KR11 – Strategic Management Foundations – Stephen Burnett - Lesson 2
Written by: Joseph Levy (yosi@consiv.com), KR11, Group C.
Recap
1.
When talking about strategy – start with asking – for whom? At what level?
Which? Corporate level, business level, functional level?
Business Definition – based on Ted Levitt
1.
Mission statements: (there's a whole book on this)
1.1.
The Railroads said thay're in the railroad business but should have said transportation.
1.2.
Movies should have been entertainment.
1.3.
Oil companies -> Energy.
1.4.
Integrated Circuits -> Electronic Solutions/Communications.
2.
Business definition is about theme (or relatedness).
3.
The theme should not be technology but rather its uses, customer needs, etc'…
(this is the basis of relatedness).
4.
Not all businesses need to be related – conglomerates such as GE – its discrete businesses have nothing in common. There are related groups. Trying not to be perceived as a conglomerate because nobody likes these.
5.
Business definition is about:
5.1.
Theme – How do you want your portfolio of businesses to be related?
5.2.
Defining a business by need is:
5.2.1.
Broader – gives you more options to grow and opportunities to expand.
Railroading companies only do railroads but transportation includes other vehicles.
5.2.2.
Less vulnerable to substitute technological (sub-tech) attacks – agnostic of technology changes – you use new technologies to differently solve a need. Movies are on large screens, but entertainment could be using the TV.
Example: Technological attacks – today – the networks (ABC, NBC) are loosing to Cable which is under attack by on-demand.
5.2.3.
External perspective – focused on the customer – if the customer changes we can adopt the product.
Example: A theatre focused on "showing movies" – we can do that better at home with the TV. The theatre needs to provide an entertainment experience. The competition is not a different theatre – it's the customer's homes.
5.3.
Discussion: The media industry has two types of companies – IP – produces programming that people love. Distribution – network such as ABC.
5.4.
Discussion: Oil industry is still under attack by alternate technology – hybrid cars, gas powered, cars with internal energy sources ("small power plants"), solar power.
6.
Example: Playboy
6.1.
One of the most famous brands in the world.
6.2.
Chicago, 1953.
6.3.
Definition: The product was a magazine. Started out as a magazine publisher.
Targeted at "men" (ages vary). It was unique (articles, cartoons, etc'…). The target men were urban, sophisticated, well dressed (fashionable) educated – a
Page 1 of 5 24/10/06

KR11 – Strategic Management Foundations – Stephen Burnett - Lesson 2
Written by: Joseph Levy (yosi@consiv.com), KR11, Group C. yuppie. What made this provocative? The sex – targeted sexually swinging guys.
6.4.
Background: High production value. Color printing was expensive.
6.5.
Back then, not many guys such as this existed or were very introverted – so this was aspirational marketing (lifestyle marketing). The market was people that aspired to be like the description above. The aspiration is for a lifestyle.
Example: Today – Nike – Target the best athletes in the world – Michael
Jordan. Really targeting all the people that want to be like Mike. This is based on people that have become role models.
6.6.
Playboy's problem – there's no role model. What does Hefner do? Become the role model. Divorced his wife, bought the mansion and started having cocktail parties.
6.7.
You need a Venue for aspirational marketing to work. This allows the people to use the product and live out the dream.
6.8.
Example: Harley Davidson – 55 year old orthodontists – professional, middle-aged males, structured lives. Role model? Willey Davidson.
Venue? Where am I going to go? When? After 2 years the new ones are sold as used and this pushes Harley's prices down.
What do we do – provide the venue – group them together. Every dealer has an organized group – joint trips with the Harley factory workers. They get you to use the bike.
6.9.
Example: Yachting – organize rallies since otherwise you don't use it much.
6.10.
Back to playboy – How do you grow? Find more men. Go international. Problems: different cultures, legislation – barriers. They need a venue.
6.11.
If there's a narrow definition that's not providing enough growth options – Playboy redefined the business – We don't publish magazines to swinging guys – we provide entertainment for men via:
6.11.1.
Clubs
6.11.2.
Resorts
6.11.3.
Merchandise – playboy bunny for the car
6.11.4.
Movies
6.11.5.
TV – there were beauty competitions on network TV
6.11.6.
PPV – pay-per-view
6.12.
Conclusion: business definition tells you where do look for growth and where do you play. It is a strategic decision.
You don't have to do everything that's consistent with the definition but it provides guidance. Too broad of a definition could be a liability. You could narrow it and sell the parts that are a burden. This is called business contraction.
6.13.
The broadening of playboy's definition provided methods of growth and the venue. "Losers" go to the playboy club and the bunnies are nice there.
The "loser" feels like Hefner.
6.14.
Brand-leveraging – the clubs were called "Playboy clubs". Hefner built a resort next to a lake. Built a Ski resort called "bunny hill".
