SUMMARY

AV ARTIKLENE
Strategi I – STR1301
Knut Mehl

“STRATEGI HANDLER OM Å VÆRE BEDRE ENN ANDRE”

STR1301 Knut Mehl

CONTENT

#1: What is Strategy?.................................................................................................................... 3

The Origins of Strategic Positions..........................................................................................................3
What is Strategy? ....................................................................................................................................4
A Sustainable Strategic Position Requires Trade-Offs ........................................................................4
Fit Drives Both Competitive Advantage and Sustainability ................................................................4
Rediscovering Strategy ...........................................................................................................................4
#2: Co-opetition ............................................................................................................................. 5
#3: Verdikjeden og konkurransefortrinn ................................................................................... 5
#5: Casting off the chains ............................................................................................................. 8
#6: Competitive Advantage and the Value Network Configuration ........................................ 8
#7: Generic Competitive Strategies ............................................................................................. 9
#8: Strategy Tradeoffs in the Knowledge and Network Economy ......................................... 10
#9: What is Disruptive Innovation? .......................................................................................... 11
#10: Reinventing Your Business Model .................................................................................... 12
#11: When to Ally & When to Acquire ..................................................................................... 14
Synergies .................................................................................................................................................14
Market Factors ......................................................................................................................................14
Collaboration Capabilities ....................................................................................................................15
How Cisco Does It ..................................................................................................................................15
#12: Desperately Seeking Synergy............................................................................................. 15

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#1: What is Strategy?

- Operational effectiveness is not the same as strategy.
o Operational effectiveness means performing similar activities better than rivals
perform them.
§ It is not only efficiency, it refers to any number of practices that allow a
company to better utilize its inputs.
• Example: Reducing defects or developing better products faster.
- Competition in operational effectiveness gives the gain to the customers and suppliers, as
the companies competing gets lower margins.
o The companies that do not include strategy will ultimately end up with all
competitors being operational effective (since it is easy to copy), which we saw
with the Japanese firms, in a wat destroying their profits.
- The more benchmarking companies do, the more they look alike.
o The more companies outsource, often to the same third partied, the more generic
those activities become.
o Competition based on operational effectiveness alone is mutually destructive, as
the competition becomes a series of races down identical paths that no one can
win.
- Competitive strategy is about being different.
o It means deliberately choosing a different set of activities to deliver a unique mix
of value. Otherwise, a strategy is nothing more than a marketing slogan that will
not withstand competition.
o The classic example is Southwest Airlines, which avoids large airports and does
not fly great distances. Frequent departures and low fares attract price-sensitive
customers who otherwise would travel by bus or car.
§ Where others tailor their activities to serving meals, having a hub-and-
spoke system centered on major airports, Southwest tailors its’ activities to
deliver low-cost, with fast turnarounds of only 15 min, no meals, avoiding
travel agents and their commissions and a standardized fleet of 737
aircrafts that boosts the efficiency of maintenance.
o Another example is IKEA, which targets young furniture buyers who want style
at low cost.
§ Where others focus at service, IKEA serves customers who are happy to
trade off service for cost. IKEA displays every product in huge stores, they
are ready-to-assemble, customers do the pickup and delivery.
§ Services such as extended hours and in-store child care are tailored for the
young customers, and are services competitors do not have.

The Origins of Strategic Positions

- Variety-based positioning. It is based on the choice of product or service varieties rather
than customer segments.
o Example: Jiffy Lube International, which specializes in automotive lubricants and
does not offer other car repair or maintenance services.
- Needs-based positioning. It arises when there are groups of customers with differing
needs, and when a tailored set of activities can servce those needs best.

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o Example: IKEA seeks to meet all the home furnishing needs of its target
customers, not just a subset of them.
- Access-based positioning. It is segmenting customers who are accessible in different
ways.
o Example: Carmike Cinemas, which target cities with less than 200,000 in
population and achieves lower overhead costs than the industry.

