Is Education to Blame for the STEM Skills Gap?

1Up until about 2014 virtually all of the research related to STEM skills shortages (especially) in technology companies was done quantitatively, with the instrument of choice the survey method and the respondents that were selected employers, businesses, technology firms. The research was conducted by government organizations, business associations and all of the large consulting firms. Pick any one of these studies and you will find consistent agreement in the methodology (quantitative), the instrument (survey) and the respondents chosen (employers). Some of the studies were conducted by Accenture (2012), Boston Consulting Group (2013), Congressional Budget Office (2011), Deloitte (2011), Manpower (2012), McKinsey (2012), President’s Council of Advisors on Science and Technology (2012), Price Waterhouse Coopers (2012), and the US Chamber of Commerce (2006). The conclusions were all the same, that is, that the education system was failing to provide STEM-qualified job applicants to industries that needed these skills in order to grow and innovate.

2Along with the survey conclusions, all of which contained high Cronbach’s (alpha) that measure internal consistency, recommendations for how to retool the education system to better inculcate STEM skills in students desiring to enter the workforce were suggested, explained and elaborated upon. Quantitative methods such as these are universally considered scientific; indeed evidence-based, positivist methodologies are only re-examined to the extent that the samples taken were (preferably) random, and sufficiently large enough to yield confidence to at least two standard deviations each side of the mean (95%). The researchers dutifully reported their survey results, along with every confirming statistic to support the validity of their conclusions. Consulting houses piled on to mimic their competitor studies and they all came to the same conclusions. Therein lies the rub.

3The bias lies not in the survey purpose, sample size, or design. The flaw is in the respondents chosen. Although it may seem intuitive to select employers as the respondents – after all, who better to judge the STEM skills it takes to be successful on the job? The qualitative studies that followed these methods have debunked, demystified and completely derailed the validity of the quantitative survey conclusions. Research question: What if employers had an incentive to blame education and the root cause of the problem was actually in the domain and under the control of the employers themselves? How would a researcher conduct a study to determine whether validity exists for such a theory and hypothesis?

4Dr. Peter Cappelli (2014) wrote his dissertation based upon all of these studies, plus a lot of tangential (tertiary) research, mixed in with data from government (Department of Labor for example), education, and industry. Rather than cross-sectional and quantitative, Dr. Cappelli approached the business problem with an historical lens to see how technology companies went from no STEM skills gap to an alleged STEM skills gap over a period of time (longitudinal). Qualitative researchers are criticized for lacking an evidence-based approach. Lacking experimental methodologies, randomized samples well-controlled and quantitative metrics, it is difficult for the interpretative researcher to garner the respect of colleagues in the peer-review process. Research methods have not matured yet to the point of comparability regarding credibility (internal validity), evidence, transferability (external validity), confirmability (objectivity) and reliability (dependability). Yet qualitative research methodologies in the interpretivist tradition, provide far more latitude when many nuanced exogenous variables, changing over the course of time, can bring a “best” persuasive description and explanation for what is going on with the business problem at hand based upon thorough exploratory research.

5The skills gaps surveys utilized skill classifications. Dr. Cappelli, in his research approach asked questions, developed strong inductive and logical support through case examples to answer these questions, then bundled the entire package to illustrate and portray an entirely different set of dynamics that accounted for the alleged STEM skills gaps. Coincident and following his initial research, others (Charette, 2013) have approached the problem with similar tools and questions, the outcome of which has buttressed Dr. Cappelli’s seminal work, laid the ground for new theory, and consequently and likely qualifies Dr. Cappelli’s work as seminal in nature. In simple terms Dr. Cappelli searched the literature and found that problems largely caused by employers themselves were at the root of the STEM skills gap.

Case after case, data upon data, and analysis over time yielded the following results, all well supported by the careful sifting and interpretation of the evidence:

  1. Employers are unwilling to pay market-clearing wages for STEM skilled workers.
  2. Employers have largely abandoned their internal company training programs that were aimed at preparing new recruits for success on the job.
  3. Employers have increased their hurdle rates in terms of inflated educational and experience requirements for jobs that used to be performed by less educated, less skilled workers.
  4. Employers have a vested interest, an incentive to continue their practices above and to push the responsibility and problem solving unto the educational system. For example, these employer claims have the effect of cajoling the government toward a policy of increasing the number of H1-B visas granted so lower compensated STEM skilled recruit can be found in other countries.

References

Accenture. 2012. “Solving the Skills Paradox: Seven Ways to Solve Your Critical Skills Gap.”

http://www.accenture.com/SiteCollectionDocuments/PDF/Accenture-Solving-the-

Skills-Paradox.pdf.

Boston Consulting Group. 2013. “The U.S. Skills Gap: Could it Threaten the U.S.

Manufacturing Renaissance?” https://www.bcgperspectives.com/content/articles/lean_manufacturing_us_skills_gap_co uld_threaten_manufacturing_renaissance/.

Cappelli, Peter. 1995. “Rethinking the ‘Skills Gap’.” California Management Review 37(4): 108- 124.
Cappelli, Peter. 1999. The New Deal at Work: Managing the Market-Driven Workplace. Boston: Harvard Business School Press.

Cappelli, Peter. 2003 “Will There Really Be a Labor Shortage?.”Organizational Dynamic 32(3): 221-233.

Cappelli, Peter. 2012. That Pesky Skill Shortage in Manufacturing. HR Executive. http://www.hreonline.com/HRE/view/story.jhtml?id=534354686.

Cappelli, P. (2014, August). Skill Gaps, Skill Shortages and Skill Mismatches: Evidence for the US. Retrieved from http://www.nber.org/papers/w20382

CBO. 2011. “CBO’s Labor Force Projections Through 2021.” Congressional Budget Office.

http://www.cbo.gov/sites/default/files/cbofiles/ftpdocs/120xx/doc12052/03-22- laborforceprojections.pdf.
CVTS 2013. Continuing Vocational Training Statistics. Brussels: European Commission. Http://epp.eurostat.ec.europa.eu/statistics_explained/index.php/Continuing_vocational_tr aining_statistics

Charette, R. N. (2013). The STEM crisis is a myth. IEEE Spectrum. Retrieved from http://www.k12accountability.org/resources/STEM-Education/The_STEM_Crisis_Is_a_Myth.pdf

Deloitte. 2011. “Boiling Point? The Skills Gap in U.S. Manufacturing.” Manufacturing Institute. http://www.themanufacturinginstitute.org/~/media/A07730B2A798437D98501E798C2E 13AA.ashx.

Manpower 2012. The Talent Shortage Survey. http://www.manpowergroup.us/campaigns/talent- shortage-2012/pdf/2012_Talent_Shortage_Survey_Results_US_FINALFINAL.pdf

McKinsey. 2012. “The World at Work: Jobs, Pay and Skills for 3.5 Billion People.” McKinsey Global Institute.

http://www.mckinsey.com/insights/employment_and_growth/the_world_at_work.

President’s Council of Advisors on Science and Technology. 2012.

http://www.whitehouse.gov/sites/default/files/microsites/ostp/pcast-engage-to-excel-final_2-25-12.pdf.

PWC. 2012. “Facing the Talent Challenge: Global CEO Survey.”

http://www.pwc.com/gx/en/ceosurvey/2012/key-findings/hr-talent-strategies.jhtml.

U.S. Chamber of Commerce. 2006. “The State of American Business 2006.” Washington D.C.

Employers Blame Educators for a Shortage of Skills Needed

6Peter Cappelli (2014) has been writing about a business dilemma that has faced US businesses at least since this generation and it goes like this: ‘The educational system is simply not teaching students the skills they will need to be successful in their careers.’ This management dilemma gives rise to a business problem of significant magnitude: ‘How do US businesses attract and retain skilled workers who possess the requisite education to assure a successful execution of company roles and responsibilities?’

1The implications of this business problem are far-reaching. If employers cannot acquire US skilled workers, they will need the government to expand the number of H1-B visas granted so that skills can be found within other countries. And the converse is this: for every person hired in the US from another country that is one less job available to be filled by an American. Further, whoever bears the greatest fault or responsibility for creating this problem that is where to examine the root cause that must be addressed and rectified. Is the root cause with employers, educators, the economy, rapid technological change or even perhaps all of these potentially exogenous variables, along with even more modifying variables?

2First, Dr. Cappelli frames the problem, no easy task given all of the opinions and “conventional wisdom” surrounding this topic. The claim of a “skills gap,” for example, is different than the claim of a “skills shortage.” There is also the claim, a dynamic one, that at any given time the supply of “skills” differs markedly from the demand for certain “skills.” He moves through his research problem conceptually. Historically employers have taken it upon themselves to train workers who show up with largely generalized educations. But more recently, that model has apparently changed, according to the research. All of these concepts must find their way into constructs with carefully crafted definitions. Just what, exactly, is a “skills gap?” And is the alleged “gap” valid or it non-existent if perhaps more reasonable job requirements were specified?