All this promoted the brand – created synergy by placing the brand on different products. Allows for automatic awareness to a new product.
Provides an image. Yields customers without large spending on marketing.
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KR11 – Strategic Management Foundations – Stephen Burnett - Lesson 2
Written by: Joseph Levy (yosi@consiv.com), KR11, Group C.
=> The two businesses (old&new) are worth more than their sum =>
Synergy!
Coffee & cake…
7.
Common Themes
7.1.
Share markets
Example: Playboy companies
7.2.
Share common needs
Example: Playboy companies satisfy the same needs
7.3.
Share common technology
Example: Honda – engines
7.4.
Vertical integration (be related via the supply chain)
Example: International Paper – own lands with trees, make pulp, fluff, paper, packages, paper cups, etc'… The CEO/Owner describes it as Integrated forest products. Will not go into plastics caps. The integration constraints the definition of the business.
8.
The business definition also defines where we DON'T play.
Example: GM – Transportation – They went into everything – cars, trucks, engine, diesel engine – very vertically integrated businesses.
Today they have a much narrower definition – cars & light-weight truck. This yielded more focus.
9.
Business definition defines who are the competitors.
Example: Playboy's club compete with local clubs, Their TV competes with the
TV channels.
10.
Why didn't playboy succeed phenomenally?
10.1.
Management - many different businesses with different types of technologies and problems. Very difficult to manage all this – need different skills. So not all products were good – mild clubs, mild resorts, etc'…
10.2.
Brand leveraging problems – if something hurts the brand – it affects all the products.
Example: Playboy -
The sexual revolution rendered playboy less relevant.
The woman's movement fought it.
Hefner is old & running around with young women – same role model.
So the brand became more negative and that hurts synergy. It's no longer cutting-edge so people don't go to clubs, view the TV channel, etc'… - the empire collapses.
Today they're mostly licensing their brand.
Example: Levis men suits – counter to their brand. Not only do the suits not
10.3.
sell, but it hurts the jeans. This is called brand dilution.
Small market…
11.
What should have been done?
11.1.
Playboy - Could have outsource resort/clubs. Then you lose control.
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KR11 – Strategic Management Foundations – Stephen Burnett - Lesson 2
Written by: Joseph Levy (yosi@consiv.com), KR11, Group C.
11.2.
International Paper is doing it – they're spinning off the land & trees since it's not consistent with their shareholder's aspirations for quarterly stock increase (land price increases does not show up in the books).
12.
The current trend in business definition is to be NARROW.
12.1.
Fewer businesses, more related & focused.
12.2.
12.3.
Outsourcing, off-shoring
How do I grow? - Be number 1 or 2 in a large market!
13.
Example: Disney
Very vertically integrated. 13.1.
13.2.
13.3.
Owns most of everything they use – parks, land, costumes.
They do it since control over the brand is very important for them
(being a brand-leverager).
14.
A conglomerate, in the 50s, was considered as a good way to spread risk. Today, the money is all in mutual funds. Each fund has a different strategy and they're looking for a certain type of stock. Therefore – they don't like conglomerates.
This is negative synergy since the company is involved in a lot of categories.
15.
The market is very brutal about synergy – If the market believes that divisions are not achieving synergy – they demand that it be spun-off. Sell it to someone who's in that business.
Example: Whitman – owns:
15.1.
PGB – Pepsi General Bottles – buys concentrate from pepsi, bottle it
15.2.
15.3.
and sell it.
Midas mufflers
Hussman – large refrigerated boxes.
No synergy. The market doesn't like this company.
15.4.
The students asked to solve this offered to split off the division, find a pure play – another company in that field, sell it off (might result in higher overhead and lower income).
15.5.
The counter-argument was that the divisions had management synergy.
Bogus claim. The stock used to be good but then went down & down.
15.6.
The company got split and was sold.
16.
Conclusion : the stock market is brutal – money wants pure plays (synergy) which yields control. Example: CEO of motorolla refused to break up the semiconductor division and was fired. Now it's FreeScale (was IPOed).
The market says that if divisions A-D are worth more together – that's fine. If not
– break it up to have exclusive stocks that are controllable (although must perform individually).
17.
Causes for this:
17.1.
17.2.
The way in which money is invested – funds with money.
Cost of competition
17.2.1.
New drug – $1Bil
17.2.2.
New car - $5Bil. That's why car companies share platforms and development. Porsche sells engineering services.
Example: car development cycles – Year1 - new platform, Year2 – new engine, Year 3&4 – need to reduce cost since end-of-life is soon and consumers know that.
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KR11 – Strategic Management Foundations – Stephen Burnett - Lesson 2
Written by: Joseph Levy (yosi@consiv.com), KR11, Group C.
Conclusion: can only consider few businesses that need to be big on a global scale (no. 1 or no. 2). Need high synergy.
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