Contemporary Strategy Analysis Text and Cases Edition, 9th Edition Solution Manual

Accounting Information Systems Connecting Careers, Systems, and Analytics, 1st Edition By Arline A. Savage

Instructors’ Manual to Accompany Contemporary Strategy Analysis (9th edn. Wiley, 2016)

CHAPTER 1. THE CONCEPT OF STRATEGY Introduction For my first class in a core course in strategic management, I have two major goals: •

To convey an appreciation of what strategy is—both in a business context and in other competitive arenas (sport, politics, warfare).

•

To introduce the basic framework for strategy analysis – in terms of external analysis (the analysis of industry and competition) and internal analysis (primarily the analysis of resources and capabilities).

The principal themes I stress in introducing the course in strategy management are: •

The contribution of strategy to the success of organizations (and individuals, too).

•

The role of strategy—especially in providing direction and integration to the activities and decisions of the firm.

•

Strategy as the linkage between the firm and its external environment and the importance of fit— the strategy of the firm needs to fit with the requirements of the external environment (especially the needs of customers), with the resources and capabilities of the firm, with the goals of the firm, and with the structure and systems of the firm.

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The distinction between business strategy and corporate strategy.

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How to identify and describe a firm’s strategy.

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How firms make strategy—which introduces the debate between the rational design and process schools of strategy.

Class Outline Even with the first class, I find it useful to kick off with a case discussion. Given that getting students to prepare a case before the first class is often difficult. Hence, I choose for case discussion either a person or company that students are familiar with (such that a productive class discussion is possible without any prior preparation) or a written case that is short and simple.

In recent years I have used the following cases to kick-off my strategy course: •

Madonna. A written version of this case was included in earlier editions of Contemporary Strategy Analysis1). To introduce her to the class I use a short video—either a YouTube music video or an extract from her Truth or Dare/In Bed with Madonna documentary movie.

•

Lady Gaga. Her career is discussed in Strategy Capsule 1.2 of Chapter 1. Again, a music video offers a useful basis for discussing her image, her “product”, and her capabilities.

For each of these individuals, I follow a similar approach: start by asking: “Why has Madonna/Lady Gaga been so successful?” In the case of Madonna this typically generates comments about her capacity to generate controversy, her capacity for adaptation through periodic changes in image and persona, her uses of sex as means of attracting attention and a strategic tool, and her capacity to entertain—especially within the context of multimedia extravaganza of her concerts, commitment to fame and sheer hard work.

Similar factors are evident in the much more recent career of Lady Gaga: career commitment, stunning visual imagery, a capacity to attract popular and media attention, and highly creative and theatrical video © 2016 Robert M. Grant .

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and live performances. The key differences are that Lady Gaga’s images are more radical and are changed on a much speedier cycle that those of Madonna—Lady Gaga’s every appearance is an opportunity for a new, usually outrageous, style. Second, Lady Gaga has fostered a different relatioinship with her fans than Madonna, using the faux-intimacy of social media and identification with teenage angst to build a loyal following.

Both artists have adapted their business models to the changing environment of popular music and popular entertainment. In particular, both have adapted to the decline of recorded music revenues and the rise of live performances and non-entertainment revenue streams—product placement, endorsements, licensing. In the discussion of Lady Gaga, I am often surprised at the lack of mention of her music. The conclusion I draw is that, when music is so ubiquitous and cheap, it is visual images that are the key for differentiation.

I then shift to resources and capabilities by asking the question: “Is Madonna/Lady Gaga talented?”

Discussion of their capabilities as singers, musicians, songwriters, and dancers usually reveal that the key talents of both are as self-promotion, image design, communication, and marketing. Similarly, both draw upon a team of talented specialists to complement their own resources and capabilities.

This discussion typically results in a board filled with a variety of different observations. I group these into four categories: • • • •

Clear, consistent, long-term goals Profound understanding of the business environment Appreciation of her own resource and capabilities Effective implementation in terms of effort, leadership, and people management.

These categories are illustrated in Figure 1.1 of Chapter 1.

I ask: “Do these different components of the success of Madonna/Lady Gaga constitute a strategy?” In neither of these individuals is there any evidence of any preconceived plan—both have pursued careers characterized by flexibility and opportunism. Yet, amidst these rich and fast-changing careers, common patterns and themes are discernible: • • • • • •

Effectiveness in identifying emerging trends in music and popular culture and building them into their own music and lifestyles Creating integrated “product designs” that encompass music, image, personality, and lifestyle Reinvention/new product development—especially in the case of Madonna A span of activities that is multimarket, multimedia, and multinational Her use of strategic alliances with key individuals and organizations The courting of constant public and media attention.

I then go on to draw upon the issues raised in the discussion to develop some general themes concerning the nature of business strategy and the overall framework for strategy analysis: •

The nature of strategy in a turbulent environment—it’s not about detailed planning; it’s about consistency of decisions, clarity of direction, and focus upon the sources of success

•

The framework for strategy analysis—the same elements that we derived from the Madonna/Lady Gaga discussion (in Chapter 1, Figure 1.1), form the basis of our general strategy framework that views strategy as a link between the firm and its industry environment (see Figure 1.2)

•

Hence, the two primary components of our strategy analysis will be (a) analyzing the industry environment and (b) analyzing resources and capabilities.

•

The development of business strategy over time. This view of strategy—as direction, as identity, and as a quest for superior performance—contrasts sharply with earlier notions of strategy as

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planning. Hence, I find it useful to review the evolution of strategic management thought and practice since the practice of “long-range planning” emerged in the late 1950s (see Figure 1.3).

•

The process of making strategy. If strategy is not about basing detailed plans on medium-term forecasts, how should companies formulate their strategy? The debate between the “design school” and the “process school” provides an interesting way into this.

Alternatively, I use my case “Tough Mudder Inc.: The Business of Mud Runs” as an introductory case.

My approach is teaching this case is outlined in the accompanying teaching note to the case. The case is useful in illuminating the same set of issues listed in the previous paragraph.

I conclude by bringing the discussion back to strategic issues facing the students in the class. Whether MBAs or undergraduates, they face critical strategic decisions with regard to future careers. I invite them to consider (a) whether they have strategies, (b) whether these strategies are implicit or explicit, and (c) how they might apply the ideas and framework outlined in the class (and in Chapter 1 of the book) to developing a career strategy. As an example of the application of strategy to managing one’s life I sometimes draw upon Stephen Covey’s Seven Successful Habits of Highly Effective People inviting students to participate in the exercise he outlines as the beginning of the chapter on Habit #2: Starting with the End in Mind. This exercise involves imaging one is attending one’s own funeral.

Other cases to use with Chapter 1 Apart from my Madonna case, several cases have been used by different instructors to accompany the introductory chapter of the book. The critical factor is not so much the precise content of the case as the role of the instructor in drawing out the main issues concerning the nature of business strategy and providing a preview of the themes and issues which the course which will be dealing with. Particularly suitable cases are those which deal broadly with issues of business success; which consider the roles of goals/values, organizational resources, and the industry environment; and which can be used to embody both analytical aspects of strategy and the human and process issues (especially the role of the leader/general manager).

There is some advantage in using cases that are relatively simple, and short. Entrepreneurial cases work particularly well, including cases on Starbucks and James Dyson and the bag-less vacuum cleaner.

Starbucks Corporation, May 2015 (R. M. Grant, Contemporary Strategy Analysis: Text and cases, 9th edn, Wiley, 2016).

Howard Schultz’s leadership of Starbucks from a single Seattle coffee shop to a global chain of over 17,000 outlets is an inspiring tale of entrepreneurial strategy. After a downturn in performance, Schultz’s reappointment as CEO in 2008 and Starbuck’s subsequent revitalization established Schultz as one of America’s most outstanding business leaders. The case offers an opportunity to assess why Starbucks’ business strategy has been so successful and to evaluate the current strategy in relation to the changing business environment that Starbucks faces.

Doing A Dyson: Case [A] (Imperial College, ECCH Case No. 599-051-1).

James Dyson’s bag-less vacuum cleaner is a stirring tale of the trials and triumph of a determined and stubborn British inventor and entrepreneur. The case offers an opportunity to explore the role of strategy in the seemingly haphazard development of a successful startup.

Innovation and Renovation: The Nespresso Story (Kamran Kashani and Joyce Miller, IMD Case No. 046, 2000; also available through HBS and ECCH).

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The case traces Nestlé’s development of its Nespresso coffee system in a separate business unit using a strategy that is a radical departure from that of most of Nestlé’s businesses. The case requires students to identify and describe Nespresso’s strategy; to consider its fit, both externally with the market and internally with Nestlé’s resources, capabilities and organizational structure and systems. It also introduces ideas of strategy as innovation.

Honda [A] and [B] (Harvard Business School Case Nos. 9-384-049 and 9-384-050).

Chapter 1 of Contemporary Strategy Analysis discusses the debate between the “rational design” and “process” schools of strategy and refers to the Honda case as a central feature of this debate. This account

by Richard Pascale of Honda’s entry into the US motorcycle market at the beginning the 1960s is one of the most insightful strategy cases ever written. The strength of the case is its two stories of the same events. The “A” case reviews Honda’s success in motorcycles through the eyes of the Boston Consulting Group—a tale of careful analysis and rational decision making. The “B” case tells the story of Honda’s US entry in the words of the managers involved—a tale of guesswork, errors, and luck.

Although the case is somewhat complex as an introduction, it provides a uniquely insightful contrast between rational and process views of strategy.

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“Madonna: Sustaining Success in a Fast Moving Business” (in R. M. Grant, Contemporary Strategy Analysis: Text and Cases, 8th edition, John Wiley & Sons, 2013) is available through .).

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Instructors’ Manual to Accompany Contemporary Strategy Analysis (9th edn. Wiley, 2016)

CHAPTER 2. GOALS, VALUES, AND PERFORMANCE Introduction Given that strategy is about achieving success, how we go about measuring performance is critically important for strategic management, hence, this is a topic that I like to address early in the strategy course. It requires students to link strategy analyses to financial analysis.

My goals in teaching this topic are for students to acquire: •

•

•

•

Familiarity with the debate over the goals of the firm (in particular the main arguments for and against shareholders goals versus stakeholder goals) and the ability to link these different goals to different conceptions and measure of what it means for the firm to create value. To emphasize the importance of performance diagnosis – before moving into the formulation of strategy for a company or business, it is important to understand the present situation: how well or badly a company is performing and what are the sources of its superior or inferior performance.

To review and reinforce students’ understanding of basic financial analysis, including the calculation of basic ratios (margins, ROE, return on capital employed), cost of capital, economic vs. accounting profit (including EVA), and DCF approaches to company valuation.

To build a bridge between financial analysis (the principles of valuation, especially DCF analysis) and strategic analysis. In particular, showing how, where qualitative strategic analysis is very useful in augmenting qualitative financial analysis –especially when attempting to forecast financial performance in the future.

To assess the role of mission, vision, business purpose, and corporate social responsibility (CSR) in strategy making.

The key topics I cover are: •

Using company information (both financial statements and qualitative information) to diagnose the sources of high or low performance. This includes disaggregating return on investment into sales margins and capital productivity ratios.

•

Interpreting performance data and selecting performance indicators (including accounting profit vs. economic profit, cash flow vs. profit, and the relationship of enterprise value to profitability).

•

The limits of financial analysis – why qualitative strategic analysis is important both in appraising past performance and predicting future performance.

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Setting performance targets: the increasing role of performance management in strategic planning. The problem of profit and returns to shareholders as strategic targets. The use and usefulness of balanced scorecards.

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The role of values and mission and the extent to which corporate social responsibility is compatible with or conflicts with profit maximization.

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Class Outline My starting point is to examine a company that is performing poorly (this can be a case study, or it can be extracts from the annual report of a company). The class discussion focuses on the following questions: • • •

How badly is the company performing? This requires evaluating the company’s performance.

What are the reasons for poor performance? This requires identifying the sources of poor performance.

What changes in strategy might alleviate these problems and improve performance?

I sometimes find that progress is slow—students often struggle to recall basic financial statement analysis and fundamental accounting ratios. There is a continual desire for students to leap to recommendations. I emphasize the need for prescription to be based on careful diagnosis—the same for strategy as for medicine: a good doctor examines the patient before picking up her prescription pad.

I encourage students to adopt a “scientific approach”: from their initial reading of the case they can adopt I of two approaches: (1) An inductive approach where they delve into the details of the firm’s performance and draw inferences concerning the reasons for poor or deteriorating performance; (2) A deductive approach where they formulate hypotheses concerning the sources of the problems (it’s the economic downturn, it’s increased competition, the firm’s strategy no longer fits with market conditions, and so on) then use the data available to see which of these hypotheses is consistent with the facts.

I tend not to go into much detail regarding the accounting and operating ratios and other data that should be used to diagnose performance problems. However, I do emphasize that students should revisit finance and accounting texts (for all business graduates, reading financial statements and using basic finance and accounting ratios to assess performance are fundamental instruments of their “toolbox”).

Where I do place emphasis is on the strategic goals of the firm. If the firm is operated in the interests of owners, this implies maximizing its value. This corresponds to maximizing the net present value of future cash flows.

This then requires some explanation of how this links the information produced by accounting data that only inform us about the past.

I draw the distinction between using accounting data to appraise the success of past strategies, and the use of performance targets to establish requirements for strategies currently being adopted. I introduce the balanced scorecard as one means of reconciling the long-term value maximization with the need to monitor performance over the short and medium term.

Cases Among the companies I have used as vehicles for exploring performance and linking financial and strategic analysis are: Kering SA: Probing the Performance Gap with LVMH (R. M. Grant, Contemporary Strategy Analysis: Text and Cases, 9th edn, Wiley, 2016).

