Strat Midterm #2

Challenges of conglomerates

integration of both the technical and human aspects of bringing another company into a large group

Challenges to growth through acquisitions

integration of both the technical and human aspects of bringing another company into a large group

Key to platform

interaction between USERS To be a platform, users must interact with content producers

Mergers: Three different approaches to growth

1) merger of equals 2) growth through acquisitions 3) Conglomerates

Product and process innovation over time

---Emergence of dominant design causes shift from radical to incremental product innovation, reducing risks to customers and firms and triggering the industry's growth phase ---The emphasis on efficiency and product reliability causes process innovation to then take precedence over product innovation

S curves of technological innovation

---Explains how innovations start slow, accelerate, then hit a ceiling requiring companies to jump a new technology ---New technologies may be worse at first ---New technologies supplant the old as they improve ---Older firms that cannot adapt are driven from the market

What Rivian plans to do to come back from these costs

---Increasingly shipping vehicles by rail instead of by truck, which is cheaper but could result in longer delivery time to customers ---Rivian said it expected losses to shrink as its plant in Normal, Ill., runs closer to full capacity of building 150,000 a year. To hit this target, Rivian said it would have to run the factory on both a day and a night shift. ---trimmed capital expenditures to preserve cash and expected to spend $2 billion rather than its original projection of $2.6 billion. ---The company last month said it would cut 6% of its workforce and slash spending. RJ Scaringe, the chief executive, said the cuts were needed to ensure the company could meet its production goals without having to raise additional cash

Creative Destruction

---Schumpeter 1945 ---A process of industrial mutation...that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism

Ford and GM Fight It Out to Electrify by the economist

---The Detroit duo is racing to electrify their fleets, and especially pickups, the biggest source of profits for both companies. ---What Ford and GM have done to prove their commitment to growing their EVs ---Most of Ford and GM's sales happen in the US but they no longer have as much market share in the US as they used to (combined 50% market share now) ---GM's share price has outperformed Ford's the past ten years

Transaction Platforms

---participants transact for private value through a standardized interface in one-time, bi-lateral (e.g. seller-buyer) exchange. Users come onto the platform, transact, and then leave or continue to the next transaction. Big challenge is who do you focus on? Buyers or sellers. Need both ---Examples of pure transaction platforms include eBay, Amazon Marketplace, Uber, AirBnB or Venmo, but even physical spaces, such as a farmers market or a business school placement office (connecting students with recruiters) can be a transaction platform.

Platform stacking patterns

-transaction and interaction platforms seem to be more common as the base platforms because users don't have to make investments that are customized to the platform and, consequently, the platform can attract more users. More users provide more opportunity for user overlap. Moreover, stacking an interaction platform on a transaction platform and vice versa is straightforward since in either case, the primary difference in the platforms is only the extent of repeated interaction among users.

Common reasons for failure in alliances (Incentives to cheat/opportunistic behavior)

1) Adverse selection 2) Moral hazard 3) Holdup

4 key considerations for building a platform based business

1) Choose the sides of the platform ---The more sides you have, the more of an advantage you will be able to create. But it also leads to a lot of complexity ---More sides lead to potentially larger cross-side network effects, larger scale and potentially diversified sources of revenues ---However, it may not be economically viable for one (or several) sides to exist independently, may create too much complexity and even conflicts of interest between the multiple sides Example: Ebay introduced skype as one of their sites because they thought communication was a good thing for buyers and sellers but it infact added more friction BUT when ebay introduced paypal this was a hi 2) Solve the chicken-or-egg problem by choosing the features and functionalities of the platform—focus on reduction of search costs, transaction costs, and product development costs, navigate interests of multiple parties ---Example: airbnb has systematic discrimination (want to reduce the cost of transacting on that site however) 3) Design the business model and pricing of each side of the platform (considerations include value to each side for being part of the platform and price sensitivity). All platform businesses need to find a way to extract value from at least one market side ---Example: eharmony 4) Establish and enforce ecosystem rules (access, interactions, market failures due to inadequate information and transparency and too much competition on one side of the MSP) ---Example: App Store→ insists on declaring privacy rules "this site is monitoring what you are doing etc"

The source of strategic advantages in platform stacking

1) Cost overlap between platforms 2) User overlap between platforms By sharing infrastructure or operating costs between an existing and a new platform—what we call cost overlap—a company lowers the cost of launching and operating a stacked platform. Cost overlap leads to the reduction of incremental or marginal costs incurred by the platform owner when building a new platform due to prior investments made for a previous platform. The company avoids infrastructure costs, development costs, and operating costs

Two forces that are fundamental in driving industry evolution

1) Demand Growth (s-shaped growth curve) 2) Creation and Diffusion of Knowledge: Dominant design and technical standards

Determinants of profitability (what performance is dependent on)

1) Environmental Determinants (Monopoly Rents) ---Industry position ---Institutional factors ---Barriers to entry 2) Firm-Specific Determinants (Ricardian Rents) ---Resources, Capabilities ---Barriers to imitation ---Structures, systems, people 3) Change (Schumpeterian Rents) ---Technological ---Demand/Supply ---Regulation

Two key dimensions that exchanges differ on

1) INTERDEPENDENCE: the degree to which platform participants repeatedly and interdependently interact with one another to exchange value ---Interdependence ranges from low (for example, autonomous or one-time interactions between platform participants like you see on eBay or Uber) to high (for example, frequent or recurring interactions like you see among participants on Facebook or Linux' open source platform) 2) CUSTOMIZATION: the extent to which platform participants must invest in customized resources or knowledge to access and participate on the platform ---Customization ranges from low (generic knowledge or resources) to high (customized knowledge or resources)

Value Creation through alliances (Sources of value creation)

1) Improve performance of a firm's current operations (Exploit economies of scale, Learn from competitors, Manage risk and sharing costs, Access complementary R&C) 2) Create an environment for superior performance (facilitate development of technology standards(DVD market) and facilitate tacit collusion) 3) Facilitate entry and exit (1. Low-cost entry into new industries (partner provides access and legitimacy) 2. Low-cost exit from industries (partner is an informed buyer) 3. Managing uncertainty (real options) 4. Low-cost entry into new geographic markets)

Managerial assumptions underlying the mathematics of permanently improving the growth rate when acquiring a business

1) Melding the businesses is costless—but in fact, it isn't there is almost always fallout in the shape of FUD (fear, uncertainty and doubt), culture clash (HP and Compaq) and at least a temporary drop in commitment and energy levels as people take their eye off the ball. Culture may not figure in accountants' merger calculations but, for takeover virgins, the costs of ignoring it are as real as any other, and often higher 2) Synergies will ride to the rescue—in reality, synergies often fail to materialize because its a construct of the producer rather than the customer Example: A service one-stop shop sounds logical to a producer, but that doesn't mean the customer will want to use it. Or take AOL and Time Warner. Five years ago AOL bet $183bn it could find synergies between the distribution and creation of internet content. It, or rather shareholders, lost 3) Assumption that acquiring company B will somehow make company A more efficient Another case of wishful thinking

Types of synergies

1) Modular 2) Sequential 3) Reciprocal

Types of alliances

1) Non-equity 2) Equity 3) Joint Venture

Common economic characteristics of online platforms/industry platforms

1) Positive direct network effects 2) Positive indirect network effects 3) cross-subsidization 4) Scale without mass 5) Potentially global reach 6) Panoramic scope 7) Generation and use of user data 8) Disruptive innovation 9) Switching costs 10) Winner-take-all or winner-take-most

Implications of the Life Cycle for Competition and Strategy

1) Product Differentiation 2) Organizational Demographics and Industry Structure 3) Location and international trade 4) The nature and intensity of competition

What can incumbents do as primary demand declines?

