Big Red Horseshoe - Vanderbilt Owen MBA Students on Business Strategy

Coke's Strategy

It's a long read, but the New York Times had a great article (registration required) yesterday on Coca-Cola's strategy. I found this passage to be most striking (bold is mine):

Of the 11 current members of the board, eight have served 10 years or longer, and four of those have logged 25 years or more. The average tenure for board members is 16.6 years, nearly double the average of Fortune 500 companies, according to an analysis by the Corporate Library, which tracks corporate governance issues and compensation for executives and board members. Coke has the 10th-longest-serving board among Fortune 500 companies, the analysis found.

The average age of the 11 directors is 68. Except for Mr. Isdell, all of the board members are American. One is African-American and one is a woman.

(By comparison, the average tenure of PepsiCo’s board is six years, and the average age of its members is 59. Of the 10 members, there are 7 men and 3 women; five of the members were born outside the United States, including the chief executive Indra K. Nooyi, 51, who was born in India.)

Could be a good explanation of Pepsi's more aggressive foray into non-carbonated beverages.

The Private Equity Advantage

Yesterday's Wall Street Journal had an op-ed piece by Bain & Company's Orit Gadiesh and Hugh MacArthur that discussed the rise of private equity deals and how private ownership has advantages in transforming coporations.

"For one, private-equity firms invest with a thesis for improving performance in a realistic, but aggressive time frame -- three-to-five years. Compare that with public companies' quarterly earnings scramble and a sense within public companies that each business they own will be a permanent part of the corporate portfolio. For another, the best private-equity firms test their investment thesis hard after the deal closes with a detailed plan of where and how to build value. Their plans often include a few simple metrics -- e.g., cash, market and operating measures -- and top fund professionals frequently review and revise these plans with management. They swiftly move unproductive assets off the balance sheet. And finally, they compensate managers strictly on results."

They conclude that private-equity deals "can be bolder, faster and more transformative." One of the success stories they mention in the piece was Warner Music Group's private equity acquisition and subsequent IPO. (Bain Capital was one of the players in the Edgar Bronfman-led acquisition from Time Warner in 2004.) While WMG is experiecing difficultings in a difficult, dynamic music industry, it is safe to say that is is faring better than EMI -- itself a target of private equity interest. EMI has not taken the proper steps to build for the future. If acquired by a private equity group -- which appears will soon happen -- we'll see the kind of bolder, faster and more transformative moves EMI should have taken long ago.

iTunes DRM-free Pricing: A Good Or Bad Strategy?

Ever since EMI and Apple announced it would sell EMI downloads in an unprotected, AAC file format, the pundits have been discussing the premium placed on those DRM-free tracks. In the U.S., the usual iTunes song will cost the usual $0.99. An unprotected track will cost $1.29 and will have a superior sound quality (although few will be able to tell the difference between the two).

The pricing scheme has raised a few eyebrows as people wonder if the two tiers will confuse consumers. Others -- mostly digital music enthusiasts who are well versed in the details of the issues -- have complained about paying more for what they feel are basic consumers rights. (Protected music files have limitations, such as the number of copies that can be made and the number of devices to which they can be transfered.)

One journalist wrote about the difference in premiums across various territories. U.S. and European customers will pay a 30% premium for the unprotected tracks. U.K. customers will pay a 25% premium. New Zealand customers will pay a 39% premium.

In his Core Economics blog, Joshua Gans, professor of management at the Melbourne Business School at the University of Melbourne, wrote that the premium should be the same...in theory. Which theory is he talking about? I'm not sure. Which theory that says prices should be consistant across political boundaries and distribution territories? That's not the case because the same good will have different prices across different markets. With music, there is no such thing as a universal price -- not even in the digital world. (For example, recorded music is more expensive in the U.K. than it is in the U.S. The VAT is one reason.) Because prices differ, premiums such as this will differ as well.

I have yet to take Professor Shor's pricing class -- that will come during the '07-'08 school year -- but I have some basic thoughts on the matter. A 30% premium on a NZ$1.49 track is NZ$2.33. What retailer is going to price a track at 2.33? What label would set the wholesale price so the track would be priced at 2.33? Just a guess here, but I doubt there will be much impact on sales with $2.49 versus $2.33. EMI and Apple went with the higher of the two, and I think that is the correct decision.

FedEx Kinkos Runs Into Culture Issues, Retools Its Strategy

Merging two companies isn't an easy feat. The New York Times' Claudia H. Deutsch has a great article, "Paper Jam at FedEx Kinko's," on the difficulties FedEx Kinko's has experienced since FedEx purchased Kinko's in 2003. The company had a goal of creating a one-stop shop for shipping, copying and mailing brochures. The problem? Cultural differences.

"'At Kinko’s, there’s a thin veneer of professional folks riding herd on a vast platoon of semitrained people,' said James E. Schrager, clinical professor of entrepreneurship and strategy at the University of Chicago Graduate School of Business. 'That’s just not the FedEx way.' A result, said Robert Boyden Lamb, a management professor at the Stern School of Business at New York University, is that 'these cultures do not gel, they do not hook together at key points.'"

Kinko's employees are short-timers while FedEx workers are careerists. Kinko's employees are fun and hip. FedEx workers are used to a more disciplined corporate culture. Layoffs and by-the-book rules have affected Kinko's culture. The result has been the opposite of what one would expect: Lower profit margins, stagnent revenue growth and higher employee turnover (OK, that last one should have been seen coming a mile away). FedEx moved Kinko's headquarters and ranked store performances, moves that irked Kinko's employees. But the transformation trudges on, and Kinko's is now experimenting with difference store sizes, formats and product mixes.

