perhaps even more than access to TN1-85 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
loans, as well as insurance, safe remittances and other services. Until we extend comprehensive financial services to all we cannot truly claim to be ‗democratising financial services‘, let alone contributing fully to the fight against poverty. DFID and other donors must play a central part in refocusing the industry.‖ See http://www.appg-microfinance.org/documents.php. A report mentioned in the above blog is worth reading: Grantmakers Without Borders is a network of public and private foundations who practice global social change philanthropy. This group has produced a resource ―Microfinance: A Guide for Grantmakers.‖ In this report, Grantmakers Without Borders explores the history and evolution of microfinance, prevailing arguments from advocates and critics about the industry, and philosophical differences on models of delivery and measurements for success. They share recent research findings on the impacts of microfinance on poverty alleviation and offer cautionary tales regarding the full-scale adaptation of microfinance. Finally, they offer recommendations for grantmakers to consider. See https://www.goldininstitute.org/images/microfinanceguide.pdf. 3. OPTIONAL QUESTION: What corporate governance mechanisms may be involved in the case of microfinance?
These are Secondary Concepts that might be discussed as well:
NOTE: There are no PowerPoint slides accompanying this part of the discussion. Referencing Chapter 9: Strategic Control and Corporate Governance Strategic control involves the process of monitoring and correcting a firm‘s strategy and performance. Corporate governance refers to the need for a firm‘s shareholders (the owners) and their elected representatives (the board of directors) to ensure that the firm‘s executives (the management team) strive to fulfill their fiduciary duty of maximizing long-term shareholder value. In this, students also should recognize that it is important to consider the needs of different stakeholders: investors, customers, employees, suppliers and other stakeholders. Using concepts from the last part of Chapter 9, students should also reference the role of external governance control mechanisms. External governance control mechanisms ensure that managerial actions lead to shareholder value maximization and do not harm other stakeholder groups. These external controls are outside the control of the corporate governance system. What external control entities might be involved in the microfinance case? TN1-86 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Microfinance institutions regularly solicit support from government and other non-governmental organizations (NGOs) for legislative and social impact studies. However there appears to be no worldwide regulatory body to address client complaints about the institution as a whole. And for those microfinance institutions that are not publicly funded, and that instead rely on grantmaking and other philanthropic organizations for additional financial support, there is no clear measure of social performance success. This raises the question of who‘s really watching the store? If the microfinance institution has shareholders, like Banco Compartamos, then the investor community will be applying profitability measures, such as return on investment, to the institution. This maximizes the value for the investor, but what about the clients who receive the loans? Are those clients receiving ―value‖ for their investment? There appears to be no mechanism to control the microfinance institution‘s behavior here. How DO microfinance banks balance growth, returns on deposits (to the poor members), and returns on investment (to possible foreign investors) without undermining their fiduciary duties to stockholders, and their social responsibility to clients in the community? Teaching Note Case 7 — FreshDirect Case Objectives 1. To investigate how to compete in a crowded industry. See the table below to determine where to use this case: NOTE: Although this case is best positioned as a business and corporate-level strategy case, it can be used to illustrate almost all of the other chapter concepts, therefore becoming a comprehensive case. Instructors can just cover the discussion of chapters 5 and 6, using only that section of the teaching note, or can start with chapter 1 and move forward in sequence. The PowerPoint slides cover all the chapters listed below. CASE OBJECTIVES TABLE Chapter Use Key Concepts 1: Strategy Concept 2: External Environment 3: Internal Analysis 4: Intellectual Assets 5: Business-Level Strategy 6: Corporate-Level Strategy 9: Strategic Control 10: Organizational
Additional Reading and/or Exercises
Strategic management Industry competition five forces; general environmental factors Value-chain analysis; resource-based view of the firm; VRIN Intellectual, human and social capital Competitive strategy; generic strategies Corporate strategy; diversification; synergy; acquisition Informational vs. behavioral control Organizational structure
NOTE additional reading, web links to industry information NOTE VIDEO
NOTE additional reading, web links
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Teaching Note Design 11: Strategic Leadership
Case 1: Robin Hood
Leadership direction
NOTE additional reading, web links, video
Case Synopsis First launched in July 2001, FreshDirect was a New York City based online grocery store with a state of the art production center, top-notch personnel, leading edge manufacturing software, the highest standard of cleanliness, health and safety, and an informative and user-friendly website. System efficiencies included: a cost-effective operational design; no middleman; a central production and distribution location; well-designed order and delivery protocols; and a policy of no slotting allowances. These system characteristics enabled FreshDirect to maintain a high product quality while keeping product prices low, therefore fulfilling its promise to grocery shoppers of ―higher quality at lower prices.‖ The ideal FreshDirect customer was described by Jason Ackerman, one of the founders, as someone who buys their bulk staples from a warehouse like Costco on a monthly basis and buys everything else from FreshDirect on a weekly basis. The website offered a broad selection of products along with information about the food. Products could be compared on taste, price, usage and nutritional information. Custom cuts and seasonings of meat could be ordered. Delivery options included direct to the home in selected zip codes throughout Manhattan and the boroughs, and as far away as Westchester, Connecticut, New Jersey, the Hamptons on Long Island, and in the Philadelphia and Delaware area. Early on the online segment of the grocery industry was a small percentage of the industry total. Despite a large potential target audience, the online segment had been slow to catch on. Total online grocery sales nationwide had been expected to reach over $29 billion by 2021, but those who shopped online for groceries still represented only about 4.4 percent of total grocery sales. FreshDirect‘s competition came from traditional brick-and-mortar grocery chains and a handful of other online grocers in New York City. The challenge was to compete on price while covering the cost of packaging items in the warehouse and delivering individual grocery orders. With margins so small, in order to be successful, some analysts estimated that the online grocers had to do 10 times the volume of a traditional grocer. This increased the pressure on FreshDirect to differentiate itself from other online and traditional brick-and-mortar competitors and capture market share. As the online grocery market continued to define itself, FreshDirect‘s challenge was to continue to innovate in product purchase, storage and distribution, and attract loyal customers while keeping costs down and quality up. In addition, the challenge was to keep the food ―fresh‖ and keep service delivery promises. Could FreshDirect maintain its market share among competition from both online and traditional grocers? Teaching Plan
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Teaching Note
Case 1: Robin Hood
The FreshDirect case is a good way to demonstrate how a well-crafted strategy can be essential to sustaining a competitive advantage in a crowded industry. Because this case discussion relies on a good understanding of how internal assets and the forces in the external environment drive competitive strategy, the instructor should position this case toward the end of the course, after students have had an opportunity to consider strategic analysis and formulation. This case is therefore a candidate for a comprehensive case. ICEBREAKER Because probably all students have bought groceries, it might be illustrative to ask: How many of you would be willing to buy groceries online? Some students might be familiar with this concept through a service in their area, but some will also be hesitant, especially about buying produce or fresh meat or fish—who picks out the ripest tomatoes for me? If students have difficulty visualizing this type of service, visit FreshDirect‘s website. You may have to provide a zip code to enter the site (try using Pace University‘s lower Manhattan zip code 10038): https://www.freshdirect.com/category.jsp?catId=about_overview The instructor might put a list on the board, listing the pros and cons of this approach to grocery shopping from the perspective of the customer. Ask students if they were going to be entrepreneurial and introduce a new sales and distribution method to this market, what might they have to consider? Delivery distance and cost? Customer service? Technology interface? This will put the students in a frame of mind where they can better appreciate the challenges faced by FreshDirect. Before engaging in discussion, you might want to test student‘s basic knowledge regarding the case and the major concepts. Below are some multiple-choice questions to use. (This will get the student‘s attention – they can‘t answer these if they haven‘t read the case!) Which of the following statements is most true? a. 70% of New Yorkers cook from scratch multiple times a week. b. FreshDirect is a subsidiary of Fairway Supermarkets. c. FreshDirect contracts out its delivery service to save on operational expense. d. FreshDirect has had four CEOs since its founding. ANSWER: a. About 70 percent of New Yorkers cook from scratch multiple times a week, and 30 percent cook multiple times a day. FreshDirect co-founder Joseph Fedele was also a cofounder of Fairway Uptown, a 35,000-foot supermarket located on West 133 Street in Harlem, but FreshDirect was a separate business. Delivery was made by one of FreshDirect‘s own trucks and was available every day of the week. Actually, FreshDirect has had seven changes in the CEO position, with co-founder Jason Ackerman holding the position two times. Co-founder David McInerney is currently the CEO.
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Teaching Note
Case 1: Robin Hood
Normal supermarkets carry about 5,000 perishable products, while FreshDirect focuses on only about 2,200. a. Yes b. No ANSWER: b. A typical grocery store carried about 25,000 packaged goods, which accounted for approximately 50 percent of its sales, and about 2,200 perishable products, which accounted for the other 50 percent of sales. In contrast, FreshDirect offered about 5,000 perishable products, accounting for approximately 75 percent of its sales, but only about 3,000 packaged goods, which made up the remaining 25 percent of sales. Summary of Discussion Questions Here is a list of the suggested discussion questions. You can decide which questions to assign and also which additional readings or exercises to include to augment each discussion. Refer back to the Case Objectives Table at the beginning of this Teaching Note to identify any additional readings and/or exercises so they can be assigned in advance. 1. How did FreshDirect use strategic management, and what were key forces in the general and industry environments that affected FreshDirect? 2. What internal resources and assets did FreshDirect have that gave it a competitive advantage? 3. How did FreshDirect choose to compete, and what competitive challenges does FreshDirect face now? Discussion Questions and Responses 1. How did FreshDirect use strategic management, and what were key forces in the general and industry environments that affected FreshDirect? To start with, the instructor might want to position the discussion by reviewing what strategic management really is. Referencing Chapter 1: Strategic Management Strategy is all about the ideas, decisions, and actions that enable a firm to succeed. See Chapter 1, Exhibit 1.1: Strategic management consists of the analyses, decisions, and actions an organization undertakes in order to create and sustain competitive advantages: ● strategy directs the organization toward overall goals and objectives ● includes multiple stakeholders in decision making ● incorporates both short-term and long-term perspectives ● recognizes tradeoffs between efficiency (cost) and effectiveness (performance) Leaders face a large number of complex challenges. Leaders must be proactive, anticipate change and continually refine changes to their strategies. This requires a certain level of ―ambidextrous behavior,‖ where leaders are alert to opportunities beyond the confines of their own jobs and are also cooperative and seek out opportunities to combine their efforts with others. TN1-90 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Leaders must make strategic management both a process and a way of thinking throughout the organization. During strategic analysis, the leader does ―advance work‖ to anticipate unforeseen environmental developments, identify unanticipated resource constraints, and assess changes in his or her preferences for how to manage. During strategy formulation, the organization addresses the issue of how to compete in a given business to attain competitive advantage. Strategies are formulated at the business, corporate, and international levels. Entrepreneurial initiatives may also play a role. In strategy implementation, depending on the type of organization structure, the leader might include key individuals in a discussion around selecting which strategies might be best to implement at which level within the organization. The leader must ensure proper strategic controls and organizational design and establish effective means to coordinate and integrate activities within the firm, as well as with suppliers, customers and possible alliance partners. Leaders should also be committed to excellence and ethical behavior while promoting learning and continuous improvement. Here‘s where innovation is important. The basic question strategic management tries to answer is: How can we create competitive advantages in the marketplace that are not only unique and valuable but also difficult for competitors to copy or substitute? An interesting question we can ask at this point is: ―What IS that ―marketplace‖? What business is FreshDirect in? Some might say groceries, but some might say online retail or product delivery. The answers to this question will help us understand the importance of vision and mission: the leader must have a clear idea of the purpose of the business, and who it competes with, in order to craft strategy. If the business is groceries or fresh produce, the focus might be on improving the storage and distribution process and searching out produce-producing partners to stay on the cutting edge of innovation here; if the business is online retail and delivery, the focus might be on capabilities regarding website design and marketing. Given FreshDirect‘s roots in the ―fresh‖ produce business, AND its decision to provide the online interface, it could be considered to be in the online grocery business. Answering this question is essential to proceeding with strategic analysis. Once we have determined what business FreshDirect is in, we can then proceed with scanning the external environment, and have a better appreciation of the trends FreshDirect must monitor in order to craft a competitive advantage. Referencing Chapter 2: Analyzing the External Environment of the Firm Organizational leaders must become aware of factors in the overall environment that might affect their ability to create a competitive advantage. So how do managers become environmentally aware? Scanning, monitoring, and gathering competitive intelligence, and using these inputs to develop forecasts prepares the firm to do more extensive analysis of the forces in the general environment and the industry or competitive environment. TN1-91 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Environmental scanning involves surveillance of a firm‘s external environment to predict environmental changes and detect changes already under way. It is a BIG PICTURE viewpoint of the industry/competition, looking for key indicators of emerging trends—what catches your eye? It alerts the firm to critical trends before changes have developed a discernible pattern and before competitors recognize them. Environmental monitoring is a firm‘s analysis of the external environment that tracks the evolution of environmental trends, sequences of events, or streams of activities. Leaders need to monitor the trends that have the potential to change the competitive landscape—what do you want to track? Firms need to CHOOSE the trends identified via the scanning activity and regularly monitor or track these specific trends to evaluate the impact of these trends on their strategy process. What factors or trends might be most important to FreshDirect? To assess how the external environment might affect FreshDirect‘s strategy, it‘s necessary to take a look at the factors in the general external environment. FreshDirect must consider the political/legal, economic and global, sociocultural and demographic, and technological forces that might affect the ability of the firm to deliver its products and sustain its business. See which factors in the general environment we might pick that have a significant impact on the grocery business. Political-Legal: State and city consumer and health regulations, labor issues (unions and undocumented workers) apply to all grocers; parking violations are unique to those that deliver. Economic: Concerns about the price of consumables drives many consumers to shop in bulk for the anticipated savings. Profit margins are tight, with product spoilage a major issue, so planning for customer demand is critical. Fluctuating gas prices can make it hard to be competitive and profitable in the online grocery delivery business. Demographic: Rising levels of affluence may give the grocery industry a boost because families may have more discretionary dollars to spend on food, especially where they perceive an opportunity to get value/quality. If there‘s a rise in the wealthy urban population, that makes it more likely for the direct delivery model to have appeal. However, an increasing immigrant population may mean a greater demand for ―ethnic‖ foods, and cheaper foods bought in bulk to serve larger families. Sociocultural: A greater concern for healthy diets and physical fitness increases the desire for ―fresher,‖ higher quality produce. Customers can also save valuable time by shopping online and not having to drive very far (or at all) to pick up groceries. An increasing interest in ―organic‖ produce and meat means opportunities for these niche providers, however customers with an interest in these foods may like to interact directly with the producer or grower if possible. Technological: Developments in technology and new uses for existing technologies can help create storage and distribution opportunities for fresh produce and meat. Also, the Internet makes an online offering available to a wider customer base.
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Teaching Note
Case 1: Robin Hood
It‘s also necessary to assess the segments of the external competitive environment that include competitors, customers, and suppliers, substitutes and new entrants. Porter’s five forces model allows strategists to anticipate where the industry might be most vulnerable. Based on the external environmental factor analysis, although there are not many rivals, the online grocery industry has many challenges to profitability. The fact that this business model is also still fairly new and may not have progressed much past the ―early adopter‖ phase of consumer acceptance, also means considerable risk of entry. This may explain why there are so few players in the online variant of the grocery business.
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Teaching Note
Case 1: Robin Hood
See the following:
Suggested: It is hard to create a competitive structure, so the current rivalry is very high for established chains that choose to compete online with economies of scale.
Substitutes Threat High
Suppliers’ Power High
Rivalry
Suggested: the brick and mortar grocery store and warehouse chain is the major substitute to online grocery shopping.
Buyers’ Power Med
Very High Suggested: High – especially for produce and meat, since environmental and market factors determine price. Suggested: Low barriers to entry, especially for those established grocery chain and warehouse operations that are willing to absorb the high online start-up and operating costs.
Threat of New Entrants
Suggested: Consumers do not have much pricenegotiating power except in the area of delivery services, but it’s much easier to compare prices and service online, so switching to another online grocer is easier.
High
NOTE — ADDITIONAL WEBLINKS TO INDUSTRY INFORMATION: An article from July of 2011 explains customers‘ key concerns: higher prices, shrinking package sizes, gas prices reducing trips to the store, concern over product nutritional labeling, demand for healthier food options; and an increasing number of shoppers using mobile devices to check prices, coupons, product information prior to going to the store. In addition, almost 5 percent visited an online retailer or food manufacturer to purchase food. http://www.progressivegrocer.com/shoppers-react-shrinking-package-sizes-higher-prices. From 2014, here‘s one opinion about how the digital shopper is changing the competitive landscape: ―The desire for same-day, on-demand grocery delivery is rapidly growing and services like Google‘s Shopping Express, AmazonFresh and Uber‘s Corner Store have quickly stepped in to fill the gap. These services create yet another fragment on the shopper‘s path to purchase—expectations are mounting for retailers to possess the capability to get food and other grocery items to their doorstep at a moment‘s notice. While currently only operating in certain cities across the United States, the convenience grocery delivery services offer will certainly fuel TN1-94 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
their popularity…. [In addition] 54 percent of online consumers use social media to discover new foods and share food experiences. What‘s for dinner is decided hours before the actual meal and often by visiting a social site such as Pinterest. In fact, curated Pinterest boards have rapidly become the modern recipe box.‖ See more at: http://www.progressivegrocer.com/departments/technology/five-new-ways-reachtoday%E2%80%99s-digital-shopper?nopaging=1#sthash.Fl7pUpCw.dpuf. These appear to be opportunities for online grocery stores. Does this mean that an online grocery shopping solution makes more sense in this environment? Data from 2012 indicated that online grocery sales represented less than 1 percent of the $850 million in U.S. food retail sales, but experts expected the segment to grow 9.5 percent annually, to reach $9.4 billion in 2017. In 2012, Citi analyst Deborah Weinswig said the top three online grocers currently are Royal Ahold's Peapod, with 8.8 percent of the market, FreshDirect with 5.7 percent, and Safeway, with 3.2 percent of the market. See http://www.supermarketnews.com/technology/online-grocery-shopping-forecast-grow-95annually-0. In 2014 other analysts predicted online grocery sales would go from 4 percent of the market to totaling between 11 and 17 percent of the total grocery market. See http://www.fierceretail.com/story/online-grocery-sales-quadruple-2023/2014-10-06. By 2017, data showed that only about 9 percent of U.S. adults were placing grocery orders online once a month, and only 4 percent of consumers shopped in this manner weekly. By contrast, 83 percent of families say they send someone to the grocery store in person at least once a week. Other interesting findings are that more young adults aged 18 to 29 purchase online (15 percent) compared to those over 65 (2 percent), and working adults, especially those living in cities in the eastern United States are more likely than their counterparts to use online grocery shopping technology. See https://retailleader.com/most-consumers-are-not-grocery-shoppingonline-now. From 2017, according to grocery research firm IGD, the U.S. grocery market is forecast to be worth $1.7 billion by 2022, with strong growth expected in both the online and discount channels. ―The online channel is developing at pace in the United States and although many leading retailers have operated online for over 20 years, it is only in the last three years where we have seen an acceleration of investment and activity. In the next five years, the online grocery channel will grow by $20 billion, significantly contributing to growth in the U.S. grocery market,‖ said Stewart Samuel, IGD‘s North America Program Director. ―A key area for retailers to focus on is to make online shopping as convenient as possible, with a particular emphasis on making it easier to order frequently purchased products. New technologies also have an important role to play in this space, with voice-based ordering set to revolutionize how products are ordered. Technology is not just important for ordering products, but it also has a big impact in other online fundamentals like fulfillment and delivery. For example, the use of robots to make deliveries and pick orders in store and the advent of drones making small deliveries by air are examples of how new technologies can improve the economics of the online grocery market, TN1-95 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
although it may be many years before they are deployed at scale in the U.S. market.‖ See https://retailleader.com/why-online-grocery-20b-opportunity. In 2019, FMI presented on the U.S. grocery shopper trends and reported that 43 percent of shoppers had shopped online in the last year, 21 percent were regular online shoppers (once a month), but only 10 percent were frequent shoppers every two weeks. And while online shopping provides better access to detailed product information and offers a broad selection of products, the regular supermarket still provides fresher perishable items and better overall customer service. Of note, technology has become more pervasive in the store as well, with 25 percent of shoppers using a grocery shopping app provided by the store for in-store use. See https://www.fmi.org/docs/default-source/webinars/trends-a-look-at-today's-grocery-shopperslides-pdf.pdf?sfvrsn=9d01576e_0. To provide historical context, from May 2009, here‘s an interview with FreshDirect‘s Chief Marketing Officer Steve Druckman, explaining how his company has succeeded where other online grocers failed. The interview mentions competition from Amazon, online, and Whole Foods, in store: http://www.perishablepundit.com/index.php?date=05/22/09&pundit=2. In 2017, CEO Ackerman noted a successful $189 million funding round would allow FreshDirect to ―accelerate our expansion into new markets, double our manufacturing capacity and drive innovative new product lines in 2017 and beyond.‖ See https://retailleader.com/freshdirect-ready-online-grocery-boom. Regarding FreshDirect competition, Stop & Shop‘s Peapod started providing delivery in Manhattan in March of 2011 (see http://www.nytimes.com/2011/03/12/nyregion/12peapod.html for the full story), and Walmart has entered the online grocery business. See http://gothamist.com/2011/04/25/walmart_invades_fresh_directs_turf.php for more details. In 2017 Walmart noted its curbside grocery pickup program for online shoppers is so popular it can‘t expand the program fast enough. While ―many food retailers are focused on new ways to deliver groceries to people‘s homes—particularly in big cities, Walmart is betting big on the millions of Americans in suburban and rural areas who drive everywhere. The company is trying to make ordering groceries online and then picking them up in your car as seamless as a fastfood drive-through.‖ See https://retailleader.com/walmart-outdoes-amazon-grocery-pickup. What appear to be the key external and internal issues that online grocers need to pay attention to? 2. What internal resources and assets did FreshDirect have that gave it a competitive advantage? Referencing Chapter 3: Analyzing the Internal Environment of the Firm When one firm tries to outperform others, it‘s important to figure out how this could be done. The answer may lie in how that firm arranges its activities and creates unique bundles of TN1-96 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
resources that allow it to sustain a competitive advantage. Students should assess the relationships between the elements in FreshDirect‘s value chain. Remember, value chain analysis is a strategic analysis of an organization that uses value-creating activities. Value is the amount that buyers are willing to pay for what a firm provides them and is measured by total revenue, a reflection of the price a firm‘s product commands, and the quantity it can sell. A firm is profitable when the value it receives exceeds the total costs involved in creating its product or service. Creating value for buyers that exceeds the costs of production (i.e. margin) is a key concept used in analyzing a firm‘s competitive position. Every activity should add value. Take a look at Exhibit 3.1 to see the value chain activities. Based on the relationships between these elements, FreshDirect can make a choice of how to proceed to craft a competitive advantage. A sample value chain analysis is below: Value chain activity Primary: Inbound logistics (distribution facilities, material control systems, warehouse layouts) Operations (efficient workflow design, quality control systems)
Outbound logistics (consolidation of goods, efficient scheduling, finished goods processing) Marketing and Sales (motivated salespeople, innovative advertising and promotion, effective pricing, proper ID of customer segments and distribution channels) Service (ability to solicit customer feedback and respond)
How did FreshDirect create value for the customer? Instead of going through an intermediary, FreshDirect bought directly from growers and producers, thereby had reduced pricing and high-quality product. Investment in a state-of-the-art production facility meant cost-effective, efficient and quality controlled systems to maintain high standards of cleanliness, health and safety. Locating the production facility near Manhattan reduced delivery time. Scheduling of delivery times to avoid peak traffic times further reduced delivery costs. Minimum delivery charges change based on fuel costs and can be a barrier to growth. FreshDirect made a decision to use imaginative advertising, word of mouth, and innovative offers to first-time customers. The website design and customer interface will be crucial in converting browsers into customers. Customers cannot put their hands on the product to touch, sniff, and weigh, which is a major barrier. Possibility for impulse buy is greatly reduced. Information on food nutrition, preparation, and price comparison was much more available online, provided an added service to the customer, and facilitated comparison shopping. Since the product was delivered to the customer, there was no direct feedback except through the driver. Mechanisms for soliciting feedback were not obvious. The online environment allows for such feedback, but was FreshDirect set up to respond? What about product returns and refunds? TN1-97
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Teaching Note Secondary (or support): Procurement (win-win relationships with suppliers, reduced dependence on single supplier) Technology development (state of the art hardware and software, innovative culture and qualified personnel) Human resource management (effective recruitment, incentive and retention mechanisms) General Administration (effective planning systems to establish goals and strategies, access to capital, effective top management communication, relationships with diverse stakeholders)
Case 1: Robin Hood
Industry-wide high product costs affected product pricing and profit margins.
Decision to use state-of-the-art technology to design the production and distribution network meant it may be possible to maintain better quality control than competitors. Decision to hire product experts and use company drivers for distribution allowed managers to keep control of employee performance. Founders Joe Fedele and Jason Ackerman had direct experience in this market. Current management appeared passionate about the business, willing to learn from mistakes.
Primary Activities In terms of primary activities, the key to FreshDirect‘s ability to differentiate itself in the market resided in its operations and marketing. The operation was designed from the beginning to facilitate freshness and maintain quality standards. The use of creative web design and the availability of current information for the customer on food nutrition, preparation and price comparison added value to the customer experience.
Support Activities With regard to support activities, a competitive advantage is achieved by developing a strong general administration that is built around visionary leadership and a culture that pushes for technological innovation. Although FreshDirect had this in the beginning, there had been some mistakes. Was current leadership stable enough to learn from those mistakes? In addition, see the concept of the resource-based view of the firm, and the three key types of resources: tangible resources, intangible resources, and organizational capabilities. A firm‘s strengths and capabilities—no matter how unique or impressive—do NOT necessarily lead to a competitive advantage. The resource-based view of the firm takes the perspective that firms‘ competitive advantages are due to their endowment of strategic resources that are valuable, rare, costly to imitate, and costly to substitute. Without these unique resources, the firm can only attain competitive parity. RBV goes beyond a SWOT analysis to integrate internal and external perspectives in a broader competitive context. RBV can reveal how core competencies embedded in a firm can help it exploit new product and market opportunities. TN1-98 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
An important issue to focus on here is the importance of intangible resources like innovation and reputation. Look at resources that are controlled by FreshDirect that might enable it to develop and implement value-creating strategies. Based on their reading of the case, students might identify those resources to include: Tangible Resources: Financial: Private investors and a training grant from the State of New York Physical: Up-to-date production and distribution facilities Technological: Production and distribution facilities designed specifically for the product to maintain product safety and freshness Organizational: Other than the initial energy and drive required to start and grow the company to this level, there were no obvious value-creating organization resources Intangible Resources: Human: Expert staffing in production areas, company drivers allowed control of distribution Innovation and creativity: The founders‘ background and innovative ability Reputation: Online hard to tell, but founder Joe Fedele‘s success with the brick-and-mortar Fairway Uptown supermarket in Harlem had to have some carrying power Determining whether the internal resources are valuable, rare, difficult to imitate, or difficult to substitute (VRIN) can help a firm sustain a competitive advantage. See Exhibit 3.6. Applying the VRIN concept, FreshDirect did have valuable activities and resources; operations, outbound logistics, marketing and sales, technology development and general administration all appeared to provide a competitive edge. The operations and outbound logistics models appeared rare so far, although they would have been easy to copy if a rival wanted to make the investment. The innovation and creativity of current administration may be difficult to imitate because of the path dependency and social complexity of the relationships built up between founders, upper management, celebrities and chefs, and local suppliers. There are also few substitutes for this kind of innovation. All this means FreshDirect may have had a unique bundle of activities and resources that could provide the basis for a sustainable competitive advantage. NOTE VIDEO VIEWING Get a behind-the-scenes look at where FreshDirect sources its food as co-founder, current CEO and Chief Food Adventurer, David McInerney, travels the world to source the best. From firstpress olive oil in Italy to harpoon swordfish in Nova Scotia to fair trade bananas in Ecuador, FreshDirect travels the world to bring customers great food. Which activities in the value chain TN1-99 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
are the most critical to FreshDirect‘s ability to deliver value? Procurement (video 1) plays an important role, and the way the new factory is organized adds efficiency and helps insure freshness. https://www.youtube.com/watch?v=KaqnPHwaWzM https://www.youtube.com/watch?v=E3_3gTkADZY Referencing Chapter 4: Intellectual Assets See the concepts of intellectual capital, human capital and social capital, all of which are intangible assets that a company like Apple needs to have in order to compete successfully. Intellectual capital is a measure of the value of a firm‘s intangible assets, its reputation, employee loyalty and commitment, customer relationships, company values, brand names, and the experience and skills of employees. How do companies create value in a knowledge– intensive economy? The general answer is to attract and leverage human capital (intangible assets) effectively through mechanisms that create products and services of value over time. Human capital involves the individual capabilities, knowledge, skills, and experience of the company‘s employees and managers. This knowledge is relevant to the task at hand, as well as the capacity to add to this reservoir of knowledge, skills, and experience through learning. Human capital is the foundation of intellectual capital. Intellectual capital is developed through attracting, developing, and retaining human capital. See Chapter 4, Exhibit 4.2. Success in retaining human capital could also be attributed to the nurturing of the ―social ties‖ or social capital. Social capital is a function of the network of relationships that individuals have throughout the organization and beyond. Relationships are critical in sharing and leveraging knowledge and in acquiring resources. Social capital can extend beyond the organizational boundaries to include relationships between the firm and its suppliers, customers, and alliance partners. If employees are working effectively in teams, across business divisions, and sharing their knowledge and learning from each other, not only will they be more likely to add value to the firm, but they also will be less likely to leave the organization. Organizational Capabilities: Specific Competencies or Skills: FreshDirect had an entrepreneurial mindset and experience, technological capability, and social capital due to connections with key suppliers. Capacity to combine resources: Innovative product marketing and distribution could have implications for future diversification, especially to new geographical areas. 3. How did FreshDirect choose to compete, and what competitive challenges does FreshDirect face now? Referencing Chapter 5: Business-Level Strategy
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Teaching Note
Case 1: Robin Hood
A competitive strategy is linked to the value chain and supported by intangible assets. Activities and assets allow FreshDirect to create products that are unique and valuable to customers. In order to achieve a sustainable competitive advantage, Apple had to assess its ability to contend with other consumer electronics products companies. The question of how to compete in a given business to attain competitive advantage requires an assessment of the types of competitive strategies, including the three generic strategies that are used to overcome the five forces and achieve a competitive advantage: 10. Overall cost leadership Low-cost-position relative to a firm‘s peers Manage relationships throughout the entire value chain 11. Differentiation Create products and/or services that are unique and valued Non-price attributes for which customers will pay a premium 12. Focus strategy Narrow product lines, buyer segments, or targeted geographic markets Attain advantages either through differentiation or cost leadership Generic strategies are plotted on two dimensions: competitive advantage and strategic target. The overall cost leadership and differentiation strategies strive to attain advantages industry wide, while focusers have a narrow target market in mind. Cost Leadership: Because of its innovative relationships with producers and growers, and its efficient production and distribution systems, FreshDirect had the ability to create a cost leadership strategy. However, its operational model could be easily imitated, especially by the big chains with deep pockets, like Walmart. Moreover, in early 2007, New York City government proposed a congestion charge for traffic entering Manhattan, adding to FreshDirect‘s delivery expenses. The rising cost of fuel and environmental concerns were also a potential threat to the low-cost strategy. Also, with the online access came the ability for the customer to comparison shop much more easily, and therefore switch ―with a mouse click.‖ Differentiation: The challenge of differentiation is to create a product that is perceived industry wide as being unique and valued by customers so much so that they will seek it out if not readily available. FreshDirect‘s strategy of providing extra information about the meats and produce and promoting the freshness and quality of their offerings should help differentiate it in the online grocery market. Focus: It‘s possible to argue that FreshDirect had a focus strategy with the produce and meat segment, especially because FreshDirect did not intend to compete with the warehouse chains like Costco. However, it would be hard to keep a narrow enough focus to gain a true competitive edge for long given all the other produce and meat specialists in brick-and-mortar. Other options firms sometimes pursue include: TN1-101 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Combination of Differentiation and Cost Leadership, Combination of Focus and Cost Leadership, Combination of Differentiation and Focus: Currently, FreshDirect appeared to be pursuing a combination differentiation and cost leadership strategy. Stuck in the Middle? Due to the competitive challenges, especially from the other online grocery offerings in FreshDirect‘s market area, there was a risk that FreshDirect might waver and become stuck in the middle. An argument could be made that FreshDirect had attempted to create an opportunity in its geographic market. Rather than trying, as some did, to convert an existing brick-and-mortar business into an online delivery one, FreshDirect focused on the customer, and not the competition. When FreshDirect started, there was only one other competitor, WebVan, which could not sustain its rapid expansion. FreshDirect decided to go in another direction, focusing on forming relationships with key suppliers and micromanaging quality control, all with the customer in mind. By building a warehouse facility with quality controls in place, and incorporating manufacturing software to monitor operations, FreshDirect could pay attention to system efficiencies as well as expert food preparation and packaging services. This meant FreshDirect could combine low cost and differentiation, providing an attractive value proposition to its customers. NOTE — ADDITIONAL READING, WEB LINKS: On the FreshDirect website, click on ―Delivery Info‖ to learn about this operation. At the bottom of the page, click on ―Home Delivery FAQs‖ for more information: http://www.freshdirect.com/help/delivery_info.jsp. FreshDirect tries to give the shopper information about key categories such as organic or kosher items it carries. Visit http://www.freshdirect.com/department.jsp?deptId=orgnat&trk=gnav and browse categories. What elements are on FreshDirect‘s website that differentiate it from a brick-and-mortar grocery shopping experience? Take a look at the websites for online grocer Peapod: http://www.peapod.com/corpinfo/GW_index.jhtml and then the website for brick-and-mortar competitor Whole Foods plus the addition of Prime for online: http://www.wholefoodsmarket.com/ Amazon.com‘s fresh food delivery service entered Los Angeles in 2013, and has expanded to 20 other cities, including New York. See the website at http://fresh.amazon.com/welcome;jsessionid=35E467669131DFA4D7161902BEDBD5FF. Walmart‘s jet.com has entered the competition with a wide range of products at https://jet.com/ but reports from 2019 note that the grocery component had ―failed to become a driver for online grocery sales and growing market share in urban areas.‖ https://www.reuters.com/article/uswalmart-jet-com-idUSKCN1TD2PS. TN1-102 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Which of these do you feel is the major competition for FreshDirect, and why? From the customer‘s perspective, it seems urban New Yorkers in 2020 really appreciate the convenience: ―Grocery shopping in Williamsburg, Brooklyn is terrible. I can't get through the produce section without my cart getting hit or my vegetables being blocked by boxes to be unloaded, and after having to weave my way through a hundred people shoved into the narrow aisles of a small store, I have to carry home 40 pounds of food. It‘s not ideal, especially for someone who has back problems and who grocery shops for a two-person household. I use FreshDirect, an online grocery delivery service that has helped me save both money and time.‖ https://www.msn.com/en-us/foodanddrink/foodnews/i-order-my-groceries-from-freshdirect-theonline-grocery-store-that-makes-food-shopping-incredibly-easy-e2-80-94-heres-what-its-like/arBBZEAUM. Referencing Chapter 6: Formulating Corporate-Level Strategies Corporate strategy focuses discussion on the questions of what businesses a corporation should compete in, and how the businesses should be managed so they can create ―synergy‖—creating value through entering new markets or developing new technologies, either through related or unrelated diversification. Diversification is the process of firms expanding their operations by entering new businesses. In related diversification, a firm enters a different business in which it can benefit from leveraging core competencies, sharing activities, or building market power. Some possibilities include: ● Mergers and acquisitions ● Strategic alliances ● Joint ventures ● Internal development Whatever the choice, it should create value for all stakeholders—employees, suppliers, distributors, and the organization‘s owners themselves. The choice of diversification strategy should create synergy so that all parties gain something they would not have had on their own. When achieving synergy through diversification, a firm has two choices: related diversification through horizontal relationships with related businesses, sharing tangible and intangible resources, and leveraging core competencies; and unrelated diversification though hierarchical relationships with unrelated business. In this case, value creation derives from the corporate office by leveraging support activities. FreshDirect has used related diversification through vertical integration of its operations, from order processing to delivering groceries to end customers. In so doing, they have bypassed the traditional grocery distributors to reduce customer prices. Through hiring experts in their respective fields, FreshDirect is able to expand their grocery offerings through related product diversification and economies of scope—using their knowledge of large-scale food processing and shipping to an ever-increasing array of foods. TN1-103 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
FreshDirect was trying to leverage core competencies, learning from its older operations and sharing activities across new markets. As it grew, certainly increasingly aggressive actions by Amazon Fresh and Walmart should be anticipated. What might FreshDirect do to counter these threats? FreshDirect illustrates the role of internal development and the need to carefully expand and maintain a measured pace of innovation in a difficult industry environment. In addition to internal development, FreshDirect had pursued strategic alliances with producers and would be wise to consider selective acquisitions in the future. FreshDirect was going multi-city by opening new production/distribution centers, and using internal development based on their previous successes. But FreshDirect needed to be careful not to grow too fast - the pace was critical. Others had failed with this in the past. The key was in using resources wisely. FreshDirect might also consider entering a new market category, other than grocery, using their online retail and delivery capability, or might consider acquiring another online competitor. The choice here is critical—they must choose wisely, or they will suffer the fate of other online grocery businesses. FreshDirect‘s entrepreneurial founders and current administration understood the opportunities that existed in the urban environment, and they had the ability to acquire the initial financial resources, and the discipline to move carefully to implement their vision of ―higher quality at lower prices.‖ The challenge would be how to maintain this competitive advantage. Referencing Chapter 10: Creating Effective Organizational Designs Strategy consists of analysis (setting goals, assessing the internal and external environment of the firm), formulation (deciding which industries to compete in and how to compete in those industries), and implementation, where organizational leaders allocate the necessary resources and design the organization to bring intended strategies to reality. FreshDirect‘s CEO made a choice of how to compete; therefore he must also decide about implementation and the organization‘s design. Chapter 10 stresses that organizational strategy has implications for a firm‘s structure. Students should relate concepts from Chapter 10, such as the differences between various structures and the effectiveness of each possible structure for FreshDirect‘s possible choices of strategy. Organizational structure refers to formalized patterns of interactions that link a firm‘s tasks, technologies, and people. Structures help to ensure that resources are used effectively in accomplishing an organization‘s mission. Structure provides a means of balancing two conflicting forces: the need for the division of tasks into meaningful groupings, and the need to integrate the groupings for efficiency and effectiveness by coordinating and integrating key activities. Structure identifies the executive, managerial, and administrative organization of a firm and indicates responsibilities and hierarchical relationships. It also influences the flow of information as well as the context and nature of human interactions. TN1-104 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Factors that facilitate the effective coordination and integration of key activities include having a common culture and shared values, horizontal organization structures, horizontal systems and processes, effective communications and information technologies, and involved human resource practices. An effective organizational design can encourage the flow of information and enhance working relationships between functional departments and activities. However, achieving the coordination and integration necessary to maximize the potential of an organization‘s human capital involves much more than just creating a new structure. Different structures lead to different degrees of flexibility and permeability and can affect the amount of culture change required. Structures can have an impact on relationships between internal and external constituencies, and therefore need the full support of the management team to implement. FreshDirect‘s structure was currently functional, based on operational departments. If FreshDirect expanded, it would have to choose a divisional design in order to handle decision making effectively. This would be a challenge to make sure the chosen strategy could still work with different reporting relationships. Referencing Chapter 9: Strategic Control and Corporate Governance The implementation of strategy requires choices to be made about how a firm is governed and how it will monitor its performance over time. Strategic control involves the process of monitoring and correcting a firm‘s strategy and performance. In a traditional control system, top management formulates strategies and sets goals. These strategies are implemented, and then performance is measured against the predetermined goals. In a contemporary control system, managers continually monitor both the internal and external environments, and identify trends and events that signal the need to revise strategies, goals and objectives. The relationships between strategy formulation, implementation, and control are highly interactive. Contemporary control utilizes two different types of strategic control: informational control and behavioral control. These two types of control play a role in the formulation and implementation of strategies. Informational control is a method of organizational control in which a firm gathers and analyzes information from the internal and external environment in order to obtain the best fit between the organization‘s goals and strategies and the strategic environment. Behavioral control is a method of organizational control in which a firm influences the actions of employees through culture, rewards, and boundaries. See Exhibit 9.2. Informational control is concerned with whether or not the organization is ―doing the right things,‖ while behavioral control is concerned with whether or not the organization is ―doing things right‖ in the implementation of its strategy. Organizations need to make sure enough information of the right kind is available to monitor activities. This is where tools like financial audits and customer feedback are essential, and where appropriate role models and rewards should be available to keep employees motivated.
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Teaching Note
Case 1: Robin Hood
Chapter 9 emphasizes the importance of aligning both informational and behavioral control systems with organizational strategy. The information gained from the internal and external environment is reviewed against the firm‘s strategy and goals. If the results are not what was expected, then behavioral controls can be utilized to encourage employees to ―do things right‖— employee actions can be influenced through building or maintaining a strong positive culture, creating effective reward and incentive programs, and setting boundaries and constraints to minimize improper and unethical conduct (see Chapter 9, Exhibit 9.3). Both the informational and behavioral components of strategic control are necessary, but not sufficient, conditions for success. What good is a well-conceived strategy that cannot be implemented? Or what use is an energetic and committed workforce if it is focused on the wrong strategic target? FreshDirect practiced a contemporary control system using informational control via feedback from the marketplace. It also needed to carefully use behavioral controls to hold employees accountable for proper operational practices and monitor the culture to make sure any labor challenges were carefully dealt with. Referencing Chapter 11: Strategic Leadership See the concept of leadership, the process of transforming organizations from what they are to what the leader would have them become. Leadership is proactive, goal oriented, and focused on the creation and implementation of the creative vision. This definition implies dissatisfaction with the status quo, a vision of what should be, and process for bringing about change. Leaders are change agents whose success is measured by how effectively they formulate and implement a strategic vision and mission. See Exhibit 11.1. This involves: ● Setting a direction ● Designing the organization ● Nurturing a culture dedicated to excellence and ethical behavior The interdependent nature of these three activities is self-evident. Consider an organization with a great mission and a superb organizational structure, but a culture that implicitly encourages shirking and unethical behavior. Often, failure of today‘s organizations can be attributed to a lack of equal consideration of these three activities. The imagery of the three-legged stool is instructive; it will collapse if one leg is missing or broken. Leaders need to set the direction for the organization by continually scanning the environment to develop knowledge of all stakeholders, and knowledge of salient environmental trends and events. Then leaders must integrate that knowledge into a vision of what the organization could become. Leaders require the capacity to solve increasingly complex problems and must be proactive in their approach so they can develop viable strategic options. Leaders are responsible for designing the organization: a strategic leadership activity of building structures, teams, systems, and organizational processes that facilitate the implementation of the leader‘s vision and strategies. Leaders have an important role in creating systems and structures to achieve desired ends. TN1-106 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Leaders play a key role in changing, developing, and sustaining an organization‘s culture. An excellent and ethical organizational culture is an organizational culture focused on core competencies and high ethical standards. Organizational culture can be an effective means of organizational control. In nurturing a culture dedicated to excellence and ethical behavior, managers and top executives must accept personal responsibility for developing and strengthening appropriate behavior; consistently demonstrate that such behavior is central to the vision and mission; develop and reinforce role models, corporate credos, codes of conduct, reward and evaluation systems, policies and procedures. Doing this requires leaders to overcome barriers to change and effectively use their power. FreshDirect had gone through seven CEOs. The constant change in top leadership had to make it difficult to set a clear direction and nurture a consistent culture. The original make-to-order philosophy and the focus on freshness required clear directions coming from a respected role model, reinforced by clear codes of conduct, and supportive policies and procedures. Do the line managers understand their responsibilities well enough to implement strategies coming from diverse top managers? Could FreshDirect afford a loss of direction while simultaneously expanding into unknown territory? Luckily the founders were still involved, so the original mission appeared to still be intact. It appeared that FreshDirect had identified important customer needs and had aligned the production and delivery enterprise around creating value for those customers. What FreshDirect might not have was the ability to keep the effort on track. Although FreshDirect might have had individuals with innovative ideas, high turnover in the CEO position, employee turnover and morale issues all may have hampered the firm‘s ability to implement innovative solutions in the past. FreshDirect had shown great discipline in keeping its focus on projects that were specific to the firm‘s domain of interest. It appeared that many of the choices already made, specifically those in the production and packaging facility, and other operational decisions, were well considered and commercially viable. The founders also seemed to have shared their belief in learning from mistakes, so efforts would not be totally wasted. Things that FreshDirect had done that appeared to work included partnering with Manhattan restaurants and chefs to produce one-time restaurant-quality meals and the four-minute meals, expanding delivery options, and offering new online shopping options, all of which were targeted at pleasing customers. FreshDirect appeared capable of continuing to compete successfully, as long as resources, including both human and financial, were available, and visionary leadership was there to inspire dedication to the firm‘s goals. FreshDirect had used industry analysis to analyze their industry‘s suppliers, buyers, threats of new entry, substitutes, rivalries, etc. It had established its position within the grocery industry via differentiation based on freshness of produce and meats, service quality, and displayed cost leadership through its modern and efficient warehouse operation. FreshDirect had been careful to TN1-107 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
roll out the service to well defined geographic areas, with creative delivery schedules, to limit delivery costs. However, given the inherent problems with widespread customer acceptance of an online grocery alternative, especially concerns about product ―freshness,‖ the current expansion beyond their geographic area, and a past ―revolving door‖ of CEOs with possibly conflicting ―visions,‖ could FreshDirect create profitability as it worked to build market share? NOTE — ADDITIONAL READING, VIDEO WEB LINKS: Here is a video interview with CEO Jason Ackerman in 2013 acknowledging his lack of experience when he initially founded FreshDirect: http://www.businessinsider.com/freshdirectjason-ackerman-success-2013-11. And there‘s increasing innovation from other service suppliers from Instacart, and Shipt, who delivers from Target, CVS and Petco. See https://billingsgazette.com/lifestyles/home-andgarden/is-it-worth-it-getting-groceries-delivered/article_e71f8d7d-dd86-51a3-9039b4c59631dcde.html. But there‘s energy and passion from Fresh Direct co-founder David McInerney as he talks about the champions who are changing the way people eat as a featured speaker at the 2013 TEDx Manhattan conference. See https://www.youtube.com/watch?v=u-9W0Hne3gM. Will FreshDirect be successful as it tries to expands the scope of its strategy? Teaching Note Case 8 — GreenWood Resources: A Global Sustainable Venture in the Making Case Objectives 1. To assess the advantages and disadvantages of different international entry modes. See the table below to determine where to use this case: NOTE: There are both PRIMARY and SECONDARY chapters that can be used for this case. The Teaching Note gives guidance for the PRIMARY use chapter and provides suggestions if the instructor wants to use the case to illustrate concepts from the optional SECONDARY chapters. CASE OBJECTIVES TABLE Chapter Use Key Concepts PRIMARY CONCEPT 7: International Strategy SECONDARY
International expansion; entry modes; OPTIONAL question on investment decision making
Additional Readings or Exercises NOTE: additional reading — article by Porter & Kramer; article by Hennart
Vision; mission; strategic TN1-108
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Teaching Note CONCEPTS 1: Strategic Management 2: External Environment 5: Business-Level Strategy 6: Corporate-Level Strategy 8: Entrepreneurial Strategy Case Synopsis
Case 1: Robin Hood objectives; stakeholder analysis
External scanning and monitoring Competitive strategy; generic strategies — low-cost leadership, differentiation, focus Corporate strategy; diversification; synergy; core competencies Opportunity recognition
GreenWood Resources, Inc. was founded in 1998 by Jeff Nuss, a bio-resources engineer. It was a Portland, Oregon, USA-based investment and asset management company with a worldwide focus on high-yield and fast-growing tree plantations (i.e. tree farms). In spite of its global vision, value proposition, and pursuit of environmental stewardship and social responsibility, GreenWood had struggled for almost ten years to obtain significant investment funds until 2007– 2008 when the company successfully raised US$375 million for tree plantations in the United States and China. Through persistent effort, GreenWood built the key elements (people, resources, and business networks) for a successful venture despite the serious early financial constraints. GreenWood entered and navigated the Chinese market, deciding to establish its China operation with only a fraction of the funds it needed. Jeff Nuss seized an opportunity to organize a US$175 million private equity fund through his connections with the timber investment community to acquire a large poplar plantation in Oregon. The expanded scale and personnel resulting from the acquisition enabled GreenWood to become a visible player in the tree plantation industry and facilitated its securing an additional commitment of US$200 million of capital for use in the Chinese market. Notwithstanding the availability of the capital and its cumulative knowledge of the Chinese market, the firm‘s investment screening and negotiation process in China turned out to be complex due to the differences in business approaches and culturally embedded mindsets. In June 2010, Nuss and his team were weighing the pros and cons of two potential projects. They felt that GreenWood needed to proceed carefully to ensure that its criteria of sustainable business (in terms of economic performance, social responsibility, and environmental stewardship) were met in China. But, they also realized the company should show some progress to its major investor in China, Oriental Timber Fund Limited. Nuss and his senior management team needed to decide whether they should recommend investing in one of the two projects. Teaching Plan
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Teaching Note
Case 1: Robin Hood
The case provides a unique setting for analyzing the market entry rationale and process and for deliberating the strategic investment decisions for an American entrepreneurial firm in China. In particular, the case describes the situation in which the company has to evaluate its investment opportunities with a simultaneous consideration of economic performance, social responsibility, and environmental sustainability. Instructors can use the case to address the need for a strategic mindset prior to making any decision on how to proceed with any given strategy, and can adopt the resource-based view (RBV) to identify and classify GreenWood‘s resources and capabilities as a precursor to any investment decision. Of special interest to more advanced students is the question of Porter and Kramer‘s ―shared value‖ view. Porter and Kramer (2006) argue that firms should adopt a strategic approach to fulfill corporate social responsibility in which a firm‘s longterm competitive advantages and positive social impact will be mutually reinforcing. This perspective applies as well to the analysis of the pros and cons of the Luxi and Dongji projects—which is the best investment project? This more extensive analysis needs to be completed before GreenWood and its investor can make an informed decision, and could benefit from a reading of Hennart‘s (2009) recent work which indicates that contractual (as opposed to equity-based) partnering is desirable at the investment project level for GreenWood. For this advanced discussion, instructors may find it helpful to assign the following articles to the class prior to the use of the case: Porter, M., & Kramer, M. 2006. ―Strategy and Society: The Link between Competitive Advantages and Corporate Social Responsibility.‖ Harvard Business Review, December: 78–92. Hennart, J. F. 2009. ―Down with MNE-centric theories! Market entry and expansion as the bundling of MNE and local assets.‖ Journal of International Business Studies, 40, 1432–1454. Icebreaker Because most of the students in a typical business class are unfamiliar with the forest/tree plantation industry, it might be useful to show a few pictures of tree farm operations (see http://greenwoodresources.com/about/), and refer to the Case Appendix. Instructors may start the discussion by asking the following questions: What do you like and dislike about doing business in the tree plantation industry? Why? What do you think about GreenWood Resources’ business focus & strategy? Money notwithstanding, how many of you would invest in one or both of the two projects (Luxi and Dongji) and why? A brief discussion of ten minutes or so tends to warm up the class. TN1-110 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Additional reading on the issue of the environmental impact of tree farms, especially those in developing countries, can be found at http://www.ejolt.org/2012/06/an-overview-of-industrialtree-plantations-in-the-global-south-conflicts-trends-and-resistance-struggles/. GreenWood Resources belongs to the Forest Stewardship Council, whose mission is to promote environmentally sound, socially beneficial and economically prosperous management of the world's forests. See https://us.fsc.org/. How might membership in this organization conflict with GreenWood‘s intention to use tree framing as an investment vehicle? According to its website, ―GreenWood Resources (GWR) is a global timberland investment and asset management company specializing in the acquisition, development and management of forestry assets: GWR creates value through the integrated deployment of improved plant material and tailored intensive forest management strategies to achieve superior risk-adjusted returns in selected regions of the world. We bring extensive experience and leadership through our 100 professionals located in offices and field locations in North America, Latin America, Europe, and Asia. This team is focused on delivering the highest quality service and on developing unique investment opportunities with a disciplined integrated management approach to meet investor‘s objectives.‖ Summary of Discussion Questions Here is a list of the suggested discussion questions. You can decide which questions to assign and which additional readings or exercises to include to augment each discussion. Refer back to the Case Objectives Table at the beginning of this Teaching Note to identify any additional readings and/or exercises so they can be assigned in advance. Discussion Questions: 1. PRIMARY QUESTION: What was GreenWood‘s rationale for entering China in 2005? What entry strategy did GreenWood use to enter China? What were the advantages and disadvantages of the China entry decision? 2. SECONDARY QUESTIONS: What forces in the external environment might affect GreenWood‘s choice of strategy? 3. What business-level and corporate-level strategy did GreenWood pursue? And how did GreenWood adopt entrepreneurial strategies in its quest for growth? 4. OPTIONAL QUESTION: Which is the best investment partner: Luxi or Dongii? Discussion Questions and Responses 1. What was GreenWood’s rationale for entering China in 2005? What entry strategy did GreenWood use to enter China? What were the advantages and disadvantages of the China entry decision? Strategy is all about the ideas, decisions, and actions that enable a firm to succeed. See Chapter 1, Exhibit 1.1: Strategic management consists of the analyses, decisions, and actions an organization undertakes in order to create and sustain competitive advantages: TN1-111 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note ● ● ● ●
Case 1: Robin Hood
strategy directs the organization toward overall goals and objectives; includes multiple stakeholders in decision making; incorporates both short-term and long-term perspectives; recognizes tradeoffs between efficiency and effectiveness.
Leaders face a large number of complex challenges. Leaders must be proactive, anticipate change and continually refine changes to their strategies. This requires a certain level of ―ambidextrous behavior,‖ where leaders are alert to opportunities beyond the confines of their own jobs, and are also cooperative and seek out opportunities to combine their efforts with others. Leaders must make strategic management both a process and a way of thinking throughout the organization. See Chapter 1, Exhibit 1.6: The primary role of the organizational leader is to articulate vision, mission and strategic objectives. Leaders must communicate their initial vision of the organization‘s purpose: Leaders should present a vision that would be one that evokes a powerful and compelling mental image of a shared future, that would be massively inspiring, overarching, and long-term, and that represented a destination that is driven by and evokes passion? The organizational mission also needs to be considered: a mission encompasses both the purpose of the company, as well as the basis for competition and competitive advantages. In writing a mission statement, it is important to understand the definition of the business: 1) who are its customers, 2) what customer need is the organization trying to fulfill, and 3) how does the business create and deliver value to customers and satisfy their needs. GreenWood Resources had a global vision to build ―a resource that lasts forever,‖ and had a plan to specialize in the development and management of high-yield, fast-growing tree plantations and then to help institutional investors (pension funds, endowments, insurance companies, etc.) and wealthy individuals invest in these professionally managed assets. The company‘s website has stated its vision/mission as follows: ● Build a resource that lasts forever ● Meet the needs of investors, communities, and the environment with the earth‘s most renewable resource—trees ● Provide excellent risk-adjusted returns for investors To do this, the company stated its values as people—helping people pursue their interests and passions for a greater good; excellence—striving to be the best in the field of acquisition and intensively managed tree farms; commitment to collaboration; and sustainability—being diligent stewards of the land, our people and our investors. From http://greenwoodresources.com/about/our-values/. Regarding his commitment to these values, Jeff Nuss stressed the importance of understanding people‘s passion: ―If that passion can be aligned with (the vision of the company), it makes it really easy to get people on the same page and on board.‖ Organizations must respond to multiple constituencies if they are to survive and prosper, and the mission provides a means of communicating to diverse organizational stakeholders. Although TN1-112 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
vision statements tend to be quite enduring and seldom change, a firm‘s mission can and should change when competitive conditions dramatically change, or the firm is faced with new threats or opportunities. GreenWood Resources had several stakeholder groups that might exert conflicting claims on the company, depending on the performance expectations each group had. The investors, both institutional and wealthy individuals, would want to see financial results; the employees would want job security and opportunities for growth, therefore expecting that the company would grow into areas where its business interests were sustainable; the government and environmental lobby groups would want compliance with environmental regulations and growth objectives that were not only environmentally sound but also socially beneficial; the community and other business partners would want the company to operate in good faith and make decisions that would benefit local interests, both economically and socially. Although CEO Jess Nuss had an obligation to provide economic returns to his investment customers, he also realized his vision/mission supported his decision to operate GreenWood‘s farms in accordance with Forest Stewardship Council (FSC) regulations—conserving biological diversity and enhancing the long-term social and economic well-being of forest workers and local communities—even though complying with these regulations might lead to higher operating costs and resulting higher prices that the market might be unwilling to bear. Anticipating that things might change, an organization‘s leadership must then establish strategic objectives to operationalize the mission statement. That is, objectives help to operationalize the mission statement with specific yardsticks, and provide guidance on how the organization can fulfill or move toward the ―higher goals‖ in the goal hierarchy—the mission and vision. These vision and mission statements and the resulting strategic objectives have implications for how to analyze opportunities, manage innovation, and provide leadership to encourage growth. It requires doing an analysis of the external environment, both relative to general factors that might affect how the product is positioned in the market, and also whom the company is competing against for that market. The basic question strategic management tries to answer is: How can we create a sustainable competitive advantage in the marketplace that is not only unique and valuable but also difficult for competitors to copy or substitute? According to the GreenWood Resources website, since its founding the company has used science to maximize its management of assets. ―Unique among timber investment management organizations, we bring expertise in the science of plant genetics and plantation silviculture to the management of assets... Our knowledge of tree genetics and silviculture, and the skill with which it is applied to the plantations that we operate, distinguishes GreenWood Resources as the leading timberland investment manager in the industry today.‖ (From http://greenwoodresources.com/science/. ) GreenWood Resources appears to have been able to carve out a unique and valuable niche for itself in the tree farm/plantation industry. TN1-113 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Corporate strategy focuses discussion on the questions of what businesses a corporation should compete in, and how the businesses should be managed so they can create ―synergy‖—creating value through entering new markets or developing new technologies, either through related or unrelated diversification. Diversification is the process of firms expanding their operations by entering new businesses. In related diversification, a firm enters a different business in which it can benefit from leveraging core competencies, sharing activities, or building market power. Some possibilities include: ● Mergers and acquisitions ● Strategic alliances ● Joint ventures ● Internal development Whatever the choice, it should create value for all stakeholders—employees, suppliers, distributors, and the organization‘s owners themselves. The choice of diversification strategy should create synergy so that all parties gain something they would not have had on their own. GreenWood Resources had started with a poplar plantation in the northwestern United States. While managing that tree farm, Dr. Brian Stanton, a renowned expert in poplar hybridization and genetic improvement, had joined the team to research the development of poplar varieties characterized by high growth rate, strong pest resistance, high wood density, and broad site adaptability. Through this internal development, GreenWood was able to transition from farm ownership to become the manager of the plantation assets. This leveraging of core competencies allowed the firm to develop a business model which integrated tree improvement, nurseries, tree farm operations, product (i.e., log, lumber, chips) sales, and trading and ecosystem services (i.e., monetizing carbon credits, biodiversity credits, water quality, and renewable energy credits and managing land for total ecosystem value). As a result of acquiring these skills, and demonstrating the ability to share activities, GreenWood was able to build market power, allowing it to use its growing reputation to get financial support for its planned expansion via strategic alliances and joint ventures into South America and China. Referencing Chapter 7: International Strategy: Creating Value in Global Markets International expansion is a viable diversification strategy, however before pursuing this, a firm needs to determine why an industry in a given country is more (or less) successful than the same industry in another country. There are several reasons to expand internationally. A firm‘s motivation for international expansion could involve the following: ▪ To increase the size of potential markets ▪ To attain economies of scale ▪ The ability to take advantage of arbitrage opportunities ▪ To extend the life cycle of a product ▪ To optimize the physical location for every activity in its value chain TN1-114 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
When choosing a country to expand into, firms must assess certain factors: the degree of consumer demand, the degree to which resources such as skilled labor and other supplier or supporting infrastructure are developed and available, the speed with which such resources can be deployed, the extent of political and economic risk and corruption, the access to qualified management. Therefore, the main motivations for international expansion include: marketseeking, efficiency-seeking, and resources (natural or intellectual)-seeking. GreenWood was motivated to seize both market opportunities and gain access to forest resources in foreign countries. The case states: ―The poplar plantation industry in the United States was of limited scale. As a result, Jeff Nuss believed, from the very beginning, GreenWood needed to consider potential opportunities in other regions of the world.‖ GreenWood developed some ownership or firm-specific advantages (i.e., unique resources and capabilities), which could be potentially exploited overseas. The advantages included: Ownership of elite poplar plant materials; Strong research competencies in hybrid poplar plantation development; Substantial experience in the development and management of high-yield, fast-growing tree plantations; Jeff Nuss‘s global vision and professional connections. At this point, the main ownership disadvantages appear to be lack of operating scale and lack of financial and human resources. Nevertheless, Jeff feels that these rather common entrepreneurial (or small business) weaknesses will be overcome because he believes that his vision and business plan will become sufficiently convincing for potential investors to commit significant financial resources, thereby allowing GreenWood to further build the human resources needed to move forward. To further support the decision to expand internationally, students can be asked to identify the resources and capabilities possessed by GreenWood before its international expansion into China. This will enable them to apply the resource-based view (RBV). The logic of RBV argues that unique bundles of resources and capabilities or core competencies can (and should) be leveraged in an ever-broader scope through internationalization. Students should be able to identify GreenWood‘s resources and capabilities systematically and explore if there are any (potential) core competencies before the company‘s international expansion. The concept of the resource-based view of the firm includes the three key types of resources: tangible resources, intangible resources, and organizational capabilities. A firm‘s strengths and capabilities—no matter how unique or impressive—do NOT necessarily lead to a competitive advantage. The resource-based view of the firm takes the perspective that firms‘ competitive advantages are due to their endowment of strategic resources that are valuable, rare, costly to imitate, and costly to substitute. Without these unique resources, the firm can only attain competitive parity. RBV goes beyond a SWOT analysis to integrate internal and external perspectives in a broader competitive context. RBV can reveal how core competencies embedded in a firm can help it exploit new product and market opportunities. TN1-115 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Appendix Exhibit TN-1 should be helpful for the instructors to summarize the class discussion on GreenWood‘s resources and capabilities before the company implemented its international expansion strategy in 2005. As shown in Exhibit TN-1, GreenWood was initially constrained by a lack of physical and financial resources. The company also had inadequate human resources. As a matter of fact, Jeff had to convince Brian Liu, a Chinese American with years of experience working for the Oregon State Department of Agriculture, to leave his stable government position and join GreenWood shortly before the establishment of GreenWood‘s Chinese operations. Nevertheless, GreenWood does possess some salient managerial and organizational capabilities. Some critical capabilities such as research capabilities and social networking skills are part of GreenWood‘s core competences as they are significantly valuable, of integrative nature, and are hard for competitors to imitate. These critical capabilities lay a good foundation for the company‘s international initiatives. Location or country-specific advantages play an important role in motivating GreenWood to enter China. Location advantages in the tree plantation industry in China include: 1) Substantial market size China‘s timber market is expanding rapidly. In Luxi, and in the remaining mills in Linyi for example, strong demand is noted. Timber has good investment returns (15 percent or so). The potential for high-yield, fast growing plantations in general, and poplar tree farming in particular, is projected to be significant. 2) Available natural resources A large forest base (2 million hectares or so) is available for developing high-yield poplar plantations in China‘s temperate region, where hybrid poplar cultivation is favored over tropical species such as eucalyptus. For example, over 6,000 hectares (92,073 mu) are available in Luxi; more than 13,500 hectares (202,650 mu) are available in Dongji. 3) Low labor costs The labor force for crop care is available. The labor costs in China, in particular in the tree plantation areas, are low due to underdeveloped economies in rural China (as indicated by Ells Culver, Mercy Corps‘ cofounder). 4) Pro-industry government policies Nationwide, China set a goal of raising its afforestation (i.e., establishing forestland by planting seeds or trees in open land) rate to 26 percent of its land area by 2050, which will require an increase of forestland in excess of 65 million hectares. The No. 9 state council decree is promulgated to encourage Chinese people to go out and grow trees in 2003. TN1-116 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
5) Lack of competitive intensity The tree plantation industry is fragmented and lacks serious competition. Students should also examine the following location disadvantages: 1) The legal enforcement of intellectual property protection is relatively weak. 2) The variety of government agencies at different levels forms a complex set of ownership structures, which needs to be worked through. 3) There is a need to build comprehensive connections in China (guanxi), which is a long and cumbersome process due to unique Chinese cultural characteristics. 4) Due to an inadequate technological infrastructure, the Chinese approach to silviculture has been rudimentary compared to Western standards. There has been a lack of systematic knowledge in tree farm investment, plant material development, and efficient irrigation in China. This has been exacerbated by a clash of mindsets between viewing the projects through the lens of short-term and long-term value. Western and Chinese approaches to assessing and pricing are very different. 5) The negotiating process for land and for tree assessment and pricing is difficult and slow. Despite some location disadvantages, the Chinese tree plantation industry is attractive to firms that make a commitment and get their foot in the door. GreenWood has many valuable ownership advantages for China. As Jeff said, ―China has two main hybrid varietals of poplar trees imported from Europe. We have many new hybrid varietals. We felt the best opportunity for us is that [China] needs more [plant] materials, better materials. . . . The [Chinese] government was issuing policies in the forestry sector that were all laser-driven to industry-based plantations, of which 45 percent are represented by poplar plantations.‖ Entry modes available for international expansion differ based on the extent of investment and risk, and the degree of ownership and control. See Chapter 7, Exhibit 7.9. In order from low to high, they include: Exporting Licensing Franchising Strategic Alliances Joint Venture Wholly Owned Subsidiary As mentioned in the case, GreenWood decided to establish a wholly owned subsidiary based on greenfield investment in China in 2005. It is useful to discuss foreign entry modes briefly in light of internalization (or transaction cost) theory. GreenWood already possesses a substantial amount of country-specific knowledge developed during its five years of market investigation. Thus, there is probably no strong desire for the company to rely upon a local partner‘s business TN1-117 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
knowledge. Also, the initial focus is the development of tree nurseries, which require relatively limited capital and land to start. The internalization advantages for a wholly owned greenfield subsidiary are significant for at least two major reasons. The first is that GreenWood‘s core ownership advantages (i.e., research competencies) can be more efficiently leveraged through a wholly owned subsidiary than via other entry options. Put differently, GreenWood‘s research competencies will be difficult to utilize efficiently via market transactions because they are not readily fungible or transferable. The second is that the organizational structure of GreenWood (Exhibit 4 and Exhibit 6 in the case) may be too complex to involve either a joint venture partner or an acquired partner effectively. Therefore, it probably makes great sense for GreenWood to make a greenfield investment (i.e., set up a wholly owned subsidiary from scratch) to internalize and control their Chinese operations. (Note: Jeff doesn‘t exclude joint venture as an option. He just says that it is difficult to find an appropriate Chinese joint venture partner.) Have these decisions been adequately anticipated by GreenWood‘s overall strategy? Are these decisions consistent with the company‘s vision, mission and values? 2. SECONDARY QUESTION: What forces in the external environment might affect GreenWood’s choice of strategy? NOTE this section does not have any accompanying PowerPoint slides. Referencing Chapter 2: Analyzing the External Environment Organizational leaders must become aware of factors in the overall environment that might affect their ability to create a competitive advantage. So how do managers become environmentally aware? By doing scanning, monitoring, and gathering competitive intelligence, and using these inputs to develop forecasts. This prepares the firm to do more extensive analysis of the forces in the general environment and the industry or competitive environment. Environmental scanning involves surveillance of a firm‘s external environment to predict environmental changes and detect changes already under way. It is a BIG PICTURE viewpoint of the industry/competition, looking for key indicators of emerging trends—what catches your eye? What alerts the firm to critical trends before changes have developed a discernible pattern and before competitors recognize them. Environmental monitoring is a firm‘s analysis of the external environment that tracks the evolution of environmental trends, sequences of events, or streams of activities. Leaders need to monitor the trends that have the potential to change the competitive landscape—what do you want to track? Firms need to CHOOSE the trends identified via the scanning activity, and regularly monitor or track these specific trends to evaluate the impact of these trends on their strategy process. What factors or trends might be most important to GreenWood? To assess how the external environment might affect GreenWood‘s strategy, it‘s necessary to take a look at the factors in the TN1-118 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
general external environment. GreenWood must consider the political/legal, economic and global, sociocultural and demographic, and technological forces that might affect the ability of the firm to deliver its products and sustain its business. See which factors in the general environment students might pick that have a significant impact on this business. Sociocultural/Demographic: Worldwide there was more awareness of the need for forests—tree plantations were under increasing scrutiny by environmental groups and expected to use sustainable practices. On the other hand, there was more and more demand for wood and wood products, and a belief that investment in timberlands was a way to generate attractive long-term capital returns. This led to a significant trend toward institutional ownership of timberlands, even though the largest plantation areas were located in Asia (China, India, and Japan) and Europe (primarily Russia, Scandinavia and Eastern Europe). Technological: Technological advances in the biological sciences as well as in planting and harvesting techniques all helped improve the efficiency of tree plantation production: the development of new tree varieties helped high-yield, fast-growing tree farms lessen the pressure of deforestation by providing the type of timber products demanded by world markets. At the same time, tree farms were a sustainable environmental solution that could improve air and water quality, reclaim deforested land, and produce renewable energy in the form of biomass. Political-Legal: Political-legal issues, especially the issues around country regulations for business operations and environmental group oversight, make it difficult to anticipate how changes here might affect the competitive landscape. Considering the cultural and institutional distances between the United States and China, as reflected in the location disadvantages (i.e., weak intellectual property protection, complex ownership structure of the land, poor technological infrastructure, Guanxi idiosyncrasies), it makes sense for GreenWood to spend time building relationships with Chinese academics and government agencies and assessing the potential risks. Just as Brian pointed out: Since the No. 9 state council decree was promulgated to encourage Chinese people to go out and grow trees in 2003, a lot of entrepreneurs jumped in. The market was overwhelmed. Some entrepreneurs were doing the wrong thing. For example, ―Wanli Afforestation Group‖ and ―Yilin Wood Industry Co. Ltd.,‖ two large local private forestry companies, were involved in some sort of financial scheme. . . . I personally felt something was going wrong, but we didn‘t know what. It‘s not the correct way. It‘s not the Western way. It‘s just too chaotic for a Western company. In addition, we had financial and personnel constraints. The above indicates that GreenWood‘s patience and caution seemed to be warranted. On the other hand, one can argue that the company moved too slowly. For example, some students may argue that GreenWood could have taken advantage of China‘s accession to the World Trade Organization (WTO) in December 2001 (not mentioned in the case, but often covered in current international business textbooks) and the Chinese government‘s afforestation initiatives in 2000 TN1-119 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
by entering China earlier. As stated in the case, Jake Eaton, Director of GreenWood‘s Global Acquisition and Resource Planning, seems to agree that ―the process could have been faster.‖ Overall, instructors can allude to GreenWood‘s then small-scale operation in the home country and its limited resource base, which probably makes a slow process necessary to avoid serious blunders. Instructors may also refer to the statement in the case of Hunter Brown, the COO of GreenWood that ―[t]he Chinese approach is an informal management style [as opposed to] the much structured, organized contract-driven style in the U.S.‖ and point out that it takes time for a small international venture to understand the different mindsets and behaviors of the local people and adapt accordingly. 3. SECONDARY QUESTION: What business-level and corporate-level strategies did GreenWood pursue? And how did GreenWood adopt entrepreneurial strategies in its quest for growth? Referencing Chapter 5: Business-Level Strategy The question of how to compete in a given business to attain competitive advantage requires an assessment of the types of competitive strategies, including the three generic strategies that are used to overcome the five forces and achieve a competitive advantage: 13. Overall cost leadership Low-cost-position relative to a firm‘s peers Manage relationships throughout the entire value chain 14. Differentiation Create products and/or services that are unique and valued Non-price attributes for which customers will pay a premium 15. Focus strategy Narrow product lines, buyer segments, or targeted geographic markets Attain advantages either through differentiation or cost leadership Ask the students which strategy they think GreenWood Resources should pursue, and why. Although any company in a commodity-based industry must keep costs low, if only to achieve parity with competition, GreenWood Resources has chosen to compete through differentiation. Building on its reputation, GreenWood would be able to provide expertise in tree plantation management that reassured investors that its services were unique and valued. Successful expansion to locations such as Asia and South America verified this choice of strategy. Referencing Chapter 6: Corporate-Level Strategy Thinking about combining resources to achieve a competitive advantage, corporate strategy focuses discussion on the questions of what businesses a corporation should compete in, and how the businesses should be managed so they can create ―synergy‖—creating value through entering new markets or developing new technologies, either through related or unrelated diversification. TN1-120 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Diversification is the process of firms expanding their operations by entering new businesses. In related diversification, a firm enters a different business in which it can benefit from leveraging core competencies, sharing activities, or building market power. Some possibilities include: ● Mergers and acquisitions ● Strategic alliances ● Joint ventures ● Internal development Whatever the choice, it should create value for all stakeholders—employees, suppliers, distributors, and the company itself. The choice of diversification strategy should create synergy so that all parties gain something they would not have had on their own. Companies can achieve synergy through diversification in two ways: Through related businesses (horizontal relationships) ● Sharing tangible resources ● Sharing intangible resources ● Leveraging core competencies Or through unrelated businesses (hierarchical relationships) ● Value creation derives from corporate office ● Leveraging support activities Core competencies reflect the collective learning in organizations—how to coordinate diverse production skills, integrate multiple streams of technologies, and market diverse products and services to create value. Core competencies must create superior customer value; the different businesses must all have similar elements in the value chain that require similar skills; and these activities or skills must be difficult for competitors to imitate. Sharing activities means that value chain elements are shared across business units, so that two or more activities are done by one of the businesses. This allows for cost savings, but businesses need to make sure to keep control over quality and customer perception. GreenWood‘s strategy included significant focus on internal development and also well-planned strategic alliances to acquire key components. As previously stated, Greenwood Resources had started with a poplar plantation in the northwestern United States. While managing that tree farm, Dr. Brian Stanton, a renowned expert in poplar hybridization and genetic improvement, had joined the team to research the development of poplar varieties characterized by high growth rate, strong pest resistance, high wood density, and broad site adaptability. Through this internal development, GreenWood was able to transition from farm ownership to become the manager of the plantation assets. This leveraging of core competencies allowed the firm to develop a business model which integrated tree improvement, nurseries, tree farm operations, product (i.e., log, lumber, chips) sales, and trading and ecosystem services (i.e., monetizing carbon credits, biodiversity credits, water quality, and renewable energy credits and managing land for total ecosystem value). TN1-121 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
As a result of acquiring these skills, and demonstrating the ability to share activities, GreenWood was able to build market power, allowing it to use its growing reputation to get financial support for its planned expansion into South America and China. Referencing Chapter 8: Entrepreneurial Strategy and Competitive Dynamics Entrepreneurship involves the creation of new value by an existing organization or new venture that involves the assumption of risk. For an entrepreneurial venture to create new value, three factors must be present—an entrepreneurial opportunity, the resources to pursue the opportunity, and an entrepreneur or entrepreneurial team willing and able to undertake the opportunity. Entrepreneurs must go through a process of identifying, selecting, and developing potential opportunities. See Exhibit 8.1 and the opportunity analysis framework: the relationship between an entrepreneur, the firm‘s resources, and the opportunities available in the firm‘s environment. Entrepreneurs need to understand the concept of opportunity recognition: the process of discovering and evaluating changes in the business environment, such as a new technology, sociocultural trends, or shifts in consumer demand that can be exploited. Changes in the external environment can lead to new business creation, but the discovery of these new ideas is not enough. They then need to be evaluated to find out if they‘re strong enough to become new ventures. Good entrepreneurial opportunities are those that are attractive to the marketplace (there must be demand for the new product or service), achievable (it must be practical and physically possible to do), durable (the window of opportunity must be open long enough for it to have a chance for success), and value creating (it must be profitable—the benefits must surpass the cost of development by a significant margin). Resources are an essential component of a successful entrepreneurial launch. The most important resource is usually money, but human resource—strong and skilled management, is also an essential asset. Social capital, or entrepreneurs who have extensive social networks or wellconnected key contacts, allows the new venture to gain exposure and build legitimacy faster. Strategic alliances represent a type of social capital that can be especially important to young and small firms. Launching a competitive venture requires a special kind of leadership involving courage, belief in one‘s convictions, and having the energy to work hard. Three characteristics of entrepreneurial leaders are: ● Vision ● Dedication and drive ● Commitment to excellence To achieve excellence, venture founders must understand the customer, provide quality products and services, pay attention to details, continuously learn, and surround themselves with good people. TN1-122 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Regarding offshore entrepreneurial ventures, technological advances in telecommunications and transportation have made it temptingly easy for entrepreneurial or relatively new ventures to go abroad. Yet, it requires a lot of managerial attention and experience to do things right. Too often entrepreneurs (or small business owners) underestimate the costs of international expansion and make decisions to go international in a haphazard manner. The result can be a financial disaster or a total failure for the entrepreneurs or the small business owners in general. GreenWood had been careful and patient in trying to understand the Chinese market and business practices prior to making its commitment. Given the internal (financial and human) resource constraints, the relatively slow pace of the industry, and the uncertainties and challenges of doing business in China, it made sense for GreenWood to be cautious. Moreover, the company was not only analyzing the Chinese market, but also taking actions purposefully. For example, GreenWood brought its hybrid poplar materials to China for adaptability tests long before the opening of its Beijing office. Furthermore, the company was leveraging its network resources to enhance its experiential knowledge of the Chinese market. This was epitomized by Dr. Stanton‘s involvement with the World Bank project in China and Brian Liu‘s visits to China on behalf of the Agricultural Department of the State of Oregon prior to joining GreenWood. Was Jeff an atypical optimist or was he representative of many ambitious entrepreneurs in international expansion? 4. OPTIONAL QUESTION: Which is the best investment partner: Luxi or Dongii? NOTE: This discussion is perhaps best conducted with advanced students who have experience with financial analysis. GreenWood spent a lot of time building relationships and negotiating with the potential partners (i.e., Luxi Forestry Bureau and Dongji Lideng Forestry Development Co., Ltd.) and meanwhile conducting due diligence. Some students may question whether or to what extent GreenWood needed such local partners. The potential benefits and risks in partnering for both the Luxi and Dongji projects are displayed in Exhibit TN-3. Despite the potential risks, GreenWood needs the local partners for investment projects for two main reasons. First, as noted in the case, all forestlands were owned either by the state or collectively in China. GreenWood can only lease the land (i.e., purchase the services of the land) given the absence of a land market. Thus, a partnership with a locally embedded organization can help mitigate the risks of being expropriated. Second, local partners can help overcome the cultural and institutional distances and manage the crop care labor forces and community relations more effectively. As one of the important contributors to transaction cost/internalization theories, Hennart (2009) argues that some form of joint venture is economically desirable if a multinational‘s ownership advantages (esp. the knowledge assets) and the complementary assets held by local owners are both difficult to transact. For GreenWood, its elite plant materials and research competencies are certainly difficult to transact in the market; so is the land held by Luxi Forestry Bureau and Dongji Lideng Forestry Development Co., Ltd. Thus, a contractual partnership seems to be the TN1-123 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
best option for GreenWood. To manage a contractual partnership effectively, a deep understanding of the partners‘ goals, motives and resources is clearly necessary. As noted previously, although GreenWood decides to set up a wholly owned subsidiary to manage its operations in China, Jeff also considers joint ventures. Hennart‘s (2009) recent work indicates that contractual (as opposed to equity-based) partnering is desirable at the investment project level for GreenWood. The above discussion on GreenWood‘s experiences in China as well as the potential benefits and risks in partnering are useful for deliberating on the two strategic investment decisions. The case says: ―By March 2009, GreenWood had assessed some twenty potential investment projects in China. The Luxi and Dongji projects passed the initial phase of screening and became the company‘s top priorities. The due diligence on these two projects was extensive, lasting over a year, but both projects still faced considerable obstacles and even potential deadlock. In June 2010, Jeff Nuss and his management team were still weighing the pros and cons of the two projects . . .‖ Because GreenWood has been striving to ―achieve [its]vision of maximizing long term returns for [its] investors and fulfilling the company‘s social and environmental responsibilities,‖ the investment decisions should be based on the evaluation of the economic, social, and environmental performance (i.e., the triple bottom line). Economic Analysis As demonstrated in Exhibit TN-4, instructors may ask the students to spell out the economic pros and cons of the Luxi and Dongji projects without conducting any sophisticated financial analysis. This might be reasonable for students with relatively poor skills in financial/quantitative analysis. For a more thorough analysis of these two potential investments, net present value (NPV) and internal rate of return (IRR) can be estimated. Exhibit TN-5 shows the NPV and IRR based on four scenarios. Detailed Financial Analysis For Year 1 of each rotation, it will cost RMB 1109 (367 + 110 + 632) (see case Exhibit 8) for planting and crop caring per mu in Luxi and RMB 387 (87 +45+255) per mu in Dongji. For the years other than Year 1 of each rotation, the expenses will be RMB 477 (367 + 110) and RMB 132 (87 + 45) per mu for Luxi and Dongji respectively. The harvest in Luxi will take place at the end of year 7; for Dongji it will be at the end of year 10; the stumpage prices will be the same as the ones in 2008. As noted in the case, a discount rate of 10 percent is used in calculating NPV. For many foreign investments, a higher discount rate is normally used for their Chinese projects. For the broadly defined forestry industry, however, the discount rate may be even lower than 10 percent because TN1-124 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
the investors prefer long-term hold, good cash flows, and net assets value appreciation resulting from biological growth. Tree plantation assets are also perceived as insurance against economic/financial crisis. The residual value per mu will be the value of tree assets per mu subtracting accrued expenses per mu. Regarding the existing assets, assume that GreenWood will pay a fair price and then harvest all of the assets immediately and get the money back.
TN1-125 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Scenario 1 We assume the growth rates for Luxi and Dongji are 1.8m3/mu/year and 0.9m3/mu/year respectively. (Note: the growth rate of 0.9m3/mu/year is optimistic for Dongji.) In Luxi, the positive cash flow per mu at the end Year 7 will be (RMB 559/m3 * 1.8m3 * 7) 477= RMB 6566. In Dongji, the corresponding number will be (RMB 445/m3 * 0.9m3 *10) 132 = RMB 3873. The investment period is assumed to be seventy years (Note: The longest lease in China is seventy years). For Luxi, the residual value per mu is: For year 1 tree assets, it is RMB (559/m3 * 1.8m3 – 1109) = RMB (–102.8); For year 2 tree assets, it is RMB (559/m3 * 1.8m3 * 2 – 1109-477) = RMB 426.4; For year 3 tree assets, it is RMB (559/m3 * 1.8m3 * 3 – 1109–477 *2) = RMB 955.6; For year 4, it is RMB (559/m3 *1.8m3 * 4 – 1109–477 *3) = RMB 1484.8; For year 5, it is RMB (559/m3 *1.8m3 * 5 – 1109–477 *4) = RMB2014; For year 6, it is RMB (559/m3 *1.8m3 *6 – 1109– 477 *5) = RMB 2543.2. Therefore, the average residual value per mu will be the addition of the above numbers divided by 6, namely RMB 1220.2. Similarly, the average residual value per mu for Dongji is RMB 1087.5. The calculation shows that the Luxi project will result in an NPV of RMB 1473.10 per mu and an IRR of 16.2 percent, while the Dongji project will have an NPV of RMB 815.90 and an IRR of 17 percent. The IRR for the Luxi project is slightly lower because of its larger investment size per mu. Scenario 2 If we assume the growth rate is 1.5m3 and 0.7m3 per mu/year for Luxi and Dongji respectively, the NPV will be RMB 237.06 and RMB 257.66, and the IRR will be 11.1 percent and 12.5 percent. Scenario 3 We assume that the investment period is about thirty years. To simplify the estimation, we will use twenty-eight years for Luxi and thirty years for Dongji considering their different rotation cycles. Then, the NPV will be RMB 260.14 and RMB 275.98, and the IRR will be 11.3 percent and 12.7 percent, for Luxi and Dongji respectively. Scenario 4 We assume that the investment period is about 30 years and GreenWood will not be able to capture the residual (or salvage) value due to expropriation for example. In such a case, the NPV and IRR will still be quite similar to the ones for scenario 3. TN1-126 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
We may also contemplate some absolutely worst-case scenarios. For example, if GreenWood has to abandon the project due to political risks or reputation risks within the first three years of its investment, the potential loss for the Luxi project could be more than RMB 1760.77 per mu (NPV of the expected expenses per mu for the first three years) x 92073 mu = RMB 162 million (~US$24 million), and the potential loss for Dongji could be more than RMB 560.08 per mu (NPV of the expected expenses per mu for the first three years) x 202650 mu =RMB 113 million (~US$18 million). The overall conclusion is that both projects are economically attractive. Although Dongji seems to have a higher estimated IRR, the case indicates that the growth rate of 0.9m3 per mu per year (scenario 1) is optimistic whereas it is believed the locally tested GreenWood elite plant materials, coupled with favorable natural conditions and intensive management could readily enhance tree growth rate in Luxi by 50 percent from 1.2m3 to 1.8m3 per mu per year. Moreover, the Luxi project will have a more attractive NPV per mu than the Dongji project with scenario 1. The analysis here is congruent with case Exhibit 9, which shows that the GreenWood managers like the potential economic value of the Luxi project better. The sensitivity analyses show that NPV and IRR will still be appealing for both projects even under undesirable scenarios barring the worst-case scenarios. If pedagogically necessary or helpful, instructors might also feel free to discuss the potential foreign exchange risks which include that (1) the required capital in U.S. dollars could be increasingly higher with the gradual appreciation of Chinese RMB and (2) GreenWood can be less competitive with the appreciation of Chinese RMB if the company sells the logs to marketplaces outside of China. Although the analysis of foreign exchange risks will be useful for the students, it may be helpful to know that the issue is never a main concern for GreenWood and Oriental for two main reasons (not covered in the case). One is that the investor is managing the currency risks at the global portfolio level rather than at the investment project level. The other is that both GreenWood and the investment company are mainly focused on the huge Chinese market and they attach more importance to the potential investment blunders than foreign exchange risks. NOTE: Students with limited finance knowledge and quantitative skills may feel challenged in conducting the above quantitative analysis. For a class with different majors and backgrounds, instructors may ask the students to form diverse teams to work on the analysis. If most students are relatively deficient in finance and accounting, instructors may provide more specific tips to guide them through the exercise. If necessary, instructors can show a part of the economic analysis to demonstrate how it is done. But the entire analysis shouldn‘t be handed out. Overall, we believe that a little number crunching will be beneficial and should be encouraged even for students without strong quantitative skills. Social and Environmental Impact Analysis As noted earlier, Porter and Kramer (2006) argue that firms should adopt a strategic approach to fulfill corporate social responsibility in which a firm‘s long-term competitive advantages and positive social impact will be mutually reinforcing. Specifically, they suggest that firms clear TN1-127 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
away as many negative value-chain social impacts as possible such as emissions, waste, and health risks for employees, and presumably strengthen the positive value-chain social impacts such as recycling, conservation of energy, truthful advertising, and job training. They also advise that firms identify the areas of social context with the greatest strategic value (using Porter‘s diamond framework) and take one or a few social initiatives to benefit both society and their own competitiveness. Among GreenWood‘s integrated value chain activities, such as tree improvement, nurseries, tree farm operations, product (i.e., log, lumber, chips) sales, and trading and eco-system services (i.e., monetizing carbon credits, biodiversity credits, water quality and renewable energy credits and managing land for total eco-system value), its research competencies and silvicultural management (i.e., land preparation, spacing and thinning, pruning, weed control, pest and disease control, fertilization, irrigation, and harvesting) generate both competitive advantages and positive social impacts. GreenWood might also take actions to contribute to the improvement of the social context with or without clear implications for its competitiveness. Based on the analysis shown in Exhibit TN-6, instructors may conclude that both projects can contribute to GreenWood‘s competitiveness and at the same time, generate substantive social value. For the Luxi project, the overall strategic value will be somewhat higher because the potential for economic value added and the positive social impact of GreenWood‘s value chain (e.g., increase of local employment, spillover of silvicultural knowledge to local farmers) will be jointly more substantial as a result of a much larger market and agricultural population. Some students may conclude that the economic value of the Dongji project is comparable to that of the Luxi project and, based on the notes in case Exhibit 9, its environmental (or ecological) value is more substantial. Thus, Dongji should be preferred. Instructors may ask these students whether the environmental value added would be strategic for GreenWood, namely whether the long-term competitive advantages and positive social impact will be mutually reinforcing. It is OK if some students strongly believe that combating desertification is strategic for GreenWood. This is a rather complex issue. On one hand, combating desertification may help enhance GreenWood‘s research competencies in the long run. That‘s why Dr. Stanton is excited about the project. On the other hand, there is perhaps little expectation from GreenWood that the Dongji project will contribute to its core competitive advantage (i.e., tree improvement) in the short to medium future. In addition, the investment committee (with Jeff being only one of the three members) will be hard pressed to believe collectively that combating desertification per se is strategically important. Other students may argue that the overall differences between the two projects are not that substantive, and, given the availability of enough capital from Oriental, GreenWood can make both investments at the same time. Instructors may consider taking this opportunity to extend the discussion on whether GreenWood is moving too slowly in the rapidly growing Chinese market. Two key factors may be (re)emphasized here. First, GreenWood is pursuing a sustainable business model that incorporates the triple bottom line of performance. Jeff believes that it‘s the right thing to do. Many global institutional investors such as International Finance Corporation TN1-128 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
also attach increasingly greater importance to sustainability. However, it‘s a challenging task to determine whether a particular project will result in a sustainable business in a foreign environment considering, for example, that FSC has not been widely adopted in the United States and other advanced economies. Second, GreenWood is still a small international venture with limited human resources (i.e., about 70 employees total) in contrast to the relatively large capital commitment it has obtained (US$200 million). It is likely justifiable for GreenWood to be careful in order to mitigate or avoid serious blunders. EPILOGUE In July 2010, GreenWood‘s senior management submitted the final investment report for the Luxi project to the investment committee for approval. The committee rejected the proposal on the grounds that the land lease expenses, as a main fixed cost item, would be too burdensome. Although GreenWood worked out a payment agreement with the Luxi Forestry Bureau so that only half of the annual land lease expenses would have to be paid upfront (and the remaining half to be paid through a profit sharing plan), the annual cash commitment for the land lease would still be around RMB 20 million (about US$3 million), which was perceived by Oriental as too risky to justify the estimated financial return. Jeff voted in favor of the project, but he said he understood the concerns expressed by the investors from Oriental. As he noted in the case, the land lease price in Luxi was more expensive than that in Australia, New Zealand, Poland, Romania, and etc. Brian believed that the decision reflected Oriental‘s lack of familiarity with the Chinese market. A key consequence of this decision was that GreenWood completely dropped Shandong province from its original strategic plan as the land lease expenses in this province were generally very high because of its fertile land. Shortly afterwards, the investment committee also accepted GreenWood‘s senior management‘s recommendation not to pursue the Dongji project because of the potential reputation risk. As described in the case, Wanli Afforestation Group and Yilin Wood Industry Co. Ltd., the two large private forestry companies, were under litigation for illegal fund raising and the use of a pyramid scheme. As of mid-2010, thirty individuals were convicted and put in jail. Lideng not only provided the silvicultural management services for the above two companies, but also adopted many similar business practices, even though there had not been any legal consequences at the time of the writing of this case. Both Oriental and GreenWood perceived the possible legal dispute faced by Lideng as a ―ticking time bomb.‖ With both the Luxi and Dongji projects out of consideration, a potential project in Jiangxi province which was initially not a priority (but still being considered) came into the picture. The feasibility analysis showed that the IRR was estimated to be 12-13percent. The land lease expenses were even a little lower than in Dongji.
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Teaching Note
Case 1: Robin Hood
Brian explained that the reason this project moved so fast was partly due to the experiences resulting from the Luxi and Dongji projects and partly due to the Chinese partner in Jiangxi being very business savvy and understanding the concerns of the foreign investors well. The tree assets acquired, however, were mainly pine and fir trees whose rotation is about 20 to 25 years, which appeared to be inconsistent with GreenWood‘s expertise and strategic focus. Brian explained that GreenWood updated its strategy to capture and expand its participation in short rotation forests. The short rotation was redefined as twenty-five years and shorter. Thus, this project was still suitable. As of the end of 2010, approximately US$20 million was invested in the Jiangxi project. In fact, GreenWood specifically formulated a strategic plan for Jiangxi province and intended to make a total investment of US$80 million in the future. References Porter, M., & Kramer, M. 2006. ―Strategy and Society: The Link between Competitive Advantages and Corporate Social Responsibility.‖ Harvard Business Review, December: 78–92. Hennart, J. F. 2009. ―Down with MNE-centric Theories! Market Entry and Expansion as the Bundling of MNE and Local Assets.‖ Journal of International Business Studies,40, 1432–1454.
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Teaching Note
Case 1: Robin Hood
Appendices EXHIBIT TN-1: GREENWOOD’S RESOURCES AND CAPABILITIES PRIOR TO INTERNATIONAL EXPANSION IN 2005 GreenWood’s Tangible Resources Physical Resources
•
Small tree plantations, nurseries, and office facilities in Oregon, U.S.
Financial Resources
• •
Fees from managing the tree plantation assets. US$1 million raised for the Chinese market.
Human Resources
• •
Strategic staff (in research) acquired. Highly competent but relatively small management team.
Organizational Resources
•
Certain cultivation methods (mechanical and chemical methods of weed control, pest management techniques, etc.)
• •
Elite plant materials. FSC certification.
•
Gathered market information/data.
•
Accumulated knowledge of the Chinese market and culture.
•
Experience in plantation management and scientific development.
•
Entrepreneurial spirit.
•
Ability to envision the future of tree plantation and its role as a sustainable environmental solution—improving air and water quality, reclaiming deforested land, generating renewable energy, etc. Research capabilities for developing elite plant materials continuously. • Expertise in poplar hybridization and genetic improvement. • Some experience in adapting elite plant materials to the Chinese environment. Integrated silvicultural management including land preparation, spacing and thinning, pruning, weed control, pest and disease control, fertilization, irrigation, and harvesting. Social networking:
GreenWood’s Intangible Resources and Capabilities Qualities of Human Resources
Organizational capabilities
•
•
•
•
Jeff Nuss‘s professional networking capabilities.
•
Dr. Stanton‘s relationship with the WorldBank and various academic experts. GreenWood‘s relationship development with the practitioners and government agencies in China.
•
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Teaching Note
Case 1: Robin Hood
EXHIBIT TN-2: COMPARISON OF ALTERNATIVE ENTRY MODES
Licensing or selling plant materials
Advantages No need to get directly involved in the foreign operations and thus has low costs.
Disadvantages Lack of control and global coordination. Developing potential competitors.
Earning licensing fees or sales revenues. Joint Venture
Risk sharing with local partners. Getting access to the resources and capabilities of local partners. Circumventing institutional and cultural barriers.
Acquisition
Possible benefits due to local partners‘ political connections. Rapid market entry. Ownership of local facilities and knowledge.
Greenfield
Full control of know-how and operations.
High transaction costs due to information asymmetry between licensors and licensees. Potential dilution of ownership advantages. Potential conflicts due to cultural and administrative differences and possibly incompatible goals. Difficult to achieve global coordination. Likely pay a premium. Difficult post-acquisition integration due to cultural and institutional distances. Potential high costs and risks due to liabilities of smallness, newness and foreignness.
Global coordination and knowledge dissemination.
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Teaching Note
Case 1: Robin Hood
EXHIBIT TN-3: POTENTIAL BENEFITS AND RISKS IN PARTNERING
Luxi Forestry Bureau
Benefits Provision of access to complementary local physical assets: land
Risks Possible dilution of some ownership advantages. Unpredictable change of leadership.
Provision of crop care labor forces.
Dongji Lideng Forestry Development Co., Ltd.
Assistance in overcoming cultural and institutional distances due to its political clout (dealing with government agencies and local farmers.) Provision of access to complementary local physical assets: land. Provision of crop care labor forces. Contributing patented deep planting technique.
Becoming a potential competitor in the future after substantial sharing of ownership advantages. Reputation risks due to its close collaboration with two large private forestry companies under litigation of illegal fundraising
Contributing plant materials developed by the FAO project. Assisting in circumventing institutional and cultural barriers due to local connections.
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Teaching Note
Case 1: Robin Hood
EXHIBIT TN-4: COMPARISON OF ECONOMIC IMPLICATIONS: LUXI VERSUS DONGJI
Pros
Luxi
Dongji
● Favorable natural conditions
● It is cheap to acquire tree
(climate, soil, etc.); Luxi has a faster rotation scheme than Dongji. ● Luxi‘s estimated annual tree growth rate will increase from 1.2 m3/mu to1.8 m3/mu (versus Dongji‘s 0.7 m3). ● High tariffs as well as transportation costs keep most imports out of the local competition. ● Local demand far exceeds supply (e.g., 2600 mills in Linyi —huge demand still exists despite the closure of a number of these mills). ● Accessible to the export markets.
plantation assets and to take care of the crops (i.e., trees). ● The land lease rate is low. ● Lideng has patented deep
planting techniques suited to the harsh environment of northern China — and has the sole right to propagate commercially superior plant materials developed by the FAO project. ● Lideng has experience in poplar
tree plantation development. ● Lideng has government approval
to establish an additional 300,000 mu of poplar plantation in 3 to 5 years. ● Local demand in Dongji far
exceeds local supply. Cons
● The upfront investment in the
● The environmental conditions are
existing plantation assets is almost three times as much as Dongii‘s. ● The land lease rate and crop
care expenses are much higher than Dongii‘s. ● It can be difficult and risky to work
with the government agencies. For example, the leadership might change and sometimes it‘s unclear who has decision making authority. Conclusion
relatively harsh. ● Dongji requires a 10-year
rotation scheme because of its low annual growth rate. ● Potential of serious threats from the Russian imports. ● Not readily accessible to the export markets. ● Potential financial risks associated with Lideng‘s reputation.
Both projects seem to be economically attractive; the economic risks appear to be higher for the Luxi project, though there are also financial risks associated with Lideng‘s reputation in the Dongji project.
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Teaching Note
Case 1: Robin Hood
EXHIBIT TN-5: IRR AND NPV ESTIMATES (PER MU): LUXI VERSUS DONGJI Luxi
Dongji
Scenario 1
Scenario 2
Scenario 3
Scenario 4
Scenario 1
Scenario 2
Scenario 3
Scenario 4
Luxi (1.8)
Luxi (1.5)
Luxi (1.5)
Luxi (1.5) ¥220.22
Dongji (0.9) ¥815.90
Dongji (0.7) ¥257.66
Dongji (0.7) ¥275.98
Dongji (0.7) ¥242.50
NPV
¥1,473.10
¥237.06
¥260.14
IRR
16.2%
11.1%
11.3%
11.1%
17.0%
12.5%
12.7%
12.5%
year 1
-1109
year 2
-477
-1109
-1109
-1109
-387
-387
-387
-387
-477
-477
-477
-132
-132
-132
-132
year 3 year 4
-477
-477
-477
-477
-132
-132
-132
-132
-477
-477
-477
-477
-132
-132
-132
-132
year 5
-477
-477
-477
-477
-132
-132
-132
-132
year 6
-477
-477
-477
-477
-132
-132
-132
-132
year 7
6566
5392.5
5392.5
5392.5
-132
-132
-132
-132
year 8
-1109
-1109
-1109
-1109
-132
-132
-132
-132
year 9
-477
-477
-477
-477
-132
-132
-132
-132
year 10
-477
-477
-477
-477
3873
2983
2983
2983
year 11
-477
-477
-477
-477
-387
-387
-387
-387
year 12
-477
-477
-477
-477
-132
-132
-132
-132
year 13
-477
-477
-477
-477
-132
-132
-132
-132
year 14
6566
5392.5
5392.5
5392.5
-132
-132
-132
-132
year 15
-1109
-1109
-1109
-1109
-132
-132
-132
-132
year 16
-477
-477
-477
-477
-132
-132
-132
-132
year 17
-477
-477
-477
-477
-132
-132
-132
-132
year 18
-477
-477
-477
-477
-132
-132
-132
-132
year 19
-477
-477
-477
-477
-132
-132
-132
-132
year 20
-477
-477
-477
-477
3873
2983
2983
2983
year 21
6566
5392.5
5392.5
5392.5
-387
-387
-387
-387
year 22
-1109
-1109
-1109
-1109
-132
-132
-132
-132
year 23
-477
-477
-477
-477
-132
-132
-132
-132
year 24
-477
-477
-477
-477
-132
-132
-132
-132
year 25
-477
-477
-477
-477
-132
-132
-132
-132
year 26
-477
-477
-477
-477
-132
-132
-132
-132
year 27
-477
-477
-477
-477
-132
-132
-132
-132
year 28
6566
5392.5
5392.5
5392.5
-132
-132
-132
-132
year 29
-1109
-1109
633.25
0
-132
-132
-132
-132
year 30
-477
-477
3873
2983
2983
2983
year 31
-477
-477
-387
-387
642.5
0
year 32
-477
-477
-132
-132
year 33
-477
-477
-132
-132
year 34
-477
-477
-132
-132
year 35
6566
5392.5
-132
-132
year 36
-1109
-1109
-132
-132
year 37
-477
-477
-132
-132
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Teaching Note
Case 1: Robin Hood
year 38
-477
-477
-132
-132
year 39
-477
-477
-132
-132
year 40
-477
-477
3873
2983
year 41
-477
-477
-387
-387
year 42
6566
5392.5
-132
-132
year 43
-1109
-1109
-132
-132
year 44
-477
-477
-132
-132
year 45
-477
-477
-132
-132
year 46
-477
-477
-132
-132
year 47
-477
-477
-132
-132
year 48
-477
-477
-132
-132
year 49
6566
5392.5
-132
-132
year 50
-1109
-1109
3873
2983
year 51
-477
-477
-387
-387
year 52
-477
-477
-132
-132
year 53
-477
-477
-132
-132
year 54
-477
-477
-132
-132
year 55
-477
-477
-132
-132
year 56
6566
5392.5
-132
-132
year 57
-1109
-1109
-132
-132
year 58
-477
-477
-132
-132
year 59
-477
-477
-132
-132
year 60
-477
-477
3873
2983
year 61
-477
-477
-387
-387
year 62
-477
-477
-132
-132
year 63
6566
5392.5
-132
-132
year 64
-1109
-1109
-132
-132
year 65
-477
-477
-132
-132
year 66
-477
-477
-132
-132
year 67
-477
-477
-132
-132
year 68
-477
-477
-132
-132
year 69
-477
-477
-132
-132
year 70 Residual Value
6566
5392.5
3873
2983
1220.2
633.25
1087.5
642.5
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Teaching Note
Case 1: Robin Hood
EXHIBIT TN-6: SOCIAL AND ENVIRONMENTAL IMPACT ANALYSIS: LUXI VERSUS DONGJI Luxi ● GreenWood‘s investment in tree plantation assets can facilitate local economic development. For example, local contractors can be hired to take care of the crops (i.e., trees). ● GreenWood‘s advanced silvicultural management (including adopting FSC standards) can generate spillover effects to help the local farmers improve forestry management. ● Locally tested, GreenWood‘s elite poplar plant materials can enhance tree growth rate and pest resistance, etc. (which is unlike Dongji, where the potential improvement of tree growth is limited or at least uncertain and the pest problem is minimal due to the harsh climate). Dongji ● GreenWood‘s investment in tree plantation assets can facilitate local economic development. For example, Lideng can be hired to take care of the crops, which will help with local employment. ●
GreenWood‘s advanced silvicultural management (including adopting FSC standards) can generate spillover effects to help the local farmers improve forestry management, at least to a certain extent.
Strategic: long-term competitive advantages and positive social impact would be mutually reinforcing Non-strategic
Luxi GreenWood can help set up a small wood processing mill with an estimated investment of US$750,000. The mill, associated with high value-added activities, will provide employment opportunities to residents in Luxi and also improve the sophistication of local demand and potential exports. However, this kind of project will fall outside GreenWood‘s core activities.
Dongji GreenWood can help combat desertification in Dongji (1.5 million mu is available for poplar plantation), which will also help improve the ecological environment in Dongji, which is unlike Luxi where such efforts have long been made. (Note: Some students may argue that this is strategic for GreenWood.) GreenWood‘s investment can help ―clean up‖ local business practices by preventing ―financial schemes‖ and the like from happening in the future.
Strategic Importance of Value Chain Activities
Overall, GreenWood‘s long term competitive advantages and positive social impact will be more mutually reinforcing from the Luxi project than from the Dongji project because GreenWood‘s expertise in tree improvement, nursery, tree farm operations, product sales and trading will likely be exploited more effectively in Luxi.
Teaching Note Case 9 — Kickstarter and Crowdfunding 2019 Case Objectives 1. To understand the importance of managing innovation, especially when pursing an entrepreneurial growth strategy. See the table below to determine where to use this case: NOTE: There are both PRIMARY and SECONDARY chapters that can be used for this case. The Teaching Note gives guidance for the PRIMARY use chapters and provides suggestions if TN1-137 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
the instructor wants to use the case to illustrate concepts from the optional SECONDARY chapters. CASE OBJECTIVES TABLE Chapter Use Key Concepts PRIMARY Opportunity recognition CONCEPTS 8: Entrepreneurial Strategies 12: Managing Innovation
Innovation; scope of innovation; entrepreneurial orientation
SECONDARY CONCEPTS 1. Strategy Concept 2: External Environment
Strategic management; vision, mission, strategic objectives
11. Strategic Leadership
Additional Readings NOTE additional reading, web links, video. See possible additional assigned reading, Mallick, E. R. 2013. The dynamics of crowdfunding: An exploratory study. NOTE additional articles, web links. See possible additional assigned reading, Lumpkin & Dess, 1996, ―Clarifying the entrepreneurial orientation construct and linking it to performance,‖ AMR, 21(1)
Industry competition five forces; general environmental factors Setting a direction
Case Synopsis Kickstarter became a popular middleman between the entrepreneur and the capital needed to turn an idea into a reality. The platform was one of the first to introduce the concept of crowd funding—raising capital from the general public in small denominations to fund creative endeavors—but more entrepreneur-friendly forums were popping up, eager to assist in fulfilling the desires of individuals looking to start something of their own. In a social-media-filled world you could now count on your peers far and wide to help you fund your big idea.
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Teaching Note
Case 1: Robin Hood
Since its inception Kickstarter had trouble pleasing both project creators and backers alike: procedures had to be refined, rules and policies established, and all parties needed better communication in order to clear up misunderstandings. Kickstarter‘s founders appeared to focus more on the creative process than on the financial outcome, believing that ―a big part of the value backers enjoy throughout the Kickstarter experience‖ was to get ―a closer look at the creative process as the project comes to life.‖ Although Kickstarter only received compensation once the project was successfully funded, it still pocketed 5 percent of the total funds raised, regardless of the eventual outcome. Kickstarter was paid whether or not the project actually created its final product and returned actual value to the backer. Kickstarter provided no guarantees that funded projects would actually produce promised items or deliver on the project‘s goals. Kickstarter‘s founders continued to try to explain to backers that they had no control over the donated funds once those funds were in the hands of the project creator/developer, and therefore couldn‘t issue refunds. Kickstarter continued to emphasize that the value was in participating, backing the process, not in receiving actual goods or services. Kickstarter seemed to want to be a place where people could ―participate in something‖—something they ―held dear‖ and ultimately become a ―cultural institution‖ that would outlive its founders. Was that the vision of a commercial venture, or was it a wish to eventually become a not-for-profit legitimate causefunding organization? Did Kickstarter have the right business model for the future? According to one researcher, the crowdfunding industry represented ―a potentially disruptive change‖ in the way business funding was done. Certainly opportunities existed, but in 2019 Kickstarter was ―in turmoil‖ after nearly 50 of the company‘s 120 staff had left, including seven out of eight members of the company‘s executive team. Co-founder Perry Chen had stepped down, and the remaining employees had unionized in order to gain ―a seat at the table.‖ What would the future hold? Teaching Plan Kickstarter is a good example of how entrepreneurial firms need a good understanding of industry and external environmental factors when crafting strategy. This case can be used toward the end of the semester to review strategy formulation and implementation, especially what might be necessary in order to manage innovation when the industry is still under development. ICEBREAKER This case can start with an icebreaker. Starting from the perspective of a customer may make it easier for students to transition to a strategic analysis. It might be interesting to have students visit the Kickstarter website at http://www.kickstarter.com/ and ask the following:
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Teaching Note
Case 1: Robin Hood
Would you invest in a Kickstarter project? Why or why not? What might entice you into making this type of investment or donation to a creative project? Some students may have already known about certain Kickstarter projects and might have stories to tell themselves about ones that failed. Expand upon the motivations for this type of investment, and why or why not Kickstarter might be a good option for entrepreneurs who wish to find funding for their projects. Summary of Discussion Questions Below is a list of the suggested discussion questions. You can decide which questions to assign and which additional readings or exercises to include to augment each discussion. Refer back to the Case Objectives Table at the beginning of this Teaching Note to identify any additional readings and/or exercises so they can be assigned in advance. 1. PRIMARY QUESTIONS: What makes Kickstarter entrepreneurial, and how is this strategy working for them? 2. What approach does Kickstarter appear to have regarding innovation, and how should this be managed? 3. SECONDARY QUESTIONS: What is it about the initial strategic analysis process that helps a firm identify a business opportunity? How might the external environment affect Kickstarter‘s entrepreneurial strategy? What are the strategic leadership challenges when the industry is still under development? Discussion Questions and Responses 1. What makes Kickstarter entrepreneurial, and how is this strategy working for them? Referencing Chapter 8: Entrepreneurial Strategy and Competitive Dynamics New ventures often face unique strategic challenges if they‘re going to survive and grow. Whether the firm is an entrepreneurial startup, a small business, or an existing business entering a market or industry for the first time, it must rely on sound strategic principles to be successful. Entrepreneurial activity influences a firm‘s strategic priorities and intensifies the rivalry among an industry‘s close competitors. Even with a strong initial resource base, entrepreneurs are unlikely to succeed if their business ideas are easily imitated or the execution of the strategy falls short. Not only is it important for a firm to recognize an entrepreneurial opportunity, a firm must understand the competitive dynamics that are at work in the business environment in order to succeed with a growth opportunity. It‘s important to have an effective competitive strategy. Entrepreneurship involves the creation of new value by an existing organization or new venture that involves the assumption of risk.
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Teaching Note
Case 1: Robin Hood
For an entrepreneurial venture to create new value, three factors must be present—an entrepreneurial opportunity, the resources to pursue the opportunity, and an entrepreneur or entrepreneurial team willing and able to undertake the opportunity. Entrepreneurs must go through a process of identifying, selecting, and developing potential opportunities. See Exhibit 8.1 and the opportunity analysis framework: the relationship between an entrepreneur, the firm‘s resources, and the opportunities available in the firm‘s environment. Launching a competitive venture requires a special kind of leadership involving courage, belief in one‘s convictions, and having the energy to work hard. Three characteristics of entrepreneurial leaders are: ● Vision ● Dedication and drive ● Commitment to excellence To achieve excellence, venture founders must understand the customer, provide quality products and services, pay attention to details, continuously learn, and surround themselves with good people, building an entrepreneurial team. Resources are an essential component of a successful entrepreneurial launch. The most important resource is usually money, but human resources, strong and skilled management, is also an essential asset. Social capital, or entrepreneurs who have extensive social networks or wellconnected key contacts, allows the new venture to gain exposure and build legitimacy faster. Strategic alliances represent a type of social capital that can be especially important to young and small firms. Entrepreneurs also need to understand the concept of opportunity recognition: the process of discovering and evaluating changes in the business environment, such as a new technology, socio-cultural trends, or shifts in consumer demand, that can be exploited. Changes in the external environment can lead to new business creation, but the discovery of these new ideas is not enough. They then need to be evaluated to find out if they‘re strong enough to become new ventures. Good entrepreneurial opportunities are those that are attractive to the marketplace (there must be demand for the new product or service), achievable (it must be practical and physically possible to do), durable (the window of opportunity must be open long enough for it to have a chance for success), and value creating (it must be profitable—the benefits must surpass the cost of development by a significant margin). Certainly, Kickstarter‘s founders had vision, dedication and drive, and they appeared to understand their customer (at least the project creator/developer). They had provided a quality service with their website interface and appeared to be paying attention to details as they continuously learned about the issues raised by disappointed backers and tried to implement solutions. Regarding resources, Kickstarter got a good start with $10 million financing from the founders of Twitter, Vimeo, Meetup and Flickr, among others. Obviously, these entrepreneurs who had TN1-141 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
preceded the Kickstarter founders believed in Kickstarter‘s vision. This gave Kickstarter initial legitimacy and social capital to develop and begin to implement its ideas. Kickstarter‘s founders appeared to have clearly identified the opportunity, the changes in the business environment that allowed their idea to emerge. Certainly the ―customer demand‖ had been there (entrepreneurs have existed for decades), but a mechanism for providing small amounts of funding from many donors was not feasible until the Internet and related programming technology became readily available. This meant that external environmental conditions were favorable: the opportunity to provide crowdfunding was attractive to the marketplace, it was now achievable, and it was durable (at least until equity-based competitors grew in number and power, possible now that the JOBS Act had removed many barriers.) The strategic question remaining was whether or not the Kickstarter business model was value creating for future customers. Part of the value in an ―investment‖ was being able to see a significant return. Kickstarter‘s founders had been clear that they were not interested in providing a conduit for investors to become equity holders in the projects they funded. Now that more competition was entering the crowdfunding space, and able to provide options for purchasing equity in new startups, could Kickstarter continue to attract new ―investors‖ by offering these investors a chance to participate in the creative process as the only ―return‖ on their investment? There had been consistent and fairly vocal negative feedback about Kickstarter‘s unwillingness to support the backer, leading some to question Kickstarter‘s motives, due to its ―delays, deception, and broken promises.‖ And, within the company itself, after co-founder Perry Chen had stepped down as CEO in 2019, having taken over from co-founder, Yancey Strickler, only two years earlier, leadership vision was uncertain. Employees were concerned that Chen had made some bad decisions, making sudden changes to planned Kickstarter features, scrapping project timelines at the last minute, forcing out highly respected employees, and trying to shake up office culture in ways that struck the rank and file as simply bizarre. In reaction, employees decided to unionize with the Office and Professional Employees International Union (OPEIU) Local 153. Kickstarter staff said they were forming a union to promote ―inclusion and solidarity, transparency and accountability,‖ and gain ―a seat at the table.‖ Because one of the key factors in achieving an entrepreneurial vision was for leaders to surround themselves with good people, building an entrepreneurial team, what would be the role for Aziz Hasan, the head of Kickstarter‘s Design and Product teams after he was made interim CEO? NOTE — ADDITIONAL READING, WEB LINKS: For further information about crowdfunding in general, the instructor might want to assign the following article as background:
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Teaching Note
Case 1: Robin Hood
Mallick, E. R. 2013. ―The Dynamics of Crowdfunding: An Exploratory Study.‖ University of Pennsylvania–Wharton School, June 26, 2013. Journal of Business Venturing. Available at SSRN: http://ssrn.com/abstract=2088298 or http://dx.doi.org/10.2139/ssrn.2088298. For initial information on the JOBS Act, see Harrison K. 2013. ―What You Really Need to Know About the Jobs Act General Solicitation Rule.‖ Forbes, October 21, at http://www.forbes.com/sites/kateharrison/2013/10/21/what-you-really-need-to-know-about-thejobs-act-general-solicitation-rule/. There are a lot more options for raising money these days: The JOBS Act was finally implemented on September 23rd, 2013 after the SEC lifted the ban on mass marketing of private securities offerings. However, it‘s important to note that the law does not seem to directly impact donation-based or non-financial-return models like Kickstarter. The law does now allow what‘s being called ―crowd investing,‖ or the ability to raise ―up to $1 million within a 12-month period from the general public through a broker-dealer or ‗funding portal‘ website.‖ See details at http://www.forbes.com/sites/realspin/2013/10/08/the-jobs-actisnt-all-crowdfunding/. There are still several issues that could prove problematic for small companies wanting to raise money by reaching out to potential investors using social media and other online venues. To explain what the JOBS Act new provisions might mean for entrepreneurs, see http://online.wsj.com/article/SB10001424127887324769704579010553419135282.html?mod=dj em_jiewr_ES_domainid. For a list from May 2013 of the ―top 10 crowdfunding sites for fundraising,‖ see http://www.forbes.com/sites/chancebarnett/2013/05/08/top-10-crowdfunding-sites-forfundraising/. Kickstarter is listed in the number 1 position, with Indiegogo at number 2, but that might change as the JOBS Act provisions increase opportunities. Here‘s an overview from 2020 https://www.thebalancesmb.com/best-crowdfunding-sites-4580494. One option similar to Kickstarter, GoFundMe at http://www.gofundme.com/ allows people to set up their own websites to accept donations. GoFundMe takes 5 percent of everything donated through the portal. Check out other fundraising sites such as Indiegogo at http://www.indiegogo.com/projects?filter_quick=popular_all. For a video story about how Peloton successfully used crowdfunding via Kickstarter to become a multimillion dollar IPO in 6 years, see https://www.inc.com/video/peloton-ipotimeline.html?cid=search.
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Teaching Note
Case 1: Robin Hood
2. What approach does Kickstarter appear to employ regarding innovation, and how should this be managed? Referencing Chapter 12: Managing Innovation and Fostering Corporate Entrepreneurship Kickstarter‘s major challenge was to create a sustainable competitive advantage in the marketplace that is not only unique and valuable but also difficult for competitors to copy or substitute. In addition, that competitive advantage had to develop and grow as the industry matured. One of the most important sources of growth opportunities is innovation. Innovation involves using new knowledge to transform organizational processes or create commercially viable products and services using the latest technology, experimentation, creative insights, and information from competitors. However it comes about, innovation occurs when new combinations of ideas and information bring about positive change. In fact, the root of the word innovation is the Latin novus, which means new. Innovation involves introducing or changing to something new. It is a critical part of strategic implementation. Before proceeding, firms must first define the scope of their innovation efforts and must ensure that they are not wasted on projects that are outside the firm‘s domain of interest. Firms must have the means to focus their innovation efforts. A strategic envelope defines the range of acceptable projects. Strategic envelope means a firmspecific view of innovation that defines how a firm can create new knowledge and learn from an innovation initiative even if the project fails. The strategic envelope also gives direction to a firm‘s innovation efforts, which helps separate seeds from weeds and builds internal capabilities. One way to determine which projects to work on is to focus on a common technology. Then, innovation efforts across the firm can aim at developing skills and expertise in a given technical area. Another potential focus is on a market theme. Companies must be clear not only about the kinds of innovation they are looking for but also the expected results. However a firm envisions its innovation goals, it needs to develop a systematic approach to evaluating its results and learning from its innovation initiatives. It needs to develop a set of questions to ask itself about its innovation efforts. In defining the innovation scope, a firm should answer several questions: ● How much will the innovation cost? ● How likely is it to actually become commercially viable? ● How much value will it add; that is, what will it be worth if it works? ● What will be learned if it does not pan out? Some of challenges of innovation involve choosing when and how to continue to innovate, the scope and pace of future innovation, as well as whether or not to collaborate with innovation partners. The innovation of new ventures requires resources such as financial, human and social capital, and requires the leadership team to have adequate vision, dedication and drive. TN1-144 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Kickstarter‘s founders certainly had vision, dedication, and drive. They appeared to have created an organization with significant resources: they had attracted legitimate entrepreneurs in several areas of artistic creation; they had a business model that provided clear financial returns with minimal processing (originally Amazon Payments, but now Stripe Payment was the only middleman); they were taking advantage of technology in crowdsourcing and social media to attract both project creators and investors; and they used this technology to provide a web-based infrastructure for communication among all parties. Their vision appeared to have attracted both human and social capital, from the apparently dedicated employees to the support of institutions like the Sundance Film Festival. If artistic supporters like Sundance were willing to continue as partners in this innovative effort, this would increase Kickstarter‘s legitimacy. In addition, Kickstarter founders appeared to be willing to engage in self-assessment—what were they learning as they proceeded with their strategic vision? They were making changes that they believed would improve the process and value of their service. The major problem appeared to be the scope of future innovation. Now that Kickstarter had implemented additional rules, especially ones limiting the ―gadget makers‖ in what they could present to promote their projects—no simulations or ―renderings,‖ just technical drawings of photos of actual current prototypes—the categories of art, music, and film appeared to have more prominence in the founders‘ eyes. This support for more artistic endeavors rather than products seemed to be enhanced by Kickstarter‘s move to reincorporate as a Public Benefit Corporation, donating 5 percent of its annual after-tax profit to promote the arts, music and education. This is not in the case, but can be viewed here: https://www.kickstarter.com/blog/kickstarter-is-now-abenefit-corporation. In the statement about this change, the founders pointed out they had amended their corporate charter to ―lay out specific goals and commitments to arts and culture, making our values core to our operations, fighting inequality, and helping creative projects come to life.‖ See https://www.kickstarter.com/about. Was that a wise choice? Would emphasis on true ―art‖ projects be lucrative enough to keep investments flowing and a for-profit company growing? Although the vision was appealing, was it commercially viable? For advanced students: the instructor might want to assign the 1996 article by Lumplin & Dess, which gives more information about the entrepreneurial orientation: in implementing an entrepreneurial strategy, it helps if leadership can embrace the entrepreneurial orientation— autonomy, innovativeness, proactiveness, competitive aggressiveness, and risk taking— necessary to sustain the pace of innovation. A culture of entrepreneurship means a search for venture opportunities permeates every part of the organization. Strategic leaders and the culture generate a strong impetus to innovate, take risks, and seek out new venture opportunities. Kickstarter‘s founders certainly had all of these characteristics at the founding. Was this enough for them to sustain a competitive advantage in this rapidly changing industry, especially with employee unrest and an interim CEO? TN1-145 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
NOTE — ADDITIONAL READING, WEB LINKS: From the project creator perspective, Kickstarter backing is not enough. Firms who raise needed funds still have to deliver. As one 2013 article points out, ―once people have pledged their cash, they expect an actual product, and actually fulfilling an order—getting the product manufactured and in the hands of a customer—is a fantastically complex process,‖ and this complexity helps explain why sometimes over 9 percent of successfully funded Kickstarter projects never deliver. See data on project failures at https://www.cnbc.com/2015/12/10/9-percent-kickstarter-projectsfail-to-deliver.html. In 2017, Kickstarter announced it would be helping gadget crowdfunders ―keep their promises‖ by partnering with a Boston-based company called Dragon Innovation. Dragon helps companies deal with the infinitely complex challenge of turning ideas into products that can be manufactured within the constraints of a particular budget and timetable. And it‘s part of an upcoming program from Kickstarter called Hardware Studio. Launching in September 2017, it‘s designed to help the creators of hardware campaigns bring their projects to life with a minimum of surprises.‖ See https://www.fastcompany.com/40421378/kickstarter-wants-to-help-gadgetcrowdfunders-keep-their-promises. For an article about the original vision of the founders, see an extensive interview with Chen, Strickler and Adler about what they believe in, from Fast Company in April, 2013, at https://www.fastcompany.com/3006694/true-to-its-roots-why-kickstarter-wont-sell. In 2015, new CEO Yancey Strickler (taking charge from co-founder Perry Chen who left to become chairman of the company) launched deals with ―New York‘s Museum of Modern Art, iTunes, and the video-game distribution company Steam to promote and distribute Kickstarter creations. The result is that Kickstarter is looking increasingly like not just a fundraising tool, but like a publishing and distribution system for creators. It‘s also a way to differentiate Kickstarter‘s brand from the As-Seen-on-TV quality of its nearest competitor, Indiegogo.‖ See https://www.fastcompany.com/3039616/kickstarter. When Kickstarter decided to ―transform its business model‖ by becoming a Public Benefit Corporation, it had to release an annual benefit statement. This document is intended to hold the board of directors accountable to following its stated purpose and deliver on their fiduciary duty to provide a ―general public benefit.‖ In 2017 Kickstarter‘s first benefit statement ―revealed that the company pays a higher than average tax rate (25 percent), employs an equal number of women and men (in an industry where 75–25 splits are the norm), and pays its executives less than five times their average employee, compared to the 95-times industry average. Rather than recruit from predominantly white Ivy League schools, the company hired 100 percent of its interns from organizations like Coalition for Queens, a nonprofit devoted to bringing diverse talent into the technology industry.‖ For more on how a PBC operates, and why Kickstarter‘s founders decided to pursue this route, see https://www.fastcompany.com/3068547/whykickstarter-decided-to-radically-transform-its-business-model and see more about how Kickstarter is ―trying to put principles before profits,‖ https://www.fastcompany.com/3068546/in-new-report-kickstarter-shows-how-its-puttingprinciples-before-. TN1-146 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
In 2017 Strickler stepped down and Chen returned as CEO. This shift caused a shake-up in senior leadership as seven of the eight members of the leadership team left the company. This leadership move may be because of Kickstarter‘s lack of growth since 2015—number of dollars successfully pledged actually fell between 2015 and 2016, and 2017 was reported to be still below the 2015 peak. The company also launched a new funding product, Drip, where subscribers can make a recurring payment to a creator rather than a project. (This is similar to the artist funding platform Patreon.) Chen has stressed how important it is to him that Kickstarter ―not fall into the trap of following traditional models,‖ and has vowed never to go public or sell the company, being committed ―to putting the well-being of creators and employees above traditional metrics like revenue growth or profitability.‖ See https://www.theverge.com/2017/11/15/16652582/kickstarter-drip-creator-subscription-serviceannounced-perry-chen-interview. In March 2019 Perry Chen, CEO of Kickstarter, announced that he was stepping down from his role. Chen stated in an open letter on Kickstarter‘s blog that he‘s going to focus more on the high-level and long-term goals within the company in his role as Chairman of the board. Chen notes that Kickstarter has managed to accomplish a lot in just ten years. For instance, the firm has successfully funded nearly 160,000 projects from all over the world and has pledged to over $4.2 billion in projects. https://hub.packtpub.com/perry-chen-kickstarter-ceo-steps-down-fromhis-role-in-the-middle-of-employees-unionization-efforts/. Interim CEO Aziz Hasan made news by firing two employees who initiated union organizing, and ―confirmed the company‘s perspective of not voluntarily recognizing a union, even if the majority of its workers signed in support of a union. He also dubbed the union framework as ―inherently adversarial.‖ Hassan also pledged not to remain neutral on unionization and said that Kickstarter would continue to actively oppose unionization efforts.‖ This caused a backlash in the tech community, and many influential and past successful Kickstarter project initiators have openly pledged to boycott Kickstarter for future projects. For more information about the challenge of worker‘s right in the tech industry, see https://hub.packtpub.com/as-kickstarterreels-in-the-aftermath-of-its-alleged-union-busting-move-is-the-tech-industry-at-a-tipping-point/ and https://www.inc.com/suzanne-lucas/what-kickstarter-employees-union-win-means-fortech.html?cid=search. 3. SECONDARY QUESTIONS: What is it about the initial strategic analysis process that helps a firm identify a business opportunity? How might the external environment affect Kickstarter’s entrepreneurial strategy? What are the strategic leadership challenges when the industry is still under development? NOTE: there are no PowerPoint slides to accompany the following. Referencing Chapter 1: Strategic Management Any discussion of strategy assumes an understanding of the strategy concept. See Chapter 1, Exhibit 1.1: Strategic management consists of the analyses, decisions, and actions an organization undertakes in order to create and sustain competitive advantages: ● strategy directs the organization toward overall goals and objectives TN1-147 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
● includes multiple stakeholders in decision making ● incorporates both short-term and long-term perspectives ● recognizes tradeoffs between efficiency and effectiveness Leaders face a large number of complex challenges. Leaders must be proactive, anticipate change and continually refine changes to their strategies. This requires a certain level of ―ambidextrous behavior,‖ where leaders are alert to opportunities beyond the confines of their own jobs, and are also cooperative and seek out opportunities to combine their efforts with others. Leaders must make strategic management both a process and a way of thinking throughout the organization. The primary role of the organizational leader is to articulate vision, mission and strategic objectives, and link that to the overall process of strategic management. See Exhibit 1.6. During strategic analysis, the leader does ―advance work‖ to anticipate unforeseen environmental developments, identify unanticipated resource constraints, assess changes in his or her preferences for how to manage. During strategy formulation, the organization addresses the issue of how to compete in a given business to attain competitive advantage. Strategies are formulated at the business, corporate, and international levels. Entrepreneurial initiatives may also play a role. In strategy implementation, depending on the type of organization structure, the leader might include key individuals in a discussion of which strategies might be best to implement at which level within the organization. The leader must ensure proper strategic controls and organizational design and establish effective means to coordinate and integrate activities within the firm, as well as with suppliers, customers and possible alliance partners. Leaders should also be committed to excellence and ethical behavior while promoting learning and continuous improvement. Here‘s where innovation is important. The basic question strategic management tries to answer is: How can we create competitive advantages in the marketplace that are not only unique and valuable but also difficult for competitors to copy or substitute? Vision: When Kickstarter was founded, Percy Chen had said that the concept was ―not an investment, lending or a charity. . . . It‘s something else in the middle: a sustainable marketplace where people exchange goods for services or some other benefit and receive some value.‖ The founders believed that creative projects would make for a better world. Mission: Co-founder Yancey Strickler had added that Kickstarter was a place where people could ―participate in something‖ that they ―held dear,‖ and that ―a big part of the value backers enjoy throughout the Kickstarter experience‖ was to get ―a closer look at the creative process as the project comes to life.‖ The stated mission of the company was ―to help bring creative projects to life.‖ (See https://www.kickstarter.com/about. ) Objective: It appeared the goal was for Kickstarter to ultimately become a ―cultural institution‖ that would outlive its founders, and NOT to participate in ―the equity wave if it comes.‖ Chen believed that ―the real disruption‖ was in funding creative projects without having to be equityTN1-148 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
based. Time had called the company a form of ―crowdsourced philanthropy.‖ Were Kickstarter‘s mission, vision and goals a clear enough statement of strategic intent to fund the company‘s future? Referencing Chapter 2: Analyzing the External Environment of the Firm Organizational leaders must become aware of factors in the overall environment that might affect their ability to create a competitive advantage. So how do managers become environmentally aware? By doing scanning, monitoring, and gathering competitive intelligence, and using these inputs to develop forecasts. This prepares the firm to do more extensive analysis of the forces in the general environment and the industry or competitive environment. Environmental scanning involves surveillance of a firm‘s external environment to predict environmental changes and detect changes already under way. It is a BIG PICTURE viewpoint of the industry/competition, looking for key indicators of emerging trends—what catches your eye? It alerts the firm to critical trends before changes have developed a discernible pattern and before competitors recognize them. Environmental monitoring is a firm‘s analysis of the external environment that tracks the evolution of environmental trends, sequences of events, or streams of activities. Leaders need to monitor the trends that have the potential to change the competitive landscape—what do you want to track? Firms need to CHOOSE the trends identified via the scanning activity and regularly monitor or track these specific trends to evaluate the impact of these trends on their strategy process What factors or trends might be most important to Kickstarter? To assess how the external environment might affect the company‘s strategy, it‘s necessary to take a look at the factors in the general external environment. Kickstarter must consider the political/legal, economic and global, sociocultural and demographic, and technological forces that might affect the ability of the firm to deliver its products and sustain its business. See which factors in the general environment students might pick that have a significant impact on the crowdfunding business. Demographic: As the economy moves toward more of an entrepreneur-driven environment, more youthful individuals from all walks of life have ideas they want to see realized. These ideas cover all types of creative individuals, from artists to technological gadget designers. Socio-cultural: With traditional funding sources drying up in the arts arena, groups of those concerned about finding opportunities to support cultural activities are looking for mechanisms to fund this activity.
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Teaching Note
Suggested: Many rivals compete for market share in this new alternative investment. orm. Suggested: Given the Internet delivery platform, suppliers are commodity Internet service providers without much power.
Suppliers’ Power
Case 1: Robin Hood
Substitutes Threat High Suggested: Substitutes include all traditional investment vehicles.
Rivalry High
Buyers’ Power Med-Low
Low Suggested: Low barriers to entry given the Internet delivery channel. It’s easy to open up an alternative investment website.
Threat of New Entrants High
Suggested: End consumer – the backer – has little economic power, however multiple choices are available for the entrepreneur seeking funding options.
Technological: The growth of the Internet and alternative payment processes has made it possible to connect individuals as never before. Social media has made communication even easier as well. Political-Legal: New options for institutional financial arrangements made possible by legislation such as the JOBS Act opens the door for many forms of investment vehicles. It‘s also necessary to assess the segments of the external competitive environment that include competitors, customers, and suppliers, substitutes and new entrants. Porter‘s five-forces model allows strategists to anticipate where the industry might be most vulnerable. Help students apply Porter‘s five forces of competition to the crowdfunding industry by drawing a diagram on the board and having students fill in the details. The crowdfunding industry currently has profit potential, but only because there are still opportunities for market penetration. Low barriers to entry have created increased competition, and as the market grows the increased bargaining power of entrepreneurs seeking alternative platforms becomes greater as well. Managing innovation will be key to maintaining market share.
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Teaching Note
Case 1: Robin Hood
With the competitive landscape changing rapidly, and backers wondering if Kickstarter projects were legitimate enough to fully support, would Kickstarter be able to maintain its competitive advantage into the future? Would the founders be able to adjust their strategy to take advantage of new opportunities? Would Kickstarter remain innovative and entrepreneurial? The future would tell. Referencing Chapter 11: Strategic Leadership The concept of leadership involves the process of transforming organizations from what they are to what the leader would have them become. See Chapter 11, Exhibit 11.1. This involves: ● Setting a direction ● Designing the organization ● Nurturing a culture dedicated to excellence and ethical behavior Leaders need to set the direction for the organization by continually scanning the environment to develop knowledge of all stakeholders, and knowledge of salient environmental trends and events. Then leaders must integrate that knowledge into a vision of what the organization could become. Leaders require the capacity to solve increasingly complex problems and must be proactive in their approach so they can develop viable strategic options. Leaders are responsible for designing the organization: a strategic leadership activity of building structures, teams, systems, and organizational processes that facilitate the implementation of the leader‘s vision and strategies. Leaders have an important role in creating systems and structures to achieve desired ends. Difficulties in implementing the leader‘s vision and strategies include a lack of understanding of responsibility and accountability among managers, reward systems that do not motivate individuals and groups toward desired organizational goals, inadequate or inappropriate budgeting and control systems, and insufficient mechanisms to coordinate and integrate activities across the organization. Leaders play a key role in changing, developing, and sustaining an organization‘s culture. An excellent and ethical organizational culture is an organizational culture focused on core competencies and high ethical standards. Organizational culture can be an effective means of organizational control. In nurturing a culture dedicated to excellence and ethical behavior, managers and top executives must accept personal responsibility for developing and strengthening appropriate behavior; consistently demonstrate that such behavior is central to the vision and mission; and develop and reinforce role models, corporate credos, codes of conduct, reward and evaluation systems, policies and procedures. Doing this requires leaders to overcome barriers to change and effectively use their power. Everything the Kickstarter founders had done during its founding seemed to point to a clear direction and a culture dedicated to excellence and ethical behavior. The major question still unanswered was whether the organization was designed in such a way as to facilitate the implementation of this vision and strategy into the future, especially given how competition in the crowdfunding industry was rapidly developing into an equity-based model and the rising TN1-151 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
unrest among tech employees. Was Kickstarter using a sustainable business model? Would they be able to achieve their vision now that the overall culture seemed to be unraveling? References Lumpkin, G.T. & Dess, G.G. 1996. ―Clarifying the Entrepreneurial Orientation Construct and Linking It to Performance.‖ The Academy of Management Review, 21(1): 135–172. Mallick, E. R. 2013. ―The Dynamics of Crowdfunding: An Exploratory Study.‖ University of Pennsylvania–Wharton School, June 26, 2013. Journal of Business Venturing. Available at SSRN: http://ssrn.com/abstract=2088298 or http://dx.doi.org/10.2139/ssrn.2088298. Teaching Note Case 10 — QVC Case Objectives 1. To apply the concepts of strategic management and demonstrate the interaction between the components of strategic management: strategic analysis, strategic formulation, and strategic implementation. See the table below to determine where to use this case: NOTE: There are both PRIMARY and SECONDARY chapters that can be used for this case. The Teaching Note gives guidance for the PRIMARY use chapters and provides suggestions if the instructor wants to use the case to illustrate concepts from the optional SECONDARY chapters. CASE OBJECTIVES TABLE Chapter Use Key Concepts PRIMARY CONCEPT 1: Strategy Concept
5: Business Level Strategy SECONDARY CONCEPT: Chapter 6
Strategic management; strategic analysis (external and internal environment); strategic formulation (generic competitive strategy, corporate strategy); strategic implementation (innovation) Competitive strategy; generic strategies Five forces; general external environmental forces; tangible and intangible resources; generic strategies; diversification, acquisition; innovation
Additional Readings or Exercises Exercise: Who shops on QVC, what marketing ―channel‖ do they use to access the service? NOTE Updated news, video
See additional information via embedded web links.
Case Synopsis
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Teaching Note
Case 1: Robin Hood
QVC was the leader in the home shopping market, and was the largest retail operation using broadcast networks, Internet websites and mobile apps. It regularly featured over 700 products on its sites each week, resulting in almost $9 million in annual sales. By its initials alone, QVC promised that it would deliver quality, value, and convenience to its customers. Founded by Joseph Segel in 1986, it had grown quickly to overtake rival Home Shopping Network by focusing on product variety, reliability, and excellent customer service. By concentrating on offering proprietary products endorsed by celebrities and combining this with money-back guarantees and extended-pay credit programs, Segel grew QVC to the position of industry leader. Since then, leadership passed to current president and CEO of QVC, Michael George, but the company‘s growth continued. In 2018, QVC‘s parent company Qurate Retail completed the acquisition of HSN and transferred the ownership to QVC. The success of QVC had been largely driven by its popular television home shopping shows that featured a wide variety of eye-catching products, many of which were unique to the channel. In 1995, QVC launched its own retail website to complement its television home shopping channel. By 2019 this website had attracted several million unique monthly visitors, making it one of the leading multimedia retailers. The firm had also created a family of mobile shopping applications for smartphones and tablets. QVC.com, a once-negligible part of the QVC empire, had grown to account for more than a third of the firm‘s domestic revenue, and was more profitable than QVC‘s television operation. QVC realized the challenges of growing its market share and was always looking for new ways to improve its services and generate a competitive edge. Besides the United States, its presence had grown to U.K., Germany, France, Italy, Japan and through a 49 percent interest to a joint venture in China. QVC knew it was not immune from shifts in technology usage and people‘s entertainment choices. Although QVC believed its loyal shoppers were less likely to drop cable services because they tended to be slightly older and more affluent (tuning in at different times of the day or night), the question remained whether or not it could continue to attract online shoppers as well since these customers missed out on the interaction between hosts and shoppers. Could QVC continue to tell compelling stories that would keep customers coming back, and therefore be able to sustain a competitive advantage that was not only unique and valuable but also difficult for competitors to imitate or substitute? Teaching Plan This case can be used early in the course to demonstrate how all elements of a good strategy should be tied together. It‘s not enough just to have a good idea. Success requires correct analysis of the competitive environment, clear identification of a strategy for competing in this environment, and coordinated execution of this strategy by utilizing appropriate resources. The QVC case can be used to introduce students to this arc of strategic management. IN-CLASS EXERCISE This case can start with an icebreaker. Starting from the perspective of a customer may make it easier for students to transition to a strategic analysis. TN1-153 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Have any of you ever bought a product advertised on TV? If so, what did you think of the experience? It is possible that some students have bought something via a TV infomercial or have shopped at either the QVC TV site or the Home Shopping Network (HSN). It may be a good idea to get them to share their experiences. If they‘ve bought both from QVC and via an infomercial, their experience may help to establish the superiority of QVC. It also makes sense to ask them about the kinds of products they would buy at any of these shopping channels. As the case indicates, QVC was trying to entice new customers by battling a perception that direct-response TV retailers sell just hokey, flimsy or kitschy goods. It has expanded its offerings in home, beauty and apparel, reducing its sales of jewelry, and added exclusive products from reality stars such as Kim Kardashian and Rachel Zoe. Are there any categories of products that students are reluctant to purchase from an infomercial or via QVC or HSN? Students may point out the reasons for their reluctance to buy certain kinds of products from these sources. It‘s also interesting to ask students if they see any difference between buying something via a TV infomercial or on the QVC TV site, and buying something online, or via their mobile device. Both QVC and HSN have e-commerce web pages, as do most of the TV infomercial pitches. Do students see any difference between the TV shopping experience and the online or mobile one? Other online shopping giants like Amazon and eBay don‘t provide the TV channel experience. Does this put them at a disadvantage? What kind of shopping are people likely to do on QVC? Students may talk about planned vs. unplanned purchases. They will eventually get to impulse shopping. Then try and get them to mention the various elements of QVC‘s strategy that may encourage and support impulse shopping. They will mention many elements, all of which are designed to get the consumer to get excited about a product and order it right away. These will include elements such as strong pitches and demonstrations in the shows to quick ordering processes to speedy delivery so that the consumer does not have much time to change his or her mind. Others include unique and exclusive products, an easy credit plan, money-back guarantee and the trustworthiness of QVC. It might be interesting to ask if any students have a favorite ―pitch person‖ they regularly watch. QVC can have both program hosts and visiting celebrities on the TV channel willing to chat with customers as they buy, making it similar to a talk show as well as a shopping destination. This will give the students of an idea how the elements of a good strategy are all tied to a theme or purpose. Would you buy something from QVC if you could do so from your mobile phone? Students should be able to see how expanding the distribution channels for QVC‘s products is one way in which QVC has extended its reach, promoting the awareness of its brand, and therefore staying ahead of its competition.
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Teaching Note
Case 1: Robin Hood
Let’s visit the QVC shopping channel and see what’s selling right now: http://www.qvc.com/onair/liveshow.aspx?rewrite=no. Note that there are now four channels available, each focusing on a different category, with Beauty iQ the newest. Summary of Discussion Questions Here is a list of the suggested discussion questions. You can decide which questions to assign, and also which additional readings or exercises to include to augment each discussion. Refer back to the Case Objectives Table at the beginning of this Teaching Note to identify any additional readings and/or exercises so they can be assigned in advance.
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Teaching Note
Case 1: Robin Hood
Discussion Questions: 1. How did QVC grow into a successful company? 2. What strategy did QVC use, and how did it support this strategy? 3. What challenges does QVC face? How has it confronted them so far? Discussion Questions and Responses 1. How did QVC grow into a successful company? Referencing Chapter 1: Strategy Concept: Introduction and Analyzing Goals and Objectives Strategy is all about the ideas, decisions, and actions that enable a firm to succeed. See Chapter 1, Exhibit 1.1: Strategic management consists of the analyses, decisions, and actions an organization undertakes in order to create and sustain competitive advantages: ● strategy directs the organization toward overall goals and objectives; ● includes multiple stakeholders in decision making; ● incorporates both short-term and long-term perspectives; ● recognizes trade-offs between efficiency and effectiveness. See Chapter 1, Exhibit 1.6: The primary role of the organizational leader is to articulate vision, mission, and strategic objectives. Leaders must also be proactive, anticipate change and continually refine changes to their strategies. What was the original vision that was ―massively inspiring, overarching, and long-term,‖ that represented a destination that is driven by and evokes passion? Is the original vision still applicable given the present circumstances? The organizational mission needs to be considered: a mission encompasses both the purpose of the company as well as the basis for competition and competitive advantages. Organizations must respond to multiple constituencies if they are to survive and prosper, and the mission provides a means of communicating to diverse organizational stakeholders. In writing a mission statement, it is important to understand the definition of the business by answering these questions: 1) Who are its customers? 2) What customer need is the organization trying to fulfill? and 3) How does the business create and deliver value to customers and satisfy their needs? Although vision statements tend to be quite enduring and seldom change, a firm‘s mission can and should change when competitive conditions dramatically change or the firm is faced with new threats or opportunities. Leadership must establish strategic objectives to operationalize the mission statement. That is, objectives operationalize the mission statement, and they help to provide guidance on how the organization can fulfill or move toward the ―higher goals‖ in the goal hierarchy—the mission and vision. Joseph Segel saw an opening and capitalized on it successfully. When viewing the Home Shopping Network in 1986, Segel noticed the poor quality of the programming and the downmarket items sold on the channel. He saw the potential to reach a vast audience and how the TN1-156 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Home Shopping Network was doing it shoddily. Television offered a very effective way to sell products. By combining sight, sound, and motion, the product‘s best features could be exhibited to the potential buyer. In addition, cable television was far more economical than direct mail, print advertising, or traditional retail store distribution. The low entry costs allowed QVC to become a player and the quality of programming and its product line allowed it to differentiate itself from the Home Shopping Network. Segel had a vision of effectively reaching a wide audience with high-quality yet appealing products and doing so in a way that generated significant profits. This vision allowed him to establish the initial mission of the company, which has not changed: to be cost-effective in its operations, yet responsive to customers; to focus on high margin products that are unique and of consistent high quality; to involve both small and large vendors in the search to find products that are ―complex enough—or interesting enough—that the host can talk about it on air.‖ QVC stands for ―quality, value, and convenience.‖ Specific objectives that flow from this vision and mission now include expanding customer reach through technology: first the internet, then streaming video with remote purchase via remote, and mobile phones. Another objective might be to keep the current customer service and product quality standards no matter which distribution channel is used. Implementing this objective means keeping current with technology innovation, continuing to scan and monitor the external environment for consumer trends, vendor product developments, and moves by competitors; and also continuing to provide an exciting work environment where employees are committed to ―quality first.‖ 2. What strategy did QVC use, and how did it support this strategy? QVC needs to create a sustainable competitive advantage in the marketplace that is not only unique and valuable but also difficult for competitors to copy or substitute. See Chapter 1, Exhibit 1.3 for a depiction of the strategic management process. During strategic analysis, the leader does ―advance work‖ to anticipate unforeseen environmental developments, identify unanticipated resource constraints, assess changes in his or her preferences for how to manage. During strategy formulation, the organization addresses the issue of how to compete in a given business to attain competitive advantage. Strategies are formulated at the business, corporate, and international levels. Entrepreneurial initiatives may also play a role. In strategy implementation, depending on the type of organization structure, the leader might include key individuals in a discussion around selecting which strategies might be best to implement at which level within the organization. The leader must ensure proper strategic controls and organizational design and establish effective means to coordinate and integrate activities within the firm as well as with suppliers, customers, and possible alliance partners. Leaders should also be committed to excellence and ethical behavior while promoting learning and continuous improvement. Here‘s where innovation is important.
