Corporate Strategy. Week 3 LectureOrganisational Purpo.docx

Corporate Strategy.
Week 3: Lecture
Organisational Purpose & Stakeholders.
Organisational Purpose:
- understanding vision, mission & objectives.
Governance and Corporate Social Responsibility (CSR):
- unpacking systems and non-economic influences.
Stakeholders - scope and analysis:
- links to strategy via power/interest.
Learning Outcomes.
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Organisational Purpose & Objectives.
It’s tempting to focus on “How”, while minimising “What” –
and “Why”.

Think of examples from Lecture 1:
Kodak – “How do we make better film for cameras?”
Nokia – “How do we make better mobile handsets?”
BUT as Peter Drucker observed:-
“That business purpose & business mission are so rarely given
adequate thought is perhaps the most important cause of
business frustration and failure”.
(from: Management: tasks, responsibilities, practices,
1973)
Pyramid of Purpose.
These can be extended i.e.“Management by Objectives”
cascading down plus further links to strategy via “Balanced
Scorecard” metrics & SMART tests at operational levels
(SMART = Specific, Measurable, Attainable, Relevant, Time-
based)
Level 1: WHY?
Vision, Values,Mission
Level 2: WHAT?
Goals & Objectives.
Level 3: HOW?
Strategy & Action.
Level 4: WHO?
People, Systems & Resources.

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The Vocabulary of Objectives.
Objectives are statements of specific outcomes to be achieved.
They can be expressed in: financial, market & increasingly
social terms.
BUT - there can be confusion with Goals, Aims, Objectives,
Targets. They should all be as SMART as possible!
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Vision & Mission Statements.
Vision concerns the desired future state of the organisation; an
aspiration to enthuse, motivate & stretch.
It’s question is: ‘What do we want to achieve?’
Mission aims to provide clarity on the overriding purpose of the
organisation
It’s questions are: ‘What business are we in?’ ‘How do we
make a difference?’ ‘Why do we do this?’
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Some Tech Company Missions.
Facebook: to give people the power to share & make the world
more open and connected.
Google: to organise the world‘s information & make it
universally accessible & useful.

Microsoft: to enable people & businesses throughout the world
to realize their full potential.
Skype: to be the fabric of real-time communication on the web.
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Influences on Purpose.
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Governance & CSR.
Corporate governance:
structures and systems of control holding managers to account
to those who have a legitimate stake in an organisation
Corporate social responsibility (CSR):
‘the responsibility of enterprises for their impacts on society’
(official definition of the European Commission in Brussels)
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Ownership structureDispersedConcentrated, interlocking pattern
of ownership between banks, insurance companies, and
corporationsConcentrated in either the hands of owner-mangers
or the wider circle of employees in joint-stock
corporationsHighly concentrated; recent tendency to more
dispersed ownershipHighly concentrated in state-owned
companies; fairly concentrated in private enterprisesHighly

concentrated ownership by family owned business groups; wave
of privatization since 1990 has reduced state ownership
Ownership identity Individuals
Pension and mutual funds Banks
Corporations
State Owner-managers
Employees
State Families
Foreign investors
Banks State
Families
Corporations Family owned business groups
StateChanges in ownershipFrequentRareFrequent, but
decreasing tendencyTraditionally extreme rare, but recently
changing Rare, but increasingly dynamic Rare
Increasing influence of foreign investorsGoals of ownership
Shareholder value
Short term profits Sales, market share, headcount
Long term ownership Profit for owners
Long term ownership Long term ownership
Growth of market shares Long term ownership
Sales, market share Long term ownership
Profit for ownersBoard controlled by Executives
Shareholders Shareholders
Employees Owner-managers
Other insiders Owners
Other insiders Owners
Party/the state Owners/
shareholdersKey stakeholders Shareholder Owners
Employees (trade unions, works councils) Owners
State Owners
Customers in overseas markets Owners
Guanxi-network of suppliers, competitors and customers
(mostly) in overseas markets Owners
Customers in overseas markets

Anglo-American
Rhenish Capitalism
Russia
India
China
Brazil
Different Corporate Governance Systems.
purpose of the corporation to maximize shareholder wealth,
underpinned by company law and corporate reliance on stock
market financing
US stockholders: emphasize short-term transactions and
dividends
clear link between earnings per share and stock prices
if managers fail to emphasize short term profits and stock prices
fall, the managers loose personally
if companies are undervalued on the stock market, they are
vulnerable to takeovers
Corporate Governance System in the USA.
Greater focus on stakeholders within the keiretsu
Japanese investors: less volatile than US investors
Companies do not pay dividends as % of profits
Japanese managers do not have stock options compensation
plans
Consistent dividends reassure the Japanese stockholder of a
company's health
Stockholders are not the most important stakeholders
Lack of outside directors to look out for the welfare of the
stockholder
Thus: a different strategy approach that allows long-term
relationships
Corporate Governance System in Japan.

