Vertical Integration, Disney, Intel

How would you categorize the different types of innovation at Dell? 1. Customers order directly by phone, internet; configure PCs themselves 2. Dell created company-specific ordering websites 3. Dell added "asset tags" for companies 4. Dell pre-installed company specific software for companies

1. operational excellence 2. customer intimacy 3. customer intimacy 4. customer intimacy

why did IBM choose open standards

- Felt pressure from Apple's initial success - Believed customers would purchase IBM brand - Wanted product to become PC standard: -network effects: value of product grows by more people using -economies of scale: lower cost more production - IBM gave away most valuable parts of pc -microprocessor to intel -operating system to microsoft

What is Vertical Integration?

-The merging together of two businesses that are at different stages of production--for example a food manufacturer and a chain of supermarkets. Merging this way with something further on in the production process (and thus closer to the final consumer) is known as forward integration -Businesses are downstream or upstream of each other depending on whether they are nearer or further away from the final consumer

How can vertical integration be contrasted to horizontal intergration?

-Vertical integration can be contrasted to horizontal integration, the merging together of businesses that are at the same stage of production, such as two supermarkets, or two food manufacturers. Merging with something further back in the process is backward integration

what are some competitive strategies disney could improve on

1. micromanaging from corporate 2. unclear roles and responsibilities 3. too much transactional costs to control efforts

Do the combined businesses have more value together, 4 ways?

1. you buy an asset on the cheap (portfolio managers), but it requires being smarter than the market in pricing the asset 2. you run the target company more effectively (restructurers) 3. you gain market power, so you two price higher 4. you exploit synergies, combining assets to create more value

what are examples of vertical integration

companies such as shell and BP came to control every step involved in bringing a oil from its origins to vehicles fuel tank

give an example of an industry that collects inventory risks?

computer industry, inventory can actually be a pretty massive risk because if the COST OF MATERIALS GOES DOWN 50% A year and you have two or three months of inventory versus 11 days, you've got a big cost disadvantage and you're vulnerable to product transitions, when you can get stuck with obsolete inventory

What is TSMC

contract manufacturer, ability to invest in latest tech processes experience curve very successful, market capitalization exceeds intel

How is what Dell did different from straight outsourcing?

Quality: Set Service Level Agreements (SLA) Information: Build Data Linkages-free flow of information Purchase Agreements: e.g. 25% of Dell's next year production Partners: Optimize (fewer the better) number of partners

What was Intel's final core competency?

R&D

Too easy for companies to lose the founder's mentality

Revenue grows faster than Talent Erosion of accountability Lost voice of the front line (of the customer) The un-scalable founder

AT&T/ Time Warner example

did not feel like two companies added more value 1. did not buy cheap, roughly 35% above its trading price 2. couldnt run it better, at&t couldnt better manage time warner's assets 3. no market power in horizontal merger 4. have to wait to see synergy

What is Dell's business model?

direct-to-consumer for made-to-order products (MTO) -grew rapidly and had flexibility through virtual integration -free flow of information with suppliers and customers -reduced asset risk: lower inventory levels and A/R -optimized(reduced) number of strategic partners bypass the dealer channel through which PC were then being solve. Instead, he would SELL DIRECTLY TO CUSTOMERS AND BUILD PRODUCTS TO ORDER.... DELL ELIMINATED THE RESELLER'S MARKUP AND COST AND RISKS ASSOCIATED WITH CARRYING LARGE QUANTITIES OF FINISHED GOODS having a relationship with the customers creates valuable info that allows them to leverage their relationship with both suppliers and customers

Founder's Mentality

do you have a lot of passion, do you care, do you love your customers when first start a company and have no customers work hard to gain popularity and then get a lot of scale buy things cheaper but then lose passion

explain downstream and upstream

downstream is towards the consumers upstream is opposite direction towards producers upstream costs create downstreams products because you have to much inventory that no one wants

Coca Cola vertical integration example

forward integration: concentrate producers decide to buy bottlers and also retail channels so they control the formula of coke, the packaging and where its distributed

What are the potential benefits of vertical integration?

greater capacity it gives organizations to control access to inputs and to control the cost, quality, and delivery times of those inputs tightly coordinated supply chain and flexibility

who was andy grove and what was his role in intel's success?

helped bring the computer age; first employee at intel coined term strategic inflection point (getting out of memories, sole sourcing manufacturing & marketing directly to consumers) management "creative confrontation missed a key strategic inflection point : rise of inexpensive laptop and non PC devices

why is vertical integration sometimes difficult for companies to implement successfully?

it is often expensive and hard to reverse

what are characteristics os semiconductor manufacturing?

large facilities requiring lots of fixed costs -processing and automation equipment -factories maintain ultra-pure clean rooms complex manufacturing process has high marginal costs too -hundred of process steps -long production time of 4+ weeks

what is virtual integration?

means you basically stitch together a business with partners that are treated as if they're inside the company

what change in industry structure served as a catalyst for Intel to become the CPU leader

pc industry shifted from vertical, (before IBM AT&T controlled distribution, apps, pc, operating systems) to horizontal intel and Motorola were big players and distribution, apps were no longer just different stages of production

list 4 of intels resources and capabilities that create its core competencies?

resources: location, human capital, patents, tech capabilities: sales & marketing, HR management, legal acumen, new product design

what did intel do with the 386 chip

stopped licensing and became the sole source of manufacturing

what are Disney's core competencies?

storytelling (thought of disney characters as industry - mini industry), creative content (good at making movies), cross promotional

What did intel start?

the memory business (essentially 100% market share in beginning, started putting more and more transistors on a chip (moore's law), limited differentiation, largely a commodities business) - had competition then improved operational efficiency the microprocessor business

what is moore's law

the observation that the number of transistors in a dense integrated circuit doubles about every two years

How do you make money from a standard?

there needs to be something pushing people to use your standard

how do assets collect risks around them?

through inventory and accounts receivable, both are risks

how did intel create and claim value

willingness to pay - intel inside and capacity rationing price - 1st to market, price high and then developed next generation of products cost- 1st to full volume, learn and increase yields

what did disney do well?

1. buena vista distribution reduced costs by 25% 2. did a lot of licensing 3. theme parks brands were used across multiple geographies

Why did this allow dell to evolve faster?

Capital: Suppliers build factories and capabilities Headcount: Fewer # of employees