High performance companies successful strategies from the worlds top achievers

149 Importance of Strategic Change and Its Performance Implications 149Mixed Performance Outcomes of Strategic Changes at Strategic Changes and Their Performance Implications at Tupperwa

High Performance CompaniesSuccessful Strategies from the World’s Top Achievers

High Performance Companies

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Library of Congress Cataloging- in- Publication Data

infl uenced me tremendously:

My (late) parents (Shri V.M Pangarkar and

Mrs S V Pangarkar);

My siblings (Shobha, Anand and Prakash) and

my wife (Ashwini); and

My children (Natasha and Anish).

Seven Concerns Raised by the Content and Approach of Other Books 6

Acquisitions Fitting the

Mittal Steel: Discovering Diamonds among Coals—Consistently! 25

Building a Global Empire through Acquisitions 27

3 Build Durable Assets 45

Tiger Balm: Durable Assets Withstand Twenty

Restoring the Tiger Balm’s Roar through Investments in

The Tiger Balm Case and Its Implications for

Big Hits, Big Flops, and Their Performance Implications 69

Small Wins: An Alternative Route to Superior Performance? 72

YKK’s Small Wins Lead to Market Dominance 73

The Lincoln Electric Company’s Small- Wins- Based Strategy 76

Illinois Tool Works: Scoring Big with Numerous Small Wins 80

The Four Cornerstones of ITW’s Strategy 81

Fanuc: Industry Dominance through Integration

Integration of External Knowledge at Fanuc 110

6 Advance (Strategically and Competitively) During a Crisis 121

The Tylenol Crisis and Johnson & Johnson 124

Singapore Airlines (SIA): Proactive Management of Crises 133

SIA’s Response to the East Asian Economic Crisis 133

The SQ 006 Crash in Taiwan and SIA’s Response 135

7 Beware of the Incremental (Strategic Change)! 149

Importance of Strategic Change and Its Performance Implications 149Mixed Performance Outcomes of Strategic Changes at

Strategic Changes and Their Performance Implications at Tupperware 156

Tupperware’s Social Impact and Performance 156

Putting the Strategic Changes and Their Performance Impacts

Applicability Beyond Large Companies 175

Some Common Themes (and Factors) Across the Examples 179

CEOs and Top Managers Set the Correct Example 179

A Clearly Conceived Strategy That Often Defi es

Careful Attention to Execution or Implementation

Issues and Management of People Resources 183

I take great pleasure in introducing this book Professor Nitin Pangarkar

has distilled the wisdom of many years of academic experience and

train-ing into a wonderful set of extremely practical and sensible principles The

book is a fascinating read and should appeal to many different profi les of

readers Any student of business, executive with an interest in strategy, or

general managers with responsibilities for managing a business would fi nd

the book useful on a multiplicity of counts I note four of these distinctive

counts below

First, the book is very easy to read, but with very signifi cant lessons,

re-plete with simple but illuminative illustrations Very often strategy books

have a tendency to get lost in jargon This book takes a refreshingly

dis-tinctive take on the problem of strategy Rather than developing

com-plex frameworks it focuses on simple, but broadly generalizable principles

Perhaps even more important than simplicity is relevance And on that

count Professor Pangarkar identifi es a set of fairly generalizable “strategic

best practices” that are meaningful for most businesses Thus, in the fi rst

instance, the book is notable for its combination of simplicity and insight

A second feature of the book that I commend is the amazing breadth and

depth of illustrations In addition to detailed case studies that form the

cen-terpieces of the individual chapters, every chapter contains many

illustra-tions Even more compelling, is the fact that the illustrations are drawn from

a variety of contexts ranging from developed to emerging economies and

from well known famous companies to relatively lesser known businesses

The book is probably unique in this respect, of drawing from such a variety

of contexts In addition to helping ground the concepts of the book for

man-agers these illustrations will serve as a treasure trove for instructors also

xi

In addition to the wonderful illustrations a particularly useful aspect

of the book is the detailed case studies By fl eshing out the key concepts

through the context of a fairly deep case study, the book helps to really

ground the concepts and enable their articulation in a detailed enough

fash-ion that the reader can make a thoughtful attempt at executing the idea

This focus on rich detail that is necessary for execution is remarkable

A fourth aspect of the book worth noting is the actual content of the

principles The principles are valuable not just because they refl ect

logi-cal, sensible thinking, but also because even though they are fundamental,

they are often ignored As an illustration consider Professor Pangarkar’s fi rst

principle—buying assets on the cheap It is amazing how simple this is and

how commonly it is violated Indeed the history of mergers and acquisitions

(M&A) consists of a plethora of violations of this advice The other

prin-ciples are similarly essential but often underemphasized or ignored But for

me to say more would be to hold the reader back from the feast that waits

So without much further ado let me hold the door open…

Gautam Ahuja

Harvey C Fruehauf Professor of Business Administration,

Professor of StrategyStephen M Ross School of BusinessUniversity of Michigan, Ann Arbor

Over the past eighteen years, I have conducted strategy sessions in a

number of different contexts—undergraduate and graduate classes, executive programs, and managerial conferences, among others I have

enjoyed these interactions, and the participants also seem to enjoy

learn-ing about strategic issues While conductlearn-ing these sessions, I have made a

number of observations about how strategy ideas and content can be best

delivered in the classroom as well as applied by managers, which has led me

to write the present book

As scholars in the strategic management discipline, we like

frame-works and, consequently, we have had a proliferation of these frameframe-works

Sometimes, the frameworks are conceptually dense and/or complex, which

may imply that practicing managers wishing to apply the frameworks have

not comprehended them (or at least their subtleties/nuances) fully Also,

despite their analytical value in terms of comprehensiveness and strong

the-oretical foundations, many frameworks are diffi cult to translate into specifi c

actionable recommendations

In this book, I have aimed to address the above issues The following are

my main reasons for doing so:

1 I do not propose a new framework since I think we have several

excel-lent ones already I propose key “principles” instead, which, hopefully, can be directly applied by managers to improve their companies’ strate-gies and performance

2 I believe that simplicity and implementability are valuable traits for

any strategy advice or book I have strived to keep the language and

xiii

presentation simple and readable, and I have made conscious efforts to

think about the implementability of the ideas I have proposed here

3 I have also aimed to include novelty and diversity regarding the

compa-nies mentioned in the book My informal checking (discussions with my

colleagues and students) suggests that fewer of them have heard about

companies such as Fanuc, ITW, YKK, and SAS Institute than the

fre-quently cited GE, Google, and Apple

I sincerely hope that the readers will take away useful (and

implementa-ble) ideas from this book

I have been teaching many of the ideas on which this book is based for

the past several years Some of these ideas emerged from classroom

dis-cussions, others from academic discussions with colleagues (e.g., about our

experiences with cases and specifi c topics), and yet others from my

gen-eral reading The thought of converting these ideas into a managerial book

came to me in early 2010 Fortuitously, one of our MBA graduates, Debesh

Sharma, was available for doing research work on the ideas so that they

could be fl eshed out I thank Debesh for doing the research on some of the

early chapters of the book, providing his comments on early drafts of some

of the chapters, and also for serving as a sounding board for whether some of

the ideas would be interesting and valuable for managers

Several other people, including MBA alumni, friends in the corporate

sector as well as in academia, and some of my own family members, also read

through parts of the book and provided valuable comments Ravi Prakash

from Accenture (India), an alumnus of our MBA program, read through all

of the chapters and provided feedback Sriram Srinivasan of JOil (Singapore)

and Dr Chung Yuen Kay of the NUS Business School (Singapore) also

commented on three chapters each My cousin, Mrs Saranga Netke, not

only read the chapters but also served as the chief cheerleader—her

posi-tive comments spurred me on and diminished my self- doubts about the

value and the readability of the book Additionally, several people provided

detailed comments on a couple of chapters each, including Ramesh Sankar

of DBS (Singapore), Rishi Khasgiwale of Mentor Graphics (USA), Ajay

Pathania of Asia Pacifi c Centre for Management Education (Singapore),

and Ashish Kalay of Airtel (India) Their comments gave me specifi c and

xv

concrete ideas about improving the book with regard to writing, readability,

and presentation

While writing the book, I did less than my fair share of work at home,

and all of my family, especially my wife Ashwini, picked up the slack Our

daughter Natasha not only read through several chapters but also gave me

ideas about making it reader friendly I consulted her extensively to come up

with short (and hopefully punchy) chapter titles Her assistance is gratefully

acknowledged Our son, Anish, prodded me to push harder by often asking

about how many pages I had fi nished writing and comparing my progress to

the “target page count.”