1) RETIRE (Technology Displacement) 2) RETREAT (Technology Retrenchment) 3) REDEFINE (Technology Reemergence)

The 6 determinants of merger success

1) Strategic vision and fit 2) Deal Structure 3) Due diligence 4) External factors 5) Pre-merger planning 6) Post-merger integration

Technology life cycle

1) Technological discontinuity: Variation 2) Era of ferment: when many different firms start thinking about different ways in which that technology can be manifested Ideas that have not fully settled are in this era (race from era of ferment to dominant design) 3) Dominant Design: product gets more standardized Most people are following that same technology The more complex the product, the more important it is to have a dominant design (don't need to have a dominant design for simple products like toilet paper etc) 4) Era of incremental change (retention): more user adoption and now people are just making small changes example : iphones-ios is still there but making new phones lighter and faster etc

Four distinctive platform types that emerge from variation on interdependence and customization

1) Transaction 2) Interaction 3) Connection 4) Collaboration

Categories of Mergers and Acquisitions (FTC's Typology)

1) Vertical: suppliers or customers 2) Horizontal: competitors 3) Product extension: complementary products 4) Market extension: new geographic market 5) Conglomerate: residual category

Three business models that Jones had to select from

1) build her own egg freezing centers in which Extend would offer a full continuum of services, from counseling, medical consultation, and hormone stimulation and monitoring to egg retrieval, freezing, and even storage ---By following this route and delivering the service under her own brand, Jones would be able to control the lab conditions and freezing process, which required high sterility. She would also be able to set her own prices, free from the constraints of a partnership agreement. On the marketing side, a standalone Extend would be able to separate its brand from any association with the pathology of infertility. When they arrived at the clinic for their egg retrieval, women would not encounter infertile couples going through IVF. Such a freestanding structure, however, might also generate significant competition from the existing clinics, who could view Jones and Extend as interlopers on their long-standing turf 2) Instead of investing in its own clinics, Extend could package the retrieval and freezing tools that preservation required into a kit, which could then be sold either directly to customers or through an obstetrician-gynecologist—-charge clients an annual storage fee ---The advantage of such an approach would be substantially lower overhead; the challenge was securing FDA approval, which was required for medical devices 3) Enter the market in a partnership, bringing bespoke egg freezing services to an existing fertility clinic Extend would still interact directly with clients, but would enter a revenue-sharing agreement with an established clinic (or clinics) to perform the actual retrieval and freezing procedures. Extend would provide the marketing, counseling, access to its cryoprotectant and oocyte preservation protocol, and long-term storage --One obvious advantage of this model was risksharing; by joining with an established clinic, Extend could boost its credibility and limit its potential liability. It would also, however, be ceding a chunk of the market before it even developed - and a market that, theoretically at least, was considerably larger than the fertility clinic's own base of patients

5 barriers to change/The sources of organizational inertia/why change is so difficult

1) organizational routines 2) social and political structures 3) Conformity 4) Limited search 5) Complementarities between strategy, structure, and systems

Three sets of factors that executives must analyze before deciding on a collaboration option(whether to make an alliance or an acquisition)

1) the resources and synergies they desire (To sum up, when companies want reciprocal synergies or have large quantities of redundant resources, whether the assets are hard or soft, they must think in terms of acquisitions. At the other end of the spectrum, when businesses desire synergies from sequential interdependence and are combining mostly soft assets, equity alliances may be the best bet. When companies want to generate modular or sequential synergies, and the assets that will create them are mostly hard, like factories, they can choose contractual alliances) ---types of synergies ---nature of resources ---extent of redundant resources 2) the marketplace they compete in ----degrees of uncertainty ---forces of competition 3) their competencies at collaborating: Smart companies prevent such mistakes by developing skills to handle both acquisitions and alliances

Types of integration strategies

1)Preservation: HIGH NEED FOR OPERATIONAL AUTONOMY AND LOW NEED FOR STRATEGIC INTERDEPENDENCE ----Exploration of a new industry ----Significant cultural differences ----Learning about the value creation and resources of the target ----Example: entire value of the target firm lies in the fact that it has to have high operational autonomy→ Vedere and Novartis 2) Holding: LOW NEED FOR OPERATIONAL AUTONOMY AND LOW NEED FOR STRATEGIC INTERDEPENDENCE ---Pure financial investment not a "strategic" acquisition ---No significant interest in combined benefit, sharing of resources, or transfer of capabilities 3) Symbiosis: HIGH NEED FOR OPERATIONAL AUTONOMY AND HIGH NEED FOR STRATEGIC INTERDEPENDENCE ---Similar positions but worth protecting ---Co-evolution of buyer and target ---Intensive transfer of capabilities ---Could lead to subsequent combination of the two companies ---Example: Amazon and Zappos 4) Absorption: LOW NEED FOR OPERATIONAL AUTONOMY AND HIGH NEED FOR STRATEGIC INTERDEPENDENCE ----High potential for rationalization ---Optimization of combined value creation ---Usually clear claim to leadership from management of buyer. ---Example: Sprint and T-Mobile

M&A should create value such that

1. Businesses in the new firm are worth more together than they would be under independent ownership ---Economies of scale (if same business) ---Synergies from economies of scope (demand and supply side) in resources and capabilities so as increase revenue and /or decrease cost 2. Equity holders cannot create the same value through portfolio investing ---Like they can in the case of an unrelated merger or acquisition 3. Pay attention to the deal price ---Total value created = Value of synergy (value creation that requires combining two entities) + Value of control (value creation that resides entirely in the target firm; usually obtained through the improvement of management at the target firm / effective integration) 4. Value is captured only through integration that is consistent with strategy.

What are alliances?

An alliance exists whenever two or more independent organizations cooperate in the development, manufacture, or sale of products or services.

Extend fertility case discussion in class estimating the target market

27-35 yr olds that are interested in having kids Think about Comparable markets and their target markets

Complementarities between strategy, structure, and systems

A BARRIER TO CHANGE In order to adapt to new circumstances, it is not enough to make incremental changes to a few dimensions of strategy—it is likely that the firm will need to find a new configuration that involves a comprehensive set of changes b/c everything fits together (strategic fit) Result: process of punctuated equilibrium→ long periods of stability during which the widening misalignment between the organization and its environment ultimately forces radical and comprehensive change on the company

Organizational routines

A BARRIER TO CHANGE The more highly developed an organization's routines are, the more difficult it is to develop new routines—> organizations then get caught in competency traps where "core capabilities become core rigidities" Organizational routines: patterns of coordinated interaction among organizational members that develop through continual repetition

Social and political structures

A BARRIER TO CHANGE As social systems, organizations develop patterns of interaction that make organizational change stressful and disruptive As political systems, organizations develop stable distributions of power; change represents a threat to the power of those in positions of authority

Limited search

A BARRIER TO CHANGE Organizations tend to limit search to areas close to their existing activities—they prefer exploitation of existing knowledge over exploration for new opportunities Limited search is reinforced by bounded rationality—human beings have limited information processing capacity, which constrains the set of choices they can consider and by satisficing—the propensity for individuals (and organizations) to terminate the search for better solutions when they reach a satisfactory level of performance rather than to pursue optimal performance