What is Strategy?
- Strategy is the creation of a unique and valuable position, involving a different set of
activities.

A Sustainable Strategic Position Requires Trade-Offs

- Trade-offs occur when activities are incompatible.
o Example: Continental tried to replicate Southwest’s success with Continental Lite.
However, it continued the normal business beside of it which creates major
inefficiencies.
- Trade-offs protect a company from imitators.
- Trade-offs arise for three reasons
o Inconsistencies in image or reputation
o Activities themselves
§ Example: The more IKEA tailor it’s products for low-cost, the less able
will it be to serve customers who require higher level of service.
o Limits on internal coordination and control.
- Strategy is choosing what not to do.
o Without trade-offs, there would be no need for choice and thus no need for
strategy.

Fit Drives Both Competitive Advantage and Sustainability

- While operational effectiveness is about achieving excellence in individual activities,
strategy is about combining them.
o Example: Southwest pays gate and ground crews well, as well as ditch serving
food and other activities, to enable rapid turnover.
- Positions built on systems of activities are far more sustainable than those built on
individual activities, as it is way more complex to replicate.
o They are hard to untangle from outside the company.
- Strategic positions should have a horizon of a decade or more. Continuity fosters
improvements in individual activities and the fit across activities.
o Conversely, frequent shifts in positioning are costly.
- Strategy is creating fit among a company’s activities.

Rediscovering Strategy
- Companies tend to launch products/services that are not adapted to their strategy, in the
chase for “easy” growth.
o A company can often grow faster – and far more profitably – by better penetrating
needs and varieties where it is distinctive than by slugging it out in potentially
higher growth arenas in which the company lacks uniqueness.
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- Companies expanding globally is likely to leverage and reinforce a company’s unique

position and identity.
o Companies seeking growth through broadening within their industry can best
contain the risk to strategy by creating stand-alone units, each with its own brand
name and tailored activities.
- The core of the leader’s role is strategy
o Defining and communicating the company’s unique position, making trade-offs,
and forging fit among activities.
o One of the leader’s jobs is to teach others in the organization about strategy – and
to say no.

#2: Co-opetition
- Both “business-as-war” and “business-as-peace” has its’ problems.
o It is war and peace simultaneously, referred to as co-opetition.
- As infrastructure is being developed, Adam Smith’s invisible hand won’t work, because
many of the markets are missing.
o Example: Having a car, without gas stations, roads etc.
o The firms of today have an ability to influence what the future will be like.
Instead of accepting it, they may ask which “game” they would like to play.
§ Game theory may be applied to analyze the game before we get into it.
- Business is different from other games – there isn’t necessarily a looser, even though it is
a winner.
o Another difference is that the playing field isn’t set in business.
- A player is a complementor if customers value your product more when they have that
player’s product than when they have your product alone.
o A player is a competitor if customers value your product less when they have that
player’s product than when they have your product alone.
o The difference in the definitions is the word more vs less. Hence, the strategy
towards a competitor should be the opposite of the strategy towards a
complementor.
o In order to understand if another player is a complementor or competitor, you
must be allocentric (centered on others, rather than egocentric).
- Too often we ask how much money other people can help us make, rather than what we
can do to make the pie larger for others and then how we can share in the gain we
created.
o The value net is the place to start – the complete map of a business’ relationships.

#3: Verdikjeden og konkurransefortrinn

- Et foretaks verdikjede hører til verdisystemet – et system av verdikjedene til kundene og
leverandørene
o Lenger opp i systemet er leverandørene – oppstrøms verdi
o Mange produkter går gjennom distribusjonskanalers verdikjeder på vei til kunden
– distribusjonskanalverdi
o Til slutt går produktet inn i kundens verdikjede

