All Cases For Strategic Management Competitiveness and Globalisation, 7th Edition by Dallas HansonK

Case Notes for Strategic Management, 7th edition Dallas Hanson, Kim Backhouse, David Leaney, Michael A. Hitt, R. Duane Ireland, Robert E. Hoskisson.

This resource contains case notes provided by author Dallas Hanson for all cases contained in Part 4. Notes for new local cases have been written to match the format used by the 13th edition of Hitt’s Strategic Management: Competitiveness and Globalization. Notes for cases reused from the previous edition retain the original case analysis format.

© 2022 Cengage Australia Pty Ltd. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Case Notes - Strategic Management, 7th edition

Case 1 JB Hi-Fi Ltd acquisition of The Good Guys CASE SYNOPSIS This case is about a successful firm in the highly competitive home appliances and electronics retailing industry. An excellent case in acquisitions theory, resource analysis, competency analysis and value chain analysis. The impact of Covid-19 is interesting here – this was an area where Covid-19 pushed sales higher.

The Good Guys (TGG) had 101 stores in the home appliances industry (stoves, fridges etc.) in Australia. It captured the young family demographic. JB HiFi (JBH) is a fast-moving firm retailing electronic goods and some home appliances. It had captured a younger demographic (with some of the aged buyer demographic too!). In 2016 JBH acquired TGG, paying $870 million in a deal favourable to JBH shareholders.

This was a complementary acquisition. Major synergies were expected – and largely achieved – in procurement, logistics, supply chain management and rationalising some support functions. JBH’s financial debt grew but not to unsustainable levels.

The JBH/TGG group has a position of high-quality goods and great service. They sell the best brands, have low operating costs, and have good store locations. Competing mainly against Harvey Norman, JB/TGG have around 29% of the consumer electronics market and 24% of appliances. They operate a growing on-line business and are benchmarked against the best global industry players. Covid-19 increased their sales as people stayed home, sought entertainment, and improved their domestic gear.

LEARNING OBJECTIVES • • • • • • •

define and describe the general environment, the industry environment, and the competitor environment (Chapter 2) describe what organisations need to know about their competitors, competitor analysis and ethical considerations (Chapter 2) define value and discuss its importance (Chapter 3) explain the purpose of forming and implementing a business-level strategy (Chapter 4) define competitors, competitive rivalry, competitive behaviour and competitive dynamics (Chapter 5) describe market commonality and resource similarity as the building blocks of a competitor analysis (Chapter 5) describe different levels of diversification with different corporate-level strategies (Chapter 6)

Dallas Hanson, Kim Backhouse, David Leaney, Michael A. Hitt, R. Duane Ireland, Robert E. Hoskisson, Strategic Management, 7th Edition. © 2022 Cengage Australia Pty Ltd. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Case Notes - Strategic Management, 7th edition

• • • • •

describe motives that can encourage managers to over-diversify an organisation, unintentionally reducing value. (Chapter 6) explain the popularity of merger and acquisition strategies in organisations competing in the global economy (Chapter 7) discuss reasons why organisations use an acquisition strategy to achieve strategic competitiveness (Chapter 7) name and describe the attributes of effective acquisition (Chapter 7) explain what executive management teams are and how they affect organisational performance (Chapter 12)

QUESTIONS 1. In relation to the JBH acquisition of TGG, what type of corporate strategy was JBH adopting? Explain why organisations use this strategy. What can be inferred from the success or otherwise of its strategy with reference to its equity price performance?

• In this case it is a related diversification corporate strategy with a moderate level of diversification. JBH and TGG are complementary businesses (‘Complementary customer profiles, product offerings and store locations’) with economies of scope. The key reason for value creation – there is also market power actions (growth opportunities for the combined business and market share gains). JBH is benchmarked well in terms of operating scale and cost of doing business in international frame of reference.

• Why diversify? Poor performance relative to industry peers, uncertain cash flows and reduce cash flow risk concentration, extract synergy, transfer valuable core competencies and market power • With reference to JBH equity price performance it provides one form of objective evidence that strategy has been successful, and that the strategy will support cash flow growth in the future (as share prices are an indicator of the markets view of future cash flow growth prospects). However, the JBH share price may indicate that the COVID-19 induced sales uplift is heavily influencing equity valuations and that the stock maybe overvalued. So, whilst the strategy appears successful today the issues of sustainability of competitive advantage are vital.

2. While JBH has a multi-channel approach for its products, it has a significant physical store footprint. Discuss whether its ‘bricks-and-mortar’ approach can withstand online competition from other mega retailers and smaller nimble competitors in this industry.

The JBH business model leverages two well-known brands and has distinct competitive advantages in its segments namely, scale, low operating cost model, quality store locations, supplier partnerships and multichannel capability. So, while it has a large physical presence it has a strong focus on the cost of doing business and is competing in the digital domain. It appears that its dual approach to channels is working based on its performance. Digital strategy is a key platform in its growth agenda.

Dallas Hanson, Kim Backhouse, David Leaney, Michael A. Hitt, R. Duane Ireland, Robert E. Hoskisson, Strategic Management, 7th Edition. © 2022 Cengage Australia Pty Ltd. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Case Notes - Strategic Management, 7th edition

3. Describe some of the key issues facing the acquirer in making the deal successful in merger and acquisition (M&A) transactions. In the case of TGG, what would be the key issues/risks facing JBH? Several factors can derail the best crafted acquisition strategy and lead to under performance and even divestiture such as: • high acquisition premiums • over optimistic synergy projections • poor due diligence on the target company • integration issues and problematic cultural assimilation • high financial leverage in debt funded acquisitions • hostile vs. friendly takeover approach • a high level of diversification leading to loss of management focus • failure to capture synergy post-acquisition; and • Poor target performance and the lack of value creation strategy.

Key acquisition issues in the TGG case would be due diligence, TGG liabilities and contingent liabilities, realisation of synergies (size of synergies and time to realise), TGG integration, debt financing risks if certain undertakings/ conditions not met and the underwriting risk of the share entitlement offer (rights issue).

4. Review the financial performance of the TGG division since the acquisition in terms of sales revenue, EBIT and EBITDA growth and margins. Is TGG performing financially compared to the JBH Australia business? What can be inferred from the financial and strategic contribution of TGG to JBH? Based on this analysis, is TGG a candidate for any restructuring action by JBH? The EBIT and EBITDA margins are for JBH Australia are higher than the TGG but the EBIT growth rate for TGG since 2018 was 77% vs. JBH Australia at 30%. The EBITDA margin growth rate since 2018 for TGG was 38% and for JBH Australia was 7.35%. The sales revenue growth rate for JBH Australia was 17% since 2018 and for TGG was 13.7%. Based on this financial analysis since the acquisition, TGG is performing as the growth rate of EBIT, EBIT margins and EBITDA margins is superior compared to JBH. The cost of doing business for TGG is also lower than JBH Australia in FY2020. So, the profitability growth rate for TGG has improved under JBH. To do a full analysis of the value of TGG to the JBH Group and whether JBH has created value in the TGG business a more detailed valuation would be required.

However, it is apparent that there is a favourable strategic and financial contribution to the JBH Group and that the related diversification appears to be delivering financial performance.

Based on the preceding analysis there does not appear to be any financial or strategic justification to initiate a restructuring of TGG such as divesture or spin-off (down scoping action). However, market conditions and performance can change with time due to external and internal changes so JBH and TGG cannot be complacent and a dynamic focus on business level strategy is needed to ensure alignment of strategic actions with internal and external environment changes.

Dallas Hanson, Kim Backhouse, David Leaney, Michael A. Hitt, R. Duane Ireland, Robert E. Hoskisson, Strategic Management, 7th Edition. © 2022 Cengage Australia Pty Ltd. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Case Notes - Strategic Management, 7th edition

5. M&A transactions are not without risk. In the presentation to investors ‘Acquisition of The Good Guys’ a key risk highlighted was: Due Diligence in relation to The Good Guys. JBH has undertaken a due diligence review in respect of the Acquisition. JBH has not been able to verify the accuracy, reliability or completeness of all the information against independent data. There is a risk that information provided by TGG (including financial information) was incomplete, inaccurate or unreliable and there is no assurance that the due diligence was conclusive or identified all material issues in relation to the TGG business. Limited contractual representations and warranties have been obtained from the vendors of TGG (the vendors) in the acquisition agreement relating to the Acquisition (the Acquisition Agreement) regarding the accuracy of the materials disclosed during the due diligence process.

Discuss the other potential risks.

Some of the potential consequences include high acquisition premium, problematic integration, inaccurate assessment of liabilities or contingent liabilities affecting future performance, poor performance in the target firm, lack of strategic fit, issues in debt financing for example specific undertakings and covenants and obligations in general, inaccurate financial position of the underlying business and erosion of shareholder value in the acquiring firm.

6. What would be the consequences of poor or incomplete due diligence be in this case?

The role of the board and corporate governance with respect to M&A proposals is set out in the JBH risk policy. What are the potential agency relationship issues with such an M&A transaction? Explain your answer.

Managerial opportunism, increasing the size and complexity of the firm through increasing the degree of diversification to justify higher remuneration and share/ bonus incentives, managerial employment risk, conflicts on free cash flow and the tension between managerial incentives and returns to equity holders.

Dallas Hanson, Kim Backhouse, David Leaney, Michael A. Hitt, R. Duane Ireland, Robert E. Hoskisson, Strategic Management, 7th Edition. © 2022 Cengage Australia Pty Ltd. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Case Notes - Strategic Management, 7th edition

Case 2 Challenges at Australia Post INTRODUCTION This is a good case that includes excellent opportunities to analyse a changing external world and a good resources and capabilities set. Australia Post (AP) has excellent resources but is faced with a digital challenge that it must meet while still having obligations to handle paper mail. How should they proceed? The issue is a current one in Australia and will be around for some time to come.

AP is traditionally a bricks and mortar mail provider using post offices and letter boxes. This is a mail delivery system. AP also operate a retail chain.

EXTERNAL ANALYSIS General Environment • Demographics – a big population with a need for communication because of the country is a big island • Socio-cultural – the young do not use mail much. AP clients order by email/net but get deliveries by mail systems • Technology – this is changing all the time, and is very difficult to predict in detail.

That said, it is certain that communication and purchasing via the net is well established and will grow even further • Government – there is a duty on AP to maintain the paper mail system • Globalisation – the world is ever-more integrated because of the technology of communication – email, the internet etc.

Technology is a threat because it leads to major challenges for the bricks and mortar mail system. Government is a threat because it stifles AP’s strategic flexibility.

INDUSTRY ANALYSIS AP is in two industries, retailing via its shops, and delivery of mail, and both need to be analysed. Delivery industry is further divided into two strategic groups – package delivery and mail delivery.

The Delivery Industry The delivery industry is moderate cycle in the package delivery strategic group of the industry – trucks and planes have not changed much recently. The market in this group is growing. It is slow cycle in the paper message delivery group.

Dallas Hanson, Kim Backhouse, David Leaney, Michael A. Hitt, R. Duane Ireland, Robert E. Hoskisson, Strategic Management, 7th Edition. © 2022 Cengage Australia Pty Ltd. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Case Notes - Strategic Management, 7th edition

Substitutes – electronic mail is a substitute for paper mail.

Rivalry – the package delivery group is increasingly competitive with many firms now operating in this world. For snail mail there is no competition to AP, but substitutes like email make it a tricky group in which to operate.

Suppliers – low power.

Buyers – the effect of substitutes on paper mail means buyers have had great power but the industry is now mature and AP is no longer eager to placate buyers because it is too expensive to do so –people expect mail to be cheap whereas it is expensive to deliver. In the package industry group buyers still have power –it is a competitive world.

New entrants –in paper mail no threat, in package delivery a growing threat of international entries.

This is an unattractive industry both for the paper mail group (no profit possible given costs and substitutes and public duty that restricts prices) and delivery of packages strategic group (high competition).

The Retailing Industry (i.e. bricks and mortar retailing) This is a mature industry with many players, big and small.

Substitutes – net orders that then get delivered are a growing substitute.

New entrants – small players enter frequently but they are extremely unlikely to become large players.

Buyer power – huge because competitors are common and switching costs are minimal.

Rivalry – very high.

Suppliers – many, few have any power.

A very unattractive industry unless you have a well-established shop network and good supplier contacts.

RESOURCES Tangible A huge post office and shop network (a key resource for both the retailing and delivery efforts).

Intangible • Dedicated staff • Great brand for message delivery –highly visible • Good leadership – they realise the issues and strive to approach them.

CAPABILITIES • • • •

Ability to deliver paper mail Australia-wide Ability to delivery packages Australia-wide Ability to sell small objects (books, DVDs, toys) in a huge network of shops Good leadership that provides the capacity to change.

Dallas Hanson, Kim Backhouse, David Leaney, Michael A. Hitt, R. Duane Ireland, Robert E. Hoskisson, Strategic Management, 7th Edition. © 2022 Cengage Australia Pty Ltd. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Case Notes - Strategic Management, 7th edition

There are no core competencies. The paper mail capability is not valuable even though it is rare and none of the others are rare.

COMPETITORS In paper mail there are none.

In packages there are many players but none that match the AP network, yet. The competition is well resourced and has global coverage for delivery of goods.

In retailing there are numerous very well-resourced competitors.

STRATEGIES AP have already raised the price of paper mail letters and increased delivery times. This indicates a gradual withdrawal from this public duty. They cannot abandon this task altogether since the government is the owner of the organisation and wants paper mail to continue, if only because it is traditional (and delivers a lot of political mail).

They are already selling a wide range of goods in their post offices. This must continue but cannot be a major profit centre because of the high levels of competition in this arena.

They must face off the competition in packages using their huge network of post offices to deliver in a timely fashion with competitive prices. This market is likely to increase and is a profit centre. It is their big opportunity A big marketing campaign to keep the public alert to APs advantages – its resources set – is also needed. The competition is likely to increase –they must stay ahead of it. The future of AP is assured if they can make use of their unmatchable delivery system and make people aware of how useful it is.

Dallas Hanson, Kim Backhouse, David Leaney, Michael A. Hitt, R. Duane Ireland, Robert E. Hoskisson, Strategic Management, 7th Edition. © 2022 Cengage Australia Pty Ltd. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Case Notes - Strategic Management, 7th edition

Case 3 Nyrstar NV: a case study in a failed vertical integration strategy CASE SYNOPSIS Nyrstar is a case in a mature and highly competitive industry in which excellent external analysis and understanding of value chains are critical.

Nyrstar is a zinc smelting and mining company formed in 2007 out of the smelting assets of Unicore. They operate in global commodity markets where margins are slim, and firms are price takers.

In a move towards backwards integration, they acquired zinc mining assets in South and North America. The idea was to protect against cyclical market risk by locking in supply of raw material. Competencies in mines acquisition were essential in this process but Nyrstar had not established that they had these. Despite this, they proceeded since it was a logical strategy and major competitors such as Glencore already had this advantage.

In 2013 they continued to focus on enhancing integration across the value chain. Meanwhile the zinc smelting market was proving difficult to compete in and it was globally fragmented, with Chinese firms making around 50% of the global market. Prices for zinc and other metals were market based and could not be predicted accurately.

By 2015 it was evident that major mining operations had failed. Their aim then was to improve smelting, but mining assets had been expensive failures and debt levels related to them were crippling. The firm was failing.

In late 2019 Trafigura, a global commodities and energy trader became majority owner.

LEARNING OBJECTIVES • • • • •

explain the importance of analysing and understanding the organisation’s external environment, and discuss the four activities of the external environmental analysis process (Chapter 2) define value and discuss its importance (Chapter 3) explain how organisations analyse the support functions and activities of the value chain for determining where they can create value for customers (Chapter 3) explain the purpose of forming and implementing a business-level strategy (Chapter 4) explain awareness, motivation and ability as drivers of competitive behaviours (Chapter 5) Dallas Hanson, Kim Backhouse, David Leaney, Michael A. Hitt, R. Duane Ireland, Robert E. Hoskisson, Strategic Management, 7th Edition. © 2022 Cengage Australia Pty Ltd. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Case Notes - Strategic Management, 7th edition

• • • • • • • • • • •

describe how strategic actions and tactical actions drive competitive rivalry between organisations (Chapter 5) describe different levels of diversification with different corporate-level strategies (Chapter 6) describe how organisations can create value by using a related diversification strategy (Chapter 6) explain the two ways value can be created with an unrelated diversification strategy (Chapter 6) define and understand the restructuring strategy and the long- and short-term outcomes of its common forms (Chapter 7) explain incentives for organisations to use an international strategy and identify three basic benefits of successful strategy implementation (Chapter 8) describe the three main international corporate-level strategies (Chapter 8) discuss environmental trends affecting the choice of international strategies, particularly international corporate-level strategies (Chapter 8) explain the five modes organisations use to enter international markets (Chapter 8) discuss the two major risks of using international strategies (Chapter 8) understand the challenges of increased organisation size and operation complexity in achieving positive outcomes as well as the limitations of international expansion (Chapter 8).

QUESTIONS 1. Compare the advantages and disadvantages of backward vertical integration. In the Nyrstar case, what were the key limitations and issues of this strategy?

Backward vertical integration is a market power action. Companies can increase control of the value chain through this strategy and thereby extract efficiencies and exploit its capabilities to generate increased value. A further advantage is that this strategy can control costs and thus improve its competitive position against rivals.