Conformity

A BARRIER TO CHANGE firms imitate one another in order to gain legitimacy Institutional isomorphism: locks organizations into common structure and strategies that make it difficult for them to adapt to change. Isomorphism also results from voluntary imitation—risk aversion encourages companies to adopt similar strategies and structures to their peers

Four network effects that a two-sided platform has

A direct, or same-side effect for each side, ie, preference regarding number of other users on own side. These effects that occur, for example, when users benefit from other users on the network (negative effects) An indirect, or cross-side effect in each direction, ie, preference regarding number of users on other side (complementors). These effects arise when there are "at least two different customer groups that are interdependent and the utility of at least one group grows as the other group(s) grow" (positive effects) ---More merchants positively impacts users AND more users positively impacts merchants The effect can be positive by enhancing value of the network to one or more sides The effect can be negative by reducing value of the network to one or more sides

Acquisitions

A firm buys another firm's stock using any (or mix) of cash, debt and equity Acquiring firm takes a controlling, majority or complete share in target firm An acquisition can be friendly or hostile Mostly through an open tender by offering a premium over the current stock price of the target firm

three primary ways to integrate strategic M&A

Absorption Symbiosis Preservation

For whom do mergers and acquisitions create value?

Acquiring firms: value is often destroyed (negative) Target firms: value increases by about 25% M&A activity creates value, but target firms capture it

How acquisition deals and alliances differ

Acquisition deals are competitive, based on market prices, and risky; alliances are cooperative, negotiated, and not so risky. So companies habitually deploy acquisitions to increase scale or cut costs and use partnerships to enter new markets, customer segments, and regions In many companies, an M&A group, which reports to the finance head, handles acquisitions, while a separate unit, headed by the business development director or VP, looks after alliances. The two teams work out of different locations, jealously guard turf, and, in effect, prevent companies from comparing the advantages and disadvantages of the strategies

Decision rules for integration

All economic value to be created in a merger or acquisition is captured after the deal. It is through interactions among individuals who have to be willing and able to collaborate in the transfer of a strategic capability

Alliances in the self driving car market

Alliance is a short term entity and not expected to last forever; alliances are a race to learn-whichever partner/firm learns first can end the alliance

Innovations definition

An innovation is invention + commercialization. It is an idea, practice, or object that is perceived as new by an individual or other unit of adoption Always think about the impact on the market and the impact on technology newness

architectural level and component level

Architectural level: creates great difficulties for established firms because an architectural innovation requires major reconfiguration of a company's strategy and activity system (example: battery-powered electric motor) Component level: (example: hybrid engine)

Nature of resources

Before settling on a strategy, companies should check if they must create the synergies they desire by combining hard resources, like manufacturing plants, or soft resources, such as people. When the synergy-generating resources are hard, acquisitions are a better option. That's because hard assets are easy to value, and companies can generate synergies from them relatively quickly. When companies have to generate synergies by combining human resources, it's a good idea to avoid acquisitions. Research suggests that employees of acquired companies become unproductive because they are disinclined to work in the predator's interests and believe that they have lost freedom. In fact, people often walk out the door after acquisitions.

Time to Get Fit— an Open Letter from Altimeter to Mark Zuckerberg (and the Meta Board of Directors)

BoD seem disappointed in the performance of Facebook and the actions the company has taken in recent years "To accomplish this goal, we recommend a three step plan that will double FCF to $40 B per year and focus the company's teams and investments: 1. Reduce headcount expense by at least 20%; 2. Reduce annual capex by at least $5 B from $30B to $25B Meta is investing more in capex than Apple, Tesla, Twitter, Snap, and Uber combined! We believe the future lies in AI. In fact, we believe that augmented and artificial intelligence has the potential to drive more economic productivity than the internet itself. And, while most companies will struggle to monetize AI, we believe Meta is incredibly well positioned to leverage AI to make all of its existing products bette 3. Limit investment in metaverse / Reality Labs to no more than $5B per year" Overall goal: want a leaner, more focused, and more productive company that regains its confidence and momentum

Growing for Broke by Paul Hemp HBR Case Study Summary

CEO of Paragon Tool, a maker of machine tools, thinks that acquiring MonitoRobotics would be a good move for the company The company uses sensor technology and communications software to monitor and report real-time information on the functioning of robotics equipment. By adapting this technology for use on our machine tools, we could offer customers a rapid-response troubleshooting service—what consultants these days like to call a "solutions" business. Over time, I'd hope we could apply the technology and software to other kinds of machine tools and even to other kinds of manufacturing equipment Paragon a solid, unexceptional business operating in an extremely difficult industry and economic environment The company was built around a line of high-end machines—used by manufacturers of aerospace engines, among others—that continued to enjoy fairly good margins, despite the battering that the machine-tool industry as a whole had taken over the previous decade and a half. Still, the market for our product was essentially stagnant. Foreign competition was beginning to take its toll. And we continued to face brutal cyclical economic swings. But we've been developing technology and software, similar to MonitoRobotics', that would allow us to respond immediately if a machine at a customer's site goes down. The division currently accounts for less than 10% of our revenue and, because of the cost of developing the new technology, it's struggling to turn a profit. The greatest opportunity, though, lay in the possibility that MonitoRobotics' software technology would become the standard means for machine tools—and ultimately a variety of industrial machines—to communicate their service needs to the people who serviced them and to other machines that might be affected by their shutdown. Several days later, I polled the members of the senior management team and found them split on the issue of the acquisition. the consultants came back to us with conflicting reports. One highlighted the market potential of MonitoRobotics' technology, noting that we might be too far behind to develop similar technology on our own. The other focused on the difficulties both of integrating the company's technology with ours and of adapting it to equipment beyond the robotics field.

Competence destroying and competence enhancing technologies

Competence destroying: technological changes that undermine the resources and capabilities of establish firms Competence enhancing: preserve, even strengthen, the resources and capabilities of incumbent firms

Netflix case discussion (Four things we focused on)

Content: No advantage, all other streaming services also use debt free cash flow, have immense amounts of data for creating content and licenses etc Aggregation: No advantage, all other streaming services also have an extensive library and do their own content Distribution: CDN, advanced 4k streaming capability, only a temporary source of competitive advantage Display: relationship with customers is strong but only a temporary advantage

non-equity alliance

Cooperating firms agree to work together using contracts but do not take equity positions in each other or form an independent firm to manage cooperation ---Example: Airbus and delta formed an equity alliance to provide maintenance solutions—-created a product that benefitted both of them ---Low control but high flexibility

Joint Venture

Cooperating firms create a legally independent firm in which they invest and share any profits thereof. ---High control but low flexibility ---Example: Daimler and BMW created "Jurbey" for short-term rental of cars to help them compete with Uber in the US and Didi in China

Equity alliance

Cooperating firms supplement contracts with equity holdings in alliance partners ---Incentives are usually not aligned so need to align incentives with equity ---Example: Google takes equity interest in many VC firms to be in the know of different technological developments taking place; Amazon took an equity position in living.com creating a home living store for amazon (Amazon is now incentivized to promote living.com and make it do well)

Facilitate development of technology standards

DVD market—> Toshiba came up with the development of HD DVD but there was also Sony's blu ray discs, there were separate alliances between those that preferred the blu ray discs and those that preferred HD DVD—> to save the market, they had to create one standard

De novo entrants and de alio entrants

De novo entrants: start-up companies De alio entrants: established firms diversifying from other industries. De alio entrants are at an advantage if the linkages are close between the resources and capabilities required in the new industry and those present in an existing industry

Disruptive technologies vs. Sustaining technologies

Disruptive: incorporates different performance attributes than the existing technology Sustaining: augments existing performance attributes

Deal Structure and Due Diligence—which deals to close?

