MGT 380 Final: Final Study Gude

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Management MGT 380

MGT 380 Final Study Guide I. L14: Corporate Strategy A. Business-Level Strategy 1. The purpose of a business-level strategy is to create differences between the firm’s position and those of its competitors in order to gain or sustain competitive advantage a. Strategic Positioning: Must decide whether it intends to perform activities differently or to perform different activities 2. Scope of the Corporation a. Three dimensions along which firms of any size can chose to expand: product/customer, value chain, and geography b. Horizontal integration (diversification) c. Vertical integration (make or buy)  expanding value chain d. International expansion (geography) 3. Key Questions a. 1. What businesses should the corporation be in? b. 2. How should resources be allocated across different business units? 4. Corporate-Level Strategy a. A corporate-level strategy specifies actions a firm takes to gain competitive advantage by selecting and managing a group of different businesses competing in different product markets b. Corporate Strategy is what makes the corporate whole add up to more than the sum of its business unit parts • When this occurs, business units benefit from corporate advantage. c. Corporate Advantage: • Not all corporations have a corporate advantage (more advantage than the sum of its parts) • Cost effective: C(Y A Y B < C(Y A + C(Y )B • Additional revenue: R(Y ,AY )B> R(Y ) A R(Y ) B d. Multibusiness companies create value by influencing – or parenting – the businesses they own • Parenting advantage = the best parent companies create more value than any of their rivals would if they owned the same businesses e. It is also possible for companies to destroy value by coming together B. Horizontal Differentiation 1. Horizontal Integration a. Narrow business scope: single-business • Over 95% of revenue from one industrial category • 2 most preferred b. Medium business scope: related diversified • No more than 30% of revenue from any one industrial category • Business units share common resources/skills • Most preferred c. Broad business scope: unrelated diversified • No more than 30% of revenue from any one industrial category • Business units do not share common resources/skills • Conglomerates • Least preferred d. Relationship between diversification and performance 2. How do related and unrelated diversifiers create value? a. Related Diversifiers: • Grow by acquisition or internal development (organic growth) • Develop organizational synergy via common resources/capabilities • Units interdependent • Corporate office involved in operations of units to maximize coordination • Some units sub-optimize performance for greater good of whole • Evaluate corporate office by value of synergies created b. Unrelated diversifiers: • Grow via acquisition • Develop private info or knowledge to value firms better than market • Find bargains and avoid bidding wars • Believe a company may be undervalued in the market, can make valuable and turn around, only way to create value by acquisition, works well in developed capital market of US • Run autonomously • Restructure and sell • But… bargains harder to find as market for corporate control become more efficient, may still work in developing countries with inefficient markets c. In less developed countries, there is lower trust in the legal infrastructure, leading to increased diversification (companies very diversified), often have own police forces 3. Reasons to Diversify a. For balancing cash flows: shareholders can diversify themselves, no necessary for managers to do this b. Firm size and growth: CEO compensation is usually tied to revenues, some incentives for empire building, not always a good reason for shareholders (a question of impact on competitive advantage) c. For acquisitions announcements: • Target (acquired often at a premium) company stock price increases • Acquiring company stock price decreases, announcing promise to shareholders, skepticism over ability to grow etc. 4. Diversification + “Guilty Until Proven Innocent” a. Operational Economies of Scope: How does it create a cost advantage? b. Transferring Core Competencies: How is expertise transferred? Is it valuable, rare, & unavailable to competitors? c. Vertical integration: Can the advantages be duplicated with market transactions? At what cost? d. Internal Capital Markets: Why do external capital markets fail? Why is there asymmetric information? e. Discipline/Restructuring: Why wouldn’t the target’s management team figure out what to do (or do it)? f. Acquisition competence: Why does the buyer have better info or fit than the rest of the market? 