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o For å levere verdi og opprettholde konkurransefortrinn må man forstå både

foretakets egen verdikjede og foretakets plass i det totale verdisystemet
- Koalisjoner (også kalt langsiktige allianser) går ut på å koordinere eller dele verdikjeder
med koalisjonspartnere på en slik måte at det effektive spekteret i foretakets kjede
utvides.
- En verdikjede representerer alle foretakets gjøremål som foretas for å utvikle, produsere,
markedsføre, levere og støtte foretakets produkt.
- Å skape kundeverdi som overstiger kostnadene ved å gjøre dette er målet for enhver
generisk strategi.
o Verdi må brukes i stedet for kostnad for å analysere konkurranseposisjonen, fordi
kostnadene ofte økes for å kunne ta høyere priser via differensiering.
- Verdikjeden viser total verdi, og viser verdiaktiviteter og margin.
o Verdiaktivitetene kan deles i primær- og støtteaktiviteter.
§ Alle verdiaktivitetene krever innsatsfaktorer, menneskelige ressurser og en
form for teknologi.
§ Primæraktivitetene inngår i den fysiske fremstillingen av produktet, salg
og overføring av produktet til kunden og service i etterkant.
§ Støtteaktivitetene støtter primæraktivitetene og hverandre, eksempelvis
rundt innkjøp av innsatsfaktorer, teknologi og menneskelige ressurser.
o Marginen er forskjellen mellom totalverdien og de samlede kostnadene for å drive
verdiaktivitetene.
o Tilført verdi (salgspris minus kostnaden på innkjøpte varer) er ikke et godt
grunnlag for kostnadsanalyse, fordi det skiller råvarene fra de andre
innsatsfaktorene.
- Identifisering av verdiaktiviteter
o Aktiviteter som er teknologisk og strategisk atskilte isoleres.
o Verdiaktiviteter og regnskapsklassifiseringer er sjelden det samme.
o Primæraktivitetene er overordnet som følger, og deles i en rekke atskilte
aktiviteter som henger sammen med bransjen:
§ Inngående logistikk
§ Virksomhet
§ Utgående logistikk
§ Markedsføring og salg
§ Service
o Støtteaktivitetene kan generelt sett deles i fire, og igjen deles i mindre deler etter
bransjen:
§ Innkjøp
• Noen kjøp gjøres sentralt, andre lokalt. En spredning tilslører ofte
hvor mye som kjøpes til sammen og gjør at mange kjøp granskes
dårlig.
• Kostnadene ved selve innkjøpsaktiviteten er ofte lave totalt sett,
men har stor innvirkning på foretakets kostnadsnivå og
differensiering.
§ Teknologiutvikling
• Bredt kan dette grupperes som tiltak for å bedre produktet og
prosessen.

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§ Administrasjon av menneskelige ressurser