3Which is the best model to frame the problem? A supply-chain model would suit the economic construct that a given supply of labor at market-clearing wages would intersect a given demand for labor. Another quantitative model idea is to start with ‘job requirements’ as the exogenous variable. But what if modifying variables such as ‘inflated job requirements’ or ‘unrealistic and excessive posted requirements’ must be considered? If an honest (valid) set of job requirements could be posted and an employee matching those requirements could be found, then there is no problem.

4Another possible variable that must be considered is the notion of ‘market-clearing wages.’ Economic theory would tell us that at the right price, the right worker could be found and hired. There is some empirical evidence that employers tend to increase wages in times of labor market shortages and to lower wages in environments of plentiful workers (Brenčič, 2012).

5Dr. Cappelli’s research ultimately led him down a quantitative and a qualitative path. His mixed methods approach cited numerous government studies. One example is the Carnegie-funded National Center on Education and the Economy, America’s Choice: High Skills or Low Wages? (1990). Dr. Cappelli examined objective government reports, education reports, consulting studies, and reports from business associations, from which he built a formidably strong inductive and persuasive collection of evidence in support of the conclusion that the fault lies primarily at the doorstep of employers. Employers have significantly reduced training, according to the evidence. Employers are not providing market-clearing wages in many cases, the data suggests. Employers are seeking an inflated set of skills that are not necessarily correlated to success on the job. Indeed Dr. Cappelli concluded that applicants, if anything, are more educated, skilled and prepared than they have been historically.

The nature of the research fits into the category of “explanatory.” The work summarizes a daunting treasure trove of data, attempts to describe what the data says to the reader, then goes on to explain why these things are so and how they work this way. The theories that are built from the constructs meld ontology, particularly, with axiology. The dynamics of the business problem introduce another variable to be contended with; for example, companies used to train a lot more in the past than they do today. Another dynamic is wages have been suppressed since the beginning of the so-called “Great Depression” in 2008. These dynamics are ‘confounding’ variables in a quantitative, longitudinal study since apparently discrete model changes have been introduced over time.

Dr. Cappelli does not argue ‘cause and effect,’ neither has he developed a model purported to be predictive. But he does make a strong case, based upon the evidence, that the conventional wisdom, the paradigm that says education is to blame, is simply unsupportable. His conclusions are persuasive and compelling, that employers need to re-examine and buttress their training programs, re-tool their compensation levels to get closer to market, and re-think the skills they must have for the applicant to have a high probability of success on the job.

References

Brenčič, V. (2012). Wage posting: evidence from job ads. Canadian Journal of Economics/Revue canadienne d’économique, 45(4), 1529-1559.

Cappelli, P. (2014). Skill gaps, skill shortages and skill mismatches: evidence for the US (No. W20382). National Bureau of Economic Research.

Cooper, D. (2013). Business Research Methods [VitalSouce bookshelf version]. Retrieved from http://online.vitalsource.com/books/0073521507/id/P3-464

National Center on Education and the Economy. 1990. “America’s Choice: High Skills or Low Wages! The Report of the Commission on the Skills of the American Workforce.” Rochester, NY.

Big Four Audit Firms Under Pressure

 1

I have worked with the largest US audit firms for decades. Over time, as Sarbanes-Oxley and Dodd-Frank legislation took hold, along with the creation of the PCAOB, increased stress on audit firms has been the result. The Big Four are the most visible and prominent, and as such, appear to have had a challenging time adopting to the new post-Enron, post- Arthur Anderson normal.

Private company audit practice. Big Four audit firms have created a new niche they call, variously, “private company audit practice.” In fact, my recent experience at a large multinational company that was private, found that the Big Four auditors assigned to us had both private and public clients. The methodology and tests appeared no different than those applied at public companies, at least that was my assessment. Second tier firms, such as McGladrey, assigned only private company auditors to the engagement after we replaced our Big Four auditor.

Internal workload. I estimate that well over half of the work done internally by my finance team was in support of protecting the Big Four from liability. It used to be that the Management Representation Letter was sufficient. Now audit firms require extensive internal analyses, documented positions, and white papers that consume internal resources.

The Big Four appear to be getting more rigid and less flexible over time, as oversight and potential derogatory regulatory assessments are now more threatening than in the past. Several years ago I had an experience involving an accounting treatment dispute with a Big Four auditor that ultimately led to an extensive discussion since I felt quite strongly about our internal accounting treatment position. After numerous meetings we were told that we could not receive an “Except For,” relative to this issue, nor could we simply default to a “Qualified Opinion.” I was left with the impression that either the report would be issued clean or it simply would not get signed off. When I suggested perhaps I change our audit partners I was warned that even such a suggestion compromised “auditor independence” and could preclude getting to completion of a successful audit.

Auditing is a commodity. GAAS and GAAP are codified for all CPA’s. An audit is a highly structured project. You will not get a vastly superior audit by utilizing the Big Four compared to second tier audit firms, or even some smaller audit firms, though reference checking is strongly recommended.

But the Big Four are global. From a command and control standpoint, the Big Four do not impose decisions upon the other statutory audits for your company’s subsidiaries around the globe. Chartered accountants must make their own decisions, independently, else risk losing their certifications. On the other hand, affiliate audit structures, such as McGladrey, have vetted good audit firms, and consequently these firms will generally strive to keep their affiliate status by working hard on cooperation, communication and goodwill.

The Big Four can be pricey. A brand carries a premium. The infrastructure of a Big Four audit firm is extensive, including many more professions and functions in their firms than just auditors – lawyers are hired to protect the Big Four from liability for example.

The PCAOB has the Big Four on the defensive. In an October 8, 2014 Wall Street Journal article, auditors at the largest U.S. accounting firms failed to follow proper procedures in more than four in 10 audits, according to the latest inspections by the U.S. government’s audit watchdog. Another argument that you don’t necessarily get quality simply by paying more and buying the brand.

All Big Four and second tier audit firms have strengths and weaknesses without a doubt. But if you view your audit as a commodity, want to perhaps shop and reduce audit fees, and don’t feel compelled by stakeholders (banks, shareholders, board members and financial media) to go with a brand, give consideration to alternative audit firms that just might suit your company better.

Rodd Mann | DBA (candidate) | CPA | MBA | BBA | APICS CPIM | Six Sigma Hands on Champion | Author | Consultant

AOL: Three Decades of Turmoil

AOL: Three Decades of Turmoil2

Introduction

AOL has gone from fame and glory to hype to trying everything possible simply to survive. Started in 1983 as “Quantum Computer” (Agamawi, 2012), later renamed America Online, the company went public on the NASDAQ in 1992 and proceeded to grow 50,000% in just two year’s time. A genuine blue ocean – disruptive innovation story not unlike future iconoclasts Google, Apple and Tesla, in a 2007 USA Today survey AOL placed fourth behind the invention of the world-wide web, the creation of email, and the development of graphic user interfaces. AOL was also included in the “.com 25” list of influencers in Silicon Valley at the same time (“AOL – Wikipedia, the free encyclopedia,” n.d.).

For many years AOL was not considered a global company, indeed most of its focus, even at its peak, was within the United States. Growth came via membership fees to access an internet portal, enabling search, browsing, email and news. AOL developed partnerships with other media companies to enable their entre into the nascent digital/online mass media market. Two decades later, however, AOL (now Aol.) would describe itself as an American multinational company, developing brands and web sites, distributing digital content, and selling advertising. The pinnacle of AOL as measured by market capitalization came in January 2001, at the time of a controversial and historically the largest merger in corporate history, between AOL and Time Warner. At that point AOL had a market capitalization of $175 billion, higher than IBM, GM and Ford’s valuations combined.

In January 2001 AOL merged with what was widely considered a conservative media company called Time Warner, itself having been built largely through mergers and acquisitions. At the time of the merger, Time Warner was valued at $90 billion, compared to AOL’s $175 billion.5

Interestingly, Time Warner was generating revenue of $27 billion in revenue, was profitable, and had 70,000 employees, while AOL was generating revenue of $5 billion, lacked profitability and had only 15,000 employees, according to Agamawi (2002). AOL acquired Time Warner, recording the transaction as a “purchase” (Verrecchia, 2013). AOL equity was issued to Time Warner shareholders in the amount of $147 billion. Of this amount $127 billion, or 86% of the consideration provided, was recorded as “Goodwill.”

As a result of the dot-com bubble and in particular the high valuation attributable to AOL, much has been written critical of the valuation process as a whole, pointing to the AOL Time Warner merger as the poster child for a complete breakdown in the methodology and approach that should be practiced in order to get reasonable valuation assessments (Barbara & Pluchart, 2013). Other research has found that stock financed takeovers in general, common especially in technology mergers and acquisitions, generally result in significantly inflated assessments of purchase prices (Eckbo, Makaew & Thorburn, 2013).

