40%: Buyouts with Benefits

 

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Don’t we all like a great deal?

Whether it is rummaging through a garage sale for unnecessary odds and ends or (if you’re like me) bee-lining to the back of the Reasors store to delve into a shopping cart of discount items, humanity is naturally drawn to a good deal.

If  you’re anything like Fiat, you are skilled in finding good deals. The only difference is Fiat isn’t solely out for frugality, the company is going for a genius corporate strategy.

That’s where our number of the day comes in: 40%. Early this year Fiat bought Chrysler for its 40% off the total value of Chrysler. It was estimated to have a value of $10.37 billion and was bought for $6.3 billion. Fiat had a smaller share of the company while the wannabe member of the American “Big Three”  auto market was going through a government bailout in 2009. (Note: This was the only bailout that earned US taxpayers a profit due to a five year early pay off of the loan).

I’ve kept an eye on the company since the recent merger to better comprehend its strategy and how it will play out. I deem this merger to be successful in the future not only in building the Fiat brand but also for Chrysler as a company. Two important strategy components to this buyout are the sharing activities and the leveraging of global markets.

With the struggling European car market (especially in Italy), Fiat’s factories have been underutilized and creating losses. Now with  Chrysler on board as part of the Fiat team, these underutilized factories have begun to build Jeeps on site. This added product line will help the manufacturing side of the Italian company gain ground and increase production. The sharing of the manufacturing sites has the potential to be a sustainable competitive advantage. Fiat has even stated that as as a company, it is  estimated to break even in the struggling market by 2016.

Not only will the companies share manufacturing activities but also distribution channels. Fiat will be able to expand its smaller luxury vehicles into the American market. With the alliance with the Tata brand recently, Fiat has gained a distribution channel into Indian. With the buyout of Chrysler, it may open more doors for up American automobiles to better penetrate the Indian market.

In my opinion(contrary to many opinions regarding the merger),  Fiat is not “bailing out” Chrysler or vice versa. The purchase of Chrysler by Fiat is beneficial to both entities. The corporate strategy to merge in this particular situation and at this time is smart. It helps both companies compensate for losses in separate struggling markets and expands the market to reach new global territories. All politics aside and bailout bitterness brushed off, both Fiat and Chrysler entered into a good deal and gained strategy that has the potential to be sustainable.

 

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BlackBerry and the Hedgehog Concept

What do you get when you cross BlackBerry and a fox?

Anyone?

You get a declining market share, faltering stock price, and lack of focus in core business.
To those familiar with Jim Collins’ book Good to Great; Why Some Companies Make the Leap…and Others Don’t, you may recognize the fox reference and its contender, the hedgehog. Collins speaks of a famous essay by Isaiah Berlin about the fox that “pursues many ends at the same time and sees the world in all its complexity.” On the contrary, hedgehogs “simplify a complex world into a single organizing idea, a basic principle or concept that unifies and guides everything.”  The concept is explained with a fox that knows many things attempting to attack a hedgehog from all angles and by way of many strategies. The little hedgehog knows one thing and that one thing it does well; to roll up in a ball in defense to the attacks.  In the end “the hedgehog always wins.”

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 As this week’s read is Good to Great, I’ve thought about the application of the concepts in the book to a company that has been headlining the business news for the past few months. I’ve been attentive to BlackBerry because of its major downfall and the remnants that have the potential for a profitable turnaround. Back in its day, BlackBerry was at the top of the industry and one of the fastest growing companies in the world as told by Forbes magazine. BlackBerry had one simple concept and one focus; to manufacture and market wireless devices to the corporate and government customers. With the comfort of growth and booming sales came also complacency. BlackBerry, which was named Research in Motion at the time, made the mistake of failing to innovate and began to lag behind with its product offering. The growth was not sustainable once the iPhone was introduced in 2007 and the company began faltering.

Waking up from the fogginess of comfortable growth, BlackBerry responded in a way similar to the fox. The strategy to regain ground was to shift focus from what the company knew best (products catered to the corporate and government sectors) to the general consumer market. It added a new line of products that were now marketed to this market and nearly identical in design to the iPhone. BlackBerry was competent in marketing to the consumer, but not the best.  The strategy of the fox failed and the company was left with a stock price of just under seven dollars per share and millions in unsold inventory. 

With the recent change in leadership and rumors of a turnaround, there may very well be a hint of a comeback of the hedgehog. The new CEO of BlackBerry, John Chen, has made some executive decisions that are reinforcing BlackBerry’s original position. For one, Chen has decided to shift back to the principal focus of corporate and government customers. Furthermore, the company has decided to outsource design and production to Foxconn (oh, the irony) so that the organization can take more time to “wring value out of software and services business.” 