Additional reading: HBS's Working Knowledge just posted an article titled "Fixing the Marketing-CEO Disconnect" that mentions Kinko's difficulty in aligning marketing activities with corporate strategy.

And here's a January 2007 Fortune interview with FedEx Kinko's CEO Ken May that talks about the company's new strategy: small and medium-sized business, mobile professionals, and convention centers and hotels.

Internet Over Power Lines?

I find this strategy to be very interesting: DirectTV may test a system that would deliver high-speed internet through power lines. (Reuters article) Said chief executive Chase Carey:

"We think it would be a good thing to have a third, a fourth or a fifth entrant in broadband and if we can be helpful in pushing that forward and if there's an opportunity for us to intelligently invest in doing so, we would."

Controlling ownership of DirectTV will change to Liberty Media Holdings Group from News Corp by the end of the year. Liberty Media is a founding shareholder in Current Group, a company that offers broadband Internet connections over power lines (called Broadband Over Powerlines, or BPL).

DaimlerChrysler Comes Undone

What strategy blog would be complete without a post about DaimlerChrysler's decision to sell a controlling interest of the Chrysler Group to a private equity group -- and thereby put to an end to the nine-year-old attempt at a trans-Atlantic super-auto company. In 1998, DaimlerBenz merged with Chrysler. Chrysler has been a business school subject lately; the struggling American auto industry makes for good learning. This acquisition all but guarantees more projects and papers will be written about the company.

This time line of the company's history offers a good list of the losses and setbacks in the last nine years.

Daimler will retain 19.9% of Chrysler...thus keeping Chrysler's profit/loss of the income statements.

Intel Aims at Tiny Devices

Yesterday I ran across this Fortune/CNN article about Intel and its belief that personal computing will be dominated by ultra-mobile PCs in the future. Intel is the kind of company that every MBA student will will probably study at one time or another. The company constantly reinvents itself at what Andrew Grove (former chairman and CEO of Intel) calls strategic inflection points, those points in time at which a company's fundamentals change and new strategies are adopted. (Read about inflection points in the preface to his book "Only The Paranoid Survive" and in this transcript of a Grove speech in August of 1998.)

Intel  wants to make sure mobile computing is up to speed with that on traditional PCs, and it wants to capitalize on the growth of this segment. (Applications like Flash, for example, show up on mobile platforms a couple of years after they are available on PCs).

That article lead to some browsing around. I found a website dedicated to Ultra-Mobile PCs called UMPCommunity. It has a link to the Samsung Q1, that company's UMPC. That's a good primer for the product category, as is the Wikipedia entry for UMPC.

Here's a podcast (that includes a transcription) of an interview with Marco Boerries, Yahoo! SVP of Connected Life, that has some good insight into Yahoo!'s UMPC strategy and how it is working with Intel. The company has a vision for mobile computing and is building Yahoo! Go for the UMPC platform. Yahoo! doesn't see this is as substitute for the cell phone:

"I see it complementary to the cell phone, not in competition to the cell phone, because I still have my cell phone with me in my pocket. So Yahoo! Go on the internet is really your internet in the pocket, but then with the Ultra Mobile PC it's really like, it's a richer environment that you have with you. ...

So really, it really blends into the device, and that I think is what made Intel so excited about working with us on this, that we really, rather than just taking Yahoo Property and making it run in a browser on the Ultra Mobile PC. We really work together and say, what is the user experience supposed to be when you now have this power portable PC in front of you called the Ultra Mobile PC.

Ownership and Acquisition Price

In light of a few recent courses at Owen as well as Rupert Murdoch's current fascination with Dow Jones & Company, I read with great interest Mark Hulbert's article in today's New York Times, "Shareholders Benefit When Managers Have a Serious Stake." Two courses I just finished, Corporate Financial Policy and Financial Statement Analysis, both spent some time on how ownership impacts management's decisions. Not enough ownership of the company, I was taught, can result in decisions that are not in the best interest of shareholders. Rather than increase shareholder value, such managers may make short-term decisions or may be motivated by personal reasons (ego, for example).

A study by four finance professors found a price disparity in cash-only acquisitions of publicly traded companies. About a third of companies were acquired by private equity firms. The other two-thirds were acquired by a public bidder. The researchers found that shareholders received 55% more when acquired by a public firm instead of a private firm.

Why the difference? Companies with management that owned less than 20% of the companies' stock were paying too much.

This finding suggests that it is not fair to say that private equity firms systematically pay too little to acquire other companies. Instead, it would be more accurate to say that acquisition prices tend to be too high when the acquirer is publicly traded and its management has a low ownership stake.

Why would the percentage of shares owned by management have anything to do with the price paid to acquire another company? The professors say that when corporate managers have only a small ownership stake, they are more likely to pursue acquisitions that do not enhance shareholders’ long-term value. In such cases, Professor Stulz said in an interview, their motivations may simply be to satisfy their egos by building a corporate empire.

Does this mean you should view Newscorp's bid for Dow Jones with skepticism? Not necessarily -- Rupert Murdoch owns 30% of Newscorp's stock.

Download a copy of the study here.

Welcome To Big Red Horseshoe

Today marks the launch of Big Red Horseshow, a blog about business strategy from students of the Owen Graduate School of Management at Vanderbilt University. Many Owen students, myself included, choose strategy as one of their concentrations. This blog will be a forum for articles and discussions on business strategy, a place for us to apply what we have learned in the classroom.

Big Red Horseshoe will examine what decisions companies make, why they make them and those decisions' outcomes. The business world is filled with case studies that can teach us about corporate successes and failings, how decisions are made and what companies should think about when they make strategic decisions. There's a lot to learn.

Thanks for reading.