• Her finner vi rekruttering, ansettelse, opplæring, utvikling og lønn.
§ Foretakets infrastruktur
• Eksempler på aktiviteter er administrasjon, planlegging, finans,
regnskapsførsel, juridiske anliggender, kontakt med myndigheter
og kvalitetsstyring.
• Det kan være delt mellom forretningsområdet og konsernnivåene,
eksempelvis kan finansiering være på konsernnivå mens
kvalitetsstyring er på forretningsområde nivå.
• Det betraktes ofte som ”overhead”, men kan være viktig for
konkurransefortrinn.
o I hver kategori av primær- og støtteaktiviteter er det tre aktivitetstyper:
§ Direkte – disse skaper verdi for kundene.
§ Indirekte – muliggjør direkte aktiviteter.
§ Kvalitetssikrende – sikrer kvalitet i de andre aktivitetene.
o Det er store forskjeller mellom bransjene hva angår viktigheten av hver aktivitet
og underaktivitetene.
o Oppdeling av aktivitetene avhenger av økonomien i aktivitetene og formålet med
analysen. Alt bedriften gjør burde inkluderes i en aktivitet. Hovedprinsippet er at
man bør isolere og skille aktiviteter som:
§ Har forskjellig økonomi
§ Har stor potensiell innvirkning på differensieringen
§ Representerer en stor eller økende andel av kostnadene
- Bindeledd i verdikjeden kan skape konkurransefortrinn ved optimering og koordinering,
ettersom aktivitetene i verdikjeden ikke er uavhengige aktiviteter.
o Eksempel: Mer kostbar konstruksjon kan gi lavere servicekostnader.
o Evnene til å koordinere bindeledd reduserer ofte kostnadene eller bedrer
differensieringen.
§ Eksempel: Presis levering kan kreve koordinering av aktivitetene i driften,
den utgående logistikken og servicen.
§ Her ligger kjernen til suksessen de japanske bedriftene har hatt.
o Informasjonssystemer er ofte viktige for å vinne konkurransefortrinn på grunnlag
av bindeledd.
o Vertikale bindeledd er av samme art som bindeledd i verdikjeden, men går til
verdikjeden til leverandører og distribusjonskanaler.
§ Her kan begge vinne samtidig – den eneste gevinst må ikke gå på
bekostning av den andre.
• Eksempel: Sjokoladefabrikk sparer kostnader ved å levere flytende
sjokolade (ikke plater), mens konfektfabrikken sparer kostnader
ved å slippe smelting.
§ Optimering og koordinering av bindeledd mot distribusjonskanalene kan
senke kostnader og bedre differensiering.
• Ofte er store deler av prisen en sluttbruker må betale distribusjon.
- Kundens verdikjeder kan være vanskeligere å forstå, da de er mindre like foretakets egne.
o Husholdninger driver en lang rekke aktiviteter, og produkter som kjøpes av
husholdninger blir brukt i forbindelse med disse.

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o Verdi skapes når et foretak skaper konkurransefortrinn for kunden, altså senker
kundens kostnader eller bedrer kundens resultater.
- Konkurransespekteret kan være viktig for konkurranseevnen til bedriften. Vi har fire
spekterdimensjoner som påvirker verdikjeden:
1. Segmentspekter – produktvariantene som lages og kundene som betjenes.
2. Vertikalspekter – i hvilken grad outsourcing benyttes.
3. Geografisk spekter – omfanget av distrikter, land og grupper foretaket
konkurrerer med koordinert strategi.
4. Bransjespekter – omfanget av beslektede bransjer hvor foretaket konkurrerer
med koordinert strategi.
o Bredt spekter gir mulighet til å utnytte bindeleddene, mens smalt spekter gir
mulighet for å skreddersy kjeden til å betjene et bestemt spekter.
- Konkurransespektre og definisjon av forretningsområder
o Forholdet mellom konkurransespektre og verdikjeden danner grunnlag for å
trekke opp relevante grenser for forretningsområdene
o Isolering av forretningsområder gjøres ved å avveie fordelene med integrasjon,
samhørighetsforholdenes styre (beslektede segmenter, områder eller bransjer) i
forhold til verdikjedene som er best egnet for å betjene dem hver for seg.
§ Krever ulike segmenter ulike verdikjede bør de adskilles.
- Verdikjeden kan være til hjelp når organisasjonsstrukturen legges.
o En organisasjonsstruktur som stemmer overens med verdikjeden vil bedre
foretakets evne til å skape seg konkurransefortrinn og beholde dem.

#5: Casting off the chains

- The world has changed: In 1960, 30 % of GNP in the US was manufacturing companies.
In 1999, it was 15 %.
- The value chain is an excellent model for describing and analyzing manufacturing
companies, but comes short in describing non-manufacturers such as a bank or a
consulting firm.
- The value networks and value shops are becoming more interesting
o They are larger than before and less regulated

#6: Competitive Advantage and the Value Network Configuration

- Using value network instead of value chain focuses on the properties of the customer, as
a central element of the choice as the whether to be a member
o The models also estimate value in different manners. For the value chain, the
customer is simply worth the discounted cash flows it creates, while in the value
network the additional value for other members must also be included
- The value network is:
o Global if it is the network’s size that affects the value of membership
o Local if it is the actual identity of the members that matters
- Insights
o The executives involved must see the model as valid
o Using value configurations as building blocks for activity systems
o Factors for deciding the appropriate model:

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§ Whether is gives better answers to the strategic questions faced by a

company
§ Whether it offers a higher likelihood that issues which are critical to the
company in question receive attention
- Competitive advantages
o Value chain: Strategic positioning is defining the specific set of customer needs
targeted by a product. Competitive advantage is achieved by the appropriate
integration of activities that create products with properties that satisfy the
targeted customer needs.
o Value network: Strategic positioning is defining the specific needs for exchange
of a specific set of customers. Competitive advantage is achieved by organizing
activities that attract and retain customers that mutually contribute to the
attractiveness of the network.
o Value chains sell something that they produce and own, whereas value networks
sell something that they organize but don’t technically own, leading to different
types of value creation economics.

#7: Generic Competitive Strategies

- In coping with the five competitive forces, there are three potentially successful generic
strategic approaches:
1. Overall cost leadership
§ Low cost relative to competitors becomes the theme running through the
entire strategy, but quality, service and other areas cannot be ignored.
§ Low cost protects against competition, as prices can be turned down to the
next most efficient competitor and still earn profits.
§ Actually, it protects against all five of the competitive forces.
§ Volume is often essential.
2. Differentiation
§ At core is creating something that is perceived industrywide as being
unique.
§ Differentiation works positively with all five competitive forces.
§ Differentiation may sometimes preclude a high market share, and be a
trade-off with cost position.
3. Focus
§ At core is focusing on a particular buying group (e.g. segment or
geographic area).
§ The strategy rests on the premise that the firm is able to serve its narrow
strategic target more effectively than competitors who are competing more
broadly.
§ In the strategic target group, the firm either has one or both of low cost
position and differentiation.
o Implementing the strategies requires different resources and skills, leadership and
cultures.
- Firms that fail to develop its strategy in at least one of the three directions are “stuck in
the middle”

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o These firms are almost guaranteed low profitability

o A firm “stuck in the middle” must decide which path to go for
o In some industries, the problem of getting caught in the middle may mean that
smaller (focused or differentiated) or larger (cost leadership) firms are the most
profitable. There is a U-shaped relation between profitability and market share.
- Risks
o Overall cost leadership
§ The strategy imposes severe burdens on the firm to keep up its position
§ Technological change that nullifies past investments
§ Imitation
§ Inability to see required product or marketing change because of attention
placed on cost
§ Example: Ford focused on low price, while the market changed to wanting
fancier cars. Ford had to make enormous investments to change.
o Differentiation
§ Prices being too high compared to low cost, so buyers are willing to
sacrifice some of the features to save money
§ Buyers’ need for the differentiating factors falls
§ Imitation narrows perceived differentiation
o Focus
§ Competitors find submarkets within the strategic target and outfocus the
focuser.
§ The difference in desired products or services (between the strategic target
and the market) as a whole is narrowed.
§ The cost differential between broad-range competitors and the focused
firm widens to eliminate the cost advantages of service a narrow target or
to offset the differentiation achieved by focus.

#8: Strategy Tradeoffs in the Knowledge and Network Economy

- The value shop
o The value created is not directly related to costs
§ It may require little effort from the expert, but may be extremely valuable
to the client
o There are economies of small scale; whereas the value chain and value network
see economies of large scale.
§ It may also be economies of scale, as the firm can draw competency from
a larger pool of employees.
- In order to decide which value creation that is taking place, we need to look at what the
firm gets paid for by its customers:
o Value chains: Products
o Value networks: Access to the network and for exchanges via the network
o Value shops: Solutions – or effort spent on their problem
- Exploration versus exploitation
o Exploitation refers to the short-term improvement and refinement of present
opportunities, competencies and solutions.