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The case focuses upon the diagnosis of a firm’s financial performance as a foundation for evaluating and developing its strategy. Kering SA is a French luxury and sports apparel company formerly known as PPR, a diversified retailing company. The acquisition of Gucci in 1999 marked the beginning of PPR’s transformation from a retailer into a diversified fashion, luxury, and sports apparel company, modelled closely on LVMH (Louis Vuitton Moet Hennessy). Yet, despite the similarities between the two companies, Kering has lagged behind LVMH in growth, profitability, and shareholder returns. The case challenges students to identify the sources of the performance gap, thereby allowing an evaluation of Kering’s strategy and a basis for recommendations as to how Kering might close this performance gap.

Starbucks Corporation, May 2015 (R. M. Grant, Contemporary Strategy Analysis: Text and Cases, 9th edn, Wiley, 2016).

Howard Schultz’s leadership of Starbucks from a single Seattle coffee shop to a global chain of over 20,000 outlets is one of the great entrepreneurial achievements of recent decades. The case offers an opportunity to diagnose the reasons why Starbucks’ business strategy has been so successful—focusing in particular on the role of strategic fit. This provides an opportunity for evaluating financial data in order to determine the principal sources of Starbucks’ impressive financial performance. It also allows a discussion of Starbucks’ mission and objectives. Starbucks is often presented as a model of “compassionate capitalism” and a “different type of business enterprise”—one in which the pursuit of profit is tempered by the desire to make the word a better place. To what extent does this represent the stakeholder goal taking precedence over shareholder goals, and, is there really any difference between the two?

Laura Ashley Holdings plc (R. M. Grant, Cases to Accompany Contemporary Strategy Analysis, 6th edn—available on the Wiley website http://.).

Laura Ashley’s traditional English country styles were in the vanguard of the British fashion revival of the late 1960s and 1970s. However, Laura’s death, overexpansion and changing customer preferences resulted in a long period of decline. By 2000, Laura Ashley is owned by a Malaysian conglomerate and well into a restructuring plan that so far has yielded few performance benefits. The case requires that the students diagnose the sources of Laura Ashley’s problem and assess the present strategy. The key issue is whether strategic and operational improvement can revive the company, or whether the Laura Ashley look and the resources and capabilities that supported it are incapable of establishing a viable position in the retail market for women’s clothing and home furnishings.

Walt Disney Company [A] (in David J. Collis and Cynthia A. Montgomery, Corporate Strategy: Resources and the Scope of the Firm, McGraw-Hill, 1997).

The early 1980s were a difficult time for Disney. Economic recession, heavy investment in Epcot and other new projects, and lack of management direction combined to depress Disney’s profitability and made it vulnerable to corporate predators. The situation requires that students appraise Disney’s performance and diagnose the sources of declining profitability. To what extent is this the result of depressed demand and high interest rates coinciding with a period of aggressive expansion, and to what extent are there deep rooted management problems? These were the issues facing Michael Eisner as he took over as Disney’s CEO. There are several other cases that deal with Disney during this period.

Hudepohl Brewing Company (Harvard Business School Case No. 9-381-092).

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Despite its age, this case is an excellent vehicle for requiring students to take an analytical approach to diagnosing the profitability problems of the struggling Cincinnati brewer facing intensifying competition as the national brewing companies move into its local market.

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Instructors’ Manual to Accompany Contemporary Strategy Analysis (9th edn. Wiley, 2016)

CHAPTER 3. INDUSTRY ANALYSIS: THE FUNDAMENTALS Introduction Understanding competition, its determinants, and its implications for profitability is a fundamental component of any core strategy course. My preference is to introduce the tools of industry and competitive analysis early in the course.

My primary goal for the class sessions on industry analysis is that students acquire a clear and deep understanding of how industry structure influences competition and what this means for industry profitability.

Despite its limitations, I continue to make Porter’s Five Forces of Competition Framework the centerpiece of industry analysis. It’s an excellent starting point for recognizing the key features of an industry’s structure and understanding how this structure may influence competition and profitability.

However, as with all areas of analytical frameworks, the value of the five forces framework is not as a theoretical model (its theoretical foundations are shaky); its value is as a tool for getting to grips with the fundamental features of an industry’s structure and understanding their implications for competition.

Hence, it is critical for students to get practice in applying the framework to different industry situations so that they gain expertise in recognizing how industries differ in their basic structures and understanding what these differences mean for the intensity of competition and the overall level of profitability.

It is this criterion of practical usefulness that justifies my continuing use of Porter’s Five Forces Framework as the primary tool of industry analysis in preference to more sophisticated and rigorous models of competitive behavior—i.e. game theory. Despite the theoretical rigor of game theory and attempts to operationalize it for practical applications, game theory models tend to be specific to certain types of competitive situation and lack generality.

For instructors who wish to use a more theoretically-rigorous game theoretic approach to the analysis of industry and competition—in particular those who deploy cooperative game theory in the form of the Brandenburger-Stuart “value capture model,” additional reading will be necessary, e.g.: •

Michael Ryall, “The New Dynamics of Competition,” Harvard Business Review, Vol. 91, June 2013, pp. 80-87.

•

Adam M. Brandenburger and Harborne W. Stuart Jr., “Value-based Business Strategy,” Journal of Economics & Management Strategy, Vol. 5, March 1996, pp. 5–24

Class Outline I begin with a case. I particularly like cases that deal with problem industries where competition is brutal and profits are scarce—airlines, automobiles, metal containers, telecommunication services (both wireless and fixed line), and many e-commerce sectors exhibit such conditions. Such industries allow students to quickly develop an understanding as to why some industries are difficult places to make money.

The principal topics I cover are:

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[A] The analysis and prediction of industry profitability. I follow the case discussion with a more systematic exposition of the Porter model, placing a lot of emphasis on industry rivalry and how an industry’s structural factors—in particular, firm concentration, product differentiation, excess capacity, exit barriers, and cost conditions—interact to determine the intensity of competition and overall level of profitability.

I then push students to use this framework to explain the reasons why profitability is what it is in different industries. Using evidence on inter-industry profit differences in Chapter 3 (Table 3.1), I ask students to select a high- or low-profit industry and explain the structural features of that industry that generate either high or low profitability. For example, why is it that pharmaceuticals and tobacco products earn such high levels of profitability? What is it about airlines, entertainment, telecommunications, telecom equipment, and forest products that causes profitability to be so low?

However, the primary purpose of industry analysis is not to explain past profitability but to predict future profitably. Hence, it is interesting to take a sector that is in the midst of rapid change (wireless telecommunications, automobiles, newspapers, recorded music, computer software, or TV broadcasting) and to ask how structural changes are likely to impact competition and profitability.

[B] Drawing industry boundaries. As soon as we move from a preselected industry to a specific company, the issue arises as to: What industry is it in? In the book chapter I discuss the case of Ferrari: is its industry motor vehicles, automobiles, or performance cars? What about the geographical scope of the industry: is it global, regional (Europe), or national (Italy)?

This question allows discussion of the role of substitutability in determining the boundaries of industries and markets. However, the key practical issues that emerge from this discussion are: (1) Different industry definitions are appropriate to different types of decision; (2) As far as Porter’s Five Forces analysis is concerned, where we draw industry boundaries is not critical: because we consider competition from outside the boundaries of the industry (entrants and substitutes), whether we define the industry narrowly or broadly is not a big issue.

That said, most conventional definitions of industries are too broad to explore the realities of competition at the firm level. As the book discusses, The Washington Post is within the US newspaper industry, yet its competitors are primarily the Washington Times, New York Times, and USA Today; few other of America’s 4,000+ newspaper compete with the Post. Indeed, in competing for advertising some of its closest competitors are likely to be local TV stations rather than other newspapers.

[C] Implications for strategy. I draw two main implications for firm strategy: •

What strategies can firms adopt to change industry structure in order to lessen competitive pressure in an industry and improve industry profitability?

•

How can a firm position itself within an industry in order to shelter form the forces of competition?

[D] Identifying Key Success Factors. I finish up by making the link with the analysis of competitive advantage by discussing key success factors (KSFs). This is likely to require revisiting the industry case study and posing the following questions—Which companies are the most profitable? What does this tell us about KSFs? This offers the opportunity to identify more systematically KSFs, by looking first at customers and how they choose between rival offerings; second, examining competition and how companies survive it (see Figure 3.6). It is also to look at how KSFs change over time. For example, in

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the world auto industry what factors will determine which companies will be most successful over the next five years?

Cases Pot of Gold? The US Legal Marijuana Industry (R. M. Grant, Contemporary Strategy Analysis: Text and Cases, 9th edn., Wiley, 2016) At the beginning of 2015, 16 US states and the District of Columbia had legalized the sale of marijuana for medical use and in four states—Colorado, Washington, Oregon, and Alaska—the sale of marijuana for recreational use had been legalized. Although the production, possession, and sale of marijuana was still illegal under federal law, the interest of venture capitalists in the investment opportunities presented by this emerging industry had been greatly stimulated by the announcement that Founders Fund, a prominent venture capital investor, was investing in the sector.

However, amidst the surge of investment interest in marijuana-related businesses, one question remained unresolved: would the legal marijuana industry offer the high levels of profitability associated with other industries supplying controlled substances such as alcohol, tobacco and pharmaceuticals, or would the forces of competition cause the industry to offer the low returns typical of agricultural produce?

The case describes major features of the industry including the consumption, cultivation, and distribution sides of the industry and its regulatory structure. The case concentrates upon the situation in Colorado which in mid-2015 had the most developed legal marijuana market of any US state.

The US Airline Industry in 2015 (R. M. Grant, Contemporary Strategy Analysis: Text and Cases, 9th edn., Wiley, 2016) During 2015, the US airline industry, boosted by a growing US economy and falling oil prices, experienced a continuation in the upswing in profitability that had begun in 2012. Did this mark a new era of prosperity for the industry, or was it simply another of the temporary upturns in profitability that would be followed by a return to the industry’s normal state of intense price competition, low margins, weak balance sheets, and frequent bankruptcies?

The case explores the factors that drive competition and profitability in the airline industry by outlining the history of the industry since deregulation in 1978. Once the regulation of fares and entry was abandoned, the economic reality of the business—new entry, excess capacity, exit barriers, lack of product differentiation, and high fixed costs—became the drivers of competitive behavior, resulting in aggressive price competition and dismal profit performance.

The case outlines how the strategies of the airlines attempted to moderate price competition. Mergers, frequent flier programs, and building dominant positions at hub airports have achieved moderate success in taming price competition.

Looking ahead, the case asks whether the airlines’ recent success in avoiding over-investment and limiting fare competition points to a restrained approach to rivalry based upon learning from the errors of the past, or whether a return to intense competition and low profitability is the inevitable result of the airline industry’s economics.

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Ford and the World Automobile Industry in 2015 (R. M. Grant, Contemporary Strategy Analysis: Text and Cases, 9th edn., Wiley, 2016).

Internationalization and maturity in the world auto industry has been associated with increasing competition and declining profitability. Since the financial crisis crash of 2008-9, the world’s auto makers have made a strong recovery—however, the basic structural problems of the industry remain: too many producers with too much capacity chasing weak demand. The case takes a long term view of the industry, tracing its evolution over the decades and addressing the factors that will reshape the industry in the future. Although primarily intended as a case for analyzing long-term industry evolution, the case also provides an opportunity to predict how an industry will change in the future and analyze the implications of structural changes for price competition, profitability, and key success factors.

Crown Cork & Seal Co., Inc. (Harvard Business School Case No. 9-378-024, 1978); or Crown, Cork and Seal in 1989 (HBS 9-793-035, 1993).

Although dated, this case provides a splendid introduction to the analysis of the industry and competition.

It is a particularly useful vehicle for applying Porter’s five forces of competition framework. The metal container industry is low growth, with limited product differentiation; it faces strong supplier and customer bargaining pressure, and increasing competition from other types of packaging. This case is also valuable for: (a) Analyzing industry segmentation – although the industry as a whole is unattractive, competitive conditions and demand prospects vary greatly between segments. (b) Analyzing competitor behavior – an important issue for Crown Cork and Seal is that its major competitors are all diversifying: so does this signal less commitment to the metal container industry, and what then are the implications for Crown Cork and Seal’s competitive strategy?

Offshore Drilling Industry (Harvard Business School Case No. 9-799-111, 1999) The case examines the structure of the offshore drilling industry and its competitive behavior with particular emphasis on the cyclical pattern of prices and profitability.

Cola Wars Continue: Coke vs. Pepsi in the Twenty-First Century (Harvard Business School Case No. 9702-442, 2002).

This case addresses issues of industry and competitive analysis that are relevant to both Chapters 3 and 4 of Contemporary Strategy Analysis. In relation to the basic Porter Five Forces framework, the case offers the in interesting contrast between industry structure and profitability in the concentrate industry (dominated by Coke, Pepsi, and few other companies) and in the bottling industry (a much less profitable industry). The case also gives the opportunity to look at the future of competition and profitability in each sector: given slower demand growth and increasing competition from healthier soft drinks, can Coke and Pepsi maintain their profitability?

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Instructors’ Manual to Accompany Contemporary Strategy Analysis (9th edn., Wiley, 2016)

CHAPTER 4. FURTHER TOPICS IN INDUSTRY AND COMPETITIVE ANALYSIS Introduction Chapter 3 on industry analysis concentrates upon presenting and applying Porter’s Five Forces of Competition framework. As was noted, the Porter framework has its limitations. The purpose of Chapter 4 is to address some of these limitations and to expand the scope of our analysis of industry and competition.

Typically, I do not devote a separate class to the topics included in Chapter 4—my approach is to address the topics, concepts, and frameworks that the chapter addresses when they arise in different case discussions. For example: •

The role of complements and the implications for network externalities and “platform-based competition” are discussed in the cases on video games (“Video Game Console Industry in 2015”) and Google (“Google is Now Alphabet—But what’s the Corporate Strategy?”).

•

Game theory concepts—notably those on preemption, deterrence, commitment, signaling, and cooperation) arise in the cases on Starbucks (“Starbucks Corporation, May 2015”), Walmart (“Wal-Mart Stores Inc., June 2015”), and Tesla (“Tesla Motors: Disrupting the Auto Industry”).