The disadvantages include input costs may be lower from other suppliers thereby locking in higher input costs. Backward integration can require large investment costs and investment in technology. This can limit financial flexibility and capacity to change technologies.

Backward integration will require the investment in new capabilities and core competencies and requires a larger scope of control by management and thereby may dilute management focus and increase costs in managing another business segment.

In Nyrstar’s case whilst Nyrstar did increase the degree of integration between mines and smelters it did not possess the requisite capabilities to extract the full value from the upstream mining assets. The backward integration strategy failed because the mining segment required significant financial resources, and this was a constraint for the overall business. The assets themselves were questionable in terms of asset quality and earnings quality. It is debatable whether adequate due diligence and financial stress testing was conducted on the acquisition targets. The vertical integration strategy became a source of competitive disadvantage to Nyrstar as it limited financial flexibility given the balance sheet was highly leveraged with debt.

Dallas Hanson, Kim Backhouse, David Leaney, Michael A. Hitt, R. Duane Ireland, Robert E. Hoskisson, Strategic Management, 7th Edition. © 2022 Cengage Australia Pty Ltd. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Case Notes - Strategic Management, 7th edition

2. Describe and critique the Nyrstar strategy as announced during 2015, using strategy frameworks. Explain your reasons.

The revised Nyrstar strategy involved down scoping actions (divestment of mining assets) and a re-focus on the dominant business (smelting). The corporate strategy was a related diversification strategy but with a low degree of diversification. The dominant business has scale advantages but there isn’t any distinct market power owing to the fragmented nature of the industry and the fact that the top six companies account for 36% of global production. The low level of diversification creates cash flow risk should the external environment (commodity prices and exchange rates) move against the business. Nyrstar operates in a highly competitive and mature industry and its strategy is unclear as to how it can sustain competitive advantage and generate additional value. Whilst market power actions might be possible the low degree of industry concentration is problematic to earn attractive returns on invested capital in the long run.

3. What was Nyrstar’s core competence? Did this support or hinder the vertical integration strategy?

Nyrstar’s core competency is converting raw material (zinc concentrate) through its smelting network and integration with the Port Pirie facility. The technical and operating capabilities combined with recycling capability at the Port Pirie smelter provide uniqueness and a source of advantage to compete with industry incumbents. However, it did not have any valuable and unique strategic capabilities in operating mining assets. The competency in smelting was not necessarily a constraint in its vertical integration strategy but rather Nyrstar did not have the requisite capabilities to execute the intended vertical integration strategy and extract sustainable value from the mining segment. So, its smelting competencies did not hinder vertical integration.

4. In mature industries like zinc, what other corporate strategic actions other than vertical integration could organisations take to increase shareholder value? Discuss other value creation approaches.

• •

• • •

Strategic actions could use mergers and acquisitions to increase scale, extract synergies and increase market power through consolidation; Other initiatives could involve spin-offs (demergers) to refocus on the core business, reduce the extent of diversification, reduce capital requirements and reduce complexity; Portfolio management approaches such as divestment actions to down scope the business and exit unprofitable business units; Forward integration through acquisition or organic investment in downstream value chains and capturing the downstream value of products and services; and Co-operative strategies such as joint ventures and strategic alliances (equity and non-equity) to jointly collaborate and share resources and capabilities to develop new competitive advantage.

Dallas Hanson, Kim Backhouse, David Leaney, Michael A. Hitt, R. Duane Ireland, Robert E. Hoskisson, Strategic Management, 7th Edition. © 2022 Cengage Australia Pty Ltd. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Case Notes - Strategic Management, 7th edition

5. In late 2010 Nyrstar made an all-cash takeover offer for the outstanding shares of Farallon Mining, valuing the equity at CN$409 million. As a result of this transaction, Nyrstar would fully own the Campo Morado asset in Mexico. The purported benefits to Nyrstar were an increase in upstream integration with low-cost mine operation, enhancement of its growth platform in the Americas, with substantial exploration potential and accretive to near-term earnings and cash flow. However, the mine never operated and was under indefinite care and maintenance. Discuss the key strategic and financial risks with international approaches to diversification.

The mode of entry is a key factor, such as whether an acquisition of an established company or the development of a new wholly owned subsidiary in the host country can be justified in terms of value, risk and whether competitive advantage can be sustained. The investment costs and complexity are a function of mode of entry. For example, whilst greenfield ventures offer greater control they may be costly and time consuming to negotiate and implement due to the political and legal environment in the host country.

Internationalisation based on acquisitions may have integration issues and acquisition premiums may be high. This is what happened with the Farallon Mining acquisition and its Mexican asset, Campo Morado.

Other risks include political and economic risks. For instance, political instability and nationalisation of assets can cause significant disruption to operations in host countries and cause material risks to the value of the international asset and parent company. Economic risks include national economic factors such as fiscal and monetary policy, tax regime and stability of tax laws, financial and capital markets, exchange rates, inflation expectations and expected Gross Domestic Product growth rates. Other economic risks associated with the resources in the host country and even restrictions in repatriation of economic profits are key factors and risks that require careful assessment and consideration in international strategies.

6. The eventual acquisition of Nyrstar by Trafigura Group Pte Ltd averted the certain financial collapse of the Nyrstar group. The poorly crafted and failed vertical integration strategy was a major cause of Nyrstar’s resulting poor financial position and solvency issues. Based on this case study and your analysis of Nyrstar’s strategy, what were the key risk management failings with Nyrstar’s growth ambitions and strategy?

The key risk management failings include the following: 1. The earnings quality of the acquired mining assets was dubious. They did not have a track record and were not quality assets as highlighted in the mining segment strategic review were deemed non-core to Nyrstar. This raises questions about the effectiveness of the due diligence conducted by Nyrstar at the time 2. There were valuation risks where acquisition premiums paid for the mining assets were likely too high and not commensurate with the cash flow risk and growth prospects of the assets

Dallas Hanson, Kim Backhouse, David Leaney, Michael A. Hitt, R. Duane Ireland, Robert E. Hoskisson, Strategic Management, 7th Edition. © 2022 Cengage Australia Pty Ltd. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Case Notes - Strategic Management, 7th edition

3. Cross border acquisition risks were not properly considered; for example, the security issues at the mining asset in Mexico were either downplayed, underestimated or misunderstood 4. Financial leverage was not prudent; the non-current liabilities increased substantially and were not proportionate with actual earnings and the cash flow risk profile. It is not clear at the time of the acquisitions whether stress testing was conducted to establish risk scenarios for the mining segment and the impact on Nyrstar’s liquidity and solvency risk 5. Nyrstar failed to properly mitigate the cash flow risk and grow cash flows from its core business. It resorted to debt financing to fund an ambitious and highly risky strategy rather than use low risk retained earnings. It failed to manage the risks associated with capital structure 6. There were obvious risks with the integration of the mining segment. Nyrstar did not possess deep knowledge or core competency in operating and growing mining businesses 7. The time horizon for risk did not explicitly appear to be considered with the mining acquisitions. Financial risks may materialise over longer time periods and this is what happened with Nyrstar being highly leveraged from the mining acquisitions of 2010 and 2011, but 8-9 years later it faced challenging market conditions and the business faced serious liquidity and solvency risks that required a major restructuring and ownership change 8. It embarked on the redevelopment of the Port Pirie metals refining facility, but its financial position and capital structure were already stressed from the failed vertical integration strategy placing further financial risk on the business. Whether this was a prudent and risk-based approach to strategy at that time is questionable and maybe the smelting segment investments could have been sequenced or timed differently as the capital structure was non-optimal at the time to justify new capital expenditures; and 9. There was a lack of investment in innovation and research and development which increased the risk of obsolescence of existing capabilities.

Dallas Hanson, Kim Backhouse, David Leaney, Michael A. Hitt, R. Duane Ireland, Robert E. Hoskisson, Strategic Management, 7th Edition. © 2022 Cengage Australia Pty Ltd. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Case Notes - Strategic Management, 7th edition

Case 4 Pfizer INTRODUCTION Case Synopsis Founded more than 170 years ago in Brooklyn, New York, Pfizer is one of the largest pharmaceutical companies in the world. It produces some of the best-known brand-name drugs, including Lipitor®, Lyrica®, Viagra®, Xeljanz®, Celebrex®, EpiPen®, and even Advil®, Robitussin®, and ChapStick®. Despite its long-term international success, the firm has struggled in recent decades.

The legal, political, and socioeconomic segments of the external environment have combined to pose serious threats for Pfizer and other big pharma companies. Bringing a new drug to market can cost billions of dollars in R&D, and Pfizer’s biggest successes have averaged close to $8 billion, largely due to the extensive testing required by the Food and Drug Administration. When a drug is finally approved, the firm only has about 10 years left on the patent, which means it must recoup its R&D costs in a relatively short amount of time. Thus, the cost of prescription drugs is quite high. Added to that, firms such as Pfizer and others need to continue to drive revenue, so they often boost drug prices even higher.

These practices have the vast majority of consumers up in arms, and even President Trump has spoken out against this situation.

As an alternative route to securing new drugs and other medical technologies, Pfizer has made a number of important acquisitions, on average every 18 months or so. These acquisitions have enabled the firm to move into growth areas in the pharmaceutical field, although some analysts predict that there are no truly breakthrough categories of drugs left to be developed. Pfizer has also made two attempts to merge with competitors – AstraZeneca and Allergan – with the intention of relocating Pfizer headquarters in a foreign country where it will be subject to lower taxes. However, both attempts have fallen through.

When Ian Read, a Pfizer ‘lifer,’ assumed the position of CEO in 2010, he made some significant changes. He restructured the firm into two main divisions: Established Products and Innovative Products. The Innovative Products category was further subdivided into the Global Innovative Pharma and Global Vaccines, Oncology, and Consumer Healthcare businesses. He also undertook a change in organizational culture with a strong emphasis on accountability. To communicate this message, he had cold coins made with the words ‘Straight Talk’ on one side and ‘OWNIT!’ on the other. OWNIT! has since become an empowering aspect of Pfizer’s culture.

Pfizer seems to be challenged on all sides, pressured to produce innovative products, please shareholders, meet legislative demands, and assuage consumers who are outraged at the high cost of prescription medication.

Dallas Hanson, Kim Backhouse, David Leaney, Michael A. Hitt, R. Duane Ireland, Robert E. Hoskisson, Strategic Management, 7th Edition. © 2022 Cengage Australia Pty Ltd. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Case Notes - Strategic Management, 7th edition

LEARNING OBJECTIVES • • • • • • • • • • • • • • • • • • • • • • •

Describe vision and mission and discuss their value. (Chapter 1) Define and classify the four major stakeholder groups and describe their ability to influence organisations. (Chapter 1) Describe the work of strategic leaders. (Chapter 1) Define and describe the general environment, the industry environment and the competitor environment. (Chapter 2) Outline and describe the seven segments of the general environment (Chapter 2) Identify the five competitive forces and interpret industry analyses to determine an industry’s profit or surplus potential. (Chapter 2) Describe different levels of diversification with different corporate-level strategies.

(Chapter 6) Explain three primary reasons firms diversify. (Chapter 6) Describe how organisations can create value by using a related diversification strategy. (Chapter 6) Explain the popularity of merger and acquisition strategies in organisations competing in the global economy. (Chapter 7) Discuss reasons why organisations use an acquisition strategy to achieve strategic competitiveness. (Chapter 7) Name and describe the attributes of effective acquisitions. (Chapter 7) Define and discuss the three major types of strategic alliances. (Chapter 9) Name the four main business-level cooperative strategies and describe their use.

(Chapter 9) Discuss the use of corporate-level cooperative strategies in diversified organisations.

(Chapter 9) Understand the importance of cross-border strategic alliances as an international cooperative strategy. (Chapter 9) Explain the use of three internal governance mechanisms to monitor and control managers’ decisions. (Chapter 10) Describe the relationship between strategy and structure. (Chapter 11) Discuss the different functional structures used to implement business-level strategies. (Chapter 11) Explain the use of three versions of the multidivisional (M-form) structure to implement different diversification strategies. (Chapter 11) Discuss the organisational structures used to implement three international strategies. (Chapter 11) Describe the managerial succession process using internal and external managerial labor markets. (Chapter 12)

Dallas Hanson, Kim Backhouse, David Leaney, Michael A. Hitt, R. Duane Ireland, Robert E. Hoskisson, Strategic Management, 7th Edition. © 2022 Cengage Australia Pty Ltd. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Case Notes - Strategic Management, 7th edition

• • • • • •

Discuss the value of strategic leadership in determining the organisation’s strategic direction. (Chapter 12) Describe the importance of strategic leaders in managing the organisation’s resources.

(Chapter 12) Define organizational culture and explain what must be done to sustain an effective culture. (Chapter 12) Explain what stratefic leaders can do to establish and emphasise ethical practices.

(Chapter 12) Define invention, innovation, and imitation, and describe the relationships among them.

(Chapter 13) Describe how organisations use acquisitions as a means of innovation. (Chapter 13)

Strategic Issues and Suggested Discussion Questions & Answers 1. Describe two ways in which Pfizer has gained access to innovative drugs and other medical technologies. What challenges do you suppose the firm has faced in pursuing each of these strategies?

Pfizer has gained access to innovations through both internal development and external acquisitions. Internally, the firm has state-of-the-art laboratories, but it still faces a number of challenges once it has targeted a specific type of drug it would like to develop. Once the initial scientific research and development has produced a viable drug for consideration, Pfizer must conduct rigorous testing, trials, and pre-market review in conjunction with the Food and Drug Administration’s strict guidelines. The complete, multiyear process can cost billions – the R&D costs of Pfizer’s biggest blockbusters have averaged close to $8 billion each – and as much as 60% of those costs are related to FDA testing and approval. By the time a drug is finally approved – and many are not – Pfizer generally has about 10 years left under patent protection in which it can recoup this huge investment. When the patent expires, similar generic drugs will become available, significantly reducing sales of the brand-name drug. And even after exhaustive research, some drugs that have made it onto the market have had lasting adverse effects on patients, which has resulted in lawsuits against Pfizer and others.

Externally, Pfizer has made frequent acquisitions of drug technology developers. Nine of the acquisitions made since 2000 demonstrate how Pfizer is interested in acquiring both large firms and small, depending on the innovative products and other medically based technologies the firms have to offer. These strategically selected firms have been valued anywhere from the low millions to $90 billion. Although the case does not specify any issues with acquired firms, given the inherent challenges of integration, it is to be expected that some acquisitions have been problematic. Pfizer may have paid too much for some firms, and some deals may have posed integration difficulties and failed to result in the expected synergies with Pfizer’s resources (Figure 7.1).

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2. Pfizer has twice attempted to merge with another pharmaceutical company, and both times the mergers have failed. Why is Pfizer so eager to merge? Why did these attempts fail? What segments of the external environment have influenced this situation?

In 2014, Pfizer attempted to merge with U.K.-based rival AstraZeneca; in 2016, Pfizer again tried to merge with Ireland-based rival Allergan. Led by Ian Read, the firm is attempting to engage in something called a corporate inversion. This type of cross-border alliance would allow Pfizer to move its headquarters to a foreign country, meaning it would be subject to lower tax rates and reduce the amount of taxes it pays to the United States. Read believes that the current U.S. tax structure puts Pfizer at a competitive disadvantage in relation to global rivals.

In both cases, lawmakers put a stop to the planned mergers; thus, the political/legal segment of the external environment has been the most influential on Pfizer’s plans. The merger with AstraZeneca would have made the new firm the largest pharmaceutical firm in the world, but legislators in both the United States and the United Kingdom vehemently rejected the proposal. Pfizer’s proposed merger with Allergan was also quashed by the U.S. Department of Treasury, which revised its rules regarding corporate inversions while the two firms were in negotiations. The proposed merger was no longer legal under the new Dallas Hanson, Kim Backhouse, David Leaney, Michael A. Hitt, R. Duane Ireland, Robert E. Hoskisson, Strategic Management, 7th Edition. © 2022 Cengage Australia Pty Ltd. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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U.S. regulations, which were specifically designed to make it more challenging for U.S.based firms to leave the country and take their tax revenues with them.

3. When Ian Read became the CEO in 2010, he restructured Pfizer into two segments: Established Products and Innovative Products. What type of structure is the firm now using? How will this move benefit the firm?

Although Pfizer is a global firm with many strategic locations (Figure 11.9), it is practicing a global strategy by selling standardised products around the world. Read’s new structure appears to take the SBU form of the multidivisional structure (Figure 11.6), in which divisions within each SBU can realise some economies of scope and scale. Separating the established products from the innovative products (Figure 1) will enable Read and his team to better monitor financial controls over the two types of products and to more easily evaluate the performance of each portfolio of products, benefits that Read described as ‘greater visibility and focus.’ It also allows each SBU to capitalise on its capabilities and core competencies more effectively.

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Case Notes - Strategic Management, 7th edition

4. Briefly summarise the bios of CEO Ian Read and other members of the top management team. How would you describe this team? What type of managerial labor market has Pfizer used to assemble its team?

Although he holds a degree in chemical engineering, CEO Ian Read began his career in accounting at Pfizer and worked his way up. He held several strategic leadership positions in international posts before assuming the top position at Pfizer. Executive VP of Strategy Portfolio and Commercial Operations Laurie Oslo is also a long-time Pfizer employee. With degrees in economics and business, she has held diverse positions within the firm, developing expertise in areas such as marketing, strategy, and operations. Rod McKenzie, the chief development officer, is a PhD scientist who has personally developed drugs at other firms and now oversees the entire R&D operation. He also is involved in strategic investments. Executive VP of Business Operations and CFO Frank D’Amelio is relatively new to Pfizer, bringing with him extensive knowledge of finance, acquisitions, and operations.

