Sessions 22-25 strategies

Session 22 - Coffee case

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Case notes:
● Mission: provide high-quality coffee to the worldwide public while helping alleviate
poverty among coffee farmers
● Developed a business model that involved a full integration of the coffee supply chain
(from planting to selling)
● Need to find customers who are willing to pay a premium price for the coffee
● Idea: provide farmers who graduated with a program a 5,000$ loan to set up their
own farms and start supplying coffee. Soon became apparent that the farmers lacked
the necessary skills to properly invest their loans
● Say invested $4 million in the project. Time to re-evaluate business model + create
success without compromising on its mission

Worldwide coffee production and consumption

● Green coffee (80% worldwide), roasted coffee, soluble coffee
● Coffee consumption is growing. Europe is the largest consumer, followed by US and
Brazil.
● Coffee prices are volatile causing a strong impact on the economy of coffee-
producing countries and living standards of coffee farmers
Supply chain
● 4 main phases: farming, trading, roasting and distribution
Coffee farming
● Best results in humid and warm conditions. If well maintained, each coffee plant
could provide up to 2 harvests per year
● Extracting coffee beans from the cherry, drying and fermenting. The processing is
juts as important as high-quality shrubs. Control over length and conditions of
fermentation determine the potential quality of coffee.
● 2 methods of processing: wet and dry. Wet: cherries are fermented, washed, dried
and peeled. Dry ("natural method"): cherries are dried and peeled. The end products
of both are green beans.
Coffee trading
● Vendors are expected to provide information on the country of origin and type of
coffee, whether it did a wet or dry processing and the official grade standard of coffee
beans
● Farmers earn only between 2.5 and 6.5% of the final retail value
● Largest share of profits from coffee exports go to intermediaries and large roasters
Coffee roasting
● Coffee traders are responsible for sorting according to grade
● Grading is helpful in establishing the final use for the coffee: cleaned and checked for
any defects
● Roasters are responsible for creating coffee blends and roasting and grinding sorted
and graded coffee beans
 ● 6 main coffee roasters served worldwide retail markets: Philip Morris/Kraft, Tchibo,
J.M Smucker company, Starbucks, Sara Lee/Douwe Egberts and Nestle.
● Roasters are the main source of innovation, developing new products and blends for
the end consumer
● Product development and marketing added value, allowing roasters to set high prices
● Roasters earned the highest profit margins in the coffee supply chain
Coffee distribution
● Supermarkets and traditional retail chains, specialty stores, and cafes. Lowest priced
coffee in supermarkets and retail chains. Cafes charged the highest prices.
Certified coffees
● Coffee produced with sustainable development: economic development for farmers,
environmental conservation and social improvements.
● Certified by independent third parties (4 main certification systems offered)
● 2 types of certified coffee recognized: organic and fair trade.
○ Organic: ecological process adapted to local conditions. Premium price for
organic
○ Fair trade: purchased directly from farmers at a higher rate than conventional
coffee
● Certified coffees have a small market share - less than 1%
● Organic coffee grew by 564%
People in LAOS
● 75% of population worked in agriculture
● Low level of education
Low productivity in agriculture
● Laos relies on traditional farming techniques
● Limited knowledge - reliance on local seed and a scarce use of fertilizers and
pesticides
● Hygiene issues contributed to inferior quality
● Crops dependent on weather conditions and seasonal infestations
Coffee industry in Laos
● 2008, Laos produced 31,125 tons of green coffee - less than 0.5% worldwide
production
BOLAVEN FARMS
● Say had bad memories of Laos but developed a strong need to contribute
● Realized that farmers lacked basic farming knowledge, crops were insufficient to feed
families. Lacked access to markets.
● Say realized they needed to build infrastructure for them to learn how to farm and to
monetize their crops. The idea of Bolaven Farms was born with the purpose of
alleviating coffee farmers' poverty
● Ensure higher profit, improve quality, provide land, educate with hands-on
experience
● Say figured managerial issues and helped develop the business model and
marketing strategies
● Suico shared his agribusiness knowledge and committed to Say
● Government granted them a lese of 67 hectares in Bolaven
● Officially launched in 2007
Bolaven's farm approach
 ● $4 million dollar investment meant to sustain operations for the first four years or until
the first coffee harvest
● 80% of future profit would be re-invested
Business with a cause
● Two main lines of business: coffee farming and distribution AND farmer education
and management training for young Laotians
● Livestock integrated to provide additional income
● 130 farmers lived on the farm for 2 years in exchange for work and benefits
● Training was taking 50% of the farm's manager time
A future for farmers
● Once farmers graduated from the program, they needed employment assurance.
Bolaven had 2 solutions:
● Give a loan of $5,000 to each graduate. Not a good idea, feared they would never
retrieve the money it investment.
● Contract farming: bolaven would own the land and hire farmers.
● This means that Bolaven needed 90 hectares of land to accommodate all graduating
families
Linking the supply chain
● Main idea was to remodel the traditional supply chain for coffee products.
● Bolaven intended to remove at least 4 intermediaries to increase the profit margins
paid to farmers
● Farm took responsibility for selling the green and roasted coffee to wholesalers and
retail customers alike.
● Bolaven wanted to sell at a premium and travelled to meet US people. US buyers
were not interested in buying an expensive product from an unknown producer and
Say was not willing to lower prices.
● People were reluctant to change their coffee suppliers and sales were way below
expected: Bolaven decided to play on the main advantage: its social dimension
If you cannot push, then pull
● Objective was to become a voice for the social cause and raise awareness about the
origin and quality of the coffee
● Set up social media to spread the word
● Journalist wrote about Say and Bolaven which led to collaborations and an increase
in sales. 10floor and 3200 employee company switched to Bolaven coffee.
Beyond the start-up
● Producing organic coffee was the easiest part
● Selling coffee and providing development prospects to graduating farmers was more
difficult than expected. He's aware of the weaknesses
● Original plan was to increase business production capacity by granting loans. In
reality, Bolaven had to reconsider the loans to farmers since they were unpractical
● Say had to face reality that the business model he had been implementing had not
been the most effective

