6/27/20151 Business Strategy & Policy PSU MGMT #562 Dave Garten Diversification Tacit Collusion, Government & Strategy

6/27/2015Dave Garten - Business Strategy2 Boeing Case – Key Learnings 1. Risk can be financially evaluated 2. 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 Launch Key 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? 6/27/2015Dave Garten - Business Strategy3

6/27/2015Dave Garten- Business Strategy4 Core Competency and Growth Core Step 1 (38%) Step 2 (26%) Step 3 (7%) Diversification (<1%) Source: Bain, October 2003 Related Unrelated

6/27/2015Dave Garten- Business Strategy5 Adjacency and Success New product & services Steps from Core Step 1 Step 2 Step 3 Step 4 New geography New customer segment New channel Forward/backward integration New business 30-50% 10-30% <10%

6/27/2015Dave Garten- Business Strategy6 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).

6/27/2015Dave Garten- Business Strategy7 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)

6/27/2015Dave Garten- Business Strategy8 Diversification - “Disagregation” Harder to derive value from unrelated diversification or vertical integration 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…

6/27/2015Dave Garten- Business Strategy9 HPQ Source: WSJ, 3/05 Source: UBS, 3/05

6/27/2015Dave Garten- Business Strategy10 Collusion Collusion 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

6/27/2015Dave Garten- Business Strategy11 Collusion – Game Theory Stakes, 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 loser In 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)

6/27/2015Dave Garten- Business Strategy12 Collusion – Game Theory What 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

6/27/2015Dave Garten- Business Strategy13 Government & Strategy  Big picture: Encourage change, domestic rivalry, innovation. Tools: X

6/27/2015Dave Garten- Business Strategy14 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

6/27/2015Dave Garten- Business Strategy15 Joint Venture: Int’l Entry Volkswagen-Shanghai JV

6/27/2015Dave Garten- Business Strategy16 Antitrust What is the goal of antitrust regulation? Laws-> Sherman (1890), Clayton (1914) Reliance on court system “Per se” vs. “rule of reason” violations Can DOJ reach across borders? When? Actions: Price, non-price and leveraging Predatory pricing, price fixing, dividing markets, exclusive dealing (e.g., tying)

6/27/2015Dave Garten- Business Strategy17 Antitrust Acquisitions 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