Cochlear Ltd Application of Strategic Management theories to Cochlear Ltd.

1. Cochlear Ltd
Global leader in profound
hearing implants
Prepared by:
Jack Ng

2. NOTE to Students
• This is my effort to guide you to prepare for
the exam case
• It is by no means a complete analysis
• You MUST prepare your own to differentiate
from others and achieve competitive
advantage.

3. What is Cochlear implants
• Cochlear implants are surgically placed
electrical device that receive sound and
transmit the resulting electrical signals to
electrodes implanted in the cochlea of the ear.
• The signals stimulate cochlea, allowing patient
to hear.
• It is also known as Bionic ear.

4. Parts of cochlear implant
• External
– Microphone
– Speech processor
– Transmitter
• Internal
– Receiver and stimulator
– An array of up to 22 electrodes

7. Cochlear implant hearing solutions
• Unlike hearing aids which merely amplify sound, a cochlear
implant bypasses the damaged part of the ear and
stimulates the auditory nerve directly.
• A sound processor is worn outside the body and uses
microphones to pick up sounds.
• The sound processor converts sounds into coded signals
that are sent to the implant inside the body.
• The implant receives the coded signals from the processor
and sends the signals to electrodes that are in the cochlea.
• The electrodes simulate the hearing nerve which carries
the signals to the brain creating the perception of sound –
just as it would for someone with normal hearing.

8. Cochlear’s vision is to connect the hearing impaired to a
world of sound by offering life-enhancing hearing solutions.
Cochlear Corporation’s vision

9. Cochlear Corporation’s values
Customer satisfaction
We meet or exceed customer expectations by actively seeking to understand their
requirements, responding to their needs in a timely manner and continuously
improving our processes and offerings.
Mutual respect
We work in a supportive and cooperative manner, respecting diverse opinions,
personalities and styles.
Performance
We are committed to achieving Cochlear’s overarching goals through high-
performing individuals and teams.
Continual improvement and innovation
We monitor the quality and reliability of our products and services and take the
initiative in optimising work methods, systems, processes and designs.
Professionalism
We act with integrity and in the wider interests of Cochlear.

10. An important hearing loss segment
Hearing Aids
 Cochlear Implants

Large group of people with high-
frequency hearing loss using hearing
aids that are not effective
Hearing Aids
The Solution – Cochlear’s Hybrid system

11. Even with a hearing aid…
They suffer from:
• Major communication difficulties
– Speech comprehension especially in
noise
– Environmental sounds: doorbells,
birds, sirens etc
• High levels of dissatisfaction in their
performance with hearing aids

12. Hybrid = the best of both
• Use a hearing aid where it is
most effective (ACOUSTIC)
• Use a cochlear implant only
where it is absolutely necessary
(ELECTRIC)
• Hybrid = Acoustic + Electric
Hearing Aid CI

13. Hearing with the Cochlear Hybrid System

14. Normal
Moderate
Severe
Profound
Mild
Moderate
to Severe
Pitch in Hertz (Hz)
125 250 500 1000 2000 4000 8000
Loudnessin
Decibels(dB)
0
20
40
60
80
100
120
 
Hybrid – completing your hearing experience
Hybrid hearing aid Hybrid cochlear implant

15. • Cochlear has received approval to start selling its hybrid
hearing implant in the US, opening up the medical device
maker’s market to adults with partial hearing loss, as opposed
to only the profoundly deaf. 21 Mar 2014
Hearing with the Cochlear Hybrid System

16. Benefits of Cochlear Implants
• Most perceive loud, medium and soft sounds.
• Many understand speech without lip-reading.
• Many can make telephone calls and
understand familiar voices over the telephone
• Some can enjoy music
Source: www.indicure.com.ng

17. Potential Growth
• Medical device maker Cochlear will begin
selling in Europe a re-approved version of its
hearing implant that was recalled in
September 2011 after the product began
failing in a small number of recipients. 02 JUN
2014

18. Concentric Growth
• Cochlear has opened a new Melbourne clinic,
moving into post-surgery care of implant
recipients for the first time, which its CEO
hopes will enable medical teams to focus on
new patients and test new ideas. 28 May JUN
2014

19. Critical Competitive Issues
• Medical device maker Cochlear is losing
market share to Swiss rival Sonova, analysis of
a strong yearly result from Sonova has said,
reporting more than 50 per cent revenue
growth in its hearing implant division. 22 May
JUN 2014
What can Cochlear do? Strategy?

20. Cochlear Ltd Facts
• Cochlear estimates it has a market leading share
of implantable hearing solutions, including
approximately 65% share of cochlear implants.
• 250,000 customers to date.
• Cochlear’s business model includes supporting
these customers with innovative and compatible
products, through the sale of sound processor
upgrades and accessories and ongoing product
support.

