Appunti corso Management di BIEM 2 parziale, Appunti di International Management

Scarica Appunti corso Management di BIEM 2 parziale e più Appunti in PDF di International Management solo su Docsity! SESSION 20 - MARKET STRUCTURE AND INDUSTRY ANALYSIS MARKET STRUCTURE AND INDUSTRY ANALYSIS BASIC INDUSTRIAL ORGANIZATION (IO): fierce competition among many firms lowers industry profitability Difference in the number of producers —> they experience different levels of rivalry among each other—> varies on the amount of different prices that they are able to charge Ex: those who work in monopolies are able to charge much higher prices so they experience higher levels of profitability, especially if they are not regulated well. Instead in perfect competitions consumers have multiple options to select from and can move from option to option —> they are pushed to lower their prices, which as a result lowers their profitability. These are the 4 different market structures. MONOPOLIES Market structures where there is only one firm or there’s one that has a huge market share They are able to create products which are highly differentiated Imperfect availability of information which created high barriers to entry
 => energy, water, transportation —> industries that tend to be monopolies mainly because these tend to be public goods and services that everyone enjoys but require a huge start-up cost + they have to interface with the government which has to be involved because it has direct bearing on life in a certain city, so its not something you want to leave up to the free market and you want to ensure that they are providing goods and services to people at costs that are fair. These industries also tend to be very capital-intensive, so engaging urban planning is extremely costly with very long- term consequences => very HIGLY REGULATED industries —> prevents other to enter Examples: - Tech giants like Facebook - Microsoft - Amazon - Utilities: water, gas, electricity, transportation - Luxottica: it own a lot of Italian brands of glasses, has an extreme aggressive growth strategy and does that through acquisitions. (For example Oakley tried to dispute their prices because Luxottica had large market shares so Lux responded by dropping Oakley from their stores and this made O’s stock price to drop dramatically. After this L acquired O) —> did this to dominate the eyewear market and prevent competitors. In 2017 L bought Essilor. - Google: monopoly in the tech industry, privacy problems - Monsanto Due to the Sherman Anti-Trust Laws (Sherman Anti-Trust Act of 1892) (—> rules of competitive behavior in the market place), it is harder for monopolies to form, and it counteracts collusion in oligopolies, lowering monopoly power.
 Sometimes monopolies can develop because firms are able to create market value that no other firm can create as well —> through network effects and some level of skill
 Consumers and members of the community are highly valuable to them —> trade-offs that we make MONOPOLISTIC MARKETS Have many firms in them Low / some barriers to entry —> more than in perfect competitions but definitely lower than oligopolies and duopolies => these types of markets do not require high levels of fixed costs Some level of product differentiation —> the products offered by each firm are generally not the same as each other No impediments —> don’t require very specialized knowledge Examples: - Restaurants / fast foods - Washing detergent - Household goods - Phone repairs - Hair dressers MONOPSONIES A monopsony is the flip side of a monopoly. It occurs when a buyer, rather than a seller, has sufficient market power to set its own price —> because of this the buyer can set the price of how much he is willing to pay We see monopsonies in area which are very specialized or in locations which are very remote. Examples: - Hospital in remote place —> only entity which is doing the hiring - Very specialized areas of engineering —> limited amount of people with exactly those skills to hire —> they decide how much they are willing to get paid and the others have to accept since there is no other that can take the job Porter (1979): IO (industrial organization) framework to provide a theory of how industry structure affects firm profitability • Not just direct established competitors but also customers, suppliers, potential entrants, and substitute products • Three forces from horizontal competition: substitutes, entrants and existing competitors • Two forces from vertical competition: buyers’ and suppliers’ bargaining power Michael Porter: - Well known professor of Harvard School of Business - Founded two consulting firms —> The Monitor Group, FSG - Came from humble beginnings, father was a civil engineer - Mechanical engineer from Princeton - Obtained MBA & PhD from Harvard PORTER’S FIVE FORCES 1. Intraindustry rivalry / Competitors 2. Threat of New Entrants 3. Producers of Close Substitutes 4. Suppliers 5. Buyers => the amount of bargaining power that these different entities have has influence over the amount of profits that firms within a certain industry are able to capture and retain for themselves. Rivalry among existing competitors is normally observed through: • Products launches —> ex: collaborations with other brands or celebrities • Innovation • Advertising —> build a relationship and a connection with their consumers / brand loyalty —> research done that the more exposure one has to a brand the more likely they will be to buying from them. 
 Competitive advertising —> ex: Ronald McDonald walking into Burger King to say that their products are better • Price discounts —> to capture more market share. These firms tend to have a cost- strategy rather than a differentiation strategy. Horizontal Competition Vertical Competition What affects competition & rivalry? Intensity of rivalry is heightened by: • Product homogeneity —> influences the level of rivalry within an industry because, when products are really similar, consumers can easily switch between different companies if they are not happy with what one company has to offer, therefore emphasizing rivalry
 • Perishable product —> if a product doesn’t last long, companies need to sell it within a fixed period of time (ex: phones, food, tickets for an event, flowers)
 • Low switching costs —> consumers can switch between different producers (ex: in gyms it is harder to switch from one to another because memberships keep you locked in for a certain amount of time)
 • High fixed costs and low marginal costs —> if a firm is operating in an industry with high fixed costs (ex: oil & gas, utilities), it has to make large investments in order to create physical assets so it becomes harder for them to leave. For them to produce each additional unit of a good is quite cheap so what these firms tend to do over time is to compete in terms of price, which lowers the amount of profit that they can get from each unit sold (ex: telecommunications companies)
 • Concentration of competitors —> there are lots of players that can take customers away from you
 • Low industry growth —> if you join an industry which is growing at the same time, each firm can do whatever it’s doing and capture a bit of profit. But if the industry is not growing then firms are competing against each other for a certain set of consumers/ profit, which means that the amount of rivalry is going to be very high 
 • High barriers to exit —> it’s hard to exit so it’s not worth it and they’ll work harder to compete within it SUPPLIER POWER Suppliers can exert their bargaining power raising input prices, and hence squeeze the profitability of an industry. Whenever we talk about bargaining power between suppliers and buyers, something that is important for us to relate this concept to is its effect on the prices that firm that it’s able to set or its effect on the cost that a firm has to pay. Economies of Scale —> refers to the idea that firms tend to produce certain products in large quantities, so it is very threatening for new entrants to join where there are already large firms owning a lot of market share in that industry. Moreover, these large firms are able to move the cost of production down so these incumbent firms can obtain larger profits than new firms that are trying to enter these markets. 
