An Introduction to the week: Elements of Strategy, Lessons Learned from other Industries, Macro Trends Dr. William Puts

1. An Introduction to the week: Elements of Strategy, Lessons Learned from other Industries, Macro Trends Dr. William Putsis Professor of Economics, Marketing and Business Strategy University of North Carolina at Chapel Hill President and Founder Chestnut Hill Associates CADEO Economics

2. Separating Fact from Fiction: When written in Chinese, the word "crisis" is composed of two characters — one represents danger and one represents opportunity. John F. Kennedy to the Convocation of the United Negro College Fund in Indianapolis on April 12, 1959 As many know, the Chinese expression for "crisis" consists of two characters side by side. The first symbol means "danger." The second symbol means "opportunity." Al Gore testifying on Capitol Hill before the House of Representatives Energy & Commerce Committee on March 21, 2007

3. Strategic lessons learned • – Marketing Blunders and “Rizzutoisms” • – A Challenge to Think Differently

4. How do you respond as a company to evolving markets and/or new technology?

5. What would you do if you were: Universal Music MP3.com Consumers Apple Sony Airbus facing a 787

6. Recognizing, shaping, influencing and creating market shifts …

7. What happens if we don’t – market forces are at work Time Warner TDS Division

8. Time Inc. Publishing Magazine Group: • 30 + magazines. • In the US, accounts for 21% of total consumer magazine ad revenue. • Ranks first in ad pages and ad revenues.

9. Challenge at Checkout – Self Scan

11. 1995 Comments Industry Structure Cover price retained (excludes RDA) Time Inc. # 1 Publisher Publisher Time Distribution Services (‘TDS’) services Time Inc., Meredith and Condé NastWarner Publisher Services (‘WPS’) services third-party clients, e.g. Petersen, Ziff-Davis Distributor • Five geographically concentrated players have 30% of a fragmented market: • Anderson • News Group • Charles Levy • Hudson • Unimag Wholesaler Wal-Mart, Safeway, Kroger and other major chains have 52% market share Retailer TV GUIDE is the leading newsstand publication in 1995 56% 4% 20% 20%

12. Comments Industry Structure Cover price retained (excludes RDA) Time Inc. # 1 Publisher Publisher TDS services Time Inc., Meredithand Martha Stewart WPS services third-party clients,e.g. Reader’s Digest Distributor Four major players represent90% of the market: Anderson News Group Levy, Hudson Wholesaler Wal-mart, Safeway, Kroger,and other major retailers are taking increasing market share(over 60%) and squeezing margin Retailer 20021995 53% 56% 4% 4% 14% 20% Upfront advance of RDA (10% of cover price) 29% 20%

13. Market Evolution and Shifts If you ignore changes in the market, you can easily … Become one of the magazine distributors left in the dust Digital Equipment Corporation A 5 ¼ in floppy drive manufacturer

14. Are there any lessons to take away from all of this? Understanding your customer important? Listening to your customer important?

15. “In today’s markets – in the environment in which you all operate – attempting to understand your customers gives you little or no sustainable competitive advantage.” … W. Putsis

16. Understanding the Business Environment Where do we go from here …

17. “Bubbles” are not new: 1634-38: Tulips Some Dutch families mortgaged life savings for these bulbs, some could cost as much as a home. 1860-73: Railroads After the Civil War, railroad stocks would make up as much as 40% of the total market capitalization of the NYSE. A financial panic in 1873 led to dozens of lines going bankrupt. 1890s: Bicycles At one point more than 300 firms raced to corner the bike market. Then came the car, and by 1905 only 12 U.S. manufacturers remained. 1920s: Radios The biggest example: Radio Corp. of America. RCA's shares soared from $1 to $573 between 1921 and 1929. The stock then fell more than 95%. Source: cnn.com

18. “Bubbles” are not new, continued: 1985-90: Japanese asset bubble The land of the Rising Sun suffered twin bubbles – real estate and equities. Between 1985 and 1989, Japanese stocks quadrupled in value. They crashed in 1990, and prices haven't fully recovered. 1997-2000: Internet stocks Huge growth in promising but in many cases profitless companies with ".com" in their names. After the party came crashing to an end in 2000, tech stocks lost four-fifths of their value. 2003-07: Residential Real estate A conservative investment (the home) became the object of rampant speculation. The collapse of the housing bubble took the stock market down with it.