21. Cochlear Ltd Facts
• Cochlear has a deep geographical reach, selling in
over 100 countries.
• Cochlear has a direct presence in approximately
20 countries and uses distributors and agents in
the balance.
• The proportion of Cochlear’s sales to end
customers by region is approximately: Americas
40%, EMEA (Europe, Middle East and Africa),40%
and Asia Pacific 20%.
• Can increase the share of Asia Pac?

22. Cochlear Ltd Facts
• In the United States, medical costs run from
US$45,000 to US$125,000; this includes
evaluation, the surgery itself, hardware
(device), hospitalization and rehabilitation

23. Cochlear Ltd Revenue 2013
• Sales of cochlear implant units were up 16% to 26,674.
• Sales revenue was up 1% from that for last year to
$715.0 million. In constant currency terms (ie restating
F12 at F13 foreign exchange rates), sales revenue was
up 3%. (It seems the price is lowering, competition?)
• Americas sales revenue of $284.4 million declined 4%
• EMEA sales revenue of $283.0 million decreased 1%
• Asia Pacific sales revenue of $147.6 million increased
20% (i.e. growing market!)

24. Cochlear Ltd products
• Cochlear offers a range of advanced solutions
to address different types of hearing loss such
as:
• cochlear implants, designed to help those
people with moderate to profound
sensorineural hearing loss; and
• bone conduction implants, designed to help
those people with conductive hearing loss,
mixed hearing loss or single-sided deafness.

25. Cochlear Ltd Sale
• For the financial year ended 30 June 2013
(F13), 89% of Cochlear’s sales revenue was
from cochlear implant (Nucleus) products and
11% from bone conduction (Baha) products.

26. Take a break, Let me play you a song

27. Define Industry
• NOT anymore just severe-to-profound
sensorineural deafness
• Cochlear has received approval to start selling
its hybrid hearing implant in the US, opening
up the medical device maker’s market to
adults with partial hearing loss, as opposed to
only the profoundly deaf. 21 Mar 2014

28. Define Industry
• What is the implication of the approval to sell
hybrid hearing implant in the USA?
• One it is approved by the US Food and Drug
Administration (FDA) in USA, it will be used as
a reference of approval for other agencies e.g.
Europe (CE), Australia (TGA), Singapore (HSA),
Japan (PMDA) i.e. high chance and faster
approval by other countries.

29. Define Industry
• Define Industry: A cochlear implant that helps
partial hearing loss, severe and profound
profoundly (completely) deaf person to have a
sense of sound.
• It is different from a hearing aid because it
helps to compensate for damaged or non
functional parts of the ear, while a hearing aid
Amplifies sound.

30. Customers
• 50% children (12 months - 17 years);
• 50% adults *
* FDA survey of venders 11/2001
http://www.nidcd.nih.gov/health/pubs_hb/coch.htm#c

31. Potential Customers
• 16 in 1,000 people are severely to
profoundly deaf
• 80 in 1,000 elderly adults (>70 years) are
severely to profoundly deaf.
• New market for adults with partial hearing
loss, as opposed to only the profoundly
deaf. (21 Mar 2014)

32. Sales Barriers
• The barriers to increasing the penetration of
the candidate base include:
• awareness of implantable solutions as a viable
option;
• patient motivation;
• lack of clear referral paths;
• affordability and funding availability; and
• clinic capacity.

33. PEST - Political
• Cochlear sales hit as US government tries to
limit health costs, 07 JUL 2014.
• The US regulatory body that administers
Public Healthcare for the Poor and Elderly may
stop paying for bone anchored hearing aids, in
a potential blow to medical device company’s
growing Baha division.

34. The political/legal environment
• Regulation is significant. Cochlear implants are
considered as medical devices and must be
approved for use by each country health
authorities: the US Food and Drug
Administration (FDA), Europe (CE), Australia
(TGA), Singapore (HSA), Japan (PMDA)

35. The political/legal environment
• Example: On 24 July 2002 the FDA issued a
notification that it had reports of a link between
cochlear implants and bacterial meningitis (a
potentially fatal infection of the lining of the
surface of the brain).
• Cochlear responded to the crisis quickly and
claimed that the infection was related to a design
change by their competitor, Advanced Bionics,
that created ‘dead space’ within the ear, thus
providing a home for bacteria.

36. The political/legal environment
• In the United Kingdom, the NHS covers
cochlear implants in full, as does Medicare in
Australia, and the Department of Health[54] in
Ireland, Seguridad Social in Spain and Israel,
and the Ministry of Health or ACC (depending
on the cause of deafness) in New Zealand.