•

Competitor analysis arises in the video games (“Video Game Console Industry in 2015”).

•

Segmentation is an issue in the cases on automobiles (“Ford and the World Automobile Industry in 2015”) and Harley-Davidson (“Harley-Davidson, Inc., May 2015”).

The learning objectives of Chapter 4 are for students to be able to: • •

•

Recognize the limits of the Porter Five Forces Framework, and extend the framework to include the role of complements as well as substitutes; Recognize competition as a dynamic, even hypercompetitive, process, appreciate the insights that game theory offers into the dynamics of rivalry, and use competitor analysis to predict the competitive moves by rivals; Segment an industry into its constituent markets, appraise the relative attractiveness of different segments and apply strategic group analysis to classify firms according to their strategic types.

Class outline The topics I cover is determined largely by the choice of case.

For example, in Ford and the World Automobile Industry in 2009 an important issue is the segmentation of the industry. Given that the overall industry outlook for profitability is so poor, a critical issue is which national markets and product segments offer opportunities for above average margins.

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The impact of complementary products on competitive dynamics is central to a number of cases that deal with competition in technology-based industries—in the microelectronics sector where hardware is dependent upon software for its functionality. I do not have a specific case on this topic, but typically use in class the examples of mobile communications which features the interactions between several industry groups: wireless telecom providers, suppliers of mobile devices, owners of operating software, suppliers of software applications.

Highly concentrated industry offer the opportunity to address issues of competitive interaction between firms: see for example, the cases on Coca-Cola/Pepsi-Cola, Boeing/Airbus, and NutraSweet/Holland Sweetener.

A key issue that instructors need to consider in planning their teaching on competitive rivalry is how far to introduce concepts and techniques of game theory. Much depends on how much game theory they have covered in their microeconomics course and whether or not this has preceded the strategy course. For instructors who want student to apply game theory concepts to real world examples a number of good cases are available.

The Cases Cases Dealing with Competition involving Complements Power Play [A]: Nintendo in 8-bit Video Games (Harvard Business School Case No 9-795-102).

Ultimately, strategy is not about understanding the industry environment and predicting changes in competition and profitability, but influencing industry structure to increase and exploit its profit potential.

The Nintendo case is a classic case of a company not just achieving a near monopoly in an industry, but managing its relationships with the suppliers of complementary goods (software companies) and distributors in order to appropriate the major part of the potential profit pool.

Video Game Console Industry in 2015 (R. M. Grant, Contemporary Strategy Analysis: Text and Cases, 9th edn., Wiley, 2016. Also available from Wiley via .). I use this case primarily for the analysis of competitive advantage in technology-intensive industries (Chapter 9), however, the case can also be introduced for the purposes of analyzing industry and competition. The key feature of the sector is the linkage between hardware (consoles) and software (games). Most of the revenue and profit is derived from the software. Yet, by controlling key aspects of technology, the console manufacturers were able to enforce exclusivity on the games publishers and appropriate a major portion of the profits from software.

However, the balance of power is shifting towards games publishers.

Cases Dealing with Dynamic Aspects of Competition Looking beyond the Porter five forces analysis calls for a competitive analysis that is more dynamic and recognizes the key role of specific competitors and their interactions. Several cases provide rich accounts of the competitive dynamic between fiercely competitive duos: Cola Wars Continue: Coke vs. Pepsi in the Twenty-First Century (Harvard Business School Case No. 9702-442, 2002) A classic situation for exploring the competitive interactions between two industry-dominating players in the fiercely competitive yet highly profitable market for cola drinks. It is an excellent case for the analysis © 2016 Robert M. Grant .

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of industry structure and industry attractiveness, the impact of structural changes on competition, and competitor analysis.

Boeing and Airbus: Competitive Strategy in the Very-Large-Aircraft Market (Kellogg School of Management Case No. KEL022-PDF-ENG, 2006) Competition between Boeing and Airbus in the market for very large commercial jets is a classic case of duopoly rivalry in a market where economies of scale are so great that the market seems too small to support two firms. This creates interesting market dynamics where signaling and preemption have an important influence on competitive advantage.

Dogfight over Europe: Ryanair [A] (Harvard Business School Case No. 9-700-115, 2000).

Ryanair’s decision to expand it routes puts it into direct competition with British Airways and Aer Lingus. How will these giants respond to tiny Ryanair’s entry into their lucrative Dublin–London route?

The case offers a good opportunity to undertake competitor analysis and predict competitive responses.

Cat Fight in the Pet Food Industry [A] (Harvard Business School Case No. 9-391-189. Reprinted in D. Collis and C. Montgomery, Corporate Strategy, Irwin, 1997).

The case documents the outbreak of aggressive competition between the main US pet food producers in the late 1980s. A key feature of the case is the extension of competitive rivalry across markets as competitors take competitive action in one market to help preserve their positions in other markets.

Bitter Competition: The Holland Sweetener Co. vs. NutraSweet [A] (Harvard Business School Case No. 9-794-079, 1994).

The case examines the competitive interaction between Monsanto’s NutraSweet subsidiary and newcomer Holland Sweetener in the market for aspartame. The case supports the application of a number of game theoretic concepts, including preemption, signaling, and prisoners’ dilemma

Cases Dealing with Segmentation and Strategic Groups Ford and the World Automobile Industry in 2015 (R. M. Grant, Contemporary Strategy Analysis: Text and Cases, 9th edn., Wiley, 2016).

The primary focus of the case is industry evolution and the relationship between industry structure and profitability in the global auto industry (see the Instructors’ Manual for Chapters 3 and 8). However, the case also offers students the opportunity to look at the internal structure of the industry and consider in which product segments and geographical areas (countries and regions) profit opportunities are most attractive. Information on the different companies in this industry also allows students the opportunity to define strategic groups.

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Instructors’ Manual to Accompany Contemporary Strategy Analysis (9th edn. Wiley, 2016)

CHAPTER 5. ANALYZING RESOURCES AND CAPABILITIES Introduction Resources and organizational capabilities (or “competencies”) are important both as a foundation for strategy formulation and the primary source of a firm’s profits. The resource-based approach to strategy has been one of the most important theoretical streams of the 1990s and a major influence on strategic thinking and strategic planning among companies. A distinguishing feature of Contemporary Strategy Analysis is the emphasis it has given to resources and capabilities as the basis for competitive advantage. My approach is to focus on practical applications of resource/capability analysis.

Specifically, Chapter 5 deals with the following topics: •

The concept of resource-based and capability-based strategies.

•

The distinction between resources and capabilities. The key categories of resource. The nature of organizational capability.

•

How to identify and appraise a firm’s resources and capabilities.

•

Formulating strategies that can best exploit a firm’s resources and capabilities.

In teaching resource and capabilities, I place little emphasis on teaching the resource-based view of the firm (RBV) as a body of theory and focus more on how to put resource and capability analysis into action. This involves three major stages: • •

How to identify a firm’s resources and capabilities How to appraise their potential for establishing competitive advantage

•

How to derive strategy recommendations from this appraisal.

Class Outline I use one of two cases to introduce resource and capability analysis: Walmart or Harley-Davidson. My approach varies according to which of these cases I use, in the case of Walmart I focus on the principal functions and value–chain activities of Walmart in order to diagnose the sources of Walmart’s competitive advantage and then consider the sustainability of this advantage. In the case of Harley-Davidson, I begin with the motorcycle industry and its key success factors in order to identify the resources and capabilities that are important in this industry, then appraise Harley’s relative strengths in these. The primary goal being to show the way in which the company’s strategy is closely tailored to its narrow, yet distinctive, set of superior resources and capabilities.

However, each case involves some core common tasks: • • •

Identifying the principal resources and capabilities Assessing their strategic importance in terms of the two major determinants of imitability: transferability and replicability Assessing the strength of the company in these resources and capabilities relative to competitors

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• •

Linking the resource analysis to the strategy being pursued Assessing the sustainability of the firm’s competitive advantage.

In following up the case discussion, I proceed as follows: 1. I ask students which should be the primary basis for formulating strategy: the external market (customer requirements in particular) or the firm’s resources and capabilities. Here I draw upon examples of companies whose strategy has been based upon developing a set of capabilities, then applying them to different product markets: Canon, Honda, 3M, LVMH, Amazon. My main argument here is that, when markets are volatile, internal strengths may offer a more secure foundation for strategy than customer needs. (Hamel and Prahalad’s notion of the “core competence of the corporation” is useful here.)

2. I emphasize the distinction between resources and capabilities—companies may acquire the resources, but this doesn’t guarantee capabilities. Sports teams are useful examples in this regard— several professional sports teams have talented and expensive players, but have not converted these into outstanding team-based capabilities (the converse too is often true). One conclusion is clear: we don’t know a great deal about the determinants of organizational capability.

3. In terms of reinforcing the approach to resource and capability analysis applied in the case discussion (of Walmart or Harley-Davidson), I go over systematically the principal stages of the analysis: a. In identifying the resources and capabilities of a firm, I outline two approaches: the externally-focused approach starts with Key Success Factors in the industry then asks what resources and capabilities are needed to meet these success factors; the internally-focused approach begins with the firm’s value chain and identifies the capabilities and resources for each major value chain activity. b. The next stage of applying resource and capability analysis is to appraise the firm’s resources and capabilities that can then be appraised in terms of their strategic importance and relative strength. The resources and capabilities can then be shown on a single chart (see Chapter 5, Figure 5.8). c. The purpose of this analysis is to generate strategy implications. Here students readily identify the potential for building upon weaknesses in resources and capabilities.

Perceptive students will inquire into the possibility of outsourcing activities where the firm’s capabilities are weak. But the key area of strategy is the exploitation of strengths. In which market segments, in relation to which customers are a firm’s resource and capabilities strengths likely to be most effective? What are the implications for how the firm should compete?

Cases To the extent that almost all cases present issues of competitive advantage, then almost all cases require some identification and appraisal of the resources and capabilities of the firm in relation to those of competitors. However, in several cases, the characteristics of the companies and their strategic situations, place especially heavy emphasis on resources and capabilities.

On the identification and appraisal of resources and capabilities:

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Wal-Mart Stores Inc., June 2015 (R.M. Grant, Contemporary Strategy Analysis: Text and Cases, 9th edn.

Wiley, 2016. Also available from Wiley via .)

The focus of the case is on the challenges facing CEO Doug McMillan in sustaining Walmart’s remarkable performance given Walmart’s growing size and complexity and the increasing pressures it faces—not only from meeting competition across an ever-broadening front—but also labor unions, governments, and NGOs. To make recommendations about whether and how Doug McMillan should adjust Walmart’s strategy requires insight into the basis of Walmart’s competitive advantage. The case allows students to identify and assess Walmart’s resources and capabilities through reviewing its main functions and major operating activities, including: purchasing, distribution and warehousing, in-store operations, marketing, information technology, human resource management, and management decision processes. By reviewing Sam Walton’s leadership and the business values and principles that he instilled, the case places a strong emphasis on the role that Walmart’s corporate culture plays in its organizational capabilities. Although Sam Walton died in 1992, these values and principles are central to Walmart’s management system and its identity.

By outlining the basis of Walmart’s competitive advantage, the case poses the issue of whether Walmart will be able to sustain its competitive advantage into the future in the face of increasing size, continued success, internationalization, and need for top management to spend less time with the basic issues of merchandising and financial performance and more with management of external relations.

There are other Wal-Mart cases that offer a suitable basis for analyzing Wal-Mart’s resources and capabilities and the characteristics and sustainability of its competitive advantage: ▪

Wal-Mart Stores, Inc. by S. Bradley, P. Ghemawat, S. Foley (Harvard Business School Case No. 794024-PDF-ENG, 1994)

▪

Wal-Mart, 2007 by D. Yoffie and M. Slind (Harvard Business School Case No. 707517-PDFENG, 2007)

Harley-Davidson, Inc.: May 2015 (R.M. Grant, Contemporary Strategy Analysis: Text and Cases, 8th edn. Wiley, 2013) Harley-Davidson offers a highly effective context for applying the framework of resource and capability analysis. A key lesson from Harley-Davidson is that, despite weaknesses in many critical resources and capabilities—technology, purchasing, manufacturing efficiency, global distribution—Harley has done a brilliant job of leveraging its critical reputational resources in order to establish itself as the world’s most profitable motorcycle company. However, the very effectiveness of Harley’s strategy has made it difficult for the company to adapt to a changing motorcycle market, exemplifying the dilemma that “core competencies are also core rigidities”.

Manchester United: Preparing for Life without Ferguson ((R.M. Grant, Contemporary Strategy Analysis: Text and Cases, 8th edn. Wiley, 2013. Now available online: from the “Additional Cases & Teaching Notes” section of the website: .).

Manchester United is one of Europe’s most successful football clubs both commercially and in terms of team performance. The primary architect of its success over the past two decades is its team manager (coach) Sir Alex Ferguson. The case requires students to identify the resources and capabilities most important to team success in professional soccer. The critical issues concern the determinants of team © 2016 Robert M. Grant .

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capabilities: are these determined primarily by the availability of quality resources (players in particular), or by the way in which resources are integrated into organizational capabilities?

On the basis of this analysis, students can make recommendations as to what ManU needs to do in order to maintain its success in European professional soccer against star-studded clubs such as Real Madrid and Barcelona and much wealthier clubs such as Chelsea and Manchester City.

Walt Disney Company.

Disney is a particularly interesting company for addressing the exploitation of its rich trove of resources and capabilities. Disney is particularly rich in durable, tangible and intangible resources and its turnaround during the 1980s under Michael Eisner and Frank Wells is an example of an effective resource-based: notably the deployment of Disney's film library, land assets, reputation, and characters. There are several cases dealing with Disney, I recommend Walt Disney Co.: The Entertainment King (Harvard Business School Case No. 701035-PDF-ENG. Reprinted in: D. Collis & C. Montgomery, Corporate Strategy, 2nd edn. McGraw-Hill, 2001.)

Airborne Express (A) (Harvard Business School Case No. 9-798-070, 1998).

