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(Barney/Hesterly, Strategic Management and Competitive Advantage)
Strategic Management in General
Disney – Strategic Management In 1984, Disney’s stock price had been flat for a decade. Earnings per share were only $0.06. Disney had profits that year of $242 million. By this point in time Disney had become primarily a theme park company. Seventy seven percent of its profits came from theme park operations that year. Twenty two percent of profits came from consumer products (licensing Mickey Mouse, Donald Duck, etc.). Only one percent of profits came from filmed entertainment in 1984. Indeed, Disney had become a different company from what Walt Disney and his brother Roy O. Disney left behind. In 1971 when Roy O. Disney died (he became CEO when Walt died in 1966), 50% of the company’s profits came from filmed entertainment. The Disney board was dissatisfied with the firm’s direction and its financial performance. Michael Eisner was hired as the CEO of Disney in 1984. He had extensive experience in the entertainment industry including a stint as the president of Paramount Pictures. Eisner recognized the value of both the filmed entertainment legacy of the firm and the theme park operations that had been developed by that time. Eisner soon focused on the animation and movie studios. He also opened the Disney vault to exploit the relatively untapped value of Disney’s animated classics. Profits from filmed entertainment went from about $2.4 million in 1984 to $845 million in 1994. Eisner spent considerable time during the early days of his tenure touring the theme parks to see what the company really had. He decided to upgrade the theme parks and increase admission prices. Profits from the theme parks went from $186 million in 1984 to $688 million in 1994. Consumer products went from profits of $53 million in 1984 to $433 million in 1994, a natural result of the success of the company’s filmed entertainment and theme park operations. The impressive part of these changes and results is that Eisner, to quite an extent, used resources that Disney already possessed such as animation and live studios. Animators were challenged to create new and exciting content—something that had not happened in a long time. Some of the Disney classics pulled from the vault were converted to the VHS format and distributed to the home market. It’s true that the timing of the advent of the VHS format and the proliferation of home video was fortunate for Disney. But, it’s also true that Eisner deployed the resources of Disney in a different way from how they had been used in the years leading up to 1984. Disney animator’s created The Little Mermaid in 1989 had box office receipts of $83.5 million. It won an Oscar. Beauty and the Beast was released in 1991, setting new box office records for an animated film ($145.8 million). The Lion King came out in 1994 and has had box office sales of over $328.5 million and has sold over 30 million copies in the home video market. All three of these animated films did extremely well at the box office, the video store, and the toy store. In time, Eisner also diversified the firm’s portfolio extensively. Disney bought ABC television, which included ESPN, hotels, professional sports teams (Anaheim Angels and the Mighty Ducks), a cruise ship, and developed a chain of retail stores. Licensing of Disney characters,
Disney’s failed relationship with Pixar is often cited as a contributing factor to Disney’s woes. Black & Decker . was aggressively expanded. The Confederate Army . Earnings per share peaked in 1997 at $0. There are different circumstances and conditions in each of these businesses. They would be making a business level strategic decision if they were to decide to position their luggage at the very high end of the market and charge a premium price. The Confederate Army had moved into a superior position (that virtually guaranteed success) before the Union Army could amass a sufficient number of troops. Eisner has done battle with disenchanted board members and executives. toy included in kids’ meals at fast food restaurants and as prizes in breakfast cereals boxes. From 1984 to 1994. Earnings per share had climbed to $1. If Disney’s recovery continues he may be able to retire with the strategic genius status he once enjoyed. Black & Decker must decide how each of these businesses will be positioned within their respective industries. The terrorist attacks of Sept. Black & Decker must decide which businesses to buy or develop. Disney is expanding internationally with a theme park opening in Hong Kong in September of 2005. which is likely a function of peoples’ willingness to resume leisure travel.Strategic Choices Black & Decker makes small kitchen appliances and power tools for the home and industrial markets.Good Strategy. 2001. Wessel. Corporate level strategic choices are made as managers decide which businesses should form the corporate whole. 