Competing For Advantage

1. Competing For Advantage Part III – Creating Competitive Advantage Chapter 7 – Cooperative Strategy

2. Cooperative Strategies • Key Terms • Cooperative Strategy – strategy in which firms work together to achieve a shared objective • Strategic Alliance– cooperative strategy in which firms combine resources and capabilities to create a competitive advantage

3. Types of Alliances • Key Terms • Equity Strategic Alliance – alliance in which two or more firms own a portion of the equity in the venture they have created • Joint Venture– strategic alliance in which two or more firms create a legally independent company to share resources and capabilities to develop a competitive advantage • Nonequity Strategic Alliance– alliance in which two or more firms develop a contractual relationship to share some of their unique resources and capabilities to create a competitive advantage

4. Cooperative Strategies • Key Terms • Co-opetition – condition created when firms that have formed cooperative strategies also compete against one another in the marketplace

5. Reasons for Cooperative Strategies • Lack the resources and capabilities • Create value that they couldn't develop by acting independently • Aligning stakeholder interests to reduce environmental uncertainty • Provision of new sources of revenue and growth • Enhance the speed of responding to opportunities • Gain new knowledge and experiences to increase competitiveness

6. Reasons for Strategic Alliances by Market Type

7. Risks of Cooperative Strategies • Potential for opportunism • Misrepresentation of competencies • Failure to provide complementary resources and capabilities that were committed • Differences in alliance-specific investments made by each partner

8. Managing Competitive Risks in Cooperative Strategies

9. Managing Cooperative Strategies • Cost Minimization • Formalized contracts and close monitoring of behavior , but leads to higher monitoring costs • Prevent opportunistic behaviors • Formalities can stifle partner efforts to gain maximum value from their participation • Opportunity Maximization • Focus on value-creation opportunities • Informal relationships and fewer constraints to take advantage of unexpected opportunities, to learn and explore additional marketplace possibilities • Requires a high level of trust that each will act in the other interest, which is more difficult in international situations

10. Effective Implementation of Cooperative Strategies • Internalize knowledge learned by organizing the knowledge and properly distributing it to those involved with forming and using cooperative strategies • Establish appropriate controls • Assign managerial responsibility for cooperative strategy to high-level executive or team • Increase the level of trust between partners

11. Competing For Advantage Part III – Creating Competitive Advantage Chapter 8 – Corporate-Level Strategy

12. Corporate-Level Strategies • Key Terms • Corporate-Level Strategy– specifies actions a firm takes to gain a competitive advantage by selecting and managing a portfolio of businesses that compete in different product markets or industries. WHERE ARE WE GOING TO COMPETE?

13. Beverages Foods Snack Foods Frito-Lay North America Frito-Lay International Quaker North America Pepsi-Cola North America Gatorade/Tropicana North America PepsiCo Beverages International

14. Snack Foods Frito-Lay North America Funyuns Sunchips Cracker Jack Chester’s popcorn Grandma’s cookies Munchos Smartfood Baken-ets fried pork skins Oberto meat snacks Lay’s Ruffles Doritos Santitas Fritos Cheetos Rold Gold

15. Snack Foods Frito-Lay International Bocabits wheat snacks Crujitos corn snacks Fandangos corn snacks Hamkas snacks Niknaks cheese sticks Quavers potato snacks Sabritas potato chips Twisties cheese snacks Walkers potato crisps Walkers Square potato snacks Walkers Monster Munch Corn snacks Miss Vickie’s potato chips Gamesa cookies Dippas Sonric’s sweet snacks

16. Snack Foods Frito-Lay International Bocabits wheat snacks Crujitos corn snacks Fandangos corn snacks Hamkas snacks Niknaks cheese sticks Quavers potato snacks Sabritas potato chips Twisties cheese snacks Walkers potato crisps Walkers Square potato snacks Walkers Monster Munch Corn snacks Miss Vickie’s potato chips Gamesa cookies Dippas Sonric’s sweet snacks

17. Beverages Pepsi-Cola North America Pepsi-Cola Mountain Dew Slice Mug Sierra Mist FruitWorks Lipton Dole Aquafina Frappuccino SoBe AMP

18. Beverages Gatorade/Tropicana North America Gatorade Propel Tropicana Dole juices

19. Beverages PepsiCo Beverages International Loóza juices and nectars Copella juices Frui’Vita juices Tropicana 100 juices

20. Foods Quaker North America Quaker rice cakes and granola bars Rice-A-Roni side dishes Near East couscous/pilafs Aunt Jemima mixes & syrups Quaker grits Quaker Oats Cap’n Crunch cereal Life cereal Quisp cereal King Vitaman cereal Mother’s cereal

21. How are we going to compete and gain a competitive advantage in each of our businesses? Foods Business Level Strategies Quaker North America Quaker rice cakes and granola bars Rice-A-Roni side dishes Near East couscous/pilafs Aunt Jemima mixes & syrups Quaker grits Quaker Oats Cap’n Crunch cereal Life cereal Quisp cereal King Vitaman cereal Mother’s cereal

22. Snack Foods Beverages Foods Corporate Level Strategy 1) What businesses do we want to compete in? 2) How do manage effectively across businesses

23. Where did they go?

24. Corporate-level strategy • Specifies actions a firm takes to gain a competitive advantage by selecting and managing a group of different businesses competing in different product markets • Expected to help firm earn above-average returns • Value ultimately determined by degree to which “the businesses in the portfolio are worth more under the management of the company then they would be under any other ownership - Synergy • Product diversification (PD): primary form of corporate-level strategy

25. Goals of Corporate Strategy Moves to enter new businesses Boosting combined performance of the businesses Capturing synergies and turning them into competitive advantages Establishing investment priorities and steering resources into business units