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Teaching Note
Case 1: Robin Hood
The basic question strategic management tries to answer is: How can we create a sustainable competitive advantage in the marketplace that is not only unique and valuable but also difficult for competitors to copy or substitute? QVC‘s strategy involved doing the following: Strategic Analysis allowed QVC to anticipate competition and other forces in its external environment. Actions taken based on this competitive analysis included the following: Acquisition of rivals to get critical mass: Using its analysis of the external competitive environment, QVC decided to expand its reach by buying competitors such as Cable Value Network Shopping Channel, and ultimately Home Shopping Network. Vertical integration: Understanding the need to anticipate possible leverage placed by key product suppliers, QVC acquired Diamonique Corporation. This gave QVC access to proprietary jewelry products, a product category that accounted for significant high margin revenues. In 2012 QVC acquired Send the Trend, Inc., an e-commerce destination known for trendy fashion and beauty products, and then acquired Zulily, an online retailer that targeted mothers who look for unique items for their children. Developing a vendor network: Understanding the need for establishing key relationships with supplier partners, QVC pursued a range of partners from some of the world‘s biggest companies to small entrepreneurial enterprises. About one-third of QVC‘s sales came from broadly available national brands. But all products had to pass through stringent quality tests. Only 15 percent of the products passed the firm‘s rigorous quality inspection on first try, and as many as one-third were never offered to the public because they failed altogether. This kept the suppliers on their toes. Focusing on customer service: Anticipating the many options customers had, QVC addressed customer service issues. Customers who were reluctant to buy through a television channel were encouraged to do so by means of an easy return policy. Every product came with a 30-day money-back guarantee. Anticipating consumer wants, QVC‘s Send the Trend was able to deliver monthly personalized recommendations that could be shared over customer‘s social networks. Strategic Formulation involves a choice about how to compete. Until QVC‘s entry into the market, the home shopper was not well served. By offering a low-risk shopping experience and high-quality products, and doing this in a unique way that delivered a valuable experience to its customer (a way of differentiating itself from other shopping venues), QVC was able to successfully carve out a sustainable competitive advantage. Strategic Implementation means marshalling resources in such a way as to coordinate and integrate activities to achieve a chosen strategy. Innovating via creative merchandising: From its inception, QVC focused on refining the implementation of its strategy. Paying attention to merchandising, it innovated by holding live shows where a product could be demonstrated and shown to its advantage to a large audience. It TN1-158 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
focused on selling a big percentage of exclusive products—products that customers could not find elsewhere. It used national brands and celebrity spokespeople to draw customers to its channel and then showcased exclusive products. Integrating operations: To establish its position as the world‘s preeminent virtual shopping mall, QVC operated on a 24/7 basis. It sold a wide variety of products, using a combination of description and demonstration by live program hosts. It provided on-air instructions for product use and was very careful in its product selection. To differentiate itself, QVC had theme-based programs, such as Now You’re Cooking and Cleaning Solutions, where celebrities appeared on the program to sell their own products. In some cases, viewers could interact with on-screen hosts. Monitoring procedures and establishing controls: Having adequate stocks of products allowed QVC to ship most products within 48 hours. Also, to take the risk out of buying a product that the customer has not held or touched, QVC offered a 30-day money-back guarantee and no hidden fees in returning goods. A team of 100 experienced buyers combed the world looking for proprietary products. QVC constantly offered new products every week, thereby attracting repeat viewers. Quality control was a major factor in the search for products. The company inspected every product prior to shipping. Among these products, national brands were featured to draw customers to the network. This was to build trust among its customers. In short, QVC‘s success was as a result of anticipating issues in its environment, and carefully selecting implementation activities that supported its strategy of differentiation. 3. What challenges does QVC face? How has it confronted them so far? The major challenges for QVC included maintaining its market share and looking for new ways to improve its services, market its products, and generate a competitive edge that would further differentiate it from its peers. To increase growth and to diversify its market, QVC had expanded into the U.K., Germany, Italy, Japan, France, and China. Now it must strategize to expand both within and beyond those markets. In an effort to succeed in higher margin items, QVC featured products by designers such as Marc Bouwer and Kim Kardashian. These designers were attracted to QVC because of its reach. QVC also actively searched for proprietary products from entrepreneurs or suppliers new to the U.S. market. Very early in the innovation adoption phase, in 1995, QVC took advantage of the explosive growth of the Internet to launch QVC online. The website played two roles. It complemented the television channel and it offered products not carried on the television channel such as books, etc. QVC had also added branded video-on-demand channels. Streaming video allowed more ecommerce consumers to experience QVC‗s innovative product offerings. QVC was also finetuning its retailing via mobile phones, interactive TV, and apps. TN1-159 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
While QVC still faces challenges from the falloff in cable television subscribers, the company‘s CEO Michael George insists that QVC shoppers are less likely to drop cable services because they tend to be slightly older and more affluent. The website does not offer the hybrid of talk show and sales pitch that attracts TV viewers, so, so far, the attractiveness of the television channel remains. QVC appears to be aware of the challenges and will continue to confront them. Referencing Chapter 5: Formulating Business-Level Strategies The question of how to compete in a given business to attain competitive advantage requires an assessment of the types of competitive strategies, including the three generic strategies that are used to overcome the five forces and achieve a competitive advantage: 16. Overall cost leadership Low-cost-position relative to a firm‘s peers Manage relationships throughout the entire value chain 17. Differentiation Create products and/or services that are unique and valued Non-price attributes for which customers will pay a premium 18. Focus strategy Narrow product lines, buyer segments, or targeted geographic markets Attain advantages either through differentiation or cost leadership Encourage students to develop their own ideas, using information gained from the discussion of the internal and external environment. Ask the students which strategy they think QVC pursues. Their answers may include some of the following points: Cost Leadership: Although QVC certainly paid attention to pricing of its products in order to remain competitive, it also paid attention to its internal costs. This was in an attempt to achieve parity with its competition. QVC did not aggressively try to create a low-cost position relative to its peers. Differentiation: Here is where QVC established its competitive advantage. By creating a service whereby customers could purchase products with a guarantee of quality, value, and convenience, QVC provided a shopping environment with non-price attributes for which its customers were willing to pay a shipping premium. QVC pursued a strategy of differentiation. Focus: QVC did not target any particular buyer segment or geographic market, so did not pursue a focused strategy here. However, because of the goal of cost efficiency and profit margin maximization, there were only certain products QVC was willing to offer. This was open to change, however, as QVC pursued innovative merchandising options.
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Teaching Note
Case 1: Robin Hood
NOTE — ADDITIONAL ONLINE INFORMATION: From October 2008 here‘s a report on how QVC planned to integrate its various distribution channels (TV, Internet, phone), and promote live broadcasts of shopping events via email, direct mail, ads in TV Guide, and teaser videos on YouTube and Facebook. QVC now sees itself as a ―big media company‖ —more than a broadcast company—with a multichannel outreach. QVC is ―trying to be everywhere our customers and potential customers are.‖ QVC's multichannel push ―is a unique strategy that nobody else can do because we have so many different platforms where we can leverage ourselves,‖ says Jeff Charney, Senior Vice President and Chief Marketing Officer at QVC. That advantage, he adds, allows the company to adjust to the current economic conditions and change customer demands on the fly. (See http://www.dmnews.com/Channelsurf/article/119639/.) Here‘s a story about how QVC entices customers, including a video demonstrating how to sell perfume on TV! (The answer is you sell it using a story.…) http://www.theatlantic.com/magazine/archive/2010/06/the-genius-of-qvc/308091/. After the announcement of losses in 2016, there was some question about whether QVC could compete in the e-commerce Amazon world, especially since Amazon had started airing video segments to entice viewers. If middle-aged women are QVC‘s core customers, and are impulse shoppers, there should be some safety for QVC, but maybe not. See what you think. See video here https://www.wsj.com/articles/is-there-time-for-qvc-in-the-age-of-amazon-1483957801. News in late 2017 was that QVC‘s parent company Liberty Interactive would be buying up enough shares of HSN, the Home Shopping Network, to create the new QVC Group, enhancing QVC‘s position as ―the leading global video e-commerce retailer,‖ making QVC the third-largest e-commerce site behind Walmart and Amazon. After the merger QVC Group will have a global reach of 23 million viewers. See http://www.refinery29.com/2017/07/162278/qvc-hsnacquisition. And in 2018, news came that Amazon had cancelled its ―Style Code Live,‖ an online show staffed with bubbly millennials promoting beauty and fashion products you could buy on Amazon, an attempt to copy what QVC had already successfully done. The retreat proved that QVC‘s formula—unscripted hosts demonstrating products to an audience of mostly women on live television—isn‘t as easy as it looks. Read more at https://www.bloomberg.com/news/features/2018-02-06/qvc-s-plan-to-survive-amazon-andescape-the-cable-tv-death-spiral. What does all this say about QVC‘s approach to strategic management?
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Teaching Note
Case 1: Robin Hood
Globally, in 2017, QVC announced a new leadership team and structure to drive global growth for the next generation of shopping. The new QVC Group will generate $14 billion in annual revenue and will serve 23 million customers worldwide. The combined group will broadcast 17 networks into more than 360 million homes in nine countries, attract 2 billion annual visits to our global websites, handle over 180 million customer contacts annually, and ship over 320 million packages annually. See https://www.prnewswire.com/news-releases/qvc-group-announces-plansfor-new-leadership-team-and-structure-to-drive-global-growth-for-the-next-generation-ofshopping-300535610.html. And here‘s an update in 2013 about how QVC business in Italy has not seen a downturn because of the economic issues in that country. It‘s been the opposite—because local e-commerce has been scared away, QVC has gained considerable online market share: http://www.businessweek.com/articles/2013-01-03/italians-want-their-qvc-austerity-be-damned. QVC‘s operational choices—establishing mechanisms to pay attention to quality and customer service—appear to be one of its strengths. Although not provided in the case, instructors can encourage students to review QVC‘s approach to its vendors, its strategic alliance partners, available at http://corporate.qvc.com/vendors and browse news stories, including a tribute to founder Joseph Segal who passed away on December 21, 2019 at the age of 88. http://www.qvc.com/qic/qvcapp.aspx/app.html/params.file.|cp|mainhqwel,html/left.html.file.|nav |navhqwel,html?cm_re=FOOTER-_-QCORPORATE-_-ABOUTUS&cm_sp=FOOTER-_QCORPORATE-_-ABOUTUS OPTIONAL DISCUSSION TOPICS If instructors wish to continue with further discussion of specific strategic elements such as external and internal environmental analysis, generic competitive strategies, corporate strategies, and innovation, the following instructional aids are provided: (There are no slides to accompany this section.) Referencing Chapter 6: Formulating Corporate-Level Strategies Corporate strategy focuses discussion on the questions of what businesses a corporation should compete in, and how the businesses should be managed so they can create ―synergy‖—creating value through entering new markets or developing new technologies, either through related or unrelated diversification. Diversification is the process of firms expanding their operations by entering new businesses. In related diversification, a firm enters a different business in which it can benefit from leveraging core competencies, sharing activities, or building market power. Some possibilities include: ● Mergers and acquisitions ● Strategic alliances ● Joint ventures ● Internal development
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Teaching Note
Case 1: Robin Hood
Whatever the choice, it should create value for all stakeholders—employees, suppliers, distributors, and the organization‘s owners themselves. The choice of diversification strategy should create synergy so that all parties gain something they would not have had on their own. Ideas to explore regarding growth for QVC might include diversification. Although not in the case, QVC already has a bricks-and-mortar retail operation in several malls, including Mall of America. Brand extensions can be a way to grow as long as the target is very clearly defined, and the program offerings are clearly distinct from competitors‘ offerings. Could there be room for a QVC reality TV show? Internationally, QVC has opportunities as countries increasingly expand their web access to consumers. Opportunities for further growth by acquisition still exist. Currently, Amazon might be QVC‘s biggest competitor. Although QVC seems to have done an excellent job so far at carefully assessing the scope of its innovations, it needs to make sure the above questions are answered before committing any additional resources. These questions might be most important as QVC pursues further international expansion. Given all of the above, where do you think QVC‘s growth opportunities lie? Teaching Note Case 11 — Cirque du Soleil in 2019 Case Objectives 1. To discuss how leadership can implement strategy and manage innovation. See the table below to determine where to use this case: NOTE: There are both PRIMARY and SECONDARY chapters that can be used for this case. The Teaching Note gives guidance for the PRIMARY use chapters and provides suggestions if the instructor wants to use the case to illustrate concepts from the optional SECONDARY chapters. CASE OBJECTIVES TABLE Chapter Use Key Concepts PRIMARY CONCEPTS 6: Corporate-Level Strategy 12: Managing Innovation SECONDARY CONCEPTS 7: International Strategy 8: Entrepreneurial Strategies 11: Strategic Leadership
Diversification; synergy
Innovation; scope of innovation International expansion; entry modes
Additional Reading and/or Exercises NOTE web links, video, case update NOTE see web links, embedded video
Opportunity recognition Leadership
NOTE additional reading, web links, embedded video TN1-163
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Teaching Note
Case 1: Robin Hood
Case Synopsis In 2019 the founder of Cirque du Soleil, Guy Lalibert , and Daniel Lamarre, president and CEO of Cirque du Soleil Entertainment Group had to review the choices they‘d made. After seeing the firm‘s growth prospects wane in recent years, they‘d tried to expand the firm in new directions, diversifying through new acquisitions while still investing in core activities. The company had acquired the Blue Man Group pop-art performance team in 2017, Florida-based circus arts producer VStar Entertainment in 2018, and The Works Entertainment magic and variety show producer in 2019. Musical theatre and special tourism events were among the other non-circus projects being pursued by subsidiaries, but some believed Cirque was trying to walk a fine line. Would these new ventures damage its central brand as a creative entity? For three decades, the firm had been reinventing and revolutionizing the circus. From its beginning in 1984, Cirque de Soleil had thrilled over 180 million spectators with a novel show concept that was as original as it was nontraditional: an astonishing theatrical blend of circus acts and street entertainment, wrapped up in spectacular costumes and fairyland sets and staged to spellbinding music and magical lighting. But since 2008 it had seen a decline in profits, had had poorly reviewed shows, and even the public death of a performer. Consultants warned that Cirque‘s market had hit saturation and the company needed to be careful about how many new shows it should add. One suggestion had been that Cirque should seek growth by moving its concept to movies, television, and nightclubs. Debate continued over whether the company should return to its roots or aim for constant reinvention. The company was seeking additional ways to position itself as Lalibert worked with Cirque‘s executive team to come up with a sustainable business restructuring plan. He had wanted to manage diversification by creating discrete business units under a central corporate entity, thereby beefing up the noncircus side of the business. Influx of capital via a majority stake taken by global investment firm TPG and a minority ownership agreement with a Chinese investor could provide needed funds, but giving up control might necessitate a shift in the company‘s culture, and what might that do to Cirque‘s strong brand identity? Over the years, Cirque du Soleil had managed to generate profits out of a business model that was quite challenging. By 2019, Cirque du Soleil had 24 shows, seven of them in Las Vegas. Since 2014 the firm had launched seven new touring shows. However, the rising costs of developing and operating so many shows had cut into the firm‘s revenues and profits, even with higher ticket prices. Efforts to trim costs and branch out into new areas could help Cirque du Soleil increase profitability, and its acquisitions into new areas could broaden the company‘s revenue base, but with each new business still running quite independently it remained to be seen if Cirque could manage the challenges of its core show business. Teaching Plan This case is best positioned after students have a firm grasp of strategic analysis, including how to assess both internal and external environments. Cirque du Soleil provides an opportunity to discuss leadership in a unique industry where the strategic choices are not easily apparent. TN1-164 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Although the case is suggested as a best use for corporate strategy and innovation, the stage may need to be set by discussing how strategy is formulated; therefore, the Teaching Note begins with this: ICEBREAKER As you begin the discussion, it might be interesting to students to view the Cirque du Soleil main website at https://www.cirquedusoleil.com/. It might be illustrative to ask: How many of you have been to a ―traditional‖ circus? How many of you have seen a Cirque du Soleil performance, either in person or on video? What’s the difference between the traditional circus and Cirque’s approach to this form of entertainment? As you look at the Cirque du Soleil main page, does it make you want to click anywhere? (Check out a video.) What does the web page signal about the difference in this circus’s offerings? Is it still a ―circus‖? The answers to these questions may prompt students to consider how hard it might be to redefine and reinvent a traditional entertainment format, as well as consider the challenges of continuous innovation. One thing that‘s apparent is that this is now more an entertainment company than a circus. As the ―About Us‖ part of the website says: ―Cirque du Soleil has expanded in a wide range of creative endeavors ranging from movies to apparel and from boutiques to nightclubs. But the essence of what we do has stayed constant: we invoke the imagination, provoke the senses and evoke the emotions of people around the world.‖ Students should consider what Cirque‘s options are now, given that it‘s been over 45 years since its founding. Before engaging in discussion, you might want to test students’ basic knowledge regarding the case and the major concepts. Here are some multiple-choice questions to use. (This will get the students‘ attention—they can‘t answer these if they haven‘t read the case!) Which statement is most true? a. Even though Cirque du Soleil‘s acrobats do death defying acts at every performance, the company is proud of the fact that no one has ever died on stage. b. Cirque du Soleil‘s firs Las Vegas show, Nouvelle Experience, was performed at the Mirage, in the parking lot. c. Cirque du Soleil‘s innovative and amazing shows have never failed to turn a profit. d. Guy Lalibert was the sole founder of Cirque du Soleil. ANSWER: b. Cirque recently suffered its first death during a performance, when an acrobat tumbled 94 feet during a stunt in a Las Vegas performance of the show Ka in 2013. In 1992, Cirque du Soleil took a show called Nouvelle Experience to Las Vegas for the first time. It was performed under the big top in the parking lot of the Mirage. For the first time in recent history, Cirque du Soleil failed to generate a profit in 2013. Cirque du Soleil developed from the early efforts of Guy Lalibert , who hooked up with a stilt-walker named Gilles Ste-Croix to create the company.
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Teaching Note
Case 1: Robin Hood
All of Cirque du Soleil‘s shows are designed to be performed, first, under the Grand Chapiteau, or Big Top, before they are modified for other venues. a. Yes b. No ANSWER: b. Even though this was true in the beginning, after the contract to develop Mystere for Treasure Island in Las Vegas, Cirque began to develop shows that were to be performed on a more permanent basis in specially designed auditoriums. Summary of Discussion Questions Below is a list of the suggested discussion questions. You can decide which questions to assign and which additional readings or exercises to include to augment each discussion. Refer back to the Case Objectives Table at the beginning of this Teaching Note to identify any additional readings and/or exercises so they can be assigned in advance. 1. What strategy can Cirque du Soleil adopt to sustain its competitive advantage? 2. Cirque du Soleil was known for its innovation. Now that it was struggling, how could it continue to innovate in new directions? 3. OPTIONAL QUESTION: How has Cirque du Soleil leadership been able to create a new market space in a traditional industry? Is setting a direction, designing the organization, and nurturing a culture sufficient to create a sustainable business? Discussion Questions and Responses 1. What strategy can Cirque du Soleil adopt to sustain its competitive advantage? Prior to answering the specific case questions, the instructor might want to position the discussion by reviewing what strategic management really is. Reviewing Chapter 1: Strategic Management Strategy is all about the ideas, decisions, and actions that enable a firm to succeed. See Chapter 1, Exhibit 1.1: Strategic management consists of the analyses, decisions, and actions an organization undertakes in order to create and sustain competitive advantages: ● ● ● ●
strategy directs the organization toward overall goals and objectives includes multiple stakeholders in decision making incorporates both short-term and long-term perspectives recognizes tradeoffs between efficiency and effectiveness
As we can see, leaders face a large number of complex challenges. Leaders must be proactive, anticipating change and continually refining changes to their strategies. This requires a certain level of ―ambidextrous behavior,‖ where leaders are alert to opportunities beyond the confines of their own jobs and are also cooperative and seek out opportunities to combine their efforts with others. Leaders must make strategic management both a process and a way of thinking throughout the organization. TN1-166 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
An interesting question that the instructor can ask at this point is: what business is Cirque du Soleil in? Some students might say the circus; others might say entertainment. The answers to this question will help students understand the importance of vision and mission: the leader must have a clear idea of the purpose of the business, and with whom it competes, in order to craft strategy. If the business is the circus, the focus might be on the ―three ring‖ model of individual performers doing amazing things (but since its founding, many other ―circus‖ firms have copied Cirque‘s performance design and business model, making Cirque no longer unique); if the business is basic entertainment, the focus might be on content or on aggregating content in multiple formats that are easily accessible to a diverse audience. At that point, how is Cirque different from any other Vegas-type show experience? Once again, Cirque may need to redefine itself once again in order to maintain its innovative reputation. ADDITIONAL READING NOTE: In a 2015 article about how Cirque du Soleil had had to reinvent itself after the 2008 economic downturn and the highly publicized death of a performer in 2013, the difference between Cirque and any other extravagant entertainment experience is still clear: ―Cirque, as a corporate enterprise, is very different from Disney or MGM. Because it is a circus, the viability of its business is rooted in the willingness of a core group of performers to risk their lives on a daily basis. At the opera, the ballet, or the theater, the audience rarely wonders if performers will live to see the final curtain. At the circus, the audience always wonders.‖ See https://www.vanityfair.com/culture/2015/05/life-and-death-at-cirque-du-soleil See Chapter 1, Exhibit 1.6: The primary role of the organizational leader is to articulate vision, mission, and strategic objectives. Leaders must communicate their initial vision of the organization‘s purpose: what was the original goal that would evoke a powerful and compelling mental image of a shared future, one that would be massively inspiring, overarching, and longterm, that represented a destination that is driven by and evokes passion? How well did Cirque du Soleil‘s founder Guy Lalibert seem to do this? In 1987 Cirque du Soleil burst onto the art scene in Montreal as an entirely new art form. Founders Guy Lalibert and Gilles Ste-Croix turned the whole concept of circus on its head. Using story lines, identifiable characters, and an emotional arc, Cirque du Soleil embodied more than a mere collection of disparate acts and feats. From the beginning, it promoted the whole show, rather than specific acts or performers. Cirque eliminated spoken dialogue so that its shows would not be culture-bound, using instead strong emotional music that was played by musicians from the beginning to the end. Performers, rather than a technical crew, moved equipment and props on and off the stage to avoid disrupting the momentum as the show transitioned from one act to the next. Most importantly, the idea was to create a circus without a ring or animals, as Lalibert believed that the lack of these two elements would draw the audience more into the performance. Cirque took everything that had existed in the past and pulled it into the present, so that it would strike a chord with present-day audiences. The organizational mission also needs to be considered: a mission encompasses both the purpose of the company as well as the basis for competition and competitive advantages. In writing a mission statement, it is important to understand the definition of the business by answering these TN1-167 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
questions: 1) Who are its customers? 2) What customer need is the organization trying to fulfill? and 3) How does the business create and deliver value to customers and satisfy their needs? Organizations must respond to multiple constituencies if they are to survive and prosper, and the mission provides a means of communicating to diverse organizational stakeholders. Although vision statements tend to be quite enduring and seldom change, a firm‘s mission can and should change when competitive conditions dramatically change, or the firm is faced with new threats or opportunities. Anticipating that things might change; an organization‘s leadership must then establish strategic objectives to operationalize the mission statement. That is, objectives help to operationalize the mission statement with specific yardsticks, and to provide guidance on how the organization can fulfill or move toward the ―higher goals‖ in the goal hierarchy—the mission and vision. Although Cirque‘s creative team tried to do continuous innovation, this didn‘t always translate to the audience, who thought the various shows would all be similar because of the well-known Cirque brand. In addition, when Cirque tried to move in these new directions, audiences complained that some newer shows were not as focused on the acrobatic feats that they had come to expect and enjoy from Cirque. How could Cirque best communicate to diverse stakeholders that it was able to create and deliver value to customers and satisfy their needs? Cirque had developed techniques that allowed it to accomplish its strategic objectives, for instance doing innovative design of custom venues using new technology such as in the 25-footdeep, 1.5 million–gallon pool of crystal clear water built for O at Bellagio. It was not afraid to reach out to other sources for inspiration and guidance, for instance, drawing on the tradition of pantomime and masks from circuses in Europe, and learning about blending presentational, musical, and choreographic elements from the Chinese. These actions allowed Cirque to operationalize its mission and vision. The basic question strategic management tries to answer is: How can we create competitive advantages in the marketplace that are not only unique and valuable but also difficult for competitors to copy or substitute? Founder and 10 percent owner Guy Lalibert and Daniel Lamarre, president and CEO of Cirque du Soleil Entertainment Group, must assess how the organization can maintain its unique and valuable brand in the face of declining audiences and financial struggles, when the rarity of its performance model appeared to have disappeared. Referencing Chapter 6: Corporate-Level Strategy Corporate strategy focuses discussion on the questions of what businesses a corporation should compete in, and how the businesses should be managed so they can create ―synergy‖—creating value through entering new markets or developing new technologies, either through related or unrelated diversification. Diversification is the process of firms expanding their operations by entering new businesses. Some possibilities include: TN1-168 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note ● ● ● ●
Case 1: Robin Hood
Mergers and acquisitions Strategic alliances Joint ventures Internal development
Whatever the choice, it should create value for all stakeholders—employees, suppliers, distributors, investors, customers and end users, and the company itself. The choice of diversification strategy should create synergy so that all parties gain something they would not have had on their own. When achieving synergy through diversification, a firm has two choices: related diversification through horizontal relationships with related businesses, sharing tangible and intangible resources, and leveraging core competencies; and unrelated diversification though hierarchical relationships with unrelated business. In this case, value creation derives from the corporate office by leveraging support activities. Core competencies reflect the collective learning in organizations—how to coordinate diverse production skills, integrate multiple streams of technologies, and market diverse products and services to create value. Core competencies must create superior customer value; the different businesses must all have similar elements in the value chain that require similar skills; and these activities or skills must be difficult for competitors to imitate. Growth strategies should create value for all stakeholders. Corporations can achieve synergy by sharing tangible and value-creating activities across their business units, through the use of common facilities, distribution channels, and sales forces, or through venture partnerships. However, cultural issues can doom intended benefits. Cirque du Soleil‘s core competencies lay primarily in its innovative approach to creating amazing live performances. In this area it had successfully integrated multiple streams of technologies, using common elements in its value chain, primarily its human resources and technological skills, allowing it to run as many as 24 shows at a time, in 450 cities across 60 countries. This meant that it should perhaps be focused on related diversification for any corporate growth. Certainly, the smaller hotel cabaret shows and children‘s TV programming appeared to take advantage of synergies here, but the theatrical production and special events subsidiary units seemed to require more of a focus on planning and operations components rather than the creative abilities Cirque was known for. In 2015 Cirque sold a 60 percent majority stake in the company to global private investment firm TPG, a 20 percent minority stake to a Chinese investment group, and a 10 percent stake to the Caisse de dépôt et placement du Québec, which manages public pensions plans in the Quebec province. This had bolstered Cirque‘s finances, but was this wise? Again, giving up control would necessitate a shift in the company‘s culture, and what might that do to Cirque‘s strong brand identity? TN1-169 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
With this influx of investment money, Cirque pursued three major acquisitions: 2017 – Blue Man Group, producer of global pop-art entertainment, purchased for ―tens of millions.‖ 2018 – Minnesota based VStar Entertainment Group and its Florida-based circus arts subsidiary, Cirque Dreams, specializing in live entertainment, theatrical shows, exhibits, cruise ship shows and outdoor events. 2019 – The Works Entertainment, a production company best known for their magic show The Illusionists, circus art shows such as Circus 1903 – The Golden Age of Circus, as well as cabaretstyle shows and musicals. The acquired companies would benefit from Cirque‘s global marketing expertise, their ability to coordinate diverse production skills, integrate multiple streams of technologies, and market diverse products and services to create value. However, it remains to be seen how well these acquired common facilities, distribution channels, and sales forces would work together, because cultural issues can doom intended benefits.
TN1-170 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
NOTE — WEB LINKS, VIDEO, CASE UPDATE: Regarding diversification, certainly, the acquisition of Blue Man Group and a partnership with NFL to create a football experience in Times Square in 2017 shows the new direction taken by the firm, financed by equity partner TPG. See story and video at https://www.cnbc.com/2017/07/06/private-equity-backed-cirque-du-soleil-inks-deal-for-blueman-group.html. From this interview: ―It‘s a big, big shift, and it has been supported by the Blue Man Group,‖ Lamarre said. ―What it means is that now, we‘re no longer only a circus company, but now, were going to become a global leader of entertainment. That‘s the goal we are pursuing.‖ Regarding Cirque‘s international strategy, news from 2015 was that Cirque du Soleil had ―sold itself off to investors in hopes of expanding into China…. [Cirque has] sold a majority stake to the Texas-based TPG Capital and the Chinese conglomerate Fosun Group in a deal that observers say marks the end of an era.‖ As with many Western firms, Cirque would like to establish a permanent foothold in China, but the company‘s failure in Macau had already demonstrated that it lacked the expertise to appeal to the Chinese consumer. See http://qz.com/387662/cirque-du-soleil-has-sold-itself-off-to-investors-in-hopes-of-expanding-inchina/ and http://www.wsj.com/articles/cirque-du-soleil-nears-sale-to-tpg-group-1429220100. This sale includes a minority stake for Canadian pension fund manager Caisse de dépôt et placement du Québec, which will allow Cirque to maintain its headquarters in Montreal. It also reduces Guy Lalibert‘s ownership from his original 90 percent to a minority share. This raises obvious questions about who will provide vision and direction for the company going forward. See http://www.forbes.com/sites/chasewithorn/2015/04/20/billionaire-guy-laliberte-cashes-outas-investors-acquire-majority-stake-in-cirque-du-soleil/. Other analysts see no chance for Cirque du Soleil in China, primarily because it had failed in its previous attempts to entertain Chinese audiences. Its first-ever Chinese shows in Shanghai were not well attended, possibly because, ―in China at least, Cirque du Soleil offers very little in acrobatic spectacle (rope tricks, spinning plates, death defying heights) that the Chinese haven‘t been doing on stage, in their own circus performances, for centuries.‖ Cirque also had failed to cater to local Chinese tastes, not understanding that Cirque‘s ―sedate aesthetic bears little relation to the spectacle and bling that middle class Chinese tend to associate with paid entertainment.‖ In addition, to demonstrate Cirque‘s lack of basic market research, when Cirque went into Macau, it ―had somehow failed to understand that Macau wasn't a typical tourist destination, but a city associated in the Chinese imagination with gambling and other unsavory financial dealings.‖ However, possible synergies might still exist, since Cirque‘s ―newly developed expertise at designing theaters will prove useful to Fosun‘s real estate and hotel developers.‖ See http://www.bloombergview.com/articles/2015-04-24/cirque-du-soleil-has-no-chance-in-china for the full story. 2. Cirque du Soleil was known for its innovation. Now that it was struggling, how could it continue to innovate in new directions?
TN1-171 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Referencing Chapter 12: Managing Innovation and Fostering Corporate Entrepreneurship One of the most important sources of growth opportunities to achieve competitive advantage is innovation. Innovation involves using new knowledge to transform organizational processes or create commercially viable products and services using the latest technology, experimentation, creative insights, and information from competitors. However it comes about, innovation occurs when new combinations of ideas and information bring about positive change. In fact, the root of the word innovation is the Latin novus, which means ―new.‖ Innovation involves introducing or changing to something new. It is a critical part of strategic implementation. Some of the challenges of innovation involve choosing when and how to continue to innovate, the scope of future innovation and the pace, as well as whether or not to collaborate with innovation partners. Firms must ensure that their innovation efforts are not wasted on projects that are outside the firm‘s domain of interest. Firms must have the means to focus their innovation efforts. The innovation of new ventures requires resources such as financial, human, and social capital and requires the leadership team to have adequate vision, dedication and drive. Although Cirque du Soleil had a leadership team with vision, dedication and drive, Lalibert ‘s idea was to move into areas related to the original vision, but not directly focused on performance. These initiatives included a musical-theatre production arm, a special events production company, children‘s television programs, among others. Were these projects too far from the company‘s original domain of interest, and could they make the best use of the company‘s existing resources? A strategic envelope defines the range of acceptable projects. Strategic envelope means a firmspecific view of innovation that defines how a firm can create new knowledge and learn from an innovation initiative even if the project fails. The strategic envelope also gives direction to a firm‘s innovation efforts, which helps separate seeds from weeds and builds internal capabilities. One way to determine which projects to work on is to focus on a common technology. Then, innovation efforts across the firm can aim at developing skills and expertise in a given technical area. Another potential focus is on a market theme. Companies must be clear not only about the kinds of innovation they are looking for but also the expected results. However a firm envisions its innovation goals, it needs to develop a systematic approach to evaluating its results and learning from its innovation initiatives. It needs to develop a set of questions to ask itself about its innovation efforts. In defining the innovation scope, a firm should answer several questions: ● ● ● ●
How much will the innovation cost? How likely is it to actually become commercially viable? How much value will it add; that is, what will it be worth if it works? What will be learned if it does not pan out?
One good thing was that Cirque had already felt the pain of a poorly executed growth strategy and appeared to have learned from this failure. This meant that the company was primed to TN1-172 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
assess and control the costs of any new innovation. In addition, it appeared that Cirque had already tested the viability of the special events unit and seen that it had the potential to increase revenue, even though down from the height of $2.7 billion in 2008. In 2015 global investment firm TPG acquired a majority stake in Cirque, allowing it to expand into these new areas, and Cirque sold a minority stake to a Chinese investment group to help launch shows in China. One area of possible concern might be the degree to which the new initiatives departed from Cirque‘s original vision and mission. Cirque‘s brand was clearly as a creative entity, known for amazing stories, performers pushing the bounds of what might be considered physically possible, with extraordinary production values, technologically advanced stage venues, lighting and music that were sufficiently different to surprise and delight the audience. Certainly, the new business units and outside financing would add financial value and buffer the firm from possible creative production failures, but would it add value to the brand overall? And if these new business ventures failed, how could that learning be brought back to help the creative side of the business develop, innovate, and grow? As explained above, it‘s important to consider all the factors that go into strategic management and decide the sequence of strategic actions in order to conserve resources and gain focus. In Cirque du Soleil‘s industry, innovation was critical. Could Lalibert and Lamarre deliver on their promise to apply Cirque‘s talents to other businesses? NOTE — WEB LINKS TO STORIES, VIDEO: To get a sense of how amazing Cirque du Soleil‘s performances are, see this video introduction: https://www.youtube.com/watch?v=jy8qrUEjEWk and a preview of the technology used in the O Bellagio production, https://www.youtube.com/watch?v=Vm11jzx7Ka0. Regarding innovation, ―Cirque du Soleil enjoys a culture of innovation supported by a vast team of global talent scouts and media archival researchers. Employing performers from over 50 different countries also helps to develop a positive artistic tension and creative frictions that allow for innovative theatrical ideas to emerge.‖ This diversity allows Cirque to hold up to 45 trademarks, signaling the importance of intellectual property. For more on how this works, see http://www.ipwatchdog.com/2015/05/05/cirque-du-soleil-to-be-sold-for-1-5-billion/id=57125/. For further appreciation of the technologic advances Cirque du Soleil has pioneered, see this description of the challenges the design team had to overcome when creating the water venue for O: ―With a 1.5 million gallon pool of water that regularly appears and disappears throughout the production, you can imagine the technical problems Cirque had to solve: how to move large amounts of water and staging without making noise; how to keep the smell of chlorine from filling the theater; how to have so many electronic systems and lighting so close to water; and, generally, how to avoid killing the performers as they interact with lots of moving, high-force elements.‖ See the full story at http://www.mscottsmith.org/?p=19. TN1-173 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Certainly, some of this talent might be put to good use in other ways as Cirque expands into new ventures. 3. OPTIONAL QUESTION: How has Cirque du Soleil leadership been able to create a new market space in a traditional industry? Is setting a direction, designing the organization, nurturing a culture sufficient to create a sustainable business? NOTE: no PowerPoint slides accompany this discussion. Referencing Chapter 8: Entrepreneurial Strategy and Competitive Dynamics Entrepreneurship involves the creation of new value by an existing organization or new venture that involves the assumption of risk. For an entrepreneurial venture to create new value, three factors must be present—an entrepreneurial opportunity, the resources to pursue the opportunity, and an entrepreneur or entrepreneurial team willing and able to undertake the opportunity. Entrepreneurs must go through a process of identifying, selecting, and developing potential opportunities. See Exhibit 8.1 and the opportunity analysis framework: the relationship between an entrepreneur, the firm‘s resources, and the opportunities available in the firm‘s environment. Entrepreneurs need to understand the concept of opportunity recognition: the process of discovering and evaluating changes in the business environment, such as a new technology, sociocultural trends, or shifts in consumer demand, that can be exploited. Changes in the external environment can lead to new business creation, but the discovery of these new ideas is not enough. They then need to be evaluated to find out if they‘re strong enough to become new ventures. Good entrepreneurial opportunities are those that are attractive to the marketplace (there must be demand for the new product or service), achievable (it must be practical and physically possible to do), durable (the window of opportunity must be open long enough for it to have a chance for success), and value creating (it must be profitable—the benefits must surpass the cost of development by a significant margin). Resources are an essential component of a successful entrepreneurial launch. The most important resource is usually money, but human resources, strong and skilled management, is also an essential asset. Social capital, or entrepreneurs who have extensive social networks or wellconnected key contacts, allows the new venture to gain exposure and build legitimacy faster. Strategic alliances represent a type of social capital that can be especially important to firms that may be changing direction. Launching a competitive venture requires a special kind of leadership involving courage, belief in one‘s convictions, and having the energy to work hard. Three characteristics of entrepreneurial leaders are: ● Vision ● Dedication and drive TN1-174 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
● Commitment to excellence To achieve excellence, venture founders must understand the customer, provide quality products and services, pay attention to details, continuously learn, and surround themselves with good people. In the beginning, Cirque du Soleil demonstrated a clear ability in opportunity recognition: it correctly gauged the public‘s appetite for innovative athleticism paired with good story telling and a stunning visual and auditory spectacle. Because of the founders‘ ability to use their social capital to attract diverse talent from around the world, the opportunity became both achievable and durable—performers were willing to stick around long enough to perfect their routines, and the innovative nature of those new choreographed routines was appealing enough for it to be obviously value creating, not only to the audiences but to the performers themselves, who were gaining new skills. However, in the face of market saturation, was Cirque now able to learn how to exploit changes in the current environment, and did it have the resources to be able to do this? Firms can grow via joint ventures or via internal development, or entrepreneurial ventures. At Cirque du Soleil, the leadership has shown vision, dedication, and drive, and a commitment to excellence, and the opportunities for entrepreneurial ventures are there, worldwide. In the past, the firm has also shown its willingness to exploit changes in the business environment that could lead to new business creation. The problem might be that there is no clear match between the opportunities out there and the resources currently available to the firm. Now that it has access to financial resources, Cirque might need more human resources with capabilities in operations and strategic management and marketing in order to develop the correct skills to boost its position in the new marketplaces it‘s trying to enter. Referencing Chapter 11: Strategic Leadership See the concept of leadership, the process of transforming organizations from what they are to what the leader would have them become. This involves: ● Setting a direction ● Designing the organization ● Nurturing a culture dedicated to excellence and ethical behavior Leadership is proactive, goal oriented, and focused on the creation and implementation of the creative vision. This definition implies dissatisfaction with the status quo, a vision of what should be, and awareness of the need for a process that brings about change. Leaders are change agents whose success is measured by how effectively they formulate and implement a strategic vision and mission. See Exhibit 11.1. The interdependent nature of these three activities is self-evident. Consider an organization with a great mission and a superb organizational structure, but a culture that implicitly encourages shirking and unethical behavior. Often, failure of today‘s organizations can be attributed to a lack of equal consideration of these three activities. The imagery of the three-legged stool is instructive: it will collapse if one leg is missing or broken. TN1-175 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Leaders need to set the direction for the organization by continually scanning the environment to develop knowledge of all stakeholders and knowledge of salient environmental trends and events. Then leaders must integrate that knowledge into a vision of what the organization could become. Leaders require the capacity to solve increasingly complex problems and must be proactive in their approach so they can develop viable strategic options. Cirque, especially through its founder Guy Lalibert , excelled at this proactive approach. From the very beginning Lalibert recognized that audiences might be hungry for a redefinition of the traditional circus, especially if they were purposively drawn into the performance with strong emotional music rather than spoken dialogue. Lalibert and his creative team were also willing to search for alternatives like using performers rather than a technical crew to move equipment and props off the stage to avoid disrupting the momentum as the show transitioned from one act to the next. They also got inspiration from other performance traditions like pantomime and choreography to produce a show that was not culture-bound or based on specific acts or performers. Instead, the direction of the company revolved around a unique formula of promoting a whole show that created a magical story arc from beginning to end. Leaders are also responsible for designing the organization: a strategic leadership activity of building structures, teams, systems, and organizational processes that facilitate the implementation of the leader‘s vision and strategies. Leaders have an important role in creating systems and structures to achieve desired ends. Cirque du Soleil originally designed an organization to be based in Montreal, the home of its founders, where it developed its shows and tried them out, first, under the Grand Chapiteau, or Big Top, before they were modified for other venues. However, after the contract to develop Mystere for Treasure Island in Las Vegas, Cirque began to develop shows that were to be performed on a more permanent basis in specially designed auditoriums, using innovative technology, one example of which was the custom-built 25-foot-deep, 1.5-million-gallon pool of crystal clear water created for O at Bellagio. This willingness to create systems and structures to achieve desired ends allowed Cirque to grow into an international entertainment conglomerate with 4,500 employees working in offices around the world, producing as many as 24 simultaneous shows in 450 cities across 60 countries. By designing appropriate processes that worked together, Cirque could build a repertory of shows that could all be running at the same time. Between the resident shows, primarily at key tourist destinations such as Las Vegas and Disney resorts, and the shows that toured arena locations, no Cirque show ever had to close. In nurturing a culture dedicated to excellence and ethical behavior, managers and top executives must accept personal responsibility for developing and strengthening appropriate behavior; consistently demonstrate that such behavior is central to the vision and mission; and develop and reinforce role models, corporate credos, codes of conduct, reward and evaluation systems, policies and procedures. Doing this requires leaders to overcome barriers to change and effectively use their power. TN1-176 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Difficulties in implementing the leader‘s vision and strategies include a lack of understanding of responsibility and accountability among managers, reward systems that do not motivate individuals and groups toward desired organizational goals, inadequate or inappropriate budgeting and control systems, and insufficient mechanisms to coordinate and integrate activities across the organization. Although Cirque du Soleil prided itself on its innovative practices, it misjudged in certain key ways, especially around budgeting and control systems, and on how it chose its new venues and crafted its expansion strategies. The rising costs of new shows, primarily due to the innovative technology that was sometimes invented specifically for Cirque, led to financial losses. Starting in 2012 Cirque had to lay off hundreds of executives and performers and pare the number of big new touring circus shows Cirque produced. Although this amounted to about $100 million of savings, it also might have had an effect on the culture, as standard perks were discontinued and child performers and tutors had to be let go. In addition, Cirque allowed certain new shows to dilute the brand by promoting them in less than ideal venues, e.g., Hollywood‘s seedy neighborhood and the Chinese gambling capital of Macau. Also, the pace of production had perhaps been too rapid—managing 12 new arena and resident shows from 2007 through 2012 might have made it difficult to control quality and properly coordinate and integrate activities across the organization. Certainly, Guy Lalibert and CEO Daniel Lamarre acknowledged these missteps, and took appropriate action to examine production costs and expansion plans. Stringent cost controls allowed Cirque to return to profitability, and the executive team developed a business restructuring plan to manage diversification through the creation of discrete business units under a central corporate entity, to try to beef up the non-circus side of the business. Launching on Broadway in 2016, the Paramour, a combination of theatre and acrobatics, was the first show to be produced by Cirque‘s new subsidiary for musical theatre production based in New York City, although the reviews were lukewarm. Another subsidiary, 45Degrees, was beginning to produce special events, and the firm was venturing into the development of small cabaret shows at hotels, children‘s television programming, and theme parks. Branching out into global entertainment with the acquisition of Blue Man Group, VStar Entertainment Group and The Works Entertainment meant Cirque was going beyond the straight athleticism of the typical Cirque show. Cirque CEO Lamarre believed the ―knowledge transfer‖ would help Cirque develop ―capabilities in this type of entertainment,‖ growing Cirque‘s ―footprint in the live entertainment production industry.‖ Would this diversification be enough to help Cirque take on new and different challenges, or was the unique culture now at risk? NOTE — WEB LINKS TO ADDITIONAL READING: To better understand the technological intricacies of a Cirque production, see this story of how it works behind the scenes in Las Vegas. Creative teams have to work out ―the balance between technology and physical performance,‖ and it takes sometimes over ―eight months of rehearsals‖ TN1-177 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
before a show can open. http://www.forbes.com/sites/michaelvenables/2013/08/30/technologybehind-the-magical-universe-of-cirque-du-soleil-part-one/2/. Another stark contrast between the circus and traditional entertainment is the risk of injury. The 2013 death of a performer on stage and hundreds of other injuries to artists in Cirque‘s various shows raises questions regarding ―how much risk is acceptable for the modern, corporate circus.‖ See this 2015 article at http://www.wsj.com/articles/injuries-put-safety-in-spotlight-at-cirque-dusoleil-1429723558. In further efforts to diversify, in 2017 Cirque acquired musical and comedy pioneers Blue Man Group. See article and video at https://www.cnbc.com/2017/07/06/private-equity-backed-cirquedu-soleil-inks-deal-for-blue-man-group.html. An article from late 2017 opines that with the influence and financial backing of TPG Capital, and the acquisition of musical pioneers Blue Man Group, the future of Cirque du Soleil is NOT the circus: https://www.bloomberg.com/news/articles/2017-11-29/the-future-of-cirque-du-soleil-isn-t-thecircus.
Teaching Note Case 12 — Pixar Case Objectives 1. To investigate how external environmental issues can affect a firm‘s strategy. 2. To examine how a sustainable strategy involves assessment of internal activities and resources. See the table below to determine where to use this case: NOTE: There are both PRIMARY and SECONDARY chapters that can be used for this case. The Teaching Note gives guidance for the PRIMARY use chapters and provides suggestions if the instructor wants to use the case to illustrate concepts from the optional SECONDARY chapters. CASE OBJECTIVES TABLE Chapter Use Key Concepts PRIMARY CONCEPTS 2: External Environment 3: Internal Analysis SECONDARY CONCEPTS
External environmental forces; five forces analysis
Value chain; tangible vs. intangible resources; VRIN Strategic management; vision, mission, strategic objectives
Additional Readings or Exercises NOTE additional web link reading, video news story
NOTE additional reading
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Teaching Note 1: Strategy Concept 5: BusinessLevel Strategy 11: Strategic Leadership 12: Managing Innovation
Case 1: Robin Hood
Generic strategies Leadership; learning organizations Innovation; sustaining vs. disruptive innovation; scope of innovation; entrepreneurial orientation
NOTE additional reading and videos of Pixar workspaces NOTE additional web link reading
Case Synopsis In spite of its domination of Academy Awards for Best Animated Film since the category was introduced in 2001, Pixar had managed to win only once since 2015. It was overlooked in 2018 for Incredibles 2, although the film broke all records for opening weekend box office revenue for an animated feature film. Even though it was a commercial success, the film failed to land an Academy Award. This loss at the Academy Awards only added to the feelings of loss within Pixar after the forced departure of John Lasseter, who had served as the firm‘s creative officer since its founding. Because of his influence on the firm, Lasseter had been heralded in the news media as a latterday Walt Disney. But his tendency to greet anyone in his proximity with lengthy bear hugs caused some to complain about the unwanted attention, and he left the firm in 2017. Despite the loss of Lasseter, Pixar was confident that it could continue to thrive as part of the Walt Disney Company. Pixar was acquired by Disney in 2006 for the hefty sum of $7.4 billon. The deal had been finalized by the late Steve Jobs, the Apple Computer chief executive who had also served as Pixar‘s initial head. After Toy Story became the box office and critically acclaimed success of 1995, Jobs was able to convince Disney CEO Bob Iger to meet his terms for Pixar‘s acquisition. Concerns at the time of the acquisition were that Disney‘s difficulties resurrecting its animation department would have a negative effect on Pixar‘s unique creative culture. However, actions taken by Pixar‘s major original investor, Steve Jobs, president Edwin Catmull, and ―creative‖ vice president John Lasseter had not only made Pixar successful, but had become mutually beneficial for both firms. Pixar‘s dedication to its lengthy process of playfully crafting a film to replace the standard production line approach that had been pursued by Disney subsequently made it one of the world‘s most successful animation companies. Although John Lasseter‘s passion drove story development, Catmull was the one mainly responsible for the firm‘s success. Catmull became the keeper of the company‘s unique innovative culture, which blended Silicon Valley techies, Hollywood production honchos and artsy animation experts, but Pixar had had difficulty stepping up its pace of production. The firm had built up its workforce to well over 1,000 employees, had handed over directorial duties to new talent, and had added new divisions. Because a large part of its success could be attributed TN1-179 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
to the talent that the firm was able to recruit and train to work together, there was some concern that this talent pool was finite, and therefore might constrain Pixar‘s ability to grow. This was even more concerning as new creative leadership took charge of both Pixar and Walt Disney Animated Studios. Pixar would face another transition when Ed Catmull stepped down from the firm in 2018. Could Pixar continue to develop hits, both for itself and for Disney, and appropriately manage the creative talent necessary to do so? Teaching Plan Although primarily indicated for the external environment and internal analysis chapters, this short case allows for discussion of the full arc of strategic analysis, formulation, and implementation. The movie industry has had some challenges: as public tastes change, technological developments allow innovation, yet movie distribution channels affect profits. Investigating the strategic decisions of an innovative company like Pixar can help students grasp these elements. Pixar gives an example of how one firm formulated and implemented strategy in the movie industry environment. Because most students have watched movies, and may be very familiar with Pixar films, it can be interesting to show them that things behind the scenes may not be as simple as they thought.
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Teaching Note
Case 1: Robin Hood
ICEBREAKER This case can start with an icebreaker. Starting from the perspective of a customer may make it easier for students to transition to a strategic analysis. How many of you have seen an animated movie? Which one was your favorite? Why? It‘s entirely possible that all students have seen at least one animated movie. If students have never seen one, ask them why not—it may be because they are not movie watchers in general, or they may be moviegoers but think that animated films are only for children. Refer to Case Exhibit 1 to see if the films they mention as their favorites are on this list. It might be interesting to put a list on the board to tally up favorite animated movies, and why they were favorites, and then identify whether Pixar made them: Favorite Animated Movie, Why a Favorite, and Made by Pixar? There‘s a high likelihood that the majority of the student‘s favorite movies have been made by Pixar. As students answer why they liked the movies, themes, such as creative idea, excellent animation technique, and touching story may emerge. This might give students an idea of what Pixar leadership may have had to do to sustain the company‘s success, and it will lead them into a discussion of how Pixar has crafted its successful strategy over the last decade. If there are older students in the class, some of them may remember the Disney classic animated films, i.e. Cinderella, Snow White, Lady and the Tramp, and the more current hits Frozen, and The Lion King. Ask if the Disney movies had the same kind of broad appeal as the Pixar films. Students may say the Disney movies were more simplistic in their storylines, appealing more to children, while the Pixar films had more sophistication, appealing not only to children but to adults as well. This insight will help make the point about how Pixar was able to craft a differentiated competitive strategy based on unique value. The other major competitor to Pixar (and Disney Animation, whose Lion King and Frozen franchises make up the highest grossing animated films to date) is DreamWorks Animation, producer of the Shrek, Madagascar, How to train Your Dragon and Kung Fu Panda franchises. The other successful producers are Illumination Entertainment, with the Despicable Me franchise, and Blue Sky Studios with the Ice Age series. See https://en.wikipedia.org/wiki/List_of_highest-grossing_animated_films. Summary of Discussion Questions Here is a list of the suggested discussion questions. You can decide which questions to assign, and which additional readings or exercises to include that can augment each discussion. Refer to the Case Objectives Table at the beginning of this Teaching Note to identify any additional readings and/or exercises so they can be assigned in advance.
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Teaching Note
Case 1: Robin Hood
Discussion Questions: 1. PRIMARY QUESTIONS: What elements in the external environment might affect Pixar‘s strategy? 2. What key internal resources does Pixar have that might help it support its competitive strategy? 3. SECONDARY QUESTIONS: How does Pixar use strategic management? What is Pixar‘s competitive strategy, and what is the basis of Pixar‘s competitive advantage? 4. How has strategic leadership and the management of innovation helped Pixar sustain its competitive edge? Discussion Questions and Responses 1. What elements in the external environment might affect Pixar’s strategy? Referencing Chapter 2: Analyzing the External Environment of the Firm The basic question strategic management tries to answer is: How can we create competitive advantages in the marketplace that are not only unique and valuable but also difficult for competitors to copy or substitute? Organizational leaders must become aware of factors in the overall environment that might affect their ability to create a competitive advantage. So how do managers become environmentally aware? By doing scanning, monitoring, and gathering competitive intelligence, then using these inputs to develop forecasts. This prepares the firm to do more extensive analysis of the forces in the general environment and the industry or competitive environment. Environmental scanning involves surveillance of a firm‘s external environment to predict environmental changes and detect changes already under way. It is a BIG PICTURE viewpoint of the industry/competition, looking for key indicators of emerging trends—what catches your eye? This analysis alerts the firm to critical trends before changes have developed a discernible pattern and before competitors recognize them. Environmental monitoring is a firm‘s analysis of the external environment that tracks the evolution of environmental trends, sequences of events, or streams of activities. Leaders need to monitor the trends that have the potential to change the competitive landscape—What do you want to track? Firms need to CHOOSE the trends identified via the scanning activity, and regularly monitor or track these specific trends to evaluate the impact of these trends on their strategy process. What factors or trends might be most important to Pixar? To assess how the external environment might affect Pixar‘s strategy, it‘s necessary to look at the factors in the general external environment. Pixar must consider the political/legal, economic and global, sociocultural and demographic, and technological forces that might affect the ability of the firm to deliver its products and sustain its business. TN1-182 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
See which factors in the general environment students might pick that have a significant impact on the movie industry. Although there is not much information directly in the case, some of this is intuitive. Students might respond as follows:
Demographic. Not in the case: In 2019, the U.S. box office dropped four percent, global theatrical revenue was flat, and more than 58 percent of the world's movie revenue happened outside theaters. See https://www.indiewire.com/2020/03/2019mpa-annual-report-future-is-streaming-1202216803/. Increasingly, movies must cross cultural and language boundaries in order to appeal to a global market. Where do movie studios see growth? Not in the theatres, but in DVD, streaming, Internet download for home viewing, and in sales of related merchandise, e.g., Buzz Lightyear figures. Note that this merchandise is marketed by Disney, and sold as, for instance, the ―Disney Toy Story Collection.‖ There is no mention of Pixar in the product packaging. The implication for Pixar, now part of Disney, is that if the movie touches people‘s hearts, i.e., if the story is great, then the characters from the story will have value. If Pixar can create the characters, as with the Cars franchise, Disney can market them. This confirms that the original decision to make a deal with Disney was a good one, because Disney had the resources and skill to be very good at marketing and merchandising, while Pixar was very good at storytelling. Sociocultural. The recent explosion of comic book characters from paper to film (i.e. Spiderman, Iron Man, The Avengers) implies that audiences of all ages are willing to engage in make-believe. The Pixar creations have also gone from film to paper (comic book publisher BOOM! Studios had the license to produce a number of Pixar series featuring nearly the entire catalog of the company's characters but lost it due to creative differences in 2010. See https://pixar.fandom.com/wiki/Boom!_Studios.) Once again, the implication is that good characters sell merchandise, and can be licensed. For the collectors, Pixar productions has become a treasured brand. Economic. Costs of movie production keep going up, however revenue from the movie-going public has not increased. On the other hand, when the economy declines, more people go to the movies, because a $10 movie ticket is cheaper than admission to almost any other form of public entertainment (e.g., amusement park or sports event). See https://www.motionpictures.org/wpcontent/uploads/2019/03/MPAA-THEME-Report-2018.pdf Plus, make-believe movies with happy endings, like Pixar films, provide a welcome escape from economic worries. TN1-183 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Technological. Advances in technology, especially computer-generated animation techniques and 3D, have allowed companies like Pixar to utilize its technological talent to push the technology even further, to everyone‘s benefit. It‘s also necessary to assess the segments of the external competitive environment that include competitors, customers, and suppliers, substitutes and new entrants. Porter‘s five forces model allows strategists to anticipate where the industry might be most vulnerable. Although there‘s not much information in the case about this, common sense might provide some answers. One important question is ―what business is Pixar in?‖ Until students are sure about the boundaries of the business, it is impossible to do an industry analysis – what is the ―industry‖ to be analyzed? Here‘s where some understanding of the industry structure is necessary. There are several components to the movie business that may need to be broken out in order to assess the profitability potential of firms like Pixar. Pixar is in the movie production industry, with Dreamworks Animation SKG (a public company, NYSE: DWA, now separate from the live action movie studio Dreamworks) as a major rival for the animated film market. Disney is a corporation in the movie production, movie distribution, TV studio, travel, entertainment, and tourism industries. Disney‘s Buena Vista division does movie distribution. Help students apply Porter‘s five forces of competition by drawing a diagram on the board similar to the following and having students fill in the details:
Suggested: Production studios compete for talent, and distribution deals: negotiated partnerships with key suppliers and buyers are critical to achieving commercial success.
Substitutes’ Threat High
Suppliers’ Power
Rivalry
High
High
Suggested: Other forms of entertainment exist books, video games, sports events, concerts why watch a movie?
Suggested: Talent is hard to acquire and keep happy. Unions have significant power.
Buyers’ Power High
Suggested: Movie producers are dependent on finding quality distributors. Suggested: Anyone can Distributor deals can be Threat of produce a film hard to negotiate technological resources New TN1-184 acceptable terms need trust for animated features Entrants Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in theto classroom. create.No reproduction or further distribution are harder to acquire. permitted without the prior written consent of McGraw-Hill.
Med
Teaching Note
Case 1: Robin Hood
Based on the external environmental industry analysis, the movie production business may require attention to growth strategies—acquisition, diversification, or internal development—in order to accrue profits. This is one reason Pixar was acquired by Disney. NOTE — ADDITIONAL READING, VIDEO STORIES: For information about the movie business in general, see this 2005 article about how movie studios make profits. Most of the big movie studios (Disney, Fox, Warner Brothers, Paramount, Universal, Sony) make their money from three sources: the box office (movie theatre-goers), DVD/video/downloads (home viewing), and TV licensing (rights to broadcast a movie on TV). TV licensing yields the best profit—box office usually loses a studio money. See the story at http://www.slate.com/articles/arts/the_hollywood_economist/2005/08/hollywoods_profits_demy stified.html. See revenue and profit data at https://www.motionpictures.org/wpcontent/uploads/2019/03/MPAA-THEME-Report-2018.pdf. Not included in this analysis is the money earned from merchandising of characters and themes from movies. Merchandising is usually done by the distributor, which is Disney‘s Buena Vista in the case of Pixar. Regarding profitability at Pixar, the deals for licensing in general have not been as lucrative in recent years—Toy Story and Cars had the best results—and some analysts are worried about the marketability of characters from Pixar‘s 2009 movie Up, especially given the more mature nature of the main character. However, John Lasseter had routinely said in interviews that marketability was not a factor in decisions about what projects to pursue. Instead of ideas that felt contemporary, he looked for stories that were rooted in the ages. According to the following 2009 article, ―Quality is the best business plan‖ is one of Mr. Lasseter‘s favorite lines. See http://www.nytimes.com/2009/04/06/business/media/06pixar.html?pagewanted=1&_r=1 The overall movie business, Hollywood itself, does not now follow the formula it invented in the 1930s: ―In terms of product, what most distinguished Studio Era Hollywood was a devotion to three principles: a corporate approach to creativity, being in it for the long haul (rather than just a one-weekend killing), and reaching every part of the moviegoing public. There was nothing especially idealistic about these principles. The studios thought they were the best way to make the most money. Quality paid, and the more possible ticket-buyers there were the more money was likely to be made. Add to those three principles unfailing creativity and innovative use of computer technology, and you have the genius of the Pixar system. Think of Pixar as an up-tothe-minute studio throwback.‖ http://www.boston.com/ae/movies/articles/2009/06/07/pixars_success_is_an_up_to_the_minute_ throwback/
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Teaching Note
Case 1: Robin Hood
As the above article points out, ―No small factor in the animation boom of the past two decades has been the tweaking of cartoons to appeal to parents as well as children. Dreamworks Animation has been especially proficient. Its Shrek films include as many pop-culture references as a season‘s worth of Saturday Night Live. Yet although boomers may not realize it, making a movie palatable to them as well as their offspring isn't the same as seeking to appeal to the entire filmgoing public. It‘s unthinkable that Dreamworks would build an animated feature around a crabby old man, let alone acknowledge a character‘s barrenness and death, as Pixar has with Up. The Pixar demography is humanity, in both senses of the word.‖ On the other hand, Dreamworks, even with hits like Shrek, has been chasing Pixar‘s success almost since Dreamworks‘ beginning in 1994 (NOTE embedded video): http://www.ultimatemovierankings.com/pixar-movies-vs-dreamworks-movies/ For an interesting direct comparison in 2017 see this animated side by side look at similar movies from Pixar and Dreamworks. At that time, the only Pixar entry that did NOT beat Dreamworks was The Good Dinosaur, which was outranked by Dreamwork‘s How to Train Your Dragon. See https://www.buzzfeed.com/affafshah/hollywoods-biggest-animated-rivalrypixar-vs-dre-34bho?utm_term=.lw58w3KJl#.gvMx27MDq If Pixar has been able to do it, why hasn‘t Dreamworks been as successful? 2. What key internal resources does Pixar have that might help it support its competitive strategy? Referencing Chapter 3: Analyzing the Internal Environment of the Firm From Chapter 3, a firm‘s value chain helps support its basis of competitive advantage. Pixar‘s value chain can be examined to ascertain the various activities that the firm carries out to establish and maintain a strong differentiation advantage. Look at Chapter 3, Exhibit 3.1 to see the value-chain activities. Pixar‘s value chain is captured visually in the following diagram: Value-chain activity
How does Pixar create value for the customer?
Primary: Inbound logistics
Adequate.
Operations
Outbound logistics Marketing and Sales
Service
Tremendous attention to every aspect of developing and making films; software to make animation more lifelike; slow, deliberate process of moviemaking with strong emphasis on story development (The example of reworking A Bug’s Life). Adequate. Reliance on the Disney brand to attract family audiences; Pixar name brand recognition fairly strong itself; reliance on Disney for downstream activities, marketing and distribution, reduced the need for cash outlays. Adequate. TN1-186
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Teaching Note
Secondary: Procurement Technology development. Human resource management General Administration
Case 1: Robin Hood
Adequate. Creation of new software helped in the production process. Luxo enabled creation of movies with fewer people. Recruitment and training of individuals who made a strong contribution; Pixar University for training; masseuse and doctor on campus every week; limit of 50 hours per week. Strong visionary leadership – Jobs, Catmull, and Lasseter – kept the organization ahead of the curve; organizational culture (Tiki huts, etc.) that pushed for creativity; sound financial position.
Primary Activities In terms of primary activities, the key to Pixar‘s differentiation resided in its operations and marketing. Pixar placed a lot of attention on every aspect of developing and making its films. From the creation of a good storyline and characters to the application of state of the art computer animation technology, there were many aspects of its operations that were tied to its differentiation advantage. In terms of marketing, Pixar relied on the Disney brand to pitch its films to family audiences. However, Pixar had attained sufficient recognition for its own brand name. The Pixar name was now a sufficient brand for signaling its audience that a high-quality film was available. Support Activities With regard to support activities, differentiation is achieved by developing a strong general administration that is built around visionary leadership and a culture that pushes for creativity. Pixar relied on human resource functions to recruit and train individuals who could make a strong contribution. In addition, apart from developing a variety of software for film making, Pixar continually pushed the envelope in technology development. In each film, Pixar attempted to go farther than it had before, e.g., developing software that could randomly apply physical and emotional characteristics to each ant‘s face in A Bug’s Life, or the Luxo software which could make the main character‘s curly hair in Brave appear to be natural. Pixar‘s value chain provided the basis for its competitive advantage, but to answer the question of how to support a competitive strategy, it‘s important to consider the concept of the resourcebased view of the firm, and the three key types of resources: tangible resources, intangible resources, and organizational capabilities. Pixar‘s profile might look like this: Tangible Resources: TN1-187 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Financial. Thanks to Steve Jobs‘ initial investment and Pixar‘s ability to deliver, financial assets appeared more than adequate for future growth. Physical. Pixar‘s physical facilities were certainly adequate. It had access to Disney‘s facilities if needed. Technological. Steve Jobs‘ initial financial investment had allowed Pixar to acquire the hardware and software needed to develop internal resources further. Disney‘s assets here provided additional options. Intangible Resources: Organizational. Pixar‘s committee-run structure for decision making supported the creativity needed to produce high quality animated films. Human. This was Pixar‘s greatest strength—the quality of its human resources. Innovation. Ed Catmull spearheaded the technological development that allowed Pixar to innovate beyond any other animation studio. Reputation. Because of all the above resources, Pixar had the best reputation in the business. Its relationship with Disney meant Disney‘s reputation would provide synergy. Organizational Capabilities. The ability to harness technological innovation in support of creative storytelling meant Pixar had significant capabilities to support a sustainable competitive advantage. Determining whether the internal resources are valuable, rare, difficult to imitate, or difficult to substitute (VRIN) can help a firm sustain a competitive advantage. See Chapter 3, Exhibit 3.6. Applying the VRIN analysis to the above shows that Pixar had both valuable and rare resources, which nearly every competent firm should have to compete; but Pixar also had inimitable resources due to the path dependent, causally ambiguous, and socially complex nature of these resources‘ development—how could any other firm, such as Dreamworks, copy what Pixar had developed? In addition, there wasn‘t really any way to substitute resources from other sources to compete in creating top quality animated films. NOTE — ADDITIONAL READING: Pixar has used ―shorts,‖ short animated films, to explore new technologies and train new animators. These shorts are not released separately but run in the theatre as preludes to the fulllength feature films. The following is an overview of some of Pixar‘s shorts, explaining some of the pioneering techniques that were incorporated: https://www.studiobinder.com/blog/pixar-shorts/ According to John Lasseter, it can take 17 hours to produce just one frame of film, with sometimes 24 frames per second, so a lot of man-hours are involved even in a 5-minute short. TN1-188 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
See more at https://www.pixar.com/theatrical-shorts. Given that these short films are not released separately, and therefore cannot be money-makers, do you think it‘s worthwhile for Pixar to spend the time and effort to produce these? 3. SECONDARY QUESTIONS: How does Pixar use strategic management? What is Pixar’s competitive strategy, and what is the basis of Pixar’s competitive advantage? NOTE: There are no PowerPoint slides to accompany this discussion. Referencing Chapter 1: Strategic Management Strategy is all about the ideas, decisions, and actions that enable a firm to succeed. See Chapter 1, Exhibit 1.1: Strategic management consists of the analyses, decisions, and actions an organization undertakes to create and sustain competitive advantages: ● ● ● ●
strategy directs the organization toward overall goals and objectives includes multiple stakeholders in decision making incorporates both short-term and long-term perspectives recognizes tradeoffs between efficiency and effectiveness.
Leaders face many complex challenges. Leaders must be proactive, anticipate change and continually refine changes to their strategies. This requires a certain level of ―ambidextrous behavior,‖ where leaders are alert to opportunities beyond the confines of their own jobs and are also cooperative and seek out opportunities to combine their efforts with others. Leaders must make strategic management both a process and a way of thinking throughout the organization. See Chapter 1, Exhibit 1.6: The primary role of the organizational leader is to articulate vision, mission and strategic objectives. Leaders must communicate their initial vision of the organization‘s purpose: what was the original goal that evokes a powerful and compelling mental image of a shared future, one that would be massively inspiring, overarching, and long-term, that represented a destination that is driven by and evokes passion? The organizational mission also needs to be considered: a mission encompasses both the purpose of the company as well as the basis for competition and competitive advantages. In writing a mission statement, it is important to understand the definition of the business: 1) who are its customers, 2) what customer need is the organization trying to fulfill, and 3) how does the business create and deliver value to customers and satisfy their needs. Organizations must respond to multiple constituencies if they are to survive and prosper, and the mission provides a means of communicating to diverse organizational stakeholders. Although vision statements tend to be quite enduring and seldom change, a firm‘s mission can and should change when competitive conditions dramatically change or the firm is faced with new threats or opportunities. Anticipating that things might change, an organization‘s leadership must then establish strategic objectives to operationalize the mission statement. That is, objectives help to operationalize the TN1-189 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
mission statement with specific yardsticks and provide guidance on how the organization can fulfill or move toward the ―higher goals‖ in the goal hierarchy the mission and vision. Pixar‘s vision might have been best expressed by Steve Jobs: as he pointed out, a film works only if its story can move the hearts and minds of families around the world. The mission of Pixar is to be known for the quality of its storytelling, to create ―great stories and characters that endure with each generation.‖ Following this, Ed Catmull and John Lasseter set the objectives of the company to continue to push the boundaries of animation technology, and to inspire creative passion in the people that utilized this technology to create great films. Jobs pursued the initial marketing and distribution relationship with Disney in order not to dilute Pixar‘s resources or require Pixar to acquire resources to perform these duties—this allowed Pixar to do what Pixar did best. See Chapter 1, Exhibit 1.3 for a depiction of the strategic management process. During strategic analysis, the leader does ―advance work‖ to anticipate unforeseen environmental developments, identify unanticipated resource constraints, assess changes in his or her preferences for how to manage. During strategy formulation, the organization addresses the issue of how to compete in each business to attain competitive advantage. Strategies are formulated at the business, corporate, and international levels. Entrepreneurial initiatives may also play a role. In strategy implementation, depending on the type of organization structure, the leader might include key individuals in a discussion around selecting which strategies might be best to implement at which level within the organization. The leader must ensure proper strategic controls and organizational design and establish effective means to coordinate and integrate activities within the firm as well as with suppliers, customers and possible alliance partners. Leaders should also be committed to excellence and ethical behavior while promoting learning and continuous improvement. Here‘s where innovation is important. The basic question strategic management tries to answer is: How can we create competitive advantages in the marketplace that are not only unique and valuable but also difficult for competitors to copy or substitute? Referencing Chapter 5: Business-Level Strategy To achieve a sustainable competitive advantage, Pixar must assess its ability to contend with other movie studios, especially those that make animated films. The question of how to compete in each business to attain competitive advantage requires an assessment of the types of competitive strategies, including the three generic strategies that are used to overcome the five forces and achieve a competitive advantage: 19. Overall cost leadership Low-cost-position relative to a firm‘s peers Manage relationships throughout the entire value chain 20. Differentiation Create products and/or services that are unique and valued Non-price attributes for which customers will pay a premium TN1-190 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
21. Focus strategy Narrow product lines, buyer segments, or targeted geographic markets Attain advantages either through differentiation or cost leadership Ask the students which strategy they think Pixar pursues. Their answers may include some of the following points: Pixar chose a strategy of differentiation—creating products that were unique and therefore valued. The strategy of differentiation consists of creating differences in a firm‘s product or service offering by creating something that is perceived industrywide as unique and valued by customers. Differentiation can establish a brand image that conveys value to customers. Pixar‘s brand name resonated with family audiences. The brand name was associated with technologically advanced and fun movies that the entire family could enjoy. Customers, once aware of the Pixar magic, might choose a Pixar film over any other animated feature, and price wouldn‘t enter into the decision-making. Here the instructor can ask students to recall the icebreaker exercise—why did they choose Pixar films as their favorites? 4. How has strategic leadership and the management of innovation helped Pixar sustain its competitive edge? Referencing Chapter 11: Strategic Leadership The concept of leadership involves the process of transforming organizations from what they are to what the leader would have them become. See Chapter 11, Exhibit 11.1. This involves: ● Setting a direction ● Designing the organization ● Nurturing a culture dedicated to excellence and ethical behavior Leaders need to set the direction for the organization by continually scanning the environment to develop knowledge of all stakeholders, and knowledge of salient environmental trends and events. Then leaders must integrate that knowledge into a vision of what the organization could become. Leaders require the capacity to solve increasingly complex problems, and they must be proactive in their approach, so they can develop viable strategic options. Steve Jobs set the initial direction for Pixar when he saw the possibility in George Lucas‘s original computer group. Although Jobs was not a moviemaker, he understood the promise of computer technology, and how that technology could be harnessed to create innovative animated films. Leaders are responsible for designing the organization: a strategic leadership activity of building structures, teams, systems, and organizational processes that facilitate the implementation of the leader‘s vision and strategies. Steve Jobs also understood and appreciated the talent of Ed Catmull and John Lasseter. Jobs provided an initial structure where both these creative individuals could thrive. Catmull and Lasseter in turn continued to build and sustain an organization that supported teamwork, TN1-191 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
effective production processes, and systems that encouraged creative ideas, even after the integration with Disney‘s animation division. Evidence of this organizational design was apparent by: ● Pixar‘s campus-like environment ● Pixar University courses ● Pixar being kept as a separate division within Disney ● Steve Jobs remaining as both director and individual stockholder until his death ● Committee approach to story development ● Lasseter‘s responsibility for creativity at both companies. He reported directly to Disney CEO Iger Difficulties in implementing the leader‘s vision and strategies include a lack of understanding of responsibility and accountability among managers, reward systems that do not motivate individuals and groups toward desired organizational goals, inadequate or inappropriate budgeting and control systems, and insufficient mechanisms to coordinate and integrate activities across the organization. Pixar‘s leaders understood the importance of culture—that employees had to be allowed to be creative in their work environment. Employees were encouraged to: ● ● ● ● ●
Transform office cubicles into tiki huts and circus tents Devote up to four hours a week to furthering their education Take the time to develop a story—don‘t rush development Not be afraid to admit mistakes and revamp the story or production Avoid collective burnout—ask permission to work more than 50 hours a week
The leader also has the responsibility to create successful learning organizations by creating a proactive, creative approach to the unknown, actively soliciting the involvement of employees at all levels, and enabling all employees to use their intelligence and apply their imagination. See Chapter 11, Exhibit 11.5. Jobs, Catmull, and Lasseter created a learning organization: shared their passion by involving employees in every step of the creative process, enabling employees to apply their imagination in pursuit of Pixar‘s mission. However, accusations of inappropriate behavior from John Lasseter in 2017 had created uncertainty around Pixar‘s treatment of women in general. Upon Catmull‘s retirement and the promotion of Pete Doctor as Creative Head of Pixar and Jennifer Lee as lead for Disney Animation things may change. NOTE — ADDITIONAL READING, PHOTOS OF PIXAR WORKSPACES:
Pixar is noted for its approach to human capital and knowing how to combine talent to produce innovative and profit-making products. One of the requirements of such a workplace is for TN1-192 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
management, such as Ed Catmull, to allow employees to be able to make mistakes without fear of reprisals. For more on Catmull‘s management philosophy, see this 2016 interview: https://www.mckinsey.com/business-functions/organization/ourinsights/staying-one-step-ahead-at-pixar-an-interview-with-edcatmull. Regarding the effect of the workplace on creativity, search for photos of the ―tiki hut‖ workspaces inside of Pixar at Google.com—how would you feel working in such surroundings? Also see the video series of indoor shots here https://www.youtube.com/watch?v=CX9OV43o4Ac and here https://www.youtube.com/watch?v=CXtsEhUwTmc. Referencing Chapter 12: Managing Innovation and Fostering Corporate Entrepreneurship Innovation involves using new knowledge to transform organizational processes or create commercially viable products and services using the latest technology, experimentation, creative insights, and information from competitors. Sustaining innovations extend sales in an existing market, usually by enabling new products or services to be sold at higher margins. Disruptive innovations overturn markets by providing an altogether new approach to meeting customer needs. There‘s no doubt Pixar disrupted the existing technology at the time, innovating in a way that created a whole new approach to animation. Some of the challenges of innovation involve choosing when and how to continue to innovate, the scope of future innovation and the pace, as well as whether to collaborate with innovation partners. The innovation of new ventures requires resources such as financial, human and social capital; requires the leadership team to have adequate vision, dedication and drive. Before proceeding, firms must first define the scope of the innovation efforts and must ensure that their innovation efforts are not wasted on projects that are outside the firm‘s domain of interest. In defining the innovation scope, a firm should answer several questions: ● ● ● ●
How much will the innovation initiative cost? How likely is it to become commercially viable? How much value will it add; that is, what will it be worth if it works? What will be learned if it does not pan out? TN1-193
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Case 1: Robin Hood
Pixar‘s leaders, Jobs, Catmull, and Lasseter, were mostly concerned with creating value, with utilizing the resources they had, and with achieving the organization‘s original vision and mission. They were also willing to approach any failures as opportunities for learning. By staying true to their vision, they did not waste innovation efforts. Organizations must have the entrepreneurial orientation necessary to succeed in a new venture. Students should assess the vision, dedication and drive, and commitment to excellence demonstrated by Pixar‘s management team; the degree of autonomy, innovativeness, proactiveness, competitive aggressiveness and risk taking, and the implications of this for the organization‘s culture. See Chapter 12, Exhibit 12.3. Autonomy. Experts, such as Pixar‘s technologists, and Lasseter‘s creative team, were allowed the freedom to experiment with new ideas. Innovativeness. Edwin Catmull‘s team made substantial breakthroughs in the development of computer-generated technology for animated films Proactiveness. Both Jobs and Catmull were proactive in identifying how computer technology could be used to push the creative boundaries of animation filmmaking. Competitive aggressiveness. With Pixar part of Disney, CEO Iger hoped to use the combined assets of both organizations to attain competitive superiority. Risk Taking. Steve Jobs‘ original investment in Pixar was a risk—first $10 million, then an additional $50 million, more than 25 percent of his total wealth at the time. The actions by Jobs, Catmull, and Lasseter instilled passion and energized effort toward making great films: ―everyone at Pixar remains committed to making films that are original in concept and execution, despite the risks involved.‖ Thus, the original vision and mission remain applicable and inspiring of future success. What challenges remain? ● Increased temptation to make sequels. ● Disney‘s Iger pledged to keep Pixar culture protected—will that commitment hold if Disney divisions have problems and resources need to be reallocated? ● Responsibility for both Disney and Pixar animation divisions may pull joint leadership in too many directions. ● Integrating expanded staff—not everyone may have the same talent or desire to pool their abilities. ● Increasing the pace of production may encourage short cuts, compromising high standards. ● Addressing the issues that have surfaced around a repressive culture for women creatives. NOTE — ADDITIONAL READING: TN1-194 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Although Lasseter was the more well-known face of Pixar, Edwin Catmull, president of Pixar and Walt Disney Animation Studios, was its spiritual father. The following is what people say about Catmull: ―Ed believes that you should always hire people who are smarter than you. Ed believes that it's more important to invest in good people than good ideas. Ed believes in a ―talent-ocracy.‖ If you make films for everybody, you need to listen to everybody's ideas, whether they come from a janitor or a storyboard artist. Ed believes that you learn by making mistakes and that success often disguises problems. Ed believes that magic happens when you don't operate out of fear.‖ See more about Catmull‘s management philosophy: http://articles.latimes.com/2006/jun/12/business/fi-catmull12. Like Steve Jobs‘ visionary leadership at Apple, and at Pixar in his role on the board, it appears Pixar has been successful because of the combined genius of Lasseter and Catmull. Now that these two have left the company, can the creative success continue? Teaching Note Case 13 — Heineken Case Objectives 1. To investigate how a firm competes in a global market. See the table below to determine where to use this case: NOTE: There are both PRIMARY and SECONDARY chapters that can be used for this case. The Teaching Note gives guidance for the PRIMARY use chapters and provides suggestions if the instructor wants to use the case to illustrate concepts from the optional SECONDARY chapters. CASE OBJECTIVES TABLE Chapter Use Key Concepts PRIMARY CONCEPT 7: International Strategy SECONDARY CONCEPTS 2: External Environment 5: Business-Level Strategy 9: Strategic Control and Governance
International expansion; international, global, multidomestic, transnational strategies; entry modes External scanning and monitoring; industry competition five forces
Additional Readings or Exercises NOTE additional reading, case updates on global competition, and Heineken‘s response, included embedded video NOTE additional reading on acquisition prospects in the industry
Competitive strategy; generic strategies – low-cost leadership, differentiation, focus Strategic control; traditional vs. contemporary control system; corporate governance mechanisms; stakeholder management TN1-195
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Case 1: Robin Hood
Case Synopsis This case deals with a firm that had been a pioneer in establishing itself as a global competitor in the beer business, gaining recognition around the world based on its well-known green bottle. Heineken had to respond to a wave of massive consolidation in the beer market. Many beer brewers had been moving aggressively to establish themselves as global players by acquiring smaller regional and national players. Jean-Francois van Boxmeer was appointed as Heineken‘s first non-Dutch CEO in October 2005. Since his appointment, Heineken had restructured itself to increase its ability to respond to the mega-acquisitions done by its formidable competitors. Heineken had to increase its presence around the globe in response to the merger of Anheuser-Busch InBev with SABMiller. This merger gave the combined firm a commanding 30 percent of global beer sales. Heineken had to grow as well. Heineken had entered into a joint venture deal with Denmark‘s Carlsberg to acquire Scottishbased brewer Scottish & Newcastle, and had acquired breweries in Nigeria, Ethiopia, the Asia Pacific region, and Mexico. A recent opening of a brewery in Mozambique would help establish Heineken as the second largest in Africa, the leading brewer in Europe, a major presence in Asia and Russia, and a supplier to the growing Hispanic population in the United States. Heineken needed to raise its stature in its various worldwide markets and respond to the changes that were occurring in the global beer industry. The firm had evolved into one of the world‘s largest brewers, operating more than 190 breweries in over 70 countries, and claiming about 10 percent of the global market for beer. In the wake of furious consolidation in the industry, were the current strategies effective? Teaching Plan This is a fairly brief case, which can be covered quickly. The major opportunity here is to demonstrate the global nature of some industries, and therefore how companies must strategize to compete in the international arena. ICEBREAKER This case can start with an icebreaker. Starting from the perspective of a customer may make it easier for students to transition to a strategic analysis. How many of you are beer drinkers? Who do you think are the top beer companies in the world? Students may call out beer BRANDS, not realizing that the global strategy of companies in the beer industry is to consolidate brands into an increasingly smaller group of beer companies. After InBev‘s acquisition of Anheuser-Busch in 2008, and its acquisition of SABMiller in 2016, the top 3 beer companies in the world are AB InBev SA/NV (Belgium), Heineken (Dutch), and China Resources (Bejing). Other top companies worldwide include the Japanese firms Kirin TN1-196 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
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Case 1: Robin Hood
Holdings and Asahi, Carlsberg (Denmark) and Molson Coors (Canada/USA). A visit to the AB InBev Wikipedia site can provide a list of its over 200 brands: https://en.wikipedia.org/wiki/AB_InBev. Regarding American consumption, Pabst is the only top selling beer in America whose brand is still owned by a U.S. company—although Pabst owns no actual breweries, contracting out production to Miller or Lion Brewery in Pennsylvania. (Miller is in a joint venture with SABMiller.) Boston Beer/Sam Adams, one of the many ―micro brewers‖ actually making beer in the United States is said to be the seventh largest brewery in the country, after Budweiser, Coors, and Pabst. (Although Coors can no longer be considered ―American,‖ having merged with the Canadian brewery Molson in 2005.) Regional brewer D.G. Yuengling & Son is considered the oldest operating brewing company in the United States, and rivals craft beer maker Boston Beer Company in size, but primarily sells on the east coast. Phew—this can get confusing! For an additional perspective on this industry, consider also assigning The Boston Beer Company case, which discusses the specific challenges faced by Sam Adams in the U.S. market. How many of you drink Heineken by choice? Why or why not? Here‘s where students can discover just how hard it is to ―differentiate‖ a brand. Is their preference based on taste or on marketing? How many of them would be willing to bet they could identify their favorite beer in a blind taste test?! Before engaging in discussion, you might want to test student’s basic knowledge regarding the case and the major concepts. Here are some multiple-choice questions to use. (This will get the student‘s attention—they can‘t answer these if they haven‘t read the case!) Which of the following statements is most true? a. Heineken is one of the most widely recognized beer brands worldwide. b. Heineken started in Belgium and has become a leading brewer in Europe. c. Although sales of beer in stagnating in other places, demand is growing in the United States and Europe. d. CEO Jean-Francois van Boxmeer is Dutch. ANSWER: a. Due to its distinctive stubby green bottle, Heineken is one of the most widely recognized beer brands worldwide. Although a leading European brewer, Heineken has always been a Dutch company. Although sales of beer have stagnated in the United States and Europe, demand is growing in other developing countries. CEO Jean-Francois van Boxmeer is the firm‘s first non-Dutch CEO. Stella Artois, along with Amstel, is one of Heineken‘s brands. a. Yes b. No ANSWER: b. Although Amstel is one of Heineken‘s brands, Stella Artois is a Belgium beer made by AB InBev.
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Case 1: Robin Hood
Summary of Discussion Questions Here is a list of the suggested discussion questions. You can decide which questions to assign, and which additional readings or exercises to include to augment each discussion. Refer back to the Case Objectives Table at the beginning of this Teaching Note to identify any additional readings and/or exercises so they can be assigned in advance. Discussion Questions: 1. PRIMARY QUESTION: What strategy does Heineken follow in the global beer market? 2. SECONDARY QUESTIONS: What is the structure of the global beer industry? 3. What changes has Heineken made that will help it deal with its challenges?
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Teaching Note
Case 1: Robin Hood
Discussion Questions and Responses 1. What strategy does Heineken follow in the global beer market? Strategy is all about the ideas, decisions, and actions that enable a firm to succeed. See Chapter 1, Exhibit 1.1: Strategic management consists of the analyses, decisions, and actions an organization undertakes to create and sustain competitive advantages: ● ● ● ●
strategy directs the organization toward overall goals and objectives includes multiple stakeholders in decision making incorporates both short-term and long-term perspectives recognizes tradeoffs between efficiency and effectiveness
Corporate strategy focuses discussion on the questions of what businesses a corporation should compete in, and how the businesses should be managed so they can create ―synergy‖ —creating value through entering new markets or developing new technologies, either through related or unrelated diversification. Diversification is the process of firms expanding their operations by entering new businesses. In related diversification, a firm enters a different business in which it can benefit from leveraging core competencies, sharing activities, or building market power. Some possibilities include: ● ● ● ●
Mergers and acquisitions Strategic alliances Joint ventures Internal development
Whatever the choice, it should create value for all stakeholders—employees, suppliers, distributors, and the organization‘s owners themselves. The choice of diversification strategy should create synergy so that all parties gain something they would not have had on their own. Referencing Chapter 7: International Strategy: Creating Value in Global Markets International expansion is a viable diversification strategy, however before pursuing this, a firm needs to determine why an industry in a given country is more (or less) successful than the same industry in another country. There are several reasons to expand internationally. A firm‘s motivation for international expansion could involve the following: ▪ To increase the size of potential markets ▪ To attain economies of scale ▪ The ability to take advantage of arbitrage opportunities ▪ To extend the life cycle of a product ▪ To optimize the physical location for every activity in its value chain
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Teaching Note
Case 1: Robin Hood
When choosing a country to expand into, firms must assess certain factors: the degree of consumer demand, the degree to which resources such as skilled labor and other supplier or supporting infrastructure are developed and available, the speed with which such resources can be deployed, the extent of political and economic risk and corruption, the access to qualified management. There are two opposing forces that firms face when entering international markets: cost reduction, and adaptation to local markets. Therefore there are four basic strategies firms can use: international, global, multidomestic, and transnational. See Chapter 7, Exhibit 7.3. Strategies that favor global products and brands should standardize all of a firm‘s products for all of their worldwide markets and should reduce a firm‘s overall costs by spreading investments over a larger market. These strategies are based on three assumptions: ● Customer needs and interests worldwide are becoming more homogeneous. ● People (worldwide) prefer lower prices at high quality. ● Economies of scale in production and marketing can be achieved through supplying global markets. Heineken pursued a global strategy and created a corporate office to coordinate and control operations across the various businesses. In addition the Heineken brand was standardized, globally developed, and promoted consistently worldwide. Heineken‘s expansion strategy was to pursue acquisitions of local breweries known in regional markets. This means these acquisitions could be geared to local tastes. Of interest is a comment Heineken CEO made in 2005: ―Beer is a multi-regional business. World scale is not what you should pursue.‖ (This is not in the case.) Heineken also engaged in joint venture partnerships with other brewers, as it did with Danishbased Carlsberg in the Scottish & Newcastle deal. One issue Heineken still needed to address was the substantial investments that may be needed to build up the activities of acquisitions, with no guarantee of market growth. Acquisition is the incorporation of one firm into another through purchase. It can be a means of obtaining valuable resources that can help an organization expand its product offerings and services. Acquisition can lead to consolidation within an industry and can force other players to merge. Corporations can also enter new market segments by way of acquisitions. Heineken had already acquired local breweries in Italy, France, Austria, and Germany. Heineken‘s acquisition of the Scottish-based Scottish & Newcastle brewer allowed it access to not only the brewery, but also pubs in the United Kingdom, Ireland, Portugal, Finland, and Belgium. Acquisition of the African breweries in Nigeria and Ethiopia, and the Mexican brewer FEMSA Cervesa allowed access to the growing African market and provided the opportunity for more inroads into the U.S. Hispanic market. Acquisition of Asian Pacific Breweries gave it access to many popular Asian beers, such as Tiger and Bintang. Heineken was planning to launch Bintang, its biggest selling beer in Indonesia, into the UK and select European markets. TN1-200 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Other acquisitions included one in Singapore, an aggressive push into Russia, and purchase of mid-size brewers from far-flung places like Belarus, Panama, Egypt, and Kazakhstan. Most recently, Heineken opened its first brewery in Mozambique. Everyone likes beer. Using its international reach and its local partners, Heineken could brew a type of beer that met local tastes while also marketing its Heineken brand in that region. This reduced overall costs, leading to economies of scale. The prices could be adjusted for the local brew, while the Heineken brand, although pricier, could be marketed based on its quality, signaling a premium for which customers would be willing to pay. The Mozambique deal was an example of this. Although Heineken had developed a global presence and a premium position, it had not been as aggressive as AB InBev and others in pursuing mega-acquisitions. Its practice of partnering with smaller local producers and positioning itself as a premium brand has allowed it to keep its position, but it may be running out of options as the industry continues to consolidate. NOTE — ADDITIONAL READING AND VIDEO VIEWING: Visit Heineken‘s website to see current news and product positioning: https://www.theheinekencompany.com/our-global-presence Go to Investors, Reports and Presentations to see the Annual Reports from previous years. For instance, the 2019 report cites strong increases in sales in Central and Eastern Europe, double digit growth in over 40 markets including Brazil, Mexico, South Africa, Nigeria, the UK, Romania and Germany. As this Heineken overview says, ―Our strategy continues to be growth oriented with an ever-increasing emphasis on the sustainability of this growth, both socially and environmentally.‖ Citing its ―Brewing a Better World‖ initiative as a strategic priority, the company continues to lower water usage, increase the proportion of renewable energy, and promote responsible consumption among its customers. Its no-alcohol portfolio grew double digit, driven by Heineken® 0.0, other line extensions of leading brands and beer mixes. Go to Investors, Reports and Presentations for up-to-date information on various segments. In an attempt to broaden the appeal of the Heineken brand, several interesting TV commercials have been made. See, for instance, the video ―The Date‖ at https://www.youtube.com/watch?v=57zo8O5pDXc News in 2017 of the change in the European competitive landscape, with Russian beer consumption growing, and a Russian brewery, Baltika, gaining market share is here: https://www.food-exhibitions.com/Market-Insights/Russia/Russia-beer-market. No wonder Heineken identified Russia as a major growth target. In the U.S. market, although sales are dominated by Anheuser-Busch InBev, Miller Coors Brewing Co. and Pabst Brewing Co., with competition from global competitors Heineken and Grupo Modelo/Crown, the ―craft‖ brewers, notably Sam Adams, are gaining ground. For an historical perspective, see the 2009 documentary ―Beer Wars,‖ which documents the rise of the TN1-201 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
craft brewers such as Boston Beer and Dogfish Head. For instance, ―Beer Wars exposes a clear and lasting dichotomy of cultures between the big brands and the smaller upstarts. In interviews with big beer brands, the executives and brew masters come off as stuffy, establishment types. On the other hand, the craft brewers—among them Sam Calagione of Dogfish Head, Greg Koch of Stone Brewery Co. and Jim Koch of Boston Brew Company—are passionate, fun, antiestablishment and maybe even a little eccentric, the kind of guys you‘d want to sit down and have a beer with.‖ Basically, flat sales of the big brands since 2006 have made critics wonder if the big brewers were ―suffering from a dangerous brew of sameness and commoditization,‖ therefore opening up the opportunity for these more flavorful craft beer companies. As proof of this pervasive ―sameness,‖ in the documentary three beer drinkers who had confidently proclaimed allegiance to a particular brand (as in ―I‘m a Bud man‖), are asked to pick their beer from a bottle wrapped in a paper bag. The drinkers failed to pick their favorites from among the three brands—Bud Light, Miller Lite, and Coors Lite—proving that these ―taste testers are susceptible to marketing and packaging‖ rather than true taste. See http://beerwarsmovie.com/. The 2016 merger between Anheuser Busch InBev and SAB Miller has caused additional rearrangements of the global landscape. See https://www.forbes.com/sites/greatspeculations/2016/12/22/heres-how-ab-inbev-trimmedbusiness-to-make-room-for-sabmiller/#5b2486b53b93 And https://www.forbes.com/sites/taranurin/2016/10/10/its-final-ab-inbev-closes-on-deal-tobuy-sabmiller/#5f98c946432c. This $100 million deal was the largest acquisition ever and makes Ab InBev a brewing powerhouse with an estimated 46 percent of global beer profits. See https://www.wsj.com/articles/sabmiller-ab-inbev-shareholders-approve-100-billion-plus-merger1475059015. Of note, in 2020, following his successful 15 year leadership of the Company, Jean-François van Boxmeer will hand over his responsibilities as Chairman of the Executive Board and CEO of Heineken N.V. to Dolf van den Brink. Van den Brink, a 22-year veteran of the Dutch beer company who currently serves as president of Heineken‘s Asia Pacific region, served as managing director of Heineken‘s U.S. operations from 2009 to 2015 before becoming managing director of the company‘s operations in Mexico. https://www.brewbound.com/news/heineken-nv-ceo-jean-francois-van-boxmeer-to-step-down-dolf-van-den-brink-to-be-nominated-assuccessor. Has growth been adequately anticipated by Heineken‘s competitive strategy? Given these conditions, what else can Heineken do to fuel growth and remain competitive? 2. SECONDARY QUESTION: What is the structure of the global beer industry? NOTE this section does not have any accompanying PowerPoint slides. Referencing Chapter 2: Analyzing the External Environment As part of strategic analysis, it‘s necessary to engage in external scanning: surveillance of a firm‘s external environment to predict environmental changes to come, detect changes already TN1-202 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
under way, put leaders in a proactive mode. Strategic management also involves external monitoring to track evolution of environmental trends, assess sequence of events, and evaluate streams of activities. Strategic analysis assesses the segments of the external competitive environment that include competitors, customers, and suppliers, substitutes and new entrants. One key issue that must be addressed is the question what industry are you in? Heineken is in the beer industry, which is different from the general beverage industry occupied by firms such as Diageo and Asahi who distribute various brands of beer, wine, liquor, and soft drinks. Once the industry is defined, Porter’s five forces model allows strategists to anticipate where the industry might be most vulnerable. See Chapter 2, Exhibit 2.7. Ask students to diagram the five forces. It should look something like the diagram below: Suggested: High - largest brewers expanding across the globe through acquisitions of smaller regional/national players; fragmented industry; beer consumption in the U.S. has declined.
Suppliers’ Power Low
Substitutes’ Threat High
Rivalry High
Suggested: Low – Supplier commodities are those such as water, hops, barley, etc.
Suggested: Med - The top four brewers account for only about a third of the global market share – many local brewers operate successfully in their niches.
Threat of New Entrants Med
Suggested: High – Growing appreciation of wine. Hard liquor still popular in many places.
Buyers’ Power Med Suggested: There are no industry buyers, only local consumers who do not have negotiating power over price; however, there are abundant choices for consumers, and the appeal of the brand is difficult to maintain. Brand image, therefore, the marketing strategy, is important.
Based on the external environmental factor analysis, the beer business has some opportunity for acquisition of rivals, and diversification into other types of liquor, but growth within the category does not seem to have much profit potential. TN1-203 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
NOTE — ADDITIONAL READING: In June 2013, Anheuser-Busch InBev audaciously completed its acquisition of Grupo Modelo. This means the brands Corona, Modelo Especial, and Pacifico, which occupy top places in market share of U.S. imported beer sales, will now add clout to the A-B InBev stable of products. A-B InBev now has Corona to add to Budweiser, Stella Artois, and Beck‘s, positioning the company as a global powerhouse in beer products. See http://online.wsj.com/article/SB10001424052702303649504577495921266834262.html for the history of this merger, which gives A-B InBev considerable ability to see synergies in its overall operations. The merger had been delayed by the U.S. antitrust watchdogs, who prevented A-B InBev from taking control of the U.S. distributor Crown Imports. This means the Grupo Modelo/InBev products will still be sold in the United States under the Constellation Brands/Crown Imports. But control over brewing the beer itself now resides with A-B InBev. See http://www.stltoday.com/business/local/a-b-inbev-completes-grupo-modelodeal/article_c6c7cfd1-883b-5d1d-bdea-dc7a0111bac2.html for more details. From 2014, here is a compilation of facts about alcohol (including beer) from around the world explained in 35 maps and charts. https://www.vox.com/2014/12/30/7423149/alcohol-mapscharts According to sources, it takes only 5 minutes of work in the United States to be able to afford a beer, which is why this is a competitive market. Corona is the top brand in 36 countries, so no wonder A-B InBev was so anxious to acquire it. Referencing Chapter 5: Business-Level Strategy In order to achieve a sustainable competitive advantage, Heineken has to assess its ability to contend with other consumer goods providers, especially its main rivals, SAB Miller and InBev. The question of how to compete in a given business to attain competitive advantage requires an assessment of the types of competitive strategies, including the three generic strategies that are used to overcome the five forces and achieve a competitive advantage: 22. Overall cost leadership Low-cost-position relative to a firm‘s peers Manage relationships throughout the entire value chain 23. Differentiation Create products and/or services that are unique and valued Non-price attributes for which customers will pay a premium 24. Focus strategy Narrow product lines, buyer segments, or targeted geographic markets Attain advantages either through differentiation or cost leadership Ask the students which strategy they think Heineken should pursue, and why. Although any company in this crowded industry must keep costs low, if only to achieve parity with competition, the only way Heineken has chosen to compete is through differentiation. The TN1-204 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
hope is that Heineken can convince the consumer that its beer has some unique attribute that sets itself apart from any other beer, so the consumer will be willing to pay a premium for this uniqueness. (Refer back to the icebreaker: WHY did some people say they liked their brand of beer? In the case it‘s suggested that a ―foreign‖ beer might have more appeal. Why?) 3. SECONDARY QUESTION: What changes has Heineken made that will help it deal with its challenges? See Chapter 1, Exhibit 1.3 for a depiction of the strategic management process. During strategic analysis, the leader does ―advance work‖ to anticipate unforeseen environmental developments, identify unanticipated resource constraints, and assess changes in his or her preferences for how to manage. During strategy formulation, the organization addresses the issue of how to compete in a given business to attain competitive advantage. Strategies are formulated at the business, corporate, and international levels. Entrepreneurial initiatives may also play a role. In strategy implementation, depending on the type of organization structure, the leader might include key individuals in a discussion around selecting which strategies might be best to implement at which level within the organization. The leader must ensure proper strategic controls and organizational design and establish effective means to coordinate and integrate activities within the firm as well as with suppliers, customers and possible alliance partners. Leaders should also be committed to excellence and ethical behavior while promoting learning and continuous improvement. Here‘s where innovation is important. The basic question strategic management tries to answer is: How can we create a sustainable competitive advantage in the marketplace that is not only unique and valuable but also difficult for competitors to copy or substitute? Heineken adopted a new organizational structure to speed up decision making—reduced size of management and created clear areas of responsibility. It also concentrated on key brands— building a global brand for Heineken and pursuing an acquisition strategy to build up presence in specific markets—Russia, Europe.
Referencing Chapter 9: Strategic Control and Corporate Governance Strategic control involves the process of monitoring and correcting a firm‘s strategy and performance. Students can discuss the differences between a ―traditional‖ and ―contemporary‖ approach to establishing control systems. In a traditional control system, top management formulates strategies and sets goals. These strategies are implemented, and then performance is measured against the predetermined goals. In a contemporary control system, managers continually monitor both the internal and external environments and identify trends and events that signal the need to revise strategies, goals and objectives. Contemporary control systems must have four characteristics to be effective: TN1-205 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
1. The focus is on constantly changing information that has potential strategic importance. 2. The information is important enough to demand frequent and regular attention from all levels of the organization. 3. The data and information generated are best interpreted and discussed in face-to-face meetings. 4. The control system is a key catalyst for an ongoing debate about underlying data, assumptions, and action plans. An executive‘s decision to use the control system interactively—in other words, to invest the time and attention to review and evaluate new information—sends a clear signal to the organization about what is important. The dialogue and debate that emerge from such an interactive process can often lead to new strategies and innovations. Students should therefore recognize the importance of involving all operating managers in setting performance goals based on continuous monitoring of the internal and external environment. Upon taking over the helm of Heineken in 2005, CEO Jean-Francois van Boxmeer had announced that he would have to work on the company‘s culture in order to accelerate the speed of decision making. Heineken had been run by three generations of Heineken ancestors, whose portraits still adorned the dark-paneled office of the CEO in the firm‘s Amsterdam headquarters. Like Thorny Ruys, the CEO he replaced, van Boxmeer faced the challenge of preserving the firm‘s family-driven traditions while dealing with threats that had never been faced before. ―Accelerating the speed of decision making‖ might mean that the new management would try to break loose from the conservative style previously practiced under the family‘s tight control. Instead, the affable 46-year-old Belgian van Boxmeer indicated that he was trying to focus on changes to the firm‘s decision-making process rather making any drastic shifts in its existing culture. Furthermore, van Boxmeer seemed quite comfortable working within the family-controlled structure. ―Since 1952, history has proved it is the right concept,‖ he stated about the current ownership structure. ―The whole business about family restraint on us is absolutely untrue. Without its spirit and guidance, the company would not have been able to build a world leader.‖ (See Ian Bickerton & Jenny Wiggins. ―Change is brewing at Heineken.‖ Financial Times, May 9, 2006, p. 12.) Highlighting the importance of using contemporary controls, involving all levels of management in decision making, Heineken created management positions that would be responsible for five different operating regions and several different functional areas. These positions were created to more clearly define different spheres of responsibility. Van Boxmeer argued that the new structure provided incentives for people to be accountable for their performance, with a focus on results. He claimed the new structure had already encouraged more risk taking and boosted the level of energy within the firm.
TN1-206 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Corporate governance refers to the need for a firm‘s shareholders (the owners) and their elected representatives (the board of directors) to ensure that the firm‘s executives (the management team) strive to fulfill their fiduciary duty of maximizing long-term shareholder value. In this, students also should recognize that it is important to consider the needs of different stakeholders: investors, customers, employees, suppliers and other stakeholders. Stakeholder symbiosis implies that stakeholders are dependent upon each other for their success and well-being; and that there is a need for organizations to consider the needs of the larger community, and act in a socially responsible manner. For more clarification regarding stakeholder identification, see Chapter 1, Exhibit 1.5 for the diverse stakeholder groups and the claims they make on the organization. Although the management of Heineken moved away from the family for the first time, the managers were well aware that the long-standing and well-established family traditions would be difficult to change. Even with the appointment of non-family members to manage the firm, a little over half of the shares of Heineken were still owned by a holding company that was controlled by the family. With the death of Freddy Heineken in 2002, the last family member to head the Dutch brewer, control passed to his only child and heir, Charlene de Carvalho, who insisted on having a say in all of the firm‘s major decisions. The family members were behind some of the changes announced at the time of van Boxmeer‘s appointment that would support the firm‘s next phase of growth as a global organization. As part of the plan, dubbed ―Fit 2 Fight,‖ the executive board was cut down from five members to CEO van Boxmeer and Chief Financial Officer Rene Hooft Graafland. The change was expected to centralize control at the top so that the firm could formulate a strategy to win over younger customers across different markets whose tastes are still developing. The Executive Committee of Heineken was cut down from 36 to 12 members in order to speed up the decision-making process. Besides including the two members of the executive board, this management group consisted of the managers who were responsible for the different operating regions and several of the key functional areas. Van Boxmeer hoped that the reduction in the size of the committee would allow the firm to combat the cumbersome consensus culture that had made it difficult for Heineken to respond swiftly to various challenges even as its industry had been experiencing considerable change. Finally, all of the activities of Heineken were overseen by a supervisory board, which consisted of 10 members. Individuals on this board were drawn from different countries and had a wide range of expertise and experience. They set up policies for the firm to follow in making major decisions on its overall operations. Members of the supervisory board were rotated on a regular basis. These changes were evidence that Heineken recognized the need to align key stakeholders‘ interests and fulfill the board‘s fiduciary duty of maximizing long-term shareholder value.
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Teaching Note
Case 1: Robin Hood
NOTE — ADDITIONAL MATERIAL ON HEINEKEN LEADERSHIP: Regarding management and leadership, the Heineken Supervisory Board in Amsterdam had asked its chief executive Anthony Ruys to step down in 2005 after only two years in the position, to be succeeded by a Belgian, Heineken executive board member Jean Francois van Boxmeer. Van Boxmeer had been with Heineken for over 20 years and would become the first nonDutchman to lead the company. The change was prompted by poor financial performance and the perceived need to streamline the management structure. According to the following article, Heineken would replace a single-market approach with operations grouped on geographic lines. This would put in place a structure aligned ―with the rest of the industry.‖ Here is information about the management structure: http://www.heinekeninternational.com/management.aspx. Van Boxmeer had said he ―would continue a strategy built on partnerships, the acquisition of regional players and organic growth.‖ Playing down prospects of a mega-merger, he added: ―Beer is a multi-regional business. World scale is not what you should pursue.‖ He said this in 2005. Do you think he would say this today? In June 2020 van Boxmeer, 58, will step down from the Heineken leadership. Under his leadership, the Dutch company was able to increase its beer revenue from $14 billion in 2006 to $27 billion in 2019. Jean-François van Boxmeer commented: ―It has been a great privilege and honour to lead Heineken and to work with so many great people from all over the world over the past three decades. I feel now is the right moment to hand over leadership to the next generation. I am proud of what we have achieved together and I would like to thank the Supervisory Board, my fellow Executive Board member Laurence Debroux and the Executive Team for their support and confidence. I would also like to thank all our employees, who make our business great every day. It is my absolute pleasure to be handing the helm to Dolf. His ability to lead teams, grow our brands and business, in a responsible way, is nothing short of impressive. I am certain that under his leadership the company is in the best of hands to continue to grow. I look forward to work with Dolf in delivering a smooth transition.‖ https://www.inside.beer/news/detail/netherlands-heineken-ceo-van-boxmer-steps-down-after-15years.html. Given this leadership transition, do you think Heineken will be able to continue its growth? Teaching Note Case 14 — eBay: Misunderstood? Case Objectives 1. To discuss the decisions and actions that a firm has to undertake to sustain a competitive advantage, especially when pursuing growth. See the table below to determine where to use this case: NOTE: There are both PRIMARY and SECONDARY chapters that can be used for this case. The Teaching Note gives guidance for the PRIMARY use chapters and provides suggestions if the instructor wants to use the case to illustrate concepts from the optional SECONDARY chapters. TN1-208 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
CASE OBJECTIVES TABLE Chapter Use Key Concepts PRIMARY CONCEPTS 6: Corporate-Level Strategy 8: Entrepreneurial Strategies SECONDARY CONCEPTS 4: Intellectual Assets 5: Business-Level Strategy 7: International Strategy 11: Strategic Leadership 12: Managing Innovation
Additional Readings or Exercises
Corporate strategy; synergy; acquisition
Opportunity recognition Human capital; intellectual capital
Generic strategies International expansion; transnational, global strategies Leadership
NOTE additional reading, web links
Innovation; scope of innovation
Case Synopsis In 2018, CEO Devin Wenig was trying to promote eBay‘s ability to thrive in a rapidly changing retail environment. At that time he said it was a real challenge for eBay as it was one of the world‘s most iconic brands, but it is also one of the world‘s most misunderstood brands. In 2019, what is eBay‘s position? Is it an auction website selling pre-owned products or an ecommerce platform with distinguished product quality and competitive delivery options? Since its inception in 1995, eBay had enjoyed strong revenue growth, and was a dominant player in the worldwide online auction industry. eBay‘s business model was based on a person-toperson marketplace on the Internet, where sellers conveniently listed items for sale, and interested buyers bid on these items. The objective was to create a forum that allowed buyers and sellers to come together in an efficient and effective manner. The company‘s success relied primarily on establishing a trustworthy environment that attracted a large number of buyers and sellers. Despite eBay‘s growth performance, achieved mainly through both foreign and U.S. acquisitions, the company still faced a number of challenges. With traffic and sales slowing over the years, eBay had tried to reposition its well-known auction site from being an online yard sale to being a trendy e-retailer. But the company faced intense competition in the United States from online giants like Amazon and Google and relative newcomers like Etsy; from Facebook‘s marketplace and the smartphone app Offer-up, as well as from traditional brick-and-mortar retailers like Walmart, Staples, and Home Depot, now aggressively promoting online retail sites. TN1-209 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
As a growth strategy, eBay had targeted distinct market niches to distinguish itself from competitors. eBay had successfully competed in certain international markets, including Europe and Latin America, but eBay‘s numerous attempts to penetrate the Asia-Pacific market, specifically China and Japan, had ended in failure. With intense competition in the online auction industry, eBay had tried to increase its market share and revenue through acquisitions and partnerships in related and unrelated businesses. However, activist investors such as Carl Ichan had pushed for strategy changes. Industry analysts were wondering about a potential acquisition of the remaining online auction business by a player like Alibaba. Although the company had announced many initiatives that included exclusive partnerships and acquisitions, investors and shareholders will be watching keenly to see if management and the board can really fix things and chart a new course for the future. Teaching Plan The eBay case is an investigation of a company whose corporate business strategies proved less than successful. As such, this case is best positioned midway through the course, after students have had an introduction to the concepts of strategy analysis and formulation. Before engaging in discussion, you might want to test students’ basic knowledge regarding the case and the major concepts. Below are some multiple-choice questions to use. (These will get the students‘ attention—they can‘t answer these if they haven‘t read the case!) Which statement is most true? a. eBay‘s interest in the Asian marketplace makes sense because that region had had the largest growth in Internet usage since 2000. b. Investor Carl Icahn had wanted eBay to sell its lucrative PayPal business. c. Amazon is eBay‘s major competitor in the worldwide online auction market. d. Meg Whitman was the first president of eBay. ANSWER: b. See Case Exhibit 4 where Africa has had the greatest growth in Internet usage since 2000. In 2014, most of eBay‘s revenues came from the Payments division, which is PayPal. Although eBay had already decided to spin out its PayPal online payments service, Icahn owned 2.5 percent of the company and insisted that management think about selling that operation to a cash-rich tech giant instead. Despite not having a huge presence in the online auction industry, Amazon was still considered a fierce online global competitor. Although Amazon had a large international presence, the company‘s linkage to brick-and-mortar shops in the United States made it a greater threat in local markets than in foreign markets. Jeffery Skoll was eBay‘s first president, and remained president until early 1998, when the company hired Meg Whitman as president and CEO. eBay founder Pierre Omidyar believed people basically just wanted to negotiate, or haggle, for a good deal. a. Yes b. No ANSWER: b. Omidyar believed people wanted to trust in a fair and open marketplace, and that people are basically good and deserving of recognition and respect as unique individuals. TN1-210 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Summary of Discussion Questions Below is a list of the suggested discussion questions. You can decide which questions to assign and which additional readings or exercises to include to augment each discussion. Refer back to the Case Objectives Table at the beginning of this Teaching Note to identify any additional readings and/or exercises so they can be assigned in advance. Discussion Questions: 1. PRIMARY QUESTION: How did eBay pursue growth? 2. SECONDARY QUESTION: What source of competitive advantage does eBay have, and is that position supported by its resources and assets? Discussion Questions and Responses 1. How did eBay pursue growth? Referencing Chapter 6: Corporate-Level Strategy Corporate strategy focuses discussion on the questions of what businesses a corporation should compete in and how the businesses should be managed so they can create ―synergy‖—creating value through entering new markets or developing new technologies, either through related or unrelated diversification. Diversification is the process of firms expanding their operations by entering new businesses. In related diversification, a firm enters a different business in which it can benefit from leveraging core competencies, sharing activities, or building market power. Some possibilities include: ● Mergers and acquisitions ● Strategic alliances ● Joint ventures ● Internal development Whatever the choice, it should create value for all stakeholders—employees, suppliers, distributors, and the organization‘s owners themselves. The choice of diversification strategy should create synergy so that all parties gain something they would not have had on their own. When achieving synergy through diversification, a firm has two choices: related diversification through horizontal relationships with related businesses, sharing tangible and intangible resources, and leveraging core competencies; and unrelated diversification though hierarchical relationships with unrelated business. In this case, value creation derives from the corporate office by leveraging support activities. Acquisition is the incorporation of one firm into another through purchase. It can be a means of obtaining valuable resources that can help an organization expand its product offerings and TN1-211 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
services. Acquisition can lead to consolidation within an industry and can force other players to merge. Corporations can also enter new market segments by way of acquisitions. eBay had countered the intense competition in the online auction industry by engaging in aggressive acquisitions of online businesses worldwide, and by forming joint venture partnerships with providers and marketers in both related and unrelated businesses. In addition, eBay pursued strategic alliances, both with its joint venture partners like Tom Online, and competitors such as Gmarket, partly to minimize the intense competition from rivals like Taobao. eBay also expanded into new markets by focusing on business-to-consumer in addition to consumer-to-consumer transactions, and by partnering with services like StubHub and Ticket Utils ticketing, and the social organizing app Snupps. eBay had also acquired Half.com, Milo and the U.K.-based marketplace Shutl, and had taken a stake in Craigslist. More recently eBay had acquired Korean online marketplace Giosis and gained an exclusive partnership with Flipkart, an Indian e-commerce platform. In addition, eBay had acquired unrelated businesses such as RedLaser, Critical Path Software, and Sales Predict, whose abilities should be able to enhance eBay‘s technical processes. eBay also had arranged an investment in Meetup social networking and entered into an international cooperation with Google. With increased competition from Yahoo, Amazon, Facebook Marketplace and Alibaba Group‘s Taobao, eBay had to continue to diversify and provide depth in its product offerings to remain competitive. In most cases, eBay expanded into new markets through acquisitions, and it slowly incorporated the newly acquired site into its global platform. However, this approach had been ineffective in the Asia Pacific region, and therefore prevented eBay from successfully competing in key markets like China and Japan. As of 2017, eBay had had no stated plans for further big acquisitions in the area, intending instead to grow by pursuing partnerships and identifying synergies in its existing businesses. Growth strategies should create value for all stakeholders: employees, strategic partners, and owners. The choice of growth strategy should create synergy so all parties gain something they would not have on their own. Corporations can achieve synergy by sharing tangible and valuecreating activities across their business units; or through the use of common facilities, distribution channels, and sales forces; or through venture partnerships. However, cultural issues can doom intended benefits, which is partly why eBay was unsuccessful in China. Likewise, acquisitions must have shared value-creating activities. An interesting example of a failed synergy was eBay‘s acquisition of Skype, the online communications software company. When eBay bought Skype, they thought it would allow buyers and sellers to discuss transactions; therefore it would have synergies with both the auction and the payment businesses. This did not turn out to be true, and eBay sold Skype in 2009. Another attempt at streamlining the portfolio involved spinning off the Enterprise and the PayPal businesses. With these being non-core components of its business, investors believed eBay was better served by focusing on the online auction and fixed-price direct selling operations. With limited synergies at work between the divisions, it could be better to just do a clean break and TN1-212 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
reinvest the resulting cash inflow somewhere else. Various stakeholders had different views of how to reinvest this cash, however, with the activist investors, including Carl Ichan, preferring enormous share buyback and dividend programs, while eBay management wanted to contemplate more acquisitions. Referencing Chapter 8: Entrepreneurial Strategy and Competitive Dynamics Entrepreneurship involves the creation of new value by an existing organization or new venture that involves the assumption of risk. For an entrepreneurial venture to create new value, three factors must be present—an entrepreneurial opportunity, the resources to pursue the opportunity, and an entrepreneur or entrepreneurial team willing and able to undertake the opportunity. Entrepreneurs must go through a process of identifying, selecting, and developing potential opportunities. See Exhibit 8.1 and the opportunity analysis framework: the relationship between an entrepreneur, the firm‘s resources, and the opportunities available in the firm‘s environment. Entrepreneurs need to understand the concept of opportunity recognition: the process of discovering and evaluating changes in the business environment, such as a new technology, sociocultural trends, or shifts in consumer demand, that can be exploited. Changes in the external environment can lead to new business creation, but the discovery of these new ideas is not enough. They then need to be evaluated to find out if they‘re strong enough to become new ventures. Good entrepreneurial opportunities are those that are attractive to the marketplace (there must be demand for the new product or service), achievable (it must be practical and physically possible to do), durable (the window of opportunity must be open long enough for it to have a chance for success), and value creating (it must be profitable—the benefits must surpass the cost of development by a significant margin). Resources are an essential component of a successful entrepreneurial launch. The most important resource is usually money, but human resources, strong and skilled management, is also an essential asset. Social capital, or entrepreneurs who have extensive social networks or wellconnected key contacts, allows the new venture to gain exposure and build legitimacy faster. Strategic alliances represent a type of social capital that can be especially important. Launching a competitive venture requires a special kind of leadership involving courage, belief in one‘s convictions, and having the energy to work hard. Three characteristics of entrepreneurial leaders are: ● Vision ● Dedication and drive ● Commitment to excellence To achieve excellence, venture founders must understand the customer, provide quality products and services, pay attention to details, continuously learn, and surround themselves with good people.
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Teaching Note
Case 1: Robin Hood
eBay‘s decision to expand into China was a huge opportunity, but it had been hard for leadership to evaluate those opportunities. Although the demand was there, and, if executed properly, it would be value creating, there were questions in the past about whether this opportunity was achievable within the existing window of opportunity. In addition, the company needed key resources, especially well-connected contacts, in order to overcome the cultural barriers it had encountered. The appropriate strategic alliance had eluded eBay in the past. In addition, although, at the time, CEO John Donahoe had appeared to have the skills, and was willing to take risks, he might not have had the appropriate vision or been able to adequately anticipate the extent of the resources needed, nor did he fully anticipate the cultural adaptations necessary in order to succeed. eBay‘s founder Omidyar had had an entrepreneurial vision, a vision of a community built on commerce, sustained by trust, and inspired by opportunity. The concept of ―trust between strangers‖ became the foundation of eBay‘s online auction and marketplace business model. Originally, Omidyar and subsequent CEO Meg Whitman had shown that they understood the customer, provided quality products and services, paid attention to details, continuously learned, and surrounded themselves with good people, including new CEO John Donahoe. However, diverse stakeholders such as activist investor Carl Icahn had a different vision: building cash and increasing stock price. The pursuit of acquisitions and related shareholder value rather than adding value to the experiences of buyers and long-time sellers such as small store owners may have soured eBay customers. For them, the core business no longer seemed to support the original community. If opportunity recognition is the process of discovering and evaluating changes in the business environment, such as a new technology, sociocultural trends, or shifts in consumer demand, that can be exploited, who is left to recognize this opportunity? What resources remain to move forward and create new value? NOTE — ADDITIONAL READING, WEB LINKS, VIDEO: CASE UPDATE: Although not discussed in the case, news from September 2019 came that Devin Wenig was resigning as CEO just as eBay was ―conducting a strategic review of its assets.‖ Wenig indicated that ―his departure was prompted by a disagreement with the board‖ and that it was ―best for everyone to turn that page over.‖ Scott Schenkel, previously the chief financial officer, became the new interim CEO. https://www.forbes.com/sites/laurendebter/2019/09/25/ebays-ceo-devin-wenigresigns/#31cb48c440c2. More information, including a video of commentary from CNBC discussing the surprising departure of Wenig amid a strategic review of eBay‘s asset portfolio, including StubHub and eBay Classifieds Group is at https://www.cnbc.com/2019/09/25/ebay-ceo-devin-wenig-is-stepping-down-as-the-companycontinues-review-of-potential-sale-of-assets.html. TN1-214 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Some conjecture surrounds the role of ―activist investors at Elliot Management, who sent eBay‘s board a letter criticizing the company‘s poor performance compared with its peers and outlining a plan to usher eBay into a new era of profitability. The letter called for a review of its assets and ‗increasing operational efficiency,‘ among other recommendations, and stressed that leadership would be key in enacting changes.‖ See https://www.washingtonpost.com/business/2019/09/25/ebay-ceo-devin-wenig-steps-down-sayshe-board-were-not-same-page/.
2. SECONDARY QUESTION: What source of competitive advantage does eBay have, and is that position supported by its resources and assets? NOTE: No PowerPoint slides accompany this discussion. Referencing Chapter 7: International Strategy If corporate strategy focuses discussion on the questions of what businesses a corporation should compete in and how the businesses should be managed so they can create ―synergy,‖ one of the options includes diversification. International expansion is a viable diversification strategy; however, before pursuing this, a firm needs to determine why an industry in a given country is more (or less) successful than the same industry in another country. When choosing a country to expand into, firms must assess the degree of consumer demand, the degree to which resources such as skilled labor and other supplier or supporting infrastructure are developed and available, the speed with which such resources can be deployed, the extent of political and economic risk and corruption, the access to qualified management. In Asia Pacific, eBay‘s management risks might have included: ● Language and culture ● Managing employees ● Managing technical processes ● Handling customer preferences There are two opposing forces that firms face when entering international markets: cost reduction and adaptation to local markets. Therefore, there are four basic strategies firms can use: international, global, multidomestic, and transnational. See Chapter 7, Exhibit 7.4. Strategies that favor global products and brands should standardize all of a firm‘s products for all of their worldwide markets, and reduce a firm‘s overall costs by spreading investments over a larger market. Global strategies are based on three assumptions: • Customer needs and interests worldwide are becoming more homogeneous. • People (worldwide) prefer lower prices at high quality. • Economies of scale in can be achieved through supplying global markets. eBay followed a global strategy. Advantages of a global strategy included a unified approach that allowed users to conduct transactions in an online global community. Users could interact TN1-215 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
and purchase or sell items with anyone in the world over a single platform. Having a single platform also minimized company costs, such as maintenance and development. Disadvantages were evident by eBay‘s inability to truly meet specific local business needs. Having a single platform provided standardization across all markets, which may or may not have been effective in certain markets with customers that had specific needs and expectations. eBay‘s decision to use a single platform to provide online trading in all its markets had been successful in most of its global communities. However, this decision appeared to have hindered eBay‘s ability to compete in the Asia Pacific region. eBay was perhaps uncomfortable turning control over to local partners and fully leveraging local expertise. Because it uses mostly virtual assets, the worldwide online auction market is basically low-cost, but certain markets also require products adapted to specific needs. This means that eBay should have adopted a multidomestic strategy. Strengths of a multidomestic strategy include the ability to adapt to local market conditions while detecting potential opportunities for attractive niches, thereby enhancing revenue. Limitations mean a decreased ability to realize cost savings through scale economies and greater difficulty transferring knowledge across countries. In addition, this may lead to over adaptation as conditions change. A multidomestic strategy, where the company could provide a standard product and meet specific local needs, might have been the optimal strategy for eBay to adopt for competing in the Asia Pacific region. The company could have achieved this strategy through its local acquisitions and realized further benefits by tailoring customized local sites for each market. A multidomestic strategy would allow eBay to sustain costs while meeting specific market needs. The company had a global strategy that prevented it from successfully competing in certain markets. A multidomestic approach would instill consistency across eBay‘s global platform and at the same time provide flexibility when entering new markets. This approach would also allow eBay to retain central control in the United States and enable local management in each of its markets. It would therefore allow eBay to share knowledge among its various worldwide holdings. The sale of eBay‘s India business to Indian e-commerce startup Flipkart, in return for a $500 million equity stake, indicated that eBay did not have the ability to run this business successfully on its own. Giving up a proprietary foothold in the Indian market was a questionable strategy, given that competitors such as Amazon and Alibaba were heavily invested there. Entry modes available for international expansion differ based on the extent of investment and risk, and the degree of ownership and control. See Chapter 7, Exhibit 7.8. In order from low to high, they include: ● Exporting ● Licensing ● Franchising ● Strategic Alliances ● Joint Venture ● Wholly Owned Subsidiary TN1-216 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
eBay‘s entry mode choices for international expansion included: alliances, joint ventures, and wholly owned subsidiaries. eBay‘s joint venture with Tom Online had provided it local expertise, but eBay‘s past experience demonstrated the company‘s inability to understand local business needs and acquire market share from China‘s online auction giant, Taobao. With Tom Online‘s intimate local knowledge and eBay‘s financial strength and experience in the online auction industry, the joint venture should have helped eBay increase its position in China‘s market. The enhanced communication channel was meant to appeal to a broader market that preferred direct communication and interaction between users, but this potential had failed to develop. eBay‘s numerous attempts to penetrate the Asia-Pacific market, specifically China and Japan, had ended in failure, with the company pulling out of Japan and buying out Chinese startup Eachnet, essentially cancelling years of invested work. eBay‘s idea to buy a joint venture stake in South Korea‘s Gmarket was part of a strategy to broaden eBay‘s market coverage. However, Gmarket was a competitor, and had already entered into an agreement with Yahoo. Although eBay had localized sites in 30 countries and had established a presence in Latin America through its investment in Mercado Libra, eBay subsequently sold its majority stake in that platform in 2016. eBay had a presence in Asia Pacific, Europe, North and Latin America, but no foothold in Africa or the Middle East, areas with significant growth potential. In order to remain successful and enjoy the same financial performance as it had in the past, eBay needed to develop an effective strategy to compete in major overseas markets and to mitigate the risk of existing local competitors, especially in Asia. It is unclear if current leadership has either the resources or the support to do so. NOTE — ADDITIONAL READING, WEB LINKS: With global expansion a concern for almost all firms, what specific issues might affect eBay‘s global growth strategy? eBay tried to expand in China with mixed results. Commentary about the differences between eBay EachNet and major competitor Taobao in 2005 was that Taobao understood the local needs of buyers. At the time, Jack Ma, the executive responsible for Taobao and Alibaba, was confident he would succeed, and eBay would fail. So far, he has been correct: See http://www.forbes.com/global/2005/0425/030.html. eBay‘s joint venture with Tom Online was seen by some as ―another failed attempt by a U.S. behemoth to extend its dominance to Chinese cyberspace‖: http://www.businessweek.com/stories/2006-12-19/tom-online-ebays-last-chinacardbusinessweek-business-news-stock-market-and-financial-advice. This article from 2013 is a story about how eBay and others might not be able to gain market share in China—it‘s all about close personal relationships, or ―swift guanxi,‖ ―based on highquality social interactions and the reciprocal exchange of mutual benefits.…Customers on Taobao spend an average of 45 minutes using what the researchers call computer-mediatedTN1-217 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
communication technologies (think instant messaging) to ask sellers questions about themselves and their products before purchasing anything.‖ See http://www.psmag.com/businesseconomics/why-ebay-failed-in-china-taobao-swift-guanxi-60072. The above analysis indicates that eBay should have been well positioned with both resources and a competitive strategy to deal effectively with its external environment, including its competition. However, eBay‘s insistence on a single global platform may not have been appropriate for all markets. This is why eBay could have considered developing a more adaptive multidomestic strategy. Giving up some corporate control in Asia to rely on more local expertise might be critical for success in this market. Referencing Chapter 5: Business-Level Strategy In order to fully appreciate eBay‘s difficulties with its growth strategies in Asia, it may help if students can step back and consider eBay‘s need for a strategic analysis and formulation. eBay had already been a success in North America before it ventured abroad. That success was based on a specific competitive strategy. In order to achieve a sustainable competitive advantage, eBay had to assess its ability to contend with other online auctioneers. The question of how to compete in a given business to attain competitive advantage requires an assessment of the types of competitive strategies, including the three generic strategies that are used to overcome the five forces and achieve a competitive advantage: 25. Overall cost leadership Low-cost-position relative to a firm‘s peers Manage relationships throughout the entire value chain 26. Differentiation Create products and/or services that are unique and valued Non-price attributes for which customers will pay a premium 27. Focus strategy Narrow product lines, buyer segments, or targeted geographic markets Attain advantages either through differentiation or cost leadership Ask the students which strategy they think eBay pursued, and why. Their answers may include some of the following points: eBay competed by creating customer options that were uniquely different from those of its competitors. It also targeted distinct market niches. Because of its reputation and longevity in providing value to its customer segments, eBay was in a unique position to continue to capture a significant share of the growing online market. Therefore, eBay pursued a combination strategy of focused differentiation. Not in the case: Regarding its competitive strategy in Asia, in order to maintain control over costs, eBay had kept central management control in the United States. Although this centralized TN1-218 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
decision structure allowed eBay to keep to a consistent global platform, it made it more difficult to be responsive to local needs. Therefore, the value of eBay‘s service in Asia did not yet convince users to either seek out the service or pay a premium. Referencing Chapter 4: Intellectual Capital See the concepts of intellectual capital, human capital, and social capital, all of which are intangible assets that a company such as eBay needs to have in order to compete successfully. Intellectual capital is a measure of the value of a firm‘s intangible assets, its reputation, employee loyalty and commitment, customer relationships, company values, brand names, and the experience and skills of employees. Human capital involves the individual capabilities, knowledge, skills, and experience of the company‘s employees and managers. Social capital is a function of the network of relationships that individuals have throughout the organization. If employees are working effectively in teams, across business divisions, and sharing their knowledge and learning from each other, not only will they be more likely to add value to the firm, but they also will be less likely to leave the organization. This applies to strategic alliance partners as well. Both Meg Whitman and John Donahoe were examples of the dedication, experience and skills of eBay‘s intellectual capital. Because eBay was in the knowledge business, the capabilities of its employees and managers were essential assets. However, especially in Asia, social capital was critical. Think of social networks like marketing by word-of-mouth. As eBay founder Omidyar said, eBay was envisioned as a community built on commerce, but sustained by trust, and inspired by opportunity. The social network of buyers, sellers, browsers, technical support gurus, managers, corporate employees, local partners, all had to see the same opportunity, and trust that commerce would happen. It appeared possible that eBay had not understood how to leverage social capital in Asia. A telling comment was rival Alibaba.com‘s CEO Jack Ma‘s observation that eBay moved too quickly to replace local management with foreigners and tried to create a market through spending rather than through a ground up process of networked local involvement. Contrasting eBay with Yahoo, when Yahoo chose to partner with Taobao and Gmarket, both Taobao and Gmarket had an in-depth understanding of the Asian culture and local market needs. They allowed users to conveniently interact with each other by offering alternate communication channels such as instant messaging and voice-over-IP (VOIP). This enabled sellers to respond to buyer questions more quickly, completing the transaction in a timelier manner. Both companies also offered fixed pricing at an early stage, which allowed buyers to purchase items without having to spend time on negotiations. Not in the case: Despite Yahoo‘s involvement with both companies, local management control was retained allowing Taobao and Gmarket to meet local market needs. NOTE — ADDITIONAL READING, WEB LINKS, EMBEDDED VIDEO: Use the tools available at this link to examine the performance of eBay‘s stock over the last five years: http://finance.yahoo.com/q?s=ebay. TN1-219 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
In 2013, eBay‘s revenue forecast showed weakness in Europe and Asia, sending the stock down to its lowest levels since August of 2011. CEO John Donahoe noted that online commerce growth in Germany, UK, and Korea was slowing. PayPal revenue, however, was strong: http://www.bloomberg.com/news/2013-07-17/ebay-revenue-forecast-misses-as-growth-abroadslows.html?cmpid=yhoo. Analyst‘s opinion in July 2013 was that eBay was successfully competing against competitors such as Amazon, primarily because of its PayPal digital payments business, its cross-border trade/international business, and its mobile connection platform. However, eBay was still not competitive in China: http://www.insidermonkey.com/blog/ebay-inc-ebay-it%E2%80%99s-timeto-stop-worrying-about-this-e-commerce-giant-202137/. What do you believe explains the stock‘s performance? Would you expect the current trend to continue? Why or why not? Here is a video reportedly produced for eBay‘s employees in 2005 on the occasion of its tenth anniversary. It interviews eBay users from different perspectives, one of whom is a Chinese seller using Eachnet. http://www.youtube.com/watch?v=lw793h14eD0&feature=PlayList&p=879A61950594D1F2&p laynext=1&playnext_from=PL&index=2. The eBay community has a lot to say about how it feels it‘s been treated. And a lot of customers feel left out as well. Many seem to believe ―eBay‘s future lays in its past.‖ See https://www.quora.com/What-is-the-future-of-eBay and https://community.ebay.com/t5/Selling/The-future-of-eBay/td-p/27129929. If you‘re an entrepreneur in 2019 looking for the best place to offer your goods for sale, options include listing your wares on eBay, becoming a third-part seller on Amazon, or using Shopify to build your own selling platform. All are options, yet Amazon has grabbed the most share. See https://www.entrepreneur.com/article/325616. How successful do you expect eBay to be going forward in its auction and direct marketplace segment if its prime users feel this way? Increasingly, eBay is focusing on the transaction part of its business. From a story in April of 2013, CEO John Donahoe explains how eBay has expanded into retail logistics and services with the 2011 acquisition of GSI Commerce, and is now ―targeting the $10 trillion total commerce market, which includes brick-and-mortar, traditional retail chains and their forays into online and mobile.‖ eBay is working with retailers to make its operations more seamless between stores, online and mobile. Donahoe sees his company as a partner with retailers as opposed to a competitor. That‘s why Donahoe spent roughly $3 billion in recent years to acquire more than 20 companies that help eBay‘s customers sell more goods, such as mobile bar-code-scanning apps and data-mining outfits. Donahoe also hinted at a major push into Russia in coming years. See http://www.usatoday.com/story/tech/columnist/veverka/2013/04/01/ebay-amazon-att-megwhitman-john-donahoe/1995211/. TN1-220 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Referencing Chapter 11: Strategic Leadership See the concept of leadership, the process of transforming organizations from what they are to what the leader would have them become. Leadership is proactive, goal oriented, and focused on the creation and implementation of the creative vision. This definition implies dissatisfaction with the status quo, a vision of what should be, and suggests a process for bringing about change. Leaders are change agents whose success is measured by how effectively they formulate and implement a strategic vision and mission. See Exhibit 11.1. This involves: ● Setting a direction ● Designing the organization ● Nurturing a culture dedicated to excellence and ethical behavior The interdependent nature of these three activities is self-evident. Consider an organization with a great mission and a superb organizational structure, but a culture that implicitly encourages shirking and unethical behavior. Often, failure of today‘s organizations can be attributed to a lack of equal consideration of these three activities. The imagery of the three-legged stool is instructive: it will collapse if one leg is missing or broken. Leaders need to set the direction for the organization by continually scanning the environment to develop knowledge of all stakeholders, as well as knowledge of salient environmental trends and events. Then leaders must integrate that knowledge into a vision of what the organization could become. Leaders require the capacity to solve increasingly complex problems and must be proactive in their approach so they can develop viable strategic options. Leaders are responsible for designing the organization: a strategic leadership activity of building structures, teams, systems, and organizational processes that facilitate the implementation of the leader‘s vision and strategies. Leaders have an important role in creating systems and structures to achieve desired ends. Leaders play a key role in changing, developing, and sustaining an organization‘s culture. An excellent and ethical organizational culture is an organizational culture focused on core competencies and high ethical standards. Organizational culture can be an effective means of organizational control. In nurturing a culture dedicated to excellence and ethical behavior, managers and top executives must accept personal responsibility for developing and strengthening appropriate behavior; consistently demonstrate that such behavior is central to the vision and mission, and develop and reinforce role models, corporate credos, codes of conduct, reward and evaluation systems, policies and procedures. Doing this requires leaders to overcome barriers to change and effectively use their power. eBay CEO John Donahoe did appear skillful at scanning the external environment to identify the trends and events that might affect the firm‘s long-term strategy. The awareness of changes in the retail environment is an example of this ability to set direction. TN1-221 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
However, by failing to anticipate how the single global platform might not be appropriate for all markets, Donahoe had not designed the organization in such a way as to facilitate strategic implementation. EBay CEO John Donahoe appeared capable of nurturing a culture that allowed the company to overcome barriers to change in the United States, but that had not yet translated well in Asia. It‘s still unclear if CEO Wenig had a clear vision of what to do. Referencing Chapter 12: Managing Innovation and Fostering Corporate Entrepreneurship Innovation involves using new knowledge to transform organizational processes or create commercially viable products and services using the latest technology, experimentation, creative insights, and information from competitors. However, it comes about, innovation occurs when new combinations of ideas and information bring about positive change. In fact, the root of the word innovation is the Latin novus, which means ―new.‖ Innovation involves introducing or changing to something new. It is a critical part of strategic implementation. Before proceeding, firms must first define the scope of the innovation efforts and must ensure that their innovation efforts are not wasted on projects that are outside the firm‘s domain of interest. Firms must have the means to focus their innovation efforts. A strategic envelope defines the range of acceptable projects. Strategic envelope means a firmspecific view of innovation that defines how a firm can create new knowledge and learn from an innovation initiative even if the project fails. The strategic envelope also gives direction to a firm‘s innovation efforts, which helps separate seeds from weeds and builds internal capabilities. One way to determine which projects to work on is to focus on a common technology. Then, innovation efforts across the firm can aim at developing skills and expertise in a given technical area. Another potential focus is on a market theme. Companies must be clear not only about the kinds of innovation they are looking for but also the expected results. However, a firm envisions its innovation goals, it needs to develop a systematic approach to evaluating its results and learning from its innovation initiatives. It needs to develop a set of questions to ask itself about its innovation efforts. In defining the innovation scope, a firm should answer several questions: ● How much will the innovation cost? ● How likely is it to actually become commercially viable? ● How much value will it add; that is, what will it be worth if it works? ● What will be learned if it does not pan out? The challenges of innovation involve: ● Choosing when and how to continue to innovate ● The scope and pace of future innovation ● Whether or not to collaborate with innovation partners ● Resources such as financial, human and social capital ● The leadership team to have adequate vision, dedication and drive TN1-222 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
eBay was in a global industry with competitors on multiple continents. eBay had to innovate in both product and process arenas simultaneously. Therefore, the scope of innovation was critical. The scope of any innovation investment must be carefully assessed to make sure it doesn‘t strain the firm‘s ability to utilize its existing resources—how much will it cost, and will we be able to learn something useful if it doesn‘t work? Does the firm have the needed capabilities? Where can eBay get access to the needed skills and expertise? Has eBay learned enough from its mistakes to succeed in the future? eBay must continue to reassess its internal and external environment in order to build its competencies, mitigate areas where it is weak, and take advantage of opportunities to be innovative and to ensure eventual global success. Teaching Note Case 15 — Weight Watchers Is Now WW Case Objectives 1. To investigate choice of competitive strategy in a crowded industry environment. 2. To examine how external and internal forces affect competitive strategy. See the table below to determine where to use this case: NOTE: There are both PRIMARY and SECONDARY chapters that can be used for this case. The Teaching Note gives guidance for the PRIMARY use chapters and provides suggestions if the instructor wants to use the case to illustrate concepts from the optional SECONDARY chapters. CASE OBJECTIVES TABLE Chapter Use Key Concepts PRIMARY CONCEPTS: 5: Business Level Strategy 2: External Environment
Competitive strategy; generic strategies
SECONDARY CONCEPTS: 6: Corporate-Level Strategy 11: Strategic Leadership 12: Managing Innovation
Diversification; synergy; core competencies; acquisitions
Industry competition five forces; general environmental factors
Additional Reading and/or Exercises NOTE see additional reading web articles, embedded video
NOTE financial and competitor info, video viewing
Leadership; learning organization Innovation; scope of innovation
Case Synopsis Weight Watchers International Inc. had been a major player in the weight loss industry since 1963. The company was known for its lifestyle approach to weight management and its TN1-223 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
recognizable brand identity. Founder Jean Nidetch had established the company‘s original format: providing group weight loss support for small groups of women in an intimate setting. Despite years of success in the weight loss industry, Weight Watchers was experiencing some challenges and opportunities, including: competitive positioning issues, reinvigorating its brand, broadening the customer mix by targeting new customer segments, and continuing efforts to develop innovative new platforms and product offerings that appealed to a wider range of consumers. In April 2019, Weight Watchers (WW) launched a new marketing campaign called ―It Works!‖ This promotional plan featured media mogul Oprah Winfrey encouraging WW members to celebrate their weight loss. The only problem was investors perceived this promotional push as too little, too late. WW had also needed to find a new CEO to replace John Chambers, who left after only three years in the job. Mindy Grossman was named President and CEO in April 2017. Under this new leadership WW posted disappointing fiscal third- and fourth-quarter reports, missing estimates and reporting a decline in its subscriber base, which had fallen to 3.9 million from 4.2 million in the fall of 2018. One of Grossman‘s strategies was to rebrand the company—turning ―Weight Watchers‖ into ―WW‖ in an attempt to ―embrace wellness‖ or encourage its customers to stay with the program long after they had achieved their target weight. However, this rebranding campaign, launched in the fall of 2018, only confused customers. The timing of this new message, just before the crucial holiday diet season, made it seem as if Weight Watchers was abandoning its core weight loss mission. Intensifying competition in the weight loss industry coupled with the perception of a ―confusing‖ brand image meant Weight Watchers had to reinvent itself. Accordingly, the company was attempting to broaden its health message by expanding to different target groups, different dieting platforms, and different means of offering them. While doing all this, could Weight Watchers still be effective in staying true to the core of Jean Nidetch‘s original vision? The weight-loss and wellness industry is not going away, and members of Weight Watchers‘ senior management continue to have many tough decisions to make. Teaching Plan The Weight Watchers case can be used to set the stage for a discussion of business policy and strategy in a practical real-world environment. Most students can see themselves or their friends wanting to lose a few pounds, so the issues may be easy for them to visualize. Therefore, this case can be introduced in the early part of the course, after students have read Chapter 2, and as a prelude to Chapter 5. Instructors can use this case to discuss the PRIMARY concern of how to choose a competitive strategy, and the importance of doing an analysis of the external environment in order to monitor the continuing appropriateness of that chosen strategy. NOTE — this case can also be used to illustrate marketing strategy, so could accompany a course in marketing communications or consumer behavior. TN1-224 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
ICE BREAKER This case can start with an icebreaker. Starting from the perspective of a customer may make it easier for students to transition to a strategic analysis. How many of you can see yourself (or your friends) having to lose a few pounds, either now or in the future? How many of you have heard of Weight Watchers? What other weight loss programs are you aware of? Based on what you know, which weight loss programs would you consider joining? The instructor may want to put a list on the board of the other weight loss programs students have heard of, including Weight Watchers, and then ask, for each program, how many students, by a show of hands, would consider joining each one and why. List these numbers and reasons on the board for each program. The board will then contain information about how each program has differentiated itself based on its current media promotions. This then becomes instant market research and may help students understand how a company struggles to create not only brand recognition and reputation, but to craft a marketing communication that convinces its target market to try its product or service. It may be interesting to also further segment the students by gender and age—do any trends emerge? Do men prefer one program over another? Do older women prefer a particular program? Especially if the Weight Watchers program does not fare well in this head-to-head comparison, put students in the role of Weight Watchers‘ marketing director, or director of strategic planning, and ask them what they would do. It‘s also possible some students are fans of health monitoring devices such as the FitBit, or are intrigued by the personal coaching approach promoted by programs such as The Biggest Loser (originally ran from 2004 to 2016 on NBC, returned to TV in 2020 on USA Network, see https://www.usanetwork.com/the-biggest-loser). Ask how many of them would be more willing to do-it-yourself rather than join a program that provided specific guidance like Weight Watchers. This discussion points to the change in the overall environment for weight loss— technology and increasing awareness of fad diet solutions had changed the competitive landscape for the weight management industry as a whole. Before engaging in discussion, you might want to test students‘ basic knowledge regarding the case and the major concepts. Here are some multiple-choice questions to use. (This will get the student‘s attention—they can‘t answer these if they haven‘t read the case!) Weight Watchers predominately uses the following operational model: a. Selling pre-prepared meals b. Providing online tools for do-it-yourself weight loss guidance c. Holding meetings where members are given instruction and group support d. All of the above TN1-225 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
ANSWER: c This can be misleading. Weight Watchers does sell meals with the Weight Watcher brand, but these are not part of a prepared meal plan such as those used by Jenny Craig and NutriSystem. Weight Watchers does provide online tools to help members monitor weight loss, but this is done as part of a one-on-one or community coaching system. Weight Watchers does not support the do-it-yourself method, believing instead that community support is crucial to a sustainable weight loss plan. This is partly what differentiates Weight Watchers from its competitors. Weight Watchers‘ primary target market is women. a. Yes b. No ANSWER: b Although Weight Watchers started out as a women‘s support network, increasingly the focus has shifted to men. See http://www.weightwatchers.com/men/index.aspx. Summary of Discussion Questions Here is a list of the suggested discussion questions. You can decide which questions to assign, and also which additional readings or exercises to include to augment each discussion. Refer back to the Case Objectives Table at the beginning of this Teaching Note to identify any additional readings and/or exercises so they can be assigned in advance. 1. How should Weight Watchers compete? 2. What are key forces in the general and industry environments that affect Weight Watchers‘ choice of strategy? 3. OPTIONAL QUESTION: How should leadership manage innovation in this industry, and what are Weight Watchers‘ options for growth? Discussion Questions and Responses 1. How should Weight Watchers compete? Referencing Chapter 5: Formulating Business-Level Strategies How firms compete with each other and how they attain and sustain competitive advantages go to the heart of strategic management. In short, the key issue becomes: why do some firms outperform others and enjoy such advantages over time? The viability of a firm‘s success is driven by both the internal operations of the firm and the desires and preferences of the market. Firms that succeed have the appropriate resources and cost structure to meet the needs of the industry and general environment. They also have a strategy… Weight Watchers had begun with a simple philosophy: a program that incorporated a food plan and an activity plan, supported by a community system where the group provided love, information, companionship and commiseration of fellow overweight individuals, helping members succeed at weight loss. Given that the Weight Watchers‘ basic model had spawned many imitators over the years, what strategy should the company pursue in order to maintain its competitive advantage? TN1-226 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
A business-level strategy is a strategy designed for a firm or a division of the firm that competes within a single business. Within the firm‘s industry environment generic strategies include basic types of business level strategies based on breadth of target market (industrywide versus narrow market segment) and type of competitive advantage (low-cost versus uniqueness). Here are the three generic strategies that are used to overcome industry forces and achieve a competitive advantage: 28. Overall cost leadership Low-cost-position relative to a firm‘s peers Manage relationships throughout the entire value chain 29. Differentiation Create products and/or services that are unique and valued Non-price attributes for which customers will pay a premium 30. Focus strategy Narrow product lines, buyer segments, or targeted geographic markets Attain advantages either through differentiation or cost leadership Generic strategies are plotted on two dimensions: competitive advantage and strategic target. The overall cost leadership and differentiation strategies strive to attain advantages industry wide, while focusers have a narrow target market in mind. Both casual observation and research supports the notion that firms that identify with one or more of the forms of competitive advantage outperform those that do not. Differentiation: This is traditionally where Weight Watchers had excelled, using differentiation to maintain market share by building off its solid reputation. Weight Watchers‘ approach to weight loss and its continual innovations were seen as value-adding and allowed Weight Watchers to command a price premium. Cost Leadership: Weight Watchers had been able to keep overall costs low amidst its use of a differentiation strategy. Due to its rented space, non-reliance on infrastructure for much of its operations, and part-time pay with no benefits for leaders of meetings, Weight Watchers had been able to keep much of its costs low. Focus: Weight Watchers had been focused in its targeting of young to middle-aged women in the past but was now broadening its differentiation approach to include men, as well as additional ethnic groups. Other options firms sometimes pursue include: Combination of Differentiation and Cost Leadership, Combination of Focus and Cost Leadership, Combination of Differentiation and Focus: While Weight Watchers had pursued a focused differentiation strategy in the past, it was now attempting to hold onto its niche while expanding its scope to become a broad differentiator. However, WW also kept its overall costs TN1-227 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
low. Taking advantage of the benefits of all of the strategies, while remaining a differentiator at its core, allowed Weight Watchers to remain competitive. Stuck in the Middle? Weight Watchers must ensure that it does not get stuck in the middle and does not sacrifice the benefits of its original focused differentiation strategy, while expanding its strategic agenda. Weight Watchers‘ ability to balance differentiation and low cost and maintain competitive parity on both will prove very important for its success in the future. As explained in the chapter, competitive parity means a firm‘s achievement of similarity or being ―on par‖ with competitors with respect to low-cost, differentiation, or other strategic product characteristics. Competitive parity on the basis of differentiation permits the cost leader to translate cost advantages directly into higher profits than competitors. Thus, the cost leader earns above-average returns. A business that strives for a low-cost advantage must attain an absolute cost advantage relative to its rivals. This is typically accomplished by offering a no-frills product or service to a broad target market using standardization to derive the greatest benefits from economies of scale and experience. Weight Watchers had always been able to control costs because of its flexible business model: meeting costs were low, and the number of meetings could be adjusted according to demand. The licensing and franchise models were equally low-cost, high-margin activities. However the advantages of an efficient low cost strategy may fail if the firm is unable to attain parity on important dimensions of differentiation such as quick responses to customer requests for services or design changes. This was one of Weight Watchers‘ current challenges. On the other hand, for those firms that choose differentiation, parity on cost requires that differentiators must integrate operations at multiple points along the value chain, reducing costs in all areas that do not affect differentiation. This is where Weight Watchers had some additional challenges as it ventured into areas such as integration of technology-based tools or on-demand personal coaching where it did not have well-developed expertise. Competition for Weight Watchers included both price competition and competition from selfhelp, pharmaceutical, surgical, dietary supplement, and meal-replacement products, as well as other weight-management brands, diets, programs, and products. Weight Watchers had been able to remain differentiated because of its ―lifestyle-based approach.‖ However, competitors such as Jenny Craig offered a different, and to some, an attractive alternative which included the sale of prepackaged meals. Weight Watchers‘ senior management did not want to change the focus of the support group meetings, saying ―Weight Watchers is in the business of helping people change behaviors,‖ not selling food. Weight Watchers was the pioneer of a differentiation strategy within the weight loss industry. It had prospered with a focused differentiation strategy in the past—targeting women. Now, Weight Watchers was attempting to branch out into broad-based differentiation, while also adapting to the growing move to online apps and activity monitors for weight control. Increasingly, the community support for weight loss could also be provided virtually rather than in the traditional face-to-face Weight Watcher meeting environments. In order to succeed, Weight Watchers must continue to achieve competitive parity on cost to be able to compete with TN1-228 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
other companies who also used a differentiation strategy, but this might involve anticipating future challenges that might affect the industry. Here‘s where an analysis of the elements in the general and industry environment and an understanding of consumer behavior may become essential.