11. Internal analysis may reveal that Black & Decker’s resources suggest positioning the small kitchen appliances business one way and positioning the home power tools business another way. Bad Implementation The Confederate Army at the Battle of Gettysburg arguably had the better strategy. Eisner announced that he will resign in September of 2006. However they did not have the ability to successfully carry out that strategy because their supply train was still several days behind them. Roy Disney who coincidentally was instrumental in hiring Eisner in 1984.old and new. Thus.95 and dipped to $-0. most notably. Disney is benefiting from increased attendance at its theme parks. kept people away from theme parks. The soldiers were able to move more quickly than the supply train.06 by the end of the first quarter of Disney’s fiscal 2005. Now that’s strategy! The Disney story is not so stellar during the second half of Eisner’s 20 year reign at Disney. Conditions in the external environment may affect each of these businesses in a different way. Orlando Sentinel. and highly prized. Other reasons for the decline are clearly outside Eisner’s control. In the early 1990s Disney characters were a common. Critics contend that the reason for the decline in performance is that Eisner has pushed out executives and board members that provided checks and balances to his power. suggesting a Disney recovery. (Huey & McGowan. 131(7): 44-55.02 in 2001. These are business level strategic choices. 2004). Black & Decker would be making a corporate level strategic decision if they were to decide to enter the luggage business. . Fortune 4/17/1995. ABC’s performance is improving largely due to the success of two new series: Desperate Housewives and Lost. Disney’s market capitalization increased from $2 billion to $28 billion. March 15. especially foreign visitors.
The battle lasted several days. Apple recently announced the 300 millionth download on its iTunes service. consumers had preferences for one company over another. General Robert E. nationwide long distance. He decided to attack. The Confederate Army was defeated even though it had had the superior strategy.‖ A reasonable objective for Apple as it embarked upon this part of its mission would have been. Apple – Competitive Advantage and Strategic Management Process Consider Apple’s iPod. Implementation issues surrounding the development and launch have been handled well. to $0. highly functional digital music device.However. Apple’s mission statement reads in part. Apple appears to be achieving competitive advantage with its iPod product. to $0.28 in Q4 of 2004. An analysis of Southwest reveals three potential sources of competitive advantage: . etc. Any one of these plan features would likely be a source of competitive advantage if a single firm could offer it without be quickly imitated. They knew that if the battle was not decided very quickly.‖ Apple’s external analysis would have shown that there were competing technologies developing. multiple phone family plans. After the major competitors all offered these features there was no advantage to offering the features. the Confederate generals knew that with the Union Army moving towards Gettysburg. Apple’s internal analysis would have revealed that the firm definitely had the R&D and design capabilities. Cellular Telephone – Sustainable Competitive Advantage Cellular telephone service providers quickly match the offerings of competitors—free nights and weekends. Lee understood that if he waited for the supply train the advantage of his timing and positioning would be lost. ―develop a stylish.12 in Q4 of 2003. Apple’s marketing capabilities.75 in Q1 of 2005. The ease of use of the iTunes service is indicative of attention to implementation issues. were obviously capable as evidenced by their history with other products. the Confederates would run short on supplies and likely lose the battle. He also understood that if he turned and ran his soldiers would be so demoralized that they would have effectively lost the war at that point. ―Apple is also spearheading the digital music revolution with its iPod portable music players and iTunes online music store. When these features were first offered. Southwest Airlines – Sources of Competitive Advantage For more than two decades Southwest Airlines has consistently achieved economic performance superior to the rest of the airline industry. The results were disastrous for both sides. An important part of their external analysis must have revealed that if a firm wanted to succeed with a hardware offering. variable usage plans. Apple’s earnings per share have gone from $0. the Confederates would have a difficult time winning the battle in time. Strategic choices were made about developing the iPod and bringing it to market along with the iTunes service. Tens of thousands of soldiers lost their lives. Apple appears to have applied the principles of the strategic management process to the development and introduction of the iPod. At this point. it also needed a reliable content provider. in conjunction with its advertising agencies.