 Network effects —> this happens when incumbent firms are able to organize their offerings in ways that make it harder for a new firm that is coming in to get customers away from them. Telecommunication companies offer cellphone plans, wifi, package deals —> this makes it hard for consumers to move to a new telecommunication provider because of the network effects within these bundles of goods. Network effects refer to this idea of synergies among different offerings that a particular producer may have. 
 Customer switching costs
 Unequal access to suppliers & distributors —> it’s usually a case in geographical markets, for example it would be a lot harder for me to join the wine industry if I’m not connected to people who are important players in this industry —> it may be because of language, because of one’s cultural background, … 
 Legal restrictions —> geographical issue as well. In order to start a company in certain countries a part of the company must be owned by a local. Moreover, legal restrictions can come in the form of licenses, so for a firm to enter a certain market it has to be approved. (For example in China there was a baby milk scandal where producers were putting inside a substance toxic to infants in order to make the milk reach a certain protein requirement so, as a result of this, the Chinese government started putting in place different legal restrictions where firms had to acquire certain licenses to stay in the market. This removed many firms.) 
 Brand loyalty —> if we think about the computer industry, Apple has a lot of brand loyalty from its customers so this is definitely something a computer manufacturer might want to consider.
 Threat of retaliation —> if you enter a market you have to keep in consideration the different reactions that may come from the larger players in the field. The threat of retaliation can come in many forms, whether it is incumbents dropping their prices or incumbents making it difficult to operate by locking access to suppliers and distributors. THREAT OF CLOSE SUBSTITUTES Definition: substitutes perform the same or similar function as an industry’s product, but by a different means. Examples of choose substitutes: - Uber and Taxi - Glovo and UberEats - physical book and ebook - Netflix and cinema - Supermarket and fastfood Usually a surprise —> usually they are not anticipated by previous players and they are not prepared to deal with the threat. Normally a new technology comes up that produces a new kind of product and previous players are caught off guard.
 Price-performance trade off is rapidly improving —> for the consumer, is there a cheaper way to address the same need? Addresses the price vs performance trade off for firms.
 Technology can play an important role —> close substitutes are created because of the creation of a new technology that allows new players to fulfill the same need in a quicker and cheaper way. SESSION 22 - STRATEGIC ANALYSIS AND COMPETITIVE ADVANTAGE PART 1 - WHAT IS STRATEGY SECOND PORTER ARTICLE, 1996, “WHAT IS STRATEGY” Key ideas: • Operational efficiency vs. strategy • Risks of focusing on operational efficiency • Risks of straddling • Different types of positioning a firm has • What is a strategy • Benefits of having a strategy What is Operational Efficiency? => performing similar activities better than competitors can Amount of value consumers get from the company vs the cost associated with the firms’ activities. A firm which is improving its operational efficiency is moving from a position which is below the curve to one which is closer to it (the Productivity Frontier), —> revolves around the idea of not wanting to be different, but wanting to be better than the competitors. In the 1970s and 1980s many Japanese companies started being very focused on operational efficiency and found different ways in which they could reduce costs, produce things faster as well as more efficiently —> how to make better use of their resources => Firms around the world started imitating these Japanese firms in order to be competitive What does improving Operational Efficiency entail? There are different ways to improve operational efficiency: Benchmarking —> keeping track of how long you are taking to perform a certain task and whether you are able to do it faster. Firms can also benchmark against their competitors by trying, for example, to produce more items than them in the same time frame.
 Total quality management —> keeping track of different ways in which to asses the quality of the product and looking if they are improving on a regular basis.
 - with internal stakeholders: if a firm has a clear strategy it is able to tell its managers what its focused on and based on this the managers will be able to make managerial decisions aligned with what the organization is trying to achieve —> on the other hand, if the firm isn’t clear about what it is trying to achieve then managers may end up making different decisions that may not support the firm (for example if you are a manager at southwest and you don’t know about their low-cost strategy then you might end up hiring flight attendants and paying them really high prices + being really strict on who to hire —> this would be a form of inconsistency) 
 2. Different positions require different inputs and resources —> you would expect different behaviors and services from a low-cost airline compared to a standard one. Having a clear strategy on what the firms has to offer is important because in this way the firm is able to acquire the correct inputs and resources necessary to occupy that particular position. 
 3. Value destruction can result when activities are not aligned —> if a firm is trying to be a low-cost carrier but is having all of these additional services that its consumers do not care about, then their value could actually be destroyed. (For example if Southwest was offering baggage service, then it would have to deal with more logistics and it would give them additional costs which would undermine their ability of setting their flights at lower prices.) STRADDLING happens when a firm is trying to occupy two or more different market positions at the same time which may be highly incompatible with each other. Example: McDonalds tried to enter the pizza market, KFC tried to make edible nail polish. TYPES OF POSITIONING Basis for positioning: I. Variety: serve a wide array of customers, but will meet only a subset of their needs
 - Jiffy Lube: only produces automotive lubricants
 - Vanguard: offers an array of common stocks, bonds and money market funds that are very low-risk. It encourages its customers to keep trading levels low which allows to reduce costs. It avoids investing in in narrow stock groups to reduce risk.
 II. Needs: targeting a specific customer segment
 - Ikea: for consumers who care of having a low-price point, people who highly value practicality and convenience, has specific activities such as child care.
 - Bessemer trust vs city bank: BT is a finance company which caters to families with a minimum of 5 million dollars, for people who make higher incomes, is not requested for loans. City bank deals with people with a lower affluence. 
 III. Access: anything that involves reaching customers a certain way - typically geographically 
 - Community banks: tend not to operate in big cities, provides different services that are more accommodating to the type of people living there. For example this type of bank in a small university town could be made in order to accomodate students. 
 - Camike cinemas: timed their movie screenings taking into account other local events that were going on.