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Teaching Note
Case 1: Robin Hood
NOTE — ADDITIONAL READING, WEB LINKS AND VIDEO: Visit the Weight Watchers main website at http://www.weightwatchers.com/index.aspx. Here are videos showing how the Weight Watchers meetings work, from 2007, highlighting the Winning Points system: http://www.youtube.com/watch?v=4SftzmDQJmI (Part 1). http://www.youtube.com/watch?v=hi4L_zJTkiA&feature=related (Part 2). In 2007, Weight Watchers promoted an online weight loss support site specifically for men. See the website here: http://www.weightwatchers.com/men/index.aspx. Weight Watchers has a branding and publishing arm that has been prolific over the years. Including books written by spokespersons, Weight Watchers has a number of branded product lines including scales for weighing both food and bodies, packaged food, ―points‖ calculators, and other accessories. From Amazon, here is a list of the 853 Weight Watcher book titles for sale: http://www.amazon.com/s/qid=1248045167/ref=sr_pg_1?ie=UTF8&rs=&keywords=weight%20 watchers&rh=i%3Astripbooks%2Ck%3Aweight%20watchers%2Cn%3A!1000&page=1. Weight Watchers is not the only program involving group motivational techniques. See a free online program called SparkPeople. This online support site provides a networking site for likeminded people who help each other set and reach goals, which include weight loss. Since Weight Watchers first established the idea of a group meeting as a motivator for reaching weight goals, many other programs have followed. SparkPeople is more of a lifestyle change program, but the free networking has helped many people lose weight. Visit the current Spark People website at http://www.sparkpeople.com/. Other competitors to WeightWatchers can be evaluated at several online sites: https://health.usnews.com/wellness/food/articles/how-us-news-ranks-best-diets; and Consumer Reports, Weight Loss Programs Reviews, http://www.consumersearch.com/weight-lossprograms One thing they all say is ―the best weight loss plan is the one you can stick to!‖ There is some scientific evidence for the efficacy of a structured weight loss program such as Weight Watchers. A study published in the Journal of the American Medical Association (JAMA) in 2003 found that participants in the Weight Watchers program lost more weight than those who tried to go it alone with brief counseling and self-help. However, these differences in weight loss were not statistically significant between groups. Although the evidence was not overwhelmingly supportive, the report concludes that ―attendance at group meetings may provide the conditions necessary to produce and sustain weight loss and may increase the likelihood of improvements in biological indicators‖ such a blood pressure and insulin levels. See http://jama.ama-assn.org/cgi/content/full/289/14/1792. Scientific evidence for promoting one diet over another has also not been conclusive. One 2005 study published in the Journal of the American Medical Association (JAMA) compared Weight Watchers, Atkins, Zone, and Ornish diet plans and found that after one year all diets ―modestly TN1-230 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
reduced body weight‖ and reduced ―several cardiac risk factors.‖ However, the main issue was whether patients continued to follow the program guidelines. Dropouts were fewer with the Weight Watcher program, probably because the dietary regimen was ―less extreme‖ than with the other diets. See the full report at http://jama.ama-assn.org/cgi/content/full/293/1/43. A report from 2012, in conjunction with the journal Obesity, found that ―commercial weight-loss programs like Weight Watchers may be just as effective in losing weight as clinical programs, and the key ingredient to success in both programs is buddying up.‖ See http://abcnews.go.com/Health/w_DietAndFitness/study-weight-watchers-successful-clinicalweight-loss-programs/story?id=17424647#.UOeEE6zNl8E. After considering the above, why has Weight Watchers been able to compete for so long against so many different companies? Take a look at the case financial exhibits. Where does Weight Watchers appear to make the most of its money, and what does this say about potential competition? Take a look at Weight Watchers (WW) financial picture at https://finance.yahoo.com/quote/WW?p=WW. 2. What are key forces in the general and industry environments that affect Weight Watcher’s choice of strategy? Referencing Chapter 2: Analyzing the External Environment Organizational leaders must become aware of factors in the overall environment that might affect their ability to create a competitive advantage. So how do managers become environmentally aware? They do it by doing scanning, monitoring, and gathering competitive intelligence, and using these inputs to develop forecasts. This prepares the firm to do more extensive analysis of the forces in the general environment and the industry or competitive environment. Environmental scanning involves surveillance of a firm‘s external environment to predict environmental changes and detect changes already under way. It is a BIG PICTURE viewpoint of the industry/competition, looking for key indicators of emerging trends—what catches your eye? It alerts the firm to critical trends before changes have developed a discernible pattern and before competitors recognize them. Environmental monitoring is a firm‘s analysis of the external environment that tracks the evolution of environmental trends, sequences of events, or streams of activities. Leaders need to monitor the trends that have the potential to change the competitive landscape— what do you want to track? Firms need to CHOOSE the trends identified via the scanning activity, and regularly monitor or track these specific trends to evaluate the impact of these trends on their strategy process. What factors or trends might be most important to Weight Watchers? The challenges for Weight Watchers include increased competition in the weight loss industry, how to appeal to a wider TN1-231 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
range of consumers from differing demographics, and how to reposition the company competitively within its industry. Obviously, Weight Watchers must do a lot of external scanning and monitoring in order to track evolution of trends. Regarding the general external environment, Weight Watchers must consider which political/legal, economic and global, sociocultural and demographic, and technological forces might affect the ability of the firm to market its product and sustain sales. See what students may say about the trends that Weight Watchers should scan for and monitor. Demographic: In terms of demographics as relating to the weight loss industry, baby boomers were getting older, and more and more men in this age group were now interested in losing weight and were increasingly turning to commercial weight loss methods in addition to diet and exercise. In addition, other ethnic groups, especially Asians and Hispanics, were interested in weight loss plans such as Weight Watchers. Both of these expansions of the possible demographic groups which Weight Watchers can target has led the company to look into customization options to appeal to a wider range of groups other than young to middle-aged women. Sociocultural: Obesity had been steadily increasing, along with awareness of its health hazards. It was now more culturally acceptable to be on a ―diet‖ and to be ―watching ones health.‖ Therefore, this wider acceptance had also been paired with an acceptance for men to be on diets, an extension of the demographic discussion above. As the trend towards health-consciousness broadened both in the United States and abroad, Weight Watchers was in a prime position to capitalize on this favorable trend affecting its industry. Technological: Technology had permeated the weight loss industry as well and had surfaced online in the form of computerized weight loss plans. Weight Watchers had embraced this shift with the implementation of various Weight Watchers online tools, allowing users to follow the plan electronically without going to meetings. The group therapy-type environment was mimicked in online discussion boards that were aimed at fostering a sense of weight loss community over the Internet. The Internet also provided the company with new ways to market as well as to capture a new set of users who were unwilling or unable to attend meetings. It‘s also necessary to assess the segments of the external competitive environment that include competitors, customers, and suppliers, substitutes and new entrants. Porter‘s five forces model allows strategists to anticipate where the industry might be most vulnerable. Help students apply Porter‘s five forces of competition to the weight loss industry by drawing a diagram on the board similar to the following, and having students fill in the details:
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Teaching Note
Case 1: Robin Hood
Suggested: many rivals compete for market share. There are many rivals in the industry.
Substitutes Threat Med
Suppliers’ Power Low Suggested: The suppliers of consumer products have little power because the companies in the industry can choose to add their logo to products made by the suppliers‘ competitors. Suppliers of meeting services (leaders) are part-time employees, who can be easily replaced.
Suggested: There is ease of entry into the weight loss industry. However, the threat is moderated for established firms by brand recognition and reputation.
Rivalry High
Threat of New Entrants
Suggested: In terms of a substitute product for standardized weight loss plans, there are over-thecounter and prescription weight loss drugs in addition to self-help dieting books and over-the-counter diet aids.
Buyers’ Power Low
Suggested: No institutional buyers at this point, so nobody is bargaining over price. The end consumer has lots of choice, but no real power.
High
Based on the external environmental factor analysis, the weight loss business has many competitors trying to carve out a piece of the ―profit pie,‖ but opportunities are still available, especially for diversification and vertical integration (which may be why Weight Watchers has produced its branded low calorie food items.) Certainly technological forces have affected the industry in at least two ways: new entrants can now easily enter via a technology solution, making it less expensive for buyers to act on behalf of their weight loss goals.
TN1-233 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
NOTE — ADDITIONAL WEB LINKS INCLUDING VIDEO VIEWING AND CASE UPDATE: See video viewing via the following: From October 2019 comes opinion about the new WW program, which has caused confusion among long-time Weight Watchers participants. https://www.youtube.com/watch?v=yz68vL822VI. In 2015 CBS News‘s Jill Schlesinger reported that Weight Watchers stock has been on a steady slide over the past three years, dropping a whopping 75 percent! The key culprit seems to be the technological revolution in weight control, resulting in free apps, wearable tech like Fitbit, and social media in lieu of in-person meetings as a support group. They have changed their marketing message in response. No longer is it celebrities who have lost weight, but rather ―you take control, we are here to help.‖ https://www.cbsnews.com/video/weight-watchers-seessignificant-drop-in-stocks/. One article from 2013 points out that while lawmakers had worked with diet program providers to forcibly change dietary habits (such as the NY ban on super-size sodas) these regulatory restrictions wouldn‘t be enough to change the consumer‘s behavior in favor of the managed weight loss programs, pointing out, ―analysts say the share of dieters preferring self-directed programs such as websites, apps, and diet books reached 82% during 2012, the highest level ever (I found the paleo diet through a book and it's done wonders for me)—center operators are going to be hard-pressed to record additional growth.‖ See http://www.fool.com/investing/general/2013/11/11/dont-expect-to-fatten-portfolio-with-weightloss-c.aspx. On the other hand, from 2014 comes another analyst‘s opinion of how Weight Watchers might be able to compete with the sociocultural trend toward free diet apps such as My Fitness Pal, saying, ―Weight Watchers' core customers are not self-motivators. People who pay $43 per month to attend a diet support group are not the kind of people who can lose weight using a diet app. Each week, 1 million members attend Weight Watchers meetings to receive encouragement and be held accountable through weigh-ins. Apps don't hold people accountable. They don't offer adequate support to the people who need Weight Watchers. They can't replace the program that has withstood five decades of diet fads to help millions of people lose weight.‖ http://www.fool.com/investing/general/2014/09/09/weight-watchers-vs-free-diet-apps-who-winsthe-die.aspx. How has Weight Watchers dealt with the current environmental forces in its industry? In September 2016, CEO James Chambers resigned after three years in the position. This came after Weight Watchers posted a series of financial losses. The company‘s struggles had been largely attributed to challenges from competitors such as Nutrisystem, free apps and websites meant to help people manage their weight. One bright spot has come from celebrity endorsements, including TV host Oprah Winfrey who purchased a stake in the company. See the story and related video at http://money.cnn.com/2016/09/12/investing/weight-watchersceo/index.html. TN1-234 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
In April 2017, Weight Watchers named Mindy Grossman, former CEO of home-shopping retailer HSN, as its next CEO. Stockholder and Board Member Oprah Winfrey was happy. The article points to the fact that consumers diet differently than when Weight Watchers was founded—now there is an interest in do-it-yourself ―holistic‖ approaches using free apps and online tips, which make it harder for companies such as Weight Watchers to charge for their programs. See http://fortune.com/2017/04/26/weight-watchers-mindy-grossman/. In November 2017, newly hired CEO Grossman stated that the company was ―moving beyond the scale‖ to focus on a ―health and wellness‖ approach. See the video at https://www.cnbc.com/video/2017/11/27/weight-watchers-ceo-were-moving-beyond-the-scaleto-focus-on-wellness.html. In December 2018 Nutrisystem was acquired by Tivity Health, a leading provider of fitness and health improvement programs. The press release says ―The combined company will be unique in offering, at scale, an integrated portfolio of fitness, nutrition and social engagement solutions to support overall health and wellness. See https://www.prnewswire.com/news-releases/tivityhealth-to-acquire-nutrisystem-for-1-3-billion-in-cash-and-stock-300762444.html. ―With this acquisition, Tivity Health will be unique in offering, at scale, an integrated portfolio of fitness, nutrition and social engagement solutions to support overall health and wellness… Tivity Health believes this powerful Calories In + Calories Out combination will offer a holistic approach to addressing critical health needs, lowering healthcare costs, and creating additional value for shareholders, health plans, fitness partners, members and consumers. The combined company will have a footprint of more than 75 million members eligible for Tivity Health's SilverSneakers®, Prime® Fitness, WholeHealth Living™ and flip50™ programs and millions of consumers for Nutrisystem's Nutrisystem®, South Beach Diet®, and DNA Body Blueprint™ products, creating multiple opportunities to increase engagement across all brands.‖ https://www.prnewswire.com/news-releases/tivity-health-completes-acquisition-of-nutrisystem300809247.html. In 2020 Nutrisystem came out on top, in at least one rating system. WW came in at number 5: https://top5diet.com/best-5-diet-programs/?msclkid=6c2eca2f81ca10ffebf994bf5fa3f699. Is it even possible to reverse WW‘s fortunes now that there are so many other options? 3. OPTIONAL QUESTION: How should leadership manage innovation in this industry, and what are Weight Watchers’ options for growth? NOTE: there are no PowerPoint slides to accompany the following. Referencing Chapter 6: Formulating Corporate-Level Strategies Corporate strategy focuses discussion on the questions of what businesses a corporation should compete in, and how the businesses should be managed so they can create ―synergy‖—creating value through entering new markets or developing new technologies, either through related or unrelated diversification. TN1-235 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Diversification is the process of firms expanding their operations by entering new businesses. In related diversification, a firm enters a different business in which it can benefit from leveraging core competencies, sharing activities, or building market power. Some possibilities include: ● Mergers and acquisitions ● Strategic alliances ● Joint ventures ● Internal development Whatever the choice, it should create value for all stakeholders—employees, suppliers, distributors, and the company itself. The choice of diversification strategy should create synergy so that all parties gain something they would not have had on their own. Companies can achieve synergy through diversification in two ways: Through related businesses (horizontal relationships) ● Sharing tangible resources ● Sharing intangible resources ● Leveraging core competencies Or through unrelated businesses (hierarchical relationships) ● Value creation derives from corporate office ● Leveraging support activities Core competencies reflect the collective learning in organizations—how to coordinate diverse production skills, integrate multiple streams of technologies, and market diverse products and services to create value. Core competencies must create superior customer value; the different businesses must all have similar elements in the value chain that require similar skills; and these activities or skills must be difficult for competitors to imitate. Sharing activities means that value chain elements are shared across business units, so that two or more activities are performed by one of the businesses. This allows for cost savings, but businesses need to make sure to keep control over quality and customer perception. Acquisition is the incorporation of one firm into another through purchase. It can be a means of obtaining valuable resources that can help an organization expand its product offerings and services. Acquisition can lead to consolidation within an industry and can force other players to merge. Corporations can also enter new market segments by way of acquisitions. In order for Weight Watchers to grow, it might take more than just appealing to wider demographics. Remember, in related diversification, a firm enters a different business in which it can benefit from leveraging core competencies or sharing value-added activities. Weight Watchers had value in its reputation and its operational model, which could easily be copied, but both the reputation and the business model might also provide a platform for doing expanded activities around different tiers of brands in related business areas, through vertical integration. For instance, Weight Watchers was transitioning into a business-to-business model by partnering with major health care plans and large self-insured corporations, which offered subsidized Weight Watchers memberships to eligible members and employees. In addition, even though Weight Watchers has produced its own branded low calorie food items, currently, the company doesn‘t sell food directly to their customers—but perhaps they should? TN1-236 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Referencing Chapter 11: Strategic Leadership: Excellence, Ethics and Change See the concept of leadership, the process of transforming organizations from what they are to what the leader would have them become. Leadership is proactive, goal oriented, and focused on the creation and implementation of the creative vision. This definition implies dissatisfaction with the status quo, a vision of what should be, and process for bringing about change. Leaders are change agents whose success is measured by how effectively they formulate and implement a strategic vision and mission. See Exhibit 11.1. This involves: ● Setting a direction ● Designing the organization ● Nurturing a culture dedicated to excellence and ethical behavior The interdependent nature of these three activities is self-evident. Consider an organization with a great mission and a superb organizational structure, but a culture that implicitly encourages shirking and unethical behavior. Often, failure of today‘s organizations can be attributed to a lack of equal consideration of these three activities. The imagery of the three-legged stool is instructive: it will collapse if one leg is missing or broken. Leaders need to set the direction for the organization by continually scanning the environment to develop knowledge of all stakeholders, and knowledge of salient environmental trends and events. Then leaders must integrate that knowledge into a vision of what the organization could become. Leaders require the capacity to solve increasingly complex problems and must be proactive in their approach so they can develop viable strategic options. Leaders are responsible for designing the organization: a strategic leadership activity of building structures, teams, systems, and organizational processes that facilitate the implementation of the leader‘s vision and strategies. Leaders have an important role in creating systems and structures to achieve desired ends. Leaders play a key role in changing, developing, and sustaining an organization‘s culture. An excellent and ethical organizational culture is an organizational culture focused on core competencies and high ethical standards. Organizational culture can be an effective means of organizational control. In nurturing a culture dedicated to excellence and ethical behavior, managers and top executives must accept personal responsibility for developing and strengthening appropriate behavior; consistently demonstrate that such behavior is central to the vision and mission; develop and reinforce role models, corporate credos, codes of conduct, reward and evaluation systems, and policies and procedures. Doing this requires leaders to overcome barriers to change and effectively use their power. Weight Watchers‘ previous CEO David Kirchhoff had been a clear champion for the brand, having struggled to lose weight himself. His personal story was inspirational not only to Weight Watchers customers, but to employees and strategic partners as well. Being a man, he therefore became a credible spokesperson for the company‘s new male demographic. In these ways, TN1-237 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Kirchhoff appeared to be a good role model, accepting personal responsibility for demonstrating the behavioral traits necessary to be successful. In these ways, he had carried on the tradition of founder Jean Nidetch, nurturing a culture dedicated to excellence. Former CEO Jim Chambers appeared skillful at scanning the external environment to identify the trends and events that might affect the firm‘s long-term strategy. The awareness of how technological tools might enhance customers‘ ability to use the weight loss plan is an example of this ability to set direction. However, he was not successful at turning around the company‘s financials. New CEO Mindy Grossman had a background in building and transforming consumer brands, including nine years as CEO of HSN, Home Shopping Network. Upon her arrival, Grossman began to map out a new direction, calling it an ―Impact Manifesto‖, and calling out a goal of $2 billion in revenue and an overall customer base of 10 million people by 2020. (See http://fortune.com/2018/09/24/weight-watchers-name-change/.) Under Grossman‘s guidance, the company was also shifting its focus away from weight loss as a primary goal, and transitioning itself into a wellness brand, hence the name change to just WW. If the leader‘s role is to develop and reinforce role models, overcome barriers to change and effectively use their power, it appeared Grossman was trying to do this, but both investors and long-time users of the old Weight Watchers program were cautious and confused. Finally, as previously discussed, leaders at Weight Watchers from the beginning had designed the organization in such a way as to harness the power of volunteers, spokespeople, and employees to create organizational processes that facilitated strategic implementation. This might not have been enough. This underscores the fact that leaders can only work with the assets they have, and these resources are part of an ever-challenging external environment that includes changing customer preferences. Referencing Chapter 12: Managing Innovation and Fostering Corporate Entrepreneurship Innovation involves using new knowledge to transform organizational processes or create commercially viable products and services using the latest technology, experimentation, creative insights, and information from competitors. However it comes about, innovation occurs when new combinations of ideas and information bring about positive change. In fact, the root of the word innovation is the Latin novus, which means new. Innovation involves introducing or changing to something new. It is a critical part of strategic implementation. Before proceeding, firms must first define the scope of the innovation efforts and must ensure that their innovation efforts are not wasted on projects that are outside the firm‘s domain of interest. Firms must have the means to focus their innovation efforts. A strategic envelope defines the range of acceptable projects. Strategic envelope means a firmspecific view of innovation that defines how a firm can create new knowledge and learn from an innovation initiative even if the project fails. The strategic envelope also gives direction to a TN1-238 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
firm‘s innovation efforts, which helps separate seeds from weeds and builds internal capabilities. One way to determine which projects to work on is to focus on a common technology. Then, innovation efforts across the firm can aim at developing skills and expertise in a given technical area. Another potential focus is on a market theme. Companies must be clear not only about the kinds of innovation they are looking for but also the expected results. However a firm envisions its innovation goals, it needs to develop a systematic approach to evaluating its results and learning from its innovation initiatives. It needs to develop a set of questions to ask itself about its innovation efforts. In defining the innovation scope, a firm should answer several questions: ● How much will the innovation cost? ● How likely is it to actually become commercially viable? ● How much value will it add; that is, what will it be worth if it works? ● What will be learned if it does not pan out? The challenges of innovation involve: ● Choosing when and how to continue to innovate ● The scope and pace of future innovation ● Whether or not to collaborate with innovation partners ● Requires resources such as financial, human and social capital ● Requires the leadership team to have adequate vision, dedication and drive Weight Watchers was in a difficult industry—it was crowded, without much opportunity for growth except through vertical integration. As discussed, Weight Watchers could decide to acquire one of its competitors, and/or incrementally innovate by diversifying into related business areas such as developing partnerships with health care providers and large corporations, and by providing direct food purchase and delivery options. However, the scope and the pace of innovation would be critical here. Any innovation in this well-known company might be disruptive to the traditional Weight Watchers meeting participants and to the volunteers who spread the ―good‖ word about the Weight Watchers program. Any innovative programming needed to be clearly within the firm‘s domain of interest in order not to dismay long-term supporters. In addition, because so many weight loss ―innovations‖ could be easily copied, pace was important—once started, an innovative strategy needed to be quickly implemented and evaluated for its commercial value. Weight Watchers would always have imitators. Weight Watchers must continue to reassess its internal and external environment in order to build its competencies, mitigate areas where it is weak, and take advantage of opportunities to be innovative in the future in order to ensure continued success. Will YOU consider Weight Watchers next time you, or a friend, feel the need to shed a few pounds? Teaching Note Case 16 — Dippin’ Dots: Is the Future Frozen? Case Objectives TN1-239 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
1. To discuss the decisions and actions that a firm has to undertake to sustain a competitive advantage. 2. To understand the importance of managing innovation, especially when pursing an entrepreneurial growth strategy. See the table below to determine where to use this case: NOTE: There are both PRIMARY and SECONDARY chapters that can be used for this case. The Teaching Note gives guidance for the PRIMARY use chapters and provides suggestions if the instructor wants to use the case to illustrate concepts from the optional SECONDARY chapters. CASE OBJECTIVES TABLE Chapter Use Key Concepts PRIMARY CONCEPTS 5: Business-Level Strategy 8: Entrepreneurial Strategies 12: Managing Innovation SECONDARY CONCEPTS 2: External Environment 3: Internal Analysis 6: Corporate-Level Strategy 9: Strategic Control 11: Strategic Leadership
Generic strategies
Additional Readings or Exercises NOTE – see additional web links reading, embedded video viewing
Entrepreneurship; opportunity recognition; resources Innovation; scope of innovation; entrepreneurial orientation External environmental forces; five forces analysis
NOTE – see additional web links reading, video.
Value chain; tangible vs. intangible resources; VRIN; balanced scorecard Diversification; synergy; core competencies; acquisitions Informational vs. behavioral control Leadership direction
Case Synopsis Dippin’ Dots was a specialty ice cream company. In 1998, Dippin’ Dots founder Curt Jones patented his idea to flash freeze liquid cream and sell the product to franchisees throughout the world. Dippin’ Dots, “the ice-cream of future,” were tiny round beads of ice cream that were created at super-cold temperatures and served in a soufflé cup with a spoon. Made at the company‘s production facility in Paducah, Kentucky, Dippin‘ Dots‘ unique frozen products are distributed in all 50 states and 10 countries. The frozen dairy industry had been occupied by family-owned businesses like Dippin‘ Dots, fullline dairies, and a couple of big international companies that focused on only one sales region. Recent years had been marked by an increase in the production and sale of a variety of frozen TN1-240 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
desserts. Most novelty ice creams could be found grouped together in a supermarket freezer case, small freezers in convenience stores, and in franchise locations, or on carts, kiosks, or trucks at summertime events. Dippin‘ Dots founder Curt Jones had developed a franchising system to try to grow the business, and, in 2005, Dippin‘ Dots ranked number two as a top new franchise opportunity. But by 2009, Dippin‘ Dots faced bankruptcy due to increased competition from companies such as Cold Stone Creamery in the ―scoop shop‖ ice cream market, other franchise operations such as Baskin-Robbins and Dairy Queen, and from traditional ice cream brands whose product was available in the grocery freezer. With such fierce competition, Dippin‘ Dots needed to adapt to customers‘ changing needs and invest in product and service innovation to survive. In 2010, Jones created two new products: frozen fresh-brewed coffee dots, and a low-fat frozen-beaded dessert alternative to ice cream, but this wasn‘t enough to counter increased operating costs and plummeting sales. Jones had to file for Chapter 11 bankruptcy in November 2011. In 2012 Dippin‘ Dots was acquired with private capital and emerged from bankruptcy with new management. The year 2018 was a relatively good year for Dippin‘ Dots. From bankruptcy in 2012 to annual sales of $300 million in 2017, the company had come a long way. New CEO Scott Fischer said that the two important pieces of the puzzle were having a strong senior management team and knowing when to pivot out of the box. Fischer said he looked forward to the company‘s growth potential in a global market and remained committed to Dippin‘ Dots reclaiming its status as ―the ice cream of the future.‖ However, by 2019 Dippin‘ Dots had been using that tag line for over 30 years, and even though the company promoted the low cost of entry and flexibility of its franchising options, franchise growth had slowed. New product lines and promotional events had had some success, distribution partnership with Doc Popcorn had yielded some results, so sales were up, but despite this the future of the company remained uncertain. Would these efforts be effective at growing the business and could the company expand organically instead of through partnership and cobranding contracts, or was this entrepreneurial journey over? Teaching Plan This short case is a good one to use to illustrate the competitive environment of companies pursuing entrepreneurship and innovation. The Dippin‘ Dots case can also be used to discuss how to choose a competitive strategy in a crowded industry. Because of its entrepreneurial focus, this case is best left to the end of the semester. It can be a good way to wrap up the course, especially if someone is willing to bring in samples of the product! ICEBREAKER This case can start with an icebreaker. Starting from the perspective of a customer may make it easier for students to transition to a strategic analysis. How many of you have tried Dippin’ Dots? Or Mini-Melts? TN1-241 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
What do you think of this product? If students are confused about the product, show these brief videos, produced by one customer segment (senior citizens at an ice cream social) and The Food Network: Here is a two-minute video of a 2007 ice cream social event in Dippin‘ Dots‘ hometown Paducah, KY featuring a brief appearance by Curt Jones: http://www.youtube.com/watch?v=iVrSz2LVeEw&NR=1. And here is a video tour of the Dippin‘ Dots plant explaining the process: https://www.youtube.com/watch?v=1mqIDqtOHn4. Or visit the Dippin‘ Dots website: https://www.dippindots.com/home.html. Dippin‘ Dots CEO Scott Fischer was featured on Undercover Boss in 2020. See the entire episode at https://www.dippindots.com/undercoverboss.html. Some students may have seen Mini-Melt or Dippin‘ Dots vending machines on campus or in other places. It‘s not easy to tell these brands apart. If students have tried any of these products, ask if they can remember which brand it was. This will illustrate some of the strategic problems currently facing CEO Scott Fischer. Summary of Discussion Questions Below is a list of the suggested discussion questions. You can decide which questions to assign, and also which additional readings or exercises to include to augment each discussion. Refer back to the Case Objectives Table at the beginning of this Teaching Note to identify any additional readings and/or exercises so they can be assigned in advance. Discussion Questions: 1. PRIMARY QUESTIONS: What is Dippin‘ Dots‘ competitive strategy? 2. What role did entrepreneurial strategy and the management of innovation play in establishing Dippin‘ Dots‘ initial competitive edge? 3. SECONDARY QUESTIONS: What elements in the external environment might affect Dippin‘ Dots‘ strategy? 4. What internal resources does Dippin‘ Dots have that might help it support its competitive strategy? What challenges remain? Discussion Questions and Responses 1. What is Dippin’ Dots’ competitive strategy? Referencing Chapter 5: Business-Level Strategy
TN1-242 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
How firms compete with each other and how they attain and sustain competitive advantages go to the heart of strategic management. In short, the key issue becomes: why do some firms outperform others and enjoy such advantages over time? The viability of a firm‘s success is driven by both the internal operations of the firm and the desires and preferences of the market. Firms that succeed have the appropriate resources and cost structure to meet the needs of the industry and general environment. They also have a strategy… A business-level strategy is a strategy designed for a firm or a division of the firm that competes within a single business. Within the firm‘s industry environment generic strategies include basic types of business-level strategies based on breadth of target market (industrywide versus narrow market segment) and type of competitive advantage (low-cost versus uniqueness). Here are the three generic strategies that are used to overcome industry forces and achieve a competitive advantage: 31. Overall cost leadership Low-cost-position relative to a firm‘s peers Manage relationships throughout the entire value chain 32. Differentiation Create products and/or services that are unique and valued Non-price attributes for which customers will pay a premium 33. Focus strategy Narrow product lines, buyer segments, or targeted geographic markets Attain advantages either through differentiation or cost leadership Generic strategies are plotted on two dimensions: competitive advantage and strategic target. The overall cost leadership and differentiation strategies strive to attain advantages industry wide, while focusers have a narrow target market in mind. Both casual observation and research supports the notion that firms that identify with one or more of the forms of competitive advantage outperform those that do not. In order to achieve a sustainable competitive advantage, Dippin‘ Dots has to assess its ability to contend with other frozen dessert producers, especially those who distribute their products in multiple venues. Ask the students how they think Dippin‘ Dots competes. Their answers may include some of the following points: Cost Leadership: This is perhaps not a good strategy for Dippin‘ Dots at this point because it may still be developing new production processes for new products—and even with the new flavors there‘s not enough experience yet to be able to learn what costs can be lowered without sacrificing quality. Differentiation: The challenge of differentiation is to create a product that is perceived industry wide as being unique and valued by customers so much so that they will seek it out if not readily available. Dippin‘ Dots must work to link its value chain processes, for instance integrating inbound logistics, operations and outbound logistics to make sure the product retains its unique TN1-243 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
qualities while being distributed to its various sales locations. Any degradation in quality would drive consumers to an alternative. The challenge for Dippin‘ Dots is that the product is easily imitated, and so a direct competitor may be out there that can offer almost identical product, in very similar packaging, so any unique advantage Dippin‘ Dots had originally could be eroded over time. In addition, Dippin‘ Dots was trying to differentiate with its franchise agreement, proposing a low initial investment and variable royalty fees to try to attract new franchisees, but was being chased by newcomers Kona Ice and Yogurtland, both of which had either more innovative product lines or global locations. Focus: Dippin‘ Dots had so far chosen to market to the out-of-home market, but industry giants such as Nestle and Unilever were also focused on this segment (Haagen-Dazs, Good HumorBreyers). Other options firms sometimes pursue include: Combination of Differentiation and Cost Leadership, Combination of Focus and Cost Leadership, Combination of Differentiation and Focus: Although initially best suited for a combination of differentiation and focus, at this point, because of the attempt to offer new products, Dippin‘ Dots may not be equipped with resources to successfully engage in a combination strategy. Stuck in the Middle? Dippin‘ Dots must be careful to choose a strategy that will fit with its organizational capabilities and resources. There is no one correct answer here. NOTE — ADDITIONAL READING, EMBEDDED VIDEO STORIES: Here is a video from the Food Network showing how the product is made in the Kentucky facility. Note how the LOW temperature is critical to the process: https://www.youtube.com/watch?v=1mqIDqtOHn4. Regarding the various customer groups who might be interested in Dippin‘ Dots, here is a two-minute video of a 2007 ice cream social event in Paducah, KY featuring a brief appearance by Curt Jones: http://www.youtube.com/watch?v=iVrSz2LVeEw&NR=1. Visit the Dippin Dots website: https://www.dippindots.com/home.html. Which demographic group does this seem aimed at? Does it seem to be consistent with previous marketing promotions? Here is commentary on the popularity of ice cream, and its long-term prospects as a market commodity: http://www.nytimes.com/2006/07/26/dining/26cream.html?ex=1182916800&en=501180740dd5 7a44&ei=5070. TN1-244 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
And on the category of frozen specialty treats: http://www.nytimes.com/2006/10/26/business/26sbiz.html?ex=1319515200&en=5f77555844021 708&ei=5088&partner=rssnyt&emc=rss. Read this article from 2008 describing the state of the ice cream industry. Dippin‘ Dots is mentioned as the originator of the cryogenically frozen ice cream pellet dessert, but competitors Mini-Melts, MolliCoolz and Ittibitz also entered the market. In 2007 MolliCoolz broke down the barrier between pelletized ice cream and the grocery store with some help from an ingredient supplier. MolliCoolz was rolled out in early 2006 but initially it was distributed only by homedelivery specialist The Schwan Food Co., Marshall, Minn. MolliCoolz overcame the sticking point for take-home purchase (the beads would tend to clump at normal ice cream freezer temperatures) in part through a stabilizer system from Cargill, and in 2007 MolliCoolz was introduced to supermarkets nationwide. (MolliCoolz has since gone out of business, demonstrating how difficult it is to sustain growth in this crowded category.) Hood and its Kemps ice cream unit produced Ittibitz, another iteration of pelletized ice cream that was available in supermarket freezer cases. (Ittibitz also no longer exists.) Read the article here (scroll down for the details on pellets): http://www.dairyfoods.com/Articles/Article_Rotation/BNP_GUID_9-52006_A_10000000000000288376. And an article from 2011 details the competition for Dippin‘ Dots‘ then new coffee product: http://www.nytimes.com/2011/07/20/dining/in-the-lab-with-the-ice-creammakers.html?pagewanted=all&_r=0. Since then, Curt Jones has taken over this product with his own business, 40° Below Joe. See https://40belowco.com/about. To illustrate how this process is not that unique, see this video of how to make Dippin‘ Dots yourself, as long as you have access to liquid nitrogen and the right equipment (styrofoam containers, regular ice cream, large diameter syringes and safety glasses): https://www.youtube.com/watch?v=yiXW1SY-NAw. In 2013 there was another new product from Dippin‘ Dots: the vanilla and chocolate YoDots line, which ―is made with nonfat yogurt and has only 70 calories per three-ounce pack.‖ This was marketed to parents as a healthier choice for kids. The challenge, however, was to make sure a product with minimal sugar and nothing artificial could also taste good. See http://blogs.wsj.com/bankruptcy/2013/03/26/after-bankruptcy-dippin-dots-aims-for-healthierfuture/ for the story. In the article, it also points out that Dippin‘ Dots is expanding to Japan, sourcing product from the existing Dippin‘ Dots factory in South Korea, with plans for development in Russia and Greece. Sellers in those countries ―will receive air shipments of dry ice-cradled dots from the company‘s 125,000-square foot factory in Kentucky. Dippin‘ Dots have to stay frozen at minus 40 degrees, a temperature colder than the typical commercial freezer is kept, until the product is sold to a customer.‖ In 2020 Dippin‘ Dots had master licensees and operations established in these countries: Australia, Canada, China, Japan, South Korea, Philippines, and Vietnam. Here‘s an interview with Scott Fischer who bought Dippin‘ Dots out of bankruptcy in 2012 for $12.7 million. Six years later in 2018, Dippin‘ Dots broke $330 million in annual revenue. In TN1-245 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
2018, Fischer formed a subsidiary called Dippin‘ Dots Cryogenics to license its cryogenic technology and ―dot-forming‖ IP in markets outside of frozen desserts. Pharmaceutical companies and probiotics companies started using the cryogenic process to increase the shelf life and quality assurance of their products, and to reduce waste and costs of distribution, and meat companies are using Dippin‘ Dots cryogenic facility to create pelletized products that provide burgers, sausage, and bacon with the consistency of simulated fat. Currently, Dippin‘ Dots generates more revenue from its plant-based meat segment than its ice cream segment. See https://entrepreneurshandbook.co/how-dippin-dots-went-from-bankruptcy-to-330m-in-annualrevenue-in-6-years-ae65a18bd59d. Scott Fischer was also featured on Undercover Boss in 2019. This episode tours the production facility in Paducah, Kentucky, a distribution warehouse, point-of-sale kiosks at an amusement park, and a pop-up at an event. Fischer points to event sales as an area where he sees growth. See https://www.dippindots.com/undercoverboss.html. Dippin‘ Dots promotes itself as the ―ice cream of the future,‖ but doesn‘t seem to have changed its formulation or its marketing approach much since it was ―invented‖ in 1988. Do you think CEO Fischer‘s plans for Dippin Dots will ―reinvent‖ it enough in 2020 and beyond? 2. What role did entrepreneurial strategy and the management of innovation play in establishing Dippin’ Dots’ initial competitive edge? Referencing Chapter 8: Entrepreneurial Strategy and Competitive Dynamics Entrepreneurship involves the creation of new value by an existing organization or new venture that involves the assumption of risk. New value can be created in start-up ventures, major corporations, family-owned businesses, franchises or home-based businesses, non-profit organizations, or established institutions. For an entrepreneurial venture to create new value, three factors must be present—an entrepreneurial opportunity, the resources to pursue the opportunity, and an entrepreneur or entrepreneurial team willing and able to undertake the opportunity. See Chapter 8, Exhibit 8.1 for the relationship between an entrepreneur, the firm‘s resources, and the opportunities available in the firm‘s environment. Entrepreneurs need to understand the concept of opportunity recognition: the process of discovering and evaluating changes in the business environment, such as a new technology, socio-cultural trends, or shifts in consumer demand, that can be exploited. Good entrepreneurial opportunities are those that are attractive to the marketplace (there must be demand for the new product or service), achievable (it must be practical and physically possible to do), durable (the window of opportunity must be open long enough for it to have a chance for success), and value creating (it must be profitable - the benefits must surpass the cost of development by a significant margin). Dippin‘ Dots had been in business for 23 years as of 2011, the year it filed for bankruptcy, and had some success, growing into a multimillion-dollar company with authorized dealers operating TN1-246 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
in all fifty states and internationally. Not in the case: CEO Curt Jones had introduced a new product, Dots‘n Cream, which was able to withstand conventional freezers while preserving the super-frozen dots in the ice cream. If Dots‘n Cream proved successful, Dippin‘ Dots could have finally had a take-home ice cream option. But after years in testing, this product was never fully viable. The newer product, the Yo-Dots frozen yogurt dessert, may be value creating if it is able to find a sustainable customer base. The major challenge for Dippin‘ Dots appeared to be the lack of opportunity in the industry, opportunity that was perhaps unachievable given the firm‘s existing resources, or the inability of anyone in the firm to recognize opportunities as they might emerge. The franchisee might be in the best place to recognize opportunity, but Dippin‘ Dots did not seem to have sought out franchisee feedback or allowed the franchisees to innovate on their own. This spoke to Dippin‘ Dots‘ poor resource utilization. Resources are an essential component of a successful entrepreneurial launch. The most important resource is usually money, but human resources, strong and skilled management, is also an essential asset. Social capital, or entrepreneurs who have extensive social networks or wellconnected key contacts, allows the new venture to gain exposure and build legitimacy faster. Strategic alliances represent a type of social capital that can be especially important to young and small firms. Finally, government resources, such as the Small Business Administration, can provide needed support, especially by giving access to contracts offered by state and local government. The Dippin‘ Dots story contains many elements of the resource dilemma—even the best idea can be difficult to launch without proper resources. Jones had difficulty acquiring both money and human resources. Although he was initially successful getting financing through his family, and finding human resources via his friends, he did not adequately research the needed governmental resources, especially regarding his patent application and subsequent patent litigation. Since the acquisition, Scott Fischer of Dippin‘ Dots LLC invested financial resources in the company‘s home facility in Kentucky, purchased energy-efficient equipment, upgraded processes, and renovated the facility. In addition, Fischer pursued distribution partnerships with amusement destinations and a co-branding strategy with Doc Popcorn that put Dippin‘ Dots products in convenience stores. These strategic alliances had helped the bottom line but may not be innovative enough to sustain growth. Launching a new venture requires a special kind of leadership involving courage, belief in one‘s convictions, and having the energy to work hard. Three characteristics of entrepreneurial leaders are: ● Vision ● Dedication and drive ● Commitment to excellence To achieve excellence, venture founders and small business owners must understand the customer, provide quality products and services, pay attention to details, continuously learn, and surround themselves with good people. TN1-247 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Jones appeared to have had the initial vision, dedication and drive, but he had also seemed to get tired of the day-to-day operational aspects of the business. Not in the case: Jones had removed himself from any administrative decision-making at Dippin‘ Dots for several years—in 2006 a news story reported that he was working to develop an ethanol plant in southern Illinois. See http://www.nbcnews.com/id/14001806/ns/business-small_business/t/supercold-dippin-dotsmake-hot-business/#.XpEIs_1KgkI. Up until 2009 Jones had retained his role as founder/chairman of the board but had relinquished the presidency of the company to Tom Leonard. Jones took back control in 2009 by removing Leonard, but then lost ownership of the business due to the bankruptcy in 2012. Therefore, Jones may not have had the desire to engage in continuous learning or to assess the ongoing excellence of either Dippin‘ Dots‘ operations or human resources. New owner Scott Fischer made a substantial investment in the facility and appeared to be enthusiastic about the company‘s opportunities, but would that be sufficient? New entry into markets, whether by start-ups or by incumbent firms, nearly always threatens existing competitors. This will likely provoke a competitive response. Competitive dynamics— intense rivalry among similar competitors—has the potential to alter a company‘s strategy. New entrants may be forced to change their strategies or develop new ones to survive competitive challenges by incumbent rivals. Companies launch competitive responses to: ● Improve market position ● Capitalize on growing demand ● Expand production capacity ● Provide an innovative new solution ● Obtain first mover advantages
When Dippin‘ Dots first entered the business, it had obtained a first mover advantage. However, Jones was not able to protect that advantage. Dippin‘ Dots was facing competitive dynamics and intense rivalry in the vending, the scoop shop, and the potential grocery business. Jones tried to move into a defensive mode, trying to provide an innovative new solution, still using his cryogenic flash-frozen technology. Others, mainly Mini Melts, had already mastered Jones‘ technology, so where was the company to find innovation?
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Teaching Note
Case 1: Robin Hood
In order to grow the business, starting in 2012 the new CEO, Fischer, would have to maintain and expand his current market base and possibly choose a big push in the scoop shop through expanded support for franchising or a push into another related business. Or he would have to develop some truly innovative new products or some combination of the above. Dippin‘ Dots‘ expertise and resource base were clearly in the ice cream manufacturing and scoop shop retailing businesses. Moving into the freezer case would require solving existing technology problems and would be a major distribution and new customer marketing challenge. Did Dippin‘ Dots have the adequate resources to do this and the control systems to monitor its performance and make changes if needed? Referencing Chapter 12: Managing Innovation and Fostering Corporate Entrepreneurship Innovation involves using new knowledge to transform organizational processes or create commercially viable products and services using the latest technology, experimentation, creative insights, and information from competitors. Some of challenges of innovation involve choosing when and how to continue to innovate, the scope of future innovation, and the pace, as well as whether or not to collaborate with innovation partners. The innovation of new ventures requires resources such as financial, human, and social capital, and requires the leadership team to have adequate vision, dedication, and drive. In addition, it helps if leadership can embrace the entrepreneurial orientation—autonomy, innovativeness, proactiveness, competitive aggressiveness, and risk taking—necessary to sustain the pace of innovation. We don‘t know how well Jones actually promoted an entrepreneurial orientation in his organization, but his old habit of hiring friends, and firing his top managers, indicates perhaps he didn‘t have the willingness to create a culture of autonomy, and team-inspired innovativeness within Dippin‘ Dots. It appears Jones once had proactive vision, and selective risk-taking, but that was in the very beginning. Does CEO Scott Fischer have the current competitive aggressiveness to counter the challenges in the ice cream industry? Does he have the vision, dedication and drive, and commitment to excellence needed to sustain this effort?
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Teaching Note
Case 1: Robin Hood
Before proceeding, firms must first define the scope of the innovation efforts and must ensure that their innovation efforts are not wasted on projects that are outside the firm‘s domain of interest. In defining the innovation scope, a firm should answer several questions: ● How much will the innovation cost? ● How likely is it to actually become commercially viable? ● How much value will it add; that is, what will it be worth if it works? ● What will be learned if it does not pan out? Not in the case: As a counter example of innovation, Mini Melts had adopted a strategy of global expansion. Mini Melts expanded by selling dealerships for vending machines and kiosks, rather than pursuing the store franchise model. (See the Mini Melts website for current locations: http://www.minimelts.com/, and note the similarity to the Dippin‘ Dots website.) Selling by vending machines meant that the products were not restricted to a specific store location, so not only was it cheaper to install, but was also easier to relocate if the initial placement didn‘t pan out. Dippin Dots appeared to have abandoned the vending machine route. (Interestingly, the Dippin‘ Dots brand was the one most associated with pelletized frozen treats, such that even MiniMelts vending machines are often mistaken for the Dippin‘ Dots product. Taking advantage of this, MiniMelts branding is very similar to Dippin‘ Dots.) While the strategy adopted by Dippin‘ Dots was to introduce new products, it appeared as if the Dots‘n Cream and Dot Delicacies products both may have required additional, possibly costly, manufacturing equipment. Certainly, the frozen coffee dots would. Perhaps the Dots‘n Cream and coffee dots products required distribution connections and marketing expertise the company did not currently possess (it‘s very hard for a new product/new brand to negotiate space in crowded supermarket freezers, which may have been why the Dots‘n Cream product failed.) In addition, there was a possibility that these new ideas would not be unique enough to add sufficient value in the mind of the consumer. Would customers pay a premium for frozen dots in existing products? (How different were the Dippin‘ Dot recipe products from a Carvel cake, Ben and Jerry‘s mix, or Dairy Queen Blizzard?) Therefore, production of the new products may consume resources and require investment that Dippin‘ Dots may not be able to recoup. What challenges exist? Will market testing be sufficient to determine what new products might be worth pursuing? Does management have the operational skill to lead this effort? Has CEO Scott Fischer thought out the implications for distribution and marketing; does he have mechanisms in place to monitor acceptance and feedback from the customer, so he can make changes quickly and not lose his technological and competitive advantage? Does he have the capability to learn from any mistakes? NOTE — ADDITIONAL READING: Here is information about one of Dippin‘ Dots competitors, who has done well since: http://www.minimelts.com. In 2005 a competitor, Frosty Bites, fought with Dippin‘ Dots over the right to produce cryogenically frozen ice cream. Curt Jones tried to argue patent protection, but lost. Here is a TN1-250 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
website where you can download a copy of the patent infringement judgment at http://www.gehrkelaw.com/2007/02/dippin_dots_inc.html. Dippin Dots was found to have procured their patent through fraud, so therefore their suit for patent infringement was unenforceable Dippin‘ Dots has had trouble in the past with its franchisees, but it‘s not the only one. Here‘s a story from 2008 about serious problems with franchisees of scoop shop competitor Cold Stone Creamery that illustrates the problems that can come with management of franchise operations: http://www.wsj.com/articles/SB10001424052970204136404577211391192172770 and another report on unhappy Cold Stone Creamery franchise investors, calling it ―one of the worst franchise investments in recent history.‖ http://www.unhappyfranchisee.com/category/franchisor/cold-stone-creamery/. Here is information on the Dippin‘ Dots franchise from Entrepreneur magazine: http://www.entrepreneur.com/franchises/dippindotsfranchising/289468-0.html and check out Dippin‘ Dots competitors‘ franchise arrangements at http://www.entrepreneur.com/franchises/categories/ffqicecr.html. In 2013, the new management announced a renewed push to open up ―additional franchise territories in the Northeast, Southeast and other parts of the United States.‖ The selling point for potential franchisees appears to be that ―unlike many franchise opportunities, Dippin‘ Dots franchises do not require a large capital outlay to construct and maintain a permanent retail location. This flexible model allows franchisees to quickly and easily meet customer demand at fairs, festivals, special events or seasonal locations anywhere in their assigned geographic region.‖ According to the current information, franchise requirements include minimum liquid capital of $80,000, minimum net worth of $250,000, and the total investment ranges from $119,704 to $366,950. See http://www.dippindots.com/business/franchising.html. Dippin‘ Dots direct competitor Mini Melts does not franchise shops, but instead supports dealers‘ vending machines that dispense the pelleted ice cream dessert worldwide. Here‘s a story of Mini Melts‘ distribution strategy, announcing the 2013 partnership with Wal-Mart, which will place Mini Melts vending machines in 5,000 Wal-Mart stores around the United States. The vending machines will be placed next to existing Red Box video dispensers. Mini Melts distribution and manufacturing rights owners Shawn and Dan Kilcoyne plan to ―represent 25 to 30 percent of the ice cream vending machine market‖ with their product, which Kilcoyne says is the ―premium choice‖ due to its 14 percent butterfat content. See http://www.theday.com/article/20130331/BIZ02/303319898/-1/BIZ for the full story. Mini Melts distributes to all 48 of the contiguous United States. Before Wal-Mart, its main distribution points were amusement centers, zoos, malls, theme parks—basically any place that attracts large numbers of children and young adults. And here‘s the Mini Melts‘ website list of international (worldwide) vendors—compare the 10 countries where Mini Melts are available with the 7 countries where Dippin‘ Dots are available: http://www.minimelts.com/home/index.php?option=com_content&view=article&id=330&Itemi d=265 versus http://www.dippindots.com/business/global.html TN1-251 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
In 2014 Dippin‘ Dots announced the acquisition of snack food franchisor Doc Popcorn. Dippin‘ Dots would distribute Doc Popcorn products through its existing franchise system, and vice versa. The thought was that Doc Popcorn complements the Dippin‘ Dots brand and helps with the corporate growth strategy. See https://www.qsrmagazine.com/news/dippin-dots-franchisingacquires-doc-popcorn News from April 2015 that Dippin‘ Dots‘ total business was on track to grow 61% based this growth on the re-launch of the franchise program. According to this report, Dippin‘ Dots hired ―a team of franchise veterans to find efficiencies in the supply chain, restructure the franchise model, and increase product development and marketing support.‖ https://www.prnewswire.com/news-releases/the-future-has-arrived-for-iconic-ice-cream-brand300060909.html By 2016 sales had grown by almost 50 percent, due to Dippin‘ Dots giving franchisees ―the resources and expertise they need to succeed,‖ organically generating revenue by existing franchisees ―expanding points of presence‖ rather than by adding new franchisees. In addition, Dippin‘ Dots was pursuing a ―multi-pronged distribution strategy intended to reach consumers beyond its traditional outlets,‖ placing grab & go packs in convenience and drugstores nationwide. See. However, even with that effort, U.S. franchises only gained 7 additional locations from 2017 to 2018. See Case Exhibit 2. In 2017, then White House press secretary Sean Spicer took a shot at Dippin‘ Dots via Twitter. Having said the brand was NOT the ice cream of the future, he now suggested the company should do something for first responders and those who have served the nation. Scott Fischer offered to treat the White House and press corps to an ice cream social. http://www.cnn.com/2017/01/23/politics/dippin-dots-ceo-pens-letter-to-sean-spicer/index.html VIDEO available: THE SURPRISING ORIGIN OF DIPPIN’ DOTS (Great Big Story, 6/22/2016, 1:47) and DIPPIN' DOTS CEO SCOTT FISCHER ADDRESSES SEAN SPICER’S TWEETS (Fox & Friends, 1/26/2017, 3:07) https://www.youtube.com/watch?v=lhoRAY7LmcY https://www.youtube.com/watch?v=EIlD7NtAqOk Great Big Story shares the serendipity of Dippin‘ Dots—an amusement park, zoo, aquarium, and overall summertime staple. The mini balls of ice cream that melt in your mouth are also a childhood favorite. But where did the ―ice cream of the future‖ come from? The answer has a little something to do with cow feed. In the second video segment, Fox & Friends invites Dippin' Dots CEO Scott Fischer to address the media attention stemming from White House Press Secretary Sean Spicer's Tweets claiming that Dippin‘ Dots are NOT the ―ice cream of the future.‖ TN1-252 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Scott Fischer also went on Undercover Boss in 2019. The episode shows areas of waste and poor quality and planning in the manufacturing and distribution facilities. It seems CEO Fischer had no idea how his business was actually run. See https://www.dippindots.com/undercoverboss.html. Do you think any change in the way Dippin‘ Dots handles its operations will make a difference? Regarding other innovation, Curt Jones used the cryogenic process to freeze coffee, starting his own company 40° Below Joe in 2018. See https://40belowco.com/about and https://www.feastmagazine.com/the-feed/st_louis_news/article_84cbd866-0db0-11e8-a5471b649d87fb1d.html. 3. SECONDARY QUESTIONS: What elements in the external environment might affect Dippin’ Dots’ strategy? NOTE: there are no PowerPoint slides to accompany the following. Referencing Chapter 2: Analyzing the External Environment of the Firm This case presents an opportunity to drive home the point that stronger industry-wide forces may drive down industry profitability. Strategy is all about the ideas, decisions, and actions that enable a firm to succeed. The basic question strategic management tries to answer is: How can we create competitive advantages in the marketplace that are not only unique and valuable but also difficult for competitors to copy or substitute? Organizational leaders must become aware of factors in the overall environment that might affect their ability to create a competitive advantage. So how do managers become environmentally aware? They do it by doing scanning, monitoring, and gathering competitive intelligence, and using these inputs to develop forecasts. This prepares the firm to do more extensive analysis of the forces in the general environment and the industry or competitive environment. Environmental scanning involves surveillance of a firm‘s external environment to predict environmental changes and detect changes already under way. It is a BIG PICTURE viewpoint of the industry/competition, looking for key indicators of emerging trends—what catches your eye? It alerts the firm to critical trends before changes have developed a discernible pattern and before competitors recognize them. Environmental monitoring is a firm‘s analysis of the external environment that tracks the evolution of environmental trends, sequences of events, or streams of activities. Leaders need to monitor the trends that have the potential to change the competitive landscape—what do you want to track? Firms need to CHOOSE the trends identified via the scanning activity, and regularly monitor or track these specific trends to evaluate the impact of these trends on their strategy process. To assess how the external environment might affect Dippin‘ Dots‘ strategy, it‘s necessary to take a look at the factors in the general external environment. Dippin‘ Dots must consider the political/legal, economic and global, sociocultural and demographic, and technological forces that might affect the ability of the firm to deliver its products and sustain its business. See which TN1-253 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
factors in the general environment students might pick that have a significant impact on the frozen dessert industry. Political/Legal. Entrepreneurial businesses that produce innovative products must beware of knock-offs—imitators can quickly steal away a new product or service idea. Entrepreneurs must guard against this by pursuing patents or copyrights. Economic and Global. The economic emergence of China, as well as all of Asia Pacific, creates a currently untapped potential market for frozen desserts, as witnessed by Dippin‘ Dots‘ licensing of capacity in a manufacturing plant in South Korea. Consolidation in the food and beverage industry has increased, with implications for the family-owned frozen dairy businesses. The sector remains competitive. The higher prices of specialty items were more obvious to consumers in the uncertain economic environment after 2008, and therefore may have slowed their purchase of frozen treats then, demonstrating how sensitive this specialty market is to economic factors. Sociocultural. A greater concern for healthy diets and physical fitness may reduce the interest in dessert, but a single serving concept may override this concern. Also, the possible MTV and sports celebrity endorsements of novelty products may attract the growing teenage market. Customers are eager for innovative approaches to products or service delivery, especially if there‘s a ―fun‖ factor (witness the ―marble slab‖ concept). Demographic. Rising levels of affluence may give the frozen dessert industry a boost because families may choose to spend discretionary dollars on special treats for the whole family. In addition, the shift in geographic population in the United States is toward the South and West where the weather is hotter, and frozen products may have more appeal. Technological. Developments in technology and new uses for existing technologies can help create manufacturing and distribution opportunities for frozen desserts, as they have for the creation of Dippin‘ Dots. Not in the case: CEO Fischer is offering the cryogenic facility to other industries such as pharmaceuticals and the meat industry. See https://entrepreneurshandbook.co/how-dippin-dots-went-from-bankruptcy-to-330m-in-annualrevenue-in-6-years-ae65a18bd59d. It‘s necessary to assess the segments of the external competitive environment that include competitors, customers, and suppliers, substitutes and new entrants. Porter‘s Five Forces Model allows strategists to anticipate where the industry might be most vulnerable. One important question is ―what business is Dippin’ Dots in?‖ Until students are sure about the boundaries of the business, it is impossible to do an industry analysis—what is the ―industry‖ to be analyzed? Some students might say Dippin‘ Dots is in the ice cream industry, but a reading of the case points out that Dippin‘ Dots is in the frozen dessert, or perhaps the ice cream novelty business. This has implications for who Dippin‘ Dots‘ direct competitors are. However, because the major conglomerates such as Nestle and Unilever have the ability to enter into the novelty business, using the overall ice cream business as the industry under analysis is suitable for a competitive overview. TN1-254 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Help students apply Porter‘s five forces of competition by drawing a diagram on the board similar to the following, and having students fill in the details:
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Teaching Note
Case 1: Robin Hood
Suggested: The reason for competition in the frozen dairy industry is the market’s potential. A look at the most recent product and sales trends of ice cream shows a category with some opportunity for Innovation, especially in the novelty area.
Substitutes’ Threat High
Buyers’ Power
Suppliers’ Power
Rivalry
Low
Very High
Suggested: Low – Supplier commodities are those such as milk, sugar, etc. Suggested: Limited number and variety of available distribution channels are available to newcomers, particularly in large grocery store chains.
Suggested: there are many alternatives to ice cream for desserts or snacks such as cake, pie, fruit, candy, etc.
Threat of New Entrants Med
Med-High
Suggested: Buyers are the supermarket chains, franchisees and the general public, 90% of whom consume ice cream and frozen desserts (data from AC Nielsen). Both the supermarket and franchisee buyer has power to bargain.
Based on the external environmental industry analysis, the novelty ice cream business may require attention to growth strategies—acquisition, diversification, or internal development—in order to accrue profits. This is one reason Dippin‘ Dots is seeing competition in the current environment. 4. What internal resources does Dippin’ Dots have that might help it support its competitive strategy? What challenges remain? Referencing Chapter 3: Analyzing the Internal Environment From Chapter 3, a firm‘s value chain helps support its basis of competitive advantage. Dippin‘ Dots‘ value chain can be examined to ascertain the various activities that the firm carries out to try to establish and maintain a competitive advantage. Dippin‘ Dots‘ value chain is captured visually in the following diagram:
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Teaching Note Value chain activity Primary: Inbound logistics (distribution facilities, material control systems, warehouse layouts) Operations (efficient work flow design, quality control systems) Outbound logistics (consolidation of goods, efficient scheduling, finished goods processing)
Marketing and Sales (motivated sales people, innovative advertising & promotion, effective pricing, proper ID of customer segments & distribution channels)
Service (ability to solicit customer feedback & respond)
Case 1: Robin Hood How does Dippin’ Dots create value for the customer? Acquisition and licensing of custom manufacturing and storage facilities in the central United States and in South Korea allow for easier distribution of perishable product. The super-cold freezing (-325º) of Dippin‘ Dots ice cream done by liquid nitrogen cryogenically locks in both flavor and freshness. Dippin‘ Dots presents a unique form factor and state of the art product line. Dippin‘ Dots has problematic logistics issues with shipping (the requirement of extreme subzero temperature storage during transport—currently supported by specially designed cryogenic transport containers and refrigerated ―pallet reefers‖) and challenges with retail distribution. At present the only modes of distribution are vending machines and scoop shops that are equipped with the requisite freezing capabilities. The general inability to easily purchase Dippin‘ Dots from a local grocery store or consume Dippin‘ Dots at home, because the product must be stored and served at such low temperatures, makes it unsuitable for regular frozen food cases and means it cannot be stored in a typical household freezer. Therefore, since, currently, it can only be consumed at or near a retail location, unless it is stored with dry ice to maintain the necessary storage temperature, consumers wishing to consume their ice cream at home will generally substitute traditional brands. The innovative approach to promotion by using MTV and sports celebrity and TV product placement meant a reach out to the younger customer segment. Website contests can help. Because the product is consumed at point of purchase, there is opportunity for immediate feedback from the customer, and the ability to respond quickly. However, the franchise design means Dippin‘ Dots has less control over the customer service experience and response.
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Teaching Note
Secondary: Procurement (win-win relationships with suppliers, reduced dependence on single supplier) Technology development. (state of the art hardware & software, innovative culture & qualified personnel) Human resource management (effective recruitment, incentive & retention mechanisms)
General Administration (effective planning systems to establish goals & strategies, access to capital, effective top management communication, relationships with diverse stakeholders)
Case 1: Robin Hood
Higher ingredient costs may affect product pricing and profit margins.
Because of the science and technology background that resides in existing employees, there‘s the ability to be innovative back in the lab where new products can be created. Initially, Dippin‘ Dots corporate positions were filled with Jones‘ friends, and authorized dealers handled sales. The introduction of franchisees allowed for growth of the ―sales team‖ without overhead costs, but franchise retention may be an issue (see the stagnation in number of franchisees over the years). Does new management have the needed skills? Jones was an entrepreneur, seemingly with all the attributes of that personality type. Growth is a priority now, and that may be a problem. The new CEO Scott Fischer seems to have the entrepreneurial mind set; but does he have the skill to move into a general administrative capacity; does he have the wisdom to know when to step aside and hire the right people to keep his business growing; does he have the skills, drive or interest to pursue innovation in a 28-year-old company?
In terms of primary activities, it appears Dippin‘ Dots‘ only ability to differentiate itself comes from the super-cold freezing operation that creates the unique form factor of the product. This need for super-cold temperatures is a real challenge—even though the competitors‘ products like IttiBitz were sold in the grocery store freezers, until they were discontinued, a shopping trip might demonstrate how it‘s difficult to keep these pelletized ice cream products in prime condition (this Notes author has done this shopping experiment, and noted half-melted containers of IttiBitz in a Stop & Shop location.) Regarding secondary activities, Dippin‘ Dots may need to make sure the human resource skills are strong—there‘s a need to recruit, train and retain both the franchisees and the scientific talent in order to maintain and possibly grow the business. Certainly, CEO Scott Fischer must also demonstrate the general administrative skills needed going forward. To further answer the question of how to support a competitive strategy, it‘s important to consider the concept of the resource-based view of the firm, and the three key types of resources: tangible resources, intangible resources, and organizational capabilities. Dippin‘ Dots‘ profile might look like this: Tangible Resources: Financial. Franchises provide cash flow options. TN1-258 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Physical. Production and distribution facilities are in Kentucky and South Korea. Technological. An innovative product, with production and distribution facilities designed specifically for this product. Intangible Resources: Organizational. Other than Jones‘ initial energy and drive required to start and grow the company to this level, and Scott Fischer‘s previous venture investment experience, there are no obvious value-creating organizational resources. Human. Franchisees can add value or damage reputation, depending on how they are handled. Innovation. Curt Jones‘ scientific background provided initial innovative ability. Existing employees might still have the science skills to continue this. Reputation. Initial endorsement by MTV and sports celebrities lends credibility. The longevity of the brand lends itself to widespread brand recognition. Organizational Capabilities. Entrepreneurial mindset, technological capability. Capacity to Combine Resources. Innovative product plus energy and marketing to gain celebrity sponsorships could add value. Determining whether the internal resources are valuable, rare, difficult to imitate, or difficult to substitute (VRIN) can help a firm sustain a competitive advantage. See Chapter 3, Exhibit 3.6. Applying the VRIN analysis to the above shows that only Dippin‘ Dots‘ technology development, and operational facilities and activities may be able to add value—they are the only resources/activities that appear to be difficult to imitate or find substitutes for. However, recent technological developments may make this resource obsolete (it IS now almost 30 years old…) The question is whether existing employees have the skills to continue innovation. Evaluating Firm Performance: The balanced scorecard looks at the interaction of various performance measures to help managers get a more comprehensive look at firm performance than they would get from looking at financial measures alone. Encourage the students to interpret Kaplan and Norton‘s approach in this case. Customers: (How do our customers see us relative to time, quality, performance, and cost?) Of interest to the Dippin‘ Dots case is the relationship it has with its franchisees. Because the franchisee is the first point of contact for the end user, this contact will make the difference in future customer acceptance of the product. Dippin‘ Dots has an ongoing challenge to support their franchisees as customers as well as agents. TN1-259 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Internal Processes: (What must we excel at internally to meet stakeholder expectations relative to cycle time, unit cost, quality, and productivity?) As Dippin‘ Dots had already done, acquisition or leasing of production facilities near to distribution centers, and the careful monitoring of production quality at those locations, was key to getting product to customers intact. Product quality must be maintained. Are any new products able to get adequate scrutiny for quality manufacturing and distribution? It‘s also possible that internal processes managing the franchise operation might need attention. Dippin‘ Dots had problems in the administration of this area in its early years. Although the business model appeared to have been the problem then, might not some other administrative or operational issue be upsetting franchisees now? (Not in the case, but there have been reports on franchisee problems experienced by competitor Cold Stone Creamery. Franchise owners do get tired after a while—might Dippin‘ Dots experience franchise owner retirement, or franchisee frustration with lack of support?) Innovation and Learning: (How can we continue to improve and create value by developing new products, creating greater value for customers, increasing operating efficiencies to penetrate new markets, increasing revenues and margins, and enhancing stakeholder value?) As Jones had already done, continual improvements in the unique product are key to keeping a competitive edge. How might CEO Fischer evaluate the potential of product enhancements or new product innovation? Financial Measures: (How do we look to our financial partners relative to improved sales, increased market share, reduced operating expenses, and higher asset turnover?) Financial data on Dippin‘ Dots is currently unavailable, but the franchise system seemed to be a good model for cash flow in the past. Dippin‘ Dots has been actively trying to grow franchising, with some results. It‘s possible the financial difficulty that prompted Jones to initially reduce headcount might have been caused by a reduction in franchise operation cash flow—was that reduction due to the slowdown in consumer spending or the dissatisfaction of franchisees and subsequent reduction in profitable franchise locations? Which financial data might students suggest they would need in order to do an adequate analysis here? Certainly, operational costs are key. Dippin‘ Dots‘ value chain, along with the tangible and intangible resources that were available to support the activities in its value chain, provided the basis for whatever competitive advantage it currently had. Referencing Chapter 6: Corporate-Level Strategy Corporate strategy focuses discussion on the questions of what businesses a corporation should compete in, and how the businesses should be managed so they can create ―synergy‖—creating value through entering new markets or developing new technologies, either through related or unrelated diversification. Diversification is the process of firms expanding their operations by entering new businesses. In related diversification, a firm enters a different business in which it can benefit from leveraging core competencies, sharing activities, or building market power. Some possibilities include: TN1-260 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note ● ● ● ●
Case 1: Robin Hood
Mergers and acquisitions Strategic alliances Joint ventures Internal development
Whatever the choice, it should create value for all stakeholders—employees, suppliers, distributors, and the company itself. The choice of diversification strategy should create synergy so that all parties gain something they would not have had on their own. Companies can achieve synergy through diversification in two ways: Through related businesses (horizontal relationships) ● Sharing tangible resources ● Sharing intangible resources ● Leveraging core competencies Through unrelated businesses (hierarchical relationships) ● Value creation derives from corporate office ● Leveraging support activities Core competencies reflect the collective learning in organizations—how to coordinate diverse production skills, integrate multiple streams of technologies, and market diverse products and services to create value. Core competencies must create superior customer value; the different businesses must all have similar elements in the value chain that require similar skills; and these activities or skills must be difficult for competitors to imitate. Sharing activities means that value chain elements are shared across business units, so that two or more activities are done by one of the businesses. This allows for cost savings, but businesses need to make sure to keep control over quality and customer perception. Acquisition is the incorporation of one firm into another through purchase. It can be a means of obtaining valuable resources that can help an organization expand its product offerings and services. Acquisition can lead to consolidation within an industry and can force other players to merge. Corporations can also enter new market segments by way of acquisitions. Originally, Curt Jones pursued internal development, trying to create new products using the firm‘s existing resources. Firms can create additional value for stakeholders through entering new markets or developing new technologies. Neither of those options appeared that attractive to Dippin‘ Dots, primarily because of the lack of valuable activities and resources available to share across any new business units. Although internal development was possible, Dippin‘ Dots might be better off seeking another firm to acquire, and grow that way, as it had recently with distribution partnerships, especially the one with Doc Popcorn that put the product in convenience stores across the country. Or the new owner might want to position Dippin‘ Dots to be acquired and exit the business that way. At least he might be able to recoup some of his investment. The only other option appears to be taking a huge risk that a new entrepreneurial strategy might work. TN1-261 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Referencing Chapter 9: Strategic Control and Corporate Governance Strategic control involves the process of monitoring and correcting a firm‘s strategy and performance. In a traditional control system, top management formulates strategies and sets goals. These strategies are implemented, and then performance is measured against the predetermined goals. In a contemporary control system, managers continually monitor both the internal and external environments, and identify trends and events that signal the need to revise strategies, goals and objectives. The relationships between strategy formulation, implementation, and control are highly interactive. This approach utilizes two different types of strategic control: informational control and behavioral control. These two types of control play a role in the formulation and implementation of strategies. Informational control is a method of organizational control in which a firm gathers and analyzes information from the internal and external environment in order to obtain the best fit between the organization‘s goals and strategies and the strategic environment. Behavioral control is a method of organizational control in which a firm influences the actions of employees through culture, rewards, and boundaries. See Exhibit 9.2. Informational control is concerned with whether or not the organization is ―doing the right things,‖ while behavioral control is concerned with whether or not the organization is ―doing things right‖ in the implementation of its strategy. Organizations need to make sure enough information of the right kind is available to monitor activities—this is where things such as financial audits and customer feedback are essential; and where appropriate role models and rewards should be available to keep employees motivated. Dippin‘ Dots didn‘t appear to have either type of control mechanism. Not only did the organization lack sufficient information from the external environment to decide if it was ―doing the right things,‖ the historical lack of appropriate behavioral controls over franchisee operations meant the organization didn‘t even have the capability to make sure the employees were ―doing things right.‖ Under Curt Jones it appeared there were disagreements with upper management about the direction of the company, and a lack of clear boundaries. When Scott Fischer bought the company in 2012, he had his work cut out for him. Teaching Note Case 17 — Tata Starbucks: A Brew for India? Case Objectives 1. To assess the advantages and disadvantages of different international entry modes. See the table below to determine where to use this case: NOTE: There are both PRIMARY and SECONDARY chapters that can be used for this case. The Teaching Note gives guidance for the PRIMARY use chapter and provides suggestions if the instructor wants to use the case to illustrate concepts from the optional SECONDARY chapters. CASE OBJECTIVES TABLE TN1-262 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Chapter Use
Key Concepts
PRIMARY CONCEPT 7: International Strategy SECONDARY CONCEPTS 1: Strategic Management 2: External Environment 3: Internal Analysis 4: Intellectual Assets 5: Business-Level Strategy
International expansion; international, global, multidomestic, transnational strategies; entry modes Vision, mission, strategic objectives
6: Corporate-Level Strategy
Additional Readings or Exercises NOTE: Video viewing
Industry competition five forces Resource-based view of the firm Intellectual and human capital; dynamic capabilities Competitive strategy; generic strategies – low-cost leadership, differentiation, focus Corporate strategy; diversification; synergy; core competencies
Case Synopsis Tata Starbucks Pvt. Ltd in India was a joint venture of U.S. beverage company Starbucks and Tata Global Beverages. Begun in October 2012, at first Tata Starbucks, under founding CEO Avani Davda, offered the usual Starbucks coffee menu in India, which was not successful. By early 2019, under the leadership of Sumitro Ghosh, Tata Starbucks had refined the India-specific strategy, as a more promising path for future growth and success among Indian customers. One of the first things Ghosh did was to introduce Starbucks Teavana with 18 diverse varieties of tea to serve the Indian market. Although the start of the venture had been disastrous, Tata Starbucks became EBITDA (earnings before interest, tax, depreciation and amortization) positive in 2019 after its sales doubled in fiscal year 2018. In the annual report of Tata Global Beverages, it said Tata Starbucks had boosted sales by 28 percent in FY18. Due to this recent success, the company announced it would open more than 25 stores across India. The Indian Café market offered a lot of potential for the Tata Starbucks alliance. While India was a nation known for its tea drinkers, sipping coffee and socializing at coffee shops was becoming increasingly popular. Domestic consumption of coffee had risen 80 percent in the past decade, but the overall market in India was intensely competitive, with multiple domestic and foreign players. Success in the Indian café market would require overcoming the usual two key challenges—competition and profitability. TN1-263 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
In 2019, Navin Gurnaney succeeded former CEO Sumitro Ghosh. In addition to coffee, Starbucks now offered a modern tea experience with 18 different varieties of premium tea in its stores. Starbucks‘ Teavana was positioned as a premium offering for tea drinkers that competed against a slew of home-grown start-ups such as Chai Point, who were willing to experiment with the Indian Chai at a reasonable price to give a branded experience. Was Teavana Starbucks‘ right answer to these home-grown start-ups? Or did Starbucks need to alter its strategy further to gain the trust of the Indian market? The challenge facing CEO Gurnaney and Tata Starbucks was a difficult one. Ghosh had emphasized positioning the company to be socially responsible by promoting worker rights in India, and had experimented with Starbucks‘ food menu, serving local innovations. In addition to Teavana, Tata Starbucks had introduced a special India-specific coffee and an Indian Espresso Roast, meant to capture the essence and rich heritage of the Indian coffee history. But how could the company maximize the long-term success of the venture in India? Doing so would mean going beyond ―the westernized and the wealthy‖ targeting that had worked so well in relatively older and more affluent Asian markets. Industry watchers said that the coffee business in India was difficult. High rental expenses and intense competition had left most foreign players struggling to achieve profitability despite years of trying. Although Starbucks‘ partnership with Tata was occasionally helping in negotiating for good real estate, Starbucks still needed to figure out how to leverage the partnership to win over the larger young and middle-income demographic segments in India. Store financials needed to be managed to maintain profitability. Would Starbucks and Tata under Gurnaney‘s leadership be able to achieve continued brand growth and sustain success in the competitive and complex Indian market? Teaching Plan Given Starbucks‘ history, goals, and current strategy in emerging markets, the focus of general discussions should center on what the issues were and whether there were ideas presented in the case that might sustain improvement for the Tata Starbucks joint venture. Details in the case provide the basis for discussion and analysis of strategies, potential markets and products, diversification, and external factors such as the economy, the industry and the global market. This is a fairly brief case, which can be covered quickly. The major opportunity here is to demonstrate the global nature of some industries, and therefore how companies must strategize to compete in the international arena. ICEBREAKER This case can start with an icebreaker. Starting from the perspective of a customer may make it easier for students to transition to a strategic analysis. Ask the following: How many of you drink Starbucks regularly?
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Teaching Note
Case 1: Robin Hood
Because Starbucks is a household name among most U.S. students, it is likely that a large number of students will be regulars. Then ask: What other coffee houses do you frequent? Even though there will probably be a number of Starbucks fans, other coffee houses have their fans as well—Dunkin‘ Donuts or some local coffee shop may be favorites. Next, the instructor can ask the students whether they think Starbucks is successful in the United States, and why. Is Starbucks successful in the United States? Why/Why not? Possible answers could include the ―Starbucks Experience‖ of premium service and premium quality, the importance of consistency across outlets, and the power of the Starbucks brand. After some discussion on this topic, the instructor can switch gears to find out how many students have been to a Starbucks location outside the country. It is likely that the number of students who have had this experience will be relatively small. Students can then be asked to ponder whether they think Starbucks‘ success drivers would be the same outside the United States. How many of you have tried Starbucks OUTSIDE the United States? Are Starbucks’ success drivers the same outside the United States? Before engaging in discussion, the instructor might want to test student’s basic knowledge regarding the case and the major concepts. Here are some multiple-choice questions to use. (This will get the students‘ attention—they can‘t answer these if they haven‘t read the case!) Which of the following statements is most true? a. Starbucks‘ U.S. market is the most profitable, worldwide. b. Unlike in the United States, both Chinese and Indian coffee consumers prefer to drink their beverages in the store rather than taking their coffee to go. c. Most of the revenue for India‘s Tata Group comes from business it does in India, such as from the local sales of its successful affordable car, the Tata Nano. d. Tata Starbucks‘ other international competitor, Gloria Jean‘s Coffee, is based in Canada. ANSWER: b. in 2018 Starbucks generated an annual revenue of $4.5 billion from its business in China. Starbucks‘ Chinese outlets had become more profitable than those in the U.S. market. Chinese people tend to not like to take their drinks off-site. Local Chinese customers enjoyed the ―Starbucks Experience‖ while sitting with friends and having something to munch on along with their coffee. Unlike countries such as the United States, where purchasing coffee was often a quick transaction at a counter or kiosk for customers on the go, the culture in India was to sit down and socialize for hours over coffee or tea. The total revenue of Tata companies was $110.7 billion in 2018, with nearly two-thirds coming from business outside India. Gloria Jean‘s Coffee is based in Australia. World-traveled consumers expected the ―Starbucks Experience‖ to be consistent worldwide. If the coffee didn‘t taste the same as it did abroad, they would not come back. TN1-265 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
a. Yes b. No ANSWER: a. Starbucks had to meet the expectations of its world-traveled customers, who were aware of the ―Starbucks Experience.‖ Many of these customers would check whether the coffee tasted the same as it did abroad and whether the store ambience was equally comfortable. If the experiences matched up, they would become regulars. Summary of Discussion Questions Here is a list of the suggested discussion questions. You can decide which questions to assign and which additional readings or exercises to include to augment each discussion. Refer back to the Case Objectives Table at the beginning of this Teaching Note to identify any additional readings and/or exercises so they can be assigned in advance. Discussion Questions: 1. PRIMARY QUESTION: What entry strategy has Starbucks used internationally? Should Tata Starbucks modify its strategy for the Indian market? 2. SECONDARY QUESTIONS: What forces in the industry environment might affect Tata Starbucks‘ choice of strategy? And what does an internal analysis tell us about this? What intellectual assets are most important to Tata Starbucks? 3. What business-level strategy should Tata Starbucks pursue? Discussion Questions and Responses 1. What entry strategy has Starbucks used internationally? Should Tata Starbucks modify its strategy for the Indian market? Strategy is all about the ideas, decisions, and actions that enable a firm to succeed. See Chapter 1, Exhibit 1.1: Strategic management consists of the analyses, decisions, and actions an organization undertakes in order to create and sustain competitive advantages: ● strategy directs the organization toward overall goals and objectives ● includes multiple stakeholders in decision making ● incorporates both short-term and long-term perspectives ● recognizes tradeoffs between efficiency and effectiveness An organization‘s leader faces a large number of complex challenges. Leaders must be proactive, anticipate change, and continually refine changes to their strategies. Leaders must make strategic management both a process and a way of thinking throughout the organization. See Chapter 1, Exhibit 1.6: The primary role of the organizational leader is to articulate vision, mission and strategic objectives. Leaders must communicate their initial vision of the organization‘s purpose: what was the original goal, one that evokes a powerful and compelling mental image of a shared future, one that would be massively inspiring, overarching, and longterm, and that represented a destination that is driven by and evokes passion? TN1-266 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
The organizational mission also needs to be considered: a mission encompasses both the purpose of the company, as well as the basis for competition and competitive advantages. In writing a mission statement, it is important to understand the definition of the business: 1) who are its customers? 2) what customer need is the organization trying to fulfill? and 3) how does the business create and deliver value to customers and satisfy their needs? Anticipating that things might change, an organization‘s leadership must then establish strategic objectives to operationalize the mission statement. That is, objectives help to operationalize the mission statement with specific yardsticks and provide guidance on how the organization can fulfill or move toward the ―higher goals‖ in the goal hierarchy—the mission and vision. These vision and mission statements and the resulting strategic objectives have implications for how to analyze opportunities, manage innovation, and provide leadership to encourage growth. It requires doing an analysis of the external environment, both relative to general factors that might affect how the product is positioned in the market, and also who the company is competing against for that market. The basic question strategic management tries to answer is: How can we create a sustainable competitive advantage in the marketplace that is not only unique and valuable but also difficult for competitors to copy or substitute? Under Howard Schultz‘s leadership, Starbucks‘ mission had been to inspire and nurture the human spirit one person, one cup, and one neighborhood at a time, and to do so not only in the United States, but also across the globe. In the past, Starbucks had entered markets with a commitment to win them over the long haul. Starbucks had done just that in the United States and Singapore, and also in Japan, and finally, China. Starbucks‘ mission and strategic objectives had allowed it to create a sustainable competitive advantage in those global marketplaces it had entered so far. Would this strategy work in India?
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Teaching Note
Case 1: Robin Hood
Reviewing Chapter 6: Corporate-Level Strategy Corporate strategy focuses discussion on the questions of what businesses a corporation should compete in, and how the businesses should be managed so they can create ―synergy‖—creating value through entering new markets or developing new technologies, either through related or unrelated diversification. Diversification is the process of firms expanding their operations by entering new businesses. In related diversification, a firm enters a different business in which it can benefit from leveraging core competencies, sharing activities, or building market power. Some possibilities include: ● Mergers and acquisitions ● Strategic alliances ● Joint ventures ● Internal development Whatever the choice, it should create value for all stakeholders—employees, suppliers, distributors, and the organization‘s owners themselves. The choice of diversification strategy should create synergy so that all parties gain something they would not have had on their own. Companies can achieve synergy through diversification in two ways: Through related businesses (horizontal relationships) ● Sharing tangible resources ● Sharing intangible resources ● Leveraging core competencies Through unrelated businesses (hierarchical relationships) ● Value creation derives from corporate office ● Leveraging support activities Core competencies reflect the collective learning in organizations—how to coordinate diverse production skills, integrate multiple streams of technologies, and market diverse products and services to create value. Core competencies must create superior customer value; the different businesses must all have similar elements in the value chain that require similar skills; and these activities or skills must be difficult for competitors to imitate. Starbucks‘ mission was to grow worldwide. It had used internal development to acquire significant core competencies in the U.S. market, and had expanded through related diversification into new markets, sharing these tangible and intangible resources with overseas partners in Asia. Together, Starbucks and its alliance partners had grown market power. Would Starbucks be successful with all its overseas expansion? Referencing Chapter 7: International Strategy: Creating Value in Global Markets International expansion is a viable diversification strategy; however, before pursuing this, a firm needs to determine why an industry in a given country is more (or less) successful than the same industry in another country.
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Teaching Note
Case 1: Robin Hood
There are several reasons to expand internationally. A firm‘s motivation for international expansion could involve the following: ▪ To increase the size of potential markets ▪ To attain economies of scale ▪ The ability to take advantage of arbitrage opportunities ▪ To extend the life cycle of a product ▪ To optimize the physical location for every activity in its value chain When choosing a country to expand into, firms must assess certain factors: the degree of consumer demand, the degree to which resources such as skilled labor and other supplier or supporting infrastructure are developed and available, the speed with which such resources can be deployed, the extent of political and economic risk and corruption, and the access to qualified management. Therefore, the main motivations for international expansion include market seeking, efficiency seeking, and resources (natural or intellectual) seeking. Because of its previous success in other parts of Asia, specifically Japan and China, Starbucks had had its eye on the large Indian market for a while. An early attempt to enter the market had failed due to complications with the Indian government and foreign direct investment (FDI) restrictions (the Government of India at the time permitted foreign retailers a maximum ownership stake of only 51 percent), so when India‘s Tata Group offered a partnership agreement in 2012, Starbucks was eager to proceed with a partner. Entry modes available for international expansion differ based on the extent of investment and risk, and the degree of ownership and control. See Chapter 7, Exhibit 7.8. In order from low to high, they include: ● Exporting ● Licensing ● Franchising ● Strategic Alliances ● Joint Venture ● Wholly Owned Subsidiary In India, at the time of Starbucks‘ entry, government regulations permitted foreign retailers a maximum ownership stake of only 51 percent. This meant Starbucks had to find a joint venture partner, which it did in Tata Group‘s Tata Global Beverages. Like Starbucks, Tata Group had a strong belief in social responsibility, and had been respected in India for more than 140 years because of its adherence to strong values and business ethics. Tata Global Beverages had access to coffee products through its subsidiaries, specifically, Tata Coffee, and saw a partnership with Starbucks, specifically its global brand and strategic expertise, as a way to broaden its product portfolio. Starbucks needed a local partner with corresponding values and strategic assets, so this relationship made a lot of sense. But Starbucks had to decide on a specific strategy for the Indian market. The global marketplace provides many opportunities for firms to increase their revenue base and profitability. However, managers face many opportunities and risks when they diversify abroad. TN1-269 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
What should a firm do in order to create value and attain a competitive advantage in this global marketplace? A strategic choice must be made. Strategies that favor global products and brands should standardize all of a firm‘s products for all of their worldwide markets and should reduce a firm‘s overall costs by spreading investments over a larger market. These strategies are based on three assumptions: ● Customer needs and interests worldwide are becoming more homogeneous. ● People (worldwide) prefer lower prices at high quality. ● Economies of scale in production and marketing can be achieved through supplying global markets. However, these assumptions may be incorrect—―one size fits all‖ does NOT generally apply: ● Product markets DO vary widely between nations—local adaptations can work. ● There is a growing interest in multiple product features, product quality and service. ● Cost of production may not be critical to product cost; a firm‘s strategy should not be solely product-driven. The opposing pressures that managers face place conflicting demands on firms as they strive to be competitive. On the one hand, competitive pressures require that firms do what they can to lower unit costs so that consumers will not perceive their product and service offerings as too expensive. In addition to responding to pressures to lower costs, managers must also strive to be responsive to local pressures in order to tailor their products to the demand of the local market in which they do business. This requires differentiating their offerings and strategies from country to country to reflect consumer tastes and preferences. The two opposing pressures result in four different basic strategies that companies can use to compete in the global marketplace: international, global, multidomestic, and transnational. The strategy that a firm selects depends on the degree of pressure that it is facing for cost reductions and the importance of adapting to local markets. See Chapter 7, Exhibit 7.3. Starbucks had been very successful in Japan and China, where it had followed a global strategy, standardizing its approach and centralizing operations to produce economies of scale. In addition, Starbucks had adopted a standard level of quality worldwide. In Japan, Singapore and China, Starbucks had entered as its own entity, using its U.S. approach—targeting affluent consumers. In Japan, because of their familiarity with the brand, that wealthy clientele considered Starbucks the ―original‖ gourmet coffee shop and aspired to emulate the Western lifestyle. In China, Starbucks recognized there was a universal need among individuals to be respected for their differences and to feel connected with others. Starbucks catered to this need by applying its culture and values in a way that was conducive to local values and tastes. Partnering with other coffee companies in different parts of the country became a way to gain insight into the tastes and preferences of local Chinese consumers. In addition, Starbucks realized that it could create a ―Starbucks experience‖ in the way it designed the stores, and that the perception of an ―elite‖ experience meant that price was not an issue for these consumers TN1-270 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Up to this point, in Asia, Starbucks had been successful by using these tactics: ● Make sure marketing and the brand image was sensitive to local culture. ● Work with the right local partner. ● Have patience, take the time to gain customer loyalty, and recruit and train local employees who would deliver the Starbucks ―experience‖ to consumers. Starbucks‘ success in China and Japan led it to believe that this culturally specific approach would also be successful in India, another large market with culturally entrenched tastes. However, the Indian market had proved to be more difficult to crack. The coffee business in India had high rental expenses and intense competition that required continuous price monitoring. Then, there was the investment in making the stores appealing to customers, finding people to run them, and building a food and beverage menu that was hip enough to keep 18- to 24-year-olds—the target market for many coffee chains—coming back for more. Industry experts argued that coffee chains in India had to maintain elaborate and plush outlets—not kiosks—to give Indian consumers what they were looking for from a coffee chain even if the proposition turned out to be very expensive. In addition, coffee bars were a sit-in concept in India, where consumers generally hung around such outlets for hours, unlike the global phenomenon of grabbing coffee on the go from generally tiny outlets and kiosks. With less throughput, or return on the significant investment in retail space, this meant most foreign players struggled to achieve profitability. Was it possible that Starbucks, now partnering with Tata, should be using a multidomestic strategy in India? A multidomestic strategy would put emphasis on differentiating products and services to adapt to local markets. This would mean tailoring to local use, considering adaptation to language, culture, income levels, customer preferences, and distribution systems. It would also mean prices would be differentiated by market. For Tata Starbucks, it meant, even in the case of relatively standardized products, at least some level of very local adaptation might be necessary. When a firm emphasizes differentiation of products and service offerings in order to adapt to local markets, it can result in enhanced revenue due to a firm‘s carve-out of attractive niches. However, local adaptation of products and services may increase a company‘s cost structure, so managers must determine the tradeoff between adaptation and cost. This was the challenge Tata Starbucks faced. How could the company maximize the long-term success of the venture in India? Should it grow aggressively, regardless of cost, to overcome challengers, or pursue the niche approach, cherry-picking high-profile, business-friendly locations that could also allow the venture to build a premium brand with premium pricing? Critical strategic choices needed to be made.
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Teaching Note
Case 1: Robin Hood
NOTE: VIDEO VIEWING See Starbucks Ceo Sumitro Ghosh on ―Teavana‖ India (ET Now, 6/8/2017, 5:05) https://www.youtube.com/watch?v=zB8vDfSaVyk. ET Now reports on Starbucks‘ efforts to brew up business in India, despite the country consuming eight times more tea than coffee. Tata Starbucks CEO Sumitra Ghosh explains that India is a complex market, and so its partnership with Tata is vital, yet India carries tremendous potential and the brand is strong. With over 300 million consumers in its middle class, these projections may be right on target. The Starbucks case provides an effective example of how growth and diversification through international expansion may challenge even the largest firms. Starbucks is following a global strategy, counting on its prestige and youth favoring Western tastes to increase coffee sales. It also caters to local tastes by making tea a part of its menu. By partnering with Tata (a partnership likely forced by the Indian government) it is also clear that Starbucks used a strategic alliance or joint venture as its entry mode. 2. SECONDARY QUESTION: What forces in the industry environment might affect Tata Starbucks’ choice of strategy? And what does an internal analysis tell us about this? What intellectual assets are most important to Tata Starbucks? NOTE this section does not have any accompanying PowerPoint slides. Referencing Chapter 2: Analyzing the External Environment As part of strategic analysis, it‘s necessary to engage in external scanning: surveillance of a firm‘s external environment to predict environmental changes to come, detect changes already under way, and put leaders in a proactive mode. Strategic management also involves external monitoring to track evolution of environmental trends, assess sequence of events, and evaluate streams of activities. To answer the question about the current forces in the Indian café market that affect Tata Starbucks‘ ongoing strategy, it is necessary to assess the segments of the external competitive environment that include competitors, customers and suppliers, substitutes, and new entrants. Porter‘s five forces model allows strategists to anticipate where the industry might be most vulnerable. See Chapter 2, Exhibit 2.7. Ask students to diagram the five forces. It should look something like the following diagram:
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Teaching Note
Suggested: High Rivalry - Many rivals compete for market share. The company experiences direct competition from domestic giant Café Coffee Day, as well as a number of foreign players.
Suppliers’ Power Low
Case 1: Robin Hood
Substitutes’ Threat Low
Rivalry High
medium. There are low entry barriers i.e. low capital requirements, for quick service restaurants e.g. McDonalds leverage existing stores to sell coffee.
Buyers’ Power Low
Suggested Low supplier power - Leading players have vertically integrated and source their coffee beans from company owned or affiliated plantations.
Suggested: Med - The threat of entry is
Suggested: There is a low threat from substitute products. Leading players have incorporated potential substitutes to coffee (e.g. tea) into their beverage offerings.
Suggested: There are no industry
Threat of New Entrants Med
buyers, only local consumers who do not have negotiating power over price; however, there are abundant choices for consumers, and the appeal of the brand is difficult to maintain. Brand image, therefore, the marketing strategy, is important.
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Teaching Note
Case 1: Robin Hood
The five forces analysis indicates that the retail coffee business saw a major challenge to profitability coming from the many rivals and potential new entrants into the industry. This implies that strategies must be carefully formulated to consider these threats. Suppliers—Low Threat: The suppliers in the Indian café market appear to have low bargaining power. The leading players are vertically integrated. Both Tata Starbucks and Café Coffee Day source their coffee from company-owned plantations. Through the joint venture, Tata Starbucks is able to source coffee beans from plantations owned by the Tata Group in the Coorg region. Café Coffee Day is part of the Amalgamated Bean Coffee Trading Company Ltd (ABCTCL) conglomerate that produces and trades coffee beans on the international market. Buyers—Low Threat: Because the company‘s products are sold via retail locations, the end consumers are the buyers of the products. Buyers are not organized into buying groups, and, hence, do not wield much bargaining power with regard to the pricing of coffee products. However, this dynamic could change in the future as Tata Starbucks competes more directly for share with Café Coffee Day. This would involve a price war as both players woo the large younger, more price conscious and socially active demographic. Industry Rivalry—High Threat: The company operates in a highly competitive industry and experiences competition from an entrenched domestic leader (Café Coffee Day) and experienced foreign players (Gloria Jean Company). A strong marketing response can be expected from one or more players, as Tata Starbucks attempts to grow volume and market share. New Entry—Medium Threat: The threat of new entrants is medium. Large real-estate related capital investments would otherwise create a big entry barrier for new entrants. However, the impending threat from quick service restaurants (QSRs) like McDonald‘s and Dunkin Donuts raises the threat level as these players can leverage existing real estate to begin to sell coffee at minimal incremental costs. In the case of McDonald‘s, McCafé counters could easily be introduced throughout the country with minimal structural adjustments to existing McDonald‘s locations. Substitutes—Low Threat: There is low threat from substitute products like tea because the leading players have included tea-related drinks to their menus. Ordinarily, this could have been a big threat within a teadrinking nation that has tea sellers at every street corner selling tea at nominal prices. Referencing Chapter 3: Analyzing the Internal Environment of the Firm To further support the decision to expand internationally, students can be asked to identify the resources and capabilities possessed by Tata. This will enable them to apply the resource-based view (RBV).
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Teaching Note
Case 1: Robin Hood
The logic of RBV argues that unique bundles of resources and capabilities or core competencies can (and should) be leveraged in an ever-broader scope through internationalization. Students should be able to identify Tata‘s resources and capabilities systematically and explore if there are any (potential) core competencies that might affect the company‘s international expansion. The concept of the resource-based view of the firm includes the three key types of resources: tangible resources, intangible resources, and organizational capabilities. A firm‘s strengths and capabilities—no matter how unique or impressive—do NOT necessarily lead to a competitive advantage. The resource-based view of the firm takes the perspective that firms‘ competitive advantages are due to their endowment of strategic resources that are valuable, rare, costly to imitate, and costly to substitute. Without these unique resources, the firm can only attain competitive parity. RBV goes beyond a SWOT analysis to integrate internal and external perspectives in a broader competitive context. RBV can reveal how core competencies embedded in a firm can help it exploit new product and market opportunities. Tata Starbucks‘ profile might look like the following: Tangible Resources Human: Tata Starbucks has a strong community of ―partners‖ who represent the face of the company while serving coffee. The company is known to have a rigorous recruiting and training process to make sure that these brand ambassadors enhance the customer experience in each store. Physical: Individual stores are known to be designed tastefully to enhance the customer experience. The stores cater to both the practical needs (free Internet, spacious seating) as well as emotional needs (cultural artifacts, pleasant music). Technological: Starbucks has been implementing a number of technology related offerings to enhance customer experience. A smartphone application allows customers to place coffee orders prior to getting to the store, thereby reducing the time spent waiting in line. Loyalty cards reward customers for repeat purchases at the store. Intangible Resources Innovation and creativity: Tata Starbucks has been innovative in its selection of sites for stores and the interior designs for each store. It has also been creative in developing a store menu that appeals to both the seasoned coffee drinker as well as the dabbler and snacker. Reputation: Both partners in the Tata Starbucks joint venture enjoy a solid reputation of being respectable companies that care about quality and social responsibility. Referencing Chapter 4: Recognizing a Firm’s Intellectual Assets See the concepts of intellectual capital, human capital, and social capital, all of which are intangible assets that a company needs to have in order to compete successfully. Intellectual TN1-275 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
capital is a measure of the value of a firm‘s intangible assets, its reputation, employee loyalty and commitment, customer relationships, company values, brand names, and the experience and skills of employees. Human capital involves the individual capabilities, knowledge, skills, and experience of the company‘s employees and managers. This knowledge is relevant to the task at hand, as is the capacity to add to this reservoir of knowledge, skills, and experience through learning. Success in retaining human capital could also be attributed to the nurturing of ―social ties‖ or social capital. Social capital is a function of the network of relationships that individuals have throughout the organization and beyond. Relationships are critical in sharing and leveraging knowledge and in acquiring resources. Social capital can extend beyond the organizational boundaries to include relationships between the firm and its suppliers, customers, and alliance partners. Dynamic capabilities involve a firm‘s capacity to build and protect a competitive advantage, which rests on knowledge, assets, competencies, complementary assets, and technologies. Dynamic capabilities include the ability to sense and seize new opportunities, generate new knowledge, and reconfigure existing assets and capabilities. Intellectual assets or intangible resources are critical to organizational success. Here are some questions organizations should ask: Human capital: does the organization effectively attract, develop, and retain talent? Does the organization value diversity? Social capital: does the organization foster positive personal and professional relationships among employees and alliance partners? Technology: does the organization effectively use technology to transfer best practices across the organization, codify knowledge, and develop dynamic capabilities for competitive advantage? Presence of Organizational Capabilities Human and Social Capital: Starbucks is known to invest in training and education programs for its employee ―partners.‖ The company invests heavily in its ―partners‖ and this translates into high motivation and a positive attitude toward work. By owning a share of the company, even at the most junior levels, employees feel a sense of ownership and pride. The partnership with Tata also provides the local muscle to negotiate attractive rental/purchase prices for its new stores. The Tata partnership also gives the joint venture access to companyowned coffee plantations. This vertical integration helps minimize supply and pricing uncertainty. In that way, Tata Starbucks showed its capacity to build and protect a competitive advantage, which rests on knowledge, assets, competencies, and complementary assets.
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Teaching Note
Case 1: Robin Hood
3. What business-level strategy should Tata pursue? Referencing Chapter 5: Business-Level Strategy The question of how to compete in a given business to attain competitive advantage requires an assessment of the types of competitive strategies, including the three generic strategies that are used to overcome the five forces and achieve a competitive advantage: 34. Overall cost leadership Low-cost-position relative to a firm‘s peers Manage relationships throughout the entire value chain 35. Differentiation Create products and/or services that are unique and valued Non-price attributes for which customers will pay a premium 36. Focus strategy Narrow product lines, buyer segments, or targeted geographic markets Attain advantages either through differentiation or cost leadership Ask the students which strategy they think Tata Starbucks should pursue, and why. The coffee market in India was intensely competitive, with multiple domestic and foreign players. The most formidable competitor was domestic giant Caf Coffee Day (CCD), which had already adopted a strategy of flooding the market with its caf s, closely mimicking what Starbucks had done in the United States. Within the United States, Starbucks was able to achieve success in two phases. It first established a strong quality and premium brand image for itself. It then expanded the number of stores to flood out the competition and satisfy the coffee drinking needs of every potential customer. In that way, Starbucks effectively utilized a differentiation strategy: establishing a reputation for unique products that were valued by consumers for those non-price attributes for which they were willing to pay a premium. Tata Starbucks could consider a similar strategy within the Indian café market. In order for the differentiation strategy to work, however, Tata Starbucks had to make sure to maintain parity with competitors on pricing. This is what Tata Starbucks had done in India, where the initial launch pricing had been set to be competitive with CCD‘s pricing (coffee drinks available for as low as Rs 100 – at the time, 50 Rs = 1 U.S. dollar; 1 crore = $10 million). Tata Starbucks could also use its premium quality image and branding to tackle any new entrants, such as McDonalds and Dunkin‘ Donuts. Quick service restaurants (QSR) usually differentiate on convenience and speedy service (―fast food‖), not high quality. Tata Starbucks could continue to leverage the elevated experience it offered in its cafes which are more professional and quieter than most QSR locations. In that way it could achieve a competitive advantage that would be sustainable as long as it protected its internal assets. Teaching Note TN1-277 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood Case 18 — The Movie Exhibition Industry: 2019
Case Objectives 3. To examine how the external environment affects options available to firms in an industry, and how the structure of an industry has implications for competition among firms. See the table below to determine where to use this case: CASE OBJECTIVES TABLE Chapter Use Key Concepts 2: External Environment
External environmental forces; five forces analysis
Additional Readings or Exercises NOTE additional web link reading, video news stories
Case Synopsis Movie box office revenue in 2018 set a new record, growing 6.9 percent over the previous year, yet ticket sales were down 17 percent since the high in 2002, and fewer people than ever were going to the movies. The movie exhibition industry was a study in contradictions. Revenues were up but movie theater attendance was largely flat. Movies were more available than ever, but fewer people were venturing to the theater to see them. Many theaters had ceased operation, driven from the market by consolidation and the loss of patrons. What was happening to the movie theater business? Are movie theaters still relevant? Will they survive? The answer existed in the analysis of the motion picture industry. The motion picture industry consisted of three stages: studio production, distribution, and exhibition (the theaters that showed the films). All stages of the industry were undergoing consolidation. The studios created content for their core audience, 12 to 24 year-olds; the distributors handled marketing and negotiated deals with exhibitors (the movie theaters) through theater buyers; the exhibitors, previously single-screen theaters, were now mostly theater complexes—cinemaplexes of various sizes—and were facing not only declining ticket sales, but increased costs of operation. There were three primary sources of revenue for exhibitors: box office receipts, concessions, and advertising. Managers had low discretion; their ability to influence revenues and expenses was limited. Operating margins among exhibitors averaged a slim 5.78 percent for the largest exhibitor chains (see Case Exhibit 12). This was before significant expenses such as facility and labor costs. The result was marginal or even negative net income for the smaller theaters. Overall, the business of exhibitors was best described as loss leadership on movies: the firms made money selling concessions and showing ads to patrons who were drawn in by the movie. Overall, the exhibitor had limited control over both revenues and profits. Box office receipts were the bulk of revenues, but they yielded few profits. Attendance allowed profitable sales of concessions and advertisements, but there were limitations on the volume of concession sales per TN1-278 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
person and sales prices seemed to have reached maximum. Advertising remained an attractive avenue for revenues and profits, but audiences disliked it. Movies remained as popular as ever, but opportunities for viewing outside the theater had greatly increased. Overall, the availability of quality content and the visual and audio experience available in the home was rapidly converging, some would argue, surpassing offerings available at the theater. At no time in the movie exhibition industry‘s existence have the stakes seemed so high. Attendance has been in a slow decline since 2002. The wait needed to see a movie outside of the theater has never been shorter. Content other than motion pictures is increasingly popular. Impressive screens and sound systems are common in homes. Cell phones, ads, and sticky floors mar the overall experience at the theater. What will it take to bring audiences back to the theater? Teaching Plan Most students have been to a movie theater, but probably haven‘t thought about how these theaters make money. Therefore, this case becomes a good way to introduce the importance of defining the industry, and examining the dynamics of competition in the industry before making a decision about whether to enter the industry, or how to increase profitability within it. This is a quick case to discuss after students have read chapters 1 and 2. It sets up a more in-depth discussion of competitive strategies and implementation issues, so can be used as a prelude to other cases, the Pixar case in particular. ICEBREAKER This case can start with an icebreaker. Starting from the perspective of a customer may make it easier for students to transition to a strategic analysis. How many of you have gone to the movies recently? Did you enjoy the experience? How many of you have stopped going to the movies? Why? Even though students may have enjoyed the movie, especially if they’ve experienced a 3D event, they might have complaints about the price of the ticket, the price of the concession items, the sticky seats or mess inside, the interruptions from other movie-goers (voices, cell phones, movement), the length of previews and advertisements, the too-loud sound system. Ask if them, they were the theater manager, what would they do about these common customer complaints? If students have read the case carefully, they will realize that the theater manager/owner doesn’t have many options. Let’s see why… Summary of Discussion Questions Here is a list of the suggested discussion questions. You can decide which questions to assign, and also which additional readings or exercises to include to augment each discussion. Refer back to the Case Objectives Table at the beginning of this Teaching Note to identify any additional readings and/or exercises so they can be assigned in advance. TN1-279 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Discussion Questions: 6. What trends in the general external environment might make the movie theater business a ―study in contradictions‖? 7. What does the structure of this industry say about the potential for profits? 8. Is there any way to achieve a competitive advantage in this industry? 9. Do movie theaters have any other alternatives? OPTIONAL DISCUSSION. Discussion Questions and Responses 1. What trends in the general external environment might make the movie theater business a “study in contradictions”? Referencing Chapter 2: Analyzing the External Environment Strategy is all about the ideas, decisions, and actions that enable a firm to succeed. If you recall, from Chapter 1, Exhibit 1.1: Strategic management consists of the analyses, decisions, and actions an organization undertakes in order to create and sustain competitive advantages: strategy directs the organization toward overall goals and objectives; includes multiple stakeholders in decision making; incorporates both short-term and long-term perspectives; recognizes tradeoffs between efficiency (cost) and effectiveness (performance). The basic question strategic management tries to answer is: How can we create a sustainable competitive advantage in the marketplace that is not only unique and valuable but also difficult for competitors to copy or substitute? To be specific: movie theaters need a way to attract customers in a way that also makes them money. To do this, it‘s first necessary to take a look at how forces in the external environment might affect this particular business. Environmental scanning involves surveillance of a firm‘s external environment to predict environmental changes and detect changes already under way. It is a BIG PICTURE viewpoint of the industry/competition, looking for key indicators of emerging trends—what catches your eye? Alerts the firm to critical trends before changes have developed a discernible pattern and before competitors recognize them. Environmental monitoring is a firm‘s analysis of the external environment that tracks the evolution of environmental trends, sequences of events, or streams of activities. Leaders need to monitor the trends that have the potential to change the competitive landscape—what do you want to track? Firms need to CHOOSE the trends identified via the scanning activity, and regularly monitor or track these specific trends to evaluate the impact of these trends on their strategy process.
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Teaching Note
Case 1: Robin Hood
What factors or trends might be most important to the movie industry? To assess how the external environment might affect strategy in this industry, it‘s necessary to take a look at the factors in the general external environment. The industry must consider the political/legal, economic and global, sociocultural and demographic, and technological forces that might affect the ability of each firm to deliver its products and sustain its business. See which factors in the general environment students might pick that have a significant impact on the movie industry. First of all, let‘s take a look at history (this is not in the case, but might be a helpful reminder of how far the industry has come): Historically, there were few entertainment options. When films were first introduced (early 1900s) through the 1940s the only option was radio, live entertainment, and the family Victrola (record player). In the 1950s, television began to take off, giving people move entertainment options. These options have steadily increased: Think of the multitude of television channels accessed through cable or satellite on which movies can be viewed (Turner Classic Movies); premium channels like HBO and Showtime that show original series as well as movies; and streaming services like Netflix and Hulu, as well as DVD rentals. These are just alternative ways to watch movies. Add to these other entertainment forms such as music (more radio stations, satellite radio, Internet radio, CDs, and MP3s), and the Internet and video games (lots of ways to waste time). The move to digital and 3D projection was intended to increase viewership at the movie theaters, but hadn‘t had quite the predicted impact. Technically, substitutes for going to the movies as an entertainment option have emerged in a number of forms. In addition, although up until the 1980s many movie theaters were single screen, these small theaters have been replaced by theater complexes—cinemaplexes—in an attempt to achieve economies of scale. Declining ticket sales and the increased costs associated with developing megaplexes began a wave of consolidation among exhibitors. Four companies dominate the ―exhibition circuit‖: AMC, Regal, Cinemark, and Cineplex (only in Canada). Operating 1,690 theaters in the country (just 30.8 percent of all theaters), these companies control 53.5 percent of the screens. (See Case Exhibit 9.) Under what conditions do these current movie theaters compete? Demographic. The core movie theater viewing audience has been 14 to 24 year olds. This population is projected to be basically flat, with 16 percent growth by 2035, just 229 people per current theater screen or 21 additional attendees per screen on the typical weekend The fastest growing segment of the population is those 60 and older. This population segment will grow 36 percent by 2035. Unfortunately, at 2.5 visits per year, this audience currently attends the movies the least. What is the trend in attendance at movie theaters? The headlines report ―record revenues‖—which is accurate—but doesn‘t tell the whole story. The reality is ticket sales have been basically flat in recent years (see Case Exhibit 2): - in 1946 the average person attended 28 films a year. - in 2006 it was 4.7. - in 2018 it was 3.9. - those 60 and older attend the theater to watch only 2.5 films a year. There were also two markets for movie theater viewing: domestic and international. The domestic market showed clear signs of maturity such as a declining number of screens domestically, increasing threat of substitution, difficulty innovating, and signs of consolidation. TN1-281 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
The international market was witnessing growth, rapidly expanding theater counts, rising attendance, and increasing revenues. Where do the movie studios see growth? Not in the theaters, but in DVD and Internet download for home viewing. This may mean the studios prefer a big initial push to get publicity, and then quickly follow up with DVD and digital streaming sales, international distribution and merchandising to better reach this core demographic. Sociocultural. Why do people go to the movies? Here are some possible reasons: The giant theater screen The opportunity to be out of the house Not having to wait to see a particular movie on home video The experience of watching the movies with a theatrical sound system The theater as a location option for a date The movie theater ―experience‖ —a combination of factors such as nostalgia, the popcorn, the environment of the crowd, etc. Why don‘t people go to the movies as much as they used to? TV in the home is sometimes relatively as large as the screen in some smaller theaters (you can sit closer and still get high definition). Lots of other cheap things to do outside the house—hang out at the mall? Unless you just want bragging rights of being the first person in your neighborhood to see the opening weekend of the next big blockbuster, you can wait a few months and see it on DVD or by using a streaming service such as Netflix, Amazon Prime Video, Hulu, HBONow, and others. The lag between theatrical and DVD release is declining: o The top films in 2000 averaged 23.7 weeks from release to DVD. o In 2012 it was 14 weeks, a 60 percent reduction in wait time since 2000. o Some studios are experimenting with simultaneous release: theaters, premium pay-per-view, DVD video on demand. o The growth of streaming sufficiently cannibalized DVD and digital sales to the point that studios imposed a 28-day delay from DVD sales to the availability of streaming. With home theater options, the theatrical sound system experience can be impressive. TVs are coming bundled with audio systems. There are other inexpensive locations to take a date: ice skating, the arcade, the mall… The overall movie ―experience,‖ the nostalgia factor, has eroded because of things like the following: o The overall cost—ticket price plus concession items can cost nearly $20 per person. o Advertisements—pay $9 or more to sit through 15 to 20 minutes of ads and trailers, before seeing a movie that lasts an hour and a quarter. o Rude moviegoers, lousy movie choices, sound from other theaters, no ushers, difficult parking, crowds, interruptions from cell phones, and the person texting in front of you.
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Teaching Note
Case 1: Robin Hood
Economic. Costs of infrastructure and overhead keep going up, however revenue has not increased (the studios have no incentive to share more profits with the theaters). On the other hand, when the economy declines, more people go to the movies, since a $10 movie ticket is cheaper than admission to almost any other form of public entertainment (i.e. amusement park or sports event). Plus, make-believe movies with happy endings provide a welcome escape from economic worries. Technological. Advances in technology like IMAX, and the move to 3D, had provided some options for revitalizing the movie-going experience, but home TVs have become larger and offer high-quality images that reduce the differentiated appeal of the ―giant‖ screen offered by exhibitors. Technology has also affected the distribution of regular movie content: content is available through streaming services such as Netflix. The average American spends 2.8 hours daily watching the TV at home. As of 2017, more than 83 percent of U.S. households have at least one HD television, most 32‖ or larger, allowing for very high quality images. Homeviewing technology has now improved so much that a home theatre system can offer a movie experience that rivals many theaters. All of the above indicates that the movie theater business is beset with some problems due to the general environment. However, movie theaters are still operating. If they have so much trouble ―competing‖ with other options for watching movies or places to take a date, how do they compete with each other? In order to formulate a competitive strategy, it‘s first necessary to assess the segments of the external competitive environment that include competitors, customers, and suppliers, substitutes and new entrants. Porter‘s five forces model allows strategists to anticipate where the industry might be most vulnerable to competition. The model also helps decide where profits might be best made, or whether there is any chance of further dividing up the profit pie: how attractive is this industry? 2. What does the structure of this industry say about the potential for profits? However, before we answer this question, an interesting and more fundamental question is how do we define the ―industry‖? Just what business are we in? Ask students to fill in the blank: Movie exhibitor houses are in the ________________ industry. Some students may say ―movie.‖ but some may also say ―entertainment,‖ or ―mass entertainment,‖ or ―exhibition‖ business. The various answers to this question will help students understand that a firm must have a clear idea of the purpose of its business, and who it competes with, in order to craft strategy. The ―movie‖ business is way too general: What‘s involved in making a movie? There is the production, the distribution, the buyer for the cinema chain, and the theater itself. And do ―movie‖ theaters only exist for movies? Might the theater be a location for mass entertainment of another kind? What about the performance aspect of the Rocky Horror Picture Show where more than half of the entertainment came from watching the audience and participating? What about the old style multi-use auditoriums where the single movie screen came down to block off the stage, and where town meetings could be held on days when the movie wasn‘t shown? Aren‘t these more ―exhibition‖ halls rather than movie theaters? TN1-283 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
However, for the purposes of this case, let‘s say the industry is movie theaters. Help students apply Porter‘s five forces of competition by drawing a diagram on the board similar to the following, and having students fill in the details: Suggested: Movie theaters compete for movie distribution deals, have to bid on concession supplies, hire the cheapest employees they can find: negotiated arrangements with suppliers are critical to achieving any hope of profitability.
Suppliers’ Power
Substitutes’ Threat High
Rivalry High
Buyers’ Power
High Suggested: Distributors and buyers have considerable bargaining power. Concession suppliers and employees have less power, but still are important.
Suggested: Anyone can show a film - technological resources for efficient mass projection are harder to acquire.
Suggested: Other movie viewing opportunities exist – DVD, pay-per-view, Internet. Other forms of entertainment exist - books, video games, sports events, concerts - why even watch a movie?
Med
Threat of New Entrants
Suggested: The only buyer with real bargaining power is the advertiser. The end consumer has choice, but consolidation means that choices usually benefit a single megaplex owner.
Med
Based on the external environmental industry analysis, the movie theater business may require attention to growth strategies—acquisition, diversification, or internal development—in order to accrue any profits. NOTE - ADDITIONAL READING, VIDEO STORY: For information about the movie business in general, see the graphic from 2012 at https://www.bloomberg.com/news/articles/2012-09-13/how-movie-studios-make-money. Also, see this article about how movie studios make profits. The majority of the big movie studios (Disney, Fox, Warner Brothers, Paramount, Universal, Sony) make their money from three sources: the box office (movie theater goers), DVD/video/downloads (home viewing), and TN1-284 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
TV licensing (rights to broadcast a movie on TV). TV licensing yields the best profit—box office usually loses money not only for the movie theater, but for the studio as well. As the saying goes, nobody knows anything in Hollywood. The film industry is in flux, and ticket sales alone don‘t drive revenue. See https://www.investopedia.com/articles/investing/093015/how-exactly-domovies-make-money.asp. For historical comparison purposes, see revenue and profit data from 2004 at https://www.edwardjayepstein.com/Demyst3.htm. Then there‘s also the money earned from merchandising of characters and themes from movies. Merchandising is usually done by the distributor. Here‘s an example of how the various participants in the movie industry share the profitability pie: http://www.howstuffworks.com/movie-distribution.htm/printable. The National Association of Theater Owners (NATO) represents those who actually show the movies. Visit their website and view the video introduction reminding us that these theater owners make most of their money from concessions: http://www.natoonline.org/. Of interest are some of their FAQs, including ―Opening a Theater,‖ which contains the advice ―The process of obtaining film (for any kind of operation, be it first run or discount) is very complicated. A good buyer/booker can make your company successful. Done improperly or inefficiently, you will without question fail.‖ The ―buyer/broker‖ is someone who connects the smaller theaters to the studios. From the source linked below: ―While the nation‘s bigger chains use in-house personnel to fill their calendars, smaller theaters hire independent booking and buying agencies to lease or license the films (the buying part) and schedule and track product (the booking part) for their screens. No one, not even NATO, keeps track of their numbers, but these independent outfits are in all parts of the country working with many hundreds of the nation‘s cinema sites. Studio sales executives suggest that at least 25 percent of the country‘s screens are booked by independent film buyers for their theater customers.‖ These independent theaters (not the big chains like Regal, AMC, or Cinemark) who team up with these broker/buyers do so for economic reasons—buying in bulk to get discounts from the studios. The theater owners pay the buyers a weekly fee for each screen— in 2007 this was maybe $20 to $40 per screen—to act as middlemen linking the theaters with the distributors. This is important for the smaller theaters because there is sometimes competition for movie releases, and the buyer/broker has the contacts to make sure the product gets to the theater. See https://www.boxofficepro.com/. For the smaller independent theater, one buyer/broker says the best theaters are ―distinguished by two personalities: one is that they offer outstanding value, maybe as low as $3.50 for an adult ticket, plus the great amenities throughout. The other is those theaters where the owners tend to be on site the most, even personalizing the experience by greeting filmgoers.‖ A short but very educational video by a mom-and-pop movie theater owner in 2008 explains how ―you‘re not going to get rich‖ running a movie theater—you probably want to generate ―popcorn sales‖ instead: http://www.youtube.com/watch?v=oo9LMuvvBag. Based on the above, would you be willing to enter this business these days? 3. Is there any way to achieve a competitive advantage in this industry? TN1-285 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
NOTE there are no PowerPoint Slides to accompany this question. The above information from the five forces analysis can prompt the instructor to discuss profitability in more detail. Ask students to investigate the three revenue sources: box office receipts, concessions, and advertising in more detail. As it says in the case, the consolidation of the big four cinemaplex companies, Regal, AMC, Cinemark, and Cineplex, means that 54 percent of the movie screens in the country are under their control. (See Case Exhibit 9.) This market share provides these exhibitors with negotiating power for access to films, prices for films and concessions, and greater access to revenues from national advertisers. There is little differentiation in the offerings of the major theater exhibitors—prices within markets differ little, the same movies are shown at the same times, and the food and services are nearly identical. Competition between theaters often comes down to the following: distance from home, convenience of parking, and proximity to restaurants. Innovations by one theater chain are quickly adopted by others. However, the chains serve different geographic markets and do so in different ways. This does mean regional differences can affect the cost of fixed assets per screen. Also, international expansion of these exhibition ―circuits‖ can increase the number of screens, as when AMC was acquired by Chinese conglomerate Dalian Wanda Group in 2012. What does determine profitability for exhibitors? Exhibitors have three revenue sources: box office receipts, concessions, and advertising (see Case Exhibits 10 and 12). They have low discretion: their ability to influence revenues and expenses is limited. Exhibitor operating margins average a slim 10 percent; net income may fluctuate wildly based on the tax benefits of prior losses. Here‘s more information on revenues, expenses and controllability: Box Office Receipts: Receipts are 2/3 of revenues, with very little return as almost all goes to the studios. Film costs average 55 percent of box office receipts. On opening weekend, an exhibitor may pay the distributor 80–90 percent of the box office gross in rental fees, retaining only 10–20 percent. At $9.11, the average ticket price has risen 26.8 percent since 2008. (See Case Exhibit 3.) Little managerial discretion beyond which movies are shown (but all theaters show the same movies). If you can increase the experience, you can increase the audience draw. TN1-286 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Concessions: Concessions average 30 percent of revenues. Direct costs are less than 15 percent of selling price. The largest source of exhibitor profit. Influenced by the three factors: o Attendance at the movie—so the draw of films is still critical; more attendees equals more concession sales. o Prices—highly studied, calculated on profit maximization. o Material costs—purchase volume (consolidation helps). Managerial discretion—not much. Moviegoer complaint is high concession prices: $5.00 for a soda? $9.00 for popcorn? Not much room to increase on existing items. Advertising, including pre-show and lobby advertising and previews: Advertising brings in just 7 percent of revenues. Highly profitable—any costs? (Not in the case) Mintel reports: advertising revenues among exhibitors is expected to increase at a rate of approximately 10 percent over the coming decade—either through rate increases or showing a given ad more times. Managerial control—audiences dislike the advertising at the theater. Balancing the revenues from ads with audience tolerance is an ongoing struggle for exhibitors. What is the trend in profitability? No improvement on the horizon. Students could evaluate the financial data provided. Decreased attendance equals decreased concessions and advertising, increased costs that need to be absorbed as theaters transition to digital (which may not help anyway). Not a pretty situation. Within the current business model there is little opportunity to increase either revenues or profits. Here are causes, and possible options:
Box Office Receipts. Although there‘s more negotiating power due to consolidation (but only for the majors), there‘s also less power to negotiate increased percent of revenue, as studios see more revenue from international sales (which was 71 percent of studio revenue in 2018. See Case Exhibit 8), DVD/download sales, and product licensing. Options. Increase attendance with alternative content such as special viewings of the Metropolitan Opera, or sporting events for which ticket prices could be greater; expand technology innovation to include things like motion seat technology (feeling the sound through the seat) or offer extra-large IMAX-type screens, making the experience more unique. Concessions. Would need more attendance, an increase in per capita consumption, or increases in prices. Attendance is outside a theater‘s control, it is mostly driven by the movie itself. Per capita consumption could increase with lower prices or new items. Options. Expand the food court concept, expand into more dining options, including beer and alcohol services. TN1-287
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Teaching Note
Case 1: Robin Hood
Advertising. Walking a tightrope. No real room to increase revenue except to increase the price per showing, and where‘s the value to the advertiser if attendance isn‘t there? More ads are likely equated with decreased attendance among those with a home theater system already. Options. Make the ads more enjoyable with interactive opportunities like crowd gaming; do more off-screen advertising with lobby events and sponsored concession promotions.
It appears no one competitor can easily outperform another, based on the current realities of the industry. 4. Do movie theaters have any other alternatives? OPTIONAL DISCUSSION. The instructor might choose to have students discuss this question. Although it doesn‘t hold value for illustrating the concepts in the chapter, it does provide students with an opportunity for creative problem solving. The instructor can use his or her discretion in deciding to proceed with this discussion. The instructor might want to use the board to list alternatives, or break the students into groups to work independently and then share their ideas. One method is to pass out packages of yellow sticky notes, have students write ideas on the notes, then post all the notes on the board. Then students, or representatives from student groups, can come up to the board and categorize the ideas into clusters that seem to respond to the challenges previously discussed—move yellow sticky notes into groups that make sense. (This exercise is a variant on the quality improvement tool called ―Affinity Grouping,‖ or the ―Affinity Diagram‖—see https://balancedscorecard.org/wp-content/uploads/pdfs/affinity.pdf for a description.) It‘s possible the ideas generated might cluster into groups similar to the following: What alternatives exist for movie theaters? SOME BAD ALTERNATIVES Exit—Close the Theaters: This is likely a premature option. 1.3 billion tickets, $11 billion industry. Let‘s try to improve it before abandoning ship. Eliminate Other Places to View: Studio revenue is tied to the aftermarket of DVD, etc. They will not go for this. Generally it is hard to put any genie back into a bottle. Just Charge More for … As blanket propositions these are bad. Box office prices and concessions are about at maximum as are concessions. In an environment with viable substitutes, you can‘t expect to simply increase prices without providing additional value added, otherwise you‘ll lose revenues. There are variants of price increases listed below, but must be coupled with increased food quality, or a box office revenue management model (lower prices for some showing, higher for others). REVIVE THE EXPERIENCE — GENERAL
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Teaching Note
Case 1: Robin Hood
Decrease Interruptions: Theater chains are adding more ushers and better scheduling show times and theaters (think loud movies next to loud movies). Others are working with technology firms to introduce equipment to jam cell phones (this is currently illegal under U.S. federal law). Viable alternative? Partly—may reduce bad behavior and interruptions (reduces one reason why people stay away), but doesn‘t give them a new reason to go to the theater. More employees also involve more overhead, but may alleviate security concerns, especially after the violence seen in Colorado at the Cinemark theater when a gunman killed 12 people and injured 70 others. A lawsuit was filed in July 2013, charging Cinemark with failure to hire armed security officers. Smell-O-Vision: (just for fun) This gimmick really existed—the 1960‘s innovation involving the pumping of smells into the auditorium. Think of the swamp smell in a Disney theme park ride. Robert Rodriguez‘s 2011 Spy Kids sequel offered moviegoers scratch-and-sniff cards so they could smell what the characters were smelling. Reviews were mixed… Viable alternative? Unlikely—may create a whole new reason for audiences to stay away! Expanded Services: Increased service touch points such as babysitting, valet parking, ushers, order-from-your-seat food service, etc. Generally transition the industry back to a service industry. Upside—some will find real value in these, but would it be enough? Consistently enough? Some needs can be met outside the theater—upscale malls offer valet services. Others provided in the theater—babysitting—will need new facilities, staff, etc. It would be hard to manage in a largely no-load /peak load business. Viable alternative? Partly—some will find value in this. Reduces reason why some people stay away, but doesn‘t really seem to give them a new reason to go to the theater. Go Upscale: The VIP lounge has arrived at the theater in many forms. Think airline first class— still on the plane, but much more comfortable than coach. Two approaches: 1. The VIP Room: Individual theaters within a complex are designated as VIP areas, accessible only with a premium-priced ticket. From plush, assigned seating with waiter service to couch-style atmospheres with usher service, this approach seeks to mimic a private screening room. Many bundle several services into a package. Many of the larger chains have experimented with this model within their locations. 2. The VIP Theater: Solely upscale location. Cinépolis began with one location in San Diego in 2011 and has since expanded to 21 locations through development and acquisition. Offerings differ by location, ranging from standard theaters with leather rocking seats to full service at-your-seat dining with bar service. Tickets for luxury screens average near $20. Upside—redifferentiates the industry (at least for some). Follows the club VIP model. Downside—what to offer and how to do it in an economically viable way? Reconstructing theaters can be very expensive. Is this about the movie at all? Some in the industry are skeptical of the all luxury concept. TN1-289 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Viable alternative? Likely for those who seek differentiation. Adds a whole new level of ―experience‖ to the theater experience. Most viable in upscale markets—Regal and AMC. ENHANCE REVENUE AND PROFITS FROM EXISTING ELEMENTS: There is potential for increasing all existing revenue streams. Increase Box Office – Revenue Management Approach: Movie ticket pricing follows a simplified structure, with prices differentiated only by evening and matinee. This is highly uncommon in the larger entertainment industry where prices vary widely based on show times, seating location, and the demand for a specific event. Under a revenue model, seats at the local theater would vary considerably for prime seats on a Friday night for the hottest new event film as opposed to a Tuesday afternoon for a largely unnoticed independent film. Under the current revenue model, the likely difference between these two is a slightly discounted matinee—say $6.76 instead of $9.50. Yet, there have been limited attempts at implementing such an approach. Upside—Technologically easy to implement—socially it is more difficult (customer acceptance?). May increase overall traffic. Downside—contracts for exhibition are usually fixed per theater, per screening, per viewers. Viable alternative? This isn‘t a new draw, but seeks to rationalize revenue collection. Some may love it—imagine a $0.99 matinee—while others will pay more (value added beyond ―I was there.‖ Is this differentiation?). May have appeal as it mimics the ―bid‖ model of eBay, and is used for all other entertainment events, but is most often used by airlines, and customers hate that. Expand Revenue – Advertising: Sure moviegoers hate ads, but they are one of the few sources of profits for theaters. Why not make them actually fun using crowd gaming technology—an audience-level interactive game environment. Three Minds, a digital marketing firm, says, ―Think of it as the Wii on steroids— Motion sensors throughout the movie theater track the audience‘s collective movement. Moviegoers swing, sway and rock in their seats as ‗human joysticks‘ that control the game. Working as a team, they direct the onscreen action using a ball and a long paddle like that in the classic Atari game ―Breakout.‖ Brandweek reported impressive results on a UK test of one form of the technology. Over 70 percent of audience members remembered the Volvo brand after they crowd gamed as a joystick to move an on-screen Volvo in an ad/game. Upside—makes an unpopular aspect actually fun. Over the long term, movies could become as interactive as video games. Downside—equipment costs? Will everyone want this? The mess—spills of popcorn, beverages, etc. How quickly will the novelty wear off? TN1-290 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Viable alternative? Maybe. It really overcomes the negative of an existing evil. Possibly charge more for advertising or have more of it. If you can incorporate the same technology into actual feature movies to change the story like a video game, then you‘re on to something. Rocky Horror would never be the same. Expand Revenue – Concessions: There‘s not much room to just raise food prices. But customers will pay more for better food (same margin on more expensive food = more profits). Most theater chains have upgraded their food offerings at the counter. This includes both the breadth of the offerings, such as hot dogs and nachos in addition to popcorn and candy, and the range, think Godiva in addition to M&Ms. Increasingly theaters are incorporating a range of food options in food court style venues, offering fare such as ice cream, pizza, and high-end coffee. Others have entered by blurring the line between theater and restaurant, incorporating bars, lounges, and full service restaurants within the theater complex, often just off the lobby. Some chains are licensing the spaces to restaurant management firms while others are undertaking the task internally. While margins on these items can be considerable, it is hard to beat the 75 percent on the staple popcorn. Increased food service also involves considerable additional overhead costs. The food service business remains near the top of the list in number of firm failures. Viable alternative? Unlikely. Better food is available everywhere. While customers bemoan the $4 box of candy, for most it‘s a bit of nostalgia—the smell of the popcorn, the candy that you don‘t eat anywhere else (Malt balls? Sno-caps?). It‘s difficult to imagine anyone in the coming years reminiscing about that nice cold sushi at the theater. REVIVE THE UNIQUENESS OF THE EXPERIENCE — VIEWING TECHNOLOGY: Full Digital: Convert theaters fully to digital to maximize the quality of the image. Even the best TVs can‘t compete with the theater screen size, because the full benefit of TVs larger than 80 inches is compromised by the viewing distance requirement that exceeds the size of most living rooms. Upside—Great clarity, improved picture, etc. Reduced distribution costs for the studios, but the costs are borne by the exhibitors. May be a gateway for other alternatives (such as alternative programming). Downside—Costs are enormous. Current model is to recoup these with higher ticket prices, but will consumers pay the premium for this? Is there a viable value proposition here? Or will more stay away because of higher prices? Viable alternative? Not really by itself. Cell phone interruptions while watching HD? IMAX®: The nearly extinct large format specialists rode the new millennium with a wave of expansion in both theaters, locations, and content. IMAX®, an acronym for Image MAXimum, originally used 70 mm prints as opposed to the standard 35 mm and a larger screen, minimum 72 ft x 53 ft, engineered to visually surround the audience. IMAX now operates more than 600 TN1-291 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
screens but with digital screens far smaller than the original. Action films, usually in 3D, are an IMAX staple. To capture more of this differentiated revenue, several circuits have begun creating their own super-size screens and formats. IMAX is typically a $3 to $7 premium per ticket. Upside—It‘s a really big screen. May bring in viewers, especially for the big thriller pictures— Spiderman and Batman did well in IMAX. This experience likely cannot be replicated with home technology (at least yet). Could this become the ―new normal‖ —along the lines from black and white to color? Silent to talkies? Downside—Not as much demand for a drama. Very high costs of installation. Viable alternative? Yes, but likely not on the scale needed. How many movies will you go to for $19 a ticket? Most appropriate for Regal and AMC in the larger cities—need a large population base to justify. 3-D: Used in conjunction with IMAX® and independently, today‘s 3-D is a much improved digital adaptation of 1950‘s technology which simulates depth of movement for the audience, but audience interest in 3D movies, available with digitization, appears limited. 3D ticket sales peaked in 2010 at 17 percent of tickets and have since been in decline percent. Additionally, it appears the public DO have a price cap in mind – moviegoers balked at the $20 ticket price for Shrek in New York IMAX 3D locations. Upside—New way to experience a movie when done well. Expansion to 4K 3D is possible but needs theaters equipped with the required projection equipment. Downside—View as a gimmick? 3D at home is easy too. Just add glasses with the DVD. Viable alternative? Maybe. Key question is can it become part of the whole experience and could you experience this at home? The answers are yes and yes, but attendance at 3D theater releases has been declining, and the home experience is still not well received. There exists something of a catch-22: Some attendees will pay a premium for enhanced visual quality, but it requires both exhibitors and film producers to commit to making the investments needed. To date, few of either have. REVIVE THE UNIQUENESS OF THE EXPERIENCE — CONTENT: Go Beyond Motion Pictures: There is no technical reason theaters, once equipped with digital projection, can‘t be used as extra-large television screens. Look for more concerts, sporting events, television season opener and finales, corporate and shareholder meetings, and other ―events‖ to appear at your local multiplex. The NFL, NBA, and college football are among those who have experimented with broadcasts of sporting events to digital theaters. Some technological obstacles remain, such as satellite broadcast interruptions, as well as social ones such as most theaters lacking permits to serve beer. Some sports broadcasts have been offered in 3D. TN1-292 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Upside—largely untapped revenues. May bring in non-peak audiences (Sunday afternoon, Monday night). Downside—want to watch the Superbowl in a dark theater for 4 hours? Beer (theaters typically now get special one day permits), social aspects (stuck in theater seat versus moving around, talking permitted?) May need VIP-type areas to fully work. Viable alternative? Real possibility to do so. NOTE – ADDITIONAL READING, VIDEO STORIES: The Motion Picture Association of America (MPAA) keeps track of data related to the industry. Visit the site https://www.motionpictures.org/. Take a look at the financial picture of the big four chains: AMC is private, and the only chain that did NOT file for bankruptcy. See their website at http://www.amctheatres.com/ and an overview at http://en.wikipedia.org/wiki/AMC_Theatres. They have also had the most successful international expansion, especially after their acquisition by Dalian Wanda Group. Regal Entertainment Group‘s info is at http://www.regmovies.com/. Cinemark‘s website is http://www.cinemark.com/ and financial info is at http://finance.yahoo.com/q?s=cnk&=. A stock analyst commentary from July 2009 illustrates how the economics might play out, and which industries might benefit from a blockbuster movie. For Transformers: Revenge of the Fallen, the director Michael Bay gets 10 percent of net profits from studio Viacom, and the movie projection system IMAX will see benefit because that was the technology used to make the movie. A movie theater chain such as Regal will probably see the least profit from this, while the teen and tween retailers in the malls where Regal has its theaters may see ―the most Transformational biz‖ from merchandise based on the movie characters: https://seekingalpha.com/article/148459-the-key-to-movies-is-the-mall. What does this say about the ongoing potential for cinemaplexes to make money? One environmental factor alluded to in the case is the sociocultural issue of the quality of the movie-going experience. With the explosion of cell phones comes texting as well as talking. Here‘s a video with one moviegoer‘s ―rant‖ about the problems in theaters these days: http://www.youtube.com/watch?v=fJa4gk4c2HU. Here‘s a video news story about the opening of a new drive-in movie theater in Texas in 2006. This is a mom-and-pop business. The business mission appears to be to ―make memories‖ from the drive-in experience: http://www.youtube.com/watch?v=F-txHaqukGI. Are there any alternatives to the problems with the in-theater movie experience? TN1-293 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood Teaching Note Case 19 — Campbell: How to Keep the Soup Simmering
Case Objectives 1. To help students understand how a firm makes decisions about what business the corporation should compete in and how growth should be accomplished. See the table below to determine where to use this case: NOTE: Although the case is primarily indicated for Chapters 5 and 6, instructors can build up to that discussion by noting the importance of the external environment and of internal analysis in making strategic decisions. CASE OBJECTIVES TABLE Chapter Use Key Concepts 1: Strategy Concept 2: External Environment 3: Internal Analysis 5: Business-Level Strategy 6: Corporate-Level Strategy 7: International Strategy
Strategic management Industry competition five forces; general environment Value-chain analysis; resource-based view of the firm; VRIN Competitive strategy; generic strategies
Additional Reading and/or Exercises NOTE web articles NOTE financial info NOTE web article and video
Diversification; synergy; core NOTE web articles, and competencies; acquisitions video International strategies; multi-domestic vs. NOTE web articles global
Case Synopsis In 2019, Campbell Soup was brimming with problems. In less than a year, the company had gone through three CEOs. Denise Morrison, who formerly headed the company‘s North American soup business, had taken over as CEO in 2011. This had been received with a lukewarm response from investors, who wondered what drastic changes Morrison had in store. By 2017, with Morrison at the helm, Campbell had launched more than 50 new products, including 32 new soups, and had acquired California juice and carrot seller Bolthouse Farms for $1.55 billion, the largest acquisition in Campbell‘s history. The company also added Pacific Foods, a leader in organic soups and broths, and Snyder‘s Lance––the second largest salty snack maker in the United States––to their portfolio. Despite these efforts the company failed to accomplish an impressive comeback. Morrison resigned in 2018 and interim CEO Keith McLoughlin was charged with implementing actions meant to return the company to long-term organic sales and earnings growth. The intent was to become a more focused company in the core North American market and achieve this by reducing costs and increasing asset efficiency, optimizing the company‘s portfolio and divesting TN1-294 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
assets and businesses. Also on the table were options to either split the company or sell it off completely. Campbell operated in the highly competitive global food industry and experienced worldwide competition for all of its principal products. The principal areas of competition were brand recognition, quality, price, advertising, promotion, convenience, and service. A leading food producer in the United States, Campbell Soup had some presence in approximately 9 out of 10 U.S. households. However, in recent years, the company faced a slowdown in its soup sales, as consumers were seeking more convenient meal options, such as ready meals and dining out. Regarding global growth, international expansion of the soup products into Russia had not worked, and the effects of efforts to make inroads into the Chinese market were still uncertain. Historically, consumption of soup in Russia and China had far exceeded that in the United States, but in both countries nearly all of the soup was homemade. Campbell had hoped to make an inroad by offering a stock soup base as an introduction to the brand. The U.S. packaged-food industry had recorded faster current-value growth in recent years, mainly due to a rise in commodity prices. In retail volume, however, many categories saw slower growth rates because Americans began to eat out more often again. After years of expansions and acquisitions, U.S. packaged-food companies were beginning to downsize. Under interim CEO McLoughlin, Campbell divested two of its non-core businesses: Campbell international and Campbell Fresh, which included previous acquisition Bolthouse Farms. In 2019 new CEO Mark A. Clouse had plans to rebase Campbell‘s soup business and strengthen its value proposition in the marketplace with a back-to-basics approach. There was a future opportunity to have additional cost savings, which would be driven by streamlining the organization, expanding zero-based budgeting efforts, and continuing to optimize the manufacturing network. Would this new management and new plan prove more effective? Teaching Plan The primary subject matter of this case concerns the importance of doing an external and an internal analysis before selecting a business unit strategy. Therefore, this is a case that is well suited for a full investigation of strategic analysis and formulation. An analysis of Porter‘s five forces can be used to analyze the environment in the packaged food industry. By building a sound foundation in external and internal environmental analysis, and identifying possible business, corporate-level, and international strategies, students can evaluate Campbell‘s progress in implementing them. As such, this case is best positioned midway through the course, after students have had an introduction to the concepts of strategy analysis and formulation.
Icebreaker This case can start with an icebreaker. Starting from the perspective of a customer may make it easier for students to transition to a strategic analysis. TN1-295 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Did you have soup this week, month, year? Was it homemade or canned? Have you ever tried Campbell’s products? Over the last few years have you seen any changes in the taste or look? What do you think about these changes? Because Campbell is present in over 85 percent of U.S. households, most of the students should be familiar with the product. Also, you can discuss the soup culture in the United States. Who still eats soup, and why? Before engaging in discussion, you might want to test students’ basic knowledge regarding the case and the major concepts. Here are some multiple-choice questions to use. (This will get the students‘ attention—they can‘t answer these if they haven‘t read the case!) Which statement is most true? a. More soup is consumed in China than in the United States. b. Campbell Soup products are in approximately 9 out of 10 U.S. households. c. Campbell brands include Pace Salsa, V8 juice, and Pepperidge Farm cookies. d. Russians eat soup more than 5 times a week, on average, compared with once a week among Americans. e. All statements are true. ANSWER: e. ALL these statements are true! Campbell has higher net income than its rival Kraft Foods. a. Yes b. No ANSWER: b. Of the major competitors listed in the case: Nestle, General Mills, Kraft/Heinz, Campbell had by far the lowest net income. (See Case Exhibit 4.) Summary of Discussion Questions Below is a list of the suggested discussion questions. You can decide which questions to assign and which additional readings or exercises to include to augment each discussion. Refer back to the Case Objectives Table at the beginning of this Teaching Note to identify any additional readings and/or exercises so they can be assigned in advance. 1. What are key forces in the general and industry environment that affect Campbell‘s choice of strategy? 2. What internal resources does Campbell have that may give it a competitive advantage? 3. What do you think Campbell should do to counter the competition and remain in the top of the soup business? Discussion Questions and Responses Prior to answering the specific case questions, the instructor might want to position the discussion by reviewing what strategic management really is.