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There is one and only one social responsibility of business - to
use its resources and engage in activities designed to increase
its profits.
(Milton Friedman)
Traditional view of business responsibility.
The idea of profit at any cost is something that is past its time.
Ralph Shrader, Chairman/CEO, Booz Allen Hamilton
In a 2008 McKinsey Survey of 2687 executives, 16% agreed
with Friedman that high returns should be a firm’s only focus,
84% said that high returns to investors should be accompanied
by broader contributions to the public.
In a 2013 survey of 1000 global CEOs from 107 countries by
Accenture, 93% of CEOs believed that sustainability will be
important to the future success of their business.
Is the traditional view past its time ?
In 1988, 18% of FTSE 100 companies had an ethical code of
practice.
In 2006, 90% of FTSE 100 companies had an ethical code.
In 2002, 45% of Global 250 had a CSR report.
In 2015, 92% of G250 had a CSR report.
In 2011, 20% of India’s 100 largest companies had a CSR
report.
In 2015, 100% of India’s 100 largest firms had a CSR report.
Growth of CSR in the UK and world-wide.

UK
key source of pressure: public opinion & NGOs
role of government: effective regulation and social welfare
little spending on CSR activities in UK
key issues: climate change, cultural sponsorship
Nigeria
key source of pressure: local communities & government
role of government: ineffective regulation and social welfare
hundreds of millions on social investments by oil companies
key issues: local communities, social investments, infrastructure
Example: UK versus Nigeria.
Example: China versus UK on animal rights.
The European Commission simply defined CSR as ‘the
responsibility of enterprises for their impacts on society’.
It may be useful to think of CSR as an umbrella term for a
variety of views and practices all of which recognize the
following:
that companies have a responsibility for their impact on society
and the natural environment, sometimes beyond legal
compliance and liability of individuals;
that companies have a responsibility for the behaviour of others
with whom they do business (e.g. suppliers);
that business needs to manage its relationship with wider

society, whether for reasons of commercial viability or to add
value to society.
Blowfield / Frynas CSR definition.
Responsibility in global supply chains
Stakeholders – Scope & Analysis.
Stakeholders: individuals/groups who depend on an organisation
to fulfil their goals & on whom, in turn, the organisation
depends.
OR:
Individuals/groups who affect, or are affected by, the operations
of an organisation in achieving its goals.
Stakeholder Mapping: useful in analysing strategy – identifies
stakeholder power, expectations & political priorities.
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Stakeholders of a large organisation.
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Key stakeholders for Shell International in London
What about subsidiaries of the multinational firm?

For example, the Shell subsidiary in the United States or Shell
in Nigeria faces many different “stakeholders”.
CSR issues can differ widely between different subsidiaries of
the firm.
Stakeholders of a large multinational firm.
Stakeholder Mapping Issues.
Whose expectations need to be prioritised?
Do actual levels of interest & power reflect the governance
framework?
Who are the key strategic blockers & facilitators?
Should we try to reposition certain stakeholders?
Can levels of interest or power of key stakeholders be
maintained?
Will stakeholder positions shift according to the issue/strategy
being considered?
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Stakeholder Mapping:
The power/interest matrix.
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Session Summary.

Week 3 Seminar groups will use the stakeholder mapping tool
to examine the BAE/EADS merger case.
We explained the importance and key elements of
Organisational Purpose.
We unpacked Governance/CSR and their links to strategy
development.
We examined the stakeholder idea and discussed mapping of
relevant of stakeholders.
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Corporate Strategy.
Week 3: Seminar.
Stakeholder Analysis at BAE/EADS.
Airbus website: http://www.airbus.com/
Wk3 Seminar: Session Plan.
Today’s seminar uses Wk3 ideas to analyse & map
stakeholders plus their affect on the failed 2012 merger between
BAE & EADS.
Prepare by reviewing Wk3 notes plus Moodle for case
material.