5. Difficulty of Generating Corporate Advantage a. Dismal track record of diversification performance b. Most corporate strategies have dissipated rather than created shareholder value c. Research: • Porter (1987) – over 25 years most corporations divested more diversification moves than they actually kept • Rumelt (1992) – corporate effects account for < 1% of variance in business unit profitability d. Anecdotal evidence – Takeovers, buyouts, spin-offs, break-ups of the 1980s e. Market is generally skeptical about acquisitions 6. Problems in achieving acquisition success a. (post-merger) Integration difficulties b. Inadequate evaluation of target – pay too much premium; winner’s curse c. Large or extraordinary debt – Junk bonds etc. d. Inability to achieve synergy e. Too much diversification (coordination costs) – Too large, bureaucratic, rigid, less innovative etc. f. Managers overly-focused on acquisitions • time-consuming search, post-merger integration process etc. • Managers’ time/attention are scarce resources 7. Myths About Diversification (POSSIBLE T/F ON EXAM) a. Unrelated diversification offers shareholders a superior means for reducing risk (not true.) b. Good managers can manage almost anything (not true.) c. If you acquire a strong firm, you will never have to intervene (not true.) d. Corporate (or Diversification) Discount: Stock market is typically skeptical of corporate strategy (i.e. break-up value > market value) 8. Diversification Summary a. In general we should compare corporate diversification on behalf of the shareholder with independent portfolio diversification by the shareholder b. Adding value: • By developing economies of scope between business units in the firms which leads to synergistic benefits • By developing economies of scale to achive market power and increase efficiency c. Requirements: • Better-off test: synergy, decreased cost, increased revenue • Ownership test: ownership vs. long-term contract, consider transaction cost economics C. Vertical Integration (make or buy?) 1. Ex in PC Industry a. GUI was unique at first, can’t use generic inputs for differentiated product, Apple had to produce own components to make work b. Changes due to commoditization in components and function of PC parts 2. Pros and Cons a. Advantages • More control over decisions made by upstream supplier or downstream distributor that can affect your competitive advantage • More control over transaction-specific investments, more customized inputs, more differentiated end product (ie Apple in the ‘80s) • More control over information flow, better coordination of new product development across stages of production (Apple, Tesla today) • More control over production timing across stages, more customized product (ie Dell ‘90s) • Avoid double-marginalization problem: theoretically can destroy market with increased markup of inputs and prices, but wouldn’t happen in reality with multiple monopolies stacked in the same value chain • Avoid downstream free-riding problem: other companies benefit from retail investments (ie go to store and learn about product, then buy online) b. Disadvantages • Entry is costly, high fixed costs and capital requirements • Reduced flexibility to choose alternative transaction partners • Captive relationships dull market forces and reduce incentive for innovation and cost control • Less access to innovations of alternate transaction partners • Need to develop different technical and managerial skills for different stages of production 3. When do pros outweigh cons for vertical integration? a. Integrate when building or sustaining competitive advantage requires control of other partys’ decisions • When transaction-specific assets are needed: site specific, technical/design specificity, human-capital specificity • When you need secrecy of information shared across stages of production • When you need coordinated timing across stages b. Differentiation requires transaction-specific assets • Can’t make differentiated product from generic inputs • In-source those inputs that are crucial to your form of differentiation (ie features, reliability, efficiency, service) • Hold-up problem: “hold up” power if you don’t absorb something from a contract or if distrust or renege on agreement, something that vertical integration can prevent 4. Illusions of Vertical Integration (MAY SHOW UP AS T/F ON EXAM) a. A strong position in one stage of the value chain can easily be translated into a strong position in adjacent stages. (Rarely true.) b. Required technical & managerial skills are the same across stages of the value chain. (Rarely true.) c. It’s better to do it internally, because we capture the other party’s profit. (Ignores entry costs, capital costs, lost flexibility & dulled