Managerial Economics II Business Strategy Lecture 25 Walt

Managerial Economics II: Business Strategy Lecture 25: Walt Disney Case Professor Wolfolds Cornell University Dyson School of Applied Economics and Management May 4 th, 2017 Cornell Business

Logistics 1. Reminder: Final Exam is Tuesday, May 16 th at 7: 00 pm in Warren B 25 2. (Optional) current events write-ups can be e-mailed to me anytime before Final Exam 3. Any questions?

Class Agenda 1. Review of last class 2. Finish Ithaca Beer Company Example 3. Class Objectives 4. Walt Disney Case Review 5. Q&A

1. Structure § STRUCTURE = The placement of power and authority in an organization. – Key considerations: § Distribution of power – centralized vs. decentralized § The shape / span of control § Department structure - functions, products, processes, markets and geography § Communication - formal vs. informal

Functional Structure President § Example: Hewlett-Packard, circa 2000. – Small-size, single-product line. – Undifferentiated market: no distinct or discrete customer bases. – Scale or expertise within the function. – Long product development and life cycles. Finance R&D HR Operations Product Marketing

Multidivisional 1: Product Structure § What is it? President – Multiple functional structures, across product line ► Finance Example: Boeing ► Product is focus of strategy ► Multiple products for separate customers ► Short product development or life cycle ► Minimum efficient scale for functions or outsourcing ► ► Commercial Airplanes Product managers get used to autonomy—incentivizes against sharing. Not conducive to customers’ demands for a customized product and service. HR Defense, Space, & Security Boeing Capital

Multidivisional 2: Geographic Structure § What is it? Thomson – Multiple functional structures, across locations § Example: Thomson Travel Services – Low value-to-transport cost ratio – Service delivery on site – Closeness to customer for delivery or support – Perception of the organization as local – Geographical market segments needed – America Europe Asia Sales Technology Services As technology makes the world more connected, many services will no longer be divided by geography.

Matrix Structure § What is it? – Structures that seek to coordinate decision making over multiple dimensions. § Some dimensions can be a greater priority for decision making than others. § PROs (according to Grant) – Allows firms to coordinate across multiple, relevant dimensions. § CONs (according to Grant) – – – Excessive complexity Larger head-office staffs Slower decision making Diffused/unclear authority Over formalized matrix organizations Dulled entrepreneurial initiative

How the two work together – The formal organization is often set up to handle easily anticipated problems. § § Standard processes Scheduled workflow Regular assignments Formal teams – The informal organization is often what’s relied on when unexpected problems arise. § § Non-standard processes Unscheduled workflow Ad hoc events Collaboration

Diagnosing Org. Design Failure § The 7 -S Model – What are the 7 S’s? § § § § Strategy Structure Systems Staffing Skills Style Shared values

Diagnosing Failure § The 7 -S system is designed around fit with each other. – The 7 different dimensions should fit with each other or align. § The 7 -S system should seek to create environmental fit too. – Think about markets, industries, and political environments. § Approaching each one of these elements is about understanding challenges, – But what they’re really about is executing strategy. – To make strategy execution a success organizations need to target each dimension of the 7 -S structure.

Class Agenda 1. Review of last class 2. Finish Ithaca Beer Company Example 3. Class Objectives 4. Walt Disney Case Review 5. Q&A

Ithaca Beer Company § Last time, we read the article and discussed 7 -S framework for IBC – Strategy: differentiation with quality and marketing/customer focus/philanthropy; “blue ocean” strategy – Structure: functional departments; small, flexible, and collaborative – Systems: formal brewing system; otherwise, not very formal in terms of hiring, communication, etc. – Staffing: “culture-first”; informal hiring process of former customer, local Ithacan – Skills: marketing/customer relations; expert brewers – Style: “managing by consensus” – Shared Values: everyone loves craft beer; people-first culture

Ithaca Beer Company § Let’s consider how this analysis would help us consider IBC’s plans for expansion § How might expansion change the 7 -S analysis we did?