TN1-296 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Reviewing Chapter 1: Strategic Management Strategy is all about the ideas, decisions, and actions that enable a firm to succeed. See Chapter 1, Exhibit 1.1: Strategic management consists of the analyses, decisions, and actions an organization undertakes in order to create and sustain competitive advantages: ● strategy directs the organization toward overall goals and objectives ● includes multiple stakeholders in decision making ● incorporates both short-term and long-term perspectives ● recognizes tradeoffs between efficiency (cost) and effectiveness (performance) Leaders face a large number of complex challenges. Leaders must be proactive, anticipate change, and continually refine changes to their strategies. This requires a certain level of ―ambidextrous behavior,‖ where leaders are alert to opportunities beyond the confines of their own jobs and are also cooperative and seek out opportunities to combine their efforts with others. Leaders must make strategic management both a process and a way of thinking throughout the organization. During strategic analysis, the leader does ―advance work‖ to anticipate unforeseen environmental developments, identify unanticipated resource constraints, and assess changes in his or her preferences for how to manage. During strategy formulation, the organization addresses the issue of how to compete in a given business to attain competitive advantage. Strategies are formulated at the business, corporate, and international levels. Entrepreneurial initiatives may also play a role. In strategy implementation, depending on the type of organization structure, the leader might include key individuals in a discussion about selecting which strategies might be best to implement at which level within the organization. The leader must ensure proper strategic controls and organizational design and establish effective means to coordinate and integrate activities within the firm, as well as with suppliers, customers, and possible alliance partners. Leaders should also be committed to excellence and ethical behavior while promoting learning and continuous improvement. Here‘s where innovation is important. The basic question strategic management tries to answer is: How can we create competitive advantages in the marketplace that are not only unique and valuable but also difficult for competitors to copy or substitute? Retired CEO Conant‘s mission for Campbell was ―together we will build the world‘s most extraordinary food company by nourishing people‘s lives everywhere, every day.‖ On her first day as CEO in August 2011 new CEO Morrison was set on employing a new vision for the company: ―Stabilize the soup and simple meals businesses, expand internationally, grow faster in healthy beverages and baked snacks—and add back the salt.‖ In August 2018 Campbell, under interim CEO McLoughlin, announced significant actions it was taking as part of its Board-led strategy and portfolio review to improve performance and drive shareholder value. In 2019 new CEO Mark Clouse took control, saying he was honored to lead TN1-297 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Campbell and its portfolio of iconic brands into the next chapter of the company‘s storied history. Although this does reference the iconic nature of the Campbell brand, is this an inspiring mission/vision? Does it provide enough guidance for a sustainable strategy? NOTE — ADDITIONAL WEB LINKS The required investor ―About‖ statement for Campbell reads: Campbell (NYSE:CPB) is driven and inspired by our Purpose, ―Real food that matters for life‘s moments.‖ For generations, people have trusted Campbell to provide authentic, flavorful and affordable snacks, soups and simple meals, and beverages. Founded in 1869, Campbell has a heritage of giving back and acting as a good steward of the planet‘s natural resources. The company is a member of the Standard and Poor‘s 500 and the Dow Jones Sustainability Indexes. For a strategy update from 2015, under Morrison, Campbell‘s key strategic imperatives were outlined, ―including plans to be more transparent about how its foods and drinks are made to build greater consumer trust; and to increase the company‘s focus on faster-growing categories and regions, such as health and well-being, packaged fresh and developing markets.‖ The press release also discussed its ongoing enterprise redesign and cost savings initiatives, which included three new divisions: Americas Simple Meals and Beverages; Global Biscuits and Snacks; and Campbell Fresh, which included Bolthouse Farms. See http://www.campbellsoupcompany.com/pressrelease/campbell-to-provide-update-on-businessstrategies-and-outline-key-initiatives-for-fiscal-2016/. In August 2018, after Morrison‘s resignation in May, the Board-led strategy and portfolio review under interim CEO McLoughlin recommended actions: specifically that Campbell would build a focused North American company, divesting Campbell International and Campbell Fresh, which included Bolthouse Farms. From the released statement: ―Campbell will continue to provide consumers with great tasting, high-quality real food. Across the portfolio, the company‘s brands will leverage consumer insights and trends to drive relevance, including health and well-being, snacking and convenience. Each of Campbell‘s brands will be managed within a focused and disciplined framework of two differentiated portfolio roles: drive profitable growth; maximize margin and cash flow.‖ See https://www.campbellsoupcompany.com/newsroom/pressreleases/campbell-announces-significant-actions-following-board-led-strategy-portfolio-review/ In December 2018, Campbell announced new CEO, Mark A. Clouse. Clouse was previously CEO of Pinnacle Foods, and had experience at Mondelez and Kraft Foods, so he was expected to bring ―a wealth of experience in the food industry, as well as a fresh perspective on the opportunities and challenges‖ facing Campbell. Clouse said ―I am committed to delivering Campbell‘s strategic objectives and look forward to partnering with the Board and working alongside the company‘s many talented employees to deliver sustainable, long-term growth. I am confident that together we can build a prosperous future for Campbell and all of its stakeholders.‖ See https://www.campbellsoupcompany.com/newsroom/press-releases/campbellnames-mark-a-clouse-president-chief-executive-officer-and-a-director-of-the-board/ To get a sense of what Campbell‘s might stand for now, see its stated purpose at https://www.campbellsoupcompany.com/about-campbell/ TN1-298 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
1. What are key forces in the general and industry environment that affect Campbell’s choice of strategy? Referencing Chapter 2: Analyzing the External Environment of the Firm Organizational leaders must become aware of factors in the overall environment that might affect their ability to create a competitive advantage. So how do managers become environmentally aware? Scanning, monitoring, and gathering competitive intelligence, and using these inputs to develop forecasts prepares the firm to do more extensive analysis of the forces in the general environment and the industry or competitive environment. Environmental scanning involves surveillance of a firm‘s external environment to predict environmental changes and detect changes already underway. It is a BIG PICTURE viewpoint of the industry/competition, looking for key indicators of emerging trends—what catches your eye? Alerts the firm to critical trends before changes have developed a discernible pattern and before competitors recognize them. Environmental monitoring is a firm‘s analysis of the external environment that tracks the evolution of environmental trends, sequences of events, or streams of activities. Leaders need to monitor the trends that have the potential to change the competitive landscape—what do you want to track? Firms need to CHOOSE the trends identified via the scanning activity, and regularly monitor or track these specific trends to evaluate the impact of these trends on their strategy process. What factors or trends might be most important to Campbell Soup? To assess how the external environment might affect the firm‘s strategy, it‘s necessary to take a look at the factors in the general external environment. Campbell Soup must consider the political/legal, economic and global, sociocultural and demographic, and technological forces that might affect the ability of the firm to deliver its products and sustain its business. See which factors in the general environment we might pick that have a significant impact on the soup and processed food business. Political-Legal: all food producers need to follow relevant laws in each country where they do business: nutrition guidelines, labeling, packaging and product quality. Changes in the food laws can affect all processed food producers. Economic: an economic downturn can make customers more reluctant to eat out, so cheap, make-at-home meals might become more attractive. Demographic: in the U.S. customers were younger, so staying in touch with the tastes and needs of this ―hipster‖ generation was more important than before. Sociocultural: tastes had changed, at least in the United States, with customers looking for more convenient meal options, such as ready meals. Both quality and convenience are key. Soup is no longer as popular as it once was. Internationally, nearly all soup is homemade. Concerns over TN1-299 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
healthy food and beverage offerings meant watching the amount of salt and fat, which affected taste. Technological: as consumers became more ―wired,‖ finding opportunities to reach these consumers, for instance with iPhone recipe apps, became more important. Technology is also a factor in production and distribution activities—the more efficient these activities are, the better for the producer. Several new technology applications were becoming available for the industry. Based on the general environmental forces, the industry faced challenges. Things were changing, especially customer tastes, and the processed food industry had to adapt. Choosing the right ―recipe‖ could be critical for long-term success. It‘s also necessary to assess the segments of the external competitive environment that include competitors, customers, and suppliers, substitutes and new entrants. Porter’s five forces model allows strategists to anticipate where the industry might be most vulnerable. See Exhibit 2.7.
Suggested: Suppliers in the packaged food industry have low bargaining power. The distribution channels are easily accessible, and the various companies have the ease of interchange between suppliers.
Suppliers’ Power Low Suggested: The threat of entry is medium. There are low entry barriers, such as low capital requirements, easy learning curves and acquisition of the know-how, but at the same time the new entrants should expect retaliation from incumbents and difficulty distributing production.
Substitutes Threat
Suggested: There is a high threat from substitute products. Consumers have a variety of choices, such as frozen food, dining out at a restaurant or a fast-food place.
High
Rivalry
Suggested: Many rivals compete for market share. There is worldwide competition in all packaged goods products.
High
Buyers’ Power High
Threat of New Entrants Med
Suggested: Products are generally resold to consumers in retail food chains, mass discounters, mass merchandisers, club stores, convenience stores, drug stores and other retail, commercial and non-commercial establishments.
Campbell Soup, like other packaged food companies, was confronting two key threats: ● One was from the high levels of rivalry, especially given the perpetual threat from TN1-300 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
substitutes. ● The second was the growing power of buyers such as discount chains. Clearly, there were a few large and equally balanced firms that were pitched in a battle for a greater share of the global market. Changing customer tastes and the threat of substitutes were resulting in an increase in this rivalry. In addition, although supermarkets had been the main retail channel for packaged food producers, the ―big box‖ discounters, including drugstore chains and the Dollar Store-type outlets, were increasing the amount of shelf space allocated to food. Competition focused on brand recognition, quality, price, advertising, promotion, convenience, and service. Capturing the end user‘s support of the brand was important, because that demand would drive the chain buyers to stock more product. Suppliers—Low Threat: The suppliers in the packaged food industry have low bargaining power. The distribution channels are easily accessible, and the various companies have the ease of interchange between the suppliers if they consider doing so necessary. The ingredients required for the manufacture of Campbell‘s food products are purchased from various suppliers. The company recognizes that disruption to the company‘s supply chain could adversely affect Campbell‘s business. In the case of damage or disruption to the company‘s suppliers or to the company‘s manufacturing or distribution capabilities—due to weather, natural disaster, fire, terrorism, pandemic, strikes, or other events—the company‘s ability to manufacture and sell its products could be impaired. The company needs to take adequate measures so as to be able to react to these scenarios that could adversely affect its business or financial results. Buyers—High Threat: In most of the company‘s markets, sales activities are conducted by the company‘s own sales force and through broker and distributor arrangements. The company‘s products are generally resold to consumers in retail food chains, mass discounters, mass merchandisers, club stores, convenience stores, drug stores and other retail, commercial and noncommercial establishments. The ultimate buyers of Campbell products do not have any significant bargaining power. They do have the choice to switch to another retailer, but their actual power to affect prices is very small. In general, major retail buyers such as Wal-Mart affect the food and beverage industry more significantly because they have the ability to offer sales or price discounts on certain products in a way that affects product sales. Campbell may be adversely impacted by the increased significance of some of its customers. The disruption of supply to any of the company‘s large customers, such as Wal-Mart Stores, Inc., for an extended period of time could adversely affect the company‘s business or financial results. In addition, the retail grocery trade continues to consolidate, and mass-market retailers continue to become larger. In such an environment, a large retail customer may attempt to increase its profitability by lowering the prices of its suppliers or increasing promotional programs funded by its suppliers. If the company is unable to use its scale, marketing expertise, product innovation and category leadership positions to respond to these customer demands, the company‘s business or financial results could be negatively impacted.
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Teaching Note
Case 1: Robin Hood
Industry Rivalry—High Threat. The food and beverage industry is characterized by intense rivalry. The company experiences worldwide competition in all of its principal products. This competition arises from numerous competitors of varying sizes, including producers of generic and private label products, as well as from manufacturers of other branded food products, which compete for trade merchandising support and consumer dollars. As such, the number of competitors cannot be reliably estimated. The principal areas of competition are brand recognition, quality, price, advertising, promotion, convenience and service. The company operates in a highly competitive industry. The company operates in the highly competitive food industry and experiences worldwide competition in all of its principal products. A number of the company‘s primary competitors have substantial financial, marketing, and other resources. A strong competitive response from one or more of these competitors to the company‘s marketplace efforts could result in the company reducing pricing, increasing marketing or other expenditures, or losing market share. These changes may have a material adverse effect on the business and financial results of the company. Barriers to Entry—Medium Threat: The threat of entry is medium. There are low entry barriers, such as low capital requirement, easy learning curves and acquirement of the knowhow, but at the same time the new entrants should expect retaliation from the incumbents. Substitutes—High Threat: There is a high threat from substitute products. Consumers have a variety of choices, such as dining out in a restaurant or a fast-food place. At the same time the fact that consumers are moving toward more healthy choices may work to the benefit of companies such as Campbell Soup Co.
NOTE — ADDITIONAL WEB LINKS TO FINANCIAL INFORMATION: One interesting way to evaluate the competitiveness in the industry is to look at comparative financial performance from the perspective of an investor. Because Campbell is a publicly traded firm, take a look at http://finance.yahoo.com/q/co?s=CPB to see how it compares with its peers. The description of the company in April 2020 is as follows: ―Campbell Soup Company, together with its subsidiaries, manufactures and markets food and beverage products. It operates through Meals & Beverages and Snacks segments. The Meals & Beverages segment engages in the retail and foodservice businesses in the United States and Canada. This segment provides condensed and ready-to-serve soups; Swanson broth and stocks; Pacific Foods broth, soups, non-dairy beverages, and other simple meals; Prego pasta sauces; Pace Mexican sauces; Campbell's gravies, pasta, beans, and dinner sauces; Swanson canned poultry; Plum baby food and snacks; V8 juices and beverages; and Campbell's tomato juice. The segment also offers simple meals and shelf-stable beverages in Latin America. The Snacks segment retails Pepperidge Farm cookies, crackers, fresh bakery, and frozen products in the United States; Milano cookies and Goldfish crackers; and Snyder's of Hanover pretzels, Lance sandwich crackers, Cape Cod and Kettle Brand potato chips, Late July snacks, Snack Factory Pretzel Crisps, Pop Secret popcorn, Emerald nuts, and other snacking products in the United States and Canada. The segment also engages in the chips business in Europe. The company sells its products through retail food chains, mass discounters, mass merchandisers, club stores, convenience stores, drug stores, and dollar stores, as well as e-commerce and other retail, commercial, and non-commercial establishments, and TN1-302 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
independent contractor distributors. Campbell Soup Company was founded in 1869 and is headquartered in Camden, New Jersey.‖ 2. What internal resources does Campbell have that may give it a competitive advantage? Referencing Chapter 3: Analyzing the Internal Environment of the Firm When one firm outperforms others by a wide margin over a long period of time, it‘s important to figure out how this could be. The answer may lie in how that firm arranges its activities and creates unique bundles of resources that allow it to sustain a competitive advantage. Students should assess the relationships between the elements in Campbell‘s value chain. Remember, value-chain analysis is a strategic analysis of an organization that uses value-creating activities. Value is the amount that buyers are willing to pay for what a firm provides them and is measured by total revenue, a reflection of the price a firm‘s product commands, and the quantity it can sell. A firm is profitable when the value it receives exceeds the total costs involved in creating its product or service. Creating value for buyers that exceeds the costs of production (i.e. margin) is a key concept used in analyzing a firm‘s competitive position. To answer the question of what strategy Campbell should choose, that strategy should be adequately supported by its value chain and other internal resources. Campbell must assess the relationships between the elements in its value chain. Every activity should add value. Take a look at Exhibit 3.1 to see the value chain activities. Here is what an assessment of this might look like for Campbell (NOTE some of this information is from outside sources, not in the case): Value chain activity
How does Campbell create value for the customer? What challenges does it have in its value chain?
Primary: Inbound logistics (distribution facilities, material control systems, warehouse layouts)
Operations (efficient work-flow design, quality control systems)
Outbound logistics (consolidation of goods, efficient scheduling, finished goods processing)
The company‘s principal executive offices and main research facilities are company-owned and located in Camden, New Jersey. Campbell has manufacturing facilities in multiple U.S. states and countries around the world. Products take advantage of overlaps in raw material processing such as tomatoes and peppers. Company‘s manufacturing and processing plants are well maintained and are generally adequate to support the current operations of the businesses. Campbell implemented certain productivity and quality projects in manufacturing facilities. Campbell uses an electronic network to facilitate its continuous-replenishment program with its most progressive retailers. Both Campbell and the retailers come out ahead. TN1-303
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Teaching Note Marketing and Sales (motivated salespeople, innovative advertising & promotion, effective pricing, proper ID of customer segments and distribution channels)
Service (ability to solicit customer feedback & respond)
Case 1: Robin Hood Sales activities are conducted by the company‘s own sales force and through broker and distributor arrangements. The company has strong market positions in its segments in the geographies in which it competes, and its businesses in these categories respond well to product innovation and consumer marketing. The company offers various sales incentive programs to customers and consumers, such as cooperative advertising programs, feature price discounts, in-store display incentives and coupons. All of the company‘s segments sold products to supermarkets, discounters, drugstores and mass merchandisers, giving them multiple points of feedback.
Secondary (or support): Procurement (procurement of raw materials, ―win-win‖ relationships with suppliers)
Technology development (innovative culture and qualified personnel) Human resource management (effective recruitment, incentive and retention mechanisms)
General Administration (effective planning systems to establish goals and strategies, access to capital, effective top management communication, relationships with diverse stakeholders)
The ingredients required for the manufacture of the company‘s food products were purchased from various suppliers. While all such ingredients were available from numerous independent suppliers, raw materials were subject to fluctuations in price attributable to a number of factors. To help reduce some of this price volatility, the company used various commodity risk management tools for a number of its ingredients and commodities Campbell sustains an appropriate technology infrastructure to provide and maintain connections among its marketing, sales, manufacturing, logistics, customer service, and accounting functions. Re. human resource management, as per CEO Conant‘s statement, the company ―possessed the people‖ to actualize the mission of building the world‘s most extraordinary food company. Management training helped build strong engagement. Under Mr. Conant‘s direction, Campbell made many reforms through investments in improving product quality, packaging, marketing, and creating a company characterized by innovation. During his tenure the company improved its financial profile, upgraded its supply chain system, developed a more positive relationship with its customers, and enhanced employee engagement. CEO Morrison grew the business through acquisition. New CEO Clouse was looking for opportunities to divest and focus on efficiencies.
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Teaching Note
Case 1: Robin Hood
Primary Activities Campbell had historical strength is all its primary activities, especially its inbound, operational and outbound activities. These were well coordinated to add value through the supply chain.
Secondary Activities Campbell had added value in its procurement processes and appeared well aware of the need for supportive technological processes in order to continue to sustain that advantage. Retired CEO Conant had appeared to establish adequate goals and strategies; however, CEO Morrison had failed to accomplish any significant growth. Interim CEO McLoughlin and new CEO Clouse had the job of refocusing and paying attention to operational efficiencies and profitability. To answer the question of how to support a competitive strategy, it‘s important to consider the concept of the resource-based view of the firm, and the three key types of resources: tangible resources, intangible resources, and organizational capabilities. Campbell‘s profile might look like this: Tangible Resources: Financial: Douglas R. Conant‘s focus on winning in both the marketplace and workplace had historically produced an increase in net sales. Morrison‘s expansion efforts had failed to produce increased revenue. McLoughlin pointed out that decreased earnings in fiscal 2018 ―reflect the need‖ for ―significant‖ action. Physical: Campbell‘s physical facilities certainly seemed adequate. Technological: Campbell seemed to maintain an adequate technological system that allowed it to operate its businesses. Organizational: Campbell was able to produce new varieties of products in the past using organizational resources. Intangible Resources: An important issue to focus on here is the importance of intangible resources like innovation and reputation. Especially in mature brands, sustaining reputation is essential. Look at any intangible resources that are controlled by Campbell that might enable it to develop and implement valuecreating strategies. Human: CEO Conant‘s and then CEO Morrison‘s focus on innovation appeared to revitalize the workforce. Campbell University existed to provide manager training across the organization.
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Teaching Note
Case 1: Robin Hood
Innovation and creativity: Campbell was constantly adding new products that better reflected the consumer‘s needs and preferences. Reputation: Excellent. Campbell started its business in 1869 and now sells its products in over 100 countries. Campbell’s name and brand logo represented reliability in product quality. In addition, Campbell was repeatedly named to the Dow Jones Sustainability Indexes (DJSI), recognizing the company‘s strategic and management approach to delivering economic, environmental, and social performance. Organizational Capabilities: The ability to produce new varieties of products for their customer‘s health and wellness and its expansion into emerging markets meant Campbell had capabilities to support a sustainable competitive advantage. Determining whether the internal resources are valuable, rare, difficult to imitate, or difficult to substitute (VRIN) can help a firm sustain a competitive advantage. See Exhibit 3.6. Applying the VRIN concept shows that Campbell had valuable resources, which nearly every competent firm should have in order to compete, especially the physical, human, and technological resources, but none were rare, and none were inimitable or non-substitutable, except perhaps the brand reputation. Here‘s where the need for strong organizational resources and effective general administration activities becomes apparent. NOTE — ADDITIONAL WEB LINKS AND VIDEO: Highlighting the importance of this brand reputation, in 2019 Campbell‘s Soup celebrated ―150 years of Campbell,‖ saying ‗It‘s been said that the greatest ideas are often the simplest ones. We couldn‘t agree more. You see, Campbell Soup Company was born from a simple idea: to make delicious and affordable food, accessible to all. 150 years later we‘re still staying true to this notion. 2019 marks our 150th anniversary. Reaching such a significant milestone makes you stop, reflect and acknowledge what got you there. For us, it‘s our people. They are a testament to our heritage, to our Purpose and values, and to the iconic brands that Campbell employees—past and present—have created and continue to nurture and grow… Campbell is a powerhouse of great brands and amazing talent. As we build our future, we‘ll push harder, always striving, constantly aspiring to succeed, until we deliver. We‘re ready for what‘s next.‖ See the story and video at https://www.campbellsoupcompany.com/150-years-of-campbell/ 3. What do you think Campbell should do to counter the competition and remain in the top of the soup business? Referencing Chapter 5: Business-Level Strategy A competitive strategy is linked to the value chain and supported by intangible assets. Campbell had historically good coordination across the value chain. Resources and assets should provide a firm with the ability to create products that are unique and valuable to customers, and Campbell did have VRIN resources and enduring intangible assets, especially the reputation, to allow it to do this.
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Teaching Note
Case 1: Robin Hood
In order to achieve a sustainable competitive advantage, Campbell had to assess its ability to contend with other processed food companies. The question of how to compete in a given business to attain competitive advantage requires an assessment of the types of competitive strategies, including the three generic strategies that are used to overcome the five forces and achieve a competitive advantage: 37. Overall cost leadership Low-cost-position relative to a firm‘s peers Manage relationships throughout the entire value chain 38. Differentiation Create products and/or services that are unique and valued Non-price attributes for which customers will pay a premium 39. Focus strategy Narrow product lines, buyer segments, or targeted geographic markets Attain advantages either through differentiation or cost leadership Generic strategies are plotted on two dimensions: competitive advantage and strategic target. The overall cost leadership and differentiation strategies strive to attain advantages industrywide, while focusers have a narrow target market in mind. Campbell had products that targeted different types of consumers and their health concerns, such as blood pressure or weight loss. When creating new products in the market while managing contract prices on raw materials, consolidated manufacturing, stable distribution, controlled advertising costs and brand management, Campbell was maintaining a low-cost strategy. Campbell‘s operational activities, the value chain synergies, propelled the firm toward a low-cost strategy. But despite this, Campbell soup was not popular in the consumer‘s eyes. There were plenty of other choices of soup on the market. The challenge was to find ways to make soup more popular or find some other popular things for Campbell to do. CEO Douglas Conant worked to create a company characterized by innovation. During his tenure, the company improved its financial profile, upgraded its supply chain system, developed a more positive relationship with its customers, and enhanced employee engagement. Conant focused on winning in both the marketplace and the workplace. Was it necessary to put more emphasis on differentiation? Would a combination strategy make sense for Campbell? Referencing Chapter 6: Corporate-Level Strategy Corporate strategy focuses discussion on the questions of what businesses a corporation should compete in, and how the businesses should be managed so they can create ―synergy‖—creating value through entering new markets or developing new technologies, either through related or unrelated diversification. Diversification is the process of firms expanding their operations by entering new businesses. Some possibilities include: TN1-307 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note ● ● ● ●
Case 1: Robin Hood
Mergers and acquisitions Strategic alliances Joint ventures Internal development
Whatever the choice, it should create value for all stakeholders—employees, suppliers, distributors, and the organization‘s owners themselves. The choice of diversification strategy should create synergy so that all parties gain something they would not have had on their own. Companies can achieve synergy through diversification in two ways: Through related businesses (horizontal relationships) ● Sharing tangible resources ● Sharing intangible resources ● Leveraging core competencies Through unrelated businesses (hierarchical relationships) ● Value creation derives from corporate office ● Leveraging support activities Core competencies reflect the collective learning in organizations—how to coordinate diverse production skills, integrate multiple streams of technologies, and market diverse products and services to create value. Core competencies must create superior customer value; the different businesses must all have similar elements in the value chain that require similar skills; and these activities or skills must be difficult for competitors to imitate. Campbell operated with a related business model. Given its core competencies in the management of its supply chain, it made sense to keep the various businesses in areas where resources could be easily shared. Campbell had grown primarily through acquisition and internal development. However, some acquisitions, especially Bolthouse Farms, had been costly and had not produced the anticipated financial results. Recent acquisitions also included Oregon‘s Pacific Foods and Snyder‘s-Lance snack food companies, which were considered to include more opportunities for shared resources. In 2018 the company decided to divest two of their non-core businesses: Campbell International, which included Australia‘s Arnott‘s Biscuits, Denmark‘s Kelsen Group, and operations in Indonesia, Malaysia, Hong Kong and Japan; and Campbell Fresh, which included Bolthouse Farms, Garden Fresh Gourmet and the U.S. refrigerated soup business. These were perceived as not related enough to justify continued investment in operations. NOTE — ADDITIONAL WEB LINKS: One of Campbell‘s strengths is its brand. As a way to enhance brand awareness, in 2013 Campbell announced that its soups, primarily the Chicken Broth & Noodle, would be available in Keurig K-cups as ―fresh-brewed‖ mini-meal options. CEO Morrison said, ―This innovative partnership is a win for consumers and for both companies and represents another important step TN1-308 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
as Campbell expands into higher-growth spaces.‖ Will this increase the brand‘s presence and drive more sales in other product categories? See https://www.campbellsoupcompany.com/newsroom/press-releases/campbell-soup-company-andgreen-mountain-coffee-roasters-inc-to-bring-campbells-soup-to-keurig-brewers/. for the whole story. Although this might have been an innovative idea, it didn‘t work. In 2016 Campbell discontinued its K-Cup single-serve soups with this statement: ―The launch of Campbell‘s Fresh Brewed Soup for the Keurig machine was initially enthusiastically received by retail customers, consumers and K-Cup fans. However, over time, the product has not performed to our expectations, so we made the difficult decision to discontinue it from stores… We will continue to focus our innovation efforts on our core soup portfolio.‖ See https://www.fooddive.com/news/why-campbell-discontinued-its-k-cup-soups-line/419401/. In June of 2013, Campbell acquired Plum Organics, ―a leading provider of premium, organic foods and snacks that serve the nutritional needs of babies, toddlers and children. ‗Plum‘ is the No. 2 brand of organic baby food in the United States and is currently the No. 4 baby food brand overall. Plum Organics generated $93 million in gross sales for the year ended Dec. 31, 2012.‖ See https://www.campbellsoupcompany.com/newsroom/press-releases/campbell-to-acquireplum-organics-a-leading-premium-organic-kids-nutrition-company/. Do these recent acquisitions and alliances bode well for the company? Are the synergies apparent here? For a look at all Campbell‘s current brands, see https://www.campbellsoupcompany.com/campbell-brands/ In June 2013, Forbes agreed that Campbell appeared to be reinventing itself with innovations and acquisitions and putting a lot of emphasis on branding and consumer outreach, especially to Hispanics and Millennials. For a report on how Campbell was reaching out, see the article at http://www.forbes.com/sites/avidan/2013/06/03/soups-on-at-campbells-as-it-reinvents-itselfwith-innovations-and-acquisitions/ For more about Morrison‘s overall strategy, see http://www.forbes.com/sites/jennagoudreau/2013/02/21/the-campbell-soup-turnaround-isheating-up-will-it-sizzle-or-fizzle-out/, which includes a timeline and video report on the new initiatives. But not everyone was buying this new brand strategy, especially the idea of ―soup in a bag.‖ Stephen Colbert poked fun at the soup pouch idea in November 2011 in this video: http://www.huffingtonpost.com/2012/11/16/stephen-colbert-soup_n_2143500.html In 2018 CEO Morrison announced Campbell was creating a new unit focused on accelerating innovation, driving long-term growth and developing new business models that will shape the future of food. The Accelerator would consist of the Campbell Fresh business, the company‘s existing Digital and e-Commerce unit, and a network of cross-functional teams that could be rapidly deployed against key growth priorities. It would include important capabilities and functions spanning strategy, innovation, consumer experience and new distribution models. TN1-309 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Morrison said, ―Campbell‘s Accelerator unit is designed to drive growth and build critical capabilities with an agile and dynamic operating model that, over time, will expand to other parts of the company and become the way we work in the future.‖ See https://www.campbellsoupcompany.com/newsroom/press-releases/campbell-announcesstrategic-reorganization/ It was hoped this new ―accelerator‖ strategy would lead to an increase in overall market share and revenue, but shortly after this announcement Morrison retired after being CEO for seven years. Speculation was that she had been given three choices: retire, resign or be fired. The following article from August 2018 provides some interesting observations, including that Morrison had chosen to divert Campbell from the core mission of selling soup to try to create a fresh food and snack empire. ―Morrison failed to understand the shifting tastes of Campbell's customers, and she missed an opportunity to leverage the company's core capabilities to position the company for growth.‖ The author of this article, Brittain Ladd, a former Deloitte Consultant, suggested ―Campbell's should play to its strengths. Three distinct capabilities of Campbell‘s are its knowledge of what consumers eat based on nearly 150 years in the food business; its ability to design and sell innovative food products; and its manufacturing prowess. When viewed through this lens, instead of Campbell‘s trying to become a company focused on snacks and carrots, Campbell‘s should leverage its distinct capabilities to identify value-creating strategies focused on its core competencies: meals, consumer insight, and manufacturing.‖ Several of the other suggestions, including divestiture of the international portfolio, are ones ultimately enacted by interim CEO McLoughlin. Ladd makes one interesting suggestion that Campbell‘s new CEO Clouse might be considering: Campbell‘s could ―outsource the majority of its supply chain management, demand planning, forecasting, inventory optimization, logistics and transportation management to Kraft Heinz. Kraft Heinz operates what I consider to be the most advanced Supply Chain Center of Excellence (COE) in existence. I estimate that Campbell's can save hundreds of millions of dollars annually contracting the Kraft Heinz COE, and collaborating with Kraft Heinz on mutually beneficial programs such as procurement, category management, energy and manufacturing.‖ Ladd goes on to say, ―A key question that must be answered is this: Who is Campbell's, where do they fit in the world, and why should customers care that Campbell's exists?‖ When discussing the potential sale of the company to a competitor, Ladd says, ―Regardless of who acquires Campbell's, they will face a massive task in turning around a company at a crossroads in terms of its identity, strategy and future.‖ See the entire article at https://www.forbes.com/sites/brittainladd/2018/08/06/campbell-soup-at-a-crossroads-what-thecompany-must-do-now/#674532a6551d Referencing Chapter 7: International Strategy NOTE — No PowerPoint slides accompany this discussion. International expansion is a viable diversification strategy; however, before pursuing this, a firm needs to determine why an industry in a given country is more (or less) successful than the same industry in another country. When choosing a country to expand into, firms must assess the degree of consumer demand, the degree to which resources such as skilled labor and other supplier or supporting infrastructure are developed and available, the speed with which such TN1-310 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
resources can be deployed, the extent of political and economic risk and corruption, the access to qualified management. There are two opposing forces that firms face when entering international markets: cost reduction, and adaptation to local markets. Therefore, there are four basic strategies firms can use: international, global, multidomestic, and transnational. See Chapter 7, Exhibits 7.4 through 7.7. A global strategy was effective if it standardized all of a firm‘s products for all of its worldwide markets. Doing this would reduce a firm‘s overall costs by spreading investments over a larger global market. However, a global strategy should be based on three assumptions: ● Customer needs and interests were homogeneous worldwide ● People worldwide generally preferred lower prices at higher quality ● Economies of scale could be achieved by supplying these global markets Campbell had been pursuing a global strategy with its simple meals and beverages and global baking and snacking businesses. The assumption was that customers liked soup, vegetable drinks, and both savory and sweet snacks worldwide. This may have been true in the European market, but breaking into the Eastern European market, especially Russia, where homemade soup was the norm, had proved challenging. The sociocultural force that had historically meant soup was made on the stove from scratch was too strong to break. Campbell had had to withdraw from Russia. The firm had also tried to break into Asia with the same formula. Soup was a major market there. In 2019 it appeared these international plans would be abandoned as Campbell‘s divested its Campbell International non-core businesses.
Teaching Note Case 20 — Nintendo: Could the Switch Turn On Gamers? Case Objectives 1. To examine how external and internal forces affect competitive strategy. See the table below to determine where to use this case: NOTE: There are both PRIMARY and SECONDARY chapters that can be used for this case. The Teaching Note gives guidance for the PRIMARY use chapters and provides suggestions if the instructor wants to use the case to illustrate concepts from the optional SECONDARY chapter. Chapter Use
Key Concepts
PRIMARY CONCEPTS 2: External
Industry competition five forces; general environmental factors
Additional Reading and/or Exercises NOTE industry report
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Teaching Note Environment 3: Internal Analysis SECONDARY CONCEPT 5: Business-Level Strategy
Case 1: Robin Hood
Value-chain analysis; resource-based view of the firm; VRIN Competitive strategy; generic strategies
NOTE additional reading, embedded video NOTE web articles
Case Synopsis In 2017 Nintendo launched its newest gaming console, Nintendo Switch, designed to allow users to play on a TV and also on-the-go. Although consumers reacted positively, so much so that demand had led to stock shortages, industry experts were cautious. Did this new Nintendo console define the ―next generation‖ of gaming? Would it allow Nintendo to leap ahead of its competition? The investors certainly didn‘t think so. As of 2017, Nintendo‘s income was off from previous years. But by January 2019, the Nintendo Switch had exceeded 32 million units sold, and software sales for the console had reached 163.61 million units. In 2006, Nintendo introduced its next generation video game console – the Wii. This console introduced an innovative motion sensor game controller that enabled a user to swing it in the air when playing video games, for example to mimic the motions of a tennis player or boxer. No other gaming console had ever provided the user this much interaction. The Wii had created a new gaming experience that its rivals, the Microsoft Xbox and Sony Play Station, initially had difficulty competing with. But by 2010 both Sony and Microsoft had caught up – with the Move and Kinect motion-sensing controllers respectively. Subsequently Nintendo released the Wii U game controller/console, and while it did bring some intriguing improvements to the table, it didn‘t appear to be innovative enough to once again allow Nintendo to leap ahead of its competition the way it did with the Wii. One problem that plagued the Wii U also seemed to create issues for the Switch: any games developed for the Xbox or PlayStation could not be easily modified to incorporate the code needed to work with the special features of Switch‘s Joy-Con controller. This limited the selection of games immediately available to the Nintendo Switch‘s audience. Nintendo had been a very successful company. Yet Nintendo sat in the midst of two potentially dominating firms: Sony with its PlayStation and Microsoft with Xbox. Nintendo Wii had been the market leader of its generation, but both Microsoft and Sony had not only copied the motionsensing technology, but also had started to invade Nintendo‘s key casual family-user market. Now that the motion-sensing technology was widespread among all competitors, it was much more difficult for Nintendo to set itself apart and portray itself as the ―family favorite,‖ as it did in its early days with the Wii. Although there was some concern, Nintendo was known to be a unique brand with games for fans of Mario and Zelda that were only available on its platform. As of February 2019, Nintendo Switch outsold Xbox One and PS4, and generated its highest February-month hardware dollar sales since February 2011. Having sold up to 32.27 million units by December 2018, Nintendo TN1-312 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
said that they expected there were still plenty of people who had played Nintendo games in the past but had not yet purchased Nintendo Switch. Will Nintendo be able to communicate the appeal of Nintendo Switch to consumers? or Is Nintendo counting on the power of nostalgia to maintain its consumer base? Teaching Plan The Nintendo case relies on a good understanding of how internal assets and the forces in the external environment drive competitive strategy, especially in a fast-moving industry. Therefore, the instructor could position this case toward the beginning of the course, as students are considering strategic analysis and formulation. The instructor may also wish to use this case as a complement to the Apple case because both rely on strategic implementation to maintain competitive advantage. In both companies, although innovation had allowed them to beat the competition, sustaining that innovative advantage, at least in Nintendo‘s case, was proving difficult to do. ICEBREAKER Because probably all students have at least heard of the Nintendo Wii, and probably some of them have either used or own one, it might be illustrative to ask: How many of you have used the Wii or Wii U? Even if you haven’t used it, what’s your opinion? How many of you have heard of the Switch? How many of you have also used a Sony Play Station or Microsoft Xbox? How do Nintendo’s products compete with these? The instructor might want to list students‘ opinions about Nintendo‘s products on the board. This can identify the key components of Nintendo‘s original success, as well as point out any potential challenges. This can position the class for a discussion about Nintendo‘s current circumstances and help students try to decide what Nintendo‘s options are. Summary of Discussion Questions Below is a list of the suggested discussion questions. You can decide which questions to assign, and which additional readings or exercises to include to augment each discussion. Refer back to the Case Objectives Table to identify any additional readings and/or exercises so they can be assigned in advance. 1. What were key forces in the general and industry environments that affected Nintendo‘s choice of strategy? 2. What internal resources and assets did Nintendo have that gave it a competitive advantage? 3. OPTIONAL QUESTION: How did Nintendo compete? Could Nintendo sustain a competitive advantage? TN1-313 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Discussion Questions and Responses 1. What were key forces in the general and industry environments that affected Nintendo’s choice of strategy? Referencing Chapter 2: Analyzing the External Environment Organizational leaders must become aware of factors in the overall environment that might affect their ability to create a competitive advantage. So how do managers become environmentally aware? They do it by scanning, monitoring, and gathering competitive intelligence, and using these inputs to develop forecasts. This prepares the firm to do more extensive analysis of the forces in the general environment and the industry or competitive environment. Environmental scanning involves surveillance of a firm‘s external environment to predict environmental changes and detect changes already underway. It is a BIG PICTURE viewpoint of the industry/competition, looking for key indicators of emerging trends – What catches your eye? It alerts the firm to critical trends before changes have developed a discernible pattern and before competitors recognize them. Environmental monitoring is a firm‘s analysis of the external environment that tracks the evolution of environmental trends, sequences of events, or streams of activities. Leaders need to monitor the trends that have the potential to change the competitive landscape – What do you want to track? Firms need to CHOOSE the trends identified via the scanning activity and regularly monitor or track these specific trends to evaluate the impact of these trends on their strategy process. What factors or trends might be most important to Nintendo? To assess how the external environment might affect Nintendo‘s strategy, it‘s necessary to take a look at the factors in the general external environment. Nintendo must consider the political/legal, economic and global, sociocultural and demographic, and technological forces that might affect the ability of the firm to deliver its products and sustain its business. See which factors in the general environment students might pick that have a significant impact on the video game console business. Political-Legal: Political-legal issues, especially the issues around copyrights, product safety, and global trade regulations were important for technology-intensive firms to stay abreast of. Demographic: Certainly the demographics had changed. Baby boomers were getting older, while the youngest generation was much more ―wired.‖ But U.S. potential consumers were also living longer and staying active into their senior years. In addition, genders appeared to be equally interested in playing all kinds of games. Sociocultural/Global: Customers were growing increasingly sophisticated. They knew what they wanted and didn‘t want to pay a lot for it, but they could be seduced by a ―sexy‖ design. Increasing globalization meant borders didn‘t matter so much anymore – American products did not have any particular edge. As long as products were high performance and high service, the TN1-314 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
customer didn‘t know or care where they came from. The ability to engage in social networking using various devices was becoming increasingly important to customers, and a movement to involve the entire family in joint activities was also growing strength in the United States. Technological: Technology, especially the growth of the Internet and increased availability of mobile devices, had created new opportunities and challenges for delivery of content and for promotion. The pace and direction of change required considerable monitoring and possibly risk taking, i.e. the incorporation of virtual reality. Complementary sources of technological innovation needed to be considered, i.e., the third-party software developers. It‘s also necessary to assess the segments of the external competitive environment that include competitors, customers/buyers, and suppliers, substitutes and new entrants. Porter‘s five forces model allows strategists to anticipate where the industry might be most vulnerable. Help students apply Porter‘s five forces of competition to the video game console industry by drawing a diagram on the board similar to the following, and having students fill in the details:
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Teaching Note
Suggested: The three major rivals compete for market share. Quest for lower prices pushes down margins. High technology obsolescence puts a premium on innovation.
Case 1: Robin Hood
Substitutes Threat High
Suppliers’ Power
Suggested: Within the video game industry the threat of substitute products is high. Computer or mobile gaming is the greatest threat, especially with online sites offering free games, free downloads, and the ability to play games with other people from all over the world at any time of day or night.
Med-Low
Rivalry Suggested: Depending on the commodity, lots of competition among suppliers keeps supply up and prices down. Game developers preferred creating for multiple vendors – the Wii was not compatible, meaning a potential shortage of game supplies.
Suggested: With three companies dominating the marketplace a newcomer to the industry would face high barriers to entry, such as economies of scale, product differentiation, capital requirements, switching costs, distribution channel access, and cost disadvantages.
Very High
Buyers’ Power Low
Threat of New Entrants Low
Suggested: Although the end consumer has little economic power, all three companies have achieved strong brand identification, and present switching costs to customers.
Based on the external environmental factor analysis, the video gaming business has three strong competitors trying to carve out a piece of the ―profit‖ pie. The rivalry is very strong in the video game industry. Each company tries to be the first company to introduce the latest generation of their product to the market and, throughout generations, customers are very loyal to their gaming console of choice. However, up until 2010 Nintendo was the only one with a unique product line – able to compete in many consumer segments and create customer switching costs – which gave it an advantage. Now, either more innovation was needed, or operational strategies had to shift.
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Teaching Note
Case 1: Robin Hood
NOTE – ADDITIONAL WEB LINK TO INDUSTRY INFORMATION: Global business requires assessment of many factors. The Entertainment Software Association published ―Essential Facts about the Computer and Video Game Industry‖ in 2019, available at https://www.theesa.com/esa-research/2019-essential-facts-about-the-computer-and-video-gameindustry/. Several interesting facts emerge; for instance, in the United States, 65 percent of adults play video games, and the average age of a gamer is 33 years old. Gamers are 54 percent male, 46 percent female. 60 percent play on a smartphone, 52 percent on a personal computer and 49 percent on a dedicated game console. Some of the top reasons gamers give for purchasing a game, other than the price, include the quality of the game graphics, an interesting story line, or a continuation of a favorite game series. Of the top 20 selling video games in 2020, across all platforms, Wii Sports was number 2, Super Mario Bros at number 5, Mario Kart Wii at number 6, Tetris for Game Boy at number 7, Wi Sports Resort at number 8, New Super Mario Bros at number 9, New Super Mario Bros. Wii at number 11, Wii Play at number 12, and Nintendogs at number 19. These 8 games sold a total of 339.2 million copies. The third best-selling game was Minecraft, followed by Grand Theft Auto V. The original Tetris from EA was the bestselling game of all. https://www.technobezz.com/best/20-best-selling-video-games-of-all-time/ In 2018 The Nintendo Wii became the best-selling video game console of all time, but the Nintendo Switch is on track to surpass that: https://fortune.com/2018/01/04/nintendo-switchsets-sales-record/. A review of the best video game consoles for 2020 picks the Play Station 4 Pro as the best because of its lineup of the most high-fidelity games, but the Nintendo Switch was rated the best portable playing option, and was also considered ―a great companion console for people who already own a PS4 Pro or Xbox One X. It can do things its competitors can‘t and offers many appealing titles that will never appear on a PlayStation or Xbox.‖ See https://www.digitaltrends.com/gaming/best-gaming-consoles/ The NPD Group publishes data on lots of industries. For video gaming, NPD says ―Back in the old days, a video game platform was synonymous with a console—like an N64 or Xbox 360. Today, that‘s quickly changing. Video games themselves are increasingly becoming platforms with the rise of DLC, Games as a Service model, and e-sports. Today, publishers and developers are pressured to deliver the content their gamers demand, when they demand it. Manufacturers, on the other hand, must know how their gamers interact with content and hardware to power the best gaming experiences.‖ They report on top selling video games, and Nintendo consistently has at least three titles in the top ten. https://www.npd.com/wps/portal/npd/us/industryexpertise/video-games/ What are some of the external environmental factors highlighted in this collection of reports that Nintendo should consider? 2. What internal resources and assets did Nintendo have that gave it a competitive advantage?
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Teaching Note
Case 1: Robin Hood
Referencing Chapter 3: Analyzing the Internal Environment When one firm outperforms others by a wide margin over a long period of time, it‘s important to figure out how this could be. The answer may lie in how that firm arranges its activities and creates unique bundles of resources that allow it to sustain a competitive advantage. Students should assess the relationships between the elements in Nintendo‘s value chain. Remember, value-chain analysis is a strategic analysis of an organization that uses value-creating activities. Value is the amount that buyers are willing to pay for what a firm provides them and is measured by total revenue, a reflection of the price a firm‘s product commands, and the quantity it can sell. A firm is profitable when the value it receives exceeds the total costs involved in creating its product or service. Creating value for buyers that exceeds the costs of production (i.e. margin) is a key concept used in analyzing a firm‘s competitive position. Every activity should add value. Take a look at Exhibit 3.1 to see the value chain activities. Based on the relationships between these elements, Nintendo can make a choice of how to proceed to craft a competitive advantage. Nintendo‘s value chain is captured visually in the following diagram: Value chain activity Primary: Inbound logistics (distribution facilities, material control systems, warehouse layouts) Operations (efficient workflow design, quality control systems)
How did Nintendo create value for the customer?
Outbound logistics (consolidation of goods, efficient scheduling, finished goods processing) Marketing and Sales (motivated salespeople, innovative advertising and promotion, effective pricing, proper ID of customer segments and distribution channels) Service (ability to solicit customer feedback and respond) Secondary (or support): Procurement (win-win relationships with suppliers, reduced dependence on single supplier) Technology development (state of the art hardware and software,
Appears to have difficulty meeting shipping schedules, distribution to retail centers. Significant delays creating Nintendo consoles.
Not in the case: Poor assessment of initial product popularity could create shortage of materials to supply increased production demands. Appears to be a cost efficient production process for the console.
Developed a product for all ages, effective and creative promotion via TV, Internet, and word-of-mouth, encouraged product trial and purchase by all. Some concern that products were mainly for children.
Presumed good, due to presence of loyal customers.
Relationships with third-party developers appear to be essential for console sales.
Not in the case: Open-ended, team-based approach to innovation, access to state-of-the-art technology, created TN1-318
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Teaching Note
Case 1: Robin Hood
innovative culture and qualified personnel)
culture of creativity.
Human resource management (effective recruitment, incentive and retention mechanisms) General Administration (effective planning systems to establish goals and strategies, access to capital, effective top management communication, relationships with diverse stakeholders)
Excellent recruitment and retention of key talent was assumed by firm performance. Poor planning, lack of anticipation of product popularity/unpopularity, but product development decisions kept profit margins in excellent shape, i.e., Nintendo realized more profit per console than the Microsoft or Sony products did. Communication between key decision makers seemed productive.
Primary Activities In terms of primary activities, the key to Nintendo‘s ability to differentiate itself in the market appeared to reside in its operational choices and marketing. However, lack of finished goods scheduling that lead to stock shortages (outbound logistics) appears to have hindered strategy implementation.
Support Activities With regard to support activities, a competitive advantage is achieved by developing a strong general administration that is built around visionary leadership and a culture that pushes for technological innovation. Nintendo should have been able to leverage its human resources and technological assets to produce more than just an innovative game console. Lack of production planning (a general administration function) and possible poorly developed relationships with third-party software developers might have suppressed initial sales. In addition, see the concept of the resource-based view of the firm and the three key types of resources: tangible resources, intangible resources, and organizational capabilities. A firm‘s strengths and capabilities – no matter how unique or impressive – do NOT necessarily lead to a competitive advantage. The resource-based view of the firm takes the perspective that firms‘ competitive advantages are due to their endowment of strategic resources that are valuable, rare, costly to imitate, and costly to substitute. Without these unique resources, the firm can only attain competitive parity. RBV goes beyond a SWOT analysis to integrate internal and external perspectives in a broader competitive context. RBV can reveal how core competencies embedded in a firm can help it exploit new product and market opportunities. An important issue to focus on here is the importance of intangible resources like innovation and reputation. Especially in mature brands like Nintendo (well-known for the NES, DS, and GameCube), sustaining reputation is essential. Look at resources that are controlled by Nintendo TN1-319 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
that might enable it to develop and implement value-creating strategies. Based on their reading of the case, students might identify those resources to include: Tangible Resources: Financial: large holdings in cash and equivalents. Physical: Assumed adequate. Technological: access to state-of-the-art technology tools, support for independent research created new technological development opportunities in the past. Organizational: Not in the case: team-based approach to management structure further encouraged creativity. Decisions to keep it simple (no advanced graphics) gave clear direction to developers. Intangible Resources: Human: creative culture may have given Nintendo developers the initial opportunity to acquire a unique skill set, therefore attracting and retaining talent. Innovation and creativity: assumed culture of experimentation appeared to encourage innovation without fear of failure. Reputation: strong brand loyalty due to the legacy games such as Donkey Kong, Zelda, and Mario. Determining whether the internal resources are valuable, rare, difficult to imitate, or difficult to substitute (VRIN) can help a firm sustain a competitive advantage. See Exhibit 3.6. Applying the VRIN concept, Nintendo had resources that were both valuable and rare. Its approach to managing its human resources – the path dependence of its history, the social complexity of its original team-based development – made Nintendo‘s reputational and creative resources inimitable for quite a while. In an industry where innovation created a competitive advantage, it was no wonder Nintendo was successful. However, the opportunity for imitation always exists, which is why sustaining a competitive advantage is so difficult. Although it took many years, both Microsoft and Sony were able to copy the motion-sensing technology, and perhaps even improve on it. Nintendo would have to continue to innovate in order to remain on top. NOTE – ADDITIONAL READING, WEB LINKS, VIDEO: Regarding the operations issue around adequate supply, in November 2008 there was speculation that Nintendo had not calculated demand properly, and that the previous shortage of Wii consoles would now turn into a glut: http://www.pcworld.com/businesscenter/article/153796/nintendo_wii_shortage_turning_into_a_ glut_for_the_holidays.html TN1-320 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
What points does this article make about the necessity of managing technological supply chains? Which components of this supply chain should Nintendo worry about the most? Arguably, one of the most valuable, rare, and inimitable resources Nintendo has is its video game designer Shigeru Miyamoto, Nintendo's Senior Managing Director and General Manager, Entertainment Analysis & Development Division. View a video interview at a gaming conference in 2007 where Shigeru Miyamoto discusses the new version of Super Mario Brothers and the origins of the Wii: http://www.youtube.com/watch?v=RR9_rBjRGR0 And see a report from June 2009 on his new ideas at that time: http://arstechnica.com/gaming/news/2009/06/miyamoto-teases-new-zelda-wii-title-dishes-onnatal-ready-for-edits-fp.ars Here‘s a story about how Miyamoto‘s genius emerged: http://www.newyorker.com/reporting/2010/12/20/101220fa_fact_paumgarten Regarding the Wii U, in 2012 Miyamoto did not appear concerned about the possible coming competition from Microsoft and Sony. When asked if the Wii U will stand alongside whatever Sony and Microsoft are planning for the future, Miyamoto said: ―If the conversation is only about whether the power is going to match up to another generation of hardware from, say, Sony or Microsoft, I can‘t answer that question yet . . . [Wii U] might not be as powerful as those systems when they eventually do come around. But I think that the more important question is... It's not just about power alone, but how to balance what you're offering in terms of power with cost.‖ Nintendo pays attention not only to how much hardware will cost to build, but how much its customers will pay, and whether the console can adapt to what‘s in the customer‘s living room. For instance, Miyamoto said, ―We also think about the environment that we‘re designing for. So in today‘s living room, where there are a lot of HDTVs, but they're not yet mostly 3D TVs, I think the console is certainly adequately powerful to create gaming experiences that will look really good on those displays. But whenever we talk about who's winning in a power competition, I think it's easy to lose sight of whether a game is fun or not. Which is certainly going to be more important to me.‖ Nintendo appears to want to fundamentally change the relationship between the television and the game console in a way other hardware makers can‘t. . . . Nintendo also views the move from standard definition to high definition as a key moment for its own development, even though others made that leap several years back. ―I think that we have enough power here to bring the kind of advanced games you see on other hardware in a totally unique form, that is different from the way it‘s realized in other places,‖ Miyamoto continued. ―In the case of Wii, we had a really clear decision, because we did not go HD on that platform, we stayed SD. That decision was based on the number of HD displays that were actually in people‘s homes, and that number has certainly changed since then as well. But at the same time, like now, we're thinking about how to balance our ability to bring a completely unique experience to consumers along with the cost that TN1-321 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
they'll have to pay to be able to have that experience in the first place. I‘m very happy with the balance that we've been able to strike. What's left is how developers use it.‖ Regarding decisions about how the Wii U console was developed, Miyamoto described the communication with Nintendo designers: ―In order to maintain a consistent development environment, you really have to fix your specs at one point and let people know what they're designing for, so they can make good progress,‖ See http://www.ign.com/articles/2012/06/20/miyamoto-discusses-wii-us-future for more details, plus embedded video. Also, in 2012, Miyamoto discussed and addressed the potential schism in video games – acknowledged by Nintendo during its E3 presentation – between more traditional, in-depth gaming experiences and the rise of casual games. While he stressed the company's commitment to the former, he also expressed an interest in opening one of Nintendo's most important franchises to a wider audience. ―One thing that‘s interesting is we‘re seeing how the way that tastes are broadening in video games, and you have some people who prefer more casual experiences, and you have some people who prefer sort of those more in-depth experiences. Obviously, as a company that‘s been making games for a very long time, we tend to be more on the deeper, longer game side of things. But really what we continue to ask ourselves as we have over the years is, ‗What is the most important element of Zelda if we were to try to make a Zelda game that a lot of people can play?‘ So we have a number of different experiments going on, and [when] we decide that we‘ve found the right one of those to really help bring Zelda to a very big audience, then we‘ll be happy to announce it.‖ See http://www.ign.com/articles/2012/06/08/e32012-miyamoto-talks-zelda-wii-u In 2013, Nintendo‘s President Satoru Iwata discussed the lack of Wii U‘s sales and admitted that the only solution is to bring out ―a number of quality software titles.‖ However, other gaming analysts believed the small size of the Wii U‘s memory – only 32GB – might keep both customers and developers away. So the decision to keep the device small, in terms of power, might be limiting its eventual adoption. See http://www.escapistmagazine.com/news/view/126733-Satoru-Iwata-Hardware-Price-Is-Not-WiiUs-Problem In 2014 Miyamoto explained his belief that the video game industry‘s creativity still had further to go, that Nintendo can ―expand and enrich the substance of our creativity‖ and ―create new entertainment that dominates the industry.‖ See http://www.nintendolife.com/news/2014/07/shigeru_miyamoto_explains_his_belief_that_the_vi deo_game_industrys_creativity_is_still_immature In 2017 Miyamoto commented on the development of the Switch, and the role that technical talent might play, saying, ―The tendency for some companies is for their technical people to be more important or treasured. Companies like that tend to want to move forward and be at the top end of everything. But at Nintendo, we really place importance on finding something unique, something that only we can do.‖ Regarding the shift in gaming to mobile, and the possibilities there, he said ―As a company, we‘ve carefully gotten ourselves involved in the mobile industry, and that‘s something that I was personally involved in. Then with the Nintendo Switch, the idea of having a console that‘s also a portable device, I think that opens up new doors to all kinds of possibilities. In the industry of fun, I think there‘s still a TN1-322 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
lot we can still explore. I think what I want to accomplish is kind of laying down the standards for what those possibilities are going to be over the next 10 years.‖ See http://time.com/4668908/nintendo-switch-miyamoto-interview/ What do you think is the appeal of the classic Nintendo products, and what can Nintendo do to retain and further develop their human resources, such as Miyamoto? Will the company be able to make good decisions in the future to keep the innovation going in the right direction? 3. OPTIONAL QUESTION: How did Nintendo compete? Could Nintendo sustain a competitive advantage? NOTE – no PowerPoint slides accompany this commentary. Referencing Chapter 5: Formulating Business-Level Strategies A competitive strategy is linked to the value chain and supported by intangible assets. Nintendo has great strengths in its human resource and technological support activities, and in its marketing and sales. These activities and the intangible assets that reside in Nintendo‘s human resources, creative culture, and brand reputation should allow Nintendo to create products that are unique and valuable to customers. In order to achieve a sustainable competitive advantage, Nintendo had to assess its ability to contend with other gaming console companies. The question of how to compete in a given business to attain competitive advantage requires an assessment of the types of competitive strategies, including the three generic strategies, that are used to overcome the five forces and achieve a competitive advantage: 40. Overall cost leadership Low-cost-position relative to a firm‘s peers Manage relationships throughout the entire value chain 41. Differentiation Create products and/or services that are unique and valued Non-price attributes for which customers will pay a premium 42. Focus strategy Narrow product lines, buyer segments, or targeted geographic markets Attain advantages either through differentiation or cost leadership Generic strategies are plotted on two dimensions: competitive advantage and strategic target. The overall cost leadership and differentiation strategies strive to attain advantages industrywide, while focusers have a narrow target market in mind. Overall Cost Leadership: With the overall cost leadership strategy, a firm dissects each component of the value chain in an effort to trim costs in each area. The cost leader uses its experience with production processes to create products at lower costs. Thus, the overall cost leader will offer similar products as its competitors but will realize higher per product returns. TN1-323 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Differentiation: A firm differentiates itself by creating a product or service that is unique and valued by customers. Differentiation can be achieved through brand image, technology, innovation, and features. A firm can achieve advantages of differentiation when their price premiums exceed the extra costs derived from having a unique product or service. Focus: A focus strategy is based on choosing a narrow competitive scope within an industry. A firm achieves competitive advantage by tailoring strategy to serve a segment or group of segments, and then dedicating itself exclusively to the chosen segment(s). A focus strategy can either target cost advantages or differentiation. Nintendo‘s strategy for the Wii was to create a video game system that would successfully compete with the Play Station and the Xbox. Nintendo‘s engineers created low-cost leadership by making decisions to trim costs in production, realizing higher per product returns than its competitors. Nintendo‘s engineers also created differentiation by developing an innovative motion sensor controller that let the player become a physical part of the game. Nintendo redeveloped the controller to make it an extension of the player‘s body, enabling a player to use body motion to act out the action that the figure would do on the screen (e.g. swing a tennis racquet or throw a punch). This motion sensor controller was very successful initially in differentiating the Wii from other game consoles that used the traditional button and joystick controller. The Wii control proved very successful for Nintendo, demonstrated by higher than expected demand when it was first introduced in late 2006. The gaming industry also embraced the new motion sensor controller and video game developers showed a strong interest in creating new titles to be played on the Wii. Nintendo‘s combined low-cost and differentiation strategy proved to be successful, at least up until 2010. However, this Wii innovation could be copied, and subsequent innovation has not yet appeared to further differentiate Nintendo in the marketplace. Although the original Wii was designed not only to be innovative but also cost-effective to produce, the Wii U doesn‘t seem to be that costeffective. (Not in the case: the Wii U was initially offered at a price that represented a loss on the hardware. The original intention was to sell the hardware below cost but make up the difference in software sales. According to Nintendo sources in 2013, ―In the end, the business model is still to drive the install base of hardware, and then to drive a strong tie ratio with all of the other software and experiences for the consumer.‖ However, that ―tie‖ effect wasn‘t working for many third-party developers who are ―refusing to develop for the console unless it moves more units.‖ See http://www.escapistmagazine.com/news/view/126666-Wii-U-Still-SellingBelow-Cost In addition, the Wii U isn‘t sufficiently innovative to signal a true difference between it and other products.) This means Nintendo‘s business strategy of differentiation wasn‘t working, and low-cost leadership was no longer an option. Should Nintendo try to create a focus strategy by further targeting a specific niche customer, such as the family? http://www.forbes.com/sites/patrickmoorhead/2013/03/25/new-game-console-success-isnt-aforegone-conclusion/ TN1-324 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
NOTE – ADDITIONAL READING: Regarding Nintendo‘s ability to attract a new customer base, the introduction of the Wii and Wii Fit opened up a whole new class of user, and a whole new set of applications for the gaming system: psychological research into the connection between cognition and action, physical rehabilitation, treatment for movement disorders like Parkinson‘s, and treatment for depression. See various articles at: http://www.sciencedaily.com/releases/2009/06/090611120744.htm To further understand Nintendo‘s global strategy, download the most current Annual Report from https://www.nintendo.co.jp/ir/en/library/annual/index.html. In the 2019 report, Nintendo said: ―As a company that creates entertainment to bring smiles to people‘s faces, the Company group‘s basic strategy is to expand the number of people who have access to Nintendo IP (characters and worlds from our games). We will develop unique products and services that are overwhelmingly fun to play and whose appeal is easy to understand at a glance… We will continue to flexibly transform ourselves by adapting to changing times while constantly valuing the spirit of originality based on the belief that ―the true value of entertainment lies in its uniqueness‖ - and will endeavor to continue providing products and services that people will be positively surprised and delighted by.‖ Do you think Nintendo can succeed with this vision? View the current stock information at: http://finance.yahoo.com/q?s=NTDOY. The company‘s description is as follows: ―Nintendo Co., Ltd., together with its subsidiaries, develops, manufactures, and distributes electronic entertainment products in Japan, the United States, Europe, Australia, Asia, and internationally. It provides video game platforms, playing cards, Karuta, and other products, and handheld and home console hardware systems and related software. The company was formerly known as Nintendo Playing Card Co., Ltd. and changed its name to Nintendo Co., Ltd. in 1963. Nintendo Co., Ltd. was founded in 1889 and is headquartered in Kyoto, Japan.‖ From a 2007 article in Business Week: Nintendo is currently riding high on the Wii, but the picture hasn't always been rosy. How has it been able to bounce back? For one thing, when faced with decline, it takes a risk: http://www.businessweek.com/stories/2007-06-27/nintendos-winning-waysbusinessweekbusiness-news-stock-market-and-financial-advice Several people have commented that Nintendo appears to have utilized Kim & Mauborgne‘s Blue Ocean Strategy to achieve market dominance. See the following from 2008 for the explanation: http://www.palermo.edu/economicas/cbrs/pdf/wii.pdf These articles suggest that Nintendo‘s continued ability to be profitable is based in its frugality, its single-minded focus on its core, and its desire to ―make the competition irrelevant.‖ Do you think Nintendo has been lucky, or has it operated successfully by using a clear strategy? Teaching Note Case 21 — Samsung Electronics 2019
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Teaching Note
Case 1: Robin Hood
Case Objectives 1. To help students understand the challenges and pitfalls of leadership and managing the innovation process. See the table below to determine where to use this case: NOTE: There are both PRIMARY and SECONDARY chapters that can be used for this case. The Teaching Note gives guidance for the PRIMARY use chapters and provides suggestions if the instructor wants to use the case to illustrate concepts from the optional SECONDARY chapters. CASE OBJECTIVES TABLE Chapter Use Key Concepts PRIMARY Innovation; innovation dilemmas; CONCEPT entrepreneurial orientation 12: Managing Innovation SECONDARY Generic competitive strategies – CONCEPTS low-cost leadership, differentiation 5: Business-Level Strategy 7: International International markets Strategy 8: Entrepreneurial Entrepreneurship; opportunity Strategy recognition 10: Organizational Organizational structure Design 11: Strategic Leadership Leadership
Additional Readings NOTE: see web-linked articles, video viewing
NOTE: see web-linked articles
NOTE: see web-linked articles
Case Synopsis In February 2019, Samsung Electronics celebrated the tenth anniversary of its introduction of the Galaxy S line of smartphones by introducing several new models. These anniversary models capped a period of two years during which Samsung Electronics had to cope with the conviction of its de factor leader, Lee Jae-Yong on charges of bribing South Korea‘s former president. Lee had provided broad direction to the firm since his father, Lee Kun-Hee was incapacitated after suffering a heart attack in 2014. But the removal of Lee came at a tough time for Samsung, which had been seeking new avenues for growth as sales of its market-leading smartphones seemed to be slowing down. A few months after Lee‘s removal, Kwon Oh-Hyun, Samsung‘s chairman of the board, shocked everyone by suddenly announcing his resignation. Kwon claimed that the firm needed to turn to a younger generation of leaders who could search for new growth engines by studying future trends. This led the firm to shake up its senior ranks in order to address concerns about a leadership vacuum. TN1-326 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
It replaced all three of its co-chief executives that were heading its main business lines: mobile, electronics components and consumer electronics. Everyone in Samsung had been hoping that these new appointments would bring fresh blood in order to help revitalize the firm. Analysts claimed that the firm faced strong pressures because of its heavy reliance on competing only with hardware while other competitors, ranging from Apple to Xiaomi, offered software and Internet services that set their products apart from all others because these services would only run on their devices. Troubles with its leadership had not diminished Samsung‘s status as an innovative—and highly profitable—powerhouse in the technology world. Executives at Samsung claimed that the firm‘s strength lay in the diverse line of its products that included televisions, cameras, laptops and even washing machines. Although smartphones had accounted for as much as two-thirds of their profits, they could also increase their revenues from their other offerings. Furthermore, unlike their rivals, Samsung made the most of its own components, allowing it to offer better products with lower costs. This allowed them to generate profits even if profit margins on some of these products continued to decline. Since 1998 Samsung Electronics had been undergoing a transformation. Under the leadership of Jong Yong Yun, CEO from 1996 to 2008, Samsung had emerged from being a company that earned modest profits on low-cost products based on competitor‘s technology to a company producing cutting-edge hi-tech products that impressed consumers—what they called ―wow products.‖ Yun believed that developing products with attractive designs and advanced technology and features would enable Samsung to grow into a premium brand that would earn higher profits. Under Yun‘s leadership, Samsung increased its research and development department to make it faster and larger than any other electronics technology company. This resulted in Samsung‘s ability to take more products from concept to rollout faster than any of their competitors, without sacrificing quality, as demonstrated by the numerous awards earned at top design contests throughout the world. Samsung‘s reputation for building innovative products may have been hampered by its de facto leader‘s arrest. However, although there were some doubts about its prospects for continued growth, the firm was confident in the investments it had made in chipmaking over the years. By 2017, Samsung had surpassed Intel to become the leading producer of semi-conductors in the world. This leadership would allow it to move into new growth areas such as artificial intelligence, autonomous driving, and growing Internet-based applications. But in spite of the opportunities that arose from such new developments, the firm faces competition from several existing and potential new entrants. Analysts, therefore, believe that Samsung‘s success with its movement into these new growth areas is likely to depend on its ability to convert its expertise in one sort of technology to others.
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Teaching Note
Case 1: Robin Hood
Teaching Plan This case is best positioned after students have a firm grasp of strategic analysis, including how to assess both internal and external environments. Samsung provides an opportunity to discuss innovation and strategic leadership in a global non-U.S. company environment. Summary of Discussion Questions Below is a list of suggested discussion questions. You can decide which questions to assign and which additional readings or exercises to include to augment each discussion. Refer back to the Case Objectives Table at the beginning of this Teaching Note to identify any additional readings and/or exercises so they can be assigned in advance. 1. How has Samsung been able to manage its innovation process? 2. OPTIONAL QUESTION: What competitive strategies did leadership adopt to turn Samsung around? What challenges does Samsung face in the future? Discussion Questions and Responses 1. How has Samsung been able to manage its innovation process? Referencing Chapter 12: Managing Innovation and Fostering Corporate Entrepreneurship Remember, from Chapter 1, strategy is all about the ideas, decisions, and actions that enable a firm to succeed. See Exhibit 1.1: Strategic management consists of the analyses, decisions, and actions an organization undertakes in order to create and sustain competitive advantages: ● strategy directs the organization toward overall goals and objectives ● includes multiple stakeholders in decision making ● incorporates both short-term and long-term perspectives ● recognizes tradeoffs between efficiency and effectiveness In doing this, leaders face a large number of complex challenges. Leaders must be proactive, anticipate change and continually refine changes to their strategies. This requires a certain level of ―ambidextrous behavior,‖ where leaders are alert to opportunities beyond the confines of their own jobs and are also cooperative and seek out opportunities to combine their efforts with others. Leaders must make strategic management both a process and a way of thinking throughout the organization. See Chapter 1, Exhibit 1.3 for a depiction of the strategic management process. During strategic analysis, the leader does ―advance work‖ to anticipate unforeseen environmental developments, identify unanticipated resource constraints, and assess changes in his or her preferences for how to manage. During strategy formulation the organization addresses the issue of how to compete in a given business to attain competitive advantage. Strategies are formulated at the business, corporate, and international levels. Entrepreneurial initiatives may also play a role. In strategy implementation, depending on the type of organization structure, the leader might include key individuals in a discussion around selecting which strategies might be best to TN1-328 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
implement at which level within the organization. The leader must ensure proper strategic controls and organizational design and establish effective means to coordinate and integrate activities within the firm, as well as with suppliers, customers, and possible alliance partners. Leaders should also be committed to excellence and ethical behavior while promoting learning and continuous improvement. Here‘s where innovation is important. Samsung‘s major challenge was to create a sustainable competitive advantage in the marketplace that is not only unique and valuable but also difficult for competitors to copy or substitute. One of the most important sources of growth opportunities to achieve competitive advantage is innovation. Innovation involves using new knowledge to transform organizational processes or create commercially viable products and services using the latest technology, experimentation, creative insights, and information from competitors. However it comes about, innovation occurs when new combinations of ideas and information bring about positive change. In fact, the root of the word innovation is the Latin novus, which means ―new.‖ Innovation involves introducing or changing to something new. It is a critical part of strategic implementation. Some of the challenges of innovation involve choosing when and how to continue to innovate, the scope and pace of future innovation, and whether or not to collaborate with innovation partners. The innovation of new ventures requires resources such as financial, human, and social capital; requires the leadership team to have adequate vision, dedication, and drive. Even for highly successful firms, these challenges can be daunting. They have been characterized as five dilemmas: ● Seeds vs. Weeds. Companies have an abundance of innovative ideas, and they must choose which ones to pursue (seeds) and which ones to cast aside (weeds). This choice can be complicated because sometimes it takes considerable financial investment and time before an evaluation can be made. ● Experience vs. Initiative. Companies must decide who will lead the innovation project. Senior managers have experience, but midlevel employees may have more enthusiasm. Initiative from either source must be rewarded. ● Internal vs. External. Innovation projects need competent staffs to succeed. Insiders may know the company‘s routines but may not be able to think outside the box, while outsiders need to be recruited and brought up to speed. Staffing decisions must be streamlined. ● Building Capabilities vs. Collaborating. Innovation projects need new skills, which can be built from within or sourced via collaboration with outside parties. Firms need mechanisms for forging links with outside partners. ● Incremental vs. Preemptive Launch. Companies must manage the timing and scale of innovation projects. Incremental launches are less risky because they use fewer resources, but they also open the door for a competitive response. Firms must make financing and management decisions that let projects hit the ground running and still be responsive to market feedback. After Jong Yung Yun took over at Samsung in 1996, he handled the five dilemmas of innovation and took Samsung from new bankruptcy to a company capable of ever increasing income (see TN1-329 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Case Exhibit 1). Yun began to push the firm to develop its own products rather than to copy those that other firms had developed. In particular, Yun placed considerable emphasis on the development of products that would impress consumers with their attractive designs and advanced technology. By focusing on such products, Yun believed that he could develop Samsung into a premium brand that would allow him to charge higher prices. He was well aware that he would only be able to maintain the higher margins as long as his firm was able to keep introducing new products into the market well ahead of its established rivals. The changes he made allowed the firm to get its products to move quickly to manufacturing with minimal problems and at the lowest possible cost. He did the following: Seeds vs. Weeds: Reduced bureaucratic layers to quickly win approval for new products, budgets, and marketing plans, speeding up their ability to seize opportunities; appointed designers to executive positions in order to make sure they can get their ideas to top managers. Experience vs. Initiative: Discarded Samsung‘s rigid seniority-based system and replaced it with a merit-based system for advancement in order to create incentives for new talent. Internal vs. External Staffing: Recruited new managers and engineers, many of whom had developed considerable experience in the United States. Building Capabilities vs. Collaborating: Worked to get ideas directly from the market by teaming up closely with retailers; forced its own units to compete with outsiders in order to speed up the process for developing innovative new products. Incremental vs. Preemptive Launch: Pushed to speed up new product development and launch by making it easier for managers to get approval for new products, budgets, and marketing plans; speed was necessary in order to keep introducing new products into the market well ahead of established rivals. In addition, it helps if leadership can embrace the entrepreneurial orientation—autonomy, innovativeness, proactiveness, competitive aggressiveness, and risk taking—necessary to sustain the pace of innovation. A culture of entrepreneurship means that a search for venture opportunities permeates every part of the organization. Strategic leaders and the culture generate a strong impetus to innovate, take risks, and seek out new venture opportunities. We should assess the vision, dedication and drive, and commitment to excellence demonstrated by the management team; the degree of entrepreneurial orientation—autonomy, innovativeness, proactiveness, competitive aggressiveness and risk taking—and the implications of this for the organization‘s culture. See Chapter 12, Exhibit 12.3. It appears Jong Yong Yun did incorporate the dimensions of entrepreneurial orientation into the reorganization of Samsung by demonstrating the following: Autonomy: The willingness to act independently in order to carry out a vision or opportunity and see it through to completion: Yun decreased the levels of bureaucracy within the organization TN1-330 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
that design teams had to go through in order to speed the pace of getting new products from idea to market. The design teams worked in research centers all around the world, including a VIP center with dormitories and showers to allow them to work quickly and to reduce complexities during the early stages of the design cycle. Innovativeness: A firm‘s efforts to find new opportunities and introduce novel solutions and processes: To stay ahead of its competitors, Samsung employed more designers and engineers than any of its competitors. Designers would observe the way consumers used Samsung products in order to understand how they were utilized. Designers also spent time researching trends in other industries (e.g. fashion, furniture, and cosmetics) to better understand new consumer preferences. Proactiveness: A firm‘s efforts to seize new opportunities in anticipation of future demand: Samsung was thinking proactively in its approach to ―designing for the digital home‖ by creating products that were fully integrated with computers. Competitive Aggressiveness: A firm‘s efforts to outperform its industry rivals, characterized by combative posture and aggressive responses aimed at improving position or overcoming threats. Yun‘s aggressiveness was illustrated in the steps Samsung took to get their products to the market faster than their rivals. Samsung created the VIP center to accommodate 24-hour design work and thus expedite the beginning stages of product development. Yun also cut the layers of management between designer and decision maker so ideas and designs could flow through the bureaucratic channels much faster. Risk Taking: Making decisions and taking action without knowing for certain the outcomes that will arise: By focusing on hardware, Samsung was taking a big risk, as its competitors moved toward software and context in order to increase revenues. Samsung was sticking with what had gotten it to its lead position and Yun was banking on his designers and engineers continuing to come up with superb products that would dominate the ―digital home‖ of the future.
NOTE — ADDITIONAL READING: The company‘s website devotes a section to innovation: https://www.samsung.com/us/ssic/innovations/ where they point out, ―At Samsung Strategy and Innovation Center, we drive global innovation for Samsung in diverse fields such as artificial intelligence, digital health, the Internet of Things, autonomous mobility, data center infrastructure, security, privacy and more. We accelerate Samsung‘s entry into new business areas through research and innovation and by creating new opportunities through mergers and acquisitions. And we invest strategically in companies who are as committed to solving big problems as we are.‖ The company‘s investment strategy is explained at https://www.samsung.com/us/ssic/investments/. An investigation in 2013 into Samsung‘s approach to innovation revealed that it gained a lot from an early partnership with scientists at the Russian Academy of Science, including the TN1-331 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
―TRIZ‖ approach to problem solving, which ―asks users to seek the contradictions in current technological conditions and customer needs and to imagine an ideal state that innovation should drive towards.‖ According to the article, ―in 2003 TRIZ led to 50 new patents for Samsung and in 2004 one project alone, a DVD pick-up innovation, saved Samsung over $100 million. TRIZ is now an obligatory skill set if you want to advance within Samsung.‖ In the opinion of this article, ―the answer to why Samsung is so innovative—with at least two major product announcements this month—is that it is heavily invested in its people, it goes in search of special talent wherever it can find it, but specifically made astute moves into Russia early on; it targets its innovations towards specific competitors and patents that it wants to overhaul (as Apple did under Jobs); and it has an innovation culture based on extensive training, repeatable methodology and creative elite formation, backed by the highest levels of management. You can argue that method and creativity don‘t go together, but that‘s a specious argument from the start. You can also argue that Apple and Google have better innovation processes, freer and more compelling for talented engineers. But what you can‘t argue is that Samsung does not do innovation. It is proving every day that it is formidable and heavily invested in taking leadership in many areas. The message for Apple and Google—get used to it, because Samsung is not only on a roll, it has enough talented people to keep pushing.‖ See http://www.forbes.com/sites/haydnshaughnessy/2013/03/07/why-is-samsung-such-aninnovative-company/ From a series of articles about where Samsung‘s innovation might be going next, see https://news.samsung.com/in/where-next-for-tech-innovation-in-2018. One way that Samsung Electronics works with the technology startup community is through Samsung NEXT—an innovation arm that scouts, supports and invests in forward-thinking new software and services businesses and entrepreneurs. Some of the technologies its investigating include artificial intelligence, augmented and virtual reality, blockchain and the internet-of-things in healthcare and in the larger community. One place to keep track of Samsung‘s product developments is via http://mashable.com/category/samsung/. NOTE that Samsung had announced its ―smart watch,‖ the Galaxy Gear, was coming out in the fall of 2013, before Apple was even willing to concede that it had such a product in the works! Samsung has not always been so nimble. In the past, there were concerns: ―Samsung is the world best in producing goods or services that others make at cheaper costs and differentiating them by adding new features,‖ said Song Jaeyong, a professor at Seoul National University who has served as an external advisor for Samsung since 2004. ―But it had not made what doesn‘t exist in the world, like Apple did.…Samsung‘s culture is a culture of hierarchy, a culture that emphasizes efficiency, which was great for enhancing competitiveness in manufacturing,‖ said Song. ―But for creative innovation, it is important to have diversity, openness, flexibility, open communication and an attitude of learning from failures. Samsung‘s corporate culture lacks these qualities.‖ So, in late 2012, Samsung created a project, ―Creative Labs,‖ which allowed some employees to ―take 6 months to a year off their regular work to collaborate on projects that [have] no deadlines, profit targets or rigorous management rules.‖ Not only Samsung, but the whole country was worried about innovation, partly because, according to some, South Korea has ―cultural values that inhibit risk taking: an emphasis on TN1-332 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
respecting seniority and hierarchy, long working hours meant to demonstrate loyalty to company and intense pressure for the young to succeed at school and college.‖ Especially after Samsung was charged for infringing on Apple‘s intellectual property in 2011, not only Samsung but the entire country was interested in inspiring original thinking. See http://news.yahoo.com/skoreafosters-startups-seeks-economic-shift-094919504.html. Some also note how Korean businesses seem able to perform above expectations and grow market share even in highly competitive markets. As one CEO said, ―In times of crisis, Koreans become more creative in seeking positive change and more innovative in making them a reality. This is why Korean companies successfully rise to the challenge in crises.‖ Another CEO said, ―The unique impatience and tendency of Koreans to rush, which had been previously frowned upon, enabled Korea to outpace its manufacturing archrival Japan. Korea‘s strength as a small country with speed, openness and connectedness will make it a world leader in the digital era of the 21st century.‖ Read more about what this country has been able to do at: http://english.donga.com/srv/service.php3?bicode=020000&biid=2009062330068. How was Samsung able to be so focused? Is it a result of the Korean business model or because of Samsung‘s strategy? Is more innovation in design needed to continue to push Samsung‘s growth? 2. What competitive strategies did leadership adopt to turn Samsung around? What challenges does Samsung face in the future? NOTE: There are no PowerPoint slides to accompany this discussion. Referencing Chapter 5: Business-Level Strategy The question of how to compete in a given business to attain competitive advantage requires an assessment of the types of competitive strategies, including the three generic strategies that are used to overcome the five forces of competition and achieve a competitive advantage: 43. Overall cost leadership Low-cost-position relative to a firm‘s peers Manage relationships throughout the entire value chain 44. Differentiation Create products and/or services that are unique and valued Non-price attributes for which customers will pay a premium 45. Focus strategy Narrow product lines, buyer segments, or targeted geographic markets Attain advantages either through differentiation or cost leadership Generic strategies are plotted on two dimensions: competitive advantage and strategic target. The overall cost leadership and differentiation strategies strive to attain advantages industrywide, while focusers have a narrow target market in mind.
TN1-333 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Up until the mid-1990s, Samsung‘s strategy was to be the overall cost leader in its industry. With an overall cost leadership strategy, a firm will dissect each component of the value chain in an effort to trim costs in each component. The overall cost leader achieves this position through experience of production processes. The cost leader can achieve higher returns by producing products similar to its competitors while maintaining lower costs of production. By using technology already developed and mimicking the designs of its rivals, Samsung developed cheaper and faster ways to manufacture its products. With the low cost of manufacturing along with the low R&D expenses incurred, Samsung was able to sell its products cheaper and still earn high revenues, maintaining an overall cost leader role in the industry. This strategy of overall cost leader was failing by the mid-1990s, however, and when Yun took over he set a new corporate strategy for Samsung, one of differentiation. A firm can achieve differentiation by creating a product or service that is unique (in brand image, technology, innovation, and/or features) and valued by the customer. A firm enjoys the advantages of differentiation when its price premiums exceed the extra costs derived from having a unique product or service. Samsung spent more than any other firm in its industry on research and development. Yun pulled Samsung products from discount stores and reinvented the brand as one of style and innovation. Samsung set out to produce the best-designed and most stylish appliances and electronics with the most cutting-edge features, ones that consumers would want. Samsung‘s transformation to a premium, high-tech brand was very successful, taking the firm from near bankruptcy to a company with significant growth in net income (see Case Exhibit 1.) Referencing Chapter 8: Entrepreneurial Strategy and Competitive Dynamics Samsung was trying to grow by identifying entrepreneurial opportunities. When formulating strategy, entrepreneurship involves the creation of new value by an existing organization or new venture that involves the assumption of risk. For an entrepreneurial venture to create new value, three factors must be present—an entrepreneurial opportunity, the resources to pursue the opportunity, and an entrepreneur or entrepreneurial team willing and able to undertake the opportunity. Entrepreneurs must go through a process of identifying, selecting, and developing potential opportunities. See Chapter 8, Exhibit 8.1 and the opportunity analysis framework: the relationship between an entrepreneur, the firm‘s resources, and the opportunities available in the firm‘s environment. Entrepreneurs need to understand the concept of opportunity recognition: the process of discovering and evaluating changes in the business environment, such as a new technology, sociocultural trends, or shifts in consumer demand, that can be exploited. Changes in the external environment can lead to new business creation, but the discovery of these new ideas is not enough. They then need to be evaluated to find out if they‘re strong enough to become new ventures. Good entrepreneurial opportunities are those that are attractive to the marketplace (there must be demand for the new product or service), achievable (it must be practical and physically possible to do), durable (the window of opportunity must be open long enough for it TN1-334 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
to have a chance for success), and value creating (it must be profitable—the benefits must surpass the cost of development by a significant margin). Resources are an essential component of a successful entrepreneurial launch. The most important resource is usually money, but human resources, strong and skilled management, is also an essential asset. Social capital, or entrepreneurs who have extensive social networks or well-connected key contacts, allows the new venture to gain exposure and build legitimacy faster. Strategic alliances represent a type of social capital that can be especially important. Samsung‘s Jong Yung Yun saw the opportunity of new technology and understood the importance of taking advantage of this window of opportunity to develop products that were attractive to the marketplace. By encouraging his managers and engineers to cut bureaucracy and speed up new product development, he used his leadership to activate the human resource potential within the organization. He also developed strategic alliances with key suppliers to take advantage of social capital. As mentioned above, he also demonstrated an entrepreneurial orientation to leadership. Referencing Chapter 7: International Strategy Samsung was a global company. When a firm chooses to do business internationally, it must assess issues of consumer demand, the degree to which resources such as skilled labor and other supplier or supporting infrastructure are developed and available, the speed with which such resources can be deployed, the extent of political and economic risk and corruption, and the access to qualified management. There are two opposing forces that firms face when entering international markets: cost control/reduction, and adaptation to local markets. Because of Samsung‘s global strategy and competitive structure, there were several ways Samsung could use international markets to achieve growth. Samsung‘s consumer products were designed to a global consumer standard of aesthetics and function, with no need for adaptation to meet the end user‘s performance needs (although the manufacture had to comply with local use issues, i.e., voltage requirements). To make sure the consumer‘s needs were met, Samsung had design centers worldwide to observe the way consumers actually used various products. However, on the business-to-business side, Samsung had to adapt to the customer‘s specifications. This meant Samsung had to have access to skilled manufacturing that was also low cost. Samsung created a global brand image for its products. NOTE: ADDITIONAL READING: Samsung Electronics is a subsidiary of the Samsung Group, which is diversified into several key industries—in Electronics: Health and Medical Equipment, Networks and Security, Semiconductors, Memory and Storage, Research and Education, as well as Consumer Electronics; in Machinery and Heavy Industries, including shipbuilding, engineering and construction; Financial Services, including insurance and financial investment; and Services including research and resorts. See https://sgsg.samsung.com/main/newpage.php?f_id=samsung_companies for the full list of the Samsung Group‘s businesses. TN1-335 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
In 2019 Samsung Electronics was 15th on Forbes’ list of the world‘s biggest public companies (China‘s government controlled bank ICBC was the largest). Samsung Electronics was the top company in South Korea, beating Hyundai Motor. See https://fortune.com/global500/2019/search/. Samsung Electronics is the flagship of Samsung Group, and Korea‘s top electronics company. Does this position place special pressure on the Electronics division to continue to deliver profitable growth, to bring honor to its country? What pressure might this place on leadership? Referencing Chapter 11: Strategic Leadership Strategy consists of analysis (setting goals, assessing the internal and external environment of the firm), formulation (deciding which industries to compete in and how to compete in those industries), and implementation, where organizational leaders allocate the necessary resources and design the organization to bring intended strategies to reality. Part of implementation requires leadership to make sure the firm is staying true to its original vision, mission, and strategic objectives. See the concept of leadership, the process of transforming organizations from what they are to what the leader would have them become. Leadership is proactive, goal oriented, and focused on the creation and implementation of the creative vision. This definition implies dissatisfaction with the status quo, a vision of what should be, and a need to develop a process for bringing about change. Leaders are change agents whose success is measured by how effectively they formulate and implement a strategic vision and mission. See Chapter 11, Exhibit 11.1. This involves: ● Setting a direction ● Designing the organization ● Nurturing a culture dedicated to excellence and ethical behavior The interdependent nature of these three activities is self-evident. Consider an organization with a great mission and a superb organizational structure, but a culture that implicitly encourages shirking and unethical behavior. Often, failure of today‘s organizations can be attributed to a lack of equal consideration of these three activities. The imagery of the three-legged stool is instructive: it will collapse if one leg is missing or broken. Leaders need to set the direction for the organization by continually scanning the environment to develop knowledge of all stakeholders and salient environmental trends and events. Then leaders must integrate that knowledge into a vision of what the organization could become. Leaders require the capacity to solve increasingly complex problems and must be proactive in their approach so they can develop viable strategic options. Leaders are responsible for designing the organization: a strategic leadership activity of building structures, teams, systems, and organizational processes that facilitate the implementation of the leader‘s vision and strategies. Leaders have an important role in creating systems and structures to achieve desired ends. TN1-336 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Leaders play a key role in changing, developing, and sustaining an organization‘s culture. An excellent and ethical organizational culture is an organizational culture focused on core competencies and high ethical standards. Organizational culture can be an effective means of organizational control. In nurturing a culture dedicated to excellence and ethical behavior, managers and top executives must accept personal responsibility for developing and strengthening appropriate behavior; consistently demonstrate that such behavior is central to the vision and mission; and develop and reinforce role models, corporate credos, codes of conduct, reward and evaluation systems, and policies and procedures. Doing this requires leaders to overcome barriers to change and effectively use their power. Cultural difficulties in implementing the leader‘s vision and strategies include a lack of understanding of responsibility and accountability among managers, reward systems that do not motivate individuals and groups toward desired organizational goals, inadequate or inappropriate budgeting and control systems, and insufficient mechanisms to coordinate and integrate activities across the organization. Jong Yong Yun engaged in the following leadership activities: Direction: When Yun took over Samsung he focused the company in a new direction. Yun steered the company away from its previous strategy of being the cost leader on the production of old technology, to a market leader firm that was focused on aggressive research and development. Samsung adopted a differentiation strategy, marketing innovative products created by the vast number of designers and engineers who Yun attracted to the company. Organization: Yun redesigned his organization to focus on research and development. By building up the engineering and design departments, Samsung focused on creating innovative designs for products that would satisfy customers far into the future. This organization design focused on new products, as opposed to the old approach, which focused on reworking the processes to produce existing products in a manner that was cheaper than the competitors. Culture: Yun was determined to build a culture dedicated to creating innovative, well-designed products that consumers would be eager to purchase. By heavily investing in R&D technologies and activities (e.g., broadening the scope of designer research to other industries and building physical facilities to foster the creative process), Samsung built an environment to support the work of engineers and designers. Referencing Chapter 10: Creating Effective Organizational Designs A firm‘s leadership has responsibility for choosing an effective organizational design. Chapter 10 stresses that organizational strategy has implications for a firm‘s structure. Organizational structure refers to formalized patterns of interactions that link a firm‘s tasks, technologies, and people. Structure provides a means of balancing two conflicting forces: the need for the division of tasks into meaningful groupings, and the need to integrate the groupings for efficiency and effectiveness by coordinating and integrating key activities. Factors that facilitate the effective TN1-337 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
coordination and integration of key activities include having a common culture and shared values, horizontal organization structures, horizontal systems and processes, effective communications and information technologies, and involved human resource practices. An effective organizational design can encourage the flow of information and enhance working relationships between functional departments and activities. However, achieving the coordination and integration necessary to maximize the potential of an organization‘s human capital involves much more than just creating a new structure. Different structures lead to different degrees of flexibility and permeability and can affect the amount of culture change required. Structures can have an impact on relationships between internal and external constituencies, and therefore need the full support of the management team to implement. Samsung Electronics was a subsidiary of the Samsung Group, and its flagship. This meant Yun had the discretion to structure his organization in a way that best suited his chosen strategy. His choice of differentiation strategy, entrepreneurial strategy, and global strategy meant the firm was focused on new products rather than reworking old processes. He configured reporting relationships based on product lines, stressing the need to create products that adapted to the personal needs of consumers. Because of his focus on design, he cut layers of management between designer and decision maker, decreasing levels of bureaucracy. He laid off employees and created a merit-based system for advancement to encourage performance from those employees remaining. In this, he had the wholehearted support of his top management team; all team members pledged to resign if the reorganization failed. 2. Cont: What challenges does Samsung face in the future? Referencing Chapter 11: Strategic Leadership REDUX CASE UPDATE: Samsung Milestones. Regarding leadership changes, there were many since Yun retired: 2008
2009 2010 2011
2012
Yoon-Woo Lee became CEO; restructured firm, consolidating divisions from five into just two, joining together its chip and display units and combining the telecom and media businesses. Gee-Sung Choi elevated to head the new digital media and communications division. Gee-Sung Choi elevated to CEO, Lee became Vice Chairman. More restructuring to address ―the conflict of interest among its many tentacles in the backdrop of the company‘s ongoing patent war with Apple.‖ Samsung Electronics reorganized again: divided into Digital Media Communications (DMC), which will oversee finished, consumer goods such as smart phones and tablets, and Devices Solutions (DS) for its component products such as LCDs and memory chips. Oh-Hyun Kwon promoted from head of components to CEO, Choi became head of Samsung Group Corporate Strategy Office. Kwon emphasized the need to hire more qualified human resources and to maintain a creative organizational structure. TN1-338
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Teaching Note
Case 1: Robin Hood
2013
Two additional CEOs named: J.K. Shin, as head of the IT/mobile division, would join Boo-Keun Yoon, as head of appliances/electronics/TVs, and overall CEO Oh-Hyun Kwon. Shin and Yoon would still report to Kwon while managing their respective divisions. Kwon kept control of components. This would encourage these heads of key departments to work more closely together and prevent potential fractures in the leadership structure. Samsung Electronics announced its new leadership for the next phase of its growth. Presidents Kinam Kim, Hyunsuk (HS) Kim, and Dongjin (DJ) Koh will succeed Vice Chairman Oh-Hyun Kwon, Presidents Boo-Keun Yoon and Jong-Kyun Shin, respectively, as heads of the DS, CE, and IM Divisions. This makes way for new leadership. The Company will maintain the current three co-CEO management structure. All new appointments will be effective immediately.
2017
Samsung appeared to be embarking on even more change in its leadership structure. To provide more detail, Jong-Yong Yun retired as CEO of Samsung Electronics in 2008, becoming a ―Company Advisor.‖ At that time, Yoon-Woo Lee was given the CEO position upon the news that previous Samsung Group chairman Lee Kun-Hee had been indicted on charges of tax evasion. In 2010 Yoon-Woo Lee was made Vice Chairman and Chairman of the Board of Directors at Samsung Group. He still holds a position as Vice Chairman of the company. In 2010, Lee appointed Samsung‘s digital media and communications division chief executive Choi Gee-Sung to the CEO position, and in 2012 Choi Gee-Sung promoted Kwon Oh-Hyun from the head of Samsung‘s components division to the CEO role. Choi became head of Samsung Group Corporate Strategy Office, a central body that rules over the organization‘s dozens of companies. Samsung Group was still controlled by overall chairman Lee Kun-hee. In 2013, news came from Samsung Electronics that there would be three CEOs: J. K. Shin, as head of the IT/mobile division, would join Boo-Keun Yoon, as head of consumer electronics/TVs/appliances, and overall CEO Oh-Hyun Kwon. Shin and Yoon would still report to Kwon while managing their respective divisions. Kwon retained control over components. In 2017 Samsung retained the three CEO structure but replaced all incumbents with new and younger individuals. The intent was to keep Samsung Electronics on its growth path. See https://news.samsung.com/global/samsung-electronics-announces-new-leadership for profiles of the new leaders. To provide historical background on these management changes, in a 2008 attempt to streamline operations and reduce costs in reaction to worsening economic conditions, new CEO Lee Yoon Woo had restructured the firm, consolidating divisions from five to just two. The sets division, called digital media and communications, would focus on consumer products such as television and mobile phones. The home appliance division, responsible for refrigerators and air conditioners, was merged with the digital media division. The parts unit, called device solutions, would handle electronic components such as semiconductors and LCD panels. The leadership team had been reconfigured: two-thirds of Samsung‘s executives were reassigned, and younger TN1-339 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
managers had been promoted. These changes were designed to eliminate bureaucracy and speed decision-making. CEO Lee also signaled a change in corporate strategy—attempting to grow via acquisition of SanDisk, a hardware firm, rather than by internal organic development. A change in product focus was also under way—Samsung was pursuing internal development of software and services rather than relying on collaboration with alliance partners such as Microsoft. Rising star Choi Gee Sung, named successor to Lee as CEO in 2010, came from the digital media division. One of his challenges was to craft strategy to move Samsung away from its heavy emphasis on investment in technology development, focusing instead on efficiency to keep costs low in order to be competitive with lower-margin products. There was some concern that Choi‘s lack of an engineering background would hinder him in these endeavors. It appeared that Choi‘s overall perspective may have been better for long-term strategy, because within two years his moves positioned Samsung in its top market spot. Likewise, Kwon Oh-Hyn, based on his year in the CEO spot and his tenure as head of Samsung‘s components division (where he was responsible for locking down deals with Apple for displays and chips), was named best global brand leader in 2013. The 2013 restructuring appeared to be an attempt to encourage these heads of key departments to work more closely together, and prevent potential fractures in the leadership structure, as these divisions—components, consumer products, and telecommunications—each contributed something toward Samsung‘s larger goal of grabbing market share from competitors across a wide range of product categories. In late 2012, Kwon ―called on all executives and employees to find new growth engines to help Samsung succeed during the coming years. As part of its plans to find new markets and products, Kwon highlighted the need for Samsung to hire more qualified human resources and to maintain a creative organizational structure. In a possible acknowledgement that Samsung has followed others into the smartphone market and was not a pioneer, the CEO said, ‗Samsung wants to become known as a market creator in a real sense not just as a fast follower.‘‖ (This is from http://www.androidauthority.com/samsungs-ceo-tells-his-employees-not-to-rest-on-theirlaurels-128453/) Would Samsung benefit from this renewed focus? NOTE — ADDITIONAL READING: Choi Gee Sung, as chief executive of the digital media division, seemed committed to innovative thinking. However, the reshuffle in early 2009 that saw Choi elevated to head the new digital media and communications division also led to two other long-term innovators leaving upper management at Samsung. Some wondered whether ―under Lee Yoon Woo‘s leadership, Samsung would focus more on profitability and efficiency than on production growth and massive investments, which were its trademark in the past.‖ See http://www.nytimes.com/2009/01/16/business/worldbusiness/16ihtTN1-340 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
16samsung.19419576.html?scp=5&sq=choi%20gee%20sung&st=cse reporting on Samsung‘s reorganization of itself into two major groups, joining together its chip and display units and combining the telecom and media businesses. http://www.nytimes.com/2009/01/16/business/worldbusiness/16ihtsamsung.1.19423395.html?scp=3&sq=choi%20gee%20sung&st=cse explains the resignation of previous Samsung Electronics chairman Lee Kun Hee after being indicted on charges of tax evasion, and the elevation of Lee Yoon Woo to the chief executive slot. In 2011, Samsung announced a reorganization to address ―the conflict of interest among its many tentacles in the backdrop of the company‘s ongoing patent war with Apple. Samsung Electronics is now divided into Digital Media Communications (DMC), which will oversee finished, consumer goods such as smart phones and tablets, and Devices Solutions (DS) for its component products such as LCDs and memory chips. CEO Choi Gee-sung, who previously headed the entire company, will now oversee the DMS division.‖ See http://www.koreaittimes.com/story/19150/samsung-electronics-dmc-outlines-aggressivestrategy-high-speed-growth. And here‘s the news story about Choi‘s move to become head of Samsung Group Corporate Strategy, and the 2012 promotion of Kwon Oh-Hyun, former head of the components division, to CEO Samsung Electronics: http://news.cnet.com/8301-1001_3-57448742-92/samsung-appointskwon-oh-hyun-new-ceo/. Kwon oversaw Samsung‘s components division, which makes displays, chips, memory, and processors, and, under his leadership, made Samsung the second largest chip maker in the world: http://www.businessinsider.com/samsung-ceos-2013-3?op=1 In 2013, Samsung Electronics announced there would be three CEOs: Boo-Keun Yoon (consumer electronics, TVs and appliances), J.K. Shin (head of IT and mobile communications), and overall leader and chairman of the board, Oh-Hyun Kwon. According to the news story, ―In its statement, Samsung said that, ‗―The new leadership structure will serve to clarify and enhance independent management of the two set divisions, as well as the independent management of the set and component businesses.‘‖ According to the report, while having three chief operating officers might seem a little unwieldy, it makes sense for a company that is responsible for onefifth of South Korean‘s $1.1 trillion economy. It‘s also worthwhile to note that five years ago, Samsung Electronics underwent a leadership crisis after Samsung Group chairman Lee Kun-hee was involved in a bribery scandal, with Samsung Life Insurance chairman Lee Soo-bin saying at the time that ―without a captain or rudder, Samsung now faces a complex crisis, with each unit meeting cut-throat competition independently.‖ Making the heads of Samsung‘s different departments work closely together might be a move to prevent potential fractures in the leadership. See https://www.cnet.com/news/samsung-adds-co-ceos-to-companys-executivelineup/. And then in 2017, three new CEOs are announced, while Samsung posts record profits. The announcement was made by CEO Kwon Oh-hyun as he unexpectedly announced his plans to step down earlier this month, citing the need for new leadership amid ―unprecedented crisis.‖ The news comes as Samsung announced its highest ever quarterly profits. It made 14.53 trillion won (about $13 billion) in operating profit off 62.05 trillion won ($55.4 billion) in TN1-341 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
revenue between July and September, beating the record of 14.1 trillion won set last quarter. The semiconductor business was the biggest driver—Samsung says that the Galaxy Note 8 helped the mobile business post strong shipments, but profit actually declined quarter-on-quarter because sales of lower-end models were higher. See https://www.theverge.com/2017/10/31/16580050/samsung-electronics-new-ceos-announcementq3-2017-earnings. The unnamed ―crisis‖ that prompted Kwon Oh-hyun‘s resignation ―appeared to be the imprisonment of Lee Jae-yong, the de facto leader of the entire Samsung group, on corruption charges. While Lee didn‘t take a hands-on role in Samsung Electronics‘ regular business, Kwon‘s resignation is the first sign that the scandal could have a major impact on the company‘s operations and culture.‖ https://www.theverge.com/2017/10/12/16467790/samsung-ceoresigning-crisis-kwon-oh-hyun. Regarding how leadership and an effective organizational design that activates key resources has helped, Samsung says it has internal networks and external partnerships worldwide. According to Samsung, its ―team of researchers and engineers include over 50,000 employees across 42 global research facilities—each one collaborating on strategic technologies to forge new market trends and set new standards of excellence.‖ See http://www.samsung.com/us/labs/. From the Samsung Research America website, here is more information: https://www.sra.samsung.com/. Samsung Electronics also won 46 awards from CES International Innovations Design and Engineering for diverse products such as phones, cameras, TVs, printers, and washing machines, and a look at current press releases from Samsung shows the rapid pace of product launches and enhancements in multiple categories. Read current news at http://www.samsung.com/us/news/, and breaking news, including what‘s happening with the current CEO crisis, at https://www.fastcompany.com/company/samsung. Do you think Samsung will be able to continue to grow through innovation, or will the many changes in leadership put this strategy in jeopardy? Teaching Note Case 22 — Emirates Airline Case Objectives 1. To examine how external and internal forces affect competitive strategy. 2. To investigate the challenges of choosing an appropriate competitive strategy. See the table below to determine where to use this case: NOTE: There are both PRIMARY and SECONDARY chapters that can be used for this case. The Teaching Note gives guidance for the PRIMARY use chapters and provides suggestions if the instructor wants to use the case to illustrate concepts from the optional SECONDARY chapters. CASE OBJECTIVES TABLE Chapter Use Key Concepts
Additional Readings or TN1-342
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Teaching Note
PRIMARY CONCEPTS 1: Strategy Concept 2: External Environment 3: Internal Analysis 5: BusinessLevel Strategy SECONDARY CONCEPTS 11: Strategic Leadership
Case 1: Robin Hood
Strategic management; vision, mission, strategic objectives
External environmental forces; Porter‘s five forces model Value chain; tangible vs. intangible resources; VRIN analysis Generic strategies
Exercises See web links, embedded video
See web links See web links. See optional advanced reading, Porter, 1996
Leadership
Case Synopsis Emirates Airline has been one of three Middle East carriers that were singled out by the largest U.S. airlines as being competitive threats in the U.S. markets due to an ―unfair advantage‖ conferred by subsidies and tax breaks. Emirates was indeed becoming a competitive threat, not because of government subsidies, which Emirates‘ management denied, but because of its effective asset utilization and its implementation of operational strategy. Since its founding in 1985, Emirates had become one of the leading international airlines in the world. Emirates‘ founder Dubai Sheikh Mohammed bin Rashid al Maktoum saw an opportunity to start an airline that would help build Dubai into a center of business and tourism and recruited British Airways veteran Sir Maurice Flanagan to lay the groundwork. However, the airline‘s growth has been attributed to Sir Tim Clark, who was handed the critical task of route planning. Clark recognized that about two-thirds of the world‘s population was within eight hours of Dubai, but the firm lacked the aircraft to take advantage of its location until the development of the Boeing 777 in 1996 and the Airbus A380 in 2008. Purchase of these two aircraft allowed Emirates to develop routes that could link any two points in the world with one stop in Dubai, allowing it to grow from 12 destinations in 1988 to 155 in 2019. This geographic advantage was not the only way Emirates was able to become the airline of choice for over 51 million passengers. In addition to making the Middle East the hub of international travel, Emirates had created a reputation for extraordinary service, especially in the amenities it provided for its premium first-class passengers: limousine rides to and from the airport, flight attendants fluent in a dozen languages, gourmet cuisine, and first-class enclosed suites with walnut and marble design and on-board spa showers. To promote these services, Emirates had created a marketing campaign in 2012, ―Hello Tomorrow,‖ that sent a message: Emirates was not just an airline that delivered a superior experience, but it was a catalyst for connecting a new global culture of shared aspirations, values, enthusiasm, and dreams.
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Case 1: Robin Hood
In the past Emirates set itself apart from other carriers by enhancing the customer experience, but its competitors, especially those also based in the Middle East, were improving their offerings, particularly for premium passengers, even creating an additional tier of services focused on premium economy class travelers. Some industry analysts questioned the ability of Emirates to deal with these challenges, but Emirates was consistently profitable and demonstrated its ability to always come up with new products However, Emirates had trouble filling its A380s and was running out of room for further expansion at its hub in Dubai. Was Emirates best positioned, with its resources and chosen strategy, to adapt to external conditions and continue its dominance in international air travel, or had its moment passed? Teaching Plan The Emirates case is a good example of what a firm must do to choose a competitive strategy. It also provides an opportunity to discuss how competitive options are dependent on resources available. Therefore, this case can be positioned in the middle part of the course, to discuss the components of strategic analysis and formulation. For more advanced students, it can also serve as an example of the nuances of strategic implementation. The instructor can also position this case discussion with a PRIMARY focus on Chapter 5: Business-Level Strategy, contrasting Emirates to the JetBlue case—in discussing choice of competitive strategy, students are encouraged to choose between low-cost leadership and differentiation, but in certain segments of the airline industry there is really no choice but competition based on controlling costs. Although students may try to explain how service amenities and features such as leather seats can create a differentiated advantage, customers rarely are willing to pay a premium for these things. This means the differences between carriers‘ success often revolve around operational choices and strategic implementation. However, Emirates operates in a unique geographical niche, offering an exclusive long-haul luxury service. Its choice of destinations is key to maintaining a differentiated advantage. Uncovering those sometimes-subtle differences between airlines can be a challenging yet fruitful discussion. For advanced students, the instructor may wish to assign Michael Porter‘s 1996 article ―What Is Strategy?‖ (Harvard Business Review, November-December, pp. 60-79) as companion reading to the case. Southwest is used as an example in this article of how tight linkages across its valuechain activities give it a valuable, rare, in-imitable, and non-substitutable competitive advantage. What might the Emirates value-chain elements look like, and are they necessarily different from Southwest‘s? In what way might Emirates have a VRIN advantage? Summary of Discussion Questions Below is a list of the suggested discussion questions. You can decide which questions to assign, and which additional readings or exercises to include to augment each discussion. Refer to the Case Objectives Table at the beginning of this Teaching Note to identify any additional readings and/or exercises so they can be assigned in advance. Discussion Questions: TN1-344 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
1. PRIMARY QUESTIONS: What are key forces in the general and industry environments that affect Emirates‘ choice of strategy? 2. How does Emirates compete? What internal resources and assets does Emirates have that may give it a competitive advantage? 3. OPTIONAL QUESTION: Assess the effectiveness of Emirates‘ leadership. Discussion Questions and Responses 1. What are key forces in the general and industry environments that affect Emirates’ choice of strategy? Reviewing Chapter 1: Strategic Management Remember strategy is all about the ideas, decisions, and actions that enable a firm to succeed. See Chapter 1, Exhibit 01: Strategic management consists of the analyses, decisions, and actions an organization undertakes to create and sustain competitive advantages: ● strategy directs the organization toward overall goals and objectives ● includes multiple stakeholders in decision making ● incorporates both short-term and long-term perspectives ● recognizes tradeoffs between efficiency and effectiveness See Chapter 1, Exhibit 1.6: The primary role of the organizational leader is to articulate vision, mission, and strategic objectives. Leaders must communicate their initial vision of the organization‘s purpose. Should Emirates evaluate its initial vision? What was the original goal that evoked a powerful and compelling mental image of a shared future, one that was massively inspiring, overarching, and long-term, that represented a destination that is driven by and evokes passion? Is the original vision still applicable given the present circumstances? Emirates‘ organizational mission needs to be considered: a mission encompasses both the purpose of the company as well as the basis for competition and competitive advantages. In writing a mission statement, it is important to understand the definition of the business by answering these questions: 1) Who are its customers? 2) What customer need is the organization trying to fulfill? and 3) How does the business create and deliver value to customers and satisfy their needs? Organizations must respond to multiple constituencies if they are to survive and prosper, and the mission provides a means of communicating to diverse organizational stakeholders. Although vision statements tend to be quite enduring and seldom change, a firm‘s mission can and should change when competitive conditions dramatically change, or the firm is faced with new threats or opportunities. Anticipating that things might change, Emirates‘ leadership must establish strategic objectives to operationalize the mission statement with specific yardsticks. That is, objectives help to provide TN1-345 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
guidance on how the organization can fulfill or move toward the ―higher goals‖ in the goal hierarchy—the mission and vision. Emirates‘ original founder had the vision of helping Dubai become a center of business and tourism, and foresaw a premium quality experience that started with a national airline that could carry those business people and tourists to its exotic destination. Emirates was not just an airline that delivered a superior experience, but it was also a catalyst for connecting a new global culture of shared aspirations, values, enthusiasm, and dreams. The mission was to offer Emirates‘ passengers the best possible experience in all sections of its aircraft, encouraging passengers to believe Emirates was the only choice for accessing that new global culture. Emirates had established strategic objectives such as having high standards for in-flight services, first-class gourmet cuisine, and highly trained personnel who could meet all customers‘ needs, from ticketing through departure and arrival at any of its 155 destinations. Now the airline was faced with changing competitive conditions. Dubai had become a worldwide wonder, attracting travelers for multiple purposes, and the airline had helped create and then perpetuate the perception of a premium experience. Emirates needed to continue to live up to that expectation. Was the vision still relevant, and did the mission still fully capture the needs of its customers? Certainly, the strategic objectives might need to change to provide guidance on how to achieve the mission and vision, but which objectives, and what resources, might be needed in order to do this? Was the original strategy still sound? The basic question strategic management tries to answer is: How can we create competitive advantages in the marketplace that are not only unique and valuable but also difficult for competitors to copy or substitute? NOTE — ADDITIONAL EXERCISES: As stated, in writing a mission statement, it is important to understand the definition of the business by answering these questions: 1) Who are its customers? 2) What customer need is the organization trying to fulfill? and 3) How does the business create and deliver value to customers and satisfy their needs? Visit Emirates‘ corporate web site to research its mission and vision at: http://www.emirates.com/english/ See the promotional video for the Emirates A380 featuring Jennifer Aniston. What does this say about Emirates‘ approach to strategy? https://www.youtube.com/watch?v=kwYr4LAIUjk Watch the ―Hello Tomorrow‖ videos: https://www.youtube.com/watch?v=xGNGPbtOOk&list=PL45753735FC829B36 Based on your visit to this website, and what you saw in the videos, how do you feel about Emirates‘ mission and what its current priorities seem to be? Referencing Chapter 2: Analyzing the External Environment of the Firm To formulate a competitive strategy, organizational leaders must first become aware of factors in the overall environment that might affect their ability to create a competitive advantage. So how TN1-346 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
do managers become environmentally aware? By doing scanning, monitoring, and gathering competitive intelligence, and using these inputs to develop forecasts. This prepares the firm to do more extensive analysis of the forces in the general environment and the industry or competitive environment. Environmental scanning involves surveillance of a firm‘s external environment to predict environmental changes and detect changes already under way. It is a BIG PICTURE viewpoint of the industry/competition, looking for key indicators of emerging trends—what catches your eye? This alerts the firm to critical trends before changes have developed a discernible pattern and before competitors recognize them. Environmental monitoring is a firm‘s analysis of the external environment that tracks the evolution of environmental trends, sequences of events, or streams of activities. Leaders need to monitor the trends that have the potential to change the competitive landscape—What do you want to track? Firms need to CHOOSE the trends identified via the scanning activity and regularly monitor or track these specific trends to evaluate the impact of these trends on their strategy process. Based on the case, the major challenges for Emirates include increased competition from other international carriers, how to appeal to the changing tastes of the premium first-class customer, how to counter challenges at the country level relative to route access, and how to maintain and enhance the firm‘s competitive position in the industry. To assess how the external environment might affect Emirates‘ strategy, it‘s necessary to look at the factors in the general external environment. Emirates must consider the political/legal, economic, and global, sociocultural/demographic, and technological forces that might affect the ability of the firm to deliver its services and sustain its business. See which factors in the general environment students might pick that have a significant impact on the international airline industry. Students might respond as follows: Political-Legal. Airline regulations apply worldwide, yet certain trade provisions and alliances between carriers are subject to country legislation, as noted by the demand by U.S. airlines for the United States to renegotiate the ―open skies‖ treaty with the Emirates, Etihad and Qatar air carriers. Of interest to this global case, international human resource law is not consistent worldwide: Emirates‘ hiring policies would not be legal in the United States (they would be subject to age and gender discrimination lawsuits). Sociocultural-Demographic. The general customers‘ preferences have changed to make air travel more of a commodity—whichever carrier gets you there the fastest and cheapest regardless of service will win, except for the business traveler who doesn‘t pay his or her own way. For these premium customers, especially the ones who travel internationally, cost is not an issue. Convenience and efficiency, getting to your destination with the minimum of hassle and wasted time, become more important. On the other hand, safety concerns have grown over the increased threat of terrorism, leading to increased security protocols, delayed flights, and increased turnaround times—all of which have an impact on customer perception of value and therefore airline profitability. TN1-347 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Economic. The airline industry is susceptible to upturns and downturns with the trends in the global economy. A growing economy and booming business mean greater demand for air travel, and a slowdown in the economy means reduced demand, consequent unutilized capacity, and intensified competition. The availability of venture capital, and other capital sources such as government subsidies have an impact on the number of new entrants into the industry. Interest rate fluctuations have an impact on the cost of operations for companies that have high levels of debt. Furthermore, wars with other nations, the fluctuating price of oil, and increases in fuel prices strongly impact the air industry. Global. Boundaries are disappearing, travelers are more aware of and give more scrutiny to global consistency in service offerings—certain amenities are accepted, and expected, everywhere (see the back-of-seat TV viewing that was unique when Emirates first offered it but is now normal on almost every international air carrier.) Geography does matter—given that people will be seeking out inexpensive yet safe travel no matter the airline. Whichever reliable carrier will get you there quickest and cheapest will get the business. This helps Emirates because its long-haul fleet has the capability of non-stop flights between most destinations and the Dubai hub. Technological. Advances in technology benefit the airline industry, especially in aircraft design and engineering that increases efficiency in fuel consumption. Technology related to operational procedures can improve processing of booking/ticketing, luggage and passenger routing, maintenance, and equipment upgrades. Technology in architectural design can improve airport and transportation efficiencies, moving passengers and cargo quicker, as well as enhancing the aesthetics of the experience. This helped grow Emirates when the new Dubai terminal opened— the airport could handle 224 aircraft and 75 million yearly passengers. To answer the question about the current forces in the industry environments that affect Emirates‘ ongoing strategy, it‘s necessary to assess the segments of the external competitive environment that include competitors, customers, and suppliers, substitutes and new entrants. Porter‘s five forces model allows strategists to anticipate where the industry might be most vulnerable. First, however, it‘s necessary to identify the industry. One important question is, ―what business is Emirates in?‖ Until students are sure about the boundaries of the business, it is impossible to do an industry analysis—what is the ―industry‖ to be analyzed? Some students might say it is in the airline industry, but the company started out by offering flights to international destinations, and its cultural history is based around creating differentiation in this category. The choice of industry to use for analysis has implications for who Emirates‘ direct competitors are, since not all competitors in the airline industry compete globally. The airline industry is a well-established industry with multiple strong direct competitors, especially at the local level. A comparative analysis of JetBlue against Southwest Airlines demonstrates how competitive this business is. In contrast, the international airline industry requires more significant assets, either in physical assets (the long-haul airplanes) or in social capital assets such as code-sharing alliances, relationships, and reputation Does Emirates TN1-348 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
compete directly with JetBlue? No. Emirates is fighting for customers within the international airline industry who already prefer quick, safe, and possibly cheap travel, but may also be looking for a point of differentiation relative to convenience and comfort. Table 1 in the case identifies the top global airlines that have ranked highest in service in recent years. Although many names might be unknown to students, others, such as Qantas, Cathay Pacific, Lufthansa, and Singapore Airlines have had a long time to build a premium reputation.
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Teaching Note
Case 1: Robin Hood
Help students apply Porter‘s five forces of competition to the international airline industry by drawing a diagram on the board similar to the following and having students fill in the details: Suggested: Many rivals compete in the international airline business. Convincing customers that one carrier is different or better than another is difficult when the amenities are similar, and options are easy to switch.
Suppliers’ Power High
Substitutes Threat Low
Rivalry Very High
Suggested: Boeing and Airbus are the only aircraft suppliers. Oil producers control jet fuel supplies and prices. Suggested: There are low barriers to entry, especially for short-haul airlines, but international travel requires alliances to break into new routes, reducing the new entry threat for established carriers.
Suggested: There are no real substitutes for quick international travel. For the business traveler, the substitute is to not need to travel, but to use teleconferencing instead.
Buyers’ Power Low
Threat of New Entrants
Suggested: Some international airlines might have to bargain with corporate clients, but end consumer has little economic power.
Medium
Based on the external environmental factor analysis, the international airline industry has many competitors trying to carve out a piece of the ―profit‖ pie. Here are some other relevant details: Because some of Emirates new competitors are also fairly new airlines (Qatar and Etihad), what implications does this have for threat of new entry into the industry? Economies of scale. This did not work out well for many players in the airline industry. The huband-spoke model developed by some major U.S. players such as American (Dallas hub) and Delta (Atlanta hub) led to more of diseconomies of scale than economies, primarily because with international travel more hubs are needed, and additional hubs mean additional costs in infrastructure and maintenance operations. However, the large investments already made by these major airlines, and their established networks, do pose a significant threat to new entrants unless these new entrants can counter it with highly efficient operations. Location. Although the hub-and-spoke model became a disadvantage for many airlines over time, it has worked for Emirates. Why? Location. Two-thirds of the world‘s population live TN1-350 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
within an eight-hour flight of Dubai, and Emirates‘ long-range aircraft could link any two points in the world with one stop in the Dubai hub. (Not in the case: In addition, Dubai has stable weather, so no thunderstorms or tornados or hurricanes will disrupt flight operations, causing delays or cancellations.) In addition, the construction of Dubai‘s new terminal greatly aided both passenger and cargo throughput, making any transition through this hub both quick and efficient. Product differentiation. Airlines try to create strong brand identification and customer loyalty by using the frequent flyer programs. When there is strong brand identification, it forces the new entrants to spend heavily on weaning away customers from the existing players, thus discouraging their entry. However, in the airline industry the brand identification has not proved to be so strong as to prevent people from switching to other airlines. Some premium international players are trying to achieve some product differentiation (e.g., Emirates‘ suites with spa showers). However, these are not very strong barriers to entry as new entrants with financial backing can imitate these amenities (e.g., Etihad‘s three-room ―Residence‖ compartments). Switching costs. There are virtually no switching costs for customers. The frequent-flier programs attempt to create switching costs. However, when many customers are presented with low-cost and convenient options, there is nothing strong enough that could prevent them from switching to other airlines, especially when those airlines can create parity on differentiated services. Thus, the international airline industry faces a threat of new entrants, particularly in the low-cost short-haul segment. The barriers can be heightened when an airline has very closely tied and ultra-efficient operating routines or location attribute advantages that competitors find difficult to copy or imitate. The intensity of rivalry among existing competitors in the international airline industry is very high. There are numerous competitors, and in times of low or moderate industry growth, the competition gets fiercer as each one tries to nab customers from the other to keep their capacity utilizations at acceptable levels. The exit barriers are high because it is difficult to dispose of grounded planes, as there would be few buyers. Also, especially in the United States, due to the bankruptcy laws, even the loss-making companies might still be around for a long time, thus intensifying competition. So, it is easier to get into the industry, but it might be difficult to get out. The only solution for many companies is to merge, which is why there has been consolidation in this industry over the years. (See http://www.investopedia.com/features/industryhandbook/airline.asp#axzz1VjKetXz3 for one source of information on the industry.) NOTE WEB LINKS: To understand how the European market views competition, see http://airlines.iata.org/blog/2015/06/working-towards-an-effective-aviation-strategy-fromregulators. According to this report from 2015, the European Union feels that a common European strategy is needed: ―Other regions put aviation at the center of their economic strategies. Fierce global competition, paired with a relative loss of capacity at EU hub airports, risks leaving the EU on the edge of the aviation world market. Capacity constraints are another TN1-351 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
major concern to be faced swiftly. Building the right capacity fosters growth, with a positive impact on employment in aviation. The new strategy should also consider common priorities in terms of regulation, such as the revision of certain safety standards, as well as new rules—for the market development of civil drones, for example. Despite the concerns about safety, security, and privacy, this is an opportunity that Europe must not miss…. Shared priorities for infrastructure development, and a specific strategy to bolster competition, are also crucial for the future of aviation. Matching the demands for more routes and better connections with those for lower costs and lower environmental impact is a major challenge for airlines in Europe. We need to create a more competitive and integrated aviation market that makes the most out of regional connectivity…. We won‘t stand a chance of delivering an effective strategy if we don‘t work together: European institutions, Member States, regulators, the industry and its employees. We all have a common interest in ensuring long-term, high-quality and sustainable services, and in remaining a major aviation region in the world.‖ More information about the global effect on existing legacy air carriers is available at ―The Airlines‘ Global Dilemma‖ strategy+business, October 25, 2010: http://www.strategybusiness.com/article/00047?gko=19274 Information on the challenges made by U.S. carriers against the three Middle Eastern carriers Emirates, Etihad and Qatar can be found in this opinion piece from February 8, 2015 ―Should the big three middle eastern airlines be stopped?‖ http://onemileatatime.boardingarea.com/2015/02/08/big-three-middle-eastern-airlines-stopped/ And here is a report on what it‘s like to fly on Etihad, and why the experience is superior: http://www.usatoday.com/story/travel/columnist/hobica/2015/09/29/etihad-emirates-qatarairlines-gulf-carriers/72986680/ Beyond the amenities, it‘s the location that matters: ―So while these airlines do stand out in many departments, perhaps what really scares competitors about them is where they call home: Doha, Abu Dhabi and Dubai. Look at a map. These three airlines' hubs sit in a sweet spot allowing them to economically link any two places on Earth, with a single connection, using existing aircraft types. . . . That‘s their real competitive advantage, even more than the shiny new planes, exemplary service and flashy airports and lounges. Other than trying to keep a lid on their expansion through negotiation or legislation or asking Boeing and Airbus to build longer-range aircraft that are economically feasible to operate, there's nothing, really, that the other airlines can do. It's simple geography.‖ Visit the website for Qatar Airways at https://www.qatarairways.com/en/about-qatarairways.html And the website for Etihad Airways at https://www.etihad.com/en-us/corporate-profile (Note both Emirates and Etihad have a code share agreement with JetBlue.) What stands out? Given such a challenging industry environment, Emirates should be admired for its ability to not only survive but to grow and remain profitable for each consecutive year. Given that it was now larger and facing competition from other premium carriers in its region, could Emirates continue with its excellent track record?
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Teaching Note
Case 1: Robin Hood
Instructors can leave students with this question and possibly move on to discuss other airline cases (JetBlue), or can ask students for ideas, and then transition into the following discussion. 2. How does Emirates compete? What internal resources and assets does Emirates have that may give it a competitive advantage? Referencing Chapter 5: Business-Level Strategy How firms compete and how they attain and sustain competitive advantages go to the heart of strategic management. In short, the key issue becomes: why do some firms outperform others and enjoy such advantages over time? The viability of a firm‘s success is driven by both the internal operations of the firm and the desires and preferences of the market. Firms that succeed have the appropriate resources and cost structure to meet the needs of the industry and general environment. They also have a strategy: A business-level strategy is a strategy designed for firm or a division of the firm that competes within a single business. Within the firm‘s industry environment generic strategies include basic types of business-level strategies based on breadth of target market (industrywide versus narrow market segment) and type of competitive advantage (low-cost versus uniqueness). Here are the three generic strategies that are used to overcome industry forces and achieve a competitive advantage: 46. Overall cost leadership Low-cost-position relative to a firm‘s peers Manage relationships throughout the entire value chain 47. Differentiation Create products and/or services that are unique and valued Non-price attributes for which customers will pay a premium 48. Focus strategy Narrow product lines, buyer segments, or targeted geographic markets Attain advantages either through differentiation or cost leadership Generic strategies are plotted on two dimensions: competitive advantage and strategic target. The overall cost leadership and differentiation strategies strive to attain advantages industrywide, while focusers have a narrow target market in mind. Both casual observation and research supports the notion that firms that identify with one or more of the forms of competitive advantage outperform those that do not. The strategy that Emirates adopted was differentiation. The company was successful in implementing this differentiation strategy by aligning its structure and systems with the strategy. It also had a firstmover advantage in the Middle East, so was able to attract customers initially and then keep them by continuously innovating in accordance with its differentiated advantage. Customers with a need to experience exotic destinations were interested to seek out the premium service TN1-353 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
attributes and were willing to pay this premium. By keeping ahead of its regional competition, Emirates was able to grow and remain profitable even in the worst of times in its industry. Instructors can ask students if it‘s possible to compete on differentiation in the airline industry. In discussing choice of competitive strategy, students are encouraged to choose between low-cost leadership and differentiation, but in the airline industry there is often no choice other than competition based on controlling costs. Although students may try to explain how service amenities and features such as leather seats can create a differentiated advantage, customers are rarely willing to pay a premium for these things. This means the differences between carriers‘ success often revolve around operational choices and strategic implementation. In Emirates‘ case, the airline made the decision to not only be conscious of costs but also to offer a better product, a unique and valued product that would encourage customers to pay, regardless of price. Because many of Emirates‘ passengers were those targeted in the promotional campaign, those who wished to connect to a new global culture of shared aspirations, values, enthusiasm, and dreams, this unique service was appealing, and passengers appeared willing to pay. The convenience conferred by Emirates‘ location advantage just made it more attractive. A competitive strategy is linked to the value chain and supported by intangible assets. Emirates had great strengths in its operations and its human capital. Tight links among its activities and assets allowed Emirates to create a service that was unique and valuable to customers. From a resource-based perspective, it was often not any single activity, but the strong coordination across the various value-chain activities (i.e., the tightly linked activity system) that became the source of sustainable competitive advantage for firms like Emirates. Let‘s see how that might be so. Referencing Chapter 3: Analyzing the Internal Environment of the Firm When one firm outperforms others by a wide margin over a long period of time, it‘s important to figure out how this could be. The answer may lie in how that firm arranges its activities and creates unique bundles of resources that allow it to sustain a competitive advantage. Students should assess the relationships between the elements in Emirates‘ value chain. Remember, value chain analysis is a strategic analysis of an organization that uses value-creating activities. Value is the amount that buyers are willing to pay for what a firm provides them and is measured by total revenue, a reflection of the price a firm‘s product commands, and the quantity it can sell. A firm is profitable when the value it receives exceeds the total costs involved in creating its product or service. Creating value for buyers that exceeds the costs of production (i.e., margin) is a key concept used in analyzing a firm‘s competitive position. To answer the question of whether Emirates‘ differentiation strategy is adequately supported by its value chain and other internal resources, Emirates must assess the relationships between the elements in its value chain. Every activity should add value. Take a look at Chapter 3, Exhibit 3.1 to see the value-chain activities. Here is what an assessment of this might look like for Emirates: TN1-354 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note Value chain activity Primary: Inbound logistics (distribution facilities, warehouse layouts) Operations (efficient workflow design, quality control systems) Outbound logistics (efficient scheduling, distribution to customers) Marketing and Sales (motivated employees, innovative advertising and promotion) Service (ability to solicit feedback and respond to customer issues) Secondary (or support): Procurement (relationships with suppliers for procurement of raw materials and supplies) Technology development (state-of-the-art equipment and software) Human resource management (effective recruitment, incentive and retention mechanisms) General Administration (effective planning systems to establish goals, access to operating capital, effective top mgmt communication, relationships with diverse stakeholders)
Case 1: Robin Hood How does Emirates create value for the ―customer‖? What challenges does Emirates have in its value chain? Emirates aided with booking, encouraging passengers to feel valued, feel good about the process. Dubai airport design allowed for efficient throughput of both passengers and cargo. Having control of gates at the Dubai hub allowed efficient scheduling. Innovative marketing connected with targeted customers. Employees carefully selected and groomed to support marketing message. Flight attendants, especially, had strict guidelines for how to respond to passenger demands.
Purchase of high-end aircraft from both Airbus and Boeing meant these vendors would want to keep good relationships with Emirates. Pushed for state-of-the-art designs and operations for in-flight services to stay ahead of competitors. Food service was an example. Very high standards for hiring, extensive training programs created a culture of excellence, meant employees were motivated to be the best. Top-down decision making, vision-driven strategy, close relationship with and support from government meant goals were clear, resources were available for goal attainment.
Primary Activities In terms of primary activities, the key to Emirates‘ ability to successfully compete in the market appeared to reside primarily in its operations, marketing and sales, and service. From the very beginning, Emirates understood the value of its location and the importance of a well-functioning airport to handle the traffic as it grew. It also had a clear picture of its premium customer and TN1-355 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
knew the service quality required to keep this customer. Recognizing that the brand needed better promotion, Emirates developed a creative and effective marketing campaign targeting its primary market of sophisticated world travelers. Support Activities With regard to support activities, a competitive advantage can be achieved by developing a strong general administration that is built around visionary leadership and a supportive human resource management strategy. Emirates‘ hiring practices and training and motivation routines built strong relationships with its employees. This became a major strength, supporting its focus on delivering a premium service. To further answer the question of how to support a competitive strategy, it‘s important to consider the concept of the resource-based view of the firm, and the three key types of resources: tangible resources, intangible resources, and organizational capabilities. A firm‘s strengths and capabilities—no matter how unique or impressive—do NOT necessarily lead to a competitive advantage. The resource-based view of the firm takes the perspective that firms‘ competitive advantages are due to their endowment of strategic resources that are valuable, rare, costly to imitate, and costly to substitute. Without these unique resources, the firm can only attain competitive parity. RBV goes beyond a SWOT analysis to integrate internal and external perspectives in a broader competitive context. RBV can reveal how core competencies embedded in a firm can help it exploit new product and market opportunities. An important issue to focus on here is the importance of intangible resources like innovation and reputation. Especially in mature brands, sustaining reputation is essential. Look at resources that are controlled by Emirates that might enable it to develop and implement value-creating strategies. Based on their reading of the case, students might identify those resources to include: Tangible Resources: Financial: Emirates has remained profitable every year since its founding. Physical: Up-to-date aircraft, new terminal facilities provide advantages. Technological: Emirates requires technology enhancements in its aircraft improvements. Intangible Resources: Organizational: Relationship with founder Sheikh Mohammed bin Rashid al Maktoum means government is supportive of Emirates‘ operation, has a stake in its long-term success. Human: Recruitment and training of staff is critical to Emirates‘ ability to provide outstanding service. Innovation: This has been a strength in the past but needs to be managed in the right direction— choice of innovation in the face of current competition is key. Reputation: Emirates‘ brand is its most significant strength—this should be protected at all costs.
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Teaching Note
Case 1: Robin Hood
Organizational Capabilities: Emirates, under Tim Clark‘s leadership, had been able to execute strategy in the past. Emirates chairman and CEO, His Highness Sheikh Ahmed bin Saeed al Maktoum appeared convinced that the firm could continue to do so. Determining whether the internal resources are valuable, rare, difficult to imitate, or difficult to substitute (VRIN) can help a firm sustain a competitive advantage. See Exhibit 3.6. Applying the VRIN concept, in the case of Emirates, an argument may be made that its resources are inimitable. This is because there was some path dependency, causal ambiguity, and social complexity in its operational history. The founding story, with the initial push by Sheikh Mohammed bin Rashid al Maktoum, created a ―path‖ that included valuable government support that was still present—even if the government did not give direct subsidies, the implication was that government perceived itself as a partner in Emirates‘ operation. Other airlines in many other countries did not have this advantage. Regarding causal ambiguity and social complexity, the decision to involve Sir Maurice Flanagan and then Sir Tim Clark created a rare combination of talent, one where ―substitutes‖ might not have been as successful—the route planning decisions became critical to Emirates‘ later success. Regarding inimitability, especially the human resource, human capital element, might be difficult to replicate. As has been noted, with its vision of being a unique provider, Emirates had an interlocking system of mutually reinforcing competencies that made its resources simultaneously valuable, rare, inimitable and non-substitutable, reinforcing its differentiation strategy, thereby providing a competitive advantage. For advanced students, the instructor may wish to assign Michael Porter‘s 1996 article ―What Is Strategy?‖ (Harvard Business Review, November-December, pp. 60–79) as companion reading to the case. Southwest Airline is used as an example in this article of how tight linkages across its value chain activities give it a valuable, rare, inimitable, and non-substitutable competitive advantage. Students can substitute Emirates to see how these two airlines compare. NOTE WEB LINKS: For more information on how Emirates manages its flight attendants, see this article from 2008, ―Rich Dubai Flirts with Hard Times, But Its Airline Is Still Flying High: Emirates Flight Attendants Live It Up; Champagne and Strict Rules on Weight‖ from http://www.wsj.com/news/articles/SB122877609256789273. The article points out how the airline is ―a demanding employer‖ with rules that ―would be deemed discriminatory in the West.‖ However, many of the recruits come from developing countries where a job at Emirates is considered ―a chance for independence.‖ Even for U.S. recruits the airline is a draw: although the pay is less, the perks include exotic destinations, luxury hotels and generous per diem allowances—the lifestyle is very attractive. 3. OPTIONAL QUESTION: Assess the effectiveness of Emirates’ leadership. NOTE: There are no PowerPoint slides to accompany this discussion. TN1-357 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Emirates is a good case to use to demonstrate the importance of strategic leadership and how decisions about how to ―control‖ operational elements can make a great difference in the success of a given strategy. Although not every point is covered in the case, the following is an optional expanded discussion that instructors can use to investigate these issues. For instance, emphasis can be placed on the importance of understanding and managing company culture. See the external web links included below. These can be used to augment the case and expand the information available to decide these issues. Referencing Chapter 11: Strategic Leadership In the case of Emirates, as with most companies, implementation issues such as those associated with strategic leadership are important for organizational effectiveness. Ask students to discuss how Sheikh Mohammed bin Rashid al Maktoum and then Sir Tim Clark illustrated the activities of strategic leadership. See the concept of leadership, the process of transforming organizations from what they are to what the leader would have them become. This involves: ● Setting a direction ● Designing the organization ● Nurturing a culture dedicated to excellence and ethical behavior Emirates had the advantage of strong leadership right from its beginning. Emirates‘ founder Dubai Sheikh Mohammed bin Rashid al Maktoum laid the foundation and set the tone from the beginning. The three critical activities of strategic leadership—setting the direction, designing the organization, and nurturing a culture dedicated to excellence—were well-balanced at Emirates and that was an important reason for the success of the organization. Setting direction. As outlined in the case, the direction for Emirates was clear: Emirates‘ original founder had the vision of helping Dubai become a center of business and tourism, and he foresaw a premium-quality experience that started with a national airline that could carry those business people and tourists to its exotic destination. Emirates was not just an airline that delivered a superior experience, but it was a catalyst for connecting a new global culture of shared aspirations, values, enthusiasm, and dreams. The mission was to offer Emirates‘ passengers the best possible experience in all sections of its aircraft, encouraging passengers to believe Emirates was the only choice for accessing that new global culture. Emirates had established strategic objectives such as having high standards for in-flight services, first-class gourmet cuisine, and highly trained personnel who could meet all customers‘ needs, from ticketing through departure and arrival at any of its 155 destinations. Organizational design. The organization was designed to ensure that employees understood their roles, and performance expectations. There appeared to be very firm control overall aspects of customer service and operational details. Nurturing a culture dedicated to excellence. At Emirates, a culture dedicated to excellence was nurtured by making excellence in customer service an explicit goal and aligning the reward TN1-358 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
systems toward that end. Also, the leadership at Emirates was successful in realizing that to have excellent customer service, the organization needed well-trained and motivated employees. Therefore, the organization openly acknowledged its strict performance standards, and created a mystique around being chosen as one of the elite employee ―stars.‖ Emirates continues to focus on its founding principles: creating an ultimate experience to exotic destinations for customers who don‘t mind paying for the privilege. Do you think Emirates‘ leadership can continue to deliver on this promise by staying ahead of its competitors, especially because Middle Eastern airlines Etihad and Qatar seem to be innovating in their service offerings? References Porter, M.E. 1996. ―What Is Strategy?‖ Harvard Business Review, 74(6): 61–78. Teaching Note Case 23 — General Motors in 2019 Case Objectives 1. To examine how external and internal forces affect competitive strategy. 2. To investigate the choices of business, corporate-level and international strategies in a highly turbulent industry. See the table below to determine where to use this case: NOTE: Although this case is primarily indicated for Chapter 3 internal analysis and Chapter 5 business-level strategy, it also works well to discuss the other chapters indicated below, as part of the arc of strategic analysis and formulation. CASE OBJECTIVES TABLE Chapter Use Key Concepts INTRO 1: Strategy Concept 2: External Environment PRIMARY 3: Internal Analysis 5: Business-Level Strategy SECONDARY 6: Corporate-Level Strategy 7: International Strategy
Additional Reading and/or Exercises
Strategic management Industry competition five forces; NOTE financial info, web links general environmental factors and embedded video Value-chain analysis; resource-based NOTE web links view of the firm; VRIN Competitive strategy; generic strategies Diversification; synergy; core competencies; acquisitions International strategies: multidomestic vs global TN1-359
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Teaching Note
Case 1: Robin Hood
Case Synopsis In 2019, General Motors was in the midst of a great transformation. Mary T. Barra, the CEO of GM was moving the firm away from many of the passenger cars that it had sold to generations of consumers. It had also moved away from many overseas markets, knocking GM out of the chase to be the top seller globally, a spot it had owned until recently. A couple of years ago, GM had exited from the European market by selling its chronically unprofitable Opel unit to the French maker of Peugeot and Citroen cars. The sale had freed the firm from persistent losses in Europe and fulfilled pledges by Barra to improve overall profit margins and increase returns to shareholders. Appointed as CEO in January 2014, Barra, who had worked her way up within the firm, became the first woman to ever run a big automobile company. She had inherited a firm with a stagnant market share and a real need for continuous improvement. One of her first tasks was to handle fallout from the ignition switch failures that caused accidents and deaths, leading to the recall of 619,000 Chevrolet Cobalts and Pontiac G5s. Barra acknowledged that the safety problems had resulted from deep underlying problems within the GM culture. In addition to quality concerns and financial problems worldwide, GM had been hampered by its multiple divisions, multiple nameplates or brands, each doing its own design and marketing. To cut costs, GM had shared designs and parts across divisions, leading to some loss of distinctiveness between the different brands. To improve its ability to revamp its product line on a regular basis, the firm had cut the GM brands down to four: Chevrolet, Cadillac, Buick, and GMC. Hummer, Saab, Saturn, and Pontiac were sold, spun off, or shut down. In 2016 GM made a significant investment in the ride-sharing service Lyft and acquired Cruise Automation, a company building the capacity for piloting a car using artificial intelligence. A startup within GM, Maven, would pave the way for a future fleet of autonomous cars that could be tapped for self-driving and ride-sharing. GM also launched the all-electric Bolt that promised an almost 240-mile range between charges for a price of $30,000 after federal tax credits. The company moved quickly to beat Tesla‘s new budget-priced Model 3 to the market. In order to shift its resources to fund these new initiatives, GM announced in November 2018 that it was halting operations at four plants in the United States and one in Canada, resulting in the loss of 6,000 factory jobs. By making all of these moves, GM felt it was constructing a portfolio of assets dedicated to disrupting its own core business from within. Even as it laid off its older workforce, it recruited younger employees with technology-heavy skills that went beyond traditional vehicle design and engineering. Barra was keenly aware that GM‘s employees would have to behave differently for its future plans to succeed. She needed to replace a culture of blame and bureaucracy with one driven by accountability and speed. Barra felt quite confident that the investments GM had made would yield results in the future. Although the firm was relying heavily on profits from its trucks and SUVs, it was banking on its new initiatives. Did GM finally have leadership that would be able to reposition the company? Could GM be reborn as a winner? TN1-360 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
CASE UPDATES A source for continual updates on the General Motors story is this New York Times site: http://topics.nytimes.com/top/news/business/companies/general_motors_corporation/index.html? inline=nyt-org. Also, see a timeline of General Motors at https://www.thestreet.com/lifestyle/cars/history-ofgeneral-motors. Teaching Plan The General Motors case can be used to discuss the challenges faced by a firm trying to compete in an industry that is undergoing substantial change. This is an easy case to use to establish the effect of external environmental forces on an industry and an individual competitor, mostly because the U.S. automobile industry had been in such turmoil since the 2009 financial crisis and the advent of the alternative vehicles such as Tesla and the promise of a self-driving car. Many students will be aware of these issues. Therefore, this case can be assigned early in the course to demonstrate the key concepts of strategic analysis. Instructors may also wish to assign the companion case of Ford Motor Company (Case 34), to follow through on concepts of strategic formulation and implementation in the auto industry. Before engaging in discussion, you might want to test student’s basic knowledge regarding the case and the major concepts. Here are some multiple-choice questions to use. (This will get the student‘s attention—they can‘t answer these if they haven‘t read the case!) Which of the following statements is most true? a. General Motors was one of the only firms that had NOT needed a government bailout after the 2007–2008 economic downturn. b. General Motors had to sell its Saab brand. c. GM is a long way off from integrating self-driving technology into its cars. d. GM‘s Buick has not been able to find a significant market in China. ANSWER: b. GM had run up cumulative losses of over $82 billion between 2005 and 2009. Having had to turn to the U.S. government for loans in order to survive, GM finally agreed to cut out four of its brands: Pontiac, Saturn, Saab, and Hummer. GM acquired Cruise Automation in order to better pursue self-driving vehicles, and it had already incorporated several aspects of this technology into a few of its models. No longer offered in other markets outside of North America or China, Buick has developed a major market there, with China contributing 80 percent of its sales. The current CEO of General Motors is a woman. a. Yes b. No ANSWER: a. Mary T. Barra, the CEO of General Motors, is the first woman to take over a large automobile company. TN1-361 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Summary of Discussion Questions Here is a list of the suggested discussion questions. You can decide which questions to assign, and which additional readings or exercises to include to augment each discussion. Refer back to the Case Objectives Table at the beginning of this Teaching Note to identify any additional readings and/or exercises so they can be assigned in advance. 1. What are key forces in the general and industry environments that affect the U.S. auto industry and General Motors? 2. What internal resources and assets does General Motors have to help counter the external forces? 3. What competitive strategy does General Motors use, and how might it position itself for future growth?
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Teaching Note
Case 1: Robin Hood
Discussion Questions and Responses Prior to answering the specific case questions, the instructor might want to position the discussion by reviewing what strategic management really is. Reviewing Chapter 1: Strategic Management Strategy is all about the ideas, decisions, and actions that enable a firm to succeed. See Chapter 1, Exhibit 1.1: Strategic management consists of the analyses, decisions, and actions an organization undertakes in order to create and sustain competitive advantages: ● strategy directs the organization toward overall goals and objectives; ● includes multiple stakeholders in decision making; ● incorporates both short-term and long-term perspectives; ● recognizes tradeoffs between efficiency (cost) and effectiveness (performance). Leaders face a large number of complex challenges. Leaders must be proactive, anticipate change and continually refine changes to their strategies. This requires a certain level of ―ambidextrous behavior,‖ where leaders are alert to opportunities beyond the confines of their own jobs, and are also cooperative and seek out opportunities to combine their efforts with others. Leaders must make strategic management both a process and a way of thinking throughout the organization. During strategic analysis, the leader does ―advance work‖ to anticipate unforeseen environmental developments, identify unanticipated resource constraints, and assess changes in his or her preferences for how to manage. During strategy formulation, the organization addresses the issue of how to compete in a given business to attain competitive advantage. Strategies are formulated at the business, corporate, and international levels. Entrepreneurial initiatives may also play a role. In strategy implementation, depending on the type of organization structure, the leader might include key individuals in a discussion around selecting which strategies might be best to implement at which level within the organization. The leader must ensure proper strategic controls and organizational design, and establish effective means to coordinate and integrate activities within the firm as well as with suppliers, customers, and possible alliance partners. Leaders should also be committed to excellence and ethical behavior while promoting learning and continuous improvement. Here‘s where innovation is important. The basic question strategic management tries to answer is: How can we create competitive advantages in the marketplace that are not only unique and valuable but also difficult for competitors to copy or substitute? 1. What are key forces in the general and industry environments that affect the U.S. auto industry and General Motors?
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Teaching Note
Case 1: Robin Hood
Referencing Chapter 2: Analyzing the External Environment of the Firm Organizational leaders must become aware of factors in the overall environment that might affect their ability to create a competitive advantage. So how do managers become environmentally aware? By doing scanning, monitoring, and gathering competitive intelligence, and using these inputs to develop forecasts. This prepares the firm to do more extensive analysis of the forces in the general environment and the industry or competitive environment. Environmental scanning involves surveillance of a firm‘s external environment to predict environmental changes and detect changes already under way. It is a BIG PICTURE viewpoint of the industry/competition, looking for key indicators of emerging trends—what catches your eye? This alerts the firm to critical trends before changes have developed a discernible pattern and before competitors recognize them. Environmental monitoring is a firm‘s analysis of the external environment that tracks the evolution of environmental trends, sequences of events, or streams of activities. Leaders need to monitor the trends that have the potential to change the competitive landscape—what do you want to track? Firms need to CHOOSE the trends identified via the scanning activity and regularly monitor or track these specific trends to evaluate the impact of these trends on their strategy process. What factors or trends might be most important to General Motors? To assess how the external environment might affect GM‘s strategy, it‘s necessary to take a look at the factors in the general external environment. GM must consider the political/legal, economic and global, sociocultural and demographic, and technological forces that might affect the ability of the firm to deliver its products and sustain its business. See which factors in the general environment we might pick that have a significant impact on the automobile business. Political-Legal: Government intervention meant some firms had lost flexibility, control. All needed to deal with emission standards, and miles-per-gallon edicts further constrained industry product design and development. Safety concerns meant companies had to comply with existing regulations. And unions had considerable power over employment contracts. Economic: The auto business was cyclical and the demand for cars was strongly impacted by a boom or a recession in the economy. First rising gas prices, then any credit crunch, meant customers were very cautious; they would give more weight to the cost of car ownership, including cost of maintenance. Demographic: Automakers needed to attract younger, more affluent buyers to high status vehicles—GM had a poor reputation here. New markets were opening up globally with increasing per-capita incomes in developing countries, creating a possible opportunity. Sociocultural: First the SUV was a status symbol, then going green (hybrid/electric) became the trend. The luxury segment was beginning to regain interest. In urban areas ride-sharing services were reducing the demand for vehicle ownership. TN1-364 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Technological: The electric/hybrid option and the move toward autonomous, self-driving vehicles was dependent on new technological developments. Based on the general environmental forces, the industry was under pressure, but there were also opportunities. Things were changing quickly, especially customer tastes, yet the auto industry‘s lag time in development meant it took a long time to react. Possibly firms with well-coordinated and integrated research and development/logistical supply teams could have an advantage. It‘s also necessary to assess the segments of the external competitive environment that include competitors, customers, and suppliers, substitutes and new entrants. Porter’s five forces model allows strategists to anticipate where the industry might be most vulnerable. See Exhibit 2.7. General Motors, like other automakers, was confronting two key threats: 1. One was from the increased levels of rivalry, and changes in technology that offered radical new designs for those firms that had the right resources. 2. The second was the growing power of buyers such as corporate and government fleet managers and the dealers, and the shift to ride-sharing services rather than car ownership. Clearly, there were a few large and equally balanced firms that were pitched in a battle for a greater share of the global market. Slower industry growth was resulting in an increase in this rivalry. Growth of capacity and high exit barriers were also making a contribution to the industry picture. The other key threat was coming from the growing power of buyers. Most buyers (dealers, fleet operators) were beginning to see more viable choices in terms of the firms from which they could buy. Although there is some difference between the major brands, customers do not have to deal with any switching costs. Major customers were corporate and government fleet managers, car-rental firms, and the dealers themselves. Suppliers did not seem to have much power, but they did become more important as the industry pressures mounted for access to various specialized parts or components, such as batteries or fuel cells.
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Teaching Note
Case 1: Robin Hood
Suggested: A few large and equally balanced competitors fighting for global market share; slow industry growth; current over capacity; high exit barriers. Technological differentiation easily copied. Limited import restrictions for foreign companies.
Suppliers’ Power
Substitutes Threat Low
Rivalry Very High
Low Suggested: Low – do not have much power, except singlesourced ones, but key suppliers may emerge. Suggested: Very hard for new companies to fund startups. Not a major issue for this industry except for key foreign company’s imports.
Threat of New Entrants Low
Suggested: No real substitute for personal automobile transportation – status symbol. Alternatives exist in ridesharing, public transportation, bicycle, and foot power, especially in urban areas.
Buyers’ Power Med-High
Suggested: Consumers do not have much price negotiating power, but do have choices; small differences among major brands; minimal switching costs for consumers. Major customers are corporate and government fleet managers, and the dealers themselves – who are powerful.
Based on the external environmental factor analysis, the U.S. auto industry has many challenges to profitability, primarily from slow industry growth. Equally balanced competitors make it difficult for anyone to achieve an advantage There was always the possibility for overcapacity, and rivals were trying to attract customers away from each other through price cuts and incentives. This became a dangerous trend in the industry because companies were spending as much as they would earn in order to retain their market shares. So, there was growth without profitability. This was true for most American companies while Japanese companies in the past had been able to capture better value by concentrating on offering more sophisticated product designs and technology. Product differentiation was susceptible to quick imitation in this industry, and in the absence of switching costs it was difficult to retain customers. Also, companies had high exit barriers as there were high fixed costs of exit, and also because exit would have had tremendous impact on the employment levels in the economy (one of the reasons for government intervention).