Profitable growth is a result of pruning away all that does not fit the Hedgehog concept.
In order to return once again to a thriving position in the market, BlackBerry must have the discipline to prune away all that does not fit what it does best in the world at. The decision to outsource to Foxconn may be those first steps. Truly finding that concept can take years but it is well worth the time and discipline. All jokes aside, there is potential for BlackBerry to once again be the hedgehog it was and focus on what it does best.

$7 – What Happened to Blackberry?

Sophistication. Professionalism. Business Savvy.

Starry eyed and new to world of business, the Blackberry represented just that to me. One of my first interactions with a true business leader and mentor was a district manager of a store I was employed. He would travel to different parts of the state to review our sales, performance, and merchandising. He was professional and had business smarts about him as he walked through the store with a briefcase and a charismatic personality. I wanted to be just like him. At all times, it seemed, he had with him a Blackberry. It was a communication tool for connecting to other stores and the home office with reports and performance metrics. In my naivety, I quickly associated the Blackberry with these characteristics.

Blackberry at this time was booming. In 2009, it was even rated by Fortune magazine as the fasted growing company in the world. It had 84% sales grow increase per year. According to David Goldman in a 2009 CNN Money article Blackberry is Still Leader of the Pack “experts cite competitive pricing, business expertise, and new consumer products as reasons for RIM’s sustained growth.” In 2007 the stock price of RIM (Research in Motion is the former name for Blackberry) was as high as $236 per share and now the stock price is just under $7. Something must have happened.

And something did happen.

In 2007, the first Apple iPhone was introduced with is touch screen keyboard and app ecosystem. Unlike the Blackberry, which catered to the business professional and government employee, it was catered to the everyday consumer. Apple was able to pivot by shifting its business focus when it perceived that iPods were beginning to show signs of product maturity. It adapted to combine music, email, phone calls, and applications on one device. This adaptation to the dynamic technology industry was crucial to the success of its product line. Innovation was a strategy that gave Apple a competitive advantage.

Meanwhile in Canada…

While the iPhone was building in popularity with consumers, the Canadian based Blackberry sat back in its comfortable market space and continued to produce the same Blackberry product. Slowly, its product lines were becoming irrelevant in a world of advancing smartphone software and technologies. According to a Canadian analysis of the company, there were ideas by top management on how to work through the problems that were arising in the beginning but the good decisions failed to be implemented.

One of the responses by the CEO at the time, Mike Lazaridis, was to buy a software development firm called Torch Mobile. This firm specialized in internet browsers for mobile phones. What iPhone did that Blackberry didn’t was have a fully Internet-capable browser. Furthermore, Apple and android used newer software platforms as compared to RIM. Lazaridis’ decision to buy this firm was a signal that he would lead the company into a red ocean strategy (where the market is full of sharks and bloody with competition). It was a mistake to decide  to be a copy of the top competitors  and  to go head to head against the competition with which it was already losing.

Back at the workplace….

I watch as the third party tech rep stops by to pick up a Blackberry from the marketing department to be repaired. It is dropped with a hollow THUNK! into a box of broken Blackberries that are soon to share the same fate. THUNK just like the stock price of Blackberry. They should have thunk outside of the box and thunk sooner.  The box full of outdated Blackberrys was a symbol of the slow response and the lack of innovation that began the company’s downfall. What had been a symbol of authority and sophistication to me was now a symbol of poor decisions by leadership and poor corporate strategy.

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When sharing is more than caring- the four concepts of corporate strategy cont’d

It is only when long held conventional thinking is shaken that we can begin to reconstruct our view with more effective strategies. Last week, I discussed the first two of the corporate strategy avenues that were conceptualized by Michael Porter, a leading voice in the world of strategic management.  These first two were the most conventional portfolio management and restructuring; the most common corporate strategies worldwide. In his article published in the Harvard Business Review, Michael Porter argues that are two more concepts of corporate strategy that are “the best avenues of value creation.”  These two are transferring skills and sharing activities. Why are these strategies the more effective path to adding shareholder value?

To first answer this question, we must start with a strong foundation. That foundation is the value chain of a corporation consisting of primary and secondary activities. Transferring activities is about the interrelationships between businesses. One of the ways to better understand the relationship is through a company’s value chain.  With the value chain as the basis of strategy crafting, a corporation can better understand the similarities of business units. When value chains are similar, knowledge can be transferred from one unit to another. Learning is then made into a competitive advantage. With this concept executed, a corporation moves more swiftly down the learning curve.