I am also grateful to the several well- known managers and academics

who read through the “fi nished article” and were kind enough to make

posi-tive remarks about the book These include Gautam Ahuja of University of

Michigan, who wrote the foreword and Grace Lee (CitiGroup Private Bank),

Alok Mishra (Johnson and Johnson), Will Mitchell (Duke University),

Srinidhi Raghvendra (Straits Financial) and Carl Zeithaml (University of

Virginia) who provided endorsements for the book Last, but not least, I am

grateful to several people at John Wiley and Sons (Singapore) My publisher,

Nick Wallwork, put the book proposal through a rigorous review process, and

his suggestion about adding an extra chapter was indeed an excellent one;

though it made me work longer and harder, I believe the extra chapter made

the book more complete Melissa Smith, the editor assigned by Wiley, helped

tremendously in making the book better I am also grateful to Joel Balbin

for helping with the production process (and patiently responding to all my

requests) and Jules Yap for serving as the point of contact at the proposal

stage and being understanding when I asked for more time to fi nish the book

Despite all the help I received from this diverse set of people, the book is

bound to have its own rough edges and fl aws, for which I am solely responsible

N ITIN P ANGARKAR

Singapore

1

My Motivations

Introduction and Positioning

Companies around the world aim to achieve sustained superior performance

Managers and analysts believe that a sound and robust strategy, in addition to

superior performance.2 In their book Strategy Execution is the Key to Success,

Robert Kaplan and David Norton (2008) argued that 70 percent of

organiza-tions that used a formal process to manage their strategy out- performed their

peers.3 In fact, a good strategy can lead to superior performance regardless of

context—in industries characterized by varying growth prospects or

techno-logical characteristics (e.g., high technology versus low technology), different

levels of competitive intensity, and even across different countries Frequently

cited examples of companies achieving excellent performance through the

deployment of a sound strategy range from Google and Apple in the high

technology space, to Nestlé in foods, to Tesco and McDonald’s in retail and

services

The furniture retailer IKEA and the budget airline Southwest serve

as excellent examples of how a sound strategy can result in superior

per-formance, even in competitive industries Both companies have been the

subjects of numerous articles in the academic arena and the popular press

In their article in the Harvard Business Review, Richard Normann and

Rafael Ramírez (1993) examined the key elements of IKEA’s strategy and their

inno-vation in the furniture retailing industry, they observed, “IKEA has blossomed

into the world’s largest retailer of home furnishings by redefi ning the

the following discussion, I will detail a few aspects of IKEA’s strategy and

that strategy’s performance implications

IKEA’s strategy revolves around the key insight of selling disassembled

furniture in fl at- packs, which, being less bulky, can be procured from the most

cost- effi cient sources around the world Both the design and the procurement

By Nitin Pangarkar Copyright © 2012 by John Wiley & Sons (Asia) Pte Ltd

processes at IKEA are geared towards achieving low costs, with the purchasing

managers scanning the globe for more effi cient suppliers and using their

instance, the company sourced its products from 1,074 suppliers in fi fty- fi ve

countries These key strategic thrusts are coupled with a global presence that

increases purchasing volume (thus reducing procurement costs), excellent

global management in terms of product mix (with 70 percent standardized and

30 percent localized items), sharing of talent (expatriate managers spreading

the IKEA culture), as well as leveraging of the good ideas (e.g., an idea such

as a children’s play area, which originated in one store, is implemented in all

IKEA stores) and innovative and impactful marketing (see Figure 1.1) In

2010, more than 197 million copies of the IKEA catalogue, an important

aspect of its marketing strategy, were printed in twenty- nine languages and

sixty- one editions The common look and feel of these catalogues combined

with innovative brand campaigns and catchy slogans (e.g., in Singapore:

“You don’t have to be rich to be clever”; and, in the US, around the time

of President Obama’s inauguration, IKEA ran a campaign with the tagline,

“Fiscally responsible furnishings for all, Embrace change”)6 contributed signifi

-cantly to the reputation of the IKEA brand, ranked 35th most valuable in the

The results of pursuing this integrated set of value- adding activities have

been spectacular Its 9,500 products helped IKEA attract 626 million visits to

its stores and 712 million visits to its homepage The company’s operations in

forty- one countries generated sales of €21.846 billion in 2009 and operating

and net incomes of €2.77 billion and €2.538 billion, respectively Even in a

challenging economic environment, the company was able to show growth

on all key metrics—revenues, operating profi ts, and net profi ts Measured

Contemporary but

simple design, inexpensive materials

Global sourcing, hard bargaining

Strong marketing, consistent theme, clear global stategy

Self service, less sales pressure for customers, family-friendly

Figure 1.1 Ikea’s strategy

over a ten- year period (1999–2009), the growth in revenues was even more

impressive because the sales in 1999 were only €7.6 billion

Southwest Airlines, similarly, pursues a set of integrated activities that

result in a competitive advantage and, consequently, superior performance

The company deemphasizes factors such as meals, lounges, and hub

con-nectivity but places a strong emphasis on other aspects of its strategy These

include maintaining a “simple” fl eet (all its planes are variants of the Boeing

737), which saves on maintenance and crew costs; charging lower prices

than the competitors; and offering friendly service and frequent fl ights

between the city pairs on its route network Similar to IKEA, Southwest’s

record of accomplishments has been impressive By September 2010, it fl ew

3,200 fl ights a day, taking more than one hundred million passengers a year

to sixty- six cities in the US In addition to the growth that has taken it to a

prominent position within the industry, the company has performed well on a

variety of other metrics According to the US Department of Transportation’s

Customer Satisfaction statistics, which has been gathered since 1987,

Southwest has the lowest ratio of complaints per passenger boarded among

all US- based airlines During 2010, Southwest was ranked number one on

the American Customer Satisfaction Index among all US- based airlines—a

distinction it has attained for seventeen consecutive years, and it was ranked

In contrast, several companies have struggled because they lacked good

and robust strategies For instance, despite being an early mover and

technol-ogy pioneer, Motorola has struggled in the mobile phone business because

of several factors, including weak marketing, stodgy product line- up (except

for a brief period when its Razr model became quite popular), and lack of a

global presence Blockbuster Video, the rental chain that was once a

domi-nant company, recently fi led for bankruptcy and thus provides an excellent

illustration of how a poor strategy can lead to a company’s demise Its

mis-steps and performance implications are discussed in some detail below

Blockbuster Video was acquired for $8.4 billion in 1994 by media

magnate Sumner Redstone Though a casual observer might associate

Blockbuster’s struggles with the emergence of the online rental business

model pioneered by Netfl ix, the company’s struggles predate Netfl ix’s

increased popularity As far back as the year 2002, before Netfl ix had

taken off, Blockbuster was losing money It lost $1.62 billion in 2002,

$978.7 million in 2003, and $1.24 billion in 2004 By June 2006 (about

(continued)

twelve years after the acquisition by Redstone), the company’s

mar-ket value had plummeted to $700 million The origins of its

stagger-ing losses and precipitous decline in market value can be traced back

to 1998 when Warner Bros offered it a revenue sharing deal, with

stu-dios receiving forty percent of DVD rental income, similar to its

existing arrangement for the VHS format In exchange, Warner Bros

offered Blockbuster a sell- through window, during which DVDs would

not be available for outright purchase In turning down Warner Bros.’