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Teaching Note
Case 1: Robin Hood
NOTE — ADDITIONAL WEB LINKS TO FINANCIAL INFORMATION, EMBEDDED VIDEO: General Motors, like most companies, has a news presence. See what stories are trending at https://www.gm.com/our-stories.html, Also, see a timeline of General Motors at https://www.thestreet.com/lifestyle/cars/history-ofgeneral-motors. View GM‘s current financial picture at: http://finance.yahoo.com/q?s=GM&ql=0. And current news at https://finance.yahoo.com/news/goldman-initiates-coverage-auto-stocks143047439.html. Perception of GM as an innovator was shifting as the Bolt electric car was first to market, beating Tesla. See this report, with interesting bits of history, from 2016 (before becoming CEO, Mary Barra had been in charge of GM‘s electrification development team for three years): https://www.wired.com/2016/01/gm-electric-car-chevy-bolt-mary-barra/. One early challenge to CEO Barra came from the 2014 ignition-switch crisis. According to a story in December 2017, there was a potential financial settlement pending. https://www.wsj.com/articles/gm-faces-1-billion-day-of-reckoning-in-challenge-to-ignitionswitch-settlement-1513432800. For one story about the ignition switch deaths and resulting lawsuits, see http://www.atlantamagazine.com/great-reads/no-accident-inside-gms-deadly-ignition-switchscandal/. In 2014, at the start of the two-day congressional hearing titled ―The GM Ignition Switch Recall: Why Did It Take So Long?,‖ Barra, in the CEO position for only three months, promised to revamp GM‘s cost-centric culture, to inject a greater sense of urgency toward safety issues, and to promote greater accountability within the company. In 2016, one lawyer said the signs of the old GM that Barra pledged to do away with have already returned. Over the past year, he says, the company has continued to deter cases from heading to trial, to deny full responsibility for its role in accidents, and to fight to be shielded from punitive damages for accidents that occurred before GM‘s bankruptcy. ―GM hasn‘t really changed their ways at all, even though they want the public to believe they have,‖ the lawyer says. ―They‘re trying to make sure that victims of the defect are not made whole.‖ From May 2015, here is an interview, including a video, with then new GM CEO Mary Barra: http://www.cbsnews.com/news/what-drives-gm-ceo-mary-barra/. Discussing the impact of the recalls due to extensive safety problems, Barra said ―I think when we look at the extraordinary steps we‘ve taken with the recalls that we did last year, the safety changes we've put in place and the way we design and engineer our vehicles, I feel that we are a very customer-focused company and, again, on a journey to be a defect-free company.‖ Do you think CEO Barra has succeeded in changing GM‘s image? TN1-367 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
2. What internal resources and assets does General Motors have to help counter the external forces? Referencing Chapter 3: Analyzing the Internal Environment of the Firm When one firm outperforms others by a wide margin over a long period of time, it‘s important to figure out how this could be. The answer may lie in how that firm arranges its activities and creates unique bundles of resources that allow it to sustain a competitive advantage. Students should assess the relationships between the elements in General Motors‘ value chain. Remember, value chain analysis is a strategic analysis of an organization that uses value-creating activities. Value is the amount that buyers are willing to pay for what a firm provides them and is measured by total revenue, a reflection of the price a firm‘s product commands, and the quantity it can sell. A firm is profitable when the value it receives exceeds the total costs involved in creating its product or service. Creating value for buyers that exceeds the costs of production (i.e. margin) is a key concept used in analyzing a firm‘s competitive position. Every activity should add value. Take a look at Exhibit 3.1 to see the value chain activities. Based on the relationships between these elements, General Motors could make a choice of how to proceed to craft a competitive advantage. A sample value chain analysis is below: Value chain activity Primary: Inbound logistics (distribution facilities, material control systems, warehouse layouts) Operations (efficient work flow design, quality control systems) Outbound logistics (consolidation of goods, efficient scheduling, finished goods processing) Marketing and Sales (motivated sales people, innovative advertising and promotion, effective pricing, proper ID of customer segments and distribution channels) Service (ability to solicit customer feedback and respond)
How did General Motors create value for the customer? Adequate.
Historically poor quality, high costs, long assembly times. Autonomous divisions made it difficult to achieve economies of scale. Adequate.
Poor image of most brands; safety concerns created perception of lack of accountability.
Adequate.
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Teaching Note Secondary (or support): Procurement (win-win relationships with suppliers, reduced dependence on single supplier) Technology development (state of the art hardware and software, innovative culture and qualified personnel) Human resource management (effective recruitment, incentive and retention mechanisms) General Administration (effective planning systems to establish goals and strategies, access to capital, effective top management communication, relationships with stakeholders)
Case 1: Robin Hood
Adequate.
Previous poor coordination between the functional areas on developing new car designs; high costs/long delays launching new car designs; new Cruise division adds significant technology that can be shared. Removal of key personnel, closure of plants creates potential for unhappy union workers. Poor leadership (past leaders); bloated bureaucracy raised overhead costs. Move to centralize decisionmaking re product development can reduce decision time, cost structure. Current leadership focusing on culture change, setting goals, pursuing internal development, external investment and acquisitions.
Primary Activities In terms of primary activities, although Barra had made moves to fix operations, it‘s hard to find any area where GM had the opportunity to add value.
Support Activities In regard to support activities, a competitive advantage is achieved by developing a strong general administration that is built around visionary leadership and a culture that pushes for technological innovation. Once again, GM‘s history of poor coordination around new product development meant that any technological innovations had only a slight chance of making any headway across product models, therefore, erasing any possible synergies. Current leadership was beginning to make some differences here by focusing on culture change, setting goals, pursuing internal development, external investment and acquisitions. With its acquisition of Cruise, GM was now well positioned to integrate self-driving technology into its own cars, thereby achieving some synergies. In addition, see the concept of the resource-based view of the firm, and the three key types of resources: tangible resources, intangible resources, and organizational capabilities. A firm‘s strengths and capabilities—no matter how unique or impressive—do NOT necessarily lead to a competitive advantage. The resource-based view of the firm takes the perspective that firms‘ competitive advantages are due to their endowment of strategic resources that are valuable, rare, costly to imitate, and costly to substitute. Without these unique resources, the firm can only TN1-369 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
attain competitive parity. RBV goes beyond a SWOT analysis to integrate internal and external perspectives in a broader competitive context. RBV can reveal how core competencies embedded in a firm can help it exploit new product and market opportunities. An important issue to focus on here is the importance of intangible resources like innovation and reputation. In this consumer-based business, sustaining brand reputation is essential. Look at resources that are controlled by General Motors that might enable it to develop and implement value-creating strategies. Based on their reading of the case, students might identify those resources to include: Tangible Resources: Financial: improving, but still uncertain. Physical: possibly considerable, but leading to overhead problems, i.e. the need for plant closures. Technological: GM engineers had to be aware of production technologies to improve efficiencies, design options (electric/hybrids). Acquisition of new technology via Cruise Automation would increase opportunities for internal development. Organizational: extremely poor in the past. Change to a more centralized management structure for product development decisions would help improve efficiencies. Rearrangement of safety personnel, establishment of a global safety and product integrity position meant culture of accountability was being developed. Intangible Resources: Human: Qualified engineers and designers were unable to collaborate effectively in the past. Key personnel were removed in the restructuring, raising questions about loss of tacit learning, core competencies. New hires seem to recognize challenges ahead. Innovation and creativity: uncertain ability to be innovative. Competency might have been present, but existing system had not allowed this resource to be fully re-activated. New acquisitions, establishment of internal development programs may be starting to bear fruit. New effort with Bolt all-electric subcompact shows GM is capable of moving away from a reliance on fuel. Reputation: unfortunately, very poor in the past. Organizational Capabilities: Specific Competencies or Skills: Considerable physical and human resources led to potential competencies, but management structure had not effectively utilized these skills in the past. Current restructuring, putting skilled individuals in key positions to improve performance and drive innovation, may produce results. TN1-370 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Capacity to Combine Resources: The old bureaucracy had made it difficult to combine any resources and activities to full advantage. Now the new Cruise autonomous car division had potential for impact across all other divisions. It‘s unclear what capabilities GM might be able to develop going forward. And whether leadership could capitalize on the new potential. Determining whether the internal resources are valuable, rare, difficult to imitate, or difficult to substitute (VRIN) can help a firm sustain a competitive advantage. See Exhibit 3.6. Applying the VRIN concept shows that General Motors had some valuable assets and activities, especially the physical, human, and innovative technology resources, but none were rare, and none were inimitable or non-substitutable, and these valuable resources remained underutilized. Here‘s where the lack of strong organizational resources, lack of effective general administration activities becomes apparent. Wagoner, and then Henderson and Whitacre, then Akerson and subsequently Barra had taken the following steps: ● Management infrastructure: restructuring of autonomous global divisions, shakeup of vehicle safety personnel, new position for global product integrity, safety engineering. ● Human resource management: (Not in the case: Union concessions, layoffs, and buyouts offered to hourly workers allowed the company to reduce its long-term labor and health care cost structure.) Closure of underperforming plants reduced overhead and personnel costs. ● R&D: development of the Bolt; Cruise new internal startup for ride-sharing, self-driving technology. ● Operations: designers encouraged to make better use of the firm‘s global resources by reusing parts from one car generation to the next. (Not in the case: cut the time it took to develop a new car from nearly four years to 20 months.) ● Manufacturing: sharing practices across divisions. ● Marketing and sales: divestment of unprofitable brands, push to improve image through refocused marketing, especially in the luxury car market. ● Corporate strategy: investment in Lyft, acquisition of Cruise Automation, divestment of brands, internal development of ride-sharing, self-driving options. Although changes had been made, it was clear that GM had lost its cache with customers. (Not in the case: With regard to design, at one time Wagoner had remarked, ―One critically bad thing at GM has been the subordination of design. People who rent our cars at airports look at them and say, ‗Isn‘t this depressing?,‘‖ from 2002, https://money.cnn.com/magazines/fortune/fortune_archive/2002/04/01/320620/index.htm. Wagoner pushed to improve ratings of GM‘s cars but failed to significantly redirect the company‘s design efforts until the re-appointment of Robert Lutz to head product development—but then Lutz retired in 2010.) Things may be changing. The development of the Volt family, with the Bolt all-electric subcompact, has made this one of the world‘s leading hybrid lineups. Efforts to redesign Buick as ―refined luxury‖ has led to this brand creating a major market in China. GM was hoping to compete with the elite class of top-level luxury cars by putting money into a redesign of Cadillac and better defining its identity. TN1-371 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Both Porter‘s model and the value chain analysis pointed to a company that was out of sync with the market. GM‘s leadership had to address cultural issues—fiefdoms, old ways of doing things, dysfunctional approach to accountability, not taking responsibility for decisions, etc. What GM had done up to 2009 were incremental changes—necessary but not complete in and of themselves. Since 2010, General Motors made progress under new leadership. In 2015, new CEO Mary Barra had taken a stand, promising that the neglect of safety issues would never happen again, and that she was committed to building the best cars GM had ever offered. By 2019, with the acquisition of Cruise Automation, investment in Lyft and the development of internal startup Zipcar-like Maven, Barra had taken moves to position GM for innovation. Would she be able to return GM to its former leadership position in the industry? NOTE — ADDITIONAL WEB LINKS: In October 2018 a profile of General Motor‘s leadership commented on the diverse management team then in place: GM veterans CEO Mary Barra and global product group president Mark Reuss, and newcomers General Motors‘ president, Dan Ammann, and incoming CFO Dhivya Suryadevara, also a woman: unlike the old GM which was known for unproductive internal conflict, ―the current team is a model of earnest conflict transmuted into productive collaboration.‖ The core concept for all three executives is trust, built on a mutual respect for what Barra calls ―leveraging diversity of thought.‖ That‘s critical because GM is huge; it combines manufacturing, financing, and technology on a mass scale, so it‘s always grappling with what Reuss calls ―big, complex problems.‖ Reuss, Ammann, and Barra know that since 2010 the auto industry has enjoyed nearly a decade of expansion, and that booming sales can‘t last forever. A downturn will arrive, and as skillful as the team has been so far, the real test is over the horizon. See https://www.businessinsider.com/gm-mary-barra-management-helped-save-automaker2018-10. In November 2018, Dan Amman gave up his job as president of GM to become chief executive of Cruise, the GM division working on autonomous vehicles. The unit was formed when Amman spearheaded GM‘s acquisition of Cruise Automation, a San Francisco start-up for more than $1 billion in 2016. See https://www.cnbc.com/2018/11/29/gm-president-dan-ammann-taking-overas-ceo-of-cruise-autonomous-unit.html.
3. What competitive strategy does General Motors use, and how might it position itself for future growth? Referencing Chapter 5: Business-Level Strategy A competitive strategy is linked to the value chain, and supported by intangible assets. GM had a historical lack of coordination across the value chain. Resources and assets should provide a firm with the ability to create products that are unique and valuable to customers, but GM did not have either VRIN resources or enduring intangible assets to allow it to do this.
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Teaching Note
Case 1: Robin Hood
In order to achieve a sustainable competitive advantage, GM had to assess its ability to contend with other automobile companies. The question of how to compete in a given business to attain competitive advantage requires an assessment of the types of competitive strategies, including the three generic strategies that are used to overcome the five forces and achieve a competitive advantage. Generic strategies are plotted on two dimensions: competitive advantage and strategic target. The overall cost leadership and differentiation strategies strive to attain advantages industrywide, while focusers have a narrow target market in mind. However, there is the possibility of combining overall low-cost and differentiation strategies into a combination strategy. This involves attention being paid to the following. Mass customization, facilitated by advances in manufacturing technologies, would allow a firm to manufacture unique products in small quantities at low cost. However, firms must maintain awareness of the industry‘s profit profile. The profit pool involves the total profits in an industry at all points along the industry‘s value chain. The structure of the profit pool can be complex. The potential pool of profits will be deeper in some segments of the value chain than others, and the depths will vary within an individual segment. Segment profitability may vary widely by customer group, product category, geographic market, or distribution channel. Additionally, the pattern of profit concentration in an industry is often very different from the pattern of revenue generation. Many firms have also achieved success with a combination strategy by integrating activities throughout the extended value chain, using information technology to link their own value chain with the value chains of their customers and suppliers. It‘s hard to see what competitive strategy would be best for General Motors. It had too many legacy costs, so was unable to maintain parity on low cost, and it was not perceived as unique enough to be truly differentiated. GM would need to be much more innovative to catch up to other manufacturers, and it had a long legacy of disappointed customers—the brand reputation had taken quite a hit with the safety problems and recalls. Even with the recent success of the Volt family of hybrid vehicles, there was still a perception of GM as an aging and unresponsive brand, as witnessed by the poorer performance of the Buick and Cadillac legacy designs. GM would have liked to use a combination strategy, but, as indicated above, did not yet have the integrative mechanisms in place to take advantage of any value chain synergy, either in its own activities, or in combination with industry partners. The legacy of a culture that avoided accountability had made it difficult to believe in any real commitment to innovation and external collaboration. At the conclusion of the case, although CEO Barra had expressed confidence in GM‘s ability to yield results in the future, the firm appeared to be stuck-in-the-middle. Referencing Chapter 6: Corporate-Level Strategy Corporate strategy focuses discussion on the questions of what businesses a corporation should compete in, and how the businesses should be managed so they can create ―synergy‖ —creating value through entering new markets or developing new technologies, either through related or unrelated diversification.
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Teaching Note
Case 1: Robin Hood
Diversification is the process of firms expanding their operations by entering new businesses. Some possibilities include: ● Mergers and acquisitions ● Strategic alliances ● Joint ventures ● Internal development Whatever the choice, it should create value for all stakeholders—employees, suppliers, distributors, and the organization‘s owners themselves. The choice of diversification strategy should create synergy so that all parties gain something they would not have had on their own. Companies can achieve synergy through diversification in two ways: 1. Through related businesses (horizontal relationships) ● Sharing tangible resources ● Sharing intangible resources ● Leveraging core competencies 2. Or through unrelated businesses (hierarchical relationships) ● Value creation derives from corporate office ● Leveraging support activities Core competencies reflect the collective learning in organizations—how to coordinate diverse production skills, integrate multiple streams of technologies, and market diverse products and services to create value. Core competencies must create superior customer value; the different businesses must all have similar elements in the value chain that require similar skills; and these activities or skills must be difficult for competitors to imitate. In the past, General Motors had pursued too much diversification into unrelated businesses. Attempts to leverage shared support activities had not worked. For instance, GM had different divisions developing their own cars, from Hummer to Saab to Saturn. There were not enough similarities in the value chain for these products to see any value creation. However, divesting those brands. as well as Opel. did provide the possibility for synergies from existing operations going forward, but only if the current leadership could streamline processes further. GM‘s current corporate structure included only four operating segments: GM North America, GM International, GM Cruise (the autonomous division), and General Motors Financial (see Case Exhibit 5). In order to further streamline operations, in November 2018 CEO Barra had made the decision to halt operations at four plants in the United States and one in Canada, resulting in the loss of 6,000 factory jobs. All of these factories had been losing money because they were producing small- and medium-sized cars such as the Chevrolet Cruze and Impala and the Buick LaCrosse. Although the firm was relying heavily on profits from its trucks and SUVs, it was banking on its new initiatives. Not only was the Bolt the first inexpensive long-range electric car on the road, it was also expected to function as the firm‘s platform for testing new models for ride-sharing and autonomous driving among the other divisions.
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Teaching Note
Case 1: Robin Hood
GM had recently pursued acquisitions and internal development, signaling a possible construction of a portfolio of assets dedicated to disrupting its own core businesses from within. Even as GM was relying on pickup trucks and sport-utility vehicles to make profits in the shortrun, it was banking on electric vehicles and self-driving cars for its future. Cruise was well on its way to developing a potentially significant market value. To support this effort, GM had brought in SoftBank, the Japanese technology giant and Honda Motor, the Japanese auto firm, as partners. However, CEO Barra knew one of the core competencies she had to develop was agility. She had to replace a culture of blame and bureaucracy with one driven by accountability and speed. In this case, value creation would have to flow from the corporate office. Referencing Chapter 7: International Strategy International expansion is a viable diversification strategy; however, before pursuing this, a firm needs to determine why an industry in a given country is more (or less) successful than the same industry in another country. When choosing a country to expand into, firms must assess the degree of consumer demand, the degree to which resources such as skilled labor and other supplier or supporting infrastructure are developed and available, the speed with which such resources can be deployed, the extent of political and economic risk and corruption, the access to qualified management. There are two opposing forces that firms face when entering international markets: cost reduction, and adaptation to local markets. Therefore there are four basic strategies firms can use: international, global, multidomestic, and transnational. See Chapter 7, Exhibit 7.4. A global strategy was effective if it standardized all of a firm‘s products for all of its worldwide markets. Doing this would reduce a firm‘s overall costs by spreading investments over a larger global market. However, a global strategy should be based on three assumptions: 1. Customer needs and interests were homogeneous worldwide. 2. People worldwide generally preferred lower prices at higher quality. 3. Economies of scale could be achieved by supplying these global markets. General Motors had tried to pursue a global strategy with Chevy, but had a multidomestic strategy with other brands. Some headway had been made with Chevy‘s fuel-efficient small cars and GM also had this multidomestic strategy with local brands in certain regions such as Opel/Vauxhall in Europe (although recently divested), and Wuling in China. See Case Exhibits 3 and 4. Buick had captured market share in China, but was not being sold elsewhere except North America. GM‘s European market was stagnant, prompting the selling of Opel to the French maker of Peugot and Citroen. However, there were some bright spots. Sales of Chevrolet cars had reinvented Chevy as a global mass-market brand, with over 60 percent of its sales coming TN1-375 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
from outside the United States. But Cadillac was still fighting cultural inertia and struggling to compete with aggressive competition from the likes of German elite luxury car makers. At General Motors, industry and value chain analysis had pointed to a company out of sync with the global marketplace. Car designs needed to improve, costs needed to be more under control, fundamental cultural issues may still need to be addressed: fiefdoms, resistance to change, dysfunctional approach to accountability, not taking responsibility for decisions, etc. All strategies needed focus to achieve synergies. Since becoming CEO in 2014, Barra appeared to have made significant changes to pursue innovation and manage costs, constructing a portfolio of assets that were dedicated to disrupting the core business from within, and had made changes to the leadership and culture, preparing GM to be a formidable player in the future. But would that future include a significant global market share? Teaching Note Case 24 — Johnson & Johnson Case Objectives 1. To help students understand how a firm makes decisions about what businesses the corporation should compete in, and how growth should be accomplished. 2. To encourage discussion of the implications of a firm‘s strategy for the structure of its organization. See the table below to determine where to use this case. NOTE: There are both PRIMARY and SECONDARY chapters that can be used for this case. The Teaching Note gives guidance for the PRIMARY use chapters, and provides suggestions if the instructor wants to use the case to illustrate concepts from the optional SECONDARY chapters. CASE OBJECTIVES TABLE Chapter Use Key Concepts PRIMARY Acquisition; diversification CONCEPTS 6: Corporate-Level Strategy 10: Organizational Organizational structure Design 11: Strategic Leadership Leadership SECONDARY Entrepreneurship; opportunity CONCEPTS recognition 8: Entrepreneurial Strategy 9: Strategic Control Informational vs. behavioral control 12: Managing Innovation Innovation
Additional Readings NOTE links to J&J‘s corporate website, video and financial info NOTE interview with CEO Weldon, articles NOTE additional articles, links, optional reading
NOTE additional articles, links, optional reading
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Teaching Note
Case 1: Robin Hood
Case Synopsis In 2019, Johnson & Johnson (J&J) faced yet another lawsuit that resulted in a jury awarding $29 million to a woman who claimed asbestos in Johnson & Johnson‘s talcum-powder-based products caused her cancer. These lawsuits, legal challenges about the quality of its products, had posed a serious problem for the well-established reputation of J&J. With 260 operating companies in virtually every country, J&J had managed to develop the world‘s largest medical device business, an even bigger pharmaceutical business, and a consumer products division with a dozen megabrands from Neutrogena to Tylenol. The firm‘s reputation had been derived from its diversified businesses, reflecting its wide range of expertise and allowing it to develop a customer base that ranged from consumers to hospitals to governments. J&J was financially stable partly because its diversified business platform allowed it the luxury of time and the ability to look at different opportunities across different business units. However, even as it had grown and become more diversified, J&J had struggled to find a way to manage its vast portfolio of diversified businesses. Much of its growth had come from acquisitions and it had developed a culture of granting considerable autonomy of each of the firms that it absorbed. Although this was intended to cultivate an entrepreneurial attitude among each of its units, this had prevented J&J from instilling a strong set of controls, such as for quality standards. It had also prevented the firm from pursuing opportunities on which its various units could combine their different areas of expertise. William C. Weldon, the firm‘s chief executive up until 2012, had believed that the best opportunities might come from increased collaboration between its different units—that the firm had the ability to develop new products by pooling resources, combining its strengths across the diverse divisions, thereby developing synergy through convergence. He created a corporate office to get business units working together on promising new opportunities, convinced that the push for communication and coordination and an emphasis on meeting tough performance targets would allow the firm to develop the synergy that he was seeking. However, after a swarm of product recalls, manufacturing lapses, and government inquiries were blamed on his obsession with cutting costs, Weldon stepped down as CEO in April 2012. The new CEO Alex Gorsky was a consummate insider, having run the two biggest of J&J‘s divisions. Going forward, Gorsky wanted to maintain a balance at J&J between the controls necessary to protect the firm‘s reputation and the freedom that would allow its business units to keep growing. Gorsky began to challenge the firm‘s once-sacrosanct principle of giving complete autonomy to its multiple units. In his view, decentralization that fostered creativity should not allow these different units to be completely disconnected. Just as Weldon did, Gorsky wanted various units of the firm to work together to find synergies, to cross-fertilize ideas, and to reap cost savings that could be reinvested in the business. To that end he created the position of group worldwide chairman, who was to align everything from HR policy to procurement processes from the 250 business units. In addition, J&J‘s seven TN1-377 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
different pharmaceuticals R&D units were merged, creating a highly coordinated and streamlined development process in which global teams and innovation centers could not only cut significant time off of drug approval, but also create interactions with outside entrepreneurs that could source productive new ideas. Gorsky‘s biggest challenge came from a demand that J&J might be better off if it were divided into smaller companies, perhaps along the lines of its different divisions. There were growing concerns about the ability of the conglomerate to provide sufficient supervision to all of its global subsidiaries. But Gorsky believed J&J drew substantial benefits from the diversified nature of its businesses, and that the firm‘s huge scale could be a rare asset for negotiating deals. Gorsky wanted to provide more direction, encouraging the diverse units to collaborate with each other to pursue emerging opportunities, but he also understood J&J needed sufficient controls to minimize future quality issues. Would J&J be able to continue to find avenues for growth, drawing substantial benefits from the diversified nature of its businesses while still maintaining adequate quality control? Could J&J keep growing without creating issues that posed further threats to its reputation? Teaching Plan This case is best positioned after students have a firm grasp of strategic analysis, including how to assess both internal and external environments. J&J provides an opportunity to investigate how strategic implementation, including organizational design, is dependent on the choice of corporate strategy. Before engaging in discussion, you might want to test student’s basic knowledge regarding the case and the major concepts. Here are some multiple-choice questions to use. (This will get the student‘s attention—they can‘t answer these if they haven‘t read the case!) Which of the following statements is most true? a. Johnson & Johnson has over 250 different subsidiaries divided among three different divisions. b. The consumer products division, including J&J baby care and Band-Aid products, was the most profitable. c. McNeil Consumer Healthcare, maker of Tylenol and other children‘s drugs, is one of J&J‘s highest quality business units. d. New CEO Gorsky comes from outside J&J, which is a good thing. ANSWER: a. Johnson & Johnson developed into an astonishingly complex enterprise, made up of over 250 different subsidiaries that were divided among three different divisions. Although J&J‘s consumer products were well known, J&J reaped far more sales from its other two divisions. Pharmaceuticals and medical devices generated operating profits almost double those generated by the consumer business. Serious issues had led to the biggest children‘s drug recall of all time. Problems at McNeil may have been exacerbated in 2006 when J&J decided to combine it with newly acquired Pfizer where it was not subjected to the same level of quality control. Gorsky had been with the firm since 1988, holding positions in its pharmaceutical TN1-378 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
businesses across Europe, Africa, and the Middle East, as well as running the medical device group during the troubles with the artificial hip recalls. Johnson & Johnson has benefited from keeping its business units separate—decentralization has fostered creativity that has led to considerable growth within each separate unit. a. Yes b. No ANSWER: b. Business unit cross-fertilization has led to some highly successful new products such as the collaboration between the consumer products and pharmaceutical divisions that created liquid Band-Aid. Summary of Discussion Questions Here is a list of the suggested discussion questions. You can decide which questions to assign, and which additional readings or exercises to include to augment each discussion. Refer back to the Case Objectives Table at the beginning of this Teaching Note to identify any additional readings and/or exercises so they can be assigned in advance. 1. PRIMARY QUESTIONS: What corporate strategy does Johnson & Johnson pursue? 2. What implications does Johnson & Johnson‘s corporate strategy have for its organizational design? 3. What is the role of strategic leadership in a company like Johnson & Johnson? 4. SECONDARY QUESTION: How can synergy best be managed at a company such as Johnson & Johnson? Discussion Questions and Responses 1. What corporate strategy does Johnson & Johnson pursue? Referencing Chapter 6: Corporate-Level Strategy: Creating Value through Diversification Any discussion of strategy assumes an understanding of the strategy concept. Strategy is all about the ideas, decisions, and actions that enable a firm to succeed. See Chapter 1, Exhibit 1.1: Strategic management consists of the analyses, decisions, and actions an organization undertakes in order to create and sustain competitive advantages: ● strategy directs the organization toward overall goals and objectives; ● includes multiple stakeholders in decision making; ● incorporates both short-term and long-term perspectives; ● recognizes tradeoffs between efficiency and effectiveness. Corporate strategy focuses discussion on the questions of what businesses a corporation should compete in, and how the businesses should be managed so they can create ―synergy‖ —creating value through entering new markets or developing new technologies, either through related or unrelated diversification.
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Teaching Note
Case 1: Robin Hood
Diversification is the process of firms expanding their operations by entering new businesses. In related diversification, a firm enters a different business in which it can benefit from leveraging core competencies, sharing activities, or building market power. Some possibilities include: ● Mergers and acquisitions ● Strategic alliances ● Joint ventures ● Internal development Whatever the choice, it should create value for all stakeholders—employees, suppliers, distributors, and the organization‘s owners themselves. The choice of diversification strategy should create synergy so that all parties gain something they would not have had on their own. Johnson & Johnson has grown mainly via acquisition in the past. Acquisition is the incorporation of one firm into another through purchase. It can be a means of obtaining valuable resources that can help an organization expand its product offerings and services. Acquisition can lead to consolidation within an industry and can force other players to merge. Corporations can also enter new market segments by way of acquisitions. Using J&J‘s huge scale as an asset in negotiating deals, Gorsky was able to acquire Auris Health in 2019 for approximately $3.4 billion in cash. The acquisition would accelerate the firm‘s entry into surgical robotics and other interventional applications that have shown considerable potential for growth. Some of J&J‘s other major acquisitions include the 2017 acquisition of the Swiss biotechnology firm Actelion for $30 billion and the acquisition of Pfizer‘s consumer health division. This consumer health division absorbed McNeil Pharmaceutical, an example of consolidation occurs in the consumer health industry. (Not in the case: The acquisition of Mentor Corporation in 2008 allowed J&J to enter the new market segment of cosmetic medicine. The 2012 acquisition of medical-device maker Synthes made J&J a major player in the trauma surgery market. Not all acquisitions have been successful. In 2007, J&J had to withdraw a promising new stent from its recent acquisition, Connor Medsystems, after it failed in trials. And J&J decided to divest itself of Cordis, which makes stents and catheters.) Johnson & Johnson is also an interesting case to use to explore avenues for creating value through diversification. When achieving synergy through diversification, a firm has two choices: 1) related diversification through horizontal relationships with related businesses, sharing tangible and intangible resources, and leveraging core competencies; and 2) unrelated diversification though hierarchical relationships with unrelated business. In this case, value creation derives from the corporate office by leveraging support activities. Upon first glance, it would appear that J&J provides a clear example of related diversification. Almost all of its businesses are in the healthcare area. Even many of its consumer businesses are tied to health care. But a much closer scrutiny of the facts in the case does clearly indicate that J&J is quite clear about allowing these businesses to operate rather autonomously. It is hard to figure out what specific resources are being shared by ALL of the business units. It is even harder to identify the specific value chain activities that are being shared between the various units. Clearly, Weldon, and now Gorsky, had been trying to get these units to do some collaborative research and development work. Traditionally, they all had their own TN1-380 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
manufacturing operations and may even do much of their own distribution. The benefit for all of these units would clearly lie in the joint marketing efforts the J&J brand offers. These facts suggest that there is some degree of relatedness, most of which is designed to increase the market power of these units. This power comes largely from the businesses being grouped together under a powerful well-known brand. Apart from that, in the past J&J had been operating these businesses as if they were relatively unrelated, when in fact, most of the businesses have mainly benefited from the access that they have to vast resource pool of a large company such as J&J. Weldon tried to work on developing this relatedness between the various business units. Above all, he had tried to develop at least some R&D activities that were shared between these units. This would increase shared resources and greater cooperation in some of the other activities. However, because these companies had been committed to maintaining their independence, there had been some concern that links would have to be developed slowly and with the support of strong incentives. Synergy due to shared resources is a key motivation for related diversification. Through synergy, each business in a portfolio helps others, and in so doing, helps itself. As indicated above, J&J follows a related diversification mode, except that there is a considerable amount of independence for the units. This helps the organization because each unit uses its independence to make quick decisions and competes better in their market arena. However, this same independence also gets in the way of ensuring synergy. Not in the case: When Weldon took over the firm in 2002, he was particularly concerned about the prospects of the firm‘s pharmaceutical division, which had consistently accounted for almost half of the firm‘s revenues and more than half of the firm‘s profits. While J&J‘s pharmaceutical business was robust, the company was looking at declining revenues from its best-selling drugs because of expiring patents and growing competition. To spur growth, Weldon believed that the best entrepreneurial opportunities would come from increased collaboration between its units. The firm had the ability to develop new products by combining its strengths across pharmaceutical products, medical devices and diagnostics, and consumer products. The challenge that Weldon faced, though, was that pushing synergy through close cooperation between units would go against the tradition of J&J which had great success in the past based on the relative autonomy and independence that it accorded its various business units. Weldon believed that any push for collaboration should build upon the entrepreneurial spirit that had been built over the years through this type of organization. When Gorsky took over the firm in 2012 he decided to continue the push for collaboration started by Weldon. Gorsky gave newly hired Sandi Peterson the position of group worldwide chairman and tasked her with aligning the 250 business units on everything from HR policy to procurement processes. This consolidation of the firm‘s data and development of shared resources would allow the company to save about $1 billion. In addition the integration of J&J‘s seven drug R&D organizations allowed for a shared and TN1-381 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
streamlined system for handling clinical or regulatory development, which cut months, and in some cases years, off the development time. Its increase in drug approvals over the past decade put J&J in a league of its own. In addition to reducing the time needed to bring drugs to market, this increased internal development lead to the creation of innovation centers in worldwide biotech clusters, where scientific entrepreneurs could interact with J&J‘s own drug and technology scouts. This increased the core competency of J&J‘s internal scientists, creating value through the development of new technologies and products. Since 2013, the firm had reviewed more than 3,400 opportunities through these centers, leading to 200 partnerships.
TN1-382 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
NOTE — ADDITIONAL READING, WEB LINKS: Johnson & Johnson competes in several highly competitive markets: healthcare consumer products, pharmaceuticals, and medical devices. View their financials compared to some of their competitors: http://finance.yahoo.com/q/co?s=JNJ. How does it appear J&J is doing? Note that this profile uses healthcare and drug manufacturing as the industry. Would the competitive picture be different in consumer products, or medical devices? What does this say about J&J‘s competitiveness? Here‘s a list of the product categories J&J competes in: http://www.jnj.com/about-jnj/company-structure. A major force in pharmaceuticals, medical devices, and consumer products, J&J draws part of its strength and sustaining power from innovation partners. See more at https://www.jnj.com/innovation-at-jnj. And see the Janssen Business Development team at J&J Innovation who seek collaboration or a merger and acquisition discussion with established pharmaceutical companies or mid-sized to large biotechnology companies. https://www.jnjinnovation.com/janssenbusinessdevelopment. In 2009, J&J was considered a strong stock pick, the ―most respected company in the world‖ according to Barron‘s, partly because of its diverse holdings (See http://online.barrons.com/article/SB124527599477624863.html?mod=googlenews_barrons with a video report at http://www.barrons.com/video/time-to-buy-jj/91D930DC-3299-491C-BFDA63208D3C1EFC.html.) But in 2012, CEO William Weldon would step down after ―massive recalls of products from artificial hips to children‘s Tylenol.‖ See a list of recalls at https://www.reuters.com/article/us-johnsonandjohnson-timeline/timeline-johnson-johnsonsproduct-recalls-idUSTRE81L01K20120222. This prompted the question of whether J&J could ―get its act together‖: http://www.nytimes.com/2011/01/16/business/16johnson-andjohnson.html?mtrref=search.yahoo.com&gwh=D1738768C700AA5BAA3D14AE88AAC6E4& gwt=pay. In 2011, the results of a special committee of the J&J board, formed to investigate the recalls and related claims that fiduciary duties may have been breached in the problems uncovered at DePuy and McNeil, found no indications of systemic failure. Specifically regarding McNeil, ―With the benefit of hindsight, it appears that the restructuring may have been imperfectly executed,‖ the committee confesses, and continues: The J&J consumer group ―should have paid more attention to Q&C, and exercised more management oversight of McNeil. With reduced central oversight and tasked with implementing the Pfizer Healthcare acquisition, some McNeil employees may have lost focus and commitment to maintain quality standards.‖ See https://seekingalpha.com/article/280813-johnson-and-johnson-special-committee-nowrongdoing. TN1-383 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
J&J reconsidered the organizational structure at McNeil, removing it from the wider group of consumer healthcare businesses, and once again making it its own organization. Making McNeil separate would ―give focused attention to quality and compliance, and the critical task of restoring‖ the reputation of its products. (See http://online.wsj.com/article/SB10001424052748703712504576233112549707154.html.) When Gorsky took over, he had some work to do to convince the investor community that he was truly doing sincere work to improve quality and transparency. J&J‘s reputation had suffered. Stakeholders were concerned that the company was not focusing enough on ―areas that drive its business and, thereby, its reputation, like development innovation, supply chain security, delivery integrity and reliability, environmental and social policies, even regulatory compliance.‖ See http://www.forbes.com/sites/jonathansalembaskin/2013/05/08/jj-corporate-image-campaignfails-to-talk-the-walk/. In 2017, CEO Alex Gorsky was interviewed at the China Development Forum 2017. He pointed out that J&J is a ―very global company‖ with supply and innovation partners around the world. He pointed out that the acquisition of Actelion merges their ―great science in execution‖ with the ―very diverse platform‖ and global reach of J&J to create a ―very significant opportunity.‖ Gorsky also stressed that J&J has been in China for 35 years and has over 10,000 employees there. He said J&J plans to invest about a half a billion dollars in research and development in China, with many of those products intended to be used there initially, and then exported around the globe. https://www.cnbc.com/2017/03/20/china-development-forum-cnbc-transcript-alexgorsky-ceo-johnson-johnson.html. Is J&J‘s diversification strategy effective? 2. What implications does Johnson & Johnson’s corporate strategy have for its organizational design? Referencing Chapter 10: Creating Effective Organizational Designs Strategy consists of analysis (setting goals, assessing the internal and external environment of the firm), formulation (deciding which industries to compete in and how to compete in those industries), and implementation, where organizational leaders allocate the necessary resources and design the organization to bring intended strategies to reality. Johnson & Johnson‘s CEO Weldon had made a choice of how to compete. He then had to make a decision about the organization‘s design. Once new CEO Alex Gorsky took over, he had to do the same. Chapter 10 stresses that organizational strategy has implications for a firm‘s structure. Students should relate concepts from Chapter 10, such as the differences between various structures and the effectiveness of each possible structure for J&J‘s possible choices of strategy. Organizational structure refers to formalized patterns of interactions that link a firm‘s tasks, technologies, and people. Structure provides a means of balancing two conflicting forces: the need for the division of tasks into meaningful groupings, and the need to integrate the groupings for efficiency and effectiveness by coordinating and integrating key activities.
TN1-384 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Factors that facilitate the effective coordination and integration of key activities include having a common culture and shared values, horizontal organization structures, horizontal systems and processes, effective communications and information technologies, and involved human resource practices. An effective organizational design can encourage the flow of information and enhance working relationships between functional departments and activities. However, achieving the coordination and integration necessary to maximize the potential of an organization‘s human capital involves much more than just creating a new structure. Different structures lead to different degrees of flexibility and permeability, and can affect the amount of culture change required. Structures can have an impact on relationships between internal and external constituencies, and therefore need the full support of the management team to implement. Historically, Johnson & Johnson had a decentralized divisional structure. Given that Weldon had wanted to take advantage of the existing entrepreneurial spirit within the different divisions and business units, he implemented changes to Johnson & Johnson‘s organizational structure to foster better communication and more frequent collaboration between J&J‘s disparate operations. He created a corporate office to get business units to work together on promising new opportunities. Not in the case: For instance, he created a new post to oversee all of the pharmaceutical division‘s R&D efforts. He also formed a divisional committee that brought together executives from R&D with those from sales and marketing to decide which projects to greenlight. Up until then, the R&D group had made these critical decisions on their own without the involvement of any other departments. This change required more horizontal coordination. Weldon worked with the company‘s other top executives to set up groups that drew people from across the firm to focus their efforts on specific diseases. Each of the groups was expected to report every six months on potential strategies and projects. Weldon‘s efforts started to pay off as seen in the following examples: ● Liquid Band-Aid was based on a material used in a wound-closing product sold by one of J&J‘s hospital-supply business. ● Its antifungal treatment, Nizoral, helped the company develop a dandruff shampoo. ● Not in the case: J&J‘s drug-coated stent, called Cypher, was a result of collaboration between the company‘s drug and device businesses. The stent props open arteries after angioplasty. Products developed through cross-fertilization allowed the firm‘s consumer business to see considerable growth. However, emerging quality control problems signaled issues with restructuring. McNeil‘s merger with Pfizer Consumer Products, and subsequent transfer from the heavily regulated pharmaceutical division to the marketing-driven consumer products division had led to reduced emphasis on quality control. Weldon had to upgrade plants and equipment, appoint new managers, improve procedures and systems, and create a centralized companywide quality TN1-385 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
control function that involved a single framework for quality across all operating units, including a new reporting system. Not in the case: In 2011, the results of a special committee of the J&J board, formed to investigate the recalls and related claims that fiduciary duties may have been breached in the problems uncovered at DePuy and McNeil, found no indications of systemic failure. Specifically regarding McNeil, ―With the benefit of hindsight, it appears that the restructuring may have been imperfectly executed,‖ the committee confesses, and continues—the J&J consumer group ―should have paid more attention to Q&C, and exercised more management oversight of McNeil. With reduced central oversight and tasked with implementing the Pfizer Healthcare acquisition, some McNeil employees may have lost focus and commitment to maintain quality standards.‖ See https://seekingalpha.com/article/280813-johnson-and-johnson-special-committee-nowrongdoing. J&J reconsidered the organizational structure at McNeil, removing it from the wider group of consumer healthcare businesses, and once again allowing it to become its own organization. Making McNeil separate would ―give focused attention to quality and compliance, and the critical task of restoring" the reputation of its products. See http://online.wsj.com/article/SB10001424052748703712504576233112549707154.html. When contemplating the various options for corporate structures, some might suggest creating multi-divisional strategic business units (SBUs) out of the current 250 different divisions. After all, there is a cost for duplication of functions, i.e. Human Resources and Finance, but combining them even in a multi-divisional structure would make it hard to foster synergy. Would centralizing these functions even save enough to matter? And even if money was saved, what might this do to the entrepreneurial spirit of the currently decentralized operating divisions? It‘s probably best, as Weldon initially decided, to use coping mechanisms to infuse cultural indoctrination for any acquired divisions, bringing them into the honored J&J Credo mantra, and let that overarching vision guide decision making. However, Alex Gorsky, when he took over as CEO, went even further in breaking down the silos between business units, even in related divisions. Gorsky began to challenge the firm‘s oncesacrosanct principle of giving complete autonomy to its 250-odd units. In his view, decentralization that fostered creativity should not allow these different units to be completely disconnected. Just as Weldon did, Gorsky wanted various units of the firm to work together to find synergies, to cross-fertilize ideas, and to reap cost savings that could be reinvested in the business. To that end he created the position of group worldwide chairman, to align everything from HR policy to procurement processes from the 250 business units. This entity allowed for the consolidation of all of the firm‘s data, such as about all of its 120,000 employees, into a single HR database, saving J&J about $1billion in decision making about contracts and timing of financial procurement forecasts. In addition, J&J‘s seven different pharmaceuticals R&D units were merged, creating a highly coordinated and streamlined development process where global teams and innovation centers TN1-386 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
could not only cut significant time off of drug approval, but also create interactions with outside entrepreneurs that could source productive new ideas. These innovation clusters allowed these outsiders access to J&J‘s intellectual and technology assets, and since 2013 had resulted in more than 3,400 opportunities for collaboration, leading to 200 partnerships, with potentially many more innovative products and processes to come. Structure provides a means of balancing two conflicting forces: the need for the division of tasks into meaningful groupings, and the need to integrate the groupings for efficiency and effectiveness by coordinating and integrating key activities. Gorsky‘s efforts all facilitated this effective coordination and integration of key activities. Gorsky had needed to rethink the process by which J&J managed its diversified portfolio of companies in order to ensure that it could keep growing without creating issues that could pose further threats to its reputation. Going forward he did agree that the firm might have to be more selective, careful and decisive about the products and partners it pursued, and possibly divest itself from those technologies that didn‘t show enough potential for growth. NOTE — ADDITIONAL READING: J&J‘s need for internal innovation, and the challenges created by the move, starting in 2006, to encourage cross-functional interaction between decentralized business units, was profiled in Business Week in April of 2006. To quote from the article, ―while J&J managers have spoken often about the potential offered by combining devices and drugs in one product, the company‘s decentralization can also create barriers to that sort of synergy.‖ See the story here: http://www.businessweek.com/stories/2006-04-16/j-and-j-reinventing-how-it-invents. An interview with CEO William Weldon about how to lead a decentralized company was published by Knowledge@Wharton in 2008: http://knowledge.wharton.upenn.edu/article.cfm?articleid=2003. For how J&J‘s innovation process is proceeding in 2016, see the article http://fortune.com/2016/07/22/the-radical-experiment-thats-changing-the-way-big-pharmainnovates/ that chronicles J&J‘s Chief Scientific Officer Paul Stoffels‘ creation of the JLABS open innovation incubators that have opened up around the United States. At its six JLABS sites, J&J is currently incubating roughly 140 companies, which are granted access to everything from J&J‘s compound library to its regulatory and commercial experts. The JLABS staff also clears the various operational hurdles that tend to slow biotech entrepreneurs down, such as securing necessary permits and ensuring health, safety, and environment standards. Despite the early skepticism around the initiative, it is now heralded as a success at J&J. CEO Alex Gorsky says he is invariably reenergized after visiting JLABS sites and seeing all the science. ―You can‘t help but get excited by the things they‘re working on,‖ he says. The radical experiment J&J embarked on four years ago is also generating good will—and being copied—in the wider biotech and pharma industry. Has Gorsky been successful in balancing the need for differentiation and autonomy with the desire for efficiency and effective integration of operations? TN1-387 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
3. What is the role of strategic leadership in a company like Johnson & Johnson? Referencing Chapter 11: Strategic Leadership: Excellence, Ethics & Change Johnson & Johnson‘s major challenge was to create a sustainable competitive advantage in the marketplace that is not only unique and valuable but also difficult for competitors to copy or substitute. Capturing unique advantages by harnessing the synergy of J&J‘s existing resources was what Weldon wanted to do to spur growth. One of the most important sources of growth opportunities is innovation. Innovation involves using new knowledge to transform organizational processes or create commercially viable products and services using the latest technology, experimentation, creative insights, and information from competitors. Some challenges of innovation involve choosing when and how to continue to innovate, the scope of future innovation and the pace, as well as whether or not to collaborate with innovation partners. The innovation of new ventures requires resources such as financial, human, and social capital. It requires the leadership team to have adequate vision, dedication, and drive. At Johnson & Johnson, Gorsky was pursuing corporate entrepreneurship, which uses the fruits of the innovation process to help firms build new sources of competitive advantage and renew their value propositions. The challenge was to create a culture of entrepreneurship, where the search for venture opportunities permeates every part of the organization, and where strategic leadership and the culture generate a strong impetus to innovate, take risks, and seek out new venture opportunities. The concept of leadership involves the process of transforming organizations from what they are to what the leader would have them become. See Chapter 11, Exhibit 11.1. This involves: ● Setting a direction ● Designing the organization ● Nurturing a culture dedicated to excellence and ethical behavior Leaders need to set the direction for the organization by continually scanning the environment to develop knowledge of all stakeholders, and knowledge of salient environmental trends and events. Then leaders must integrate that knowledge into a vision of what the organization could become. Leaders require the capacity to solve increasingly complex problems, and must be proactive in their approach so they can develop viable strategic options. Leaders are also responsible for designing the organization: a strategic leadership activity of building structures, teams, systems, and organizational processes that facilitate the implementation of the leader‘s vision and strategies. Leaders have an important role in creating systems and structures to achieve desired ends. Difficulties in implementing the leader‘s vision and strategies include a lack of understanding of responsibility and accountability among managers, reward systems that do not motivate individuals and groups toward desired organizational goals, inadequate or inappropriate TN1-388 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
budgeting and control systems, and insufficient mechanisms to coordinate and integrate activities across the organization. A key role for leaders is to set a clear direction for the organization as a whole and to then facilitate the movement of the organization towards this direction. In the past, this direction was defined rather loosely by Johnson & Johnson because it operated as a confederation of fairly autonomous businesses. The role of the leader was basically confined to that of providing encouragement and support for the efforts of its various business units. Weldon, then Gorsky, had set a clear direction for the organization as a whole. Under Gorsky‘s new approach, there was a more specific emphasis on the steps that must be taken. He wanted the business units to share their knowledge and learn from each other, and from outsiders. Through such a form of interaction, he felt that J&J would be able to uncover and exploit many more opportunities. Some of the past successes of the firm had already successfully emerged from such a process. Past successes of collaboration could encourage divisions to pursue future collaboration, generating the needed growth of the company. Gorsky appeared to still see value in J&J being a large globally diversified company, and appeared to be pursuing innovation through collaboration across the whole healthcare continuum. But Gorsky might still have some work to do to convince the investor community that he was truly doing sincere work to improve quality and transparency. J&J‘s reputation had suffered in the past. Gorsky would have to manage J&J‘s diversified portfolio of companies in a way that kept it growing without creating issues that could pose any further threats to its reputation. NOTE — ADDITIONAL READING, WEB LINKS: In 2013, stakeholders had been concerned that the company was not focusing enough on ―areas that drive its business and, thereby, its reputation, like development innovation, supply chain security, delivery integrity and reliability, environmental and social policies, even regulatory compliance.‖ See http://www.forbes.com/sites/jonathansalembaskin/2013/05/08/jj-corporateimage-campaign-fails-to-talk-the-walk/. J&J continues to innovate under Gorsky, as witnessed by the 2017 acquisition of Actelion. See https://chiefexecutive.net/ceo1000-johnson-and-johnson/ in which Gorsky noted in 2016 that J&J will likely pursue smaller deals that involve early-stage technologies. He preferred making smaller acquisitions of early-stage companies, even though the company‘s large and growing cash pile could fund much larger deals as speculated by analysts. Gorsky cited the company‘s hallmark approach to innovation, as well as lessons learned in making past M&A deals, as rationale behind the plan: ―Because we‘re more of an innovation-focused company, the ideal deal for us is early, great innovation, great science, then we scale it, versus going in and simply ripping out costs and trying to find other synergies.‖ 4. SECONDARY QUESTION: How can synergy best be managed at a company such as Johnson & Johnson? Note: No PowerPoint slides accompany this discussion. TN1-389 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Referencing Chapter 8: Entrepreneurial Strategy & Competitive Dynamics Johnson & Johnson‘s Gorsky had also been trying to grow by identifying entrepreneurial opportunities that existed among his business units. Entrepreneurship involves the creation of new value by an existing organization or new venture that involves the assumption of risk. New value can be created in start-up ventures, major corporations, family-owned businesses, franchises or home-based businesses, non-profit organizations, or established institutions. For an entrepreneurial venture to create new value, three factors must be present—an entrepreneurial opportunity, the resources to pursue the opportunity, and an entrepreneur or entrepreneurial team willing and able to undertake the opportunity. See Chapter 8, Exhibit 8.1 for the relationship between an entrepreneur, the firm‘s resources, and the opportunities available in the firm‘s environment. Entrepreneurs need to understand the concept of opportunity recognition: the process of discovering and evaluating changes in the business environment, such as a new technology, socio-cultural trends, or shifts in consumer demand that can be exploited. Good entrepreneurial opportunities are those that are attractive to the marketplace (there must be demand for the new product or service), achievable (it must be practical and physically possible to do), durable (the window of opportunity must be open long enough for it to have a chance for success), and value creating (it must be profitable—the benefits must surpass the cost of development by a significant margin). Resources are an essential component of a successful entrepreneurial launch. The most important resource is usually money, but human resources, strong and skilled management, is also an essential asset. Social capital, or entrepreneurs who have extensive social networks or wellconnected key contacts, allows the new venture to gain exposure and build legitimacy faster. Strategic alliances represent a type of social capital that can be especially important.
As previously noted, synergy due to shared resources is a key motivation for related diversification. Through synergy, each business in a portfolio helps others, and in so doing, helps itself. As indicated above, J&J follows a related diversification mode, except that there is a considerable amount of independence for the units. This helps the organization because each unit uses its independence to make quick decisions and compete better in their market arena. However, this same independence also gets in the way of ensuring synergy. To spur growth, Weldon had believed that the best entrepreneurial opportunities would come from increased collaboration between its units. The firm had the ability to develop new products by combining its strengths across pharmaceutical products, medical devices and diagnostics, and consumer products. Weldon believed that any push for collaboration should build upon the entrepreneurial spirit that had been built over the years through this type of organization, but this would also need a well-coordinated control system. TN1-390 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Gorsky had pushed even more aggressively into a search for entrepreneurial opportunities via the creation of the innovation labs where J&J scientists would work alongside other outside scientific entrepreneurs to develop new products and processes. This was an example of an opportunity, access to resources, and a supportive corporate culture that could help create new value for all. Referencing Chapter 9: Strategic Control & Corporate Governance Strategic control involves the process of monitoring and correcting a firm‘s strategy and performance. In a traditional control system, top management formulates strategies and sets goals. These strategies are implemented, and then performance is measured against the predetermined goals. In a contemporary control system, managers continually monitor both the internal and external environments, and identify trends and events that signal the need to revise strategies, goals and objectives. The relationships between strategy formulation, implementation, and control are highly interactive. This approach utilizes two different types of strategic control: informational control and behavioral control. These two types of control play a role in the formulation and implementation of strategies. Informational control is a method of organizational control in which a firm gathers and analyzes information from the internal and external environment in order to obtain the best fit between the organization‘s goals and strategies and the strategic environment. Behavioral control is a method of organizational control in which a firm influences the actions of employees through culture, rewards, and boundaries. Informational control is concerned with whether or not the organization is ―doing the right things,‖ while behavioral control is concerned with whether or not the organization is ―doing things right‖ in the implementation of its strategy. Organizations need to make sure enough information of the right kind is available to monitor activities—this is where things such as financial audits and customer feedback is essential, and where appropriate role models and rewards should be available to keep employees motivated. Although Weldon had believed in the power of behavioral controls—the culture and rewards created to influence employees to ―do things right‖ through the decentralized entrepreneurial structure—the firm needed more informational control to make sure it was ―doing the right things.‖ The failure to adequately monitor activities, especially regarding quality, put the firm at risk. Gorsky had instituted more informational control through his appointment of a group worldwide chairman, to align everything from HR policy to procurement processes from the 250 business units. This entity allowed for the consolidation of all of the firm‘s data, such as about all of its 120,000 employees, into a single HR database, saving J&J about $1 billion in decision making about contracts and timing of financial procurement forecasts. This illustrates how both kinds of control are necessary, especially in a decentralized structure.
TN1-391 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Referencing Chapter 12: Managing Innovation and Fostering Corporate Entrepreneurship Johnson & Johnson‘s major challenge was to create a sustainable competitive advantage in the marketplace that is not only unique and valuable but also difficult for competitors to copy or substitute. Capturing unique advantages by harnessing the synergy of J&J‘s existing resources was what Weldon wanted to do to spur growth. One of the most important sources of growth opportunities is innovation. Innovation involves using new knowledge to transform organizational processes or create commercially viable products and services using the latest technology, experimentation, creative insights, and information from competitors. Some of challenges of innovation involve choosing when and how to continue to innovate, the scope of future innovation and the pace, as well as whether or not to collaborate with innovation partners. The innovation of new ventures requires resources such as financial, human and social capital; requires the leadership team to have adequate vision, dedication, and drive. At Johnson & Johnson, Gorsky was pursuing corporate entrepreneurship, which uses the fruits of the innovation process to help firms build new sources of competitive advantage and renew their value propositions. The challenge was to create a culture of entrepreneurship, where the search for venture opportunities permeates every part of the organization, and where strategic leadership and the culture generate a strong impetus to innovate, take risks, and seek out new venture opportunities. NOTE — ADDITIONAL READING AND WEB LINKS: J&J prides itself on its history of product innovation. See this section of their website: https://www.jnj.com/innovation. J&J has pursued acquisitions to grow its business, as well as soliciting ideas and funding research from prospective partners via their Corporate Office of Science and Technology. As J&J announced in 2012, by opening innovation centers around the world, J&J will be looking to identify promising early stage innovations and to establish collaborations to further explore their development potential for unmet medical needs. ―By refocusing our outward facing activities and locating our experts and our deal-making capabilities in those regional hubs we can simplify the deal making and coordination for entrepreneurs who are looking to collaborate and partner with the Johnson & Johnson Family of Companies.‖ See http://www.investor.jnj.com/releaseDetail.cfm?ReleaseID=707523&year=2012. Even though they also seem to be trying to encourage innovation between divisions, it still appears that external sources are important. If you were an employee in a J&J division, how might you feel about this obvious solicitation of ideas from outside the company? Here is a list of the various divisions within J&J: http://www.jnj.com/about-jnj/company-structure. Based on the descriptions of their businesses, what kinds of sharing regarding innovative technology might you expect to see? J&J has a challenge discovering and developing new products in all its product categories. TN1-392 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
The biggest news in 2007 was related to the acquisition and integration of the newest brands acquired from Pfizer, such as Listerine, Zyrtec, Neosporin, Nicorette, and others. J&J has the reputation for ―preserving the independence of the operations it acquires,‖ and seems to also encourage innovation in marketing as well as technology, especially for its consumer products. However it may have been this ―independence‖ that created the problems once Pfizer products were merged with McNeil, and the Consumer Division. See commentary on J&J‘s acquisition strategy at: http://www.businessweek.com/stories/2007-06-17/online-extra-johnson-andjohnsons-next-baby. J&J had made its biggest acquisition ever in the medical devices division by purchasing Synthes. See http://www.bloomberg.com/news/articles/2012-05-01/j-j-new-ceo-s-takeover-watch-spansedwards-to-st-jude-real-m-a. However, analysts were suggesting Gorsky might better consider spending ―J&J‘s cash to bolster quality control rather than relying on acquisitions to lift its shares…fix their current house before they put on an addition.‖ How could any new businesses be successfully integrated into the company while also including appropriate controls? J&J continues to innovate under Gorsky, as witnessed by the 2017 acquisition of Actelion. See https://chiefexecutive.net/ceo1000-johnson-and-johnson/ where Gorsky noted in 2016 that J&J will likely pursue smaller deals that involve early-stage technologies. He preferred making smaller acquisitions of early-stage companies, even though the company's large and growing cash pile could fund much larger deals as speculated by analysts. Gorsky cited the company's hallmark approach to innovation, as well as lessons learned in making past M&A deals, as rationale behind the plan: ―Because we‘re more of an innovation-focused company, the ideal deal for us is early, great innovation, great science, then we scale it, versus going in and simply ripping out costs and trying to find other synergies.‖ Is ANY new acquisition enough to generate overall growth? Teaching Note Case 25 — Proctor & Gamble Case Objectives 1. To investigate what it means to be a strategic leader. See the table below to determine where to use this case: NOTE: There are both PRIMARY and SECONDARY chapters that can be used for this case. The Teaching Note gives guidance for the PRIMARY use chapters and provides suggestions if the instructor wants to use the case to illustrate concepts from the optional SECONDARY chapters. CASE OBJECTIVES TABLE Chapter Use Key Concepts PRIMARY CONCEPT 11: Strategic
Leadership; barriers to change; learning organization
Additional Readings or Exercises NOTE: embedded video and news stories about Lafley‘s leadership and innovation
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Teaching Note Leadership 10: Organizational Design SECONDARY CONCEPTS 3: Internal Analysis 4: Intellectual Assets 5: Business-Level Strategy 6: Corporate-Level Strategy
Case 1: Robin Hood
Organizational structure; modular organization Intangible resources
Human capital; intellectual capital Generic strategies
NOTE: embedded video and news stories about Lafley‘s and McDonald‘s strategy
Related and unrelated diversification
Case Synopsis In 2019 Procter & Gamble announced it would revamp its management structure as part of an effort to streamline its operations. The firm had failed to show much growth over the last five years, resulting in pressure from activist investor and board member Nelson Peltz of Trian Fund Management. The firm said it would shrink the number of its business units from ten to six and give the heads of each of these control over the management of different products as well as over their regional sales teams. P&G would also reduce its corporate functions, with about 60 percent of corporate work shifting to the new business units. ―There is a need for greater agility,‖ said CEO David Taylor Procter & Gamble had made several bold, innovative moves over the years to build itself into one of the best-known consumer product firms. However, by the 1990‘s, sales on most of P&G‘s 18 top brands were slowing as it was being outhustled by more focused rivals such as KimberlyClark and Colgate-Palmolive. In January 1999, the firm turned to Durk I. Jaeger to try to create new momentum. Jaeger rolled out many radical changes, most of which resulted in a further deterioration in the profits of the firm. Faced with a growing crisis, the board replaced Jager with Alan G, ―A.G.‖ Lafley, a P&G veteran. After his appointment in 2000, Lafley implemented a series of changes that were designed to radically alter the firm. Determined to create a more outwardly focused and flexible company, Lafley made drastic changes in the organizational structure and workforce of the company, focusing on the need to develop employees for management roles. To better focus on serving the needs of the consumers, Lafley put a tremendous amount of emphasis on the firm‘s brands. Feeling that P&G had often let technology, rather than consumer needs, dictate its new products, Lafley was intent on shifting the focus of P&G back to its consumers. Lafley also challenged the supremacy of P&G‘s research and development operations. Confronting head-on the stubbornly held notion that everything must be invented within P&G, he asserted that half of the firm‘s new products should come from the outside. Under his tenure, the percentage of new product ideas coming from outside the firm increased from 10 percent, when he took over, to almost 50 percent. TN1-394 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Lafley had many ideas about how to make P&G relevant in the 21st century. Starting with the costly acquisitions of Clairol and Wella, he shifted the focus of the firm away from its traditional reliance on household care to make inroads into higher margin health and beauty products, including fragrances. Those areas subsequently accounted for about one-quarter of the firm‘s total revenues. In June 2009, Lafley retired and Bob McDonald became his successor as CEO of P&G. McDonald had been groomed for this role, having been with P&G since 1980. McDonald‘s experience with P&G in emerging markets was expected to aid him in crafting P&G‘s future strategy. However, McDonald had replaced Lafley‘s clear motto of ―The consumer is boss‖ with his own slogan of ―purpose-inspired growth.‖ This was an undeniably laudable ambition, but many employees simply could not fathom how to translate his rhetoric into action. By the middle of 2012, it was becoming obvious that P&G was struggling under McDonald‘s leadership. Known for its reliable performance, the firm was forced to lower its profit guidelines three times in six months, frustrating analysts and investors alike. McDonald had found it difficult to establish priorities for P&G. Given the wide range of problems that he faced, in terms of pushing for growth across several different businesses in many markets, he tried to address all of them at the same time. By 2013 it had become obvious that McDonald would not be able to take the bold moves that might allow the firm to recover from its slump. In May of 2014 Lafley was asked to step back in and respond to investor concerns that P&G had become too large and bloated to respond quickly to changing consumer demands. In April 2014, Lafley began the process of streamlining the firm. He sold off most of P&G‘s pet food brands and then announced that the firm would unload as many as 100 of its brands to better focus on 60 to 70 of its biggest ones, but this caused critics to charge that P&G, which once was most successful in building and managing brands, had lost its touch. There was still a cumbersome centralized and bureaucratic structure that had developed at P&G, especially around internal R&D, stifling needed innovation. P&G was now struggling with its push to place more emphasis on products that carried higher margins to move the firm away from its dependence on household staples. In November 2015, Lafley stepped down, passing the leadership reins to David Taylor, again a P&G veteran. Taylor continued Lafley‘s strategy of cutting back brands, selling 43 beauty brands to Coty and divesting interest in Duracell. Under Taylor, P&G had been trying to find ways to revive the prospects of its mostly aging brands. The latest effort to jettison over half of its brands indicated that the strategy was not working anymore. In particular, P&G had been struggling with its push to place more emphasis on products that carried higher margins in order to move it away from its dependence on household staples. Analysts were hoping that the decision to restructure P&G would address long-standing problems that the firm had been facing. The new organization would give more responsibility for its different product categories to separate business units, giving them control over their sales for the largest 10 geographic markets, including the United States, China, Russia, and Germany. TN1-395 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Such a push for decentralization would give these units more freedom to adjust their strategies to the needs of the different product categories in each of the markets. Would this reorganization finally give P&G the agility it needed to grow? Teaching Plan This case is best used to illustrate the concept of strategic leadership, and how a leader needs to understand the key resources needed to enact change and implement a competitive strategy. Especially because P&G is a well-known organization, it might capture students‘ attention early in the course, after a discussion of the external environment, to point out how strategy implementation requires a careful assessment of internal resources, especially intangible ones. ICEBREAKER This case can start with an icebreaker. Starting from the perspective of a customer may make it easier for students to transition to a strategic analysis. How aware are you of P&G’s brands? Can you name some of them? Some students may have already known about certain products, like Tide, but, even if they read the case, many students will not realize the extent of P&G‘s brand penetration. Case Exhibit 4 lists P&G‘s business segments and ―billion-dollar brands,‖ so students can be reminded of this, but it might also be interesting to go to P&Gs‘ website to look. Go to https://us.pg.com/ourbrands and click the ―All Brands‖ box to see all of them. Click on https://us.pg.com/innovation/ to see P&G‘s approach to innovation. Show of hands: How many of you brushed your teeth with Crest today? How many of you used an Oral B toothbrush? How many of you have washed your hair with Pantene or Head & Shoulders shampoo? How many shaved with a Gillette razor? A Braun electric shaver? How many of you use Tide laundry detergent? Dawn dishwashing liquid or Febreze air freshener? What about preferring Charmin toilet paper or Bounty paper towels? How many of you have even needed to use Vicks for your cold symptoms or Prilosec for heartburn? By the time this list is done, it‘s highly probable that EVERYONE in the room will have raised his or her hand at least once. This illustrates how P&G brands touch lives all over the world. (International students may recognize the Ariel brand of laundry detergent—P&G‘s Tide equivalent in most of Europe, Central and South America.) This exercise may get students in the mindset—how important is it to P&G to protect and grow these iconic brands? Doesn‘t the CEO of P&G have an obligation to the legacy of these products to craft a successful strategy into the future? If brands need to be removed from this lineup, which ones, and how does one choose? Summary of Discussion Questions
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Teaching Note
Case 1: Robin Hood
Here is a list of the suggested discussion questions. You can decide which questions to assign, and which additional readings or exercises to include to augment each discussion. Refer to the Case Objectives Table at the beginning of this Teaching Note to identify any additional readings and/or exercises so they can be assigned in advance. Discussion Questions: 1. Assess leadership at Procter and Gamble. 2. What were the major organizational changes leadership made at P&G, and what challenges does the current leadership face now? 3. OPTIONAL QUESTIONS: What intangible resources does P&G have that can be used to enact strategies? What competitive strategy do these resources best support now? Discussion Questions and Responses 1. Assess leadership at Procter and Gamble. Referencing Chapter 11: Strategic Leadership To start with, the instructor might want to position the discussion by reviewing what strategic management really is: Strategy is all about the ideas, decisions, and actions that enable a firm to succeed. See Chapter 1, Exhibit 1.1: Strategic management consists of the analyses, decisions, and actions an organization undertakes to create and sustain competitive advantages: ● strategy directs the organization toward overall goals and objectives; ● includes multiple stakeholders in decision making; ● incorporates both short-term and long-term perspectives; ● recognizes tradeoffs between efficiency and effectiveness. In doing this, leaders face many complex challenges. Leaders must be proactive, anticipate change, and continually refine changes to their strategies. This requires a certain level of ―ambidextrous behavior,‖ where leaders are alert to opportunities beyond the confines of their own jobs, and are also cooperative and seek out opportunities to combine their efforts with others. Leaders must make strategic management both a process and a way of thinking throughout the organization. See Chapter 1, Exhibit 1.3 for a depiction of the strategic management process. During strategic analysis, the leader does ―advance work‖ to anticipate unforeseen environmental developments, identify unanticipated resource constraints, assess changes in his or her preferences for how to manage. During strategy formulation, the organization addresses the issue of how to compete in a given business to attain competitive advantage. Strategies are formulated at the business, corporate, and international levels. Entrepreneurial initiatives may also play a role. In strategy implementation, depending on the type of organization structure, the leader might include key individuals in a discussion around selecting which strategies might be best to implement at which level within the organization. The leader must ensure proper strategic controls and organizational design, and establish effective means to coordinate and integrate TN1-397 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
activities within the firm, as well as with suppliers, customers, and possible alliance partners. Leaders should also be committed to excellence and ethical behavior while promoting learning and continuous improvement. Here‘s where innovation is important. The basic question strategic management tries to answer is: How can we create competitive advantages in the marketplace that are not only unique and valuable but also difficult for competitors to copy or substitute? Over the decade of leadership under A.G. Lafley, from 2000 to 2009, Proctor & Gamble had been known for its superior products, its marketing brilliance, and the intense loyalty of its employees, all of which were unique, valuable, and therefore difficult for any competitor to copy. However, sustaining this competitive advantage required not only the ability to anticipate changes in the overall external environment, but also to formulate appropriate strategy to counter those changes and then implement the chosen strategy. In 2009, P&G under McDonald had faced recession-battered consumers who abandoned the firm‘s premium-priced products for cheaper alternatives. P&G‘s previous strategy under Lafley had been to shake up and expand sales through acquisitions and to innovate around product innovations that came from P&G‘s consumers. The focus was on providing products that customers wouldn‘t mind paying a premium to use—the essence of differentiation. This had worked until the changing economic conditions and surging commodity prices made P&G‘s products too expensive for its struggling middle class customers. Reductions in revenue and ultimately profits made shareholders frustrated. McDonald tried to deal with the reduced margins by focusing on operational efficiency, but implementing this on the organizational level confused employees, stalled the firm‘s innovation engine, and lowered morale so that many key people left the firm. Amid this failure to coordinate and integrate activities within the firm, P&G seemed to have lost its ability to innovate. After returning to the leadership role in 2013, Lafley, who had previously doubled sales through a string of acquisitions, had gotten rid of brands and placed more emphasis on products that carried higher margins to move the firm away from its dependence on household staples. The corporate strategy was now to become a more focused company by divesting those elements of the firm that were unrelated to its ―core‖ business, but exactly how to implement this strategy was still undetermined. Part of strategy implementation requires leadership to make sure the firm is staying true to its original vision, mission, and strategic objectives. See the concept of leadership, the process of transforming organizations from what they are to what the leader would have them become. Leadership is proactive, goal oriented, and focused on the creation and implementation of the creative vision. This definition implies dissatisfaction with the status quo, a vision of what should be, and a process for bringing about change. Leaders are change agents whose success is measured by how effectively they formulate and implement a strategic vision and mission. See Chapter 11, Exhibit 11.1. This involves: ● Setting a direction ● Designing the organization TN1-398 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
● Nurturing a culture dedicated to excellence and ethical behavior The interdependent nature of these three activities is self-evident. Consider an organization with a great mission and a superb organizational structure, but a culture that implicitly encourages shirking and unethical behavior. Often, failure of today‘s organizations can be attributed to a lack of equal consideration of these three activities. The imagery of the three-legged stool is instructive: it will collapse if one leg is missing or broken. Leaders need to set the direction for the organization by continually scanning the environment to develop knowledge of all stakeholders and knowledge of salient environmental trends and events. Then leaders must integrate that knowledge into a vision of what the organization could become. Leaders require the capacity to solve increasingly complex problems, and they must be proactive in their approach so they can develop viable strategic options. When Lafley had originally been elevated to CEO, in 2000, he had set direction by involving external stakeholders, specifically the retailer and the end consumer, in product innovation discussions. This yielded technology improvements, such as the Tide StainBrush, and marketing refinements, such as Crest—no longer just toothpaste, it became an oral care brand. Lafley‘s model of innovation, ―Connect and Develop‖ made it clear that innovation should come from an emphasis on consumer needs. Lafley‘s vision was clearly ―the consumer is boss.‖ Under McDonald, in 2009, the emphasis became more operational. In his attempt to deal with the economic challenges that had developed, he created a vision of ―purpose-inspired growth.‖ He wanted P&G to touch and improve ―more consumers‘ lives in more parts of the world, more completely.‖ Although this was a wonderful slogan, it was hard to implement. Employees were left wondering what assets should be used for what problem with what emphasis at what time. In 2013, upon his return, Lafely stated his intention to refocus on the ―core‖ brands, presumably to place emphasis on those product lines that had the best fit with firm assets. Leaders are responsible for designing the organization: a strategic leadership activity of building structures, teams, systems, and organizational processes that facilitate the implementation of the leader‘s vision and strategies. Leaders have an important role in creating systems and structures to achieve desired ends. Lafley in 2000 made changes to the organizational structure by relocating executive offices, replacing managers, promoting women, and then tracking and training lower level employees who had talent, preparing them for promotional opportunities. This sent the message that performance mattered. Under McDonald, this focus was diluted as he tried to push for growth across several different businesses across many markets, all at the same time. This broad focus meant innovation stalled. The lack of growth and diluted emphasis on product development eroded morale among employees, causing many managers to take early retirement or move to competitors. This meant many teams would lose their internal leadership as expertise left the company. The original focus TN1-399 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
of growth from within, where key talent was promoted to better build the company, was now in disarray. When Lafley returned in 2013, the organization appeared too large and bloated to respond quickly to changing consumer demands, so Lafley began unloading brands. It also became apparent that P&G‘s cumbersome centralized and bureaucratic structure had stifled innovation. Lafley‘s ―Connect and Develop‖ program that he had started as a way of bringing in new ideas from outsiders had led to new technologies being reworked or modified by P&G‘s internal R&D group. Most of the new ―innovations‖ were coming from line extensions of existing brands. CEO David Taylor, who took over in 2015, initially appeared cautious about making any abrupt changes in organizational process, continuing Lafley‘s strategy of divesting unprofitable brands that did not contribute to core growth. However, under the urging of the board, the new direction Taylor decided to take in 2019 included restructuring, shrinking the number of business units from ten to six and giving the heads of each of these control over the management of different products as well as over their regional sales teams. Taylor also planned for P&G to reduce its corporate functions, with about 60 percent of corporate work shifting to the new business units. CEO David Taylor wanted the firm to be more agile. He realized P&G needed to revive the prospects of its mostly aging brands, and he wanted P&G products to become part of consumers‘ daily routines. P&G also needed to place more emphasis on products that carry higher margins in order to move it away from its dependence on household staples. To better connect with customers, the new structure would give more responsibility for its different product categories to separate business units, making them more autonomous, giving them control over their sales for the largest 10 geographic markets, including the United States, China, Russia and Germany. Such a push for decentralization would give these units more freedom to adjust their strategies to the needs of the different product categories in each of the markets. By accelerating the pace of change, CEO Taylor hoped this could meet the current challenges. Leaders play a key role in changing, developing, and sustaining an organization‘s culture. An excellent and ethical organizational culture is an organizational culture focused on core competencies and high ethical standards. Organizational culture can be an effective means of organizational control. In nurturing a culture dedicated to excellence and ethical behavior, managers and top executives must accept personal responsibility for developing and strengthening appropriate behavior; consistently demonstrate that such behavior is central to the vision and mission; develop and reinforce role models, corporate credos, codes of conduct, reward and evaluation systems, policies and procedures. Doing this requires leaders to overcome barriers to change and effectively use their power. Cultural difficulties in implementing the leader‘s vision and strategies include a lack of understanding of responsibility and accountability among managers, reward systems that do not motivate individuals and groups toward desired organizational goals, inadequate or inappropriate budgeting and control systems, and insufficient mechanisms to coordinate and integrate activities across the organization. TN1-400 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Lafley‘s predecessor, Jaeger, exercised his leadership by pushing through specific organizational changes without preparing the employees for these, resulting in a great deal of confusion and paralysis. Lafley, by contrast, had a vision of a much more radically different firm, but he was aware of the importance of getting the employees to work with him on making these changes. In particular, Lafley provided the firm with a broad plan for its future. He established clear objectives that had to be achieved in order for the firm to remain competitive. He built upon two key intangible resources—the firm‘s human resources and its consumer brands. He wanted to focus the firm on those activities in which it could demonstrate excellence. In implementing a vision, leaders have to overcome barriers to change. Organizations are prone to inertia and slow to change due to vested interests in the status quo, systemic barriers, behavioral barriers, political barriers, and personal time constraints. Lafley allowed the managers and the employees to participate in and take responsibility for his proposed changes—thereby addressing the status quo issues. He did not push for specific changes without giving a chance for the other people in the organization to get involved— proceeding to overcome systemic barriers. Not in the case: He helped shape decisions by asking a series of keen questions—modeling a different kind of behavior. He patiently communicated what he would like to see done differently—removing the fear of time constraints. In so doing, Lafley worked to overcome some of the key barriers to change. The leader also has the responsibility to create successful learning organizations by creating a proactive, creative approach to the unknown, actively soliciting the involvement of employees at all levels, and enabling all employees to use their intelligence and apply their imagination. See Chapter 11, Exhibit 11.4. Lafley tried to develop a stronger orientation for learning within P&G. In particular, he tried to get his managers and his employees to be more open to ideas, including ones that may come from other organizations. In this regard, through his ―Connect and Develop‖ model he got P&G to work with outsiders in order to get new products into the market. Lafley also tried to get his firm to focus more on those specific activities in which P&G could establish excellence. A stronger focus on specific tasks may allow for more learning that is concentrated on a few critical tasks. Lafley tried to contract out those activities that could be done equally well by other firms. McDonald tried to continue this idea. Internally, McDonald introduced the concept of ―purposeinspired growth,‖ which was meant to help P&G employees believe that they were not merely pushers of detergents and deodorants but that they were helping to improve people‘s daily existence. However, this directive was difficult to implement, and ultimately led to a loss of morale and talent as key employees left the company. Lafley had set the direction and designed the organization, but McDonald was unable to nurture a culture to sustain the strategy. Lafley had come back to provide strategic leadership once again, TN1-401 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
but the external environment had changed, requiring internal change as well. What could now CEO David Taylor do to show revenue growth, to address shareholder concerns when ―cosmetics, household and personal care stocks are no longer in vogue‖? The challenge was to turn around P&G, an iconic company that brought the world Tide and Pampers and yet had failed to adapt to changing circumstances. P&G Under Lafley doubled sales, boosted P&G market share by $100 million, grew portfolio of billion-dollar brands from 10 to 24, acquired Wella & Gilette, developed new brands such as Swiffer & Febreze. But P&G has lost market share, reduced profits & shareholder value, and lost some promising executives. McDonald‘s mantra— ―living a life driven by purpose is more meaningful and rewarding than meandering through life without direction. My life‘s purpose is to improve lives.‖ Lafley‘s belief—businesses fail when they don‘t make difficult choices about where and how they can win particular markets and put the full weight of the business behind them. Lafley said he wanted to scale back and focus on what he called the ―core‖ business. This move to ―stick to the knitting‖ seemed reasonable, as a way to consolidate assets and possibly leverage remaining core competencies, but so far, the choice of ―core‖ brands remained unclear. And, even if the choice focused on those long-term steady performers, such as in the fabric and home care line, would there be enough business there to build market power and therefore profit margins? Now CEO Taylor had to make these decisions, but under increased scrutiny from stockholders. Would the restructuring effort work? NOTE — ADDITIONAL READING AND VIDEO VIEWING ON LAFLEY’S LEADERSHIP To provide historical context, CEO A.G. Lafley believed that innovation was key to the success of P&G brands, and that design, not simply price or technology, should be P&G‘s key differentiator; and that a product‘s value, not its price is what people look for. Here‘s an interview from 2005: https://www.fastcompany.com/53103/what-pg-knows-about-power-design. He notes in this 2005 article that not every one of P&G‘s businesses was able to fully embrace this concept. What did Lafley do to implement his ideas? This interview from February of 2007 was after Lafley was named one of America‘s best leaders for 2006 by Harvard‘s Kennedy School of Government and U.S. News & World Report: http://www.usatoday.com/money/companies/management/2007-02-19-exec-pandg-usat_x.htm. A.G. Lafley has said innovation is at the core of P&G‘s strategy. A.G. Lafley and Ram Charan wrote the book The Game Changer about how this focus on innovation can help organizations ―change the game‖ in their respective industries. Here is a video interview of Lafley by Harvard Business Publishing in 2008 about this subject (14 minutes): http://www.youtube.com/watch?v=xvIUSxXrffc&feature=related.
Regarding Lafley‘s approach to the culture change at P&G, in 2007 he describes a management decision he made unilaterally. Lafley skipped over 78 general managers with more seniority in TN1-402 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
making a key staff appointment, a woman, without even consulting the rest of his management team. Lafley says ―there was almost a revolt‖ over his decision. Read the analysis, where Noel Tichy explains Lafley‘s decision process: https://www.bloomberg.com/news/articles/2007-0912/the-issue-a-dot-g-dot-lafleys-judgment-callbusinessweek-business-news-stock-market-andfinancial-advice. Lafely realized after the fact that he had made a mistake by not involving his senior executives in the decision, so he called them together to pitch their cases for other internal candidates. As stated in this piece, Lafely had no intention of changing his mine. He instead used this opportunity to educate upper managers on the culture change he was planning to make. See https://hbr.org/2009/06/ag-lafley-judgment-and-the-red. What lessons can you learn about leadership from this? To contrast styles, see this 8-minute video where McDonald gives a tour of his office at P&G when he was CEO: http://www.youtube.com/watch?v=c2Paz6EJ7BQ Do you find him inspiring? Regarding the restructuring effort, driven by the board, here‘s commentary by Dave Taylor in 2018. https://www.youtube.com/watch?v=VyqYxKnVUYU. His efforts are focused on consumers, making sure they stay with the brands, getting it right in the United States. He says he believes these restructuring changes are sustainable. 2. What were the major organizational changes leadership made at P&G, and what challenges does the current leadership face now? NOTE: There are no PowerPoint slides to accompany this discussion.
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Teaching Note
Case 1: Robin Hood
Referencing Chapter 10: Organizational Design Organizational structure refers to the formalized patterns of interactions that link a firm‘s tasks, technologies, and people. Structure provides a means of balancing two conflicting forces: the need for the division of tasks into meaningful groupings, and the need to integrate the groupings for efficiency and effectiveness by coordinating and integrating key activities. Structure identifies the executive, managerial, and administrative organization of a firm and indicates responsibilities and hierarchical relationships. It also influences the flow of information, as well as the context and nature of human interactions. Factors that facilitate the effective coordination and integration of key activities include having a common culture and shared values, horizontal organization structures, horizontal systems and processes, effective communications and information technologies, and involved human resource practices. An effective organizational design can encourage the flow of information and enhance working relationships between functional departments and activities. However, achieving the coordination and integration necessary to maximize the potential of an organization‘s human capital involves much more than just creating a new structure. Different structures lead to different degrees of flexibility and permeability, and can affect the amount of culture change required. Structures can have an impact on relationships between internal and external constituencies, and therefore need the full support of the management team to implement. Lafley wanted P&G to be big, yet nimble. He made drastic changes in the organization‘s structure to ensure better communication among managers. For instance, he moved division presidents from the eleventh-floor executive suite to the same floors as their staff. He replaced more than half of the company‘s top 30 officers, and moved more women into senior positions. Not in the case: He established Monday morning meetings with his top executives. At these meetings he maintained a low profile. Changing the table from rectangular to round removed any power executives may have previously exercised due to seating order and placement. Executives were now able to sit where they liked. Lafley had trimmed P&G‘s workforce by cutting 9,600 jobs and there was always the possibility of more downsizing to come. This would be a challenge because human resources are P&G‘s principal assets (along with its brands). Not only could P&G lose valuable employees in any downsizing, the loss of morale among existing employees could also lead to turnover. Different structures can create an effective flow of information and enhance working relationships between functional departments and activities. Achieving the coordination and integration necessary to maximize the potential of an organization‘s human capital involves much more than just creating a new structure. Some organizations, especially those with a focus on innovation, may benefit from a boundaryless organizational design, where the structure allows internal and external boundaries between internal activities and external parties, between departments and functions, employees and customers, to become open and permeable.
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Teaching Note
Case 1: Robin Hood
Some firms, such as Proctor & Gamble, may want to leverage relationships with outside suppliers and create a more modular organization: an organization in which non-vital functions are outsourced, which uses the knowledge and expertise of outside suppliers while retaining strategic control. There are both advantages and disadvantages to this choice of structure. The advantages of a modular organization include: ● Directs talent to the most critical activities ● Maintains strategic control over core competencies ● Achieves best performance at every link in the value chain ● Outsourcing requires a smaller capital commitment ● Encourages information sharing, organizational learning The disadvantages include: ● Inhibits common vision due to reliance on outsiders ● Outsourcing may diminish future competitive advantages ● Difficult to bring value-added activities back into the firm ● Erodes cross-functional skills ● Decreases operational control—possible loss of control over suppliers Financial results indicated the success of Lafley‘s moves in the above direction. The company‘s growth rate increased along with its profitability. However, P&G still faced several challenges. Outsourcing new product innovation meant that P&G might not pick the product winners, missing opportunities that might go to P&G competitors, or, if adopted, new product introductions that might not fulfill P&G‘s customer needs. In addition, if the company became too dependent on external sources of new products, it would be hard to resurrect the internal R&D effort. Brand development was also critical now that P&G had moved into the luxury perfume business. Also, notwithstanding P&G‘s efforts to build superbrands, P&G continued to be heavily dependent on Wal-Mart. P&G needed to be able to exert some control over its customers, as well as its suppliers. (For information about how P&G dealt with its ―innovation partners,‖ see http://www.pg.com/en_US/partners_suppliers/index.shtml.) However, choice of structure is also dependent on the ability of top management to guide decision-making. Not in the case: Lafley had created the design of a complex matrix organizational system that shared power among executives in charge of functions such as HR, marketing, and finance; executives overseeing different geographic regions and executives for various product categories such as health care and beauty care. The groups served as checks and balances on one another so that no one person or group had complete responsibility for any product or area. A matrix organizational structure is an organizational form in which there are multiple lines of authority and some individuals report to at least two managers. This approach strives to overcome the inadequacies inherent in the other structures. It is a combination of the functional and divisional structure. Most commonly, functional departments are combined with product groups on a project basis. Some large multinational corporations rely on a matrix structure to combine product groups and geographical units. Personnel may work under the manager of the group for the duration of the project. The individuals who work in a matrix organization become responsible to two managers: the project manager and the manager of their functional area. TN1-405 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Product managers may have global responsibility for the development, manufacturing, and distribution of their own line, while managers of geographical regions have responsibility for the profitability of the businesses in their regions. There are both advantages and disadvantages of this structure as well: The matrix structure allows for shared resources instead of duplicating functions, as would be the case in a divisional structure based on products. Individuals with high expertise can divide their time among multiple projects. Such resource sharing and collaboration enables the firm to use resources more efficiently and to respond more quickly and effectively to changes in market conditions. The flexibility inherent in the matrix structure provides professionals with a broader range of responsibility that enables them to develop their skills and competencies. However, the dual reporting structures can result in uncertainty and lead to intense power struggles and conflict over the allocation of personnel and other resources. Working relationships become more complicated. This may result in excessive reliance on group processes and teamwork, along with the diffusion of responsibility, which in turn may erode timely decision making. Under McDonald, this matrix system became more cumbersome, leading to a decline in the influence of brand and country managers. It appeared that this organizational structure was no longer effective, especially given McDonald‘s management style. Lafley‘s decision to divest the company of brands would create major change in organizational structure. He would have to assess the capabilities of his workforce and reconfigure reporting relationships as needed to focus the firm on the performance of the remaining brands. Certainly P&G‘s internal R&D group would have to be willing to embrace new ideas. CEO David Taylor made the decision to redesign reporting relationships, creating a hybrid structure where business units had product responsibilities within geographic regions. He also shifted corporate staff to place them within these new business units, improving decision flow. Taylor had to make sure the new organizational design would be more agile, and thereby would achieve the goals of reviving P&G‘s iconic brands. 3. What intangible resources did P&G have that can be used to enact strategies? What competitive strategy do these resources best support now? NOTE: There are no PowerPoint slides to accompany this discussion. Referencing Chapter 3: Analyzing the Internal Environment of the Firm To answer the question of how to support a competitive strategy, it‘s important to consider the concept of the resource-based view of the firm, and the three key types of resources: tangible resources, intangible resources, and organizational capabilities. The P&G case can be used to focus on the importance of intangible resources within a firm. Intangible resources can often provide a firm with the strongest possible source of advantage. Let‘s look at Proctor & Gamble‘s key intangible resources:
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Teaching Note
Case 1: Robin Hood
Intangible Resources: Organizational. Lafley reorganized to keep the focus on those activities that P&G did better than anyone else—its brand development. Human. P&G employees were tightly knit and loyal in the past—P&G only promoted from within, reinforcing this loyalty. However, under McDonald some had lost their faith in the company‘s direction, and left the firm. Innovation. This was a traditional strength, but it needed to be managed in the right direction— choice and scope of innovation was key. Reputation. P&G‘s core brands are its most significant strength—this should be protected at all costs. Organizational Capabilities: Lafley‘s vision, leadership, and focus on innovation had kept P&G flexible, therefore able to respond quickly to emerging opportunities. This had been the firm‘s most important capability. But it now seemed incapable of adapting to ever changing external conditions. Referencing Chapter 4: Intellectual Capital Consider the concepts of intellectual capital and human capital, both of which are intangible assets that a company such as Proctor & Gamble needs to have in order to compete successfully. Intellectual capital is a measure of the value of a firm‘s intangible assets, its reputation, employee loyalty and commitment, customer relationships, company values, brand names, and the experience and skills of employees. Human capital involves the individual capabilities, knowledge, skills, and experience of the company‘s employees and managers. Both Lafley and McDonald focused clearly on two key intangible resources: consumer brand reputation and the loyalty and commitment, skills and experience of P&G‘s human resources. The case provides evidence of both Lafley‘s and McDonald‘s interest in building P&G‘s brands. Lafley added to the firm‘s brands through acquisitions. Some of the best examples of this are the acquisitions that P&G made in the personal care business, with Clairol, Gillette, and Wella. But as the case of Crest shows, Lafley also tried to extend existing brands into new areas. Underlying Lafley‘s interest in brands is his emphasis upon understanding the needs of the consumer. Both Lafley and McDonald worked closely with retailers who were aware of consumer habits and preferences. Both pushed to develop both lower priced and premium priced products in order to serve the broadest possible range of customers. McDonald had extended P&G‘s brands into the service area through the Mr. Clean car wash and Tide dry cleaning franchises. In terms of human resources, Lafley focused on improving the leadership qualities of his top management team. He pushed for appointments based on abilities and performance, resulting in significant changes within the top management team. Lafley also pushed his division presidents to move closer to their employees to improve communications. Lafley‘s personal charm and willingness to sit back and let his employees have the freedom to innovate may have been what made his strategy successful in the past.
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Teaching Note
Case 1: Robin Hood
McDonald‘s concept of ―purpose-inspired growth‖ extended Lafley‘s vision to all employees, encouraging P&G‘s human resources to think about how they were improving people‘s lives. However, evidence was that the employees were confused about this, and were having difficulty figuring out how to translate this into action. McDonald‘s engineering past also predisposed him to focus on processes, trying to improve efficiency, which caused some managers to worry that there was a lot of concern for productivity, but less interest in winning back the customer For instance, McDonald had taken a risk with the new franchise operations, (not in the case) and had hired, for the first time, an outsider into a key upper management role to run this franchise business. In addition, the move to enter into licensing agreements for high-end fragrances was risky as well—P&G‘s strength was in its methodological approach to brand building and convincing mass-market customers to buy consumer staples. The beauty brands, especially fragrances, had traditionally dealt with a more quirky and fickle customer. Evidence in the case was that P&G‘s intellectual capital might not be up for these new challenges. Referencing Chapter 5: Business-Level Strategy In order to achieve a sustainable competitive advantage, Proctor & Gamble has to assess its ability to contend with other consumer goods providers, especially its main rival, Unilever. The question of how to compete in a given business to attain competitive advantage requires an assessment of the types of competitive strategies, including the three generic strategies that are used to overcome the five forces and achieve a competitive advantage: 49. Overall cost leadership Low-cost-position relative to a firm‘s peers Manage relationships throughout the entire value chain 50. Differentiation Create products and/or services that are unique and valued Non-price attributes for which customers will pay a premium 51. Focus strategy Narrow product lines, buyer segments, or targeted geographic markets Attain advantages either through differentiation or cost leadership Generic strategies are plotted on two dimensions: competitive advantage and strategic target. The overall cost leadership and differentiation strategies strive to attain advantages industrywide, while focusers have a narrow target market in mind. Ask the students which strategy they think P&G should pursue, and why. Their answers may include some of the following points: It may seem as if cost leadership should be the chosen strategy for a company in the fast-moving consumer goods industry, but Proctor & Gamble had tried to keep costs under control in order to achieve parity with competitors. P&G has tried to develop a differentiation advantage while keeping costs at a reasonable level. Differentiation requires the creation of something that is perceived industry wide as unique and valued by customers. Differentiation is achieved by a firm configuring its activities to support its position so that customers are willing to pay a premium for something unique. In P&G‘s case, using its key intangible resources, especially the existing TN1-408 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
strength of its brands and the abilities of its human resources, P&G had been able to successfully pursue a differentiation strategy in the past. As evidence of this, many consumers continued to buy Tide even when generic products were cheaper! Think about why they do this—had P&G convinced them that they get better performance from Tide, therefore justifying the premium price? Both Lafley and McDonald believed that P&G should begin concentrating on higher margin products, like beauty and personal care, rather than laundry detergent, which can be easily knocked-off (imitated) by private labels. But couldn‘t P&G use the same strategy that worked so well for Tide and apply it successfully to a category like skin care? Certainly, things had changed, with consumers becoming increasingly price sensitive, which was difficult for P&G with its premium-priced product lines. In addition, although P&G had been innovative with product extensions, such as the Tide detergent ―pods,‖ this didn‘t drive overall sales, because if consumers bought the ―pod‖ they didn‘t buy the bottle. What P&G might really need was truly innovative new products. NOTE — WEB LINKS, VIDEO: Succession Planning Pitfalls: In June 2009 Lafley retired and selected Bob McDonald as his successor as CEO of P&G. McDonald had been groomed for this role, having been with P&G since 1980, and promoted to COO in 2007. McDonald‘s experience with P&G in emerging markets was expected to aid him in crafting P&G‘s future strategy. Lafley would remain Chairman of the Board. Here is one story about the hand-off: http://archive.fortune.com/2009/11/19/news/companies/procter_gamble_lafley.fortune/index.htm Then when McDonald stepped down and Lafley was chosen to return, this raised issues about internal succession planning processes: https://hbr.org/2013/06/whos-really-responsible-for-pg. In January 2013 at least one investor, activist shareholder Bill Ackman, clearly stated his disappointment with the direction of the business, and he shared his opinion that McDonald was not likely the best person for the job as CEO based on his track record, partly because top management had no confidence in McDonald‘s leadership. Another point made was that the decision to decentralize R&D (under Lafley) may not have been the best decision, because it restricted innovation from outside the box, which would come from a centralized R&D function whose mission was to be creative across product lines. See the video at http://www.youtube.com/watch?v=F18fRkVUZS0. In May 2013 P&G‘s board replaced Bob McDonald after four years of struggle to revive the business. Even though McDonald had ―expanded P&G‘s business in developing markets, building a strong innovation pipeline,‖ it wasn‘t enough. The board had ―had enough,‖ especially in the face of strong criticism from the investment community. McDonald was to be replaced by the previous CEO AG Lafley. It was clear that McDonald had a very different style from Lafley and that Lafley was a very popular CEO, so when Lafley said ―yes‖ to the job, the board appeared relieved to ―wipe the slate clean and start over.‖ See the 3-minute video at http://www.youtube.com/watch?v=-jTY9CfwKGo. TN1-409 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
The question in June of 2013 was ―can Lafley hit the target‖? Lafley brought a ―rock star‖ quality to the job, but that may not be enough. Lafley needed to crank up the innovation pipeline, get the right products to the right markets, and groom a successor. Lafley had to get revenue up quickly. Both P&G‘s future and Lafley‘s legacy were at stake. Although Lafley was previously focused on the consumer, this becomes even more important today. He needed to engage today‘s consumer with a compelling line of products, and the consumer in 2013 was quite different from the one he last interacted with in 2009. See the 4-minute video at http://www.youtube.com/watch?v=H5aZL50BzbE. Also, in June 2013 came the news that Lafley was reorganizing the organizational structure: streamlining its businesses into four industry-based groups: global baby, feminine and family care; global beauty; global health and grooming; and global fabric and home care. In a statement, Lafley said, ―We expect this structure to facilitate faster global expansion of brand and product innovations to win with consumers. . . . Taken together, these organization changes will help us operate better and faster as one unified team to win.‖ The heads of these four divisions will report directly to Lafley, and there‘s some supposition that Lafley‘s eventual successor will come from this group of four. Lafley said he would continue the turnaround plan started by McDonald, aimed at cutting $10 billion in costs through 2016, and renewing focus on P&G‘s leading businesses. See the story at http://www.bloomberg.com/news/articles/2013-06-05/p-greorganizes-into-four-industry-groups. In May 2013 Procter & Gamble CEO Bob McDonald stepped down, and ex-CEO A.G. Lafley returned to the job—since Lafley‘s four-year absence, P&G had lost market share, reduced profits and shareholder value, and lost some promising executives. Taking the post holds risks for the 65-year-old executive. Since stepping aside almost four years ago, Lafley has retained a rock star reputation as one of America‘s most lionized corporate chieftains. Now his legacy will rest on whether he can turn around P&G, an iconic company that brought the world Tide and Pampers and yet has failed to adapt to changing circumstances. P&G Under Lafley, sales doubled, the P&G market share grew by $100 million, the portfolio of billion-dollar brands expanded from 10 to 24, Wella and Gilette were acquired, and Swiffer and Febreze were developed. In the last few years, since Lafley‘s absence, P&G has lost market share, reduced profits and shareholder value, and lost some promising executives. McDonald‘s mantra— ―Living a life driven by purpose is more meaningful and rewarding than meandering through life without direction. My life‘s purpose is to improve lives.‖ http://www.bloomberg.com/news/2013-05-28/lafley-s-ceo-encore-at-p-g-puts-rock-star-legacyat-risk-retail.html. Lafley‘s motto— ―Businesses fail when they don‘t make difficult choices about where and how they can win particular markets and put the full weight of the business behind them.‖ Read more: http://www.businessinsider.com/ag-lafley-rehired-as-pg-ceo-2013-5#ixzz2W3wBaDnu. Upon Lafely‘s second departure, concern was whether P&G could ―find its aim‖ again under David Taylor. According to Taylor, P&G was ―reorganizing its R&D function and moving TN1-410 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
power to the leaders of product categories rather than leaving it to senior executives far from the marketplace. It is again focusing on breakthrough technologies that can change people‘s lives.‖ NOTE: This article has an excellent overview of strategy: http://fortune.com/procter-andgamble-david-taylor-fortune-500/. Referencing Chapter 6: Corporate-Level Strategy Corporate strategy focuses discussion on the questions of what businesses a corporation should compete in, and how the businesses should be managed so they can create ―synergy‖ —creating value through entering new markets or developing new technologies, either through related or unrelated diversification. Diversification is the process of firms expanding their operations by entering new businesses. In related diversification, a firm enters a different business in which it can benefit from leveraging core competencies, sharing activities, or building market power. Some possibilities include: ● Mergers and acquisitions ● Strategic alliances ● Joint ventures ● Internal development Whatever the choice, it should create value for all stakeholders—employees, suppliers, distributors, and the organization‘s owners themselves. The choice of diversification strategy should create synergy so that all parties gain something they would not have had on their own. When achieving synergy through diversification, a firm has two choices: related diversification through horizontal relationships with related businesses, sharing tangible and intangible resources, and leveraging core competencies; and unrelated diversification though hierarchical relationships with unrelated business. In this case, value creation derives from the corporate office by leveraging support activities. Proctor & Gamble had primarily pursued related diversification through its acquisition of brands such as Gillette, Clairol, and Wella that augmented its existing consumer personal care product line. P&G also had engaged in unrelated diversification through its acquisition of Duracell. This was intended to leverage support activities through Duracell‘s marketing and innovation assets, but ultimately did not appear to create enough long-term value. Duracell was ultimately divested. Acquisition is the incorporation of one firm into another through purchase. It can be a means of obtaining valuable resources that can help an organization expand its product offerings and services. Acquisition can lead to consolidation within an industry and can force other players to merge. Corporations can also enter new market segments by way of acquisitions. Over the years, P&G had spent heavily to acquire hundreds of additional brands in new businesses that it hoped could also become part of consumers‘ daily routines. Lafley‘s recent effort to jettison over half of its brands indicated that the strategy was not working anymore. In TN1-411 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
particular, P&G was struggling with its push to place more emphasis on products that carried higher margins in order to move the firm away from its dependence on household staples. The beauty business, started when P&G acquired Gilette, then Clairol, Wella, and then continued with the move into new market segments with the high-end perfume line licensing deals, had not lived up to its promise, generating the lowest profit margins. Lafley said he wanted to scale back and focus on what he called the ―core‖ business. This move to ―stick to the knitting‖ seemed reasonable, as a way to consolidate assets and possibly leverage remaining core competencies, but so far, the choice of ―core‖ brands remained unclear. And, even if the choice focused on those long-term steady performers, such as in the fabric and home care line, would there be enough business there to build market power and therefore profit margins? Now CEO Taylor had to make these decisions, but under increased scrutiny from stockholders. How would he proceed? Teaching Note Case 26 — Ascena: Still Struggling in Specialty Retail Case Objectives 1. To investigate the choice of strategy in a highly turbulent industry. See the table below to determine where to use this case: NOTE: This case can be used as a COMPREHENSIVE CASE, covering almost all the chapters in the textbook. However, because the primary focus of this case is Corporate-Level Strategy, the instructor may want to use this case to discuss Chapter 6. If so, start with that section of the Teaching Note. CASE OBJECTIVES TABLE Chapter Use Key Concepts PRELIMINARY CONCEPT 1: Strategy Concept PRIMARY CONCEPT 6: Corporate-Level Strategy SECONDARY CONCEPTS 2: External Environment 3: Internal Analysis 4: Intellectual Assets 5: Business-Level
Additional Reading and/or Exercises
Strategic management; vision, mission, strategic objectives
Optional Exercise, optional assigned reading, Porter, 2008
Corporate strategy; diversification; synergy; related and unrelated diversification
NOTE additional reading, web links CASE UPDATE
Industry competition five forces; general environmental factors
NOTE web links to industry environment, stock price
Value-chain analysis; tangible and intangible resources; VRIN Intellectual and human capital Competitive strategy; generic strategies TN1-412
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Teaching Note Strategy 9: Strategic Control 10: Organizational Design 11: Strategic Leadership
Case 1: Robin Hood
Strategic control; informational vs. behavioral control; culture, reward systems
NOTE optional assigned reading, Porter, 1996 & 2007.
Organizational structure Leadership
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Teaching Note
Case 1: Robin Hood
Case Synopsis In the first quarter of 2019, nine retailers filed for bankruptcy, but 2017 saw 21 closures, giving it the dubious distinction of being the worst year for retailing since 2008, when twenty entities closed shop. This was the state of the external environment in 2019 as Ascena Retail Group, Inc. (NASDAQ: ASNA), owners of a well-rounded portfolio of brands providing women‘s and girls‘ specialty apparel, was trying to position itself for this challenge. Ascena had made several moves to improve its portfolio, most recently with its acquisition of ANN INC., iconic specialty retailer of women‘s apparel provided under its Ann Taylor, LOFT, and Lou & Grey brands. Regarding competition in the U.S. as of 2019, The Gap was the apparel industry‘s leading specialty retailer. The Gap was followed closely by L Brands, the owner of Victoria‘s Secret and Bath & Body Works. In terms of revenue, Ascena Retail Group held the third spot and was the largest focused exclusively on women and girls. Ascena operated four focused, branded retail options: the ―Premium Fashion‖ segment with brands Ann Taylor, LOFT, and Lou & Grey; the ―Value Fashion‖ segment, represented by the brands Maurices and Dress Barn; its ―Plus Fashion‖ segment with Lane Bryant and Catherine‘s stores; and merchandise for tween girls via the Justice brand, under the ―Kids Fashion‖ segment. Ascena also offered intimate apparel via Cacique and Catherine‘s Intimates. The ANN acquisition meant Ascena had expanded its brand profile even further across multiple segments and would operate over 4,500 stores with annual projected sales of about $6.5 billion. Ascena had not only gained a presence in the premium women‘s fashion market, but also hoped to realize synergies through the integration of ANN‘s sourcing, procurement, distribution, and logistics operations. Ascena had had disappointing same-store sales in its previous portfolio for several years and had boosted overall revenue primarily through acquisitions. Industrywide retail sales projections continued to be on the soft side, and many analysts worried that the increased debt Ascena now carried would need increased positive cash flow in order to provide adequate coverage. CEO Jaffee noted in the Annual Report that Ascena was ―reinvigorating growth from our core,‖ but that included closing underperforming stores across all segments and addressing the ―unacceptable level of profitability‖ in its value brands by offering up Maurices for sale. In the wake of this announcement rumors were floated that Dressbarn was also up for grabs. This might fix the value segment‘s underperformance, but financial fixes would not help a company attract customers. Retailers needed to do something that would drive sales. In term of appealing to customers, one fashion watcher said, ―today the Ascena brands are a completely known quantity. And while they may be trusted and dependable, that also makes them boring.‖ In 2019 it was more apparent than ever that changing consumer behavior was transforming retail. As The Gap, L Brands and Ascena had found out, it appeared the odds of survival in specialty retail were not favorable, even for top companies.
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Teaching Note
Case 1: Robin Hood
Teaching Plan The Ascena case is a candidate for a ―comprehensive‖ case that can be used to illustrate many facets of strategic management. Ascena (ASNA) was a large specialty retailer facing an extremely competitive and uncertain environment. Overall economic conditions had further complicated competition from rivals. Ascena faced a variety of challenges, with several strategic options to consider. The addition of the industry and current competitors‘ information makes the case a good one to use for strategic analysis and formulation. Information on Ascena‘s multiple divisions and operational overview makes it a good candidate for a discussion of internal resources and capabilities, and the strategic choices facing CEO David Jaffe leads to a discussion of strategic leadership and implementation. For those instructors who like to include a discussion of marketing concerns as part of an overall business policy course, the branding challenges outlined in Ascena, challenges that face the whole retailing industry, make it possible to use the case to augment a discussion of marketing strategy, especially in how to adapt to changing customer trends. For instance, Victoria‘s Secret, the iconic brand known for its sexy lingerie and ―angel‖ runway models, was no longer the brand of choice for those women seeking intimate apparel. The trend was to a more comfortable style and a shopping experience that was more inclusive of all body types and lifestyles. UPDATE: NOTE that L Brands, Victoria‘s Secret parent company, sold the lingerie brand to a private-equity company in 2020. This, amid accusations of "misogyny, bullying and harassment" within the company, was also a reaction to customers who had become increasingly dissatisfied with a company who built a brand by turning women into sexual objects. See https://www.washingtonexaminer.com/opinion/victorias-secret-was-never-feminist-but-itsfinally-failing-because-its-also-not-woke In addition, the shopping experience needed to adapt to provide personalization and the ability for customers to browse, order, and shop across what should be seamlessly integrated channels. The case shows how Chico‘s FAS was partnering with Amazon, ShopRunner and QVC as well as thinking about implementing the buy-online-pick-up-in-store (BOPIS) model to drive traffic to the physical stores. In addition, although not in the case, female customers, especially, were increasingly concerned about the environment and the conditions under which clothing was manufactured. A move toward more sustainable production was influencing buying patterns and led to a decrease in demand for ―fast fashion‖ from retailers such as Forever 21. The whole industry was changing in many ways, which makes an ongoing assessment of the external environment essential in order to have any possibility for sustainable success.
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Teaching Note
Case 1: Robin Hood
For an interesting commentary on the generational change in shoppers‘ mentality, especially how GenZ isn‘t brand loyal, see https://www.theatlantic.com/health/archive/2019/10/temporarily21/599356/ ICEBREAKER/UPDATE Because almost every student has shopped for clothing at some point, it might be illustrative to ask: How do you choose where to shop for clothes? Do you shop based on price, or based on fashion trends, or based on other factors? What stores or venues have you frequented during the last year in your search for things to wear? Men may find this case hard to swallow, focusing as it does on women‘s fashion. Point out that the challenges in women‘s specialty retail are not that different from those faced by Abercrombie & Fitch, or The Gap, or, for more stylish men‘s fashions, by Jos. A. Banks. Although men may not be as fanatic as women shoppers, men still have to make choices about where to go to find something to wear. Certainly most women will have no trouble identifying with this case, and some might even be committed Ann Taylor fans. If so, it might be interesting to ask if Ann Taylor or LOFT customers have seen any difference in the shopping experience since Ascena‘s acquisition in 2015. To help identify the challenges in this industry, the instructor may want to put a list on the board of how students decide where to shop: Price? Fashion or quality? Location—is there a preference for a quick in and out? And what stores they frequented. Any online shoppers? Students might be surprised at discovering the thought processes they use when making these kinds of purchase decisions. One ―a-ha‖ might be that marketing promotions make a difference—TV, print ads, word-of-mouth, the status symbol of wearing something a celebrity has modeled. In addition, the retail environment has changed significantly since the growth of online shopping. Customers now expect an efficient shopping experience, and any retailer must meet those expectations. Because Ascena struggles in this very competitive industry to create some sort of differentiated image, students may end up having some sympathy for CEO Jaffe as they read about his challenges. CASE UPDATE AS OF APRIL 2020 In early 2019 Ascena sold its Maurices brand to an affiliate of British private equity firm OpCapita, and also closed all Dressbarn stores, maintaining the e-commerce business. In December 2019 Ascena announced that it had sold the intellectual property assets of Dressbarn and will transition its e-commerce business to a subsidiary of Retail Ecommerce Ventures LLC. Having now exited the mid-value segment, the remaining Ascena brands were now Ann Taylor, LOFT, Lou & Grey, Lane Bryant, Catherines, Cacique and Justice. TN1-416 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
In October 2019 Moody‘s downgraded Ascena Retail Group Inc. saying that Ascena's capital structure was likely unsustainable as a result of its weak operating performance, high leverage, and negative free cash flow, creating an elevated risk of a debt restructuring including a material debt repurchase at a significant discount. In December 2019 Ascena‘s board of directors approved a 1 for 20 reverse split of its common stock in an effort to avoid delisting from the Nasdaq stock exchange. The stock would continue to trade on the Nasdaq exchange under the symbol ―ASNA‖ on a split-adjusted basis. The reverse stock split affects all issued and outstanding shares of the company‘s common stock and reduces the number of shares from 199.4 million to 9.97 million. In February 2020 Ascena announced changes would be made to its ―tween‖ and kids fashion brand, Justice, after a 15 percent drop in sales for the second quarter. Gary Muto, CEO of Justice's New Jersey-based parent company Ascena Retail Group Inc. (NYSE: ASNA), promised changes there as it dragged down growth at the company's other brands like Lane Bryant and Ann Taylor. He pointed out that Justice has a unique market position, saying "We will use fashion, fun and community to connect with tween girls. We are the only specialty store that delivers this experience for the 6-year- to 12-year-old.‖ See https://www.bizjournals.com/columbus/news/2020/03/10/after-a-rough-quarter-central-ohioretailers-owner.html In March 2020, amid the spread of COVID-19, Ascena said it would furlough all of its retail employees and half its corporate staff and cut executive salaries in half. It remains to be seen if Ascena will be able to survive. Summary of Discussion Questions Here is a list of the suggested discussion questions. You can decide which questions to assign, and also which additional readings or exercises to include to augment each discussion. Refer back to the Case Objectives Table at the beginning of this Teaching Note to identify any additional readings and/or exercises so they can be assigned in advance. 1. Does Ascena‘s corporate strategy seem sound? 2. OPTIONAL QUESTIONS: What are the key forces in the general and industry environments that affect Ascena‘s choice of strategy? 3. What internal resources and assets did Ascena have that gave it a competitive advantage? 4. How did Ascena compete? 5. What has CEO David Jaffe done to implement strategy, and what challenges remain? Discussion Questions and Responses Prior to answering the specific case questions, the instructor might want to position the discussion by reviewing what strategic management really is.
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Teaching Note
Case 1: Robin Hood
PRELIMINARY CONCEPT Reviewing Chapter 1: Strategic Management Strategy is all about the ideas, decisions, and actions that enable a firm to succeed. See Chapter 1, Exhibit 1.1: Strategic management consists of the analyses, decisions, and actions an organization undertakes in order to create and sustain competitive advantages: ● Strategy directs the organization toward overall goals and objectives. ● Multiple stakeholders are included in the decision making. ● Both short-term and long-term perspectives are incorporated. ● Tradeoffs between efficiency (cost) and effectiveness (performance) are recognized. Leaders face a large number of complex challenges. Leaders must be proactive, anticipate change, and continually refine changes to their strategies. This requires a certain level of ―ambidextrous behavior,‖ where leaders are alert to opportunities beyond the confines of their own jobs and are also cooperative and seek out opportunities to combine their efforts with others. Leaders must make strategic management both a process and a way of thinking throughout the organization. See Chapter 1, Exhibit 6: The primary role of the organizational leader is to articulate vision, mission, and strategic objectives. Leaders must communicate their initial vision of the organization‘s purpose: what was the original goal, one that evokes a powerful and compelling mental image of a shared future, that would be massively inspiring, overarching, and long-term, and that represented a destination that is driven by and evokes passion? The organizational mission also needs to be considered: a mission encompasses both the purpose of the company, as well as the basis for competition and competitive advantages. In writing a mission statement, it is important to understand the definition of the business: 1) who are its customers, 2) what customer need is the organization trying to fulfill, and 3) how does the business create and deliver value to customers and satisfy their needs. Organizations must respond to multiple constituencies if they are to survive and prosper, and the mission provides a means of communicating to diverse organizational stakeholders. Although vision statements tend to be quite enduring and seldom change, a firm‘s mission can and should change when competitive conditions dramatically change, or the firm is faced with new threats or opportunities. Anticipating that things might change, an organization‘s leadership must then establish strategic objectives to operationalize the mission statement. That is, objectives help to operationalize the mission statement with specific yardsticks, and they provide guidance on how the organization can fulfill or move toward the ―higher goals‖ in the goal hierarchy—the mission and vision. The original Ascena brand, Dress Barn, was based on providing wear-to-work dresses and other clothing options for women entering the workforce. This vision had not changed. Ascena was still clearly focused on workplace fashion but acknowledged the trend toward a more casual look and the diversity among women‘s body types. TN1-418 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
The mission was to serve as the wardrobe source for working women wherever they may live and shop; professional women who had limited time to shop and who were attracted to the Ascena group of stores for their total wardrobing strategy, personalized client service, efficient store layouts, and continual flow of new merchandise, in most cases at a reasonable price. In addition, Ascena hoped to appeal to 6-12 year-old tween girls, with its Justice brand offering a range of products in an ―energetic environment.‖ The company‘s strategic objectives revolved around the need to continually evolve and elevate the brands so they remained compelling to Ascena‘s expanded target audience of tween girls and women from the ages of 25 to 55, providing not only sophisticated high-quality items, but also casual options, even accessories, swimwear, and intimates for a range of sizes and pocketbooks. Obviously, additional objectives included meeting the expectations of stockholders and other stakeholders. These vision and mission statements, with the resulting strategic objectives, have implications for how to analyze opportunities, manage innovation, and provide leadership to encourage growth. It requires doing an analysis of the external environment, both relative to general factors that might affect how the product is positioned in the market, and also whom the company is competing against for that market. It requires also doing an assessment of internal resources and capabilities for production of high quality products. Here is where students can be reminded how the chapters in the book are linked. See Chapter 1, Exhibit 1.3 for a depiction of the strategic management process. During strategic analysis, the leader does ―advance work‖ to anticipate unforeseen environmental developments, identify unanticipated resource constraints, assess changes in his or her preferences for how to manage. During strategy formulation, the organization addresses the issue of how to compete in a given business to attain competitive advantage. Strategies are formulated at the business, corporate, and international levels. Entrepreneurial initiatives may also play a role. In strategy implementation, depending on the type of organizational structure, the leader might include key individuals in a discussion around selecting which strategies might be best to implement at which level within the organization. The leader must ensure proper strategic controls and organizational design and establish effective means to coordinate and integrate activities within the firm, as well as with suppliers, customers, and possible alliance partners. Leaders should also be committed to excellence and ethical behavior while promoting learning and continuous improvement. Here‘s where innovation is important. The basic question strategic management tries to answer is: How can we create competitive advantages in the marketplace that are not only unique and valuable but also difficult for competitors to copy or substitute? An interesting question that the instructor can ask at this point is: What IS that ―marketplace‖? What business is Ascena in? Students might want to say the ―retail‖ or ―clothing‖ business, but neither captures the intense competitive environment. As seen in the case, Ascena competed directly with retailers such as The Gap and Chico‘s, both of whom were ―specialists‖ in the women‘s niche. TN1-419 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
AS AN EXERCISE, a follow up on the icebreaker, have students list all the variations or types of retail environments that they might have encountered. The Apparel Retail Industry section of the case describes discount mass merchandisers, multi-tier department stores, and specialty retail stores. Other environments include online, catalog, TV infomercial, mall and main street pedestrian locations. Influences for shopping experiences were increasingly coming from online social media, with tips from Pinterest and other aggregators driving consumer choice. Ask students if they think these types of stores and various shopping environments are all part of the same ―industry‖? Does it matter what products are offered? Do shoe stores and sporting goods stores compete with each other? The reality of Ascena‘s business portfolio is that all the divisions were clothing retailers— specifically, women‘s clothing. (Justice focused on kids/tween girls.) By the end of this discussion, students can see that a reasonable definition of the industry from the perspective of Ascena‘s management is that they compete in the women’s specialty retail clothing industry. For advanced students, assigning Michael Porter‘s 2008 HBR article ―The five competitive forces that shape strategy‖ will help students understand why this is an important question: Porter (2008) uses a definition that incorporates more of an ―extended competition‖ concept. He points out that an industry is defined by the scope of its products or services—if products have the same buyers, suppliers, barriers to entry, etc., then these products should be considered as being part of the same industry. Entities that compete for the same industry profit pool (i.e., buyers and suppliers), or any new entrants or substitute entities that dampen the profit potential, can also be considered competitors for the profit available in a given ―industry‖ space. Other definitions can be used. However, all definitions incorporate the idea of firms producing similar products for similar customers. Answering this question is essential to proceeding with strategic analysis. Once students have determined what business Ascena is in, they can then proceed with scanning the external environment, and have a better appreciation of the trends Ascena must monitor in order to craft a competitive advantage. 1. Does Ascena’s corporate strategy seem sound? Referencing Chapter 6: Corporate-Level Strategy Corporate strategy focuses discussion on the questions of what various related and unrelated businesses a corporation should compete in, and how these businesses should be managed so they can create ―synergy,‖ creating value through entering new markets or developing new technologies, either through related or unrelated diversification. Diversification is the process of firms expanding their operations by entering new businesses. In related diversification, a firm enters a different business in which it can benefit from leveraging core competencies, sharing activities, or building market power. Some possibilities include: ● Mergers and acquisitions ● Strategic alliances TN1-420 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
● Joint ventures ● Internal development Growth strategies should create value for all stakeholders: employees, suppliers, distributors, strategic partners, and owners. The choice of growth strategy should create synergy so all parties gain something they would not have on their own. Corporations can achieve synergy by sharing tangible and value-creating activities across their business units; or through the use of common facilities, distribution channels, and sales forces; or through venture partnerships. Likewise, acquisitions must have shared value-creating activities. However, cultural issues can doom intended benefits. In retail, it appears that firms need to continually assess the degree to which previous acquisitions or internal development in related businesses, such as brand extensions, can actually destroy synergy. In specialty retail, as mentioned in the case, Limited Brands was one example of a firm that decided to sell off some of its brands (Abercrombie & Fitch being the major divestiture), and keep Victoria‘s Secret, presumably because of heavy resource requirements and a lack of relatedness between Victoria‘s Secret and the discarded businesses. Another example was The Gap‘s decision to spin off the Old Navy brand. Companies can achieve synergy through diversification in two ways: Through related businesses (horizontal relationships) ● Sharing tangible resources ● Sharing intangible resources ● Leveraging core competencies Or through unrelated businesses (hierarchical relationships) ● Value creation derives from corporate office ● Leveraging support activities In the context of women‘s clothing, The Gap‘s decision to acquire Weddington Way, the virtual showroom for bridesmaid dresses, could represent a corporate strategy decision to pursue unrelated diversification into something different from the core business of brick-and-mortar sportswear and casual clothing. Gap thought that it could leverage existing support activities to encourage customers to browse, order and shop across what should be seamlessly integrated channels, but it hadn‘t worked, especially for such a high-end purchase. In retrospect, lack of relatedness to the core brand seems relatively obvious and can be explored using an assessment of elements in the value chain and a company‘s core capabilities. (See the discussion of internal resources and assets relating to Chapter 3 further along in this teaching note.) Related diversification seeks to add value through synergy, though leveraging the competencies and activities that exist in business units that have some meaningful relationships. Core competencies reflect the collective learning in organizations—how to coordinate diverse production skills, integrate multiple streams of technologies, and market diverse products and services to create value. Core competencies must create superior customer value; the different TN1-421 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
businesses must all have similar elements in the value chain that require similar skills; and these activities or skills must be difficult for competitors to imitate. Sharing activities means that value-chain elements are shared across business units, so that two or more activities are done by one of the businesses. This allows for cost savings, but businesses need to make sure to keep control over quality and customer perception. Ascena appears to be very well aware of the possibilities of synergies coming from the sharing of activities and core competencies deriving from the various acquisitions it has made over the years. All the acquisitions, with the exception of Justice, were among entities in the same focused space: women‘s clothing, so each had similar activities and goals, and each required similar skills and activities in order to be successful. Acquisition is the incorporation of one firm into another through purchase. It can be a means of obtaining valuable resources that can help an organization expand its product offerings and services. Acquisition can lead to consolidation within an industry and can force other players to merge. A corporation can also enter new market segments by way of acquisitions, or it can position itself as a takeover target, offering itself for sale, being acquired for its assets, increasing the core competencies of its acquirer. This may make certain stakeholders happy, because it returns value to them. This is what happened to ANN‘s shareholders when ANN was acquired by Ascena. Ascena expanded its business primarily through internal development and acquisition. Beginning with the original Dress Barn, opened in 1962, targeting working women aged 35-55, Ascena grew as follows: Internal Development 1989: Dress Barn Woman, extension of the original Dress Barn into plus-size fashion. 2013: Catherine‘s plus-size intimates, already part of Catherine‘s, later promoted as a separate brand. 2014: Cacique and Livi Active, Lane Bryant private label lines of intimate and active-wear clothing. Acquisition 2005: Maurices, wide range of sizes, reasonably priced, for women aged 17–34 (subsequently sold off in 2019). 2009: Justice, teenage girls clothing and accessories. 2012: Lane Bryant and Catherine‘s plus-size women‘s fashion. 2015: Ann Taylor, LOFT, Lou & Grey, professional, fashion-conscious women aged 25–55. Building on the assets and capabilities it acquired, Ascena intended to evolve from the original seven $1 billion companies into ONE $7 billion powerhouse, using that ―combined strength, expertise and scale to exceed our customers‘ expectations and become a leader in specialty retail.‖ Ascena planned to do this via ―centers of excellence‖ in procurement, global sourcing, real estate expertise, digital/customer platforms, supply chain optimization, and advanced analytics, with corporate oversight for human resources and finance. Refining the capabilities it TN1-422 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
had acquired with ANN, this would transform the enterprise through centralization, standardization, and using better methodologies and best practices. Through efficiency— reducing costs—and effectiveness—increasing capabilities—Ascena hoped to drive top line sales at profitable margins. In addition to the physical shopping locations Ascena had added to its portfolio, Ascena was investing in technology platforms to support the growth of its omni-channel strategy. ANN, Justice, and Maurices all had e-commerce platforms, but the other brands needed to do the same. Retailers had to have an omni-channel strategy in order to compete. ANN had already brought Ascena the capability to ship from store, use an iPad app to shop an ―endless aisle,‖ do crosschannel returns, and use an ―online find‖ app in the store. Going forward, ANN and other Ascena brands would have to add the capability to buy online and pick up in the store, provide for alternative payments using a one-click checkout, and allow enhanced site reviews. In 2018, sales at the Ascena Retail Group were at almost $7.0 billion. Growth had been the result of acquisitions and the expansion of technology platforms to augment e-commerce. Going forward, it was expected that the synergies resulting from these acquisitions would reduce costs of sales, but the trend had been downward, and by 2019 the Acsena Retail Group had seen share prices drop, market capitalization decline, and comparable store sales in one of its four operating segments post a significant loss. Academic studies do show that acquisitions, on average, do not create shareholder value, and that the promised synergies do not always appear. (See Chapter 6.) That said, there can be significant economies of scope, depending on the activities that are shared. For instance, an improved distribution system can reduce costs across the corporation, resulting in more attractive gross margins. The trick is in how the core competencies reflect the collective learning in the corporation—whether that more efficient distribution system can create increased value to the customer. In addition, it‘s important, especially with acquisitions, that the core competencies be fully integrated into each entity in a way that enhances value-creating activities. As a point of caution, cultural issues can doom intended benefits, so the introduction of new capabilities must be done carefully, with awareness of the need for a shared mindset as well as shared activities. Success was important to many stakeholders here because Ascena had had disappointing samestore sales in its previous portfolio for several years and had boosted overall revenue primarily through acquisitions rather than organic sales growth. Industrywide retail sales projections continued to be on the soft side, and many analysts worried that the increased debt Ascena now carried would require positive cash flow in order to provide adequate coverage. Given the overall uncertainty in the retail environment, especially in specialty retail, analysts wondered if Ascena had pursued a growth strategy at the wrong time. Integration of shared activities and subsequent operational synergies would be critical, but would that be enough to counter the threats from the changing external environment?
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Teaching Note
Case 1: Robin Hood
NOTE CASE UPDATE AS OF APRIL 2020 In early 2019 Ascena sold its Maurices brand to an affiliate of British private equity firm OpCapita, and also closed all Dressbarn stores, maintaining the e-commerce business. In December 2019 Ascena announced that it had sold the intellectual property assets of Dressbarn and will transition its e-commerce business to a subsidiary of Retail Ecommerce Ventures LLC. Having now exited the mid-value segment, the remaining Ascena brands were now Ann Taylor, LOFT, Lou & Grey, Lane Bryant, Catherines, Cacique and Justice. In October 2019 Moody‘s downgraded Ascena Retail Group Inc. saying that Ascena's capital structure was likely unsustainable as a result of its weak operating performance, high leverage, and negative free cash flow, creating an elevated risk of a debt restructuring including a material debt repurchase at a significant discount. In December 2019 Ascena‘s board of directors approved a 1 for 20 reverse split of its common stock in an effort to avoid delisting from the Nasdaq stock exchange. The stock would continue to trade on the Nasdaq exchange under the symbol ―ASNA‖ on a split-adjusted basis. The reverse stock split affects all issued and outstanding shares of the company‘s common stock and reduces the number of shares from 199.4 million to 9.97 million. In February 2020 Ascena announced changes would be made to its ―tween‖ and kids fashion brand Justice after a 15 percent drop in sales for the second quarter. Gary Muto, CEO of Justice's New Jersey-based parent company Ascena Retail Group Inc. (NYSE: ASNA), promised changes there as it dragged down growth at the company's other brands like Lane Bryant and Ann Taylor. He pointed out that Justice has a unique market position, saying "We will use fashion, fun and community to connect with tween girls. We are the only specialty store that delivers this experience for the 6-year- to 12-year-old.‖ See https://www.bizjournals.com/columbus/news/2020/03/10/after-a-rough-quarter-central-ohioretailers-owner.html In March 2020, amid the spread of COVID-19, Ascena said it would furlough all of its retail employees and half its corporate staff and cut executive salaries in half. It remains to be seen if Ascena will be able to survive. NOTE — ADDITIONAL READING, WEB LINKS: THE ANN ACQUISITION: Given the overall turmoil in the specialty retail industry, and ANN‘s struggles, it was not surprising that in May 2015 Ascena Retail Group purchased ANN for about $2.16 billion. According to one analyst, ―The takeover unites the Ann Taylor and LOFT brands with Ascena‘s Lane Bryant, Maurices, and Justice chains, creating a company with more than 4,900 stores focused exclusively on women‘s clothing and accessories. Adding Ann Taylor should give Ascena access to younger, career-oriented customers.‖ See the story and video that discusses problems at Ann Taylor and in the overall retail industry at http://www.bloomberg.com/news/articles/2015-05-18/ascena-agrees-to-buy-ann-taylor-ownerfor-47-a-share. One point made in the video is that the major argument for this kind of acquisition is increased operational synergies, but the positive financial impact of this is many times overstated. TN1-424 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Ascena Retail Group, Inc. (NASDAQ – ASNA) is a leading specialty retailer offering clothing, shoes, and accessories for missy and plus-size women under the Ann Taylor, LOFT, Lou & Grey, Lane Bryant, Cacique, Maurices, Dress Barn, and Catherine’s brands, and for tween girls under the Justice brand. Ascena operates through its subsidiaries approximately 4,900 stores throughout the United States, Canada, and Puerto Rico. For more information about Ascena Retail Group, Inc. and its brands, visit Ascenaretail.com, AnnTaylor.com, loft.com, louandgrey.com, lanebryant.com, maurices.com, dressbarn.com, catherines.com, cacique.com, and shopjustice.com. The following is an excerpt from the article: Ascena has built an empire through acquisition of brands that sell clothing to real American women—those on a budget, and who might not wear size eight. [Ascena Chief Executive David Jaffe has built] Ascena into a holding company that handles back-end operations like sourcing and distribution for a growing stable of brands. He has focused on chains in underserved but growing markets such as plus sizes. He says some 40% of American women wear size 14 and above. The plus-size market in the U.S. accounts for roughly $9 billion in revenue and is expected to grow strongly through 2019, according IBISWorld Inc. The [ANN] purchase comes three years after Ascena paid about $900 million for Charming Shoppes Inc., which brought it the Lane Bryant Chain, [focused on plus-size women.] In 2009, Ascena bought Justice, which caters to tween girls, and in 2005 it bought Maurices, which sells women‘s apparel mainly in small towns. [According to one story,] Ann Taylor brings the company a venerable line popular with suburban moms and career women, while LOFT sells more casual sportswear. But it is also a bet on a segment of retailing that has been among the most troubled. A number of women‘s clothing chains have either scaled back or closed in recent years, including Coldwater Creek, Deb Shops and Wet Seal. Others including Talbots and JJill have been acquired by private-equity firms…―I‘m very bullish on women‘s fashion,‖ Mr. Jaffe said. ―While we‘ve been in a bit of a slump, I‘m hopeful we‘ll start coming out of it.‖ Perhaps he is right? See story at http://www.wsj.com/articles/ann-inc-agrees-to-sell-itself-for-22-billion-1431949557. 2. What are key forces in the general and industry environments that affect Ascena’s choice of strategy? NOTE: No PowerPoint slides accompany this or following discussions. Referencing Chapter 2: Analyzing the External Environment of the Firm Organizational leaders must become aware of factors in the overall environment that might affect their ability to create a competitive advantage. So how do managers become environmentally TN1-425 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
aware? They do so by scanning, monitoring, and gathering competitive intelligence, and using these inputs to develop forecasts. This prepares the firm to do more extensive analysis of the forces in the general environment and the industry or competitive environment. Environmental scanning involves surveillance of a firm‘s external environment to predict environmental changes and detect changes already under way. It is a BIG PICTURE viewpoint of the industry/competition, looking for key indicators of emerging trends—what catches your eye? Scanning alerts the firm to critical trends before changes have developed a discernible pattern and before competitors recognize them. Environmental monitoring is a firm‘s analysis of the external environment that tracks the evolution of environmental trends, sequences of events, or streams of activities. Leaders need to monitor the trends that have the potential to change the competitive landscape—what do you want to track? Firms need to CHOOSE the trends identified via the scanning activity, and regularly monitor or track these specific trends to evaluate the impact of these trends on their strategy process. What factors or trends might be most important to Ascena? To assess how the external environment might affect Ascena‘s strategy, it‘s necessary to take a look at the factors in the general external environment. Ascena must consider the political/legal, economic and global, sociocultural and demographic, and technological forces that might affect the ability of the firm to deliver its products and sustain its business. See which factors in the general environment students might pick that have a significant impact on the women‘s specialty retail clothing business. Political-Legal: Political-legal issues, especially potential trade regulations and supplier disruptions, have had a potential effect not only on Ascena but also on the apparel industry, as most textile manufacturing is done outside of the United States. Economic: Macro-economic changes are always important. Beyond the generic issues (e.g., currency shifts, inflation, interest rates, national income, and unemployment), there appears to be little here that is specific to retailing, except for a possible reduction in individual discretionary spending due to economic uncertainty. Demographic: Several issues stand out in this general environment segment. First, there‘s the overall diversity of the women‘s market. Second, there is a changing ethnic composition in the United States with more Latinas, in particular, who might shop in venues with different geographies and accessible layouts. Third, there are more dual income households than ever before and many of those working women are also working mothers. Fourth, disposable income shifts were occurring as the distribution of wealth increasingly skewed toward the wealthiest Americans. Ascena was targeting a diverse market, from the more budget-focused to the wealthier working woman and acknowledging the different body types from petite to ―fullsized.‖ Sociocultural: A primary issue here includes the trend towards more casual work environments. Students can respond with insights from their own experience. For instance, TV series and TN1-426 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
celebrity interviews might encourage high fashion, brand awareness, but may also portray a more playful and individually chic consumer. Additionally, spending habits have been changing over time, with younger consumers spending more of their discretionary income and saving less of it than their older counterparts. For this reason, those in the 18–35 demographic are increasingly important for retailers as younger buyers are more likely to spend discretionary income and less likely to save. Alternately, women over 45 are less likely to ―dress their age,‖ yet still want clothes that are comfortable. All were increasingly being influenced by social media and websites, such as Pinterest that aggregated fashion options. Web-based retailers such as Zappos were providing one-stop shopping experiences with same-day shipping and no charge returns. Increasingly, female customers, especially, were concerned about the environment and the conditions under which clothing was manufactured. A move toward more sustainable production was influencing buying patterns and led to a decrease in demand for ―fast fashion‖ from retailers such as Forever 21. Technological: Technology, especially the growth of the Internet, has created new opportunities for marketing of product and for promotion. Continuous innovation in supply-chain management techniques and inventory control systems is a major issue for retailers. Also, the Internet channel has been helpful to Ascena by acting as a marketing vehicle, as well as providing a channel for international shoppers. It‘s also necessary to assess the segments of the external competitive environment that include competitors, customers, and suppliers, substitutes and new entrants. Porter’s five forces model allows strategists to anticipate where the industry might be most vulnerable. Draw a diagram on the board similar to the following and have students fill in the details:
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Teaching Note
Case 1: Robin Hood
Suggested: No real substitutes for a woman’s career wardrobe.
Suggested: The industry has low concentration with many rivals competing for market share. Some product differentiation exists, but a lack of switching costs means firms will compete to steal customers.
Substitutes Threat
Suppliers’ Power
Rivalry
Low
High
Low
Suggested: Retail buyers have many choices of retailers and clothing lines. However, many women’s specialty stores design their own private label clothing lines and thus do not sell to other retailers. Therefore buyers have little power.
Buyers’ Power Low
Suggested: There are many supplier firms with a lack of differentiation between them, so power is lowered. Some switching costs may exist if the clothing buyer changes suppliers, but the costs are manageable. Lots of capacity exists in Asia, so suppliers have few alternative markets.
Threat of New Entrants Med-High
Suggested: At the regional level, entry is not difficult as a retailer can enter as small scale with little capital and be able to find raw materials, suppliers and target consumers. Likely entry is from acquisition of existing competitors (similar to what Ascena did with ANN). However, at a national level entry is more difficult.
Ascena, like other women‘s clothing specialty retailers, was confronting some threats. There was no threat from viable substitutes, and both retail buyers and suppliers lacked power. However, there was high rivalry, and threat of new entrants. As the analysis suggests, the environment is challenging. Based on the external environmental factor analysis, the U.S. specialty retail industry was facing reduced profitability, primarily from slow industry growth. Equally balanced competitors made it difficult for any one of them to achieve an advantage. Rivals were trying to attract customers away from each other through price cuts and customer incentives. That was the dangerous trend in this industry because it might cost companies in merchandise markdowns as much as they would earn in order to retain their market shares. So, there was a possibility for growth without much profitability.
TN1-428 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
NOTE — ADDITIONAL WEB LINKS TO INDUSTRY INFORMATION See this story from 2012: http://www.fool.com/investing/general/2012/04/26/are-these-clothing-stores-a-good-fitnow.aspx. In general, the clothing retailers continually struggle with positioning, as explained in this late 2012 article about ―fast fashion,‖ or the rush of retailers such as Forever 21 to put styles on the shelves soon after their runway debut. The fast-fashion companies tried to encourage shoppers to buy armloads of trendy, disposable wear, sometimes cutting quality to compete on price and capture sales. ―Fast fashion is almost cheap enough to be disposable, prompting consumers to visit the stores again and again in search of new pieces. Merchandise turns over rapidly, sometimes two or three times a week, compared to once a month in traditional retailers. Much of the clothing isn‘t meant to last more than one season—or one washing—anyway… Critics of fast fashion say it contributes to overconsumption, leading to landfill-clogging waste, and that it exploits workers in overseas sweatshops. Consumers argue that fashion is a form of selfexpression and say the stores make style accessible to more people.‖ How can a more traditional retailer such as Ascena compete against that? http://www.sandiegouniontribune.com/sdutforever-21-zara-fast-fashion-explodes-san-diego-2012aug20-story.html. However, there is a limit to sociocultural acceptance of fast fashion. In September 2019 Forever 21 filed for bankruptcy, citing competition from online sellers like Amazon.com and the changing fashion trends dictated by millennial shoppers. Younger, more environmentally conscious shoppers are choosing brands that ethically source garments instead of retailers that use cheap fabrics to make T-shirts that are snapped up for $5. Resale sites like thredUp.com, which calls itself the largest online thrift store, are also growing in popularity. One analyst said ―customers have become more conscious of where they spend their dollars. They want sustainability, they want to feel represented and I don‘t think Forever 21 particularly stood for any of this.‖ See https://www.reuters.com/article/us-forever21-bankruptcy-idUSKBN1WF043. Browse some of the companies on the following list to learn more: http://en.wikipedia.org/wiki/Category:Clothing_retailers_of_the_United_States. What does this tell you about the industry and Ascena‘s promotional position? 3. What internal resources and assets did Ascena have that gave it a competitive advantage? Referencing Chapter 3: Assessing the Internal Environment of the Firm If one firm wants to outperform others by a wide margin over a long period of time, it‘s important to figure out how this could be done. The answer may lie in how that firm arranges its activities and creates unique bundles of resources that allow it to sustain a competitive advantage. Students should assess the relationships between the elements in Ascena‘s value chain. TN1-429 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Remember, value-chain analysis is a strategic analysis of an organization that uses value-creating activities. Value is the amount that buyers are willing to pay for what a firm provides them and is measured by total revenue, a reflection of the price a firm‘s product commands, and the quantity it can sell. A firm is profitable when the value it receives exceeds the total costs involved in creating its product or service. Creating value for buyers that exceeds the costs of production (i.e., margin) is a key concept used in analyzing a firm‘s competitive position. Every activity should add value. Take a look at Exhibit 3.1 to see the value-chain activities. Based on the relationships between these elements, Ascena can make a choice of how to proceed to craft a competitive advantage. The case, of course, is obviously focused on Ascena. However, it may be fruitful for the instructor to talk more generally about value-chain activities as they relate in general to specialty retailers pursuing a focused differentiation strategy. Here is a synopsis of some key points: Value chain activity
How does a specialty retailer create value for the customer? What challenges did Ascena have in its value chain?
Primary: Inbound logistics (distribution facilities, material control systems, warehouse layouts) Operations (efficient workflow design, quality control systems)
Certainly, it is always important to maintain stock of necessary items both in the warehouses and the stores. It also helps to do that efficiently. By consolidating operations, Ascena had created a global sourcing capability. Specialty stores have limited space and merchandise. The shopping experience in the store is critical to the customer‘s overall experience—new store designs may be needed, as well as overall design of the clothing being displayed. Ascena was investing in e-commerce platforms to make the overall purchasing environment more convenient. Outbound logistics Specialty retailers have one logistics location, appropriately (consolidation of goods, noted as inbound. They do not have finished goods efficient scheduling, warehoused like manufacturers do. Outbound logistics is finished goods processing) when retailers like Ascena ship goods to customers directly (online, mail, or phone purchases). It‘s also possible to consider the flow of in-store customers as outbound logistics—efficient store layout can encourage customers to interact with merchandise as they enter, browse, and leave. Marketing and Sales This area seems to be absolutely critical for a specialty (motivated salespeople, retailer. There is no room for error in identifying the market innovative advertising and and effectively promoting to it. Ascena uses omni-channel promotion, effective pricing, distribution through direct retail, Internet, and direct mail. proper ID of customer Having an e-commerce platform is becoming increasingly segments and distribution important for long-term growth. channels) Service (ability to solicit Throughout the modern economy, all companies in all customer feedback and industries are increasingly recognizing the value of this TN1-430 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note respond)
Secondary (or support): Procurement (win-win relationships with suppliers, reduced dependence on single supplier)
Technology development (state of the art hardware and software, innovative culture and qualified personnel)
Human resource management (effective recruitment, incentive and retention mechanisms)
General Administration (effective planning systems to establish goals and strategies, access to capital, effective top management communication, relationships with diverse stakeholders)
Case 1: Robin Hood function. In the context of a specialty retailer, however, there doesn‘t appear to be anything particularly unique or noteworthy in how this function is done. Ascena‘s focus on consistent quality, and in the design of the stores, was reinforced by their long-term relationship with customers. Relying on international partners for international production reduces dependence on centralized structure. Department stores must do more of this activity as they not only purchase store brands but also must purchase a wide variety of merchandise from all types of suppliers. Specialty retailers, particularly Ascena, have less to do in terms of this area. Ascena mostly bought store brand items. Still, it is important to find the right suppliers for those items, especially when sourcing costs are expected to increase. All retailers invest in IT upgrades and innovations, especially regarding the Internet, logistics, inventory, and store management. However, this area is not as critical for Ascena as it might be for others with a cost leadership strategy. Given Ascena‘s differentiation strategy, the company must invest in innovation in terms of product design and fashion trends. However, Ascena cannot neglect the efficiency gained through effective utilization of corporate-wide computer systems to manage inventory and distribution. Companies that use a differentiation strategy must maintain some level of parity with those that compete on the basis of cost leadership (for example, the value added by an efficient supply chain can help Ascena keep these costs comparable to the cost of Target‘s line of designer fashions). Ascena has made so many acquisitions, so quickly, that there is likely to be some confusion and uncertainty among employees. This will have to be carefully monitored to make sure communications are consistently informative, and a strong, appropriately incentivized culture is maintained in each division. CEO Jaffe has longevity with Ascena and, therefore, the credibility to create effective planning systems to establish goals and strategies, as well as manage relationships with diverse stakeholders. One area of concern is the degree to which Jaffe communicates with the division heads, especially those recently acquired, to make sure strategies are implemented consistently and with a view to maximizing synergies wherever possible.
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Teaching Note
Case 1: Robin Hood
Primary Activities In terms of primary activities, the key to Ascena‘s ability to differentiate itself in the market seemed to reside in its inbound logistics and operations. As was critical for any specialty retailer, Ascena placed a lot of attention on every aspect of sourcing and distributing its products. From the design of the clothing and the physical store layout to the decisions about omni-channel distribution there were many aspects of its operations that might contribute to a competitive advantage. The Ascena brand had to signal fashion available to everyone, no matter economic status or body type.
Support Activities With regards to support activities, a competitive advantage can be achieved by developing a strong general administration that is built around visionary leadership and a culture that pushes for excellence in implementation of strategy. This appears to be an area where Ascena, and perhaps CEO Jaffe could excel, as long as the acquisition strategy and operational decisions were carefully staged and monitored for effectiveness over time. In addition, see the concept of the resource-based view of the firm, and the three key types of resources: tangible resources, intangible resources, and organizational capabilities. A firm‘s strengths and capabilities—no matter how unique or impressive—do NOT necessarily lead to a competitive advantage. The resource-based view of the firm takes the perspective that firms‘ competitive advantages are due to their endowment of strategic resources that are valuable, rare, costly to imitate, and costly to substitute. Without these unique resources, the firm can only attain competitive parity. RBV goes beyond a SWOT analysis to integrate internal and external perspectives in a broader competitive context. RBV can reveal how core competencies embedded in a firm can help it exploit new product and market opportunities. An important issue to focus on here is the importance of intangible resources like innovation and reputation. Especially in mature brands, sustaining reputation is essential. Look at resources that are controlled by Ascena that might enable it to develop and implement value-creating strategies. Based on their reading of the case, students might identify those resources to include: Tangible Resources: Financial: Ascena appeared to have sufficient assets available to handle current cash flow needs. However, the company had considerable debt, and appeared to have declining revenues across all divisions under increasingly difficult economic conditions. Physical: Ascena had multiple real estate formats and evidenced an understanding of the need to continuously evaluate the effectiveness of its real estate strategy. Ascena had agreed it ―probably‖ had too many stores, and was developing a ―fleet optimization project‖ that would reduce the physical footprint as it transferred more business either to nearby stores or online. TN1-432 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Technological: One asset here might be Ascena‘s recognition of the need for adequate supply chain and inventory management systems, both hardware and software. Ascena also was aware of the necessity of investing in technology platforms, using an onmi-channel strategy to market all brands. Organizational: CEO Jaffe‘s emphasis on the need for providing a shopping experience for ALL Ascena‘s diverse customers may have created an organization more capable of delivering performance. However, the reporting structure may have stretched too thin. It remains to be seen if appropriate actions had been taken to create and maintain coordination between divisions. Intangible Resources: Human: Although not mentioned in the case, Jaffe‘s aggressive push to acquire different brands may have produced confusion and uncertainty among employees. He might need to pay attention and manage expectations in order to make sure all employees have the same vision, especially the recently acquired upper-level executives. Retail was famous for having a revolving door in upper-level management, as talent moved between entities anxious to acquire a competitive edge. Innovation and creativity: Although not mentioned in the case, it‘s possible this area might need development. One problem might be that Ascena was trying to acquire competitors rather than develop any truly innovative products or marketing strategies with its existing entities. Reputation: This dimension was Ascena‘s most significant strength. Especially with the recent acquisition of ANN, the company‘s brand was very well known. Determining whether the internal resources are valuable, rare, difficult to imitate, or difficult to substitute (VRIN) can help a firm sustain a competitive advantage. See Exhibit 3.6. Applying the VRIN concept, probably Ascena‘s most valuable activities would be operations (possibly distribution) and technology development (plans to further develop its omni-channel). Also obviously valuable might be the human resources, and the company‘s brand name and reputation, especially those recently acquired. In retailing, it seems unlikely that any resource or capability can be easily characterized as rare or non-substitutable. With high labor mobility and non-exclusive systems, it is hard to see any capability as being rare. It‘s hard to make a decision about inimitability except we know from the case that other specialty retailers have struggled with the same issues confronting Ascena. This means it might be hard for Ascena to truly utilize its internal resources to sustain a competitive advantage, but the same could be said for Ascena‘s competitors as well—specialty retail appeared to be a difficult industry in which to sustain a competitive advantage! Referencing Chapter 4: Recognizing a Firm’s Intellectual Assets See the concepts of intellectual capital and human capital, both of which are intangible assets that a company such as Ascena needs to have in order to compete successfully. Intellectual capital is a measure of the value of a firm‘s intangible assets, its reputation, employee loyalty and commitment, customer relationships, company values, brand names, and the experience and TN1-433 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
skills of employees. Human capital involves the individual capabilities, knowledge, skills, and experience of the company‘s employees and managers. Human capital is the foundation of intellectual capital. Intellectual capital is developed through attracting, developing, and retaining human capital. See Chapter 4, Exhibit 4.2. Organizational Capabilities: Specific Competencies or Skills: Ascena was certainly successful at designing and implementing focus (niche) strategies for specific target markets—first with Dress Barn and then with Lane Bryant and Catherine, and more recently with the ANN portfolio. In the past, Ascena seems to have delivered combinations of a shopping location and accompanying merchandise selections for those divisions that had worked well, demonstrating that it had skills in marketing and brand management. These are critical skills for retailers to have. Capacity to combine resources: Although Ascena did have some activities and resources, especially those recently acquired, that could have been assets, the intangible assets represented by human capital might have been weak, given Ascena‘s rapid pace of acquisition. This meant that the level of commitment, breadth and depth of talent needed to combine resources might be lacking. 4. How did Ascena compete? Referencing Chapter 5: Business-Level Strategy In order to achieve a sustainable competitive advantage, Ascena had to assess its ability to contend with other specialty retailers. In the women‘s retail-clothing industry, by default Ascena was using a focus strategy, targeting the professional woman. But how else did Ascena compete? The question of how to compete in a given business to attain competitive advantage requires an assessment of the types of competitive strategies, including the three generic strategies: 52. Overall cost leadership Low-cost-position relative to a firm‘s peers Manage relationships throughout the entire value chain 53. Differentiation Create products and/or services that are unique and valued Non-price attributes for which customers will pay a premium 54. Focus strategy Narrow product lines, buyer segments, or targeted geographic markets Attain advantages either through differentiation or cost leadership Generic strategies are plotted on two dimensions: competitive advantage and strategic target. The overall cost leadership and differentiation strategies strive to attain advantages industrywide, while focusers have a narrow target market in mind. Let‘s see what other options Ascena had.