Class Agenda 1. Review of last class 2. Finish Ithaca Beer Company Example 3. Class Objectives 4. Walt Disney Case Review 5. Q&A

Class Objectives § Use Disney case to review key class concepts – – – Resource-Based View (Resources/Capabilities/Source of Advantage) Organizational Design Vertical Integration Diversification Globalization Corporate Social Performance

Class Agenda 1. Review of last class 2. Finish Ithaca Beer Company Example 3. Class Objectives 4. Walt Disney Case Review 5. Q&A

Walt Disney Case: Success § Why is Walt Disney successful? § What does Disney mean to you?

Walt Disney Case: Resources § What is a key resource for Disney? – Brand – Mickey Mouse/animated characters § Does it pass the VRIN test? – Valuable: yes (a key component to their success and differentiation) – Rare: yes (few/no firms have this kid-friendly, widespread appeal) – Inimitable: yes (partly based on first-mover advantage! Daffy Duck, Mighty Mouse, and Bugs Bunny from Warner Bros. don’t have the same appeal as Donald Duck, Mickey Mouse, and Roger Rabbit) – Non-substitutable: somewhat (partly can be replaced with resource of quality movie making, e. g. Pixar/Dreamworks)

Walt Disney Case: Capabilities § What is a core capability of Disney? – Quality control/consistent experience – Resources that create it: brand, employee culture, animated characters § Why is it core? – Disney’s competitive advantage comes from connecting the different Disney products (movies, toys, theme parks) and providing high quality and a consistent experience – Consumers rely on Disney name as translating to family-friendly and quality

Walt Disney Case: Competitive Adv. § Does Disney compete on cost or differentiation? – Differentiation § What is the driver of this advantage? – – – Product features: Mickey Mouse is unique to them Complementary Services: have matching toys/clothes/experiences for movies Intensity of Marketing activity: brand name Customer experience: “Disney” experience on cruise ships and theme parks Vertical integration: Disney channel for TV shows too

Walt Disney Case: Imitation § How imitable is their competitive advantage? 4 step process 1. Identify a firm’s competitive advantage - Known for being profitable Competitive advantage is clearly largely from brand

Walt Disney Case: Imitation § How imitable is their competitive advantage? 4 step process 1. Identify a firm’s competitive advantage 2. Determining incentives for imitation - Do aggressively pursue patent violations Preempt entry through diversification and integration

Walt Disney Case: Imitation § How imitable is their competitive advantage? 4 step process 1. Identify a firm’s competitive advantage 2. Determining incentives for imitation 3. Acquire the resources/capabilities necessary to imitate - Key resource of brand/animated figures that resonate is difficult to replicate 1 st mover advantage and socially complex

Walt Disney Case: Imitation § How imitable is their competitive advantage? 4 step process 1. 2. 3. 4. Identify a firm’s competitive advantage Determining incentives for imitation Acquire the resources/capabilities necessary to imitate Assemble those resources/capabilities into the identical strategy as firm - While strategy is complex in terms of number of business etc. , is not causally ambiguous

Walt Disney Case: Corporate Strategy § What businesses is Disney in?

Walt Disney Case: Diversification § Pick a type of diversification: does it pass Porter’s 3 tests? – Cruise ships 1. The Attractiveness Test: diversification must be directed towards attractive industries (or those with the potential to become attractive). - Unsure of profitability; let’s check Porter’s 5 forces: Bargaining power of consumers: fairly high - easy to price-compare with other cruises Bargaining power of suppliers: fairly low - lots of shipmakers, perhaps some unions for technical employees? Threat of entry: fairly low - lots of physical and human capital, as well as logistics, to enter; Rivalry: fairly high - very large companies seem to dominate and often have themes/special attractions; but brand may differentiate Threat of Substitutes: high - other vacations are the main source; seems pretty high in terms of strength of substitutes 2. The Cost of Entry Test: the cost of entry must not capitalize all future profits. - Fairly high cost of entry (purchase cruise ships, develop new staff, etc. ) but not particularly competitive to enter, so likely not capitalizing all future profits 3. The Better-Off Test: either the new unit must gain competitive advantage from its link with the company, or vice-versa (i. e. some form of “synergy” must be present) - Yes, synergy from sharing the Disney brand experience that helps the cruise ship by increasing differentiation, and promotes the Disney brand with additional consumers.