Strategy

From the AOL side was needed a durable and profitable company with hard assets that was run well, in order to tackle the problem of their core business which was experiencing a significant decline in “dial up” service demand. From the Time Warner side, management believed they could benefit from access to the digital era through integration with the largest Internet media firm at the time. Both lacked key assets to prosecute their strategies, but believed the merger would solve for that problem. The combination was meant to “tie the knot” between old economy infrastructure and the open content of the new media business and economy (“Analysis of the AOL and Time Warner Merger,” n.d.). The long-term strategy for the merger was to provide users with cable broadband, as well as a wide range of other related broadband technologies. The merger was considered at the time to be the “Deal of the Century,” and advertised as AOL’s “rebranding.” It later would be called the worst deal ever by the erstwhile CEO of Time Warner.

Such was the strategy backdrop, but the global telecommunications industry was not cooperating. Blue ocean threats began to buffet the combined business almost from the outset. One upstart in particular, Google, would go on to all but monopolize user searches and advertising revenue.

Organization culture and leadership

The Time Warner and the AOL cultures have been characterized as “diametrically opposed” (“Analysis of the AOL and Time Warner Merger,” n.d.), their management styles sharply conflicting. Time Warner’s executive leaders were outnumbered by the senior executives from AOL who were young, precocious and seemed to be in a hurry at all times. The disproportionately higher equity in the new company went to AOL shareholders. Studies have shown that when mergers and acquisitions fail, they do so as a result of the poor handling of “change management” (Kansal & Chandani, 2014). Recommendations that researchers agree will help merge different corporate cultures, such as deep cultural learning at the front end (Lee Marks, Mirvis & Ashkenas, 2014), can help reduce future conflict and employee turnover. There is no mention in the literature that anything beyond perfunctory and superficial attention was paid to this important aspect during the AOL Time Warner merger.

One employee of the merged company described having three CEO’s during her AOL Time Warner tenure, each with his own vision, mission and 100-day plan. The “top team” du jour changed often, what was on top today suddenly lost status and a new team was highly esteemed. Her only certainty was that change would continue, change would be a constant, referring to “repetitive change syndrome,” the manifestation of which is “initiative overload” (Abrahamson, 2013).

From the beginning AOL began to show cracks in its business model and reputation, creating further disrespect within the Time Warner leadership ranks. Yamanoi and Sayama (2013) found that cultural integration predicated upon two very different central individuals, in this case Steve Case and Jerry Levin, can result in significantly higher individual turnover, organizational communication breakdowns, and interpersonal conflicts.

As a result of a government inspection, AOL was accused of overstating their 2000-2001 revenue by as much as $1 billion (“Complaint for violation of the securities act of 1933,” 2003) though the case was later settled at a fraction of that amount. The stress on the two Chief Executive Officers, Jerry Levin of Time Warner, and Steve Case of AOL, led both to leave the merged company in December 2001 and early 2003 respectively. Since that time the firm struggled to reduce its debt by selling assets including sports and cable television channels and a book publishing division. A decade later in an interview on CNBC, Jerry Levin admitted he made the “worst deal in a century,” and apologized for the results (Harrington, 2013).4

Competitive environment and market conditions

Global consolidation and the entry of foreign interlopers such as Deutsche Telecom (Germany), as well as Nippon Telephone & Telegraph (Japan) altered the entire industry. Yahoo and MSN began moving well beyond fast follower status into broadband, significantly increasing data transfer speeds, as well as creating unique and appealing home pages, email, news, search and browsing capabilities. The first movers were the telephone companies, all having tremendous in-place infrastructure that AOL initially had sorely lacked. DSL broadband brought to the telephone companies a blue ocean business, leaving “dial-up” and voice telephone calls in the rear-view mirror, and moving huge amounts of digital information through their networks to their installed base of customers.

Blue Ocean Google joined the contest for media content market share, along with MySpace, Fox Interactive Media and Facebook, each with a different primary focus but having in common both “content” and “delivery,” the revenue and profitability coming largely from online advertising. Broadband operators were competing with AOL for Internet subscribers. Internet magazines and new websites were striving with Time Warner’s online magazines such as Fortune and People (“Analysis of the AOL and Time Warner Merger,” n.d.). To make matters even worse, piracy of Time Warner video games, television and films was cannibalizing revenue and profits.

Current growth and new business strategies

On May 7, 2014 AOL announced disappointing financial results, profit slid 64% (Kaufman, 2014). AOL had been spun off as a separate public company (IPO) in 2009 (“AOL,” n.d.). The years from the merger to the spinoff were mostly disappointing. Since most of the consideration had come from an overvalued AOL, much of the strength of the leadership team relied upon AOL. Cultures were markedly different between the two firms. AOL executives, especially AOL CEO Steve Case, had been described as aggressive, wobbly, and moving very quickly (“Analysis of the AOL and Time Warner Merger,” n.d.), whereas Time Warner culture was more refined and cautious.

Tim Armstrong, AOL’s new CEO ever since the IPO, declared the new strategy for AOL would be to lead mechanized advertising sales (Kaufman, 2014). This new strategy included the purchase of Convertro for $100 million, basically an engine for analyzing the purchasing habits of users. In 2013 AOL bought Adap.tv, a company that had developed video advertising.   While this new strategy, along with growth through acquisitions, AOL was finally poised to increase revenue, though profitability would lag for some time. The competition was fierce, and companies such as Google and Facebook dominated the online advertising business by an order of magnitude. Mr. Armstrong said he would continue to the growth strategy, via more acquisitions, especially in the video space. The AOL market capitalization as of September 6, 2014 was approximately $3.8 billion, compared to the valuation of $175 at the time of the AOL merger 13 years ago, a decline of 98%.

Primary business model

Originally, prior to the ill-fated merger with Time Warner, AOL was known for its software suite, or browser, allowing customers to utilize AOL as an internet launching pad into email, search, news and other digital content. At AOL’s peak, membership topped at approximately 126 million worldwide (“AOL – Wikipedia, the free encyclopedia,” n.d.). Subscriptions averaged 25 months, and each subscription generated $350 in revenue for AOL. AOL operated a chat room that allowed groups of people having similar interests to meet online. “Private rooms” held up to 23 people, “conference rooms” and “auditoriums” more. AOL developed dozens of partnerships to increase their online offerings, including the American Federation of Teachers, Discovery Networks National Geographic, Highlights for Kids and many more (“AOL – Wikipedia, the free encyclopedia,” n.d.).

In 1996 AOL changed their hourly fee for chat rooms to a flat $20 per month. This led to a flood of demand that crippled the fledgling company’s computer infrastructure and network, resulting in annoying busy signals. The brand began to suffer and Steve Case himself spoke in a commercial asking for patience as “AOL was working day and night to fix the problems” (“AOL – Wikipedia, the free encyclopedia,” n.d.).

At the time of the merger in 2001 AOL, along with it Time Warner acquisition, sought to create an integrated communication and media company (Agamawi, 2012). Between the time of the merger and up until AOL was spun off as a separate public company May 28, 2009, AOL transitioned into a new phase of “re-branding,” while also experiencing a general decline in its business.

AOL added personalized greetings in 2004 as users accessed basic functions; one year later developed the capability to broadcast live concerts. They launched an anti-virus, anti-spyware, proprietary firewall bundle with McAfee and shortly thereafter began selling diagnostic tools to check security status. AOL began to offer free email accounts in 2006 (80% of members converted within a few months), and embarked on a cost reduction program.

They added many content-rich services such as news, videos and remote backup services. AOL transitioned out of the $26 per month dial up access to $10 per month broadband unlimited access. Beginning in 2007 they began a campaign to acquire several advertising dot-coms. But the decline continued, largely a result of fierce competition from Google, MSN and Yahoo, and near the end of 2007 AOL had a 40% layoff across the board. At the time of the layoff AOL’s subscriber base had diminished to 10 million, almost even with Yahoo and Comcast.

Tim Armstrong, fthe ormer Google executive, was named Chief Executive Officer in March 2009, and AOL was spun off as a separate public company. The AOL name and brand changed to Aol and commissioned artists superimposed the new log on canvas (“AOL – Wikipedia, the free encyclopedia,” n.d.). Mr. Armstrong then embarked on a series of acquisitions including Patch Media (community-specific news) and The Huffington Post. Partnerships with Yahoo and Microsoft were initiated so that each partner could sell the others’ inventory and the group could better compete with Google. A big advertising push was begun in 2012.

In February 2013, AOL announced quarterly revenue of almost $600 million; the first time revenue had grown in 8 years. Shortly after the quarterly earnings announcement more and significant layoffs began and Tim Armstrong’s Patch Media was spun off.

SWOT, Ability to leverage and execute growth strategies and resources

The AOL brand name represented, certainly for many years, a strong asset. The post merger management team, however, failed to execute its strategy and as was pointed out, the two key leaders left the company only a couple years after the merger. According to Friesner (2014), Time Warner remains a dominant media company throughout the world with 23 magazines and 50 websites. But what can be said about AOL in 2014?

Apart from an increase in revenue announced May 7, 2014, along with a decrease in profits of 64%, AOL’s revenues are in a slump. The decline is largely the result of a decrease in the number of domestic AOL brand subscriber’s along with the sale of their German access business in 2008.