It’s easy to see that these differences from other airlines may be sources of competitive advantage for Southwest. the workforce is paid less than other airlines pay and yet. Robert Taylor.) Coca-Cola . However. Thus. Resources and Capabilities Softsoap – Internal Analysis for Market Entry Softsoap was the brainchild of Minnetonka’s CEO. The workforce is highly cross functional—to the point of pilots sometime handling baggage. Harvard Business Review. Employees are willing to do whatever is necessary to turn planes around at gates in about half the time it takes other airlines. The strategy worked. The Right Game: Use Game Theory to Shape Strategy. (Brandenburger & Nalebuff. These routes allow Southwest to use airports that have lower gate fees and less congestion than the larger metropolitan airports used by other major airlines.Resources and Capabilities Coca-Cola has a distinctive red can with a trademarked white wave image that goes around the can. Coca-Cola has access to substantial working capital . These are physical resources. However.• a set of human resource practices that has resulted in a workforce that is different from other airlines. we cannot measure the competitive advantage directly. we rely on economic performance as an indicator of sources of competitive advantage possessed by Southwest. they had no advantage when it came to the pump bottles. Taylor bought all the pumps the two manufacturers could produce in a year. He paid more for these orders of pumps than Minnetonka was worth at the time. The idea of putting liquid hand soap in a pump container for home use was novel at the time. On average. Taylor knew that the most likely competitors would be large companies like Procter & Gamble who were good at developing and marketing new products for the home and personal care markets. Procter & Gamble. would have quickly imitated his product and most likely driven him out of business. • a fleet of aircraft consisting of a single model . These other manufacturers were many times larger than Minnetonka. we can see that Southwest has superior economic performance and we can see that there are several plausible sources of competitive advantage. He knew the liquid soap would be easy to manufacture and that he could buy the pumps from one or both of the two existing pump manufacturers. This policy creates efficiency in maintaining the aircraft and ensuring that every flight crew can handle every aircraft in the company. He recognized that if he bought all the pump bottle production of the two manufacturers he would have an advantage over firms much larger than Minnetonka. and probably others. Had Taylor forged ahead without any form of internal analysis he would have rightly developed a great product. 1995. He had a 12-18 month lead over his much larger competitors in which he was able to establish the Softsoap brand and capture market share. Taylor engaged in a form of internal analysis by recognizing that even though these larger companies had a resource advantage when it came to manufacturing and marketing the liquid soap. Southwest’s employee turnover is extremely low. • a network of short non-hub-to-hub routes.the Boeing 737. Rather.
As rebuilding efforts gave way to industrial and infrastructure expansion. Coca-Cola has the ability to put these various resources together in an effective marketing campaign. It would be virtually impossible to imitate this relationship. It was a unique set of historical conditions that brought Caterpillar to this point. These are individual human resources. Originally these two came together to use a computer to map out and coordinate the movements of the university’s marching band. bonuses.S. However. no other software company was able to match the innovation of WordPerfect. especially for the legal profession. The interests of the government were wellserved during the war. Caterpillar was the obvious choice for heavy equipment because its service was so reliable. human. However. The government chose to help Caterpillar establish this worldwide capability. Caterpillar was uniquely suited to fill this need. One thing led to another and within a short time. reward systems. etc. Much of this innovation was the result of the social relationships among the programmers. and Bruce Bastian. WordPerfect – Social Complexity The WordPerfect word processing software was developed by college professor. and organizational resources. capital. They continued to work together in creating a word processor for an office on campus. Soon a set of relationships developed among these programmers such that development efforts aimed at improving the product were naturally well-coordinated. Caterpillar continued to enjoy a unique position in the market. Coca-Cola also has well established set of reporting structures. WordPerfect benefited even more from another form of social complexity. This is a capability. they had developed a software package that was better than anything available on the market at the time. These are organizational resources. This is a financial resource. Caterpillar – Historical Conditions During WWII the U. They allowed the programmers to have the best of everything—offices. Therefore. Thus we would correctly refer to Coca-Cola’s marketing capability as one of its resources right along with its other physical. In most. but not all.(cash). after the war there was a continuing need for heavy equipment in rebuilding efforts around the world. cases this equipment was needed to support military operations. communications systems. Ashton and Bastian realized that the programmers were their bread and butter. government found a need for heavy construction equipment throughout the world. Break downs could impair important military operations—often with dire consequences. For several years. The immense amount of typing done by attorney’s office staffs was greatly reduced and simplified by WordPerfect’s technology. a student. and IT systems. This unique social relationship between Ashton and Bastian led to the early development of the software. the U.S. Alan Ashton. government had a keen interest in being able to get replacement parts anywhere in the world within 24-48 hours. extremely flexible hours. Early on. . These programmers were able to develop new features in the product that were astonishing for their time. Coca-Cola has talented marketing professionals. The cost faced by competitors in imitating this global capability vastly outweighed the benefit.