Again there will be class group work. Results will inform your
assessment task.
http://video.cnbc.com/gallery/?video=3000121186
Wk3 Seminar: Session Brief.
The Brief:- (choose one question)
1. Identify the key strategic issues facing BAE & EADS in their
merger proposal. Why were they “strategic”?
2. Use the Power/Interest matrix to carry out a Stakeholder
analysis on the BAE/EADS merger case. Identify & map the
main players.
3. Use course ideas to establish the Strategic Purpose of
BAE/EADS for its merger proposal. Which Stakeholders were
opposed & why?
Form groups (5/6) to answer the brief. You have 40 mins to
produce a flip chart for class sharing.
EADS and BAE Systems
- thanks to Vlad for these seminar slides.
Q1: Identify the key strategic issues facing BAE & EADS in
their merger proposal. Why were they “strategic”?
Long-term
French and German governments’ loss of control
German job losses
UK relationship with USA
EADS: heavy reliance on Airbus
EADS: entry to US defence market
BAE: coming back to Airbus (currently heavily reliant on
defence)

BAE might lose some work to Spanish companies (competitive
position)
Complex (various governments involved)
Strategic importance for a number of governments (defence):
US government concerns about German and French involvement
with US defence contracts
Cost savings and synergies
Negative cycle for both civil aviation and defence sometimes
coincide
Stakeholder Mapping:
the power/interest matrix.
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Q2: Use the Power/Interest matrix to carry out a Stakeholder
analysis on the BAE/EADS merger case. Identify & map the
main players.Competitors (Dassault & Thales)
EADS & BAE Shareholders
US government and Boeing
French government
German government
UK government
EADS Management
BAE System management
Trade unions
Low Interest
High
High Power Low

Pyramid of Purpose.
These can be extended i.e.“Management by Objectives”
cascading down plus further links to strategy via “Balanced
Scorecard” metrics & SMART tests at operational levels.
Level 1: WHY?
Vision, Values,Mission
Level 2: WHAT?
Goals & Objectives.
Level 3: HOW?
Strategy & Action.
Level 4: WHO?
People, Systems & Resources.
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Q3: Use course ideas to establish the Strategic Purpose of
BAE/EADS for its merger proposal. Which Stakeholders were
opposed and why?
Why? To compete with Boeing and to reduce reliance on Airbus
(civil aviation)
What? Simplify the governance. Get defence contracts in USA.
How? Merger with BAE Systems
Who? Governments, EADS and BAE management and
employees
Opposed stakeholders:

French and German government
BAE shareholders (Invesco perpetual)
BAE Systems
Vision: “To be the premier global defence, aerospace and
security company”.
Mission: “To deliver sustainable growth in shareholder value
through our commitment to Total Performance”.
Source: http://www.baesystems.com/en/our-company/about-
us/our-culture
EADS (Airbus Group)
“We aim to remain a leader in commercial aeronautics and
defence and space markets”.
Source: http://www.airbusgroup.com/int/en/group-vision.html
Corporate Strategy.
Reminders: Strategic Capability, Resources & Value Chain.

Strategic Capability.
RESOURCES
CAPABILITIES.
Threshold Capability:
Required to be able to compete in a market.
Threshold Resources.
Threshold Capabilities.Distinctive Capability:
Required to achieve competitive advantage.
Distinctive Resources.
Distinctive Capabilities.Resources
TANGIBLE
INTANGIBLE
HUMAN
· Financial
· Physical
· Technological
· Reputational
· Cultural
· Specialised skills & Knowledge.
· Communication & Interactive Abilities

· Motivation
The VRIN Model.
11/16
Corporate Strategy.
Week 6: Lecture
Analysing Strategic
Capability.
Resource-Based View:
- introduce what the RBV is.
Foundations of Strategic Capability:
- understand resources & capabilities.
VRIN Analysis & Advantage:
- see how VRIN tests capabilities.
Learning Outcomes.

2
Just as the external business environment is important
(opportunities and threats), managers need to understand the the
internal firm environment: the unique strengths and weaknesses
of their firm relative to their competitors.
Internal Business Environment.
doing things
When Google entered the search engine market in 1998, there
were many established rivals, e.g. AltaVista, HotBot, Lycos,
Yahoo! etc.
But Google did not care much about competition. From the
start, Google was happy to be different, i.e. different strategies
& products.
From 2003, Google diversified into various industries such as
Android phones, self-driving car project, Google glass etc.
Watch this video on Google history:
https://www.youtube.com/watch?v=n9eo8b3hEns
diFFerently
Strategic fit is about developing strategy by identifying
opportunities in the business environment and adapting
resources and competences so as to take advantage of these.
Strategic stretch is about identifying and leveraging the