The joint affiliations and partnerships AOL had formed held significant promise if leveraged and executed well. The multi-year alliance with Sesame Workshop, for example, allowed AOL to exclusively distribution the Sesame Street library beginning in late 2009.

The difficulty, or threat comes from firms such as Google, Yahoo and Microsoft’s fierce competition, along with Facebook and Fox Interactive Media. Broadband access providers also continue look to take market share from AOL.

Thompson (2014) recommends principal components of the Strategy Execution Process. Below are brief assessments of AOL’s strategy execution process:

  • Attract and retain employees with proven capability, and at the top proven execution skills. AOL has blundered at times when it comes to human resources management. On Friday, August 8, 2013, during a widely attended company conference call, CEO Tim Armstrong, becoming increasingly annoyed as one of his employees (Abel Lenz, formerly from Patch) walked about the conference room snapping photos, finally said, “Abel, put that camera down. You’re fired. Out.” The imbroglio went viral and Mr. Armstrong was compelled to release an “explanatory memo,” though he never hired back Mr. Lenz (Morrison, 2013). In addition, according to the New York Times (February 14, 2014), Mr. Armstrong changed the 401(k) company matching benefits to be paid lump sum at year-end, rather than evenly throughout the year, attributing the change in part to higher medical costs specifically resulting from the “distressed babies” in the families of two AOL employees. Mr. Armstrong later, under intense public pressure, rescinded the change (Kaufman, 2014). These are not the hallmarks of a compassionate leader but instead create insecurity and consternation throughout the organization.
  • The need to build capability that will enable strategy execution to be successful. In the 2010 to 2014 period, through a variety of acquisitions, AOL became more narrowly focused on digital online advertising targeting TV (video) market share, and appears to be poised to grow both revenue and profitability barring increasingly strong competition, especially from Google.
  • The organization must be structured consistent with the AOL strategy. Given CEO Tim Armstrong’s mercurial management style, along with recently laying off half of the employees from the Patch acquisition (Mr. Armstrong had earlier championed the Patch acquisition), along with a raft of new acquisitions to support the new digital online advertising strategy, it is reasonable to assume more people will need to be hired and that likely more will be fired in order to achieve organizational alignment with the new strategy.
  • The allocation of resources must support the execution of the strategy. The new acquisitions must by optimized and synergized into AOL circa 2009 and going forward. AOL is growing again, about 12% per quarter, and profitable (“Business, Investments, Stocks & Quotes – Yahoo Finance,” n.d.). Its balance sheet is in good shape with equity three time total liabilities, a current ratio of 1.2, and upwards of $300 million of cash flow per year. Barring any unforeseen large capital investments required in order to implement their new digital advertising platform, AOL appears well-resourced to execute its nascent strategy. Much will depend upon the retention of key managers in the Adap.tv and other future acquisitions, along with a productive partnership with AOL’s new alliances.
  • New policies and procedures (P&P) will have to be developed and digested given several disparate business recently coming together. Whenever you have new businesses you have new cultures. Management must integrate best practices from their new businesses and from the industry and do this without incurring the time delay and costs of change resistance and employee turnover. Technology companies are notorious for having weak, superficial P&P, knowing that change happens so quickly they cannot afford to be bound by archaic P&P that no longer suits their new business model.
  • Incentive awards are tied to a combination of adjusted net income along with the achievement of earlier established objectives (“Annual Incentive Plan for Executive Officers, by AOL Inc.,” 2014, p. 3). This is a somewhat common management incentive plan found in technology companies. Cash is used for acquisitions (as is stock), compensation and incentive bonuses; AOL does not pay its shareholders a dividend.
  • Instilling the corporate culture that it will take to compete with Google in a space relatively new for AOL, Mr. Armstrong will need to determine how he organizes his managers, what priorities are at the top of his list, what his objectives and strategies are, and he must ask each manager to come up with a list of their own tactical plans to meet the objectives they commit to deliver.
  • To take the strategy forward will necessitate aggressive competitive behavior, such as undercutting the ad pricing television offers, as well as connecting with as many potential customers as possible. The CEO must meet directly with the biggest of the potential customers to win them over to AOL.

Strategy map

 Slide11

Future opportunities for innovation

AOL is seeking to pursue a strategy to take more advertising market share from television (“AOL CEO Leads Charge to Pry Ad Dollars From TV,” 2013). So called “programmatic” ad buying, or essentially ads via automated exchanges. AOL signed new deals with several ad agencies that have made commitments to purchase online AOL-based ads beginning in 2014. This latest move on the part of AOL is part of a larger strategy to capture television dollars for online video and other platforms. AOL’s 2014 acquisition of Adap.tv for over $400 million was an integral part of this new strategy according to AOL’s CEO. The programmatic ad buying industry is expected to be perhaps as large as $100 billion in just a few years’ time. Advertisers can target the demographic they seek, pull together an audience online and across a variety of sites, and advertisers will have better, more targeted advertisements via the web versus TV.

Additionally, AOL allows advertisers to purchase ads using the same formula as the television industry to determine pricing. To make this work AOL announced in 2012 a partnership with Nielsen to determine overnight ratings that would allow comparison of AOL videos to TV. Last year digital video advertising grew 46% compared to only 6% with TV, though the absolute dollars are only $3 billion in digital video advertising compared to TV’s almost $65 billion.

AOL’s dominant competition is Google YouTube, with over 70 million viewers. At this stage AOL can adopt a fast-follower strategy since they are ranked only #6. Huffington Post, the AOL acquisition, can certainly help leverage this endeavor. Digital video advertising remains a nascent industry, a potential blue ocean that traditional television advertisers will find difficult to overcome. If AOL can focus on this niche, and compete effectively against a blue ocean Google YouTube, they stand to emerge a survivor, albeit a very small version of the size, reputation and market capitalization they held thirty years ago.

Conclusion

During the heady days of the dot-com bubble AOL was viewed as new media and Time Warner old media. A merger that gave 55% of the deal to AOL shareholders, including important operating management roles, began to almost immediately unravel. Over the course of the next several years Time Warner reasserted its dominant status, with its higher revenue and profitability, and spun off AOL in 2009 as a public company. The merger started as acquirer AOL purchased and acquired Time Warner. The reality of the business operations, and later the AOL public company spinoff, indicate Time Warner’s management turned the tables on the original deal and established and supplanted their goals and strategy in the face of inexperienced and impetuous young entrepreneurs. Not until the 2009 IPO and the hiring of Tim Armstrong as CEO did AOL get the chance to develop their own corporate vision and corporate strategy they have been pursuing for the past five years.

AOL was for a very long time in a state of virtually continuous decline, struggling to find a viable strategy through numerous acquisitions followed by almost as many divestitures. With Tim Armstrong at the helm, though still surprising Wall Street with unacceptable profitability and uneven revenue growth, it appears that AOL is beginning to find its footing. In the 2011 to 2013 timeframe AOL is far humbler than its beginnings. AOL generates about $2.5 billion in revenue and has a market capitalization of slightly under $4 billion. Return on assets is about 5 ½% and return on equity 3 ¼% (“Business, Investments, Stocks & Quotes – Yahoo Finance,” n.d.). With a newer, narrower focus and strategy toward digital advertising revenue AOL stands to remain viable. But with competitors like Google, Google YouTube and Facebook, the battle is far from over. The CEO’s challenges include building a secure and aligned team in the face of many acquisitions, some (Patch) ill-fated, overcoming and improving upon poor human resource management in order to attract and retain talented managers, and convincing TV advertisers AOL’s programmatic advertising on a digital platform is the new blue ocean strategy that they should embrace.

r_mannRodd Mann | BBA | MBA | DBA (candidate) | APICS CPIM | Six Sigma Hands-on-Champion

 

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AOL CEO Leads Charge to Pry Ad Dollars From TV. (2013, September 24). Wall Street Journal. Retrieved from http://online.wsj.com/news/articles/SB10001424052702303983904579093651838913202

AOL – Wikipedia, the free encyclopedia. (n.d.). Retrieved September 8, 2014, from http://en.wikipedia.org/wiki/AOL

Barbara, L., & Pluchart, J. J. (2013). Business Modelling with UML: the Corporate Valuation Process. World, 3(1).

Complaint for violation of the securities act of 1933. (2003). Retrieved from Securities and Exchange Commission website: http://www.ucop.edu/news/aoltw_complaint.pdf

Eckbo, B. E., Makaew, T., & Thorburn, K. S. (2013). Are stock-financed takeovers opportunistic?

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Harrington, R. W. (2013). AOL & Time Warner: How the “Deal of a Century” Was Over in a Decade (Doctoral dissertation, Drexel University).

Kansal, S., & Chandani, A. (2014). Effective Management of Change During Merger and Acquisition. Procedia Economics and Finance, 11, 208-217.

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Disney: A Wonderful World

1The “Wonderful World of Disney,” has been much written about, most people can reflect on the impact some product or aspect of Disney had on their childhood. “Make a Wish Foundation” seeks to honor a dying child’s final request by raising funds that will allow that child to visit Disneyland (Wasko, 2013). Behind this global corporation are strategies and value constraints that have generally worked well to increase revenue and profitability, though not always, especially so in the case of some of the overseas theme parks projects.