Although profitable, Airborne Express is considerably smaller than its two major rivals UPS and Federal Express. The case allows an assessment of Airborne’s resources and capabilities relative to those of FedEx and UPS and an assessment of its potential for survival and competitive advantage in relation to these giants.

Capital One Financial Corporation (Harvard Business School Case No. 9-700-124).

Compared to most banks, Capital One has taken a radically different approach to competing in the US credit card industry. Using IT and statistical analysis to capturing new business, analyze credit risk, and tailor credit card offerings to the characteristics of individual customers, Capital One has emerged as one of the most profitable and rapidly growing credit card issuers in the US. The case allows students to examine the capabilities that underlie Capital One’s superior performance and identify other markets where Capital One might deploy those same capabilities.

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Instructors’ Manual to Accompany Contemporary Strategy Analysis (9th edn. Wiley, 2016)

CHAPTER 6. ORGANIZATION STRUCTURE AND MANAGEMENT SYSTEMS: THE FUNDAMENTALS OF STRATEGY IMPLEMENTATION Introduction The chapter covers the fundamental aspects of strategy implementation. It begins with strategy execution—the challenge of translating strategic plans into action and goes on to consider the core principles of organizational design.

Issues of strategy implementation—in particular the design of organizational structure and management systems—arise in virtually all strategy cases. Indeed, in analyzing organizational capabilities, organizational structure, processes, and human resource systems play central roles in their development and operation. Nevertheless, in order to address more systematically the issues concerning the implementation of business strategies, I find it useful to introduce some basic principles of organizational design.

Whether I devote a class session to issues of organizational design depends on whether or not the principles of organizational structure and design are being taught in a parallel organization behavior/organization theory course. If it is, then I allow issues of strategy implementation to arise through the case studies that focus on resources and capabilities, internationalization, diversification, innovation, and so on.

The key areas of learning that I try to cover in this session are: •

The processes of strategy execution: how is strategy—as formulated in strategic planning processes—translated into action? Here I look in particular at the role of capital expenditure budgets, operating plans, and performance management systems.

•

The fundamental problem of organizing: how to reconcile specialization with coordination and cooperation.

•

The role of hierarchy both as a control mechanism and as a coordination mechanism—this takes us into the principles of modularity and loose coupling (organizational devices that reconcile coordination with flexibility and responsiveness).

•

The basis for defining organizational units: how intensity of coordination needs determines whether a firm should be organized by functional departments, product divisions, geographical units, or a matrix structure.

•

Contingency approaches to organization design: what types of structures are suited to what types of environment?

Class Outline Gaining appreciation of why companies are organized the way they are and the opportunities for improving organizational design requires the exploration of real-world examples. Hence, I typically begin either with a case (see below) or by exploring some examples of real-world organizations—preferably © 2016 Robert M. Grant .

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organizations that students are familiar with. For example, asking students how their business school is organized usually elicits descriptions of product-based organization (e.g. organized by programs: bachelor’s program, MBA program, executive programs), functional organization (e.g. organized by discipline/function into departments of marketing, finance, operations, and business ethics), and matrix organization (organized by products and functions). The advantages and disadvantages of each basis of organization can be discussed.

In terms of illuminating the environmental and strategic influences that determine the choice of organizational structure, it is useful to look as a company undergoing or contemplating a change in its organizational structure. For example: •

The classic example of the product-division structure was GM, with its separate Chevrolet, Cadillac, Oldsmobile, Buick, Truck, and Parts divisions. Since the early 1980s these product divisions have been increasingly collapsed so that by the late 1990s GM possessed a single North American car division. At the same time, functionally defined groupings have become increasingly important. (See Figures 6.2 and 6.4 in Contemporary Strategy Analysis).

•

Traditionally, in the management consulting industry (in common with other service industries) firms were organized around geographical units and project teams. As the need for specialist knowledge has increased and the companies have been under increased pressure to share learning and generate new knowledge, so the basic organization of project teams and local offices has been overlain by industry practices (e.g. energy, financial services, telecom), competency-based practices (e.g. strategy, marketing, change management, IT), and communities-of-practice. (The HBS “Booz Allen Hamilton case—see Instructors’ Manual, Chapter 6—offers evidence on this.)

Cases Manchester United: Preparing for Life without Ferguson ((R.M. Grant, Contemporary Strategy Analysis: Text and Cases, 8th edn. Wiley, 2013. Available from the Instructor Companion Site of .).

Although this case is primarily concerned with the sources of competitive advantage in professional soccer, at its heart are issues of organization: the structure of the club, the allocation of decision rights, organizational processes, and motivation. The case offers penetrating insight into the role of these organizational factors in supporting team capabilities. It is interesting to compare the effectiveness of these organizational factors at ManU (and FC Barcelona) with clubs that have failed to achieve such organizational alignment (Chelsea, Inter Milan, and Real Madrid).

Procter & Gamble’s Organization 2005 Project (Available from the Instructor Companion Site of .).

In June 2000, Procter & Gamble’s newly appointed CEO A. G. Lafley faces a critical decision: whether to endorse or cancel “Organization 2005”, a far-reaching program of organizational restructuring launched by his predecessor.

P&G’s international operations were traditionally organized by national subsidiaries and regional headquarters. Over time P&G has moved to a matrix structure where the geographical structure has been overlaid by global product divisions. “Organization 2005” involves a shifting of financial and strategic decision making paper from its geographical units to its product divisions in order to encourage innovation and cost efficiency. © 2016 Robert M. Grant .

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Reorganizing the Royal Dutch Shell Group. (Available from the Instructor Companion Site of .).

The Shell Group is one of the world’s largest and most complex organizations. During the early 1960s under the guidance of McKinsey & Company it adopted a matrix structure. The 200 or so operating companies were coordinated through regional, sectoral, and functional units. By the early 1990s the Group was becoming increasingly unwieldy. The challenge for a new task force combining senior Shell executives with McKinsey consultants was to design a new structure that would improve coordination between the operating companies, permit more effective financial and strategic control, and reduce costs – especially at the two corporate headquarters in London and The Hague.

Corning Glass Works: International [A], [B1], [B2], [C1], [C2], [D] (Harvard Business School Case Nos. 9-381-160 to 9-381-164, and 9-381-112).

This is a classic case in the problems of organizing the multinational, multiproduct corporation. The case looks at the design of a matrix structure and the problems encountered in its implementation. There are several videos to support this case.

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Instructors’ Manual to Accompany Contemporary Strategy Analysis (9th edn. Wiley, 2016)

CHAPTER 7. THE NATURE AND SOURCES OF COMPETITIVE ADVANTAGE Introduction Chapter 7 integrates and extends the analysis of competitive advantage that was introduced in the Chapter 7 which discussed the external sources of competitive advantage—namely key success factors at the industry level—and Chapter 5 which discussed the internal sources of competitive advantage—namely the resources and capabilities which provide the foundation for superior performance. Chapter 7 outlines the conditions under which competitive advantage arises and is eroded by competition, then goes on to examine analyze the two main dimensions of competitive advantage—cost advantage and differentiation advantage—outlining frameworks for identifying the potential for cost and differentiation advantage.

Class Outline Given that I will have taught the principal inputs into the analysis of competitive advantage when discussion industry analysis and the analysis of resources and capabilities, this topic requires little in the way of conceptual exposition. Hence my focus for this topic is upon case discussion.

If the number of sessions in the strategy course allow it, I teach a case which addresses cost advantage and a case which addresses differentiation. For shorter courses, either a choose a case on cost advantage or a case on differentiation advantage, or a case which addresses both.

[1] Cost Advantage Depending on the length of the course, I take one of three approaches to the analysis of cost advantage: • I may devote an entire class session to cost advantage in which case I use one of the cases below; • If time does not permit, I use half of a class session to expound the framework for cost analysis using examples to apply the concepts; • Alternatively, I sometimes cover cost and differentiation advantage as a single topic. For example the Harley-Davidson case is primarily concerned with the analysis of differentiation advantage, however, the case can also be used to explore the sources and extent of Harley’s cost disadvantage (especially relative to Honda which produces twenty times as many bikes annually) and to suggest ways of minimizing Harley’s cost disadvantage.

The two main components of the framework for cost analysis outlined in Chapter 7 are: 1. The factors which cause one firm’s unit costs to differ from those of its competitors (“cost drivers”). In relation to each of the cost drivers, I ask the students for an example of a firm that derives a cost advantage form this particular driver. For example, in relation to scale economies, Toyota (8.5 million cars per year) gains considerable advantages in purchasing, new product development, manufacturing, and marketing over BMW (1.5 million cars per year). In relation to input costs (especially labor costs), Tata has as has a considerable advantage over VW— simply because of location. © 2016 Robert M. Grant .

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2. The value chain. Again, I focus on an example. For example, in relation to commercial aircraft production, I ask the class to outline the main stages of a value chain, then identify at which stages the major opportunities for obtaining cost advantage occur (similar to the case of automobile manufacture in Figure 9.4).

Cases: AirAsia: The World’s Lowest Cost Airline (R. M. Grant, Contemporary Strategy Analysis: Text and Cases, 9th edn., Wiley, 2016).

The low cost airlines offer an excellent opportunity for the analysis of cost advantage. Cases on Southwest and Ryanair are widely used on strategy courses. AirAsia offers an interesting alternative to these two better-known airlines—especially given that Malaysian-based AirAsia has the distinction of having a lowest cost per passenger per kilometer flown of any of the world’s larger airlines. Through comparisons of costs with its larger rival, Malaysian Airlines, the case allows exploration of the sources of AirAsia’s cost efficiency. It also examines AirAsia’s expansion into long-haul flights—which risks compromising the simplicity and consistency of AirAsia’s business model.

Southwest Airlines 2002 (Thunderbird Graduate School of International Business, Case No. A07-020009, 2002) The case provides cost and efficiency data on the US airline industry, on Southwest, and on the established airlines that allows examination of the basis of Southwest’s superior efficiency and lower cost per seat-mile. Southwest has been the most profitable of the US airlines. The case d considers the sustainability of Southwest’s competitive this advantage in the face of plans by other airlines to create their own budget airline subsidiaries. See also Southwest Airlines – 1993 [A] (Harvard Business School Case No. 9694-023, 1997).

Airborne Express [A] (Harvard Business School Case No. 9-798-070).

Airborne Express is in a difficult competitive situation relative to its two major rivals, UPS and Federal Express. The case allows an assessment of Airborne’s competitive position relative to those of FedEx and UPS and offers the opportunity to consider Airborne’s potential for cost competitiveness in the face of the scale and network economies available to FedEx and UPS. Walmart.

The Walmart cases (see the Grant case and the two HBS cases listed under “Chapter 5. Analyzing Resources and Capabilities”) can also be used to support a deeper probing in the sources of competitive advantage, in particular, Walmart’s ability to establish an unassailable cost advantage together with remarkable flexibility and responsiveness. (For this purpose, the Harvard case, Wal-Mart Stores, Inc. by S. Bradley, P. Ghemawat, S. Foley, HBS Case No. 794024-PDF-ENG, 1994 may be the best because it offers a good deal of rich cost data).

[2] Differentiation Advantage I devote more time and attention to the topic of differentiation advantage that I do to cost advantage, partly because differentiation advantage tends to be more sustainable that cost advantage, partly because differentiation offers greater scope for innovation, insight, and the exploitation of uniqueness, and partly

© 2016 Robert M. Grant .

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because differentiation advantages brings us face to face with some central concepts of strategy including coherence and identity.

The analysis of differentiation advantage is concerned with identifying opportunities for matching the demand-side desire for differentiation with the supply-side potential for the firm to create uniqueness in its offerings. A key feature of this matching process is exploring linkages between the value chain of the firm and that of its customers.

My major goal for the session on differentiation advantage is to for students to recognize how opportunities for profitable differentiation can be identified through bringing together the demand side of differentiation (customers’ preferences for product characteristics) with the supply side of differentiation (a firm’s capacity for creating unique attributes in its offerings).

I begin with a case discussion—typically Harley-Davidson. Inevitably this case discussion goes well beyond the issues raised by the analysis of differentiation advantage covered in Chapter 7. In particular, the Harley case raises some fascinating issues in the analysis of resources and capabilities: how is it that a company which at the time of its initial buyout was near bankrupt and producing a mere 45,000 motocycles a year could establish itself as the world leader in heavyweight motorcycles and the most profitable motorcycle producer on earth? The key is in creating a highly focused, exceptionally wellintegrated strategy that exploited its few resource strengths. This leads on to a fuller consideration of the specifics of its differentiation strategy, and the challenges it faces looking ahead.

In terms of the issues I draw from the class discussion, I place particular emphasis on developing the value chain analysis of differentiation advantage applying the same framework as in Strategy Capsule 10.2.

Cases Harley-Davidson Inc., May 2015 (R. M. Grant, Contemporary Strategy Analysis: Text and Cases, 9th edn., Wiley, 2016).

At the heart of Harley-Davidson’s superior performance in the motorcycle industry is its creation of a unique position of differentiation based upon the resources where it trumps all its rivals: image and heritage. At the heart of H-D’s differentiation advantage is the core recognition by the company: H-D is not supplying motorcycles, it is supplying an experience. The case offers the basis for comprehending the appeal of this strategy and the means through which H-D has nurtured and delivered this experience.

The case offers an excellent opportunity for applying the value chain analysis of differentiation advantage outlined in Strategy Capsule 7.8. “Using the Value Chain to Identify Differentiation Opportunities for a Manufacturer of Metal Containers” in Chapter 7 of Contemporary Strategy Analysis. This provides students with the opportunity for identifying further opportunities for H-D to create value for its customers.

Although the emphasis of the H-D case is the analysis of differentiation advantage, H-D also offers opportunities for applying the tools of cost analysis. Despite H-D’s superior profitability and its big price margin over rivals that produce lookalike V-twin cruisers, H-D needs to ensure that its price premium is not eaten up by diseconomies of scale. How can a company producing around 280,000 motorcycles annually avoid a widening cost gap with volume manufacturers such as Honda with production of over 12 million bikes a year? The case can be used to apply value chain analysis both to cost and differentiation analysis.