incentives.) d. It’s better to integrate, because we gain bargaining power. (Could be true for horizontal integration; rarely true for vertical integration) e. It always makes sense to integrate into more attractive markets. (Not if entry costs are high, which is especially likely if entry requires developing new skills.) f. It never makes sense to integrate into less attractive markets. (No, depends on control over decisions that are critical to building & sustaining competitive advantage.) D. Key Ideas 1. Transition Cost Economics a. A theory that explains the boundary of the firm. (firm vs. market) b. Market failure can arise when transaction cost is higher than the value of exchange from the transaction • Therefore, a firm may be a better mechanism than market transaction in such case c. Sources of transaction costs? • Difficulty in searching buyer and/or seller • Costly to write and/or enforce contract • Asset specificity, opportunism, uncertainty • Asymmetric information d. TCE can explain “boundary of the firm” • Vertical Integration (make vs. buy decision); e.g. Disney stores/toys/cruises • Horizontal integration (M&A) • Market vs. Firm • Grupos (Latin America), conglomerates in Asia, business houses of India etc 2. Trend in Scope of the Firm a. Alfred Chandler has documented the growing vertical, geographical and product scope of firms since 1860’s b. Why? Administrative costs of the firm have fallen compared to transactions costs of markets due to: • Improvements in management: accounting systems, decision science, organizational structures c. But: Trend has reversed since 1980. Why? • Advances in information and communication technology • That is, transaction costs decreased • Market transactions became easier and all-encompassing large firms became less efficient d. I. L15: PepsiCo’s Restaurants A. Group Discussion Points (FILL IN) B. PepsiCo Overview 1. The Business a. What are the businesses PepsiCo is in at the time of the case (1992)? • Soft Drinks (Pepsi-Cola): 39% of profit • Snack Foods (Frito-Lay Company): 35% of profit • Fast-food Restaurants (KFC, Taco Bell, Pizza Hut): 26% of profit (but fastest growth) b. Together they generated $20B in sales in 1991. 2. Leadership Style a. Wayne Calloway’s leadership style? (at the time of case) – CEO & Chairman Wayne Calloway known to be “tough” • “if it ain’t broke, fix it anyway” • Packing company with workaholics and expecting a lot of them b. Emphasis on “people, people, people”: “we take eagles and teach them to fly in formation” c. Calloway, together with the upper level management reviewed the performance of 550 top-level managers d. In 1989, PepsiCo was the first major U.S. corporation to offer all of its 300,000 employees a stock option plan 3. Corporate Strategy a. Decentralized (low coordination across businesses) corporate structure b. Competitive, autonomous culture • Competitive between units and incentives c. Not very much coordination across restaurants (“synergy is a dirty word here. It’s a cultural thing at Pepsi that you do it on your own…”) d. 3 Separate chains and PFS (distribution and supply unit) e. Why not coordinate? Emphasis on entrepreneurial management • “We don’t give away our trade secretes” but “our goal is to try to help each other without hurting ourselves” • Had managers often switch between divisions 4. Coordination vs. Autonomy a. PepsiCo has a restaurant business where there are clear potential benefits to sharing (can’t get more related than three fast food restaurants) b. Why don’t they coordinate? (way things were and company culture) c. Benefits of autonomy: • Maintain entrepreneurial management • Sense of ownership • Incentives to get to the frontier, instead of suboptimizing for greater good of the corporate whole 5. Strengths a. So far, PepsiCo provides a central source of “skilled consumer marketing managers” and “monitoring independent divisions” through outcome control • They have done this successfully C. Acquisitions? 1. Acquiring Carts of Colorado (COC)  vertical a. Pros: • **extends points of distribution • Critical to PepsiCo’s increasing POD strategy • Strategically important (?): foreclose competitors like Coke from access to COC carts and kiosks (versus the loss of business COC will suffer when Coke refuses to buy from COC) • 18 months ahead of its competitors (is this enough or a sustainable gap?) b. Cons: • Why vertically integrate into manufacturing, then why no vending machines? • How imitable is COC’s products/how long is their technological lead relevant? • Maybe difficult to convince restaurant businesses to use COC carts given its autonomous culture • May conflict with existing franchise contracts c. At time of case, CoC was a designer, manufacturer, and merchandiser