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o Exploration is associated with the long term, and implies experimentation and
the search for new opportunities, competencies and solutions.
o The failure trap refers to the firm not having the patience to wait for the payback
on exploration, which leads to a vicious circle.
o The success trap is associated with too much exploitation, i.e. the firm being
satisfied with the returns on exploiting present knowledge and technologies.
- Time tradeoffs
o Value chain
§ Focusing only on present skills will reduce the firm’s ability to understand
how the market is changing as well as its ability to create new products.
o Value networks
§ If a network firm introduces a broad range of services too early, these will
be useless. If the firm is late in expanding service range, the subscription
may become outdated and uninteresting to the customers.
o Value shops
§ Value shops face a tradeoff between competence specialization and scope.
§ If value shops increase scope too early (without sufficient specialization)
they risk providing irrelevant services. However, too much specialization
limits the growth potential.
§ Sometimes a breakthrough project might be taken, even though it has a
financial loss, as it gives the company knowledge and develop
competencies in new areas.
-

#9: What is Disruptive Innovation?

- Different types of innovation require different strategic approaches.
- Disruption describes a process whereby a smaller company with fewer resources is able
to successfully challenge established incumbent businesses.
o More specifically, the established businesses focus on the needs of their most
demanding customers (and normally the most profitable) and ignore the needs of
others.
o Entrants that prove successful begin by targeting those overlooked segments.
§ This approach make the reaction of the established players smaller.
o Entrants then move upmarket, delivering the performance that incumbents’
mainstream customers require, while preserving the advantages that drove their
early success. When mainstream customers start adopting the entrants’ offerings
in volume, disruption has occurred.
- Disruptive innovations:
1. Originate in low-end or new-market footholds.
§ Uber didn’t target low-end (as taxi isn’t non-low-end) and didn’t create a
new market (as the customers weren’t non-taxidriving). Uber did the
opposite – they started in the mainstream market.
2. Don’t catch on with mainstream customers until quality catches up to their
standards.
§ Mainstream customer does change product just because of price – they
wait until the quality is good enough, and then accept a lower price.

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§ Uber was probably a better service than regular taxi from the beginning,
due to ease in ordering, payment, rating drivers++
- Four important points are overlooked:
o Disruption is a process. It is sometimes referring to a product or service at one
fixed point, rather than to the evolution of that product or service over time.
o Disrupters often build business models that are very different from those of
incumbents.
§ The iPhone disrupted by replacing laptops as the main access point to the
internet.
o Some disruptive innovations succeed; some don’t.
§ Success is not part of the definition of disruption.
o The mantra “Disrupt or be disrupted” can misguide us.
§ Established companies needs to respond to disruption, but they should not
overreact by dismantling a still-profitable business.
• Instead, they should continue to strengthen relationships with core
customers, and may create a new division focused on the growth
opportunities.
- Uber is an outlier. The taxi industry, with market entry and prices being controlled, do
little innovation. Individual taxi drivers have little possibilities to innovate.
o However, Ubers approach in the limousine market is disruptive, as they do not
offer pre-order. The customers are those that are willing to get a better price by
not pre-ordering. If they are able to go into pre-order, they are on a disruptive
road.
- How to face disruption (as an established firm) is yet to be answered. Sometimes a
separate division works, sometimes not.

#10: Reinventing Your Business Model

- Apple succeeded with the iPod, even though others were first, as they built a great
business model with low-margin iTunes Music and high margin iPods
- Business model innovation is rare
o Less than 10 % of innovation investment is focused on it
- Why is it so difficult to pull off the new growth that business model innovation can
bring?
o Very little formal study has been done into the dynamics and processes of
business model development
o Few companies understand their existing business model well enough
§ At core is the premise behind its development, its natural
interdependencies and its strengths and limitations
- New business models often look unattractive to internal and external stakeholders. The
companies need a road map, which might look like:
1. Success starts by not thinking about business models, but about the opportunity to
satisfy a real customer who needs a job done.
2. Construct a blueprint layout out how your company will fulfill that need at a
profit
3. Compare that model to existing model to see how much you’d have to change it
to capture the opportunity