Does the investment thesis hold? What is the deal's stand-alone value based on rigorous analysis of cash flow under a range of scenarios? What is the true value of the synergies, beginning with near-in cost synergies, moving out to revenue options, and subtracting negative synergies 3 General Caveats ---True Potential Synergies < Estimated Synergies ---Realized Synergies < True Potential Synergies ---Realized Dis-synergies >Estimated Dis-synergies

Creation and Diffusion of Knowledge

Drives industry evolution Dominant Design: a product architecture that defines the look, functionality, and production method for the product and becomes accepted by the industry as a whole ---Refers to the overall configuration of a product or system ---A dominant design may or may not embody a technical standard—a firm that sets a dominant design does not normally own intellectual property in that design ---Except for some early mover advantage, there is not necessarily any profit advantage from setting a dominant design ---Exist in processes, business models Technical Standards: Typically embody intellectual property in the form of patents or copyright

Potentially global reach

Due to the internet's end-to-end interoperable design, online platforms have the potential to reach customers world wide. Netflix

Tools and mechanisms to minimize threat of cheating

Explicit Contracts & Legal Sanctions: Writing explicit contracts, close monitoring of contractual compliance and threat of legal sanctions can reduce, but may not eliminate, the probability of cheating. (Non-equity alliances) Equity investments: Value of Firm A depends on the performance of its partner (Firm B) in which Firm A makes an equity investment, thereby reducing Firm A's incentive to cheat Firm B (Equity Alliances) Firm Reputations: A reputation for cheating can affect a firm's future opportunities. Cheating in a current alliance may foreclose opportunities to enter new (potentially valuable) alliances. Joint Ventures: Cheating in joint ventures hurts both partners. When the probability of cheating in an alliance is high, a joint venture is preferred. Trust: A rich set of interpersonal relations and trust can support economic linkages. Trust, in combination with contracts, can reduce threat of cheating.

What Ford and GM have done to prove their commitment to growing their EVs

GM: ---Pledged to build 4 battery factories by 2025 with its partner, LG Chem, a South Korean battery-maker ---Said they want all their vehicles to be emissions-free by 2035 ---Overall pledged to spend $35 bn on electrification by 2025 ---Created BrightDrop, a new unit dedicated to electric delivery vehicles. And it retains an edge in basic technology, as well as in making batteries in-house, a sure route to cutting the costs of the priciest element of electric cars. Its Ultium batteries, with a wire-free system that cuts weight and costs, married to its new electric motors, could make for a vehicle with a range of 450 miles (724km), nearly 50 more than the longest-range Tesla Ford: ---Ford and its battery partner, SK Innovation, also of South Korea, announced an investment of $11bn in three battery factories and an assembly plant for electric F-Series pickups ---Said that they think 40% of their global sales will be electric by 2030 ---Overall pledged to spend over $30 bn on electrification by 2025 Company has an undisclosed but sizeable stake in rivian, a EV-trucks startup ---Ford's offerings look more compelling, desirable and closer to the firm's areas of expertise. The battery powered Mustang Mach-E has revived a dying brand. Whereas the electric Chevy Silverado may not hit the showrooms until 2024, Ford's F-150 Lightning can already be pre-ordered and goes on sale next year

FTC

Generally disallows any merger or acquisition involving US-headquartered firms that could potentially generate monopoly profits in an industry Example that the FTC is involved in is Microsoft and Activision; AT&T when it tried to buy Time Warner because this is horizontal when they are actually vertical

Challenges to mergers of equals

both companies seek control over the new organization. Every aspect of the company's business practices is subject to discussion, and the selection of best methods often takes a back seat to each company's desire to maintain their own status quo

Role of investment banks

Help structure the transaction (with lawyers and accountants) Pitch the right offer Provide valuable market intelligence Potential competitive response Informed view on reaction of financial markets and company shareholders Calculation of a range of fair values Organize due diligence Offer financing solutions Guidance on HOW, WHEN, and HOW MUCH It is the firm's responsibility to understand and convey the strategic rationale - the WHY

Rivalry among players, Type of innovation, number of competitors, Strategic Focus (KSF), and Price at each of the four stages in the industry life cycle

INTRODUCTION Rivalry: Low Innovation: Product Innovation Competitors: Few KSF: Innovation Price: High GROWTH Rivalry: Increasing Innovation: less product more process innovation Competitors: Many KSF: Ability to grow Price: Moderate MATURITY Rivalry: Strong Innovation: Increasing process innovation Competitors: Fewer but still large KSF: Market share/ costs Price: Moderate to low DECLINE Rivalry: strongest Innovation: process innovation at a maximum Competitors: Few KSF: Ramp down/disengage Price: low

Forces of competition

If there are several suitors, a company may have no choice but to buy a firm in order to preempt the competition. Still, companies should avoid taking over other firms when the degree of business uncertainty is very high. Instead, the company should negotiate an alliance that will let it pick up a majority stake at a future date after some of the uncertainty has receded

The nature and intensity of competition

Implications of changes in industry structure for competition: first, a shift from nonprice competition to price competition; second, margins shrink as the intensity of competition grows Introduction phase: battle for technological leadership, price competition is weak, heavy investments in innovation and market development depress profitability; product innovation is the basis for initial entry and for subsequent success Growth phase: more conducive to profitability, market demand outstrips industry capacity, especially if incumbents are protected by barriers to entry; high investment in R&D, plant and equipment, and high sales Maturity phase: increased product standardization and excess capacity stimulate price competition, especially during shakeout. Intensity of this depends on the balance between capacity and demand and the extent of international competition; high importance of efficiency particularly in industries that tend toward commoditization; cost efficiency through scale economies, low wages, and low overheads becomes the key success factor Decline phase: strong price competition, often degenerating into destructive price wars, dismal profit performance

Advantages and Disadvantages for Incumbents and Startups in the EV Market

Incumbents: ----Advantages: Infrastructure Pre-existing relationships with lobbyists, suppliers, and dealers Access to capital ----Disadvantages: Brand Reallocation of resources (how much and when) HR Startups ----Advantages: Brand VC funding HR Flexibility ---Disadvantages: Legal challenges (harder cost to enter the market) Capital constraining Infrastructure

What type of firm typically partakes in sustaining innovation and disruptive innovation?