The newest Pfizer employee to assume a leadership role is Charles H. Hill III, executive vice president of Worldwide Human Resources. Prior to joining Pfizer, he was the head of HR for another organization within the industry.

Clearly, Pfizer has deliberately created a heterogeneous team. Some members are long-time Pfizer employees with an ingrained sense of the organisation’s culture, mission, and values.

The CEO was most likely chosen because of his deep knowledge of Pfizer’s core competencies and his understanding of what the company needs. Other team members, however, were brought in from other firms, bringing with them alternate perspectives and areas of knowledge. All are industry insiders, and collectively they provide expertise in every aspect of business – finance, operations, R&D, marketing, strategy, and more. Thus, Pfizer has used both the internal and external managerial labor markets to identify and hire these strategic leaders.

5. Pfizer and other big pharma companies have been harshly criticised for charging ‘exorbitant’ prices for some of their drugs, but Pfizer says its prices are justified.

Debate the issue, examining both viewpoints. Is this a smart pricing strategy or not?

This question could make for a lively formal or informal debate in class, touching on both financial and ethical issues. Some students will take Pfizer’s side, arguing that the firm must recoup the huge investment it makes in drug development. Some drugs fail, and those costs must be covered as well. And finally, investors are expecting healthy returns. When all the other drug companies are charging similar prices, students can make a case for Pfizer following suit. On the other hand, the firm has been known to charge up to hundreds of dollars for a single pill that must be taken daily. Many students will agree that it is unethical to force people to pay for – or to deny people who can’t afford to pay for – these lifealtering and, in some cases, life-saving drugs. Quite often, it is elderly people on fixed incomes who need these drugs.

[Note: Pharmaceutical companies must take out a patent for a new drug when development begins. Development and testing often take many years, so there is often a relatively short

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time (10 years or so) left on the patent in which the drug company can recoup its investment on its successful drugs before generic versions enter the marketplace. A former Pfizer CEO has suggested that if the laws were changed, and patents were not issued until a new drug is released, that would give the drug companies a longer timeframe over which to amortise costs, which should result in lower prices. This debate could end with a discussion of this possibility and other solutions to this ethical dilemma.]

Additional Resources Reuters’s company profile gives in-depth background on Pfizer’s current financials, leadership, valuation, news, and more: https://www.reuters.com/finance/stocks/overview/PFE.N Yahoo! Finance’s company profile offers additional background on Pfizer’s current financials, leadership, valuation, news, and more: https://finance.yahoo.com/quote/PFE/ Investors tried to pressure Pfizer into splitting into two companies in 2016, but the firm refused and explained why: https://www.ctvnews.ca/business/drugmaker-pfizer-decides-not-to-break-up-business1.3088696 The North Jersey Record reported on a drug pricing conspiracy lawsuit against Pfizer and several other drug companies from May 2019: https://www.northjersey.com/story/news/new-jersey/2019/05/11/teva-pfizer-among-20drug-companies-accused-illegally-boost-prices-nj-lawsuit/1175940001/ In April 2019, The Motley Fool described three obstacles that could negatively impact Pfizer’s future success: https://www.fool.com/investing/2019/04/14/the-3-greatest-risks-pfizer-faces.aspx In March 2017, CNBC interviewed Pfizer’s former CEO Henry McKinnell, who advocated for legal changes for the industry: https://www.youtube.com/watch?v=ZW08fvL__kY Pfizer CEO Ian Read recorded this presentation on the pharmaceutical industry in March 2017: https://www.youtube.com/watch?v=vSLKcWEbhy4 Dr. Peter Rost, former Pfizer VP, described some corrupt practices in the medical industry in August 2015: https://www.youtube.com/watch?v=A5ypZsPedsg

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Case 5 Atlassian INTRODUCTION This is an Australian software company that started in 2002 and in 2016 was more valuable than major mining companies such as Fortescue. It is a terrific case that highlights a different (and very successful) business model. The set of new businesses that have different models to the old systems/models that are basic to B Bus teaching is growing and this case shows how one of these works. The industry is InfoTech (software development and sales and telecommunications), and the strategic group within it is Business InfoTech and that is what we will analyse.

The two guys who developed Atlassian (At) believe that if you have great software, price is right and make it downloadable from the net, customers will come, and they have. Their big issue is how to stay innovative even when large.

EXTERNAL ANALYSIS General Environment Technology is fast-changing, new software for business is in high demand. A big opportunity is present but you require innovation capabilities to take advantage of them.

• Demographic – good workers are available with advances in education • Government – no issues • Global – this is a global industry and software does not have national boundaries hence the market is huge • Natural environment – a paperless world is still out there as an aim INDUSTRY ANALYSIS Analysis is of the strategic group Business InfoTech. This is a very fast cycle industry with great potential.

Substitutes – the threat of substitutes is low.

New entrants – the threat of new entrants is high.

Buyers – bargaining power of buyers is high –there are many alternatives.

Suppliers – bargaining power of suppliers is low with the exception of labour supplies which might pose a problem if universities don’t turn out good graduates.

Rivalry – rivalry is high. Legacy companies are keen to be more flexible.

On this analysis is not an attractive industry with high rivalry and many new entrants.

Balancing that, it is a very profitable industry if you can enter and survive. A great product and good business model will yield great profits.

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COMPETITORS Start-ups are common. The legacy companies are striving to be more flexible. They have huge resources sets.

RESOURCES Tangible • Good product line Intangible • Excellent leaders • Good business culture • Good reputation • Good links to customers CAPABILITIES 1. Ability to innovate and develop new and cost-effective business software 2. Ability to market this via the net, inexpensively 3. Ability to operate a workforce that is collaborative and innovative 4. Ability to be flexible in the marketplace and within the organisation 5. Ability to market products cheaply via the net and word of mouth All these capabilities are core competencies, for now. Atlassian’s big issue is to ensure that they remain so. As the company grows the automatic flexibility that is related to small size is challenged and Atlassian must work out a way of ensuring that they stay flexible.

Major competitors are already alert to the problem and are striving to change STRATEGIES Atlassian already has a range of a differentiated products with a good market coverage in the business world. Their business model is based on supplying great products with marketing handled by the product itself plus ‘world of mouth’ in the net space.

Their problem is success: they are now a large company and this threatens their innovative edge and collaborative workplace. The business model must stay the same but the organisation must, to retain flexibility, become a network of smaller organisations, collaborative both within and between these new smaller organisations.

The alternative strategy is to attempt to stay flexible while remaining one large organisation has not proved successful in this or any other industry. The legacy players have struggled and failed with just this issue and provide a model of how NOT to tackle the issue.

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Case 6 The Sunshine Coast UNESCO Biosphere Reserve and Smart City: a new governance opportunity in a post pandemic world?

CASE SYNOPSIS A case about the importance of the natural world and the complexity of implementing sustainable development policies. It also involves stakeholder analysis issues.

A bioregion requires that new ethical relationships with stakeholders be developed.

Bioregions include land and sea and are areas providing local solutions to global challenges.

Queensland’s Sunshine Coast (SC) is exposed to the impacts of climate change (‘climate chaos’). Changes needed are now helped by sensors proving information to decision makers. These are now used in ‘smart cities. The vision of SC is to become Australia’s most sustainable region, using the framework provided by the 17 sustainable development goals proposed by the UN. For Organisations this means a multi stakeholder approach and a participative governance system. This is a complex mix; sustainable development requires interconnected social, economic and ecological systems. Implementation means handling economic and political risks. Local bioregions such as SC are likely to require social and economic innovations to achieve SD. Covid19 may have led to shifts towards cooperative social attitudes.

LEARNING OBJECTIVES • • • • • • •

define and describe the general environment, the industry environment and the competitor environment (Chapter 2) explain the importance of analysing and understanding the organisation’s external environment, and discuss the four activities of the external environmental analysis process (Chapter 2) define cooperative strategies and explain why organisations use them (Chapter 9) explain the use of three internal governance mechanisms to monitor and control managers’ decisions (Chapter 10) describe how the external corporate governance mechanism – the market for corporate control – restrains executive managers’ decisions (Chapter 10) discuss the nature and use of corporate governance in international settings, especially in Australia, Germany, Japan, Spain and China (Chapter 10) describe how corporate governance fosters the making of ethical decisions by an organisation’s executive managers. (Chapter 10).

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QUESTIONS 1. What is the strategic leadership role and stakeholder dynamic for business towards Biosphere Reserves and Agenda 2030?

Effective strategic leaders build and maintain internal and external social capital. Internal social capital promotes cooperation and coordination within and across the firm’s units.

External social capital provides access to resources from external parties that the firm needs to compete effectively.

Shaping the firm’s culture is a central task of effective strategic leadership. An appropriate organisational culture encourages the development of an entrepreneurial mind-set among employees and an ability to change the culture as necessary.

Effective strategic leadership has five key actions: determining the firm’s strategic direction, effectively managing the firm’s resource portfolio (including exploiting and maintaining core competencies and managing human capital and social capital), sustaining an effective organisational culture, emphasising ethical practices, and establishing balanced organisational controls.

2. Does the EU’s smart specialisation strategies (S3), with their inclusion of civic society as a key stakeholder, represent an opportunity for business leaders to contribute to shaping the general environment?

Identifying opportunities and threats is an important objective of studying the general environment. An opportunity is a condition in the general environment that, if exploited effectively, helps a company reach strategic competitiveness.

When monitoring, analysts observe environmental changes to see if an important trend is emerging from among those spotted through scanning. Critical to successful monitoring is the firm’s ability to detect meaning in environmental events and trends.

Effective monitoring requires the firm to identify important stakeholders and understand its reputation among these stakeholders as the foundation for serving their unique needs.

Beyond regular analysis of the external environment, a Smart Specialization Strategy (S3), with its inclusion of civic society as a key stakeholder, and using the 17 SDGs as a new set of categorisations, business might not only forecast/identify events and trends and opportunities and threats, but shape them.

Alignment with SDGs is foundational towards sustainable business, finance models and supply chains which are key to withstanding market shocks.

As noted by economic measure alone the benefit-cost ratio for pandemic prevention, according to the World Bank’s Development Report of 2014, is roughly 11:1. Essentially, if countries developed and implemented systems for early and effective prevention that met Dallas Hanson, Kim Backhouse, David Leaney, Michael A. Hitt, R. Duane Ireland, Robert E. Hoskisson, Strategic Management, 7th Edition. © 2022 Cengage Australia Pty Ltd. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Case Notes - Strategic Management, 7th edition

specified international standards, such as those of the SDGs, annual expenses would be moderate, and serve as an investment costing ten times less than the expected annual cost of inaction (World Bank, 2013).

Furthermore, the leadership role business is taking up in governance is unprecedented, as is its willingness to be ‘part of the solution’.

The COVID-19 pandemic added a massive shock to a system already strained by geopolitical, societal, economic and environmental tensions.

To rebuild greener economies following the COVID-19 crisis, highlights the priority for government/business not only to avoid conflict between trade and climate policies, but to actively bring worldwide leverage in global value chains to mitigate environmental damage.

For example, heads of state have pledged to commitment in meeting the targets of SDG 14 (Life Below Water) to conclude a WTO deal banning subsidies for harmful fisheries by 2020.

Without this a healthy ocean for the future is jeopardised as is food security and multiple related economic impacts with that.

3. What commercial value might be generated from a Biosphere Reserve? Together with smart city capabilities, does it present business and government with a sustainable business model and a way to future-proof supply chains, investment and growth? What role has the Covid-19 pandemic played?

Businesses large and small, governments, NGOs, researchers and citizens bring valuable perspective to identifying political, social and economic challenges and innovations in meeting them. BR represent an opportunity to add to international trade benefits and contribute to not just sustainability but regenerative actions serving the ecosystem, humanity and the planet.

Global supply chains have been in the spotlight since lockdown disrupted factories, closed borders and reduced the number of passenger flights able to carry freight.

This is resulting in a significant overhaul of the status quo. Indeed, a McKinsey survey of 60 senior supply chain executives found that 93% of them are planning to increase the level of resilience across their supply chains.

Smart city infrastructure and use of blockchain, and smart contracts will help drive efficiency, reducing both bureaucracy and CO2 emissions. Accelerated digitalisation and uptake of new technologies can help firms find a balance between supply chain resiliency and efficiency.

As recently as 2016, trading nations were erecting fresh barriers – subsidies, tariffs, quotas, licensing requirements and other obstacles – at twice the rate they were adopting measures to liberalise trade, according to Global Trade Alert.

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This new wave of protectionism, which includes a sharp rise in the use of international economic sanctions and penalties, will significantly increase the cost of goods at a time when we are experiencing historic levels of joblessness, poverty, and business failures on every continent.

The first step toward resiliency is diversification of sources and suppliers.

The goal of Man and the Biosphere (MAB) Programme is to support sustainable development through effective management, innovative technologies, policy suggestion and governance.

Biosphere Reserves play an important role in scientific investigations and innovation, generating knowledge, and experiences to link socio-economic development and biodiversity conservation for human well-being.

BR and natural habitat areas provide critical carbon storage that help mitigate climate change.

More regional and local autonomy should not mean the end of international collaboration.

In systemic challenges, collaboration is the best approach to avoid unintended consequences. Local government and UNESCO BR networks represent an opportunity to act locally and globally toward resilience.

Indeed, most citizens expect businesses and states to collaborate to stem the pandemic and environmental crisis and limit its health and economic impacts. In the aftermath of the pandemic, growth might be relaunched by a decisive reinvention of our economies around green technology, renewable energy and natural infrastructure to develop more efficient and resilient low-carbon economies.

Humans use at least 40,000 species of plants and animals on a daily basis. Many people around the world still depend on wild species for most of their needs like food, shelter and clothing.

A further example of critical commercial value is the connection between biodiversity and drug discovery from wild species which has always been, and will continue to be one of the most important for most if not all aspects of health care, disease prevention, and wellness In general, this represent opportunities to diversify and build resilience in terms not only supporting core competencies that are a source of competitive differentiation for the firm, this may be in terms of value chain activities through to related branding of the BR – tourism and agriculture are other clear industry examples which stand to benefit.

4. What implications are there for strategic planning, structure and controls in light of Covid-19, and considerations of the broader community and other non-industry stakeholders?

This question considers the nature of external environments characterised as turbulent, complex and global It highlights the importance of identifying opportunities and threats

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through an effective general environment analysis which helps a company reach strategic competitiveness or may hinder a firm’s efforts to achieve strategic competitiveness This includes an appraisal as to the importance of non-industry stakeholders (individuals, groups, and organisations) that can affect the firm’s vision and mission, who are both affected by the strategic out-comes achieved, and have enforceable claims on the firm’s performance (directly and indirectly).

Their ability to withhold participation that is essential to the firm’s survival, competitiveness, and profitability is the source of stakeholders’ ability to enforce their claims against an organisation.

Stakeholders continue to support an organisation when its performance meets or exceeds their expectations. Research suggests that firms managing relationships with their stakeholders effectively outperform those that do not.

Stakeholder relationships and the firm’s overall reputation among stakeholders can therefore be a source of competitive advantage.

When earning above-average returns, the firm is in a better position to manage stakeholder relationships effectively. With the capability and flexibility provided by above-average returns, a firm can satisfy multiple stakeholders more easily. When the firm earns only average returns, it is unable to maximise the interests of all stakeholders. The objective then becomes that of satisfying each stakeholder group’s minimal expectations.

Strategic planning is the leading task for the strategist as tactician.

This holds implications for organisational structure which specifies the firm’s formal reporting relationships, procedures, controls, and authority and decision-making processes.

It determines and specifies the decisions that are to be made and the work that is to be completed by everyone within an organisation as a result of those decisions. Structures are intended to cope with environmental uncertainty, but they don’t always do so.

It provides structural stability for managing daily work routines.

Organisational controls guide the use of strategy, indicate how to compare actual results with expected results, and suggest corrective actions to take when the difference is unacceptable.

Strategic controls are largely subjective criteria intended to verify that the firm is using appropriate strategies for the conditions in the external environment and the company’s competitive advantages.

Strategic controls are concerned with examining the fit between what the firm might do (as suggested by opportunities in its external environment) and what it can do (as indicated by its internal organisation in the form of its resources, capabilities, and core competencies)

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Strategic controls demand rich communications between managers responsible for using them to judge the firm’s performance and those with primary responsibility for implementing the firm’s strategies (such as middle and first-level managers).

Corporate governance is a relationship among stakeholders that is used to determine a firm’s direction and control its performance. How firms monitor and control top-level managers’ decisions and actions affects the implementation of strategies. Effective governance that aligns managers’ decisions with shareholders’ interests can help produce a competitive advantage for the firm.

Effective governance mechanisms ensure that the interests of all stakeholders are served.

Thus, strategic competitiveness results when firms are governed in ways that permit at least minimal satisfaction of capital market stakeholders (e.g., shareholders), product market stakeholders (e.g., customers and suppliers), and organisational stakeholders (e.g., managerial and non-managerial employees).

Moreover, effective governance produces ethical behaviour in the formulation and implementation of strategies.