offer, Blockbuster seriously underestimated the speed at which

dig-ital media would spread, and it overestimated its own importance to

the studios Warner Bros went on to offer DVDs to discounters such

as Wal- Mart at suffi ciently low prices so as to enable them to compete

with video rentals That fateful rejection of Warner Bros.’ revenue

shar-ing deal came back to haunt Blockbuster because the discounters used

low DVD prices to entice customers to their stores, thereby

decimat-ing Blockbuster’s business—in fact, by 2003, the studios were generatdecimat-ing

three times as much revenue from DVD sales as they were from VHS

sales In another strategic blunder, Blockbuster turned down the

oppor-tunity to buy Netfl ix for a mere $50 million, and instead entered a

ludi-crous home- delivery deal with Enron.9

Nokia’s recent travails provide another example of a company that

used to be extremely successful but later suffered because of a lack of

a clear (and clever) strategy In 2006, not only was Nokia the largest

mobile phone maker in the world, but it also enjoyed operating

mar-gins (15.3 percent) that were substantially higher than any of its

also had a greater than 50 percent share of the high-end phone

mar-ket.11 Over the next few years, a series of mistakes, including an

incor-rect strategy and several execution fumbles, caused Nokia’s market

share in mobile phones to plummet More importantly, the success

of companies as diverse as Apple, HTC (Taiwan) and Research in

Motion (the Canadian maker of Blackberry devices) eroded Nokia’s

market share in high-end phones and relegated it to the low-end

count on the support of the telecom service operators and had to

Kuittinen, an analyst with MKM Partners noted, “In May, European

operators largely rejected the new Nokia models, particularly the E6

and C7 This is now driving panic price cuts for those models but,

without operator support, price cuts rarely work.”14 In the interest of

parsimony, I include only a brief summary of Nokia’s strategic mistakes

rather than a complete discussion

With regard to strategic decisions and choices, three of Nokia’s decisions stand out First, Nokia incorrectly gauged the consumer pref-

erences While it continued to offer a broad range of models (and had

an ambitious target of launching several dozen smartphones between

2006 and 2010), it underestimated the competitive threat posed by a

narrow range of phones (e.g., Apple’s limited range), which offered a

dramatically superior customer experience

Second, Nokia also continued to practice vertical integration by using a self-designed chip as the heart of its smartphones Most of its

rivals, including Apple (especially for the generations before iPhone

4), chose to use outside suppliers for their phones Being specialized

companies, outside providers such as Qualcomm and Samsung could

offer faster development Coupled with a wide product range, internal

development stretched Nokia’s engineering resources and could have

Third, Nokia’s marketing communication and strategy also failed

to highlight some of the advantages of its product range over rivals

such as the bundled (and free) music with many of its phones

In addition to some of the questionable strategic choices mentioned above, Nokia also fumbled its execution Nokia’s product and service

introductions were generally six months (or more) late In a rapidly

evolving industry, the six-month delay was substantial Secondly, some

of Nokia’s services were launched prematurely—as in before they had

been fully tested The Ovi store, which was supposed to be the

show-case for the company’s transition from a phone manufacturer to a service

provider had several issues and even (previously) loyal users were

frus-trated by these issues.16 Nokia also changed course a few times, not only

confusing its customers but also probably affecting internal morale For

instance, in 2010, Nokia announced that it would merge its operating

system with an Intel platform to come up with the new MeeGo

operat-ing system Within a year, however, Nokia was givoperat-ing up on the MeeGo

operating system and going with Microsoft’s Windows operating system

This change in direction would cause further delays in the launch of

new models, and Nokia also risked losing the support of its partners,

(continued)

The preceding examples show the importance of strategy for a company’s

performance: a good strategy can lead to superior performance, but a bad

strat-egy might even lead to the downfall of leading players and, in the process,

cause destruction of value (e.g., Blockbuster Video) Given the importance

of an appropriate strategy in achieving superior performance, it is not

surpris-ing that there are scores of books on how companies can strategize to achieve

superior performance The sheer number of books and their popularity indicate

a strong interest in business strategy and its performance implications—not

frame-works addressing a variety of strategic issues, such as environmental analysis

(e.g., PEST, PESTEL, fi ve forces analysis),20 generic pathways to achieve

supe-rior performance (e.g., generic strategies, value disciplines),21 and frameworks

others The content and approach of many books raise important concerns,

however, as discussed below (see Figure 1.2)

Seven Concerns Raised by the Content and Approach of Other Books

1 Constraints in crafting a new strategy: Many books work on the premise

that a company has tremendous freedom to craft a new strategy For

instance, a book emphasizing strategic or business model innovation

might suggest a radical redesign of strategy, as in the cases of the Nintendo

Wii and Cirque de Soleil In contrast, a fi ve forces analysis might suggest

that a company can perform better by shifting its focus to another

indus-try or segment—for example, from mass- market cars (which might have

effective substitutes in the form of public transport in some countries

and also have a highly damaging rivalry for incumbents because of lower

product differentiation and price-sensitive buyers) to luxury cars This

shift in focus, however, may be diffi cult to achieve even in the medium

especially software developers As one analyst noted rather succinctly,

“Nokia’s going all in with Microsoft, after spending years trying to avoid

Windows It joined and bought Symbian, hooked up with Intel on

MeeGo for mobile Linux, and bought the Qt cross-platform brains That

means Nokia has now got an army with completely the wrong skills

They’ll need to decide who will be retrained, will be cut, or who will

thou-sands of workers “walked out” to signal to the management that they did

not believe that the (Microsoft) partnership was in their best interest.18

term because companies might lack the necessary resources To enter the luxury car segment, a manufacturer such as Ford would fi rst need to beef

up its engineering skills because buyers of luxury cars have higher tations The manufacturer would also need to enhance its brand because buyers might attach some value to the prestige commanded by the brand

expec-And third, the manufacturer would need to fortify its channel because luxury car dealerships are expected to provide higher levels of service

The limited fi nancial resources available to the mass- market car facturer (e.g., Ford, which has high levels of debt combined with low profi tability) might also eliminate the possibility of accessing the needed resources through acquisitions

manu-In February 2011, while assessing Nokia’s struggles in the phones business and its readiness (actually, lack of it) to transform itself

smart-to compete better with Apple, the Economist magazine commented,

“But turning a Finnish hardware- maker into a provider of software and services is no easy undertaking Nokia dallied and lost the initiative

Limited freedom for companies to

do a strategy redesign

Downplay the interdependence between formulation and implementation

Limitations of the existing strategy books

Limited managerial freedom and possible risk aversion

Limited recognition of inertia either because companies have adequate current performance or they lack skills for a new strategy

Limited usefulness for commonly encountered strategic decisions

Dominant company bias and resulting difficulties in generalizing

Developed country bias resulting in loss

of specific subtleties

context-Figure 1.2 Areas where existing books on strategy fall short

Historically, Nokia has been a highly effi cient manufacturing and

logistics machine capable of churning out a dozen handsets a second

and selling them all over the world Planning was long- term and new

devices were developed by separate teams, sometimes competing with

each other—the opposite of what is needed in software where there is

faced even by a former industry leader such as Nokia (which has been

the subject of many business books) illustrate the diffi culties in bringing

about strategic change.24

2 Inertia for changing the current strategy: Though many companies may

be looking to improve their performance, they may yet be reluctant to

adopt an entirely new strategy either because they are currently

per-forming adequately or because they lack the skills to implement the new

strategy (as suggested above) Coca- Cola provides an excellent

illustra-tion of the former scenario (discussed below) while Ford illustrates the

latter scenario (discussed above)