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Starbucks Corporation, May 2015 (R. M. Grant, Contemporary Strategy Analysis: Text and Cases, 9th edn., Wiley, 2016) Starbucks is a master of differentiation advantage. As Gary Hamel has observed: before Starbucks who would ever have envisaged thast construction workers would line up to pay $4 a cup for a cappuccino?

Like Harley, Starbucks is in the business of selling a customer experience. Its strategy of creating the “Starbucks experience” combines a number of tangible and intangible elements from the coffee, to the ambiance of the Starbucks stores, to human resource management, to corporate social responsibility.

However the case also raises several issues concerning the sustainability of Starbucks competitive advantage

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Instructors’ Manual to Accompany Contemporary Strategy Analysis (9th edn. Wiley, 2016)

CHAPTER 8. INDUSTRY EVOLUTION AND STRATEGIC CHANGE Introduction As the introduction to Chapter 8 makes clear, change is a feature of all business situations. Hence, challenges and opportunities arising from a changing business environment are present is every strategy case study. This chapter takes a systemic view of the principal forces of change—especially technology and demand—and develops implications for how industries evolve. This provides a basis for considering the challenges of managing strategic change.

The key learning goals for this chapter are for students: •

To recognize the different stages of industry development and understand the factors that drive the process of industry evolution;

•

To identify the key success factors associated with industries at different stages of their development and recommend strategies, organizational structures, and management systems appropriate to these stages;

•

To appreciate the sources of organizational inertia and become familiar with different approaches to managing strategic change

•

To become familiar with the different approaches that firms have taken in developing organizational capabilities—including the role of dynamic capabilities.

•

To recognize the principal tools of knowledge management and the roles they can play in developing organizational capability.

However, in addressing this topic in class, I tend to focus upon a subset of these issues and objectives—this subset being determined primarily by the case I choose for exploring industry evolution and the management of change.

Class Outline In teaching this topic I use a case study of a firm that is grappling with the implications of a radically changing industry environment. My preferred case for this is Eastman Kodak. Although Kodak has failed in its mission to become a leading company in digital imaging (it entered Chapter 11 bankruptcy early in 2012), there is still tremendous insight to be gained from examining its strategy, the reasons for its failure, and alternative strategies that it might have pursued.

Largely reflecting my own interest in organizational capabilities, my teaching of the management of strategic change places a big emphasis on the challenges of developing new organizational capabilities.

I follow up this case by generalizing on some of the issues that it raises (which also form key components of Chapter 8), namely:

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• • • •

The nature and sources of organizational inertia The challenges of technological change (especially when it is a “disruptive technology” and embodies “architectural innovation”) The difficulties of established firms in developing new organizational capabilities General lessons for the management of strategic change.

Cases Eastman Kodak’s Quest for a Digital Future (R. M. Grant, Contemporary Strategy Analysis: Text and Cases, 9th edn., Wiley, 2016).

On January 19, 2012, Eastman Kodak declared Chapter 11 bankruptcy. Faced with the challenge to its entire business from the transformation to digital technology, Kodak had staked its future on being a leader in digital imaging. Despite massive investment and a string of acquisitions and strategic alliances, Kodak’s ability to establish competitive advantage within the digital imaging sector and to generate satisfactory returns from its investments remains in doubt. The case describes Kodak’s digital imaging strategy, explores the reasons for the failure of Kodak’s digital imaging strategy to generate profits, and looks at the options that remain for CEO Antonio Pérez.

Ford and the World Automobile Industry in 2015 (R. M. Grant, Contemporary Strategy Analysis: Text and Cases, 9th edn., Wiley, 2016).

The historical account of the automobile industry allows identification of the major life cycles stages (from introduction to growth to maturity) and the key events that have signaled the transition from one stage to another (the emergence of a dominant design, the process innovations that allowed price reductions and rapid market penetration, market saturation in the advanced economies). The case also allows analysis of the future evolution of the industry, including the use of scenarios to outline different futures for the industry.

The Evolution of the Circus Industry (A) (Insead Case No. 302-057-1, 2001) The case demonstrates the potential for a declining, structurally unattractive circus industry to be revitalized by strategic innovation. Cirque du Soleil was able to reinvent the circus industry and create new market space by challenging the conventional assumptions about how to compete. It value innovated by shifting the buyer group from children (end-users of the traditional circus) to adults (purchasers of the traditional circus), drawing upon the distinctive strengths of other alternative industries, such as the theatre, Broadway shows and the opera, to offer a totally new set of utilities to more mature and higher spending customers.

Corning Incorporated: The Growth and Strategy Council (by Rebecca Henderson and Cate Reavis, MIT Sloan Management, Case No. 08-056, revised April 2009) The case outlines the development of Corning with particular emphasis on its history of innovation. The case highlights Corning's ability to "recreate" itself—moving from glass to cookware to fiber optics and glass for liquid crystal displays. It explains the role of the company's Growth and Strategy Council, a centralized team including the CEO, COO, and CTO which is heavily involved with deciding which projects to support and fund.

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Instructors’ Manual to Accompany Contemporary Strategy Analysis (9th edn. Wiley, 2016)

CHAPTER 9. TECHNOLOGY-BASED INDUSTRIES AND THE MANAGEMENT OF INNOVATION Introduction For analyzing the sources of competitive advantage, industries subject to rapid technological change where innovation is a key strategy variable are particularly interesting. These industries are predominantly emerging industries whose existence is the result of innovation. In addition, there are industries where technology and innovation continue to be the principal dimension of competition—e.g. electronics, chemicals, aerospace, and pharmaceuticals.

The principal topics I cover are: • • • • •

The linkage between innovation and competitive advantage and the determinants of the profitability of innovation.

Alternative strategies to exploit an innovation.

First-mover advantage.

Competition in markets (a) where standards arise and (b) competition is among rival platforms.

The organizational conditions conducive to innovation and creativity.

Class Outline I typically begin this topic with a case that explores issues in managing innovation. Cases I have used include: the Chris Bartlett classic, EMI and the CT Scanner and my own Raisio and the Benecol Launch and Tesla Motors: Disrupting the Automobile Industry. These cases cover many of the same issues regarding formulating and implementing a strategy to exploit an innovation.

I use these cases to develop several key themes, notably: •

Strategy alternatives for exploiting an innovation (licensing vs. alliances and joint ventures vs. internal development within a wholly owned subsidiary).

•

The nature and extent of first-mover advantage.

•

The role of complementary resources and capabilities.

•

The rapid evolution of industry structure and key success factors as an industry moves from its “introduction” to “growth” stage of development.

The Tesla Motors case is slightly different form the other two insofar as it does not involve a new invention (electric cars were around at the beginning of the 20th century), but it is very good for addressing the challenges of an innovative, technology-based start-up facing established giants.

I also like to add a case dealing with an industry where rapid technological change is a perennial feature of the competitive environment. For this purpose, I find that the video games industry works well – partly because most students identify readily with the product (and many are highly knowledgeable, too), partly because successive product generations allow the tracking of similarities and changes in key success factors over time, and partly because it is an excellent market for studying network externalities, hardware–software complementarities, and platform-based competition.

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The key issues I explore here are: •

Managing hardware–software complementarities. In most hardware–software systems, the primary profit source is the software. But who appropriates this profit? In the case of personal computers, it was the software suppliers (notably Microsoft); in video games it has been the hardware suppliers.

Nintendo’s strategy during the 1980s and early 1990s is a fascinating study in profit appropriation. Since that time, the successful entry of Sega and then Sony into this market has required careful coordination of hardware and software.

In recent years, however, the balance of power appears to be shifting from the console makers to the games publishers—explaining this transition is important to understand the dynamics of this industry.

•

Standards and network externalities. Video games consoles appears to be a “winner-takes-all” market—although there have been three major players in recent years, only the market leader has made profits in this market. The tendency for convergence around a single platform can be analyzed using the concept of network externalities. The discussion of how network externalities lead to the emergence of standards and how companies compete for standards is a fascinating area of strategy. I draw on past standards battles – Sony and Matsushita in VCRs, IBM and Apple in PCs – and current standards battles – Palm vs. Microsoft vs. Symbian in operating systems for cell phones and handheld devices, Sony vs. Toshiba in high-density DVDs, and XM vs. Sirius in satellite radio broadcasting – to develop this analysis.

For a case that is target specifically on the issues of standards wars, my case on The DVD War of 2005–2008: Blu-Ray vs. HD-DVD allows in-depth consideration of the implications of network externalities and the dynamics of competition between rival standards. This illustrates a number of key features of standards wars—notably the use of alliances to build a “bandwagon”, the importance of managing expectations, the difficulties of achieving coordinated investments among different companies to support a new technology, and the speed of convergence once a “tipping point” has been reached.

Cases As I observed in relation to Chapter 8, cases that explore the competitive advantage and strategy making in technology-based industries can also be used to address issues of industry evolution and firm adaptation, since a key feature of these industries is the speed with which industry structure changes and the basis for competitive advantage shifts.

The cases that have been used successfully with this chapter of Contemporary Strategy Analysis by myself and other instructors include: Tesla Motors: Disrupting the Automobile Industry (R. M. Grant, Contemporary Strategy Analysis: Text and Cases, 9th edn., Wiley, 2016) Despite its small size—producing a mere 50,000 cars in 2015—Tesla Motors had generated a level of excitement and anticipation that was unique in the automobile sector. Its founder—entrepreneur and visionary Elon Musk—viewed Tesla as leading the industry into a new era of technological sophistication

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and environmental sustainability. In doing so it would link with his plan to simultaneously revolutionize the generation and storage of electrical power.

The case allows for an assessment of Tesla’s strategy, including its decision to make available its patent portfolio to its competitors, and an evaluation of Tesla’s prospects for success in the intensely competitive automobile industry.

Raisio and the Benecol Launch [A] and [B] (Available from Wiley—see Instructor Companion Website to www.contemoporarystrategyanalysis.com) Raisio, a grain milling and vegetable oil company based in Finland, has developed a patented process for the production of stanol ester and its use as cholesterol-lowering food additive. Its first product to incorporate stanol ester has been a huge market success in Finland and Raisio’s share price has increased tenfold. The company is anxious to exploit the worldwide potential for Benecol and is considering alternative strategies for exploiting its innovation. The A case focuses upon strategy alternatives to exploit the innovation. Key issues here are (a) the strength of Raisio’s patent position and (b) whether Raisio has the resources and capabilities needed to develop a worldwide market for Benecol and other products containing stanol ester.

The B case revisits Raisio three years later. Its chosen strategy—a partnership with Johnson & Johnson where the latter has been granted a worldwide license for commercial development of Benecol, is in disarray. Its US launch has experienced regulatory delays, Unilever has developed a competing cholesterol-reducing margarine, and the global alliance with Johnson & Johnson is experiencing strains.

What has Raisio done wrong and how should it adjust its strategy to meet the new market conditions?

Video Game Console Industry in 2012: The Next Round (R. M. Grant, Contemporary Strategy Analysis: Text and Cases, 8th edn., Wiley, 2013 and direct from Wiley via the website .).

The case traces the development of the video games industry through its major eras of market dominance: from Atari, to Nintendo, to Sega, to the three-way battle for leadership between Microsoft, Sony, and Nintendo during the most recent generation of consoles. The case outlines the strategies of the different players and the dynamics of competition. This provides a basis for analyzing key success factors in the industry – including the role of network externalities.

A key feature of the most recent round of competition (the 7th generation of video game consoles) was the profound changes that were occurring in the industry. Not only had Nintendo defied industry wisdom to become worldwide market leader with its Wii console, but profound shifts were occurring in the relationships between console makers and the developers and publishers of games. As the three firms prepare for the next round of competition their strategies need to take account of the profound changed in their industry environment.

EMI and the CT Scanner [A] and [B] (Harvard Business School Case Nos. 9-383-194 and 9-383-195.

Also available from the Instructor Companion Site to .).

One of the all-time greats among strategy cases, this case deals with a broad range of strategic issues concerning the exploitation of an exceptionally promising innovation – the X-ray scanner – by a British music and electronics company. Critical issues at the end of the A case include (a) the appropriability of the returns to innovation in situations where patent protection is weak and (b) the choice of entry mode – should EMI exploit its innovation by means of licensing, joint-venture, or a wholly owned new venture?

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The B case takes up the situation four years later. The market has matured considerably, new competitors have appeared (General Electric in particular), and EMI must (a) assess the emerging competitive situation—particularly with regard to its comparative weaknesses in complementary resources and (b) develop an organizational structure and management systems to deal with the internal conflicts and inefficiencies it suffers.

DVD War of 2005–8: Blu-Ray versus HD DVD (R. M. Grant, Cases to Accompany Contemporary Strategy Analysis, 7th edn., Wiley, 2010, available from the via the Instructor Companion Site to .)

This account of the two-year struggle between Toshiba and Sony offers insight into the dynamics of standards war. Although Toshiba’s HD DVD was launched before Sony’s Blu-Ray, and initially both camps appeared to be well-matched in terms of support from key industry players, in a little more than two years, Toshiba announced its exit from the market. The case offers students to consider the factors leading to Sony’s victory and what Toshiba might have done differently in order to succeed against Sony’s Blu-ray.

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Instructors’ Manual to Accompany Contemporary Strategy Analysis (9th edn. Wiley, 2016)

CHAPTER 10. COMPETITIVE ADVANTAGE IN MATURE INDUSTRIES Introduction Chapter 10 addresses strategies for mature industries—including those in decline. It is the shortest chapter in the book and exists primarily to complement the chapter on strategies for emerging and technology-based industries. The chapter does not introduce any fundamentally new concepts or frameworks; hence, whether or not this topic is included in your strategy course depends primarily upon your course objectives and whether you view this topic as an opportunity to introduce a particularly interesting teaching case.