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- A business model can be said to consist of four elements, that together create and deliver
value:
1. Customer value proposition (CVP)
§ This is the most important element.
§ Products and services must be designed with the real job in mind, so it
solves it perfectly.
§ The more important the job is to the customer, the lower the level of
customer satisfaction with current options and the better your solution is
than existing alternatives at getting the job done stimulates the CVP.
2. Profit formula
§ It is the blueprint that defines how the company creates value for itself
while providing value to the customer.
§ It may be most useful to start by setting the price required to deliver the
CVP and then work backwards to determine what the variable costs and
gross margins must be. From this, we may determine the scale and
resource velocity needed.
3. Key resources
§ The focus is the elements that create value for the customer and the
company, and the way those elements interact.
4. Key processes
§ Successful companies have operational and managerial processes that
allow them to deliver value in a way they can successfully repeat and
increase in scale.
- Example: Tata group saw that whole families travelled on a scooter in India, because cars
cost five times as much. Ratan Tata understood that providing an affordable car could
create a new market.
- Five strategic circumstances that often require business model change:
1. A large group of potential customers are unserved because existing solutions are
too expensive of complicated for them
§ Example: Tata and cars in India.
2. The opportunity to capitalize on a brand-new technology by wrapping a new
business model around it
§ Example: Apple and iPod.
3. The opportunity to bring a job-to-be-done focus where one does not yet exist.
§ Example: FedEX delivered far, far faster and more reliably than any other
service could
4. The need to fend off low-end disrupters.
§ Example: The competitors of Tata.
5. The need to respond to a shifting basis of competition.
§ Example: Hilti needed to change model as lower manufacturing costs
made low-end entrants begin chipping away at the market for high-quality.
o Creating a new model does not mean the current model is threatened or should be
changed – it can often reinforce and complement the core business.
- A successful new business typically revises their business models four times or so on the
road to profitability

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o Successful incumbents must tolerate initial failure and grasp the need for course
correction
o Companies with new business models should be patient for growth, but impatient
for profit

#11: When to Ally & When to Acquire

- Most acquisitions and alliances fail.
o Acquisitions on average either destroy or don’t add shareholder value.
- Research of author: Firms do not compare alliance and acquisition before choosing one.
o In many companies, an M&A group reports to the finance head, while a separate
united headed by the business development director looks after alliances. The
units do not work together.
o Coke and Protector & Gamble announced in February 2001 that they would create
a joint venture. Coke’s share price fell, while P&G rose. The market wondered
why Coke would share profits with a competitor. In July 2001, the alliance was
terminated.
o Intel bought DSP at a 40 % premium in 1999. Intel’s stock price fell 11 % over
the three days after the deal.
§ In high-tech firms, people tend to leave when bigger companies absorb
them. This happened in DSB, where also the biggest customer left.
- Three factors must be analyzed before deciding: the resources and synergies they desire,
the marketplace they compete in and their competencies at collaborating.

Synergies
- Modular synergies (they manage resources independently and pool only the results for
greater profits) fancy nonequity alliances.
o E.g. Airliner and hotel collaborate to offer frequent flyer miles.
- Sequential synergies (when one company completes its task and passes on the result to a
partner to do its bit) fancy equity-based alliances.
- Reciprocal synergies (working closely together and executing tasks through an iterative
knowledge-sharing process), fancy acquisitions over alliances.
o E.g. The merger between Exxon and Mobil to become more efficient in every part
of the value chain.
- When the synergy-generating resources are hard resources (e.g. manufacturing plants),
acquisitions are a better option as these assets are easy to value and synergies can be
created quickly.
o For soft resources (e.g. human resources) acquisitions should be avoided. The
workers believe that they have lost freedom. Research have proven that these
acquisitions lose more value than the ones with hard resources.
- Large quantities of redundant resources also fancy acquisition.