When Disney invests in theme parks, for example, it learns not only from what was done well, but what could have been done better. When Disney considered opening a new theme park outside Paris, it was determined to include within the park hotels – something that was neglected in the 1983 Tokyo theme park, much to the chagrin of management as they watched hotel entrepreneurs capitalizing on their newly built hotels near the Disney Tokyo theme park.

Less than 10 years after Tokyo, Disney opened “Euro Disney” outside Paris. Disney bought farmland for the new theme park and that is where the warning signs began. Effigies of Mickey and Minnie were hung on fence posts, indeed the French people with their unique culture were not at all enamored with this incursion, this interloper bearing contemporary Western entertainment that the French neither understood nor cared much for (Walker, Laurion, & Resler, 2013). Disney carefully crafted their global strategy, protecting corporate brand and values and essentially exporting the Disney theme park in situ without regard nor consideration for differing cultures, tastes and preferences.

Europeans found the Euro Disney food and hotels far too expensive. Euro Disney had to discontinue offering breakfasts because Europeans generally do not eat breakfast. The financial losses mounted to such an alarming level that the president was forced to structure a financial rescue plan to save the theme park from closing. The marketing plan, along with new strategy and tactics were developed to try to put things right. (Amine, 2011). The new strategy transitioned from global to transnational in terms of both “think” and “act” in accordance with the culture of the local market, not just the French, but Pan-European (Thompson, 2014). Disney remains intent on bringing their global brand to the entire world, but now makes room for local twists. Today, at France’s Epcot Center you can find not only French cuisine, but fine wines as well (“France Epcot,” n.d.), something that perhaps would cause Walt Disney to roll over in his grave.

Disney carefully chooses businesses to enter based upon their ability to cross-leverage each business in such a way that all or most of the Disney businesses will derive accretive benefit from each new project or acquisition. Disney invests in its own projects, parks and resorts for example, sometimes taking on other investment partners as is the case with their current project: Disney Shanghai (Disney is a 43% investor). Disney will acquire businesses to expand it global brand reach and footprint. An example of a recent acquisition was October 2012 when Disney acquired Lucasfilm, for which Disney paid $4 billion, half in cash, and half in stock. The “Star Wars” franchise alone was a top children’s brand that had generated over $4 billion in revenue for Lucasfilm (Mucha, 2012).

An alliance or partnership is a relationship between two or more entities to pursue a set of mutually agreed upon goals or to fulfill a critical business need while remaining independent organizations. Disney’s business growth is a function of organic growth of sustaining businesses (Disney’s theme parks in the United States), new projects (theme parks in other countries), acquisitions (studios such as Pixar and Lucasfilm) and many and various types of partnerships and alliances.

Hewlett-Packard and Disney maintain their long-standing alliance, beginning in 1938, when Disney bought several oscillators for their Fantasia sound design from HP founders Hewlett and Packard. Later, when Disney sought to develop a virtual attraction they referred to as “Mission: SPACE,” the so-called Disney Imagineers, along with the HP engineers, utilized HP architecture and HP computers to design Disney’s most advanced attraction (Je’ Czaja, n.d.).

While research has generally shown that alliances and partnerships often experience high failure rates (Kumar, 2012), Disney has been careful to keep these ventures within the industries they already perform well in, and to ensure the relationship will add to their competitive strength and market position overall.

Disney begins where its brand is most powerful – products for children. The five main Disney business groups all benefit from child-oriented investments:

  1. Studio entertainment (Pixar – Toy Story)
  2. Disney Consumer Products (Disney Stores – Woody)
  3. Walt Disney Parks and Resorts (Employee dressed as Woody, and Woody in various sizes in the park and resort stores)
  4. Disney Media Networks (Comic books featuring Woody via Marvel acquisition)
  5. Disney Interactive (LEGO is a licensee and has a Toy Story line of toys)

Disney cruise lines have imagery and characters from Toy Story’s Woody on their ships. Computer software, DVD’s, movie sequels, all leverage Toy Story and Woody. No Disney SBU is left out of the opportunity (Mashable, 2011).

The author examined the Disney “Nine-Cell Matrix,” (Thomson, 2014) as the various industries might be scored in terms of attractiveness and competitive strength/market position. The results show that the strongest Disney businesses are the studios and the theme parks / resorts. They generate by far the greatest amount of revenue and earnings, while some of the other businesses, while tangentially related and certainly can leverage the brand and the target markets (moms/children), they are either highly competitive (ESPN, media), or stray somewhat from core Disney competencies (Interactive, Playdom).

 

Table 1 Disney Nine-Cell Matrix (Thomson, 2014)

Slide1

 

James Rasulo, the Chief Financial Officer of Disney for the past five years discussed Disney’s global growth strategy, Disney brands, and their content pipeline (May, 2014). Disney has grown from $1.4 billion in revenue in 1985 to $50 billion by 2014. Today Disney is a global company in television (e.g. ESPN), movies, theme parks and more. The Chief Executive Officer, Bob Iger, charts strategy with his leadership team consisting of 12 direct reports.

Mr. Iger’s strategy for picking films is done through top leadership decision-making. Following the film picks, the studios pick up the projects (Marvell, Disney Studio, Pixar) and determine the creative side, the content, when to release, how much to spend, as well as the particulars involved in promotion, distribution and timing.

Two major tenets of the Disney strategy emerge. The first, “authenticity,” and the second, “corporate citizenship.” Authenticity refers to the deeply held family values that were in place when Walt and Roy Disney in Los Angeles first started the company in 1923. More than 90 years later the firm emphasizes that films must be “aspirational.” Disney won’t make films that are violent, dark, disturbing or at odds with their core value.

As a corporate citizen, Disney is concerned about the emissions from their cruise ships. They are deeply involved in the labor standards and environmental footprint in all of their locations around the world. Disney recognizes that their core customers are mothers and children. To help with childhood obesity, Disney requires 85% of their food products advertised must be healthy (the remaining 15% are for snacks – birthday parties and celebrations). This decision was a costly one for Disney, but their values required it nonetheless.

The basic capital deployment and allocation strategy is as follows:

  • 60% Business and content growth
  • 20% Stock buybacks and dividends
  • 20% Acquisitions

The company extols creativity and technology through the creation and distribution of their products. Acquisitions have included Pixar, Lucas films and smaller companies in places like India. Disney is not interested in hoarding their cash; they prefer instead to utilize excess cash for stock buybacks and the payment of dividends to shareholders.

After more than a dozen new theme parks, Disney is adept at forecasting how much a new park will cost and when it will be completed. The challenge and the focus of financial resources go instead toward opening day. Did the theme park live up to pro-forma expectations? Shanghai is the latest theme park under construction (Barlas, 2014), and is on budget, and on time. Disney has committed $5 billion for its 43% ownership in the Shanghai theme park.

Since Disney utilizes partnerships as it grows, Netflix is one of the more recent. The reason for the Netflix investment (Pomerantz, 2012) is that the total available market for content and libraries could be greatly expanded. Acquisitions such as the Marvell (Bedigian, 2012) investment leverage one of two possible integration strategies. Disney studies the user interface to determine which strategy is best, whether the interface is primarily employees, or primarily customers. Disney’s preference is to leave the new acquisition intact, don’t suffocate the business from Disney corporate, simply leave it in place as is (Latif, Ilyas, Saeed, et al, 2014).

Contrast this first strategy to acquisitions that are best leveraged through the Disney brand. Cable, movie business exhibitors, and licensing, are all advantaged, both in terms of scale and in terms of the capital financing markets by integration into the global Disney brand and corporation.