 => deal with people who live in more rural areas The straddler tries to match the benefits of a successful position while maintaining its existing position. WHY DOES HAVING A STRATEGY MATTER? Benefits of having a strategy: Consistency Reinforcing —> having a strategy enables the firm to make choices that reinforce their market position (ex: Neutrogena, a high end skin care brand, offered its product in Walmart which wasn’t very consistent with its strategy —> after they made their strategy clearer and started selling their products in high end hotels and this allowed the brand to reinforce their market position and sell itself as a high end brand) Optimizing —> tends to earn more from the supply chain, means to be very clear with what the organization is made (ex: having many basics but restocking them on a regular basis making sure that stores always had products) It facilitates communication It enables coordination of activities Managers need to be cognizant of the growth trap - Increasing product lines and geographies can be more detrimental to them although others are doing them too. LEADERSHIP A clear strategy allows and requires leadership because what you need is for managers to understand the firm’s market position and to be able to make decisions that prioritize certain activities. It is very tempting to saying yes to new projects while it’s very difficult to say no because they don’t want to offend people —> a clear strategy is a leadership that says what to say yes to and what to say no to. PART 2 - COMPETITIVE ADVANTAGE WHAT AFFECTS FIRM PROFITABILITY? The industry does not fully determine a firm’s profitability. => even if you belong to an industry that is growing slowly, a firm can still do really well if it is able to have a clear strategy and competitive advantage. Industry analysis is an important way to understand the competitive forces in an industry. Nonetheless, some firms still outperform their peers. Competitive advantage can be defined as the ability of a company to outperform its competitors in a given industry, receive privileged access to resources or barriers that allow the company to sustain its sales, margins, and profits. WHAT IS COMPETITIVE ADVANTAGE? The ability of a company to outperform (in terms of profitability) its competitors in a given industry, because of: • Privileged access to resources (RBV), and/or • The existence of entry barriers (IO) That allows the company to sustain its sales, margins, and profits. OR … the ability to create and sustain added value WHAT CREATES A COMPETITIVE ADVANTAGE? Starts by taking a look at its primary activities (those that relate directly to the production of the goods) The primary activities are: • Inbound logistics (refers to the transportation, the storage and the receiving of goods into a business) • Operations • Outbound logistics • Marketing and sales • Service And then support activities (do not directly impact the production of the good in itself but enables operations to work smoothly) which refer to: • Firm infrastructure (refers to the structure of an organization, like leadership structure, corporate): are activities with do not primarily affect the value chain but are necessary for the survival • Human resource management • Technology development = R&D • Procurement: acquiring resources that the firm needs STEP 2: ANALYZE RELATIVE COSTS In order to understand a firm’s market position, the costs it incurs need to be analyzed Each activity of the value chain generates a cost
 Qualification and comparison of those costs • Profit and loss account • Economies of scale, degrees of utilization, learning, resource quality
 Cost driver: factors that make the cost of an activity rise or fall, takes into account different cost drivers —> could come in the form of a variety of goods that the firm decides to offer • Firms should focus on the cost drivers that they have influence over if they want to change their market position • They should break down the costs in a way that is effective • They should take costs and divide them amongst the activities A firm’s cost increases when there is a distribution to urban areas —> there is an increase in coordination and there is a product variety. A firm’s cost decreases with the demand. Overhead vs variable costs: when a firm is engaging in a relative cost analysis, it is looking for ways in which to improve their competitive advantage and looking for costs can be lowered.   => a “cost driver” is the unit of an activity that causes the change of an activity cost. A cost driver is any activity that causes a cost to be incurred. The main cost drivers are: Economies of scale Saturation capacity Economies of learning Product design Process design Access to cheap resources Managerial efficiencies STEP 3: ANALYZE WILLINGNESS TO PAY Understanding what the consumers want and what aspects of the good or service influences their WTP. Every activity in the value chain generates not only costs but also willingness to pay. Product design Aesthetics / safety Functionality Quality Durability Timely delivery After sales care Opportunities for consumer segmentation (knowing the different categories of customers and different customer profiles) —> can occur in both dimensions: 1. VERTICAL DIFFERENTIATION: when customers agree on which product is better —> can offer both hard cover and ebooks and all customers have a preference
 2. HORIZONTAL DIFFERENTIATION: when different buyers value different products differently —> can offer different types of books and different consumers have different types of preferences Who is the real buyer? Where does this buyer really shop? What do these buyers really care about. STEP 4: EXPLORE OPTIONS AND MAKE CHOICES Reducing (increasing) costs often also lowers (raises) willingness to pay. Firms need to consider the ultimate effect on firm profit and its relative size • Should we consider changing our scope or sale? Firms need to ask themselves: • How may our customers react • How may our competitors react • How does changing one activity affect other activities Eliminate costs that do not contribute to willingness to pay. Managers can also reverse engineer from different options. Idea that firms need to explore all the options to create a value. DIFFERENT BARRIERS TO ENTRY THAT AFFECT THE COMPETITION AMONG PLAYERS - There are high fixed costs and this could be a difficult barrier to enter - Access to licenses - A lot of routes were already covered by other airlines - It was an highly regulated sector and the deregulation act 1978 significantly drop prices, this deregulation could be a very strong barrier to entry - September 11 event was a big barrier because consumers were more afraid to take planes, there were some regulations that highly increased the costs for the airlines companies and fewer people were traveling, so lowered demand - Power that labour units have in the airlines industries is an other difficult barrier 2. BUYERS / CONSUMERS Who are they? What is important to them? - Leisure/commercial travelers who really care about price - Business travelers who are really interested in convenience What affected consumer power relative to the airlines? - Internet and technology —> online reservation systems made information much more available and it was easier to make reservation and to choose the cheaper flight, this gave them a lot more power - September 11 brought safety and service quality for the customers - Deregulation and low product differentiation among airlines increased buyer power 3. SUPPLIERS What were the key inputs discussed in the case / what cost structure did most airlines company have? There were 2 types of suppliers which really affect the cost: - The 40% of cost for airlines companies was made by labor, which have a lot of influence in this industry because the fact that labour was unionized give a lot of bargaining power - Aircrafts carriers was about the 20% of the cost for an airline industry - They had a cost associated to aircrafts as well because sometimes they rented aircrafts from other suppliers instead of