When the similarities are discovered, a corporation can then begin to connect differing business units. Sharing activities is the linking of value chain activities between businesses. This is a step beyond transferring skills in that it uses the activities that have been transferred and related to gain advantages such as economies of scale. Examples of activities that can be transferred can include anything from technology innovation to advanced human resources systems. Results of this concept are often the reduction of the cost and competition of business units in a corporation.

The findings of the four concepts were published in the 1980s. With the rapid advancement of capital markets, it seems inevitable that these findings will, in a way, expire. Instead, these concepts are timeless truths about corporations that can be applied now. It is unfortunate that corporations today still cling tightly to traditional strategy thinking and continue down the route of portfolio management and restructuring solely as means to creating shareholder value. The transferring of skills and sharing activities seem to be such simple concepts of corporate strategy and, in a way, they are. Nevertheless, these two are less common then of the four.

Sharing won’t just benefit the business units but the corporation as a whole and the shareholders. The concepts are proof that thinking out of the box and investing time to integrate and share activities and skills can be one of the strongest strategies in even the most advanced economies. I predict that as corporations advance globally, transferring skills and sharing activities will become more and more commonly selected and implemented corporate strategies. They are, after all, vital to a corporation’s success.

4 Concepts of Strong (or not so strong) Corporate Strategy

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What does corporate strategy truly consist of?

The past few weeks, I have been pouring over strategic management books and articles when my curiosity was sparked by this question.  Endeavoring to better understand what corporate strategy truly entails and how sustainable competitive advantage relates to corporate strategy, I came upon one of my now favorite articles. It is one written by Michael Porter (a pioneer in strategy) and found in a Harvard Business Review book of consolidated articles on the topic called, Strategy: Seeking and Securing Competitive Advantage. (It’s newly added to my reading list and I highly recommend this book to those who are interested in strategy and the truth behind long-held corporate myths.)  According to this article, corporate strategy can be broken down into four concepts; portfolio management, restructuring, transferring skills, and sharing activities

To begin, the most widely used concept in corporate strategy is portfolio management. Furthermore, it is also the most commonly held strategy concept in many organizations both large and small worldwide. In a nutshell, most of these activities consist of the acquisition of attractive businesses in hopes to add shareholder value and to diversify. Managers choose to add companies in order to gain a competitive advantage and to capitalize on future profits.  There are dangers and downsides to this concept that are becoming more common as markets become more and more developed. One example of the dangers of this concept is acquiring a company because of a hot trend such as in the technology industry. The best practices for portfolio businesses are to stay within the boundaries of the matching industry when looking to acquire a new company.  It is important to not just look for good companies that will add value in the short term but also ones that will add sustainable long term value. If a company is acquired because of short term benefits, it will cost in the long run…especially the sell off price (lol). According to Porter, shareholders are actually better off diversifying themselves. These days, portfolio management is becoming less fitting in advanced markets. Relying solely on portfolio management as a strategy of large company is a prerequisite to failure. Hopefully this concept will become a prehistoric dinosaur to advanced economies.

The second concept of corporate strategy may be closely related to portfolio management. If (and usually when) portfolio management fails, the next concept often comes into play (but the two may not be mutually exclusive).  When I hear the word “restructuring” I’m programmed to think downsizing or its disguise name “rightsizing”. Restructuring, (I stand corrected) is the shift of strategies or a significant change in a business unit in order to capitalize on “unrealized potential”.  A company that I know fairly well is under restructure at this time. The restructuring process brought the company to divide business units into tiers. Labor and management were changed to reflect the sales of that unit. Companies targeted for this concept of corporate strategy are usually ones with declining ROI and struggling units. The company that I spoke of is actually growing at a substantial pace so I am curious as to the basis of this decision. My assumption is that the restructure is just one part of an advanced long-term strategy that combines two or more of the four concepts. A company with a successful restructure is usually characterized by strengthened business units and reduction of costs.

These two are the most common concepts that occur outside the corporation.  The other two occur within and rely on the interrelationships between business units. Relying solely on one concept is possible but some advanced corporations may not find this such a strong strategy. A combination is ideal if corporate strategy is crafted with the long-term in mind. The first two may not be the most ideal concepts but may be necessary depending on the circumstances. 