5. Does collaborative governance (such as S3) represent a critical strategic alliance key to dealing with booming cities, which raises the stakes for biodiversity, global health for populations and the need for smart urban planning? What are the opportunities and challenges for business?

The probability of alliance success increases as the amount of trust between partners expands. Efforts to build trust are affected by at least four fundamental issues: the initial condition of the relationship, the negotiation process to arrive at an agreement, partner interactions, and external events. Smart Specialization Strategies are supportive of this process.

As noted, Edelman research findings clearly confirm citizens expect businesses and states to collaborate to mitigate crisis whether its nature relates to health, environmental or economic impacts.

In politics and economics, the concept of ‘capital’ is to mean assets like buildings or cash.

This should extend to the environment too. Nature is an asset, and its capital value is highlighted by its ongoing loss.

The reductions in forests, the depletion of fish stocks, the degradation of soil, the loss of biodiversity, more severe flooding and similar trends underscore the economic impacts.

However, these are invisible if measured by GDP alone. Hence the historical absence of political incentive to do anything.

Smart Specialization Strategies represent opportunities in forming a new type of strategic alliances and the primary reasons for doing so – namely to create value they couldn’t generate by acting independently and entering markets more rapidly, and quite simply,

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constrained resources. Companies lack the full set of resources needed to pursue all identified opportunities and reach their objectives in the process of doing so on their own.

SDG metrics can define sustainability reporting into financial updates as a matter of course.

The pandemic has shown the purpose of companies has moved beyond profit to helping create a better world and financial controls should reflect this reality.

Further ways of building trust supportive of alliance success for smart cities and urban infrastructure is through digital technologies (i.e., G5) that have the potential to reach more people through the community, lower costs and reduce inefficiencies, especially for SMEs. Smart contracts can build trust in the absence of human interactions as will stronger data privacy protection, better online dispute systems and algorithms that don’t discriminate against minorities and smaller players. This requires true public-private partnership and a human-centred approach.

COVID-19 has highlighted that businesses across virtually all industries will have to find a new balance between efficiency and resiliency, the complexity is the latter carries a cost yet so too does lack of investment in effective preventative measures. Rather than trying to 'deglobalise' or shorten the physical length of previous international supply chains, business can look to resiliency through accelerated digitalisation and deeper integration of technology which serves both commercial and sustainability goals which are self-reinforcing.

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Case 7 CrossFit at the crossroads INTRODUCTION Case Synopsis Known for being brash and outspoken, Greg Glassman, founder and sole owner of CrossFit, Inc., is a self-made billionaire. Based on his unique fitness training philosophy, Glassman started the company in 2000 and has created one of the fastest-growing, most successful fitness businesses in the industry.

CrossFit gyms, known as ‘boxes’, have spread throughout the world through an affiliate program. Unlike other gym franchises like LA Fitness, Planet Fitness, and Anytime Fitness, CrossFit affiliates are extremely affordable at a cost of just $3000 a year (plus other expenses for the facility and equipment), and the only other requirement is a brief training seminar to become certified as a Level 1 instructor. Because Glassman is a big believer in freewill (he refers to himself as a ‘rabid libertarian’), he allows affiliate owners to operate their boxes on their own terms, a practice which some describe as a troubling lack of oversight.

In addition to the revenues from affiliates’ fees, CrossFit, Inc., also earns income by providing insurance to affiliates. These gyms require unique insurance policies generally not available from more traditional insurance providers, so CrossFit’s RRG (Risk Retention Group) covers CrossFit affiliates in a specialised way. A third revenue stream is the CrossFit Training Certification Programs.

CrossFit devotees are known for their near-obsessive dedication to Glassman’s method of fitness training, which has now become a sport in itself. Thanks to these CrossFit fans’ inperson and online word-of-mouth advertising, the CrossFit brand has spread like wildfire.

Glassman himself has also used technology to his advantage by creating a website and blog that provide a wealth of free resources for the CrossFit community.

For fans of CrossFit, the annual CrossFit Games have become a huge event, attracting hundreds of thousands of participants. Since 2007, CrossFit has been hosting this yearly competition where CrossFit athletes compete for cash prizes and the title of ‘Fittest on Earth’. Reebok is now the official sponsor of the games, and as such, it is providing an increasing amount of money for the prizes. ESPN provides valuable media coverage.

In spite of a multitude of competitors, serious criticism from industry experts about the safety and efficacy of Glassman’s methods, and an apparent lack of a formal business plan, CrossFit, Inc., continues to be a rising star in the fitness industry.

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Case Notes - Strategic Management, 7th edition

LEARNING OBJECTIVES • • •

• • • • • • • • • • • • • • • •

Analyse the components of the strategic management process. (Chapter 1) Describe vision and mission and discuss their value. (Chapter 1) Explain the importance of analyzing and understanding the firm’s external environment, and discuss the four activities of the external environmental analysis process. (Chapter 2) Define and describe the general environment, the industry environment and the competitor environment. (Chapter 2) Outline and describe the seven segments of the general environment. (Chapter 2) Explain why organisations need to study and understand their internal organisation.

(Chapter 3) Define value and discuss its importance. (Chapter 3) Describe the differences between tangible and intangible resources. (Chapter 3) Define capabilities and discuss their development. (Chapter 3) Describe four criteria of sustainable competitive advantage used to determine whether resources and capabilities are core competencies (Chapter 3) Explain the purpose of forming and implementing a business-level strategy. (Chapter 4) Describe business models and explain their relationship with business-level strategies. (Chapter 4) Define competitors, competitive rivalry, competitive behavior, and competitive dynamics. (Chapter 5) Describe market commonality and resource similarity as the building blocks of a competitor analysis. (Chapter 5) Explain awareness, motivation, and ability as drivers of competitive behavior.

(Chapter 5) Define strategic leadership and describe executive managers’ importance. (Chapter 12) Discuss the value of strategic leadership in determining the organisation’s strategic direction. (Chapter 12) Describe the importance of strategic leaders in managing the organisation’s resources.

(Chapter 12) Define organisational culture and explain what must be done to sustain an effective culture. (Chapter 12)

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Case Notes - Strategic Management, 7th edition

Strategic Issues and Suggested Discussion Questions & Answers 1. How would you describe CrossFit’s vision and mission? Explain how Glassman has used – or has failed to use – vision, mission, and the other elements of the strategic management process to create a successful business.

As the owner of a privately held company, Glassman is not under any obligation to disclose anything about his business and his answers to interview questions are often glib or obtuse.

However, students should be able to imagine what CrossFit’s vision and mission statements might look like. The company’s vision might be something like ‘inspiring people of all ages to improve their lives through health and fitness the CrossFit way’. The firm’s mission statement might be something like ‘to operate CrossFit fitness boxes in every country around the world’ or perhaps ‘to make CrossFit a recognised sport worldwide’.

For a company owner who admits to not having a business plan, Glassman has been extremely successful at generating above-average returns in a competitive business. By observing some of the more visible aspects of the business, students should be able to deduce some of his strategies and tactics. For example, from the beginning, CrossFit’s creator pushed the firm’s differentiation strategy by constantly touting how unorthodox, yet results-oriented, his methodology is. Glassman clearly set out to build grassroots support for the CrossFit methodology in order to gain recognition for the organisation and its affiliates.

His primary tactic in implementing this strategy was to build out the corporate website with numerous free resources, most of which are sharable through social media. CrossFit fans took up that cause and have rapidly spread awareness of the sport on their own. The creation of the annual CrossFit Games was another ingenious tactic because it allows average people to experience the thrill of being a professional athlete for a short time, and that ‘dream’ is a powerful attractor to new fans. Another important strategy is to provide support to affiliate owners, which helps build their reputation and success. The financial barrier to entry is very low – far lower than a typical franchise – and Glassman provides additional support by offering certification training courses and specialised insurance programs. It appears that Glassman’s newest strategy will focus on building even greater awareness through broader commercial efforts, such as adding his sport to the Olympics, branding a stadium, and advertising on national television (Figure 12.1).

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Case Notes - Strategic Management, 7th edition

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Case Notes - Strategic Management, 7th edition

2. Use the seven segments of the external environment to identify threats and opportunities in CrossFit’s external environment. Which of these threats might cause you the greatest concern if you were an affiliate owner?

Students should work through each segment, one at a time (Figure 2.1).

Demographic: CrossFit’s data show that the methodology (or sport) appeals equally to men and women, and other statistics show that there is a growing recognition among people, at least in developed countries, of the need for formal exercise. In general, the demographic segment shows opportunities for the brand.

Economic: In developed economies, there is an ongoing threat of an economic downturn, which would have a significant impact on a CrossFit business. People tend to give up what they consider to be ‘luxuries’ – and for many that would include a gym membership – during an economic slump. Certain regions in emerging economies, such as Brazil or India, might offer opportunities for a CrossFit affiliate, although many parts of the world simply could not afford and have no need for gyms. This segment poses a mixture of opportunities with some threats.

Political/Legal: It is critically important for any CrossFit affiliate to comply with all national and regional regulations governing the operation of a gym, but this does not constitute a threat. (CrossFit and other gym operators should also consider the ethical ramifications of their business; CrossFit has been criticised for encouraging athletes to push themselves too Dallas Hanson, Kim Backhouse, David Leaney, Michael A. Hitt, R. Duane Ireland, Robert E. Hoskisson, Strategic Management, 7th Edition. © 2022 Cengage Australia Pty Ltd. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Case Notes - Strategic Management, 7th edition

hard physically and endangering the health of their customers.) The case did not state whether CrossFit’s corporate headquarters is involved with political and legal activity related to the fitness industry, so a CrossFit affiliate owner should investigate this further. It is a potential threat.

Sociocultural: This segment is closely tied to demographics. Generally speaking, highintensity fitness training is viewed more favorably among younger adults, which explains why the majority of CrossFit customers are under the age of 34. However, research shows that more and more adults of all ages are recognising the value of fitness and the need for formal fitness training, which presents a real, albeit limited, opportunity for CrossFit affiliate owners. These limitations could possibly be viewed as a threat.

Technological: In terms of technology-driven innovations in products, processes, or materials, CrossFit would be unlikely to capitalise on these because the methodology is actually based on a limited use of equipment. Thus, technology is neither a threat nor an opportunity. However, in terms of innovative marketing, technology has and will continue to offer tremendous opportunities for CrossFit affiliate owners.

Global: This segment is closely tied to the economic segment. CrossFit has easily expanded globally due to numerous opportunities in many locations. For the most part, the same need for fitness training exists in many places, and the product transfers easily from one culture to another. However, certain regions would not support a CrossFit affiliate for economic reasons, and others might reject it for cultural reasons. For example, in some cultures men and women cannot intermingle, and women cannot allow their bodies to be seen in public.

Overall, the global segment offers more opportunities than threats.

Sustainable physical: Generally speaking, CrossFit gyms have a relatively small footprint, both literally and figuratively, and affiliate owners could take precautions to reduce their footprint even further. This segment is fairly neutral, in that it offers neither opportunities nor threats.

On balance, the economic segment probably offers the biggest threats. CrossFit affiliate owners might consider options for preventative safeguards and strategic responses to an economic decline.

3. Identify several of CrossFit’s key tangible and intangible resources. How have these been used to create capabilities and core competencies?

CrossFit, Inc., is built on a network of affiliates. For a company of its value and annual revenues, it has relatively few employees, no manufacturing facilities, and no product inventory. In terms of tangible resources, the biggest and most important one is financial, specifically the firm’s ability to generate funds internally through the sale of affiliates, training programs, and insurance (Table 3.1).

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CrossFit has far more intangible resources. It was founded on an innovative concept for fitness training, and the firm and its affiliates continue to enhance and improve upon it.

Perhaps the most important intangible resource is the firm’s reputation. CrossFit followers are obsessive, to the point that some outsiders view the overall organisation as something similar to a cult. Many customers have absolute faith and trust in the quality and reliability of the product, and it would appear that critics and naysayers have done very little to dampen most CrossFit followers’ enthusiasm for this sport (Table 3.2).

CrossFit has turned its capability for reputation-building into a core competency. The firm continues to produce tons of related content – and encourages followers to produce their

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Case Notes - Strategic Management, 7th edition

own content – that can be shared through social media. This content not only builds awareness, but it also creates a sense of competition that entices more people to participate and adopt the CrossFit methodology. The annual CrossFit Games and other promotional activities add to the firm’s reputation. Other fitness programs also yield powerful results so that core competency is neither rare nor non-substitutable, but the intensely close bond that CrossFit shares with its customers is indeed valuable, rare, irreplaceable, and impossible to imitate.

4. Imagine that you are considering opening your own gym, either as a CrossFit affiliate or a franchise owner of one of the other competitor brands listed in the case. Your neighborhood doesn’t currently have a gym, so the choice is yours. From a business standpoint, which of these brands would you choose to go into business with and why?

Students’ answers will vary, but they should be able to support their answers with logical reasoning. Many students will pick CrossFit. Compared to competitors like LA Fitness, Planet Fitness, and Anytime Fitness, CrossFit offers a much lower barrier to entry. The fees for an affiliate are extremely low compared to the cost of a franchise ($3,000 for a CrossFit affiliate as compared to approximately $35,000 for an Anytime Fitness franchise), and a CrossFit ‘box’ requires a much smaller workout facility with far less equipment. Furthermore, CrossFit’s die-hard ‘community’ almost guarantees a ready-made customer base.

However, it is precisely the CrossFit following that may prompt some students to choose other options. Some may believe that, despite the higher start-up and operating costs, a more traditional gym has a higher earnings potential because it will appeal to a broader clientele. These other gyms also afford greater opportunities for supplemental revenue streams, such as merchandise and personal training. Those who are cost-conscious will most likely opt for Zumba, but some students will argue that Zumba is a passing fad, whereas CrossFit and other competitors offer longevity.

Additional Resources Mike Ozanian of Forbes profiled Greg Glassman, including some video clips, in February 2015: https://www.forbes.com/sites/mikeozanian/2015/02/25/how-crossfit-became-a-4-billionbrand/#3f5fe30d1f96 Rally Fitness provided some statistical data on CrossFit as of March 2017: https://rallyfitness.com/blogs/news/the-business-of-crossfit-an-update-on-new-marketresearch-2017 Quartz contributor Marion Maneker offered his analysis of CrossFit’s business model and strategy in July 2015: https://qz.com/461063/crossfits-extremely-lucrative-business-plan-is-also-deceptivelysimple/ From a 2018 survey of CrossFit affiliates, Wodify put together this extended infographic: https://www.wodify.com/crossfit-industry-report-2018

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Case Notes - Strategic Management, 7th edition

CNBC interviewed Greg Glassman in September 2016: https://www.youtube.com/watch?v=9Kgyui6-g3o CNBC also interviewed Greg Glassman in August 2016: https://www.youtube.com/watch?v=4I31HQhTGJw TeamRICHEY published this informal interview with Greg Glassman in March 2019: https://www.youtube.com/watch?v=g4fSKt3hRpw

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Case 8 The Movie exhibition industry: 2018 and beyond INTRODUCTION Case Synopsis The motion picture industry has been in a precarious position over the last several years.

While box office attendance has varied year by year, there has been an overall decline of 21% since 2002. Ticket prices have steadily increased, and some say these prices may be exceeding the price typical consumers are willing to pay for the theater experience. Most theater goers fall in the 12- to 24-year-old demographic group, yet the fastest growing segment of the population is those 60 and older. Exhibitors, which have little control over their costs, have invested billions in upgrading their projection and sound systems, but that move has not paid off in increased ticket sales. And finally, studios are increasingly torn between producing movies for domestic audiences and meeting the expectations of international audiences. In general, the picture looks bleak for the movie industry’s key players.

These players include three essential categories of participants: studios, some of which make multimillion-dollar investments in the hope that a gross-sales-to-production-cost ratio of 2.0 allows them to break even; distributors, which are responsible for marketing, logistics, and administration as well as providing digital copies of films to exhibitors; and exhibitors, or movie theaters, which are dominated by a few chains that have the ability to negotiate better deals and realise economies of scale due to their large sizes. Given that film rental fees average 54% of box office receipts, theaters must seek additional revenues from concessions and advertising.

Exhibitors are facing increasing competition from product substitutes. While there was once a time when the in-home experience couldn’t begin to compare to the in-theater experience, with its huge screen, superb sound quality, and comfort, this is no longer the case. Incredible advancements in TV technology have enabled many consumers to purchase in-home screening equipment that is almost the equal of a theater experience, only with all the comfort and convenience of being at home. Furthermore, thanks to (formerly) DVD rentals and (currently) streaming media, home viewers can select from a wider variety of entertainment, from a vast collection of movies to increasingly high-quality television programming and more.

In response to these innovations that have virtually eroded their competitive advantage, exhibitors are looking for ways to restore the theater experience to a place of prominence in consumers’ minds. These initiatives include even larger screens, a 4D viewing experience (including tactile sensations, such as scent and weather effects), alternative content in the form of other types of events (concerts, stage performances, sporting events, etc.), more luxurious seating, enhanced concession offerings in a restaurant-like setting, audience

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participation and interactivity, and dynamic pricing that varies according to demand and seat location. Only time will tell if these innovations can save the movie theater business.