Below is a list of Disney’s businesses (“Columbia Journalism Review,” 2013). There is one question that immediately pops out of such a long list. How does Disney manage all of its acquisitions, alliances, joint ventures, stock investments and partnerships? Though research has shown that over 50% of weaker “alliances” and “joint ventures” fail (Kaplan, Norton, & Rugelsjoen, 2010), the large majority of Disney business investments and partnerships have been highly successful:

  • Film and Theater
  • Disneynature
  • Disney Theatrical Productions
  • Touchstone Pictures
  • Marvel Entertainment
  • LucasFilm
  • Walt Disney Pictures
  • DisneyToon Studios
  • Walt Disney Animation Studios
  • Pixar Animation Studios
  • Walt Disney Studios Motion Pictures International (Distribution)
  • Walt Disney Studios Home Entertainment
  • Music
  • Disney Music Group
  • Hollywood Records
  • Walt Disney Records
  • Television
  • ABC-Owned Television Stations Group
  • WLS (Chicago, IL)
  • KFSN (Fresno, CA)
  • KTRK (Houston, TX)
  • KABC (Los Angeles, CA)
  • WABC (New York, NY)
  • WPVI (Philadelphia, PA)
  • WTVD (Raleigh-Durham, NC)
  • KGO (San Francisco, CA)
  • Disney ABC Television Group
  • ABC Television Network (ABC Daytime, ABC Entertainment, and ABC News)
  • ABC Family
  • ABC Studios
  • A&E Television Networks (50%)
  • The Biography Channel (50%)
  • Disney ABC Domestic Television
  • Disney ABC International Television
  • Disney-ABC-ESPN Television
  • Disney Channel Worldwide (Disney XD, Playhouse Disney, Jetix, and ABC Kids)
  • History (formerly The History Channel) (50%)
  • H2 (50%)
  • Hungama
  • Lifetime Entertainment Services (50%)
  • SOAPnet
  • Disney Junior (Flanders and the Netherlands)
  • ESPN, Inc. (80%)
  • ESPN (and ESPN.com and ESPN360.com)
  • ESPN2
  • ESPN 3D
  • ESPN Classic
  • ESPN Deportes
  • ESPNEWS
  • ESPNU
  • ESPN Enterprises
  • ESPN Interactive
  • ESPN International
  • ESPN Mobile Properties
  • ESPN on Demand
  • ESPN PPV
  • ESPN Regional Television
  • Longhorn Network
  • Radio
  • WDDY AM (Albany, NY)
  • WDWD AM (Atlanta, GA)
  • WMKI AM (Boston, MA)
  • WGFY AM (Charlotte, NC)
  • WRDZ AM (Chicago, IL)
  • WWMK AM (Cleveland, OH)
  • KMKI AM (Dallas-Fort Worth, TX)
  • KDDZ AM (Denver, CO)
  • WFDF AM (Detroit, MI)
  • KMIC AM (Houston, TX)
  • WRDZ FM (Indianapolis, IN)
  • KPHN AM (Kansas City, MO)
  • KDIS FM (Little Rock, AR)
  • KDIS AM (Los Angeles, CA)
  • WMYM AM (Miami, FL)
  • WKSH AM (Milwaukee, WI)
  • KDIZ AM (Minneapolis, MN)
  • WQEW AM (New York, NY)
  • WDYZ AM (Orlando, FL)
  • WWJZ AM (Philadelphia, PA)
  • KMIK AM (Phoenix, AZ)
  • KDZR AM (Portland, OR)
  • WDZY AM (Richmond, VA)
  • KIID AM (Sacramento, CA)
  • KWDZ AM (Salt Lake City, UT)
  • KRDY AM (San Antonio, TX)
  • KMKY AM (San Francisco, CA)
  • KKDZ AM (Seattle, WA)
  • WSDZ AM (St. Louis, MO)
  • WWMI AM (Tampa, FL)
  • ESPN Radio
  • WMVP (Chicago, IL)
  • KESN (Dallas-Fort Worth, TX)
  • KSPN (Los Angeles, CA)
  • WEPN (New York, NY)
  • WDDZ AM (Pittsburgh, PA)
  • Publishing
  • Hyperion Books
  • ABC Daytime Press
  • Hyperion
  • Jump At The Sun
  • Mirimax Books
  • Voice
  • Disney Publishing Worldwide
  • Disney Digital Books
  • Disney English
  • Disney Global Book Group
  • Global Children’s Magazines
  • S. Magazines
  • ESPN The Magazine (50% with Hearst)
  • ESPN Books
  • Parks and Resorts
  • Adventures by Disney
  • Disney Cruise Line
  • Disneyland Resort
  • Disneyland Resort Paris (51%)
  • Disney Vacation Club
  • Hong Kong Disneyland (48%)
  • Shanghai Disney Resort (43%)
  • Tokyo Disney Resort (Owned and operated the Oriental Land Company)
  • Walt Disney Imagineering
  • Walt Disney World Resort
  • Other
  • The Baby Einstein Company
  • Club Penguin
  • Disney Consumer Products
  • The Disney Store
  • Disney Apparel
  • Disney Accessories & Footwear
  • Disney Fashion & Home
  • Disney Food
  • Disney Health & Beauty
  • Disney Stationery
  • Disney Toys
  • Disney Interactive Media Group
  • Disney Interactive Studios
  • Disney Online (Disney.com)
  • Disney Online Studios
  • Disney Mobile
  • El Capitan Theatre
  • The Muppets Studio
  • Playdom
  • Rocket Pack
  • UTV Software Communications

 

The basic business management model has remained the same for 75 years, since Walt Disney inculcated values that were referred to as “The Disney Way.” Walt Disney firmly believed that these values could underpin and drive the success of any business, not just the entertainment business. None of the films, products or services could be attributed to amazingly good fortune; all were carefully considered innovation and creativity, with a dogged adherence to a set of beliefs that survived for more than seven decades. Walt Disney himself created his company university (Disney Institute) to teach his management techniques, and he invented the use of storyboards and his approach to project management and problem-solving tools. All of Mr. Disney’s concepts and approaches to management evolved from four basic concepts or drivers: “Dream, believe, dare and do;” and these four drove his entire value chain that continued for all this time, along with a central course which was to provide the very finest in family entertainment (Capodagli & Rockhurst University, 2007).

Disney has calculated that each theme park visitor, on average, will translate into $62,000 in revenue throughout that person’s lifetime. The revenue generated from the Disney Institute continues to grow and is able to charge new students $9,600 to attend. Though you do not often hear much about their management and customer-service consulting, at least not to the degree of a McKinsey or a Deloitte, corporate clients pay to attend the institute to learn how to apply Disney’s time-tested management techniques to their own companies. Disney has a saying: “Green side up,” essentially “all hands on deck.” This is the culture driving every employee to contribute to every business in some way, and to require the success of any given business through the leveraging of the other Disney businesses to their full extent possible (Gray, 2012).

Disney’s global brand is powerful, and its reputation as “family entertainment” makes their corporate social responsibilities program a relatively easy one for people to understand and embrace. Over half the Disney revenues comes from films and product licensing. The licensing relates to all of its film and product intellectual property, on a pro-forma financial basis this revenue drops through the income statement with very little cost (Latif, et al, 2014). The merchandise it sells is considered a “vertical extension” of the Disney brand and logo. The films spur demand for the consumer products and vice versa, in a brilliant interconnectedness of all of the Disney businesses. Disney retains and protects its “cultural objects,” leverages them throughout all of their businesses, and thereby retains its customers for generations. The globalization of everything Disney is not always viewed in a favorable light, as was the case with Euro Disney (later Disney Paris), viewed by the Europeans not as globalization but more as “Americanization” (Robbins, 2014).

In summary, the highly ethical family entertainment business that Walt Disney created 75 years ago retains the original values of the founder, and has become among the most recognizable global brands in the world. The organization and management structure requires every Disney business to look to and tap into the other Disney businesses to leverage further growth and profitability. The management team carefully chooses ventures such as the next films, before handing these decisions off to the studios and other businesses to productize and prosecute. In very few cases (e.g. Disney Paris) has the Disney brand been perceived in a negative light that created strategic and financial problems for Disney taking considerable time and effort to correct.

 

References

 

 

 

 

 

 

Stratasys : 3D Printing : Disruptive Technology

1A new manufacturing technology is showing the hallmarks of “radical” technological innovation (Koen & Elsum, 2011). 3D printing is a means of manufacturing prototypes and parts through the process of deposition, essentially building the required parts in three dimensions from the ground up to completion. The new upstarts in this business include a company called Stratasys. Founded in 1998, and currently employing more than 1400 people, Stratasys produces 3D parts based upon CAD files or other 3D content (http://www.stratasys.com).

The business strategy for Stratasys 3D printing is based upon their vision that complicated parts can be manufactured for very low cost. Without need of a large capital investment in a production line, a $15,000 Stratasys 3D printer will manufacture complicated prototypes and parts, based upon CAD files or other 3D content, for low per unit manufacturing costs.

Utilizing their patented technology, called “Fused Deposition Modeling,” or FDM, the proposed value proposition is to meet the needs of testing form, fit and function of a brand new part design, or creating a new hip replacement that promises virtually perfect dimensions and tolerances, as well as quick ambulatory recovery for the patients.

O’Reilly & Tushma (2004) suggest separating such a new and innovative business model from an existing sustaining organization. In the case of Stratasys, the company began as a typical hi-tech startup, raising capital through IPO, and has now attracted so-called “sustaining partners” as their technology proves increasingly viable. Hewlett-Packard has entered into an agreement with Stratasys (Shankland, 2010) to purchase HP branded 3D printers later in 2014.

As Stratasys continues to grow both organically and through acquisitions, they are developing a value network through the success of an ever increasing list of manufactured parts proving inexpensive on the basis of unit cost, reliable on the basis of their FDM technology, and meeting specifications that can be described as beyond six sigma in capability. As their resources grow, their capabilities increase, and in the last half of 2014 Stratasys will invest $50-$70 million in new manufacturing capacity to support future growth plans.