6.7 and why it may not be as bad as it seems

Just a few days ago, the number 6.7 was posted in many business news headlines and business journals. The reports are chock full of phrases like “lowest since 2008” and “why 6.7% is bad news.” It seems as though most of the media is communicating our need to be concerned over the latest hare-raising number released by the Bureau of Labor Statistics.

I’m one to be easily hyped and excitable, but these reports beg reasoning. Let’s start with why 6.7% seems to be a bad number for the United States economy.  In December the unemployment rate fell to 6.7% which is the lowest it has been since the fall of 2008. Not so bad, right?…..wrong. The key reason behind this number is that the labor force participation has fallen meaning that people have stopped looking for work. (You know, that ugly phrase “discouraged workers”) Other bad news is that only 74,000 jobs were created in the US as compared to the average of approximately 212,000. These factors are ones that have analysts and economists rolling their eyes and sighing.

But…before we get too engrossed in the negative aspects of this newly released statistic, I found it is important to step back and look at the big picture. Though this snapshot is not the most appealing, it’s exactly just that; a snapshot.  Instead of this 6.7 unemployment number being one to freak out about, it needs to be communicated that this may not be as dramatic as the business news makes it out to be and why this is so.

As stated before, it is crucial to shift our emphasis to the bigger picture. Combine the statistics for the year for a broader view and the economy is still at a healthy point. In fact, it’s better than it has been.  The United States economy is expected to have expanded as much as 3.5% in 2013 versus the previously estimated 2%.

Another positive, yet very debatable point about this statistic I believe is that it may slow the Federal Reserve’s tapering. The Fed has planned to reduce the amount invested in stimulus from $85 billion to $75 billion. The tapering for consumers may mean that interest rates on mortgages and students loans and whatnot will increase. The Fed’s continuation down the road of the taper process is data dependent. If the gloomy numbers continue to be released consistently, it may end or slow the tapering of the stimulus investment.

But tapering or not, I’ll have to side with Aesop on this one and agree that slow and steady wins the race. An important strategy is not to engross ourselves in the gloomy snapshots, but in the big picture. So I’ll choose to see this “hare”-raising statistic as another step (shaky, but still a step) on the road to recovery.

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Number of the Day: 49

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49%: It’s a number that makes Dearborn, MI smile.

 A number dear to me as well because I like to see businesses in my home state thrive. Ford Motor Company, a late comer to the Chinese market, reported that it increased sales in China by forty nine percent in 2013. What is fascinating to me is how numbers like this jump and the basis for these numbers. In this particular case, behind the numbers may be a very strong global strategy.  I’ve dug into the topic a bit and found that two crucial components of Ford’s China strategy seem to be the revised product offering and investment in other motor companies in China.

Ford took a transnational approach to make this increase as a strategy of global expansion. This approach is a happy medium between multidomestic and global strategies. Multidomestic approach is one in which a company decides to tailor its products to the specific country in which it is doing business. On the other hand, a global strategy is one in which product offering does not vary and a standard product is maintained in each country that it does business.  With transnational, Ford is choosing to revise some parts of it product offering in order to fit the culture in which it does business. For example, the company came out with a Chinese version of the Fusion called Mondeo (see image above) which is designed which for Chinese roads and gasoline. In Ford’s case, this smart strategy to think global yet act local seems to have been successful last year.

The next facet of Ford’s approach is its investment in JMC or Jiangling Motors Corporation which specializes in commercial vehicles. This investment helps spread risk of global expansion across other channels. Specialization in the commercial vehicle seems to be even more brilliant because it helps bring balance with a different segment. Current joint ventures with dealership networks have brought similar results.  

Nevertheless, there is another critical question to ask about this 49% growth as it greatly affects the trade of Ford. Simply put, is this growth sustainable? Was the increase in sales due to a well crafted strategy, a little bit of luck, ability to react fast, or a combination of all of them? Ford knows the rising demand for small cars in Asian countries, especially China and India. One thing that could have affected the growth for Ford is the political unrest in Japan. Maybe Chinese consumers are choosing not to buy Japanese cars because of the violent protests and boycotts happening in that industry. Maybe we benefited from the political turmoil of another company?  Possibly.

Regardless, 49% is a strong step in the right direction for Ford’s goal of 6% market share in China by 2015. In 2013, market share was just over 3%. I’m a fan of BHAGs (Big, Hairy, Audacious Goals) but this seems quite aggressive.  I hope to see Ford collaborate more with dealerships in China and grow the dealership network for sustained growth.  

Keep on driving growth Ford.

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