Class notes:
● Bolaven Farms: a premium coffee
● Business with a social cause (help and integrate farmers in the company, give them
a loan to get training + land to produce high quality coffee beans)
 ● A vertical integrated firm
● Insert picture traditional coffee vs Bolaven farms
● Traditional coffee: roasters get most of the money
● Roaster market is concentrated (few players)
● Bolaven: do everything under the company (sell directly to the consumers)
○ Benefits of vertically integrated model
■ Control quality
■ More profits (get rid of intermediaries)
■ Vertical integration allows flexibility
■ Transaction costs?
■ Negotiation

● Retaining of upstream and downstream profit margins

● Improvement of supply chain coordination
● Lower uncertainty in management of upstream and downstream activities
● Reduction of transaction costs
● Economies (synergies) of combined operations
● Limitations of vertically integrated model
○ High-investment, capital-intensive solution
○ Higher administrative costs
○ Decrease in flexibility of organizational structure due to investments
○ The more things you do, the less specialized you are
○ Management problems (administrative costs - internal disagreement with
managers)
○ You do things with a higher cost (market for roasting, buying, etc)
○ More downstream players to keep happy (roasters, consumers, retailers, etc)
○ Issues can backfire (block supply chain)
● Challenges of vertical integration at Bolevan
○ Notes
chart

The less risky the demand is, the better the use of vertical integration (traditional
coffee)

Session 23
Diversification is driven by growth and risk reduction.
The shift from diversification to refocusing was an outcome of the growing commitment
of corporate managers to the goal of creating shareholder value.
Growth
● Without diversification, firms are prisoners to their industries.
● Diversification is very successful in generating revenue growth (especially when it is
achieved through acquisition)
● What are its consequences for profitability? If diversification efforts become a cash
drain for companies in declining industries, then diversification may well hasten
rather than stave off bankruptcy.