purchasing them itself and this increased the costs - Pilots represented a highly skilled workforce - And there were a lot of tradeoffs between wages and flexibility 4. CLOSE SUBSTITUTES Who are they? - Internal competition but also busses, cars trains for small tracks ( under 600 miles) - For around the world, there was mostly internal competition ( bigger than 600 miles) - There were also new close substitutes like video conferencing and calls 5. NEW ENTRANTS Who are they? - The local airlines were new entrants, after the deregulation act there were this new local airlines which put low costs and there was a lot of competition. - There were a lot of new entrants, the two most important were Southwest ( focused on really small flights that were not covered by any other company and they lowered the cost) . southwest: • Direct flights among less served airports • Low price- competes directly with cars • No frills • Profit sharing among employees • Flexible work condition • Simply pricing structure - The other one was Jet Blue which tried to differentiate, keeping low cost but trying to differentiate. Jet Blue: • Bring humanity back to air travel • Focuses on New York to Florida • Flexibility among employees • Hired college students to work • Didn’t use technology, only paper • It was chic ➔ Airlines industries had to deal with a lot of pressure and rivalry, there were a lot of new entrants that came to the market after the deregulation act and this increased also the competition DELTA AIRLINES Was bought in 1928 - Operated predomply in Florida ( Southeast) - Least unprofitable major airlines after the deregulation - Had to face different challenges in 2002 like competition from regional players and LCC ( low cost companies) DELTA EXPRESS - Tried lounging delta express in October 1996, a subsidies which have lower prices - Tried to operate in different gates, refinishing the airplanes and giving snacks - Delta distinguish by delta express by operating in different gates, there were more light snacks, the planes were painted differently - Operated as an extention of delta KEY TAKEAWAYS ➢ Straddling and moving to a new market position isn’t straight forward, very often firms have to compete with industries that have a strong brand identity in that case and this make the logistics more complex ➢ They have troubles coordinating activities and work ➢ Coming up with a strategy is not that easy ➢ Leaders need to deal with uncertainty SESSION 24 - SIZE ADVANTAGES AND LEARNING ECONOMIES SIZE ADVANTAGES: ECONOMIES OF SCALE • Henry Ford was critical about economies of scale and revolutionized the way in which firms operated, the production process. • Picture of a pin factory —> the production of this very simple product has been divided in single steps and there are different people in charge of the production process independent from each other. What industries are characterized by a large scale production? • Clothes industry • Cars • Pharmaceuticals • Food industry (large scale agriculture) What industries are NOT characterized by a large scale production? • Art • Luxury industry • Some musical instruments STANDARDIZATION History: Major shift in the middle of the 18th century (first industrial revolution), with the creation of factories. New aspects: • Technical transformation processes were mechanized • Work was broke into single tasks assigned to different people • Product started to become more standardized • Mass production began in the late 19th century • Brought to global success by Ford in early 20th century Modern Corporations Standardization is evident in certain industries. Size & Scale: - Large size is a predominant trait of modern corporations - The size of organizations can differ based on industry • Large scale: chemical, pharmaceutical, banking, insurance, automobiles • Smaller scale: craft & cultural industries DEFINITION: the production of large volumes of goods with identical or very similar characteristics for a relatively long period of time Normalization: ex CDs are all the same size so that they can fit into CD players, standardized understanding of what certain products are used for, at the end products were similar to each other Modularity => the underlying economic phenomenon is the standardization of production processes (modern industrial systems) FORMS OF STANDARDIZATION Standardization: • Parts and components (e.g. screws & pipes): standardized way in which people will refer to these components, you can get a certain type of screw from different procedures allowing firms to acquire these components a lot more easily since there was a clear shared understanding regarding what a particular type of screw will look like
 • Processes (e.g. assembling a car): there are certain process that need to happen before you can put the car together , standardized
 • Complementary goods (e.g. cars need tires and steering wheels) PROS OF STANDARDIZATION - Facilitates large-scales production and cost efficiencies • Fixed-cost absorption: fixed costs do not change regardless of how many units are being produced. When a fixed cost is divided amongst a lot of units of a good, then the costs are absorbed. • Scale economies: lowering the average cost of goods by producing more units of them • Learning economies - Reduces consumer uncertainty: what happens when people bring new products to the marketplace? Consumers may not know what the product is and may not want to buy it —> consumers know the product with standardization.
 - Enables network effects: the value of a product is a function of how many people use it • Revolves around the idea that the benefits of a product are tied to the number of people who use it • Standardization facilitates diffusion, increasing value —> the value of a product increases with the number of people who use it (an example with social media) There are 3 dimensions: 1. Benefit related to the amount of people that are using the good (ex: phones) 2. Network effect from complementary goods, for example devices related to goods. If there is standardization, people have a clear understanding of what a particular product looks like. 3. Post sales support network effect: if you have a unique kind of car it would be harder for you to find post-sale support —> it is more likely when you are using a more standardized product
 - Improves quality control: standardization allows organization to improve quality control CONS OF STANDARDIZATION - Rigid production process: can only go from one step to an other, so firms are not very adaptable
 - Limited choice for consumers: consumers have only some standard goods, since firms make the same thing so there is no innovation
 - May discourage product and processes innovation: when the process of making a product is always the same, employees may stop wanting to innovate because they come to assume that there is only one way of producing things