frozen foods maker. The major problem with this value chain was the amount of unsold books returned by booksellers. However. This motivated the company to consider . Why would this happen? Investing near the farmlands is a transaction-specific investment. Birds Eye could not find a single taker. there were no processing plants in existence within the 90 minutes radius. Wright and Park. which added significantly to their costs. Their U. One of the first products they sought to introduce in the U. Its value would be great only in the context of serving Birds Eye and nobody else.K. Amazon backward integrated by bypassing the wholesaler and going directly to the publisher. Frozen Food Industry. More importantly. was frozen vegetables. wanted to expand to the U. Birds Eye was forced to vertically integrate into owning processing plants because of this problem. Publishers faced return rates as high as 30 percent. Houston. (Laseter.Vertical Integration Amazon and the Publishing Industry The book publishing industry traditionally was characterized by a long value chain. Donnelley and Quebecor) to print the books. This allowed Amazon to reduce drastically the returns to publishers (from 30% to 3%) and use this to bargain for better prices from them.K.R. Birds Eye contacted a number of processors and asked them to invest in a facility near the farmlands. Why would a processor make such a transaction-specific investment when the possibility of opportunistic behavior by Birds Eye is great? After the investment is made. Books were distributed to bookstores through wholesalers such as Ingram and Baker & Taylor. The company manufactured seats to order and delivered the seats to firms that specialized in installation.‖ Strategy+ Business. Amazon was able to lower costs by cutting out wholesalers. First Quarter 2000) Bird’s Eye and the Frozen Foods Industry – Transaction-specific Investment Birds Eye. attracted by the large market and the absence of a frozen food industry. They contracted with farmers to grow vegetables for them. By going directly to publishers. Harvard Business School Case) Seat Manufacturer – Vertical Integration and Capabilities A company that manufacturers seats for auditoriums and stadiums faced a difficult problem. ―Amazon your industry: Extracting Value from the Value Chain.S. Amazon changed the value chain. The publisher contracted with authors to write books and entered into agreements with commercial printers (such as R. (Colis and Grant. Processing vegetables after 90 minutes typically resulted in the product lacking freshness. Seeing this inefficiency as an opening. The company won plaudits for the quality of its seats.K. Birds Eye could take advantage of this sunk cost by paying less to the processor. in the 1950s. they faced numerous complaints regarding poor installation. the U. 1992. Because the farmlands were on the outskirts of London. Birds Eye and the U. they placed orders with publishers after customers ordered from their website.S. experience had taught them of the need to process the vegetables within 90 minutes of harvest.