Mature industries are conventionally thought of as of stable industries with low rates of technological change as a result of market saturation and a slowing of innovation. Yet, beyond these simple generalities, the key feature of mature environments is their diversity. Some are commodity businesses: metal containers, energy, iron and steel, tires, airlines. Others are highly differentiated: management consulting, musical instruments, specialty retailing.

One of the most valuable learning objectives, in my view, in teaching this topic is to challenge the whole concept of maturity through emphasizing the potential for strategic innovation. While the potential for technological innovation may be limited, mature industries typically have tremendous opportunities for strategic innovation: Starbucks in coffee shops, Capital One in credit cards, Southwest and Virgin Atlantic in airlines, Luxottica in eyeglasses. Hence, this topic offers an opportunity to explore strategic innovation and introduce concepts such as business model innovation, organizational ambidexterity, and dynamic capabilities, and frameworks associated with Kim and Mauborgne’s “blue ocean strategy.

Class Outline If the key concepts of industry evolution have been covered in a previous class, there is little need to spend time on introducing concepts. Hence, the teaching of the topic can be focused around the lessons arising from a particular specific case. My preferred approach is to use a case that requires students to use creativity and judgment in developing strategies for a firm that is facing the challenges of a maturing—even declining— industry. Thus, in the case of the New York Times, the challenge is to address the problems of declining circulation, rising costs and falling advertising revenues. Should the company stick to the traditional model and seek financial viability through aggressive cost cutting, or is there a new business model through which a newspaper can tap new sources of revenue for its content?

Other cases feature companies that have prospered through innovative strategies—Capital One Financial Corporation—is a particularly interesting example of entrepreneurship and strategic innovation in the seemingly commoditized business of credit cards. The issues in such cases concern the sustainability and the extendibility of the strategy.

Cases New York Times: The Search for a New Business Model. (R. M. Grant, Contemporary Strategy Analysis: Text and Cases, 9th edn., Wiley, 2016) Like most newspapers, the New York Times had suffered decades of declining circulation and revenues as readers and advertisers shifted to online media. The New York Times Company responded by shedding

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assets and employees and seeking ways to build and monetize its online readership, while sustaining its reputation for brilliant journalism. During 2014–2015, The Times’ quest for a viable online model was reinvigorated by its incoming CEO, Mark Thompson, who called for a dramatic rethinking of The Times’ approach to the needs of readers and advertisers in a digital world. Can a 165-year-old newspaper abandon the habits of a print-based world and adapt to a new online era? And, most importantly, can it make money in doing so?

Capital One Financial Corporation (Harvard Business School Case No. 9-700-124, 2000).

This case was recommended for the purposes of analyzing resources and capabilities. Capital One can also be used as a case for examining the potential for strategic innovation in a mature industry. Under the guidance of two young consultants who perceive the opportunity for using information technology to refine and streamline credit card issuing, Signet Bank (later renamed Capital One) breaks away from the credit card business’s “industry recipe” and adopts a radically new information-based strategy. The case raises interesting issues of why banks were so reluctant to adopt the approach advocated by the consultants, and whether Capital One’s competitive advantage is sustainable.

Laura Ashley Holdings plc: The Battle for Survival (Available from the Instructor Companion Website to .)

The case addresses the potential for turnaround at the iconic but failing British clothing and housewares company, Laura Ashley. Newly installed CEO is the seventh CEO of Laura Ashley Holdings since the death of its founder in 1985. During this period, the company’s performance had been mostly downhill. Cheong is faced with declining sales, mounting operating losses, and an unwillingness of banks to offer further loans. Cheong must determine the sources of Laura Ashley’s problems, stem the losses, and reformulate the company’s strategy for the future. The case tests students’ ability to diagnose the sources of a company’s performance problems and use that diagnosis as the basis for a revising a turnaround plan Crown Cork and Seal Co. Inc. (Harvard Business School Case No. 9-388-096).

In addition to its use in the analysis of industry and competition, CC&S is also an excellent case for exploring the creation and sustaining of competitive advantage in a mature industry. CC&S’s superior profitability and growth may be attributed to its judicious segment selection, its resolute pursuit of cost efficiency, and its ability to provide its customers with superior service, plus its internationalization strategy through which it pursues the product life cycle in packaging products across different countries.

(See also: Crown Cork & Seal in 1989 (HBS Case No. 9-793-035), which considers the strategic issues facing new CEO William Avery in 1989 in the light of continuous change in the packaging industry.)

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Instructors’ Manual to Accompany Contemporary Strategy Analysis (9th edn. Wiley, 2016)

CHAPTER 11. VERTICAL INTEGRATION AND THE SCOPE OF THE FIRM Introduction Chapters 11-15 are concerned with corporate strategy. The number of sessions I devote to corporate strategy depends upon the length of the course and whether or not there is a subsequent elective course in corporate strategy.

I introduce corporate strategy by looking first at the boundaries of firms and their historical trends— concentration on the expanding size and scope of companies for most of the 19th and 20th centuries, followed by more recent downsizing, refocusing, and outsourcing. I then focus on vertical integration. I begin with vertical integration rather than multinational expansion, or diversification mainly because vertical integration is the most direct way of addressing the determinants of the boundaries of the firm— particularly the role of transaction costs. My preferred case for introducing vertical integration is my own case on American Apparel which covers similar issues (in relation to vertical integration) as the cases on Zara (and its parent, Inditex).

Either way, my main goals for this session are for students: •

To appreciate the central issue of corporate strategy – the determination of the scope of the firm.

•

To be capable of making vertical integration decisions. In relation to a specific activity, should the firm make or buy? In relation to the vertical scope of the firm as a whole, how broad a span of the industry value chain should the firm encompass?

Class Outline I introduce corporate strategy by considering the boundaries of the firm—covering the material in the first section of Chapter 11, “Transaction Costs and the Scope of the Firm.” Following the work of Alfred Chandler (The Visible Hand and Strategy and Structure), I note the expansion in the size and scope of firms since the middle of the 19th century and ask my students “Why?” The points that emerge concern technology (the telephone, the computer) and the developments in management (financial systems, organizational forms, management techniques).

I then address the contracting of the boundaries of larger firms since the mid-1970s and the trends towards outsourcing and re-focusing on core businesses, again asking my students “Why?" Explanations include increased uncertainty and turbulence in the business environment which have increased the costs of coordination within large, complex, hierarchical organizations. Also the development of digital technologies have made the same ICT capabilities available to small firms and individuals as to large organizations.

This discussion of the relative merits of organizing within large corporations as compared with small firms coordinated by markets provides an easy way into the basic principles of transaction cost analysis.

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I then turn to the analysis of vertical integration; I begin with the American Apparel case—or another firm where vertical integration has been a primary feature of the firm’s strategy (e.g. Zara, Bird’s Eye, Comcast).

If, as in textiles and clothing, the industry is vertically de-integrated (i.e. separate firms manufacture the fabric, undertake design and marketing, cut and sew the garments, and retail), I ask why this is so.

Typically the key factors are (a) relatively efficient competitive markets in which firms contract with one another (with little need for transaction-specific investments) and (b) differences in the resources and organizational capabilities required at each vertical stage.

So, why is that our case study firm (whether American Apparel or Zara or some other business) has been successful despite rejecting industry conventions? The key is to recognize the unique features of its strategy and understand that, despite foregoing the efficiency advantages associated with outsourcing, it has gained particular competitive advantage through a unique strategy that exploits advantages of close coordination between multiple vertical stages. Thus in the case of American Apparel and Zara it is extremely short cycle times between initial product design and delivery to retail stores which allows very fast response to emerging fashion preferences.

The issues arising from the case study discussion then allow a more systematic treatment of the advantages and disadvantages of vertical integration and the factors that determine their relative importance (as shown in Table 11.1 of Contemporary Strategy Analysis).

I finish up by pointing out that vertical integration and “arms-length” market contracts are just two extremes of a range of vertical relationships—a key feature of supplier relationships today is the ability to combine the coordination advantages of vertical integration with the flexibility and specialization advantages of outsourcing.

Cases American Apparel: Vertically Integrated in Downtown L.A. (R. M. Grant, Contemporary Strategy Analysis: Text and Cases, 9th edn., Wiley, 2016).

In 2015 American Apparel is in crisis: its founder has been fired as CEO and the company has sought Chapter 11 bankruptcy protection. A key issue for the new CEO is whether to maintain American Apparel’s vertical integration model or to follow the approach of almost all mass-market fashion clothing companies: outsource production to low-wage countries. American Apparel’s business model is based upon designing and manufacturing in downtown Los Angeles then selling through company-owned retail stores. The case outlines the logic of American Apparel’s strategy of vertical integration and considers the potential for turnaround.

Zara (Kasra Ferdows, Jose Machuca, and Michael Lewis, ECCH Case No. 603-002-1, 2002) Like American Apparel, Inditex (the parent company of Zara) has rejected the conventional wisdom of the fashion clothing trade. At its base in the northwest of Spain it designs and manufacturers fashion garments which it distributes direct to its own retail stores worldwide. While losing the cost benefits of outsourcing production to manufacturers in developing countries, its tightly-integrated system allows remarkable speed in responding to new fashion trends.

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Birds Eye and the UK Frozen Foods Industry (Available from the Instructor Companion Site to .).

Birds Eye’s competitive advantage was built on market dominance through its construction of a vertically integrated chain. The case raises important issues concerning the rationale for vertical integration over spot transactions or long-term contracts, then analyzes how industry evolution destroys the advantages of vertical integration. The case examines in some detail the evolution of industry structure, competition, and the competitive position of the industry leader over the industry’s life cycle.

Eni SpA: The Corporate Strategy of an International Energy Major (R. M. Grant, Contemporary Strategy Analysis: Text and Cases, 9th edn., Wiley, 2016).

The Eni case considers the corporate strategy of a vertically-integrated, multinational oil and gas major at a time when the strategy that has successfully guided it for two decades is threatened by a combination of problems—the most serious being a collapse in crude oil prices. Eni has undergone a transformation from an unprofitable, state-owned enterprise to a shareholder-focused, international energy company.

Yet, it is still very different from most other petroleum majors—in particular it has a large, vertically integrated natural gas business. Yet, this gas strategy is threatened by political uncertainties in several of its major production sources (Libya, Egypt, Russia) and the European Union’s policies for increasing competition in the European gas market. The case addresses issues of “Which businesses should Eni be in?” “How should resources be allocated between them?” and “How should the linkages between them be managed?”

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Instructors’ Manual to Accompany Contemporary Strategy Analysis (9h edn. Wiley, 2016)

CHAPTER 12. GLOBAL STRATEGIES AND THE MULTINATIONAL CORPORATION Introduction Given that internationalization and the design of global strategy have been such important management issues in recent years, most instructors will probably give prominence to this topic in their courses in strategic management. How many sessions are devoted to global strategy and the management of the MNC will depend, first, on whether students are a required to take a course in international business in their program (and the extent to which such a course covers strategic and managerial issues) and, second, whether there is a subsequent elective course in global strategy and the management of the MNC. The issues that I give most emphasis to are: •

Decisions over international location and modes of foreign market entry.

•

The design of global strategies—with particular emphasis on the factors which give rise to competitive advantage from operating across national borders.

•

The organization of the multinational corporation.

Class Outline Introducing the international dimension raises a wide range of strategic management issues, and no single case will include them all. Hence, instructors need to choose cases on the basis of the issues that they wish to give the greatest priorities to.

If there is sufficient time available, I like to use two cases: one that that deals with a company extending its activities abroad (for this purpose I have used are my own cases on Chipotle Mexican Grill, Haier, Outback Steakhouse, and Euro Disneyland cases) and one that addresses the challenge of reconciling the benefits of global integration with the need for adapting to individual national markets (for this purpose I use the Vodafone, P&G (Japan), or BRL Hardy cases).

In relation to international expansion, I address two questions: •

Under what circumstances can a company extend its competitive advantage from its home market to an overseas market? Issues concerning the transferability and replicability of the firm’s competitive advantage are critical here.

•

What mode of foreign market entry should a firm adopt? Again, issues of resources and capabilities and the need for local market knowledge, distribution, and political and business connections become critical here.

In relation to reconciling global strategy with national differentiation case, I address the following questions: •

What are the benefits of global integration in this industry and how significant are they? To what extent does a global strategy need to take account of national market differences (including differences in national culture)?

•

What are the implications of the strategy chosen for the organizational structure, management systems, and allocation of decision making within the multinational firm?

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Cases Chipotle Mexican Grill, Inc.: The International Challenge (R. M. Grant, Contemporary Strategy Analysis: Text and Cases, 9th edn., Wiley, 2016) The case addresses the question of whether Chipotle Mexican Grill can replicate its massive success within the US in overseas markets and, if so, how? Chipotle’s few international forays have met with limited success. To what extent is the Chipotle restaurant concept, its strategy, and its business system suited to overseas markets? Do overseas consumers have fundamentally different preferences from those in North America? Can Chipotle recreate in overseas markets the resources and capabilities that make it so successful in the US? If overseas opportunities are attractive to Chipotle, how should the company adapt its US strategy and organizational model to meet the circumstances of foreign markets, and what mode of entry should it adopt?

Haier Group: Internationalization Strategy (R. M. Grant, Contemporary Strategy Analysis: Text and Cases, 9th edn., Wiley, 2016) The rise of Haier from a near-bankrupt, state-owned refrigerator factory in Qingdao, China to become the world’s biggest domestic appliance company (in terms of units sold) is a remarkable tale of entrepreneurial leadership by CEO Zhang Ruimin. It has also involved a strategy that flouts most of the conventional principles of international business expansion. Is Haier’s international success down to its unconventional strategy or in spite of it? Given its present position and the capabilities it has developed in the design, manufacture, and marketing Outback Steakhouse: Going International (Available from the Instructor Companion Site to .).

The case provides a brief and straightforward introduction to the issues involved in overseas expansion.