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Teaching Note
Case 1: Robin Hood
Cost Leadership: This strategy relies on successful procurement activities. As with most specialty retailers, Ascena probably focused on working with suppliers that could produce and distribute most efficiently with very high economies of scale. This strategy also requires the retailer to be particularly efficient in its supply chain, inventory control, and store operations. There is less emphasis on technology development (for example, product design). However, in the interest of cost control, many retailers have made significant strides in terms of inventory and distribution systems, using computer-based control systems. Other options for technology use include the creation of customer databases to streamline marketing efforts. Ascena had signaled its intent to do this. Differentiation: This strategy relies on dynamic leadership with a strong fashion sense and marketing skills. It is critical to identify the target market and sell effectively to the buyers in that segment. High-fashion products and effective store layouts are most critical here. Hence, the most important areas of the value chain are general administration, technology development (product design), marketing, merchandising, and operations. Here is where Ascena appeared to be best positioned to compete, given the internal analysis done above. Bear in mind that all specialty retailers, by default, were using a focus strategy, and had to maintain parity with each other relative to cost. This was why Ascena was so insistent on the synergies and economies of scale it would gain from its acquisitions. The only option for any specialty retailer was to be as differentiated as possible in the customer‘s mind, and this differentiation could be in the quick availability of new fashion from the runway, cheaply produced but equally cheaply priced. Paying attention to trends and consumer sensibilities was key. Ascena was a ―house of brands,‖ implying that the consumer was not aware of the Ascena name but did recognize those brands that were specifically targeting her sensibilities: whether the lower price yet fashionable solutions for the heartland working mother (Maurices and Dressbarn); the extended-sized clothing and intimate items provided by Lane Bryant and Catherine‘s; or the sophisticated, updated classics of Ann Taylor. The plus-size market was especially not well covered, except by the Ascena brands, so the company had a definitely differentiated competitive edge in this focused market. Although Ascena might have a slight advantage at the moment, in the future the major competitive advantage might go to those retailers who could deliver quicker and more conveniently via an online solution. The ease of entry for a very specialized clothing designer targeting a specific demographic was getting more probable as technology solutions became more widely available and social media influencers became more savvy at reaching the individual consumer with a customized solution. It‘s hard to figure out how mainstream retailers could compete with this. 5. What has CEO David Jaffe done to implement strategy, and what challenges remain? Referencing Chapter 9: Strategic Control and Corporate Governance
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Teaching Note
Case 1: Robin Hood
Strategic control involves the process of monitoring and correcting a firm‘s strategy and performance. Strategic control focuses especially on the roles of informational and behavioral control in the formulation and implementation of strategies. See Chapter 9, Exhibit 9.2. Informational control is concerned with whether or not the organization is ―doing the right things,‖ while behavioral control is concerned with whether or not the organization is ―doing things right‖ in the implementation of its strategy. Ascena needs to make sure enough information of the right kind is available to monitor activities—this is where things such as financial, quality control, and customer feedback is essential, where information ensures the firm is doing the right things; and where appropriate role models and rewards should be available to keep employees motivated, where employees are encouraged to do things the right way. Chapter 9 emphasizes the importance of aligning both informational and behavioral control systems with organizational strategy. The information gained from the internal and external environment is reviewed against the firm‘s strategy and goals to make sure strategy is formulated to ―do the right things.‖ If the results are not what was expected, then behavioral controls can be utilized to encourage employees to ―do things right‖—leadership can implement programs or policies so employee actions can be influenced through building or maintaining a strong positive culture, creating effective reward and incentive programs, and setting boundaries and constraints to minimize improper and unethical conduct (see Chapter 9, Exhibit 9.3). Both the informational and behavioral components of strategic control are necessary, but not sufficient, conditions for success. What good is a well-conceived strategy that cannot be implemented? Or what use is an energetic and committed workforce if it is focused on the wrong strategic target? Ascena appeared to have information controls in its inventory management, financial systems, and customer feedback mechanisms. Retailers need to have this critical information in time to make decisions about clothing designs and procurement for the upcoming season (fall fashion decisions are made at the beginning of the year), and therefore ―do the right thing.‖ The problem in retail is how to anticipate fashion trends and react accordingly. The reactions need to be made by employees who are skilled, experienced, and motivated to act in support of organizational goals. In addition, the decisions to ―do things right‖ sometimes are hard to make, given that they almost always include making tradeoffs (if I do this, then I can‘t do that). For advanced students, assigned reading of Michael Porter‘s 1996 HBR article ―What is strategy?‖ and his 2007 interview in Fast Company provides more clarity regarding the issue of tradeoffs, especially in retail. In the Fast Company interview, Porter says: The essence of strategy is that you must set limits on what you‘re trying to accomplish. The company without a strategy is willing to try anything. If all you‘re trying to do is essentially the same thing as your rivals, then it‘s unlikely that you‘ll be very successful. It‘s incredibly arrogant for a company to believe that it can deliver the same sort of product that its rivals do and actually do better for very long. (p. 3) TN1-436 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
One can argue that Ascena did not seem able to set limits. Only one specialty retailer in the case, Limited Brands, appeared to have taken Porter‘s advice to heart, divesting itself of brands that had the potential for good performance (Abercrombie & Fitch, Lane Bryant), and paring down to focus resources on key brands Victoria‘s Secret and Bath & Body Works. Up until 2019 Victoria‘s Secret had been a success, creating a differentiated and iconic brand in a crowded category (women‘s lingerie). Even the men in the class have heard of this brand. Perhaps CEO Jaffe needed to consider some of these types of tradeoffs. Could he truly create a ―house of brands‖ that would offer something to every woman? UPDATE: NOTE that L Brands, Victoria‘s Secret parent company, sold the lingerie brand to a private-equity company in 2020. This, amid accusations of ―misogyny, bullying and harassment‖ within the company, was also a reaction to customers who had become increasingly dissatisfied with a company who built a brand from turning women into sexual objects. See https://www.washingtonexaminer.com/opinion/victoriassecret-was-never-feminist-but-its-finally-failing-because-its-also-not-woke. In addition, this chapter discusses the importance of a strong, positive culture, and reward systems that rely more on achievement of jointly created and internalized goals and objectives than on constraints imposed by rules and regulations. Behavioral controls involve a system of rewards and incentives coupled with a strong culture. Managers need to understand the need to hire the right people, that training plays a key role, managerial role models are vital, and reward systems need to be clearly aligned with organizational goals and objectives. As previously noted, retail has a history of a revolving door in top management, so even though Jaffe had appeared to carefully staff his leadership with seasoned individuals—with each brand supposedly unique, it was felt the person responsible for a brand‘s creative vision should be unique as well—each of the Ascena divisions was led by a CEO, CFO or president with expertise in that area. However, unless communication was clear and integrated with a compelling overall vision, any strategic restructuring might cause a problem with Ascena‘s culture and reward systems going forward. Referencing Chapter 10: Creating Effective Organizational Designs Strategy consists of analysis (setting goals, assessing the internal and external environment of the firm), formulation (deciding which industries to compete in and how to compete in those industries), and implementation, where organizational leaders allocate the necessary resources and design the organization to bring intended strategies to reality. Ascena‘s David Jaffe made a choice of how to compete; therefore, he must also make a decision about implementation and the organization‘s design. Chapter 10 stresses that organizational strategy has implications for a firm‘s structure. Students should relate concepts from Chapter 10 such as the differences between various structures and the effectiveness of each possible structure for Ascena‘s possible choices of strategy. Organizational structure refers to formalized patterns of interactions that link a firm‘s tasks, technologies, and people. Structures help to ensure that resources are used effectively in accomplishing an organization‘s mission. Structure provides a means of balancing two conflicting forces: the need for the division of tasks into meaningful groupings, and the need to TN1-437 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
integrate the groupings for efficiency and effectiveness by coordinating and integrating key activities. Structure identifies the executive, managerial, and administrative organization of a firm and indicates responsibilities and hierarchical relationships. It also influences the flow of information as well as the context and nature of human interactions. Factors that facilitate the effective coordination and integration of key activities include having a common culture and shared values, horizontal organization structures, horizontal systems and processes, effective communications and information technologies, and involved human resource practices. An effective organizational design can encourage the flow of information and enhance working relationships between functional departments and activities. However, achieving the coordination and integration necessary to maximize the potential of an organization‘s human capital involves much more than just creating a new structure. Different structures lead to different degrees of flexibility and permeability and can affect the amount of culture change required. Structures can have an impact on relationships between internal and external constituencies, and therefore need the full support of the management team to implement. As previously mentioned, CEO Jaffe had kept all the brands separate in a divisional structure, where relatively autonomous units were governed by a central corporate office. This provides for separation of strategic and operating control. Divisional managers can focus their efforts on improving operations in the product markets for which they are responsible, and corporate officers can devote their time to overall strategic issues for the entire corporation. The case doesn‘t specify, but Ascena‘s organizational structure could have followed the strategic business unit (SBU) model where each entity had responsibility for its operational functions, while centralized sourcing and distribution and diffusion of technology, financial and human resource activities would be managed across all divisions, yielding the promised synergies. No matter the structure, Jaffe still had the challenge of integrating culture across the entire corporation, making sure all divisions understood the broader vision and mission, which was to serve as the wardrobe source for working women wherever they may live and shop. In addition, all division leaders had the responsibility for coordinating their operational activities toward achieving the strategic objectives. These objectives revolved around the need to continually evolve and elevate the brands, so they remained compelling to Ascena‘s expanded target audience of tween girls and women from the ages of 25–55, providing not only sophisticated high-quality items, but also casual options, even accessories, swimwear and intimates for a range of sizes and pocketbooks. Obviously, additional objectives included meeting the expectations of stockholders and other stakeholders and returning the corporation to profitability across all divisions! Referencing Chapter 11: Strategic Leadership See the concept of leadership, the process of transforming organizations from what they are to what the leader would have them become. Leadership is proactive, goal oriented, and focused on the creation and implementation of the creative vision. This definition implies dissatisfaction TN1-438 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
with the status quo, a vision of what should be, and process for bringing about change. Leaders are change agents whose success is measured by how effectively they formulate and implement a strategic vision and mission. See Exhibit 11.1. This involves: ● Setting a direction ● Designing the organization ● Nurturing a culture dedicated to excellence and ethical behavior The interdependent nature of these three activities is self-evident. Consider an organization with a great mission and a superb organizational structure, but a culture that implicitly encourages shirking and unethical behavior. Often, failure of today‘s organizations can be attributed to a lack of equal consideration of these three activities. The imagery of the three-legged stool is instructive: it will collapse if one leg is missing or broken. Leaders need to set the direction for the organization by continually scanning the environment to develop knowledge of all stakeholders, and knowledge of salient environmental trends and events. Then leaders must integrate that knowledge into a vision of what the organization could become. Leaders require the capacity to solve increasingly complex problems and must be proactive in their approach so they can develop viable strategic options. COE Jaffe had been proactive in the past, as witnessed by the series of strategic acquisitions he made. He seemed to have provided focused guidance about the direction each division should take regarding their separate customer segments. His vision was clear, and his strategic objectives seemed reasonable and appropriate given this vision. Leaders are responsible for designing the organization: a strategic leadership activity of building structures, teams, systems, and organizational processes that facilitate the implementation of the leader‘s vision and strategies. Leaders have an important role in creating systems and structures to achieve desired ends. Jaffe may not have been so effective at designing an organizational structure and mobilizing a management team that could implement his strategic objectives. Given the rapid pace of acquisitions—a new company every 3 to 4 years—was there time to fully integrate each new addition? Jaffe added many components and proposed many new initiatives. Had Ascena developed the resources and capabilities necessary to succeed at all of these, at the same time? Leaders play a key role in changing, developing, and sustaining an organization‘s culture. An excellent and ethical organizational culture is an organizational culture focused on core competencies and high ethical standards. Organizational culture can be an effective means of organizational control. In nurturing a culture dedicated to excellence and ethical behavior, managers and top executives must accept personal responsibility for developing and strengthening appropriate behavior; consistently demonstrate that such behavior is central to the vision and mission; develop and reinforce role models, corporate credos, codes of conduct, reward and evaluation systems, policies and procedures. Doing this requires leaders to overcome barriers to change and effectively use their power. TN1-439 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Difficulties in implementing the leader‘s vision and strategies include a lack of understanding of responsibility and accountability among managers, reward systems that do not motivate individuals and groups toward desired organizational goals, inadequate or inappropriate budgeting and control systems, and insufficient mechanisms to coordinate and integrate activities across the organization. As previously discussed, we don‘t know if Jaffe had the ability to institute reward systems that effectively motivated managers, and we don‘t know whether the coordination and integration mechanisms were sufficient. Although not in the case, there‘s a telling 2017 quote from exCOO Brian Lynch, saying that the corporation was ―working hard to adopt a mindset of continuous improvement across the business, across all of our functions at all levels of responsibilities. I certainly believe that‘s the kind of results-oriented operational culture necessary for sustainable success.‖ Saying that implies some concern that that ―mindset‖ did not currently exist in as robust a fashion as might be needed given the challenges that remained in this very difficult industry environment. Did Jaffe really believe in Ascena‘s ability to implement its chosen strategy? At the end of the case he appears upbeat and positive about the future, but does the corporation really have the resources and talent to succeed in the retail environment of 2019? Teaching Note References (and possible additional assigned readings) Porter, M.E. 1996. ―What is strategy?‖ Harvard Business Review, 74(6): 61–78. Porter, M.E. 2007. ―Michael Porter‘s Big Ideas.‖ Fast Company, 44, (December 19), available at http://www.fastcompany.com/magazine/44/porter.html. Porter, M.E. 2008. ―The five competitive forces that shape strategy.‖ Harvard Business Review,86(1): 78–93.
Teaching Note Case 27 — The Boston Beer Company: Brewing Up Success? Case Objectives 1. To examine how the competitive forces in an industry affect choice of strategy. 2. To examine how formulating a competitive strategy involves assessment of internal activities and resources. See the table below to determine where to use this case: NOTE: There are both PRIMARY and SECONDARY chapters that can be used for this case. The Teaching Note gives guidance for the PRIMARY use chapters, and provides suggestions if the instructor wants to use the case to illustrate concepts from the optional SECONDARY chapters. TN1-440 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
CASE OBJECTIVE TABLE Chapter Use Key Concepts PRIMARY CONCEPT: 5: Business Level Strategy SECONDARY CONCEPTS: 2: External Environment 3: Internal Analysis
Competitive strategy; generic strategies – low-cost leadership, differentiation, focus External scanning and monitoring; industry competition five forces; strategic groups
Additional Readings or Exercises NOTE additional reading. video; see APPENDICES for additional information NOTE additional reading, embedded video
Value-chain analysis; resourcebased view of the firm; VRIN
Case Synopsis The Boston Beer Company, known for its Samuel Adams brand, is the largest craft brewery in the United States, holding a 1 percent stake in the overall beer market. It faces growing competitive threats from other breweries, both large and small. In the past several years, the beer industry has been on a decline, while sales of wines and spirits have increased. The Boston Beer Company competes within the premium beer industry, which includes craft beer and premium imported beers like Heineken and Corona. Although the beer industry has been on a decline, the premium beer industry had seen a small amount of growth, and the craft beer industry had seen a surge in popularity. Because of this success of the craft breweries, the major breweries had taken notice and many new craft breweries had sprung up. According to the Brewers Association, as of 2018, around 7,346 craft breweries and 7,450 total breweries operated in the United States. While craft breweries accounted for over 98 percent of all the breweries in the United States, they only produced approximately 25 percent of all beer sold. However, with the rise in popularity of premium beers, the craft breweries were expected to continue to grab more of the market. As the country‘s largest craft brewery, the Boston Beer Company had revenue of over $995.7 million in 2018 and sold over 4.2 million barrels of beer. Other large craft breweries included D.G.Yuengling & Son, Inc., and Sierra Nevada Brewing Company. In addition, some smaller breweries had been merging to take advantage of economies of scale and enhance their competitive position. However, The Boston Beer Company competed not only with domestic craft breweries but also with premium beer imports, such as Heineken and Corona, which sold beer in a similar price range. Like Anheuser-Busch Inbev and MillerCoors, Heineken and Corona had large financial resources and could influence the market. The Brewers Association defined a craft brewery as brewing less than six million barrels per year and being less than 25 percent owned or controlled by another economic interest. Maintaining status as a craft brewery could be important for image and, therefore, sales. The size of the Boston Beer Company, however, was an issue. With continued growth, the brewery could TN1-441 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
potentially increase its volume output to more than 6 million barrels per year, thus losing its craft brewery status. Also, because of its size, Boston Beer had less in common with other craft breweries and more with the major breweries regarding distribution. Furthermore, with the size of the company and its ability to market nationwide, the company ran the risk of alienating itself from other craft breweries who believed Samuel Adams no longer fit the profile. Many craft breweries already believed the company, which had been public since 1995, was more concerned with making money than with providing quality beer and educating the public on craft beers. So, who did Boston Beer compete with? The Boston Beer Company was facing a difficult competitive environment. It was facing direct competition from both larger and smaller breweries and from premium imported beers. Some of the smaller craft breweries were growing quickly and wanted to be larger than the Boston Beer Company. Other craft breweries felt that the Boston Beer Company was too large already. Thus, while further growth would be beneficial in terms of revenue, growing too large would negatively affect the company‘s status as a craft brewery and the perceptions of its customers. In the past, the Boston Beer Company had the advantage of being one of the only craft breweries that was nationally recognized. It didn‘t want to lose that premium status. However, as beer drinkers saw more choice, Boston Beer revenues had been declining. How could Boston Beer Company continue to brew flavorful beers, maintain a loyal customer base, yet see continued growth in the future? Teaching Plan This is a brief case, which can be covered quickly, especially because it‘s a familiar industry to most students. The major opportunity here is to demonstrate how the nature of some industry structures complicate what seems, at first, to be a straightforward strategic choice. As such, it can be discussed early in the semester after students have studied strategic analysis and formulation, to further expand their awareness of these components before they move into more complex areas of the strategic process. We recognize that industry and internal issues drive strategy, but we start with the question of choice of business strategy, the importance of understanding strategic groups, and then show how the internal and external environment can affect options for growth. Before engaging in discussion, you might want to test student’s basic knowledge regarding the case and the major concepts. Here are some multiple-choice questions to use. (This will get the students‘ attention—they can‘t answer these if they haven‘t read the case!) Which of the following statements is most true? a. The beer industry has been on a decline, while sales of wine and spirits have increased. b. Boston Beer competes primarily with other craft brewers. c. Many craft brewers appreciate Boston Beer‘s commitment to producing quality beer. d. The only product Boston Beer markets is beer via the Samuel Adams brand. TN1-442 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
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ANSWER: a. Even though the craft beer movement is growing, overall the beer industry is in decline. Boston Beer‘s major competitors are AB InBev and Molson Coors. Many craft breweries believe Boston Beer is more concerned with making money than with providing quality beer and educating the public on craft beers. Boston Beer also markets the Rebel IPA line, Twisted Tea hard iced tea, and Angry Orchard hard cider. Blue Moon is made by a craft beer competitor of Boston Beer. a. Yes b. No ANSWER: b. Blue Moon is made by Molson Coors. Although student perception may be that Blue Moon is a ―craft‖ beer, it‘s actually produced by one of the big 3 worldwide breweries who do business in the United States (AB InBev, Molson Coors, Heineken). ICEBREAKER This case can start with an icebreaker. Starting from the perspective of a customer may make it easier for students to transition to a strategic analysis. How many of you are beer drinkers? Who do you think are the top beer companies in the United States? Students may call out beer brands, not realizing that the global strategy of companies in the beer industry is to consolidate brands into an increasingly smaller group of beer companies. After InBev‘s acquisition of Anheuser-Busch in 2008 and its acquisition of SABMiller in 2016, the top three beer companies in the world are AB InBev SA/NV (Belgium), Heineken (Dutch), and China Resources (Bejing). Other top companies worldwide include the Japanese firms Kirin Holdings and Asahi, Carlsberg (Denmark), and Molson Coors (Canada/USA). A visit to the AB InBev Wikipedia site can provide a list of its over 200 brands: https://en.wikipedia.org/wiki/AB_InBev. Regarding American consumption, Pabst is the only top-selling beer in America whose brand is still owned by a U.S. company—although Pabst owns no actual breweries, contracting out production to Miller or Lion Brewery in Pennsylvania. (Miller is in a joint venture with SABMiller.) Boston Beer/Sam Adams, one of the many ―micro brewers‖ actually making beer in the United States is said to be the seventh largest brewery in the country, after Budweiser, Coors, and Pabst. (Although Coors can no longer be considered ―American,‖ having merged with the Canadian brewery Molson in 2005.) Regional brewer D.G. Yuengling & Son is considered the oldest operating brewing company in the United States, and rivals craft beer maker Boston Beer Company in size, but primarily sells on the east coast. Phew—this can get confusing! For an additional perspective on this industry, consider also assigning the Heineken case, which discusses the specific challenges faced by one of the top global competitors. Heineken offers premium beers in the price range of Samuel Adams, making them a close competitor in the United States. How many of you drink Sam Adams by choice? Why, or why not? Do you consider Sam Adams to be a top brand? TN1-443 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
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Case 1: Robin Hood
Here‘s where students can discover just how hard it is to ―differentiate‖ a brand. Is their preference based on taste or on marketing? How many of them would be willing to bet they could identify their favorite beer in a blind taste test!? Summary of Discussion Questions Here is a list of the suggested discussion questions. You can decide which questions to assign, and which additional readings or exercises to include to augment each discussion. Refer to the Case Objectives Table at the beginning of this Teaching Note to identify any additional readings and/or exercises so they can be assigned in advance. Discussion Questions: 1. PRIMARY QUESTION: What strategy does Boston Beer follow in the beer market? 2. SECONDARY QUESTIONS: What is the structure of the beer industry, and how does this affect choice of strategy? 3. What internal assets does Boston Beer have that may help it deal with its challenges? Discussion Questions and Responses 1. What strategy does Boston Beer follow in the beer market? Strategy is all about the ideas, decisions, and actions that enable a firm to succeed. See Chapter 1, Exhibit 1.1: Strategic management consists of the analyses, decisions, and actions an organization undertakes to create and sustain competitive advantages: ● strategy directs the organization toward overall goals and objectives; ● includes multiple stakeholders in decision making; ● incorporates both short-term and long-term perspectives; ● recognizes tradeoffs between efficiency and effectiveness. See Chapter 1, Exhibit 1.3 for a depiction of the strategic management process. During strategic analysis, the leader in the organization does ―advance work‖ to anticipate unforeseen environmental developments, identify unanticipated resource constraints, assess changes in his or her preferences for how to manage. During strategy formulation, the organization addresses the issue of how to compete in a given business to attain competitive advantage. Strategies are formulated at the business, corporate, and international levels. Entrepreneurial initiatives may also play a role. In strategy implementation, the leader must ensure proper strategic controls and organizational design, and establish effective means to coordinate and integrate activities within the firm, as well as with suppliers, customers and possible alliance partners. The basic question strategic management tries to answer is: How can we create competitive advantages in the marketplace that are not only unique and valuable but also difficult for competitors to copy or substitute?
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Case 1: Robin Hood
Referencing Chapter 5: Business-Level Strategy How firms compete and how they attain and sustain competitive advantages go to the heart of strategic management. In short, the key issue becomes: why do some firms outperform others and enjoy such advantages over time? The viability of a firm‘s success is driven by both the internal operations of the firm and the desires and preferences of the market. Firms that succeed have the appropriate resources and cost structure to meet the needs of the industry and general environment. They also have a strategy… A business-level strategy is a strategy designed for firm or a division of the firm that competes within a single business. Within the firm‘s industry environment generic strategies include basic types of business level strategies based on breadth of target market (industrywide versus narrow market segment) and type of competitive advantage (low-cost versus uniqueness). Here are the three generic strategies that are used to overcome industry forces and achieve a competitive advantage: 55. Overall cost leadership Low-cost-position relative to a firm‘s peers Manage relationships throughout the entire value chain 56. Differentiation Create products and/or services that are unique and valued Non-price attributes for which customers will pay a premium 57. Focus strategy Narrow product lines, buyer segments, or targeted geographic markets Attain advantages either through differentiation or cost leadership Generic strategies are plotted on two dimensions: competitive advantage and strategic target. The overall cost leadership and differentiation strategies strive to attain advantages industry wide, while focusers have a narrow target market in mind. Both casual observation and research supports the notion that firms that identify with one or more of the forms of competitive advantage outperform those that do not. To achieve a sustainable competitive advantage, Boston Beer must assess its ability to contend with other brewers, especially its main rivals, the other craft brewers such as Sierra Nevada and New Belgium Brewing Company, as well as global players AB InBev and Heineken. Ask the students which strategy they think Boston Beer should pursue, and why. Although any company in this crowded industry must keep costs low, if only to achieve parity with competition, the only way Boston Beer has chosen to compete is through differentiation. The hope is that Boston Beer can convince the consumer that its beer has some unique attribute that sets itself apart from any other beverage, so the consumer will be willing to pay a premium for this uniqueness. (Refer to the icebreaker: WHY did some people say they liked their brand of beer?) TN1-445 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
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Exhibit 9 in the case, shows that the price per six pack doesn‘t seem to matter. Beer drinkers DO seem to be willing to pay a premium for their favorite brew, and the craft beer makers Boston Beer and Sierra Nevada appear to be able to grab market share, even at double the price of the best sellers from Budweiser and Coors/Miller. Some might want to suggest that Boston Beer attempt a focus strategy, targeting those who prefer the hand-crafted types of beers, but looking at the strategic groups exercise, in the discussion of the external environment, we can see that Boston Beer has grown beyond the craft beer niche, and must now compete with the brewers who offer a broader product line. NOTE — ADDITIONAL READING, CASE UPDATE: Here‘s a video made by Jim Koch of Boston Beer, describing how he started the company: https://www.youtube.com/watch?v=3iqUDPQl9_A. In the U.S. market, although sales are dominated by U.S. Brewers Anheuser-Busch InBev, Molson Coors, and Pabst Brewing Co., with competition from global competitors Heineken and Grupo Modelo, the ―craft‖ brewers, notably Sam Adams, which holds .009 market share, are gaining ground, (see Case Exhibit 9). For an historical perspective, see the 2009 documentary ―Beer Wars,‖ which documents the rise of the craft brewers such as Boston Beer and Dogfish Head. For instance, ―Beer Wars exposes a clear and lasting dichotomy of cultures between the big brands and the smaller upstarts. In interviews with big beer brands, the executives and brew masters come off as stuffy, establishment types. On the other hand, the craft brewers—among them Sam Calagione of Dogfish Head, Greg Koch of Stone Brewery Co. and Jim Koch of Boston Brew Company—are passionate, fun, anti-establishment and maybe even a little eccentric, the kind of guys you‘d want to sit down and have a beer with.‖ Basically, flat sales of the big brands since 2006 have made critics wonder if the big brewers were ―suffering from a dangerous brew of sameness and commoditization,‖ therefore opening the opportunity for these more flavorful craft beer companies. As proof of this pervasive ―sameness,‖ in the documentary three beer drinkers who had confidently proclaimed allegiance to a particular brand (as in ―I‘m a Bud man‖), are asked to pick their beer from a bottle wrapped in a paper bag. The drinkers failed to pick their favorites from among the three brands, Bud Light, Miller Lite, and Coors Lite, proving that these ―taste testers are susceptible to marketing and packaging‖ rather than true taste: See http://beerwarsmovie.com/. For up-to-date financial and news information on Boston Beer (SAM), see http://topics.nytimes.com/top/news/business/companies/boston-beer-company-inc/index.html Or http://finance.yahoo.com/q?s=sam&ql=1. For more information on the company, see the investor relations website at http://www.bostonbeer.com/. And the beer website at http://www.samueladams.com/. Analysts in 2017 are concerned that although the craft beer market could grow by 6 percent in 2018, most of the expansion will come from small players or brands acquired by the giants such TN1-446 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
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Case 1: Robin Hood
as AB InBev. Boston Beer‘s national scale seems to have become a liability as the craft-beer trend picked up, with consumers opting for more local varieties. See https://www.barrons.com/articles/boston-beer-a-bullish-analyst-has-brewing-concerns1510349812?mod=yahoobarrons&ru=yahoo&yptr=yahoo. Regarding preferences, the list from 2020 is little different from what it was in earlier years, except Boston Beer doesn‘t make the cut. See https://247wallst.com/specialreport/2020/03/11/the-most-popular-beer-brands-in-america-2/2/. And see the list from 2019 at https://vinepair.com/articles/infographic-25-best-selling-beers-america-2019/. As the case points out, the big brewers, especially Anheuser-Busch InBev, have taken on the taste challenge, and produced more flavorful beers such as Shock Top (A-B InBev) and Blue Moon (Molson Coors). Has the growth of these offerings from the big competitors been adequately anticipated by Boston Beer‘s competitive strategy? 2. What is the structure of the beer industry, and how does this affect choice of strategy? Referencing Chapter 2: Analyzing the External Environment of the Firm As part of strategic analysis, organizational leaders must become aware of factors in the overall environment that might affect their ability to create a competitive advantage. So how do managers become environmentally aware? By doing scanning, monitoring, and gathering competitive intelligence, and using these inputs to develop forecasts. This prepares the firm to do more extensive analysis of the forces in the general environment and the industry or competitive environment. Environmental scanning involves surveillance of a firm‘s external environment to predict environmental changes and detect changes already under way. It is a BIG PICTURE viewpoint of the industry/competition, looking for key indicators of emerging trends—what catches your eye? Alerts the firm to critical trends before changes have developed a discernible pattern and before competitors recognize them. Environmental monitoring is a firm‘s analysis of the external environment that tracks the evolution of environmental trends, sequences of events, or streams of activities. Leaders need to monitor the trends that have the potential to change the competitive landscape—what do you want to track? Firms need to CHOOSE the trends identified via the scanning activity, and regularly monitor or track these specific trends to evaluate the impact of these trends on their strategy process. What factors or trends might be most important to Boston Beer? To assess how the external environment might affect the firm‘s strategy, it‘s necessary to look at the factors in the general external environment. Boston Beer must consider the political/legal, economic and global, sociocultural and demographic, and technological forces that might affect the ability of the firm to deliver its products and sustain its business. See which factors in the general environment students might pick that have a significant impact on its business. TN1-447 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
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Case 1: Robin Hood
Demographic: Although companies need to be aware of alcoholic beverage drinking age constraints, people from all walks of life, ethnicities and genders could be interested in flavorful beverages. There were opportunities for non-alcoholic innovations in addition to new beer flavors. The tiered distribution system meant people could be approached with product in bars or restaurants as well as supermarkets and convenience stores. Geography was not a major barrier except where local laws prohibited sales and consumption in public. However, some parts of the United States had more beer drinkers than others, partly because of the number of young males in blue-collar jobs, such as in Montana and the Dakotas. Beer was also a cheaper alternative for alcoholic consumption than hard liquor, so maintaining low pricing was important. However, in contrast to the traditional ―Joe six-pack‖ consumer, millennial-aged drinkers seemed to prefer more flavorful drinks, including cocktails, while babyboomers seemed more drawn to wine. Some drinkers were being increasingly drawn to wine and ―wine coolers‖ that might have been malt beverages, but had a sweeter taste (Mike‘s Hard Lemonade is an example.) According to industry data, men drank about 72 percent of beer of all types, including craft beer, and about 59 percent of craft beer by volume is drunk by Americans whose annual household income is at least $75,000. Craft beer drinkers also spend two more years in school than the general population. Sociocultural: Consumption habits of beer drinkers had changed – less standard and economy lagers were being consumed, but, in addition to the IPA (India Pale Ale) varieties, wheat beers (dark ale) and premium lagers (predominately made by craft brewers) were also being sold in the United States. Quirky advertisements and brew names were catching the public‘s attention (as in Stone Brewing Company‘s ―Arrogant Bastard Ale‖), helping to boost the popularity of the craft breweries. Beer drinkers also saw a clear relationship with sports, so supporting key sport contests, such as the SuperBowl, was key to continued popularity of certain brands. Technological: Beer making is a very old technology, but refinements in flavor can come from unexpected sources and combinations of ingredients, many discovered in home brewer‘s kitchens. This means any company that wants to take advantage of these discoveries needs to be well connected to social networks (both in person and online) and gatherings where these ideas, and activities can be shared. Advancement of the beer brewing craft can also come from the corporate laboratory, so technology investments there might be essential as well. Political-Legal: Companies in the beer industry needed to be aware of the problems with drunk driving and other alcohol-induced behaviors. There was an assumption that brewers had a social responsibility to keep their customers safe, therefore, awareness and education campaigns were necessary to maintain a good reputation for the industry as a whole. Regarding corporate strategy and opportunities for growth by merger or acquisition, U.S. antitrust laws would apply. Strategic analysis also assesses the segments of the external competitive environment that include competitors, customers, and suppliers, substitutes and new entrants. One key issue that must be addressed is the question what industry are you in? Boston Beer is in the beer industry, which is different from the general beverage industry occupied by firms such as Diageo who TN1-448 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
distribute various brands of beer, wine, liquor, and soft drinks. (Diageo imports best selling beer brands Guinness and Red Stripe into the United States.) Once the industry is defined, Porter’s five forces model allows strategists to anticipate where the industry might be most vulnerable. Ask students to diagram the five forces.
Suggested: High - largest brewers expanding across the globe through acquisitions of smaller regional/national players; fragmented industry; beer consumption in the U.S. has declined.
Substitutes’ Threat High
Suppliers’ Power
Rivalry
Low
High
Suggested: Low – Supplier commodities are those such as water, hops, barley, etc.
Suggested: Med - The top four brewers account for only about a third of the global market share – many local brewers operate successfully in their niches.
Threat of New Entrants Med
Suggested: High – Growing appreciation of wine. Hard liquor still popular in many places.
Buyers’ Power Med – High Suggested: Med-High - With the tier system in the U.S., distributors have a lot of power to negotiate; however, there are abundant choices for consumers, and the appeal of the brand is difficult to maintain. Maintaining good relationships with distributors, and brand image, therefore the marketing strategy, are both important.
Based on the external environmental factor analysis, the beer business has some opportunity for acquisition of rivals, and diversification into other types of beverages, but growth within the category does not seem to have much profit potential. The case explains this well, highlighting the drop in total beer sales over the years. However, there had been a shift in the sales by type of beer—the craft brew market had exploded, with considerable growth in dark ales and premium lagers. This implies that there may be segments of the industry that are doing better than others. Strategic Groups: Some groups of firms are more similar to each other than other firms. Rivalry will be greater in firms that are alike. Strategic groups are clusters of firms that share similar TN1-449 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
strategies. The concept of strategic groups can be used as an analytical tool that helps think through the implications of each industry trend for the strategic group as a whole. Dimensions should be considered that reflect the variety of strategic combinations in an industry. The movement of the various strategic groups can help predict the future volatility and intensity of competition. Members of a strategic group can consider overcoming mobility barriers and migrate to other groups that they find attractive if they are willing to commit time and resources. The question is how to group firms in an industry based on similarities in their resources and strategies. Identifying the strategic group your organization is in helps to decide where threats or opportunities lie. Mapping of strategic groups can be helpful to understand how rivals within an industry compete. The map also helps determine where a given firm might be able to find opportunity, and reposition itself for potential strategic advantage. When determining how strategic groups can be identified, it helps to choose measurable factors, such as product line breadth, perception of product quality or brand image, number of distribution channels. These become either the x or y axis, respectively, of your map. Then, using a factor such as sales or market share, you can place the firms on the map with a circle of relative size to see how they overlap, or not. For the beer industry, using data from within the case, the map might look something like this: Competitors = Anheuser-Busch InBev, MolsonCoors (Miller Coors), Heineken, Boston Beer, Sierra Nevada, New Belgium Brewing Measurable Factors = product line breadth (types of beer: dark vs lager—premium versus standard versus economy lager), perception of quality (awards based on competitions), size of market share (all based on the case exhibits). Here is a sample strategic group map of the beer competitors:
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Teaching Note
Case 1: Robin Hood
Based on this map, Boston Beer is caught in the middle between the low quality, broad product line competitors, and the high quality, narrow product line breadth competitors. The craft beers have ejected Boston Beer from their group for being too large, but the company is not large enough to truly compete with the big global players. It competes more directly with Heineken in the U.S. market, yet hasn‘t quite enough size or assets to challenge directly. This has implications for Boston Beer‘s choice of strategy. NOTE — ADDITIONAL BACKGROUND READING AND VIDEO: Historically, the global beer industry has looked to acquisitions or product innovations to fuel growth in the past. In June 2013, Anheuser-Busch InBev audaciously completed its acquisition of Grupo Modelo. This means the brands Corona, Modelo Especial, and Pacifico, which occupy top places in market share of U.S. imported beer sales, added clout to the A-B InBev stable of products. A-B InBev now had Corona to add to Budweiser, Stella Artois, and Beck‘s, positioning the company as a global powerhouse in beer products. See http://online.wsj.com/article/SB10001424052702303649504577495921266834262.html for the history of this merger, which gives A-B InBev considerable ability to see synergies in its overall operations. The merger had been delayed by the U.S. antitrust watchdogs, who prevented A-B InBev from taking control of the U.S. distributor Crown Imports. This means the Grupo Modelo/InBev products will still be sold in the U.S. under the Constellation Brands/Crown Imports. But control over brewing the beer itself now resides with A-B InBev. See http://www.stltoday.com/business/local/a-b-inbev-completes-grupo-modelodeal/article_c6c7cfd1-883b-5d1d-bdea-dc7a0111bac2.html for more details. TN1-451 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
From 2014 here is a compilation of facts about alcohol (including beer) from around the world explained in 35 maps and charts. https://www.vox.com/2014/12/30/7423149/alcohol-mapscharts According to sources, it takes only five minutes of work in the United States to be able to afford a beer, which is why this is a competitive market. Corona is the top brand in 36 countries, so no wonder A-B InBev was so anxious to acquire it. Here‘s a fun facts graphic on AB InBev: http://www.businessweek.com/articles/2012-10-25/99facts-about-beer-on-the-wall-dot-dot-dot. The 2016 merger between Anheuser Busch InBev and SAB Miller has caused additional rearrangements of the global landscape. See https://www.forbes.com/sites/greatspeculations/2016/12/22/heres-how-ab-inbev-trimmedbusiness-to-make-room-for-sabmiller/#5b2486b53b93 And https://www.forbes.com/sites/taranurin/2016/10/10/its-final-ab-inbev-closes-on-deal-tobuy-sabmiller/#5f98c946432c. This $100 million deal was the largest acquisition ever, and makes Ab InBev a brewing powerhouse with an estimated 46 percent of global beer profits. See https://www.wsj.com/articles/sabmiller-ab-inbev-shareholders-approve-100-billion-plus-merger1475059015. Regarding the names of beer brands and the confusion over whether a brand was truly a ―craft‖ beer or not, Molson Coors had been receiving criticism from small beermakers regarding its Blue Moon brand, for not ―spelling out their corporate parentage in ads or on their packaging.‖ The fear was that the public would think this beer was truly a ―craft beer,‖ when, from the perspective of the real craft beer makers, this was ―a phony artisanal brew created by a megacompany to exploit a rapidly expanding market.‖ For their part, Molson Coors was ―taking credit for helping popularize the craft beer movement. ‗We should be proud to make beers that grow and are popular—that‘s the American way,‘ says MillerCoors Chief Executive Officer Tom Long. ‗Being small and unpopular, what‘s the utility in that?‘. . . The fight over Blue Moon‘s legitimacy peaked in 2013 when the Brewers Association, craft beer‘s primary U.S. trade group, published a list of companies, including MillerCoors, that didn‘t fit its definition of a ‗craft brewer.‘ The association knocked some brands for excluding parent companies from their labels. Craft brewers are ‗small, independent, and traditional,‘ according to the group‘s definition. That means they produce fewer than 6 million barrels a year—it used to be 2 million until Samuel Adams maker Boston Beer got too big to qualify. They also must be less than 25 percent-owned by a megabrewer and meet certain ingredient thresholds.‖ Some wonder if those designations make the craft breweries ―snobs‖—why not let everyone benefit from flavorful beer, no matter who makes it? See http://www.businessweek.com/articles/2013-08-08/blue-moon-vs-dot-craftbeer-rivals-millercoors-strikes-back?campaign_id=yhoo for the whole story. ALSO see additional articles and video in the sidebar that accompanies this article. Here‘s a video story from 2015 about how AB InBev has pursued acquisitions and bid for the craft beer designation. https://www.youtube.com/watch?v=LMb8d5sYfRc TN1-452 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
And here‘s why craft breweries are selling out to the big companies in 2016: https://www.youtube.com/watch?v=miFZvoNE4_E THESE HELP EXPLAIN THE IMPORTANCE OF STRATEGIC GROUPS. Regarding the global socioeconomic challenges of beer, news in 2017 of the change in the European competitive landscape, with Russian beer consumption growing, and a Russian brewery, Baltika, gaining market share is here: https://www.food-exhibitions.com/Market-Insights/Russia/Russia-beer-market. Although the rankings are continually changing, there is still consolidation going on. Surprisingly, China has two of the largest breweries in the world, Tsingtao and China Resource Snow Breweries. See the 2017 list of the 10 largest breweries at https://www.insidermonkey.com/blog/the-10-largest-beer-brewing-companies-in-the-world335281/?singlepage=1. And https://www.insidermonkey.com/blog/11-largest-beer-companies-in-the-world-in-2017-2614132/?yptr=yahoo. 3. What internal assets does Boston Beer have that may help it deal with its challenges? Referencing Chapter 3: Analyzing the Internal Environment When one firm attempts to outperform others, it‘s important to figure out how this could be done. The answer may lie in how that firm arranges its activities and creates unique bundles of resources that allow it to attain and sustain a competitive advantage. Students should assess the relationships between the elements in Boston Beer‘s value chain. Remember, value-chain analysis is a strategic analysis of an organization that uses value-creating activities. Value is the amount that buyers are willing to pay for what a firm provides them and is measured by total revenue, a reflection of the price a firm‘s product commands, and the quantity it can sell. A firm is profitable when the value it receives exceeds the total costs involved in creating its product or service. Creating value for buyers that exceeds the costs of production (i.e. margin) is a key concept used in analyzing a firm‘s competitive position. Every activity should add value. Look at Chapter 3, Exhibit 3.1 to see the value chain activities. Based on the relationships between these elements, Boston Beer can decide how to sustain a competitive advantage. But before we look at the specific activities, it might be helpful to reconsider how the beer industry works. As it says in the case, beer distribution in the United States is regulated with a ―tier‖ structure. This means that brewers have limited options for vertical integration within the industry. This therefore means that the activities in the value chain are constrained as well. The supply chain in the industry can look like this: raw material grower (hops, barley, etc.) ➔ supplier (aggregator of raw materials) ➔ brewer (can be the actual company, or can be outsourced to a contracted brewer) ➔ bottler (can be the actual TN1-453 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
company, or can also be outsourced to a contracted bottler) ➔ distributor (warehouser and entity that delivers product to various retailers) ➔ retailer (can be a bar, restaurant, supermarket, convenience store) ➔ consumer (you!) NOTE: See the end of this teaching note for an appendix entry explaining exactly how beer is made. The only activities that a brewer can ―own‖ are the brewing and/or bottling activities. All the rest are components of the supply chain that the brewer does not control. This has implications for the importance of those activities that are under control of the brewer. Boston Beer‘s value chain is captured visually in the diagram below: Value chain activity
Primary: Inbound logistics (distribution facilities, material control systems, warehouse layouts) Operations (efficient work flow design, quality control systems) Outbound logistics (consolidation of goods, efficient scheduling, finished goods processing) Marketing and Sales (motivated sales people, innovative advertising and promotion, effective pricing, proper ID of customer segments and distribution channels) Service (ability to solicit customer feedback and respond) Secondary (or support): Procurement (win-win relationships with suppliers, reduced dependence on single supplier)
Technology development (state of the art hardware and software, innovative culture and qualified
How does Boston Beer create value for the customer? What challenges does Boston Beer have in its value chain? Hard to assess. Need information on inbound raw material supplies (hops, barley, etc.) or bottling. Invested in brewery production efficiencies to lower costs; brewed 90 percent of its beer in its own breweries. Focused on on-time service, forecasting, production planning in cooperation with distributors to reduce storage time, means beer stays fresher. 300-member salesforce with high level of product knowledge; educated distributors & the public on the benefits of Sam Adams‘ products.
Rewarded loyal customers in the past by advertising stock offerings on six-packs, believing those who enjoyed the beer should have a stake in the company. Relied on about 400 distribution partners for selling products, multiple foreign suppliers for raw material ingredients. Crop shortages could cause production disruption out of Boston Beer‘s control. Reliance on independent distributors meant good relationships were critical. Creation of Alchemy & Science to research brewing technologies meant ability to help grow the business, plus help others in the industry. TN1-454
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Teaching Note
Case 1: Robin Hood
personnel) Human resource management (effective recruitment, incentive & retention mechanisms) General Administration (effective planning systems to establish goals and strategies, access to capital, effective top management communication, relationships with diverse stakeholders)
Anecdotal reports are that employees support the company‘s efforts to compete. Jim Koch owns significant stock in the company, able to make decisions without receiving approval from other shareholders, but has had a successful vision, made good decisions so far. Has tried to help other small breweries to succeed, therefore creating positive relationships with diverse stakeholders.
Primary Activities In terms of primary activities, the key to Boston Beer‘s ability to differentiate itself in the market appeared to reside in its operations, outbound logistics, and marketing. In all three areas there appeared to be a consistent focus on quality, which was verified in the awards Boston Beer received for its special brews, and in the number of distributors it was able to retain in its network.
Support Activities With regards to support activities, a competitive advantage can be achieved by developing a strong general administration that is built around visionary leadership and a culture that pushes for technological innovation. Jim Koch appeared to be able to inspire excellent performance from his company, and showed commitment to research through the establishment of the Alchemy & Science subsidiary. Appeared to realize that excellent relationships with key distribution partners and suppliers were critical to continued success. Efforts to help other brewers succeed meant positive word-of-mouth might spread throughout the industry, increasing possibilities for strategic alliances in the future. In addition, see the concept of the resource-based view of the firm, and the three key types of resources: tangible resources, intangible resources, and organizational capabilities. A firm‘s strengths and capabilities—no matter how unique or impressive—do NOT necessarily lead to a competitive advantage. The resource-based view of the firm takes the perspective that firms‘ competitive advantages are due to their endowment of strategic resources that are valuable, rare, costly to imitate, and costly to substitute. Without these unique resources, the firm can only attain competitive parity. RBV goes beyond a SWOT analysis to integrate internal and external perspectives in a broader competitive context. RBV can reveal how core competencies embedded in a firm can help it exploit new product and market opportunities. An important issue to focus on here is the importance of intangible resources like innovation and reputation. Especially in mature brands, sustaining reputation is essential. Look at resources that TN1-455 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
are controlled by Boston Beer that might enable it to develop and implement value-creating strategies. Based on their reading of the case, students might identify those resources to include:
Tangible Resources: Financial: Financially sound. However, capital was tied up in large investments in brewing facilities. Physical: Owned significant brewery capacity—90 percent of products could be produced in its own facilities. Technological: Creation of subsidiary Alchemy & Science to research brewing technologies meant information would be available to help grow the business, plus help others in the industry. Organizational: Good relationships with its subsidiary and distributors indicate it has the resources here to make good organizational decisions. Intangible Resources: Human: Knowledgeable sales people able to increase brand awareness, educate distributors and the public on the benefits of craft beer in general and Boston Beer products in specific. Innovation and creativity: Appears to be a strength based on the continual expansion of seasonal and flavorful new brands, in both beer and non-alcoholic beverages. Reputation: So far, a real strength based on awards won in competition against both global premium brands and home brewers. Determining whether the internal resources are valuable, rare, difficult to imitate, or difficult to substitute (VRIN) can help a firm sustain a competitive advantage. See Chapter 3, Exhibit 3.6. Applying the VRIN concept, it‘s hard to identify any true in-imitable advantage Boston Beer derives from its internal resources. They may be valuable, but they are not rare, difficult to imitate or difficult to substitute. Based on this analysis, the best Boston Beer can do is achieve competitive parity in its industry. This demonstrates how hard it is to craft a truly differentiated competitive strategy.
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Teaching Note
Case 1: Robin Hood
APPENDIX: HOW DOES BEER GET MADE? For fun, see National Geographic‘s Ultimate Factories Budweiser episode at http://channel.nationalgeographic.com/ultimate-factories/episodes/ultimate-factoriesbudweiser/?_ga=2.264941900.2139618470.1514311686-918373485.1514311686. The steps in brewing:
What processes do you think Anheuser-Busch InBev might outsource? See https://www.budweiser.com/en/our-beer/default.aspx#/our-beer/five-ingredients-nocompromise/index for more info on the Budweiser process. See http://www.howtobrew.com/section1/chapter2-3.html for info on how to brew beer at home. Whatever the process, it takes up to 2 weeks to prepare the malt (which is why home brewers buy their malt extract from places like Briess— http://www.briess.com/food/Processes/nstep.php), 2 hours to ―cook‖ the malt extract and hops into wort and then add the yeast, and then up to 4 weeks to ferment and ―brew.‖
Teaching Note Case 28 — McDonald’s in 2019 TN1-457 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Case Objectives 1. To investigate the key external environmental issues that can affect a firm‘s strategy. 2. To examine how a reevaluation of strategy involves assessment of internal activities and resources. See the table below to determine where to use this case: NOTE: There are both PRIMARY and SECONDARY chapters that can be used for this case. The Teaching Note gives guidance for the PRIMARY use chapters, and provides suggestions if the instructor wants to use the case to illustrate concepts from the optional SECONDARY chapters. CASE OBJECTIVE TABLE Chapter Use Key Concepts
Additional Readings or Exercises
PRIMARY CONCEPTS 2: External Environment
External environmental forces; Porter‘s five forces model
3: Internal Analysis 5: BusinessLevel Strategy SECONDARY CONCEPTS 1: Strategy Concept 4: Intellectual Assets 6: CorporateLevel Strategy 7: International Strategy
Value chain; tangible vs. intangible resources; VRIN analysis Generic strategies Strategic management; vision, mission, strategic objectives
Visit investor commentary on MCD, see video links re customer response; read about healthy foods controversy, watch video re SuperSize Me, FastFoodNation See video links re value chain challenges Visit McDonald‘s website to evaluate its mission. See an embedded video of a 1967 McDonald‘s TV commercial.
Human capital; intellectual capital Corporate strategy; diversification; synergy; acquisition International expansion
Case Synopsis In 2019, McDonald‘s acquired a company that could give instantaneous updates to the drivethrough menu based on factors such as time of day, weather, and trending menu items. This was part of a plan to create more personalized experiences for McDonald‘s customers. McDonald‘s had been trying to attract more customers to its restaurants by offering more customized products that were also healthier. It had lost a lot of ground with consumers, especially millennials, who were defecting to traditional competitors like Burger King and TN1-458 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Wendy‘s, as well as to new designer burger outlets such as Five Guys and Shake Shack. Changing tastes were also responsible for the loss of customers that lined up at fast-casual chains such as Chipotle Mexican Grill and Panera Bread, both of which offered customized ordering and fresh ingredients. Over the years, McDonald‘s response to this growing competition was to expand its menu with more sandwiches and salads. It also started to add snacks and drinks, but the greatly expanded menu led to a significant increase in costs and longer preparation times. This forced the firm to increase the prices of many of its items and to take more time to serve customers, moving it away from the attributes that it had built its reputation upon. Over the years, under various leaders, McDonald‘s had done things such as focus on improving franchise performance; provide better training for employees; sell off non-burger chains; introduce new and healthier products; add McCafé sections to restaurants to serve lattes, cappuccinos, ice-blended frappes, and fruit-based smoothies; refurbish aging stores; offer more order customization; and provide all-day breakfast. McDonald‘s was trying to grow by reaching out to different customer segments with different products at different times of the day, yet a recent survey found that only 20 percent of millennials had ever tried a Big Mac. Above all, the expansion of the menu beyond the staple of burgers and fries raised some fundamental questions. Most significantly, it is not clear just how far McDonald‘s can stretch its brand while keeping all of its outlets under the traditional symbol of its golden arches. In fact, industry experts believed that the long-term success of the firm may well depend on its ability to compete with rival burger chains. After all, especially in America, people love their burgers. Teaching Plan This is a case that is well suited for a full investigation of strategic analysis and formulation. Especially because most students are well aware of McDonald‘s strategic challenges, the case can be placed in the course at the point where the instructor is ready to lead into a discussion of strategy formulation. By building a sound foundation in external and internal environmental analysis, a discussion of McDonald‘s can provide an intro for the challenges of competition in a changing environment. As such, this case is best positioned midway through the course, after students have had an introduction to the concepts of strategy analysis and formulation. Regarding a competitive strategy, McDonald‘s has now moved into the drinks segment (with McCafe coffee and smoothies), which pits it against the likes of Starbucks and Jamba Juice. The instructor might want to assign the Jamba Juice case as well to provide another view of this part of the industry. ICEBREAKER This case can start with an icebreaker. Starting from the perspective of a customer may make it easier for students to transition to a strategic analysis.
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Teaching Note
Case 1: Robin Hood
Have you ever eaten at McDonalds? Over the last few years, have you seen any changes in either the menu or the restaurant décor? What do you think of these changes? It is safe to say that McDonald‘s is an American icon. Chances are that almost every student has visited McDonald‘s at least once. A good way to start the discussion of this case is to ask students about their experiences with McDonald‘s. Those who had visited McDonald‘s as little kids could share their experience about what McDonald‘s meant to them as kids and how their perception of the restaurant changed as they grew older. This may lead to a discussion of the quality of food and service, and how this compares with choices at other places. The instructor may want to put a chart on the board: what students Like, what they Don’t Like about McDonald‘s and then what they think McDonald‘s should Do Differently. There may be some disagreements about the likes and dislikes: some people really like the taste of the fries, while others dislike the unhealthy nature of the food; some people like the ―fast-food‖ part— preferring the drive-in—while others prefer to be able to sit down and share food with their friends. If there are international students in the class, it‘s also fun to have them share both the décor/service and menu differences between international McDonald‘s and McDonald‘s restaurants in the United States. These differences could also be put on the board. If there is diversity among responses, it may make it easier for the instructor to then ask: so if you were McDonald‘s CEO, how would you respond to these diverse opinions from your customers? What strategic issues do you need to consider? This flows straight into a discussion of mission and the external environment. Before engaging in discussion, you might want to test student‘s basic knowledge regarding the case and the major concepts. Here are some multiple-choice questions to use. (This will get the student‘s attention—they can‘t answer these if they haven‘t read the case!) Which of these statements is the truest? a. Millennials are defecting from McDonald‘s to traditional competitors like Burger King and Wendy‘s. b. McDonalds‘s dollar menu has worked well. c. McDonald‘s doesn‘t have to worry about restaurants like Panera Bread because these kinds of fast-casual dining destinations don‘t draw the same customers as McDonald‘s does. d. McDonald‘s continues to own many of its outlets, rather than put them in the hands of franchisees because this allows for better quality control. ANSWER: a Changing tastes has customers, especially millennials, more likely to go to new designer burger outlets such as Five Guys and Shake Shack, and even traditional competitors such as Burger King and Wendy‘s. McDonald‘s tweaked its ―dollar menu,‖ replacing it with ―dollar value and more‖ and raising the prices of many items as part of a bid to get each customer to spend more. Over the previous five years, about 15 percent of the chain‘s sales had come from its dollar menu, on which everything cost a dollar. Changing tastes were responsible for the loss of customers who were lining up at fast-casual chains such as Panera Bread, which offered customized ordering and fresh ingredients. As part of its turnaround strategy, McDonald‘s had TN1-460 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
been selling off the outlets that it owned. More than 80 percent of its outlets are now in the hands of franchisees and other affiliates. In general, customers are more consistently satisfied with burger chains than with any other type of fast-casual or fast-food restaurants. a. Yes b. No ANSWER: b See Exhibit 4. Chick-fil-A, Panera Bread, and even Subway score higher than McDonald‘s, Burger King, or Wendy‘s. Summary of Discussion Questions Here is a list of the suggested discussion questions. You can decide which questions to assign, and also which additional readings or exercises to include to augment each discussion. Refer back to the Case Objectives Table at the beginning of this Teaching Note to identify any additional readings and/or exercises so they can be assigned in advance. Discussion Questions: 1. What are the current forces in the external environment that might affect McDonald‘s strategy? 2. What source of competitive advantage does McDonald‘s have, and is that position supported by its value chain and other internal resources? 3. OPTIONAL QUESTION: What other strategies could McDonald‘s formulate to achieve a competitive advantage? Discussion Questions and Responses 1. What are the current forces in the external environment that might affect McDonald’s strategy? Referencing Chapter 2: Analyzing the External Environment Organizational leaders must become aware of factors in the overall environment that might affect their ability to create a competitive advantage. So how do managers become environmentally aware? By doing scanning, monitoring, and gathering competitive intelligence, and using these inputs to develop forecasts. This prepares the firm to do more extensive analysis of the forces in the general environment and the industry or competitive environment. Environmental scanning involves surveillance of a firm‘s external environment to predict environmental changes and detect changes already under way. It is a BIG PICTURE viewpoint of the industry/competition, looking for key indicators of emerging trends—What catches your eye? This alerts the firm to critical trends before changes have developed a discernible pattern and before competitors recognize them. Environmental monitoring is a firm‘s analysis of the external environment that tracks the evolution of environmental trends, sequences of events, or streams of activities. Leaders need to monitor the trends that have the potential to change the competitive landscape—What do you want to track? Firms need to CHOOSE the trends TN1-461 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
identified via the scanning activity, and regularly monitor or track these specific trends to evaluate the impact of these trends on their strategy process. What factors or trends might be most important to McDonald‘s? To assess how the external environment might affect McDonald‘s strategy, it‘s necessary to take a look at the factors in the general external environment. McDonald‘s must consider the political/legal, economic and global, sociocultural and demographic, and technological forces that might affect the ability of the firm to deliver its services and sustain its business. See which factors in the general environment students might pick that have a significant impact on the fast food industry. Students might respond as follows: Demographic. Customers are now working around the clock, expecting 24-hour access to fast food. How to please the range of customers from kids to contractors? Sociocultural. Customers‘ preferences have changed to more exotic foods, healthier food with better taste, attention paid to sustainable solutions for the food chain, i.e. cage-free eggs. However the growth in fast-food burger places such as Five Guys shows that customers will ignore healthy as long as the food tastes really good—people still like a juicy, good-tasting hamburger. Economic. Any current economic downturn means customers might trade down to McDonald‘s if they want to eat out. However, this means that the fast-food meals must be perceived as worth the prices paid, meaning costs still need to be low enough to charge comparably low prices. Global. Boundaries are disappearing, travelers are more open to global consistency in food offerings—Golden Arches are accepted, and expected, everywhere. Geography does matter— given that people will be seeking out inexpensive yet good food, it doesn‘t matter the brand. Whichever burger chain is closest will get the business. To answer the question about the current forces in the general and fast-food industry environments that affect McDonald‘s ongoing strategy, it‘s necessary to assess the segments of the external competitive environment that include competitors, customers, and suppliers, substitutes and new entrants. Porter‘s five forces model allows strategists to anticipate where the industry might be most vulnerable. Help students apply Porter‘s five forces of competition by drawing a diagram on the board similar to the following and having students fill in the details. Based on the external environmental industry analysis, the fast-food business is not an attractive industry, with many competitors trying to carve out a piece of the ―profit‖ pie.
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Teaching Note
Case 1: Robin Hood
Suggested: High - Many rivals compete in the fast- food business. Convincing customers that menu items are different or better than competitors is difficult when the food category is limited to take-out options.
Substitutes Threat Med-High
Suppliers’ Power
Rivalry
Low
High
Buyers’ Power Med-High
Suggested: Low — Suppliers of beef, eggs, potatoes have little power. Soft drink suppliers beg for partnership deals with restaurants.
Suggested: Med-Low threat of new entrants - establishing a restaurant chain requires significant financial and infrastructure resources.
Suggested: Med-High – Major substitute is home cooking — it’s easy to make a burger on the home grill.
Threat of New Entrants
Suggested: Med-High Major power is wielded by franchisees who can drag down company reputation. End consumer has little economic power.
Med-Low
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Teaching Note
Case 1: Robin Hood
NOTE — ADDITIONAL EXERCISES, VIDEO VIEWING: One interesting way to evaluate the competitiveness in the industry is to look at comparative financial performance from the perspective of an investor. Because McDonald‘s (MCD) is a publicly traded firm, take a look at http://finance.yahoo.com/q/co?s=MCD to see how it compares with its peers. Regarding MCD‘s performance over the last nine years, see the following: After James Cantalupo charted the ―Plan to Win‖ strategy, some argued that McDonald‘s stock was potentially a good investment: In April of 2007, McDonald‘s had made some changes, and still came out on top http://www.fool.com/investing/high-growth/2007/04/20/mcdonalds-stillgoing-strong.aspx?terms=mcdonalds&vstest=search_042607_linkdefault, and then impressed based on its global sustainability strategy http://www.fool.com/investing/general/2007/04/25/mcdonalds-making-money-making-adifference.aspx?terms=mcdonalds&vstest=search_042607_linkdefault and strategy for global expansion http://www.fool.com/investing/general/2007/08/22/monsieur-mcdonald-charms-thecontinent.aspx. In October of 2007 McDonald‘s increased its focus on diversifying its menu offerings by confirming that it would compete with Starbucks for the specialty coffee market by 2008 http://www.fool.com/investing/general/2007/10/03/mcdonalds-head-ofsteam.aspx?terms=mcdonalds&vstest=search_042607_linkdefault, and in December 2007, it had outperformed its direct competitors and looked poised to weather the forecasted economic downturn in 2008 in good shape, thanks in part to its overseas expansion plans: http://www.fool.com/investing/general/2007/12/31/best-stock-for-2008mcdonalds.aspx?terms=mcdonalds&vstest=search_042607_linkdefault. As MDC announced details of its coffee roll out in 2008, some wondered if this was the right time for such an expansion, especially because Starbucks was seeing a decline in business as more consumers brewed coffee at home, and it would cost the franchisees an average of $100,000 per location to do the needed remodeling: http://online.wsj.com/article/SB122506692561270623.html Information from McDonald‘s history, and interviews with its franchisees, details MCD‘s turnaround strategy in this article: http://www.nytimes.com/2009/01/11/business/11burger.html?_r=1. Especially noteworthy was MCD‘s performance outside the United States (See http://www.nytimes.com/imagepages/2009/01/10/business/20090111_BURGER_GRAPHIC.htm l for graphs and commentary on MCD‘s international performance.) For current information on the company, see http://topics.nytimes.com/top/news/business/companies/mcdonalds_corporation/index.html. In 2011 analysts recommended McDonald‘s as ―a solid defensive stock. It‘s a lean, mean competitive machine, focusing entirely on its core strengths.‖ http://www.fool.com/investing/general/2011/01/24/mcdonalds-getsdefensive.aspx?source=isesitlnk0000001&mrr=0.33. TN1-464 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
And in 2013, after MCD announced disappointing quarterly results, in the wake of aggressive competition from Wendy‘s and Burger King and the continued economic troubles in Europe, one analyst pointed out another ―challenge for McDonald‘s is the growing number of chains that offer quick, better quality food at higher prices, including Chipotle, Noodles & Company, Panera Bread, and others. Those chains are reshaping expectations when people go out to eat.‖ The question was whether Thompson, who took over in 2012, ―will be able to keep McDonald's image up to date as it struggles though the tough economic climate‖: http://finance.yahoo.com/news/mcdonalds-predicts-tough-despite-items-132325729.html. In 2015, after Easterbrook‘s promotion to CEO, traffic was down in all market segments, and was trying new menu combinations to appeal to millennials. See video https://www.youtube.com/watch?v=vBnS4E4KhAw. And in 2016 news was good as MCD had its best quarter in nearly four years, by trying to appeal to millennials with, for instance, the customizable kiosk. See video https://www.youtube.com/watch?v=A9ofHCPYC-A. In 2017 Easterbrook talks about growth based on what customers want: value and speed, but has also been forced to respond to quality and cleaning up the supply chain, i.e. cage free eggs. He also notes that consumer economic confidence is what ultimately drives customer visits. See video https://www.youtube.com/watch?v=xfn-D654m7s. Based on the information provided there, and from other analysts, would you be willing to invest in McDonald‘s stock today? Why or why not? McDonald‘s was criticized in some quarters for providing unhealthy food that contributes to an obesity epidemic in the United States, most notably in the documentary film Super-Size Me and in the book and movie Fast Food Nation. Watch the video trailers here: Super-Size Me: http://www.youtube.com/watch?v=I1Lkyb6SU5U. Fast Food Nation: http://www.youtube.com/watch?v=zc_z623Wsro. Read commentary on how McDonald‘s reacted, compared to Burger King‘s ad campaign: http://www.prophet.com/blog/aakeronbrands/26-did-burger-king-panic. See McDonald‘s nutritional information from their website https://www.mcdonalds.com/ca/enca/about-our-food/nutrition-calculator.html. What is McDonald‘s core position about the role of its food in a healthy diet? Do you agree or disagree with the company‘s view? Another sociocultural trend worldwide, touched on in Fast Food Nation, is focused on the treatment of animals used for food. The Humane Society of the United States has challenged McDonald‘s to get its eggs from free-range chickens rather than cage-bound layers. In Britain, the company already does this, but it has been slow to make the switch in the United States. MCD uses upwards of 3 billion eggs a year. See the strategy here: http://www.guardian.co.uk/business/2009/may/24/mcdonalds-us-free-range-eggs-trial. Then in 2015 McDonald‘s announced it will be transitioning and that within 10 years all of its American and Canadian egg suppliers will be cage-free. http://www.npr.org/sections/thesalt/2015/09/10/438934607/the-latest-scramble-in-the-eggindustry-mcdonalds-is-going-cage-free. TN1-465 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
By 2019 this shift had happened. Next on the strategic agenda is sustainable beef. 2. What source of competitive advantage does McDonald’s have, and is that position supported by its value chain and other internal resources? Referencing Chapter 5: Formulating Business-Level Strategies In order to achieve a sustainable competitive advantage, McDonald‘s has to assess its ability to contend with other fast-food restaurants. The question of how to compete in a given business to attain competitive advantage requires an assessment of the types of competitive strategies, including the three generic strategies that are used to overcome the five forces and achieve a competitive advantage: 58. Overall cost leadership Low-cost-position relative to a firm‘s peers Manage relationships throughout the entire value chain 59. Differentiation Create products and/or services that are unique and valued Non-price attributes for which customers will pay a premium 60. Focus strategy Narrow product lines, buyer segments, or targeted geographic markets Attain advantages either through differentiation or cost leadership Ask the students which strategy they think McDonald‘s should pursue, and why. Their answers may include some of the following points: Cost leadership has been the traditional strategy for the fast-food industry, but McDonald‘s kept costs under control in order to achieve parity with competitors. McDonald‘s tried to develop a differentiation advantage while keeping costs at a reasonable level. Differentiation requires the creation of something that is perceived industry wide as unique and valued by customers. Differentiation is achieved by a firm configuring its value chain activities to support its position so customers are willing to pay a premium for something unique—could McDonald‘s do this effectively? Referencing Chapter 3: Analyzing the Internal Environment To answer the question of whether McDonald‘s differentiation strategy is adequately supported by its value chain and other internal resources, McDonald‘s must assess the relationships between the elements in its value chain. Every activity should add value. Take a look at Chapter 3, Exhibit 3.1 to see the value chain activities. Here is what an assessment of this might look like for McDonald‘s: Value chain activity
How does McDonald’s create value for the ―customer‖? What challenges does McDonald’s have in its value chain?
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Teaching Note Inbound logistics (food & supply deliveries) Operations (efficient processing of orders, quality control systems) Outbound logistics (distribution to customers) Marketing and Sales (motivated employees, innovative advertising & promotion) Service (ability to solicit feedback & respond to customer issues) Secondary (or support): Procurement (relationships with suppliers for procurement of raw materials and supplies) Technology development (state of the art equipment & software) Human resource management (effective recruitment, incentive & retention mechanisms) General Administration (effective planning systems to establish goals, access to operating capital, effective top mgmt communication, relationships with diverse stakeholders)
Case 1: Robin Hood Assumed adequate. Strived for consistency across the chain, with differing results. Refurbishing of restaurants, change in hours may help draw customers. Assumed adequate. Many product innovations failed, $1 menu didn‘t go well with franchisees. The ―I‘m Loving It‖ campaign was an attempt to reach all customers. Assumed adequate.
Assumed adequate.
Adoption of expensive cooking processes failed to generate desired results. Premium salads take advantage of technology. Lower standards for hiring, less time for training led to deterioration of service.
Top-down decision making, lack of involvement in changes caused franchisee complaints, especially when profits went down. Franchise training program may help.
Basic changes in the value chain at McDonald‘s needed to be made to get the company back on track. Menu changes and franchisee relationships were key factors that had been addressed. These moves seem to have paid off in that the firm‘s financial performance improved, but fundamental issues still remained—would the customizable ―kiosks‖ and ―healthier‖ menu dilute the traditional brand image, confuse customers, and harm McDonald‘s reputation for value and speed? To further answer the question of how to support a competitive strategy, it‘s important to consider the concept of the resource-based view of the firm, and the three key types of resources: tangible resources, intangible resources, and organizational capabilities. Determining whether the internal resources are valuable, rare, difficult to imitate, or difficult to substitute (VRIN) can help TN1-467 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
a firm sustain a competitive advantage. See Chapter 3, Exhibit 3.6. McDonald‘s profile might look like this: Tangible Resources: Financial. McDonald‘s appears to have managed its finances well, currently has adequate cash on hand. Physical. Has significant physical assets in the restaurants. Technological. Has kept up with current technology. Intangible Resources: Organizational. The franchise model is a weakness unless strong quality controls are in place Human. The training of staff is critical, could be a problem. Innovation. This is a current strength, but needs to be managed in the right direction—choice of innovation is key. Reputation. McDonald‘s brand is its most significant strength—this should be protected at all costs. Organizational Capabilities: The revolving door of CEOs over the years means potential lack of a clear, consistent vision or strategy. Applying the VRIN analysis, McDonald‘s doesn‘t appear to have any resources that are clearly valuable, rare, in-imitable, or non-substitutable. This indicates that McDonald‘s may have a major challenge sustaining a competitive advantage, especially because any strategy it implements can be quickly imitated by competitors. However, McDonald‘s core capability appears to be its operations focus on the original vision and mission. This has allowed its brand reputation to remain solid over the years. NOTE - ADDITIONAL VIDEO VIEWING: In 2017 Easterbrook talked about growth based on what customers want: value and speed, but had also been forced to respond to quality and cleaning up the supply chain, i.e. cage free eggs. He also noted that consumer economic confidence is what ultimately drives customer visits. See video https://www.youtube.com/watch?v=xfn-D654m7s. 3. OPTIONAL QUESTION: What other strategies could McDonald’s formulate to achieve a competitive advantage? NOTE: There are no PowerPoint slides to accompany the following.
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Teaching Note
Case 1: Robin Hood
Referencing Chapter 1: Introduction and Analyzing Goals and Objectives Strategy is all about the ideas, decisions, and actions that enable a firm to succeed. See Chapter 1, Exhibit 1.1: Strategic management consists of the analyses, decisions, and actions an organization undertakes in order to create and sustain competitive advantages: a. strategy directs the organization toward overall goals and objectives; b. includes multiple stakeholders in decision making; c. incorporates both short-term and long-term perspectives; d. recognizes tradeoffs between efficiency and effectiveness. Leaders face a large number of complex challenges. Leaders must be proactive, anticipate change, and continually refine changes to their strategies. This requires a certain level of ―ambidextrous behavior,‖ where leaders are alert to opportunities beyond the confines of their own jobs, and are also cooperative and seek out opportunities to combine their efforts with others. Leaders must make strategic management both a process and a way of thinking throughout the organization. See Chapter 1, Exhibit 1.6: The primary role of the organizational leader is to articulate vision, mission, and strategic objectives. Leaders must communicate their initial vision of the organization‘s purpose. Should McDonald‘s evaluate its initial vision? What was the original goal that evoked a powerful and compelling mental image of a shared future, one that was massively inspiring, overarching, and long-term, that represented a destination that is driven by and evokes passion? Is the original vision still applicable given the present circumstances? McDonald‘s organizational mission needs to be considered: a mission encompasses both the purpose of the company as well as the basis for competition and competitive advantages. In writing a mission statement, it is important to understand the definition of the business by answering these questions: 1) Who are its customers? 2) What customer need is the organization trying to fulfill? and 3) How does the business create and deliver value to customers and satisfy their needs? Organizations must respond to multiple constituencies if they are to survive and prosper, and the mission provides a means of communicating to diverse organizational stakeholders. Although vision statements tend to be quite enduring and seldom change, a firm‘s mission can and should change when competitive conditions dramatically change or the firm is faced with new threats or opportunities. Anticipating that things might change, McDonald‘s leadership must establish strategic objectives to operationalize the mission statement with specific yardsticks. That is, objectives help to provide guidance on how the organization can fulfill or move toward the ―higher goals‖ in the goal hierarchy—the mission and vision. McDonald‘s original vision was to provide local customers with a quality meal at a fair price through a quick and convenient service delivery. McDonald‘s mission became to deliver this TN1-469 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
service consistently, providing an all-around enjoyable experience for the whole family. CEO Cantalupo‘s objective was to inspire employees and franchisees to ―put the smile back into the McDonald‘s experience.‖ External forces had begun pushing for healthier forms of food. Company-owned and franchisee restaurants had inconsistency in service and décor. New menu items had to be accepted by loyal customers. Skinner appeared to have continued with the original vision and mission. Easterbrook seemed to do the same. McDonald‘s provides an interesting example of a firm that did very well for decades with a clear strategy and then stumbled as it tried to reevaluate what it wanted to do. It is clear from the case that McDonald‘s had been tremendously successful primarily as a fast-food chain, with particular emphasis on hamburgers. Should any McDonald‘s CEO continually rethink strategy as a result of factors in the environment? See Chapter 1, Exhibit 1.3 for a depiction of the strategic management process. During strategic analysis, the leader does ―advance work‖ to anticipate unforeseen environmental developments, identify unanticipated resource constraints, assess changes in his or her preferences for how to manage. During strategy formulation, the organization addresses the issue of how to compete in a given business to attain competitive advantage. Strategies are formulated at the business, corporate, and international levels. Entrepreneurial initiatives may also play a role. In strategy implementation, depending on the type of organization structure, the leader might include key individuals in a discussion around selecting which strategies might be best to implement at which level within the organization. The leader must ensure proper strategic controls and organizational design, and establish effective means to coordinate and integrate activities within the firm as well as with suppliers, customers, and possible alliance partners. Leaders should also be committed to excellence and ethical behavior while promoting learning and continuous improvement. Here‘s where innovation is important. The basic question strategic management tries to answer is: How can we create competitive advantages in the marketplace that are not only unique and valuable but also difficult for competitors to copy or substitute? NOTE — ADDITIONAL EXERCISES AND VIDEO VIEWING: As stated, in writing a mission statement, it is important to understand the definition of the business by answering these questions: 1) Who are its customers? 2) What customer need is the organization trying to fulfill? and 3) How does the business create and deliver value to customers and satisfy their needs? Visit McDonald‘s corporate website to research its mission and vision at: https://corporate.mcdonalds.com/corpmcd/config/about0.html. Based on your visit to this website, how do you feel about McDonald‘s mission and what its current priorities seem to be?
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Teaching Note
Case 1: Robin Hood
Here‘s a McDonald‘s television advertisement from 1967: http://www.youtube.com/watch?v=RFEkfipbI3Q&feature=related. Compare McDonald‘s positioning of itself within the restaurant industry in 1967 to its positioning today. What are the similarities and differences? Which one seems truest to the original vision and mission of the company? Referencing Chapter 4: Assessing Intellectual Capital Consider the concepts of intellectual capital and human capital, both of which are intangible assets that a company such as McDonald‘s needs to have in order to compete successfully. Intellectual capital is a measure of the value of a firm‘s intangible assets, its reputation, employee loyalty and commitment, customer relationships, company values, brand names, and the experience and skills of employees. Human capital involves the individual capabilities, knowledge, skills, and experience of the company‘s employees and managers. McDonald‘s has some valuable intangible assets to help it carry out its mission, but these need to be further developed, especially now that the company has transitioned to a more franchise-based model. Easterbrook‘s leadership is necessary. Given McDonald‘s challenges both internally and externally, he must make some good choices about how to compete going forward. Regarding the steps Easterbrook could take to fix the problems McDonald’s faced, McDonald‘s should review the components of the strategic management process. Remember our previous discussion. See Chapter 1, Exhibit 1.3 for a depiction of the strategic management process. During strategic analysis, the leader does ―advance work‖ to anticipate unforeseen environmental developments, identify unanticipated resource constraints, assess changes in his or her preferences for how to manage. During strategy formulation, the organization addresses the issue of how to compete in a given business to attain competitive advantage. Strategies are formulated at the business, corporate, and international levels. Entrepreneurial initiatives may also play a role. In strategy implementation, depending on the type of organization structure, the leader might include key individuals in a discussion around selecting which strategies might be best to implement at which level within the organization. The leader must ensure proper strategic controls and organizational design, and establish effective means to coordinate and integrate activities within the firm, as well as with suppliers, customers and possible alliance partners. Leaders should also be committed to excellence and ethical behavior while promoting learning and continuous improvement. Here‘s where innovation is important. Once again, the basic question strategic management tries to answer is: How can we create a sustainable competitive advantage in the marketplace that is not only unique and valuable but also difficult for competitors to copy or substitute? McDonald‘s CEO Skinner had continued the tough ―up or out‖ grading system for franchisees that identified underperforming units. He introduced new products such as McGriddle‘s breakfast sandwich; added healthier items; created a new promotion, ―I‘m loving it‖; refurbished restaurants, making them more comfortable, providing TVs and wireless access; allowed TN1-471 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
franchisees to experiment and make changes to fit their local community; moved toward 24/7 allhour customer access; innovated by incorporating McCafé concept to appeal to another type of customer. McDonalds‘s had already experienced a relatively unprecedented comeback, but were things different now? The prevailing belief was that when restaurants started to slide, it really took a lot to turn them around. Would McDonald‘s be the exception? Referencing Chapter 6: Formulating Corporate-Level Strategies Corporate strategy focuses discussion on the questions of what businesses a corporation should compete in, and how the businesses should be managed so they can create ―synergy‖—creating value through entering new markets or developing new technologies, either through related or unrelated diversification. Diversification is the process of firms expanding their operations by entering new businesses. In related diversification, a firm enters a different business in which it can benefit from leveraging core competencies, sharing activities, or building market power. Some possibilities include: ● Mergers and acquisitions ● Strategic alliances ● Joint ventures ● Internal development Whatever the choice, it should create value for all stakeholders—employees, suppliers, distributors, and the organization‘s owners themselves. The choice of diversification strategy should create synergy so that all parties gain something they would not have had on their own. When achieving synergy through diversification, a firm has two choices: related diversification through horizontal relationships with related businesses, sharing tangible and intangible resources, and leveraging core competencies; and unrelated diversification though hierarchical relationships with unrelated business. In this case, value creation derives from the corporate office by leveraging support activities. McDonald‘s has pursued related diversification through its relationships with franchisees. Acquisition is the incorporation of one firm into another through purchase. It can be a means of obtaining valuable resources that can help an organization expand its product offerings and services. Acquisition can lead to consolidation within an industry and can force other players to merge. Corporations can also enter new market segments by way of acquisitions. McDonald‘s hade acquisitioned Chipotle Mexican Grill and Boston Market. Cantalupo divested these acquisitions— they did not add enough value to McDonald‘s portfolio—were not related enough to McDonald‘s core capabilities. CEO Skinner continued to pursue internal development.
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Teaching Note
Case 1: Robin Hood
Referencing Chapter 7: International Strategy: Creating Value in Global Markets International expansion is a viable diversification strategy; however, before pursuing this, a firm needs to determine why an industry in a given country is more (or less) successful than the same industry in another country. When choosing a country to expand into, firms must assess the degree of consumer demand, the degree to which resources such as skilled labor and other supplier or supporting infrastructure are developed and available, the speed with which such resources can be deployed, the extent of political and economic risk and corruption, the access to qualified management. McDonald‘s has now had enough experience internationally to learn what works and what doesn‘t. Asia Pacific and Europe appeared to be growing. Growth was slower in the Americas. International expansion and internal development in partnership with franchisees appear to be the best choices for future growth. Teaching Note Case 29 — Lime: Is Bike Sharing the Next Uber? Case Objectives 3. To examine how external and internal forces affect competitive strategy. 4. To investigate the challenges of choosing an appropriate competitive strategy. See the table below to determine where to use this case: CASE OBJECTIVES TABLE Chapter Use Key Concepts PRIMARY CONCEPTS 1: Strategy Concept 2: External Environment 5: BusinessLevel Strategy
Strategic management; vision, mission, strategic objectives
External environmental forces; Porter‘s five forces model Generic strategies
Additional Readings or Exercises See web links and video.
See web links and video. See web links and video. Consider assigning the Porter articles for more advanced discussion (see References).
Case Synopsis The San Mateo, CA-based startup, Lime, introduced dockless bikes to the United States in mid-2017. The founders had the simple idea that all communities deserved access to smart, affordable mobility. Substantiating their belief that electric bikes would be preferred over classic bikes and electric scooters for long-distance trips, Lime was able to support over 6 million rides in just over 12 months. TN1-473 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Lime entered the marketplace with a goal of eliminating docking stations in order to make bikes more affordable in comparison to traditional bike-sharing models. The idea of saving millions per year for cities that invested in expensive stations and overpriced bikes appealed to both consumers and the government. By 2019, the Lime dockless bike-share company operated in over 80 cities in the United States, 22 college campuses, and 7 countries. The mobile app charged $1 to unlock and 15¢ per minute to ride after the user unlocked the bike. While many cities had bike-sharing services, electric scooters that cost less than $2 per ride were the next innovation in mobility. Hoping to catch the next version of Uber or Lyft, the app-based carhailing services, investors were pouring money into Lime and its main electric scooter-service competitor Bird. The services competed on a city-by-city basis, vying to become the next premier brand. Although experiencing rapid growth, the scooter industry was having some of the same problems as ride-hailing. Aggressive startups were butting heads with local governments. For instance, in the UK, regulators wouldn‘t allow scooters because they ―don‘t comply with normal vehicle construction rules.‖ Lime faced competition from several fronts. Although bike-sharing was gaining hold as a transportation option in cities across the United States, high venture capital funding coupled with generally low ridership had raised questions regarding the overall sustainability and volatility of the dockless bike-share market. The big four dockless bikes in the United States were Lime, JUMP, MoBike, and Spin, but the competitive landscape wasn‘t stable. In less than a year of existence, one U.S.-focused company, BlueGoGo, and a number of China-based dockless bike companies had filed for bankruptcy, merged with other companies, or ceased operations. All bike-sharing and scooter-sharing companies faced problems with vandalism and municipal ―litter‖ as bikes piled up on sidewalks. A decade ago in China, a bike-sharing app seemed to be the ideal solution and millions of bikes were poured into China‘s streets by the private sector without proper regulations. But today, as the companies fail, unused units pile up in bicycle graveyards, and queues of angry users demand their deposits back. In addition, Uber and other automobile-based companies had entered the bike- and scooter-share market. In 2018, Uber Technologies Inc. acquired dockless bike company JUMP of Washington, DC, and Lime entered into a partnership with Uber, as Uber planned to expand its service to bikes and scooters. Dockless bike company Spin had already been acquired by Ford Motor Company. While Lime was one of the leading companies that had created the market for cost-effective bikesharing systems in the United States, it faced several hurdles with neck-and-neck competitors, municipal pushback, and vandalism. Also, with car-hailing services such as Uber and Lyft entering the bike-share market, do startups like Lime and Bird have a future? Lime needed to establish a strong survival strategy for the long run.
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Teaching Note
Case 1: Robin Hood
Teaching Plan The Lime case focuses on the initial stage of the strategic management process: an assessment of the internal and external environment within which an enterprise hopes to achieve a sustainable competitive advantage. The Lime story can also be used to investigate how the introduction of new ventures into a developing marketplace can create disruption as existing entities try to respond to multiple threats from competitors. In such a dynamic environment, who can survive and thrive? For more advanced students this case allows for discussion of the impact of innovation on multiple stakeholders, for instance, the intersection of for-profit firms and local government. To what degree can issues of government compliance and regulations affect innovation in an industry? And to what degree might municipal concerns for the health of their cities drive innovation? What opportunities might exist? For instance, Deloitte‘s 2019 City Mobility Index report found cities that score highest in mobility offer multiple, integrated modes of transportation, ensure the system is relatively safe, and maintain roads and other infrastructure to minimize congestion and travel times. They also make mobility options accessible to all residents by offering widespread public transit coverage, affordable options, and user-friendly ways to access a variety of transportation modes. How do dockless bike-sharing and scootersharing services fit in? See https://www2.deloitte.com/us/en/insights/focus/future-ofmobility/deloitte-urban-mobility-index-for-cities.html. Instructors might wish to pair the Lime case with the Ford case, pointing out that this type of innovation is being pursued by multiple firms in related industries. The Apple case, looking at innovation in software and how that might relate to autonomous vehicles, is relevant here as well. In 2008, Michael Porter made an important point about the presence of complements, those products or services that can be used together with an industry‘s product: ―complements arise when the customer benefit of two products combined is greater than the sum of each product‘s value in isolation. Computer hardware and software, for instance, are valuable together and worthless when separated . . .‖ (Porter, 2008, p. 86.) In the Lime case none of the dockless electric bike or scooter businesses would be able to function without the complement of a smart phone and an app, and they are all subject to public policies established in various urban municipalities, all of which must be negotiated individually. ICEBREAKER This case is about a new approach to urban transportation, one that many students may know something about. Therefore it‘s possible to begin with an icebreaker: Ask students for a show of hands: How many of you have used Uber or Lyft? It‘s likely that most students are familiar with this ride-sharing business model. Remind them that the app-based, car-hailing service companies rapidly gained in popularity but not without controversy, outcries from traditional taxi services, and claims of abuse and unfair wage TN1-475 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
practices from the contract-labor drivers. Now, the dockless electric bike or scooter is adopting the same app-based model but without the need for hailing a driver. Does this seem to be an obvious and attractive transportation option? Ask students for a show of hands. How many of you have seen these bikes or scooters in your local community? If so, what was your impression of the service? Do you think it’s a good idea? Depending on where students live, they may have seen these in urban areas, especially big cities, such as New York and San Francisco, or on college campuses. Ask students how many of you have ridden one? If students have had direct experience, ask them how is it different from other modes of transportation? Regarding the effect on the larger community, ask students: Have you seen evidence of vandalism or unsightly abandonment of bikes? If so, what do you think communities should do about this? It‘s possible to put a list of pros and cons on the board: for personal cars where the driver has full autonomy, to taxis where the system is well-established and regulated (in most cases) to be fair to the taxi driver/owner, to car-sharing where the price is negotiated up front with full transparency and the driver is contracted with little income protection, to bike-sharing/scooters where bikes and scooters share the road with cars and the rider takes all the risks yet the cost to ride is much lower. Categories to assess strengths and weaknesses could include the following: Comfort, safety (chance of injury to person or property), efficiency (less waste of time or other resources), cost, autonomy (you can decide what to do when), social good (less pollution or congestion), and fun! Which option is most attractive to students and under which circumstances? This should illustrate to students that although the emergence of companies such as Lime might seem an exciting and novel development, there are tradeoffs to be made. Not every option is best for every circumstance, and it‘s hard to decide which option has the chance to make the most profit overall. This discussion should get students to focus on how Lime may be an innovative solution to local transportation, yet also create unexpected problems with effective long-term implementation of the business model. Students can be reminded that being one of the first movers in the United States sets Lime up for being overrun by Uber or Lyft, companies that can wait until the TN1-476 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
competitive landscape evens out and then use their corporate assets to ―jump‖ in. This will prime students for the discussion of competitive strategy to follow. Summary of Discussion Questions Here is a list of the suggested discussion questions. You can decide which questions to assign, and which additional readings or exercises to include to augment each discussion. Refer to the Case Objectives Table at the beginning of this Teaching Note to identify any additional readings and/or exercises so they can be assigned in advance. Discussion Questions: 4. What business is Lime in? What appears to be Lime‘s mission, its vision, and its values? Who are its customers and other stakeholders? And how does Lime intend to serve them? 5. Assess the influence of industry forces on Lime‘s business model. Has Lime done an adequate job of assessing the factors in its overall environment? What are those factors and how has Lime responded to them? 6. Does Lime appear to be able to outperform rivals by establishing a difference that it can preserve? Does it have a sustainable strategy? Discussion Questions and Responses 1. What business is Lime in? What appears to be Lime’s mission, its vision and values? Who are its customers and other stakeholders, and how does Lime intend to serve them? Reviewing Chapter 1: Strategic Management Remember strategy is all about the ideas, decisions, and actions that enable a firm to succeed. See Chapter 1, Exhibit 1.1: Strategic management consists of the analyses, decisions, and actions an organization undertakes to create and sustain competitive advantages: ● strategy directs the organization toward overall goals and objectives; ● includes multiple stakeholders in decision making; ● incorporates both short-term and long-term perspectives; ● recognizes trade-offs between efficiency and effectiveness. See Chapter 1, Exhibit 1.6: The primary role of the organizational leader is to articulate vision, mission, and strategic objectives. Leaders must communicate their initial vision of the organization‘s purpose. Should Lime evaluate its initial vision? What was the original goal that evoked a powerful and compelling mental image of a shared future, one that was massively inspiring, overarching, and long-term, that represented a destination that is driven by and evokes passion? Organizations must also respond to multiple constituencies if they are to survive and prosper, and the mission provides a means of communicating to diverse organizational stakeholders. Although vision statements tend to be quite enduring and seldom change, a firm‘s mission can TN1-477 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
and should change when competitive conditions dramatically change, or the firm is faced with new threats or opportunities. Lime is essentially in the business of urban short-distance personal transportation. According to the case, Lime was founded by Toby Sun, Brad Bao, and Adam Zang on the simple idea that all communities deserve access to smart, affordable mobility. Their initial belief that electric bikes are preferred over classic bikes and electric scooters for long-distance seems to have worked. In their first year, they logged over 6 million rides in just over 12 months. Then, in February 2018 with the recognition that there was market demand for scooters, Lime added electric scooters to its product mix. Lime entered the marketplace with a goal of eliminating docking stations in order to make bikes more affordable in comparison to traditional bike-sharing models. The idea of saving millions per year for cities that invested in expensive stations and overpriced bikes appealed to both consumers and the government. According to Lime founder Toby Sun, ―If you ask me what the vision for the next 3 to 5 years will be, we want to become the default short-trip, on-demand service for getting people around cities.‖ Lime seemed to care about being a good ―neighbor‖ and taking care of discarded or vandalized bike/scooters, responding to neighborhood complaints, as well as partnering with municipalities to share data about transportation options to help reduce traffic congestion and give urban residents cost-effective transportation choices. Lime seemed aware of the environmental impact of its service, and saw municipalities and local communities as key stakeholders. This willingness to engage with the community might be a way for Lime to carve out a differentiated position. The basic question strategic management tries to answer is: How can we create competitive advantages in the marketplace that are not only unique and valuable but also difficult for competitors to copy or substitute? NOTE – WEB LINKS AND VIDEO: As stated, in writing a mission statement, it is important to understand the definition of the business by answering these questions: 1) Who are its customers? 2) What customer need is the organization trying to fulfill? and 3) How does the business create and deliver value to customers and satisfy their needs? Visit Lime‘s website to research its mission and vision at: https://www.li.me/en-us/home. The Lime website says the company believes ―city life is a beautiful life,‖ and stresses its commitment to ―simple, accessible micromobility for all.‖ They believe their scooter is ―connecting countries and communities‖ and even though they say ―you‘re free to roam‖ they also want you to ―stay safe,‖ and they encourage customers to ―protect yourself‖ by wearing a helmet, use bike lines where legally permitted, and ride responsibly: ―slow down when riding downhill, wear reflective clothing when dark, and never drink & ride.‖ Their tag line is ―unlock life.‖ TN1-478 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
See the video ―how to lime‖ https://www.li.me/how-to-lime and learn about how to be a Lime ―juicer,‖ ―by earning money collecting our e-scooters and charging them while you sleep!‖ at http://limebike.com/juicer. Lime‘s blogs stress their relationship to the communities within which they function. See https://www.li.me/second-street. Based on your visit to this website, and what you saw in the videos, how do you feel about Lime‘s mission and what its current priorities seem to be? 2. Assess the influence of industry forces on Lime’s business model. Has Lime done an adequate job of assessing the factors in its overall environment? What are those factors and how has Lime responded to them?
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Teaching Note
Case 1: Robin Hood
Referencing Chapter 2: Analyzing the External Environment of the Firm To formulate a competitive strategy, organizational leaders must first become aware of factors in the overall environment that might affect their ability to create a competitive advantage. So how do managers become environmentally aware? By doing scanning, monitoring, and gathering competitive intelligence, and using these inputs to develop forecasts. This prepares the firm to do more extensive analysis of the forces in the general environment and the industry or competitive environment. Environmental scanning involves surveillance of a firm‘s external environment to predict environmental changes and detect changes already under way. It is a BIG PICTURE viewpoint of the industry/competition, looking for key indicators of emerging trends—what catches your eye? This alerts the firm to critical trends before changes have developed a discernible pattern and before competitors recognize them. Environmental monitoring is a firm‘s analysis of the external environment that tracks the evolution of environmental trends, sequences of events, or streams of activities. Leaders need to monitor the trends that have the potential to change the competitive landscape—what do you want to track? Firms need to CHOOSE the trends identified via the scanning activity and regularly monitor or track these specific trends to evaluate the impact of these trends on their strategy process. Lime needed to be aware of multiple external factors. The larger macro or general environment cannot be ignored when doing strategic analysis. Peter Drucker was famous for stating the obvious and challenging the status quo. In 1994 he admonished organizational leaders for not understanding their ―theory of business‖: what assumptions had they made about the environment of the organization, the political-legal, economic, social, and technological realities of the larger context within which they chose to operate; what assumptions had they made about their stated mission and how they envisioned this ―making a difference in the economy and in the society at large‖ (p. 100); and, finally what assumptions had they made about the skills and abilities that needed to be developed in order to attain and sustain leadership in their chosen market? These assumptions needed to be continually challenged. Drucker (1994) suggested organizations should periodically challenge ―every product, every service, every policy, every distribution channel with the question, If we were not in it already, would we be going into it now?‖ (p. 102) In addition, Drucker thought it was important to study ―noncustomers,‖ those who get their problems solved outside of the market in which the organization currently functions. A lot can be learned by monitoring market shifts. Lime must consider the political/legal, economic and global, sociocultural/demographic, and technological forces that might affect the ability of the firm to deliver its services and sustain its business. See which factors in the general environment students might pick that have a significant impact on the dockless bike-scooter sharing industry. Students might respond as follows:
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Teaching Note
Case 1: Robin Hood
Political-Legal. The political-legal policy movement toward creating bike lanes made it more attractive and safer to ride; while simultaneously making it challenging for municipalities to determine appropriate regulations—drivers‘ licenses and insurance requirements. And what to do about abandoned or damaged vehicles cluttering city lots. Sociocultural-Demographic. The dockless electric bike/scooter market was created by a social shift in urban dwellers. They didn‘t want to own cars, and so the rideshare market developed by Uber and Lyft became very attractive, while the increasing congestion on the streets opened an opportunity for personal transportation options like the bike/scooter. This was also attractive to city managers who were wondering how dockless bike/scooter shares could further their goals of safety, equity, and sustainable mobility. On the other hand, the established and entrenched taxi owners had made it difficult for Uber and Lyft by noting the unfair advantage of using ―contract‖ labor rather than directly paid employees. Economic. The price wars made consumers see the economic sense of using the least expensive option. Global. The dockless bike/scooter market was worldwide, with little difference between countries. Note that the idea of bike sharing started in Amsterdam, and current electric bikes and scooter firms built a large presence in China before coming to the United States. Technological. The technological advances of smartphones and apps made it easy to engage with these services, while the development of smaller and more efficient batteries made it possible for the electric bikes and scooters to work for everyone. To answer the question about the current forces in the industry environments that affect Lime‘s ongoing strategy, it‘s necessary to assess the segments of the external competitive environment that include competitors, customers, and suppliers, substitutes and new entrants. Porter‘s five forces model allows strategists to anticipate where the industry might be most vulnerable. First, however, it‘s necessary to identify the industry. One important question is ―what business is Lime in?‖ Until students are sure about the boundaries of the business, it is impossible to do an industry analysis—what is the ―industry‖ to be analyzed? The choice of industry to use for analysis has implications for who Lime‘s direct competitors are because not all competitors use the same vehicles or business model. Some students might say it is in the transportation industry, but the Lime case states that the industry, the ―business‖ being analyzed, is the bike-sharing/e-scooter market. In this industry, the dockless electric bike or scooter is a substitute for the automobile as an option for transportation in urban areas. It‘s possible to include the car-sharing market here as well because both of these operate with similar business models, with similar infrastructures, and are transportation options that appropriate ―share‖ from the traditional taxi or private car market. Help students apply Porter‘s five forces of competition to the bike and scooter-sharing industry by drawing a diagram on the board similar to the following and having students fill in the details: TN1-481 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Suggested: Many rivals compete in this business. Convincing customers that one scooter is different or better than another is difficult when the product looks and functions the same across brands.
Suppliers’ Power Low
Substitutes Threat Low
Rivalry Very High
Suggested: There are multiple suppliers of components for creating the bike.
Suggested: Changes in technology or consumer needs may create an opportunity for new entrants, who can easily set up shop given the low cost of a startup in this space.
Suggested: There are no real substitutes for agile urban travel on crowded city streets except for the traditional bicycle.
Buyers’ Power Low
Threat of New Entrants
Suggested: The consumers don’t have the ability to bargain.
Very High
Based on the external environmental factor analysis, the bike and scooter-sharing industry has many competitors trying to carve out a piece of the ―profit‖ pie. Rivalry and threat of new entrants creates a constraint on profitability and awareness of current or future substitutes may be critical. Here are some other relevant points: In 2008, Porter made an important point about the presence of complements, those products or services that can be used together with an industry‘s product: ―complements arise when the customer benefit of two products combined is greater than the sum of each product‘s value in isolation. Computer hardware and software, for instance, are valuable together and worthless when separated‖ (Porter, 2008, p. 86.) Other factors that need to be considered when evaluating the interaction among the five forces are industry growth rate, the degree of technology and innovation in the industry, and the influence of government and public policy. In the Lime case, none of the dockless electric bike or scooter businesses would be able to function without the complement of a smart phone and an app, and they are all subject to public TN1-482 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
policies established in various urban municipalities, all of which must be negotiated individually. (See Case Exhibit 4.) Also, regarding ―new entrants,‖ as the substitutes from bikes and scooters affect the automobile ride-sharing industry, it creates opportunities for mergers—see Uber‘s acquisition of JUMP of Washington, DC, and Ford Motor‘s acquisition of Spin. Uber‘s partnership with Lime‘s scooter business has implications for Bird, as well as providing an additional revenue stream for Lime. This very crowded competitive space makes it difficult to identify a clear competitive strategy. Given the current intense competition, might existing companies benefit from considering if they should abandon this business, or pivot into another area where the ―noncustomers‖ go? What other options might there be for efficiently and safely moving around in an urban environment, especially for the very young or the very old? What about providing opportunities for lowincome individuals and other marginalized communities? An ongoing assessment of the factors in the general environment, and developing the capability of responding appropriately to both the opportunities and the threats that emerge—this might be critical to future success for Lime. NOTE WEB LINKS AND VIDEO: Regarding the overall profit picture, see this video report from The Verge in 2019 about how hard it is for these electric scooter companies to make a profit. They say ―electric scooters have been one of the biggest tech crazes of the last year, with venture capitalists pouring more than $1 billion into the startups. But the fundamental numbers don‘t add up because the scooters don‘t bring in enough money to cover their costs. If the business continues on its current path, the scooter hype might be short-lived.‖ They point out how the scooters don‘t physically last long enough to recoup the cost, and also show how much vandalism has occurred: https://www.youtube.com/watch?v=vt1Pcb2cnEw. From 2018 comes a full report from a customer‘s first ride on the electric scooter. It addresses the essential appeal and why this type of transportation may serve a needed niche. Takeaways include the following: ―electric scooters are a novel mode of transportation. They unite many of the best elements of traveling by car, bike, and foot. Like cars, they have an engine, so you can get to work without getting sweaty. Like bikes, there isn‘t really road congestion, so you can travel faster than most cars can. And like walking, they let you spend your commute outside… Most of the billion-dollar start-ups of the last several years—think of Uber, Lyft, Grubhub— have combined an old service with a smartphone in the name of convenience. Other have grafted new legal or logistical frameworks on old services (like Spotify, Netflix, Airbnb), also in the name of convenience. Scooters do something slightly different. They take a number of manufacturing advances made possible by the global smartphone industry—smaller and cheaper cell antennas, GPS chips, and electric batteries—and apply them in a novel and useful way, and in a surprisingly good way. When was the last time a tech company did that? The scooter companies make hardware that lets you do something you couldn‘t do otherwise. They inhabit a much smaller, and much more interesting, class of companies.‖ https://www.theatlantic.com/technology/archive/2018/05/electric-scooters-are-the-cargo-shortsof-transportation/561440/. TN1-483 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Does this convince you of the attractiveness of the industry? 3. Does Lime appear to be able to outperform rivals by establishing a difference that it can preserve? Does it have a sustainable strategy? Referencing Chapter 5: Business-Level Strategy How firms compete and how they attain and sustain competitive advantages go to the heart of strategic management. In short, the key issue becomes: Why do some firms outperform others and enjoy such advantages over time? The viability of a firm‘s success is driven by both the internal operations of the firm and the desires and preferences of the market. Firms that succeed have the appropriate resources and cost structure to meet the needs of the industry and general environment. They also have a strategy.… A business-level strategy is a strategy designed for firm or a division of the firm that competes within a single business. Within the firm‘s industry environment generic strategies include basic types of business-level strategies based on breadth of target market (industrywide versus narrow market segment) and type of competitive advantage (low-cost versus uniqueness). Here are the three generic strategies that are used to overcome industry forces and achieve a competitive advantage: 61. Overall cost leadership Low-cost-position relative to a firm‘s peers Manage relationships throughout the entire value chain 62. Differentiation Create products and/or services that are unique and valued Non-price attributes for which customers will pay a premium 63. Focus strategy Narrow product lines, buyer segments, or targeted geographic markets Attain advantages either through differentiation or cost leadership Generic strategies are plotted on two dimensions: competitive advantage and strategic target. The overall cost leadership and differentiation strategies strive to attain advantages industrywide, while focusers have a narrow target market in mind. Both casual observation and research supports the notion that firms that identify with one or more of the forms of competitive advantage outperform those that do not. The strategy that Lime adopted was differentiation. However, Harvard professor Michael Porter (1996) has famously answered the question ―what is strategy?‖ by explaining that strategy is about creating a position for competing in the marketplace; it is about performing different activities from rivals‘ or performing similar TN1-484 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
activities in different ways. He believes ―a company can outperform rivals only if it can establish a difference that it can preserve‖ (p. 62.) And part of preserving that position requires making sometimes difficult decisions: ―strategy is about making choices, trade-offs; it‘s about deliberately choosing to be different‖ (Porter, 2007, p 2–3). Regarding these choices, Porter (2007) says the following: The essence of strategy is that you must set limits on what you‘re trying to accomplish. The company without a strategy is willing to try anything. If all you‘re trying to do is essentially the same thing as your rivals, then it‘s unlikely that you'll be very successful. It‘s incredibly arrogant for a company to believe that it can deliver the same sort of product that its rivals do and actually do better for very long (p. 3). In the Lime case, given the number of companies trying to compete in the dockless electric bike/scooter market, do any of them appear to be carving out a ―difference that it can preserve‖? The answer is that none of them have yet to emerge as a market leader, and several have left the market, such as BlueGoGo. It seems none of Lime‘s existing competitors have been able to establish a break-out position. Lime, like many similar businesses, started in California where the weather and laid-back lifestyle was welcoming to the idea of an affordable, efficient transportation option. Although it‘s not clear from the case, it appears Lime had the financial resources and connections to equipment and infrastructure in order to rapidly expand to multiple markets. In addition, Lime had the foresight and resources to respond to the market demand for scooters, allowing it to directly compete with Bird. However, the rapid growth and increase in its employee base from 50 to 400 in just one year may mean difficulty in managing the human resources, resulting in uncertain priorities and uneven service response. The case mentions how Lime has invested in higher-quality bikes—and the lime color helps establish brand recognition—while the company is also aware of the need to partner with municipalities, helping them achieve their goals by sharing aggregated usage data. In addition, outreach to the riders with education about safety and bike drop-off may help with the image among non-riders in the neighborhood. All these may mean Lime can signal its added value to the market, but the price wars (scooters that cost the consumer less than $2 per ride) may make it difficult to realize any significant profit, especially when vandalism and bike theft erode Lime‘s assets‘ value. So far Lime does not appear to have formulated an effective strategy. Although it‘s not clear in the case, Lime appears to be maintaining parity on price, but, just like its competitors, it‘s suffering from having to deal with the costs of vandalism, theft, and complying with municipal regulations. Regarding its ability to differentiate in the market, the only thing that seems to stand out is the lime green color of its vehicles and the warning message that the scooters play, threatening to call the police, at high volume, when tampered with. It‘s not clear Lime has a strategy that will allow it to sustain a competitive advantage.
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Teaching Note
Case 1: Robin Hood
Has Lime fully acknowledged the shifts in its market, and is it positioned to adapt to the future where people can use ―one app‖ to hail either a scooter, a bike, or a car? Its partnership with Uber may be a way for both companies to find a competitive niche, unless Uber is able to overcome Lime‘s initial advantage with its more extensive assets. What if both Uber and Lyft enter the scooter market with fully realized business models based on their own well-known apps? (UPDATE: both Lyft and Uber have now entered the market.) How can Lime succeed in a market with almost more rental business competitors than bikes of scooters to rent? NOTE — WEB LINKS AND VIDEO: Information on how the electric scooter has created a culture that may be ―out of control‖ comes from a 2018 story about individuals hired by Bird to pick up scooters every night, charge them, and return them to service by the next morning. At the time, Bird was a direct competitor to Lime, who had just entered the scooter market. Here‘s information from the article: Bird is a scooter-sharing company that launched in 2017 and has been dubbed the ―Uber of scooters.‖ Its goal is to alleviate congestion and allow people an easy way to travel quickly for short distances of just a few miles. Riders can locate and unlock scooters using the company‘s smartphone app, and after paying the $1 unlocking fee are charged 15 cents per minute during use. . . . The scooters are all battery-powered and dockless, so they can be picked up or dropped off anywhere. But when night falls, what most riders don‘t realize is that the scooters themselves are charged by a contract workforce. These people are known as ―Bird hunters‖ or ―chargers,‖ and they‘re growing exponentially in number. Registering to become a charger isn‘t hard. Unlike Uber or most ride-sharing services, Bird doesn‘t require a background check or any kind of complicated registration procedure. It takes a few simple steps including registering your address and providing personal information, tax information, and bank-account information so you can get paid via direct deposit. If your application is approved, within a matter of days Bird will mail you three charging packs to get started. Charging a Bird doesn‘t require a ton of electricity, so minus the labor cost, charging a few scooters overnight is essentially free—especially if you live in a large apartment building and can do so in your bike room. As Birds and comparable scooter-sharing services continue to expand, charging has become a popular way for high-schoolers, college students, and young professionals to earn easy money. But while Bird hunting is fun and games for some, other chargers take the job much more seriously. Charging in some cities, like San Diego, has become a cutthroat competition between workers where every last dollar counts. Hoarding in particular has become a problem in these crowded markets. Bird and other companies will pay a $20 reward for missing scooters, so some chargers simply keep the scooters in their garage until they‘re reported missing by riders or the bounty goes up to $20, then claim the finder‘s fees. Bird TN1-486 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
theoretically polices this behavior, and [some have] gotten a warning call from the company for hoarding, but the bad behavior has become commonplace and punishment is unevenly enforced… Criminals and pickpockets have also begun to recognize Bird hunters as prime targets and can use the Birds to lure their prey to isolated areas. . . . Still, interest in becoming a charger continues to rise. Harry Campbell, also known as the RideShare Guy, who covers the sharing economy on his site by the same name, says that if you get in early in a new market, there‘s a lot of money to be made Bird hunting. . . . But while some tech observers and Redditors debate the moral implications of the charging economy, Nick Abouzeid, a 21-year-old charger in San Francisco, says that becoming a Bird hunter can feel like a good deed, almost like cleaning up the neighborhood. ―You see them lying around on the side of a sidewalk,‖ he says. ―As a charger you can pick them up, you take them home, take care of them, and leave them in a nice little row in the morning, ready to go for people. It‘s really satisfying.‖ Taylor Lorenz, The Atlantic, May 20, 2018. See https://www.theatlantic.com/technology/archive/2018/05/charging-electricscooters-is-a-cutthroat-business/560747/. And here‘s a video investigating whether it is worth it to do this same service for Lime (Lime calls it‘s gig workers ―Juicers.‖) The answer is you only make about $3.50 an hour to start, so it is not worth it unless you can service a LOT of scooters a night. See https://www.youtube.com/watch?v=oM6oYufB9sU. There doesn‘t seem to be that much difference between the experiences of Bird or Lime gig workers, and that makes one wonder if the ride experience is any different between these companies. Regarding the ride and experience with all the scooters out there, here‘s one review from 2019 where the author evaluated differences between these ―largely undifferentiated electric skateboards.‖ Testing Bird, Lime, Lyft‘s entry (where the scooter unlocks via Lyft‘s app), Uber‘s entry (called JUMP), and Spin (Ford‘s acquisition), Lime came in last, partly because, although their scooters felt study and robust, it also looked like ―they got dragged behind other scooters‖ and needed a paint job. Regarding Uber‘s JUMP, the author reported: ―Overall scooter construction is sturdy, powerful, and reliable. The pricing regime is better than others, offering free unlock as opposed to $1 unlock for competitors. It is by far the most prevalent scooter brand at SXSW, boasting huge lounges on the street where riders can charge phones, grab swag, and choose from scores of identical scooters. All of which gives one the sense Uber has waited for pioneers to problem-solve in the space, and has now jumped in to bury the competition under mountains of capital.‖ https://adage.com/article/agencies/reviewing-scooter-brands-sxsw/316941
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Teaching Note
Case 1: Robin Hood
As noted in the case, these days, people want to use one app where ―you can hail a scooter or a bike or a car.‖ With car-hailing services such as Uber and Lyft entering the bike-share market, do startups like Lime and Bird have a future? References Drucker, P. F. (1994). ―The Theory of Business,‖ Harvard Business Review, 72(5): 95–104. Porter, M.E. (1996). ―What Is strategy?‖ Harvard Business Review, 74(6): 61–78. Porter, M.E. (2007). ―Michael Porter‘s Big Ideas,‖ Fast Company, Vol. 44, December 19, available at http://www.fastcompany.com/magazine/44/porter.html (accessed 6 August 2018). Porter, M.E. (2008). ―The Five Competitive Forces That Shape Strategy,‖ Harvard Business Review,86(1): 78–93. Teaching Note Case 30 — United Way Worldwide Case Objectives 1. To apply the concepts of strategic management to a nonprofit organization. 2. To evaluate the impact of negative publicity on a nonprofit organization and the implications for strategic leadership in such a case. See the table below to determine where to use this case: NOTE: There are both PRIMARY and SECONDARY chapters that can be used for this case. The Teaching Note gives guidance for the PRIMARY use chapters, and provides suggestions if the instructor wants to use the case to illustrate concepts from the optional SECONDARY chapters. CASE OBJECTIVES TABLE Chapter Use Key Concepts PRIMARY CONCEPT 1: Strategy Concept 2: External Environment SECONDARY CONCEPTS 9: Strategic Control 10: Organizational Design
Strategic management; vision, mission, strategic objectives
Additional Readings or Exercises See NOTE video interview with CEO Brian Gallagher
Industry competition five forces; general environmental factors Behavioral control; corporate governance
See NOTE United Way ratings by watchdog groups
Organizational structure TN1-488
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Teaching Note 11: Strategic Leadership
Case 1: Robin Hood Leadership capabilities; ethical orientation
See additional articles, video
Case Synopsis In 2019, United Way Worldwide remained America‘s largest charity organization. However, the organization had reached a plateau in donations. The total funds collected had increased from the low point in 2017, but were basically level with the amount that had been raised in 2000. The same amount of money raised, yet there were still significant challenges faced by communities around the world, most importantly lack of education, unemployment, poor health care, and homelessness. United Way released an analysis noting a decline in the fraction of Americans giving to charity, especially among middle- and low-income families. The company stressed on the need to rectify the declining behavior, as it said that ―if these changes continue in the long term, it is unlikely that continued growth in philanthropic giving will be sustainable.‖ What could be done about the continuing trend—reduction in giving, increase in need? The United Way Case illustrates the problems that have been created due to a well-established business model, in a challenging environment, facing the possibility of declining growth and competition from new directions, all under the threat of potential bad news that could erode trust. This case shows how a mature brand, with a powerful and mostly honorable history, can still be in need of a strategy. In this environment, Brian Gallagher, United Way of America CEO since 2002, had established membership standards to enhance the level of accountability and transparency in United Way affiliates‘ operations, re-branded United Way as doing ―what matters‖ in the communities it served, and updated the ―standards of excellence.‖ These standards provided a description of best practices to better reflect the organization‘s strategic shift. Regarding the mission of United Way, Gallagher had worked to change the focus from fundraising to community impact, from ―How much money did we raise?‖ to ―How much impact did we have on our community?‖ United Way had transitioned from its traditional role as strictly a fundraiser to a mission focused on identifying and addressing the long-term needs of communities. In the past decade, the concern that surrounded American donors was their ability to access information regarding how their donations were going to be used, what percentage of the charity‘s spending went toward actual current programs, how their privacy was going to be protected when giving via the Internet, and whether the charity met voluntary standards of conduct. As they moved into 2019, United Way‘s biggest challenge was the need to retain donors by leveraging a digital strategy, one that allowed the charity to better connect with donors, to engage and support the causes they cared about. Was Gallagher‘s shift in strategy sufficient to ensure the continued viability of the United Way, or was its very mission perhaps no longer relevant? Teaching Plan
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Teaching Note
Case 1: Robin Hood
This case is best used to illustrate the importance of a clear strategic mission in the face of external environmental challenges. Because most students will be familiar with this organization, the instructor can ask students for their personal impression of giving to United Way, and their attitude toward charitable giving in general. This will position the discussion about strategy in a more personal context. If students were trying to encourage giving for a cause they believed in, what should they do? Do these umbrella charities still have a role to play in an environment where self-help services such as GoFundMe were gaining increased attention? As a community service exercise, after discussing the case, the instructor can encourage students to make themselves aware of the local charities supported by their community United Way. Students might be encouraged to participate in community service activities as a result of this new knowledge.
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Teaching Note
Case 1: Robin Hood
Summary of Discussion Questions Here is a list of the suggested discussion questions. You can decide which questions to assign, and also which additional readings or exercises to include to augment each discussion. Refer back to the Case Objectives Table at the beginning of this Teaching Note to identify any additional readings and/or exercises so they can be assigned in advance. This case can start with an icebreaker. Starting from the perspective of a customer may make it easier for students to transition to a strategic analysis. All students should be able to identify with the concept of nonprofit missions and charitable giving. Choosing any of the following questions can get students thinking about their experiences with the products and the industry: Have any of you ever given to United Way or know someone who has? Based on what you know, even before reading the case, what is your opinion of United Way and other broad-based charities such as the American Cancer Society and the Salvation Army? Have you ever used their services or do you know someone who has? Do you trust them? If asked, would you donate to them? Would you rather donate to some other charity? Why? Discussion Questions: 1. What are the current challenges facing United Way? What are key issues in the general and nonprofit charitable giving industry environments that affect United Way‘s operations? 2. OPTIONAL QUESTION: What unique responsibilities does United Way have to its stakeholders, and how successful has the organization been with its overall strategy? Is United Way‘s mission still viable? Discussion Questions and Responses 1. What are the current challenges facing United Way? What are key issues in the general and nonprofit charitable giving industry environments that affect United Way’s operations? To start with, the instructor might want to position the discussion by reviewing what strategic management really is. Referencing Chapter 1: Strategic Management Strategy is all about the ideas, decisions, and actions that enable a firm to succeed. See Chapter 1, Exhibit 1.1: Strategic management consists of the analyses, decisions, and actions an organization undertakes in order to create and sustain competitive advantages: ● strategy directs the organization toward overall goals and objectives; ● includes multiple stakeholders in decision making; ● incorporates both short-term and long-term perspectives; TN1-491 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
● recognizes tradeoffs between efficiency and effectiveness. Leaders face a large number of complex challenges. Leaders must be proactive, anticipate change and continually refine changes to their strategies. This requires a certain level of ―ambidextrous behavior,‖ where leaders are alert to opportunities beyond the confines of their own jobs, and are also cooperative and seek out opportunities to combine their efforts with others. Leaders must make strategic management both a process and a way of thinking throughout the organization. See Chapter 1, Exhibit 1.6: The primary role of the organizational leader is to articulate vision, mission, and strategic objectives. Leaders must communicate their initial vision of the organization‘s purpose by answer the question of what was the original goal that evoked a powerful and compelling mental image of a shared future, one that would be massively inspiring, overarching, and long-term, that represented a destination that is driven by and evokes passion. The organizational mission also needs to be considered: a mission encompasses both the purpose of the company as well as the basis for competition and competitive advantages. In writing a mission statement, it is important to understand the definition of the business: 1) who are its customers, 2) what customer need is the organization trying to fulfill, and 3) how does the business create and deliver value to customers and satisfy their needs. Organizations must respond to multiple constituencies if they are to survive and prosper, and the mission provides a means of communicating to diverse organizational stakeholders. Although vision statements tend to be quite enduring and seldom change, a firm‘s mission can and should change when competitive conditions dramatically change or the firm is faced with new threats or opportunities. Anticipating that things might change, an organization‘s leadership must then establish strategic objectives to operationalize the mission statement. That is, objectives help to operationalize the mission statement with specific yardsticks, and provide guidance on how the organization can fulfill or move toward the ―higher goals‖ in the goal hierarchy—the mission and vision. Is United Way‘s mission effective? What is United Way‘s vision and does it inspire you? Would you be willing to give based on what you know about them? Visit https://www.unitedway.org/our-impact/mission to see the mission: ―United Way improves lives by mobilizing the caring power of communities around the world to advance the common good. Our focus is on education, income, and health—the building blocks for a good quality of life and a strong community.‖ United Way sees its work as follows: ―United Way envisions a world where every individual has an opportunity to succeed, and entire communities thrive as a result. We‘re getting a little closer every day, with help from millions of people around the world.‖ These vision and mission statements can lead to strategic objectives that have implications for how to analyze opportunities, manage innovation, and provide leadership to encourage growth. This requires doing an analysis of the external environment, both relative to general factors that TN1-492 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
might affect how the product is positioned in the market, and also against whom the company is competing for that market. It requires also doing an assessment of internal resources and capabilities for production of high-quality products or services. During strategic analysis, the leader does ―advance work‖ to anticipate unforeseen environmental developments, identify unanticipated resource constraints, assess changes in his or her preferences for how to manage. During strategy formulation, the organization addresses the issue of how to compete in a given business to attain competitive advantage. Strategies are formulated at the business, corporate, and international levels. Entrepreneurial initiatives may also play a role. In strategy implementation, depending on the type of organization structure, the leader might include key individuals in a discussion around selecting which strategies might be best to implement at which level within the organization. The leader must ensure proper strategic controls and organizational design, and establish effective means to coordinate and integrate activities within the firm, as well as with suppliers, customers and possible alliance partners. Leaders should also be committed to excellence and ethical behavior while promoting learning and continuous improvement. Here‘s where innovation is important. The basic question strategic management tries to answer is: How can we create competitive advantages in the marketplace that are not only unique and valuable but also difficult for competitors to copy or substitute? NOTE — ADDITIONAL EXERCISES: In writing a mission statement, it is important to understand the definition of the business: 1) who are its customers, 2) what customer need is the organization trying to fulfill, and 3) how does the business create and deliver value to customers and satisfy their needs. Visit the United Way of America‘s website to view its mission and vision at: https://www.unitedway.org/our-impact/focus and watch the video overview of its mission. Watch the following video interview of CEO Brian Gallagher from 2008 on United Way‘s 10year goals—the strategy of working to advance the common good, through education, income, and health. Does he inspire you? https://www.youtube.com/watch?v=vLmjjDZmUMw. This 2008 video relates the story about what one family was willing to sacrifice. https://www.youtube.com/watch?v=pm9AV5KOTPw. Would YOU be willing to do this? What is the ―right‖ amount to give to charity? Most people give an average of $250 or 2 percent of individual income, but is that enough? Based on this, how do you feel about the mission of United Way? Would you feel willing to give, based on what you know about them and the causes they support?
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Teaching Note
Case 1: Robin Hood
Referencing Chapter 2: Analyzing the External Environment of the Firm Organizational leaders must become aware of factors in the overall environment that might affect their ability to create a competitive advantage. So how do managers become environmentally aware? By doing scanning, monitoring, and gathering competitive intelligence, and using these inputs to develop forecasts. This prepares the firm to do more extensive analysis of the forces in the general environment and the industry or competitive environment. Environmental scanning involves surveillance of a firm‘s external environment to predict environmental changes and detect changes already under way. It is a BIG PICTURE viewpoint of the industry/competition, looking for key indicators of emerging trends—what catches your eye? Alerts the firm to critical trends before changes have developed a discernible pattern and before competitors recognize them. Environmental monitoring is a firm‘s analysis of the external environment that tracks the evolution of environmental trends, sequences of events, or streams of activities. Leaders need to monitor the trends that have the potential to change the competitive landscape—what do you want to track? Firms need to CHOOSE the trends identified via the scanning activity, and regularly monitor or track these specific trends to evaluate the impact of these trends on their strategy process. What factors or trends might be most important to United Way? To assess how the external environment might affect United Way‘s strategy, it‘s necessary to take a look at the factors in the general external environment. United Way must consider the political/legal, economic and global, sociocultural and demographic, and technological forces that might affect the ability of the firm to deliver its services and sustain its business. See which factors in the general environment students might pick that have a significant impact on the nonprofit philanthropic industry. Students might respond as follows: Demographic: Certainly the demographics had changed. Mergers and acquisitions were reducing the number of corporate partners available in local areas, and, although these larger corporations had significant assets and employees available for potential donations, many such corporations were considering creating their own charitable arms, preferring to use these to promote their own social responsibility while retaining control of the causes they supported. Also, the rich individuals were getting richer, the baby boomers were getting older and staying active longer, all good for nonprofits looking for large individual donors and volunteers. However, the poor were getting poorer and more in need of help. Sociocultural: Sociocultural issues included the traditional highly philanthropic nature of the average American citizen (first noticed by Alexis de Tocqueville in 1831, who wrote, ―I must say that I have seen Americans make a great and real sacrifice to the public welfare; and have noticed a hundred instances in which they hardly ever failed to lend faithful support to one another.‖ The top United Way donors who contributed at least $10,000 annually were honored by being inducted into the Tocqueville Society). TN1-494 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Technological: Technology, especially the growth of the Internet had been a significant boon to all nonprofits, especially in accomplishing administrative duties and in communicating with current and potential donors. United Way appeared to be aware of these benefits. Political-Legal: Political-legal issues had an effect not only on United Way, but also on the nonprofit philanthropic industry as a whole. Changes in tax law, pension regulations, potential legislation of governance controls similar to Sarbanes-Oxley for nonprofits, all these were being discussed. United Way had dedicated public policy advocacy personnel to monitor and lobby for these issues, but changes here make it difficult to anticipate the future. To further answer the question about the key issues in the general and nonprofit charitable giving industry environments that affect United Way’s operation, it‘s also necessary to assess the segments of the external competitive environment that include competitors, customers, and suppliers, substitutes and new entrants. Porter‘s five forces model allows strategists to anticipate where the industry might be most vulnerable. Here‘s where the answer to the question ―What business are you in?‖ becomes most important because identifying the wrong industry can create problems for crafting an effective strategy. Help students apply Porter‘s five forces of competition by drawing a diagram on the board similar to the following one and having students fill in the details:
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Teaching Note
Case 1: Robin Hood
Suggested: Many rivals compete for donors. Showing how programs are different and explaining the current change in United Way mission is difficult when some competitors are also previous partners.
Threat of Substitutes High
Rivalry Suppliers‘ Bargaining Power
High
Suggested: Donors can switch to being program providers on their own; recipients can raise their own funds.
Buyers‘ Bargaining Power High
None
Suggested: There are no traditional suppliers in the nonprofit philanthropic industry. Both donors and recipients can be considered ―customers.‖
Threat of New Entrants High
Suggested: Donors encounter almost no switching costs, so loyalty cannot be assumed. Recipients have less bargaining power.
Suggested: Almost no resources are needed to start up a nonprofit.
A look at the external environmental factor and industry analysis shows that the nonprofit charitable-giving business is not an attractive industry, with many competitors trying to carve out a piece of the ―profit‖ pie. What might CEO Gallagher be able to do to succeed in this industry? Based on this analysis, United Way has some major challenges. There is no easy answer. In the current charitable giving environment, especially when technology has removed barriers, it doesn‘t matter if the organization is large or small. It‘s the organizational mission and vision that can attract donations. Smaller charities can go direct from donor to service provider, getting rid of the middle men such as United Way. Why would any small charity even need United Way today? Working with its diverse stakeholders to be creative and identify innovative program ideas for the future might help recharge the United Way Worldwide mission, and produce long-term results that are valuable to all.
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Teaching Note
Case 1: Robin Hood
NOTE — ADDITIONAL EXERCISES and OPTIONAL READINGS: The ongoing challenge of philanthropic organizations is to maintain the pace of donations. Historical context can be important here: In 2006, ABC‘s 20/20 did an investigation into why people give, and who gives the most. The full story is available at http://abcnews.go.com/2020/story?id=2682730&page=1. With the U.S. economic downturn that began in 2008, what happened to charitable giving trends? See this additional story from 2009 which includes an interesting graphic available in the left sidebar: http://www.nytimes.com/2009/06/10/us/10charity.html. And here, listen to or read about how charitable contributions dropped in 2008: http://www.npr.org/templates/story/story.php?storyId=105178804. In addition, students can be given an assignment to read the 1996 article by Michael Porter, ―What Is Strategy?,‖ Harvard Business Review, 74(6): 61–78; and the 1999 article by Porter and Kramer, ―Philanthropy‘s New Agenda: Creating Value,‖ Harvard Business Review, 77(6): 121– 130. Concepts from these articles will allow the students to further develop their understanding of the issues facing United Way Worldwide and its strategy. Instructors might log onto HBR for an overview of the 2011 article ―Creating Shared Value‖ by Michael E. Porter and Mark R. Kramer, from Harvard Business Review, January 2011: http://hbr.org/2011/01/the-big-idea-creating-shared-value. Here‘s a video by Porter on ―Rethinking Capitalism.‖ https://www.youtube.com/watch?v=LrsjLA2NGTU This challenges for profit corporations to consider the needs of others. Is this a possible erosion of United Way‘s competitive advantage, or is this an opportunity for United Way to create more strategic alliances? To see how the current environment is hard for all non-profits, see this report on the status of the largest U.S. charities in 2017. As the article says, ―since 2007, Alexandria, Va.-based United Way Worldwide has seen its donations fall by a sixth. The decline reflects the problems plaguing many social-service agencies that try to be many things to many donors amid a rise of narrower, more targeted charities focusing on, say, a specific illness. The Internet and social media have provided powerful new tools for those narrow charities to promote their causes. (While donors to United Way can designate specific charities they want to support, if they don't, the local unit decides what operating charities it will support.) Moreover, while payroll deduction has long been a convenient way to give, these days donors have equally easy alternative options of donating, even via text messaging. Yet another factor is the diversion of dollars to donor-advised funds affiliated with major financial services companies. These funds allow donors to make a charitable donation and claim a tax deduction now, while doling out the money to specific charities later.‖ See https://www.forbes.com/sites/williampbarrett/2017/12/13/the-largest-u-scharities-for-2017/#505af4f858e1. 2. What unique responsibilities does United Way have to its stakeholders, and how successful has the organization been with its overall strategy? Is United Way’s mission still viable? NOTE: there are no PowerPoint slides to accompany the following. TN1-497 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Referencing Chapter 9: Strategic Control and Corporate Governance Corporate governance involves the relationship among various participants in determining the direction and performance of corporations. The primary participants are (1) the shareholders, (2) the management, and (3) the board of directors. The strategic control mechanism known as corporate governance focuses on the need for both shareholders (the owners of the corporation) and their elected representatives, the board of directors, to actively ensure that management fulfills its overriding purpose of increasing long-term shareholder value. However, management cannot ignore the demands of other important firm stakeholders such as creditors, suppliers, customers, employees, and government regulators. At times of financial duress, powerful stakeholders can exert strong and legitimate pressures on managerial decisions. In general, however, the attention to stakeholders other than the owners of the corporation must be addressed in a manner that is still consistent with maximizing long-term shareholder returns. Sound governance practices often lead to superior financial performance. United Way is governed via a federation of affiliates, with each responsible for keeping its own relevant stakeholders happy. How might this be monitored and controlled by the United Way Worldwide corporate structure? Strategic control involves the process of monitoring and correcting a firm‘s strategy and performance. It focuses especially on the roles of informational and behavioral control in the formulation and implementation of strategies. See Chapter 9, Exhibit 9.2. Informational control is concerned with whether or not the organization is ―doing the right things,‖ while behavioral control is concerned with whether or not the organization is ―doing things right‖ in the implementation of its strategy. United Way needs to make sure enough information of the right kind is available to monitor activities—this is where things such as financial, quality control, and customer feedback is essential; and that the appropriate role models and rewards are available to keep employees motivated. United Way has a unique challenge because of its structure of affiliates. To what degree do the role models at United Way Worldwide seem to affect the behavior at the local affiliates? United Way needs to make sure enough information of the right kind is available to monitor activities— this is where things such as measures of financial accountability, quality control in the delivery of programs and administration of services to recipients, and customer feedback from volunteer staff, funding partners AND donor recipients are essential; and that the appropriate role models and rewards are available to keep employees and volunteers motivated. NOTE — ADDITIONAL EXERCISES United Way is governed via a federation of affiliates. To see how the United Way in your area is rated, search below: http://www.charitynavigator.org/index.cfm?keyword_list=united+way&Submit2=GO&bay=sear ch.results. TN1-498 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Note that different affiliates receive different ratings! What might that mean for the overall reputation of United Way Worldwide? United Way Worldwide is rated per below: http://www.charitynavigator.org/index.cfm/bay/search.summary/orgid/4629.htm. The Better Business Bureau publishes standards for charitable accountability, available here: http://www.bbb.org/us/Standards-Charity/. United Way meets these standards: http://charityreports.bbb.org/Public/Report.aspx?CharityID=1994. Perhaps contrast United Way‘s ratings with that of another charity that serves your student‘s local needs. How do they compare? Based on the reports from these watchdog groups, how does the United Way of America appear to handle its financial responsibility? Does it increase its long-term value in the eyes of its various stakeholders? Referencing Chapter 10: Creating Effective Organizational Designs Strategy consists of analysis (setting goals, assessing the internal and external environment of the firm), formulation (deciding which industries to compete in and how to compete in those industries), and implementation, where organizational leaders allocate the necessary resources and design the organization to bring intended strategies to reality. United Way made a choice of how to compete; therefore, it must also make a decision about implementation, and the organization‘s design. Chapter 10 stresses that organizational strategy has implications for a firm‘s structure. Students should relate concepts from Chapter 10, such as the differences between various structures and the effectiveness of each possible structure for United Way‘s possible choices of strategy. Organizational structure refers to formalized patterns of interactions that link a firm‘s tasks, technologies, and people. Structures help to ensure that resources are used effectively in accomplishing an organization‘s mission. Structure provides a means of balancing two conflicting forces: the need for the division of tasks into meaningful groupings, and the need to integrate the groupings for efficiency and effectiveness by coordinating and integrating key activities. Structure identifies the executive, managerial, and administrative organization of a firm and indicates responsibilities and hierarchical relationships. It also influences the flow of information as well as the context and nature of human interactions. Factors that facilitate the effective coordination and integration of key activities include having a common culture and shared values, horizontal organization structures, horizontal systems and processes, effective communications and information technologies, and involved human resource practices. An effective organizational design can encourage the flow of information and enhance working relationships between functional departments and activities. However, achieving the TN1-499 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
coordination and integration necessary to maximize the potential of an organization‘s human capital involves much more than just creating a new structure. Different structures lead to different degrees of flexibility and permeability, and can affect the amount of culture change required. Structures can have an impact on relationships between internal and external constituencies, and therefore need the full support of the management team to implement. United Way has a loosely coupled system, more a modular than a divisional structure, with every chapter unit operating in a semi-autonomous fashion. Organizational structures should help improve decision making by providing mechanisms for command and control, yet United Way doesn‘t have such a thing. The lack of a structure that has such controls might be why the organization has had so many scandals—there is no actual control over activities or mechanism to ensure compliance with standards at the local level. Decisions made by affiliate leadership are not subject to oversight at the corporate level until after the fact. An organizational structure is meant to integrate the various organizational groupings in a way that leads to efficiency and effectiveness by coordinating and integrating key activities. With no required oversight, each chapter affiliate is free to engage in its own activities. Although this might be effective for local constituencies, is it an efficient use of United Way Worldwide resources? Might a more consistent vision across chapters increase donations? Strategy should lead to structure, so more increase in accountability should suggest a clearer more controlling structure, and that should then increase donations. But what does that do to the culture of autonomy that chapters currently experience? Might a tighter structure affect the existing culture at the affiliate level, and have a negative effect on local leadership and volunteerism? Regarding what can happen at the local level, here‘s a news story from 2009 about how Washington. DC area charities were suspending their memberships with the local United Way and partnering with another fundraising group, America‘s Charities, partly as a result of United Way‘s past financial scandals at that local chapter: http://www.washingtonpost.com/wp-dyn/content/article/2009/04/28/AR2009042803701.html. What should nonprofits do to ensure that temptation doesn‘t result in inappropriate behavior from individuals in leadership positions in chapter affiliates and create subsequent reputational problems for United Way Worldwide? In 2012, United Way Worldwide announced it was restructuring to better ―leverage operational resources‖ and ―foster a model of distributed leadership where the network leads the organization.‖ Other than ―expanded support and capacity-building teams resident in United Way regions: Africa and the Caribbean, Asia-Pacific, Europe and the Middle East, Latin America, and North America,‖ it‘s unclear what that structure actually looks like: http://www.unitedway.org/press/release/united-way-worldwide-realigns/.
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Teaching Note
Case 1: Robin Hood
Referencing Chapter 11: Strategic Leadership See the concept of leadership, the process of transforming organizations from what they are to what the leader would have them become. Leadership is proactive, goal oriented, and focused on the creation and implementation of the creative vision. This definition implies dissatisfaction with the status quo, a vision of what should be, and suggests a process for bringing about change. Leaders are change agents whose success is measured by how effectively they formulate and implement a strategic vision and mission. See Exhibit 11.1 in Chapter 11. This involves: ● Setting a direction ● Designing the organization ● Nurturing a culture dedicated to excellence and ethical behavior The interdependent nature of these three activities is self-evident. Consider an organization with a great mission and a superb organizational structure, but a culture that implicitly encourages shirking and unethical behavior. Often, failure of today‘s organizations can be attributed to a lack of equal consideration of these three activities. The imagery of the three-legged stool is instructive: it will collapse if one leg is missing or broken. Leaders need to continually scan the environment to develop knowledge of all stakeholders, and knowledge of salient environmental trends and events. Then leaders must integrate that knowledge into a vision of what the organization could become. Leaders require the capacity to solve increasingly complex problems, and must be proactive in their approach so they can develop viable strategic options. Difficulties in implementing the leader‘s vision and strategies include a lack of understanding of responsibility and accountability among managers, reward systems that do not motivate individuals and groups toward desired organizational goals, inadequate or inappropriate budgeting and control systems, and insufficient mechanisms to coordinate and integrate activities across the organization. Leaders, especially those who have responsibility for some degree of public trust, as United Way does, must also maintain at least the outward appearance of an ethical business culture. See the discussion of organizational ethics in Creating an Ethical Organization in Chapter 11: ―The ethical organization is characterized by a conception of ethical values and integrity as a driving force of the enterprise. Ethical values shape the search for opportunities, the design of organizational systems, and the decision-making process used by individuals and groups. They provide a common frame of reference that serves as a unifying force across different functions, lines of business, and employee groups.‖ Organizational ethics helps to define what a company is and what it stands for. The ethical orientation of the leader is a key factor in promoting ethical behavior, promoting an ethical orientation. A strong ethical orientation can have a positive effect on the organization‘s commitment and motivation to excel.
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Teaching Note
Case 1: Robin Hood
The practices that a firm can use to promote an ethical business culture include providing ethical role models, corporate credos, and codes of conduct; creating ethically-based reward and evaluation systems; and making sure ethical policies and procedures are consistently enforced. CEO Brian Gallagher has acknowledged the potential difficulties of his plan to change the way both the national United Way and its local affiliates plan for and deliver service. See his perspective on strategy, and the shift to digital, from Harvard Business Review in 2018: https://hbr.org/2018/09/united-ways-ceo-on-shifting-a-century-old-business-model. From a 2011 interview, when asked about how to sustain the momentum of change, Gallagher had this advice for a new CEO: ―Understand your environment. Take the time to know the organization‘s history, know the industry‘s history, and know the national and global history as it relates to your organization. Be really open about what value you are creating and not creating because sometimes we get enamored with what we used to be. And sometimes we get blind to what is really not creating value any longer—and to what could create value in the future. Your field of vision has to be really wide, and you have to be open to the need to take risks. You have to be flexible and adjust as you go. There are not any full stops anymore. There are just yield signs along the way occasionally.‖ From Boston Consulting Group, Leading Transformation: Conversations with Leaders on Driving Change, https://www.bcg.com/documents/file87317.pdf. Here‘s an interview from 2012 where CEO Brain Gallagher reflects on the progress of his vision and strategy first announced in 2008. This interview is over an hour, but the beginning gives context: https://www.youtube.com/watch?v=hejpY7ZjYNw. What strategies might Gallagher use to get everyone to buy into his strategic vision? Let students know that at this point it is not clear whether Brian Gallagher‘s strategy is sufficient for enlisting the local affiliates‘ long-term support, especially given the history of ethical violations. Students don‘t have to identify one best strategy, just use this discussion to explore the implications of how strategy is developed, and discuss what the pros and cons are for each business decision. Whatever decisions students come to can be checked by asking ―is this strategy sustainable,‖ and ―will the need for United Way still exist ten years from now‖? In the current charitable giving environment, especially when technology has removed barriers, it doesn‘t matter if the organization is large or small. It‘s the organizational mission and vision that can attract donations. Smaller charities can go direct from donor to service provider, getting rid of the middle-men such as United Way. Why would any small charity even need United Way today? Working with its diverse stakeholders to be creative and identify innovative program ideas for the future might help recharge the United Way Worldwide mission, and produce longterm results that are valuable to all. One interesting discussion might be regarding United Way‘s international outreach. The mission and role of United Way in developing countries was more of a consultancy model, which might be more relevant than the traditional role played in the American philanthropic market. United Way did have some extensive experience creating and serving multiple constituencies. Using that experience to coach others to provide for unique community needs might be a worthwhile and successful approach worldwide, therefore continuing to keep their overall mission viable. Teaching Note TN1-502 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood Case 31 — Alibaba Group: Rivals at the Gate?
Case Objectives 3. To introduce concepts and frameworks to assess how firms create value and achieve a competitive advantage via diversification in global marketplaces. 4. To prompt a debate about the benefits and risks of diversification via international expansion taking into account dynamic external environments. See the table below to determine where to use this case: CASE OBJECTIVES TABLE Chapter Use Key Concepts 2. Analyzing External Environmental factors and strategic Environment choice; digital economy 5. Business-Level Competitive factors and strategic Strategy choice; generic strategies 6. Corporate-Level Corporate structure and Strategy diversification choices 7: International Demand conditions; global Strategy competitive advantage; transnational strategy; cost reduction vs. adaptation to local markets; political and economic risk; optimizing the location for activities in the value chain Case Synopsis During a visit to the United States in 1995, Jack Ma, the founder of Alibaba, heard about the internet for the first time. With his hands on the technology, he searched for the word beer on Yahoo. Ma was surprised to find that his Internet search came up with beers from Europe and America but there was nothing from China. At that moment, he decided to build a business that could facilitate the buying and selling of Chinese products abroad. Even in the face of great scrutiny, he identified the great business potential of e-commerce and founded Alibaba in 1999. Ma‘s once criticized vision for the Alibaba Group subsequently evolved into a thriving global operation, making it one of the most successful companies of the past decade. Alibaba‘s stock price appreciation made it one of the top performers among technology companies around the world. Its 2018 stock price performance aggressively competed with one of its fiercest international competitors, Amazon (as shown in case Exhibit 1). However, Alibaba‘s continuously evolving business model along with increasingly growing domestic competition from companies like Tencent Holdings, Baidu, and JD.com created numerous challenges for the company to move forward and replicate that past performance record. These challenges included domestically-based pressures like increasing competition, and international obstacles involving new and unchartered U.S. market conditions. Additionally, the case also presents information that allows for a look at recent regulatory behavior by the Chinese government. As China has reached a higher level of development, Chinese corporations have become important in the study TN1-503 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
of international business. The information regarding China can be used to facilitate discussion relating to recent regulatory actions taken by the Chinese government. By 2019, CEO Jack Ma faced many ambiguities associated with the determination of the company‘s future competitive sustainability and financial viability. Teaching Plan The ―Alibaba Group: Rivals at the Gate‖ is ideally paired with coverage of Chapter 7 in the textbook, which illustrates different modes of international entry. The case can also be paired with coverage of Chapter 5 ―Business-Level Strategies,‖ in particular the generic strategic choices that firms make in order to position themselves in dynamic, competitive environments, and Chapter 6, ―Corporate-Level Strategies,‖ in particular the choices that firms make in approaching diversification opportunities. It is also highly suitable for a review of Chapter 2, ―Analyzing the External Environment of the Firm,‖ in particular, concepts and frameworks asking students to assess the general environment and the competitive environment in which firms compete. The Alibaba case offers insights on how large a role Alibaba has played in the evolution of the Chinese e-commerce industry, challenges that the Chinese e-commerce industry faces, and an understanding of a complex business model that will shape the future of online businesses around the world. This Alibaba case can also be used to demonstrate how a new startup business can become a leader in its industry via constant innovation and experimentation with new forms and ways of doing business. The case is designed to be taught in one to one and a half class hours and is expected to require one to two hours of outside preparation by students for reading and analysis. Each instructor may differ regarding the depth of discussion and detail in which aspects of the environment and firm strategy are discussed. The case covers business strategies, technological innovations, and utilization of technology needed to gain competitive edge over business rivals in a dynamic and intensely competitive ecommerce marketplace. The case also sheds light on the complexity of Alibaba‘s business model that evolved with time in response to the needs and wants of consumers, small businesses, and technological development in China. With groups of students who already have familiarity with China and Chinese markets from other course works, it is possible to shorten the Chinese market‘s landscape discussion at the instructor‘s discretion. In The Competitive Advantage of Nations (1990), Michael E. Porter writes: ―Competitive advantage is created and sustained through a highly localized process. Companies achieve competitive advantage through acts of innovation. They approach innovation in its broadest sense, including both new technologies and new ways of doing things.‖ This statement applies to Alibaba and its competitors. The Chinese economy has been expanding at a remarkable growth rate over the past few decades. Companies like Alibaba connected the population of a billion people to transact and do business. Small business in China benefited enormously as e-commerce connected those businesses to rest of the world. Companies need to adapt to and understand the local competitive landscape during the growth phase. However, understanding the global competitive landscape becomes more important with time and increases in size of the business. It is difficult for Chinese businesses to remain competitive in China, and even more difficult to compete with western businesses. Amazon has become the world‘s largest e-commerce company. To compete with Amazon internationally is one the greatest challenges that Alibaba has faced since its inception. TN1-504 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Assignment Questions Below is a list of suggested discussion questions. You can decide which questions to assign and which additional readings or exercises to include to augment each discussion. Refer back to the Case Objectives Table at the beginning of this Teaching Note to identify any additional readings and/or exercises so they can be assigned in advance. 1. What steps will Alibaba need to take to retain a dominant and competitive position in China‘s domestic market? What are the domestic competitive threats?
2. How would you characterize the international competitive landscape in e-commerce? Who are the international competitors? What are the international opportunities?
3. Which regions of the world should Alibaba prioritize for entry and expansion? 4. How will Alibaba‘s growth strategy of mergers and acquisitions help the company to compete in the US and other international markets?
Responses to Assignment Questions 1. What steps does Alibaba need to take to retain a dominant and competitive position in the Chinese domestic market? What are the domestic competitive threats? Alibaba is facing unique challenges in both domestic and international markets. The large size of the company requires a huge scale of growth and installed base of customers to experience a tangible difference in earnings. Alibaba‘s domestic strategy is intended to enable the firm to achieve a broad, overall cost leadership position in China.
Alibaba‘s competitive position in the China‘s domestic market is strong for the company as it also owned a first mover‘s advantage in that country.
Being the first mover enabled Alibaba to enjoy experience curve effects that its rivals cannot match, similar to the examples of firms in Chapter 5 (Aldi, Primark, and Zulilly) that have also achieved this.
These experience curve gains form a foundation for Alibaba‘s cost advantage over its rivals since the firm knows the source of the cost reduction and can keep these gains proprietary. TN1-505
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Teaching Note
Case 1: Robin Hood
According to Chapter 5, striving to attain overall low-cost position enables a firm to achieve above-average returns despite strong competition. It protects a firm against rivalry from competitors, because lower costs allow a firm to earn returns even if its competitors eroded its profits through intense rivalry.