 - Price based competition: the main consequence of this is lower profits because when a good becomes homogeneous, consumers can switch between costs very easily so there is a price war and each firm ends up taking lower profits MODULARITY • Refers to when processes are complex and are divided in modules, a module contains different processes • It is when the components of a product are particularly complex so they might be assembled from modules (e.g. airplanes, automobiles) • A product can be broken down into different modules and each module in itself can be thought of as a complex package A module is part of an end product that is a separate product by itself (each component of a car is a module) —> modularity enables standardization (when you assemble modules you are more likely to fall into standardization) Break down a certain complex product into modules. => A COMPANY WITH HIGHER PRODUCT CAPACITY WILL HAVE LOWER COSTS WHAT DOES TATAL COST COMPRISE OF? Fixed costs: do not vary with output like plant, sales, marketing, ecc… Variable costs: vary with output like materials, inputs, labor FIXED COST ABSORPTION Dividing fixed costs across larger units of output produced (given a production capacity). - We realize fixed.cost absorption economies by increasing the rate of utilization (for a given MPC) - These economies are higher if fixed costs represent a larger fraction of total costs (e.g. industrial production as opposite to trade and intermediaries) In the graph, we see that we are increasing the capacity from 80% to 100% and when we do it the fixed costs are divided by a greater number of unit of goods and this results in a lower cost per unit. SOURCES OF ECONOMIES OF SCALE - Indivisibility of certain inputs • Even if production capacity is low, some inputs cannot be broken into sub-units - Specialization • Larger size enables resources to be developed in a more specialized way - Bargaining power • Easier to get price discounts from suppliers - Greater technological efficiency • E.g. an engine (power) or air-conditioning - Geometric properties of containers (storage) • Tends to pertain to storage and inventory • When PC relates to volumes, the increase in capacity grows by the 3rd power with respect to its linear dimension. But costs are often expressed in terms of the square surface area, which grows by the 2nd power. WHY DON’T FRIMS PRODUCE AT MPC? PROGRESS RATIO • The slope of the curve reflects the speed of learning • The progress ratio < 1 indicates that learning is taking place • Varies between firms and industries • Largely between 0.70 - 0.90 • This reflects cost falling by 30% - 10% LEARNING CURVE For an 80% learning curve: • If cumulative production doubles from 50 to 100, the hours required to produce the 100th unit are 80% of the hours required for the 50th unit. • If cumulative production doubles from 100 to 200, then the hours required to produce the 200th unit are 80% of the hours required for the 100th unit. SOURCES OF LEARNING ECONOMIES What enables learning economies? - Repetition enhances quality of individual skills • People improve their work habits and perform assigned tasks faster & better • Become more mechanic and automatic and you will do things faster - Routinization: simplification of products and processes • When people gain experience regarding a certain product or production process, they can also grasp possible pathways to simplification, leading to grater efficiency at lower costs - Better selection of materials • Understanding which resources are most appropriate for carrying out a task - Higher programmability of activities • Events become more predictable and response-time to non-standard circumstances is quicker and more effective • Facilitates planning, optimization and coordination • We can anticipate sometimes what can not go right - Higher coordination • Individuals get to know one another and learn how to work in teams and coordinate different processes across teams • When you build up more experience, you are able to coordinate things better and may allow you to find way to reduce costs more effectively LEARNING CURVE CHANGES What does innovation do? - Innovation causes shifts in the learning curve • Production get shaken up and employees adjust their routines to accommodate the changes in process/product Why does learning diminish? - It requires effort and dedication to be constantly learning and adjusting LEARNING CURVES IN M&A U-Shaped Curve LIMITATIONS TO LEARNING BY DOING Context matters especially to strategic tasks. - Strategic tasks are INFREQUENT, HETEROGENEOUS and AMBIGUOUS in their cause-effect relationship - In the absence of established/used performance metrics and “active” learning, • Past experience becomes routine • Routines are applied without adjustment - These problems increase when: • The current acquisition is different • Lack of alternative perspectives • Past acquisitions were successful SIZE ADVANTAGES: SCALE AND LEARNING Replication Strategies - Learning, scale and fixed-absorption cost economies are interrelated • Greater maximum capacity and utilization rate entail greater cumulative output • Combining size and learning effects can create powerful competitive positions for products/businesses • These ideas can be used to strategized on resources allocation across business units within a corporation Apple’s differentiation strategy Apple has differentiated products compared to competitors, creating added value, meaning that if they were to leave the market, they will leave big shoes to fill in, regarding the design of the product, the quality  Strong relationship with their suppliers  Apple invested heavily in R&D (9%) which is way higher than other companies in the marketplace, which enabled apple to create solid products  Affective ads: it was able to create an identity around the company  Brand identity is very strong because of steve jobs → he was very selective in what to add in apple products PORTER’S FIVE FORCES • Incumbents: • IMB (20th century) • Dell - 13.5% of market share • HP - 17.1% of market share • Lenovo - strength was dominant position in China, 35% of share The rivalry in this industry is very intense, there is a lot of competition within the existing firms Lot of price-based competition, since the products were mostly homogenous They were making low profits but all had market share Apple managed to differentiate themselves thanks to their price strategy, their consumer loyalty was very high, implying that they have a strategic advantage over the others • Consumers: home, small and medium size business, corporate, education and government Home: mobility, wireless connectivity, design Education: software availability Business: price-service-support balance, compatibility Consumers became more sophisticated overtime, as they gained more information about the market • Suppliers microprocessors : intel Operating system : microsoft Apple made its own software and did not have many suppliers, since they integrate both vertically and horizontally Apple is often integrating, even today where they created their own CPU (Apple Silicon) to dissociate from Intel Apple did not have many suppliers, therefore supplier power was not very high • Close substitutes Smartphones, video game consoles, tablets They are not a threat for those who use computers to work Apple dealt with this by creating its own substitutes “If you don't cannibalize yourself, others will” Although PC definitively offer a different value of utility compared ot the substitutes, and the threat is high In general these different close substitutes do cannibalize the sale of PCs in some consumer groups SESSION 26 - ECONOMIES OF SCOPE AND VERTICAL INTEGRATION SCOPE ADVANTAGES: DIVERSIFICATION & VERTICAL INTEGRATION WHAT IS P&G? Procter and Gamble is a multinational industry, they started with soap and candles and then diversified. It was founded in 1937. Faced a variety of product categories that are different from each other. —> they are still diversified but not as much as they were before. DEVRO—> 1 single business which focuses on one single product (sausages) OFFERING MORE THAN 1 GOOD IS TYPICAL Example: consumer goods companies which own different products and have more than one category —> ex: Mitsubishi, which owns and produces different types of things such as beer, cars, air conditioning, cruise ships, … => Even firms that tend to specialize may still offer a variety of goods, like Ikea. Corporate strategy understand the forces acting on the business, and how to make profits off of them. The goal is to create corporate advantage. Key features: • Structure of the decision —> has to do with strategy • Process of how one comes up with the decision —> engaging enough people, making sure the decision is fair Looks across different businesses and catches similarities in order to obtain more value —> cuts across different business units. Identify ways in which the firm can organize itself to capture more profit and value. If a firm has a really good corporate strategy, the firm will be able to create more value for these separate businesses if they were combined under one roof compared to if they were separate businesses. KEY IDEA BEHIND CORPORATE STRATEGY • All business units should have a positive stand-alone value • The whole must be more than the sum of its parts • The value from the parent must be higher than that of alternative parents LEVELS OF STRATEGY Competitive strategy is about achieving competitive advantage in an industry. Corporate strategy is about: • The scope of the businesses in which the firm should operate (both vertically and horizontally) • How to structure the relationship between these businesses The objective of corporate strategy is to capture value that exceeds the sum of the firm’s individual parts, by facilitating linkages between these parts or creating new opportunities (e.g. using the resources of business unit in another). MAIN CORPORATE STRATEGY DECISIONS • Entering and exiting businesses (diversification & divesting)
