It was a beautiful sunny, but windy morning today. If you see through the window, one would not realize that it had rained so much in the last few days.
Today, we had interesting sessions, including one on Enron and what led to its collapse.
The session on strategy was the last of the cases where we discuss competitive advantage. We have already covered how successful firms have a wider wedge between the costs incurred and the WTP (Willingness To Pay) than the average industry competitor. We have already covered Walmart, The Economist and Samsung - and today we will be discussing Walt Disney.
- Walmart : Successful low cost competitor
- The Economist : Sucessful differentiated competitor
- Samsung : Competitor with dual advantage ( high premium and low cost)
In defining strategy, there are contrasting modes of thought that different organizations apply. The table below summarizes this well - there is a common approach which is not so efffective that is used by many, and there is a better more relevant approach used by a few.
A good strategy is not a collection of best practices. Another trap which many firms fall into is indiscriminate benchmarking, which can be disastrous. An effective strategy statement describes the targeted advantage, scope (the customer segment or where to play) and the activities (how to win).
Another big issue facing many large organizations is whether and when they need to diversify. It is interesting to note that today an average US Fortune 500 company operates in four different industries. And it is more prominent in other parts of the world - with business houses in India, chaebol's in S.Korea and Keiretsu's in Japan. And in most of these cases, poor corporate strategy is common.
What is the impact of corporate strategy on the different business units (BU) ? It varies from country to country. For example:
- In the US, good corporate strategy is an icing on the cake; business units must be competitive on their own and in attractive industries; but the icing can make the decisive difference between a good cake and a bad one. Quantitatively a good corporate strategy can have a 4% higher impact on profitability of a business unit.
- If we compare similar data from 14 emerging economies in the world, corporate strategy seems to be making a higher impact and hence more important. As compared to 4% positive impact in the US, here it has a 11% positive impact.
Walt Disney is the first case, where we look at corporate level or multi-business strategy. In what set of industries should a diversified corporation compete ? How does a diversified corporation coordinate the internal activities of its businesses so that the business units have a greater competitive advantage together ? Keep this in mind - "If you like milk and need milk, it does not mean you have to own the cow".
Typically, there are two tests of a corporate level strategy:
- Better-off-test : Does the presence of a corporation in a given market improve the totoal competitive advantage of the business units ? With the help and name of the corporation, can they drive a higher wedge between WTP and costs ?
- Ownership test : Does ownership of the business unit produce a greater competitive advantage than an alternative arrangement would produce ? Alternative arrangement could be a partnership, JV, etc
A corporation is likely to pass the tests, when it has some shared resources that creates competitive advantages to the BU's and it is difficult to trade efficiently via the market. A good example in the case of Disney is its animated characters.
Having said all this, ensuring coordination between different business units is easier said than done. It requires sophisticated structures, systems, processes and reward systems that are well coordinated.
The case of Enron - its phenomenal success and dramatic failure - is a complex case of greed, failure of fiduciary responsibilities, complexity of the business model, accounting complications and many more.
It looks like (of course hindsight is 20-20) there were tell tale signs:
- Accounting for discounted future revenues today, when there is an issue in estimating costs
- Hedged the future costs in SPV - where the ownership and assets of the SPV are linked back to Enron stock; clear case where this conflict of interest; hence the hedging was illusionary; and using a technicality the financials of the SPV's were not consolidated
- Complacency of the board, audit committee, internal and external auditors - in the face of an aggresive CEO and high market expecations
- Contradictions - vision was to be "asset light" but board approved huge investments in power plants internationally
- Internal and external auditors were the same !
If the external auditors beleive that their customer is "management", then we have an issue. All the institutions - the board, the audit committee , the external auditors, the internal auditors - are only effective if the people who appoint them allow them to function independently by empowering them and respecting them. In a deposition to the US Senate investigation team, the CEO of Enron made a statement that the accounting issue was complex, he did not fully understand it and depended on the advice of the external auditors. All members who have a fiduciary responsibility (CEO, CFO, board, etc) have to understand the business complexity - either you understand it completely or dont get into it !
The third of the cases for today was agin Samsung Electronics - which was already discussed in a strategy class. But today we are discussing about their marketing transformation - which is the third case on Marketing transformation, after Burberry and Real Madrid. Samsung's challenge was to move from a "low cost OEM" to a "high value products provider", as well as compete and win against the likes of Sony.
Samsung had won in the OEM market, riding on the strategy of:
- Manufacturing being the core
- Driving new product development - high spend on R&D
- Hardware focus and open architecture
- Focus on digital
- Breadth of products
But, when it comes to marketing, an OEM will typically focus on very different things compared to a high value-added brand - see the table below:
The newly appointed CMO in Samsung, drove changes on the power of the following three things:
- Information power : by getting sales data by product, by Geography, by channel and marketing spend in each;
- Incentive power : Incentivised the SBU heads, who are the powerful line managers, on selling all Samsung products - not just their division products
- Structural power : he was hand-picked by the Vice-Chairman to drive marketing changes
Prof. Quelch, made one important statement - when you appoint a C level person, especially to a staff position like the CMO, it is very important to see their credibility with the line managers - which is very crucial for the success of the newly appointed person; in many cases, if you get people who have held line jobs in the past, it helps in building the credibility with the line managers.
Samsung increased its market share by careful spending and focusing on areas where there are accelerated purchase cycles like cell phones. It is more difficult to change market share in areas like automobiles, which have much longer purchase cycles. You have to look at an opportunity where the customers make an independent brand choice - and there are more such opportunities in products which have an accelerated purchase cycles.
Today, the weather was just great - after the classes, did some reading for tomorrow. And went for my long run - did 10k today - while the outbound run was great, the in bound was tough as it was quite windy and I was running against the wind. But thoroughly enjoyed it.
My friend, Tae Hyung, took a picture in class, just before Prof. Healy's class on Enron. Prof. Healy is in the background.
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| Partha, with Prof Healy (with tie) in the background |
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