26. 4 Conditions of Successful Diversification • 1) Growing industries with complementary products and technologies • Apple IPhone • 2) Leverage existing capabilities which match the KSFs in other arenas • Disney Cruise Lines • 3) Closely related moves which reduce costs • Kroger & Fred Meyer • 4) Powerful brand and reputation • Marguerittaville, NASCAR Café, or Emril’s

27. Product Diversification • Primary form of corporate-level strategy • Entails the scope of the industries and markets in which the firm competes • Defines how managers buy, create, and sell different businesses to match skills and strengths with opportunities • Is expected to reduce variability in the firm's profitability, generating earnings from several different business units • Its development and monitoring carry a cost which must be balanced with benefits to establish an ideal portfolio of businesses

28. Levels and Types of Diversification

29. Curvilinear Relationship between Diversification and Performance

30. Procter & Gamble’s Diversification Strategy • Purpose of diversification: Use expertise and knowledge gained in one business by diversifying into a business where it can be used in a related way • Builds synergy: value added by corporate office adds up to more than the value if different businesses in the portfolio were separate and independent • Procter & Gamble (P&G) • Product mix: beauty products targeting women and baby care products • 2005: Acquired Gillette (consumer health care products) focused on masculine market

31. Related Diversification at Disney Entertainment/Production Theme Parks Resorts Entertainment/Broadcasting Retailing Cruise Lines

32. Levels of Diversification (N=3) (Cont’d) • 2. Moderate to High Levels • Related Constrained Diversification Strategy • Less than 70% of revenue comes from the dominant business • Direct links (I.e., share products, technology and distribution linkages) between the firm's businesses • Related Linked Diversification Strategy (Mixed related and unrelated) • Less than 70% of revenue comes from the dominant business • Mixed: Linked firms sharing fewer resources and assets among their businesses (compared with related constrained, above), concentrating on the transfer of knowledge and competencies among the businesses

33. Tyco Electronics Tyco Telecommunications Tyco Fire and Security Tyco Safety Products Tyco Healthcare Tyco Plastics Tyco Adhesives Tyco Flow Control Tyco Electrical and Metal Products Tyco Fire and Building Products Tyco Infrastructure Services

34. GE Advanced materials Commercial loans Appliances Insurance Jet engines Electric power generation Medical imaging NBU Universal Chemical Treatment Equipment services and rentals

35. Levels of Diversification (N=3 ) (Cont’d) • 3. Very High Levels: Unrelated • Less than 70% of revenue comes from dominant business • No relationships between businesses

36. Unrelated Diversification • Key Terms • Financial Economies– cost savings realized through improved allocations of financial resources based on investments inside or outside the firm

37. Drawbacks for Unrelated • Demanding requirements • Limited to no opportunities to share advantages

38. Creating Value with Diversification Strategies • Operational relatedness - sharing activities • Corporate relatedness - transferring knowledge

39. Value-Creating Strategies of Diversification

40. Diversification and the Multidivisional Structure • Key Terms • Multidivisional Structure (M-form)– organizational structure which ties together several operating divisions, each representing a separate business or profit center to which responsibility for daily operations and business-unit strategy is delegated

41. Original Benefits of the M-form • It enabled corporate officers to more accurately monitor the performance of each business, which simplified the problem of control • It facilitated comparisons between divisions, which improved the resource allocation process • It stimulated managers of poorly performing divisions to look for ways of improving performance

42. Diversification and the Multidivisional Structure • Key Terms • Organizational Controls – guide the use of strategy, indicate how to compare actual results with expected results, and suggest corrective actions to take when the difference between actual and expected results is unacceptable • Strategic Controls – subjective criteria intended to verify that the firm is using appropriate strategies for the conditions in the external environment and the company's competitive advantages (used for "sharing" strategies) • Finance Controls – objective criteria used to measure firm performance against previously established quantitative standards (used for unrelated diversification)

43. Operational Relatedness – Sharing Activities • Activity sharing requires sharing strategic control over business units • Pursuing appropriate coordination mechanisms can lead to successful creation of economies of scope • Activity sharing can be risky because business-unit ties create links between outcomes and can cause organizational difficulties that interfere with success • More attractive results are obtained through activity sharing when facilitated by a strong corporate office

44. Variations of the M-form • Cooperative • Strategic business-unit (SBU) • Competitive

45. Cooperative Form of the Multidivisional Structure • Key Terms • Cooperative Form – organizational structure using horizontal integration to bring about interdivisional cooperation

46. Cooperative Form of the Multidivisional Structure

47. Cooperative Form of the Multidivisional Structure • All of the divisions share one or more corporate strengths • Interdivisional sharing depends on cooperation • Links resulting from effective integration mechanisms support sharing of both tangible and intangible resources • Centralization is one integrating mechanism that can be used to link activities among divisions, allowing firms to exploit common strengths and share competencies • Success is influenced by how well information is processed among divisions • Success can be influenced by managerial commitment levels and the response to some lost managerial autonomy

48. The Strategic Business-Unit Form of the Multidivisional Structure • Key Terms • Strategic Business-Unit (SBU) Form– multidivisional organization structure with three levels used to support the implementation of a diversification strategy

49. SBU Form of the Multidivisional Structure

50. SBU Form of the Multidivisional Structure • Divisions within each SBU are related in terms of shared products and/or markets • Divisions of one SBU have little in common with division of other SBUs • Divisions within each SBU share product or market competencies to develop economies of scope • Integrations used in cooperative form are equally effective for the SBU form • Each SBU is a profit center • Financial controls are more vital for evaluating performance