of mobile food carts and kiosks 2. Acquiring California Pizza Kitchen (CPK)  horizontal a. Pros: • Hot concept with growth potential • Learning “casual dining” • Can add capital and professional management talent to CPK to make it grow • A fast growing chain with lots of opportunities b. Cons: • PepsiCo knows nothing about “casual dining” • Maybe too costly for learning (why not just hire key personnel and imitate) • CPK may be merely a passing yuppie fad • Track record of failure for PepsiCo wit La Petite Boulangerie acquisition failed ($13m loss, huge overhead) c. At time of case, had to act fast since CPK going public 3. Post-Acquisition Integration a. How should CoC and CPK be placed into PepsiCo structure and who to report to b. If PepsiCo bought COC it would be for POD strategy, if CPK for learning the casual dining market c. Options: • Leave COC independent to stimulate entrepreneurship (under PepsiCo’s culture), should $7m company report to Calloway directly • Put companies under one chain or another (CPK may resent being controlled by KFC, Taco Bell, etc) • Put companies under PFS (can’t even demand toilet paper coordination easily) D. Update and Current Perspectives 1. Updates a. PepsiCo made both acquisitions, they took a 51% ownership with agreements to buy out the rest over time, conditional or performance b. CPK and CoC were left as independent companies • Reporting to VP strategic planning (Ken Stevens) and one or two restaurant presidents • CoC was reconceived as a design and marketing company, with production outsourced • CPK has rolled out more stores nationwide, using the funding from PepsiCo c. However, 1994 operating profits from restaurants fell 6% • Autonomy strategy worked in the 90s, more focus and focus in core competencies was necessary with increasing competition d. Founders of COC buy back PepsiCo’s equity investment in 1995 e. CPK was bought out by private equity firm and went public in 2001 f. PepsiCo Vice-chairman Roger Enrico’s goals were to return to profitable growth by tying together business functions across the chains, including accounting, billing, and purchasing to cut costs, and reducing the number of company owned stores (**more coordination) 2. Yum Brands a. In 1997, PepsiCo spun of its restaurants as Tricon, renamed Yum! Brands Inc. in 2002 • KFC, Taco Bell, Pizza Hut • Spectacular success with spin off • More focused and faster decision making in the highly competitive restaurant business • Later, Yum! Brands china spun off for faster growth in a focused market b. Yum! Focused on generating concentrated efficiencies under a single brand, sometimes placing two or three brands into a single restaurant, sales have increased considerably, though still less than at McDonalds c. Yum! Is currently the world’s largest restaurant company with more than 40,000 restaurants in 125 countries (in 2014), and has achieved phenomenal growth after spinning off 3. Franchise a. A franchise is a type of license that a party (franchisee: local entrepreneur) acquires to allow them to have access to a business's (the franchisor: Pizza Hut, KFC, Taco Bell etc.) proprietary knowledge, processes and trademarks in order to allow the party to sell a product or provide a service under the business's name • In exchange for gaining the franchise, the franchisee usually pays the franchisor initial start-up and annual licensing fees b. From a TCE (Transaction Costs Economics) perspective, franchising (long-term contract) is an alternative arrangement to corporate diversification via outright ownership • Some of the most popular franchises today include Subway, 7-Eleven, Hampton Inn & Suites, McDonald’s, H&R Block, and local gasoline stations c. Corporate strategy for firms when • B2C business that have brand power • Service rather than manufacturing • Service quality can be observable and consistent with relative ease • Great deal of standardization in the business model 4. Advantages of Franchises a. To Franchisor: • Mitigating risk, avoids investments and liability • Incentive alignment: franchisee is said to have a greater incentive than a direct employee, the franchisor’s success depends on the success of the franchises • Can be used in less standardized business environment when franchisor has lack of local knowledge • Franchisors are able to sell franchises and expand rapidly (in standardized manner) across countries and continents using the capital and resources of their franchises while reducing their own risk b. To Franchisee: • Pay royalty for the established trademark • Receive training and advisory services given to the franchisee • National or international advertising are commonly made available by the franchisor • Franchisee knows the local market, mutual benefit working with company and broad appeal of brand image E. Key Takeaways 1. PepsiCo Restaurants are a clear example of cost and benefits of sharing and coordination at the corporate level a. Even here there is a tradeoff between autonomy and coordination! 