19. What do we learn from this? • The inevitability of bubbles bursting is predictable; the timing is not • Assets involved in bubble are real, sustainable and important • Asset prices generally come back, but more often then not over decades • The tsunami of events that they take in their wake is where the action is • Leading out of the bubble in areas other than that of the speculation, investment opportunities can be huge • Those that survive (thrive) out of a downturn flourish • Share, costs, innovation and actions during the downturn are keys to successful growth

20. What about today?

21. Beware … • During the recession of 2001 – 2002, the US economy served as world’s growth engine; in 2009, Chinese banks doled out over $1 trillion in loans on top of a $600 billion government stimulus (US economy still 3x China) • China has $2.13 trillion trade surplus with the West; Chinese economic group 8.7% in 2009, forecasted to be 9.8% in 2010 according to Citigroup • We are not alone – French exports rose 18.2% last quarter (NY Times) • Industrial production jumped 28% in Korea, 26% in Taiwan last quarter

22. Recent research (Dekimpe, et al. 2009): • One of the biggest “Rizzutoisms” is what companies often do during a downturn • Advertising • Pricing • New Product Introductions/Innovation • Cost reduction/staffing decision timing … it’s almost as bad coming out of a recession

23. The Reality: It's too late to close the stable door after the horse has bolted French Proverb

24. What does recent research tell us? • Over 75% of those that shift brands during a downturn do not return during and after a recovery (within out a 5-year time horizon; Dekimpe et al. 2009). Why?

25. What does recent research tell us? • Strategies should be robust to future business climate, not depend on predicting it • Invest into and during downturn through promotion and advertising, lower price where needed using “reference price theory” • Out of downturn: • Focus on cost, supply chain and lean • Build brand, focus on differentiation • The role of new introductions

26. What does recent research tell us? • Social media is here to stay • the importance of points of touch • choice of type of touch matched to objective http://www.youtube.com/watch?v=sIFYPQjYhv8&feature=related • New business opportunities abound – but be careful! http://www.youtube.com/user/xplanevisualthinking http://www.youtube.com/watch?v=6ILQrUrEWe8

27. Normally: • What is the source of your sustainable competitive advantage that provides a clear positioning advantage over rivals across key dimensions of importance to high priority current and potential customers • Now: • How can we more efficiently, more nimbly, more quickly move to a position of sustainable competitive advantage? Is it through lean, acquisition, partnership?

28. Leadership Reflection

29. Exercise – think of companies who you think of as good at marketing. Some examples may include Starbucks, Google, Apple, Nike, Cisco, etc. At your table teams, please discuss the following: • What companies come to mind when you think about good marketing companies? Why do they come to mind - what sets them apart? What is it about companies that are truly innovative in their respective markets (e.g., Google, Apple) – why are they so successful?

30. "Chance only favors the prepared mind"                                                  ...  Louis Pasteur "Strategy however beautiful should occasionally be looked at for results"                                 ...  Winston Churchill "This strategy represents our policy for all time, until it's changed"                                                        ...  Marlin Fitzwater "Strategy without tactics is the slowest route to victory, tactics without strategy is the noise before defeat"      ... Sun Tzu "We don't simply want to be one step ahead of the competition, we want to be so far ahead of them that they can't find us" "What better way to motivate than to teach your people a strategic process and to instill in them a sense of strategic thinking that they can use to guide and influence”                                                                                                               ... William Putsis Chestnut Hill Associates

31. An Exercise: Write down three “take-aways” or three “lessons learned” from today’s discussion on the pad in front of you We will discuss these as a group …

32. Fundamentals, fundamentals, fundamentals

33. Backup Slides

34. Background analysis of wēijī Victor H. Mair of the University of Pennsylvania has called the popular interpretation of wēijī in the English-speaking world a "widespread public misperception."[1] In fact, wēi (危) does roughly mean "danger, dangerous; endanger, jeopardize; perilous; precipitous, precarious; high; fear, afraid" (as in wēixiăn 危险, "dangerous"), but the polysemous jī (机) does not necessarily mean "opportunity." The compound noun jīhuì (机会) means "opportunity," but jī is only a part of it; jī has numerous meanings, including "machine, mechanical; airplane; suitable occasion; crucial point; pivot; incipient moment; opportune, opportunity; chance; key link; secret; cunning." More importantly, these are "secondary" meanings—according to Mair, jī only acquires the connotations of secondary meanings (such as "opportunity") when used in conjunction with another morpheme (in this case, in jīhuì); by itself, it does not have these meanings. Mair suggests that jī in wēijī is closer to "crucial point" than to "opportunity."[1]