Outback Steakhouse is a highly successful restaurant chain whose strategy has been carefully adjusted to the customers it serves and its competitive positioning within the US restaurant market. Overseas markets offer a huge opportunity for Outback, but it must consider how customer preferences and market conditions are different from the US, whether it can replicate its resources and capabilities overseas, and what adaptations need to be made to its US strategy.

Euro Disney: From Dream to Nightmare (Available from the Instructor Companion Site to .).

The case explores the decision to create a Disney theme park in Europe, and examines the subsequent fortunes of the venture. In examining the initial entry decision, the case raises issues about the attractiveness of the European theme park market, Disney’s potential to establish a competitive advantage, and the complex mode of entry that Disney devised (a joint-venture, licensing contract, and management contract). The subsequent difficulties of Euro Disney underline the complex cultural issues that are especially important for international service companies.

Vodafone in 2012: Rethinking International Strategy (Available from the Instructor Companion Site to .).

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In early summer 2012, CEO Vittorio Colao is addressing Vodafone’s continued need to improve its financial performance. Despite considerable progress since becoming CEO, Vodafone’s leading position in the world’s market for mobile communications has not translated into outstanding performance. A critical issue for Colao is the extent to which Vodafone can benefit from its extensive international scope.

Vodafone offers service in 25 countries and has partner agreements in a further 39 countries yet the potential for reducing costs or providing superior service through cross-border integration appear limited in wireless telecommunication. The case requires an analysis of the potential benefits from international scope in wireless telecommunications and the development of strategy recommendations for Vodafone— especially in relation to its presence in the US. BRL Hardy: Globalizing an Australian Wine Company (Harvard Business School Case No. 300018PDF-ENG, 2003).

The wine industry is particularly interesting for the study of international strategy. International trade in wine is substantial (not least because wine production is concentrated into a dozen countries in the world).

At the same time, wine drinking customers and preferences are highly differentiated. New World wine producers – the Australians in particular – have pioneered global strategies (including global brands) in wine. However, the design and implementation of BRL Hardy’s international strategies face complex challenges because of the conflicting pressures for globalization and local adaptation.

P&G Japan: The SKII Globalization Project (Harvard Business School Case No. 9-303-003, 2004).

This is a fascinating (and complex) study of the challenge facing P&G in its efforts to stimulate global innovation and new product development through supporting initiatives at the local level. P&G Japan has developed an innovative system of face cleaning and moisturizing. The challenge is to assess its potential in other markets and manage its international rollout. This calls for an analysis of the conflicting forces of globalization and localization within the context of product development in the cosmetics business.

Four Seasons Goes to Paris (Harvard Business School Case No. 9-803-069, 2003).

Four Seasons’ acquisition of the management contract for the venerable George V hotel in Paris offers an intriguing study of international management in the luxury hotel industry. The case focuses particularly on the challenges of cross-cultural management. The corporate values and management systems of the Four Seasons group must be reconciled with the national culture of France and the traditions and norms of the George V. Meg Whitman and E-Bay Germany (Harvard Business School Case No. 9-402-006, 2001).

E-Bay is a business (online person-to-person auctions) where there are substantial scale economies supported by strong network externalities. Hence, international expansion is an attractive strategy.

However, as the experience in Germany shows, exploiting global scale and network economies encounters significant difficulties arising from the need to adapt to national conditions and from the challenges of integrating overseas acquisitions. The case provides a good introduction to the competitive advantages offered by global strategies and the need reconcile globalization with national adaptation.

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Instructors’ Manual to Accompany Contemporary Strategy Analysis (9th edn. Wiley, 2016)

CHAPTER 13. DIVERSIFICATION STRATEGY Introduction Diversification lies at the heart of corporate strategy. It also gives rise to highly contentious strategy decisions—diversification has been the source of more destruction of shareholder value than almost any other type of strategy. Its study, therefore, is important!

Diversification decisions require an appraisal of a firm’s resources and capabilities of the firm and assessment of their potential to establish competitive advantage through deploying them across industry boundaries. This requires understanding and applying the following concepts: •

Economies of scope in resources and capabilities.

•

Transaction costs in deploying resources and capabilities across different product markets.

•

Costs of entry into a different product market.

•

The nature and types of relatedness between different businesses.

It also requires recognition of situations where diversification does not create value – for example, where diversification is directed towards reducing risk and where economies of scale can be exploited efficiently through market transactions.

During the past two decades, the predominant direction of firm development has been specialization rather than diversification. Hence, an important strategic question for many companies is not so much where to diversify, but more which existing businesses should be divested?

Class Outline To get quickly to the core issue of diversification—whether owning different businesses creates value (“synergy”)—it is useful to kick off with a case that involves a diversified company or one that is considering diversification. I particularly like companies whose past diversification decisions seem to lack obvious business logic. For this purpose, my Virgin Group case works well – despite the fact that it is dealing with a network of companies rather than diversification by a single corporation.

Discussion of Virgin directs attention to the resources and capabilities that Virgin possesses (the brand, Branson himself, the Group’s capabilities in launching new business ventures, etc.). This raises the issue of domain –over what types and what range of businesses can Virgin add value. This then has implications for the type of organizational structure and management systems Virgin needs to possess to best realize that value.

This challenge of discerning the strategic logic (or lack of it) that underlies diversification decisions is also a feature of my case on Google (see below). Again, here is a company that has left its core business—the Google search engine and the advertising revenues it generates—to enter a variety of businesses. These are not just online information services but a variety of software applications, groupware, telecommunication services, operating systems, mobile devices, home security and automation, and a variety of experimental projects.

The principal issues that arise from these cases are:

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•

The conditions under which diversification creates value. Diversification directed towards growth and risk spreading is more likely to destroy rather than create value. This takes us to Porter’s “essential tests.” Here my key point is that “cost of entry” tends to offset “industry attractiveness” – hence the key test is the “better off” test. This focuses the discussion on the analysis of competitive advantage.

•

The conditions under which diversification can create competitive advantage are where economies of scope exist in resources and capabilities and where these economies of scope cannot be efficiently exploited by market transactions – e.g. licensing brands and technologies – due to transaction costs.

•

Different types of resources and capabilities give rise to very different patterns of diversification: technical capabilities are likely to support narrow-spectrum diversification (Microsoft diversifying from operating systems to applications software during the early 1980s); general management capabilities support much wider diversification (GE spread from jet engines and plastics to financial services and TV broadcasting). This raises some interesting issues concerning what we mean by industries being “related”.

•

The conventional treatment of relatedness (and sources of synergy) between industries emphasizes the benefits form sharing resources and transferring capabilities. However, when we look at diversification among industries based upon digital technologies, additional factors come into play.

These industries tend to form “ecosystems” of complementary and technically-dependent industry sectors. For example, mobile information and communication involves mobile telecom providers, handset makers, application providers, component suppliers and other groups. In these circumstances diversification can exploit complementarities, build bargaining power, and deter rivals (what Jacobides refers to a creating “architectural advantage”).

Cases The Virgin Group in 2015 (R. M. Grant, Contemporary Strategy Analysis: Text and Cases, 9th edn., Wiley, 2016).

At the beginning of 2007, Branson’s Virgin Group of companies is continuing to diversify into new fields and at the same time divesting – selling businesses to other owners, or floating its businesses through initial public offerings. The task for the students is to offer a strategic appraisal of this loose-knit corporate empire; to determine which logic, if any, links together the motley collection of business ventures; to determine whether any of the businesses should be divested; to establish clear criteria to guide future new diversification; and to recommend changes in the financial and management structure of the Virgin companies.

Google Is Now Alphabet—But What’s the Corporate Strategy? (R. M. Grant, Contemporary Strategy Analysis: Text and Cases, 9th edn., Wiley, 2016.).

Google’s transformation into a holding company called Alphabet in August 2015 did little to clarify its corporate strategy. Although its highly successful web search engine still generates most of its revenues, Google has expanded into a bewildering variety of technology-based business—many of them with little linkage to online information services, computer software, and advertising management. The challenge of the case is to identify the strategic logic, if any, linking Alphabet’s array of different businesses and to consider, in the light of the challenges Alphabet currently faces, whether and how the company should define its corporate strategy.

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Amazon Web Services (by R. S. Huckman, G. P. Pisano, L. Kind; Harvard Business School Case No. 609048-PDF-ENG, 2008) Amazon Web Services (AWS), a division of Amazon.com, Inc., is a leading provider of web-based storage and computing services to web developers. As a result, Amazon faces increased competition from established technology giants, such as Google, Microsoft, and IBM. The case requires students to consider whether entry into web services by Amazon—an online retailer of books, music and other products—is a prudent move by the company. The case requires students to identify and assess overlaps exist between Amazon's core retailing business and AWS. Students are also provided with an opportunity to discuss operational diversification and its limits within the AWS context

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Instructors’ Manual to Accompany Contemporary Strategy Analysis (9th edn. Wiley, 2016)

CHAPTER 14. IMPLEMENTING CORPORATE STRATEGY: MANAGING THE MULTIBUSINESS FIRM Introduction In our analysis of all three dimensions of corporate scope—vertical, geographical, and product—the key strategic issues are exploiting economies from sharing resources and capabilities across different business units and avoiding transaction costs. However, this focus upon the benefits of extending corporate scope ignores the costs of doing so. These costs of administering multiple businesses depend upon how the firm is organized and managed. Hence, the design of structure and systems and the type of corporate leadership are key factors that determine the success of corporate strategy.

The emphasis of Chapter 14 is the role of the corporate headquarters in multibusiness company and, in particular, how the corporate headquarters can create value for the individual businesses. This necessitates examining the role of the corporate headquarters and the relationships it has with the individual businesses.

Class Outline Chapter 17 is organized around the different means through which the corporate headquarters of the large multibusiness corporation creates value for its constituent businesses. Here I follow the work of Michael Goold, Andrew Campbell, and other members of the Ashridge Strategic Management Center and focus upon three types of mechanisms: • Managing the business portfolio: the processes and tools through which business are added (i.e. acquired or created), divested, and through which resources are allocated.

• Managing linkages: how the corporate HQ facilitates the exploitation of synergies across the different businesses.

• Managing individual businesses: the processes of performance management, strategic planning, and financial control through which the corporate HQ guides the strategies and performance of the individual businesses.

For investigating these issues, I find General Electric a highly illuminating case study. General Electric has been a source of a large proportion of the tools of corporate management developed over the past 100 years. Its two most recent CEOs, Jack Welch and his successor Jeff Immelt, one of the biggest and most complex firms in the world has shown remarkable agility and flexibility. By studying the leadership of either of these CEOs, students can learn a great deal about the challenges of developing and implementing corporate strategy.

The issues concerning the corporate management of large, multibusiness, multinational companies can be studied using many other cases too. Three companies which I have found offer a basis for interesting and illuminating class discussions are: • Danone, the French-based dairy and infant foods company with a highly decentralized style of management.

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• Tata Group, India’s biggest business group, a loose-knit holding company involving over 100 separate corporate entities.

• Samsung Electronics a diverse yet highly integrated electrical and electronics giant.

The chapter closes with a discussion of corporate governance. Although I recognize this as an important topic, I typically do not address in in my core strategy courses—unless it arises within the context of a case study discussion (as it does in the “Bank of America’s Acquisition of Merrill Lynch”—see the Instructors’ Manual: Chapter 15)

Cases Jeff Immelt and the New General Electric (R. M. Grant, Contemporary Strategy Analysis: Text and Cases, 9th edn., Wiley, 2016) General Electric has long defied the prevailing wisdom that widely-diversified corporations are a source of value subtraction rather than value addition. The case describes Jeff Immelt’s 15 years as CEO of GE—one of the most turbulent periods in the company’s history. The case looks beyond the crises that have punctuated his tenure at GE to consider the corporate strategy and the organization changes that he has put in place over this period. To what extent is Immelt’s emphasis on business development, innovation, and higher levels of organizational integration consistent with the realities of the 21st century global business environment and with GE’s capabilities? Does GE possess the management systems and leadership capabilities needed to make Immelt’s strategy work, or does the company need to look to more radical strategic solutions—including breakup?

The case addresses issues which are relevant to corporate strategy, organizational design, and leadership style of all large multibusiness, multinational corporations in adapting to the challenging global business environment of the 2nd decade of the 2ist century.

Danone: Strategy Implementation in an International Food and Beverage Company (Available from the Instructor Companion Site to .)

By 2012, Danone had grown to become one of the world’s largest multinational food companies with four major business areas—fresh dairy products, water, baby nutrition, and medical nutrition—and a growing emphasis on emerging markets. Danone’s growth had been achieved with a strategy and management system that was very different from its leading rivals’—Nestlé and Kraft Foods—or from other consumer product multinationals. Its strategy was entrepreneurial and decentralized: the heads of its country business units possessed substantial decision-making powers and local brands accounted for a high proportion of its total sales. Danone’s business principles played a key role in its overall coordination, cohesiveness, and identity. The case seeks to comprehend the contribution of Danone’s values and principles, and especially its commitments to social and environmental responsibility, to its competitive advantage and to the effectiveness of its strategy implementation, and to explore how Danone might improve its financial performance and shareholder returns in the future.

Jack Welch and the General Electric Management System (Available from the Instructor Companion Site to .)

Under Welch’s leadership from 1981–2001, GE achieved remarkable growth and shareholder return – a rare example of a highly successful conglomerate. The case describes Welch’s initiatives in terms of reconfiguring

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GE’s portfolio of businesses, changing organizational structure and management systems, and transforming the culture of the corporation. The case considers how, in an era or downsizing, divestment, and refocusing when most large diversified companies have broken up, GE succeeded in becoming the world’s most valuable company while maintaining a uniquely broad business scope.