Incumbent—> sustaining New entrant—-> disruptive

Location and International Trade

Industries migrate internationally during their life cycles—beginning in the advanced industrial countries because of the presence of affluent consumers and availability of technical and scientific resources then expanding to other countries as demand grows. In other countries, they are serviced initially by exports, but with deskilling of production processes, production shifts first to newly industrializing countries and eventually to developing countries

Reason for Rivian's Losses

Inflation affecting the prices of their raw material inputs and lithium Increased costs from expedited freight expenses Parts-related problems that slowed production While factory output is improving, Rivian said its assembly lines are designed for building a higher number of vehicles than it had been producing, resulting in labor and overhead costs weighing on its bottom line Rivian's efforts to boost sales longer-term were dealt a blow this week with lawmakers proposing to add new restrictions to a $7,500 tax credit available to electric-vehicle buyers. The revisions would add a price cap to current subsidy, making any electric truck and SUV costing $80,000 or more ineligible for the federal credit

Challenges in alliances

Instability in the early years ---Two thirds of the alliances vulnerable to termination in first two years Increasingly short lived ---Average duration of alliances has decreased with time High failure rate ---40-70% of the alliances regarded as fail

Four phases of an industry life cycle

Introduction/Emergence ---Sales are small and the rate of market penetration is low because the industry's products are little known and customers are few ---High costs and low quality ---Customers for new products tend to be affluent, tech-savvy, and risk-tolerant ---starts with innovators then early adopters with the dominant design coming in at the chasm in early adopters Growth ---Accelerating market penetration as technical improvements and increased efficiency open up the mass market Maturity ---Increasing market saturation causes the onset of maturity ---Once saturation is reached, demand is wholly for replacement Decline ---New substitute products appear

Achieving success in alliances key takeaways

It is important to understand that alliances are often a temporary means to an end and should be managed accordingly Assess the Opportunity and appropriateness of the Partner Consider the identities, goals, contribution, and risks of both firms Evaluate the business case from the strategic and financial point of view Manage the alliance to learn from your partner and to create long term alliance capabilities in the firm Develop "Alliance Strategies" not "Strategic Alliances"

Extend Fertility early days

Jones believed that the key to starting something was to become an expert To further her understanding of the market, Jones surveyed a group of more than 250 women about their perspectives on egg freezing and attended industry conferences to network with leading fertility experts

Developing a strategy for extend fertility

Jones had to decide which technology to pursue: slow freezing (traditional method) or vitrification, both of which were designed to prevent the formation of crystals Jones had to select from three possible business models:

When to Ally and When to Acquire by Jeffrey H. Dyer, Prashant Kale, and Harbir Singh

Knowing when to use which strategy may be a greater source of competitive advantage than knowing how to execute them. Our research shows that most companies simply don't compare the two strategies before picking one. Consequently, they take over firms they should have collaborated with and ally with those they should have bought, making a mess of both acquisitions and alliances ---If a company has succeeded already with two alliances it will tend to enter another alliance even if an acquisition would be better for the circumstance ---Organizational barriers also stand in the way

Fuji v. Kodak

Kodak went out of business and Fuji thrived What did Fuji do? (TECHNOLOGICAL REEMERGENCE) ----Downsized film production lines and shut down redundant facilities ---R&D focused on greater communication and collaboration ---Realized low potential profitability of digital camera business, embarking on a massive diversification based on capabilities and innovation ---Film technologies were adapted to pharmaceuticals, cosmetics, and protective LCD polarizer films (70% of current market)

Kroger Case SUMMARY

Kroger buying Albertsons (the largest and second-largest U.S. supermarket operators); combining would give them greater scale and increased leverage in negotiations with vendors The deal would also allow the companies to invest in keeping prices low, technology and other operations Creating a strong No. 2 behind Walmart could give the combined entity more leverage in negotiations with vendors and help it push back on price increases combined regional influence

Commons errors during the business investigation process (due dilligence) include

Limitation to financial and legal matters Delegation of review solely to outside advisors and consultants Appointment of team members who do not have sufficient experience, resources, and time Use of the review only to make a "Go / No Go" decision on the transaction rather than to obtain information for use in negotiating and planning all aspects of the transaction including post transaction integration and operation

Disruptive innovation

Many platforms are successful due to their disruption of existing business models Airbnb

What kind of acquisition is the Kroger and Albertsons acquisition

Market expansion because they are expanding into an area that they didn't have before (also could be overcapacity but not as much as market expansion)

Extend Fertility case discussion in class: merits and cons of egg freezing

Merits of egg freezing ---Individual: independence and timing, flexibility, illness, right relationships, testing egg for diseases ---Business: smart professional business women ---Society: addresses the declining fertility, increases equity for women who are subject to implicit biases, results in happier relationships marriages and parents Cons of egg freezing ---Individual: solution for the wealthy, impact on health (taking hormones etc), timing for procedure and appointments, mental health impact, impact on the chance of naturally conceiving, ethical and religious concerns ---Business: challenge of older parenting, expensive for business ---Society: unregulated, solution to the problem instead of fixing the problem

Product differentiation

Most of differentiation occurs during the introduction phase—in the mature phase, there tends to be convergence around a dominant design that is followed by commoditization (buyers select primarily on price) The trend toward commoditization however also creates incentives for firms to create novel approaches to differentiation

New moves of Netflix

Netflix is in the process of executing two major strategic shifts in an effort to increase its revenue and subscriber base. The first is rolling out its first tier of ad supported content which will help increase revenue and also are thinking of adding more mobile games or video games Crack down on people sharing passwords

Executing Strategy

Once the appropriate strategy has been designed, the firm has to consider the best way to execute the strategy to gain competitive advantage 1) Internal Resources and Capabilities 2) Alliances 3) Mergers and acquisitions

Businesses that do not qualify as online platforms

One is cloud services providers. These businesses are online but they are not platforms because they serve only one set of users: those who pay for the ICT resources that the provider is renting out. Another example is traditional radio stations before the advent of streaming. They were platforms because they served two sets of users (listeners and advertisers), but they were not online.

The social proof effect

One means we use to determine what is correct is to find out what other people think is correct Applies especially to what constitutes correct behavior In times of uncertainty, the natural tendency is to look around at the actions of others for clues ---Example: Actor on a busy new york street that looks to be in some distress, they had another act by ignoring him, and then everyone that walked behind him also ignored the guy

Scale without mass

Online platforms have the possibility to grow extensively, quickly, and inexpensively due to low to negligible marginal costs inherent in their structure. Compared to traditional businesses, there is significantly less investment in tangible assets and employees for comparable growth rate Wikipedia

Cross subsidization

Online platforms often use the fact that they are multi-sided to increase the user base on one side by subsidizing that side with another when advertising revenues make it possible to offer free services to users on the other side of the platform's business Search engines: advertisers pay but we can just search for free

Achieving success in mode of growth

Organic Growth, Alliances, and M&A are alternative ways to achieve the strategic objectives of a firm Develop growth strategy based on firm capabilities and an evaluation of environment and industry analysis Evaluate best option to execute strategy based on a clear value proposition Organic Growth, Alliance, Merger or Acquisition: Go after new resources in the simplest way that will satisfy your goals Types of synergies (modular, sequential, reciprocal), nature of resources (relative value of soft to hard resources), extent of redundant resources, degree of market uncertainty, level of competition Create a sound investment thesis based on sources of value creation to guide search for target firms to ally with or acquire. An acquisition is the most complex option Pay attention to the process! Short changing the process could hurt the firm in the long run

Holdup

Partner firm exploits the transaction-specific investments made by the other firm in the alliance. ---Tesla and Panasonic

Moral hazard

Partner firm's behavior changes after the deal is struck (provides skills and abilities of lower quality than promised in the agreement, for example) ---Example: Amazon and Toys R US (providing less than promised)---ToysRUs shared more information than what Amazon shared with them

Panoramic scope

Platform companies could exploit economies of scope because of complementarities between two or more services they provide In some cases, development costs and/or data can be shared across business lines and applications can be given a common look and feel so that users gain familiarity with "sister" platforms more quickly Uber: has insight into a larger space