Although Coca- Cola is striving to improve its current (adequate) performance (e.g., between February 2005 and 2010, Coca-Cola’s share

price increased from $43.64 to $53.09—price on February 26, 2010),

the company may be reluctant to implement a radical change in

strat-egy, especially because it has experienced failures while implementing

radical departures from its traditional strategy of selling carbonated soft

drinks using its strong distribution channel and, for some products, its

highly reputable brand name Coca-Cola’s new product failures include

the New Coke which was withdrawn, and Powerade which badly lags

behind Pepsi’s Gatorade It has also struggled while undertaking

alli-ances or acquisitions: it lost out in acquiring SoBe and Quaker Oats

(Gatorade) to Pepsi, which enjoyed good success in boosting its growth

through those acquisitions; Coca- Cola also abandoned an announced

(2001) alliance with Procter & Gamble to develop and merchandize

Like Coca- Cola, many companies may be reluctant to jeopardize their adequate fi nancial performance and dramatically increase their risk levels

by undertaking a drastically different (though possibly rewarding) strategy

3 Limited degrees of freedom for a typical manager to redesign a strategy:

The degree of freedom enjoyed by a typical business unit manager may

be even less than that of the top manager of a whole company Whereas

a top manager (e.g., Jeff Immelt at GE or John Chambers at Cisco

Systems) might be able to implement a radical design should he or she

wish to do so, a typical business unit manager (e.g., Anne LeGrand,

Vice President and General Manager of GE’s global X- ray business

in July 2010) might be constrained by the overall agenda of the pany (a broader level than the business unit he or she is heading; e.g., the business unit is supposed to play a specifi c role, such as generating cash, in the overall company) and the need to satisfy multiple stakehold-ers, including employees, managers, and shareholders, among others

com-The manager might also be constrained by his or her risk preferences

For example, while aiming for superior performance through a radical re- design of strategy, the manager runs a real risk that the strategy won’t pay off and the actual performance will fall well short of expectations

This phenomenon of falling quite short while aiming for superior mance is well illustrated by the contrasting fortunes of two successive CEOs

perfor-of Procter & Gamble—Durk Jaeger and A G Lafl ey

One could argue that Durk Jaeger, who had one of the shortest ures of any Procter & Gamble CEO, didn’t have the wrong ideas—he argued for more innovation and simultaneous global and local focus at the then- struggling company Instead, he was unsuccessful because he tried to implement radical changes in a company that was long used to

Lafl ey, tried to solve the company’s immediate problems by coining a simple message that his employees could understand and relate to—

P&G doesn’t need a radical makeover It just needs to sell more Tide (and other bestselling brands).27

4 Inapplicability of broad frameworks to “smaller” decisions: Many of the

broad frameworks suggested by strategy books may be of less use to agers in making “smaller decisions” that collectively contribute to the continuation or alteration of a company’s strategy For instance, most of the commonly used frameworks in strategy (e.g., SWOT, PEST, generic strategies, value disciplines, or Blue Ocean) are unable to guide a manager

man-in terms of where he or she should spend scarce resources on an ongoman-ing basis—for instance, a decision on whether to add manufacturing capacity,

to build up distribution, to advertise, or to enhance employee training

5 Focus on strategy formulation or execution, but not both: Many books,

depending on the authors’ perspectives and expertise, have either a mulation or an execution bias; that is, they emphasize one aspect over the

sequential: once a strategy is formulated, an implementation plan needs

to be designed The two aspects of formulation and implementation are, however, intertwined, as opposed to sequential or independent The stra-tegic principles proposed in the present book consider formulation and

implementation aspects as intertwined (and inseparable) for explaining

performance outcomes

6 Dominant company bias and the resulting diffi culties in

generaliza-tion: Generally, strategy books have a pronounced dominant- company

bias Popular examples of companies with good strategies include high

profi le companies such as GE, Toyota, 3M, Google, Microsoft, and

Nestlé Though there is much to learn from these leading companies, less

prominent companies might struggle to follow the strategic paths of these

leading companies because they lack similar resources, including brand

reputation, access to capital, and strong partners (e.g., channel strength)

7 Developed- country bias and inapplicability to other geographic contexts:

Existing books often cite examples of companies from developed

countries When this developed- country bias occurs together with the

dominant- company bias noted above, the novelty and learning potential

from the examples may be reduced, especially for a nondominant company

from a developing- country context On the one hand, as noted above, this

company may not have the skills of a GE or IKEA On the other hand,

thanks to its institutional setting, it may also have several unique

opportu-nities— profi t- enhancing diversifi cation opportunities, for example.29

Consider the F&N group from Singapore, which entered the ated soft drinks business in 1883 In 1931, it entered the beer industry, and

carbon-in 1936, it obtacarbon-ined the Coca Cola franchise for Scarbon-ingapore and Malaysia,

which went on to become one of its main businesses The company

con-tinued to diversify (often successfully) into several new businesses, and by

2010, it was operating its diverse businesses under three broad divisions:

food and beverage (a joint venture stake in the leading beer producer in

Asia, dairy products, other drinks besides carbonated drinks); property

development (residential apartment complexes, serviced residences); and

printing and publishing (publishing books, printing press, retail stores).30

Interestingly, the new businesses, such as the property development

ven-tures, have fl ourished to such an extent that the company has divested

the Coca Cola bottling operation and also ventured internationally into

several other countries with its new businesses.31 The F&N group’s

exam-ple suggests that by considering companies from other parts of the world

as models, we might uncover valuable lessons (e.g., the fruitfulness of

diversifi cation strategies under appropriate circumstances), some of which

may be generalizable to similar contexts

In summary, though the existing books on strategy yield important

insights, they also raise important concerns In this book, I aim to address

the above concerns and help managers in their strategy-making processes

A Book on Strategic Principles: The Idea

High Performance Companies is meant to complement the approach adopted

by most of the existing books on strategy Because I believe that we have

several interesting and useful frameworks to guide broad strategy making, I

do not propose another framework Instead, I propose several rules of thumb

(or principles) that companies can consider while making their day- to- day

decisions, which, in turn, will determine their actual strategy The

princi-ples cover a broad range of strategic issues ranging from resource acquisition

to strategic adaptation I have dedicated each chapter to one central theme

though each may also include elements of other strategic aspects For

exam-ple, while discussing Mittal Steel’s resource acquisition strategy, I also discuss

organizational aspects that contributed signifi cantly to the performance of

Mittal Steel’s strategy For a schematic representation of the range of

strate-gic issues I have addressed in the book, see Figure 1.3 I also briefl y identify

the key message and content of each chapter at the end of this chapter

Approach of the Book

I have adopted a reader- friendly approach Each chapter begins with a brief

discussion of the key idea (principle) followed by a few illustrative

exam-ples These examples are followed by a detailed case study of a company that

highlights the nuances of the key idea Each chapter concludes by

identify-ing the lessons from the case studies and, where applicable, the subtleties of

the circumstances under which the principle may or may not apply A few

key characteristics of the approach are listed below

Less known, yet interesting, company examples: Though I use several dominant-

company examples in this book, I adopt two strategies to enhance the

learn-ing value from these examples

Figure 1.3 Strategic aspects addressed in this book

Resource acquisition

Resource allocation

Innovation strategy

Strategic adaptation (externally driven)

Strategic adaptation (internally driven)

Overall business-level strategy

Key idea:

Discover diamonds among coals

to enhance performance

Key idea:

Build durable assets and reap rewards year after year

Key idea:

Score small wins and replicate them to achieve a big impact

Key idea:

Integrate the knowledge from various stakeholders and partners to innovate

Key idea:

Advance (strategically and competitively) during a crisis

Key idea:

Beware of the incremental (strategic) change that can

be detrimental

First, I focus on specifi c and lesser known aspects of these companies—for

instance, rather than focusing on the broad strategies of companies such as

McDonald’s and Starbucks (which are well known), I focus on the specifi c

strategic changes implemented by them (and those implementations’

perfor-mance implications)—for example the product recall crisis faced by Toyota

and Nestlé’s Alcon acquisition Similarly, I discuss (briefl y) the Tata group’s

investments in community development rather than its launch of the Nano

car, which is a relatively well- known story

Second, I supplement the well- known examples of companies with other

examples of companies that are equally interesting from a strategic lessons

perspective Some of the companies chosen for these detailed case studies

include Tupperware (strategic changes), Tiger Balm (performance benefi ts

from building durable assets), Mittal Steel (acquiring undervalued assets),

and Illinois Tool Works (securing small wins instead of going for the big

bets or “home runs”) In the brief case studies, I discuss the strategies and

performance of a diverse group of companies, including Canon, Singapore

Airlines, Lincoln Electric, SAS Institute, Fanuc (the Japanese robotics

com-pany), and YKK (the Japanese company best known for making zippers)

Diversity of examples: In addition to citing several lesser known examples, I

have also aimed for diversity in the types of companies discussed, including

companies in to- consumer (Tupperware, Starbucks) and

to- business (Lincoln Electric) sector; low technology (Tiger Balm) as well

as high technology (Canon); manufacturing (Illinois Tool Works) as well

as service (McDonald’s) They also come from various regions of the world,

including Asia (e.g., Tiger Balm, Heng Long Leather, Singapore Airlines),

the USA (e.g., Tupperware, Illinois Tool Works), and Europe (Nestlé,

Mittal Steel) The fact that all these companies are also multinational

high-lights the global applicability of the principles discussed

Recognizing the infl uence of history on current strategy and performance: Unlike

many strategic analyses that take snapshots of either successes or failures

and draw lessons from them, I have emphasized the historical aspect in

strategy development as well as in strategy- performance relationship

(dis-cussed in the conclusion) For example, while the success of Tiger Balm as

a leading global analgesic is interesting in itself, viewing its performance in

a historical context yields valuable additional insights, such as the fact that

the brand endured twenty years of neglect and underinvestment when it

was licensed to the Jack Chia Group from Thailand Similarly, while a

snap-shot of Tupperware’s performance might reveal that the company performed

well in the deep economic recession of 2008–2009, a historical perspective

reveals that the company survived a near- death experience when it tinkered

with its time- tested strategy by starting to sell through Target stores Not

only did the distribution to Target not lead to signifi cant additional sales, but

it also undermined (and demoralized) one of the company’s core strengths—

its sales force—as well as its overall strategy of direct sales The importance

of this core asset to the company’s strategy may be better appreciated if one

considers the historical development of the company

Readability: Motivated by a desire to improve the readability of the book, I

have deployed schematics, stock charts, graphs, and pictures to supplement

the text

Organization of the Book

The book consists of eight chapters: six chapters on strategic principles

sandwiched between the introduction and concluding chapter The broad

message and scope of each of the chapters are identifi ed below

Chapter 1: Introduction and Motivation

This chapter has briefl y reviewed the approach of the existing books on

strat-egy and identifi ed how the present book complements the existing approaches

Chapter 2: Strategic Principle 1: Discover Diamonds among Coal

In this chapter, I argue that while acquiring the resources to implement their

strategies, companies must pay great attention to the costs of acquiring those

resources Overspending for resource acquisition can easily cut into future

profi ts, as exemplifi ed by movie studios, which often overpay actors thereby

adversely impacting their movies’ profi tability, and by several acquisitions

in which the acquirers overpaid for the target (e.g., the AOL/Time Warner

acquisition) Finding undervalued resources and, better yet, generating

syn-ergy (e.g., by adding value through cross- pollination of relevant skills), can

signifi cantly enhance the performance of a company Brief examples include

Nestlé’s Alcon acquisition and Phillip Morris’s Miller Beer acquisition

The detailed case study on this is the building of the Mittal Steel company

through a series of acquisitions

Chapter 3: Strategic Principle 2: Build Durable Assets

In this chapter, I argue that companies should aim to allocate their resources

so as to build barriers for would- be imitators; specifi cally, they should allocate

resources to brand building, technology development, or employee

devel-opment While this strategy undoubtedly carries risks in the form of low

salvage value of investments (e.g., when trained employees leave the

com-pany or a high- profi le, expensive advertising campaign does not result in

the desired improvement in sales or market share), the rewards are likely to

outweigh the risks, as evidenced by the excellent performance of companies

such as Coca- Cola, Canon, and Singapore Airlines Brief cases discussed

detailed case study in this chapter is Tiger Balm

Chapter 4: Strategic Principle 3: Focus on Small Wins

In this chapter, I argue that companies can boost their performance signifi

-cantly by arriving at a “recipe” for scoring small wins and then replicating that

recipe several times Though the performance impact of each small win may

be small, the cumulative impact of many wins may be substantial, as evidenced

by the superior performance of companies such as Illinois Tool Works I argue

that seeking small wins is an especially appropriate approach for nondominant

companies because the strategy is less likely to invite competitive retaliation,

since the company is “fl ying under the radar” (of stronger rivals) as well as

strategically advancing in small steps The brief cases discussed are Lincoln

Electric and YKK, and the detailed case study is Illinois Tool Works

Chapter 5: Strategic Principle 4: Integrate to Innovate

In today’s intensely competitive environment, innovation has become an

imperative Though a plethora of studies have considered the traditional

ways to achieve innovation (e.g., resource allocation in the form of higher

R&D budgets or organizational practices in illustrious companies such

as 3M and Google), I have focused this chapter on how companies can

integrate the knowledge availed from many different sources— including

employees, customers, and external parties such as universities, research

agencies, customers, and even rivals, to boost their innovation My

empha-sis is on the integration mechanisms employed by the companies and how

those mechanisms make a dramatic difference to the outcome of the

inno-vation process and, consequently, to fi rm performance The brief case study

is on Procter & Gamble, and the detailed case study is on Fanuc

Chapter 6: Strategic Principle 5: Advance (Strategically

and Competitively) During a Crisis

In this chapter, I argue that companies should be clear about their vision

and goals, and pursue those goals even during a crisis Johnson & Johnson’s

credo, for instance, served as the guiding light in the famous Tylenol recall of

1983 Within a year of that recall decision, Tylenol had regained 80 percent

of the market share it had held prior to recall Singapore Airlines’ laser- like

focus on its customers guided its decision to undertake a S$500 million

over-haul of all product classes in the middle of the Asian crisis of 1998 Because

remained intact despite the crash of fl ight SQ 006 on October 31, 2000, in

Taiwan, which caused the death of eighty- three people and injured fi fty- six

others The brief case studies are on Johnson & Johnson and Toyota The

detailed study is on Singapore Airlines

Chapter 7: Strategic Principle 5: Beware of the Incremental

(Strategic Change)!