LEARNING OBJECTIVES •

• • • • • • • • • • • • • •

Explain the importance of analysing and understanding the organisation’s external environment, and discuss the four activities of the external environmental analysis process. (Chapter 2) Define and describe the general environment, the industry environment and the competitor environment. (Chapter 2) Outline and describe the seven segments of the general environment. (Chapter 2) Identify the five competitive forces and interpret industry analyses to determine an industry’s profit or surplus potential (Chapter 2) Describe the differences between tangible and intangible resources. (Chapter 3) Define capabilities and discuss their development. (Chapter 3) Describe four criteria of sustainable competitive advantage used to determine whether resources and capabilities are core competencies. (Chapter 3) Discuss the relationship between customers and business-level strategies in terms of who, what, and how. (Chapter 4) Describe business models and explain their relationship with business-level strategies. (Chapter 4) Explain the differences among business-level strategies. (Chapter 4) Use the five forces of competition model to explain how above-average returns can be earned through business-level strategy. (Chapter 4) Discuss the risks of using each of the business-level strategies. (Chapter 4) Define competitors, competitive rivalry, competitive behavior, and competitive dynamics. (Chapter 5) Describe market commonality and resource similarity as the building blocks of a competitor analysis. (Chapter 5) Explain competitive dynamics in each of the slow-cycle, fast-cycle, and standardcycle markets. (Chapter 5)

Dallas Hanson, Kim Backhouse, David Leaney, Michael A. Hitt, R. Duane Ireland, Robert E. Hoskisson, Strategic Management, 7th Edition. © 2022 Cengage Australia Pty Ltd. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Case Notes - Strategic Management, 7th edition

Strategic Issues and Suggested Discussion Questions & Answers 1. Studio A is producing a fast-paced action movie – starring three of the hottest young actors of the moment – targeted at 12- to 24-year-olds at a cost of $210 million. Studio B is producing a drama set in the 1960s – starring two beloved, 60-something icons of the screen – targeted at the 60+ market at a cost of $107 million. Use several factors in both the industry and general environment to analyze the potential for each project. Which do you think is the better investment?

Studio A’s action movie is designed to appeal to the demographic group that views movies in theaters most often. Although many similar movies, or product substitutes, have come on the market in recent years, this type of movie continues to draw in the crowds. Young adults can’t seem to get enough of the thrill and excitement of car-chase movies, especially when viewed in the theater on a high-definition screen with a sophisticated sound system. And this is true of movie goers around the globe. Action movies translate well across borders, and many have been extremely successful on the international market (Figure 2.1).

Studio B’s drama is designed to appeal to a demographic group that attends movies far less, yet it is the fastest growing segment of the population. Relatively few movies are made for this segment, meaning there are few product substitutes, so older adults have been known to come out specifically for movies targeted at them. Industry analysts agree that there is tremendous potential in making movies for this demographic segment. However, the nuanced story line of a drama may not translate well across borders, so there may be limited appeal internationally.

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Students need to factor in the cost of each movie when determining the better investment.

The action movie seems to be a much better bet, but the gross-sales-to-production-cost ratio must be at least 2.0 to break even; at a cost of $210 million, that will require very high gross sales. Also, there is always a risk that a film will flop, which would mean a significant loss for Studio A. Studio B’s drama, at $107 million, will require much lower gross sales to break even, which may be attainable, even with just U.S. distribution.

2. Traditionally, what were theaters’ core competencies, and how were they used to provide competitive advantage over other forms of entertainment, both inside and outside the home?

In previous decades, theaters possessed quite a few core competencies that created competitive advantages over other forms of entertainment, whether it was external events such as concerts and sporting events, or at-home activities such as watching television and family game night. The plush seating, air conditioning, and modest concession stands provided plenty of comfort. Theater chains’ ability to negotiate favorable fees and to earn additional revenue from concessions and advertising added up to an appealing ticket price, which meant that many people from different income brackets could afford movies, even teens on dates. The location of theaters in small towns and large cities alike also meant that movies could be enjoyed by a significant portion of the population, including all age groups.

And the huge screen and superior sound system made viewing a movie at the theater an immersive experience unlike any other form of entertainment, which used to bring people out of their homes far more than it does today.

3. Describe some of the tactics theater chains plan to use to regain competitive advantage in the future. How will these tactics be used by chains following a differentiation strategy?

How will they be used by chains practicing a cost leadership strategy? Is it possible for a theater chain to practice the integrated cost/differentiation strategy?

Theater exhibitors have proposed a number of ways to regain competitive advantage in consumers’ minds. These initiatives include engineering even larger and higher definition screens, generating a 4D viewing experience (including tactile sensations, such as scent and weather effects), providing alternative content in the form of other types of events (concerts, stage performances, sporting events, etc.), building more luxurious seating, offering enhanced concessions in a restaurant-like setting, incorporating audience participation and interactivity, and switching to dynamic pricing that varies according to demand and seat location.

Most of these initiatives require significant investment on the part of exhibitors. It is hoped that these enhancements will provide enough incentive to bring people back into theaters, which will increase revenues and allow exhibitors to recoup their investments. Of course, theaters using these tactics will have to charge slightly premium prices, so this approach is probably only suitable for chains using the differentiation strategy. Those chains using the cost leadership strategy may not be able to afford the up-front investment for some of these tactics. Dynamic pricing would be an especially good option for them, although some

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may be able to incorporate certain enhancements such as better concession offerings and low-cost forms of audience participation. However, given the up-front investments involved, the generally low profit margins of the industry, and the narrow range of pricing options, it may not be possible for a chain to use the integrated cost/differentiation strategy (Figure 4.1).

4. Describe the competitive dynamics of the movie delivery business of today. To what degree do these competitors share common markets and similar resources?

Movie theaters today face fierce competition from rivals in the movie delivery business.

Huge advancements in technology, particularly in TV screens and sound systems, have made the at-home viewing experience for many people fairly comparable to the theater experience, except that home viewing is less expensive, more convenient, and often more comfortable. Even those who have more moderate home entertainment systems often opt for at-home viewing because it is more economical, especially for families. This has opened the door for a succession of new competitors. First, it was sales and rentals of videos/DVDs, not to mention the rise of TV channels playing first-run movies and the emergence of commercial-free TV programming that is the equal of movie productions. Much of the rental business has since disappeared, but Redbox and similar firms are holding out, mainly because of their convenience and because they often get new movies sooner than the streaming firms. However, more recently, streaming media has pretty much taken over, offering even more variety in the content that can be viewed, the ways in which it can be viewed, and the appealing price points.

The market for movies is identical for movie theaters, DVD sellers/renters, and streaming media companies, which means they are all competing for the same dollars. However, they each have different tangible and intangible resources, which add up to different strengths and weaknesses. At the moment, the competitive advantages formerly enjoyed by movie theaters appear to be losing out to the strength of the at-home viewing methods’ competitive advantages. Diminishing box office sales suggest that more and more people

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Case Notes - Strategic Management, 7th edition

are opting for at-home or even on-the-go mobile viewing due to lower costs, increased comfort, more convenience, and broader variety.

5. If you viewed movie theaters as a single entity within the overall entertainment industry, would you say they were competing in a slow-cycle, fast-cycle, or standard-cycle market? How are theaters positioned within its cycle?

Movie theaters, taken together as a single entity or ‘focal firm,’ should be seen as a competitor in a slow-cycle market. In the past, theaters had several competitive advantages over other forms of entertainment, such as concerts, sporting events, and at-home activities like watching television. Theaters boasted great comfort – with plush seating and air conditioning – at an appealing price that many could afford. Theaters appeared everywhere, from small towns to large cities, so movies could be enjoyed by a significant portion of the population, and the diverse array of movie choices appealed to all age groups. Viewing a movie on the large screen was an immersive experience into another time and place that was like no other. Movie theaters enjoyed a sustained competitive advantage for decades, but now that advantage is eroding. It is time for movie theaters on the whole to counterattack if they are going to survive (Figure 5.4). Most of the counterattack measures involve creating an environment within the movie theater that is once again superior to the at-home experience and thus desirable.

Additional Resources In December 2018, The Washington Post published this analysis of the movie theater industry: https://www.washingtonpost.com/business/is-netflix-killing-the-movie-theater-not-sofast/2018/12/24/7a16dbf8-037a-11e9-81864ec26a485713_story.html?utm_term=.cccead03b1fd Business Wire offered its analysis and forecasts of the movie theater industry in January 2019:

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https://www.businesswire.com/news/home/20190111005110/en/Global-Movie-TheatresMarket-Size-Trends-Forecasts PC Magazine provided its analysis of the streaming media industry as of April 2019: https://www.pcmag.com/news/367423/the-new-entertainment-giants-welcome-to-thestreaming-indus TechCrunch made 10 predictions for the media industry in 2019: https://techcrunch.com/2018/12/31/1763827/ CBS This Morning filed this report on the future of the movie theater experience: https://www.youtube.com/watch?v=C2hJnwDgVCw At TEDx North Carolina in December 2018, Alan Jackson gave this talk on the future of movie theaters: https://www.youtube.com/watch?v=N8Lk2Ndto-g This YouTube video features comments from Steven Spielberg and George Lucas on the future of movie making: https://www.youtube.com/watch?v=0f1FD5jOhGU In 2016, Vox described how China’s audiences are impacting U.S.-made films: https://www.youtube.com/watch?v=8R-FQTY4KJk In February 2016, a movie industry expert panel discussed new ways movie theaters can attract audiences: https://www.youtube.com/watch?v=bqLvqAj72LM

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Case 9 Pacific Drilling: The Preferred Offshore Driller INTRODUCTION Case Synopsis In the offshore oil drilling industry, producers typically focus on the early stages of exploration of new resources of oil and gas. Some producers also drill and extract these resources themselves, but many outsource this activity to drillers. Pacific Drilling, founded in 2006, was one such driller. But unlike competitors, which often utilise all three types of rigs for different drilling environments – jack-ups for shallow drilling, semi-submersibles for somewhat deep water, and drillships for ultra-deepwater (UDW) drilling – Pacific Drilling specialised in drillships for UDW environments.

Pacific Drilling began as a joint venture, and start-up costs were high due to the advanced technological equipment involved. Christian Beckett was brought on as CEO and first employee, and from the beginning he envisioned a company that would do things differently. He intended to use the latest technology to disrupt the industry by being more efficient and safer, which would result in cost savings for customers. He was also determined to leverage innovations in oil drilling technology. For example, Pacific collaborated with its first and most important customer, Chevron, to utilise an as-yetuntried invention called dual-gradient drilling (DGD), which would allow Chevron to tap resources that had previously been considered ‘undrillable.’ Perhaps most important, Beckett created an organisational culture that emphasised consistency, quick decision making, accountability, and an entrepreneurial mind-set.

Landing the first account with Chevron took at least six months of negotiating, but it was essential in getting other producers to trust the new firm. Pacific developed an excellent, ‘seamless’ working relationship with Chevron, but some potential customers later saw that as a drawback, believing that Pacific would not be able to work with other firms.

Fortunately, enough other clients booked Pacific’s services, and the firm was able to weather the economic crisis of 2008.

That downturn, however, turned out to be the early stages of an ongoing slump for Pacific and its competitors. The oil drilling business has been subject to peaks and valleys for decades, but there has been a steady downward slide since 2014. The price of oil since 2014 has rapidly declined, decreasing demand, and that has been coupled with a surplus of drilling rigs competing for the small amount of drilling business that’s left. With a heavy debt load on its balance sheet, Pacific Drilling was in serious financial trouble.

(Note: Pacific Drilling has since gone through a bankruptcy. A full accounting of the company’s recent financial history is available on its website at http://pacificdrilling.com.)

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LEARNING OBJECTIVES •

• • • • • • • • • • • • • • • • • • •

Explain the importance of analysing and understanding the organisation’s external environment, and discuss the four activities of the external environmental analysis process. (Chapter 2) Define and describe the general environment, the industry environment and the competitor environment. (Chapter 2) Outline and describe the general environment’s seven segments. (Chapter 2) Identify the five competitive forces and interpret industry analyses to determine an industry’s profit or surplus potential. (Chapter 2) Describe the differences between tangible and intangible resources. (Chapter 3) Define capabilities and discuss their development. (Chapter 3) Explain how organisations analyse the support functions and activities of the value chain for determining where they can create value for customers.. (Chapter 3) Discuss the relationship between customers and business-level strategies in terms of who, what, and how. (Chapter 4) Describe business models and explain their relationship with business-level strategies. (Chapter 4) Explain the differences among business-level strategies. (Chapter 4) Use the five forces of competition model to explain how above-average returns can be earned through business-level strategy. (Chapter 4) Discuss the use of corporate-level cooperative strategies in diversified organisations.

(Chapter 9) Understand the high probability of failure in cooperative strategies and explain cooperative strategies’ risks. (Chapter 9) Describe cost minimisation and opportunity maximisation as key approaches used to manage cooperative strategies. (Chapter 9) Discuss the value of strategic leadership in determining the organisation’s strategic direction. (Chapter 12) Describe the importance of strategic leaders in managing the organisation’s resources.

(Chapter 12) Describe entrepreneurs and the entrepreneurial mind-set. (Chapter 13) Explain how organisations use cooperative strategies to innovate. (Chapter 13) Describe how organisations use acquisitions as a means of innovation. (Chapter 13) Explain how strategic entrepreneurship helps organisations create value. (Chapter 13)

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Strategic Issues and Suggested Discussion Questions & Answers 1. Analyze Pacific Drilling’s current situation through the lens of the seven segments of the external environment. Which of them, if any, offer opportunities? Which of them, if any, pose threats?

In terms of opportunities, technology is far and away the most important segment. Many of Pacific Drilling’s core competencies are derived from their innovative use of new technologies, and there is good reason to believe there are future opportunities for the firm to utilise even more emerging technologies or to discover new ways to leverage existing technologies. In some ways, this factor may be tied to opportunities in the sustainable physical environment. Pacific could become one of the leaders in pioneering more environmentally friendly practices for oil drilling. Students might also list global business as an opportunity – albeit not a new opportunity – because Pacific Drilling has always been able to work with producers around the globe and its drillships can be deployed to work anywhere in the world.

On the other hand, there are far more threats for this organisation in the demographic, economic, sociocultural, and sustainable physical environment segments. Because the firm only drills in UDW environments, it already has a limited number of potential customers, and they currently have very little work to offer with no expectation of a reversal in the future. The per-barrel price for oil has dropped dramatically and with it the demand for oil drilling. Overlaid on these shifts are a growing desire for alternate energy sources and a move toward lower energy consumption as consumers in many parts of the world heed the call to protect the planet’s resources (Table 2.1).

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2. Identify and describe at least two tangible resources, at least two intangible resources, and at least two capabilities within Pacific Drilling. How have these emerged as core competencies for the firm? How do these competencies create value for customers?

The case specifies several very distinct tangible resources at Pacific Drilling: One is its flattened organisational structure, which has resulted in better communications, knowledge and idea sharing, decision making, and accountability. Other tangible resources include its state-of-the-art drillships, use of communication technology, and technological innovations developed in partnership with its customers (Table 3.1).

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Pacific Drilling also possesses many intangible resources. CEO Chris Beckett, a respected strategic leader in the industry, has assembled a team of equally trusted, knowledgeable, and entrepreneurial-minded managers and employees. As a team, they are known for their skills and for their ability to collaborate with partners, thanks in part to the relationships they’ve built with others in the industry. Pacific’s organisational culture places a heavy emphasis on scientific capabilities, opportunities, and innovation. And finally, the firm’s high-quality performance and stellar safety record have helped to earn Pacific a very strong reputation (Table 3.2).

Additionally, several strong capabilities have emerged. The CEO has a clear vision for the firm, and the organisation’s mission and values are plainly communicated. In general, the flow of communication is strong within the firm, and employees at all levels are encouraged Dallas Hanson, Kim Backhouse, David Leaney, Michael A. Hitt, R. Duane Ireland, Robert E. Hoskisson, Strategic Management, 7th Edition. © 2022 Cengage Australia Pty Ltd. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Case Notes - Strategic Management, 7th edition

to identify opportunities for creating value for customers. Because it empowers team members at all levels and rewards entrepreneurial behavior, Pacific has become an ‘employer of choice,’ attracting and retaining top-quality employees. Collectively, they excel at using technology and identifying innovations, some of which could even be considered disruptive (Table 3.3).

Overall, Pacific’s core competencies, particularly its strengths in management and technology use, provide tremendous value for customers by making UDW drilling more efficient and safer. Pacific works very closely with customers from the beginning to the end of the process, which means customers know what to expect and what they’re getting at every moment. In some instances – for example, through the use of DGD – Pacific has opened up new sources of oil and gas for producers, sources that were previously thought unobtainable.

Dallas Hanson, Kim Backhouse, David Leaney, Michael A. Hitt, R. Duane Ireland, Robert E. Hoskisson, Strategic Management, 7th Edition. © 2022 Cengage Australia Pty Ltd. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Case Notes - Strategic Management, 7th edition

3. Which business-level strategy is Pacific Drilling using? How have the five forces influenced this firm, and what risks does it face? Would you recommend a change in strategy, and if so, which strategy would you select? Explain your answer.

Unlike Pacific Drilling’s competitors, which often utilise all three types of rigs for different drilling environments – jack-ups for shallow drilling, semi-submersibles for somewhat deep water, and drillships for ultra-deepwater (UDW) drilling – Pacific Drilling uses drillships for UDW environments exclusively. Chris Beckett, the CEO, believes this kind of focus gives the firm a competitive advantage, in that his teams can learn to utilise their equipment and innovate on their technologies and processes in ways that add tremendous value for customers. Of course, that means Pacific can only work for producers that want to work in deep water. Therefore, Pacific Drilling is using a focused differentiation strategy (Figure 4.1).