Overall cost leadership requires a tight set of interrelated tactics that include: o Aggressive construction of efficient-scale facilities o Vigorous pursuit of cost reductions from experience o Tight cost and overhead control o Avoidance of marginal customer accounts o Cost minimization in all activities in the firm‘s value chain, such as R&D, service, sales force, and advertising
A low-cost leadership positional also affords Alibaba: o Protection against powerful buyers o More flexibility to cope with demands from powerful suppliers for input cost increases o A stronger ―moat‖ due to substantial entry barriers against substitute e-commerce services introduced by new and existing competitors
However, as noted in Chapter 5, such a strategy may fail if Alibaba is unable to attain parity on important dimensions of differentiation such as quick responses to customer requests for services or design changes.
Moreover, as noted in Chapter 6, Alibaba in China has achieved economies of scope and market power via related diversification, similar to Amazon‘s in the United States. o Both Alibaba and Amazon developed strong competencies in Internet retailing, website infrastructure, cloud storage, warehousing, and order fulfillment to dominate the online e-commerce retail industry. o Both used these competencies along with their well-recognized brand names to expand into a range of online retail businesses. o Competitors in China and the United States, respectively, have had great difficulty imitating Alibaba‘s and Amazon‘s competencies, and many have simply stopped trying. Instead, they have partnered with these two e-commerce giants and contracted with them to provide services. TN1-506
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Teaching Note
Case 1: Robin Hood
Also, as noted in Chapter 7, Alibaba‘s sources of competitive advantage in China may not translate as well to other countries where Alibaba is not a first-mover, e.g. competition is already dominated by Amazon or other e-commerce companies, or where factors influencing demand conditions are dissimilar to China‘s.
Alibaba is striving to pursue a transnational strategy. As stated in Chapter 7, ―A central philosophy of the transnational organization is enhanced adaptation to all competitive situations as well as flexibility by capitalizing on communication and knowledge flows throughout the organization.‖ However, there are advantages and drawbacks associated with a transnational strategy. See table below. Table 1 • • • •
Relative Advantages and Disadvantages of Transnational Strategies
Strengths Attain economies of scale Adapt to local markets Locate activities in optimal locations Increase knowledge flows and learning
Limitations Face unique challenges in determining optimal locations of activities to ensure cost and quality • Overcome managerial challenges in fostering knowledge transfer •
Adapted from Table 7.7 in the textbook. For Alibaba, the most important competitive advantage associated with a transnational strategy would be cost reductions enabled by achieving economies of scale.
Achievement of scale economies would thrust Alibaba into a competitive position in the global marketplace.
Moreover, backward and forward integration of the company across nations or regions to optimize the location of its activities would also enable Alibaba to achieve the goal of cost reductions by controlling both ends of the service offerings.
The company will also need to continue improving its existing technology platforms and customer service to enable it to adapt to local markets and increase knowledge flows and learning.
That said, there are some unique challenges that Alibaba faces in global markets. For example, switching costs to customers are low in the e-commerce industry. What keeps customers loyal is the consistent quality of service and price. The domestic macro-environmental and competitive threats that are covered in Chapter 2 can seriously hamper Alibaba‘s growth in China and the rest of the world. See Table 2 below. Table 2
Impact of Macroenvironmental and Competitive Factors on Alibaba in China and Global Markets TN1-507
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Teaching Note Factor Demographic Sociocultural
Case 1: Robin Hood Impact on Alibaba in Chinese Market Young population in China (and other developing nations) Rising concerns about health and climate change; xenophobia
Political/Legal Barriers to e-commerce and social network rivals to protect incumbent Chinese providers Technological Diffusion of mobile devices and Internet access; cloud-based computing Economic Rising affluence Global
Competitive
Many global supply chains originate in China and the Pacific Rim. Moderate buyer power Moderate supplier power Low threat of new entrants Moderate threat of substitutes Moderate industry rivalry
Impact on Alibaba in the Global Markets Aging population in developed nations Rising concerns about increasing market power & dominance by a few Internet companies; rising nationalism Open access and privacy/security concerns; trade barriers and tariffs Disruption of bricks & mortar retail by ecommerce vendors Low interest rates & low unemployment boost consumer spending Increasing global trade / emergence of China as a global economic power High buyer power Moderate supplier power Low threat of new entrants Moderate threat of substitutes Intense industry rivalry
Source: Adapted from exhibits 2.2 and 2.5 in the textbook.
In its home market, China, Alibaba must contend with the aggressiveness of domestic competitors and partnerships of rivals such as Tencent and JD.com, Alibaba needs to build a moat around its service offerings. Although the number of competitors is relatively small, the difference in quality will determine customer loyalty. The scale and quality of service are the two most important factors to deal with the domestic rivalry. 2. How would you characterize the international competitive landscape in e-commerce? Who are the international competitors? What are the international opportunities? The international marketplace in e-commerce is extremely competitive and challenging for Alibaba, notwithstanding its size and the nature of the business.
The developing world has more potential and untapped markets compared to the developed markets such as Europe and the United States.
The cost of expansion is very high, as is the cost of acquiring new customers in international markets, especially in the United States.
As pointed out in Chapter 7, distance still matters, i.e., ―it is easier to do business in a neighboring country than in a faraway country, all else being equal,‖ not only because of
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Case 1: Robin Hood
physical distance, but also owing to cultural differences, language barriers, religious differences, and the idiosyncrasies of different countries‘ political and legal systems.
Amazon dominates the U.S. e-commerce market and competing with Amazon in the US is a major international challenge.
Time and cost of entry are probably not as attractive as earlier in the decade of the 2010s, however it is not too late.
Alibaba will need to develop cost advantages in the United States and offer a very competitive quality of service. There are opportunities for Alibaba as its business model and types of service offerings are distinct from those of Amazon.
Alibaba can expand upon its B2B services and its online payment systems, among many others. There are also opportunities for Alibaba to benefit from international trade.
Alibaba can connect the Chinese markets with the rest of the world. It will provide new opportunities for accessing a larger market, which domestic competitors outside China may not provide.
5. Which regions of the world should Alibaba prioritize for entry and expansion? Michael E. Porter notes that, ―Firms that succeeded in global markets had first succeeded in intensely competitive home markets.‖ As stated in Chapter 7, ―competitive advantage for global firms typically grows out of relentless, continuing improvement, and innovation.‖ Entry and expansion into global markets, as noted in the chapter, is often complicated by the degree of customer sophistication (demand conditions) and country risk. Students might consider as attractive those developing countries and their e-commerce markets where the degree of customer sophistication is low but also where country risk is high (as is the potential return, due to the absence of a dominant competitor). There are many untapped markets among developing nations that Alibaba can target.
E-commerce industry and infrastructure have yet to develop in regions like Africa, the Middle East, Southeast Asia, and South America.
Having a large scale of resources and influence, Alibaba must target these markets, which together constitute about two-thirds of the world‘s population.
Income levels as well as accessibility to the Internet are increasing in developing nations.
Being part of the global development in the e-commerce industry can reap great benefits for the first movers.
That does not mean Alibaba should completely or even partially abandon the developed country markets. However, for its transnational strategy to be effective, Alibaba will have to ensure the TN1-509 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
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Case 1: Robin Hood
development of competencies that help the company to achieve effective entry into developing nations – as opposed to focusing solely on expansion in developed nations. 6. How will Alibaba’s growth strategy of mergers and acquisitions help the company to compete in the US and other international markets? Alibaba has great experience in serving Chinese customers but customers around the rest of the world are unique. Mergers and acquisitions in international markets will enable Alibaba to benefit from established infrastructures, business models, and management required to run its business in those markets. The cost of acquiring new customers will not be as high as entering the market without alliances. As discussed in Chapter 7, the various modes of international entry form a continuum ranging from exporting (low investment and risk, low control) to a wholly owned subsidiary (high investment and risk, high control). Managers may choose among four types of entry strategies when entering international markets: exporting, licensing/franchising, strategic alliances/joint ventures, and wholly owned subsidiaries. The key trade-off in each of these strategies is the level of investment or risk versus the level of control.
To date, Alibaba has focused primarily on domestic investment endeavors in China, although the company has financially engaged some U.S. companies as well.
Alibaba has apparently chosen a medium investment and risk, medium control entry strategy into the U.S. market. o Alibaba‘s current presence in the U.S. stock market via an IPO and adherence to SEC standards inevitably leaves the company more transparent and vulnerable as compared to domestic Chinese companies as well as foreign competition. o Alibaba has also made strategic investments in Lyft, a U.S. ride-sharing service, and Tango, a messaging service.
After establishing a strong market share and foothold in the U.S. market, Alibaba can expand further using its wide range of resources via the following approaches:
Alibaba‘s growth strategy of mergers and acquisitions has been quite successful in the past.
Given the saturation in development of new technologies, it will probably be efficient to acquire the most promising companies developing those technologies rather than ―greenfield‖ development of new technologies.
Developing e-commerce infrastructure takes time, resources, and experimentation that can be very costly.
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Case 1: Robin Hood
Therefore, instead of focusing on organic growth Alibaba should acquire existing companies to compete in the international market.
A transnational and localization strategy will be required to penetrate other international markets.
Epilogue As of April 2020, Alibaba faced the following opportunities and challenges: Opportunities
Despite severe headwinds due to declining consumer demand during the COVID-19 pandemic and its aftermath, growth opportunities in eCommerce in China remain significant—penetration is rising in less-developed regions (Morningstar).
Opportunities in cloud and international eCommerce suggest potential upside in the medium term (Mergent, Company investor relations website).
Its dominant position in a market with a long runway for growth justifies a premium valuation vs. peers. The cash-generating core business also offers Alibaba resources to reinvest in new businesses for long-term growth (Morningstar).
By mid-April 2020, Alibaba's P/E had fallen to 23x nine trailing months‘ non-GAAP EPS (vs. a historical P/E average since 2017 ranging from 18x-37x), which we think does not reflect the potential of its other businesses like AliCloud and Ant Financial, which are leaders in China's fast-growing cloud/fintech markets (Morningstar).
Enterprises' work-from-home demand owing to shelter-in-place restrictions during the COVID-19 pandemic has triggered cloud computing demand. The situation may reset their attitude toward continuity and accelerate cloud adoption. We believe Alibaba (ticker symbol: BABA) will be the key beneficiary given its leading position in China's cloud market (Morningstar).
Challenges / risks
Intensified competition in less-developed regions could attenuate growth, limit upside on monetization of customer demand, and pose severe downsides to profit margins (Mergent).
Lingering macro headwinds, should there be continuing economic downturn or a resurgence of the COVID-19 pandemic in that country, may pressure discretionary consumer spending in China and impede future earnings (Morningstar). TN1-511
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Case 1: Robin Hood
Smaller-than-expected public cloud adoption by enterprises in China or more restrictive regulations on e-commerce could impede long-term growth (Company investor relations website).
Sources: Mergent Online, Alibaba Group Holding Inc., accessed April 15, 2020. Morningstar Equity Analyst Report, Alibaba Group Holding, Ltd., March 20, 2020. Company investor relations website, accessed April 15, 2020, at: https://www.alibabagroup.com/en/ir/home. Teaching Note Case 32 — Apple Inc.: Where’s the Next Innovation? Case Objectives 1. To investigate strategic options in a fast-moving industry. 2. To discuss the leadership implications for managing innovation. See the table below to determine where to use this case: NOTE: This case can be used as a COMPREHENSIVE CASE, covering all the chapters in the textbook. However, because the primary focus of this case for most instructors is probably business-level strategy, the instructor may want to use this case to discuss Chapters 5 and 6. If so, start with that section of the Teaching Note. CASE OBJECTIVES TABLE Chapter Use Key Concepts PRIMARY CHAPTERS: 1: Strategy Concept 5: Business-Level Strategy 6: Corporate-Level Strategy
Additional Reading and/or Exercises
Strategic management; vision, mission, strategic objectives Competitive strategy; generic strategies Diversification; synergy; core competencies; acquisitions
9: Strategic Control
Informational vs. behavioral control 10: Organizational Design Organizational structure 11: Strategic Leadership 12: Managing Innovation
NOTE embedded video, Jobs interviews NOTE additional reading web articles. See optional advanced reading, Mintzberg, 1990; Harrigan, 1985; Porter, 1996 NOTE additional reading web articles NOTE additional reading web articles NOTE additional reading, video
Leadership; learning organization; ethical orientation Innovation; scope of NOTE additional reading, innovation; entrepreneurial embedded video regarding Jobs; orientation (optional) optional advanced reading, TN1-512
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Teaching Note
SECONDARY CHAPTERS: 2: External Environment 3: Internal Analysis 4: Intellectual Assets 7: International Strategy 8: Entrepreneurial Strategies
Case 1: Robin Hood
Industry competition five forces; general environmental factors Value-chain analysis; resourcebased view of the firm; VRIN Intellectual and human capital; dynamic capabilities International expansion Opportunity recognition
Lumpkin & Dess, 1996 NOTE web links, stock price
NOTE web links
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Case 1: Robin Hood
Case Synopsis Apple, founded by two guys in a garage in 1976, produced the first computer with a graphical user interface (communicating with the user via icons on the screen), and continued to innovate both in hardware and software, particularly when led by co-founder and charismatic visionary, Steve Jobs. By 2007, after 30 years of carving a niche for itself as the premier provider of computing technology solutions for graphic artists, web designers, and educators, Apple had reinvented itself as a digital entertainment company and changed its name from Apple Computer to Apple Inc. As an example of innovation in digital entertainment, the iPod portable digital music player introduced by Apple in 2001 became one of its most famous products. This success was linked to the iTunes software, and subsequently spawned the iPod Touch, Apple‘s initial invasion of the gaming world. The iPhone, likewise, stole market share from other mobile devices, especially when supported by downloadable applications from Apple‘s App Store. Apple‘s computers, the desktop iMac and MacBook notebooks, were still favorites with Apple‘s core computing users in the graphic design and education community, and these products had been adopted by others, especially students, after the conversion to the Intel Core Duo CPU that allowed Macs to run Windows software. The iPad, selected as one of the 50 best inventions of 2010, had successfully become the market leader in tablet computers, and Apple‘s 2015 entry into wearable technology, the Apple Watch, was expanding its boundaries even further. Services, including Apple Pay mobile payment, and Apple Music, the subscription-based music-streaming service, were accounting for more and more revenue. Was there anything Apple couldn‘t do? In October 2011, founder Steve Jobs succumbed to the pancreatic cancer that had sidelined him from active participation in Apple‘s day-to-day activities since 2009. COO Tim Cook, who had been called the genius behind Steve because of his handling of the day-to-day operational business at Apple, became CEO. Under Cook‘s stewardship the company reached a market capitalization of over $1 trillion in 2018, making it the most valuable company in the world. Apple‘s ongoing stated strategy had been to leverage ―its unique ability to design and develop its own operations system, hardware, application software, and services to provide its customers new products and solutions with superior ease-of-use, seamless integration, and innovative industrial design.‖1 This strategy required not only product design and marketing expertise but also scrupulous attention to operational details. It also required continuous innovation and a way to anticipate consumer needs that lead to market share. Unfortunately, in almost all of Apple‘s product categories, either demand was down overall (desktop/laptop computers) or competitors were grabbing share (mobile devices). Where was growth to be found? Rumors were circulating about the development of software for self-driving cars, and other services such as Apple Music, iTunes, and the App Store, were beginning to account for a growing percent of revenues. Was Apple‘s future in services, acquisitioning companies in related industries, or something else? Given Apple‘s global growth in multiple product categories and the associated complexity in strategic execution, would CEO Tim Cook be able to sustain the level of innovation the company 1
From the Apple, Inc., 2008 Annual Report, 10-K filing, available at www.apple.com/investor
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Case 1: Robin Hood
had been known for? Would Apple still be considered a hypergrowth innovator, or was it now just a major consumer products company, like all others in the industry? In the coming years, would Apple still be able to take a bite out of all competition, and delight its many fans with yet another innovative product or service? Teaching Plan The Apple case is a good example of vertical integration, and the role of entrepreneurship in maintaining the pace of innovation within an industry with a volatile product life cycle. This is a comprehensive case, and so it can be used to illustrate the complete arc of strategic management: from analysis through formulation to implementation. Because Apple is a well-known company, with such a well-known founder story, the discussion of strategic leadership can take center stage. Therefore, this case can be used as a semester-long case, touching on each component as it is assigned, or this case can be used toward the end of the semester to review all the strategic components and then to make a decision about whether or not and how Apple could continue to be successful now that it had transitioned, under the leadership of Tim Cook, from being a hypergrowth company to being a premium, branded consumer company. If instructors choose to focus on only one concept, perhaps the question of business-level strategy in Chapter 5, and corporate-level strategy in Chapter 6, might be the place to start. Therefore this Teaching Note begins with this, and then backs into the full arc of strategic management to explain how it all works. Used to encourage more advanced analysis among exceptional students, the instructor may suggest possible external research sources and possible supplemental assigned reading. It may be especially interesting to initiate a discussion among advanced students to consider whether the traditional design/Harvard model or the Mintzberg process/emergent strategy model is more applicable here (Mintzberg, 1990). See the discussion about this in the textbook in Chapter 1. Just looking at what the company had historically accomplished, especially since Steve Jobs‘ return in 1997, the organization appeared to have gone through a major reformulation of strategy, with continuing fits and starts well through 2010. Some mistakes were made, but the company learned as it went along. (See Case Exhibit 4: Apple Innovation Time Line.) As Mintzberg (1990: 182) says, in defense of strategy as ―emergent‖: ―Every strategic change involves some new experience, a step into the unknown, the taking of some kind of risk. Therefore, no organization can ever be sure in advance whether an established competence will prove to be a strength or a weakness.‖ In addition, assigned reading of Porter‘s 1996 HBR article ―What Is Strategy?,‖ Harrigan‘s 1985 ―Vertical Integration and Corporate strategy,‖ and Lumpkin & Dess‘s 1996 ―Clarifying the Entrepreneurial Orientation Construct‖ can help students get a fuller picture of the case. ICEBREAKER Because all students have heard of Apple‘s products, and probably most of them have either used or owned one, it might be illustrative to ask: TN1-515 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
How many of you own an Apple computer? How many of you have used an iPhone or iPad? Who has an Apple Watch? It‘s very possible that at least one student is currently using an Apple computer or tablet, and more probable that many more students own an iPhone. What do you think of Apple’s products? The instructor can ask those who use a Mac computer what they think of it. The same question can be asked about the iPad or iPhone—whether these products truly are the best tablets or cellphones out there (whether they are or are not, they still remain the best-selling ones. Why?) Here‘s where the instructor can point out the tradeoffs Apple made in performance, and the synergy it purposively developed between its products, so that if a customer wants truly seamless integration across the Apple Watch to the iPad to the iPhone, and wants to create and share things with others (via the iMac, MacBook, iPad, or iPhone), then purchasing only one Apple product tends to lead to purchasing others. The instructor can ask how many students own more than one Apple product, and why. Here‘s where the instructor can click on the link to Apple‘s product website, http://store.apple.com and scroll down to show all the products Apple offers. What does this say about Apple‘s strategy? Students should comment on the consistency in design, the interactivity between the products, and possibly the marketing. Some students may have heard about the famous Mac vs. PC TV ads, and many will have had the Apple retail store experience. (Depending on where they live, students may have been to a flagship Apple store and can comment on how unique the shopping experience is—or isn‘t.) The instructor might want to put a list on the board of students‘ responses to the question ―what exactly IS the Apple mystique?‖ Answers to this question provide an intro into the case discussion of competitive strategy, how Apple creates value for customers. One interesting discussion might provide further insight. Ask students how many have ever owned or seen an iPod (show of hands), then how many still USE one? (Hands will almost all go down.) The iPhone has replaced the iPod. Is this a problem for Apple? Of course not, because the iPhone is the most lucrative product Apple has ever developed. The iPod may have very successfully paved the way for the subsequent adoption of more Apple products—ANY Apple product—by satisfied and almost fanatic users. Finally, the instructor can ask: How many of you think Steve Jobs is the one mainly responsible for Apple’s success? Probably everyone has heard about Steve Jobs iconic leadership style and the vision that drove Apple‘s initial innovation. Ask students who they think is responsible for Apple’s success. Many may say it was due to Jobs‘ initial leadership, but the actions of Tim Cook since Jobs‘ death show that the company is still in good hands. This provides the instructor with an opportunity to introduce the case as an examination of the arc of strategic management—from strategic analysis TN1-516 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
of the internal and external environment, through formulation of a competitive strategy, to issues of implementation, of which strategic leadership is a critical component. Before engaging in discussion, you might want to test student’s basic knowledge regarding the case and the major concepts. Here are some multiple-choice questions to use. (This will get the student‘s attention—they can‘t answer these if they haven‘t read the case!) Which of the following statements is most true? a. The Apple iPhone is the most popular smartphone in the world. b. Apple iPhone sales represent the bulk of Apple‘s revenues. c. The Apple smartphone iOS is the world‘s most widely adopted operating system. d. The Apple iPhone is the most popular smartphone in Asia. e. All of the above statements are true. ANSWER: b. Although the iPhone represented 63 percent of Apple‘s total sales in 2018, it is not the most popular smartphone in the world. Samsung holds that spot worldwide, especially in Asia, and Google‘s Android operating system is the most widely adopted smartphone operating system. Apple manufactures all of its own products. a. Yes b. No ANSWER: b. This is a deceptive question. Apple outsources most manufacturing to plants in Asia. Foxconn, the subject of labor unrest in 2012, is Apple‘s largest manufacturing partner. With facilities in China, Foxconn produces all of Apple‘s iPhones. Summary of Discussion Questions Here is a list of the suggested discussion questions. You can decide which questions to assign and also which additional readings or exercises to include to augment each discussion. Refer back to the Case Objectives Table at the front of this Teaching Note to identify any additional readings and/or exercises so they can be assigned in advance. 1. How does Apple use strategic management to compete? 2. What is leadership‘s role in Apple‘s strategic implementation? 3. OPTIONAL QUESTIONS: What are key forces in the general and industry environments that affect Apple‘s choice of strategy? 4. What internal resources and assets does Apple have that may give it a competitive advantage? How does Apple use those assets to craft strategy?
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Case 1: Robin Hood
Discussion Questions and Responses 1. How does Apple use strategic management to compete? To start with, the instructor might want to position the discussion by reviewing what strategic management really is: Reviewing Chapter 1: Strategic Management Strategy is all about the ideas, decisions, and actions that enable a firm to succeed. See Chapter 1, Exhibit 1.1: Strategic management consists of the analyses, decisions, and actions an organization undertakes in order to create and sustain competitive advantages: ● strategy directs the organization toward overall goals and objectives; ● includes multiple stakeholders in decision making; ● incorporates both short-term and long-term perspectives; ● recognizes tradeoffs between efficiency (cost) and effectiveness (performance). Leaders face a large number of complex challenges. Leaders must be proactive, anticipate change and continually refine changes to their strategies. This requires a certain level of ―ambidextrous behavior‖ in which leaders are alert to opportunities beyond the confines of their own jobs and are also cooperative and seek out opportunities to combine their efforts with others. Leaders must make strategic management both a process and a way of thinking throughout the organization. See Chapter 1, Exhibit 6: The primary role of the organizational leader is to articulate vision, mission and strategic objectives. Leaders must communicate their initial vision of the organization‘s purpose: what was the original goal, one that evokes a powerful and compelling mental image of a shared future, that would be massively inspiring, overarching, and long-term, and that represented a destination that is driven by and evokes passion? The organizational mission also needs to be considered: a mission encompasses both the purpose of the company, as well as the basis for competition and competitive advantages. In writing a mission statement, it is important to understand the definition of the business: 1) Who are its customers? 2) What customer need is the organization trying to fulfill? and 3) How does the business create and deliver value to customers and satisfy their needs? Organizations must respond to multiple constituencies if they are to survive and prosper, and the mission provides a means of communicating to diverse organizational stakeholders. Although vision statements tend to be quite enduring and seldom change, a firm‘s mission can and should change when competitive conditions dramatically change or the firm is faced with new threats or opportunities. Anticipating that things might change, an organization‘s leadership must then establish strategic objectives to operationalize the mission statement. That is, objectives help to operationalize the TN1-518 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
mission statement with specific yardsticks, and provide guidance on how the organization can fulfill or move toward the ―higher goals‖ in the goal hierarchy—the mission and vision. Steve Jobs‘ original vision of Apple was as the digital hub of a creative entertainment lifestyle. (Not in the case: The ―digital hub‖ quote is from Job‘s keynote address at Macworld Expo in January 2001, described at http://db.tidbits.com/article/6268. At least part of Apple‘s mission was articulated by Steve Jobs in 2004: to ―make the best things in the world,‖ and to ―always make a profit . . . so we can keep making those great products.‖ He also pointed out the Apple innovation process, which meant that Apple was ―always thinking about new markets,‖ but with a discipline that made sure Apple didn‘t ―get on the wrong track or try to do too much.‖2) Now Tim Cook is displaying his single-minded emphasis on pursuing only those projects where Apple could be the best at creating a ―singularly exceptional experience‖ for its users, where Apple could use this philosophy and vision to attract the best and brightest key personnel, and where it could leverage its considerable skill in managing its distribution and supply chain while simultaneously maintaining its ―culture of flexibility, adaptability, and creativity.‖ These vision and mission statements can lead to strategic objectives that have implications for how to analyze opportunities, manage innovation, and provide leadership to encourage growth. It requires doing an analysis of the external environment, both relative to general factors that might affect how the product is positioned in the market, and also whom the company is competing against for that market. It requires also doing an assessment of internal resources and capabilities for production of high-quality products. Here is where students can be reminded how the chapters in the book are linked. See Chapter 1, Exhibit 1.3 for a depiction of the strategic management process. During strategic analysis, the leader does ―advance work‖ to anticipate unforeseen environmental developments, identify unanticipated resource constraints, assess changes in his or her preferences for how to manage. During strategy formulation, the organization addresses the issue of how to compete in a given business to attain competitive advantage. Strategies are formulated at the business, corporate, and international levels. Entrepreneurial initiatives may also play a role. In strategy implementation, depending on the type of organization structure, the leader might include key individuals in a discussion around selecting which strategies might be best to implement at which level within the organization. The leader must ensure proper strategic controls and organizational design, and establish effective means to coordinate and integrate activities within the firm, as well as with suppliers, customers, and possible alliance partners. Leaders should also be committed to excellence and ethical behavior while promoting learning and continuous improvement. Here‘s where innovation is important. The basic question strategic management tries to answer is: How can we create competitive advantages in the marketplace that are not only unique and valuable but also difficult for competitors to copy or substitute? 2
Peter Burrows, The seed of Apple‘s innovation, Bloomberg BusinessWeek, October 12, 2004, https://www.bloomberg.com/news/articles/2004-10-11/the-seed-of-apples-innovation
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Case 1: Robin Hood
An interesting question that the instructor can ask at this point is: What IS that ―marketplace‖? What business is Apple in? Some students might say computers or cellphones, some may say technology, some may say consumer electronics or digital entertainment. The answers to these questions will help students understand the importance of vision and mission: the leader must have a clear idea of the purpose of the business, and with whom it competes, in order to craft strategy. If the business is computers or technology, the focus might be on improving the science and searching out technology partners to stay on the cutting edge of technology innovation; if the business is consumer electronics or digital entertainment, the focus might be on capabilities regarding design and marketing. Because Jobs originally envisioned Apple as ―the digital hub of a creative entertainment lifestyle,‖ Jobs had stressed innovative design coupled with reliable performance that would wow the consumer. As he once stated, the primary core capabilities lay in Apple‘s people. As such, Apple could be considered to be in the consumer electronics/digital entertainment business. Answering this question is essential to proceeding with strategic analysis. Once students have determined what business Apple is in, they can then have a better appreciation of how Apple might craft a competitive advantage. Referencing Chapter 5: Business-Level Strategy In order to achieve a sustainable competitive advantage, Apple had to assess its ability to contend with other consumer electronics products companies. The question of how to compete in a given business to attain competitive advantage requires an assessment of the types of competitive strategies, including the three generic strategies: 64. Overall cost leadership Low-cost-position relative to a firm‘s peers Manage relationships throughout the entire value chain 65. Differentiation Create products and/or services that are unique and valued Non-price attributes for which customers will pay a premium 66. Focus strategy Narrow product lines, buyer segments, or targeted geographic markets Attain advantages either through differentiation or cost leadership Generic strategies are plotted on two dimensions: competitive advantage and strategic target. The overall cost leadership and differentiation strategies strive to attain advantages industrywide, while focusers have a narrow target market in mind. Given Apple‘s goals, low-cost leadership is not an option. Apple has a focused niche strategy, targeting a differentiated market—first adopters for the new computers, tablets, and the initial iPhone, ―wired‖ individuals for the other products. Apple‘s products are universally unique, and valued enough to warrant a price premium that savvy customers don‘t mind paying. TN1-520 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
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Case 1: Robin Hood
NOTE – ADDITIONAL READING, VIDEO INTERVIEWS WITH STEVE JOBS, PC vs MAC TV COMMERCIALS: One area where Apple‘s differentiation strategy is apparent is in its approach to retail. See this video interview with Steve Jobs on CNBC on the opening of the Apple Store on Fifth Avenue in New York City in 2006: http://www.youtube.com/watch?v=y6BFhRkUJEI&mode=related&search=. For fun viewing, here are links to the various Mac vs PC TV commercials, and the original ―1984‖ Macintosh commercial: https://www.youtube.com/watch?v=qfv6Ah_MVJU. http://www.youtube.com/watch?v=vNy-7jv0XSc. How does Apple‘s retail strategy support its overall approach to competitive strategy? Many people thought Apple‘s move into the mobile handset market with the iPhone may have been a risky one. View this video interview with Steve Jobs at the introduction of this product in 2007: http://www.youtube.com/watch?v=SX1Lz8PDgg8&NR=1. How important was the introduction of this product into the Apple product lineup? What has this done to the other handset competitors? What other industries did this product introduction affect? Regarding Apple‘s compatibility with business enterprise software, when Microsoft expanded its ―Enterprise App Store‖ in 2012, some wondered if Apple shouldn‘t have tried harder to woo business enterprise converts to its operating system by opening up Apple software to the corporate market: ―The corporate market is far too important to ignore, and it‘s not, as Apple seems to believe, ceding the selection of devices and software to its employees. Bring your own device (BYOD) may indeed be the future, but bring your own software (BYOS) will not. And over time, as you will see, Apple will become more insular, while the rest of the market opens up.‖ http://www.forbes.com/sites/markfidelman/2012/08/15/microsofts-enterprise-app-store-will-beapples-demise-again/. Do you think Apple should be making a bigger play for business software compatibility? In 1997, after his return to Apple, Steve Jobs gave a speech about marketing, about how he wanted to connect with Apple‘s users, to stress how Apple is more than ―just a box‖ (the Mac computer) that helps people do their jobs. Jobs said Apple‘s core value is that ―we believe that people with passion can change the world for the better.‖ He also said he believed that values, and core values, shouldn‘t change, and he wanted Apple to remember that. This was the introduction of the ―Think Different‘ campaign. See the video of his talk and the campaign at https://www.youtube.com/watch?v=keCwRdbwNQY. To fully appreciate the impact Apple has had on the design community, think about how just the sight of the Apple logo signals innovation and excellence. In 2016, to celebrate 20 years of Apple design, a book featuring 450 photographs of Apple products ―Designed by Apple in TN1-521 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
California‖ was published. Dedicated to the memory of Steve Jobs, the book illustrates Apple‘s creative inspiration and thinking. In the foreword, Jony Ivy, Apple‘s chief design officer, says ―The idea of genuinely trying to make something great for humanity was Steve‘s motivation from the beginning, and it remains both our ideal and our goal as Apple looks to the future. This archive is intended to be a gentle gathering of many of the products the team has designed over the years. We hope it brings some understanding to how and why they exist, while serving as a resource for students of all design disciplines. . . . While this is a design book, it is not about the design team, the creative process or product development. It is an objective representation of our work that, ironically, describes who we are. It describes how we work, our values, our preoccupations and our goals. We have always hoped to be defined by what we do rather than by what we say. We strive, with varying degrees of success, to define objects that appear effortless. Objects that appear so simple, coherent and inevitable that there could be no rational alternative.‖ http://www.apple.com/newsroom/2016/11/designed-by-apple-in-californiachronicles-20-years-of-apple-design.html. This captures the vision and legacy of Steve Jobs and points to the essence of Apple‘s differentiation strategy. Referencing Chapter 6: Corporate-Level Strategy Thinking about combining resources to achieve a competitive advantage, corporate strategy focuses discussion on the questions of what businesses a corporation should compete in, and how the businesses should be managed so they can create ―synergy‖—creating value through entering new markets or developing new technologies, either through related or unrelated diversification. Diversification is the process of firms expanding their operations by entering new businesses. In related diversification, a firm enters a different business in which it can benefit from leveraging core competencies, sharing activities, or building market power. Some possibilities include: ● Mergers and acquisitions ● Strategic alliances ● Joint ventures ● Internal development Whatever the choice, it should create value for all stakeholders—employees, suppliers, distributors, and the company itself. The choice of diversification strategy should create synergy so that all parties gain something they would not have had on their own. Companies can achieve synergy through diversification in two ways: 1. Through related businesses (horizontal relationships) ● Sharing tangible resources ● Sharing intangible resources ● Leveraging core competencies 2. Or through unrelated businesses (hierarchical relationships) ● Value creation derives from corporate office TN1-522 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
● Leveraging support activities Core competencies reflect the collective learning in organizations—how to coordinate diverse production skills, integrate multiple streams of technologies, and market diverse products and services to create value. Core competencies must create superior customer value; the different businesses must all have similar elements in the value chain that require similar skills; and these activities or skills must be difficult for competitors to imitate. Apple diversified through creating horizontal relationships in related businesses: all business units—computers, music, communication—related to Jobs‘ original vision of a digital lifestyle, one facilitated via integrated software and peripherals. Regarding Apple‘s core competency in software development, Jobs said: ―we could write all these different kinds of software and tweed it all together and make it work seamlessly. And you ask yourself: What other companies can do that? It‘s a pretty short list.‖3 Sharing activities means that value chain elements are shared across business units, so that two or more activities are done by one of the businesses. This allows for cost savings, but businesses need to make sure to keep control over quality and customer perception. Apple‘s major sharing activity was its marketing and sales, which was one of its strengths. The Apple case is a good example of vertical integration, and the role of entrepreneurship in maintaining the pace of innovation in the face of a volatile product life-cycle industry. Apple‘s strategy included significant focus on internal development (see R&D expenditures), but also well-planned strategic alliances (with Samsung for instance) to acquire key components. Apple also pursued quiet, selective acquisitions. Acquisition is the incorporation of one firm into another through purchase. It can be a means of obtaining valuable resources that can help an organization expand its product offerings and services. Acquisition can lead to consolidation within an industry and can force other players to merge. Corporations can also enter new market segments by way of acquisitions. Although not in the case, Apple had also quietly pursued many acquisitions of software companies over the years, and, in 2008, Apple spent a reported $278M to purchase P.A. Semi, a small U.S. microprocessor design company with not only an energy efficient chip capable of doing high-end processing, but also having low power requirements. Such a device, owned by Apple, would support most of Apple‘s hand-held devices. If Apple used these chips exclusively within Apple products, it would not have to worry about turning control of core components over to a partner, and it would create one more rare resource to ensure Apple‘s competitive advantage. (See the story at http://www.forbes.com/2008/04/23/apple-buys-pasemi-tech-ebizcz_eb_0422apple.html.) Further recent acquisitions include Quattro Wireless, a U.S. mobile advertising firm, in 2010, for $275M; C3 Technologies, a Swedish 3D mapping firm, in 2011, for $267M; Anobit, an Israeli 3
Fisher, A. 2008. ―America‘s most admired companies‖, Fortune, March 17: 74.
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Teaching Note
Case 1: Robin Hood
flash memory provider, also in 2011, for $390M—this memory was for use in iPhones and iPads; AuthenTec, a U.S. security firm providing security hardware and software for computers and mobile devices, in 2012, for $356M; and, in 2013, Passif Semiconductors, a U.S. manufacturer of microprocessor radio chips for the low power Bluetooth LE standard, created with both embedded and wearable computing applications in mind. Speculation was that this chip technology would be a good fit for an Apple iWatch product. In 2014 the acquisition of Beats Technology for $3 billion gave Apple access to not only the headphones but also to the music-streaming capability of Beats Music. Apple continued its pace of acquisitions, showing an increased interest in augmented reality (AR), machine learning, artificial intelligence, and image and emotion recognition, with its most expensive purchases being machine-learning company Turi in 2016, artificial intelligence company Lattice Data in 2017, Shazam, a UK based company specializing in music and image recognition in 2018, Dialog Semiconductor in 2018, and Intel‘s smart modem business in 2019. (See the list at http://en.wikipedia.org/wiki/List_of_mergers_and_acquisitions_by_Apple.) Given the trend toward machine learning and artificial intelligence in many industries, Apple‘s interest in this technology means it could be accumulating assets and focusing resource on what might appear to be unrelated diversification into something like the automobile industry. However, an argument can be made that this is still related diversification because of the opportunity for resource sharing and the leverage of core competencies that exist throughout the Apple ecosystem. In addition, Apple‘s current cash position has analysts speculating about a major merger. Possible companies Apple could target include Disney, Activision, Electronic Arts, Take-Two, Tesla and Hulu, with Netflix being the prime candidate. (See one story from January 2018 at http://www.businessinsider.com/apple-potential-merger-acquisition-candidates-aapl-2017-12.) This type of major acquisition would be a departure for Apple because it has never had to worry about the integration of such a large and potentially very different culture into its exiting ecosystem. In fact, analysts had pointed to evidence that Apple was uncomfortable with an acquisition process where it could not be in charge of the negotiation from the beginning. Reports on the process Apple had used for smaller acquisitions described a team of Apple engineers advising on which potential acquisition targets are attractive and include talented engineers that would add value to Apple. Therefore, ―Apple‘s acquisition strategy works well for smaller startups, which it acquires frequently, but the company faces a challenge for bigger deals. Apple refuses to work with investment bankers in an attempt to work directly with the other company‘s management teams. This results in an air of arrogance, according to Eric Risley, who has negotiated deals with Apple, further stating that ‗they‘re used to being able to muscle their way in and get attractive economics.‘‖ See the full story at https://www.macrumors.com/2017/02/15/apples-arrogance-acquisitions/. Because any proposed merger should create value for all stakeholders—employees, suppliers, distributors, and the company itself—it might be a difficult choice for CEO Cook to make. The choice of diversification strategy should create synergy so that all parties gain something they TN1-524 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
would not have had on their own. What would Apple gain, and how could the value of resources and core competencies be enhanced in both companies? Here‘s also where advanced students can be asked their opinion of Mintzberg‘s (1990) emergent strategy: Does Apple appear to be learning as it goes along, never ―sure in advance whether an established competence will prove to be a strength or a weakness‖? After discussing this case, advanced students should have a greater sense of corporate strategy diversification issues, including why firms may choose to diversify or not, and how to analyze this strategy in terms of relatedness and potential synergies (also see Harrigan, 1985). In addition, advanced students may benefit from a re-reading of Porter‘s 1996 HBR article, ―What Is Strategy?‖ —especially the section on tradeoffs. What tradeoffs did Apple make, and were those decisions profitable? What tradeoffs might be necessary in the future? What is leadership’s role in Apple’s strategic implementation? Referencing Chapter 10: Creating Effective Organizational Designs Strategy consists of analysis (setting goals, assessing the internal and external environment of the firm), formulation (deciding which industries to compete in and how to compete in those industries), and implementation, where organizational leaders allocate the necessary resources and design the organization to bring intended strategies to reality. Apple‘s Steve Jobs had originally made a choice of how to compete, therefore, he also had had to decide about implementation and the organization‘s design. Chapter 10 stresses that organizational strategy has implications for a firm‘s structure. Students should relate concepts from Chapter 10, such as the differences between various structures and the effectiveness of each possible structure for Apple‘s choices of strategy. Organizational structure refers to formalized patterns of interactions that link a firm‘s tasks, technologies, and people. Structures help to ensure that resources are used effectively in accomplishing an organization‘s mission. Structure provides a means of balancing two conflicting forces: the need for the division of tasks into meaningful groupings, and the need to integrate the groupings for efficiency and effectiveness by coordinating and integrating key activities. Structure identifies the executive, managerial, and administrative organization of a firm and indicates responsibilities and hierarchical relationships. It also influences the flow of information as well as the context and nature of human interactions. Factors that facilitate the effective coordination and integration of key activities include having a common culture and shared values, horizontal organization structures, horizontal systems and processes, effective communications and information technologies, and involved human resource practices. An effective organizational design can encourage the flow of information and enhance working relationships between functional departments and activities. However, achieving the coordination and integration necessary to maximize the potential of an organization‘s human capital involves much more than just creating a new structure. Different structures lead to TN1-525 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
different degrees of flexibility and permeability, and can affect the amount of culture change required. Structures can have an impact on relationships between internal and external constituencies, and therefore need the full support of the management team to implement. Apple‘s structure was divisional, based on product and technological specialty. Key management responsibilities included marketing, retail, software design, hardware design, operations, and financial matters. Jobs was famous for being fanatic about keeping each department and each project separate from one another, and for having just a few, key people directly reporting to him. CEO Tim Cook has kept to that structure, so far. Not in the case: At Apple, since Jobs‘ death, there had been attrition and restructuring in the top ranks. Ron Johnson, former head of Apple Retail, responsible for the success of Apple Stores, left to try his luck as head of J.C. Penney. This meant Philip Schiller, head of Apple‘s worldwide marketing, had more on his plate. Scott Forstall, head of software design, was escorted out of the company in October 2012, presumably because of missteps and maverick moves, including the poorly researched Maps software. Jonathan Ive, Apple‘s design chief, was asked to take on Forstall‘s software role as well as hardware, a move applauded in some circles. Ive‘s leadership in industrial design would become critical. With such a small product line, Apple could not afford a single misstep going forward. CEO Cook‘s leadership and the depth of his small upper management team were critical. Apple employees tended to be specialists, and weren‘t typically encouraged to work or interact outside their area of responsibility. Under Jobs, Apple was run as a ―star‖ or ―hub & wheel‖ communication structure. This means the structure is not that permeable, but relies on the CEO for clear direction. Effective communication processes are critical. Although the message was very clear (everyone knew what Jobs wanted), it could be time-consuming to wait for approval from the top. In 2013 the structure changed again. For one view of Apple‘s 2013 upper management structure, see http://www.asymco.com/2013/07/03/understanding-apples-organizational-structure/. Reportedly, Jonathan Ive was encouraging employees to collaborate across projects. This would help things move faster, but could also lead to mistakes and delays as employees tested out new relationships with new skills. (See http://www.businessinsider.com/apples-new-organizationalstructure-could-help-it-move-faster-2013-5. Check out the humorous cartoons comparing the management structures at Amazon, Google, Facebook, Microsoft, Oracle, and Apple.) From a report in 2015, it appears the hierarchy still applies, implying ―Apple‘s organizational structure does not support rapid changes because everything must go through Tim Cook and the senior VPs.‖ See http://panmore.com/apple-inc-organizational-structure-features-pros-cons. Referencing Chapter 9: Strategic Control and Corporate Governance Strategic control involves the process of monitoring and correcting a firm‘s strategy and performance. In a traditional control system, top management formulates strategies and sets TN1-526 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
goals. These strategies are implemented, and then performance is measured against the predetermined goals. In a contemporary control system, managers continually monitor both the internal and external environments, and identify trends and events that signal the need to revise strategies, goals, and objectives. The relationships between strategy formulation, implementation, and control are highly interactive. This approach utilizes two different types of strategic control: informational control and behavioral control. These two types of control play a role in the formulation and implementation of strategies. Informational control is a method of organizational control in which a firm gathers and analyzes information from the internal and external environment in order to obtain the best fit between the organization‘s goals and strategies and the strategic environment. Behavioral control is a method of organizational control in which a firm influences the actions of employees through culture, rewards, and boundaries. See Exhibit 9.2. Informational control is concerned with whether or not the organization is ―doing the right things,‖ while behavioral control is concerned with whether or not the organization is ―doing things right‖ in the implementation of its strategy. Organizations need to make sure enough information of the right kind is available to monitor activities—this is where things such as financial audits and customer feedback is essential; and where appropriate role models and rewards should be available to keep employees motivated. Chapter 9 emphasizes the importance of aligning both informational and behavioral control systems with organizational strategy. The information gained from the internal and external environment is reviewed against the firm‘s strategy and goals. If the results are not what was expected, then behavioral controls can be utilized to encourage employees to ―do things right‖— employee actions can be influenced through building or maintaining a strong positive culture, creating effective reward and incentive programs, and setting boundaries and constraints to minimize improper and unethical conduct (see Chapter 9, Exhibit 9.3). Both the informational and behavioral components of strategic control are necessary, but not sufficient, conditions for success. What good is a well-conceived strategy that cannot be implemented? Or what use is an energetic and committed workforce if it is focused on the wrong strategic target? Apple practices a contemporary control system using informational control via feedback from the marketplace. As one of Steve Jobs‘ legacies, Apple had traditionally kept the specifics of its research and development a closely guarded secret and fiercely protected its innovative patents. Therefore internal ―information‖ was closely guarded. This doesn‘t mean the firm didn‘t carefully seek out information from the external environment about how its products and services were perceived in the marketplace. Note in the case: the Apple users groups were encouraged to be actively involved, especially via Macworld, an annual ―fan‖ event Apple sponsored to showcase new products and technology each year. Although an opportunity since 1985 for fans and vendors to interact around all things related to the Apple Macintosh, Apple itself stopped participating in 2009 and the event was suspended indefinitely in 2014.
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Teaching Note
Case 1: Robin Hood
Regarding behavioral controls, especially under Jobs, Apple was notoriously unforgiving when things went wrong. Employees were held strictly accountable for success and failures. Not in the case: Accountability still appears to be strictly enforced by Tim Cook, as witnessed by Scott Forstall‘s dismissal in 2012 from his post as head of software design after the poorly researched Maps software failed to perform as advertised. Note in the case: For one story about this use of behavioral controls, see the 2011 explanation of ―how Apple works‖ in Forbes, especially the following: ―at Apple there is never any confusion as to who is responsible for what. Internal Applespeak even has a name for it, the ‗DRI,‘ or directly responsible individual.‖ Yet employees who excel are granted special status. Read the whole story at https://fortune.com/2011/05/09/inside-apple/. Referencing Chapter 11: Strategic Leadership See the concept of leadership, the process of transforming organizations from what they are to what the leader would have them become. Leadership is proactive, goal oriented, and focused on the creation and implementation of the creative vision. This definition implies dissatisfaction with the status quo, a vision of what should be, and suggests a process for bringing about change. Leaders are change agents whose success is measured by how effectively they formulate and implement a strategic vision and mission. See Exhibit 11.1. This involves: ● Setting a direction ● Designing the organization ● Nurturing a culture dedicated to excellence and ethical behavior The interdependent nature of these three activities is self-evident. Consider an organization with a great mission and a superb organizational structure, but with a culture that implicitly encourages shirking and unethical behavior. Often, failure of today‘s organizations can be attributed to a lack of equal consideration of these three activities. The imagery of the threelegged stool is instructive: it will collapse if one leg is missing or broken. Leaders need to set the direction for the organization by continually scanning the environment to develop knowledge of all stakeholders, and knowledge of salient environmental trends and events. Then leaders must integrate that knowledge into a vision of what the organization could become. Leaders require the capacity to solve increasingly complex problems, and they must be proactive in their approach so they can develop viable strategic options. Leaders are responsible for designing the organization: a strategic leadership activity of building structures, teams, systems, and organizational processes that facilitate the implementation of the leader‘s vision and strategies. Leaders have an important role in creating systems and structures to achieve desired ends. Leaders play a key role in changing, developing, and sustaining an organization‘s culture. An excellent and ethical organizational culture is one that is focused on core competencies and high ethical standards. Organizational culture can be an effective means of organizational control.
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Teaching Note
Case 1: Robin Hood
In nurturing a culture dedicated to excellence and ethical behavior, managers and top executives must accept personal responsibility for developing and strengthening appropriate behavior; consistently demonstrate that such behavior is central to the vision and mission; develop and reinforce role models, corporate credos, codes of conduct, reward and evaluation systems, policies and procedures. Doing this requires leaders to overcome barriers to change and effectively use their power. Through Steve Jobs‘ vision and the example he set for his firm, it seems likely he was able to nurture a culture dedicated to excellence, especially in the behavioral controls he established – the focus on personal accountability. Cook appears to have the same dedication to Apple as Jobs did, although he is not as charismatic. Has he been able to set an equally inspiring example, and therefore continue to nurture Apple‘s culture? What about ethics? Leaders, especially those who have responsibility for some degree of public trust, must also maintain at least the outward appearance of an ethical business culture. (See the definition of organizational ethics toward the end of Chapter 11.) Organizational ethics are the values, attitudes, and behavioral patterns that define an organization‘s operating culture and that determine what an organization holds as acceptable behavior. The ethical organization is characterized by a conception of ethical values and integrity as a driving force of the enterprise. Ethical values shape the search for opportunities, the design of organizational systems, and the decision-making process used by individuals and groups. These values provide a common frame of reference that serves as a unifying force across different functions, lines of business, and employee groups. Organizational ethics helps to define what a company is and what it stands for. The ethical orientation of the leader is a key factor in promoting ethical behavior, promoting an ethical orientation. A strong ethical orientation can have a positive effect on the organization‘s commitment and motivation to excel. Ethical orientation involves the practices that firms use to promote an ethical business culture, including ethical role models, corporate credos and codes of conduct, ethically-based reward and evaluation systems, and consistently enforced ethical policies and procedures. Ethical leaders must take personal, ethical responsibility for their actions and decision making. Leaders who exhibit high ethical standards become role models for others and raise an organization‘s overall level of ethical behavior. The ethical organization is characterized by a conception of ethical values and integrity as a driving force of the enterprise. Ethical values shaped the search for opportunities, the design of organizational systems, and the decision-making process used by individuals and groups. They provide a common frame of reference that serves as a unifying force across different functions, lines of business, and employee groups. The advantages of a strong ethical orientation can have a positive effect on employee commitment and motivation to excel. This is particularly important in today‘s knowledge-intensive organizations, where human capital is critical in creating value and competitive advantages. In 2012, CEO Tim Cook was hit with accusations of failure to provide proper oversight of operations at China‘s Foxconn manufacturing facility where iPad and iPhone products were assembled. After news media exposed wrongdoing, violations in wages, overtime, and TN1-529 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
environmental standards, Cook visited the plant and stated that Apple remained ―committed to the highest standards of social responsibility across our worldwide supply chain.‖ Would Cook be willing to truly enforce these standards if it meant an increase in costs or delay in delivery? What example was he willing to set regarding an ethical orientation? This is yet to be determined, but one thing Cook was willing to do was to investigate moving at least some manufacturing back to the United States. This might affect the perception of Apple‘s commitment to doing the ―right thing‖ relative to the American economy, but could that action erase the perception of wrong-doing in Asia? Note in the case: See a January 2012 report on the Foxconn violations, plus video on working conditions in China at http://www.nytimes.com/2012/01/26/business/ieconomy-apples-ipad-andthe-human-costs-for-workers-in-china.html?_r=1. Although Apple is certainly not the only electronics company doing business with Foxconn and other Asian factories, it‘s perhaps the one with the most to lose if its reputation is damaged (Dell, HP, IBM, Lenovo, Motorola, Nokia, and others routinely use the Asian factories as well). Apple does have a ―supplier code of conduct,‖ which most companies also have, that details standards on labor issues and safety precautions, but the pattern of violations seems to have gone back to at least 2007. Reports from former Apple executives appear to point to ―an unresolved tension within the company: executives want to improve conditions within factories, but that dedication falters when it conflicts with crucial supplier relationships or the fast delivery of new products.‖ Certainly Tim Cook, in his former role as COO, was interested in keeping costs under control and deliveries coming. What would he do to address these issues? Regarding the culture of excellence, Jobs also had gone further at Apple to create a learning organization, one able to continue his ideas and ideals by encouraging all employees to use their intelligence and apply their imagination. Learning organizations are organizations that create a proactive, creative approach to the unknown, characterized by (1) inspiring and motivating people with a mission and purpose, (2) empowering employees at all levels, (3) accumulating and sharing internal knowledge, (4) gathering and integrating external information, and (5) challenging the status quo and enabling creativity. See Exhibit 11.4. Higher-level skills are required of everyone, not just those at the top. The learning environment involves organization-wide commitment to change, an action orientation, and applicable tools and methods. It must be viewed by everyone as a guiding philosophy and not simply as another change program. Jobs said, ―We hire people who want to make the best things in the world.‖ Cook said Apple had ―35,000 employees, all of whom are wicked smart.‖ Giving credit to the people who do the work is the mark of executives who encourage employees to use that intelligence in support of the firm‘s goals. Not in the case: From 2017, here are some opinions about how Cook took Jobs‘ legacy and made some adjustments that continued to keep Apple in line as the most valuable company in the world (a March 2017 market capitalization of over $750 billion): Cook believes in thinking differently, learning and collaborating but writing ―your own rules‖; moving slowly and doing a few things really well, not expanding the product line without careful assessment of the TN1-530 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
integration implications; engaging with big social issues such as security and the environment; paying attention to finances; and using those financial assets to spend on research and development. Cook had even been praised by employees for inspirational leadership and for ―helping his subordinates to become a better human being.‖ Cook appeared to be setting a direction and nurturing a culture of excellence even though the perception was that the pace of innovation had slowed enough that the golden age of Apple was over. (See http://www.cnbc.com/2017/03/21/how-tim-cook-led-apple-to-700-billion-following-techstoughest-act.html and http://research-methodology.net/apple-leadership-and-apple-organizational-structure/. So far Cook had been able to demonstrate that the company‘s values—true passion for innovation, design excellence, and momentum around new product development—would continue. Referencing Chapter 12: Managing Innovation and Fostering Corporate Entrepreneurship Innovation involves using new knowledge to transform organizational processes or create commercially viable products and services using the latest technology, experimentation, creative insights, and information from competitors. However it comes about, innovation occurs when new combinations of ideas and information bring about positive change. In fact, the root of the word innovation is the Latin novus, which means new. Innovation involves introducing or changing to something new. It is a critical part of strategic implementation. For instance: There are ―five disciplines‖ for creating what customers want: 1. Identify important customer needs. 2. Create solutions that fill those needs. 3. Build innovation teams. 4. Empower ―innovation champions‖ who keep the effort on track. 5. Align the entire enterprise around creating value for customers. Apple appeared to be able to do all of the above, especially the last one. (Source: ―Getting to ‗Aha!‘,‖ Business Week. September 4, 2006.) Before proceeding, firms must first define the scope of the innovation efforts, and they must ensure that their innovation efforts are not wasted on projects that are outside the firm‘s domain of interest. Firms must have the means to focus their innovation efforts. A strategic envelope defines the range of acceptable projects. Strategic envelope means a firmspecific view of innovation that defines how a firm can create new knowledge and learn from an innovation initiative even if the project fails. The strategic envelope also gives direction to a firm‘s innovation efforts, which helps separate seeds from weeds and builds internal capabilities. One way to determine which projects to work on is to focus on a common technology. Then, innovation efforts across the firm can aim at developing skills and expertise in a given technical area. Another potential focus is on a market theme. Companies must be clear not only about the kinds of innovation they are looking for but also the expected results. However a firm envisions its innovation goals, it needs to develop a systematic approach to evaluating its results and TN1-531 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
learning from its innovation initiatives. It needs to develop a set of questions to ask itself about its innovation efforts. In defining the innovation scope, a firm should answer several questions: ● How much will the innovation cost? ● How likely is it to actually become commercially viable? ● How much value will it add; that is, what will it be worth if it works? ● What will be learned if it does not pan out? Referring back to Steve Jobs‘ statement about innovation, one of the most important things he wanted Apple to do was to be ―always thinking about new markets‖ but with a discipline that made sure Apple didn‘t ―get on the wrong track or try to do too much.‖ Jobs was very clear about the need for discipline and continuous learning. It‘s likely that these questions were uppermost in his mind, especially about what might be learned if something didn‘t work. The creation of the iPad is rumored to be a result of Jobs‘ memory of the Newton tablet, which didn‘t work out in 1998. Jobs must have thought, ―what could be learned from that failure.‖ The challenges of innovation involve: ● Choosing when and how to continue to innovate ● The scope and pace of future innovation ● Whether or not to collaborate with innovation partners ● Requires resources such as financial, human and social capital ● Requires the leadership team to have adequate vision, dedication and drive Steve Jobs seemed to have been an innovator all his life. As the firm continues to develop new opportunities, CEO Tim Cook also seems to be making sure the above issues are considered before committing the organization‘s resources. In addition, it helps if leadership can embrace the entrepreneurial orientation—autonomy, innovativeness, proactiveness, competitive aggressiveness, and risk taking—necessary to sustain the pace of innovation. A culture of entrepreneurship means a search for venture opportunities permeates every part of the organization. Strategic leaders and the culture generate a strong impetus to innovate, take risks and seek out new venture opportunities. Jobs certainly had all of these characteristics. Was maintaining Steve Jobs‘ legacy essential to Apple‘s success? There is no one right or wrong answer here. Arguments can be made on both sides, but given Jobs‘ original drive, dedication, and discipline, and how this was shared throughout the company, it‘s likely this legacy still drives Apple‘s attention to detail. Certainly Tim Cook shares this same intensity, and has steered Apple to financial success and developed a clear focus on services in addition to innovative hardware. For advanced students, the instructor might want to assign the 1996 article by Lumpkin & Dess, which gives more information about the entrepreneurial orientation.
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Teaching Note
Case 1: Robin Hood
NOTE – ADDITIONAL READING, VIDEO LINKS RE STEVE JOBS: Many believe Steve Jobs was a true visionary leader: See Snell, J. ―Steve Jobs on Mac‘s 20th Anniversary.‖ Exclusive Interview. Macworld. February 1, 2004, http://www.macworld.com/article/1029181/themacturns20jobs.html. Goodell, J. ―Steve Jobs in 1994: The Rolling Stone Interview‖, Rolling Stone, January 17, 2011: http://www.rollingstone.com/culture/news/steve-jobs-in-1994-the-rolling-stone-interview20110117. What did Steve Jobs offer that might be different from other innovative leaders? View a video of Steve Jobs‘ famous commencement speech at Stanford University in 2005: http://www.youtube.com/watch?v=D1R-jKKp3NA. What can we learn about entrepreneurship from this speech? How important, really, was Steve Jobs to Apple? CEO Tim Cook was interviewed at the All Things Digital conference in May 2013 and didn‘t really have much new to say: the iWatch continues to be just a rumor, or perhaps ―a year or two away‖; the existing product line (iPhones, iMacs, iPods) are doing just fine, thank you—as Cook said, ―For us, winning has never been about making the most. Arguably we make the best PC, we don‘t make the most. We make the best music player, we wound up making the most. We make the best tablet, we make the most. We make the best phone, we don‘t make the most phones.‖ Cook also mentioned that it‘s not just market share that counts—usage share is important, too. Citing an IBM study, Cook said that there are twice as many e-commerce transactions on iPads than all Android devices (tablets and smartphones) combined. In addition, Apple TV is doing well (and might be enhanced), and there‘s going to be a new version of the Apple operating system (no new news there). See the story plus a link to the video of Cook‘s interview at http://www.extremetech.com/computing/156890-apple-ceo-tim-cook-discusses-theiwatch-ios-7-itv-and-the-future-of-the-iphone. Another Apple-watcher points out that ―the most obvious contrast between Tim Cook and his predecessor is that Steve Jobs was a visionary. He saw it all in every detail and was just impatiently waiting for everyone else to catch up with him. This may have been infuriating, but it was also inspiring and (for the most part) productive.‖ Reporting on Apple‘s 2nd quarter 2013 earnings call, the analyst felt Tim Cook was business-like and fairly underwhelming: ―Everything he said today was consistent with Apple being a successful and stable company. It‘s probably a much more reasonable place to work under Cook than Jobs. But that‘s not what we expect from Apple and it‘s not what Apple‘s stock has been priced on…[Cook] has pulled back from the aggressive targets, as well, to avoid further mishaps and to assure quality control. There are many factors contributing to the success of Apple‘s products, not all internal to the company, and some [of] the manufacturing variables may be out of Cook‘s control. But he doesn‘t seem to be effectively blocking the gains of Samsung and Google. The problem, I think, is not that Cook is a bad CEO, but that he is not an a******.‖ (This refers to Steve Jobs‘ famous aggression and TN1-533 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
lack of adherence to the ―normal rules of social engagement.‖ Somehow Jobs ―was able to both set really aggressive (and some might say unrealistic) targets and then motivated his people (through any means necessary) to deliver—with excellence. And he did that, without fail, for more than a decade.‖) See the article at http://www.forbes.com/sites/anthonykosner/2013/04/24/two-ways-tim-cook-isnt-like-steve-jobsone-unprintable/. In 2015, Apple CEO Tim Cook was named the ―world‘s greatest leader.‖ Here is more information that provides ―a closer look at Cook‘s transition from a soft-spoken operations manager to a high-profile leader at Apple, and reveals how Cook has managed the pressure that comes with his new role.‖ http://www.macrumors.com/2015/03/26/tim-cook-post-jobs-erafortune/. By 2017, analysts were acknowledging that Apple, and CEO Cook, faced a ―mammoth challenge: finding ways to make the world‘s most valuable company even more valuable when it‘s already so big that conventional growth strategies—extending product lines, moving into new territories—would barely move the needle.‖ Apple might even be the victim of its own success: ―even Jobs may have had a harder time being innovative under the weight of the iPhone, which now brings in 70 percent of Apple‘s revenue.‖ It‘s hard to move beyond the importance of this flagship product and innovate in other ways, especially since the expectation is that Apple will continue to manage the iPhone‘s innovation to keep it prominent in its category. See http://fortune.com/2016/01/07/tim-cook-apple-growth-challenge/ and http://www.npr.org/sections/alltechconsidered/2017/04/10/523035456/has-apple-lost-itsinnovation-mojo. See what you think about Cook‘s passion and commitment to Apple, and his apparent innovation strategy going forward. Is he the leader of an innovative Apple, or is Apple now just a wellperforming company?? 3. OPTIONAL QUESTION: What are key forces in the general and industry environments that affect Apple’s choice of strategy? NOTE: there are no PowerPoint slides to accompany this discussion. Referencing Chapter 2: Analyzing the External Environment of the Firm Organizational leaders must become aware of factors in the overall environment that might affect their ability to create a competitive advantage. So how do managers become environmentally aware? By doing scanning, monitoring, and gathering competitive intelligence, and using these inputs to develop forecasts. This prepares the firm to do more extensive analysis of the forces in the general environment and the industry or competitive environment. Environmental scanning involves surveillance of a firm‘s external environment to predict environmental changes and detect changes already under way. It is a BIG PICTURE viewpoint of the industry/competition, looking for key indicators of emerging trends—what catches your eye? Alerts the firm to critical trends before changes have developed a discernible pattern and before competitors recognize them. TN1-534 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Environmental monitoring is a firm‘s analysis of the external environment that tracks the evolution of environmental trends, sequences of events, or streams of activities. Leaders need to monitor the trends that have the potential to change the competitive landscape—what do you want to track? Firms need to CHOOSE the trends identified via the scanning activity, and regularly monitor or track these specific trends to evaluate the impact of these trends on their strategy process. What factors or trends might be most important to Apple? To assess how the external environment might affect Apple‘s strategy, it‘s necessary to take a look at the factors in the general external environment. Apple must consider the political/legal, economic and global, sociocultural and demographic, and technological forces that might affect the ability of the firm to deliver its products and sustain its business. See which factors in the general environment students might pick that have a significant impact on the consumer electronics/digital entertainment business. Demographic: Certainly the demographics have changed over time. Baby boomers were getting older, while the younger generations were much more ―wired.‖ Global markets were growing increasingly more important, especially in Asia. Sociocultural: Customers were growing increasingly sophisticated. They knew what they wanted and didn‘t want to pay a lot for it, but they could be seduced by a ―sexy‖ design. Increasing globalization meant borders didn‘t matter so much anymore—American products did not have any particular edge. As long as products were high performance and high service, the customer didn‘t know or care where they came from. Technological: Technology, especially the growth of the Internet, had created new opportunities for delivery of content and for promotion. Companies like Intel and Samsung were making many advances in memory and display technology. The pace and direction of change required considerable monitoring and possibly risk taking. Political-Legal: Political-legal issues, especially the issues around copyrights, monitoring of content distribution (digital rights management), environmental waste, and the possibility of global trade monopolies. U.S. regulators from Federal Trade Commission, Securities and Exchange Commission continued scrutiny of trade and stockholder issues. Intellectual property disputes were more common (i.e. Samsung). Issues regarding outsourcing to Asia and concern over labor abuses there were more often in the news, requiring firms to more closely audit operations. It‘s also necessary to assess the segments of the external competitive environment that include competitors, customers, and suppliers, substitutes, and new entrants. Porter‘s five forces model allows strategists to anticipate where the industry might be most vulnerable. Help students apply Porter‘s five forces of competition to the consumer electronics industry by drawing a diagram on the board similar to the following, and having students fill in the details.
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Teaching Note
Suggested: many rivals compete for market share. Ongoing consolidation as quest for lower prices pushes down margins. High technology obsolescence puts a premium on innovation.
Suppliers’ Power Med-Low
Case 1: Robin Hood
Substitutes Threat Med
Rivalry
Buyers’ Power
High
Suggested: depending on the commodity, lots of competition among suppliers keeps supply up and prices down - except for memory Suggested: most components are readily available. Assembly and distribution is easy. Price sensitive customers always looking for a deal and local service means an entrepreneur could easily carve out a niche in a specific product class.
Suggested: substitutes for the Mac computer include smart phones, Windows based computers. Substitutes for media players include mobile phones. Substitutes for iPhone include traditional phones.
Med-High
Threat of New Entrants High-Med
Suggested: corporate computing customers demand customization and price breaks. Switching costs are minimal, loyalty to a given brand cannot be assumed. End consumer has little economic power.
Based on the external environmental factor analysis, the consumer electronics business has many competitors trying to carve out a piece of the ―profit‖ pie. However, Apple is the only one with a well-diversified product line—able to compete in many product categories. NOTE — ADDITIONAL WEB LINKS TO FINANCIAL DATA: Do a search for Apple Inc.‘s current financial performance. https://finance.yahoo.com/quote/AAPL?p=AAPL. Apple has a very large market cap. To whom should Apple be compared? Originally, as Apple Computer, certainly Apple competed directly with Hewlett-Packard (HPQ) and Dell (DELL). Should Apple now be included in the diversified telecommunication industry along with BlackBerry Limited? Or compared with the diversified businesses of Korean-based Samsung Electronics (LSE: BC94.L) and LG Electronics (KRX: 066570.KS)? Or businesses like Google (GOOG) and Microsoft (MSFT)? TN1-536 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
4. OPTIONAL QUESTION: What internal resources and assets does Apple have that may give it a competitive advantage? How does Apple use those assets to craft strategy? Referencing Chapter 3: Analyzing the Internal Environment of the Firm When one firm outperforms others by a wide margin over a long period of time, it‘s important to figure out how this could be. The answer may lie in how that firm arranges its activities and creates unique bundles of resources that allow it to sustain a competitive advantage. Students should assess the relationships between the elements in Apple‘s value chain. Remember, value chain analysis is a strategic analysis of an organization that uses value-creating activities. Value is the amount that buyers are willing to pay for what a firm provides them and is measured by total revenue, a reflection of the price a firm‘s product commands, and the quantity it can sell. A firm is profitable when the value it receives exceeds the total costs involved in creating its product or service. Creating value for buyers that exceeds the costs of production (i.e. margin) is a key concept used in analyzing a firm‘s competitive position. Every activity should add value. Take a look at Exhibit 3.1 to see the value chain activities. Based on the relationships between these elements, Apple can make a choice of how to proceed to craft a competitive advantage. Apple‘s value chain is captured visually in the diagram below: Value chain activity Primary: Inbound logistics (distribution facilities, material control systems, warehouse layouts) Operations (efficient work flow design, quality control systems) Outbound logistics (consolidation of goods, efficient scheduling, finished goods processing) Marketing and Sales (motivated sales people, innovative advertising and promotion, effective pricing, proper ID of customer segments and distribution channels) Service (ability to solicit customer feedback and respond)
How does Apple create value for the customer? What challenges does Apple have in its value chain? Apple supplies its retail stores successfully. Has traditionally been a strength. Tim Cook‘s area of expertise. Distribution is effective, except for certain product availability at times.
Multichannel distribution through Apple retail, thirdparty resellers, Internet, direct mail, word-of-mouth. Sales supported through creative advertising. Attention to design elements means it‘s easy to recognize an Apple product. This is a major strength. Many blogs and Apple-related websites provide lots of commentary and feedback. Retail ―experts‖—Genius Bar—provide custom support.
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Teaching Note Secondary (or support): Procurement (win-win relationships with suppliers, reduced dependence on single supplier) Technology development (state of the art hardware and software, innovative culture and qualified personnel) Human resource management (effective recruitment, incentive and retention mechanisms) General Administration (effective planning systems to establish goals and strategies, access to capital, effective top management communication, relationships with diverse stakeholders)
Case 1: Robin Hood
Relying on multiple international partners for sourcing of some components allows for hedging against potential shortages. Negotiation and partnership with others, such as Samsung, creates barrier for competitors. Absolutely one of Apple‘s great strengths.
After major shake-ups in the 1990‘s and 2013, and in spite of Jobs‘ death, current employees and management appear focused and effective under CEO Cook. Cook seems to excel at this. Witness current financials.
Primary Activities In terms of primary activities, the key to Apple‘s ability to differentiate itself in the market resided in its operations and marketing. Apple placed a lot of attention on every aspect of developing and producing its products. From the choice of supplier to the decisions about multichannel distribution there were many aspects of its operations and marketing that were tied to its unique advantage. The Apple brand signaled high quality and reliability.
Support Activities With regard to support activities, a competitive advantage is achieved by developing a strong general administration that is built around visionary leadership and a culture that pushes for technological innovation. Especially under Steve Jobs, Apple continually pushed the envelope in technology development. With each product launch, Apple had gone farther than it had before. In addition, see the concept of the resource-based view of the firm, and the three key types of resources: tangible resources, intangible resources, and organizational capabilities. A firm‘s strengths and capabilities—no matter how unique or impressive—do NOT necessarily lead to a competitive advantage. The resource-based view of the firm takes the perspective that firms‘ competitive advantages are due to their endowment of strategic resources that are valuable, rare, costly to imitate, and costly to substitute. Without these unique resources, the firm can only attain competitive parity. RBV goes beyond a SWOT analysis to integrate internal and external TN1-538 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
perspectives in a broader competitive context. RBV can reveal how core competencies embedded in a firm can help it exploit new product and market opportunities. An important issue to focus on here is the importance of intangible resources like innovation and reputation. Especially in mature brands, sustaining reputation is essential. Look at resources that are controlled by Apple that might enable it to develop and implement value-creating strategies. Based on their reading of the case, students might identify those resources to include: Tangible Resources: Financial: Financially sound. Cash reserves can fund more R&D or acquisitions. Physical: Historically adequate. New campus is an attention-grabber and possibly focus for inspiration. Technological: Biggest asset here is Apple‘s human resource—capable, motivated and highly technologically creative employees insure Apple will keep up with technology innovation. Organizational: Jobs‘ strategy of focusing on the digital ―lifestyle‖ opened up what may have become functional ―silos‖ in other companies. Intangible Resources: Human: Focus on innovation continually revitalizes the workforce. Innovation and creativity: One of Apple‘s major strengths. Reputation: This is one of Apple‘s most significant strengths. The Apple brand is known worldwide. Determining whether the internal resources are valuable, rare, difficult to imitate, or difficult to substitute (VRIN) can help a firm sustain a competitive advantage. See Exhibit 3.6. Applying the VRIN concept, Apple‘s internal resources (especially the intangible ones) are both valuable and rare, but most importantly, they are currently inimitable: because of Steve Jobs‘ initial leadership, there is path dependency; there‘s also causal ambiguity and social complexity – Apple keeps its secrets! It‘s also hard to come up with substitutes for intellectual and human capital, unless someone could steal away Apple‘s employees. NOTE – WEB LINKS: Responding to the marketing & sales value chain activity, as an indication of how Apple creates value with this link in the chain, there‘s substantial evidence that Apple fans can become true evangelists for the brand: See ―Brand Loyalty‖ in ―Apple Inc.‖ at Wikipedia, http://en.wikipedia.org/wiki/Apple_Inc. Referencing Chapter 4: Recognizing a Firm’s Intellectual Assets TN1-539 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
See the concepts of intellectual capital, human capital, and social capital, all of which are intangible assets that a company such as Apple needs to have in order to compete successfully. Intellectual capital is a measure of the value of a firm‘s intangible assets, its reputation, employee loyalty and commitment, customer relationships, company values, brand names, and the experience and skills of employees. How do companies create value in a knowledge– intensive economy? The general answer is to attract and leverage human capital (intangible assets) effectively through mechanisms that create products and services of value over time. Human capital involves the individual capabilities, knowledge, skills, and experience of the company‘s employees and managers. This knowledge is relevant to the task at hand, as is the capacity to add to this reservoir of knowledge, skills, and experience through learning. Human capital is the foundation of intellectual capital. Intellectual capital is developed through attracting, developing, and retaining human capital. See Chapter 4, Exhibit 4.2. Success in retaining human capital could also be attributed to the nurturing of the ―social ties‖ or social capital. Social capital is a function of the network of relationships that individuals have throughout the organization and beyond. Relationships are critical in sharing and leveraging knowledge and in acquiring resources. Social capital can extend beyond the organizational boundaries to include relationships between the firm and its suppliers, customers, and alliance partners. If employees are working effectively in teams, across business divisions, and sharing their knowledge and learning from each other, not only will they be more likely to add value to the firm, but they also will be less likely to leave the organization. Dynamic capabilities involve a firm‘s capacity to build and protect a competitive advantage, which rests on knowledge, assets, competencies, complementary assets, and technologies. Dynamic capabilities include the ability to sense and seize new opportunities, generate new knowledge, and reconfigure existing assets and capabilities. These capabilities are related to the entrepreneurial side of the firm and are built within a firm through its environmental and technological sensing apparatus, its choices of organizational form, and its collective ability to strategize. Dynamic capabilities are about the ability of an organization to challenge the conventional wisdom within its industry and market, learn and innovate, adapt to the changing world, and continuously adopt new ways to serve the evolving needs of the market. Intellectual assets or intangible resources are critical to organizational success. The growing importance of knowledge, coupled with the move by labor markets to reward knowledge work, tells us that investing in a company is, in essence, buying a set of talents, capabilities, skills, and ideas—intellectual capital—not physical and financial resources. Here are some questions organizations should ask: Human capital: Does the organization effectively attract, develop, and retain talent? Does the organization value diversity? Social capital: Does the organization have positive personal and professional relationships among employees and alliance partners? Technology: Does the organization effectively use technology to transfer best practices across the organization, codify knowledge, and develop dynamic capabilities for competitive advantage? TN1-540 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
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Teaching Note
Case 1: Robin Hood
Presence of Organizational Capabilities: Specific Competencies or Skills: Jobs‘ initial focus on the design professional, and education consumer seems to have gotten Apple its initial loyal customer base. Apple‘s additional skills include speed to market, brilliant design, creative marketing, and the ability to watch margins. This last highlights the importance of good operational skills, evident in ex-COO, now CEO Tim Cook. Capacity to combine resources: How to combine the above competencies to continue to revitalize and grow the brand depends on Apple‘s ability to focus on performance and innovation, and leverage its intangible assets. Referencing Chapter 7: International Strategy International expansion is a viable diversification strategy—it provides a way to further leverage assets and enhance opportunities for profitability—however, before pursuing this, a firm needs to determine whether an industry in a given country may be more (or less) successful than the same industry in another country. Very likely there will be country-specific differences. When choosing a country to expand into, firms must assess the degree of consumer demand, the degree to which resources such as skilled labor and other supplier or supporting infrastructure are developed and available, the speed with which such resources can be deployed, the extent of political and economic risk and corruption, the access to qualified management. There are two opposing forces that firms face when entering international markets: cost reduction, and adaptation to local markets. Therefore, there are four basic strategies firms can use: international, global, multidomestic, and transnational. See Chapter 7, Exhibit 7.4. Apple followed a global strategy. Advantages of a global strategy included a unified approach that allowed users to purchase items that worked in multiple markets (with some changes due to processing modes, i.e. cell phone signals and voltage differences). Having a unified product line also minimized company costs, such as in maintenance and development. Disadvantages might include Apple‘s inability to meet specific local business needs (i.e. the Microsoft or other software computing requirements). Having a single platform provided standardization across all markets, which may or may not have been effective in certain markets where customers had specific expectations. Entry modes available for international expansion differ based on the extent of investment and risk, and the degree of ownership and control. See Chapter 7, Exhibit 7.9. In order from low to high, they include: ● Exporting ● Licensing ● Franchising ● Strategic Alliances ● Joint Venture ● Wholly Owned Subsidiary TN1-542 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Apple wanted to grow cell phone market share in China, India, and Russia, but needed incountry partners to subsidize the iPhone via the existing wireless networks. Not in the case: Apple lost out to Nokia in China, presumably because CEO Tim Cook wouldn‘t offer better financial terms to the biggest cell phone service provider, China Mobile. The Asia-Pacific environment, especially, is still volatile and the differences between this region‘s electronics culture and the rest of Apple‘s customer experience seem to be diverging, especially among younger users who no longer see Apple‘s products as the ―coolest.‖ These younger consumers are increasingly moving to Android devices. In addition, there‘s pressure for Apple to create a lower priced phone specifically for this Asian market—something Tim Cook has so far refused to do. Do you think Apple will be able to gain a more significant share of the Asian market, especially in cell phones? What international strategy should Apple pursue in this market? (NOTE: See the eBay Case 14 for another viewpoint of China strategy.) Referencing Chapter 8: Entrepreneurial Strategy and Competitive Dynamics Entrepreneurship is another way to grow a company. It involves the creation of new value by an existing organization or new venture that involves the assumption of risk. For an entrepreneurial venture to create new value, three factors must be present—an entrepreneurial opportunity, the resources to pursue the opportunity, and an entrepreneur or entrepreneurial team willing and able to undertake the opportunity. Entrepreneurs must go through a process of identifying, selecting, and developing potential opportunities. See Exhibit 8.1 and the opportunity analysis framework: the relationship between an entrepreneur, the firm‘s resources, and the opportunities available in the firm‘s environment. Entrepreneurs need to understand the concept of opportunity recognition: the process of discovering and evaluating changes in the business environment, such as a new technology, socio cultural trends, or shifts in consumer demand that can be exploited. Changes in the external environment can lead to new business creation, but the discovery of these new ideas is not enough. They then need to be evaluated to find out if they‘re strong enough to become new ventures. Good entrepreneurial opportunities are those that are attractive to the marketplace (there must be demand for the new product or service), achievable (it must be practical and physically possible to do), durable (the window of opportunity must be open long enough for it to have a chance for success), and value creating (it must be profitable—the benefits must surpass the cost of development by a significant margin). Resources are an essential component of a successful entrepreneurial launch. The most important resource is usually money, but human resources, strong and skilled management, is also an essential asset. Social capital, or entrepreneurs who have extensive social networks or wellconnected key contacts, allows the new venture to gain exposure and build legitimacy faster. Strategic alliances represent a type of social capital that can be especially important to young and small firms. Launching a competitive venture requires a special kind of leadership involving courage, belief in one‘s convictions, and having the energy to work hard. Three characteristics of entrepreneurial leaders are: TN1-543 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
1. Vision 2. Dedication and drive 3. Commitment to excellence To achieve excellence, venture founders must understand the customer, provide quality products and services, pay attention to details, continuously learn, and surround themselves with good people. With Steve Jobs as the founding entrepreneur, the competitive advantage offered by the resources he acquired and developed, and the opportunities present in the external environment, could Apple continue to exploit those factors to achieve a sustainable competitive advantage? Are there further opportunities Apple might be willing to exploit? This will depend on what factors might impact Tim Cook‘s implementation of strategy. References Harrigan, K.R. 1985, ―Vertical Integration and Corporate Strategy,‖ The Academy of Management Journal, 28(2): 397–425. Lumpkin, G.T. & Dess, G.G. 1996. ―Clarifying the Entrepreneurial Orientation Construct and Linking It to Performance.‖ The Academy of Management Review, 21(1): 135–172. Mintzberg, H. 1990. ―The Design School: Reconsidering the Basic Premise of Strategic Management.‖ Strategic Management Journal, 11: 171–195. Porter, M.E. 1996. ―What Is Strategy?,‖ Harvard Business Review, 74(6): 61–78. Teaching Note Case 33 — JetBlue Airways Corporation: Getting Over the ―Blues‖? Case Objectives 1. To investigate the challenges of choosing an appropriate competitive strategy. 2. To examine how external and internal forces affect competitive strategy. See the table below to determine where to use this case: NOTE: There are both PRIMARY and SECONDARY chapters that can be used for this case. The Teaching Note gives guidance for the PRIMARY use chapters, and provides suggestions if the instructor wants to use the case to illustrate concepts from the optional SECONDARY chapters. CASE OBJECTIVES TABLE Chapter Use Key Concepts PRIMARY CONCEPT 5: Business-Level
Competitive strategy; generic strategies
Additional Reading and/or Exercises NOTE optional reading, Porter, 1996, ―What Is Strategy?‖ TN1-544
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Teaching Note Strategy SECONDARY CONCEPTS 2: External Environment 3: Internal Analysis 4: Intellectual Assets 6: CorporateLevel Strategy
Case 1: Robin Hood
Industry competition five forces; general environmental factors Value-chain analysis; resource-based view of the firm; VRIN Intellectual and human capital Diversification; synergy; core competencies; acquisition
NOTE web links, stock price, commentary
NOTE embedded video, Neeleman, Barger interviews
Case Synopsis In March 2019, JetBlue‘s reputation was challenged by a lawsuit by two of its flight attendants claiming that they were raped by some JetBlue pilots and that the airline did not take sufficient corrective actions as an organizational response. This crisis just added to JetBlue‘s other operating issues. JetBlue had been facing challenges that included rising fuel prices, troubling technical disruptions, and declining quality of the flying experience. Prior to that, for several years in a row, JetBlue had enjoyed low fuel prices that had helped increase the company‘s earnings, but the company experienced technical issues that caused booking problems and resulted in delays, as well as bad publicity. In order to cope with the likelihood of a rise in future fuel prices, JetBlue undertook massive cost reductions by investing in cabin restyling—for instance, adding more seats to JetBlue‘s A320 airplanes. However, the shrinking legroom that accompanied the cabin restyling was despised by passengers. This posed a problem for an airline that had once offered customers a captivating (as opposed to a captive) flying experience. In February 2015, Robin Hayes took charge of the company as its third chief executive. Hayes was the executive vice president of British Airways for the Americas before joining JetBlue in August 2008. Having worked for about 25 years and having extensive experience in the airline industry, Hayes was considered an optimal choice to become the third chief executive of JetBlue. To meet the challenges, CEO Robin Hayes orchestrated various initiatives, including wider fare options, enhanced Mint services, cabin restyling, new lines of JetBlue credit cards, and partnerships with other airlines. In spite of these efforts, JetBlue faced substantial headwinds, and its operating margins declined precipitously. In promoting Robin Hayes to be the airline‘s new CEO, JetBlue‘s board signaled its readiness to focus on investor-friendly changes. With news of his selection, the share price immediately soared by 5 percent. But JetBlue loyalists who loved the company for its customers-first policies TN1-545 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
were getting more and more uncomfortable. Would JetBlue soar into clearer skies, or would it sink into the ―blues‖ again? JetBlue had been established with the goal of being a leading low-fare passenger airline that offered customers a differentiated product and high-quality customer service on point-to-point routes. JetBlue had a geographically diversified flight schedule that included both short-haul and long-haul routes. The mission of the company, according to founder David Neeleman, was ―to bring humanity back to air travel.‖ To stimulate demand, the airline focused on underserved markets and large metropolitan areas that had high average fares. JetBlue was in a niche positioned between the ultra-low-cost and full-service network air carriers. CEO Hayes said that the airline was committed to delivering ―the best travel experience for our customers. . . . JetBlue‘s core mission to Inspire Humanity and its differentiated model of serving underserved customers remain unchanged,‖ but the substantial challenge regarding a tradeoff between travel experience and profit margins remained. Would JetBlue be able to hold onto its core mission and still be able to make its stakeholders happy? Investors wondered if JetBlue really had a strong and clear strategic position and coherent business model to support it. Teaching Plan The JetBlue case is a good example of how a firm can struggle to formulate and sustain a competitive strategy. It also provides an opportunity to discuss how the external environment and internal resources either support or challenge a firm‘s choice of strategy—that strategic formulation should not be done without a full strategic analysis. Therefore, this case can be positioned in the early part of the course, just after introduction and discussion of the components of strategic analysis. The instructor can also position this case discussion with a sole PRIMARY focus on Chapter 5: Business-Level Strategy, contrasting JetBlue to the Emirates and Southwest cases—in discussing choice of competitive strategy, students are encouraged to choose between low-cost leadership and differentiation, but in the airline industry there is really no choice but competition based on controlling costs. Although students may try to explain how service amenities and features such as leather seats can create a differentiated advantage, customers rarely are willing to pay a premium for these things. This means the differences between carriers‘ successes often revolve around operational choices and strategic implementation. Uncovering those, sometimes subtle, differences between airlines can be a challenging yet fruitful discussion. For advanced students, the instructor may wish to assign Michael Porter‘s 1996 article ―What Is Strategy?‖ (Harvard Business Review, November–December, pp. 60–79) as a companion reading to the case. Southwest Airlines is used as an example in this article of how tight linkages across its value chain activities give it a valuable, rare, inimitable, and non-substitutable competitive advantage. By assigning this article, the instructor can also position the JetBlue case discussion as a direct contrast to what is known about Southwest Airlines—that Southwest pays careful attention to operational components that are critical to the effective implementation of a competitive TN1-546 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
strategy. The customer service differentiation advantage touted by JetBlue may be misleading. In comparison to Southwest, for instance, many Southwest customers (and JetBlue customers), and maybe some students, are loyal fans of these airlines. It is believed that loyalty is hinged not so much because of the airlines‘ low-costs, but because of their customer service experiences. It might be interesting to students that Southwest does NOT base its competitive strategy on creating this unique customer service culture. The point is not to differentiate itself from its competitors based on how the customer values the experience, but on being able to DELIVER that experience as cheaply as possible—that‘s how Southwest has been able to achieve continuous profitability! Summary of Discussion Questions Here is a list of the suggested discussion questions. You can decide which questions to assign, and also which additional readings or exercises to include to augment each discussion. Refer back to the Case Objectives Table at the beginning of this Teaching Note to identify any additional readings and/or exercises so they can be assigned in advance. 1. PRIMARY QUESTION: What are the components of JetBlue‘s competitive advantage, and what are the merits and demerits of these components? 2. SECONDARY QUESTIONS: What are key forces in the general and industry environments that affect JetBlue‘s choice of strategy? 3. What internal resources and assets does JetBlue have that may give it a competitive advantage? 4. Is JetBlue‘s competitive advantage sustainable?
TN1-547 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Discussion Questions and Responses 1. What are the components of JetBlue’s competitive advantage, and what are the merits and demerits of these components? Referencing Chapter 5: Business-Level Strategy How firms compete with each other and how they attain and sustain competitive advantages go to the heart of strategic management. In short, the key issue becomes: why do some firms outperform others and enjoy such advantages over time? The viability of a firm‘s success is driven by both the internal operations of the firm and the desires and preferences of the market. Firms that succeed have the appropriate resources and cost structure to meet the needs of the industry and general environment. They also have a strategy… A business-level strategy is a strategy designed for a firm or a division of the firm that competes within a single business. Within the firm‘s industry environment generic strategies include basic types of business-level strategies based on breadth of target market (industry wide versus narrow market segment) and type of competitive advantage (low-cost versus uniqueness). Here are the three generic strategies that are used to overcome industry forces and achieve a competitive advantage: 67. Overall cost leadership Low-cost-position relative to a firm‘s peers Manage relationships throughout the entire value chain 68. Differentiation Create products and/or services that are unique and valued Non-price attributes for which customers will pay a premium 69. Focus strategy Narrow product lines, buyer segments, or targeted geographic markets Attain advantages either through differentiation or cost leadership Generic strategies are plotted on two dimensions: competitive advantage and strategic target. The overall cost leadership and differentiation strategies strive to attain advantages industry wide, while focusers have a narrow target market in mind. Both casual observation and research supports the notion that firms that identify with one or more of the forms of competitive advantage outperform those that do not. In order to achieve a sustainable competitive advantage, JetBlue had to assess its ability to contend with other airlines. The two bases of JetBlue‘s competitive advantage were cost leadership and differentiation. Therefore, JetBlue chose a combined strategy. JetBlue achieved cost leadership by attaining efficient operations. New planes minimized maintenance and fuel costs, larger planes ensured more revenue per flight, longer hauls on an TN1-548 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
average as compared to other point-to-point services keep planes longer in air. No meals served helped quicker turnarounds and reduce costs. However, JetBlue needed to be careful. Firms pursuing low-cost strategy generally get trapped in focusing on too few of value chain activities, or lack parity on differentiation with competitors. The low-cost advantage also gets eroded when the competitive pricing information becomes available more easily. The strategy can be imitated too easily. The other component of JetBlue‘s strategy is differentiation. This is based on creating differences in the firm‘s product or service offering by creating something that is perceived industry wide as unique and valued by customers. Firms may differentiate themselves in both primary and support activities (see the value chain discussion to follow). Firms achieve and sustain differentiation advantages and attain above-average performance when their price premiums exceed the extra costs incurred in being unique. In JetBlue‘s case, differentiation originally was achieved through a strong brand image, the various features including entertainment through LiveTV and comfort due to more legroom. The problem with differentiation strategy is that differentiating features could be easily imitated. Firms may also get entrapped in too much differentiation, which customers may not value. Firms employing combination strategies should have a much stronger strategy to outperform rivals. They can achieve superior performance by successfully integrating low-cost operations with differentiation, thereby avoiding the pitfalls of either of the strategies. JetBlue employed a combination of these two strategies that, if successfully implemented, could give it a distinctive competitive advantage. It combined low-cost services with a differentiated offering. The company invested in technology for efficient operations right from its inception and, therefore, was able to provide high quality services at low-cost. Going forward, the extent to which JetBlue can maintain this integration of low-cost and differentiation will determine whether its competitive advantage is sustainable. The mutually reinforcing components of JetBlue‘s strategy are critical to assess. Any change in one of the components has an impact on all interconnected activities. Currently, the key activity appears to be JetBlue‘s degree of differentiated service. The original differentiators JetBlue offered were friendly, customer service-oriented employees, new aircraft, roomier leather seats with 36 channels of free LiveTV, 100 channels of free XM satellite radio, movie channel offerings from FOXInflight, and more legroom (one row of seats was removed to create additional space). These are all easy for other airlines to imitate. JetBlue had prided itself on being able to deliver these differentiated service elements, while also paying attention to costs. In order to succeed, however, JetBlue needed to achieve competitive parity on both fronts. As explained in the chapter, competitive parity means a firm‘s achievement of similarity or being ―on par‖ with competitors with respect to low-cost, differentiation, or other strategic product characteristics. Competitive parity on the basis of differentiation permits the cost leader to translate cost advantages directly into higher profits than competitors. Thus, the cost leader earns above-average returns. A business that strives for a low-cost advantage must attain an absolute TN1-549 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
cost advantage relative to its rivals. This is typically accomplished by offering a no-frills product or service to a broad target market using standardization to derive the greatest benefits from economies of scale and experience. However, such a strategy may fail if the firm is unable to attain parity on important dimensions of differentiation such as quick responses to customer requests for services or design changes. On the other hand, for those firms that choose differentiation, parity on cost requires that differentiators must integrate operations at multiple points along the value chain, reducing costs in all areas that do not affect differentiation. Instructors can ask students if it‘s possible to compete on differentiation in the airline industry. In discussing choice of competitive strategy, students are encouraged to choose between low-cost leadership and differentiation, but in the airline industry there is really no choice but competition based on controlling costs. Although students may try to explain how service amenities and features such as leather seats can create a differentiated advantage, customers rarely are willing to pay a premium for these things. It‘s not enough just to be different. A differentiation strategy must provide unique bundles of products and/or services that customers value highly. Firms may also strive for quality of service that is higher than customers desire, thus they become vulnerable to competitors who provide an appropriate level of quality at a lower price. This means the differences between airline carriers‘ success often revolve around operational choices and strategic implementation. Although it might seem reasonable to pick one of the generic strategies and proceed, a firm‘s competitive strategy is also dependent on both the external forces it faces and the internal resources available to it. JetBlue needs to do an analysis of both the general and industry environment to see where opportunities may exist and where challenges might lie. In the airline industry, as already mentioned, there are several challenges inherent in the industry structure that JetBlue must contend with. In addition, competitive strategy is linked to the value chain, and supported by intangible assets. JetBlue has some operational strengths in its activities, and possible social capital through its alliance relationships. These activities and assets might allow JetBlue to offer services that are unique and valuable to customers, but the costs to deliver these services must be carefully considered. 2. What are key forces in the general and industry environments that affect JetBlue’s choice of strategy? NOTE: No PowerPoint slides accompany this discussion. Referencing Chapter 2: Analyzing the External Environment of the Firm Organizational leaders must become aware of factors in the overall environment that might affect their ability to create a competitive advantage. So how do managers become environmentally aware? By doing scanning, monitoring, and gathering competitive intelligence, and using these inputs to develop forecasts. This prepares the firm to do more extensive analysis of the forces in the general environment and the industry or competitive environment. Environmental scanning involves surveillance of a firm‘s external environment to predict environmental changes and detect changes already under way. It is a BIG PICTURE viewpoint of the industry/competition, looking for key indicators of emerging trends—what catches your TN1-550 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
eye? Alerts the firm to critical trends before changes have developed a discernible pattern and before competitors recognize them. Environmental monitoring is a firm‘s analysis of the external environment that tracks the evolution of environmental trends, sequences of events, or streams of activities. Leaders need to monitor the trends that have the potential to change the competitive landscape—what do you want to track? Firms need to CHOOSE the trends identified via the scanning activity, and regularly monitor or track these specific trends to evaluate the impact of these trends on their strategy process What factors or trends might be most important to JetBlue? To assess how the external environment might affect JetBlue‘s strategy, it‘s necessary to take a look at the factors in the general external environment. JetBlue must consider the political/legal, economic and global, sociocultural and demographic, and technological forces that might affect the ability of the firm to deliver its service and sustain its business. Political-Legal: Under the legal factors, the deregulation of the airline industry in 1978 provided an opportunity to several players to enter the market. It allowed new market segments such as that of the low cost, point-to-point services to emerge. It thus changed the industry landscape. Also, the bankruptcy laws had a significant role to play as they allowed even non-profitable operators to continue in the industry when they were protected. One major change that affected the low-cost carriers such as Southwest was the expiration of the Wright Amendment, which now allowed airlines operating out of Dallas Love Field to offer unrestricted non-stop flights to destinations in Texas and elsewhere. Economic: The airline industry is susceptible to upturns and downturns with the trends in the economy. A growing economy and booming business mean greater demand for air travel, and a slow-down in the economy means reduced demand, consequent unutilized capacity and intensified competition. The availability of venture capital, and other capital sources have an impact on the number of new entrants into the industry. Interest rate fluctuations have an impact on the cost of operations for companies that have high levels of debt. Furthermore, wars with other nations and increases in fuel prices strongly impact the air industry. Sociocultural: The airline industry is highly susceptible to the extreme events such as the September 11, 2001 attacks on the World Trade Center, and publicity surrounding any air accidents. These create fears in the minds of customers toward air travel and have a severe adverse impact on the industry. It also means increased security concerns, delayed flights, increased turnaround times—all these have an impact on customer perception of value, and therefore affect airline profitability. Technological: The emergence of Internet technology and other breakthroughs have had an impact on the way the airlines conduct their businesses. For example, the Internet reduced the dependence on ticketing agents. Most of the low-fare airlines sell tickets through their websites. Customer service is being extended by personnel working from their homes. All these have made it possible to reduce the costs of operations making it favorable for the low-cost airlines to TN1-551 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
operate. Also, with the Internet, customers now search and compare prices of air tickets much more easily than earlier and this accentuates the price competition. It‘s also necessary to assess the segments of the external competitive environment that include competitors, customers, and suppliers, substitutes and new entrants. Porter‘s five-forces model allows strategists to anticipate where the industry might be most vulnerable. Help students apply Porter‘s five forces of competition to the airline industry by drawing a diagram on the board similar to the following, and having students fill in the details: Suggested: There are numerous competitors; low switching costs for consumers.
Suppliers’ Power High
Substitutes Threat High
Rivalry Very High
Buyers’ Power Low
Suggested: There are only two major suppliers: Boeing and Airbus.
Suggested: There are low barriers to entry, especially for the lowcost airlines, with low switching costs, therefore a medium threat of new entrants into the industry.
Suggested: The threat of substitutes such as car, limo, bus, train, is high, especially when distances traveled are short.
Threat of New Entrants
Suggested: Buyers are not concentrated; there is no threat of backward integration.
Med-Low
Based on the external environmental factor analysis, the airline industry has many competitors trying to carve out a piece of the ―profit‖ pie. Here are some details: Threat of new entrants: The extent of threat due to new entrants is determined by how high or low are the barriers to entry into an industry. In the airline industry, deregulation and availability of alternate sources of funding reduced the barriers to entry. Economies of scale. This did not work out well for the players in the airline industry. The huband-spoke model developed by the major players, led to more of diseconomies of scale than economies. However, the large investments already made by the major airlines, and their established networks do pose a significant threat to new entrants unless they counter it with highly efficient operations. TN1-552 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Product differentiation. Airlines try to create strong brand identification and customer loyalty by using the frequent flyer programs. When there is strong brand identification, it forces the new entrants to spend heavily on weaning away customers from the existing players, thus discouraging their entry. However, in the airline industry the brand identification has not proved to be so strong as to prevent people from switching to other airlines. Some low-cost players are trying to achieve some product differentiation; however, these are not very strong barriers to entry as the other entrants are imitating them rather easily. Switching costs. There are virtually no switching costs for customers. The frequent flier programs attempt to create switching costs. However, when the customers are presented with low-cost options, there is nothing strong enough that could prevent them from switching to other airlines. Thus, the airline industry faces a high threat of new entrants particularly in the low-cost segment. The barriers can be heightened only when they have very closely tied and ultra-efficient operating routines that competitors find it difficult to copy or imitate. Bargaining power of suppliers is high when there are few suppliers in the industry, there are no easy substitutes to supplier‘s products, when the buyer industry is not an important customer of the supplier group, the supplier‘s product is an important input to the buyer‘s business, the supplier products are differentiated or built up switching costs, or the supplier group poses a credible threat of forward integration. There are only two major suppliers, i.e., Boeing and Airbus, to the industry and when the airline trains its pilots on either Boeing or Airbus, switching costs get built in terms of pilots‘ training in the event the airline decides to change the supplier. Thus, the supplier does enjoy considerable bargaining power. However, there is no credible threat of forward integration by the suppliers such as Boeing or Airbus. Bargaining power of buyers is low as the buyers are not concentrated. While the buyer does not have any switching costs, and there are several choices available, they still lack concentration. Internet impacted in increasing the buyer bargaining power because the buyers can compare the prices more easily and in view of no switching costs, they could choose whichever airline offers a low price. Thus, the buyers may be able to influence the airlines to reduce their prices over time. There is no threat of backward integration from the buyers. Threat from substitutes is high when the distances traveled are shorter. In such cases, the customer can choose to travel by land, by car/limo/bus/rail as they might prove to be cheaper alternatives. However, for longer distances and for more hurried customers, the airlines do not face significant threat from substitute modes of travel. The intensity of rivalry among existing competitors in the airline industry is very high. There are numerous competitors, and in times of low or moderate industry growth, the competition gets fiercer as each one tries to nab customers from the other in order to keep their capacity utilizations at acceptable levels. The exit barriers are high because it is difficult to dispose of grounded planes, as there would be few buyers. Also, due to the bankruptcy laws, even the lossmaking companies might still be around for a long time thus intensifying competition. So, it is easier to get into the industry but might be difficult to get out. The only solution for many TN1-553 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
companies is to merge, which is why there has been so much consolidation in this industry over the years. In addition, as described in the case, there were traditionally three segments to the U.S. airline industry: major airlines such as the legacy carriers American, United, and Delta, regional airlines such as Sky West (based in Utah), and low-fare carriers such as Southwest, Virgin America, and Allegiant Air. Although JetBlue is identified as a low-fare airline, the external environmental shifts in recent years meant the legacy carriers could provide innovative offerings similar to those of low-cost airlines while still maintaining their alliances with regional carriers. The gap between low-cost airlines and the traditional network-based carriers was diminishing rapidly. JetBlue was caught in this squeeze, forcing it to evaluate its operational decisions even more carefully. (See http://www.investopedia.com/features/industryhandbook/airline.asp for one source of information on the industry.) NOTE – ADDITIONAL WEB LINKS TO FINANCIAL DATA AND COMMENTARY: Use the tools available at this link to identify JetBlue‘s stock price fluctuations over the last five years: https://finance.yahoo.com/quote/JBLU?ltr=1. Although JetBlue did post a rare first quarter profit in 2009, JetBlue said it is being helped by lower fuel expenses, capacity reductions and new revenue from services such as charging for a second checked bag, rather than from increased passenger traffic: http://blogs.wsj.com/middleseat/2009/04/24/jetblue-posts-a-profit-two-carriers-stumble/ From the customer‘s perspective, the carriers‘ cost concerns and consolidation in the industry have eroded expectations of customer service. From an analysis in 2015, the airlines with the highest profit margins also have the lowest customer service scores, implying that ―the more an airline earns, the less it cares about service… The highest rated airline, JetBlue, with a customer service score of 81, had an operating margin of 9 percent,‖ says Kevin Mitchell, whose Business Travel Coalition advocates for corporate travelers. ―The lowest rated, Spirit, with a score of 54, had an operating margin of 19 percent.‖ Some carriers, such as Southwest, Alaska, and, recently, Delta, have managed to keep profits up while also earning good customer service ratings. The key, it seems, is what airlines DO with the profits they earn. See http://fortune.com/2015/06/09/airline-profits-are-soaring-but-its-not-good-news-for-consumers/. What does all this say about the industry, and JetBlue? Regarding the airline industry, a 2007 article at The Motley Fool, http://www.fool.com/investing/general/2007/06/15/remove-that-clothespin-from-your-nose.aspx, said, ―Even Warren Buffett is skeptical about making money in airlines (he should know from his experience with USAir. In a 2002 interview, he was famously quoted as saying: If a capitalist had been present at Kitty Hawk back in the early 1900s, he should have shot Orville Wright. He would have saved his progeny money. But seriously, the airline business has been extraordinary. It has eaten up capital over the past century like almost no other business because people seem to keep TN1-554 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
coming back to it and putting fresh money in. You‘ve got huge fixed costs, you‘ve got strong labor unions, and you‘ve got commodity pricing. That is not a great recipe for success. I have an 800 number now that I call if I get the urge to buy an airline stock. I call at 2 in the morning and I say: ‗My name is Warren, and I‘m an aeroholic.‘ And then they talk me down.‖ Given the above, and the fact that it‘s fairly easy to start up an airline, but hard to consistently make money at it, what might be a good competitive strategy for JetBlue to adopt going forward? 3. What internal resources and assets does JetBlue have that may give it a competitive advantage? Referencing Chapter 3: Analyzing the Internal Environment of the Firm When one firm outperforms others by a wide margin over a long period of time, it‘s important to figure out how this could be. The answer may lie in how that firm arranges its activities and creates unique bundles of resources that allow it to sustain a competitive advantage. Students should assess the relationships between the elements in JetBlue‘s value chain. Remember, value chain analysis is a strategic analysis of an organization that uses value-creating activities. Value is the amount that buyers are willing to pay for what a firm provides them and is measured by total revenue, a reflection of the price a firm‘s product commands, and the quantity it can sell. A firm is profitable when the value it receives exceeds the total costs involved in creating its product or service. Creating value for buyers that exceeds the costs of production (i.e. margin) is a key concept used in analyzing a firm‘s competitive position. Every activity should add value. Take a look at Exhibit 3.1 to see the value chain activities. Based on the relationships between these elements, JetBlue can make a choice of how to proceed to craft a competitive advantage. See the following suggestions: Value chain activity Primary: Inbound logistics (distribution facilities, material control systems, warehouse layouts) Operations (efficient workflow design, quality control systems) Outbound logistics (consolidation of goods, efficient scheduling, finished goods processing)
How does JetBlue create value for the customer? Web-based booking gives greater control on managing seat sales. Customers won‘t get bumped. Paperless cockpit, no meals served, no paper tickets – all reduce time and costs. A320s are larger and more fuel-efficient. Less congested airports help quicker and on-time flight departures.
TN1-555 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note Marketing and Sales (motivated sales people, innovative advertising & promotion, effective pricing, proper ID of customer segments & distribution channels) Service (ability to solicit customer feedback & respond)
Secondary (or support): Procurement (win-win relationships with suppliers, reduced dependence on single supplier) Technology development (state of the art hardware & software, innovative culture & qualified personnel) Human resource management (effective recruitment, incentive & retention mechanisms) General Administration (effective planning systems to establish goals & strategies, access to capital, effective top management communication, relationships with diverse stakeholders)
Case 1: Robin Hood Web-based ticketing as a distribution channel. Market segment properly identified, i.e., business travelers flying point-to-point. Effective pricing so far, but fees for extras keep climbing.
Customers need to be informed of changes or inconveniences. The Customer Bill of Rights providing rewards for customers experiencing operational problems, delays or cancellations has helped. Aircraft procurement plan to support growth. Increased number of code-sharing agreements allows customers the flexibility for extended international travel. Investments in technology from the beginning of the airline. Process initiatives such as automated baggage handling, web-based ticketing, paperless cockpit etc., Non-unionized workforce (so far), reward systems such as stock-option plans, profit sharing, innovative recruitment policies and culture promoting camaraderie…employees called ―crewmembers.‖ Change of the CEO from David Neeleman to Dave Barger in May 2007, then to Robin Hayes in 2014 signaled shifts here. Top management with expertise in airline business, should have ability to coordinate and integrate activities across the value system, and remain highly visible to inculcate organizational culture, reputation and values.
Primary Activities In terms of primary activities, the key to JetBlue‘s ability to successfully compete in the market appeared to reside primarily in its operations. Having copied many of its operational systems from Southwest, JetBlue was able to effectively control costs. However, unlike Southwest, JetBlue had had major problems with its service component. This is an example of how one component of the value chain can detract from, rather than add, value to the overall experience.
Support Activities With regards to support activities, a competitive advantage can be achieved by developing a strong general administration that is built around visionary leadership and a supportive human resource, technological or external network of willing partners. JetBlue‘s change of CEO from Neeleman to Barger, and then to Hayes appeared to be positive ones. Certainly the growth in TN1-556 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
code-share agreements with other airlines would help increase JetBlue‘s appeal to its customers, therefore increase value, and the new emphasis on cost controls would please shareholders. In addition, see the concept of the resource-based view of the firm, and the three key types of resources: tangible resources, intangible resources, and organizational capabilities. A firm‘s strengths and capabilities—no matter how unique or impressive—do NOT necessarily lead to a competitive advantage. The resource-based view of the firm takes the perspective that firms‘ competitive advantages are due to their endowment of strategic resources that are valuable, rare, costly to imitate, and costly to substitute. Without these unique resources, the firm can only attain competitive parity. RBV goes beyond a SWOT analysis to integrate internal and external perspectives in a broader competitive context. RBV can reveal how core competencies embedded in a firm can help it exploit new product and market opportunities. An important issue to focus on here is the importance of intangible resources like innovation and reputation. Especially in mature brands, sustaining reputation is essential. Look at resources that are controlled by JetBlue that might enable it to develop and implement value-creating strategies. Based on their reading of the case, students might identify those resources to include: Tangible Resources: Financial: Hard to reliably assess. Cost fluctuations in fuel and fees are hard to anticipate. Certainly profit margins are not where they should be. Physical: Terminal at JFK, newer planes, but questions remain about financing and increased capital expenditures. Technological: Doesn‘t appear that these resources are any more developed than any other airline. Organizational: Hard to assess Hayes‘ effect on the organization. Human: Originally, this might have been a strength. Now union troubles, financial and service concerns might have eroded willingness of employees to step up. Innovation and creativity: Neeleman‘s original vision for the airline—to ―bring humanity back to air travel‖—was creative. Reputation: Originally, JetBlue had a very good reputation—consistent travel awards—but after the Valentine‘s Day ice storm, the reputation became tarnished. What does JetBlue stand for? Determining whether the internal resources are valuable, rare, difficult to imitate, or difficult to substitute (VRIN) can help a firm sustain a competitive advantage. See Exhibit 3.6. Applying the VRIN concept, in case of JetBlue, it is too early to say whether its resources are inimitable. This is because there is not much of path dependency or causal ambiguity and social complexity developed at this point in time. As can be noticed, its efficient low-cost operations can lead to a sustainable competitive advantage in future. However, the low-cost operations themselves are TN1-557 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
interrelated to other activities such as technology development, better human resource management, etc. The event of severe weather in February 2007 exposed many shortcomings of JetBlue‘s low-cost system, particularly in the area of communication with customers as well as baggage handling. JetBlue should work to develop an interlocking system of mutually reinforcing competencies that would make it simultaneously valuable, rare, inimitable and nonsubstitutable, thereby providing a competitive advantage. Referencing Chapter 4: Recognizing a Firm’s Intellectual Assets See the concepts of intellectual capital, human capital, and social capital, all of which are intangible assets that a company such as JetBlue needs to have in order to compete successfully. Intellectual capital is a measure of the value of a firm‘s intangible assets, its reputation, employee loyalty and commitment, customer relationships, company values, brand names, and the experience and skills of employees. How do companies create value in a knowledge intensive economy? The general answer is to attract and leverage human capital (intangible assets) effectively through mechanisms that create products and services of value over time. Human capital involves the individual capabilities, knowledge, skills, and experience of the company‘s employees and managers. This knowledge is relevant to the task at hand, as is the capacity to add to this reservoir of knowledge, skills, and experience through learning. Human capital is the foundation of intellectual capital. Intellectual capital is developed through attracting, developing, and retaining human capital. See Chapter 4, Exhibit 4.2. Success in retaining human capital could also be attributed to the nurturing of the ―social ties‖ or social capital. Social capital is a function of the network of relationships that individuals have throughout the organization and beyond. Relationships are critical in sharing and leveraging knowledge and in acquiring resources. Social capital can extend beyond the organizational boundaries to include relationships between the firm and its suppliers, customers, and alliance partners. Dynamic capabilities involve a firm‘s capacity to build and protect a competitive advantage, which rests on knowledge, assets, competencies, complementary assets, and technologies. Dynamic capabilities include the ability to sense and seize new opportunities, generate new knowledge, and reconfigure existing assets and capabilities. These capabilities are related to the entrepreneurial side of the firm and are built within a firm through its environmental and technological sensing apparatus, its choices of organizational form, and its collective ability to strategize. Dynamic capabilities are about the ability of an organization to challenge the conventional wisdom within its industry and market, learn and innovate, adapt to the changing world, and continuously adopt new ways to serve the evolving needs of the market. Intellectual assets or intangible resources are critical to organizational success. The growing importance of knowledge, coupled with the move by labor markets to reward knowledge work, tells us that investing in a company is, in essence, buying a set of talents, capabilities, skills, and ideas—intellectual capital—not physical and financial resources. Here are some questions organizations should ask: TN1-558 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Human capital: Does the organization effectively attract, develop, and retain talent? Does the organization value diversity? Social capital: Does the organization have positive personal and professional relationships among employees and alliance partners? Technology: Does the organization effectively use technology to transfer best practices across the organization, codify knowledge, and develop dynamic capabilities for competitive advantage?
Organizational Capabilities: Hard to say what JetBlue‘s current capabilities are now. Specific Competencies or Skills: Originally, JetBlue‘s operations were its most valuable competency. Barger seemed interested in operational controls and extending relationships with alliance partners. Certainly technology practices, especially in the operational components, are critical. Capacity to combine resources: Analysts are frustrated – JetBlue should be able to use intellectual, human, and social capital to re-engage operational competencies, and once again impress customers with performance. Time will tell. 4. Is JetBlue’s competitive advantage sustainable? Referencing Chapter 6: Formulating Corporate-Level Strategy Corporate strategy focuses discussion on the questions of what businesses a corporation should compete in, and how the businesses should be managed so they can create ―synergy‖—creating value through entering new markets or developing new technologies, either through related or unrelated diversification. Diversification is the process of firms expanding their operations by entering new businesses. In related diversification, a firm enters a different business in which it can benefit from leveraging core competencies, sharing activities, or building market power. Some possibilities include: ● Mergers and acquisitions ● Strategic alliances ● Joint ventures ● Internal development Whatever the choice, it should create value for all stakeholders—employees, suppliers, distributors, and the company itself. The choice of diversification strategy should create synergy so that all parties gain something they would not have had on their own. Companies can achieve synergy through diversification in two ways: 1. Through related businesses (horizontal relationships) ● Sharing tangible resources ● Sharing intangible resources ● Leveraging core competencies TN1-559 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
2. Or through unrelated businesses (hierarchical relationships) ● Value creation derives from corporate office ● Leveraging support activities Core competencies reflect the collective learning in organizations—how to coordinate diverse production skills, integrate multiple streams of technologies, and market diverse products and services to create value. Core competencies must create superior customer value; the different businesses must all have similar elements in the value chain that require similar skills; and these activities or skills must be difficult for competitors to imitate. Sharing activities means that value chain elements are shared across business units, so that two or more activities are done by one of the businesses. This allows for cost savings, but businesses need to make sure to keep control over quality and customer perception. Acquisition is the incorporation of one firm into another through purchase. It can be a means of obtaining valuable resources that can help an organization expand its product offerings and services. Acquisition can lead to consolidation within an industry and can force other players to merge. Corporations can also enter new market segments by way of acquisitions. JetBlue was in an interesting position. It had carved out a niche for itself, competing using a combined strategy, but was this enough for long-term growth? JetBlue at the end of the case was pursuing a ―hybrid‖ model, with high-end perks plus a low-cost option. In order to keep its operations under control, JetBlue was also going after new code share partners, staying independent while also establishing strategic alliances with other airlines. In this way, JetBlue was trying to create value through related diversification, sharing the activities it could control across its lines of business, while coordinating diverse relationships with other carriers. JetBlue had so far relied on a hub-and-spoke model, using New York as the hub, but as it expanded routes to provide a point-to-point service via code share arrangements, it was using a hybrid strategy, and becoming a hybrid model operationally as well. Did it have the core competencies to manage these expanded activities, and did it have the operational discipline to manage the associated costs? What should JetBlue do to sustain its competitive advantage? NOT IN THE CASE: CEO Barger had said he was not interested in doing any acquisitions, and he did not see JetBlue as a target for a buy-out offer, even though the Lufthansa deal had caused some speculation about this. Yet the airline had expanded into Alaska and on the West Coast of the United States, and there were multiple code share agreements in place as of 2015. See https://www.jetblue.com/airline-partners. Was JetBlue diversifying or not? Starting in 2014, JetBlue ―will begin vying for big-spending business travelers‖ by offering ―lieflat seats and private suites on transcontinental flights on the highly competitive routes between Los Angeles and New York and San Francisco and New York… the new seats added to Airbus A321 planes will have adjustable firmness, a massage function, a 15-inch wide-screen television and a ―wake-me-for-service‖ indicator if the flier decides to sleep. The private suites will include a closeable door for privacy. The airline plans to dedicate 11 planes to serve the two transcontinental routes, with expansions along the same routes and the addition of lie-flat seats on other routes, depending on demand.‖ In 2015, JetBlue was set to fly these ―Mint businessclass seats‖ between New York and the Caribbean. See TN1-560 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
http://www.usatoday.com/story/todayinthesky/2015/03/15/report-jetblue-to-fly-mint-lie-flatseats-to-caribbean/24811043/. Follow this link to JetBlue‘s Mint page for more on the lie-flat seats: https://www.jetblue.com/flying-with-us/mint. And as another example of how JetBlue was trying to add special ―perks‖ to its service, here‘s a story from August 2013: ―. . . as the airline industry continues to put the squeeze on luggage fees, U.S.-based carrier JetBlue has launched a baggage delivery service that will allow flyers to bypass the carrousel and proceed directly home or to their resort holiday. JetBlue unveiled details this week of its new Bags VIP concierge service, which will hand deliver checked bags to customers‘ final destination within a 40-mile radius of the airport. Promotional pricing starts at $25 for delivery of one bag and $40 for up to 10 bags.‖ Read more: http://www.nydailynews.com/life-style/jetblue-launches-luggage-delivery-article1.1422585#ixzz2bWi1CHxb. Finally, the instructor can discuss a recap of the 2007 Bill of Rights incident, pointing out customers, some of whom said they appreciated this. As Congress has said, all airlines should do this kind of thing (NOTE: Southwest has always had a ―Customer Service Commitment‖ document, with considerably more detail than the JetBlue one. See http://www.southwest.com/about_swa/customer_service_commitment/customer_service_commit ment.html.)
Based on passenger‘s traditional issues, such as leg room, baggage handling, and effective communications, does JetBlue appear to have addressed the general concerns most travelers have about air travel? Do these initiatives further reinforce JetBlue‘s differentiation advantage, or are these just things others can easily copy, as JetBlue seems to have copied, itself? Further, regarding JetBlue‘s activity system, and the importance of all mutually reinforcing components‘ effect on strategy, see the following graphic adapted from one produced for Southwest Airlines:
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Teaching Note
Case 1: Robin Hood
No meals
Pre-assigned seating, LiveTV etc.,
Reliable departures
Effective reward
Nonunionized workforce – for now…
Quick gate turnaround
Limited but differentiate d service
No baggage transfer
Limited connections with other airlines
Web-based and automatic ticketing
Lean, productive workforce
Brand new aircrafts
Short and long-haul from secondary airports
Very low ticket prices High aircraft utilization
JetBlue’s activity system, modeled after Southwest’s activity system. As in M. E. Porter. 1996. ―What Is Strategy?‖ Harvard Business Review, November–December, pp.60–79. Also, according to this article, the darker circles indicate the higher-order strategic themes. These are implemented through the clusters of tightly linked activities which are in the lighter circles.
NOTE: This activity figure is not reproduced in the PowerPoint slides. If the instructor has assigned the Porter 1996 article from which this figure is adapted, students can use the Porter article to assess JetBlue‘s degree of integration among these activities. NOTE — ADDITIONAL READING, VIDEO INTERVIEWS WITH NEELEMAN & BARGER: JetBlue ranked highest in the J.D. Power Airline Satisfaction Survey http://www.jdpower.com/press-releases/2015-north-america-airline-satisfaction-study.
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Teaching Note
Case 1: Robin Hood
JetBlue has embraced social media. See JetBlue‘s Twitter page at http://twitter.com/JetBlue. The use of technology and marketing through social networking is an attempt to broaden JetBlue‘s appeal. However, most airlines, including JetBlue have begun charging for all kinds of things like pillows, blankets, checked baggage, and new CEO Hayes announced a tiered pricing arrangement where customers can decide what ―bundles‖ of features they want to pay for. This has prompted some to wonder if this is just getting more complicated for passengers: http://skift.com/2015/01/29/jetblue-to-unveil-bag-fees-and-new-types-of-fares-in-the-secondquarter/. When asked if JetBlue might contemplate a merger in the future, Hayes said JetBlue is ―still very committed to our organic growth plan.‖ Regarding areas where JetBlue has stumbled with its competitive (dis)advantage, the February 2007 ice storm in the Northeast created many problems for JetBlue‘s passengers trying to fly out of New York‘s JFK airport. View the video commentary by one group of travelers below: https://www.youtube.com/watch?v=K6cwIy3pWMQ. Further investigation showed that these JetBlue customers could not use JetBlue to get home to Sacramento. They had to pay to get an ATA flight to Chicago‘s Midway, and then a Southwest flight to Sacramento, California. JetBlue also lost their luggage… This kind of customer experience is what led CEO David Neeleman to publicly apologize, and publish the Customer Bill of Rights, available here: http://www.jetblue.com/about/ourcompany/promise/index.html. Do you think the existence of a bill of rights might has appeased these travelers? Here is Neeleman‘s video apology for the February fiasco: https://www.youtube.com/watch?v=-r_PIg7EAUw&list=PL8F3BBDA63E013068 Do you think the learning and strategies outlined will be sufficient to prevent future problems? Business Week‘s first-ever ranking of the 25 companies who provide the best customer service had Southwest in 13th place (the only airline on the list), and dropped JetBlue from contention altogether based on their February 2007 customer service failure. Here‘s a description of how Southwest handled things when weather affected travelers: http://www.businessweek.com/stories/2007-03-04/customer-service-champs. What additional lessons might JetBlue have learned? In May of 2007, when Neeleman was replaced as CEO, the thought was ―he‘s a great entrepreneur, but perhaps one of those types who is much better at innovating than operating.‖ See the story in Time: http://content.time.com/time/business/article/0,8599,1619387,00.html. CEO Dave Barger, in his first year on the job in October 2007, explained JetBlue‘s competitive advantages: http://www.fool.com/investing/general/2007/10/03/an-interview-with-jetblues-davidbarger.aspx?terms=jetblue&vstest=search_042607_linkdefault.
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Teaching Note
Case 1: Robin Hood
According to one analyst in 2012, ―JetBlue isn‘t immune to the industry‘s bane: soaring fuel costs. Ten years ago jet fuel cost an average of 71¢ a gallon; JetBlue now pays an average of $3.15. Higher fuel costs represented 71 percent of its yearly increase in operating expenses,‖ and JetBlue is planning on adding more routes attractive to business travelers. That practice of adding flights and routes—thus incurring more operating and capital expenses—while the rest of the industry is shrinking to cope with fuel costs is what bothers Dahlman Rose analyst Helane Becker: ―JetBlue started as the airline for the New York leisure traveler. They don‘t have the route structure or the miles to compete with the majors for business dollars.… expanding this way in spite of soaring fuel costs is a risk.‖ See http://www.bloomberg.com/bw/articles/2012-0405/once-high-flying-jetblue-returns-to-earth. Regarding the questions about whether JetBlue is positioned for being a buy-out target, as of 2012, Barger doesn‘t see acquisitions or mergers as an option. He believes he can grow JetBlue ―organically‖ by watching costs in fuel and operational activities: See video at https://www.youtube.com/watch?v=yOM6csohc5c. And see also ―JetBlue Airways enters new phase of hybridisation with premium seats, two-way codeshares,‖ CAPA Centre for Aviation, June 27, 2013 at http://centreforaviation.com/analysis/jetblue-airways-enters-new-phase-of-hybridisation-withpremium-seats-two-way-codeshares-109321 for more about the ―hybrid‖ business model JetBlue appears to be trying to exploit—being low-cost PLUS differentiated. In 2019, CEO Robin Hayes talks about JetBlue‘s new service to London, and how the ―JetBlue‖ effect applies—fares tend to go down once JetBlue enters a market. See https://www.washingtonpost.com/video/postlive/wplive/jetblue-ceo-robin-hayes-says-jetblueservice-to-london-will-cut-fares-dramatically/2019/10/07/81f44a08-56df-49e6-9e48298d80c1e97e_video.html. What do you think CEO Robin Hayes needs to focus on the most? Just as an ironic note, in 2008, after leaving the JetBlue CEO job, Dave Neeleman started an airline in Brazil, Azul (―Blue‖), using the Brazilian Embraer airliner, with the same business model as he used in starting JetBlue. See his story from 2010 about this founding at https://www.youtube.com/watch?v=TH-l5ARltZg. As of 2015, Azul was Brazil‘s third biggest airline, and poised to raise additional capital for expansion by selling shares in an IPO. Perhaps Neeleman was successful in Brazil because the lack of intense competition in this market allowed this business model to create a ―first-mover advantage.‖ As Brazil‘s economic power grows, will other competitors come along to copy Azul, just as Neeleman‘s original JetBlue copied Southwest? References Porter, M.E. 1996. ―What Is Strategy?‖ Harvard Business Review, 74(6): 61–78. Teaching Note Case 34 — Ford: An Auto Company in Transition
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Teaching Note
Case 1: Robin Hood
Case Objectives 1. To examine how external and internal forces affect competitive strategy. 2. To investigate the choices of strategies in a highly turbulent industry. 3. To discuss how leadership can use organizational design concepts to innovate and implement strategy. See the table below to determine where to use this case: NOTE: Although pointed primarily at strategic analysis and formation, this case is also appropriate for an in-depth discussion of how implementation is aided by effective design and leadership. Therefore, this is a COMPREHENSIVE case that can be used to cover all chapters, all concepts. CASE OBJECTIVES TABLE Chapter Use Key Concepts PRIMARY CHAPTERS: 1: Strategy Concept 2: External Environment 3: Internal Analysis 5: Business-Level Strategy 6: Corporate-Level Strategy 10: Organizational Design SECONDARY CHAPTERS: 4: Intellectual Assets 7: International Strategy 8: Entrepreneurial Strategies 9: Strategic Control 11: Strategic Leadership 12: Managing Innovation
Strategic management; vision, mission, strategic objectives; stakeholder groups
Industry competition five forces; general environmental factors Value-chain analysis; resource-based view of the firm; VRIN Competitive strategy; generic strategies
Additional Reading and/or Exercises NOTE Case Updates
NOTE: web links, embedded video
Corporate strategy; diversification; synergy; related and unrelated diversification Organizational structure Intellectual and human capital
International expansion Opportunity recognition Strategic control; informational vs. behavioral control; culture, reward systems Leadership
NOTE: web links
Scope, pace of innovation
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Teaching Note
Case 1: Robin Hood
CASE SYNOPSIS In 2019, Ford Motor Company was facing disruption in the automobile industry and moving in a direction that meant it was becoming more than just an auto company. Reminding investors of the company‘s long-term legacy, Mark Fields, CEO of Ford from 2014 to 2017, had pointed to founder Henry Ford and his idea of ―democratizing technology‖—not just making products for people who could afford luxury vehicles, but using technology to solve problems of mobility and access, providing not only products but also innovative transportation services that made people‘s lives better. So, although Ford would always sell cars and trucks, it was also making big bets in autonomous technology (self-driving cars), electric vehicles, and other transportation services such as urban mobility solutions via ride-sharing, bike/scooter-sharing, and customized interior vehicle experiences serving multiple customer needs. This might have been a bit of a gamble. Ford, which was one of the world‘s most profitable companies until 1999, had been struggling for survival since 2003 and had faced its largest single-year loss in 2006. Although foreign automakers had been aggressively targeting the U.S. market during this time, some of the important reasons for Ford‘s decline had been internal: frequent leadership and organizational changes, poor leadership, loss of touch with customers, and a failed diversification plan. In an attempt to improve the financial condition of the struggling automaker, a new chief executive officer, Alan Mulally, had been selected in September 2006. Mulally, a former executive vice president of the Boeing Company, was expected to use his expertise and leadership skills to rebuild the corporate culture and regain Ford‘s ability to compete in a global industry. Mulally made structural and procedural changes in the company, especially in top management. He also refocused on the Ford brand by selling off the brands Jaguar, Land Rover, Volvo, and Aston Martin, as well as discontinuing Mercury. Mulally had the full support of the Ford family, including chairman of the board Bill Ford. This confidence appeared well-founded when Ford was able to avoid the bankruptcy scenarios used by GM and Chrysler in the economic downturn of 2009, and posted sales in 2010 that made it the world‘s top-earning automaker once again. By 2013, although problems remained in Europe, Asia, and South America, Ford had seen sales recover in the United States to its best performance ever. This performance confirmed Mulally‘s vision and allowed him to retire, hand-picking his successor, Mark Fields, to take over in July 2014. In 2015 Ford Motor Company had the best financial results in years. The year 2016 was almost as profitable, but, going into 2017, Ford was guiding profits lower, primarily because of CEO Fields‘ intent to invest in emerging mobility services opportunities. Investors were confused and the stock price suffered. Chairman Bill Ford asked Fields to resign and promoted Jim Hackett to the CEO position. Hackett, previously head of Ford Smart Mobility LLC (a subsidiary of Ford formed to accelerate the company‘s plans to design, build, grow, and invest in emerging mobility services, such as TN1-566 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
autonomous vehicles) also believed in the need for transformation. He planned to address the current product lineup, create an entire portfolio of electric vehicles, and develop a viable autonomous vehicle business that included ―Mobility Experiences,‖ software and services that could address the problems of congested cities and roads. Although Ford would always sell cars and trucks, it was now betting that a seismic shift in personal transportation could translate to greatly increased profit margins. Although Hackett had Chairman Bill Ford‘s support, he was facing an industry in disruption: not only were global markets hard to predict, but technology shifts and consumer preferences were changing the nature of the whole transportation experience. This would require significant innovation, and an adaptable, nimble organization that could deliver. Henry Ford had the initial vision of disruption in personal transportation. Would the 21st-century version of Ford Motor Company be as successful? Teaching Plan Everyone should be familiar with the challenges facing the American automobile industry. The Ford case provides an opportunity for an investigation of the entire arc of strategic management, with special attention to how strategies are formulated under uncertain and evolving conditions. The case can also be used for a discussion of strategic implementation—organizational redesign, and the role of leadership under these conditions. Therefore, this case can be used as a semester-long case, addressing each concept as it is encountered in the textbook readings. Or the case can be positioned toward the end of the course to tie all the concepts together. The instructor may wish to assign the General Motors case as well, earlier in the course, as a warm-up, and point of comparison, and then assign the Ford case as a wrap-up of strategic management concepts. In addition, the Lime electric bicycle/scooter case raises interesting questions about strategic alliances and the changing external environment, especially because Lime‘s competitor Spin had been acquired by Ford. ICEBREAKER/UPDATE Because almost every student has had the responsibility for the upkeep on an automobile, it might be illustrative to ask: How many of you own, or have ever had responsibility for the upkeep of a car made by GM, Ford, or Chrysler? What is your opinion of this vehicle? How many of you would consider buying a Ford in the future? It‘s unlikely that a majority of students own or have responsibility for the upkeep on a car made by an American auto company. It is likely that the opinion of these American cars is not that high. The instructor may want to list the three companies (Ford, GM, Chrysler) on the board and tally the number of cars in each one, and then list the opinions for each company‘s car. See if any TN1-567 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
trend emerges. It‘s possible that the comments on Ford cars may not be as negative as those from the other two firms. The students‘ reaction will demonstrate the uphill battle these American firms have to face in regaining consumer confidence in their products‘ style and quality. This will prepare students to enter strategy analysis mode—what are the forces that might work against Ford as it tries to compete in the current environment? It might be useful to visit this website https://shop.ford.com/showroom/#/ to take a look at Ford‘s current brands. As of 2018, Ford promoted Ford vehicles—the Fiesta, Focus, Fusion, Taurus, and the new C-Max, with the F150 pickup, and iconic Mustang being among the top brands. The company also promoted the Lincoln lineup, which is now a separate division, The Lincoln Motor Company, accessible at http://www.lincoln.com/. Ford had abandoned the Mercury brand, and Ford‘s Volvo brand, which was acquired in 1999, had been sold to China‘s Geely Automobile. Ford had divested its interest in Aston-Martin in 2007 and had sold off Jaguar and Land Rover to Tata Motors of India in 2008. New, ―next generation‖ vehicles such as hybrids and EV‘s were being promoted, using the ―small-vehicle platform,‖ incorporating ideas from the Ford Silicon Valley Research Lab and advances in manufacturing technology. See http://corporate.ford.com/innovation for current news. ADDITIONAL CASE BACKGROUND NEWS & UPDATES To review history: After refusing the government bailout offered in the spring of 2009, Ford had the challenge of doing business carrying a debt load, while rivals Chrysler and GM escaped this via bankruptcy. The following article from July 2009 details the situation: ―If auto sales don‘t improve soon, some analysts say, Ford‘s debts may eventually drive it into bankruptcy, where it would could seek to jettison overhanging costs like the other auto companies did.‖ The major threats appeared to come from lower sales and Ford‘s underused capacity. See http://www.washingtontimes.com/news/2009/jul/13/big-3s-heaviest-debt-load-now-falls-onford/. By 2013, these threats appeared to be in the rearview mirror. In August 2013, Ford had its greatest sales month since 2006, with the F-Series trucks leading the way. According to reports, Ford had been operating near full manufacturing capacity since 2012. This had a positive effect on profit margins because it kept fixed costs low. But tight inventories for products like Fusion, Focus, and Explorer also limited Ford‘s potential to grow sales and gain market share. Ford was also facing challenges in China but had been ―making up ground there, with a 46 percent increase in sales for 2013 over the previous year. In China, Ford was planning to spend $5 billion in new plants and bringing 15 new vehicles to the country by 2013. The company believed that China and India combined could account for 40 percent of the company‘s sales by 2020 versus 15 percent of sales today.‖ See http://www.fool.com/investing/general/2013/09/10/ford-is-goingfull-speed.aspx for the full story. For more background, see this video interview from June 2013 with Alan Mulally discussing how Ford is as innovative as Tesla, is focused on the Lincoln brand, and is also focused on growth in India and China: https://www.youtube.com/watch?v=anTB0c5a6ZA. TN1-568 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
There had been press about the challenges Ford had with the Lincoln brand. Ford acknowledged this, planning a re-imagining campaign to hopefully improve perception and increase sales of the Lincoln vehicles. Matthew McConaughey even stars in one of the videos of a Lincoln Navigator ad at https://www.youtube.com/user/lincoln. Regarding Alan Mulally and his pending retirement, he had stated he would stay at Ford as CEO at least through 2014. What might happen then? See this 2013 video of Ford Chairman Bill Ford discussing Mulally‘s initial hire, the ―fit‖ between Ford & Mulally, and possible succession plans: https://www.youtube.com/watch?v=Peuiz7gEpuk. Mark Fields became CEO of Ford in July 2014, and, according to this video and story from 2015, Fields addresses ―disruptors‖ in the auto industry, seeing this as an opportunity, positioning the car as the ―ultimate technology product‖ and points out the presence of the new Ford research center in Silicon Valley as a way of transitioning Ford from just an automotive manufacturer into a ―mobility company.‖ See http://fortune.com/2015/04/24/mark-fields-fordceo/. In January 2017, CEO Mark Fields talked about how Ford had ―big plans to transform itself from a company that just sells cars to a company that touches all aspects of mobility,‖ with big bets on autonomous technology, electric cars and transportation services. See http://www.businessinsider.com/ford-ceo-mark-fields-interview-2017-1. But then, in May 2017, CEO Mark Fields was abruptly removed from his position, replaced by James P. Hackett, head of Ford‘s Smart Mobility LLC subsidiary. During Fields‘ three year tenure Ford‘s shares dropped 40 percent, and the shareholders were concerned that he was unable to expand the company‘s core auto business, and had been slow to implement the ―mobility strategy‖ he had championed. Other concerns were that Fields had lacked his predecessor‘s ability to ―rally employees around a common mission or make critical decisions about the company‘s strategy.‖ See stories at https://www.cnbc.com/2017/05/22/ford-motor-isreplacing-mark-fields-as-c-e-o.html and https://jalopnik.com/ford-ceo-mark-fields-reportedlyfired-in-management-sha-1795421644 with video at https://www.cnbc.com/video/3000620572. Opinions about why Mark Fields might have been removed from the top job at Ford included the following from 2017: ―Fields might have said he supported ‗the future,‘ but he showed no results, he bungled Trump, Ford‘s car sales fell harder than the industry standard and Ford‘s stock price took a dive under his watch.‖ It also appeared that Ford Chairman Bill Ford ―didn‘t think Fields acted enough like his counterpart at General Motors, Mary Barra. Under new Ford CEO Jim Hackett, Bill Ford said the automaker needs to address ‗underperforming areas,‘ modernize its business and invest in The Future. Yes, The Future. But Ford has lagged behind General Motors, particularly on autonomous vehicles and electric cars. GM has had a number of milestones, with its investment in the autonomous tech start-up Cruise, as well as the rollout of the Bolt EV. As for ‗underperforming areas,‘ Barra also oversaw GM‘s departure from Russia and India, along with the sale of its European operations to PSA Group. ‗This is a time of unprecedented change,‘ Bill Ford said. ‗A time of great change requires a transformational TN1-569 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
leader,‘ he added.‖ Obviously, Mark Fields was NOT Alan Mulally… See https://jalopnik.com/why-mark-fields-was-fired-1795431562. Speaking about the transition, in a video from May 2017, Chairman Bill Ford identified incoming CEO Jim Hackett as ―not just a futurist, he‘s a very good operative executive‖ and stressed that Jim will continue to transform the culture of the company, caring about this culture, making sure that ideas will flow freely without regard to hierarchy. Bill Ford believes the business needs to be ―sharpened,‖ ―modernized‖ in regard to current and upcoming technology, and that new business needs to be developed via better, speedier decision making. See the video and story at https://www.nytimes.com/2017/05/22/business/ford-ceo-mark-fields-jim-hackett.html. It‘s unclear how long Hackett will remain in the CEO role, partly because he has little automobile experience (Hackett came from Steelcase, an office-furniture maker), so is assumed not to have an intense passion for the business. There are other individuals at Ford who could be groomed to take over in a few years. For more on the challenges see http://www.businessinsider.com/why-mark-fields-is-leaving-ford-2017-5. In early 2020 CEO Hackett announced a reshuffling, promoting Jim Farley, 57, the current head of new business and strategy, to the position of chief operating officer, reporting directly to Hackett. Farley will now be responsible for all of Ford‘s global automotive operations. The move came days after Ford reported a $1.7 billion net loss in the fourth quarter, news that caused a 9 percent drop in its stock price. On Friday, after the news of the appointment, the stock fell another 1.7 percent, to $8.11, its lowest closing price in more than a year. ―Clearly we underperformed, and we know why that happened,‖ Mr. Hackett said, adding he ―couldn‘t be more confident‖ in Ford‘s turnaround plan. When Mr. Hackett took the helm at Ford in May 2017, Ford stock was trading at $11 a share. In the conference call, Mr. Hackett, 64, said Mr. Farley‘s new appointment does not suggest that he is nearing an end to his tenure, but the move does appear to position Mr. Farley as Mr. Hackett‘s likely successor whenever his term ends. As part of the announcement, Ford said Joe Hinrichs, 53, currently president of Ford‘s automotive operations, would retire. When CEO Hackett took his leadership position he had kept the company separated, with Hinrichs in charge of automotive operations while Farley ran the new business division, which included Ford Mobility. Now the company was ONE Ford again. See https://www.nytimes.com/2020/02/07/business/ford-motor-jim-farley.html. For more information on Ford‘s initiative ―transforming the world‘s greatest cities by solving mobility problems one person at a time,‖ see https://www.ford.com/mobility.html. Here is where you can see information about Ford‘s partnership with other mobility solution providers and the story of its acquisition of Spin electric scooters. For up-to-date status on the company, see this compilation of information from The New York Times: http://topics.nytimes.com/top/news/business/companies/ford_motor_company/index.html.
TEST QUESTIONS TN1-570 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Before engaging in case discussion, you might want to test student’s basic knowledge regarding the case and the major concepts. Here are some multiple-choice questions to use. (This will get the student‘s attention—they can‘t answer these if they haven‘t read the case!) Which of the following statements is most true? a. Ford was one of the firms that had needed a government bailout after the 2007–2008 economic downturn. b. Ford had to sell its Lincoln brand. c. Ford has more market share in China than General Motors does. d. American engineer and industrial icon Henry Ford did not invent the assembly line. ANSWER: d. Ford was the only automobile firm that had NOT needed a government bailout after the 2009 economic downturn. Although it sold off many other brands such as Jaguar, Land Rover, Aston Martin and Volvo, Ford did not sell the Lincoln brand. (Not in the case: In 2012, Mulally set Lincoln up as a separate division under the name The Lincoln Motor Company.) Ford was late to the China market, and GM had a higher brand penetration in China. American engineer and industrial icon Henry Ford had been a true innovator. He didn‘t invent the automobile or the assembly line, but through his ability to recognize opportunities, articulate a vision, and inspire others to join him in fulfilling that vision, he was responsible for making significant changes in the trajectory of the automobile industry and even in the history of manufacturing in America. The assembly line concept was borrowed from other industries. As part of its ―mobility‖ strategy, Ford was partnering with ride-sharing service Lyft. a. Yes b. No ANSWER: b. General Motors had partnered with Lyft. Ford was partnering with Uber, which was trying out the Ford Fusion autonomous vehicle. Summary of Discussion Questions Here is a list of the suggested discussion questions. You can decide which questions to assign and also which additional readings or exercises to include to augment each discussion. Refer back to the Case Objectives Table at the beginning of this Teaching Note to identify any additional readings and/or exercises so they can be assigned in advance. 1. What are key forces in the general and industry environments that affect Ford‘s choice of strategy? 2. What internal resources and assets does Ford have that may give it a competitive advantage? 3. How should Ford compete? 4. OPTIONAL QUESTION: What has leadership done to implement strategy, and what challenges remain?
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Teaching Note
Case 1: Robin Hood
Discussion Questions and Responses Prior to answering the specific case questions, the instructor might want to position the discussion by reviewing what strategic management really is. Reviewing Chapter 1: Strategic Management Strategy is all about the ideas, decisions, and actions that enable a firm to succeed. See Chapter 1, Exhibit 1: Strategic management consists of the analyses, decisions, and actions an organization undertakes in order to create and sustain competitive advantages: ● strategy directs the organization toward overall goals and objectives; ● includes multiple stakeholders in decision making; ● incorporates both short-term and long-term perspectives; ● recognizes trade-offs between efficiency (cost) and effectiveness (performance). Leaders face a large number of complex challenges. Leaders must be proactive, anticipate change and continually refine changes to their strategies. This requires a certain level of ―ambidextrous behavior,‖ where leaders are alert to opportunities beyond the confines of their own jobs, and are also cooperative and seek out opportunities to combine their efforts with others. Leaders must make strategic management both a process and a way of thinking throughout the organization. See Chapter 1, Exhibit 6: The primary role of the organizational leader is to articulate vision, mission and strategic objectives. Leaders must communicate their initial vision of the organization‘s purpose. What was the original goal that evokes a powerful and compelling mental image of a shared future, one that would be massively inspiring, overarching, and longterm, that represented a destination that is driven by and evokes passion? The organizational mission also needs to be considered: a mission encompasses both the purpose of the company as well as the basis for competition and competitive advantages. In writing a mission statement, it is important to understand the definition of the business: 1) who are its customers, 2) what customer need is the organization trying to fulfill, and 3) how does the business create and deliver value to customers and satisfy their needs. Organizations must respond to multiple constituencies if they are to survive and prosper, and the mission provides a means of communicating to diverse organizational stakeholders. Although vision statements tend to be quite enduring and seldom change, a firm‘s mission can and should change when competitive conditions dramatically change or the firm is faced with new threats or opportunities. Anticipating that things might change, an organization‘s leadership must then establish strategic objectives to operationalize the mission statement. That is, objectives help to operationalize the mission statement with specific yardsticks, and provide guidance on how the organization can fulfill or move toward the ―higher goals‖ in the goal hierarchy—the mission and vision.
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Teaching Note
Case 1: Robin Hood
After being brought in to reposition Ford for turnaround following its near bankruptcy in 2006, the one thing CEO Alan Mulally did early in his tenure was to refocus Ford‘s vision into a smaller and more profitable Ford—―ONE Ford.‖ The ONE Ford message was intended to communicate consistency across all departments, all segments of the company, requiring people to work together as one team, with one plan, and one goal: ―an exciting viable Ford delivering profitable growth for all.‖ Mulally wanted to leverage Ford‘s unique automotive knowledge and assets to build cars and trucks that people wanted and valued. His mission was to focus organizational stakeholders on the Ford and Lincoln brands, close down Mercury, and sell off the other ―premier‖ autos (Aston-Martin, Jaguar, Land Rover, and Volvo.) The management of these brands had confused customers, and had not added any value to the Ford name. Mulally wanted to ―integrate and leverage‖ the core Ford assets around the world. In order to operationalize this focused mission, Mulally had to set some strategic objectives. His overall strategy was to obtain operating profitability at a lower volume while changing the mix of products to better appeal to the market. Mulally had to make structural and procedural changes in the company: he reconfigured executive reporting relationships, closed plants and cut jobs, increased goals for plant utilization and production levels in each production unit, tried to pay attention to market trends and encourage designers to develop more appealing vehicles. After Mulally retired in 2014, new CEO Mark Fields announced Ford would be using innovation ―not only to create advanced new vehicles but also to help change the way the world moves by solving today‘s growing global transportation challenges.‖ Fields‘ vision was to make ―people‘s lives better by changing the way the world moves,‖ and the mission was to deliver top quartile shareholder returns through both the standard automotive and also the new high-growth mobility businesses. Fields‘ objectives included fortifying profits for the standard-bearers—trucks, vans, commercial vehicles—as well as updating the performance line-up—Ford GT and Mustang; transforming the underperforming Lincoln, Continental, and Navigator luxury products; and growing investments in emerging opportunities, especially in electrification, autonomous vehicles, and mobility services. Fields was focusing Ford‘s efforts on technology, not just making products for people who could afford luxury vehicles, but using technology to solve problems of mobility and access, providing not only products but also transportation services that made people‘s lives better. It‘s also important to consider the concept of stakeholder symbiosis, that stakeholders are dependent upon each other for their success and well-being; and that there is a need for organizations to consider the needs of the larger community, and act in a socially responsible manner. Leaders must pay attention to all stakeholder needs, including various stakeholder values and the organizational culture. See Chapter 1, Exhibit 1.5 for the diverse stakeholder groups and the claims they make on the organization. Although not in the case, the discussion over the fate of the auto industry in early 2009 clearly demonstrated the dependencies among all stakeholders. Parts suppliers, unionized autoworkers and car dealerships were all dependent on the car companies‘ ability to produce cars that would TN1-573 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
sell; local communities were dependent on the tax income from dealerships and parts suppliers; local businesses were dependent on the continued ability of employees to spend money; state and government entities were afraid of the burden on social systems if any of this failed. Stockholders and the overall U.S. financial system were dependent on a somewhat predictable future. This is why the government felt it had to act to bail out General Motors and Chrysler in March 2009 by loaning them enough money to stay afloat. All the U.S. automobile-related industries had an obligation to act in good faith and accept the government‘s terms. Although not needing this loan, Ford‘s CEO Mulally had to develop a sound strategy and give clear guidance. For an overview of this event, see http://useconomy.about.com/od/criticalssues/a/auto_bailout.htm. Going forward, with the threat of competition not only from General Motors, Fiat/Chrysler and the Japanese, Korean and German automakers, but also from Tesla, and even Apple, CEO Fields had to be careful to keep not only customers, suppliers and employees focused on the automotive products, but also keep shareholders happy as he continued to experiment and innovate with his idea to solve transportation and mobility problems in cities across the globe. Could Fields craft a clear, focused message, expressing a cohesive narrative or game plan that made sense to all? Investors were confused by Fields‘ message, so Fields was replaced by new CEO Jim Hackett, who planned to execute a strategy that could develop a winning portfolio of products, create clean-running cars that included electric vehicles, build a viable autonomous vehicle business with products such as ride-hailing and delivery solutions for city leaders, and focus on Mobility Experiences that addressed problems of congested cities and roads. The vision of a seismic shift in personal transportation was fully supported by Ford Board Chairman Bill Ford, who hoped to continue the innovative vision of his great-grandfather Henry Ford. The ultimate goal was to improve people‘s lives. Here is where students can be reminded of how the chapters in the book are linked. See Chapter 1, Exhibit 1.3 for a depiction of the strategic management process. During strategic analysis, the leader does ―advance work‖ to anticipate unforeseen environmental developments, identify unanticipated resource constraints, assess changes in his or her preferences for how to manage. During strategy formulation, the organization addresses the issue of how to compete in a given business to attain competitive advantage. Strategies are formulated at the business, corporate, and international levels. Entrepreneurial initiatives may also play a role. In strategy implementation, depending on the type of organization structure, the leader might include key individuals in a discussion around selecting which strategies might be best to implement at which level within the organization. The leader must ensure proper strategic controls and organizational design, and establish effective means to coordinate and integrate activities within the firm as well as with suppliers, customers, and possible alliance partners. Leaders should also be committed to excellence and ethical behavior while promoting learning and continuous improvement. Here‘s where innovation is important.