2. Transaction cost economics (TCE) of corporate strategy vs. franchise business 3. You can create value through fairly independent divisions, but the question is, can coordinate create even more value? II. L16: Internationalization, Managing Global Expansion A. International Strategy Basics 1. What is international strategy? a. A strategy through which the firm sells its goods or services outside its domestic market (country of origin) • “Host country” = foreign country • “MNC” = multi-national corporations b. When international strategies are successful, firms can derive four basic benefits: • Increased market size (growth) • Return on investment (efficiency) • Economies of scale and learning (knowledge) • Location advantages 2. Increased Market Size a. Increase growth opportunities (ie Coke, Pepsi, and Wal-Mart) b. Domestic market may lack the size to support efficient scale of manufacturing facilities c. The size of an international market affects a firm’s willingness to invest in R&D to build competitive advantage • Larger markets usually offer higher potential returns and thus pose less risk for a firm’s investment 3. Return on Investment a. Large investment projects may require global markets to justify the capital outlays (ex Pharmecauetical R&D) b. Weak patent protection in some countries implies that firms should expand overseas rapidly in order to preempt imitators c. Extend a product’s life cycle • Innovation occurs in home-country market, especially in an advanced economy, and demand for product develops in other countries, so exports provided by domestic organization 4. Economies of Scale and Learning a. Expanding size or scope of markets helps to achieve economies of scale in manufacturing as well as marketing, R&D, or distribution (ie Samsung) b. Costs are spread over a larger sales base c. Profit per unit can be increased (learning-by-doing) via cost reduction d. Multinational firms have substantial occasions to learn from the different practices they encounter in separate international markets • Multimarket competition (ie Apple vs. Samsung smartphones) 5. Location Advantages a. Low cost markets may aid in developing competitive advantage and achieving better access to critical resources • Resources such as raw materials, lower labor cost, key customers, energy, etc • Results in offshoring vertical disintegration b. Other motives include hedging currency fluctuation, avoiding tariffs • Key resources may exist outside country (and maybe cheaper) 6. Strategic Imperative a. According to Gupta and Govindarajan (2000), international expansion may no longer be an option but a strategic imperative for all big firms • Always growing competition is a key factor b. There are at least 5 reasons why globalization is no longer an option but a strategic imperative for virtually all medium to large sized corporations today • The growth imperative • The efficiency imperative • The knowledge imperative (ie Swiffer was taken and globalized by P&D as Swiffer from a japanese company without a patent) • Globalization of customers • Globalization of competitors 7. Choice of Products a. This matrix shows expected payoffs from globalization vs. required local adaptation b. Low adaptation and high payoff is the most attractive option (least work, highest reward), whereas low payoff and high adaptation is least attractive B. International Strategy Methods 1. Logic of International Strategy a. Replication = capitalizing on similarities between countries b. Arbitrate = capitalizing on differences between countries c. Transformation = both arbitrage and replication across national border d. 3 generic international strategies: • Multi-domestic strategy • Global strategy • Transnational Strategy 2. Multi-Domestic Strategy a. An international strategy in which strategic and operating decisions are decentralized to the strategic business unit in each country so as to allow that unit to tailor products to the local market (highly decentralized approach) • Authority and control to local managers • Minimal coordination across countries b. The industry is present in many countries, but competition occurs on a country- by-country basis c. Firm’s competitive advantage is largely specific to the country and is not transferable across nations d. Not much economies of scale and can be more costly • Sacrificing economies of scale and efficiency to maximize market adaptation e. Business units in one country are independent of each other  market specific customers 