37. PEST - Economic
• Asia is the fastest growing economic region
and the largest continental economy by GDP
PPP in the world. China is the largest economy
in Asia and the second largest economy in the
world.
• GDP growth Per capita: 7.9% (2010)
• Asia Pacific sales revenue of $147.6 million
increased 20%

38. PEST - Economic

39. PEST - Social
• Companies to benefit from an ageing population
• There is a silver lining to Australia’s rapidly
growing ageing public profile, part of a trend that
could be worth up to $US15 trillion ($16 trillion)
worldwide, and includes locally listed names such
as AMP, Challenger and Cochlear, a new report by
Bank of America-Merrill Lynch has found. 11 JUN
2014
• The new lifestyle of watching movie and listening
music on smart phone, MP3 players, tablets on
the go….

40. PEST – Social - Ethical Dilemmas
Imagine that you and your spouse are deaf. Your child is born
without hearing. Would you go forward with the implant? What
are all the issues you would consider?
Would your reasoning change if you both could hear?

41. PEST – Social - Deaf Culture
• Deaf Culture is linguistically unified through American
Sign Language (ASL)
– ASL is not a manual translation of English
– ASL has its own syntax, morphology, and vocabulary
– ASL does not have a written correlate
• Deaf individuals share an identity based on a culture
rather than a medical diagnosis
• “Deafness, particularly when early in onset, confers a
life experience that is radically different owing to a
systematically different language base not shared by
the majority of hearing culture” (Niparko, 2009).

42. Deaf Culture and Cochlear Implants
Conflict of Cross-Cultural Values
Child as Recipient Impact on Deaf Culture
• Parental Authority- Hearing
parents who implant deaf
children are viewed as “ill-
founded” and “ill-fated” in
their decision
• Deaf do not view deafness as a
disease, and it is unethical to
operate on a healthy child
• CIs fail to foster language
acquisition in children born
deaf (Lane & Bahan, 1998).
• Socio-cultural genocide
• Undermines the survival of
Deaf culture

43. Deaf Culture and Cochlear Implants
• Advocates for Deaf individuals
– The National Association of the Deaf
– The World Federation of the Deaf
– This cross-cultural conflict is without a resolution that is morally
valid (Lane & Bahan, 1998)
– Research is needed to determine why some children with CIs
are successful in the hearing world and other are not
• Clinical trials
• High quality, generalizable results

44. PEST - Technology
Countries by smartphone penetration

45. PEST - Technology
• The artificial regeneration of hair cells within the
cochlea seemed to be a long way away
• Clearance by FDA for the implant of hybrid
hearing solution.
• High speed mobile internet and coverage,
enabling the use of connected mobile devices for
watching of movies and music on the go.
• U.S. sales of premium stereo headphones ($100+)
grew 25 percent in units in Q1 2013 year-over-
year, accounting for 95 percent of the revenue
growth for the total headphone market

46. Five forces
• Threat of new entrants (Low)
• Threat of substitute products or services (Low/moderate?)
- Hearing Aid, Hearing Amplifier or “Personal Sound Amplification
Products” (PSAPs). (re: attached notes), Sign language, Interpreter
(Human, voice to text software)
• Bargaining power of customers (buyers)
- Doctors & Clinics (high), end customers (moderate?)
- e.g. IndiCure (Slide#137) offers special discounted prices to
customers.
• Bargaining power of suppliers (low?)
• Intensity of competitive rivalry (high?)

47. Threats of new entrants (low)
• Even if a new drug is found, it is a lengthy
process for any approval by authority.
• The artificial regeneration of hair cells within
the cochlea seemed to be a long way away

48. Industry Analysis- Rivals (High)
• (USA) FDA approved:
– Cochlear Corporation: Nucleus
– Advanced Bionics: Clarion
– Med-EL: Combi-40+
– AllHear: AllHear single channel
• Antwerp Bionic Systems: Laura (now owned by Cochlear)
• MXM Laboratories: Digisonic
• (In Europe, Africa, Asia, South America, and Canada): Neurelec (France, a division
of William Demant)
• (some parts of the world ): Nurotron (China)
• (India): The Defence Research and Development Organisation
• (South Korea): The Seoul National University Hospital
• Each manufacturer has adapted some of the successful innovations of the other
companies to its own devices. There is no clear-cut consensus that any one of
these implants is superior to the others. Users of all four devices display a wide
range of performance after implantation.