Pacific’s entry into the market, and especially its use of the latest technology, caused its better-established competitors to take note. Many rivals have responded by upgrading their technology as well, which has somewhat diminished Pacific’s advantage. A far more worrisome development in the market, however, is the rapid decline in demand for oil drilling services. This has given customers a great deal of bargaining power as Pacific and its rivals compete for the few contract jobs available. Some of these rivals, which now have somewhat comparable services and equipment, are willing to drop their prices to win the bids. In some instances, customers are opting for the less expensive drillers because Pacific’s points of differentiation do not offer enough perceived value to justify the higher cost, a risk that can occur with this strategy.

Regardless of perception, Pacific Drilling still offers several value-adding points of differentiation, so the firm should not completely abandon the differentiation strategy.

However, to continue competing in the face of this severe downturn in the demand for oil drilling, it might want to consider moving to an integrated cost/differentiation strategy.

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4. Why do you think the initial partners who set up Pacific Drilling chose Christian Beckett to be the CEO? What kind of organisational culture has he created?

Beckett had excellent credentials coming into the job. He holds an MBA from Rice University, and he has an industry-insider’s perspective due to his tenure as head of corporate planning at Transocean and as U.S. land seismic manager at Schlumberger, both leading firms in the industry. Additionally, he was a strategy consultant at McKinsey, so he was a known strategic leader in the oil drilling business.

From the beginning, Beckett envisioned an oil drilling firm that was highly differentiated from competitors. Rather than relying on old technology and practices, he wanted to do things differently by incorporating new technology and other innovations, all in the name of adding value to customers. For example, Pacific’s use of SAP software allowed Pacific employees on the firm’s state-of-the-art drillships and at the headquarters to communicate more efficiently and quickly. The firm’s field testing of dual-gradient drilling (DGD), done in collaboration with Chevron, was a breakthrough in drilling for oil and gas resources that were previously considered out of reach.

A strong leader, Beckett looked for ways to establish a specific culture within the new organisation. He led the development, for example, of a mnemonic device around the word ‘PACIFIC’ to help employees grasp the firm’s core values (Figure 13). With an eye toward using the social capital of future employees, Beckett cherry-picked the best managers from other firms in the industry, who fit the entrepreneurial spirit of the new firm and could use their relationships to help it grow. He designed a system for carefully screening additional job candidates to ensure they had the leadership potential and entrepreneurial mind-set that fit Pacific’s style. His organisational structure of the firm – one having few layers – supported this culture by facilitating communication and decision making.

Additional Resources Reuters’s company profile gives in-depth background on Pacific Drilling’s current financials, leadership, valuation, news, and more: https://www.reuters.com/finance/stocks/overview/PACD.K Yahoo! Finance’s company profile offers additional background on Pacific Drilling’s current financials, leadership, valuation, news, and more: https://finance.yahoo.com/quote/PACD/ Dallas Hanson, Kim Backhouse, David Leaney, Michael A. Hitt, R. Duane Ireland, Robert E. Hoskisson, Strategic Management, 7th Edition. © 2022 Cengage Australia Pty Ltd. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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In July 2018, the Wall Street Journal filed this report on Pacific Drilling’s bankruptcy and restructuring: https://www.wsj.com/articles/pacific-drilling-chooses-lender-backed-restructuring-plan1532712597 In November 2018, Rigzone posted this follow-up on Pacific Drilling’s emergence from Chapter 11 bankruptcy: https://www.rigzone.com/news/pacific_drilling_emerges_from_bankruptcy-20-nov-2018157530-article/ Late in 2018, Seeking Alpha offered these predictions on Pacific Drilling’s future: https://seekingalpha.com/article/4230137-pacific-drilling-expectations-2019 Seeking Alpha later published Pacific Drilling’s April 2019 fleet status report: https://seekingalpha.com/article/4253653-pacific-drilling-april-2019-fleet-status-reportanalysis SAP Technology’s 2013 video explained how and why Pacific Drilling uses SAP software: https://www.youtube.com/watch?v=zBn-xchrs58 ITP’s 2016 video contained no narration but offered excellent views of one of Pacific’s rigs, the Pacific Khamsin: https://www.youtube.com/watch?v=38zR4X0ue_I

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Case 10 The trivago way – growing without growing up?

INTRODUCTION Case Synopsis After 10 years in business, hotel meta-search engine trivago had achieved several significant goals. The firm was doing business in 190 countries, its annual revenues topped 750 million euros, and in December 2016, it realised NASDAQ’s largest IPO of a German company in history.

Founded by friends Rolf Schrömgens, Peter Vinnemeier, and Stephan Stubner, who was later replaced by Malte Siewert, trivago was designed to be an independent provider of hotel-related information. Unlike online travel agents, which actually sell bookings, trivago’s purpose was to facilitate bookings by providing searchable information that connected hotels and travel agents with travelers. The firm monetised its database of information with its cost-per-click bidding platform, and the later addition of price-comparison info enabled the firm to become a leader in its industry. Angel funding helped trivago survive in its first few years in business, and these funds were later invested in TV advertising, which helped the company grow exponentially.

The three founders had all worked in corporations prior to starting their own company, and in their opinion, corporations were rigid and bureaucratic and shunned innovative thinking.

Thus, their primary goal was to create a firm that was anything but ‘corporate.’ From the beginning, they cultivated an organisational culture that stressed independent thinking, accountability, responsibility, innovation, and ongoing and immediate communication. With the goal of being an international competitor, the firm recruited young, entrepreneurialminded employees from all parts of the globe, enticing them to the firm’s headquarters in Germany with an exciting, supportive work environment. In the early days, employees sat in an open-plan environment, and none of them had job titles.

In just a few short years, however, trivago expanded rapidly, going from a few dozen employees to more than 1,200. To better convey the organisation’s culture, employees were interviewed and six key values emerged: fanatical learning, entrepreneurial passion, power of proof, unwavering focus, authenticity, and trust. Internally, the organisation has fought hard to maintain the familial, democratic, entrepreneurial culture upon which it was founded. Although the management team has recognised the need for ‘professionalisation,’ meaning the development of more structure and systems, it has sought to balance those measures with team-building activities, improved communication channels, and peer-topeer performance appraisals. The firm still eschews job titles, although employees are now designated as developers (innovators), executors (managers), and supporters (project leaders). No matter how large trivago may grow, the top-level managers intend to maintain their ‘absence of ego’ mentality.

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LEARNING OBJECTIVES • • • • • • • • • • • • • • • • •

explain incentives for organisations to use an international strategy and identify three basic benefits of successful strategy implementation (Chapter 8) Describe the three main international corporate-level strategies. (Chapter 8) Explain the five modes firms use to enter international markets. (Chapter 8) Describe the relationship between strategy and structure. (Chapter 11) Discuss the different functional structures used to implement business-level strategies. (Chapter 11) Discuss the organisational structures used to implement three international strategies. (Chapter 11) Define strategic leadership and describe executive managers’ importance. (Chapter 12) Explain what executive management teams are and how they affect organisational performance. (Chapter 12) Discuss the value of strategic leadership in determining the organisation’s strategic direction. (Chapter 12) Describe the importance of strategic leaders in managing the organisation’s resources.

(Chapter 12) Define organisational culture and explain what must be done to sustain an effective culture. (Chapter 12) Define strategic entrepreneurship and corporate entrepreneurship. (Chapter 13) Define entrepreneurship and entrepreneurial opportunities and explain their importance. (Chapter 13) Define invention, innovation, and imitation, and describe the relationships among them.

(Chapter 13) Describe entrepreneurs and the entrepreneurial mindset. (Chapter 13) Explain international entrepreneurship and its importance in improving organisation performance. (Chapter 13) Describe how firms internally develop and implement innovations. (Chapter 13)

Strategic Issues and Suggested Discussion Questions & Answers 1. In the first few years of trivago’s operation, certain aspects of the firm’s ‘who, what, and how’ changed. What was this evolutionary step? How did this new core competency benefit the firm?

In the beginning, trivago’s ‘who, what, and how’ was to use the Internet to provide a searchable database of hotel-related information that would match travelers planning domestic and international trips with hotels and online travel agents looking for more bookings. At first, however, the travelers’ specific needs were defined quite broadly, and trivago’s developers tried including all kinds of information and advertisements to attract a

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growing number of website visitors. The firm knew that a high volume of traffic was essential to success, given its cost-per-click pricing strategy. But conflicting advertisements only seemed to confuse trivago’s site visitors and traffic declined; in an attempt to resolve that issue with greater clarity, the trivago team hit upon the idea of a price-comparison feature. Site users welcomed the new feature, and it became the ‘a-ha’ moment, the point at which the firm understood more clearly what its consumers wanted. Once it narrowed the scope of its services to meta-search and price comparison strictly for hotels (Figure 1), trivago’s site traffic increased dramatically, outpacing the firm’s two major competitors and thus attracting more business from hotels and online travel agents.

2. Which business-level strategy is trivago using? How would you describe the firm’s structure? How does the firm’s structure support its strategy?

Being the first to market with a price-comparison feature that attracts far more site visitors than competitors has allowed trivago to charge hotels and online travel agents a premium for listings on the trivago site. trivago’s exceptionally strong database creates more value for both parties involved; thus, the firm is using a differentiation strategy.

The firm’s founders have avoided anything that feels ‘corporate’ in the belief that it would stifle the organisation’s growth and innovation. In the beginning, they set up a simple structure for their firm, and they would probably have been happy to continue that if they could have. But over time, dramatic increases in the number of employees forced trivago’s leadership team to recognise the need for a slightly more complex, formalised structure. At this point, trivago appears to be using a functional structure (Figure 11.3) with a CEO, a limited number of other senior leaders, and functional line managers – called executors – leading the main organisational areas. With this structure, knowledge sharing and communication between functional areas can sometimes decline, but trivago’s leadership team has put several mechanisms in place to prevent disruptions and breakdowns in the Dallas Hanson, Kim Backhouse, David Leaney, Michael A. Hitt, R. Duane Ireland, Robert E. Hoskisson, Strategic Management, 7th Edition. © 2022 Cengage Australia Pty Ltd. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Case Notes - Strategic Management, 7th edition

internal flow of information. This allows employees from various departments to work together to create innovations and develop new ways to further differentiate the firm from competitors.

3. One of the co-founders’ most important objectives has been to avoid ‘becoming corporate’? What do they mean by this? How have they achieved this objective?

Trivago’s co-founders – friends Rolf Schrömgens, Peter Vinnemeier, and Stephan Stubner, who was later replaced by Malte Siewert – all had work experience in corporations prior to starting their company. They felt corporations were rigid and bureaucratic and not open to new ideas or innovative thinking. Thus, their primary goal was to create a firm that was not ‘corporate,’ but rather flexible, dynamic, and open minded.

From the beginning, they cultivated an organisational culture that emphasises independent thinking, accountability, responsibility, and above all, ongoing and immediate communication. At first, the founders had an open-door policy, inviting employees to check in and discuss ideas. Later, as the company grew, the top-level managers moved out of offices and sat within the same open-plan work environments as other employees. This is typical of the nonhierarchical, ‘absence of ego’ mentality that also caused the founders to refuse to assign job titles and instead to simply categorise employees as developers, executors, and supporters.

Unlike the corporate environments they had worked in, trivago’s founders sought to create an environment that encouraged innovation as well. Any employee can put forth a concept for a project to explore; as long as it shows potential for short-term return potential and the numbers make sense, he or she can request the resources to pursue the project. Perhaps most important of all, if the concept fails, it is seen as a valuable opportunity to learn.

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Today, new hires are immersed in the trivago way through a full week-long onboarding process where they absorb the six core values of the firm. Case studies introduce them to the specific roles and responsibilities of each department, and one of the managing directors meets with them to explain more about the organisation’s un-corporate culture.

4. Describe trivago’s organisational culture, using at least three specific examples. Which of the six core values do your examples illustrate? Is this a place you would want to work?

Why or why not?

Students’ examples will vary because the case offers many to choose from. In general, trivago’s culture can be described as cooperative, democratic, and entrepreneurial, as evidenced by the following: •

•

•

•

•

A team-oriented work environment that encourages interaction and communication among co-workers. Employees sit in open-office areas, and relaxation areas, meeting spaces, and kitchens are shared communally. This exemplifies the core values of unwavering focus, trust, entrepreneurial passion, and fanatical learning (Figure 6).

A preference for hiring typically young, entrepreneurial-minded employees who demonstrate an adventurous spirit, a willingness to take risks, and an ability to adapt to new situations. Employees come from diverse backgrounds and offer varying skills and knowledge. This exemplifies the core values of entrepreneurial passion, authenticity, and fanatical learning.

A rejection of hierarchical job titles and an organisational structure based on three categories: developers (innovators), executors (managers), and supporters (project leaders). To make this work, employees have to be internally motivated, positive, trusting of others, responsible, accountable, open to change, and determined. This exemplifies the core values of unwavering focus, trust, entrepreneurial passion, authenticity, and fanatical learning.

No fixed number of work hours per week and an unlimited number of vacation days.

As long as employees get their work done and achieve the expected results, they can be flexible with their time. This exemplifies the core values of trust and entrepreneurial passion.

A commitment to bringing employees together in social settings, such as holiday parties, meetings, and trips, as a means of communication. These meetings are designed to keep employees aware of and focused on strategic initiatives within the firm. This exemplifies the core values of unwavering focus, trust, entrepreneurial passion, and fanatical learning.

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•

A focus on innovation. When any employee has an idea for a project that is analytically sound and shows potential for short-term return potential, he or she can request the resources to pursue the project. If proof-of-concept testing reveals issues with the project, the initiator can either make adjustments or abandon the project without any repercussions. Failing is viewed as a learning opportunity. This exemplifies the core values of the power of proof, unwavering focus, trust, entrepreneurial passion, and fanatical learning.

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Case Notes - Strategic Management, 7th edition

Students’ opinions on whether trivago is a desirable workplace will also vary. Many will be attracted to the free-thinking, cooperative, entrepreneurial work environment. Others might prefer to work in a better-defined structure and/or a more competitive environment, and some might reject the idea of moving to Germany.

5. How do innovations develop within trivago? What elements of the organisation’s culture encourage innovation?

From trivago’s earliest days with only a few employees to the present day with more than a thousand employees, innovation has been woven into the fabric of the organisation’s culture. For years, the company operated on a break-even basis because it reinvested all of its profits in exploring innovations that would grow the company. Even now, new ideas are autonomously encouraged, especially from the many people within the organisation who are designated as developers. All job candidates are hired for their entrepreneurial mindset, but developers in particular are encouraged to seek out opportunities and to develop the means to exploit them.

However, trivago’s embrace of innovation has always been performance driven. When a trivago employee has a concept and asks for the resources to pursue it, the value of the project has to first prove to be analytically sound and to demonstrate some short-term return potential before it’s approved. Specifically, initiatives are run through a test to obtain proof-of-concept data. If the initiative fails, the project leader can either make adjustments or abandon the project; either way, the experience is viewed as a learning opportunity. In short, a decision to move forward with an innovative idea is always made based on analytics, rather than on emotion or intuition.

Additional Resources Reuters’s company profile gives in-depth background on trivago’s current financials, leadership, valuation, news, and more: https://www.reuters.com/finance/stocks/overview/TRVG.O Yahoo! Finance’s company profile offers additional background on trivago’s current financials, leadership, valuation, news, and more: https://finance.yahoo.com/quote/TRVG/ In April 2019, The Motley Fool examined trivago’s advertising budget and its effect on profits: https://www.fool.com/investing/2019/04/23/why-trivago-stock-popped-11-thismorning.aspx The Leipzig Glocal, a web-based magazine, profiled trivago’s organizational culture: https://leipglo.com/2018/04/04/company-culture-trivago-leipzig-hub/ CNBC analyzed trivago’s culture, values, and productivity in August 2017: https://www.cnbc.com/2017/08/04/trivago-doesnt-make-its-employees-come-towork.html

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In August 2017, The Jet Set went behind the scenes to look at trivago’s culture and global diversity: https://www.youtube.com/watch?v=wkni6RAvqSo trivago CEO Rolf Schrömgens was interviewed at the 2017 Tech Open Air: https://www.youtube.com/watch?v=w0DenUydPzY In 2015, trivago published this video on CEO Rolf Schrömgens’s perspective on the modern workplace: https://www.youtube.com/watch?v=QpOAq6yyM6g This video takes the viewer inside trivago’s Dusseldorf campus: https://www.youtube.com/watch?v=R8O_cduQoso

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Case 11 The Volkswagen emissions scandal INTRODUCTION Case Synopsis In September 2015, a scandal of epic proportions hit the auto industry, affecting both the United States and Germany. Volkswagen (VW), which had only recently assumed the position of top automaker in the world, was forced to admit that it had been fitting diesel cars with ‘defeat devices’ that allowed the cars to pass emission tests when, in fact, they did not meet U.S. emission standards. Hundreds of thousands of cars were recalled, Volkswagen paid billions in fines, and top-level leaders faced criminal charges for the deception.

From its early roots during WWII, the Volkswagen AG umbrella grew to house a number of respected brands, including Volkswagen, Audi, Porsche, and Bentley. Known for expert engineering, particularly of smaller vehicles like the Beetle, Passat, Jetta, and Golf, Volkswagen had factories in 31 countries, employed more than 600,000 people, and sold cars in nearly every country in the world.