Risk reduction
The notion that risk spreading is a legitimate goal for the value-creating firm has become a
casualty of modern financial theory

● If cash flow of 2 different businesses are imperfectly correlated the bringing them
together under common ownership certainly reduces the variance of the combined
cash flow.
● Shareholders diversify risk by holding diversified portfolios. The only advantage is if
firms can diversify at a lower cost than individual investors.
● Acquiring firms incur the costs of using investment banks and legal advisors, they
must also pay an acquisition premium to gain control of an independent company

The capital asset pricing model (CAPM) = risk is relevant to determining the price of a
security is not the overall risk (variance) of the security's return but the systematic risk (part
of the variance that is correlated with overall stock market returns). This is measured by the
security's beta coefficient.

Corporate diversification does NOT reduce systematic risk. If two separate companies are
brought together under common ownership, and their individual cash flow streams are
unchanged, the beta coefficient of the combined company is simply the weighted average of
the beta coefficient of the constituent company.
So, bringing different businesses under common ownership does NOT create shareholder
value through risk reduction.
 ● Special issues arise with credit risk. Diversification that reduces cyclical fluctuations
in cash flows reduces the risk of default on the firm's debt. This may permit the firm
to carry a higher level of debt which can create shareholder value because of the tax
advantages of debt.
During the financial crisis, diversified companies benefitted from their ability to rely on
funding their own internally generated funds.

Value creation: Porter's "Essential Tests"

Superior profitability: industry attractiveness and competitive advantage. 3 tests to determine

if diversification will create shareholder value:
● The attractiveness test: the industries chosen for diversification must be structurally
attractive or capable of being attractive
● The cost-of-entry test: must not capitalize all future profits
● The better-off test: the new unit must gain competitive advantage from its link with
the corporation or vice versa

The attractiveness test & cost-of-entry test

● Industry attractiveness on its own is insufficient to justify diversifying into another
industry
● Cost of entry: recognizes that outsiders the cost of entry may counteract the
attractiveness of the industry
The better-off test:
● Addresses the issue of competitive advantage
● In most cases, attractiveness is rarely a source for diversification and cost-of entry
cancels out any advantages from attractiveness.
● Better-off can work in unattractive industries as well. By cost efficiency and
innovative differentiation, it created value.

Competitive advantage from diversification

Key linkages are those that permit the sharing of resources and capabilities across different
businesses.

Economies of scope

● Economies of scope exist when using a resource across multiple activities uses less
of that resource than when the activities are carried out independently.
● Economies of scale = increasing output of a single product
● Economies of scope = increasing output of multiple products

Tangible resources
● Ex. Distribution networks, information technology systems, sales force…
● Eliminate duplication (single facility can be shared among several businesses)
● The greater the fixed costs of these items, the greater the associated economies of
scope
Intangible resources
 ● Brands, corporate reputation, technology… offer economies of scope from the ability
to extend them to additional businesses at a low marginal cost.
● Exploiting a strong brand across additional products is called brand extension
● Ex. Starbucks --> extended its brand to packaged cold drinks, home espresso
machines, books, etc.

Organizational capabilities: can also be transferred within a diversified company

● General management capabilities, operation capabilities, technical capabilities.

● Supply-side economies of scope: cost savings from producers sharing resources and
capabilities across different businesses.

Economies from Internalizing Transactions

● Does a firm have to diversify across businesses to exploit economies of scope? No

● Economies of scope can be exploited by selling or licensing the use of the capability
to another company

Parenting advantage
● If a parent company is to own a particular business, not only must it be able to add
value to that business but also it should be capable of adding more value than any
potential parent. Otherwise, it would be better off selling the business to the company
that can add the most value.
● The concept of parenting value offers a different perspective on diversification from
Porter's better-off test.
● Parenting value comes from applying the management capabilities of the parent
company to a business
● Porter's better-off test focuses on the potential to share resources

The diversified firm as an internal market

● Presence of transaction costs makes diversification preferable to licensing contracts
● Economies of scope do not provide adequate rationale for diversification
● Diversified companies have 2 advantages
○ By maintaining a balanced portfolio of cash-generating and cash-using
business, they can avoid the costs of using external capital market, including
the margin between borrowing and lending rates and the heavy costs of
issuing new debt and equity
○ Better access to information on the financial prospects of the different
business
● Disadvantage: investment allocation within the company is a politicized process in
with strategic and financial considerations are subordinated to turf battles and ego
building.
● Private equity firms also operate efficient internal capital markets that avoid the
transaction costs of external capital markets. Create value by increasing financial
leverage, cost-cutting, incentivizing top management.
Internal labor markets
● Efficiencies arise from the ability of companies to transfer employees between their
divisions and to rely less on hiring/firing.
 ● The costs associated with hiring include advertising, time spent interviewing, cost of
head-hunting agencies.
● Graduating students compete intensely for entry-level positions in diversified
corporations in the belief that these can offer richer career development

