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Business Strategy & Policy PSU MGMT #562

Dave Gartendaveoutside@alum.mit.edu

DiversificationTacit Collusion, Government & Strategy

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Boeing Case – Key Learnings

1. Risk can be financially evaluated2. Key risk factors and assumptions

can be used to focus decision-making

3. Key risk factors can be identified with specific actions, repentances or contingencies

4. Government can have a huge effect on Strategy.

A380 LaunchKey focal issue: should Airbus proceed?Critical uncertainties

EU Loans. Can we get low interest loans? Will the GATT affect this? Boeing. What will Boeing do with the 747? Update it? Drop price? Launch customers. Can we get enough launch customers to mitigates

risk? Fuel price. What if fuel prices go way up or way down? Technology. Will the cost be higher than planned? Will development

time be longer? Airport acceptance. Will enough airports make the changes to

accommodate the A380? Market for aircraft. How large will the market be?

Which will drive the scenarios?04/18/23 Dave Garten - Business Strategy 3

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Core Competency and Growth

Core

Step 1 (38%)

Step 2 (26%)

Step 3 (7%)

Diversification (<1%)

Source: Bain, October 2003

Related

Unrelated

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Adjacency and Success

New product & services

Steps from CoreStep 1 Step 2 Step 3 Step 4

New geography

New customer segment

New channel

Forward/backward integration

New business

30-50%

10-30%

<10%

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Diversification

“Barneyspeak” (related) Concentric diversification = new but related

products (related) Horizontal integration = increased control over

competitors (related) Horizontal diversification = unrelated products,

related customers (unrelated) Conglomerate diversification

NPV (together) > NPV(A) + NPV(B).

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Diversification (Related)Driven by operational economies Shared activities: sales/marketing/channels,

manufacturing, R&D, support functions Core competency Growth and/or consolidation

Driven by financial & mgt economies Risk management, capital allocation, tax Core competency to manage a business

Motivated by market power Market share (antitrust issues) Multipoint diversification (conglomerate)

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Diversification - “Disagregation”

Harder to derive value from unrelated diversification or vertical integration

Presumption: focus -> improved competitive position -> improved profitability

Presumption: focus -> improved competitive position -> improved profitability

X

Innovation of IT, efficiency of information More specialization Deregulation, globalization of markets Efficiency of capital markets Increasing customer sophistication…

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HPQ

Source: WSJ, 3/05 Source: UBS, 3/05

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CollusionCollusion as a business strategy What is collusion? Why do companies collude? Why is tacit collusion? Why use

it? Under what conditions does

collusion tend to occur?Alliance vs. collusion

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Collusion – Game TheoryStakes, positions & interests can be modeled

People (or organizations) have “stakes” in the game They will behave in their own self interest, i.e. their stake

Prediction requires thinking strategically about others’ problems/goals…however…don’t assume the competitor thinks the way you do (check your cognitive biases)There is ultimately a winner and a loserIn general, a good (but not perfect) predictor of a competitor’s future behavior is their past behavior, but…If the situation has changed materially, then follow the money (i.e., their self interest)

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Collusion – Game TheoryWhat does signaling accomplish? Matching, threatening, non-threatening Examples

Matching - airlines Tough vs. soft – Nutrasweet/Hollander Top dog, Lean & hungry – DRAM Puppy Dog, Fat Cat – IKEA

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Government & StrategyBig picture: Encourage change,

domestic rivalry, innovation. Tools:

X

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Government & Strategy“Government's proper role is as a

catalyst and challenger; it is to encourage, promote even push companies to raise their aspirations and move to higher levels of competitive performance.”

Porter doesn’t like: Trade barriers, forced JV & tech transfer, subsidies, local content laws, spending

(defense & domestic)

Derived from Michael Porter, Competitive Advantage of Nations

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Joint Venture: Int’l Entry

Volkswagen-Shanghai JV

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AntitrustWhat is the goal of antitrust regulation?Laws-> Sherman (1890), Clayton (1914) Reliance on court system

“Per se” vs. “rule of reason” violationsCan DOJ reach across borders? When?Actions: Price, non-price and leveraging Predatory pricing, price fixing, dividing markets,

exclusive dealing (e.g., tying)

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AntitrustAcquisitions Implications for managers Proposed actions legal? Will a lawsuit be brought? What are “costs” of a lawsuit?

Some antitrust examples DRAMs, Cingular/AT&T wireless Lysine cartel