 - diversification: enter a new business
 - divesting: exiting a market (ex: P&G divested Pringles from its core business) • Acquiring suppliers or distributors (vertical integration) • Combining the firm’s resources with those of partners (alliances and joint ventures) • Acquiring and merging with other companies (M&A) The common characteristic of these decisions is that they involve, at least potentially, other organizations. That is, corporate strategy changes the boundaries of the firm, determining positive or negative synergies. POSITIVE SYNERGIES Synergies consist in creating or destroying value by combining the resources or the activities of organizations that were previously distinct. There are 2 possibilities: 1. Higher revenues due to new valuable products or increases WTP for existing products that are sold or produced in different ways 2. Cost savings (economies of scale, access to less expensive inputs or to better resources, reduction of duplicated costs, …) Also called “economies of scope”. NEGATIVE SYNERGIES Value is destroyed because of the downsides of combining resources or activities: 1. Difficulties in integrating the cultures of different organizations (e.g. in mergers) 2. Constraints on transactions with other organizations that could provide better value (e.g. impossibility to use external suppliers after vertical integration)
 - moving into a new line of business could negatively affect the relationship with other firms in that industry
 - I am a car maker and I buy a company that makes steel. This acquisition could influence the relationship I had with steelmakers as I am now a competitor
 3. Reduced incentives to efficiency due to lack of competition (e.g. “internal clients” do not have to compete for the firm’s resources)
 - the operators of the steel company become assured that the steel they produce will surely be bought by the company that acquired them Often firms are attracted by positive synergies and discover the negative synergies only after integration. HOW DO FIRMS ACHIEVE SCOPE? HORIZONTAL DIVERSIFICATION: firms try to enter markets similar to its own (economies of scale) VERTICAL INTEGRATION: entering other parts of the supply chain (transaction costs: make vs buy) produced by apple will be supported by the products that they were already producing • Corporate image • Know-how —> sometimes firms acquire start-ups because they have technologies that could benefit the way the firm produces its goods DIVERSIFICATION - What business is the company in? - Different levels of diversification: • Single business • Dominant business
 • Related business
 • Unrelated business • Conglomerates A firm diversifies when it enters a new business in addition to the original ones. Diversification can be: 1. Related: when the businesses share clients or technologies 2. Unrelated: when businesses do not share clients nor technologies RELATED DIVERSIFICATION Ex: Poste Italiane —> it’s a post office but also communications, logistic and financial products and services. Common resources: 1. A wide network of local branches, which allows the firm to sell a range of services CDs 2. A traditional and well-known brand that adds value to trust-sensitive services ( financial services, package delivery, etc.) ADVANTAGES OF RELATED DIVERSIFICATION Cost savings that derive from activities that complement each other (e.g. making engines for cars leads to learning effects in making engines for motorcycles) or common manufacturing facilities, distribution systems, or sales forces (but consider the costs of coordinating use of common activities by different business units)
 Walmart Disney, Apple General electric, Tata Complementarities in revenue streams (e.g. customers that are loyal to the toothpaste will buy the deodorant with the same brand) Leveraging competencies: operating in multiple businesses that are related to a firm’s competence (e.g. Giorgio Armani deployed its design abilities in watches, jewelry, accessories, eyewear, cosmetics, home interiors, etc.)
 Increased market power: pooled negotiating power, strengthening a firm’s position in relation to suppliers and buyers UNRELATED DIVERSIFICATION Ex: Associated British Foods (ABF) ADVANTAGES OF UNRELATED DIVERSIFICATION General management capabilities: can be broad enough to be deployed in a variety of unrelated businesses
 Business units receive benefits from useful activities at the corporate level (budgeting and planning, industry and government relations, general administrative functions, finance) Diversification of risk: unrelated businesses do not move together during economy expansion/recession; this is important when firm shareholders cannot diversify the risk through personal investments ( ex family firms, in which the owners have most of their wealth invested in the company) RISKS OF DIVERSIFICATION Loss of focus: managerial attention is a scarce resource
 - managers may not be able to identify the synergies between the different lines of business
 - may become too complex to coordinate the activities
 Knowledge, competencies and intangibles may be difficult to transfer elsewhere, because they are mostly tacit and difficult to replicate
 Complexity and coordination problems: it is difficult for managers to coordinate too many businesses, unless they delegate responsibility to business unit managers; but if the business units are independent, then most benefits of diversification are lost Diversification discount: the reduced value that financial markets tend to give to diversified companies, and especially to conglomerates. When a company is very diversified it becomes difficult to benchmark its performance against the other companies that are not as diversified. The more diversified the harder it is for investors to judge what to invest in. HOW TO DIVERSIFY EFFECTIVELY? Corporate headquarters started getting actively involved • Selecting businesses to acquire • Managing acquisitions • Facilitating integration and links among business units WHAT IS HORIZONTAL INTEGRATION? - The acquisition of additional business activities that are at the same level of the value chain in similar or different industries. It can be achieved by internal or external expansion - Happens along the same line of business WHY ENGAGE IN HORIZONTAL INTEGRATION? Economies of scale: achieved by selling more products (e.g. Geographical expansion) Economies of scope: achieved by sharing resources common to different products Increased market power: over suppliers and distributors —> if the internal costs are lower than the costs of outsourcing something, firms will decide to do something in house, and vice versa The transaction cost theory thinks about when and how for firms is convenient to join with an other firm. DETERMINANTS OF TRANSACTION COSTS 1. Asset specificity: difficulties in redeploying assets involved in the transaction to some other purposes; when these difficulties are high, the supplier has no bargaining power and is afraid of the “ hold- up risk” ( the customer may change the terms of the transaction to its own benefit).
 2. Frequency: when the transaction is infrequent, there are larger incentives to opportunism; when it is frequent, searching costs are reduced and partners are afraid of losing the streams of income of future transactions (“shadow of the future”), reducing opportunism.