49. Industry Analysis- Rivals

50. Industry Analysis- Rivals

51. Industry Analysis- Rivals

52. value chain analysis
Please construct one

53. Core Competencies
• 65% share of cochlear implants with 250,000 customers
• Cochlear has a deep geographical reach, selling in over 100
countries.
• Cochlear has a direct presence in approximately 20
countries and uses distributors and agents in the balance.
• Cochlear offers a range of advanced solutions to address
different types of hearing loss
• Cochlear has received approval to start selling its hybrid
hearing implant in the US, opening up the medical device
maker’s market to adults with partial hearing loss, as
opposed to only the profoundly deaf

54. Core Competencies
• Cochlear has started post-surgery care of
implant recipients , enable medical teams to
focus on new patients and test new ideas

55. Core Competencies
• COCHLEAR LAUNCHES NUCLEUS® PROFILE™
IMPLANT SERIES IN EUROPE 2 June 2014
• The thinnest implant body on the market.
• It has CE (for Europe) approval, waiting for
regulatory approval from other markets.

56. Core Competencies
• Strong presence in EMEA (Europe, the Middle
East and Africa), Cochlear Academy in
Mechelen, Belgium, established in 2004,
provides training for external customers and
internal staff so that Cochlear products can be
used optimally and with best results.

57. Market Potential
• TechNavio's analysts forecast the Global
Cochlear Implants market to grow at a CAGR
(compound annual growth rate) of 13.6 %
over the period 2011-2015

58. Corporate Growth Strategy
• Concentration Vertical Growth Strategy with
Forward Integration
• Cochlear purchased distributors in many
countries

59. Offices

60. Generic Business Strategies
• How broad is your market? (Scope)
• What is your competitive basis? (CA)
• What timing?
• How will you confront competitors? (Cost,
Differentiation or Focus?)
60

61. Three Generic Strategies
5-61
Cost Structure
MarketScope
(Segmentation)
Narrow
(asegment)
Broad
(Industrywide)
Low CostUniqueness perceived by
Customers (Higher Cost)
Cost
Leadership
(Operational
effectiveness)
Differentiation
(Strategic
Positioning)
Cost
Focus
Differentiation
Focus
Competitive Advantage
Remember, everything a firm does to practice these generic
strategies takes place in the value chain

62. 1. Overall Cost Leadership
Tight set of interrelated tactics that
includes:
• Tight cost and overhead control
• Avoidance of marginal customer accounts
• Cost minimization (not cost-cutting) in all
activities in the firm’s value chain
– Not at the expense of delivering value
– Process perspective
• Primarily defensive
5-62

63. Cost leadership
• Danger, danger …someone will undercut
you. Why? How?
• Price, quality: Value proposition- A balancing act
• Aldi;
• Mass market
– Seek benefits from economies of scale,
experience curve (& if relevant economies of
scope) e.g. Heinz and baked beans
• Cost leadership is a footing, a means, not
an end, to good strategy

64. Competitive Advantage Based on Low-
Cost Leadership
Infrastructure
Human
Resource
Management
Technology
Development
Procurement
PRIMARY
ACTIVITIES
SUPPORTACTIVITIES
Centralized cost controls
Intensive training to emphasize cost savings means;
encourage employees to look for new ways to improve methods
Economies of scale of R&D and technology development;
learning and experience amortized over large volume
Purchasing from numerous sources;
strong bargaining power with suppliers
Large
shipments;
massive
warehouses
Economies of
scale in plants;
experience
effects
Mass marketing;
mass distribution;
national ad
campaigns
Bulk or
large order
shipment
Centralized
service
facilities in
region
Inbound
Logistics
Operations Outbound
Logistics
Marketing
/ Sales
Service
Reprinted/Adapted with the permission of The Free Press, a division of Simon & Shuster, Inc., from COMPETITIVE ADVANTAGE:
Creating and Sustaining Superior Performance, by Michael E. Porter. Copyright ©1985 by Michael E. Porter.
(It takes place in the value chain)

65. • Remember: Cost is cost, price is price
• Make achievement of meaningful lower costs
than rivals the theme of firm’s strategy: “I am
reducing cost so that ...”
• Include features and services in product
offering that buyers consider essential

66. • Find approaches to achieve a cost advantage
in ways difficult for rivals to copy or match

67. Experience curve & learning
• Every time total output (all that is produced
in the life time of the company), costs drop
by a certain percentage, depending on
industry
• Typically 25% or so for a manufacturing
• Impact on cost:
– Why do OEMs exists?