3. Global Strategy a. An international strategy through which the firm offers standardized products across country markets, with competitive strategy being dictated by the home office (centralized decision) • HQ controls and same business model in each country b. There is a significant competitive advantage in integrating some activity on a worldwide basis c. Emphasizes economies of scale and coordination d. A firm’s competitive position in one country is significantly affected by its position in other countries e. A firm must integrate at least some activities on a worldwide basis to exploit linkages among countries 4. Transnational Strategy a. An international strategy through which the firm seeks to achieve both global efficiency and local responsiveness (hybrid strategy) b. Need to respond to host country pressures and global competitive demand simultaneously c. Management challenge is to coordinate responsive national units in a globally efficient system d. Units coordinate activities with HQ and with one another (very organizationally complex) • Some activities to max adaptation, some to max coordination/efficiency, but can be a disaster if not executed perfectly e. Continuous learning is necessary 5. When is each strategy appropriate? a. Can differ inside an industry, firm, and even with functions for within firm’s operations b. In reality there is most often some kind of mix, no truly global or multi-domestic strategy 6. Important questions for international expansion a. Which foreign markets to enter and which to avoid? • Market potential vs. learning potential? Local competition? b. How to compete globally and transfer an advantage in one market to another? c. What mode of entry? • Export? License? Joint venture? Wholly-owned subsidiary C. International Decisions and Entry 1. **CAGE Framework + Local competition for market selection a. Cultural: language, taste preferences, brand loyalty, religion, consumption patter b. Administrative: taxes, age limit, restriction on ads, former colony c. Geographic: shipping cost, time lag, climate, seasonality d. Economic: per capita GDP, organized distribution channels e. Use this framework for prioritizing market entry • Must also consider the local competition as a key factor for market selection • Once you narrow the analysis down to a limited number of countries, then conduct an in depth analysis weighing the pros and cons of each market for prioritization 2. Overview of Different Entry Modes a. Transactions: licensing (franchising), contract manufacturing, exporting b. Investments: wholly-owned subsidiary (greenfield), acquisition, strategic alliance (ie joint venture) 3. Licensing (Franchising) + Contract Manufacturing a. Process: • Assessing potential in target market  finding suitable licensing candidates  negotiating a license agreement  building a working partnership with licensee b. Appropriate when: • Lack of capital/resource/local knowledge, small target market, technology is not core, technology evolves fast, partner not close to competitor, testing a market for future entry c. Advantages: • Allows a foreign company to purchase the right to manufacture and sell the firm’s products within a host country, takes both manufacturing and selling risk (low risk, low return) • Least costly form of international expansion • Licensee pays royalty • Useful tool to extend product life cycle (Chinese semiconductor competitors in the Samsung case) d. Disadvantages • Little control over manufacturing, distribution, and quality • Potential returns may be small (sharing with licensee) • International firm may learn technology and become future competitor 4. Export a. Advantages • Doesn’t require the expense of establishing operations overseas • Less costly to implement, just need a local distributor, still retain full control over quality and manufacturing • May have to increase production capacity at home country • Risk of selling products (marketing and distribution) are born by the host country firm, manufacturing by domestic country firm b. Disadvantages • High cost of transportation (ie beverage, cement) • Tariffs • Currency exchange fluctuation risk • Less control over marketing and distribution in host country • Price of product is higher due to distributor margin, possible double- marginalization problem 5. Strategic Alliance (Joint Ventures) a. Traditional reasons for: • Sharing of resources and risks • Host gov’t requirements • Overcoming strong nationalistic sentiments • **Quicker entry (relative to acquisition and Greenfield) and benefit from partner’s local knowledge b. Emerging reasons for: • **Learning form one another and leveraging relative strength • Rising R&D costs and technological interdependence • Attain global