 3. Uncertainty: when contingencies are difficult to anticipate or there is technological changes, contracts become more complex and transaction costs increase. ADVANTAGES OF VERTICAL INTEGRATION Better control on product quality and scheduling: when you are producing something in house you have better information about the product Internalize strategic skills and resources Easier to build barriers to entry Strategic independence DISADVANTAGES OF VERTICAL INTEGRATION Very costly ( due to coordination problems and bureaucratic costs) Low flexibility ( firm is locked into certain products and technologies) Nearly irreversible ( very costly to go back to previous configuration) INFLUENCES ON VERTICAL INTEGRATION, non-financial considerations Besides economic convenience, vertical integration ( make or buy) decisions are influenced by the following considerations: • Strategic importance; • Preference / dominance; • Regulation (e.g. antitrust laws that break vertical chains). SESSION 27 - COST STRUCTURE ANALYSIS & BREAK-EVEN POINT KEY DETERMINANTS OF OPERATING INCOME Operating income = sales revenue – operating costs THE DETERMINANTS OF COSTS Costs are important for both low-cost leaders and differentiators ( because they must be efficient to create value). Being efficient (low-costs) depends not only on good practices but also on structural determinants of costs, such as: • Standardization of products • Technologies • Size of the plants —> economies of scale • Volumes of production —> fixed cost absorption • Length of experience —> economies of learning • Diversification of businesses • Degree of vertical integration • Regulation AVERAGE UNIT COST (AUC) A NOTE ON LABOR COSTS Labor is regulated and it is not easy for firms to hire/ fire workers depending on volume of production. However, factory workers can be sometimes moved to other plants or lines of production depending on market demand. So, their cost is fixed for the firm but variable for the plant. In general it is assumed that: - Direct labor (factory workers who participate in production) is a variable cost - Indirect labor (maintenance / repair / supervision factory work + white-collar employees) is a fixed cost KEY DETERMINANTS - PRICE LEVELS - Purchasing prices (also known as the firms’ costs) • Price of inputs bought from suppliers - Selling prices • Price of output sold to consumers by competitors - Both prices depend on internal & external factors • Internal factors: ability to negotiate, scale, cost of production • External factors: industry trends, level of competition KEY DETERMINANTS - VOLUME - Volumes affect operating profits by influencing: • Costs - variable costs • Revenues - We use the break even point (BEP) analysis to understand the relationship between volumes and operating profits THE BREAK-EVEN POINT The operating income is a crucial economic result that reflects fundamental firm choices and external market conditions. BREAK-EVEN ANALYSIS It is an important and widely-used framework that illustrates and models the relation between the volumes produced and sold by a firm and its operating income The analysis answer the following questions: • What is the relationship between volumes and economic results? • What is the effect of fixed-cost absorption? • If sales volume increase (or decrease), how will it affect earnings? • What is the minimum volume that needs to be sold to cover all the costs? • What effect do decisions to internalize/externalize have on cost structure, earnings, etc.? THE OPERATING INCOME EQUATION Sometimes it is useful to express the contribution margin as a percentage of revenue (CM%, or CM ratio) Then: You use BER when different products have different prices, but CM% is the same (e.g. you want the same ratio from all products) or you know the average CM%. (for example supermarkets use BER not BEP) CM ( CONTRIBUTE MARGIN) = ( PRICE-VARIABLE COST) /PRICE PROFIT POINT (OR OVERALL BEP) It is the volume/revenue that covers all costs (operating costs + interest and taxes) and provides an acceptable net income. Useful to understand volume or revenues that must be achieved for targeted profitability. Notice that the other costs (interest and taxes) are fixed. So you calculate a Target Operating Income and you add it to the operating fixed costs (TFC). DEFINITIONS AND ADDITIONAL MEASURES Break-even quantity: the level of sales which enables a firm to cover all its operating costs
 Contribution margin: the contribution that the production and sale of each unit of output provides toward covering the fixed costs of core operations and realizing operating profits
 Return on investment (ROI): is a performance measure used to evaluate the efficiency of an investment or compare the efficiency of a number of different investments CONTRIBUTION MARGIN & BREAK-EVEN ANALYSIS What if we want to make profit? - How much does the production and sale of each unit of output contribute to covering fixed costs?
 - Often, contribution margin is expressed as a percentage of total revenues: - Using this term, we can compute the revenue-based BPEr: - Alpha and Beta have the same BEP, but Alpha is riskier (larger wedge between revenues and total costs). Notice that Alpha has higher fixed costs and lower total variable costs than Beta. ELEMENTS AND SIGNIFICANCE OF OPERATING RISK Operating risk is determined by 2 elements: 1. The level of BEP (the higher the BEP, the higher the risk); 2. The operating elasticity (the higher the elasticity, the lower the risk) Operating risk is not bad, it just amplifies losses and profit • Loss is the area left of the BEP • Gains is the area at the right of BEP Hence, the choice of expansion depends on: • Demand estimation: how much volumes sold would exceed the BEP • The manager’s degree of risk aversion COMPUTING - Operating elasticity can be measured by calculating the relationship between the total variable costs and fixed costs at the BEP. - The higher the operating elasticity, the lower the risk. - Graphically, it reflects into the gap between the lines of total revenues and costs. The wider the wedge between the lines, the higher the risk. Class Exercise Calculate BEP and Operational Elasticity (2/5) PLANTA PLANT B Price 28.50 28.50 VC, 1.30 1.20 FC (Inv+Lab+Service+Ov 13.983.620 17.559.120 +Maint) BEP 13.983.620/(28.50- | 17.559.120/(28.50- 1.30) = 514.104 1.20) = 643.192 (1.30*514.104) / (1.20*643.192) / OP. ELASTICITY 13.983.620 = 0,0477 | 17.559.120 = 0.0439 PLANT A | PLANT B COMMENTS Plant B seems more risky. The BEP 514.104 | 643.192 higher the BEP, the higher the risk OP. Plant B seems more risky. The lower ELASTICITY 0,0477 0.0439 the OP. EL., the higher the risk . Plant B seems more risky. The GAP Smaller Bigger higher the gap, the higher the risk SESSION 29 - STRATEGY IMPLEMENTATION HOW TO DIVERSIFY? On the left, these allow the firm more integration and control, while on the right they allow coordination and flexibility. If the firm is trying to grow the firm themselves, this new part of the organization is part of the firm itself. In between internal growth and contractual forms, you have ownership of another organization that the incumbent firm is making part of itself. They may not have complete control over how this entity is set up since it was already established. In a partnership, the other firm also has a say in the decisions, limiting control VALUE CREATION VS VALUE CAPTURE IN M&As Part of the value creation potential from the M&A process goes to: • The seller (premium) • Employees (implementation, retention packages) • Customers/suppliers (retention deals) • Competitors (quality gaps, attacks) WHY ENGAGE IN M&A? Increased market power: within an industry or in general because it is getting bigger, enjoying economies of scale as well as scope and fixed cost absorption
 Overcoming entry barriers: entering a completely new market would generally require the parent firm to have people from that industry and connections so acquiring a company that already has a presence in that market makes the process easier and faster 
 Cost of new product development and speed to market
 Lower risk compared to developing new products: highly risky process because you don’t know when and how exactly you are going to be able to cerate this new product. The parent company usually delegates the production to the new firm or acquires the new firm directly after the product has been brought out and received positively by the public 
 Increased diversification: expand product portfolio 
 Reshaping the firm’s competitive scope: firm reorganizes itself, strengthening the organization’s resources and expertise 