68. Translating a Low-Cost Advantage into Higher
Profits:
• earn high profits because its costs are lower
than competitors charging a similar price
(Woolworths)
• charge a lower price than competitors so
increasing sales and market share (Red Dot /
rugs a million)
• enter new markets charging a lower price than
competitors (Aldi / Kao)
• Boost profits by reducing unit costs (Heinz
baked beans)

69. Pitfalls of Overall Cost
Leadership Strategies
• Too much focus on one or a few value-chain
activities
• All rivals share a common input or raw material
• The strategy is imitated too easily
• A lack of parity on differentiation
• Erosion of cost advantages when the pricing
information available to customers increases
• Remember cost leadership is only a means to
an end
5-69

70. • Technology broadly shared
• Marketing myopia, losing sight of the
customers’ needs
Pitfalls of Overall Cost
Leadership Strategies

71. 2. Differentiation
• Prestige or brand image
• Technology
• Innovation
• Features
• Customer service
• Dealer (channel) network
5-71
Which parts of
the value
chain give
you these
differentiation
opportunities?

72. Differentiation Strategies
• Incorporate differentiating features that
cause buyers to prefer firm’s product or
service over brands of rivals
• Find ways to differentiate that create value
for buyers and are not easily matched or
cheaply copied by rivals: Competitive
Advantage

73. Differentiation
• Firms may differentiate along several
dimensions at once
• Successful differentiation requires integration
with all parts of a firm’s value chain
• An important aspect of differentiation is speed or
quick response
5-73

74. Competitive Advantage Based on
Differentiation
PRIMARY
ACTIVITIES
Inbound
Logistics
Operations Outbound
Logistics
Marketing
/ Sales
Service
SUPPORTACTIVITIES
Reprinted/Adapted with the permission of The Free Press, a division of Simon & Shuster, Inc., from COMPETITIVE ADVANTAGE:
Creating and Sustaining Superior Performance, by Michael E. Porter. Copyright ©1985 by Michael E. Porter.
Infrastructure
Human
Resource
Management
Technology
Development
Procurement
Try to coordinate activities tightly among functions;
build quality into organizational practices
Heavy R&D expenditures to make distinctive or even unique products;
refinement of high quality manufacturing and technology processes;
emphasis on excellence, world class quality
Treat employees as special team members;
emphasize design incentives to promote quality
Selective purchasing from best or world-class suppliers.
Use of best
materials,
parts and
components
Extremely
fine quality
manufactured
workmanship
emphasized
Fast delivery
to distributors;
extra care in
packaging and
transport
Special,
distinctive ads;
Technical
sales and
know-how
High emphasis on
treating customer
as special
individual; fast,
special service

75. Differentiation: Improving Competitive
Position (5 forces)
• Creates higher entry barriers due to customer
loyalty
• Reduces buyer power because buyers lack
suitable alternative
• Provides higher margins that enable the firm to
deal with supplier power
• Establishes customer loyalty and hence less
threat from substitutes
5-75

76. Potential Pitfalls of
Differentiation Strategies
• Uniqueness that is not valuable (Mkt determines
Value)
• Too much differentiation
• Too high a price premium
• Differentiation that is easily imitated
• Not spending more to achieve differentiation
than the price premium that can be charged
5-76

77. 3. Focus
• Focus is based on the choice of a narrow
competitive scope within an industry
– Firm selects a segment or group of segments
(niche) and tailors its strategy to serve them
– Firm achieves competitive advantages by
dedicating itself to these segments exclusively
– 3a Cost focus or 3b differentiation focus
5-77

78. Focus / Niche Strategies
• Involve concentrated attention on a
narrow piece of the total market
– Serve niche buyers better than rivals (Morgan Car)
• Choose a market niche where buyers
have distinctive preferences, special
requirements, or unique needs and
develop unique capabilities to serve them
Morgan +4: 100% hand-
made, traditional yet
modern (powerful
engine); bygone era

79. Approaches to Defining a Market Niche
• Geographic
uniqueness: mountain,
snow
• Specialized
requirements in
using product/service:
surgical equipment
– Cochlear implants
• Special product
attributes appealing
only to niche buyers:
– Spitfire
Handcrafted in
Australia;
retails:
-DIY: ~$200000
-Assembled:
$250,000

80. What Makes a Niche
Attractive for Focusing?
• Big enough to be profitable and offers good growth
potential
• Not crucial to success of industry leaders otherwise …:
GM Volt vs Tesla
• Costly or difficult for multi-segment competitors to meet
specialized needs of niche members: barrier to entry
– Focuser has resources and capabilities to effectively serve an
attractive niche: B & B’s
• Few other rivals are specializing in same niche
• Focuser can defend against challengers via superior
ability to serve niche members

81. 3(a) Focus – low cost
5-81
 Can be similar to overall cost leadership, but on a
narrow segment-based approach
 Chosen segment’s needs are less than the
average needs
 Operate at a substantially lower cost than
competitors
 Better profitability, combining segment focus and
cost management

82. 3(b) Focus – differentiation
5-82
 When the needs of the chosen segment are
above the average
 Customers willing to pay a premium price
 Higher cost structures
 Substantial profits

83. Pitfalls of Focus Strategies
• Erosion of cost advantages within the narrow
segment
• Focused products and services still subject to
competition from new entrants and from imitation
• Focusers can become too focused to satisfy
buyer needs
5-83

84. Pitfalls of Focus Strategies
5-84
 Size does matter
 Higher cost structures
 Suppliers generally have more power
 Technology changes may reduce barriers to entry,
e.g. web design using Joomla CMS, Word Press
 Macro-environmental changes, e.g. bloggers
offering new advertising media.
 Attracting larger, better-resourced competitors.