In this chapter, I argue that while tweaking their current strategy,

compa-nies must make sure they don’t undermine the core elements of their current

strategy I demonstrate that sometimes even illustrious companies such as

Starbucks and McDonald’s have implemented strategic changes that

under-mine the commitment of their key stakeholders, such as employees or

custom-ers I also identify the characteristics of companies that may be vulnerable to

making these inappropriate strategic changes Brief case studies in this chapter

include McDonald’s and Starbucks; the detailed case study is on Tupperware

Chapter 8: Conclusion: Strategic Principles in a Nutshell

In this chapter, after briefl y summarizing the principles and the geographic

coverage of examples, I identify the salient aspects of the principles proposed

scenarios, such as in various geographies (e.g., countries/regions) or for

countries) I advance the argument that the principles may, in fact, be more

relevant for small companies This is because small companies may have a

manage-rial resources to undertake comprehensive strategy development exercises,

and they may wish to mitigate risks to the extent possible, making

princi-ples such as scoring small wins especially relevant for them I also identify

the commonalities across the examples I’ve used in the book in terms of their

strategies and organizational policies, and I conclude by noting the caveats to

the book’s content and approach

The Final Word

This book complements the existing books and approaches on strategy

Several characteristics of the book—its reader- friendly style, its coverage

of case studies from around the world, and its approach (analyzing

making principles that can be implemented without a complete strategy

redesign)—all mean that the book is likely to be a useful resource for

stu-dents as well as for practitioners of strategy

Endnotes

1 “A Defi nition of Business Strategy,” Rapid Business Intelligence Success http://

www.rapid-business-intelligence-success.com/definition-of-business-strategy

html

2 Charles Snow and Lawrence Hrebeniak, “Strategy, Distinctive Competence,

and Organizational Performance,” Administrative Science Quarterly, 25, no 2

(1980): 317–36

3 Robert Kaplan and David Norton, Strategy Execution is the Key to Success

(Cambridge, MA: HBS Press, 2008)

4 Richard Norman and Rafael Ramirez, “From Value Chain to Value Constellation:

Designing Interactive Strategy,” Harvard Business Review, 71 (1993): 65–77.

5 Ikea Online Catalogue, accessed June 5, 2011, http://onlinecatalogueasia.ikea

.com/2011/ikea_catalogue/SG/ In a recent advertisement in Singapore, IKEA

made the following comment: “When we constantly lower our costs with effi

-cient production, transportation and storage, we pass the savings to you Which

is why some products have even lower prices this year than the last.”

6 “Facts and Figures: Yearly Summary FY 2010”, ikea.com, accessed June 5, 2011,

http://www.ikea.com/ms/en_US/about_ikea/pdf/Welcome_inside_2010.pdf; brand

value Figures from “The Top 100 Brands,” Bloomberg Businessweek, accessed June

5, 2011, http://images.businessweek.com/ss/08/09/0918_best_brands/36.htm

7 Well- known Brands Jump on Obama’s Inaugural Bandwagon, in UK Brand

and Web Design, a blog by Simon Verall, January 15, 2009, http://simonverrall

wordpress.com/tag/ hot- sauce

8 “Fact Sheet,” Southwest Airlines, accessed June 5, 2011, http://www.southwest.

com/about_swa/press/factsheet.html

9 Edward J Epstein, “Hollywood’s New Zombie, The Last Days of Blockbuster,”

Slate, January 9, 2006, http://www.slate.com/id/2133995.

10 “Handset and Match,” The Financial Times (Lex column), July 3, 2007.

11 Kevic C Tofel, “When Will Nokia’s Smartphone Transition End,” June 27, 2010,

http://gigaom.com/2010/06/27/when-will-nokias-smartphone-transition-end/

12 By the end of 2010, Nokia’s market share in smartphones had shrunk to 31

percent Vlad Savov, “Smartphone Market Share Shrinks to 31 Percent,

Operating Profi ts Take a Beating Too,” Nokia, January 27, 2011, http://www

percent- operating-p/

13 Telecom operators include companies such as British Telecom, AT&T, and

Singapore Telecom

14 Anton Shilov, “Nokia Cuts Smartphone Prices as Market Share Declines,” Xbit

Laboratories, July 5, 2011, http://www.xbitlabs.com/

15 “Why Nokia Might Soon Find Itself Behind Apple and the iPhone,” March 4, 2009,

http://greenerdesktop.com/246/why-nokia-might-soon-fi the-iphone

16 Matthew Miller, “23 Issues with the Ovi Store, Main One Keeps Me Away,”

August 25, 2009, http://nokiaexperts.com/wrong-ovi-store/; Ewan Spence,

“AAS to Nokia: 23 Suggestions for Fixing and Improving Ovi Store,” August

19 Examples include the following: W Chan Kim and Renee Mauborgne, Blue

Ocean Strategy (Cambridge, MA: HBS Press, 2005); Michael Treacy and Fred

Wiersema, The Discipline of Market Leaders (New York: Basic Books, 1997);

Michael E Porter, Competitive Strategy: Techniques for Analyzing Industries and

Competitors (New York: The Free Press, 1980).

20 Babette E Bensoussan and Craig S Fleisher, Analysis Without Paralysis: 10 Tools

to Make Better Strategic Decisions (London: FT Press, 2008); Porter, Competitive Strategy: Techniques for Analyzing Industries and Competitors.

21 Porter, Competitive Strategy: Techniques for Analyzing Industries and Competitors;

Treacy and Wiersema, The Discipline of Market Leaders.

22 Bensoussan and Fleisher, Analysis Without Paralysis: 10 Tools to Make Better

Strategic Decisions; Bruce D Henderson, Henderson on Corporate Strategy

(New York: Harper Collins, 1982)

23 “Nokia at the Crossroad: Blazing Platforms,” The Economist, February 12, 2011,

69–70

24 Dan Steinbock, Winning Across Global Markets: How Nokia Creates Strategic

Advantage in a Fast Changing World (San Francisco: Josey Bass, 2010); Martti

Häikiö, Nokia: The Inside Story, (Harlow, UK: Financial Times Prentice Hall,

2002) In fact, Nokia itself has been the subject of several books

25 “ Coca- Cola and Procter and Gamble Join Forces in New Venture,” March

12, 2001, Nations Restaurant News, accessed June 5, 2011, http://fi ndarticles

.com/p/articles/mi_m3190/is_11_35/ai_72119167

26 James M Higgins, “The Eight S’s of Successful Strategy Execution,” Journal of

Change Management, 5, no 1, (2005): 3–13.

27 Katrina Brooker and Julie Schlosser, “The Un CEO,” Fortune, September 16, 2002.

28 The following books focus on formulation: Cynthia A Montgomery and

Michael E Porter, Strategy: Seeking and Securing Competitive Advantage

(Cambridge, MA: HBS Press, 1991); Anita M McGahan, How Industries

Evolve: Principles for Achieving and Sustaining Superior Performance (Cambridge,

MA: HBS Press, 2004); David B Yoffi e and Mary Kwak, Judo Strategy, Turning

Your Competitors’ Strength to Your Advantage (Cambridge, MA: HBS Press,

2001) The following books focus on execution: Larry Bossidy and Ram Charan,

Execution, the Discipline of Getting Things Done (New York: Crown Business,

2002); Kaplan and Norton, Strategy Execution is the Key to Success.

29 Tarun Khanna and Krishna Palepu, “Why Focused Strategies May Be Wrong

for Emerging Markets,” Harvard Business Review, 75 (1997): 41–51.

30 “Our Businesses, Publishing and Printing,” Fraser and Neave, Limited, accessed

June 5, 2011, http://www.fraserandneave.com/FN_ourbusiness_publish_printing.asp

31 “About Us,” Fraser and Neave, Limited, accessed June 5, 2011, http://www

.fraserandneave.com/FN_aboutus_our_heritage.asp

2

Discover Diamonds among Coals

controlled by L N Mittal (hereafter LNM), about taking over a

losing plant, Sicartsa II (later renamed Imexsa) The Mexican government

was attracted by LNM’s reputation for turning around sick mills, and

Sicartsa II indeed needed a good doctor and some “strong medicine.” Built

only a few years earlier at costs exceeding US$2 billion, the plant was

oper-ating at one- third of installed capacity, and there were bitter, and public,

disagreements between the various stakeholders (especially the government

and employees) about who was at fault Though LNM paid an initial price

of US$220 million for Sicartsa II, he was able to recoup US$135 million by

selling a plate mill that was still in crates, thus reducing the purchase price

shipments increased from 528,000 tons to 929,000 tons, and cash costs per

ton of steel produced went down from US$253 per ton to US$178 per ton

Consequently, the money- losing plant turned a profi t The initial success

was no fl ash in the pan either, with continued improvements in capacity

utilization as well as employee morale, as illustrated by the following

state-ment by one of the employees: “At fi rst, I wanted Imexsa to be the best

steel plant in Lazaro Cardenas, then the best steel plant in Mexico, but

now I ask, ‘Why can’t we be the best steel plant in the world?’ We always

wanted to be the best, but we couldn’t because the old management put up

Resources, Firm Strategy, and Performance

Resources form one of the basic building blocks of strategy, with superior

resources supporting an inimitable strategy that can lead to industry- beating

results year after year (see Figure 2.1) Resources can be broadly categorized

into two types: tangible and intangible Tangible resources are those that

are physical—as in the aircraft owned (or operated) by an airline, or an

air-line’s physical infrastructure such as gates, hangers for repairing planes, and