Network effects

Platforms create network effects. Network effect refers to any situation in which the value of a product, service, or platform depends on the number of buyers, sellers, or users who leverage it. Typically, the greater the number of buyers, sellers, or users, the greater the network effect and the greater the value created by the offering. "In other words, the willingness to pay, for a buyer, increases as the number of buyers or sellers for the business grows. (Platforms have network effects but network effects are not confined to platforms)

Generation and use of user data

Platforms have rich insights into user behavior due to the amount and quality of data they collect about the users. These are often leveraged for their benefit at the expense of user privacy Facebook(Meta)

Adverse selection

Potential partner misrepresents the value of the skills and abilities it brings to the alliance. The more intangible the partner's and capabilities, the higher the chance of adverse selection. ---Rooted in asymmetric information—> seller has more information than the buyer (example→ used car market and lemons)

Some reasons for lack of value capture in M&A

Premium paid - for the deal to break even the acquired company must now do better than what the market had already priced into the shares Faulty managerial assumptions: 1. Melding businesses is costless 2. Synergies will ride to the rescue 3. The target will improve operational weakness of the acquirer

Primary versus secondary demand

Primary demand: represents the demand for a category of product / service in the overall market Secondary demand: represents demand for one firm or a specific brand in a category of product / service (i.e., a company's market share)

Action recommendations for Facebook that we discussed in class

Privacy Younger generations using it Content moderation Fake news Spam account censorship/political involvement Revenue allocation

Technology Reemergence

REDEFINE Technology reemergence is a path whereby market demand for a legacy technology first retrenches and contracts into a limited niche but later achieves substantive and sustained demand growth. Firms engage in reinvestment in old and new facilities and demand creation and growth Example: Fuji came out with a new type of product in TVs and found new users for it, no longer doing cameras but still using similar inputs/resources/capabilities

technology displacement

RETIRE Once demand for an older technology is supplanted by a new dominant design, the field will reorient itself and incumbent firms will retire the legacy technology. The displaced technology is presumed to have little or no utility, leaving incumbents with few options but to wind down production, reallocate or disband investments in manufacturing facilities, and cease R&D devoted to that technology

Technology retrenchment

RETREAT The legacy technology moves into a contracted niche in its home market or relocates in a new market application. Incumbents exploit heterogeneity in its demand environment that permits a limited alternative use. The goal and expectation of technology retreats is not for growth and expansion, but rather for survival and contraction. Thus a core assumption of technology retrenchment is that the market for the old technology will decline, and only a small subset of firms will be able to survive by exploiting the remaining pockets of latent demand. Example: start to become more specialized in terms of what you are offering—>calculator market or cash registers because a lot of things are electronic right now

Big Deal, but does it add up? By Simon Caulkin in The Observer, 2005 SUMMARY

Rising stock markets bring out takeovers the way spring brings out green shoots, by hotting up the value of acquirers' shares. But while an inflated currency may make deals easier to sign, it does not make them easier to bring to success on the ground ---Takeovers make headlines and give the impression of purposeful activity. But, managerially and mathematically, the odds against them paying off are as high as they ever were. Most acquirers have to fork out a premium over the current value to persuade shareholders in the target company to sell. The mark-up - sometimes up to 30 per cent - means that for the deal to break even the acquired company must now do better than what the market had already priced into the shares

Degrees of uncertainty

Risk exists when companies can assess the probability distribution of future payoffs; the wider the distribution, the higher the risk. Uncertainty exists when it isn't possible to assess future payoffs. Before entering into an acquisition or alliance, companies should break down the uncertainty that surrounds the collaboration's outcome into two components: 1) managers must evaluate the uncertainty associated with the technology or product it is discussing with the potential partner 2) the company should assess if consumers will use the technology, product, or service and how much time it will take to gain widespread acceptance. When a company estimates that a collaboration's outcome is highly or moderately uncertain, it should enter into a non equity or equity alliance rather than acquire the wouldbe partner

Growing for Broke case question

Should Paragon Tool further its growth ambitions by trying to acquire MonitoRobotics?

Winner-take-all or winner take most

Some platforms can exploit early mover advantages and switching costs along with positive network effects and economies of scale of scope to prevent significant competition and consequently dominate the market Amazon

Switching costs

Some platforms require / encourage investments by users that make it harder for them to use a competing platform (multihoming) . Multihoming by users can inhibit a platform even with strong same-side (direct) network effects from fully monetizing cross-side (indirect) network effects Twitter and other social media platforms Video games: x box having people buy their console and decreased the price so low that people bought so many consoles to play other games too which hurt x box

SpaceX and T-Mobile Plan to Link Starlink Satellites to Cellphones by Thomas Gryta and Micah Maidenberg

SpaceX and T-Mobile US Inc. said they plan to work together to use the rocket company's satellites to provide connections to T-Mobile cell phones across the U.S., even in remote areas with no current wireless service The goal of the partnership is to provide voice and data services anywhere, regardless of cell towers, allowing areas not yet reached by wireless networks to get service. That would include places where cellular signals can't reach, such as the middle of a national park or a large body of water. T-Mobile Chief Executive Mike Sievert said that the company expects most current smartphones would work with the new service and that it expects the satellite service to be included free on its most popular monthly plans Risks: The project faces regulatory hurdles. The Federal Communications Commission would need to sign off on SpaceX's use of the T-Mobile spectrum, a spokeswoman for the carrier said. She added that SpaceX would need to secure additional permission from the agency The National Aeronautics and Space Administration, a SpaceX customer, has registered worries that the satellites could cause more collisions in orbit The plan is ambitious partly because it will use existing phones rather than requiring new hardware, and while grand in scope, it will begin with texting and messaging apps. Text messages are less burdensome on a network compared with calls or streaming data.

Strategic Vision and Fit

Strategic investment thesis - Vision and Fit STRATEGIC OBJECTIVES 1) The Overcapacity M&A: Eliminate overcapacity, gain market share, and create a more efficient operation 2) The Geographic roll up M&A: really small businesses, usually family businesses, expands geographically by buying many small units, operating units remain local 3) The Product or Market Extension M&A: Extend a company's product line or its international coverage 4) M&A as R&D: Meta and Oculus-Meta took that technology by buying the firm, Used in lieu of in-house R&D to build market position quickly 5) The Industry Convergence M&A: To establish position in new industry by culling resources from existing industries whose boundaries are eroding; the existing firms use their existing resources that are becoming obsolete so they reconfigure these resources—>example: Disney did a variety of acquisitions in order to compete effectively

Fundamental drivers of platform success

Strategies to succeed (become dominant) in a platform business: ---Encourage and take advantage of direct and indirect network effects Governance principles ---Who can (and cannot) participate: Clarity of mission and brand ---Build and maintain trust and legitimacy: Legitimacy as platform leaders is hard to build and easy to destroy ---Curate to minimize low-quality transactions: Balance fairness and trust with public and private interests

4 types of innovations

Sustaining: A significant improvement on a product that aims to sustain the position in an existing market (top left, high impact on market but low technology newness) Incremental: gradual, continuous improvements on existing products and services (bottom left, low impact on market and low technology newness) Disruptive: technology or new business model that disrupts the existing market (top right, high impact on market and high technology newness) Radical:technological breakthrough that transforms industries, often creates a new market (bottom right, low impact on market but high technology newness)

Why does the study of mergers and acquisitions need a new framework for analysis?