85. In practice
• Competitors find effective ways to match a focuser’s
capabilities in serving niche (YHA vs Base (owned by
Accor)). Will we see a B & B chain?
• Niche buyers’ preferences shift towards product
attributes desired by majority of buyers – niche
becomes part of overall market i.e. niche becomes
mainstream: greywater, solar power, skateboarding
• Segment becomes so attractive it becomes crowded
with rivals, causing segment profits to be splintered
• With the advent of technology and with bigger
providers taking over smaller providers to grow and
gain market share, a focus strategy is fraught with
danger. The niches become smaller and smaller

86. Combination Approaches (stuck in the
middle)
• Automated and flexible manufacturing systems
• Exploiting the profit pool concept for competitive
advantage
• Coordinating the “extended” value chain by way
of information technology
5-86

87. Combination Approaches (stuck in the
middle)
5-87
Cost Structure
MarketScope
(Segmentation)
NarrowBroad
Low CostHigher Cost
Cost
Leadership
(Operational
effectiveness)
Differentiation
(Strategic
Positioning)
Combination
Approaches
Cost
Focus
Differentiation
Focus

88. Combination Strategies: Improving
Competitive Position
• Combination strategies
– High entry barriers
– Bargaining power over suppliers
– Reduces power of buyers (fewer competitors)
– Value position reduces threat from substitute
products
– Reduces the possibility of head-to-head
rivalry
5-88

89. Pitfalls of Combination Strategies
• Firms that fail to attain both strategies may
end up with neither and become “stuck in
the middle”
• Miscalculating sources of revenue and
profit pools in the firm’s industry
5-89

90. Timing
• 1st mover or late mover?
– Risk factors
– Barriers to entry? E.g. patent, proprietary
knowledge

91. Advantages:
– Pioneering helps build firm’s image and reputation: Apple: iPod,
iphone; switching costs are high. First Mover Advantage.
• Mercedes Hydrogen car
– Early commitments to new technologies, new-style components,
and distribution channels can produce cost advantage:
experience curve, economies of scope, economies of scale:
• amazon
– Loyalty of first time buyers is high:
• On-going commitment?
• Element of self-image?
– Moving first can be a preemptive strike: Just before Gillette
launched the G3 in Australia, Schick blitzed the market with its 2-
blade product touting enhanced nick protection
5-91

92. Location tactics:
• Frontal (head-on): Coles and Woolworths
supermarkets
• Flanking (attack on the sides): 7-up vs Colas
• Bypass: Dyson
• Guerrilla: Aldi
• Encirclement/Multi-front: Woolworths and
Wesfarmers
• Pre-emptive

93. Based on your
analysis of the
external
environment
(general and the
industry), this is the
anticipated trajectory
the environment will
take Based on your
analysis of the
organisation
(capabilities,
competencies,
current business
strategy and
corporate strategy
(next week)), this is
the anticipated
trajectory your
organisation is
taking

94. Closing the gap
• 2 choices:
– Change the environment:
• Disruptive innovations
• Lobbying
– Change the company:
• Change your corporate strategy
– Change the growth direction
– Change your portfolio
– Change the parenting skills
• And/or Change your business strategy:
– Reconstruct your value chain
All of these
require you to
change your
organisation’s
capabilities.
You will rarely
close the gap
by choosing
only 1 of
these options

95. Directional strategy
• Directional strategy is concerned with the firm’s
orientation towards growth
• What’s driving your direction?
• 3 options :
1.Growth Strategies (expand activities)
2.Stability Strategy (no change to activities)
3.Retrenchment Strategy (reduce activities)

96. Corporate Directional Strategies

97. Corporate directional strategies
Growth
Stability
Retrenchment

98. Growth and use of funds: how much
do you have?
• Index of Sustainable Growth Robert L.
Higgins, this index helps determine the level
of growth of sales beyond which external
capital will be needed. In other words, when
planning for a specific growth in sales, one
must be aware of whether external financing
will be needed.