Wal-Mart clearly has tremendous bargaining power over these companies. Kohlberg Kravis Roberts (KKR) acquired Beatrice and sold it piece by piece. It is very likely that similar percentages can be found for many of Wal-Mart’s leading suppliers. passenger revenues accounted for 92 percent of total revenues. forward integration into retailing does not make sense from a capabilities viewpoint. Diversification proved not to be a value creating strategy for Beatrice largely because the management was never able to exploit potential synergies between divisions. Harvard Business School Case) Delta Airlines – Example Limited Corporate Diversification) Single Business Delta Airlines is an example of a single-business firm. As a diversified company.the possibility of vertically integrating into the installation activity. Wal-Mart. When James Dutt became CEO in 1979. Hershey Foods indicated that Wal-Mart accounted for 22 percent of total sales in the year 2003. A leveraged buy out firm. When they analyzed the situation. where Wal-Mart’s corporate headquarters is located. while cargo revenues provided the rest (Delta Airlines Annual Report. Wal-Mart was responsible for 16 percent of Procter and Gamble’s 2004 revenues. Many of these companies have well-staffed offices in Bentonville. Its 2008 annual report states that in each of the last four fiscal years. These are transaction-specific investments made by these companies to serve one customer. do these firms have the resources to obtain a competitive advantage in retailing? Not likely. previous leaders ran Beatrice as a decentralized operation and made no attempt to coordinate activities among the businesses. This example helps to illustrate the importance of implementation issues in the context of diversification strategies.) created a competitive advantage in the installation business. Arkansas. Corporate Diversification Beatrice Companies – Diversification Failure Since its founding as a regional dairy company in 1891. But. (Colis and Stuart. Indeed. they realized that none of the capabilities that were valuable in the manufacturing business (design. he decided on an aggressive strategy of corporate marketing and attempted to create synergy among the business units. Beatrice Companies grew to be a $12. Beatrice Companies – 1985. 2008). unskilled work force to generate efficiency. for example) to succeed in the installation business.5 billion diversified producer of a variety of products – ranging from grocery products to chemicals – by 1985. So. The company decided against vertical integration! Wal-Mart Suppliers – Capabilities and Transaction-specific Investment In its 2004 Annual Report. The opportunism minimization logic would indicate that these firms should forward integrate into retailing to reduce the possibility of losses due to Wal-Mart’s opportunistic behavior. quality. This proved to be an extremely difficult task and the company ran into financial problems. . they had to develop new capabilities (managing a temporary. etc. A succession of CEOs had propelled the company through a series of acquisitions to diversify the company’s activities.
Colgate-Palmolive can do the same. he diversified into a host of industries: motion pictures (Paramount Pictures. home fashions. office products. The company pursues a related-constrained diversification strategy because all their products share significant commonalities in the areas of plastic injection molding. the company is organized into five segments: cleaning and organization. and sugar. Disney was a related-constrained firm till about the early 1990s. The Disney-McDonalds alliance is an example of a nonequity alliance. zinc mines. and pens. Neither McDonalds nor Disney invested in the equity of the other – rather the two agreed to work with each other . tools and hardware. Newell Rubbermaid is a good example of a related-linked firm. When Disney started making movies for mature audiences and acquired ABC television. retail distribution. and. Disney – Examples Related Corporate Diversification Bic. Gulf+Western. and other movies). the French Company. cigars. The products are sold under various brand names (Sharpie. and brand name. clothing. Levolor) and do not typically share common technology or inputs across segments. The company had evolved from a single-business to a dominant-business to a diversified firm under the leadership of Michael Eisner and his predecessors. Newell. ITT – Examples Unrelated Corporate Diversification When Charles Bluhdorn was CEO of a company called Gulf+Western in the 1950s. it moved into a more related-linked mode. home and family. All five segments share common distribution channels – supermarkets (such as Wal-Mart) and office supply stores (Staples. cigarette lighters. among others! ITT owned 250 or more unrelated businesses! Procter & Gamble – Example Imitability of Diversification If Procter and Gamble acquired Gillette to exploit economies of scope based upon shared sales force. Office Depot. for example. After Newell Company acquired Rubbermaid. auto parts.Bic. produces products such as disposable razors. Chinatown. etc. the makers of The Godfather. Strategic Alliances Disney/McDonald – Nonequity Alliance Disney has the capability to produce movies with compelling characters that children can identify with while McDonalds provides grassroots marketing.).