The analysis of the causes of failure of mergers and acquisitions has often been shallow and the measures of success weak, measured by narrow and uninformative things such as short-term stock price which is taken at face value and moved on to search for causes of failure such as culture clash, lack of synergies, and flawed strategy

Rivian's Losses Nearly Triple to $1.7 Billion by Sean McLain

The auto maker affirmed its 2022 production guidance of building 25,000 vehicles by the year's end, but said its operating loss is expected to grow to $5.45 billion, from its previous projection of $4.75 billion for the full year

Mergers

The firms purchase a fraction of each other's assets Typically, they are not unfriendly ("Merger of Equals") One of the parent firms usually emerges as the dominant management

Main findings of organizational ecology

The number of firms in an industry increases rapidly during the early stages of an industry's life. As an industry gains legitimacy, failure rates decline and the rate of new firm foundings increases Number of firms begins to fall with the onset of maturity, often implying a shakeout phase during which the rate of firm failure increases sharply. After this point, rates of entry and exit decline and the survival rate for incumbents increases substantially Consolidation may be accompanied by a new phase of entry as new firms seek niche positions in the industry—a process referred to as resource partitioning (example: as the world beer industry has become dominated by a few global giants (AB INbev, Carlsberg and Heineken), a wave of craft brewers have entered the industry)

What does the demise of great companies reflect?

The rise of new industries—notably the information and communications technology (ICT) sector The failure of established firms to adapt successfully to the life cycles of their own industries

Technology and Industry Life Cycles Key Takeaways

There are regular, common trends of new markets and technology Know what drives these trends and adapt early and often The Era of Ferment often begins when the old technology has reached its technical limits (flattening of S curve). The Era of Ferment combines substitution and design competition Often, in the early stages of the industry life cycle, firms focus solely on product innovation. Strategically, market innovation is needed for the product innovation to succeed. Buyer uncertainty has to be alleviated and user behavior has to adapt to the new way of doing things As the industry matures, competition increases and firms succeed by continued product and process innovation. Focus is on market share and margins.

Motivation for M&A

To Ensure Survival: e.g. M&A activity among banks during the financial crisis Free Cash Flow: Utilize excess cash generated instead of giving dividends or buying back stocks ---When the top management team does not want to find alternative ways to get rid of cash like share buybacks Agency Problems: Managers' desire for status and pecuniary benefits Managerial Hubris: Over-confidence that acquiring firm can manage the target firm's assets more efficiently Potential for above-normal profits: Some mergers and acquisitions have the potential to create value for both the acquirer and the target

Lemons and adverse selection

Used car market Lemons in the market could cause the collapse of the used car market Have warranties to prevent adverse selection though so that is why the used car market does well

Connection platforms

When app developers or advertisers target users participants connect to a standardized platform interface to sell specialized products or services to platform customers. Connection platforms include Apple's App Store, Salesforce's AppExchange, Game Consoles (to which game developers connect their games), or physical spaces such as a food court in a mall (where food vendors connect their stores through a physical interface). At fast-growing Southern New Hampshire University (SNHU), instructors connect to the SNHU platform and teach courses to the 150,000 students by creating and delivering courses with specific content requirements as specified by SNHU

Extent of Redundant Resources

When companies have a large amount of redundant resources, they should opt for acquisitions or mergers. That gives executives complete control over decision making and allows them to get rid of redundant resources easily

Growing for Broke in class discussion

While service is becoming increasingly important, here are some issues: 1) No clear underlying strategy can be determined 2) Reactive interest in acquisition ---If the sole reason for an acquisition is to match a competitor's move, it is almost guaranteed to fail ---It is projected as a "strategic" deal i.e. the financial benefits will only be realized only fair in the future or cannot be quantified at all ---The deal could seriously stretch the firm's financial resources ---The firm appears to have no clue as to how to manage the acquisition and the people ---The reasons above imply that the price will be hard to estimate 3) If the firm wants to build "service" capabilities, this is best done internally at this stage 4) More importantly, the firm needs to establish a clear overall strategy and investment thesis

Extend Fertility HBS Case

Working to help women whose oocytes (eggs) were liable to be damaged by chemotherapy or other major medical interventions, scientists had been slowly discovering better and better techniques for preserving the young women's eggs, and thus their fertility. The techniques were still largely unproven and the market—such as it was—confined almost entirely to women facing the impending loss of their reproductive facilities. Christy Jones's plan was to take the science of egg freezing to a massively broader market, offering young and fertile women an opportunity to suspend their biological clocks by proactively preserving their eggs. By freezing their eggs, she reasoned, women could finally take complete control of their own reproduction. They could have children on their own schedules, free from the historical constraints of marriage, careers, and even biology

Platform

a digital or physical space that enables exchanges between users who supply or sell value and users who demand or buy value online platform is defined as a digital service that facilitates interactions between two or more distinct but interdependent sets of users (whether firms or individuals) who interact through the service via the Internet. Companies operate platforms, but are not the platform itself (e.g. Uber is not a platform but is rather a company that operates a ride-hailing platform and a food delivery platform)

online platform definition

a digital service that facilitates interactions between two or more distinct but interdependent sets of users (whether firms or individuals) who interact through the service via the Internet

Conglomerates

a third type of entity in which large companies are brought together without any clear attempt to create synergies or meld strategies, keeping them separate to provide the advantages of decentralization and autonomy Example: Tyco

Radical innovation

a type of innovation that combines the power of technology with a new business model. It is a concept that changes the relationship between customers and suppliers by displacing current products and services or by making new product categories Make capabilities irrelevant Cars/other forms of transportation made horse and buggies irrelevant talking about the impact on the INCUMBENTS---the radical technology makes the incumbents capabilities obsolete

Positive indirect network effects

all platforms have positive indirect network effects, and if indirect network effects exist, then the entity or market in question must be two-sided or multi-sided. Positive indirect network effects occur when a group of users (say, third-party sellers on a businessto-consumer platform) benefits more as the number of people in another group of users (buyers who use the same platform) increases, and possibly vice-versa solves a co-ordination problem between two or more sides that stand to benefit if they can be united and helped to interact when indirect network effects are present, the volume of demand for the platform's services will depend not only on the magnitude of the prices it sets, but on the structure of those prices across the sides of its market

As primary demand decreases, incumbents focus on...

increasing secondary demand

Innovation equation

innovation= invention (technology life cycle) + commercialization (industry life cycle)

Social proof can lead to...

collective ignorance

multi-sided platforms

combinations of platform types stacked on top of each other Product platform, resellers multi-sided online platforms: direct interaction between users on that platform; interaction between vendors and sellers on Etsy ---These platforms have some important things in common, including the use of information and communication technologies to facilitate interaction between users, the collection and use of data about those interactions and network effects. Examples: Facebook has been described as a three-sided platform (users, developers/advertisers, sellers) and LinkedIn as a three-sided platform (users, recruiters, advertisers) that is in the process of adding two more sides (developers, publishing) These platforms should each be managed differently as determined by the types of exchanges they enable.