99. Index of Sustainable Growth
g = (X1 (1 - X2) (1 + X3)) / (X4 - (X1 (1 - X2) (1 + X3)))
X1 = Profit Margin = (Income before Taxes / Sales) * 100
X2 = Dividend Payout Ratio = Total Dividends / Net Income
X3 = Leverage = Liabilities / Equity
X4 = (Assets / Sales) * 100

100. • If Sales growth forecast are above g:
– External financing (equity or debt) should be
sought after,
– or the profit margin should be improved,
– or the distribution of dividends should be lower,
– or the level of assets should be lower (lease
instead of buy)
• Use of funds to grow organically or externally

101. Decision 1 Decision 2 Decision 3
Vertical
Horizontal
Concentric
Related Industry
Value Chain
Conglomerate
Unrelated industry
value chain
Same industry
value chain
InternalorExternal
Concentration
Growth options

102. Growth Strategies: Internal/External
• Internal: Corporation can grow
internally (aka organic growth) by
expansion of operations globally and
domestically:
• External: OR through Mergers,
Acquisitions and Strategic Alliances
(external growth)

103. Decision 1 Decision 2 Decision 3
Vertical
Horizontal
Concentric
Related Industry
Value Chain
Conglomerate
Unrelated industry
value chain
Same industry
value chain
InternalorExternal
Concentration
Growth options
Vertical growth or Horizontal growth
Diversification

104. Growth Strategies
Basic Concentration Strategies:
–Vertical growth
–Horizontal growth

105. Growth Strategies
– Concentration
• Vertical Growth: integrating forwards or
backwards on the same industry value chain
– Reasons:
» Reduce power of suppliers/buyers
» Maintain a channel to buyer
» Access to raw materials
– Issue of costs
– Carter Holt Harvey:
» Forestry - sawmilling- paper products

106. • Horizontal Growth: Same point on same
industry value chain
– More products within the industry to same
market or same product in different (usually
geographic) markets
– E.g. bank sells mortgages plus credit cards,
insurance (more products to same market)
– Wizard Home loans expansion to WA (same
product in diff mkt)

107. Growth Strategies
Basic Diversification Strategies:
– Concentric Diversification
– Conglomerate Diversification

108. By Concentric Growth
– Growth via related industries
• Leverage off distinctive competencies that can
be applied in different industries: Search for
synergies
• useful when firm holds strong competitive position
but industry attractiveness is low
• McCafe
– Potential economies of scope

109. Conglomerate Diversification: When?
By Conglomerate diversification
Example: Wesfarmers and Coles
 growth in unrelated industries
 Unattractive current industry:
 Lack of product skills to transfer to other related
industries – use conglomerate diversification
 Focus is on financial considerations
 $rich company with limited opportunities in current
industry moves into industry with big opportunities
but sparse cash

110. Mergers, Acquisitions, Takeovers
• External growth strategies
• External growth strategies can take the same form as
internal : in the form concentration
(horizontal/vertical) or diversification
(concentric/conglomerate) via mergers, acquisitions
and takeovers

111. Mergers
 Transaction involving 2 or more companies in which
stock is exchanged
 However, only 1 company survives
 Usually occur between firms of a similar size and are
“friendly”
 Resulting firm likely to have a name derived from its
composite firms
 e.g. Pricewaterhouse Coopers

112. Reasons for Acquisitions
 Increased market power – size of the firm and its
resources and capabilities to compete in the
marketplace: Invocare and Bledisloe Holdings
 Overcoming entry barriers
international entry/market segment entry
SAB Miller (no. 2) wants to enter Australia via Foster’s
 Cost of new product development
Microsoft
 Increased speed to market: Volvo and Geely
 Lower risk than new product development
 Increased diversification: blessing and curse
 Avoid excessive competition: takeover competitor:
Wild Oats+ and Whole Foods

113. Acquisitions
Problems in achieving
success
Adapted from Figure 7.1
Integration
difficulties
Inadequate
evaluation of target
Large or
extraordinary debt
Inability to
achieve synergy
Too much
diversification
Managers overly
focused on
acquisitions
Too large

114. Problems in achieving acquisition
success (cont’d)
 Integration difficulties
Melding two disparate corporate cultures: Daimler
Chrylser
Linking different financial and control systems
Building effective working relationships (particularly
when management styles differ)
Resolving problems regarding the status of the
newly acquired firm’s executives
Retaining key personnel: which CEO stays?