Market Factors
- Many companies believe that collaboration decisions are internal matters – they don’t
take into account external factors before making a decision.
o They should take these factors into account, even if they can’t control them.

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- High uncertainty fancy nonequity or equity alliances rather than acquire the partner.
o The acquirer is less exposed and has the option to acquire at a later point in time.
o There may be losses with the alliance, but they won’t come close to the loss a
failed acquisition might make.

Collaboration Capabilities
- Firms tend to go with the choice they have most experience with, even if it’s not the best.
o Smart companies prevent these mistakes by developing skills to handle both
acquisitions and alliances.
o Research indicate that firms that use both grows faster than those who don’t.

How Cisco Does It

- Cisco has acquired 36 firms in the period 1994-2004, but also entered into 100 alliances
in the same period, resulting in an annual sales growth of 36 % and 44 % growth in
market cap.
- In Cisco, M&A, strategic alliances and technology incubation is placed under one senior
VP.
o In this way, Cisco is able to look internally first, before evaluating an alliance or
an acquisition.
- Cisco rarely buys companies that are not located in its general neighborhood as it would
require employees to relocate. Relocation makes the employees leave.

#12: Desperately Seeking Synergy

- Many synergy effects end up destroying value, rather than creating it
o The challenge is to separate the real opportunities from the illusions.
o With a more disciplined approach, executives can realize greater value from
synergy – even while pursuing fewer initiatives
- Synergy refers to the ability of two or more units or companies to generate greater value
working together than they could working apart.
- Six typical forms of synergy
1. Shared know-how
2. Coordinated strategies
3. Shared tangible resources
4. Vertical integration
5. Pooled negotiating power
6. Combined business creation
- Four managerial biases
1. Synergy bias – Overestimating the benefits and underestimating the cost
2. Parenting bias – A belief that synergy will only be captured by cajoling or
compelling the business units to cooperate
§ It is not given that the units should cooperate. Example: Same ads in
different countries.
3. Skills bias – The assumption that whatever know-how is required to achieve
synergy will be available within the organization.

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4. Upside bias – Executives concentrate so hard on the potential benefits of synergy

that they overlook the downsides.
§ Knock-on effects (either beneficial or harmful) is unforeseen
consequences of the strategy.
o In combination, these biases make synergies seem more attractive and more easily
achievable than it truly is.
o Knowledge about the biases is a start in handling them.
- The goals of synergy programs should be clear, as well as the real objectives and
benefits.
o The benefits should be estimated. An order-of-magnitude estimate will often do –
is the program likely to deliver $1M, $10M or $100M in profits?
o Understanding the opportunity costs can help corporate managers better
understand the source of any unit manager’s resistance.
- Corporate opportunity is when intervention by the corporate parent is justified, and has
three criteria:
1. A problem for cooperation between the unit managers must be pointed out
2. Showing why the corporate executives would solve the problem
3. Confirm that the corporate executives have the necessary skills
o Perception opportunities arise when businesses are unaware of the potential
benefits of synergy, which the parent can help to understand.
o Evaluation opportunities arise when the businesses fail to assess correctly the
costs and benefits of a potential synergy. The parent can correct the units
thinking, as the unit is often colored from previous experience.
o Motivation opportunities, which derive from a simple lack of enthusiasm by one
or more units, can stop collaboration dead in its tracks. The corporate executives
can identify and eliminate these.
o Implementation opportunities open up when unit managers understand and
commit to a synergy program but, through a lack of skills, people or other
resources, can’t make it happen.
- The downsides should be considered, also the knock-on effects, before the decision of a
pursuing a synergy is taken, as collaboration can have big downsides.
o Example: Two units competing internally. If they are merged, the competition
disappears, and the result might be worse.
o Typically, cooperation and sharing are viewed as ideals that are beyond debate.
- The approach summed up:
1. Clarify the real benefits to be gained
2. Examining the potential for parental involvement
3. Taking into account the possible downsides

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