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Teaching Note
Case 1: Robin Hood
The basic question strategic management tries to answer is: How can we create competitive advantages in the marketplace that are not only unique and valuable but also difficult for competitors to copy or substitute? 1. What are key forces in the general and industry environments that affect Ford’s choice of strategy? Referencing Chapter 2: Analyzing the External Environment of the Firm Organizational leaders must become aware of factors in the overall environment that might affect their ability to create a competitive advantage. So how do managers become environmentally aware? By doing scanning, monitoring, and gathering competitive intelligence, and using these inputs to develop forecasts. This prepares the firm to do more extensive analysis of the forces in the general environment and the industry or competitive environment. Environmental scanning involves surveillance of a firm‘s external environment to predict environmental changes and detect changes already under way. It is a BIG PICTURE viewpoint of the industry/competition, looking for key indicators of emerging trends—what catches your eye? Alerts the firm to critical trends before changes have developed a discernible pattern and before competitors recognize them. Environmental monitoring is a firm‘s analysis of the external environment that tracks the evolution of environmental trends, sequences of events, or streams of activities. Leaders need to monitor the trends that have the potential to change the competitive landscape—what do you want to track? Firms need to CHOOSE the trends identified via the scanning activity, and regularly monitor or track these specific trends to evaluate the impact of these trends on their strategy process What factors or trends might be most important to Ford? To assess how the external environment might affect Ford‘s strategy, it‘s necessary to take a look at the factors in the general external environment. Ford must consider the political/legal, economic and global, sociocultural and demographic, and technological forces that might affect the ability of the firm to deliver its products and sustain its business. See which factors in the general environment might have a significant impact on the automobile business. Political-Legal: Government intervention meant some firms lost flexibility, control; emission standards, miles-per-gallon edicts further constrained industry product design and development; unions had considerable power over employment contracts. Economic: The auto business was cyclical and the demand for cars was strongly impacted by boom or recession in the economy; first rising gas prices, then the credit crunch, meant customers were very cautious, they would give more weight to the cost of car ownership, including the cost of maintenance.
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Teaching Note
Case 1: Robin Hood
Demographic/Global: Automakers needed to attract younger, more affluent buyers to high-status vehicles—Ford had a spotty reputation here. New markets were opening up globally with increasing per-capita incomes in developing countries, creating a possible opportunity. Sociocultural: First the SUV was a status symbol; then going green (hybrid/electric) became the trend. The luxury segment was beginning to regain interest. Consumers were even beginning to rethink their dependence on car ownership (see the popularity of Uber and Lyft.) Certainly all the buzz was around Tesla, electric vehicles, and driverless cars. Technological: The electric/hybrid and ―autonomous‖ or driverless vehicle options were dependent on new technological developments. Based on the general environmental forces, the industry was under pressure, but there were also opportunities. Things were changing quickly, especially customer tastes, yet the auto industry‘s lag time in development meant it took a long time to react. Possibly firms with well-coordinated and integrated research and development/logistical supply teams could have an advantage. It‘s also necessary to assess the segments of the external competitive environment that include competitors, customers, and suppliers, substitutes and new entrants. Porter’s five forces model allows strategists to anticipate where the industry might be most vulnerable. See Exhibit 2.7. Ford, like other automakers, was confronting four key threats: ● One was from the ever-changing levels of rivalry among existing automakers. ● The second was the growing power of buyers such as corporate and government fleet managers and the dealers. ● Third was the threat of new entrants with advanced technology, such as Tesla and even Apple. ● Fourth was the threat of substitutes—consumers, especially in urban areas, were forgoing car ownership in favor of ride-sharing or alternate transportation modes such as bicycles. Clearly, there were a few large and equally balanced firms that were pitched in a battle for a greater share of the global market. Slower industry growth was resulting in an increase in this rivalry. Overcapacity and high exit barriers were also making a contribution to the industry picture. Another threat was coming from the power of buyers. Most buyers were clearly beginning to see more viable choices in terms of the firms from which they could buy, and the options available. Although there was some difference between the major brands, customers did not have to deal with any switching costs. Major customers were corporate and government fleet managers, carrental firms, and the dealers themselves. Suppliers did not seem to have much power, but they did become more important as the industry pressures mounted for access to various specialized parts or components, such as batteries or fuel cells. A new series of threats were coming from the ascendance of companies such as Tesla and others who were developing new technologies, especially electric or autonomous vehicles, self-driving cars. In addition, if these vehicles did not rely on internal combustion engines, the core competencies of the traditional auto manufacturers would no longer apply. Finally, substitutes TN1-576 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
were emerging, especially in urban areas, as residents considered the cost of automobile ownership and opted for ride-sharing or bike/scooter-sharing to better navigate congestions in large cities. Based on this external environmental factor analysis, the U.S. auto industry had many challenges to profitability, primarily from slow industry growth. Equally balanced competitors made it difficult for any one of them to achieve an advantage. There was always the possibility for overcapacity and rivals were trying to attract customers away from each other through price-cuts and incentives. That was the dangerous trend in this industry because companies were spending as much as they would earn in order to retain their market shares. So, there was growth without profitability. This was true for most American companies, while Japanese companies were able to capture better value by concentrating on offering much sophisticated product designs and technology. Product differentiation was susceptible to quick imitation in this industry, and in the absence of switching costs it was difficult to retain customers. Also, companies had high exit barriers as there were high fixed costs of exit, and also because exit would have had tremendous impact on the employment levels in the economy (one of the reasons for government intervention). Suggested: A few large and equally balanced competitors fighting for global market share; slow industry growth; current overcapacity; high exit barriers. Technological differentiation easily copied. Limited import restrictions for foreign companies.
Suppliers’ Power
Substitutes Threat Low
Rivalry Very High
Low Suggested: Low – do not have much power, except single sourced ones, but key suppliers may emerge. Suggested: Hard for new companies to fund startup, but threats could come from foreign companies’ imports and technology innovators.
Threat of New Entrants Medium
Suggested: No real substitute for personal automobile transportation. – status symbol. But alternatives exist in public transportation, ridesharing, bicycle/scooter, and foot power, especially in urban areas.
Buyers’ Power Med-High Suggested: Consumers do not have much price negotiating power, but do have choices; small differences among major brands; minimal switching costs. Major customers are corporate and government fleet managers, and the dealers themselves – who are powerful.
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Teaching Note
Case 1: Robin Hood
NOTE — ADDITIONAL WEB LINKS, EMBEDDED VIDEO: Ford Motor Company has created a place to communicate with the public: https://social.ford.com/en_US/about-us.html?gnav=footer-fordsocial. Here‘s one website summarizing Ford‘s status and news events. Examine Ford‘s stock price over the last five years using the tools available. Also view all auto and truck manufacturers‘ data: http://topics.nytimes.com/top/news/business/companies/ford_motor_company/index.html. Visit this website https://shop.ford.com/showroom/#/ to take a look at Ford‘s current brands. As of 2018, Ford promoted Ford vehicles—the Fiesta, Focus, Fusion, Taurus, and the new C-Max, with the F150 pickup, and iconic Mustang being among the top brands. The company also promoted the Lincoln lineup, which is now a separate division, The Lincoln Motor Company, accessible at http://www.lincoln.com/. Ford had abandoned the Mercury brand, and Ford‘s Volvo brand, which was acquired in 1999, had been sold to China‘s Geely Automobile. Ford had divested its interest in Aston-Martin in 2007 and had sold off Jaguar and Land Rover to Tata Motors of India in 2008. New, ―next generation‖ vehicles such as hybrids and EV‘s were being promoted, using the ―small-vehicle platform,‖ incorporating ideas from the Ford Silicon Valley Research Lab and advances in manufacturing technology. See http://corporate.ford.com/innovation for current news, and see this video interview from June 2013 with Alan Mulally discussing how Ford is as innovative as Tesla, is focused on the Lincoln brand, and is also focused on growth in India and China: https://www.youtube.com/watch?v=anTB0c5a6ZA. One example of innovation is the ―Info Cycle‖ project at the Ford Innovation and Research Center, which is gathering data on how bicyclists navigate the streets of Palo Alto, CA ―in order to develop new ideas for increasing roadside safety, reducing traffic congestion, and enhancing environmental impact.‖ As this post says, ―For Ford, the data offers a new opportunity to understand how bicycles are sharing the road with its cars and trucks and how new forms of transportation might be positioned to serve future urban mobility needs. But beyond that, it‘s a bold step toward a future where Ford vehicles participate in the urban environment in smarter, safer ways.‖ See http://corporate.ford.com/innovation/pedal-power-.html. Regarding disruption in the entire auto industry, see this thought-provoking series from late 2017: A new auto industry is forming, triggered by a reimagining of the vehicle itself. New business models are coalescing, centered on technology innovators, fleet operators, services businesses and platform providers. By 2030 the landscape may look entirely different. How will it all shake out? http://www.autonews.com/section/industry_redesigned#top. Does Ford appear ready to deal with the competitive forces in its industry? 2. What internal resources and assets does Ford have that may give it a competitive advantage?
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Teaching Note
Case 1: Robin Hood
Referencing Chapter 3: Analyzing the Internal Environment of the Firm When one firm outperforms others by a wide margin over a long period of time, it‘s important to figure out how this could be. The answer may lie in how that firm arranges its activities and creates unique bundles of resources that allow it to sustain a competitive advantage. Students should assess the relationships between the elements in Ford‘s value chain. Remember, value chain analysis is a strategic analysis of an organization that uses value-creating activities. Value is the amount that buyers are willing to pay for what a firm provides them and is measured by total revenue, a reflection of the price a firm‘s product commands, and the quantity it can sell. A firm is profitable when the value it receives exceeds the total costs involved in creating its product or service. Creating value for buyers that exceeds the costs of production (i.e. margin) is a key concept used in analyzing a firm‘s competitive position. Every activity should add value. Take a look at Exhibit 3.1 to see the value chain activities. Based on the relationships between these elements, Ford can make a choice of how to proceed to craft a competitive advantage. A sample value chain analysis is below: Value chain activity Primary: Inbound logistics (distribution facilities, material control systems, warehouse layouts) Operations (efficient work flow design, quality control systems)
Outbound logistics (consolidation of goods, efficient scheduling, finished goods processing) Marketing and Sales (motivated sales people, innovative advertising and promotion, effective pricing, proper ID of customer segments and distribution channels) Service (ability to solicit customer feedback and respond) Secondary (or support): Procurement (win-win relationships with suppliers,
How does Ford create value for the customer? Assumed adequate.
Outdated manufacturing facilities for some products; few ―flexible manufacturing systems‖ that could build two or more models in one plant (possible legacy—―any color you want as long as it‘s black‖?); poor quality control in the past appears to be improving. Assumed adequate.
Some strong brands built customer loyalty: F150, Mustang.
Ability to manage massive product recalls.
Poor material requirement planning in the past? TN1-579
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Teaching Note reduced dependence on single supplier) Technology development (state of the art hardware and software, innovative culture and qualified personnel) Human resource management (effective recruitment, incentive and retention mechanisms) General Administration (effective planning systems to establish goals and strategies, access to capital, effective top management communication, relationships with diverse stakeholders)
Case 1: Robin Hood
Strong technological skills, but technological breakthroughs not disseminated or communicated throughout the organization quickly enough in the past to support primary activities. Workforce culture had been highly bureaucratic, problem of internal fiefdoms caused lack of communication in the past. Lack of knowledge sharing had led to duplication and complexity in operations with a concurrent increase in costs. Failure to coordinate activities meant the inability to catch key trends and react appropriately. Mulally‘s ONE Ford tried to fix this. Fields and Hackett‘s restructuring, focus on Mobility, hoped to increase levels of innovation, but investors felt the lack of a unifying message.
Primary Activities In terms of primary activities, the key to Ford‘s possible ability to differentiate itself in the market resided in its marketing. Certain brands, especially the F-150 truck and the Mustang, had iconic value. Although operations had been a problem in the past, Mulally had focused on improvements here. Fields, and now Hackett, continued to refine the product lineup.
Support Activities With regards to support activities, a competitive advantage is achieved by developing a strong general administration that is built around visionary leadership and a culture that pushes for technological innovation. Under Mulally, Ford had pushed for more technological development. Mulally‘s attention to general administration issues meant this could become a strength going forward if it was able to be protected. Certainly his vision had inspired some change. Under CEO Mark Fields, and now under Jim Hackett, it was unclear if these changes could be sustained and innovative technology could be further developed. In addition, there didn‘t appear to be any clear strategy for how to integrate new acquisitions and innovations into the company as a whole. In addition, see the concept of the resource-based view of the firm, and the three key types of resources: tangible resources, intangible resources, and organizational capabilities. A firm‘s strengths and capabilities—no matter how unique or impressive—do NOT necessarily lead to a competitive advantage. The resource-based view of the firm takes the perspective that firms‘ competitive advantages are due to their endowment of strategic resources that are valuable, rare, costly to imitate, and costly to substitute. Without these unique resources, the firm can only attain competitive parity. RBV goes beyond a SWOT analysis to integrate internal and external TN1-580 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
perspectives in a broader competitive context. RBV can reveal how core competencies embedded in a firm can help it exploit new product and market opportunities. An important issue to focus on here is the importance of intangible resources like innovation and reputation. Especially in mature brands, sustaining reputation is essential. Look at resources that are controlled by Ford that might enable it to develop and implement value-creating strategies. Based on their reading of the case, students might identify those resources to include: Tangible Resources: Financial: Not great, but it had been better than other U.S. automakers in the past. Physical: Considerable physical resources worldwide—perhaps too many unproductive facilities with high overhead in the past, currently appear to have been addressed. Technological: Considerable advances, especially the hybrid electric models and self-driving options. The focus on mobility innovation seemed to be building. Organizational: CEO Mulally streamlined reporting relationships to encourage transparency in reporting problems so decisions could be made to proceed with effective fixes. CEO Fields, and then CEO Hackett, made structural changes to pursue innovation. Intangible Resources: Human: Although considerable depth in employee tenure and skill, past problems had made it difficult to utilize this resource and operate effectively. Creation of the innovative Mobility division had the opportunity to attract talented engineers. Innovation and creativity: CEO Fields had made investments and acquisitions in innovation, and created an innovation and research center, also encouraging employees to file over 3,200 patents in 2016, more than any other automaker. CEO Hackett is continuing these investments. Reputation: Poor, but is improving. Determining whether the internal resources are valuable, rare, difficult to imitate, or difficult to substitute (VRIN) can help a firm sustain a competitive advantage. See Exhibit 3.6. Applying the VRIN concept, Ford had no valuable, rare, inimitable and non-substitutable capabilities that could become a source of sustainable competitive advantage. In comparison, the Japanese counterparts, specifically Toyota Motor Corporation had succeeded in developing a network of relationships with members in its extended value chain that had all the VRIN attributes and therefore was a source of sustainable competitive advantage. Because these network types of relationships could be studied and emulated, Ford did have an opportunity to benefit from imitating some of its rivals. In fact, Mulally flew to Japan in 2007 to meet with top executives at Toyota to seek their advice. The area where Ford had seen the most advance was in the hybrid electric technology and the Smart Mobility efforts. Although not inimitable, Ford appeared to have an edge over some American rivals here. TN1-581 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
3. How should Ford compete? Referencing Chapter 5: Business-Level Strategy A competitive strategy is linked to the value chain, and supported by intangible assets. Ford had historical lack of coordination across the value chain. Resources and assets should provide a firm with the ability to create products that are unique and valuable to customers, but Ford did not have either VRIN resources or enduring intangible assets to allow it to do this. In order to achieve a sustainable competitive advantage, Ford had to assess its ability to contend with other automobile companies. The question of how to compete in a given business to attain competitive advantage requires an assessment of the types of competitive strategies, including the three generic strategies that are used to overcome the five forces and achieve a competitive advantage: 70. Overall cost leadership Low-cost-position relative to a firm‘s peers Manage relationships throughout the entire value chain 71. Differentiation Create products and/or services that are unique and valued Non-price attributes for which customers will pay a premium 72. Focus strategy Narrow product lines, buyer segments, or targeted geographic markets Attain advantages either through differentiation or cost leadership Generic strategies are plotted on two dimensions: competitive advantage and strategic target. The overall cost leadership and differentiation strategies strive to attain advantages industrywide, while focusers have a narrow target market in mind. It‘s hard to see what competitive strategy would be best for Ford. It had tried differentiation in the past, and had been partly successful with pickup trucks and the Ford Mustang, but differentiation advantages are easily copied (Not in the case: see Toyota‘s push into the big truck category with the Tundra, and the 2009 J.D. Power & Associates initial quality results, which showed the F150 and Tundra tied for first place http://news.pickuptrucks.com/2009/06/f150-ridgeline-tundra-top-jd-power-and-associates-initialquality-study.html ). Ford‘s current advance into developing solutions to the mobility problem could have created differentiation, but all other auto manufacturers and others from outside the industry were moving in this direction as well. All Ford appeared to be able to do was maintain parity here.
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Teaching Note
Case 1: Robin Hood
Ford would have had an opportunity for cost leadership if it had been able to better manage its value chain relationships. Production efficiencies would have helped contain costs, but, as with General Motors, health care and pension, and wage issues meant any production cost advantages would have rapidly evaporated into employee‘s pockets. Ford, at the conclusion of this case, appeared to be stuck-in-the-middle. Referencing Chapter 6: Corporate-Level Strategy Corporate strategy focuses discussion on the questions of what businesses a corporation should compete in and how the businesses should be managed so they can create ―synergy‖—creating value through entering new markets or developing new technologies, either through related or unrelated diversification. Diversification is the process of firms expanding their operations by entering new businesses. Some possibilities include: ● Mergers and acquisitions ● Strategic alliances ● Joint ventures ● Internal development Whatever the choice, it should create value for all stakeholders—employees, suppliers, distributors, and the organization‘s owners themselves. The choice of diversification strategy should create synergy so that all parties gain something they would not have had on their own. Companies can achieve synergy through diversification in two ways: Through related businesses (horizontal relationships) ● Sharing tangible resources ● Sharing intangible resources ● Leveraging core competencies Or through unrelated businesses (hierarchical relationships) ● Value creation derives from corporate office ● Leveraging support activities Ford‘s previous leadership, primarily under Jacques Nasser, had followed an unrelated diversification strategy (some of the relationships were tenuous at best). The objective had been to move from low-margin businesses into high-margin businesses. (Not in the case: As a result, the company divested from auto-parts making and invested in luxury car business, bought up dealerships and entered retailing, and even purchased junkyards.) On the face of it, the strategy seemed to be one of related diversification. However, though diversification into luxury-car markets, retailing, junkyard recycling etc., was related to the car business, there was little, if any, in common between those businesses. Ford Motor Company could not gain any scope or scale advantages with such diversification.
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Teaching Note
Case 1: Robin Hood
Primarily a mass-market carmaker, Ford could not work any wonders in the luxury-car business (e.g., Jaguar had not been marketed as a ―Ford‖ product, and the Lincoln brand had struggled to attain a true luxury identity). The company did not have any understanding or expertise of businesses such as junkyard recycling. Not only that, its entry into retailing by purchasing dealerships, actually angered the dealers and led to sour relationships with them. Consequently, the diversification strategy had failed and destroyed shareholder value. Related diversification seeks to add value through synergy, though leveraging the competencies and activities that exist in business units that have some meaningful relationships. Core competencies reflect the collective learning in organizations—how to coordinate diverse production skills, integrate multiple streams of technologies, and market diverse products and services to create value. Core competencies must create superior customer value; the different businesses must all have similar elements in the value chain that require similar skills; and these activities or skills must be difficult for competitors to imitate. Sharing activities means that value chain elements are shared across business units, so that two or more activities are done by one of the businesses. This allows for cost savings, but businesses need to make sure to keep control over quality and customer perception. Again, given its iconic legacy, Ford should have had considerable core competencies in automobile production; however, those competencies had not been well coordinated in the past. The different businesses had not integrated their multiple streams of technologies, or managed similar value chains in a way that created unique advantages over the competition. CEO Mulally was aware of this missed opportunity, and he took steps toward more integration and coordination, more sharing of activities across business units in an attempt to create synergy, and, ultimately, to grow market share. Mulally‘s concept of the ―ONE Ford‖ meant that all Ford vehicles competing in global segments would be the same in North America, Europe, and Asia – sharing activities through common parts and systems. Attaining this goal would reduce complexity, and thus costs, in the purchasing and manufacturing processes. Mulally and then Fields also pursued alliances with overseas partners, and the move into ―mobility‖ saw Fields create the Ford Smart Mobility subsidiary for investing efforts in mobility services. This entity was intended to design and build these services on its own and collaborate with other startups and tech companies as needed to pursue opportunities. As part of this push into alternate technologies, Ford was pursuing a partnership with Uber, which was trying out the Ford Fusion autonomous vehicle. Ford had put Amazon‘s virtual digital assistant Alexa in its cars. Ford had invested in Velodyne, a company that developed lidar remote-sensing technology for self-driving cars, and in artificial intelligence software firm Argo AI. Ford had acquired an app-based, crowd-sourced, ride-sharing service, Chariot. Ford had teamed up with Motivate, the global leader in bike-sharing to include the FordPass mobility network in the Ford GoBike commuting transportation option. Through its innovation and research centers, Ford was also developing strategies in fleet and data management, route and TN1-584 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
journey planning, and telematics, all in an effort to help solve congestion and help move people more efficiently in urban environments. These diversification efforts were intended to develop both new services and products, including new electric vehicles and possibly a self-driving car, and to experiment with ways to provide innovative solutions to transportation and mobility problems in cities across the globe. The difficulty was that these efforts seemed more unrelated than related: what did bike-sharing and artificial intelligence have to do with the car business? There was no doubt that the auto industry was changing, and that this disruption required a different way of creating value across all lines of business, but it was hard to see how either tangible or intangible resources could be shared, or core competencies leveraged between the traditional manufacturing and the transportation/mobility solution businesses. It appeared this needed a true visionary to guide the strategy here. Was current leadership up to the task? Referencing Chapter 10: Creating Effective Organizational Designs Strategy consists of analysis (setting goals, assessing the internal and external environment of the firm), formulation (deciding which industries to compete in and how to compete in those industries), and implementation, where organizational leaders allocate the necessary resources and design the organization to bring intended strategies to reality. Ford‘s Alan Mulally made a choice of how to compete; therefore, he also needed to decide about implementation and the organization‘s design. Chapter 10 stresses that organizational strategy has implications for a firm‘s structure. We can relate to concepts from Chapter 10 such as the differences between various structures and the effectiveness of each possible structure for Ford‘s possible choices of strategy. Organizational structure refers to the formalized patterns of interactions that link a firm‘s tasks, technologies, and people. Structure provides a means of balancing two conflicting forces: the need for the division of tasks into meaningful groupings, and the need to integrate the groupings for efficiency and effectiveness by coordinating and integrating key activities. Structure identifies the executive, managerial, and administrative organization of a firm and indicates responsibilities and hierarchical relationships. It also influences the flow of information as well as the context and nature of human interactions. Factors that facilitate the effective coordination and integration of key activities include having a common culture and shared values, horizontal organization structures, horizontal systems and processes, effective communications and information technologies, and involved human resource practices. An effective organizational design can encourage the flow of information and enhance working relationships between functional departments and activities. However, achieving the coordination and integration necessary to maximize the potential of an organization‘s human capital involves much more than just creating a new structure. Different structures lead to different degrees of flexibility and permeability, and can affect the amount of culture change required. Structures can have an impact on relationships between internal and external constituencies and, therefore, need the full support of the management team to implement. TN1-585 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Early on, Mulally did some senior executive reorganization. Not in the case: Many of the newly appointed executives reported directly to him, including the global head of product development, the head of worldwide purchasing, the chief of quality and advanced manufacturing, the head of information technology, the chief technical officer and the leaders of Ford‘s global divisions – Europe, Asia Pacific, Africa, and America. This meant Ford utilized a strategic business unit (SBU) structure, or an organizational form in which products, projects, or product market divisions are grouped into homogenous units. Highly diversified corporations may consist of dozens of different divisions. A purely divisional structure would make it nearly impossible for the corporate office to plan and coordinate activities, because the span of control would be too large. With an SBU structure, divisions with similar products, markets and/or technologies are grouped into homogenous units to achieve synergies, including those available through related diversification such as leveraging core competencies, sharing infrastructures, and market power. Generally, the more related businesses are within a corporation, the fewer SBUs will be required. Each of the SBUs at Ford operated as a profit center, yet certain key responsibilities such as product development, information technology, and quality all reported directly to Mulally. This meant Mulally had the ability to coordinate and control key functions while implementing his strategy. CEO Mark Fields had not changed reporting relationships in the traditional lines of business, but had made a major change to the organizational structure when he created the new subsidiary Ford Smart Mobility LLC, formed to design, build, grow, and invest in emerging mobility services. Designed to compete like a start-up company, Ford Smart Mobility LLC was created to design and build mobility services on its own, and collaborate with start-ups and tech companies as needed to pursue opportunities. This entity showed up in the Income Statement for the first time in 2016 as ―other.‖ This restructuring signaled that Ford would be using innovation ―not only to create advanced new vehicles but also to help change the way the world moves by solving today‘s growing global transportation challenges.‖ Although there was reason to focus efforts here, and create a semiautonomous structure to do this, it could be difficult to figure out how to manage the mobility units effectively in a way that coordinated and integrated key activities. Given the increasing disruption in the industry, and the obligation to return value to understandably concerned investors, Ford leadership had some significant decisions to make in the coming years. 4. OPTIONAL QUESTION: What has leadership done to implement strategy, and what challenges remain? Note: No PowerPoint slides accompany this discussion. Referencing Chapter 7: International Strategy TN1-586 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
International expansion is a viable diversification strategy. However, before pursuing this, a firm needs to determine why an industry in a given country is more (or less) successful than the same industry in another country. When choosing a country to expand into, firms must assess the degree of consumer demand, the degree to which resources such as skilled labor and other supplier or supporting infrastructure are developed and available, the speed with which such resources can be deployed, the extent of political and economic risk and corruption, the access to qualified management. There are two opposing forces that firms face when entering international markets: cost reduction, and adaptation to local markets. Therefore, there are four basic strategies firms can use: international, global, multidomestic, and transnational. See Chapter 7, Exhibit 7.4. Ford tried to pursue a global strategy—ONE Ford—but their production technologies appeared to be multidomestic, different in different countries, with questionable production capacity, especially in China. Also, see Case Exhibit 6 that shows losses in South America and Europe. Ford is only making significant money in the Americas, and Asia Pacific appears to be in real trouble. Ford management said it was spending money to alter the product lineup in this region, and was planning to push certain brands into China. The global strategy was meant to take advantage of synergies between brands. Was this strategy working? Referencing Chapter 8: Entrepreneurial Strategy and Competitive Dynamics Entrepreneurship involves the creation of new value by an existing organization or new venture that involves the assumption of risk. For an entrepreneurial venture to create new value, three factors must be present—an entrepreneurial opportunity, the resources to pursue the opportunity, and an entrepreneur or entrepreneurial team willing and able to undertake the opportunity. Entrepreneurs must go through a process of identifying, selecting, and developing potential opportunities. See Exhibit 8.1 and the opportunity analysis framework: the relationship between an entrepreneur, the firm‘s resources, and the opportunities available in the firm‘s environment. Entrepreneurs need to understand the concept of opportunity recognition: the process of discovering and evaluating changes in the business environment, such as a new technology, socio-cultural trends, or shifts in consumer demand, that can be exploited. Changes in the external environment can lead to new business creation, but the discovery of these new ideas is not enough. They then need to be evaluated to find out if they‘re strong enough to become new ventures. Good entrepreneurial opportunities are those that are attractive to the marketplace (there must be demand for the new product or service), achievable (it must be practical and physically possible to do), durable (the window of opportunity must be open long enough for it to have a chance for success), and value creating (it must be profitable—the benefits must surpass the cost of development by a significant margin).
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Teaching Note
Case 1: Robin Hood
Resources are an essential component of a successful entrepreneurial launch. The most important resource is usually money, but human resources, and a strong and skilled management team, is also an essential asset. Social capital, or companies who have extensive social networks or wellconnected key contacts, allows the new venture to gain exposure and build legitimacy faster. Strategic alliances represent a type of social capital that can be especially important to firms trying to enter new markets. Launching a competitive venture requires a special kind of leadership involving courage, belief in one‘s convictions, and having the energy to work hard. Three characteristics of entrepreneurial leaders are: ● Vision ● Dedication and drive ● Commitment to excellence To achieve excellence, venture founders must understand the customer, provide quality products and services, pay attention to details, continuously learn, and surround themselves with good people. An adaptive new entry can work. Strategies meant to enter a new market must quickly generate cash flow and build credibility for the overall brand. New entries that are adaptive offer a product or service that is somewhat new and sufficiently different to create new value for customers and capture market share. This is adaptive in the sense that it shows awareness of marketplace conditions and can capitalize on current trends. An adaptive new entry involves taking an existing idea and adapting it to a particular situation. However, unless potential customers believe the product or service does a superior job of meeting their needs, they will have little motivation to try it. Second, there is nothing to prevent a close competitor from mimicking the new firm‘s adaptation as a way to hold onto its customers. Third, once an adaptive entrant achieves initial success, the challenge is to keep the idea fresh. If the attractive features of the new business are copied, the firm must find ways to continually adapt and improve the product or service offering. Ford had an opportunity to create adaptive new entries with the hybrid and electric vehicle technology. Mulally had provided leadership with a clear vision of ONE Ford that should have spurred an entrepreneurial spirit. CEO Fields, and then Hackett, believed in the promise of emerging mobility services, such as autonomous vehicles. When Hackett was promoted to CEO, he had said breakthrough technologies were demanding a rethink of how to design transportation systems. Hackett believed Ford needed to speed up decision making, and invest capital where it could create value, and then move decisively to address underperforming areas. Certainly there were adaptive new entries in car designs with products such as the hybrid electrics, and Ford was trying with its new partnerships and acquisitions to expand on advances in technology in the area of mobility and autonomous vehicles, but it appears Ford had only reached parity in North American with these products—everyone else already had something similar, or was developing it. Could Ford use this new venture spirit to achieve a lasting adaptive advantage? TN1-588 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
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Teaching Note
Case 1: Robin Hood
Referencing Chapter 4: Intellectual Capital See the concepts of intellectual capital, human capital and social capital, all of which are intangible assets that a company such as Apple needs to have in order to compete successfully. Intellectual capital is a measure of the value of a firm‘s intangible assets, its reputation, employee loyalty and commitment, customer relationships, company values, brand names, and the experience and skills of employees. How do companies create value in a knowledgeintensive economy? The general answer is to attract and leverage human capital (intangible assets) effectively through mechanisms that create products and services of value over time. Human capital involves the individual capabilities, knowledge, skills, and experience of the company‘s employees and managers. This knowledge is relevant to the task at hand, as well as the capacity to add to this reservoir of knowledge, skills, and experience through learning. Human capital is the foundation of intellectual capital. Intellectual capital is developed through attracting, developing, and retaining human capital. See Chapter 4, Exhibit 4.2. Success in retaining human capital could also be attributed to the nurturing of the ―social ties‖ or social capital. Social capital is a function of the network of relationships that individuals have throughout the organization and beyond. Relationships are critical in sharing and leveraging knowledge and in acquiring resources. Social capital can extend beyond the organizational boundaries to include relationships between the firm and its suppliers, customers, and alliance partners. If employees are working effectively in teams, across business divisions, and sharing their knowledge and learning from each other, not only will they be more likely to add value to the firm, but they also will be less likely to leave the organization. Intellectual assets or intangible resources are critical to organizational success. The growing importance of knowledge, coupled with the move by labor markets to reward knowledge work, tells us that investing in a company is, in essence, buying a set of talents, capabilities, skills, and ideas—intellectual capital—not physical and financial resources. Here are some questions organizations should ask. Human capital: Does the organization effectively attract, develop, and retain talent? Does the organization value diversity? Social capital: Does the organization have positive personal and professional relationships among employees and alliance partners? Technology: Does the organization effectively use technology to transfer best practices across the organization, codify knowledge, and develop dynamic capabilities for competitive advantage? Organizational Capabilities: Specific Competencies or Skills: Due to Ford‘s legacy, it should have had considerable intellectual and human capital it could have used to leverage employees‘ experience and skills, therefore, preserving its reputation, brand names and values. This then would have increased the loyalty and commitment of its customers.
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Teaching Note
Case 1: Robin Hood
Capacity to combine resources: Although Ford had the capacity to combine resources, prior to Mulally‘s arrival, it had neither the will nor the capability to do so. With Mulally‘s, Field‘s, and now Hackett‘s vision, there was more possibility here, especially with newly acquired and focused technology. Referencing Chapter 9: Strategic Control & Corporate Governance Strategic control involves the process of monitoring and correcting a firm‘s strategy and performance. In a contemporary control system, managers continually monitor both the internal and external environments, and identify trends and events that signal the need to revise strategies, goals and objectives. We should, therefore, recognize the importance of involving all operating managers in setting performance goals based on continuous monitoring of the internal and external environment. The relationships between strategy formulation, implementation, and control are highly interactive. A contemporary approach to strategic control utilizes two different types of control: informational control and behavioral control. These two types of control play a role in the formulation and implementation of strategies. Informational control is a method of organizational control in which a firm gathers and analyzes information from the internal and external environment in order to obtain the best fit between the organization‘s goals and strategies and the strategic environment. Behavioral control is a method of organizational control in which a firm influences the actions of employees through culture, rewards, and boundaries. See Exhibit 9.2. Informational control is concerned with whether or not the organization is ―doing the right things,‖ while behavioral control is concerned with whether or not the organization is ―doing things right‖ in the implementation of its strategy. Organizations need to make sure enough information of the right kind is available to monitor activities. This is where things such as financial audits and customer feedback are essential, and where appropriate role models and rewards should be available to keep employees motivated. Chapter 9 emphasizes the importance of aligning both informational and behavioral control systems with organizational strategy. The information gained from the internal and external environment is reviewed against the firm‘s strategy and goals. If the results are not what was expected, then behavioral controls can be utilized to encourage employees to ―do things right.‖ Employee actions can be influenced through building or maintaining a strong positive culture, creating effective reward and incentive programs, and setting boundaries and constraints to minimize improper and unethical conduct (see Chapter 9, Exhibit 9.3). Both the informational and behavioral components of strategic control are necessary, but not sufficient, conditions for success. What good is a well-conceived strategy that cannot be implemented? Or what use is an energetic and committed workforce if it is focused on the wrong strategic target? In addition, this chapter discusses the importance of a strong, positive culture and reward systems that rely more on achievement of jointly created and internalized goals and objectives than on constraints imposed by rules and regulations. Behavioral controls involve a system of rewards and incentives coupled with a strong culture. Managers need to understand the need to TN1-591 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
hire the right people, that training plays a key role, managerial role models are vital, and reward systems need to be clearly aligned with organizational goals and objectives. Not in the case: Mulally encouraged weekly meetings where he rewarded those who told the truth. Although Mulally did implement changes in the culture, his methods did create conflict with certain members of management, and some experienced people quit the firm. Regarding Fields, we don‘t know enough about his approach to behavioral controls to tell how they were working, but there was some evidence that Fields lacked a cohesive narrative or game plan. This caused some confusion regarding the priorities for goals and objectives. Hackett had continued the two division structure, but implied that he would ―move decisively to address underperforming areas.‖ Referencing Chapter 11: Strategic Leadership See the concept of leadership, the process of transforming organizations from what they are to what the leader would have them become. Leadership is proactive, goal oriented, and focused on the creation and implementation of the creative vision. This definition implies dissatisfaction with the status quo, a vision of what should be, and process for bringing about change. Leaders are change agents whose success is measured by how effectively they formulate and implement a strategic vision and mission. See Exhibit 11.1. This involves: ● Setting a direction ● Designing the organization ● Nurturing a culture dedicated to excellence and ethical behavior The interdependent nature of these three activities is self-evident. Consider an organization with a great mission and a superb organizational structure, but a culture that implicitly encourages shirking and unethical behavior. Often, failure of today‘s organizations can be attributed to a lack of equal consideration of these three activities. The imagery of the three-legged stool is instructive: it will collapse if one leg is missing or broken. Leaders need to set the direction for the organization by continually scanning the environment to develop knowledge of all stakeholders, and knowledge of salient environmental trends and events. Then leaders must integrate that knowledge into a vision of what the organization could become. Leaders require the capacity to solve increasingly complex problems, and must be proactive in their approach so they can develop viable strategic options. One interesting aspect of the Ford story was the extent of Ford family member involvement. Controlling about 40 percent of the company‘s voting shares, these individuals had considerable power to set direction for the company, especially through chairman of the board Bill Ford. However, outside investors worried about the sense of entitlement that might have had retained earnings allocated to dividends instead of being reinvested in the firm. Ford family members had not been that proactive in the past, but Bill Ford, in his brief tenure as CEO, did have the foresight to go outside the firm to seek his replacement. He was willing to recognize that the environment had changed such that only an outsider would have had the point of view necessary to get the firm back on track. In this way, Bill Ford set the initial direction for Ford‘s turnaround. TN1-592 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Leaders are responsible for designing the organization: a strategic leadership activity of building structures, teams, systems, and organizational processes that facilitate the implementation of the leader‘s vision and strategies. Leaders have an important role in creating systems and structures to achieve desired ends. Not in the case: One immediate change that new CEO Mulally implemented was the weekly meeting with executives to discuss business plans. Previously, executives used to meet only monthly or semiannually, and spent a great deal of time and energy trying to explain away bad news. By creating these regular meetings, Mulally showed an awareness of the importance of organizational processes that facilitated timely communication of his vision. As previously stated, Mulally changed the structure of the organization‘s design, moving top executives to report directly to him, consolidating key functions globally, and encouraged frank discussion of ―bad news‖ in weekly meetings. This meant team leaders had clear guidance and could understand the importance of their responsibilities in carrying out Mulally‘s vision of ONE Ford. This new structure could create better integrating mechanisms across the company. Leaders play a key role in changing, developing, and sustaining an organization‘s culture. An excellent and ethical organizational culture is an organizational culture focused on core competencies and high ethical standards. Organizational culture can be an effective means of organizational control. In nurturing a culture dedicated to excellence and ethical behavior, managers and top executives must accept personal responsibility for developing and strengthening appropriate behavior; consistently demonstrate that such behavior is central to the vision and mission; develop and reinforce role models, corporate credos, codes of conduct, reward and evaluation systems, policies and procedures. Doing this requires leaders to overcome barriers to change and effectively use their power. By the time Mulally was ready to retire, it appeared that his vision had been sound. Mulally had been an effective role model for the fearless risk-taking and willingness to make hard decisions that Ford needed in order to revitalize itself. The Ford family had supported Mulally and were now supporting new CEO Jim Hackett. Ex-CEO Fields had made changes as well, structuring the company to accelerate innovation in connectivity, mobility, and autonomous vehicles, among other things. Hackett would need to further spur innovation into an era when cars may no longer need drivers. Was there a clear strategy and was he the right role model to do this? NOTE — ADDITIONAL READING, EMBEDDED VIDEO: Watch this video about Henry Ford and the creation of Ford Motor Company: https://www.history.com/shows/men-who-built-america/videos/henry-fords-motor-company. How might Ford Motor Company today capitalize on Henry Ford‘s ideas, image, and philosophies?
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Teaching Note
Case 1: Robin Hood
Referencing Chapter 12: Managing Innovation and Fostering Corporate Entrepreneurship Innovation involves using new knowledge to transform organizational processes or create commercially viable products and services using the latest technology, experimentation, creative insights, and information from competitors. However it comes about, innovation occurs when new combinations of ideas and information bring about positive change. In fact, the root of the word innovation is the Latin novus, which means ―new.‖ Innovation involves introducing or changing to something new. Ii is a critical part of strategic implementation. Before proceeding, firms must first define the scope of the innovation efforts, and they must ensure that their innovation efforts are not wasted on projects that are outside the firm‘s domain of interest. Firms must have the means to focus their innovation efforts. A strategic envelope defines the range of acceptable projects. Strategic envelope means a firmspecific view of innovation that defines how a firm can create new knowledge and learn from an innovation initiative even if the project fails. The strategic envelope also gives direction to a firm‘s innovation efforts, which helps separate seeds from weeds and builds internal capabilities. One way to determine which projects to work on is to focus on a common technology. Then, innovation efforts across the firm can aim at developing skills and expertise in a given technical area. Another potential focus is on a market theme. Companies must be clear not only about the kinds of innovation they are looking for but also the expected results. However a firm envisions its innovation goals, it needs to develop a systematic approach to evaluating its results and learning from its innovation initiatives. It needs to develop a set of questions to ask itself about its innovation efforts. In defining the innovation scope, a firm should answer several questions: ● How much will the innovation cost? ● How likely is it to actually become commercially viable? ● How much value will it add; that is, what will it be worth if it works? ● What will be learned if it does not pan out? The challenges of innovation involve: ● Choosing when and how to continue to innovate ● The scope and pace of future innovation ● Whether or not to collaborate with innovation partners ● Requires resources such as financial, human and social capital Requires the leadership team to have adequate vision, dedication and drive Mulally certainly had demonstrated the vision, dedication, and drive to succeed. His restructuring efforts had provided the needed human and social capital resources, and the financial resources had returned improved margins. Fields had made changes in management in his term as CEO, many focused on accelerating innovation in connectivity, mobility, and autonomous vehicles, among other things. His push to create more innovation via the Smart Mobility entity meant resources were being dedicated to TN1-594 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
this activity. Fields had chosen Jim Hackett to head up this new division. Hackett, formerly the CEO of Steelcase, a Michigan furniture company, had been credited with developing that business into a global leader, transitioning it from a traditional furniture manufacturer into an industry innovator. The hope was that Hackett could use that vision, dedication, and drive to grow Ford in a new direction. This heavy investment into the promise of ―mobility,‖ although it still included cars and trucks, also required the development of autonomous technology (self-driving cars), electric vehicles, and other transportation services such as urban mobility solutions via ride-sharing, bike/scootersharing, and customized interior vehicle experiences serving multiple customer needs. Chairman Bill Ford was supporting this investment, with the hope that the company could make increased profit margins on new services, more than double what it had traditionally made selling cars and trucks. The remaining question left to ask was if the pace and scope of innovation was what it needed to be. Would this innovation yield the expected results? Teaching Note Case 35 — Jamba Juice: FOCUS Is on the Menu Case Objectives 1. To investigate choice of competitive strategy in a crowded industry environment. 2. To examine how external and internal forces affect competitive strategy and options for innovation and growth. See the table below to determine where to use this case: NOTE: There are both PRIMARY and SECONDARY chapters that can be used for this case. The Teaching Note gives guidance for the PRIMARY use chapters, and provides suggestions if the instructor wants to use the case to illustrate concepts from the optional SECONDARY chapters. CASE OBJECTIVES TABLE Chapter Use Key Concepts PRIMARY CONCEPTS: 5: Business-Level Strategy 6: Corporate-Level Strategy SECONDARY CONCEPTS 2: External Environment 3: Internal Analysis
Competitive strategy; generic strategies
Additional Reading and/or Exercises NOTE additional reading web articles, embedded video
Diversification; synergy; core competencies; acquisitions Industry competition five forces; general environmental factors
NOTE additional reading web articles
Value chain analysis; resourcebased view of the firm; VRIN
NOTE additional reading web articles, embedded
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Teaching Note
Case 1: Robin Hood video
4: Intellectual Assets 8: Entrepreneurial Strategies 11: Strategic Leadership 12: Managing Innovation
Intellectual and human capital; dynamic capabilities Opportunity recognition Leadership Innovation; scope of innovation
Case Synopsis In January 2019 Jamba Juice made the final transition out of the public eye, becoming a privately-held subsidiary of FOCUS Brands global multichannel foodservice empire. FOCUS Brands was an Atlanta-based developer operating more than 5,000 locations around the world. With expertise in franchise operations, its brands included Carvel, Cinnabon, Schlotzsky‘s, Moe‘s Southwest Grill, Auntie Anne‘s, and McAlister‘s Deli. Jamba Juice, the lifestyle brand with a passion for making healthy living fun, had needed a refresh. Since 2015 the brand had been undergoing repositioning on multiple levels. Financial results for recent years had indicated a decrease in revenues and sluggish profits. Although the company had tried to explain this by pointing to the non-recurring expenses of business model adjustment and corporate relocation, investors were wary as the stock price continued to slide. The largest shareholder and activist investor, Engaged Capital, had called on the company to ―slash costs and close unprofitable stores,‖ which Jamba CEO Dave Pace had proceeded to do. Jamba Juice had made moves on many fronts: relocation of headquarters, reduction in corporate headcount, removal of self-serve kiosks in non-franchisee-operated locations, transition from company-owned and operated units to over 90 percent of its stores in franchisee hands, changes to menu offerings, and a shift in the quality of franchise operators with a move to attract multistore franchising partners. Although the intent was to improve Jamba Juice‘s operational and revenue-producing opportunities, the significant changes to the company‘s business model, leadership, and key personnel resulted in a ―significant increase in non-routine transactions and impacted certain routine processes needed to effectively accumulate and present consolidated financial results,‖ which made it impossible for Jamba to produce audited financials from Q3-2016 until Q1-2018. This failure to file prompted NASDAQ to threaten delisting and made the company uninvestable for many market participants. Despite this, several analysts believed the transformation from a company operator to a franchisor model had ―massively improved marginal profitability and reduced capital requirements,‖ subsequently increasing the firm‘s ―take-private potential,‖ and noting even ―franchisees think that the company would be more focused if it were not beholden to quarterly reporting demands.‖ Obviously, FOCUS Brands thought so as well. TN1-596 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Jamba Juice, started in San Luis Obispo, CA in 1990, was a company intent on helping individuals lead healthier life styles. Jamba Juice had been the smoothie industry leader, but there had been increased competition from the likes of Starbucks and quick-serve restaurants like McDonald‘s. Previous CEO James White had started a turnaround in 2008, and had passed the challenge on to Dave Pace, but the quick-serve, fast-food industry was a lot more competitive now. Stand-alone brands faced rising costs and needed significant scale in order to effectively manage operations, which was why the category was increasingly under consolidation. Would Jamba‘s move to become a privately-held subsidiary of FOCUS Brands, an organization known for franchise management, be enough to keep Jamba Juice top-of-mind with current customers and attractive to new ones?
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Teaching Note
Case 1: Robin Hood
Teaching Plan The Jamba Juice case can be used to set the stage for a discussion of business policy and strategy in a practical real-world environment. Most students can see themselves managing a juice bar, so the issues may be easy for them to visualize. Therefore, this case can be introduced in the early part of the course, after students have read chapters 2 and 3. Instructors can use this case to set up the importance of doing an analysis of the internal and external environment as a prelude to choosing a competitive strategy. At the time of the case, Jamba Juice was at a critical juncture and uniquely positioned in the specialty juice and smoothie industry. The competition was highly fragmented in the juice and smoothie industry, with competitors including other juice and smoothie retailers (e.g. Juice It Up!, Planet Smoothie, and Smoothie King), but other quick-serve restaurant chains were encroaching on the smoothie market, and Jamba was moving into the sandwich and prepared meal segment, therefore, competing against coffee shops (e.g. Starbucks, Tim Hortons, and Dunkin Donuts), dessert retailers (e.g. Cold Stone Creamery and Baskin Robbins), fast food chains (e.g. Panera Bread, McDonald‘s, and Burger King), and sandwich shops (Subway, for example). Jamba was now entering a much larger industry segment. The question became how to effectively manage and grow operations while still meeting the needs of stockholders. Significant changes to the business model, including the transition from company-owned to franchised stores, had created non-routine financial transactions, which made it difficult to produce audited financials that fulfilled NASDAQ requirements. What choices did leadership have? The purchase offer from FOCUS Brands, to become a privately-held subsidiary of a developer of global multichannel foodservice brands, could not be ignored. This gives the instructor the opportunity to discuss how the transition from a standalone company to a member of a corporate entity can be of benefit to each. What can we learn about corporate strategy from studying Jamba Juice‘s new relationship to FOCUS Brands? Students will not know how to recommend strategy, but can be guided to realize that Jamba Juice now had an opportunity to flourish. NOTE: This case can also be used to illustrate marketing strategy, so could accompany a course in marketing communications or consumer behavior. Summary of Discussion Questions Here is a list of the suggested discussion questions. You can decide which questions to assign, and also which additional readings or exercises to include to augment each discussion. Refer back to the Case Objectives Table to identify any additional readings and/or exercises so they can be assigned in advance. 1. How should Jamba Juice compete? What options does Jamba Juice have for managing growth? 2. OPTIONAL QUESTIONS: What are key forces in the general and industry environments that affect Jamba Juice‘s choice of strategy? TN1-598 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
3. What internal resources and assets does Jamba Juice have that may give it a competitive advantage? 4. How should leadership manage innovation in this industry, and is Jamba Juice still entrepreneurial? Discussion Questions and Responses 1. How should Jamba Juice compete? Referencing Chapter 5: Formulating Business-Level Strategies How firms compete with each other and how they attain and sustain competitive advantages go to the heart of strategic management. In short, the key issue becomes: Why do some firms outperform others and enjoy such advantages over time? The viability of a firm‘s success is driven by both the internal operations of the firm and the desires and preferences of the market. Firms that succeed have the appropriate resources and cost structure to meet the needs of the industry and general environment. They also have a strategy… Jamba Juice had faced two critical decisions: what it could do to maintain its lead in the juice and smoothie market; and how much it should broaden its menu offerings to include more food and therefore compete with other fast food restaurants. Does it make sense for Jamba Juice to move from one highly competitive environment into another even more highly competitive environment? A business-level strategy is a strategy designed for firm or a division of the firm that competes within a single business. Within the firm‘s industry environment generic strategies include basic types of business level strategies based on breadth of target market (industrywide versus narrow market segment) and type of competitive advantage (low-cost versus uniqueness). Generic strategies are plotted on two dimensions: competitive advantage and strategic target. The overall cost leadership and differentiation strategies strive to attain advantages industrywide, while focusers have a narrow target market in mind. Here are the three generic strategies that are used to overcome industry forces and achieve a competitive advantage: 73. Overall cost leadership Low-cost-position relative to a firm‘s peers Manage relationships throughout the entire value chain 74. Differentiation Create products and/or services that are unique and valued Non-price attributes for which customers will pay a premium 75. Focus strategy TN1-599 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Narrow product lines, buyer segments, or targeted geographic markets Attain advantages either through differentiation or cost leadership
Jamba Juice had followed a focused differentiation strategy: focused on the healthy consumer segment; differentiated through its attention to quality products and creative store atmosphere. Jamba Juice was trying to further differentiate itself through its expanded menu items – it hoped the extensive information on its products‘ nutritional value would encourage customers to pay a premium, or make an extended search for a Jamba Juice store rather than buy something from a competitor. Jamba Juice appeared to have been fairly successful with this strategy, in the juice and smoothie industry. If Jamba Juice expanded its offerings to include more food, it would now compete with firms in a slightly different yet still highly competitive environment. To what degree would its assets and value-adding activities help it against the likes of Starbucks or McDonald‘s? This question does not have a clear answer. Perhaps the trick is to go back to an analysis of the general environment—what customer segments should Jamba Juice focus on, and what is the value proposition those customers are looking for that Jamba Juice is uniquely qualified to deliver? Healthy well-balanced portable meals using fresh ingredients, served by employees who really seem to care about the customers‘ well-being? Here‘s where an analysis of the elements in the general and industry environment and an understanding of consumer behavior may become essential. But no matter what, Jamba Juice had to have adequate operational resources—both financial and human—to manage growth. In the move from company-owned to franchised operations Jamba Juice had had to make sure its franchise agreements were perceived by potential franchisees as attractive and that company support was adequate and supportive. This suffered during the transition because the company did not have an active Franchise Disclosure Document (―FDD‖) to solicit prospective franchisees through much of 2017, due to delayed financial reporting. Because it was relying on its franchisees to do most of the new product promotion, and to deploy the new store design and drive-through format, this meant it was not able to fully act on its new differentiated strategy. Part of strategy requires managing all parts of the business in such a way as to ensure synergy among diverse operations. Partly because of the increased competition in the quick-serve fastfood industry, Jamba needed the resources of a larger firm to truly help grow the business. This is why the FOCUS Brands buy-out offer was so attractive. NOTE — ADDITIONAL READING, WEB LINKS AND VIDEO: In a series of articles in late 2012, Motley Fool analysts discussed Jamba Juice‘s situation: Munarriz, R.A. 2012. Is a Smoothie War Breaking Out? The Motley Fool. September 4. http://www.fool.com/investing/general/2012/09/04/is-a-smoothie-war-breakingout.aspx?source=isesitlnk0000001&mrr=0.11. TN1-600 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
South, J. 2012 Why Jamba Juice Jumped. The Motley Fool. October 2. http://www.fool.com/investing/general/2012/10/02/why-jamba-juicejumped.aspx?source=isesitlnk0000001&mrr=0.14. Munarriz, R.A. 2012. Is Jamba the Next Teavana? The Motley Fool. November 15 Discussion about whether Jamba Juice might make an attractive acquisition for someone: http://www.fool.com/investing/general/2012/11/15/is-jamba-the-next-teavana.aspx. Caplinger, D. 2012. How Jamba Juiced Investors‘ 2012 Returns. The Motley Fool. December 21. http://www.fool.com/investing/general/2012/12/21/how-jamba-juiced-investors-2012returns.aspx. In January 2013, CEO James White was interviewed on CNBC about the increasing competition in the juice business. See the video here: https://www.cnbc.com/video/2013/01/04/jamba-juice-ceo-on-increasingcompetition.html?__source=yahoo%7Cheadline%7Cquote%7Cvideo%7C&par=yahoo. And here is a 2018 story about Jamba Juice‘s revised franchise strategy, https://www.qsrmagazine.com/news/jamba-juice-re-energizes-franchise-strategy, and an opinion on Jamba Juice‘s future, which notes its ―attractive medium-term cash flow profile and take-private potential:‖ https://www.barrons.com/articles/stocks-with-big-dividendyields-51553720912. What does this say about Jamba Juice‘s ability to carve out a sustainable competitive advantage as a stand-alone entity? 2. What options does Jamba Juice have for managing growth? Referencing Chapter 6: Formulating Corporate-Level Strategies Corporate strategy focuses discussion on the questions of what businesses a corporation should compete in, and how the businesses should be managed so they can create ―synergy‖ – creating value through entering new markets or developing new technologies, either through related or unrelated diversification. Diversification is the process of firms expanding their operations by entering new businesses. In related diversification, a firm enters a different business in which it can benefit from leveraging core competencies, sharing activities, or building market power. Some possibilities include: ● Mergers and acquisitions ● Strategic alliances ● Joint ventures ● Internal development Whatever the choice, it should create value for all stakeholders—employees, suppliers, distributors, and the company itself. The choice of diversification strategy should create synergy so that all parties gain something they would not have had on their own. Companies can achieve synergy through diversification in two ways: TN1-601 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Through related businesses (horizontal relationships) ● Sharing tangible resources ● Sharing intangible resources ● Leveraging core competencies Or through unrelated businesses (hierarchical relationships) ● Value creation derives from corporate office ● Leveraging support activities Core competencies reflect the collective learning in organizations—how to coordinate diverse production skills, integrate multiple streams of technologies, and market diverse products and services to create value. Core competencies must create superior customer value; the different businesses must all have similar elements in the value chain that require similar skills; and these activities or skills must be difficult for competitors to imitate. Sharing activities means that value chain elements are shared across business units, so that two or more activities are done by one of the businesses. This allows for cost savings, but businesses need to make sure to keep control over quality and customer perception. Acquisition is the incorporation of one firm into another through purchase. It can be a means of obtaining valuable resources that can help an organization expand its product offerings and services. Acquisition can lead to consolidation within an industry and can force other players to merge. Corporations can also enter new market segments by way of acquisitions. In order for Jamba Juice to continue its growth, it needed to be even more aggressive. Remember, in related diversification, a firm enters a different business in which it can benefit from leveraging core competencies or sharing value-added activities. Jamba Juice had value in its internal assets, partly because of its history and experience, which might continue to provide a platform for doing more internal development, through product line enhancement. The freshsqueezed juice was an example of this. Jamba could also use its improved reputation to attract additional key licensing partners. These strategic alliances could expand brand awareness via multiple channels. Jamba Juice had also grown through acquisition, absorbing Talbott Teas, and could consider similar acquisitions in the future. In addition, as previously mentioned, Jamba Juice was now competing with much bigger firms, and getting increased attention from the investment community. Some had wondered if it was a potential buy-out candidate—could it be acquired by someone else? Since 2015 Jamba Juice had been undergoing repositioning on multiple levels. Financial results for recent years had indicated a decrease in revenues and sluggish profits. Although the company had tried to explain this by pointing to the non-recurring expenses of business model adjustment and corporate relocation, investors were wary as the stock price continued to slide. The largest shareholder and activist investor, Engaged Capital, had called on the company to ―slash costs and close unprofitable stores,‖ which CEO Dave Pace proceeded to do. TN1-602 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Jamba Juice had made moves on many fronts: relocation of headquarters, reduction in corporate headcount, removal of self-serve kiosks in non-franchisee-operated locations, transition from company-owned and operated units to over 90 percent of its stores in franchisee hands, changes to menu offerings, and a shift in the quality of franchise operators with a move to attract multistore franchising partners. Although the intent was to improve Jamba Juice‘s operational and revenue-producing opportunities, the significant changes to the company‘s business model, leadership, and key personnel resulted in a ―significant increase in non-routine transactions and impacted certain routine processes needed to effectively accumulate and present consolidated financial results,‖ which made it impossible for Jamba to produce audited financials from Q3-2016 until Q1-2018. This failure to file prompted NASDAQ to threaten delisting, and made the company uninvestable for many market participants. Despite this, several analysts believed the transformation from a company operator to a franchisor model had ―massively improved marginal profitability and reduced capital requirements,‖ subsequently increasing the firm‘s ―take-private potential,‖ and noting even ―franchisees think that the company would be more focused if it were not beholden to quarterly reporting demands.‖ Obviously, FOCUS Brands thought so as well. FOCUS Brands was an Atlanta-based developer of global multichannel foodservice brands operating more than 5,000 locations around the world. With expertise in franchise operations, its brands included Carvel, Cinnabon, Schlotzsky‘s, Moe‘s Southwest Grill, Auntie Anne‘s, and McAlister‘s Deli. On August 2, 2018, FOCUS had agreed to buy Jamba Juice for $200 million, or $13 per share, which was 17 percent higher than Jamba‘s stock price that day, and the firm‘s highest share price point since 2015. This made Jamba Juice a privately-held subsidiary of FOCUS Brands. The mutually beneficial merger took Jamba Juice out of the public eye, removing the necessity of meeting increasingly aggressive quarterly financial growth goals, and allowed Jamba Juice to utilize FOCUS‘s market experience to accelerate the growth of the brand. Remember, in related diversification, a firm enters a different business in which it can benefit from leveraging core competencies, sharing activities, or building market power. FOCUS Brands‘ acquisition of Jamba Juice benefited both entities because a standalone brand faced significant need for increased spending on corporate overhead, general and administrative structures, and scale became increasingly important. Bringing brands together allowed for the cost to be spread out among multiple acquisitions, and to fine tune the operational model. Jamba Juice had market power on its own, and significant core competencies in the juice business. FOCUS Brands had a well-developed system for franchise training, marketing and technological support, plus financial resources. These plus Jamba‘s strong reputation, a key intangible asset, made for increased synergies: sharing both tangible and intangible resources and leveraging the core competencies of both firms meant both should benefit, as long as they stayed focused on the opportunities and threats posed by the external environment. TN1-603 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
NOTE WEB LINKS: For stories about the acquisition of Jamba Juice by FOCUS Brands in August 2018, see https://www.beveragedaily.com/Article/2018/08/07/Jamba-Juice-acquired-by-Focus-Brands-for200m. And https://www.foodbev.com/news/focus-brands-to-acquire-jamba-juice-in-a-200m-deal/. For information on how FOCUS Brands manages its franchise operations, see https://www.qsrmagazine.com/sponsored/how-focus-brands-drives-franchisee-success. Consolidation in the quick-serve fast-food industry has been increasing. So much so that analysts warn, ―your favorite fast-food chain may not be exactly what it seems.‖ While chains like Burger King, Taco Bell, and Olive Garden have name recognition, many of the biggest brands in the restaurant business are actually owned by mega-companies. These holding companies and private-equity firms often invest in or own a number of brands, in and outside of the restaurant industry. As costs rise, scale is increasingly crucial in the restaurant business. There‘s an inherent competitive advantage if cost can be spread across many restaurants. Note that Jamba Juice‘s new owner FOCUS Brands, in turn, is owned by private-equity firm Roark Capital, which is reportedly considering an IPO for FOCUS Brands. Roark‘s portfolio expands beyond food and beverage, with stakes in companies such as Anytime Fitness and Drybar, as well as Inspire Brands, another restaurant-centric company. See the current state of the industry in March 2019 at https://www.businessinsider.com/who-owns-taco-bell-arbys-burger-king-2019-3#jollibeefoods-corporation-10. And to see why this consolidation might be attractive to investors in 2019, see https://www.restaurantbusinessonline.com/financing/can-multiple-brand-approach-turnstruggling-chains-around. From the article, investors see continued profit challenges in the industry going forward, as labor and other costs rise and demands for things such as technology and remodels increase. Midsize chains have a tough time keeping pace with the investment larger chains are making. ―A stand-alone brand requires significant investment in G&A structure,‖ Casey said (Casey is CEO of High Bluff Capital-owned Rego Restaurant Group, which acquired Quiznos and Taco Del Mar.) By bringing multiple brands together, an investor can leverage that structure over multiple brands. And the larger company can attract more talented executives than could a single brand. However, there is a limit to growth. For one opinion on whether a megachain can happen in today‘s environment, see this 2019 article: https://www.restaurantbusinessonline.com/financing/no-more-megachains. The article points out that the mountain for chains to climb in order to reach megachain status is a lot steeper than it once was. ―First, the business is simply more competitive than it was just 10 years ago. And existing megachains aren‘t exactly surrendering their market share all that easily. That‘s especially true in quick service, which is dominated by a small handful of companies led by McDonald‘s, Starbucks, Subway, Taco Bell and Chick-fil-A. For another thing, today‘s chains tend to be more specialized and aimed at smaller groups of consumers. Such chains can‘t expect to grow into megachains because they simply can‘t attract the customer base to support it.‖ TN1-604 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
The question becomes does the merger of Jamba Juice with FOCUS Brands‘ other firms truly create enough synergy for long-term success? 3. OPTIONAL QUESTIONS FOLLOW: What are key forces in the general and industry environments that affect Jamba Juice’s choice of strategy? NOTE: No PowerPoint slides accompany this discussion. Referencing Chapter 2: Analyzing the External Environment Organizational leaders must become aware of factors in the overall environment that might affect their ability to create a competitive advantage. So how do managers become environmentally aware? By doing scanning, monitoring, and gathering competitive intelligence, and using these inputs to develop forecasts. This prepares the firm to do more extensive analysis of the forces in the general environment and the industry or competitive environment. Environmental scanning involves surveillance of a firm‘s external environment to predict environmental changes and detect changes already under way. It is a BIG PICTURE viewpoint of the industry/competition, looking for key indicators of emerging trends—what catches your eye? Alerts the firm to critical trends before changes have developed a discernible pattern and before competitors recognize them. Environmental monitoring is a firm‘s analysis of the external environment that tracks the evolution of environmental trends, sequences of events, or streams of activities. Leaders need to monitor the trends that have the potential to change the competitive landscape—what do you want to track? Firms need to CHOOSE the trends identified via the scanning activity, and regularly monitor or track these specific trends to evaluate the impact of these trends on their strategy process. The challenges for Jamba Juice include increased competition in the juice and smoothie industry, how to appeal to a wider range of consumers from differing demographics, and how to reposition the company competitively within its industry. Obviously, Jamba Juice must do a lot of external scanning and monitoring in order to track evolution of trends. What factors or trends might be most important to Jamba Juice? To assess how the external environment might affect the firm‘s strategy, it‘s necessary to take a look at the factors in the general external environment. Jamba Juice must consider the political/legal, economic and global, sociocultural and demographic, and technological forces that might affect the ability of the firm to deliver its products and sustain its business. See which factors in the general environment we might pick that have a significant impact on the specialty juice industry. Political-Legal: Given the franchise model used by many fast food restaurants, companies have to keep abreast of local and state operational requirements. Economic: Economic uncertainty was still affecting all fast food traffic—cheap alternatives such as McDonald‘s were thriving; more designer-based high-end high-price offerings such as those at Starbucks and Panera were also in demand. TN1-605 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Demographic: Weather played a role, so expansion of the smoothie market tended to follow customer relocations—if population increases occurred in the South, then fairly steady sales could be expected year-round. Northern states would experience seasonal variability in store traffic unless heated drinks and food items were on the menu. Sociocultural: Consumer demand had shifted from fast food, regardless of nutritional content, to a preference for quick but healthy alternatives, especially those that provided extra benefits such as blocking cholesterol buildup. Customers‘ fast-paced lifestyle meant getting a quick, healthy meal that offered an energy boost, with something from all the food groups in a portable form, was a major goal for some. The idea of a somewhat guilty ―treat‖ that had fewer calories was attractive to others. Technological: Any improvements of technology used in design of store ambiance, equipment used in food preparation and service, software for inventory control and purchasing agreements were all important trends to track. It‘s also necessary to assess the segments of the external competitive environment that include competitors, customers or buyers, and suppliers, substitutes and new entrants. Porter‘s five forces model allows strategists to anticipate where the industry might be most vulnerable. One important question is ―what business is Jamba Juice in?‖ Until students are sure about the boundaries of the business, it is impossible to do an industry analysis—what is the ―industry‖ to be analyzed? Given Jamba Juice‘s current push to enlarge the menu to include more non-juice items, some students might say it is in the fast food industry, but the company started out in the juice and smoothie industry, and its cultural history is based around creating differentiation in this consumer category. The choice of industry to use for analysis has implications for who Jamba Juice‘s direct competitors are, since not all competitors in the juice and smoothie industry also compete in the fast food industry. The juice and smoothie industry is a relatively young industry with few strong direct competitors. In contrast, the fast food industry is an old and pervasive competitor. Jamba‘s approach within each industry must have a different focus. Jamba is fighting for customers within the juice and smoothie industry who already have a preference for juice and smoothie products but are just looking for a point of differentiation from competitors. In the fast food industry, Jamba Juice would be trying to convert customers from the traditional offerings.
TN1-606 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Porter’s five forces model allows strategists to anticipate where the industry might be most vulnerable. See Exhibit 2.7. The industry chosen in this example is the juice and smoothie industry. Suggested: Many rivals compete for market share in the southernCalifornia-style juice bar category. Adding lifestyle and nutritional counseling could be a differentiator for some.
Substitutes Threat Med
Suppliers’ Power
Rivalry
Med-High
High
Suggested: Produce is a seasonable, perishable commodity. Depending on the item, suppliers could have significant bargaining power.
Suggested: It’s easy to open up a juice bar. Little investment necessary except a delivery system, blender and produce storage. Think old-time lemonade stand…
Suggested: Substitutes for the store smoothie are easy – customers just need a recipe and a home juicer to make their own custom healthy beverages and cook their own healthy meals. Or eat the fruits raw…
Buyers’ Power Med-High
Threat of New Entrants High-Med
Suggested: Franchise owners could have some power negotiating for multiple locations. Franchisees also have power over customer experience – companies have little control here. End consumer has little economic power.
Based on the external environmental factor analysis, the specialty juice business has many competitors trying to carve out a piece of the ―profit‖ pie. There are differences between the major competitors in the juice and smoothie industry in terms of their approach to strategic differentiation, channels of distribution, expansion strategy, and brand extensions. Competitors in other market segments, such as Starbucks and McDonald‘s, have their differences as well. Understanding how competitive the industry is will help students recognize the importance of internal assets and ―bundles‖ of resources in the search for a sustainable competitive advantage. NOTE — ADDITIONAL WEB LINKS TO DATA AND COMPETITORS: The broader refranchising strategy was one of the initiatives proposed in Jamba Juice‘s ―BLEND‖ program in January 2009. According to President and CEO James White, ―Today we wanted to formally reiterate our strategic priorities to allow all of our core constituencies the ability to understand our actions to revitalize Jamba in light of continuing weaknesses in the consumer spending environment. Our strategic priorities are focused on a disciplined expense reduction effort, building a customer-first and operationally focused service culture across the TN1-607 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
company, assembling a retail food capability across all day-parts, accelerating franchise and nontraditional store growth, and enhancing our licensing platform.‖ See https://www.businesswire.com/news/home/20090121006338/en/Jamba-Announces-2009%E2%80%9CBLEND%E2%80%9D-Plan for the full strategy. And in January 2013, CEO White announced strategic priorities to focus on brand building, product innovation, growth, and store refresh programs under BLEND Plan 3.0. See https://www.businesswire.com/news/home/20130116005585/en/Jamba-Affirms-2012-GuidanceAnnounces-Strategic-Priorities for details. In November 2017, third-quarter results showed a decline in comparable store sales, with the worse performance coming from company-owned stores than from franchise stores. During 2017, there was an increase in the number of franchise stores and an emphasis on the new ―drivethrough‖ concept. This was a concept of interest to franchisees, but development was dependent on the availability of appropriate real estate, currently in short supply. In addition, Jamba Juice was considering a catering option for business-to-business markets. CEO Pace commented on the transition to the new corporate location in Texas. See the Annual Report released January 2018: http://www.annualreports.com/HostedData/AnnualReports/PDF/NASDAQ_JMBA_2017.pdf And here is the Jamba Juice franchise website. The ―Brand Power‖ section explains the benefit of FOCUS Brands‘ involvement. See the available opportunities at the top of the page. Jamba offers traditional, drive-through and kiosk stores, and ―non-traditional‖ single stores that are allowed in schools, hospitals, airports, gyms, or within existing ―big box‖ retail stores: https://jambafranchise.com/. How does Jamba Juice appear to compete, and in what categories? 76. OPTIONAL QUESTION: What internal resources and assets does Jamba Juice have that may give it a competitive advantage? Referencing Chapter 3: Analyzing the Internal Environment A competitive strategy is linked to the value chain and supported by intangible assets. As can be seen below, Jamba Juice had some strengths in its support activities, and in its procurement systems. Its human and organizational resources gave it an opportunity for differentiation. When one firm outperforms others by a wide margin over a long period of time, it‘s important to figure out how this could be. The answer may lie in how that firm arranges its activities and creates unique bundles of resources that allow it to sustain a competitive advantage. Students should assess the relationships between the elements in Jamba Juice‘s value chain. Every activity should add value. Take a look at Exhibit 3.1 to see the value chain activities. Based on the relationships between these elements, Jamba Juice can make a choice of how to proceed to craft a competitive advantage. A sample value chain analysis follows: TN1-608 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Value chain activity Primary: Inbound logistics (distribution facilities, material control systems, warehouse layouts)
Operations (efficient work flow design, quality control systems)
Outbound logistics (consolidation of goods, efficient scheduling, finished goods processing) Marketing and Sales (motivated sales people, innovative advertising and promotion, effective pricing, proper ID of customer segments and distribution channels) Service (ability to solicit customer feedback and respond) Secondary (or support): Procurement (win-win relationships with suppliers, reduced dependence on single supplier) Technology development (state of the art hardware and software, innovative culture and qualified personnel) Human resource management (effective recruitment, incentive & retention mechanisms) General Administration (effective planning systems to establish goals and strategies, access to capital, effective top management communication,
Case 1: Robin Hood
How does Jamba Juice create value for the customer? Emphasis on high quality ingredients. Not in the case: Conducted quality assurance testing at supplier locations to ensure product met USDA standards. Suppliers stored flash frozen product until needed. Store locations clustered to take advantage of efficient product deliveries from independent distribution companies. Jamba Juice had no central warehouse, reducing distribution costs. Emphasis on consistent product quality. Not in the case: attention to following the recipe during preparation. Attention to store design helped maintain efficient work flow. New formats such as store-within-a-store, and the ―At Home Smoothies‖ kit available in the local grocer‘s fruit aisle meant more efficient product delivery. Jamba Juice promoted its healthy products by stressing healthy benefits, keeping the menu appealing, introducing new exciting products. Used word-of-mouth advertising, in-store promotions, community involvement through participation in charity events, to increase customer awareness. Move to non-traditional locations increased visibility in unique venues. Jamba Juice‘s involvement of the consumer in promotions and new product development was a plus. Purchased fresh produce in order to assure the highest quality.
Assumed adequate. Not in the case: In the past Jamba had stressed the importance of an innovative culture.
Assumed adequate. Selection of appropriate franchisees was important. Change of strategy regarding franchisees could help get access to needed capital, and is what attracted FOCUS Brands to acquire Jamba Juice. This mutually beneficial merger could help accelerate the growth of the brand. FOCUS Brands had significant market experience in TN1-609
Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note relationships with diverse stakeholders)
Case 1: Robin Hood franchise development.
In addition, see the concept of the resource-based view of the firm, and the three key types of resources: tangible resources, intangible resources, and organizational capabilities. Determining whether the internal resources are valuable, rare, difficult to imitate, or difficult to substitute (VRIN) can help a firm sustain a competitive advantage. See Exhibit 3.6. An important issue to focus on here is the importance of intangible resources like innovation and reputation. In this consumer-based business, sustaining brand reputation is essential. Look at resources that are controlled by Jamba Juice that might enable it to develop and implement value-creating strategies. Based on their reading of the case, students might identify those resources to include: Tangible Resources: Financial: Jamba Juice had struggled with strategy here. The strategy to increase the number of franchised stores, and increase customer traffic was a way to fix lagging finances. CEO White‘s original emphasis on an ―asset light‖ model meant costs could be further contained going forward. CEO Pace‘s decision to relocate headquarters to Texas, further reducing costs, would help, but more scrutiny of product mix and store profitability would be needed. Deciding to exit the JambaGo automated drink stations was another example of an attempt to strengthen the company‘s core business. Physical: Stores had been designed to be attractive, and showcase natural materials. Technological: Jamba Juice was paying attention to up-to-date technology to improve store-level productivity and methods of performance measurement in order to achieve its goals. Organizational: Move to franchise and licensing models meant Jamba had less direct control, but more opportunities to benefit from partner innovation. Intangible Resources: Human: Jamba did realize that promoting a consistent culture was key to its brand. Use of ―Ambassadors of WOW‖ allowed fans to become the face of the company, emphasizing Jamba‘s strong commitment to its communities. Listening to customers helped decide on new product directions. Innovation and creativity: Innovative development of new venues such as store-within-a-store allowed for growth. Jamba also used current data from dieticians and nutritional science to develop new products. Reputation: Attempt to get involved in the local community, pay attention to local concerns for health and the environment, gave Jamba Juice a good local reputation. Move to eco-friendly packaging might also help increase reputation. Note that CEO Pace had decided to exit the TN1-610 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
JambaGo automated drink platform partly because customer feedback had indicated that the quality of the JambaGo product was not up the standards that consumers expected from Jamba; therefore, Jamba management felt JambaGo would degrade the brand and impact the company‘s opportunity to grow the core business and brand over the long term. Applying the VRIN concept, Jamba Juice‘s internal resources were all valuable, but few were rare, and none were inimitable or non-substitutable. The only differentiator was the attention to store layout—the theatre-like atmosphere—which could still be easily copied. Other value-added elements included the procurement system and the company culture, neither of which were unique, but, still, many competitors might have tried, and failed, to replicate these elements exactly. NOTE — ADDITIONAL READING, WEB LINKS AND VIDEO: From the Food Network in 2007, here‘s a 4-minute video visit to Jamba Juice, promoting the smoothie as an energy boost: http://www.youtube.com/watch?v=J0N0YIKQMuM. Although popular with customers, many of Jamba Juice products have been criticized as being very high in sugar calories. See the breakdown of nutrition in the Macha Green Tea Blast Smoothie at http://www.nutritiondata.com/facts/foods-from-jamba-juice/9084/2. In 2016, Jamba Juice introduced a cold-press focused juice ―innovation bar‖ with an open design. See the pictures and story here: https://www.goodnature.com/blog/jamba-juice-openscold-press-focused-juice-innovation-bar/. What does this tell you about Jamba Juice‘s internal resources and capabilities? 5. OPTIONAL QUESTIONS: How should leadership manage innovation in this industry, and is Jamba Juice still entrepreneurial? Referencing Chapter 4: Assessing Intellectual Capital See the concepts of intellectual capital, human capital, and social capital, all of which are intangible assets that a company such as Jamba Juice needs to have in order to compete successfully. Intellectual capital is a measure of the value of a firm‘s intangible assets, its reputation, employee loyalty and commitment, customer relationships, company values, brand names, and the experience and skills of employees. Human capital involves the individual capabilities, knowledge, skills, and experience of the company‘s employees and managers. This knowledge is relevant to the task at hand, as well as the capacity to add to this reservoir of knowledge, skills, and experience through learning. Human capital is the foundation of intellectual capital. Intellectual capital is developed through attracting, developing, and retaining human capital. Success in retaining human capital could also be attributed to the nurturing of the ―social ties‖ or social capital. Social capital is a function of the network of relationships that individuals have TN1-611 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
throughout the organization and beyond. Relationships are critical in sharing and leveraging knowledge and in acquiring resources. Social capital can extend beyond the organizational boundaries to include relationships between the firm and its suppliers, customers, and alliance partners. If employees are working effectively in teams, across business divisions, and sharing their knowledge and learning from each other, not only will they be more likely to add value to the firm, but they also will be less likely to leave the organization. Intellectual assets or intangible resources are critical to organizational success. Investing in a company is, in essence, buying a set of talents, capabilities, skills, and ideas—intellectual capital—not physical and financial resources. Here are some questions organizations should ask. Human capital: Does the organization effectively attract, develop, and retain talent? Does the organization value diversity? Social capital: Does the organization have positive personal and professional relationships among employees and alliance partners? Presence of Organizational Capabilities: Specific competencies or skills: CEO White‘s focus on the workforce, innovative hiring practices, treating his employees well, encouraging teamwork and the sharing of knowledge across the organization, had all contributed to the intangible resources available to the company. This intellectual capital added value to the firm. CEO Pace was careful to make sure that his cost-cutting measures did not erode these competencies, especially when dealing with the franchisees who could be critical to long-term growth. Capacity to combine resources: How to combine the above competencies to continue to revitalize and grow the brand depends on Jamba Juice‘s ability to focus on performance and innovation, and leverage its intangible assets. Certainly being able to have access to the franchise management expertise of new owners, FOCUS Brands made it much easier to build and enhance existing competencies. Referencing Chapter 8: Entrepreneurial Strategy & Competitive Dynamics Entrepreneurship involves the creation of new value by an existing organization or new venture that involves the assumption of risk. For an entrepreneurial venture to create new value, three factors must be present – an entrepreneurial opportunity, the resources to pursue the opportunity, and an entrepreneur or entrepreneurial team willing and able to undertake the opportunity. Entrepreneurs must go through a process of identifying, selecting, and developing potential opportunities. See Exhibit 8.1 and the opportunity analysis framework: the relationship between an entrepreneur, the firm‘s resources, and the opportunities available in the firm‘s environment. Entrepreneurs need to understand the concept of opportunity recognition: the process of discovering and evaluating changes in the business environment, such as a new technology, socio-cultural trends, or shifts in consumer demand, that can be exploited. Changes in the TN1-612 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
external environment can lead to new business creation, but the discovery of these new ideas is not enough. They then need to be evaluated to find out if they‘re strong enough to become new ventures. Good entrepreneurial opportunities are those that are attractive to the marketplace (there must be demand for the new product or service), achievable (it must be practical and physically possible to do), durable (the window of opportunity must be open long enough for it to have a chance for success), and value creating (it must be profitable—the benefits must surpass the cost of development by a significant margin). Resources are an essential component of a successful entrepreneurial launch. The most important resource is usually money, but human resources (strong and skilled management) are also essential assets. Social capital, or entrepreneurs who have extensive social networks or wellconnected key contacts, allows the new venture to gain exposure and build legitimacy faster. Strategic alliances represent a type of social capital that can be especially important to young and small firms. Launching a competitive venture requires a special kind of leadership involving courage, belief in one‘s convictions, and having the energy to work hard. Three characteristics of entrepreneurial leaders are: ● Vision ● Dedication and drive ● Commitment to excellence To achieve excellence, venture founders must understand the customer, provide quality products and services, pay attention to details, continuously learn, and surround themselves with good people. Under CEO James White, Jamba Juice had a leader with energy, dedication and drive, and a clear strategic vision for the future. White had appeared capable of identifying and developing potential opportunities for growth: the demand for healthy snack alternatives was there, his firm had the operational resources and was prepared to act to fill that demand, and, so far, the ideas he had tried were value creating. Are there further opportunities Jamba might be willing to exploit? This will depend on what factors might impact CEO Pace‘s implementation of strategy. It appeared White had been successful with strategy in the past, or had he just been lucky? CEO Pace had faced the inevitable challenge that a stand-alone brand faced: the significant need for increased spending on corporate overhead, general and administrative structure, which made the ability of an operation to scale an increasingly important capability. Bringing brands together allowed for the cost to be spread out among multiple acquisitions, and to fine tune the operational model. Just like an entrepreneurial leader should, Pace saw the opportunity presented by FOCUS Brands, and took it. Referencing Chapter 11: Strategic Leadership: Excellence, Ethics & Change See the concept of leadership, the process of transforming organizations from what they are to what the leader would have them become. Leadership is proactive, goal oriented, and focused on the creation and implementation of the creative vision. This definition implies dissatisfaction TN1-613 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
with the status quo, a vision of what should be, and process for bringing about change. Leaders are change agents whose success is measured by how effectively they formulate and implement a strategic vision and mission. See Exhibit 11.1. This involves: ● Setting a direction ● Designing the organization ● Nurturing a culture dedicated to excellence and ethical behavior The interdependent nature of these three activities is self-evident. Consider an organization with a great mission and a superb organizational structure, but a culture that implicitly encourages shirking and unethical behavior. Often, failure of today‘s organizations can be attributed to a lack of equal consideration of these three activities. The imagery of the three-legged stool is instructive: it will collapse if one leg is missing or broken. Leaders need to set the direction for the organization by continually scanning the environment to develop knowledge of all stakeholders, and knowledge of salient environmental trends and events. Then leaders must integrate that knowledge into a vision of what the organization could become. Leaders require the capacity to solve increasingly complex problems, and must be proactive in their approach so they can develop viable strategic options. Leaders are responsible for designing the organization: a strategic leadership activity of building structures, teams, systems, and organizational processes that facilitate the implementation of the leader‘s vision and strategies. Leaders have an important role in creating systems and structures to achieve desired ends. Leaders play a key role in changing, developing, and sustaining an organization‘s culture. An excellent and ethical organizational culture is an organizational culture focused on core competencies and high ethical standards. Organizational culture can be an effective means of organizational control. In nurturing a culture dedicated to excellence and ethical behavior, managers and top executives must accept personal responsibility for developing and strengthening appropriate behavior; consistently demonstrate that such behavior is central to the vision and mission; develop and reinforce role models, corporate credos, codes of conduct, reward and evaluation systems, policies and procedures. Doing this requires leaders to overcome barriers to change and effectively use their power. Jamba Juice CEO James White had embarked on an aggressive expansion strategy. He had a vision of Jamba Juice as a healthy, active-lifestyle company, and had initiated programs for engaging workers and even the customer ―fan‖ community in acting out this healthy message. In these ways, White appeared to be nurturing a culture dedicated to excellence. White did appear skillful at scanning the external environment to identify the trends and events that might affect the firm‘s long-term strategy. The awareness of how non-traditional venues such as airports and school cafeterias could accelerate growth is an example of this ability to set direction. TN1-614 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
By transitioning to an innovative multi-venue franchise model, also using consumer packagedgoods licensing agreements to expand in retail categories, White had designed the organization in such a way as to facilitate strategic implementation. CEO Dave Pace had continued this strategy, plus had employed new tactics in order to manage increasing operational costs and concerns from investors. The major leadership decision Pace made was to accept the buy-out offer from FOCUS Brands. Referencing Chapter 12: Managing Innovation & Fostering Corporate Entrepreneurship Innovation involves using new knowledge to transform organizational processes or create commercially viable products and services using the latest technology, experimentation, creative insights, and information from competitors. However it comes about, innovation occurs when new combinations of ideas and information bring about positive change. In fact, the root of the word innovation is the Latin novus, which means new. Innovation involves introducing or changing to something new. It is a critical part of strategic implementation. Before proceeding, firms must first define the scope of the innovation efforts, and must ensure that their innovation efforts are not wasted on projects that are outside the firm‘s domain of interest. Firms must have the means to focus their innovation efforts. A strategic envelope defines the range of acceptable projects. Strategic envelope means a firmspecific view of innovation that defines how a firm can create new knowledge and learn from an innovation initiative even if the project fails. The strategic envelope also gives direction to a firm‘s innovation efforts, which helps separate seeds from weeds and builds internal capabilities. One way to determine which projects to work on is to focus on a common technology. Then, innovation efforts across the firm can aim at developing skills and expertise in a given technical area. Another potential focus is on a market theme. Companies must be clear not only about the kinds of innovation they are looking for but also the expected results. However a firm envisions its innovation goals, it needs to develop a systematic approach to evaluating its results and learning from its innovation initiatives. It needs to develop a set of questions to ask itself about its innovation efforts. In defining the innovation scope, a firm should answer several questions: ● How much will the innovation cost? ● How likely is it to actually become commercially viable? ● How much value will it add; that is, what will it be worth if it works? ● What will be learned if it does not pan out? The challenges of innovation involve: ● Choosing when and how to continue to innovate ● The scope and pace of future innovation ● Whether or not to collaborate with innovation partners ● Requires resources such as financial, human and social capital ● Requires the leadership team to have adequate vision, dedication and drive TN1-615 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Jamba Juice was in an expanding industry—with McDonald‘s and Starbucks as direct competitors, it was increasingly hard to define the boundaries. Jamba Juice had to continue to introduce new menu items as well as continue to innovate by trying out new product delivery venues and marketing channels. However, the scope and the pace of innovation would be critical here. Any innovation might require re-education to key stakeholders—especially franchisees, licensing partners, and employees. It was important for all to hear the same message and deliver it consistently. In addition, any innovative product launch needed to be operational with existing resources. In addition, since product ―innovations‖ could be easily copied, pace was important—once started, an innovative strategy needed to be quickly implemented and evaluated for its commercial value. McDonald‘s, especially, had extensive resources available to overtake Jamba Juice unless it could establish an initial brand advantage. Jamba Juice would always have imitators. Jamba Juice must continue to reassess its internal and external environment in order to build its competencies, mitigate areas where it is weak, and take advantage of opportunities to be innovative in the future in order to ensure continued success. Will YOU consider a Jamba Juice smoothie next time you crave a healthy snack? Teaching Note Case 36 — BlackBerry in 2019 Case Objectives 3. To investigate strategic options in a fast-moving market. See the table below to determine where to use this case: NOTE: The PRIMARY focus of this case for most instructors would likely be Corporate-Level Strategy. There are also SECONDARY chapters that can be used for this case. The Teaching Note gives guidance for the PRIMARY use chapter only. CASE OBJECTIVES TABLE Chapter Use Key Concepts PRIMARY CHAPTER: 6: Corporate-Level Strategy
Diversification; synergy; core competencies; acquisitions
SECONDARY CHAPTERS: 2: External Environment 3: Internal Analysis
Industry competition five forces; general environmental factors Value-chain analysis; resourcebased view of the firm; VRIN Competitive strategy; generic strategies
5: Business-Level Strategy
Additional Reading and/or Exercises NOTE additional reading web articles. See optional advanced reading, Mintzberg, 1990; Harrigan, 1985; Porter, 1996 NOTE: web links
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Teaching Note
Case 1: Robin Hood
Case Synopsis Ten years ago, Blackberry‘s annual report featured a picture of its phone followed by the statement, ―Ask Someone Why They Love Blackberry.‖ The next page answered, ―People love BlackBerry smartphones because they make life easier.‖ Once a market leader in the smartphone industry, Blackberry‘s all-time high share price of $144.56 in 2008 came crashing down to less than $7 by 2016. Blackberry had lost significant market share in the smartphone industry. Speculations began to rise among investors as to whether Blackberry would ever recover. After experiencing severe losses in both hardware revenues and mobile subscribers, the company hired John Chen in 2013, a turnaround specialist, as its CEO to get the formerly dominant smartphone producer back to profitability. Soon after joining the company, Chen formulated a plan that emphasized a focus on corporate and government enterprises. This significantly reduced the company‘s operating costs. With Chen at the helm, BlackBerry appeared to be stabilizing. But would this strategy be sustainable? In February 2019, BlackBerry became a billion-dollar cybersecurity company after acquiring Cylance, an artificial intelligence (AI) and cybersecurity company. It appeared BlackBerry‘s new goal was to become the world‘s largest and most trusted AI-cybersecurity company. This capability was added to BlackBerry‘s push into the Endpoint Security Software market, with aims to provide the embedded intelligence to secure the ―Enterprise of Things‖ so that the Internet of Things can thrive. And in its original market, although BlackBerry no longer called itself a smartphone company, its licensing partner, the Chinese consumer-electronics company TCL, had introduced a version of the BlackBerry Key2 device in 2019. By 2019, the company had four distinct operating segments from which it drew revenue: Enterprise Software and Services: BlackBerry Technology Solutions (―BTS‖); Licensing, IP and Other, Handheld Devices; and Service Access Fees (―SAF‖). In moving away from hardware, BlackBerry was focusing attention on company strengths in software and security services. For instance, its QNX technology solution software was embedded in 120 million cars. While competing with big players such as Microsoft, Symantec, and Cisco in the Internet of Things market, CEO Chen still believed BlackBerry could be an ideal fit for more lightweight devices rather than trying to penetrate the large networked systems market served by Cisco and Symantec. Analysts were saying Blackberry was ―a born-again startup,‖ implying confidence in the company‘s ability to be a player in the Unified Endpoint Security Management space and provider of technology solutions to Internet of Things devices such as autonomous cars. The road ahead for BlackBerry required successful execution of strategies that supported all of these businesses, including its licensed smartphone. Would CEO John Chen be able to steer the company to his target of revenue growth of between 23 and 27 percent for 2020? Teaching Plan
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Teaching Note
Case 1: Robin Hood
The case of BlackBerry is best suited for a corporate-strategy case and can help students understand different issues associated with strategic change, especially in a market that‘s part of a fast-changing industry. After analyzing this case, students should understand why corporate strategy is not permanent, why firms change and adapt to the external industry environment, and how a firm might identify the necessity to change its corporate strategy. Using a corporate-level strategic analysis, this case is a fascinating example of a ―David versus Goliath‖ story. BlackBerry (RIM) emerged as a fast and flexible innovative tech company that initially took down the major players in the mobile phone market and carved out a leading position for itself. However, BlackBerry failed to understand the driving forces in the external environment and did not update its corporate strategy. Apple and Google understood very well the larger industry‘s driving forces, and the result was that BlackBerry lost its place as the mobile phone leader. By 2019 the major players, Apple and Samsung, had a diversified portfolio of products, where internal resources were well able to complement each other, enabling these two giants to outperform on both profit and performance. Part of the question became, had BlackBerry fully understood the industry it was in? Successful mobile or smartphone products were being produced by companies with other lines of business, such that the stand-alone mobile phone manufacturers like Nokia. Subsequently, BlackBerry (RIM) saw their market evaporate almost overnight. What business was BlackBerry in? This is what CEO John Chen needed to decide. Students should be asked to address BlackBerry‘s strategic options. What were CEO John Chen‘s choices when he took over? By responding to this question, students should identify that BlackBerry‘s opportunities were: 1. Sell the company. 2. Divest the hardware unit and focus on software and security solutions for enterprise clients. 3. Continue with hardware by truly innovating based on existing technological assets, seeking alliance partners or select acquisitions to gain additional competencies. Instructors might enrich this discussion by referring to the Apple and Samsung cases for alternate examples of strategic leadership. Used to encourage more advanced analysis among exceptional students, the instructor may suggest possible external research sources and possible supplemental assigned reading. It may be especially interesting to initiate a discussion among advanced students to consider whether the traditional design/Harvard model or the Mintzberg process/emergent strategy model is more applicable here (Mintzberg, 1990). See the discussion about this in the textbook‘s Chapter 1. Just looking at what the company accomplished, especially early on, the organization appeared to have gone through a major reformulation of strategy, with continuing fits and starts from 2008 well through 2013. It made mistakes, but did it learn as it went along? As Mintzberg (1990: 182) says, in defense of strategy as ―emergent‖: ―Every strategic change involves some new experience, a step into the unknown, the taking of some kind of risk. Therefore, no organization can ever be sure in advance whether an established competence will prove to be a strength or a weakness.‖ In addition, an assigned reading of Porter‘s 1996 HBR article ―What Is Strategy?‖ TN1-618 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
and Harrigan‘s 1985 ―Vertical Integration and Corporate Strategy‖ can help students get a fuller picture of the case. ICEBREAKER Because it‘s possible not all students have heard of BlackBerry, it might be illustrative to ask: How many of you have seen a BlackBerry? How many of you have ever used one? It‘s very possible that most students own either an iPhone or a Samsung phone using the Android operating system, so ask How many of you own an iPhone or a Samsung Galaxy? The instructor might want to put a list on the board of students‘ responses to the question ―what are the most desirable features of a smartphone?‖ Answers to this question provide an introduction into the case discussion of competitive strategy, how BlackBerry might have created value for customers by adapting its design. BlackBerry assumed that a physical keyboard (rather than the touchscreen), long battery life and a secure messaging system would be enough to differentiate its products and sustain market share. See if any of these features are listed as desirable by students! For students who have no idea how this phone‘s QWERTY keyboard was configured, see the pictures at https://en.wikipedia.org/wiki/BlackBerry. The above discussion should highlight the failure of BlackBerry to keep up with technology shifts in the smartphone industry. Students can be asked what they would do if they had had to reconfigure the company. Hopefully, students will notice that core competencies in technology can be used to develop related diversification strategies. Summary of Discussion Questions Here is a list of the suggested discussion questions. You can decide which questions to assign, and also which additional readings or exercises to include in order to augment each discussion. Refer back to the Case Objectives Table at the beginning of this Teaching Note to identify any additional readings and/or exercises so they can be assigned in advance. 1. What corporate strategy should BlackBerry Limited deploy in order to maximize profitability in the years to come? 2. OPTIONAL QUESTION. (Discussion not included in this Teaching Note.) What are key forces in the general and industry environments that affect BlackBerry‘s choice of strategy? 3. What internal capabilities does BlackBerry have that can be used to craft strategy? How should BlackBerry compete? Discussion Question and Response What corporate strategy should BlackBerry deploy in order to maximize profitability in the years to come? TN1-619 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Referencing Chapter 6: Corporate-Level Strategy When thinking about combining resources to achieve a competitive advantage, corporate strategy focuses discussion on the questions of what businesses a corporation should compete in, and how the businesses should be managed so they can create ―synergy‖—creating value through entering new markets or developing new technologies, either through related or unrelated diversification. Diversification is the process of firms expanding their operations by entering new businesses. In related diversification, a firm enters a different business in which it can benefit from leveraging core competencies, sharing activities, or building market power. Some possibilities include: ● Mergers and acquisitions ● Strategic alliances ● Joint ventures ● Internal development Growth strategies should create value for all stakeholders: employees, suppliers, distributors, strategic partners, and owners. The choice of growth strategy should create synergy so all parties gain something they would not have on their own. Corporations can achieve synergy by sharing tangible and value-creating activities across their business units; or through the use of common facilities, distribution channels, and sales forces; or through venture partnerships. Likewise, acquisitions must have shared value-creating activities. However, cultural issues can doom intended benefits. Companies can achieve synergy through diversification in two ways: 1. Through related businesses (horizontal relationships) ● Sharing tangible resources ● Sharing intangible resources ● Leveraging core competencies 2. Or through unrelated businesses (hierarchical relationships) ● Value creation deriving from corporate office ● Leveraging support activities Core competencies reflect the collective learning in organizations—how to coordinate diverse production skills, integrate multiple streams of technologies, and market diverse products and services to create value. Core competencies must create superior customer value, the different businesses must all have similar elements in the value chain that require similar skills, and these activities or skills must be difficult for competitors to imitate. BlackBerry diversified through creating horizontal relationships in related businesses: starting with the device, the mobile phone, initial innovation through internal development, led to the breakthrough concept of ―e-mail on a belt‖ and then the wireless data peer-to-peer messaging service. As a result of the device being adopted by first-responders such as law enforcement and firefighters, security and reliability became key features. These features then created software TN1-620 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
solutions such as the BBM messaging app that gave users the privacy they sought. An offshoot of that led to the enterprise security services product. By 2019, the company had four distinct operating segments from which it drew revenue: Enterprise Software and Services: BlackBerry Technology Solutions (―BTS‖): Licensing, IP and Other, Handheld Devices: and Service Access Fees (―SAF‖). BlackBerry was restructured to give each of its four divisions a chance to develop. While the revenue-producing software services division grew, it would open up opportunities to provide additional security services. This would be an example of synergy. Sharing activities means that value-chain elements are shared across business units, so that two or more activities are done by one of the businesses. This allows for cost savings, but businesses need to make sure to keep control over quality and customer perception. It doesn‘t appear that BlackBerry had utilized sharing activities adequately, especially relative to the marketing of the BBM messaging service as an application beyond the phone. Although BBM had been released for Android and iOS users through their respective app stores, more reinvestment in this technology would have been needed to update features and channels. The BlackBerry case raises the question of vertical integration and the role of entrepreneurship in maintaining the pace of innovation in the face of a volatile product life cycle industry. Vertical integration implies that businesses benefit from expansion through the value chain, where suppliers and distribution channels to end users become part of the corporate entity. BlackBerry‘s strategy originally included significant focus on internal development (see R&D expenditures), but it could also have benefited from well-planned strategic alliances to work with suppliers in order to develop and acquire technology. In order to enhance core competencies, BlackBerry did pursue some selective acquisitions, such as QNX Software, which allowed it ultimately to pursue more attractive enterprise solutions, and Cylance, which gave it access to powerful cybersecurity capabilities. Acquisition is the incorporation of one firm into another through purchase. It can be a means of obtaining valuable resources that can help an organization expand its product offerings and services. Acquisition can lead to consolidation within an industry and can force other players to merge. A corporation can also enter new market segments by way of acquisitions, or it can position itself as a takeover target, offering itself for sale, being acquired for its assets, increasing the core competencies of its acquirer. This may make certain stakeholders happy because it returns value to them. Because any proposed merger should create value for all stakeholders—employees, suppliers, distributors, shareholders, and the company itself—it might be a difficult choice for CEO Chen to make. The choice of diversification strategy should create synergy so that all parties gain something they would not have had on their own. What would BlackBerry gain from an acquisition or joint venture, or from being acquired, and how could the value of resources and core competencies be enhanced in both companies? Not in the case: BlackBerry acquired QNX, and originally offered itself for sale to Fairfax Financial Holdings, but the board ultimately TN1-621 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
withdrew its offer. CEO Chen said he did not plan to sell the company. Instead he convinced shareholders to back his plan to transition into software and security services. In February 2019, BlackBerry became a billion-dollar cybersecurity company after acquiring Cylance, an artificial intelligence (AI) and cybersecurity company. It appeared BlackBerry‘s new goal was to become the world‘s largest and most trusted AI-cybersecurity company. This capability was added to BlackBerry‘s push into the Endpoint Security Software market, with aims to provide the embedded intelligence to secure the ―Enterprise of Things‖ so that the Internet of Things can thrive. And in its original market, although BlackBerry no longer called itself a smartphone company, its licensing partner, the Chinese consumer-electronics company TCL, had introduced a version of the BlackBerry Key2 device in 2019. By 2019, the company had four distinct operating segments from which it drew revenue: Enterprise Software and Services; BlackBerry Technology Solutions (―BTS‖); Licensing, IP and Other, Handheld Devices; and Service Access Fees (―SAF‖). In moving away from hardware, BlackBerry was focusing attention on company strengths in software and security services; for instance its QNX technology solution software was embedded in 120 million cars. Did this adequately position BlackBerry for the future? Here‘s also where advanced students can be asked their opinion of Mintzberg‘s (1990) emergent strategy: does BlackBerry appear to be learning as it goes along, never ―sure in advance whether an established competence will prove to be a strength or a weakness‖? In the beginning, given the initial choices made by Lazaridis, it appeared risks were taken and lessons learned, but this learning did not appear to continue until the arrival of CEO Chen. After discussing this case, advanced students should have a greater sense of corporate-strategy diversification issues, including why firms may choose to diversify or not, and how to analyze this strategy in terms of relatedness and potential synergies (also see Harrigan, 1985). In addition, advanced students may benefit from a re-reading of Porter‘s 1996 HBR article, ―What Is Strategy?‖—especially the section on tradeoffs. What tradeoffs did BlackBerry make, and were those decisions profitable? What trade-offs might be necessary in the future? NOTE: WEB LINKS Visit the U.S. website for BlackBerry Limited at https://us.blackberry.com/. And see this interview with the authors of a book about the rise and fall of BlackBerry: Jacquie McNish and Sean Silcoff, Losing the Signal: The Untold Story Behind the Extraordinary Rise and Spectacular Fall of BlackBerry. The authors conclude with their belief that ―the race is faster than ever. It never ends, and the people who are the leaders today will most likely be the followers tomorrow… These days you‘re an algorithm away from some pretty serious competition.‖ See https://knowledge.wharton.upenn.edu/article/victim-success-rise-fallblackberry/. Also see a timeline of RIM then BlackBerry from the beginning in 1985 up to 2013: http://www.telegraph.co.uk/technology/blackberry/10237847/BlackBerry-timeline-from-RIM-toRIP.html. TN1-622 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
In 2016, BlackBerry formed a joint venture with PT BB Merah Putih to license its software and services for the production of handsets for the Indonesian market. It also signed a cross-platform deal with Emtek—an entertainment, media, and technology power house of Indonesia, and did a deal with Giuliani Partners to combat cyber threats. Another agreement with Indian telecom enterprise, Optiemus Infracom Ltd, is worth mentioning. BlackBerry is also working with Baidu and Ford Motor Company on software for self-driving cars, focusing on automotive cybersecurity. This is made possible by BlackBerry‘s QNX operating system. See https://www.blackberry.com/us/en/company/newsroom/press-releases/2016/blackberryannounces-first-major-device-software-licensing-agreement-with-joint-venture-pt-bb-merahputih. See news releases at the BlackBerry corporate newsroom, https://www.blackberry.com/us/en/company/newsroom/press-releases. From early 2017, analysts were commenting on BlackBerry‘s turnaround, the shift from a hardware company into a Software-as-a-Service (SaaS) company focusing on security, and how the revenue stream shifted from the Service Access Feed (SAF), which everyone paid to use the BlackBerry operating system, to the software and services division. The SAS sector has higher margins and faster growth. See http://markets.businessinsider.com/news/stocks/blackberrysturnaround-is-complete-rbc-says-2017-4-1001895220. In 2019 CEO Chen reinforced his belief that BlackBerry had made a turnaround, especially after its successful acquisition of Cylance. However, he admits making changes at BlackBerry has not been easy. ―I underappreciated the fact that I had a strong culture to overcome, because it was a hardware company and [had been] a darling of the world.‖ Regarding the future, analysts see some big challenges ahead for BlackBerry. Rob Enderle, an independent analyst who tracks BlackBerry, believes Chen is on the right path and has saved the company. He said BlackBerry is well positioned, ―given the amount of cyber threats right now against vehicles and smartphones.‖ But while the elimination of phone revenue may signal a total commitment to that strategy, Enderle points out revenue from phone sales will be difficult to replace. ―You lose the hardware, you lose in your top line.‖ See https://www.cnbc.com/2019/09/14/blackberry-ceo-says-hes-hittipping-point-in-company-turnaround.html. Does it seem CEO John Chen‘s diversification strategy might be working? References Harrigan, K.R. 1985, ―Vertical Integration and Corporate Strategy.‖ The Academy of Management Journal, 28(2): 397–425. Mintzberg, H. 1990. ―The Design School: Reconsidering the Basic Premise of Strategic Management.‖ Strategic Management Journal, 11: 171–195. Porter, M.E. 1996. ―What Is Strategy?‖ Harvard Business Review, 74(6): 61–78. Teaching Note Case 37 — Venmo: War on Cash? TN1-623 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Case Objectives 7. To introduce concepts and frameworks to assess how firms create value and achieve a competitive advantage via corporate-level strategies. 8. To prompt a debate about the benefits and risks of diversification via mergers and acquisitions. See the table below to determine where to use this case: Chapter Use Key Concepts 2. Analyzing External Environment Environmental factors and strategic choice; digital economy 5. Business Strategy Competitive factors and strategic choice; generic strategies 6: Corporate Strategy Related diversification; mergers and acquisitions; economies of scope; market power; synergistic effects; strategic partnerships and alliances; growth for growth‘s sake. Case Synopsis Acquired by Braintree Payment Solutions in 2012 and subsequently by PayPal in 2013, Venmo was a well-known financial services company that by 2019 had approximately 22 million users and 77,000 social media followers among users of Facebook, Instagram, LinkedIn and Twitter. Millennials and Generation Z formed Venmo‘s primary customer demographics. With its massive attraction to and rapid growth of users, the company‘s brand name became commonly used as a verb similar to Google and Netflix. If customers wished to make a payment, exchange money, split a bill, or create ―IOUs‖ they just had to ―Venmo‖ the money. With the click of a button, funds were transferred successfully and quickly from one source to another. Included in these transactions were optional descriptions with or without emojis (usually with) to describe the purpose of the transaction. As Venmo became increasingly popular, large banks felt the threat and fired back by introducing Zelle in September 2017. A consortium of banks led by Bank of America, Wells Fargo, and JP Morgan Chase developed Zelle, a peer-to-peer (P2P) payment service that enabled U.S. banks to enter the peer-to-peer mobile payment market space. By the end of 2017, three months after being introduced, Zelle had already surpassed Venmo in terms of volume of processed transactions. Along with Zelle, long time competitor Square, Inc remained a threat via its Cash App released in October 2013. Venmo‘s customers and critics raised privacy concerns around its ―default‖ public social feed. Venmo also had a minimal presence outside of the United States. Although Venmo was widespread in the United States and supported by many, growth of its revenue streams and achievement of profitability remained elusive as of 2019. At that time, Venmo was reportedly taking major steps towards reaching profitability by introducing a Venmo debit card, adding placement of advertising on its transaction sites, and forming partnerships with several TN1-624 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
businesses and merchants. While there appeared to be room for Venmo to maintain its presence in the mobile P2P payments industry, it faced increasingly intense competition in that market space from the likes of Android Pay, Apple Pay, Google Pay, Square, and Zelle, among others. Teaching Plan The ―Venmo: War on Cash?‖ case may be used for a review and discussion of the benefits and risks associated with the ―Digital Economy‖ material in Chapter 2 of the text. It pairs well with coverage of the ―Business-Level Strategies‖ material, particularly the benefits and risks of various generic strategies, in Chapter 5. It is also suitable for coverage of corporate-level strategy concepts in Chapter 6, as noted in the Case Objectives Table at the beginning of this Teaching Note. Finally, the case presents an ideal occasion to remind students about the importance of conducting financial ratio analysis (covered in Chapter 13, Appendix 1), in order to determine whether or not Venmo and its parent company PayPal have any degrees of freedom in making certain diversification choices. The case lends itself well to a thoughtful discussion of how corporations like PayPal use related diversification, such as the 2013 acquisition of Braintree (and its then subsidiary, Venmo), to achieve synergistic benefits through economies of scope and market power.
Economies of scope includes two elements, leveraging core competencies and sharing activities o Core competencies reflect the collective learning in organizations, such as how to coordinate diverse production skills, integrate multiple streams of technology, and market diverse products and services. o Sharing activities involves the joint issues of value-creating activities, such as common manufacturing facilities, distribution systems, and sales forces by multiple business units in the corporation.
Market power reflects the firm‘s ability to profit through restricting or controlling supply to a market or coordinating with other firms to reduce investment.
The two primary means to achieve market power are pooled negotiating power and vertical integration.
Assignment Questions Below is a list of suggested discussion questions. You can decide which questions to assign and which additional readings or exercises to include to augment each discussion. Refer back to the Case Objectives Table at the beginning of this Teaching Note to identify any additional readings and/or exercises so they can be assigned in advance. 1. How well is Venmo positioned in the social media market space? Are there untapped opportunities available to Venmo to create profitable revenue streams in this space? 2. How can Venmo attract newer customers in various demographics? TN1-625 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
3. What options does Venmo have available to diversify its business model to create incremental revenue streams? How would you rate the attractiveness of these diversification opportunities into new products, services or markets? 4. How would you assess PayPal‘s (Venmo‘s parent company) financial strength to support any initiatives that Venmo might pursue? 5. What recommendations would you make to PayPal CEO Dan Schulman to improve Venmo‘s competitive position? Responses to Assignment Questions 1. How well is Venmo positioned in the social media market space? Are there untapped opportunities available to Venmo to create profitable revenue streams in this space? Students should be able to determine that:
Venmo has spent a number of years building a brand for itself and making its presence well known in the industry.
It has a loyal customer base that favors the social network aspect of its business.
As mentioned in the case there are several social media companies that started out not making money but focused on building their brands instead.
Eventually they went on to becoming public companies or engaging in acquisitions.
The social media market industry has space, as it is mostly digital, thus this route for Venmo is worth pursuing.
The second part of this question is partially answered in the case – Venmo‘s partnership with new merchants, introduction of debit card for retail and online transactions and possible ad revenue opportunities.
In sum, the social media market is something Venmo should cultivate. o The main source of revenue in this market space is ad sales. o Numerous companies take advantage of the networking that exists on social media platforms, thus pushing advertisements, banners etc. to potential customers for attraction.
2. How can Venmo attract newer customers in various demographics? Venmo is pursuing a broad differentiation strategy that could enable it to attract a wider target customer demographic. Although Venmo is heavily supported by the Millennial and Gen Z customer demographic segments, it has ease of use and some ability to broaden its P2P customer base by targeting older customer demographic segments, such as attracting Gen X and Baby Boomers via promotion of Venmo as a speedy way to transfer cash to their children and grandchildren without having to remember their bank account information. That said, however, there are some potential risks to pursuing a broad differentiation strategy that are applicable to Venmo, as shown in Table 1, ―Potential Pitfalls of Differentiation Strategies for Venmo.‖ TN1-626 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note Table 1
Case 1: Robin Hood Potential Pitfalls of Differentiation Strategies for Venmo
Pitfalls of Differentiation Strategy Applicable to Venmo? Uniqueness that is not valuable Yes Too much differentiation No A price premium that is too high No Differentiation that is easily imitated Yes Dilution of brand identification through product-line extensions Yes, potentially Perceptions of differentiation that vary between buyers and sellers Yes Source: Adapted from Exhibit 5.5 in the textbook.
Students should be reminded that:
Case Exhibits 5 and 6 reveal that Venmo does not offer significant benefits to consumers over other P2P apps, nor does it enjoy the highest quality ratings in the Consumer Reports reviews.
Companies like Venmo must realize that although they may perceive their products and services as differentiated, their customers may view them as commodities.
It is stated in the case that, according to the Apple App Store for iOS and Google Play Store for Android, ―Venmo‘s position has an indirect correlation with a top average app rating of 4.8 stars between Apple and Google Play. Lagging behind, average app ratings for PayPal, Cash App, and Zelle, are 4.6, 4.3, and 3.5 stars respectively.‖
Chapter 5 in the text also cautions that firms like Venmo may erode their differentiation/ quality brand image by adding products or services such as credit cards or social media advertising with lower prices and less quality than rivals, product line extensions that were under consideration by Venmo at the time the case was written.
9. What options does Venmo have available to diversify its business model to create incremental revenue streams? How would you rate the attractiveness of these diversification opportunities into new products, services or markets?
As the company‘s revenue is directly tied to the level of discretionary income of its P2P customers, Venmo is sensitive to macroeconomic conditions.
While its parent company PayPal‘s international operations present currency and execution risk, Venmo is primarily subject to domestic risk.
o Venmo should adopt a highly cautious approach to globalization and foreign market entry. o Some governments have shown a preference for local payment processors, which could freeze Venmo out of certain markets. TN1-627 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Some students may argue, however, that although regulations on cash transfers are strict for entering global markets, international expansion is still worth pursuing. o With the help of globalization and strength in international markets, eventually P2P payments could serve as a benefit. o Customers deal with friends, family, businesses and associates all over the world, thus, a simplified payment process across the globe could make transacting easier.
As indicated in the case, PayPal has already made substantial acquisitions and has communicated that it will continue to do so. o These acquisitions could destroy value if the company overpays or fails to effectively integrate these operations, and the company‘s broad differentiation strategy based on quality could be diluted.
Finally, any company like Venmo that is involved in processing payments has potential exposure to breaches in its systems.
There is a perhaps a larger question to be asked about PayPal's acquisition strategy and whether or not Venmo continues to add value to PayPal‘s larger portfolio going forward. The Venmo case notes that, ―The P2P payments market spaces appear to be valuable, as consumers flock to open accounts, but the willingness of users to pay for the social aspect of the product must be determined and verified,‖ but the Venmo case provides insufficient business segment information on PayPal to enable a determination of the value provided by P2P transaction, nor data required to conduct a portfolio analyses such as the BCG Matrix, covered in the textbook in Chapter 6, Exhibit 6.4. Divesting a business like Venmo, for example via a spin-off or sell-off or sale to another company interested in entering the mobile P2P payments space could accomplish a variety of objectives for PayPal, as noted in Chapter 6:
Reverse the acquisition as it did not work out as planned Enable PayPal managers to focus attention on the remaining businesses in the B2C and B2B market spaces Provide PayPal with additional resources to invest in more attractive alternatives Raise cash for PayPal to invest in existing businesses
From a financial standpoint, it is difficult to determine the enterprise value of Venmo in the event of a divestiture or sale, much less its revenue contributions to PayPal. PayPal appears to be sufficiently strong financially to absorb losses from Venmo for the foreseeable future, as we will see in the next question. 10. How would you assess PayPal’s (Venmo’s parent company) financial strength to support any initiatives that Venmo might pursue?
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Teaching Note
Case 1: Robin Hood
Students should have reviewed Appendix 1 in Chapter 13 of the text and be able to do the calculations in Table 2, ―PayPal Common Size Income Statements 2016–2018,‖ and Table 3, ―Financial Ratio Analysis for PayPal, 2017–2018.‖ Highlights of these analyses should lead students to conclude that:
Net revenues grew at an annual compound rate (CAGR) of 19% from 2016–2018 and net income grew at an annual compound rate of 21%.
During that period, transaction expenses have risen from about 31% of sales to about 36% of sales, while most other operating expenses as a percentage of sales have remained fairly flat, and as a result, PayPal‘s operating margins (operating income as a percentage of sales), a measure of its cash generation capacity, have also remained relatively flat.
Other measures of profitability, Return on Sales (ROA), Return on Assets (ROA), and Return on Shareholders‘ Equity (ROE) have shown mixed improvement: o ROS declined slightly from 13.7% to 13.3% o ROA rose from 4.1% to 4.7% from 2017 to 2018 o ROE rose from 11.2% to 13.4%
PayPal had become increasingly highly leveraged, thereby increasing its financial risk (and return to investors), as shown by its rising Debt to Assets, Debt to Equity, and Longterm Debt to Equity ratios in Table 2.
In 2018 PayPal had lower liquidity benchmarks than in 2017, as its current ratio (current assets / current liabilities) declined from 1.43x to 1.27x, and its working capital declined from nearly $10 billion to $7 billion. o Based on careful examination of PayPal‘s balance sheet accounts in case exhibit 4, the company appeared to have improved its cash position from about $2.9 billion to $7.5 billion from 2017 to 2018, thus affording it some maneuverability to pursue selective diversification via partnerships, mergers, and acquisitions.
Table 2
Common Size Income Statements for PayPal, 2016–2018 ($ millions)
FY 12/31 Net revenues Operating expenses: Transaction expense Transaction and loan losses Customer support and operations Sales and marketing Product development General and administrative Depreciation and amortization
2016 % of sales 2017 % of sales 2018 % of sales $10,842 100.0% $13,094 100.0% $15,451 100.0% 3,346 1,088
30.9% 10.0%
4,419 1,011
33.7% 7.7%
5,581 1,274
36.1% 8.2%
1,267 969 834 1,028 724
11.7% 8.9% 7.7% 9.5% 6.7%
1,364 1,128 953 1,155 805
10.4% 8.6% 7.3% 8.8% 6.1%
1,482 1,313 1,071 1,451 776
9.6% 8.5% 6.9% 9.4% 5.0%
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Teaching Note
Case 1: Robin Hood
Restructuring and other charges Total operating expenses Operating income Other income (expense), net Income before income taxes Income tax expense Net income
— 9,256 1,586 45 1,631 230 $1,401
132 10,967 2,127 73 2,200 405 $1,795
85.4% 14.6% 0.4% 15.0% 2.1% 12.9%
83.8% 16.2% 0.6% 16.8% 3.1% 13.7%
309 13,257 2,194 182 2,376 319 $2,057
85.8% 14.2% 1.2% 15.4% 2.1% 13.3%
Source: Calculated using data provided from Case Exhibit 3.
Table 3
Financial Ratio Analysis for PayPal, 2016–2018 2016 Profitability ROS % 12.9% Operating ROA% ROA% ROE% Leverage Debt: Assets % Debt: Equity % LT Debt: Equity % Liquidity Current ratio, x Working Capital, $ millions Compound Annual Growth % Net revenues Net income
2017
2018
13.7% 5.2% 4.1% 11.2%
13.3% 5.1% 4.7% 13.4%
60.8% 154.9% 12.0%
64.5% 181.6% 13.3%
1.43 9,782
1.27 $ 7,059
$
19.4% 21.2%
Source: Calculated using data provided from case exhibits 3 and 4. Note: Blank cells indicate that information was unavailable.
11. What recommendations would you make to PayPal CEO Dan Schulman to improve Venmo’s competitive position?
Venmo needs to build incrementally for the long term upon its enviable position in the current environment, given its focus on some of the fast-growing areas of the payment space and synergies in FinTech with its parent company, PayPal.
However, we retain our long-term concerns that PayPal and Venmo could face increased competition from larger peers over time. o In our view, PayPal‘s dominant position in online payments may come increasingly under attack as the e-commerce market grows and interest in serving the space increases, forcing Venmo to remain on the defensive.
While the rate of margin improvement for PayPal has slowed a bit over the past couple of years, we believe that while margins on P2P transactions are not expected to grow appreciably, the scalable nature of the business model for C2B transactions via Venmo could well allow for sustained margin improvement over time. TN1-630
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Teaching Note
Case 1: Robin Hood
o Square, Android Pay, and ApplePay have grown their dominance in C2B transactions o Venmo has yet to demonstrate higher quality or ease of use than those rival platforms
Furthermore, PayPal‘s 2018 acquisition of iZettle provided the company with a viable platform for point-of-sale transactions, and its experience with mobile payments could boost its position on this side as consumers look for more convenient options at the cash register. o As a result, PayPal could leverage its online niche into a growing presence in point-of-sale transactions and see meaningful new opportunities to link those transactions to its proposed Venmo card.
On the consumer mobile payments side, services such as Android Pay and Apple Pay also represent a new type of competition for PayPal.
If competition on both sides (from other financial institutions as well as merchants such as Google and Amazon) chips away at PayPal‘s position, the network effect that has driven the Venmo side of the business historically could deteriorate quickly.
Epilogue
PayPal maintained its strong growth in the fourth quarter of 2019.
Excluding currency effects, net revenue was up 18% year-over-year. Relative to recent quarters, growth in active accounts slowed a bit, but transactions per account accelerated, resulting in a revenue growth rate on par with recent results.
Venmo continued to see impressive growth, with volumes up 56% year-over-year.
Adjusted operating margins improved to 23.6% from 21.6% in the same quarter in 2018. During the quarter, non-transaction-related expenses increased only 13 cents for every dollar of revenue, highlighting the company‘s potential operating leverage.
PayPal had over 300 million active accounts at the end of 2019, including over 20 million merchant accounts (Morningstar, Company investor relations website).
In January 2020, PayPal closed its acquisition of Honey, an estimated $100 million company in revenues, for approximately $4 billion (Morningstar, Company investor relations website). o Founded in 2012, Honey offers rewards programs and price-tracking tools to connect consumers and merchants online (Morningstar). o With 17 million monthly active users and 30,000 online retailers, Honey appeared to have established itself as a viable platform (Morningstar).
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Teaching Note
Case 1: Robin Hood
o The overarching strategy behind the deal appeared to be pairing Honey‘s services with PayPal‘s reach to bolster the company‘s online offerings (Morningstar).
PayPal also made material progress in establishing itself in China in late 2019 and early 2020, completing its acquisition of a majority stake in local player GoPay in December and signing a partnership agreement with UnionPay in January 2020 (Company investor relations website).
Some industry analysts make note of the fact that: o PayPal has nearly a 6x lead over the next largest digital wallet (Amazon Pay) and o PayPal is available as a checkout option at 70% of the top 10 US merchants online (Morningstar).
Nonetheless, owing to the COVID-19 pandemic in 2020 and its still unfolding impact on the US economy as of April 2020, there likely needs to be some near-term moderating of expectations for PayPal and Venmo, as investors further contemplate the risk from declining discretionary spending (even in eCommerce) and supply-related issues across PayPal's marketplaces (Company investor relations website). o Some analysts have forecasted sharply negative growth in Venmo P2P transactions during the second and third quarters of 2020, and a slight uptick in the fourth quarter of 2020 (Morningstar, Company investor relations website).
Despite these headwinds, industry analysts continue to see PayPal‘s core digital wallet business as relatively resilient given its 100% eCommerce exposure and its efforts to build habitation among consumers who are shifting to online purchases now more than ever ((Morningstar, Company investor relations website). o One can expect this volume will continue to grow at or above the rate of eCommerce (ex-Amazon), as PayPal remains the digital wallet of choice for nonAmazon merchants (Morningstar).
Sources: Mergent Online, PayPal Holdings Inc., accessed April 16, 2020. Morningstar Equity Analyst Report, Paypal Holdings, Inc., March 17, 2020. Company investor relations website, accessed April 16, 2020, at: https://investor.paypal-corp.com/investor-relations.
Teaching Note Case 38 — Flipkart: Winning in India? Case Objectives TN1-632 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
12. To introduce concepts and frameworks to assess how firms create value and achieve a competitive advantage via corporate-level strategies. 13. To prompt a debate about the benefits and risks of generic strategies, alone or in combination. See the table below to determine where to use this case: CASE OBJECTIVES TABLE Chapter Use 2. Analyzing External Environment 5. Business-Level Strategy 6. Corporate-Level Strategy 7. International Strategy
Key Concepts Environmental factors and strategic choice; digital economy Competitive factors and strategic choice; generic strategy Diversification via merger and acquisition Direct foreign investment
Case Synopsis Flipkart was founded in October 2007 by Mr. Sachin Bansal and Mr. Binny Bansal, both alumni of the Indian Institute of Technology, Delhi. The two Bansals previously worked for Amazon, and eventually quit to start their new venture, ―Flipkart Online Services Pvt Ltd.‖ The company was headquartered in Bangalore and operated exclusively in India. During its initial years, Flipkart focused only on selling books, but soon started offering other products like electronic goods, air conditioners, stationery supplies, lifestyle products, and e-books. Since its founding, Flipkart grew its installed base significantly and by the end of 2018, the company reported 100 million registered users, eight million shipments per month, 100,000 sellers, and 21 warehouses. Flipkart came to epitomize the Indian e-commerce industry, achieving the top position among online shopping platforms in that country. The 2013 entry of Amazon India and subsequent tremendous success in India made that company a close runner-up to Flipkart. In an attempt to create some daylight between itself and Amazon and combat Amazon‘s presence, Flipkart pursued a number of offensive thrusts to expand its market share via: (1) engaging in eight company mergers and acquisitions since 2014, (2) pursuing a change in its business model, and (3) launching an innovative and secure payment system. The battle for e-commerce dominance in India was intense because the stakes were high. India represented a highly attractive market due its huge population and growing consumer market. Growing Internet and mobile permeation were increasing the use of online payments in India. The e-commerce sector in India was expected to grow by four times its current size and was anticipated to exceed $100 billion by 2024. In August 2018, Walmart invested $16 billion to acquire a 77 percent stake of Flipkart and infused another $2 billion in the company to grow the business. Flipkart Group‘s CEO Binny Bansal abruptly left the company under a cloud in November 2018, followed by a management reshuffling and the ascension of Kalyan Krishnamurthy to group CEO. Krishnamurthy sought to improve the performance of all of Flipkart‘s businesses, reduce its dependence on mobile phones, and make strategic investments in small businesses and supply chain development. Yet Krishnamurthy wondered if Flipkart could survive the increasingly intense competition from Amazon and if so, how and for how long? TN1-633 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
Teaching Plan ―Flipkart: Winning in India?‖ case pairs nicely with the ―Alibaba Group: Rivals at the Gate?‖ case in that both deal with the enormous growth of and competitive pressures within the ecommerce market spaces in two of the world‘s largest developing economies, India and China. Instructors can ask students to compare and contrast the macroeconomic and competitive forces in each nation and evaluate the impact of those forces as well as the presence or absence of US ecommerce giant Amazon in those marketplaces. Students can also compare and contrast the competitive approaches of Flipkart, which is backed by subsidies for e-commerce due to the Indian government industrial policy and by Walmart‘s 2018 multibillion dollar investment in the company, and Alibaba, which has been afforded protection by Chinese government regulators and has recently completed an IPO in the United States on the New York Stock Exchange. Assignment Questions Below is a list of suggested discussion questions. You can decide which questions to assign and which additional readings or exercises to include to augment each discussion. Refer back to the Case Objectives Table at the beginning of this Teaching Note to identify any additional readings and/or exercises so they can be assigned in advance. 6. Evaluate the macro and competitive forces in India‘s e-commerce industry. For example, the Indian government has been pushing and creating new ways of transforming the Indian market into Digital India. How will this change the game for Flipkart, Amazon, and other players in the e-retail business? 7. Assess Flipkart‘s competitive position in the Indian e-commerce industry. What are Flipkart‘s sources of competitive advantage, if any? For example, Flipkart uses its own Logistics & SCM, but Amazon still depends on 3rd Party Logistics (3PL). Does Flipkart have a competitive edge over other players by having its own Logistics & SCM? 8. What do you see as the strategic options for Flipkart going forward? How might Flipkart put some daylight between itself and Amazon in the race for industry dominance? For example, what kind of new innovations or business ideas should Flipkart consider to increase its market share and retain or even expand its industry-leading position? 9. How would you assess Flipkart‘s financial strength to support any initiatives that the firm might pursue? 10. What recommendations would you make to Flipkart‘s CEO, Kalyan Krishnamurthy, to improve Flipkart‘s competitive position in the Indian e-commerce industry? Responses to Assignment Questions 1. Evaluate the macro and competitive forces in India’s e-commerce industry. For example, the Indian government has been pushing and creating new ways for
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Case 1: Robin Hood
transforming the Indian market into Digital India. How will this change the game for Flipkart, Amazon, and other players in the e-retail business? Flipkart faces many challenges and opportunities in the Indian e-commerce industry. For example, switching costs to customers are low in the e-commerce industry, as covered in Chapter 2 of the text section on digital commerce. Flipkart has based its strategy to date on:
The trust engendered by its consistent quality of service, customer responsiveness, and price and security of transactions Its acquisitions over the years of vertical market e-commerce companies such as LetsBuy.com and Myntra Its development and deployment of technological innovations that have ranged from COD payments to PhonePe, cited in case Exhibit 5 as a ‖revolutionary mobile payments system‖
All of the above are part and parcel of Flipkart‘s broad differentiation generic strategy, covered in Chapter 5 of the text. Conversely, Amazon, Flipkart‘s closest rival, competes using an industry cost leadership strategy. Flipkart also enjoys certain resource advantages owing to its sale of a 77% stake in the company to Walmart for $16 billion in 2018, an example of foreign direct investment that is covered in Chapter 7 of the text. Previously, Flipkart had sold a un unknown stake in the company to eBay for $500 million. Numerous macro-environmental and competitive forces are covered in Chapter 2; those forces can seriously propel or hinder Flipkart‘s future growth, as shown in Table 1, ―Challenges and Opportunities for Flipkart in India.‖ Table 1
Challenges and Opportunities for Flipkart in India
Factor
Key Features
Challenges for Flipkart
Opportunities for Flipkart
Demographic
Young population in India: 75% between 15 and 34 Rising concerns about health and climate change
Non-cash payment transactions estimated to surpass cash transactions by 2023 Potential concerns about increasing market power and dominance by Flipkart and Amazon Open access and privacy/security concerns; trade barriers and tariffs Lack of homogeneity in mobile connectivity & unequal access to the Internet
PhonePe app offers secure transaction options for almost all types of payment methods Indian nationalism trumps Amazon‘s brand recognition and reputation
Sociocultural
Political/Legal
Technological
Government promotion of digital commerce Diffusion of mobile devices and Internet access; cloud-based computing
Indian government’s investment of $17 billion in e-commerce infrastructure India #2 in world in digital ecosystem (see case exhibit 9); deep pockets from Walmart investment
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Case 1: Robin Hood
Rising standard of Protectionist policies not a India‘s population size & density; eliving to boost realistic scenario in India in 2019 commerce growth 4x current size to consumer spending $120 billion w/in next 5 years Global Many global supply Entry of large international rivals Flipkart ‗s R&D in AI in & capital chains originate in with mobile pay apps & deep investments from Silicon Valley, USA China & the Pacific pockets for investment / Rim acquisition Competitive High buyer power; Amazon undercuts Flipkart by Overall industry attractiveness Low supplier offering a wider variety of moderate to high due to rapid power; services and more discounts; growth; Flipkart jockeying with Moderate threat of may attract Indian consumers Amazon for market leadership; each new entrants; used to tradition of negotiating has 30% share; Paytm is Moderate threat of prices challenging both leaders in the substitutes; mobile payments space Increasing industry rivalry Source: Adapted from exhibits 2.2 and 2.5 in the textbook. Shaded areas indicate most potent external forces. Economic
Our view is that four major forces—demographic, political/legal, technological, and the intensity of competitive rivalry—have the highest potential impact on Flipkart in India. Of those factors, all appear to be favorable for Flipkart with the exception of the increasingly intense rivalry with Amazon, now joined by the upstarts Paytm and Snapdeal, with whom Flipkart is jockeying for market leadership. As noted in the case:
―Flipkart remained in the spotlight in the Indian e-commerce industry through frequent mergers and acquisitions, acquiring most competitors and increasing market share in an effort to compete with Amazon.‖
―In March 2019, another e-commerce rival, Paytm, took on Amazon and Flipkart as it launched its subscription-based loyalty program, Paytm First, in India.‖ o Paytm has over 100 million registered users and gets approximately 60 million orders per month. o Paytm offers the option of recharging a secure online wallet, Paytm-Cash. o Paytm is backed by a parent company, One-97 Communications, and has also attracted outside investors including Tata (India) and Alibaba Group (China). o Paytm is valued at an estimated at $5 billion, behind Flipkart‘s $5.39 million.
Snapdeal has grown via acquisition and transformed itself from a group coupon company into an online marketplace, the result of its ―relentless determination to prosper as the best B2C (business to customer) marketplace in India.‖ o Snapdeal‘s enterprise value is now estimated to be around $1 billion, and, currently, there are more than 50,000 sellers and about 5 million products sold. TN1-636
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Teaching Note
Case 1: Robin Hood
o Snapdeal has a relatively young workforce, with an average age of about 25 years, and its values include innovation, change, openness, honesty, and ownership, which have propelled the company to great success. Other key points about the macroeconomic and competitive forces that students may raise:
The Indian government is pushing the Indian population to go digital by offering many services and discounts for consumers as well as firms and industries that decide to shift towards digitalization.
The future of e-commerce in India will be driven by new technologies and access to digitalization of the economy.
While Flipkart gained a competitive edge in the industry with its COD method of payments (because the Indian economy has not been as dependent on nor has usage expanded as quickly for digital payment and EFT systems) that method might become less pervasive in the future, at least according to the graph in case Exhibit 6, ―Online Payments in India.‖
Flipkart has launched a secure payment platform to make purchases through its website, and consumers can use it everywhere. o Flipkart‘s PhonePe app is a collaborative business strategy, utilizing a government-backed platform to build trust over rival vendors‘ offerings. o However, Amazon has also launched its own wallet for digital payments in India.
Flipkart‘s business model within India relies on flexibility and innovation. o Flipkart offered a no-questions-asked return/ exchange policy, wherein customers could return goods that did not meet their expectations. o Flipkart recognized that mobile network connectivity was not homogeneous throughout India, prompting the creation of Flipkart Lite designed for mobile users o Since foreign companies in India are restricted from multi-brand e-tailing, Flipkart sells its products through WS Retail, a private limited e-commerce company in India (as shown in case Exhibit 7). o In June 2019, Flipkart revamped its fee structure, significantly reducing percentages paid by sellers, a strategic move to inspire seller loyalty, as competition intensifies.
The degree of trust that Indian consumers have in e-commerce purveyors and online platforms is an important factor. o Due to lack of exposure to technology and digital modes of payments and shopping, many Indian consumers are skeptical about safety factors, trusted brands, and ease of use. TN1-637
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Teaching Note
Case 1: Robin Hood
o Gaining and retaining customer trust will be vital for any rival to establish a competitive edge in this market. 2. Assess Flipkart’s competitive position in the Indian e-commerce industry. What are Flipkart’s sources of competitive advantage, if any? For example, Flipkart uses its own Logistics & SCM, but Amazon still depends on 3rd Party Logistics (3PL). Does Flipkart have a competitive edge over other players by having its own Logistics & SCM? Flipkart initially entered the Indian e-commerce industry and competed by using a broad differentiation generic strategy. Flipkart foresaw the future its future path to industry leadership requiring allocations of R&D and investment capital to in-house Logistics and SCM, which Flipkart felt could provide a sustainable competitive edge in the industry. This question should provoke debate among students, who generally will fall into two camps:
Building competitive advantage via having a specialized division for fulfillment process provides Flipkart with a powerful source of differentiation. o Flipkart has its own logistics division, which only delivers orders placed through the Flipkart website. o One of Flipkart‘s core values is offering quality service to its customers via its COD system. o Even though the total operational cost will be higher than Amazon‘s, Flipkart gains a competitive edge as it has a dedicated service that only oversees its own products and services rather than having a 3PL like Amazon. o Competitive advantages can be derived from transporting a product to the required location at the right time to meet or beat a customer‘s expectation.
Ceding industry cost leadership to other providers such as Amazon is a long-term strategic error, because Amazon can always win on price. o It is important to efficiently develop quality services, but price is a very important factor in order to gain a competitive edge. o Product availability and breadth of offerings are more important to consumers that are seeking ―one-stop shop‖ solutions. o Having a specialized division increases costs, and Flipkart has not yet reached profitability o Now that Walmart has made a major investment in Flipkart, there will be pressure from this stakeholder to make the necessary adjustments to put the company in line with Walmart‘s industry cost leadership position.
3. How might Flipkart put some daylight between itself and Amazon in the race for industry dominance? For example, what kind of new innovations or business ideas TN1-638 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
should Flipkart consider to increase its market share and retain or even expand its industry-leading position? Most students should recognize that:
Flipkart not only helped to start the e-commerce industry in India, but also contributed to development of the industry. o Flipkart transformed the e-commerce industry in India to a highly potential market, and when the market was established other players jumped in.
Flipkart is not merely an e-commerce industry player anymore; it has already settled its logistics roots deep into the Indian region, not only in the main cities, but also in remote villages. o However, today even the global and domestic courier services serve India‘s businesses as rivals to Flipkart for delivery and logistics services.
To distance itself from Amazon, the case gives a hint that Flipkart will not only make the investments in logistics and supply chain initiatives that benefit India, but will also be entering the B2B business category by offering logistics services to corporate clients such as Samsung, which can be a new business model. o Flipkart can add Logistic B2B services that can be very effective and can also bring a competitive edge. o Flipkart can earmark part or all of Walmart‘s additional $2 billion investment to do so.
Flipkart can also attempt to benefit from India‘s government protections to help it expand into untapped markets within India. o As mentioned in the case, it has recently launched the PhonePe app, which represents the future of the business. o Flipkart is transforming itself into a complete business solution center in the B2C sector.
4. How would you assess Flipkart’s financial strength to support any initiatives that the firm might pursue? Students should have reviewed Appendix 1 in Chapter 13 of the text and be able to do the calculations in Table 2, ―Common Size Income Statements for Flipkart, 2017 and 2018,‖ and Table 3, ―Financial Ratio Analysis for Flipkart 2017-2018.‖ Note: The Appendix to this Teaching Note presents revised balance sheets for Flipkart that were constructed to correct the addition errors in case Exhibit 2. Highlights of these analyses should lead students to conclude that:
Flipkart is increasingly unprofitable. TN1-639
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Teaching Note
Case 1: Robin Hood
Flipkart‘s purchases of stock in trade (cost of goods sold) exceeds its revenues.
Accordingly, some attention needs to be paid to its inventory build-up (and the attendant carrying costs for those inventories.)
Still, Flipkart grew its revenues from operations by almost 40% and assets by 34% yearon-year from 2017 to 2018.
Flipkart‘s activity ratios all showed improvement from 2017 to 2018.
Flipkart is moderately leveraged and the company clearly strengthened its balance sheet after the 2018 equity investments from eBay and Walmart.
Flipkart‘s liquidity ratios and working capital all showed improvement from 2017 to 2018.
On balance, Flipkart appears to be in fair-to-middling financial health and not improving.
Attention needs to be paid to negotiate better terms with its suppliers to reduce costs of stock in trade and also reduce trade payables.
Rapid growth of transactions from the mobile payment transactions operation, PhonePe, could reverse these trends., inasmuch as financial transactions services: (1) entail no inventory purchases or carrying costs, and (2) generally carry higher margins than do sales and delivery of consumer goods.
To expand or even protect its 30% domestic market share in India, the e-commerce company cannot afford a price war with Amazon at this point in time, due to Flipkart‘s negative profitability and negative gross and operating margins.
Walmart and eBay may thus have to temper their expectations for a rapid achievement of profitability by Flipkart, and instead view theirs as strategic foreign direct investments into e-commerce in the world‘s second most populous and second most rapidly growing e-commerce industry.
Table 2
Common Size Income Statements for Flipkart, FY 2017 and 2018
(in thousands of dollars) Revenue from Operations Other Income Total Revenue Cost of Materials Consumed Purchases of Stock in Trade Changes in Inventory Employee Benefit Expenses Finance Costs Depreciation and Amortization
3/31/17 % of sales 2,169,783 98.0% 43,332 2.0% 2,213,115
3/31/18 % of sales 3,047,427 99.0% 31,132 1.0% 3,078,559
2,238,566 45,907 23,691 1,428 7,988
3,363,310 72,482 47,128 3,322 8,847
101.2% 2.1% 1.1% 0.1% 0.4%
109.2% 2.4% 1.5% 0.1% 0.3%
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Teaching Note
Case 1: Robin Hood
Other Expenses Total Expenses Net Profit/Loss
22,136 2,247,903 (34,788)
1.0% 101.6% -1.6%
21,942 3,372,067 (293,508)
0.7% 109.5% -9.5%
Source: Data in case Exhibit 1.
Table 3
Financial Ratios for Flipkart, FY 2017 and 2018
Profitability Gross margin % ROS % ROA % ROE % Activity Total Asset Turnover, x Fixed Asset Turnover, x Inventory Turnover, x Leverage Debt: Assets % Debt: Equity % Liquidity Current ratio, x Working capital $ 000 Quick ratio, x Growth, year-on-year Revenues from operations Profits Assets
3/31/17
3/31/18
-3.2% -1.6% nmf nmf
-10.4% -9.5% nmf nmf
2.55 134.62 9.03
2.67 152.03 10.50
38.6% 62.9%
38.9% 63.7%
2.48 484,895 1.72
2.05 462,754 1.32 40.4% nmf 34.0%
NOTES: (1) Addition errors in the case exhibit have been corrected in statements from Case Exhibit 2. (2) nmf = Not Meaningful Figure or data were unavailable. Sources: Data in case exhibits 1 and 2, and Appendix at the end of this Teaching Note.
5. What do you see as the strategic options for Flipkart going forward? What recommendations would you make to Flipkart’s CEO, Kalyan Krishnamurthy, to improve Flipkart’s competitive position in the Indian e-commerce industry? Students may well argue that:
For Flipkart to be successful in the rest of India, it will need to extend its COD payments system that is already entrenched and widely accepted and trusted by Indian consumers.
Although Amazon is poised to provide tough competition on price for Flipkart, the latter‘s fundamental broad differentiation advantages—quality and innovation—that contributed to Flipkart‘s success to date can still carry the company a long way. TN1-641
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Teaching Note
Case 1: Robin Hood
Most importantly, with players from abroad such as Alibaba or Google that may be considering or are poised for entry into the e-commerce business in India, Flipkart may need to find ways to capitalize on its home-grown advantage.
This is a good place to remind students that, according to Chapter 5 in the text (in particular Exhibit 5.2), firms typically measure their competitive advantage in incremental percentage terms by using benchmarks such as: 1. Return on investment (ROI) 2. Sales growth 3. Gain in market share As noted in Chapter 5 of the text, there may be a good rationale for Flipkart to pursue both differentiation and cost leadership simultaneously. The text states that, ―firms that successfully integrate both differentiation and cost advantages create an enviable position,‖ which translates into higher ROI (%), faster sales growth (%), and greater market share gains (%) than either oa differentiation or a cost leadership generic strategy would afford on its own. That said, a major challenge for Flipkart in India is whether or not to direct an overwhelming amount of managerial time, attention, and resources to value-creating activities that produce the greatest margins—to the detriment of other important, albeit less profitable, activities (again, as noted in Chapter 5). In other words, the biggest risk for Flipkart is to eventually become ―Stuck in the Middle,‖ between the innovative upstarts on the differentiation side and giant Amazon in India on the overall cost leadership side. Therefore, we feel that Flipkart should in the near term acquire rival Snapdeal to combine the two companies‘ innovation cultures and installed e-commerce customer bases, in support of the broad differentiation strategy, while working on building the B2B Logistics side, in support of achievement of economies of scale and cost competitiveness, over the medium term. See Table 4.
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Teaching Note
Case 1: Robin Hood
Table 4
Strategic Options for Flipkart in India
Option
Pro
Con
Stay the course – do nothing
Buys time for CEO Krishnamurthy‘s cost-cutting initiatives and Walmart‘s additional $2 billion investment to bear fruit
Potential market share erosion to Amazon (which competes on price) and to Paytm (on the mobile payments side) and to Snapdeal (on the e-retailing to consumers side)
Build out logistics B2B services
Leverages current infrastructure and leads to scale economies; good fit with company’s public commitment to make investments that benefit India’s infrastructure, supply chains, and small businesses
Likely to provoke competitor retaliation from other B2B logistics providers of (e.g. FedEx, DHL, and UPS)
Reduce reliance on COD merchandise transactions and replace with roll-out of PhonePe systems
Faster ramp to profitability if installed base grows exponentially
Difficult to see synergies with CEO Krishmamurthy‘s decision to reduce reliance on mobile phone sales plus potential attrition of customers who rely on COD payments or who do not trust mobile P2P or P2B payments systems
Acquire Snapdeal
Logical extension of Flipkart’s successful acquisition track record, plus close cultural fit with a young, innovative company, to foster differentiation as well as bolt-on revenues and market share
Valuation and asking price may exceed Flipkart’s capability to make the deal work
Note: Shaded areas indicate our preferred approaches.
Epilogue A late 2019 e-commerce analyst‘s report about Flipkart‘s persistent unprofitability noted that, In the Indian e-commerce sector, it has been widely acknowledged that companies continue to experience losses even as the user base and e-commerce volume grows. That‘s because the Indian market is primarily geared towards discountsled purchasing, which means e-commerce companies have to spend a lot on customer acquisition. For instance, even when U.S. retail giant Walmart acquired Flipkart in 2018, the company had no express expectations for profits. Instead, the company said the acquisition will negatively impact its performance. Walmart TN1-643 Copyright © 2021 McGraw-Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill.
Teaching Note
Case 1: Robin Hood
said in its regulatory filing that it expects the ongoing operations of Flipkart to negatively impact fiscal 2019 and 2020 net income, including additional interest expense due to the long-term debt issuance in the second quarter of fiscal 2019 (Anon., FRPT, 2019). According to a January 2020 report in the Wall Street Journal, ―Walmart Inc. laid off more than 50 of its managers in India as it pivoted its focus to business-to-business e-commerce to take on Amazon.com Inc. and other rivals in the South Asian nation . . . Walmart India had at that time a total of 5,391 employees in the country. India's restrictions on foreign investment in retail had prevented Walmart from selling directly to consumers there for decades through stores. . . .The management shake-up was part of Walmart's plans to use the know-how, connections and talent it acquired when it bought Flipkart to grow much faster and better serve its members online, said one person familiar with its plans.‖ (Bellman, 2020) According to Bloomberg News, India's Competition Commission opened an antitrust probe in January 2020 into Amazon.com Inc. and Walmart Inc.‘s Flipkart Online Services Pvt, over exclusive arrangements between the retailers and mobile phone brands and preferential treatment given to some sellers (Rai & Altstedter, 2020).
Sources: Anon. (2019) ―Why Is Flipkart Making Losses Despite Revenue Growth?‖ (2019). FRPT – Ecommerce Snapshot, 6. Bellman, E. (2020, Jan 13). ―Walmart lays off 56 managers in India; management shake-up is part of retailer's shift in focus to business-to-business e-commerce in country.‖ Wall Street Journal (Online) Rai, S., & Altstedter, A. (2020, Jan. 13). ―India Opens Antitrust Probe into Amazon, Flipkart.‖ Bloomberg.Com, N.PAG.
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Teaching Note
Case 1: Robin Hood Appendix to Teaching Note for Flipkart: Wining in India? Revised Balance Sheets for Flipkart, FYE 2017 and 2018
In thousands of dollars Equity and Liabilities Shareholders’ Funds Share Capital Other Equity Share Application Money Pending Allotment Non-Current Liabilities Long-Term Provisions Current Liabilities Short-Term Borrowings Trade Payables Other Current Liabilities Short-Term Provisions Total Equity and Liabilities Assets Non-Current Assets Property, Plant and Equipment Capital Work-in-Progress Goodwill Intangible Assets Investments Loans Other Financial Assets Other Assets Current Assets Inventories Investments Trade Receivables Cash and Cash Equivalents Short-Term Loans & Advances Other Current Assets Total Assets
3/31/17
3/31/18
77 521,692
103 695,789
806
1,083
325,183 821 1,460 850,039
32,482 408,041 318 1,468 1,139,284
16,118 1,472 259 18
20,045 1,953 259 5 81,160
211 17,984 1,618
128,544 2,255
247,787 109,509 126,910 109,989 189,753 28,411 850,039
320,269 228,600 175,634 9,987 44,588 125,985 1,139,284
NOTE: Addition errors in the case exhibit have been corrected in statements. Source: Data from Case Exhibit 2.
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