115. Problems in achieving acquisition
success (cont’d)
 Inadequate evaluation of the target
Due diligence
The process of evaluating a target firm for
acquisition
• Ineffective due diligence may result in the
acquirer paying an excessive premium
 One of the issues behind the failure of
HIH Insurance Group

116. Problems in achieving acquisition
success (cont’d)
 Inadequate evaluation of the target
Evaluation requires examining the:
Financing of the intended transaction
Differences in culture between acquiring and
target firms
Tax consequences of the transaction
Actions necessary to meld two workforces
Human capital aspects: knowledge and
experience

117. Problems in achieving acquisition
success (cont’d)
Large or extraordinary debt
High debt taken on by the firm can:
Increase the likelihood of bankruptcy: z-score?
Impact on profitability, ability to raise additional
debt
Lead to downgrading of its credit rating
Preclude investment in:
• Research and development
• Human resource training
• Marketing

118. Problems in achieving acquisition
success (cont’d)
Inability to achieve synergy
Synergy exists when assets create more value
working together than they do independently
Pepsi and food holdings
Firms experience transaction costs when using
acquisition strategies to create synergy
 Firms may underestimate costs:
• Direct – such as bank charges
• Indirect – such as investment of managerial time

119. Problems in achieving acquisition
success (cont’d)
 Too much diversification
Firms must process more information
Broad scope may cause managers to rely too much
on financial rather than strategic controls
Reinforcing cycle of acquisitions becomes a
substitute for internal innovation. Over time, the firm
becomes increasingly reliant on other companies’
innovations
Point of diminishing utility
PepsiCo: Used to own KFC, Taco Bell, Pizza Hut,
Wilson Sporting Goods;

120. Problems in achieving acquisition
success (cont’d)
 Too large
Additional costs of controls may exceed the
benefits of the economies of scale and additional
market power: e.g. Saatchi and Saatchi
More bureaucratic controls due to large size:
Formalised controls often lead to relatively rigid and
standardised managerial behaviour
Firm may become less flexible and then produce
less innovation
Challenge of becoming big while retaining the
flexibility of being small: 3M

121. Defensive strategies
• Especially relevant in a mature market
• Continually dictate terms to the market:
• Maintain the Blue ocean - create new demand in an uncontested
market
• Structural barriers:
• See Porter’s Barriers to entry
• Retaliation:
• Proctor and Gamble’s fighting brand
• HP introduced Apollo (<$100) in 1999. Brand withdrawn in 2002.
– (what would happen if Hoyts opened North of the river?)
• Lower inducement to attack
– This is what Woolworths might end up doing in the supermarket segment
– Beware a defense based on cost-cutting
– Someone will ALWAYS undercut you
• Why?

122. Some ideas
• Block Avenues Open to Challengers:
– Participate in alternative technologies that deliver the
same value
– Introduce new features, add new models, or broaden
product line to close gaps rivals may pursue
– Maintain economy-priced models
– Increase warranty coverage
– Offer free training and support services
– Reduce delivery times for spare parts
– Make early announcements about new products or
price changes
– Challenge quality or safety of rivals’ products using
legal tactics
– Sign exclusive agreements with distributors

123. Growth Strategies: Internal/External
• Internal: Corporation can grow
internally (aka organic growth) by
expansion of operations globally and
domestically:
• External: OR through Mergers,
Acquisitions and Strategic Alliances
(external growth)

124. Decision 1 Decision 2 Decision 3
Vertical
Horizontal
Concentric
Related Industry
Value Chain
Conglomerate
Unrelated industry
value chain
Same industry
value chain
InternalorExternal
Concentration
Growth options
Vertical growth or Horizontal growth
Diversification

125. Cost of Cochlear Implant Surgery
• Cochlear Implants and surgery cost much higher in western countries
as compared to developing countries
• The cost of cochlear implant surgery at NHS is approximately £40,000
and the device itself costs approximately £18,000 thus totaling to
£58,000 or approximately 90,000 USD.
• In India, the cost of Pre Surgery Tests –is about $1000, Implantation -
$5000 US Dollars, Cost of cochlear Instrumentation - $15000 to 25000
• It is more economical to get the surgery done in India as compared to
UK or USA.
www.indicure.com.ng

126. Cochlear Implant Surgery in India
• Excellent health care facilities
• State-of-the art hospitals
• Best of cochlear implant surgeons
• Affordable Cost
• English speaking hospital staff
• Peaceful recovery
• Scenic locations
www.indicure.com.ng

127. Cochlear Implants in India with IndiCure
• The most trusted medical tourism company
• Round the clock assistance
• Offers special discounted prices
• Prompt services
• Visa assistance and travel planning
• Complete transparency
www.indicure.com.ng

129. Stay Hungry, Stay Foolish
• Stay Hungry - Never be satisfied, and always
push yourself further.
• Stay Foolish - Do the things people say cannot
be done.

130. One last video

131. “Don’t ever let someone tell you, you can’t do
something. Not even me.”
~ Chris Gardner – On Pursuits Of Happyness

132. Jack Ng
Thank you for being
so wonderful!
Slide 132