When CEO Martin Winterkorn assumed leadership of Volkswagen in 2007, he developed a vision called Strategy 2018. The goals of the decade-long plan were: (1) to sell more than 10 million cars a year, (2) to become the world leader in quality and customer satisfaction, (3) to achieve an 8% return on sales, and (4) to be the most attractive employer in the industry.

Winterkorn, under the mentorship of previous CEO and family owner-shareholder Ferdinand Piëch, drove his team hard, and their combined management style created a competitive culture with no tolerance for failure. Ironically, the organisation demonstrated a strong commitment to ethics with a written Code of Conduct for all employees, but this commitment did not extend to top leadership, or perhaps it simply couldn’t be sustained under the internal pressure to perform.

In the early 2000s, when other manufacturers were expanding into electric vehicles and hybrids, Volkswagen developed a strategy of promoting diesel-powered vehicles in the United States, which historically had not favored diesel passenger vehicles but they were slowly gaining traction. Creating a diesel engine that met U.S. emission standards was a struggle, and Volkswagen was hard-pressed to engineer a solution. Then, under the Obama administration, the EPA issued new rulings that favored the production of hybrids and electrics, which severely impacted Volkswagen’s diesel strategy. This was compounded with a shift in U.S. consumer preference for larger SUVs. Volkswagen’s ambitious growth plans were in jeopardy.

Volkswagen’s deceitful solution – to program its diesel vehicles to meet emission standards under test conditions but not on the open road – came to light when researchers from the International Council on Clean Transportation noticed discrepancies between the performance of diesel vehicles in the United States and in Europe. Their subsequent Dallas Hanson, Kim Backhouse, David Leaney, Michael A. Hitt, R. Duane Ireland, Robert E. Hoskisson, Strategic Management, 7th Edition. © 2022 Cengage Australia Pty Ltd. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Case Notes - Strategic Management, 7th edition

investigation produced irrefutable evidence of tampering with the vehicles programming coding, and Winterkorn was forced to acknowledge the deception before resigning.

Volkswagen’s sales, particularly in the United States, dropped way off, and the company was forced to pay out billions in settlements. The company and its senior leadership are still dealing with the fallout.

LEARNING OBJECTIVES • • • • • • • • • • • • • • •

Analyse the components of the strategic management process. (Chapter 1) Describe the competitive landscape and explain how globalisation and technological changes shape it. (Chapter 1) Use the industrial organisation (I/O) model to explain how companies can earn aboveaverage returns. (Chapter 1) Use the resource-based model to explain how firms can earn above average-returns.

(Chapter 1) Describe vision and mission and discuss their value. (Chapter 1) Define corporate governance and explain why it is used to monitor and control executive managers’ decisions. (Chapter 10) Explain why ownership is largely separated from managerial control in organisations.

(Chapter 10) Define an agency relationship and managerial opportunism and describe their strategic implications. (Chapter 10) Explain the use of three internal governance mechanisms to monitor and control managers’ decisions. (Chapter 10) Discuss the nature and use of corporate governance in international settings, especially in Australia, Germany, Japan, Spain and China. (Chapter 10) Describe how corporate governance fosters the making of ethical decisions by an organisation’s executive managers. (Chapter 10) Discuss the value of strategic leadership in determining the organisation’s strategic direction. (Chapter 12) Describe the importance of strategic leaders in managing the organisation’s resources.

(Chapter 12) Define organisational culture and explain what must be done to sustain an effective culture. (Chapter 12) Describe what strategic leaders can do to establish and emphasise ethical practices.

(Chapter 12)

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Case Notes - Strategic Management, 7th edition

Strategic Issues and Suggested Discussion Questions & Answers 1. How did changes in technology and globalisation lead to the Volkswagen scandal?

Technology and globalisation are two of the most powerful forces in business today, and they have certainly had an impact on automotive manufacturers like Volkswagen AG. In the past several decades, as the world’s supply of oil has diminished, there has been a global drive to find alternative energy sources, especially for vehicles. In the early 2000s, many manufacturers were pushing electric vehicles and hybrids as the ideal solution for the future. Volkswagen, however, decided to pursue a different strategy focused on promoting cheaper, more powerful, diesel-driven vehicles, especially in the United States. In the past, American consumers were slow to adopt diesel passenger vehicles, but Volkswagen was gaining some traction in convincing people of diesel’s benefits through its promotional campaigns.

Nevertheless, creating a diesel engine that met American emission standards was a struggle, and with standards becoming ever more restrictive, Volkswagen was challenged to quickly engineer a solution. Then, under the Obama administration in 2011, the EPA issued new rulings that favored the production of hybrids and electrics, which severely impacted Volkswagen’s diesel strategy. This was further compounded with a shift in U.S. consumer preference for larger SUVs. Volkswagen’s prospects, not to mention its ambitious Strategy 2018 goals, were in jeopardy.

Together, new technologies, higher technological standards, national legislation, a need for expanding into new markets, and shifting consumer preferences all combined to drive Volkswagen’s leadership to deceive American consumers. At some point, a group of people within the Volkswagen organisation decided to circumvent the problem by making dieselpowered vehicles appear to meet U.S. emission standards. They did it by inserting code in the vehicles’ programming that gave different emissions data under test conditions than what would actually happen on the open road.

2. Explain how a supervisory board should work as a mechanism for corporate governance in Germany. Why did Volkswagen’s board fail to prevent this case of managerial opportunism?

In Germany, owners and managers are often the same, but firms employing more than 2,000 people are required to have a two-tiered board that separates the owners from the managers and maintains the same type of oversight responsibility found in typical, Western boards of directors. Per Germany’s corporate laws, Volkswagen AG had a supervisory board made up of 20 members. Also, by law, half of the seats were allocated to VW’s unionised employees, specifically, union representatives and VW employees who are elected representatives of the union. The other 10 seats were allocated to VW shareholders. Of these, five were filled by family members, two by representatives of the city of Saxony (where VW’s headquarters are located), two by representatives of the sovereign wealth fund of Qatar, and only one by an outsider, Annika Falkengren, the CEO of a Swedish bank.

Under this structure, 19 of the 20 positions were filled by insiders with a vested interest.

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Managerial opportunism occurs when top-level managers of an organisation make decisions with guile: decisions intended to benefit themselves and not necessarily the organisation.

The purpose of corporate governance mechanisms is to prevent this type of behavior through oversight. It’s the role of board members to ask questions and demand explanations of anything in the company’s operations that looks unethical, illegal, or merely just illogical. However, that did not happen in this case. It would be wrong to accuse supervisory board members of conspiring with the strategic leaders who perpetrated this crime, but it does seem likely that the predominantly insider-run supervisory board did not review product developments thoroughly enough and may have turned a blind eye to the sudden change in the firm’s ability to get its diesel-powered vehicles to pass U.S. emission standards.

3. What are some of Volkswagen’s long-standing capabilities and core competencies?

What are the firm’s values? What new competencies and values does the firm need to develop?

One of Volkswagen’s core competencies would have to be engineering excellence. In fact, the company promoted itself on the tagline of ‘the power of German engineering.’ Given the firm’s success in nearly every country in the world, it must also have excellent manufacturing capabilities, as well as the capability to adapt its products and its marketing strategies to different market needs and expectations (Table 3.3). The firm’s structure and strategies are well designed to capitalise on these strengths.

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Case Notes - Strategic Management, 7th edition

Volkswagen lists customer focus, superior performance, creating value, renewability, respect, responsibility, and sustainability as its values. The organisation documented its commitment to ethical behavior and decision making with a Code of Conduct, which was and continues to be communicated to all employees through compliance training.

Students’ answers about new competencies and values may vary, but should demonstrate critical thinking. One suggestion might be to develop a stronger internal system of checks and balances to avoid ethical misconduct in the future. Also, after reflecting on the scandal, most consumers will have serious doubts about Volkswagen’s true values. The firm might need to communicate a renewed commitment to honesty and transparency in its business dealings in order to win back consumer trust.

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Case Notes - Strategic Management, 7th edition

4. What factors within the Volkswagen organisation’s culture do you think led to a group decision to engage in illegal practices and an international deception?

A few descendants of the original founders are still active in Volkswagen’s leadership, primarily former CEO Ferdinand Piëch, who was known for his tough, authoritarian management style. He groomed Martin Winterkorn to take his place as CEO in 2007. Much like his mentor, Winterkorn was seen as a cold and distant dictator. Under their leadership, employees, especially those in engineering, were in constant fear for their jobs. There was no room for errors or failure. The fiercely competitive environment also meant the firm was not open to strategic alliances with others. For example, one senior engineer was fired from his job when he partnered with archrival Daimler to gain access to some technology he felt would solve the diesel emissions problem.

Coupled with the tense, authoritarian management style was a bold ambition to become the world’s premier automaker. Winterkorn’s 10-year plan, called Strategy 2018, had four goals: (1) to sell more than 10 million cars a year, (2) to become the world leader in quality and customer satisfaction, (3) to achieve an 8% return on sales, and (4) to be the most attractive employer in the industry. Halfway through the plan, the organisation was making great headway on meeting these goals, so the pressure to perform must have been intense.

The firm’s leaders may have shared a certain degree of hubris and thus believed they would not get caught.

In some ways, it’s not surprising that top strategic leaders at Volkswagen conspired to push through the firm’s diesel strategy in the United States at all costs. Without a significant bump in sales in that market, the firm would not have been able to achieve its goals.

Additional Resources Reuters’s company profile gives in-depth background on Volkswagen’s current financials, leadership, valuation, news, and more: https://www.reuters.com/finance/stocks/overview/VOWG_p.DE Yahoo! Finance’s company profile offers additional background on Volkswagen’s current financials, leadership, valuation, news, and more: https://finance.yahoo.com/quote/VOW3.DE/ In December 2017, NPR filed this follow-up report on arrests related to the Volkswagen scandal: https://www.npr.org/sections/thetwo-way/2017/12/06/568949541/senior-volkswagenexecutive-sentenced-in-diesel-emissions-scandal In June 2018, NPR filed a follow-up report on the Audi CEO’s arrest in conjunction with the Volkswagen emissions scandal: https://www.npr.org/2018/06/18/620953719/audi-ceo-arrested-in-connection-withvolkswagen-emissions-scandal

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Case Notes - Strategic Management, 7th edition

Quartz published this report on ‘dieselgate’s’ possible effect on the future of electric and hybrid vehicles: https://qz.com/1621872/renault-ceo-thierry-bollore-says-dieselgate-is-pushing-electricvehicles-ahead/ In March 2019, Wharton’s School of Business reported on the ongoing fallout from Volkswagen’s scandal: https://knowledge.wharton.upenn.edu/article/volkswagen-diesel-scandal/ The Verge created this video explanation of how the ‘defeat device’ works: https://www.youtube.com/watch?v=CQ4irwe3ZDk CNN Business documented the time line of the ‘dieselgate’ scandal in this video: https://www.youtube.com/watch?v=Y5TvFY7xRDM On October 8, 2015, VW executive Michael Horn testified before Congress: https://www.youtube.com/watch?v=Sr9GknJ1kGk

Dallas Hanson, Kim Backhouse, David Leaney, Michael A. Hitt, R. Duane Ireland, Robert E. Hoskisson, Strategic Management, 7th Edition. © 2022 Cengage Australia Pty Ltd. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Case 12 Otis in the global elevator industry INTRODUCTION This case is excellent for a first case because it has clear issues in the general and industry environments. It is also a very interesting industry. Otis is one of the major players in the global elevator (lift) industry and is part of UTC, a major diversified US firm.

Will they survive into the future? Will economic crises affect them badly?

EXTERNAL ANALYSIS General Environment • Demographics – ageing populations lead to increased demand for lifts. Globally, and especially in Asia, increasing incomes and population growth in new areas also lead to increases in demand • Technology – fast change leading to off-site monitoring of elevators and new types of elevators. The current pace of change is faster than usual in this industry. ‘Smart elevators’ that are immediately responsive to user demands are just around the corner. Services to very tall buildings are now far more efficient. Cable-free elevator cars using magnetic technology are the cutting edge and they increase useable areas in buildings and travel very fast • Socio-cultural – people require elevators in tall buildings, and increasingly in domestic buildings, as well as for people with disabilities. A change in culture may be merging with people more insistent on using lifts • Physical – no issues • Political–legal – tight regulation of lift safety • Global – this is a global industry with players from the USA, Japan and Europe Demographics and socio-cultural segments yield opportunities. The technology segment is also positive since it creates opportunities for new lifts and more efficient maintenance of lifts.

INDUSTRY ANALYSIS This is a medium to fast-cycle industry with rapid technological change emerging in the last decade. There is a large and expanding profit pool. It is well structured with sales sensitive to business cycles, but maintenance of lifts insensitive to cycles.

Substitutes – no threat, in tall buildings lifts are essential.

New entrants – low threat because of the need to sell globally and because of the need for maintenance (which entails a global workforce of trained technicians).

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Case Notes - Strategic Management, 7th edition

Buyers – new lifts are price- and economic-condition-responsive, hence a low threat but not for maintenance which must be undertaken regularly.

Suppliers – no threat.

Rivalry – it is genteel amongst the five competitors, but increasing, fed by technological advantages.

The industry is very attractive – a rare ‘five star’ industry.

COMPETITORS There are four well-resourced competitors, and more are emerging (e.g. Mitsubishi). All have good corporate backing and are potentially formidable competition. That said, the market is large and there is no need for fierce competition.

RESOURCES Tangible Excellent finances on turnover of $12.4 billion; 200,000 staff; sells to 200 countries; backed

by UTC ($65 billion turnover).

Intangible The original elevator and still a great brand: innovation-driven culture; technological knowledge; global mindset; maintenance knowledge.

CAPABILITIES 1. Ability to manufacture elevators and other person moving technology 2. Ability to maintain elevators globally and other person moving technology 3. Ability to sell elevators and other person moving technology globally using their brand and global sales force 4. Ability to control a global workforce 5. Innovation in elevators and other person moving technology Core competencies There is a good argument to be had here. Otis are players in a small industry group and all players have similar capabilities, hence the conclusion is that there are no core competencies. It is also possible to argue that all are core competencies.

STRATEGIES Otis are differentiators. They have global sales reach and support their sales with a global maintenance workforce. They also innovate continually, and this is now more important than ever.

There is no sense in changing their approach. The industry is expanding, markets are continually growing, and they are well placed to take advantage of this situation.

Maintenance makes them fairly recession proof – lifts need to be maintained. And, in good times, the market is lively.

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Their big problem is increasing competition. Technological change has led to moves by competitors that give them competitive advantage (e.g. the magnetic lifts). And, the emerging players are a big threat too – Mitsubishi is a huge company with a great resources set and innovation capabilities. Otis really needs to be responsive to the market to remain a leading elevator company. They will only survive into the future if they innovate. Building reliable lifts is not the issue because all the players can do that, building new-style responsive lifts is the answer, and the frontier of what ‘responsive’ means is shifting quickly – for example, speedy carriages, pressure control, noise control, interactive lift rooms.

Economic crises will affect sales because they affect numbers of new tall buildings.

However, Otis is in a good position because past market success means there are thousands of Otis lifts around which provides maintenance cash flow to tide them over.

In the medium-term, Otis is safe because of their capabilities and market position. For the long term they must be great at what they do in order to continue in a dominant market position.

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Case 13 Dick Smith: the fall of an Aussie icon CASE SYNOPSIS A great case on the decline of capabilities over time and the need to develop new capabilities. This means it suggest leadership issues and issues about synergies.

Dick Smith was an electronics retailer started by Dick in 1968 in the early days of domestic electronics. They were first movers. Well established and well branded it grew fast. The Smith family sold it in 1982 to Woolworths who were unable to make it successful. Then in 2012 it was sold to Archangel Capital who floated it on the market, raising 345 million at a share price of $2.20.

Archangel were after sort-term gains. They did try to improve profit by lowering costs, and started an online business. This was not a success since the firm lacked capabilities in online business. (They are not alone; a huge number of firms have assumed they can get into online business and failed because of a capability shortfall).

The electronics retailing space is also extremely competitive with JB HiFi and Harvey Norman who are well established and well branded. Dick Smith was increasingly marginalised with a poor cost structure and fading bricks and mortar sales.

They then allied with David Jones as their electronics division. This was also unsuccessful. It was a difficult fit since DJs were in a different retailing area and DJs were also struggling with online sales.

In late 2015 they went into administration; the share price had collapsed, and they faded from the scene. Why? They were not cost effective compared with the competition. In this fast cycle and highly competitive retailing strategic group competitors are cost effective and provide consumers with well-priced gear. They are well marketed and well branded. DS failed to get into profitable online sales at a time when success in this area was vital, and Anchorage was after short term gains and not long-term shareholder value.

They lingered longer than many thought possible because of the strength of the Dick Smith brand as a first mover but this faded over time.

