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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$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.