Empirical research has 2 issues:

how do diversified firms perform relative to specialized firms?
Does related diversification outperform unrelated diversification?

Diversified and specialized firms

● No consistent evidence of a systematic relationship between diversification and
profitability.
● Conglomerate discount of the stock market undervaluing diversified firms relative to
specialized firms --> seems to be the result of measurement and sampling errors.
● Diversification impacts profitability
● Curvilinear relationship: diversification enhances profitability up to a point
Related and unrelated diversification
● At the beginning, diversification in related industries is more profitable than in
unrelated industries. Now, it is less apparent
● Some studies point to unrelated diversification outperforming related diversification.
● The relationship is complex, it is motivated by different goals, relationships,
businesses, effectiveness…
● The data we have is crude
● Financial performance is limited and inconsistent
● Performance depends on benefits AND management costs that diversification
imposes

Relatedness in diversification
● Relatedness refers to the potential for sharing and transferring resources and
capabilities between businesses, no unambiguous criteria to determine whether 2
industries are related.
● Relatedness at an operational level (manufacturing, marketing, distribution).
● Strategic-level linkages: ability to apply similar strategies, resource allocation
procedures, and control systems across the different business within the corporate
portfolio.

●
SESSION 24 - BECAUSE THERE IS NO PLANET B - ECOALF CASE

file:///Users/sarapascualg/Desktop/STR010114-U-ENG-WOD.pdf

Corporate social responsibility (CSR)

Firms that donate to social causes are rewarded by doing so by key stakeholders.

Shareholder view
● Social responsibility of a business is to increase profits
● Manager responsibility to act in the interest of shareholders
Stakeholder view
● A business is responsible to stakeholders of all sorts
● Stakeholders can be internal or external and can affect the organization's behavior
● Companies must be socially responsible (act ethically)

CSR
● The investment in CSR could be critical in face of negative shocks and events since
it can act as an airbag with reputational capital
● Approach slowly becoming outdated
● Not only should businesses use CSR but also combine aspects of a business with a
social mission since more people are becoming interested in organic produce, work
conditions and the environment
● Blend profitable and social objectives
● Social business hybrids: Benefit (B) corporations: business with high social impact
ECOALF has taken up this challenge
● Spanish company
● 100% recycled fabrics to produce high quality clothing
● Aims to merge profits with social impact

● Name: ecology + alfred

● Does NOT use new natural resources, everything is recyclable
● High quality garments:
○ Timeless (basic products)
○ Xtrem (sportive)
○ Uptown (fashionable)
 ● Had to convince consumers that recycled fashion was cool because consumers used
to think it would have poorer quality
● Distinguished itself by its manufacturing process
● Alliances and partnerships were key to grow
● Certified B-corporation (CBC) --> voluntarily chosen to be audited on social and
environmental performance by b-lab, a non-profit organization
● B-lab: helps entrepreneurs to get a recognized certificate based on a social mission
● Sales are currently booming + expanding geographically

SESSION 25 - Google is now Alphabet - but what's the corporate strategy?

● Google's CEO announced that Google Inc would become Alphabet Inc.
● Some thought it was positive (top management finally acceding to investors'
demands for greater transparency), others thought it was negative (prioritizing
reckless technology-based diversification over shareholder interests)
● Google acknowledged it was no longer a search company
● Google expanded its scope: streaming, downloading books, TV platform, fit health
tracking system, cloud storage, etc.
● Growing hardware products: smartphones, laptop, watches, home security, etc.
 ● Google's development projects: driverless cars, intelligent contact lenses, robotics,
etc.a
● Google is running in thousands of different directions… its identity has become
muddled
● Alphabet was created to offer greater independence to Google's different businesses
● Entry into so many markets brought Google into direct competition with more
companies: Apple in mobile platforms, Microsoft in browsers, facebook in social
media, etc.
● Federal Trade Commission found Google had used anticompetitive tactics and
abused its monopoly power.