Tata: Leadership with Trust (Richard Ivey School of Business, 2010. Available from Harvard Business School Publishing, case ref. 910M25-PDF-ENG.) The case illustrates the opportunities, challenges, and trade-offs involved in the design, evolution, and institutionalization of corporate social responsibility (CSR) and corporate sustainability (CS) within the Tata Group - an India-based indigenous multinational enterprise (MNE) with a unique 140-year-old commitment to the community as the key stakeholder of business. Despite the 2008-2009 global recession, the Tata Group topped the economic value creation charts. In 2008-2009, the Group had grossed US$70.8 billion in revenues; 64.7% of the Group's revenues were now coming from outside India. Its 96 independent companies spanned seven sectors: information systems and communications, engineering, materials, services, energy, consumer products, and chemicals. Economic turbulence had put a break on social and environmental investing for many other companies but renewed Tata Group's commitment: the Group had recently revised its charitable giving, adopted a group-wide climate change policy, and separated its mandatory and voluntary initiatives. The case deals with the intricate connections between the Group's profitability and competitiveness on the one hand and its long-standing tradition of social responsibility on the other. It explores value creation, leadership, ethics, and sustainable development on the backdrop of rapid internationalizations and shifting stakeholders' expectations for corporate social responsibility.

Ong Yong Yun, Samsung Electronics' CEO: Competing Through Catastrophe Culture (IBS Case Development Center, 2005. Available through European Case Clearing House, ref. 305-487-1) Jong Yong Yun, Samsung Electronics' Chief Executive Officer since December 1996, has restructured Samsung by defying traditional Korean corporate culture of hierarchy and lifetime employment. Yun instilled a sense of perpetual crisis among his employees and encouraged them to come up with innovative products that according to him, were necessary for Samsung's survival. His emphasis was on quality products with unique designs and effective brand promotions. In 2004, Samsung surpassed Sony to earn profits of US$9.4 billion over revenue of US$72 billion. Still, Yun felt that to compete in the global market, Samsung's products needed to be transformed into brands like that of Apple's iPod or Sony's Walkman. This case study, while explaining the growth of Samsung Electronics, offers scope to discuss how a change in leadership and organizational culture helps to enhance a company's competitiveness.

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Instructors’ Manual to Accompany Contemporary Strategy Analysis (9th edn. Wiley, 2016)

CHAPTER 15. EXTERNAL GROWTH STRATEGIES: MERGERS, ACQUISITIONS, AND ALLIANCES Introduction Like its preceding chapter (Chapter 14, “Implementing Corporate Strategy: Managing The Multibusiness Firm”), Chapter 15 is concerned with strategy implementation rather than strategy formulation. Mergers, acquisitions and alliances are mechanisms by which strategy implemented rather than strategies themselves. As a consequence, the key strategic issues that motivate mergers, acquisitions and alliances have been discussed in other chapters of the book: Chapter 7 on achieving economies of scale, Chapter 8 on acquiring the capabilities needed to manage strategic change, Chapter 9 on exploiting innovation; Chapter 10 on consolidating an industry to manage decline, Chapter 12 on foreign market entry, Chapter 13 on diversification—and so on. Hence, this chapter adds little in terms of new strategic analysis. Its primary focus is to address some of the management issues that arise in managing these different types of growth and in addressing the factors which determine the optimal mode of growth for a firm.

The case for having a separate chapter on this topic is that external growth strategies—and especially mergers and acquisitions—represent an area of strategic decisions that is fraught with danger. While every firm needs to augment its range of business activities in response to change and obsolescence, attempts to do so through mergers and acquisitions have yielded, on the whole, disappointing results.

Empirical studies shown that mergers and acquisitions create value overall, but for acquiring firms, acquisitions tend to destroy shareholder value. By addressing some of the issues involves both in the choice of acquisition targets and alliance partners and the management issues involved in post-acquisition and alliance management we lay the groundwork for better informed external growth strategies.

Class Outline Because the theories relating to mergers, acquisitions and alliances is diverse and the empirical evidence inconsistent and idiosyncratic, my treatment of this topic relies heavily on case analysis. My own case on Bank of America’s acquisition of Merrill Lynch offers insight into different aspects of M&A decision making including: • The tendency for M&A initiatives to be driven by management hubris.

• The “lemons problem” arising from asymmetric information (the buyer of a company has access to less information than the seller) • Analyzing the different dimensions of a merger: horizontal integration, diversification, international expansion • The problems of most-merger integration arising from differences in culture, systems and traditions.

The problems that have accompanied so many mergers and acquisitions have increased the relative attractiveness of alliances as a means of combining the resources and capabilities of different firms. I emphasize how alliances have proving especially attractive in certain contexts—especially in international expansion and in the exploitation of innovations. As industries become increasingly linked, so networks of alliances become increasingly important in managing affirms “ecosystem.”

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Cases Bank of America’s Acquisition of Merrill Lynch (R. M. Grant, Contemporary Strategy Analysis: Text and Cases, 9th edn., Wiley, 2016) In December 2008, Bank of America’s board has its final chance to withdraw from its acquisition of Merrill Lynch. The acquisition offered Bank of America the chance to build America’s biggest wealthmanagement company, and establish itself as a leading global corporate and investment bank. However, new evidence of the extent of Merrill Lynch’s losses confirms that Bank of America is overpaying for its acquisition. The case requires an assessment of the likely synergies from the merger, an appraisal of the “universal banking” model, and consideration of the challenges of integrating the two companies.

The Walt Disney Company and Pixar, Inc.: To Acquire or Not to Acquire? (by Juan Alcacer, David J. Collis, Mary Furey, HBS Premier Case Collection No. 709462-PDF-ENG, 2009) Soon after Robert Iger took over as CEO of the Walt Disney Company in late 2005, he turned his attention toward Pixar, the animation studio with which Disney had worked since 1991 and was responsible for producing hits such as Toy Story and Finding Nemo. Disney's own animated film business had been in decline since Jeffrey Katzenberg left to establish rival studio Dreamworks and the business relied on revenue from its partnership with Pixar to maintain performance. With the Co- Production Agreement between the two studios coming to a close in 2006, Pixar was looking to negotiate better terms with another distribution partner. Could Disney risk losing them?

The case reinforces the lesson that expanding scope creates value when it passes the "better off" and "ownership" tests and to apply those tests to the vertical integration decision. Also exposes the limitations of contracts and the difficulty in valuing relational assets.

A Big (Double) Deal: Anadarko's Acquisition of Kerr-McGee and Western Gas Resources (by Clayton M. Christensen, Curtis B. Rising, Harvard Business School Case No. 610020-PDF-ENG, 2009) On June 23, 2006, Anadarko Petroleum Corporation announced that it was simultaneously acquiring two public companies, Kerr-McGee and Western Gas Resources, in all-cash deals. The total price was about $24 billion, a figure close to Anadarko's market cap at the time. The parallel deal flows and negotiations had been completed in a matter of months. The specific dynamics of this "deal" were extraordinary.

Anadarko, Kerr-McGee and Western were all companies with rich and dynamic histories. The combination of resources, processes and people involved in these deals was complex and powerful. The announcement presented a real investor relations challenge for Anadarko. How would Anadarko explain the deals? How would the companies combine to build the most value? What would be divested to pay back the cash? What was the strategy behind these transformative deals? How was this pulled off so quickly and effectively?

Renault-Nissan: The Paradoxical Alliance (by P. Morosini, ESMT, case no. 305-0047-1, 2008, available from the Case Center) The alliance between French car company Renault and the Japanese car company Nissan has been one of the most successful strategic alliances in the history of the automobile industry. Allowing Renault to join the ranks of the leading international automakers, and saving Nissan from financial crisis. From this 'marriage of desperation for both parties' the two companies achieved a remarkable turnaround under the leadership of Carlos Ghosn who became CEO of both companies. The case outlines Ghosn’s Nissan © 2016 Robert M. Grant .

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Revival Plan. This was a company-wide business initiative with clear targets, which aimed to radically strengthen, the collaboration of the two companies through cross-company teams, and development of trust, loyalty and reciprocity between the companies.

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Instructors’ Manual to Accompany Contemporary Strategy Analysis (9th edn. Wiley, 2016)

CHAPTER 16. CURRENT TRENDS IN STRATEGIC MANAGEMENT Introduction I devote the final session of the course to considering emerging trends in strategic management. Inevitably, this means addressing whatever is happening at the time—but hopefully the content of this chapter 16 written during early summer 2015 will still be relevant to the circumstances at the time of your final class!

My primary goal for this session is to encourage students to recognize two factors. First, that the business environment is in constant change and new circumstances will require new strategies and new approaches to implementing those strategies. Second, that strategic management is a young subject that is still in its early stages of development. Finding solutions to familiar and new business problems will require openness to new ideas, new concepts, and new approaches to strategy formulation and implementation The dominate features of the business environment of 2015 was continued slow growth of the world economy—which has tended to exacerbate competitive pressures in most markets, a rise in antibusiness sentiment reflected in skepticism over the merits of shareholder-based capitalism and increased pressures on companies to adopt CSR and environmental sustainability, political turbulence, the transformative impact of digital technologies on industries and management systems, , and increasing competition from companies based in emerging markets.

In my final chapter I address the following themes:

•

The outlook for the future. I view the succession of crises (economic, political and natural) of the 21st century as inevitable consequences of a highly interconnected world—with the implication that turbulence and instability will continue to be defining features of business environment.

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I affirm the basic case for shareholder capitalism—despite the crimes and lunacy that been associated with “shareholder value maximization”—I argue that the maximization of the enterprise value—so long as it is focuses on the lifetime of the firm and takes account of need for the firm to coexist with its different stakeholder groups and the natural environment and retain legitimacy within society—provides the only viable guideline for ensuring the effective and efficient strategic management of a business enterprise.

•

To reaffirm the usefulness of the basic tools of strategic analysis—notably industry analysis and the analysis of resources and capabilities—while acknowledging that new tools and concepts of strategy analysis are available to enhance managers’ ability to navigate through difficult times. In particular, I point to the need to adopt the tools of real option analysis and complexity theory.

More generally. I point to the potential for innovatory approaches to strategy formulation and organizational design structure including new approaches to the management of coordination and cooperation, and the potential for alliances and novel forms of interfirm collaboration.

Class Outline I use one of two approaches to the final class:

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[1] A case study that exposes students to an innovatory approach to management—preferable one that might provide a model of other firms. Companies I find suitable for this purpose include W.L. Gore and Associates, Zappos, —an example of a non-hierarchical firm structure where employees have an unusual freedom to organize themselves and pursue innovation.

•

AES—under its founders Roger Sant and Dennis Bakke, AES developed a highly unusual management system based upon trust and devotion of decision making. Although AES’s radical management style and system did not survive the post-Enron shock which shook the independent power sector in the US, AES’s system still offers a clear demonstration that alternatives to “command and control” management systems can work.

[2] A general class discussion where I pose the following questions for students: (a) What will be the key developments in the global environment of business during the next five years? (b) On the basis of these, what will be the greatest challenges that firms from the advanced industrialized countries will face? (c) What strategies will firms need to adopt in order to prosper in the environment you foresee? (d) What are the implications for these developments for firms’ organizational structures, management systems, and leadership styles?

If students experience difficulty in projecting into the future, I ask: “Are there companies today whose strategies, structures and approaches to management you think will provide leading examples for other companies in the future?” This typically gives rise to suggestions concerning companies such as Google, Cisco Systems, Virgin, Haier, and Samsung. The challenge then is to drill into these examples and identify what it is about these companies that is innovative or exemplary.

Cases W.L. Gore & Associates: Who’s In Charge Here? (R. M. Grant, Contemporary Strategy Analysis: Text and Cases, Wiley, 8th edn., 2013. Also available from Wiley via .) W.L. Gore, the manufacturer of GoreTex, has a unique organization structure and management style build around its “lattice” principle. The result is a remarkable lack of hierarchy and exceptional decentralization of decision making to selfmanaging teams. The case offers the opportunity to consider the advantages and disadvantages of Gore’s management structure, and the potential to apply it to other companies.

Zappos: Happiness in a Box (J. Aaker and S. Leslie, Stanford Business School case no. M333, 2010.

Available free from www.thecasecentre.org/stanfordfreecases) Under the leadership of Tony Hsieh, on-line footwear company, Zappos has developed an enterprise that not only satisfying customers' needs faster and more simply than ever but established a novel approach to management with unprecedented opportunities for employee fulfillment.

AES Corporation: Rewriting the Rules of Management. (Available from Instructor Companion Site to .).

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Despite its unglamorous industry (electricity generation), AES is a remarkable company. Founded by two civil servants, the company’s established its primary goals as social responsibility and fun for employees: what the Wall Street Journal described as “empowerment gone mad.” Under Sant and Bakke specialist staff were almost non-existent – finance, human resource management, purchasing, and health and safety were devolved to ad hoc task forces. The basic guideline for managers was not to make decisions, but to delegate. However, AES was caught up in the ripples that followed the collapse of Enron crisis. Its founders were forced out and with them their radical management principles. The case offers students the opportunity to discuss whether radical new approaches to management are possible or desirable, or whether tried and tested management principles will prevail, either because they are inherently superior or because of the inherent conservatism of financial markets.

Oticon [A] (by J. Kao, Harvard Business School Case No. 9-395-144, 2001).

Oticon, a Danish manufacturer of hearing aids, was transformed from a traditional, hierarchy and rulebased organization into a creativity-driven, highly flexible organization, with almost no hierarchy and little formal structure. The company has relied on team-based, informal collaboration supported by IT to provide the basis for coordination and integration.

St. Luke’s Advertising Agency (Diane L. Coutu, “Creating the Most Frightening Company on Earth: An Interview with Andy Law of St. Luke’s,” Harvard Business Review, September 2000).

The article outlines the development of the innovative, employee-owned, London advertising agency and its unusual approach to recruitment, incentives, organization, and the management of creativity. Chairman and cofounder Andy Law outlines the ideas and philosophy behind St. Luke’s unique approach. “We’re fundamentally convinced that there is a connection between co-ownership, creativity, collaboration, and competitive advantage. … The firm requires people to peel away all the levels of their personalities ...

Self knowledge is the DNA of a creative company in the creative age.” The article provides a basis for discussing the viability of alternatives to shareholder-owned, profit-maximizing corporations in an era where competitive advantage is increasing knowledge based.

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