scale economies from raw material/component supply and in marketing and distribution c. Risk of strategic alliances • Incompatible or conflicts between partners • Asymmetric learning and possible opportunism • Execution can go wrong with a hybrid/partner solution 6. Acquisition a. Advantage • Cross-border acquisition provides quick access to foreign market (ex Beer companies often take this route) b. Disadvantage • More complicated and could be more costly than domestic acquisitions • Post-acquisition integration process can be even more challenging, more things that may go wrong with cross border M&A (ie cultural barriers, norms) c. **Foreign direct investment (FDI) includes both greenfield ventures and cross- border acquisition (from host company perspective) 7. Wholly-Owned Subsidiary: Greenfield Venture a. A greenfield venture is the establishment of wholly owned subsidiary b. Advantage • It affords maximum control to the firm and ability to reap all the benefits (if huge economic benefits, firms often follow this route) • Has the most potential to provide above-average returns c. Disadvantage • The process of creating one can be costly and complex • Higher risk (high risk, high return) 8. Comparing the Entry Modes Entry Mode Degree of Control Systemic Risk Dissemination Risk Resource Commitment Exporting Low Low Low Low Licensing Low Low High Low Joint Ventures Medium Medium Med-High Med-High Wholly-Owned High High Low High Subsidiaries a. Systemic risk is the risk in the host country b. Dissemination risk is the risk of knowledge/secrecy dissemination with teaching new technology, could leak to competitors 9. Political Risk Matrices a. Vs. Economic Opportunity • Lack of gov’t trust or threat of asset seizure as risk is bad, supports lesser direct involvement in host country • More local delegation if high political risk b. Vs. potential risk of hold-up by trading partner • Holdup or opportunistic partner risks, reduced options • If high risks on both fronts, may not be the right market to chose III. L17: P&G’s Global Expansion: SK-II A. Key Facts 1. Background a. The biggest strategic challenge facing most companies in a global environment is to develop and diffuse worldwide innovation rapidly and effectively b. Paolo de Cesare’s 3 Roles • A manager transferred into a strange new environment where he has been given responsibility for a business turnaround (Max Factor Japan) • GLT (Global Leadership Team) member with oversight for P&G’s worldwide beauty care business • A global franchise leader for SK-II 2. P&G Organizational Structure a. In 1986: mainly a country by country management style, local adaptation • Hierarchical, but corporate heads of each division with overall VP Finance and Admin, Product Supply, R&D • Note: dotted lines imply communication but not direct responsibility b. In 1990: old structure not working, moved to more matrix structure • Lack of communication, authority differences between local and corporate, less coordination • With more countries, newer and bigger regions, more divided roles • Matrix hard because its isn’t easy to have uniform brand across countries • New product rollout difficult to organize and use in a timely manner • Had global product manager levels on one “axis” and the different regional divisions on the other c. In 1999: post O2005 implementation • Global product manager has authority and decision making role, and others report to • 7 MDO’s = market development organizations • Switch to a focus on product lines over managers focus 3. P&G Globalization Evolution a. Country Based Management with local responsiveness emphasis • Multi-domestic strategy approach with country general mangers until the 1980s • Too much competition across the general managers b. Globalization phase matrix organization with global efficiency emphasis • Regional headquarters become more active • Eliminated unnecessary country-to-country differences c. Worldwide innovation and learning • Sensing strategic needs and opportunities • Develop and diffuse worldwide innovation rapidly and effectively 4. SK-II a. An obscure skin care product that had not been recognized, much less evaluated, in the Max Factor acquisition • Containing Pitera, a secret yeast-based ingredient supposedly developed by a Japanese monk who noticed the hands of workers in sake breweries kept young looking • SK-II had a small but extremely loyal following, priced at $120 or more per bottle, it was clearly at the top of the skin care range b. Success factors: • Is there an arbitrage opportunity? Transferability of product business model? • SK-II caters to developed, multi-step skin care routine in Japan  need a base of sophisticated consumers in the market • In Japan people were willing to pay for