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Case Notes - Strategic Management, 7th edition

LEARNING OBJECTIVES • • • • • • • • • • • • • • • • • • • • •

define and describe the general environment, the industry environment and the competitor environment (Chapter 2) explain the importance of analysing and understanding the organisation’s external environment, and discuss the four activities of the external environmental analysis process (Chapter 2) identify the five competitive forces and interpret industry analyses to determine an industry’s profit or surplus potential (Chapter 2) define strategic groups and describe their influence on the organisation (Chapter 2) explain why organisations need to study and understand their internal organisation (Chapter 3) define value and discuss its importance (Chapter 3) describe the differences between tangible and intangible resources (Chapter 3) define capabilities and discuss their development (Chapter 3) explain the purpose of forming and implementing a business-level strategy (Chapter 4) describe business models and explain their relationship with business-level strategies (Chapter 4) define competitors, competitive rivalry, competitive behaviour and competitive dynamics (Chapter 5) describe market commonality and resource similarity as the building blocks of a competitor analysis (Chapter 5) discuss factors affecting the likelihood a competitor will take competitive actions (Chapter 5) describe factors affecting the likelihood a competitor will respond to actions taken against it (Chapter 5) explain three primary reasons organisations diversify (Chapter 6) describe how organisations can create value by using a related diversification strategy (Chapter 6) explain the popularity of merger and acquisition strategies in organisations competing in the global economy (Chapter 7) discuss reasons why organisations use an acquisition strategy to achieve strategic competitiveness (Chapter 7) describe seven problems that work against achieving success when using an acquisition strategy (Chapter 7) define organisational structure and controls and discuss the difference between strategic and financial controls (Chapter 11) describe the relationship between strategy and structure (Chapter 11).

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QUESTIONS 1. Critically analyse the fatal flaws in the DSG strategy using the framework of strategic capabilities and competitive advantage in the post-IPO period. Did DSG possess any core competence or not? Provide views and supporting arguments.

The expansion strategy was as follows: 1. New store expansion with the ambition to grow to 420-430 stores 2. New formats to target new segments of the market with MOVE and David Jones 3. Private Label growth 4. Leveraging online platforms at physical locations; and 5. Cost transformation.

The fatal flaw in its expansion strategy was the logic that a greater physical store network would increase the profitability. Whilst scale can contribute to increased bargaining power with suppliers and lower costs the fatal issue in this case was DSG was not profitable and was not generating enough free cash flow from its existing store network. It is arguable that DSG had the requisite core competency. Whilst they did possess a valuable brand name (intangible resource) it was at a competitive disadvantage as it didn’t possess a unique combination of capabilities that satisfied the criteria of a core competency namely; valuable, costly to imitate, rare and non-substitutable. On the basis of the facts and issues of this case it is difficult to justify that DSG had any enduring and sustainable competitive advantage.

2. Discuss whether a non-PE buyer (i.e. a strategic buyer rather than a pure financial buyer) that DSG may have had a more sustainable financial outcome and avoided financial collapse. Or was it doomed to fail regardless of corporate sponsor/ owner? Provide views with supporting arguments.

Anchorage was a private equity company, and it had no long run interest in retaining the DSG business so its horizon was short term with the objective of monetising the business for profit. Anchorage exited DSG within 12 months of the IPO. A different company with strategic capability in retailing ion electronics industry may have extracted synergies and used valuable skills and capabilities (its core competencies) to position DSG differently. For example, it may have rationalised and restructured DSG to make it more sustainable and reinvigorated its marketing and product/ market domains. The fact is that DSG had several key risks and issues with its business model and a successful incumbent with deep skills and capabilities in this sector may have turned around DSG around.

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3. DSG had arguably an experienced, qualified and well credentialled board, was essentially compliant with ASX Corporate Governance principles and conventional governance regimes at the time, and had a coherent risk policy and framework. Why did the board still miss the growing financial and liquidity risk with the intended strategy?

Provide plausible reasons and logic supporting your views.

While DSG had a Risk and Audit Committee there was a lack of understanding of the growing financial risks. The financial analysis indicates that several metrics and indicators were of concern well in advance of voluntary administration. One possible reason could be that the risk framework did not have adequate stress testing of the company’s financial position. A further reason could be that strategy and compensation systems were not aligned and that long run risk and value creation were not explicitly part of the executive enumeration. Strategic and financial controls may also have been deficient and ineffective.

4. Using industry structure models, discuss the core issue facing DSG. Using the five forces model of competition by Porter the analysis indicates that rivalry among competing firms was a key problem for DSG. The electronics retailing industry is highly competitive with large incumbent and new on-line retailers. Incumbents need to have a low-cost model otherwise profit margins will be under pressure. DSG did not have a strong competitive position with respect to the cost of doing business. Whilst the expansion strategy did identify cost transformation it was not in a good position.

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Case 14 [Online] Virgin Australia: a flight to oblivion?

CASE SYNOPSIS This case is an interesting and fact filled analysis of the Australian and international airline industry, one of the globe’s most competitive, and surely the only major global industry that has losses each year.

Virgin Australia (VA) is Australia’s second largest airline group. Starting out as Virgin Blue in 2001, by 2014 when it acquired budget carrier Tiger Air, it had become VA. It competes in the domestic industry against Qantas (and their budget carrier, Jetstar) and in international markets against a host of major players. Internationally it goes to 425 destinations, and is in a code-sharing alliance with major airlines. VA was owned by a number of major airlines including Singapore and Etihad. Domestically passenger numbers rose year on year.

In 2019 VA had heavy debt loads (some of it relating to the acquisition of Tiger), major fuel costs, high airport charges and high labour costs with a large corporate contingent. They were badly structured for any major disruption.

Covid 19 struck and both domestic and international markets disappeared. Tiger was a casualty. Despite simplifying their organisation structure and sacking 750 headquarters staff, re-negotiating key lease agreements and tightening the whole operation VA were still unable to cope and went into voluntary administration. They also asked the Federal Government for a one-off injection of 1.5 billion. No was the answer.

VA was sold in 2010 to Bain Capital a USA private investment firm. The CEO of VA then resigned, and the new CEO Jayne Hrdlicka stated in November 2020 that VA would be situated ‘mid-market so it was not competing in the budget area with Jetstar, or high end with Qantas. A hard strategy to implement successfully.

LEARNING OBJECTIVES • • • • •

define and describe the general environment, the industry environment, and the competitor environment (Chapter 2) describe what organisations need to know about their competitors, competitor analysis and ethical considerations (Chapter 2) define value and discuss its importance (Chapter 3) explain the purpose of forming and implementing a business-level strategy (Chapter 4) define competitors, competitive rivalry, competitive behaviour and competitive dynamics (Chapter 5)

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• • • • • • • • • • • • • • • • •

describe market commonality and resource similarity as the building blocks of a competitor analysis (Chapter 5) describe different levels of diversification with different corporate-level strategies (Chapter 6) describe motives that can encourage managers to over-diversify an organisation, unintentionally reducing value. (Chapter 6) explain the popularity of merger and acquisition strategies in organisations competing in the global economy (Chapter 7) discuss reasons why organisations use an acquisition strategy to achieve strategic competitiveness (Chapter 7) name and describe the attributes of effective acquisition (Chapter 7) explain incentives for organisations to use an international strategy and identify three basic benefits of successful strategy implementation (Chapter 8) describe the three main international corporate-level strategies (Chapter 8) discuss environmental trends affecting the choice of international strategies, particularly international corporate-level strategies (Chapter 8) define cooperative strategies and explain why organisations use them (Chapter 9) define and discuss the three major types of strategic alliances (Chapter 9) understand that collusive and other types of competition-reducing strategies are deemed illegal and opposed by many governments around the world (Chapter 9) discuss the use of corporate-level cooperative strategies in diversified organisations (Chapter 9) understand the high probability of failure in cooperative strategies and explain cooperative strategies’ risks (Chapter 9) describe cost minimisation and opportunity maximisation as key approaches used to manage cooperative strategies (Chapter 9) define organisational structure and controls and discuss the difference between strategic and financial controls (Chapter 11) describe the relationship between strategy and structure (Chapter 11).

QUESTIONS 1. Describe Virgin Australia’s corporate level strategy before voluntary administration.

What were the strategic risks?

Virgin Australia has adopted a dominant business diversification strategy where most of its revenue comes from domestic and international airline industries. This implies a low degree of diversification. Virgin Australia operates in a mature competitive environment both domestically and internationally so the key risks are cash flow uncertainty and riskiness in cash flows due to the competitive nature of the industry and impact of external economic factors such as exchange rates, general economic conditions and Government induced restrictions such as border closures as seen during the COVID-19 pandemic.

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2. Discuss whether the proposed strategic review announced during 2019 would have been effective at returning VA to profitability? Explain your reasons.

The proposed actions from the 2019 Strategic Review are predominantly downsizing restructuring initiatives aimed to turnaround performance. However, in themselves it is questionable that they would ensure long run strategic and financial performance as they are engineered for short to medium term improvements. So, while it may have improved profitability the core issue for Virgin Australia was the strategy and positioning as a fullservice carrier covering multiple segments and geographies. It should be noted that Virgin recorded in FY2019 a statutory loss after tax of $315 million and a significant reduction in EBIT of 59% compared to FY2018 and had a reduction in balance sheet equity of 43%. So, the turnaround task was significant, and the proposed actions may not have been enough to generate a reversal in profitability.

3. In past annual reports the following risk statement features several times: ‘Global economic and geopolitical conditions, as well as pandemics, terrorism, severe weather conditions, natural disasters or other Acts of God, which can materially adversely affect operations and demand for air travel’.1 The impact of pandemic was recognised within Virgin Australia for some time. Discuss the strategic interventions VA could have taken in prior years to position VA to minimise the financial solvency risk due to the Covid-19 pandemic.

The key issue is whether the Virgin Australia strategy was resilient enough to counter global risks such as a pandemic. Their strategy was centred around a full-service model catering for a wide spectrum from low cost to premium segments and their geographic reach was substantial. Domestically it was at a disadvantage to Qantas (refer Figure 9) and its segments (apart from Velocity) were underperforming in terms of EBIT (Figure 3).

Profitability was a concern before the COVID-19 pandemic impact so their strategy and performance was not effective even with a cash buffer of $1.7 billion as at end of FY2019.

The business required a material change in strategy. The possible strategic actions that could have been considered were downsizing and downscoping interventions for example an earlier divestment of the underperforming Tigerair Australia business as well as a review of the international division and associated international alliances to refocus only on selected profitable routes.

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4. On 17 October 2014, Virgin Australia Holdings Limited (Virgin Australia) announced a transaction which would see Virgin Australia acquire the remaining 40 per cent of shares in Tiger Australia Airways Pty Ltd (Tigerair Australia) from Tiger Airways Holdings Limited (Tiger Holdings).2 The transaction, once completed, would see Virgin Australia secure 100 per cent ownership and full control of Tigerair Australia. As part of this proposed transaction, Virgin Australia would secure the brand rights to fly Tigerair Australia to a number of short-haul international destinations, providing new growth opportunities for the business. At the time Virgin Australia CEO John Borghetti said: ‘This proposed transaction marks an important milestone for Tigerair Australia and forms part of the Virgin Australia Group’s Virgin Vision strategy to 2017’.3 Discuss the merits or otherwise of the acquisition of Tigerair Australia from the perspective of value creation and strategy.

Explain your reasoning.

From a strategic perspective the full ownership of Tigerair was a poor decision. The acquisition of Tigerair was to position Virgin to extend its market reach to cover the low cost (budget) segment of air travel and compete directly with Jetstar. It is questionable whether it needed the Tigerair brand and certainly the strategic and financial logic of acquiring the remaining 40% of Tigerair was doubtful as Tigerair did not have critical mass compared to Virgin’s main domestic business and its revenue contribution was 10% (FY2019). As seen in Figure 3 Tigerair was a poor performer and delivered the worst performance of the segments.

5. Review the airline industry structure prior to the Covid-19 pandemic in terms of the five forces model of competition. What does your analysis indicate about the attractiveness of the industry?

Industry rivalry The degree of industry rivalry among incumbents is high. The industry fixed costs are significant which means competition for market share is intense. Internationally the level of competition is high given the diversity of competitors and brand names. Product/ service differentiation is not material amongst airlines so competitive pressure on margins is high and leveraging brands is a key factor. The industry switching costs are low as customers can easily switch airlines and thus competitive behaviour amongst incumbents is high. The exit barriers are high as industry withdrawal is difficult and high cost and thus incumbents must compete to survive and generate value for its shareholders and owners.

Threat of substitutes The threat of substitutes is moderated as there are few time-sensitive alternatives for international and domestic travel although as witnessed during the COVID pandemic technology has enabled other products and services to thrive during the travel restrictions (for example on line video conferencing such as ZOOM).

Bargaining power of buyers The product/ service attributes of the airline industry are not highly differentiated and switching costs are low and the volume of buyers is high relative to the concentration of the industry.

Dallas Hanson, Kim Backhouse, David Leaney, Michael A. Hitt, R. Duane Ireland, Robert E. Hoskisson, Strategic Management, 7th Edition. © 2022 Cengage Australia Pty Ltd. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Case Notes - Strategic Management, 7th edition

Bargaining power of suppliers Supplier concentration whether it is aircraft manufacturing or aircraft leasing companies or aviation fuel suppliers are high relative to the airline industry concentration. For instance, Boeing and Airbus dominate the global commercial airline manufacturing industry but the diversity of international airlines is high and the concentration of international airlines is comparatively lower. The suppliers’ input are critical for the final products (aircraft) or fuel the industry so that bargaining power rests with the suppliers to the industry.

Threat of new entrants The airline industry is characterised by strong brand identity, high capital cost requirements for the physical network of airplanes, a high degree of scale, retaliatory actions from industry incumbents and a stringent Government regulatory framework. The barriers to entry are considered high.

In conclusion, based on the above qualitative analysis of the airline industry attributes it is unlikely these structural characteristics would support attractive industry returns.

6. Critique the effectiveness or otherwise of the Virgin Australia strategy post-voluntary administration under its new private equity owner Bain Capital (assuming the resumption in airline travel to pre-Covid-19 levels would take three years).

The restructuring and strategy realignment actions proposed appear reasonable under the circumstances. However, assuming the COVID-19 impacts and travel restrictions persist for the medium term it is questionable whether these actions will be enough to counter the revenue risks that the on-going pandemic poses. Furthermore, it is uncertain how customer behaviour to travel post-COVID restrictions in general will affect the industry and demand for travel in the long run.

The Virgin Australia business will focus on value and its operating footprint will be materially smaller, but it is uncertain whether the new owners Bain Capital can materially turnaround the business and position it to be a more profitable business given the challenges in the external environment. If the objective is to exit through an IPO in five years or so the strategic actions will need to focus on sustainable value creation. For Bain Capital the stakes are high as their $3.5 billion investment is at risk as the industry structural characteristics have deteriorated further with COVID-19.

7. What are the key differences with a private equity acquirer? Are the concerns about private equity involvement in the Virgin Australia transaction justified? Discuss.

Private equity firms are financial buyers as opposed to strategic buyers as they do not possess any particular complementary assets or bring deep industry knowledge and capability when acquiring a business. The model is similar to an unrelated diversification strategy where financial economies are derived from restructuring interventions as private equity acquire unrelated businesses that are either undervalued, distressed or not managed well and implement turnaround actions typically cost reductions to return the business to

Dallas Hanson, Kim Backhouse, David Leaney, Michael A. Hitt, R. Duane Ireland, Robert E. Hoskisson, Strategic Management, 7th Edition. © 2022 Cengage Australia Pty Ltd. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Case Notes - Strategic Management, 7th edition

profitability. The private equity firm then exits ownership after a period of time say 3-5 years either through an Initial Public Offering or a private treaty transaction for the assets with the objective of generating positive excess returns on its invested capital. Private equity typically uses high leverage in transactions which is different for industry acquirers that are generally more conservative and use a mix of debt and equity.

In the Virgin Australia case whilst there are concerns that Bain’s focus is short term there were no other credible alternatives for Virgin Australia other than a private equity solution.

Bain Capital is assuming significant risk with Virgin Australia at a time when air travel has been impacted will continue to be impacted by COVID-19 for the foreseeable future.

Furthermore, they will need to do the work on turnaround and improving profitability which is risky in the current environment and is not certain and will require time. The evidence is mixed with private equity involvement and not all private equity backed IPOs are failures with many examples demonstrating success. Conversely, given the short-term focus Bain may not be setting up Virgin Australia for long run economic sustainability as excessive cost reduction and down scoping may harm the business and limit market opportunities in the long run.

The Virgin Australia business was struggling for a number of years before the COVID pandemic hit and the strategy was not effective. It is normal that with new owners and a new strategy that concerns will be present, but Bain Capital are accepting significant risk with their investment (AU$3.5 billion) so while there are reservations with private equity involvement the alternative (wind up and liquidation) would have been far worse for employees, suppliers, creditors and the economy. So, the concerns are probably not justified at this early stage and Bain will need time to implement the turnaround for Virgin Australia. Furthermore, Bain are aware that the market is watching, and their credibility and reputation is also at stake.

Notes: 1. Virgin Australia, Virgin Australia Group Annual Report 2019, p. 21.

2. Virgin Australia, 2014, Virgin Australia Holdings Limited (ASX: VAH) announces proposed acquisition of remaining 40% of Tigerair Australia, Virgin Australia Media, https://www.virginaustralia.com/au/en/about-us/media/2014/VAH-TIGERAIRACQUISITION2014, 17 October.

3. Ibid.

Dallas Hanson, Kim Backhouse, David Leaney, Michael A. Hitt, R. Duane Ireland, Robert E. Hoskisson, Strategic Management, 7th Edition. © 2022 Cengage Australia Pty Ltd. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.