the cooperating companies (the ―parents‖) create a legally independent firm in which they invest and from which they share any profits created. the company decided to protect itself from the risk of a big budget movie failing at the box office. General Motors/Toyota – Strategic Alliances and Economies of Scale Alliances may help improve operations because of learning opportunities. The box office smash Titanic that cost more than $200 million was coproduced by 20th Century Fox and Paramount. Back in 1986.S. every big budget movie was a make or break event for the young company. the two pharmaceutical companies. Dreamworks was able to reduce its exposure to the ups and downs of the movie business. Failure of one movie could be offset by succeeding releases. wanted to learn to operate manufacturing plants in the U. Johnson&Johnson/Merck – Joint Venture A special form of equity alliance is a joint venture. From early on. or distribution agreements (agreeing to sell another company’s goods). General Motors wanted to learn lean production techniques. supply agreements (agreeing to supply inputs). When firms work together. Jeffrey Katzenberg and David Geffen. For example.for a certain period of time. Such agreements could involving licensing (where one firm allows the use of its design or brand name to another). workers. . Established movie companies typically had a number of movies in various stages of production. Interestingly. By partnering. equity alliances are formed. and Munich. they can observe each other and transfer skills across firms. Toyota. As the example of the NUMMI alliance between General Motors and Toyota points out. both firms wanted to learn from each other. Here. (Variety. old movies could be reissued in DVDs to provide a steady revenue stream. Disney took a small equity position in Pixar as part of the terms of the strategic alliance. Dreamworks – Strategic Alliances and Economies of Scale Dreamworks SKG is the movie company formed by the trio of Stephen Spielberg. various issues). Such interactions help in learning. War of the Worlds. particularly to adapt their famed production technology to U. Johnson and Johnson and Merck created a joint venture (called Johnson and Johnson Merck Consumer Pharmaceuticals) to market over-the-counter pharmaceuticals such as Mylanta. on the other hand. Since Dreamworks did not have a ―library‖ of old movies nor a stream of movies under production. this phenomenon is not limited to Dreamworks. Also. The alliance was prior to Disney’s acquisition of Pixar in 2006. The Disney-Pixar alliance is an example. Disney/Pixar – Equity Alliance When agreements to work with one another are supplemented with equity investments. Movies produced by Dreamworks under such alliances include The Gladiator. The company decided to partner with other studios for such movies.S..
there was a standards war for the next generation storage medium for video and data. in performance within the alliance. The alliance partners developed a personal finance magazine called Smart Money that was one of the most successful magazine launches ever. led by Toshiba and NEC Corporation. and content providers such as Disney and 20th Century Fox. BDA was a strategic alliance of hardware producers such as Sony and Sharp. Smart Money – Strategic Alliance and Risk Reduction of Market Entry When Dow Jones & Company (the publisher of The Wall Street Journal) wanted to enter the magazine market. Disney got the option to benefit from this technology if it became popular. and in allocating the value created in the alliance. Blu-ray has more information capacity but a higher initial cost. Partners may take advantage of other partners at several points in an alliance relationship: in contributions to the alliance. Disney managed this uncertainty by forming an equity alliance with Pixar. to experiment making animated movies using computer technology. Sony. Back in 1986. The competing format was Blu-ray disc. OPEC meets and decides to limit output by a certain number of . Sharp. TDK and a host of others. it realized that its skills in producing a daily newspaper were not adequate to succeed in the monthly magazine market. Good Housekeeping. OPEC is an alliance of oil producing nations. Each format was trying to woo content providers who were