Saturday, November 14, 2015

Strategizing Based on Strengths

Coherence, or the idea of a company understanding not only what it is capable of but also where exactly its place is in its relative industry, was the theme of this week's readings. In the Coherence Premium the concept of coherence was outlined, with Pfizer serving as an example of a coherent company. In pursuit of being a leader in consumer health care products, Pfizer re-evaluated its strengths in the health care business in relation to its holdings in confectionery and hygiene fields and decided to divest in pursuits that were less successful in order to focus on growing health care brands that promised higher returns. Pfizer serves as a sharp contrast to Sara Lee, who invested wildly and randomly in a variety of arenas completely unrelated to snack cakes like shoe polish to underwear. Consequently they held restructurings and ended up divesting in unrelated fields and following Pfizer's example.
Further reinforcing this concept was Jim Immelt in G.E. Goes With What It Knows: Making Stuff, with his move to divest from G.E. Capital, which previously was a source of cash but increasingly was becoming a money pit that dragged down the whole operation. This occurred because G.E. Capital was focused on whatever it perceived the next big thing to be and lost sight of fields pertinent to its operations where it lacked expertise. Like Pfizer, G.E. also got rid of unrelated media holdings Immelt in the form of holdings in NBC Universal. Now Immelt is following a prudent strategy of focusing on businesses where G.E. has a competitive advantage and ignoring unrelated investment opportunities. Immelt is following through on his belief that technology-based manufacturing is the future of a reinvigorated American economy by using investments in manufacturing to increase G.E.'s investments in research and development. G.E. has also looked at how it can improve manufacturing operations and discovered that by ignoring hierarchy they've been able to tweak production processes and cut overall production times.
In the case Southwest Airlines: In a Different World, Southwest Airlines showed how sometimes market coherence can take place in an overlap of two semi-related fields. In this case, Southwest Airlines came about to serve as a substitute for short car-rides between large cities in Texas. Southwest developed a no-frills but highly efficient business model and unique culture that eventually was able to grow and adapt to a national market without losing its core ethos even as it moved into larger markets and longer flights.
Amazon also seems to be following the coherence principle with its move to enter the fast-growing business-to-business(B2B) online marketplace, as outlined in Amazon launching a new marketplace for U.S. businesses. Recognizing the fact that acting as a middle-man for third-party vendors accounts for 40% of its sales, Amazon chose to attempt to leverage its expertise on establishing online marketplaces to facilitate commerce of hard-to-find items often for commercial use. In doing this, Amazon is recognizing what they are capable of and that their industry isn't just facilitator of online sales between individuals but businesses as well.

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