the premium product • In beauty: skin care need expertise vs. makeup, can see effects on the spot c. SK-II business model: • Price premium and high consumption, funding customer support/beauty counselors (in department stores) and selling mystique/advertising • These lent to building loyalty with sophisticated customers through advice and service (beauty counselors) and awareness/credibility (advertising) • Thus, SK-II was a unique and effective product that sold for a premium • Also used famous actresses and other unusual/extra advertising efforts • Beauty imaging system (BIS) for sophisticated, information driven Japanese woman in buying skincare 5. SK-II Transferability a. Pros: • Successful in Hong Kong and Taiwan • Successful transfer of Lipfinity and Swiffer in P&G’s past • Leverage fine-fragrance distribution channels • Innovation is a strategic priority for P&G CEO • New organization designed to support global innovation b. Cons: • Japanese consumers are much more sophisticated than elsewhere • Different distribution channel- department stores, counters, beauty consultants (high costs) • Image, mystique may not be transferable (would other consumers have the same WTP) • Not P&G’s core competency (“stack it high, sell it cheap”) • MDO’s swamped with new products • CEO Durk Jaeger not a strong supporter of top-end products B. SK-II Expansion Decisions 1. Further Expansion in Japan a. Opportunities • Established market, low investment compared to new-market entry • Huge potential to leverage • Only has 3% market share of a $10B beauty product market (“larger than the US laundry market”)  extend product line • The most profitable option • One loyal SK-II customer in Japan already spends $1000 a year • Can exploit innovation, such as with BIS b. Concerns • Expansion abroad has momentum and support • Market growth had slowed in Japan • Too conservative approach c. Low risk, large expansion reward • Really this strategy can happen any time, high potential • Reputation in Japan already, boosts CA 2. Great Britain a. Opportunities • Strategically, a gate for European and US expansion (western markets) • Established skin care market with sophisticated customers • Access to department stores already established with P&G’s fine fragrance business, gives experience and access in market • Mike Thompson’s the head of European beauty business, support from within company • Paolo’s knowledge of Europe (previously a manager there) • Reputation-enhancing • Relatively less urgent compared to China b. Concerns • Very competitive market with strong established competitors • Skin cream the norm in Europe • Image and mystique absent • Cost of ads (TV or print) in Europe are very high • Organization support limited (lacks MDO support), O2005 was causing a good deal of organizational disruption and management distraction particularly in Europe 3. China a. Opportunities • Highest growth potential and prestige beauty segment growing at 30-40% a year • Brand awareness from Hong Kong and Taiwan, large influence of Japan as well • Low cost beauty consultants • Fits China’s Olay access and success (Olay + service component) • Strong local management support • Defend Olay vs. competitors • First mover advantage and timing crucial (most urgent) b. Concerns • Few sophisticated consumers • High import duties (35-40%), largest concern  but lower wage rate could offset some import duty • Elite appeal not mainstream focus (too expensive) • Conflict with mainstream China strategy c. In China, P&G typically had a WalMart strategy and already have distribution means • With Olay as a “premium” product, could bring it down and bring SK-II to the top • China GM in support of bring SK-II to China, most important to access 4. What Happened? a. O2005 was a big organizational distraction b. P&G consolidated position in Japan (room to expand) c. Launched SK-II in China, immediately #1 brand in China • Higher disposable income than expected d. Consolidated position in other Asian countries (Korea, Singapore, and Malaysia) e. Cautious entry to UK, encouraging early results, exceeding own forecasts • Counters slowly rolled out and still slowly rolling out f. Currently, SK-II is the #1 skin care brand in the world C. Key Takeaways 1. Global access to innovation and effective diffusion becomes a key source of competitive advantage for multinational firms today a. Exporting products to foreign markets is no longer enough b. In the P&G case, we observed a company gradually learning that it could no longer simply implement products and strategies developed in the US, even if it tweaked and adapted those for the local market 2. Global organizational change requires more than structu
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