either undecided or had signed non-exclusive contracts with the other format. formed the Blu-ray Disc Association (BDA). It formed an alliance with the Hearst company (a successful publisher of magazines such as Cosmopolitan. and Warner had signed non-exclusive agreements to support HD-DVD. Paramount. while Disney and Columbia supported the Blu-ray format.) to pool the skills of the two organizations. led by a strategic alliance consisting of Sony. Pixar. computer companies such as Apple and Dell. These challenges arise primarily because of the difficulties of monitoring the actions of other partners. the future of this technology was unknown.Blue-ray Disc – Strategic Alliance and Improvement of Competitive Environment Recently. Disney/Pixar – Strategic Alliance and Managing Uncertainty Alliances help in managing uncertainty. OPEC – Incentives to Cheat One of the key challenges to a successful strategic alliance strategy is that partners often face strong incentives to misappropriate the value created within an alliance. To avoid the example of Betamax. As compared to the HD-DVD format. It stood to lose its small investment if the technology did not pan out. etc. The Blu-Ray format won the standards war. For a small investment. Apple. The success of Pixar’s movies from Toy Story to The Incredibles made Disney’s decision a profitable one. The race between the two competing formats was to sign up as many content providers as they could to get the critical mass necessary to become the dominant standard. the leader of the Blu-ray format. when George Lucas (of Star Wars fame) formed a small company. Universal. One format was HD-DVD. Partners in this alliance have a history of cheating on one another.
Collective action taken to improve the market for all members may be exploited (misappropriated) by individual members who take the opposite action. Lafley. This is a common problem in alliances. Mergers & Acquisitions Procter&Gamble/Gillette – Merger In contrast. In addition.G. is in combining the partners’ resources in such a way that value creation is maximized. However. the management team at Newell controls the affairs of NewellRubbermaid. The cheating on quotas becomes apparent in time. though. but the individual cheaters are usually able to profit for a while. This may be difficult to imitate by others. the CEO of Procter and Gamble to merge the two companies. while Merck has an enviable track record in developing new drugs. Some firms may have tremendous expertise in forming and managing alliances and may benefit from the learning curve. Firm B can form a similar alliance. This combination is rare in that it combines the skills of two industry leaders. its competitor. The point is that a merger may end up looking like an acquisition in terms of which firm has control. Lafley continues to be the CEO of Procter and Gamble that now includes Gillette. one firm dominates the other. . Johnson&Johnson/Merck – Rarity Johnson & Johnson is arguably the leader in marketing health care products directly to the end user. Thus. While a merger may start out as a transaction between equals. If Firm A in an industry can form a marketing alliance. Imitability alliances can be imitated by direct duplication. mergers are not typically unfriendly. James Kilts. A. There is no mechanism in OPEC to closely monitor the sales of any one country in a timely way. the CEO of Gillette invited A. as prices rise each member has a strong incentive to cheat by increasing output and selling more oil at the higher prices. The merged firms may retain the name of one firm (the Gillette business was absorbed by Procter and Gamble and Gillette ceased to exist as an independent entity) or may create a new name (the merger of Newell and Rubbermaid resulted in a new firm called NewellRubbermaid). it may happen that in the course of time. There is usually a great amount of trust and information exchange among the partners. This may be difficult for others to imitate. Successful alliances are typically characterized by complex social relationships between the partners.barrels of production. a merger occurs when the assets of two similar-sized firms are combined. The test.G. OPEC members understand that if they limit output prices will rise and benefit all the members simultaneously.