Walt Disney Case: Diversification § Pick a type of diversification: does it pass Porter’s 3 tests? – Cruise ships 1. The Attractiveness Test: diversification must be directed towards attractive industries (or those with the potential to become attractive). 2. The Cost of Entry Test: the cost of entry must not capitalize all future profits. 3. The Better-Off Test: either the new unit must gain competitive advantage from its link with the company, or vice-versa (i. e. some form of “synergy” must be present) § What about the “need-to-own” test? – Similar to discussion about licensing vs. direct subsidiary, this is getting at whether the firm should bring it in house – In this case, the Disney “experience” which has high transaction costs is an important part of the cruise ship diversification Need-to-own § What drives the value added? – Sharing intangible resource of brand use of animated characters – Transferring functional capabilities of advertising/promotion and tangible resource of marketing force § In what ways is it related and not related? – Resource allocation: related in large capital investment to theme parks and movies (although not really toys) – Strategy formulation: theme park and cruise ships related in key success factors, and differentiated competitive position – Performance Management: related to theme park as can use customer satisfaction/retention

Walt Disney Case: Diversification § What about the ABC Merger? Touchstone movies? § Does this pass Porter’s 3 tests? The need-to-own test? Does it add value?

Disney’s Vertical Integration § How do they decide which businesses to vertically integrate versus which to license? Provide an example of each. – Disney toy stores: do integrate. Want to ensure user experience even when purchasing toys, which is hard to transact on. – Toy manufacturing: don’t integrate. Easy to standardize and check for quality.

Walt Disney Case: Globalization § Let’s do the CAGE Analysis for Disney Paris. – Cultural Distance: different languages and social norms fairly high distance – Administrative and Political Distance: similar democratic government and administrative processes fairly low distance – Geographic Distance: Western Europe is easy to access, but is across the ocean! somewhat high distance – Economic Distance: similar consumer incomes and human capital low distance § How did they decide which mode of entry to use for Disney Paris? – Cultural distance is the highest, so perhaps pursue partnerships? But want to ensure Disney experience, so perhaps local subsidiary? – Disney designed and operates it, but hires French employees, including the Euro Disney president multi-domestic strategy

Disney and CSP § Disney is celebrated as one of the best companies in terms of CSP. Why do you think CSP is useful for Disney? 1. 2. 3. 4. 5. 6. 7. 8. CSP attracts responsible consumers. CSP attracts consumers willing to pay a premium for responsibly sourced goods. CSP could remove local barriers to growth as motivated ethical consumers advocate for access. CSP improves employee morale and productivity by enabling positive work satisfaction. CSP attract employees willing to accept lower wages, making a tradeoff for positive work satisfaction. CSP improves brand other intangibles. CSP improves access to government. CSP provides insurance against scandals.

Disney and CSP § Disney is celebrated as one of the best companies in terms of CSP. Why do you think CSP is useful for Disney? 1. 2. 3. 4. 5. 6. 7. 8. CSP attracts responsible consumers. CSP attracts consumers willing to pay a premium for responsibly sourced goods. CSP could remove local barriers to growth as motivated ethical consumers advocate for access. CSP improves employee morale and productivity by enabling positive work satisfaction. culture is key at Disney CSP attract employees willing to accept lower wages, making a tradeoff for positive work satisfaction. CSP improves brand other intangibles. Disney brand relies on being family friendly. CSP improves access to government. Hong Kong and French government have provided good incentives for theme park expansion. CSP provides insurance against scandals.

Q&A § Any questions? § Fill out muddiest card and leave here if anything was confusing today!

End of Lecture: § Tuesday: Review – Will run through a set of review slides covering material starting after the prelim material § Assignments: – None!