 Learning to develop new capabilities: acquiring knowledge that was previously not  within the firm HORIZONTAL & VERTICAL ACQUISITIONS Market power exists when a firm is able to sell its goods or services above competitive levels or when the costs of its primary or support activities are below those of its competitors. Horizontal acquisition: increase a firm’s market power by exploiting cost-based or revenue-based synergies. Example: pharmaceutical companies acquiring start-ups Acquisitions are usually with competitors ( for example Gillette with P&G) Vertical acquisitions: a firm acquiring a supplier or distributor of one of its goods or services. Example: ice creams company acquiring a dairy company, Sony acquiring CBS- hardware devices and music content The acquisition can help the parent company to achieve diversification ACQUISITIONS TO INNOVATE • High cost to innovate • Challenging to ensure a profitable return • 88% of innovations fail - 60% of innovations fall within 4 years of receiving a patent • Acquisitions are a means for firms to gain access to new products or to current products that are new to the firm - Quicker returns - Faster entry to new markets • Extensive in the pharmaceutical industry • Usually large biotech or pharmaceutical firms acquire small firms with innovations Cost of bringing a new drug to the market in 2005 was “pushing $900 million and the average time to launch stretched to 12 years” - E.g. In 2005, Pfizer acquired Angiosyn Inc to develop a drug to avoid blindness • Acquiring to gain access to innovations are also popular in high tech - E.g. Facebook acquiring Whatsapp CROSS BORDER ACQUISITIONS • 40-45% of acquisitions in 90s were cross border acquisitions • Historically, the US companies are the most active acquires - Bank of America bought a stake of the Chinese Construction bank in 2005 and sold off its stake in 2013 - 40% of Walmart’s international acquisitions were cross-border • Relaxed regulations around M&A within Europe have facilitated more internal European acquisitions - Many European corporations have maximized growth in their domestic markets • Firms from emerging markets also engage in acquisitions to expand into developed markets - In 2005, the Lenovo group acquired the PC assets of IBM and was allowed to use IBM’s brand label for 5 years • Typically used for entering new markets • Overcoming barriers to entry • Sources of barriers to entry: - Established relationships with suppliers - Customer loyalty - Market incumbents - Lack of familiarity with local culture - Lack of economies of scale • Gives firms more control over their international operations and lowers risk • Cross-border acquisitions can be a political issue - Foreign firms have a cap on the % of a firm it can acquire in china (20%) - Chinese National Offshore Oil Corporation (CNOOC) [an oil and natural gas producer in the Chinese market] - Tried to stop a deal between Chevron & Unocal (vertical acquisition) by offering Unocal $18.5 billion in cash (Chevron had offered $17.1 billion initially) - Acquisition of Nexen for $15.1 billion in 2012 was subject to evaluation by the Canadian and US authorities WHICH ARE THE DOWNSIDES OF AN ACQUISITION? • Integration difficulties • Inadequate evaluation of the target: if you are not able to evaluate the target you might end up to pay too much for it • Large or extraordinary debt: if the target is too expensive, you might have a big debt • Inability to achieve synergy • Too much diversification: if a market is entering too many business different from each other the parent company might have quite to many firms too coordinate • Managers only focused on acquisitions • Too large: results in problems of coordination • Extremely costly • You can buy too much and grow too much and then is difficult to achieve synergies bcs it is to complex • If you have to much market power you could experience consumer’s protests and disappointment - Employee poaching - Customer poaching - Financial markets sensitive to any (negative) news STEP 4: PMI implementation • Implementation: project management activities necessary to get to desired level of integration - Implementing desired level of operational integration - Includes linking IT, bank office, payroll, HR etc. - Communication is a key element - Faster is usually better to avoid uncertainty • Implementation capability hugely important, as eventually acquisition synergies are realized in this phase • Central corporate coordination and PMI teams critical WHEN TO ALLY AND WHEN TO ACQUIRE FORMAL ALLIANCES • Formal arrangements between two or more entities • No new company is created, but the companies establish a cooperating to reach a given objective (synergies) • Good when value creation comes from sharing information rather than assets INFORMAL ALLIANCES • No formal agreements (a Memorandum of Understanding, or MoU) • Sometimes is a way to collude among competitors (cartels) • Industrial districts / clusters, to coordinate and share costs (training, advertising, distribution ecc) • Supply networks (for example toyota’s suppliers association, with the specific goal of sharing information, training and mutual development) EQUITY ALLIANCE = GENERALLY A FORMAL ALLIANCE BUT NOT ALL FORMAL ALLIANCE IS A EQUITY ALLIANCE, AN EQUITY ALLIANCE YOU BOTH BUY A BIT OF EACH OTHER JOINT VENTURE • Two companies, A and B, see an advantage in doing an activity together • They create a company C, while company A and B continue to exist • Good when value creation comes from resource sharing and asset complementarity PARTIAL OWNERSHIP • Two companies, A and B, see an advantage in establishing corporate ties • They do not create a new company but they establish an ownership relationship • Company A buys 10% shares of company B and company B buys 7% of company A (board appointments) • If this happens among many firms, then we have a business group • It is not like joint venture because the two companies are still different from each other, they do not create a new business together • In partial ownership we don’t create a new business, they just buy stoke of each firm GENERAL ISSUES WITH PARTNERSHIPS • Contract incompleteness - information asymmetry on motives and capabilities - impossible to specify all responsibilities - impossible to foresee the evolution of the partnership and of the context in which it evolves • Strategic commitment of partners - inconsistent commitment to partnership goals - highly unstable over time and across units or locations - dependent on emotional and political dynamics • Learning impairments - “learning race” among partners to access IP ( intellectual property) and relationships - Barriers to adapt goals, strategies, structures, systems, behaviors ecc - Firms need to learn how to work together and the inability to learn how to coordinate their activities can result in partnership problems TOOLS TO HANDLE PARTNERSHIP ISSUES 1. DESIGN of the collaborative agreement 2. PLAN / STRUCTURE of post-formation activities 3. PROCESSES and CAPABILITIES supporting partnership activities - Objective evaluation of key performance indicators - Open/transparent discussion (goals, results, issues) - Emotional intelligence: anticipate/handle emotional dynamics internally, with partner, with stakeholders CASE, WHAT WERE THE CHANGES GOING ON WITH DISNEY IN 90S- EARLY 2000S? There is the evolution from the hand-writing to the computer drawing, new technology • Problems managing animators ( number of animators. Compensation of animators-80% of sales) • Loss of Katzenberg • Internal tension due to CG lab • Tensions with pixar ( 2 contracts) => As time went on, Disney kept giving up more control to pixar as the cartoons were becoming more successful Pixar Be Acquired by Disney or Not to be Acquired? Strategic - Disney is the best owner - Implications - Long working history - Financial - This is a great deal, we get a return on investment - Sellatits peak Competitive - Disney Alternatives * Hire talent away from Pixar * Difficult Worst owner — cultural misfit Lose human capital - Why not renegotiate contract with Disney to pay a tiny distribution fee Disney knows us well; it can take advantage of our weaknesses We have many other alternatives that can be leveraged. Create competition and play them off each other e Team based rather than individual based * Fix Disney's animation unit e New long term contract Pixar Be Acquired by Disney or Not to be Acquired? * Build own distribution network, merchandising sales and etc. * Sign an exclusive distribution deal with a different movie company e Newlongterm contract