resources and competencies of the organization to yield new
opportunities or to provide competitive advantage.
The contrast between strategic fit and strategic stretch
exemplifies different views on how firms should compete in
global markets.
Strategic Fit versus Strategic Stretch.
Resource-Based View of Strategy.
The RBV says that advantage and superior performance stem
from the distinctiveness of what firms can do.
Positioning View: the business opportunity should be the
starting point for developing successful strategies.
Resource-Based View: unique firm resources should be the
starting point for developing successful strategies.
The RBV suggests that firms differ in their bundles of resources
and what they can do – their capabilities.
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Firms have resources and capabilities.
Resources are all assets, capabilities, organizational processes,
firm attributes, information, knowledge, patents, real estate etc.
controlled by a firm.
Capabilities are complex bundles of skills and collective
learning, exercised through organizational processes, that
ensure superior coordination of functional activities.
The Components of Capability.
Competence as Tree Metaphor.

Resources versus Capabilities.
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Threshold & Distinctive Capabilities.
Threshold Capabilities are those needed to meet necessary
requirements to compete in a given market & achieve parity
with competitors – ‘qualifiers’.
Distinctive (Unique) Capabilities are those that critically
underpin competitive advantage & that others cannot imitate or
obtain – ‘winners’.
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Threshold & Distinctive Capabilities.
(Note this for our seminar analysing the James DYSON case!)
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Identifying Resources & Capabilities.
Capabilities: different ways to identify:-
1). Kay (1993) - Architecture, Reputation, Innovation.

2). Functional Areas: e.g. Marketing, Distribution etc.
3). Value Chain: analyse through primary & secondary
activities
How do we identify these for an organisation?
Resources:
1). Grant’s (1998) three categories of Tangible, Intangible &
Human to analyse.
2). SWOT can identify resources too.
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Managers must understand the economic value of the different
activities that a firm performs.
Value added is the difference between the cost of inputs and the
market value of outputs; it is the value that a firm adds to its
bought-in materials and services through its own production and
marketing efforts within the firm.
The Concept of Value Added.
Example: Product value of South African grapes
Source: Frynas, J. G. and Mellahi, K. Global Strategic
Management 3e (Oxford University Press, 2014)
Value Chain Analysis.
Source: Adapted with the permission of The Free Press, a
Division of Simon & Schuster, Inc., from Competitive
Advantage: Creating and Sustaining Superior Performance
by Michael E. Porter. Copyright © 1985, 1998 by Michael E.

Porter. All rights reserved
Value chain analysis depicts the main activities inside the firm
and aims to reveal the relative value added amongst the
different parts of the firm’s operations.
Undertaking a value chain analysis helps the firm to understand
its cost position and to identify its competitive strengths.
15
Simplifed value chain for South African fresh fruit and
vegetables
Core Competences.
Core competences (Hamel & Prahalad, 1990) are the linked set
of skills, activities & resources that, together:
deliver customer value
differentiate from competitors
potentially, can be extended & developed as opportunities arise.
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Understanding Advantage
Competitive Advantage is:
“The ability to outperform rivals on significant CSFs, thus
earning superior returns.” (Grant, 2013).
Porter (1985): “There are two basic types of competitive

advantage: cost leadership and differentiation.”
Kay (1993): advantage is delivered by distinct capabilities &
strategic assets.
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VRIN Analysis & Competitive Advantage.
4 criteria to assess capabilities as a basis of achieving
sustainable competitive advantage are:
value,
rarity,
inimitability and
non-substitutability
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VRIN Criteria for Testing Capabilities.
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V – Value of Strategic Capabilities.
Strategic capabilities are of value when they:
enhance opportunities & neutralise threats,
provide value to customers
provide potential competitive advantage at a cost that allows an
organisation to realise acceptable levels of return.
The question of value: Do a firm’s resources and capabilities

enable it to respond to environmental threats or opportunities?
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R – Rarity.
The question of rarity: Do capabilities exist that no (or few)
competitors possess?
Rare capabilities are those possessed uniquely by one
organisation or by a few others only.
(e.g. a company may have patented products, have supremely
talented people or a powerful brand.)
Rarity could be temporary.
(e.g.: patents expire, key individuals can leave or brands can be
de-valued by adverse publicity)
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I – Inimitability.
The question of inimitability: Is a resource or capability
difficult for competitors to imitate?
Inimitable capabilities are those that competitors find difficult
to imitate or obtain.
Advantage can be built on unique resources - e.g key
individuals - but may not be sustainable (key people can
leave!).
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N - Non-Substitutability.
The question of non-subsitutability: Is the risk of capability