Modular synergies

companies create modular synergies when they manage resources independently and pool only the results for greater profits (example: when an airline and a hotel chain plan a collaboration that will allow hotel guests to earn frequent flyer miles, they wish to club the consumer's choice of airline and hotel, so that both benefit from her decision)

S-shaped growth curve

demand growth industry sales on y-axis and time on x-axis starts with introduction, then growth, then gets to its highest peak at maturity, then declines

growth begins only after the...

dominant design

Evolutionary economics

emphasizes change within individual firms; firms evolve through searching for new routines, replicating successful routines, and abandoning unsuccessful routines

Reciprocal synergies

generated when companies work closely together and execute tasks through an iterative knowledge-sharing process ---For companies that desire this synergy, acquisitions are better than alliances

Mergers of equals

involve two entities of relatively comparable structure coming together and taking the best of each company to form a completely new organization Example: JPMorgan merging with Chase Manhattan Bank in 2000 to become JPMorganChase

Growth through acquisitions

involves the much simpler process of fitting one smaller company into the existing structure of a larger organization Example: Cisco

Transaction platforms require

management skill in dynamically adjusting price (or other mediums of exchange) as a two-sided incentive to drive transaction volume; rapidly onboarding parties to the platform in order to scale; and creating automated algorithms for users to find, match, and interact with counterparties. Mechanisms to quickly establish trust among buyers and sellers are critical. Owners of transaction platforms typically monetize the platform by taking a small fee on each transaction Focus: lowering transaction costs

Connection platforms require

management skill in effective design and implementation of plug-and-play systems, and the recruiting, screening, and regulating of partners who make the customized investments to build and offer products on the platform. Too many sellers can result in too much competition and drive away quality complementors who then do not want to make the customized investments required. Atari's failure to screen complementors led to a flood of low-quality games that hurt the entire platform. Owners of connection platforms typically monetize by creating and managing partner profit sharing or commission-based pricing schemes Focus: create effective, easy-to-use plug and play systems and build a reputation for quality that attracts quality complementors.

Interaction platforms require

management skill in providing effective tools that keep users on the platform for as long as possible, including interaction tools, gamification, virtual meeting spaces, content sharing, ranking and rating systems (such as "likes") and other mechanisms that drive "sticky" engagement. Owners of interaction platforms typically monetize by charging an upfront access fee or subscription (e.g. eHarmony), offering a "freemium" model for upgrades (e.g. Linkedin), or selling access to advertisers (e.g. Facebook). Focus: facilitating meaningful interactions and protecting user communication privacy.

Collaboration platforms require

management skill in screening and regulating qualified users and developing specialized tools or workspaces that permit joint resource production in which users cooperate interdependently to reach a joint outcome. For example, to be approved to work on Linux, software engineers must have expertise in Linux to collaborate on assigned and organic coding projects where they engage in extensive reciprocal knowledge sharing, debate, and iteration to produce improved Linux code. Owners of collaboration platforms typically monetize by sharing in the profitability on sales of the joint products or services created. Platform participants (such as coders on Github or Linux) may also participate to receive intrinsic benefits, such as acquiring knowledge, reputation, or expertise that can be deployed later in furthering their corporate reputations or individual careers, or in monetizing future projects. Focus: provide incentives to attract qualified participants and ensure effective collaboration with, and among, platform participants.

Cross-side network effects

more sellers attracting more buyers and more buyers attracting more sellers

Technical standards arise when there are...

network effects

Kroger

not a platform but a reseller Negative same side direct benefits: many sellers and many users Positive indirect cross side benefits: the more sellers the more will be interested in selling to Kroeger

Sustaining innovation

occurs when a company creates better-performing products to sell for higher profits to its best customers. Typically, sustaining innovation is a strategy used by companies already successful in their industries. The motivating factor in sustaining innovation is profit; by creating better products for its best customers, a business can pursue ever-higher profit margins Dramatic improvement in performance Example: IPhone, each upgrade/improvement costs more so you are going to people with higher WTP for it Targeting higher end market

Collaboration platforms

participants collaborate through platform interfaces to create specialized products or services for platform customers. Examples include Linux, Firefox browser, Github, or Wikipedia, but also some supply chain platforms qualify, such as "automotive supplier parks" that consist of multiple firms that develop modules and systems that fit the product platform designed by the automaker." For example, Toyota's technical center houses not only its engineers but also dozens of supplier "guest engineers" who collaborate to design automotive systems.

Interaction platforms

participants interact for private value through platform interfaces in repeated bi-lateral (two users) and multi-lateral (many users) exchange. Note here that interactions are repeated and such platforms become gathering places for this repeated interaction. Pure interaction platforms include Facebook (the original social network), Instagram, LinkedIn, Zoom, and physical locations such as the spaces employed by start-up accelerators like Techstars or YCombinator

The threat that newcomers pose to established firms is greatest during

periods of technological change-especially when the new technology is "competence destroying", "architectural", or "disruptive"

incremental innovation

refers to a series of small improvements made to a company's existing products or services. Generally, these low-cost improvements help further differentiate a company from the competition while building on current offerings (what the incumbent does) Capabilities remain the same but you are going upmarket Not dramatic improvement in performance Usually done by incumbents to get more margin by increasing differentiation

network effects

the need for users to connect with one another; cause each customer to choose the same technology as everyone else to avoid being stranded

Platform stacking

the new competitive strategy being used by leaders of platform business models to not only defend their market position but also to overtake others; building new platforms on top of old ones but in specific advantageous ways that lower the platform owners' costs of building the new platform and lower users' costs to use the new platform Example: Facebook's Marketplace stacked on top of its existing interaction platform/social network—trust based mechanism: buyers can view sellers' profiles to see that they are trustworthy, something that Craiglist did not have. Facebook also had the ability to remove users that were not good actors

Organizational Demographics and Industry Structure

the number of firms in an industry changes substantially over the lifecycle Organizational ecology

Disruptive innovation

usually occurs when a company with fewer resources moves upmarket and challenges an incumbent business. A key to disruptive innovation is that, opposed to sustaining innovation, it does not take place with established competitors. There are two types of disruptive innovation: 1) Low end disruption, in which a company uses a low-cost business model to enter at the bottom of an existing market and claim a segment 2) New-market disruption, in which a company creates and claims a new segment in an existing market by catering to an underserved customer base Providing same customer proposition but may be focused on creating a new customer market (people that might have been left behind in sustaining innovation) Examples: G suite as a substitute for microsoft—-G suite is cheaper and sufficient for most people's day to day usage needs; minute clinics Talking about the impact on the USER

Organizational ecology

theory of economic change that assumes organizational inertia; industry evolution occurs through changes in the population of firms rather than by adaptation of firms themselves; industries develop and grow through new entry spurred by the imitation of initial successful entrants Selection mechanism: organizations whose characteristics match the requirements of their environment can attract resources; those that do not are eliminated analyzes the population of firms within an industry and the processes of founding and selection that determine entry and exit Field founded by Michael Hannan, John Freeman, and Glen Carroll

Sequential synergies

when one company completes its tasks and passes on the results to a partner to do its bit—resources of the two firms are sequentially interdependent (Example: when a biotech firm that specializes in discovering new drugs, like Abgenix, wishes to work with a pharmaceutical giant that is more familiar with the FDA approvals process, such as AstraZeneca, both companies are seeking sequential synergies) ---Companies must customize resources to some extent if they want handoffs between the organizations to go smoothly. According to our research, that will likely happen only if partners sign rigid contracts that they monitor very carefully, or better, enter into equity-based alliances (equity based alliances are best with sequential synergies)

Positive direct network effects

when the utility that users on one side derive depends on the number of other users on that same side The effect is both positive and direct when utility increases as the user base on the same side of the platform grows Examples: social media and instant messaging (IM) platforms. Both applications are virtually useless to the consumer if he or she is the only person using them, but their value increases as the number of other users grows.

The ease with which established firms adapt to technological change depends upon:

whether the innovation occurs at the component or the architectural level

Extend Fertility case two issues/questions

who to target to? How to message the service?