As evidence for the success of the Statasys strategy, and in support of their future financial guidance, second quarter 2014 financial results (http://investors.stratasys.com/releasedetail.cfm?ReleaseID=864895) reported August 7th include $178 million in revenue, 35% growth in revenue (all organic), and net income up over 50% to $28 million. Within the Stratasys’ financial results is a comment that the long-term business environment appears to be quite favorable. With HP as a new “sustaining” partner, it appears that for Stratasys, at least, the sky is the limit.

 

References

Koen, P. A., Bertels, H. M., & Elsum, I. R. (2011). The three faces of

business model innovation: challenges for established firms.

Research-Technology Management, 54(3), 52-59.

O Reilly, C. A., & Tushman, M. L. (2004). The ambidextrous organization. Harvard

business review, 82(4), 74-83.

Shankland, S. (2010). HP Joining 3D Printer Market With Stratasys Deal.

online]. CNET. Accessed August, 5, 2011.

Stratasys Reports Record Second Quarter Financial

Results (NASDAQ:SSYS). (n.d.). Retrieved from

http://investors.stratasys.com/releasedetail.cfm?Rel

easeID=864895

Professional 3D Printing | Stratasys. (n.d.). Retrieved from http://www.stratasys.com

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$15k is lowest price point of Stratysys 3D printer

HP Branded 3D Stratysis product available later this year

 

 

Stratasys Reports Record Second Quarter Financial

Results (NASDAQ:SSYS). (n.d.). Retrieved from

http://investors.stratasys.com/releasedetail.cfm?Rel

easeID=864895

 

Professional 3D Printing | Stratasys. (n.d.). Retrieved from http://www.stratasys.com

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shankland, S. (2010). HP Joining 3D Printer Market With Stratasys Deal.

online]. CNET. Accessed August, 5, 2011.

$15k is lowest price point of Stratysys 3D printer

HP Branded 3D Stratysis product available later this year

 

 

 

Koen, P. A., Bertels, H. M., & Elsum, I. R. (2011). The three faces of

business model innovation: challenges for established firms.

Research-Technology Management, 54(3), 52-59.

 

In fact, none of the disruptions we’ve described- Apple’s iPod, new digital advertising channels, and digital photography-relied on either a low-price or a new nonconsumer business model.

Within the technology dimension, the model distinguishes among incremental, architectural, and radical technological innovation.

 

O Reilly, C. A., & Tushman, M. L. (2004). The ambidextrous organization. Harvard business review, 82(4), 74-83.

O’Reilly and Tushman (2004) advocate yet another approach for business model innovations in this area: the ambidextrous organization. This approach offers a middle ground between completely separated and completely integrated organizations. O’Reilly and Tushman suggest separating the new business model from the sustaining organization-but they argue that both organizations should share senior management.

 

 

  1. Growing markets – what has been the business strategy for success in the past 3-5 years?
    1. Scott Crump started Stratasys 20 years ago based upon a breakthrough technology called Fused Deposition Modeling or FDM for three-dimensional “printing with product systems for manufacturers, engineers and designers.
    2. http://www.stratasys.com/3d-printers/technologies/fdm-technology#sthash.UXpI8Qa9.dpuf
    3. Stratasys Ltd. (NASDAQ: SSYS) is a 20-year old 3D printing firm located in Minneapolis, Minnesota and is considered the top of the food chain in this new disruptive technology as measured in revenue and unit sold. The vision is that entire products can be printed into existence, driving the equivalent of the next industrial revolution. The strategy is through the utilization of the FDM technology, 3D printing will allow complicated parts to be manufactured based upon low capital investment formerly required for a production line. Founded in 1998, and currently employing more than 1400, Stratasys produces 3D parts based upon CAD files or other 3D content.
  2. From Ch 4:
    1. Resources – How to develop a new value network with components that are new to the company
    2. Capabilities – Capital expenditures are projected at $50 million to $70 million, which includes significant investments in manufacturing capacity in anticipation and support of future growth.
    3. Competitiveness – Competitors are seeking to follow Stratasys with their own technology designs, but in terms of revenue and units, the FDM technology appears to be the one to chase.
  3. Evidence for
    1. Analysis
    2. Conclusions – http://investors.stratasys.com/releasedetail.cfm?ReleaseID=864895

As evidence for the success of the Stratasys strategy, second quarter financial results reported August 7th include $178 million in revenue, 35% growth in revenue (all organic) and net income up over 50% to $28 million. In the Stratasys’ financial results is a comment that the long-term business environment appears to be quite favorable.

Microsoft Xbox: 2001-2014

Introduction

Microsoft Corporation (Nasdaq, “MSFT”) founded in 1975, is a publicly traded company based in Redmond, Washington. The primary businesses within Microsoft include the Windows Operating System and Microsoft Office, a software suite of word processing, presentation and spreadsheet applications for businesses and individual consumers. As of the fiscal year ended June 2014, Microsoft generated approximately $86 billion in revenue, and $22 billion (25%) of net income. On the corporate website (www.microsoft.com) Microsoft lists key pillars of their growth strategy, including the development of future leaders through diversity and educational programs, and focusing on product innovation by creating the accessibility of technology information in order to drive market excellence.

Microsoft is segmented into engineering, operating and functional groups. One such group, called the “Devices Group,” headed by Stephen Elop, has responsibility for hardware devices such as smartphones, tablets, and Xbox. Xbox started as a video gaming console in 2001, but since then has evolved into an online, eighth-generation gaming brand that supports multiple streaming services (www.microsoft.com). Prior to entry into hardware devices Microsoft had tied its entire company to a business strategy that would leverage and enhance the operating systems and computer software products.

1

Xbox Launch: 2001

The transition into hardware involved significant risk for Microsoft. Initially the Xbox was given their own strategy formulation apart from close headquarters scrutiny. The change made sense: business units are closer to their customers, costs and competitors.   Nevertheless, as Whitney points out (1995), new risky business units can fail, just as headquarters can fail, by losing focus and synergy on organizational priorities and capabilities.

The Xbox strategy, however, began by using the software foundation as a “common base of knowledge” from which Microsoft could experiment with new products in new industries (“Marketing Strategies – Microsoft’s Xbox,” n.d.). One of Microsoft’s chief concerns had been that their product line-up was getting old. New and innovative products like Xbox were intended to change that image and improve the Microsoft brand.

Microsoft adopted Porter’s (1980) four competitive strategies for Xbox (Dess & Davis, 1984). Xbox is labeled under “focus,” since it has a narrow technological focus, that of the video gaming industry. In addition, the Xbox strategy utilizes “differentiation” since the business seeks to offer additional specialized products and services in addition to the gaming console. The $299 console is considered to be an “investment,” from which the purchase of games and online video streaming services can generate profitability and cash flow (“Marketing Strategies – Microsoft’s Xbox,” n.d.). That strategy has worked well for Microsoft’s Xbox as it has for their primary competitors Sony (PlayStation), and Nintendo (Wii). The objective is to provide customers a gaming and entertainment experience that exceeds competitors’ offerings in terms of fun and graphic quality. The target market is primarily male gamers, both children and adults that enjoy novel products. This helps differentiate Xbox from Nintendo Wii since Nintendo has as a primary value proposition a “healthy” experience that can include exercise and education.

Since the introduction of Microsoft’s Xbox in 2001, the three dominant gaming companies, Microsoft Xbox, Sony, and Nintendo have traded market share several times. The primary differentiating features of what determined whether one company would create an advantage over another company was the graphics quality and consumer excitement around the development of the games, such as Microsoft’s “Halo.” After five years of losses in the business unit, Xbox 360 entered the gaming market with a promise of more memory and better graphics. Not until late in 2013 did Xbox attempt a revolutionary upgrade to the Xbox platform called: Xbox One. The most significant difference with the Xbox One was that all of the Microsoft operating, engineering and functional groups were brought back into one umbrella strategy, requiring all employees to work together to achieve goals and objectives.

After more than a decade of product improvement and competitive games, each of the three major gaming competitors sought to move beyond simply a strategic model of console-game, and to differentiate themselves further from each other in order to create their own distinct advantage.

Both Microsoft and Sony, Xbox’s chief rival, are located in the western U.S. In Silicon Valley, the most concentrated group of software designers, work on developing an unending product pipeline of new and exciting video games. Apart from this concentration there is not a lot of gaming software development activity. The largest game retailer is GameStop, with approximately 50 retail stores in the greater Los Angeles region. Other retailers include Electronics Boutique, Toys “R” Us, and most retail chain stores such as Sears.

Key Partners in the Xbox Value Chain

Slide1

Strengths, Weaknesses, Opportunities and Threats (SWOT)

Strengths

  1. Microsoft is a large company with deep resources and significant management expertise. Xbox can leverage engineering, software and functional organizations within a technology company to support ongoing product development efforts.
  2. Microsoft Xbox is a strong brand, along with customer loyalty, that translates into strong pricing power.
  3. The adjacent products, such as the Xbox game “Halo,” for example, are tied exclusively to the Xbox console hardware, providing a proprietary product annuity stream over several years, as long as the popularity of the game remains.
  4. The advent of Xbox has provided an “innovative” dimension to the Microsoft brand.
  5. Since Netflix (2008), Microsoft has added to Xbox more than 60 services, including Hulu, Comcast’s Xfinity, and Amazon (Russell, 2014).