substitution low?
Competitive advantage may not be sustainable if there is a
threat of substitution.
This can be product or service substitution from a different
industry/market. E.g. postal services partly substituted by e-
mail.
Competence substitution. For example, a skill substituted by
expert systems or IT solutions
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Example: Business model of the clothing retailer Zara
Management 3e (Oxford University Press, 2014)
Zara’s success in achieving extremely fast product cycles was
supported by in-house textile manufacturing subsidiary and
close relationships with sewing workshops in Spain
Session Summary.
Week 6 Seminar groups will examine Strategic Capability at
James DYSON – the British vacuum cleaner maker.
We introduced & explained what the Resource-based View of
Strategy is.
We examined Resources & Capabilities plus how to identify
them.
We explained VRIN analysis of capabilities & links to
advantage.

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Corporate Strategy.
Week 6: Seminar.
Resources, Capability & Advantage at DYSON.
Today’s seminar uses ideas from Wk6 to analyse Strategic
Capability at DYSON
Prepare by reviewing Wk6 notes plus Moodle (and your own
researching) for DYSON case material.
Again there will be class group work. Results should be kept for
your assessment revision.
1. What is Strategic Capability? Use these ideas to analyse the
Threshold/Distinctive Resources & Capabilities at DYSON.
2. What are Strategic Resources? Use Grant’s 3 types to
analyse DYSON’s resources. Which create most advantage?
3. What are Strategic Capabilities? Analyse DYSON’s
Distinctive Capabilities & show where on the Value Chain these

lie.
Corporate Strategy.
Seminar Resources.
This handout contains reminders about industry CSFS, PESTLE
analysis and Porter’s 5 Forces. Support material in slides and
notes are in Wk4 plus RYANAIR resources. There are lots of
web sources too e.g:
http://www.thedrum.com/news/2014/11/13/higher-plane-how-
ryanair-refined-its-tone-voice-and-improved-customer-
experience
Reminders: CSFs, PESTLE, & 5 Forces.
These three sets of ideas are relevant for the Wk4 seminar
questions.
1). Industry Critical Success Factors (CSFs).
These are INDUSTRY factors customers particularly value and
where an organisation must excel to prosper. They answer the
question: “What do firms in this industry have to do well to
succeed?” Grant (1998) links them to two key aspects:

i). What do our customers want? ii). How do we survive
competition?
2). The PESTLE Categories.
· Political: e.g. Government policies, regulation, trade rules,
political risk.
· Economic: e.g. GDP trends, interest & exchange rates,
unemployment.
· Socio-cultural: e.g. population, lifestyles, culture & fashion.
· Technological: e.g. discoveries & tech developments, ICT
innovations.
· Legal: e.g. competition, employment, health & safety,
employment.
· Environmental: e.g. green rules, emissions, global warming,
waste.
3). Porter’s 5 Forces.
Coursework Report Review: Worksheet.
Organisation:
Q1. Strategic Issues.
Issue 1: (PESTLE)
Issue 2:
(5 Forces)
Issue 3: (Advantage)

Q2. Strategic Capability & Advantage.
Industry?
CSFs?
Unique Resources
(what do they have?)
Unique Capabilities
(what can they do?)
Links to Advantage.
(map to CSFs?)
Q3. Evaluation & Improvement.
Which Porter Generic?
Evaluation – Suitable?
(to the environment)
Evaluation – Acceptable?
(to key stakeholders)

Evaluation – Feasible?
(is it possible?)
How to Improve the Strategy?
(Ideas?)
Corporate Strategy.
Week 4: Lecture
Analysing the Strategic Environment.
Environmental Analysis:
- introduction & explanation.
Far Environment & PESTLE Analysis.
- understanding & applying the tool.

Near Environment & Porter’s 5 Forces Analysis:
- competing in the near environment.
Learning Outcomes.
2
The business environment consists of all factors inside and
outside the company, which influence the firm’s competitive
success.
(Frynas and Mellahi, Global Strategic Management 3e, 2014)
The business environment can be divided into:
the external macro environment (or: far environment)
the external industry environment (or: near environment)
the firm environment (or: internal environment)
The Business Environment.
FAR
ENVIRONMENT
Little/no influence and no control
NEAR
ENVIRONMENT
Some influence, but less control
INTERNAL
ENVIRONMENT
Strong influence and control

Layers of the Business Environment.
Management
The external business environment of the firm can provide both
opportunities and threats to firms.
Opportunities refer to events or processes in the external
business environment, which may help the company to achieve
competitive success.
Threats refer to events or processes in the external business
environment, which may prevent the company from achieving
competitive success.
Opportunities and threats.
Strategy can be seen as the matching of the resources and
activities of a firm to the environment in which it operates –
known as “strategic fit”.
Strategic fit is about developing strategy by identifying
opportunities in the business environment and adapting
resources and competences so as to take advantage of these.
Organizations, which do not possess minimum degree of
strategic fit are bound to fail.
Strategic Fit.
Applied Corporate Strategy.
The Far Environment &
PESTLE Analysis.