The google search engine

● Larry Page + Sergey Brin developed a page-ranking algorithm that used backlink
data to measure the importance of any web page
● Called their search engine "Google"
● Attracted a rapidly growing following because of its superior page ranking and simple
design
● Google began selling advertisements (paid web links associated with search
keywords)
● By 2004, google became the US market leader in web search and became a public
company valued at 23 billion dollars

Organizing the world's information

● Google expanded beyond web search. Goal: organize the world's information and
make it universally accessible and useful
● Google was expanding its advertising-based revenue model (AdWords main
advertising revenue)

Android and mobile technology

● Google acquired android in 2005 and developed its software platform in 2007
● Android was a success in establishing market leadership. It prevented Apple from
dominating the smartphone and tablet market.

Chrome
● Generated huge publicity, but little surprise (2008)
● Google's goal for Chrome was an "InPrivate" protection mode that would delete
cookies, making it more difficult to track users' browsing habits. This limits Google's
ability to use such information to target advertising
Google in hardware
● Google acquired the struggling maker Motorola Mobility.
● Motorola's rich portfolio of patents relating to wireless communication gave Google a
bigger bargaining chip and help it counter legal challenges from competitors
● Allowed closer integration of hardware and software development
● In 2012, Google sold Motorola to Lenovo
● Google became a supplier of home security and home devices
Google +
● In march 2010, Facebook overtook Google as the most visited website, Google
became fully aware of the threat posed by Facebook to its online advertising revenue
● Google +, the company's fourth venture into online social networking
● Their level of engagement was low and users have declined since that peak
Google X
● Experimental projects (driverless cars, google glass, project loon) are part of google
x
● A corporate lab for developing experimental technologies
● Project wing (package delivery via air), makani power (electrical power through wind
turbines), porjects relating to Parkisons disease, etc.
Google's Management and Capabilities
● Hiring policy:
○ only hired the "brightest of the bright
○ Not confined to specific tasks
○ Talented people
● Dramatically flat, radically centralized organization:
○ Traditionally managed organizations that should be avoided: authority, rules,
formality, job roles
○ Easy access to key decisions
○ Minimize hierarchy
○ Rule of seven: each manager must have at least seven direct reports
● Small, self-managing teams:
○ Engineers in teams of 3 or 4
○ Team size limited to "two-pizza rule": team small enough to be fed by 2
pizzas
○ Teams appointed their own leaders and could switch teams without HR
department approval
● Environment that fosters creativity
○ Fostered interaction
○ 70-20-10 rule: google devoted 70% of its engineering resources to developing
the core business. 20% to extend that core into related areas and 10%
allocated to fringe ideas
○ Spend time working on projects of their own choosing
● Rapid, low-cost experimentation:
○ Just-try-it philosophy
Capacity for innovation and effective implementation of new initiatives
Financial powerhouse
Financial strength allowed Google to buy its way through acquisition

Alphabet: the new structure

● Google's businesses remained the same. The difference was in the structuring of the
company.
● Google was an integrated corporation with internal functional departments, product
groups and project teams
● Alphabet was a holding company with separate subsidiaries
● Greater independence for individual subsidiaries.
● Gains from greater autonomy and flexibility would be at the cost of less integration
Performance
● Revenues derived from advertising carried on its own websites
● As google diversified, so its non-advertising revenues grew
● Digital content revenue
● The shift of internet access to small-screen mobile devices which were less
conducive to presenting advertising and making online purchases
The future alphabet
● Changes for company identity and management
● Greater autonomy to develop and grow
● Limit the potential for exploiting synergies between different businesses
● Facilitate adding new business for future diversification
● No indication that financial data would be available for the individual lines of business
within google
● Google's dominant share of internet search and android's share of mobile operating
systems meant it as a monopoly
● Privacy concerns: scanning emails, use of cookies, depiction of private residences on
google street view, release of user data