Weaknesses

  1. Microsoft is under the spotlight from a vocal community of avid technologists, gamers and computer geeks. These people have strong reactions, opinions, and are apt to post these opinions to public forums, debate about the merits of new products, and if an aspect of Xbox is deemed weak or problematic, create negative customer goodwill through these discussions and posts.
  2. Microsoft is a large company, and as such, finds incubating new products and innovative ideas an especially formidable challenge given the maze of bureaucracy that has developed as the firm has grown. The inclination is to develop products and services that leverage their existing core competencies. Yet, while this seems admirable, it may result in products that are not quite what the customer is looking for or expecting.
  3. Microsoft, at its core, is a software company. The hardware business is an entirely new and different undertaking, and the costs of manufacturing and distributing hardware significantly more expensive than software. The supply chain is extensive, and the temptation to produce low-cost consoles ever-present. Microsoft was the first gaming company to include a hard disk drive for storage in their early consoles. This proved to result in negative gross margin on hardware sales (“Microsoft’s Xbox One Almost Went Entirely Disc-less After E3,” 2014).
  4. The entertainment industry is fraught with parental concerns about violence, sexuality and gaming addiction. Xbox must tread carefully to ensure their products are not offensive and that customer acceptance will follow each new game.
  5. At $499 for the Xbox One, young potential gamers of modest financial means will struggle just to get started with their gaming experience.

Opportunities

  1. With the combination of Internet connectivity and the utilization of the cloud, Xbox can sell products and services with a global reach.
  2. With low-cost bundled packages for emerging markets, Xbox could expand their overall total available market. Combinations of bundled products and services in general, given the vast offering from Microsoft, present further attractive possibilities.
  3. Greater innovation can lead to new and exciting products that address the entire niche of “home entertainment.”
  4. More third party partnerships, especially with Hollywood studios and others tied to consumer entertainment, could yield breakthrough product offerings.
  5. Expanding the total available market by appealing to females, as wells as disparate cultures throughout nations around the world.
  6. Professional gaming is a large market, and continuing to grow at a high rate. Multi-user hardware such as high-end headphones (Dr. Dre, Beats) may generate high margin hardware and accessory sales (Wagner, 2006).

Threats

  1. The gaming market is maturing, competition is consolidating, accretive business will result more and more from the strategy of taking market share, expanding the total available market will be more and more difficult in the future.
  2. The disruptive factors unknown to the Xbox team can take the business by surprise. In a technology segment, with fickle consumers changing their tastes, and fast moving new upgrades to products and services such as on-demand video, innovative breakthroughs are common.
  3. An ongoing willingness on the part of competitors to continuously cut the console prices to gain market share. Since it is difficult to predict the accretive revenue and gross margin stream that follows a given hardware purchase, gaming companies are tempted to almost give the hardware away in a kind of “razor / razor blades” marketing strategy.

In 2013 Microsoft shifted the Xbox strategy to be more inclusive from a corporate standpoint. Specifically (Bass, 2013), the new Xbox One was to debut November 22, 2013 consistent with Steve Ballmer’s (Microsoft CEO) new “One Microsoft Strategy.” Corporations that manage more than one business model and more than one business strategy find geometrically increasing complexity and pressure on the organization and its workforce (Casadesus-Masanell & Tarzijan, 2012). Mr. Ballmer sought simplification through unity, cohesion through cooperation, and product leverage through integration. The idea within the new strategy was to knit the product groups together in a way that the hardware, systems, software and functions would work more cohesively and efficiently.

Inside the Xbox One was the latest Windows 8 operating system to make further software development easier. To further differentiate the Xbox One from Sony’s newest PlayStation 4 (which was released around the same time), Microsoft added a variety of new features such as the ability to watch HD Blu-ray movies, “Live TV,” and cloud networking that would require perpetual Internet connections. This last feature, a requirement for continuous Internet connection, would turn out to be more damaging for Microsoft than it was helpful. Assembly/Edelman, the leading public relations market researcher for several Microsoft businesses was hired to promote the launch of the new Xbox One.

The requirement for online connectivity with the new Xbox One met with negative customer backlash initially. While the gaming community posted hostile online reviews, competitor Sony responded with ads showing the ease of sharing games, featuring one gamer handing a disk to another gamer. Yet Sony too has had its share of problems to overcome with their own gaming product called PS Vita, the follow-on product to the successful PSP handheld device. While precise hardware unit sales are unavailable, estimates of the combined hardware of both PS Vita and PSP devices is well below their expected 10 million per year after the launch more than two years ago. Similarly, Nintendo’s Wii U sales, along with a general lack of excitement about GamePad, is reported as perhaps the worst misstep in the history of the company’s gaming business (“The Difference in Sony, Microsoft, and Nintendo’s Reactions to Failure,” 2014).

For the month of December 2013, Xbox One had attained number one status in terms of console sales in the U.S., selling almost 1 million units in December alone. The prior major Xbox platform, Xbox 360 (2005), also sold 643,000 units in the same month, earning it third in market share for its generation. Combined, the two platforms of Xbox were able to hold 46 percent of the hardware market in terms of share, achieving 10 percent growth from the prior year.

Total retail spending on the Xbox platform (Xbox One and Xbox 360) in December was $1.4 billion, fully 50 percent of the software and hardware total U.S. retail sales spend. In the U.S. alone consumers purchased almost 3 games since the launch of Xbox One. Fans continue to show their excitement for the new generation Xbox One games, with U.S. consumers purchasing an average of 2.9 games per console since launch (Source: NPD Group, December 2013).

According to Microsoft Corporation’s 10-K filed with the SEC July 31, 2014, Xbox revenue has increased to $1.7 billion per year, while annual costs rose to $2.1 billion on the heels of the new Xbox One investment. New gaming platforms require a significant investment, so it is not clear what the forecasted cost run rate will be 3-5 years out, nor did Microsoft provide future revenue guidance in their annual report and their corresponding analysts’ call.

Conclusion

Much has been written about Microsoft’s initial vision for the Xbox to become the gateway into home entertainment. Perhaps the original vision was never fully realized and in fact Xbox landed somewhere between that vision and just being another gaming product. To support the thesis that the business model was a failure, writers such as Koen, Bertels, & Elsum, (2012) point to the financial losses generated by the business unit. With cost reductions in the hardware supply chain, however, increasing revenue on game sales including licensing revenue for the in-house developed games, as well as the Xbox Live Gold subscriptions ($60/year) it may not be difficult for the business unit to turn profitable in several years. The unknown in all of this is that given eight generations of consoles across three major platforms, Xbox, Xbox 360 and Xbox One, 2001, 2005 and 2013 respectively, another major platform development could be expected in the next five years or so, requiring yet another large infusion of research and development costs.

Although Microsoft may see its primary competition coming from new console releases from Sony and Nintendo, there is another external aspect of competition that could radically change the entire gaming market. Hagiu and Herman (2012) argue that the biggest challenge to gaming consoles will come from tablet and mobile-based games, as well as the cloud. Given Nintendo’s claim to own the “casual gamer” niche, it may be most at risk as these less intensive gamers will show desire to use their smartphone or tablet to download and play games. Cloud-based gaming lends itself to less complex games that could be played on simpler devices that are cheaper than the investment in sophisticated gaming consoles. At this stage it appears both Microsoft and Sony do not have any near-term plans to embrace cloud-based gaming however. Perhaps a fourth competitor will emerge, in the form of a disruptive innovator, that prosecutes the lower-cost platforms across the cloud and multiple devices, appealing to gamers around the world in terms of affordability, flexibility, with a gaming ubiquitous platform.

 

References

Bass, D. (2013, November 21). Xbox is a test for the One Microsoft Strategy. Bloomberg

Businessweek. Retrieved from http://www.businessweek.com/articles/2013-1121/xbox-is-a-test-for-the-one-microsoft-strategy.

Casadesus-Masanell, R & Tarzijan, T. (2012). When one business model isn’t enough. Harvard

            Business Review, 90(1/2), 132-137.

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strategic group membership and organizational performance. Academy of

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Challenges for established firms. Research Technology Management, 54(3), 52-59.

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http://teamxbox.wikidot.com/marketing-strategies

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http://www.sec.gov/edgar.shtml#.U_krvEuBlfM.

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Forbes.com. Retrieved from

http://www.forbes.com/sites/insertcoin/2014/01/03/microsofts-xbox-one-almost-went-entirely-disc-less-after-e3/

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            Apple TV. Retrieved from

http://www.businessinsider.com/the-xbox-is-microsofts-strategy-for-the-tv-2014-4

The difference in Sony, Microsoft, and Nintendo’s reactions to failure. (2014).

Retrieved from http://www.fool.com/investing/general/2014/06/23/the-difference-in-sony-microsoft-and-nintendos-rea.aspx.

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Whitney, J. O. (1995). Strategic renewal for business units. Harvard Business Review, 74(4), 84-

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