By Nitin Pangarkar Copyright © 2012 by John Wiley & Sons (Asia) Pte Ltd

the like On one hand, tangible resources can generally be replicated (e.g.,

rivals can acquire similar capital equipment) and hence do not, by

them-selves, lead to superior performance On the other hand, though intangible

resources do not have a physical presence, they serve as the foundation of

supe-rior performance achieved by many world- leading companies For instance,

brand reputations are a key resource for many superior performing companies

such as Colgate, Palmolive, Coca- Cola, and Procter & Gamble Another set

of companies, such as Qualcomm, Canon, and IBM, rely on technology in

the form of patents, or other types of intellectual property, to achieve superior

returns For accumulation of most resources, companies can choose between

internal development and external acquisition For instance, Pepsi acquired

the Gatorade brand through its Quaker Oats acquisition and was thus able to

diversify its portfolio of drinks Canon, on the other hand, develops most of

its technology internally (as will be discussed in Chapter 3)

As shown in Figure 2.1, companies can achieve competitive advantage

and superior performance by either creating high- quality resources (e.g.,

a unique technology) or by acquiring resources below their intrinsic value

In this chapter, I focus on the latter possibility

Regardless of the types of resources underpinning a company’s strategy

(tangible or intangible; brand reputation or technology) and the

accumula-tion strategy (internal development or external acquisiaccumula-tion) a key tenet for

achieving superior performance is that while accumulating resources, a

com-pany must not overspend; if it does, it will cut into the expected future profi ts

Many academics, however, have suggested that the market for resource

acqui-sition is a competitive one.3 In their quest to acquire high- quality resources,

companies may overspend and hurt their performance The movie- making

business exemplifi es this issue of high resource acquisition costs

In 2006, the average cost of making a movie was US$100.3 million,

including US$65.5 million in production costs and US$34.8 million in

Figure 2.1 Relationship between resource quality and costs, and company

performance

Resources

Quality

Costs of acquisition

Competitive advantage

Performance

marketing costs In producing the movie Stealth, Columbia Pictures spent

an estimated US$138 million, largely because it tried to attract “real” stars

by offering handsome remuneration; these stars included Jamie Foxx, who

had won the Academy Award for the Best Actor in 2004, and Jessica Biel,

who was then a rising star in Hollywood In a fairly common movie

indus-try scenario, the movie failed at the box offi ce, generating a mere US$64

ten-dency to overpay for desirable resources is also evident in the case of movie

sequels Basic Instinct 2, which cost US$70 million to make but earned

Though the above two examples were about high acquisition costs of key

human resources, the argument is equally applicable to acquisition of other

resources (e.g., key technology, content, intellectual property)

In contrast to the above cases in which high resource acquisition costs

destroyed profi tability, numerous instances show low acquisition costs of key

resources boosting performance For instance, Bill Gates obtained the rights

to the QDOS operating system for US$50,000 and secured the valuable

contract for supplying IBM with the operating system for its PCs Internal

development of the operating system would have been time consuming for

Ted Turner’s (August 1985) acquisition of MGM/UA libraries also falls into

this category Turner was attracted to MGM’s storied history because it was

the top studio in Hollywood’s golden era Contrary to the skepticism of

sev-eral industry analysts who believed that the content was dated and would be

of little interest to viewers, he placed a high value on its library of content,

which included 1,600 non- silent movies and boasted nine Academy Award

winning movies such as Gone with the Wind, and 1,190 short- subjects

Time magazine made the following comment about the transaction: “His

costly acquisition of MGM’s movie library in 1986, widely considered a

Despite the broad applicability of the argument that acquiring

under-valued resources will boost performance, I focus the following discussion

on acquisitions of whole companies rather than individual resources, such as

brand names or specifi c technologies, because they (acquisitions of

compa-nies) are discrete events for which much information (e.g., the acquisition

price—the cost of acquiring the resource) is available in the public domain

It is noteworthy, however, that acquisitions of whole companies are

moti-vated primarily by the acquisition of individual resources, such as a brand

name or a particular technology For instance, HP and Dell recently engaged

in a bidding war for the 3Par company because they wished to access its

Acquisitions Fitting the “Discover-Diamonds-among-Coals” Adage

Nestlé’s acquisition of Alcon serves as an excellent example of the key theme

of this chapter—discovering a diamond among coals In 1974, the Swiss

com-pany ventured outside the food industry for the fi rst time by becoming a major

shareholder of L’Oreal, one of the largest cosmetics companies in the world

Soon after, the company was hit with several adverse trends: rising oil prices,

slower growth in developed countries, depreciation of most major currencies

versus the Swiss franc, and, between 1975 and 1977, galloping prices of key

raw materials such as coffee, which quadrupled between 1975 and 1977, and

cocoa, which tripled between 1975 and 1977 In response, Nestlé embarked

upon its second venture outside the food industry by buying Alcon Labs, a US-

based manufacturer of ophthalmic products for US$280 million Looking back

at the acquisition in 2002, an analyst said, “While Alcon did not fi t its food

profi le, Nestlé was impressed with its strong fi nancial performance, experienced

president, chairman and CEO of Alcon in 2002—had the following

com-ment about the acquisition from Alcon’s perspective: “It happened to coincide

with the time when the board of Alcon decided that in order to grow, it needed

to be part of a larger group We were approached by a number of

With Nestlé’s active support, Alcon opened two major research centers:

the William C Conner Research Center, signifi cantly expanding its

class research into treatments for ocular diseases and disorders (1982), and

the Irvine Technology Center (ITC), the world’s foremost center for the

a number of acquisitions (see Figure 2.2)

With its enhanced research capability and broader presence across

vari-ous product categories built through acquisitions, Alcon was able to launch

a slew of new products, including a world- leading intra-ocular lens line

(1994 and 2005), surgical instruments, and eye and ear allergy medications

In 2002, Alcon launched the largest healthcare Initial Public Offering (IPO)

in the history of the New York stock exchange when it raised US$2.5 billion

at US$33 a share The IPO was partial because Nestlé retained ownership

of 75 percent of the shares and, remarkably, Alcon had reentered the stock

performance was even more impressive (see Figure 2.3 for the astounding

growth in Alcon’s value under Nestlé ownership)

In 2008, Novartis acquired a 25 percent stake in Alcon for US$143

per share Novartis also received a call option to buy an additional 52

percent stake from Nestlé for US$180 per share, or US$28.1 billion

In total, Novartis paid US$38.5 billion for Nestle’s 77 percent stake.14

•

Figure 2.2 Alcon’s acquisitions under Nestlé ownership

1988, Sharpoint Inc.:

Alcon expanded its ophthalmic surgical manufacturing capabilities to ophthalimic cutting instruments, with manufacturing facilities in Sinking Springs, Pennsylvania

2000, Summit Autonomous and Giriehaber: Alcon entered the refractive laser market and expanded its line of surgical instruments used

in retina surgery

1989, CooperVision Surgical: Alcon became the leading ophthalmic surgical company in the world

2007, Wavelight AG:

Alcon entered the rapidly growing market of Lasik surgery

Figure 2.3 Astounding growth in the value of Nestlé’s investment in Alcon

Sources: For 1977 value, 144th Annual General Meeting of Nestle SA, Lausanne, 14th April 2011

http://www.nestle.com/Common/NestleDocuments/Documents/Media/Events/AGM2011/AGM2011_

speech_EN.pdf

For the 2010 value, Novartis completes 77 percent majority ownership of Alcon adding new growth

platform in eyecare to its leading healthcare portfolio

(http://www.novartis.com/newsroom/media-releases/en/2010/1440394.shtml) and Alcon unleashes $2.3 billion IPO, Nestlé still owns 75 percent of

the company, Ocular Surgery, April 15, 2002, (http://www.osnsupersite.com/view.aspx?rid=13303)

Note: The US$41 billion value includes the amount generated by the IPO and the price paid by

Novartis The above illustration does not account for either the time value of money (e.g., $41 billion

in 2010 is equivalent to a considerably smaller amount in 1978 or the $2.5 billion raised in 2003 is

equivalent to a bigger sum in 2010) or the additional investments made by Nestlé in Alcon between

1978 and 2010 Most likely, even after accounting for the additional investments and the time value of

money, the growth in value would be tremendous.

1 10 100 1000 10000 100000

1977

280

41,000

2010 Value of Nestle’s investment in $ millions

For the quarter ending December 2009, Alcon posted net profi ts

Immediately following the announcement, the Alcon

Indepen-dent Director Committee said that Alcon’s impressive fi nancial

results for the fourth quarter of the 2009 fi nancial year underscored

the intrinsic value of Alcon and reinforced its conclusion that the

Novartis proposal was grossly inadequate.16

Nestlé’s other acquisition of Rowntree, though successful in its own

right, cannot be classifi ed under the discover-diamonds-among-coals

strat-egy because control of the excellent (even iconic, to some British) Kit Kat

brand, meant that Rowntree was hardly under appreciated In fact, Rowntree

had attracted a rival bid from Jacob Suchard, and its potential sale was

dis-cussed in the British parliament.17

Philip Morris’ acquisition of Miller Beer for US$130 million in June 1969

is another diamond found among coals Philip Morris was able to convert the

eighth-largest beer company in the US to the second-largest player in the

industry, by more than quintupling its market share from 4.1 percent in 1970

to 22.2 percent in 1981 Unlike Nestlé, which adopted a hands- off

integra-tion strategy for Alcon, Philip Morris implemented a number of pioneering

strategies (for the beer industry) at Miller: it infused Miller with managerial

talent and used its deep pockets to spend heavily (some estimates were as

high as US$1 billion)18 on advertising Miller Lite Philip Morris also changed

the media mix more towards network TV than towards spot ads and doubled

con-sumption of beer in the US meant that the revenue growth was even more

impressive than the quintupling of market share Though subsequent

(post-1981) market share gains were limited, Philip Morris was able to sell the

Miller Beer Company to South African Breweries in May 2002 for US$3.6

billion worth of stock and US$2 billion in debt Philip Morris retained a 36

percent share at that time, with voting rights of 24.99 percent.20

On the other hand, Philip Morris failed in its next acquisition of 7-Up in a

strategic as well as fi nancial sense, with a loss in value exceeding 50 percent

between the acquisition of 7-Up and its divestment One key factor

explain-ing the contrastexplain-ing results in these two acquisitions was that the beer industry

was fragmented (with a number of regional players) and the leader (Anheuser

Busch) was not a skilled marketer By deploying its substantial marketing skills

to design innovative campaigns for specifi c unserved segments in the beer

market, Philip Morris was able to gain signifi cant market share at the expense

of the regional producers who lacked similar skills In other words, Phillip

Morris’ superior skills allowed it to convert a raw diamond (Miller Beer) into a

•

•

polished one In the 7-Up acquisition, however, Philip Morris had bought into

a niche category brand with limited growth prospects and faced two

sophisti-cated marketers in the form of Coca-Cola and Pepsi Cola who both reacted

extremely vigorously to the encroachment Philip Morris played upon their

key segment of cola drinks In other words, 7-Up was not a raw diamond, nor

did Philip Morris have the ability, on a relative basis (i.e, compared to key

rivals), to improve its potential

Based on the above two case studies, the fi nding-diamonds-among-coals

strategy is graphically depicted as in Figure 2.4

Although Nestlé and Philip Morris had mixed records (with a few

suc-cesses as well as a few failures) at fi nding diamonds among coals, Mittal

Steel and its boss, LNM, have succeeded in fi nding several diamonds among

coals Financial Times called Mittal Steel “the only true global steel

mills.22 Below, I include a detailed case study of Mittal Steel, which provides

an excellent illustration of this chapter’s concept and many of its subtleties

Mittal Steel: Discovering Diamonds among

Coals—Consistently!

To appreciate the company’s current standing, strategies, and performance,

it may be useful to understand the company’s founding and its historical

development The history of the Mittal Group can be traced back to the

• Identifying underappreciated assets

• The asset could be low profile but must have potential

• Identify the key elements of value creation through cooperation

• Avoid unnecessary meddling or intereference

• Through means such as IPO

• If positive growth is expected, partial offering should be preferred (because

of option value), rather than full offering

Identifying the raw diamond

Polishing the diamond

Monetizing

or unlocking the value

Figure 2.4 Graphical depiction of “discovering diamonds among coals” through

acquisitions

1950s, when Mohan Mittal (LNM’s father), formed the Ispat Group in India

with his brothers and children India had become independent of the British

just a few years earlier (1947) Motivated by social justice considerations

and inspired by the USSR, the Indian government had adopted the

socialis-tic pattern of development Under the system (called “license raj” by some)

private companies had to obtain permits from the government for the range

of products as well as the quantity they wished to make—in effect,

grant-ing protection from competition to those who could secure the licenses

Signifi cant capacity in heavy industries such as steel was also considered

the domain of public sector enterprises that had superior access to capital

in addition to protection Discouraged by the bleak prospects for

expan-sion in the domestic market, the Mittals looked abroad for opportunities In

1976, they invested US$15 million in a steel plant in Indonesia, which they

named PT Ispat Indo In 1989, their search for raw materials (specifi cally

non- scrap iron) for the plant in Indonesia, led the Mittals to Trinidad and

Tobago, where they acquired Iscott (Iron and Steel Company of Trinidad

and Tobago), a government- founded steel company that was losing more

technology, the Mittals managed to make Iscott profi table within a year

In 1991, Ispat’s reputation for turning around badly performing steel

plants motivated the Mexican government to invite Ispat as one of three

bidders for privatizing a money losing plant (Sicartsa II) Though the

gov-ernment had sunk massive investments to the tune of US$2.2 billion in

the plant only a few years earlier, the plant was operating at one- third of its

capacity, and a blame game was on between government offi cials, on one

side, and management and employees of the company, on the other LNM

was successful in the bid and the integration process that resulted in superior

performance by the plant will be discussed in detail later in the chapter

In 1994, Ispat International was split from the Ispat Group in India, and

concentrated on international acquisitions under the leadership of LNM,

who had a global vision Emboldened by Ispat’s success at turning around and

man aging steel plants in developing countries (e.g., Indonesia, Trinidad, and

Tobago), LNM launched a slew of acquisitions around the world— buying

steel mills at low prices and then employing his company’s considerable

skills to make the companies profi table Thanks to these acquisitions, by the

late 1990s, Ispat had several steel plants around the world and controlled

nearly one- tenth of global steel production In 2004, Ispat International NV

acquired LNM Holdings NV (the private company controlled by LNM) and

merged with International Steel Group Inc (the remnants of Bethlehem

Steel, Republic Steel, and LTV Steel) to form Mittal Steel Arcelor Mittal,

the world’s largest steelmaker, was formed when Mittal Steel merged with