69 for Wells Fargo stock and $15. The motivation to access new geographic markets drives firms toward market extension mergers. Extension Mergers In a product extension merger. beverage market. J&J/Guidant – Horizontal Merger When a firm acquires a former competitor.. as in the J&J-Guidant deal. Wells .. a manufacturer buying a distributor). After several months. quickly stepped in and announced that it would acquire First Security for just over $3 billion (April. An example would be Unilever’s acquisition of Ben & Jerry’s Ice Creams. The valuation was set at $43. Horizontal mergers come under FTC’s scrutiny because such mergers have immense competitive implications.9 billion.K. it engages in a horizontal merger. Berkshire Hathaway is one such example. there are some examples in which value appears to have been created. Wells Fargo – Expected vs. Johnson & Johnson’s acquisition of Guidant is an example of a horizontal merger since both firms produce medical devices. a regional bank headquartered in Utah. When Time Warner (a content creator) merged with AOL (a content distributor). This appears to be a matter of spreading a core competency (Berkshire Hathaway’s management style) across different businesses. Wells Fargo proposed to buy First Security using Wells Fargo stock. Wells Fargo.g. announced its proposed acquisition of First Security Bank of Utah for $5. based in California. the possibility of the acquisition having an adverse impact on customers) may mean that either the acquisition will be disallowed by the FTC. or. firms acquire complementary products through the M&A activity. in a sense there can be economies of scope even in unrelated M&A activity. Therefore. Unrelated companies are purchased and then managed with a strict philosophy and ample financial controls. Oprational Value In 1999.g.50 for each share of First Security stock. a manufacturer buying a supplier) or forwards (e. Cadbury-Schweppes’ acquisition of 7UP allowed the U. the FTC may insist on J&J divesting some of Guidant’s activities after the acquisition.Berkshire Hathaway – Unrelated M&A and Value Although unrelated M&A activity will usually not create value.S. either backwards in the industry value chain (e. 2000). Time Warner/AOL – Vertical Merger A vertical merger involves a vertical integration move by the bidding company. shareholders of Zions decided that the acquisition was grossly overvalued and they pressured Zions’ management to terminate the acquisition.-based company to enter the U. it was a vertical (forward) merger. Zions Bank. The possibility of antitrust concerns (in other words.
The internet bubble burst in 2001 and stock prices fell. In effect the market was saying. in just a few months the market had rewarded Wells Fargo handsomely for the acquisition. Thus.0 billion $105. None was as large as the First Security deal. an M&A strategy has seemed to work well for Wells Fargo. The deal was completed by October of 2000.44 and the market capitalization was at $65.19 to $13. the stock price stood at $40.89 $62. the stock price stood at $56.15 Market Capitalization $74.50.Fargo agreed to trade 0.‖ In fact. A year later. when the deal was announced.2 billion.69 and the market capitalization was at $95. The company appears to be able to buy other banks and financial concerns and create operational value. ―We think this is a good deal for First Security shareholders but not for Wells Fargo shareholders. Another interesting aspect of this example is that First Security was probably worth more to Wells Fargo than it was to Zions Bank. Wells Fargo did not face the same constraint because it was not currently doing business in most of those same cities and small towns.0 billion $82. But over time. before the deal was announced. Over the next four years Wells Fargo continued to acquire other financial concerns. the market was predicting that Wells Fargo would actually see a decrease in value over time because of this deal. As predicted by M&A value creation research. the stock market was rising rapidly during that time. But. . it would seem that the stock market may not always be accurate in its assessment of M&A activity. If Zions Bank had purchased First Security bank regulators would have forced Zions to close many branches in cities and small towns throughout Utah and neighboring states where First Security and Zions were both doing business.7 billion. The stock price had risen by more than the per share acquisition price of $15.60 $46. (These numbers do not correspond to the valuation prices because stock prices were not the same as the valuation placed on the deal several weeks earlier). The movement in stock prices reflected the market’s expectation.38.0 billion $100. To be fair. after the acquisition. At the end of 1999.25 to $39. First Security’s shares rose $1. Wells Fargo stock dropped on the first day $0.0 billion These numbers indicate that Wells Fargo is good at M&A activity.355 shares of Wells Fargo stock for each share of First Security stock.50 and the market cap had risen by much more than the $3+ billion total price of the acquisition. but Wells Fargo was clearly following a corporate level strategy of acquisition. Stock prices and market capitalization changed from year to year as follows: Year Stock 2001 2002 2003 2004 Year-end Price $43.87 $58. A look at Wells Fargo’s stock prices and market capitalization tells a very different story.
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