Understanding PESTLE.
PESTLE categorises Macro Environment (or: Far Environment)
factors into 6 main types:
Political, Economic, Social, Technological, Legal and
Environmental.
It is a broad tool or checklist to help managers understand the
far environment by identifying strategic opportunities, threats
or issues.
A description of factors often given without analysing impact
only does half the job. Impact of PESTLE factors is crucial.
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The PESTLE Categories.
Political: - Government policies, regulatory rules, trade
regulations, political risk.
Economic: - GDP trends, interest & exchange rates, real
incomes, unemployment.
Socio-cultural: - demographics, lifestyles, culture & fashion
trends.
Technological: - discoveries & technology, ICT innovations,
R&D spending.
Legal: - competition, health & employment laws, licensing,
laws on intellectual property rights.
Environmental: - green regulations, emissions, energy issues,
global warming, waste & re-cycling

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Using the PESTLE Framework.
Full PESTLE analysis should comprise:-
Identification – relevant impact factors.
Validation – focus on those factors that have a real impact on
strategic issues.
Quantification – test impact & probability.
Projection – foresight and scenarios
Planning – respond to foresight and scenarios
Implementation – you should take action on key strategic
threats & opportunities.
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Using PESTLE : Factor/Impact.
“Factor/Impact” is key & context changes impact:-
(1). Single organisation effect: E.g Roehampton loses fee
income from a political change - allowing for-profit
Universities.
(2). More complex when PESTLE changes across many sectors
& organisations. E.g. Brexit and the weak pound - positive for
UK tourism and some export firms, but negative for retailers
and some importers.
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Using PESTLE for country selection at Baser Food

United States
Political:
High political stability (O)
Economic:
High per cap. income (O)
Stability in terms of trade/currency rates (O)
Low market growth (T)
Social:
Mediterranean cuisine familiarity (O)
What advice would you give to Baser Food on country selection
for exporting olive oil?
Australia
Political:
High political stability (O)
Economic:
High per cap. income (O)
Stability in terms of trade/currency rates (O)
Low market growth (T)
Social:
Mediterranean cuisine familiarity (O)
Concern with diet (O)
China
Political:
Corrupt officials (T)
Regulations (T)
Political risk (T)
Economic:
High market growth (O)
Low per cap. income (T)
Trade/currency rates (T)
Social:
Little awareness of health benefits (T+O)
Baser Food was a Turkish company that produced olive oil. The
company wanted to expand its exports of olive oil to new
international markets.

Key Drivers of Change.
These are factors having a high impact on strategic success or
failure. Typically they vary by industry or sector. For example:
Mediterranean cuisine familiarity (social) is a key driver in
olive oil sector
The oil price (economic) is a key driver of profitability in the
airline industry
ICT innovations and R&D spending (technological) are key
drivers for technology companies such as Google
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Forecasts versus scenario planning
Scenario is ‘a hypothetical sequence of events constructed for
the purpose of focusing attention on causal processes and
decision points’.
Scenarios explore possible future events by looking at particular
causes and seek to understand and explain why certain events
might or might not occur.
Scenario analysis does not try to predict what will actually
happen – it tries to identify several possible futures (typically,
2-4 scenarios), each of which is plausible but not assured.
Scenario planning is used mostly (but not exclusively) in
industries with long planning horizons.
Scenario planning.
Using Scenario Planning.
2014 EU-wide Banking “stress test”

scenarios were used on European Banks to test capital levels in
potential future financial crises.
https://www.eba.europa.eu/-/eba-publishes-2014-eu-wide-stress-
test-results
Shell and long-term investments
the global oil company was a pioneer of scenario planning. The
link shows how they use it:
http://www.shell.com/global/future-energy/scenarios/40-
years.html
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Applied Corporate Strategy.
The Near Environment & Porter’s Five Forces.
The Near Environment.
Comprises industries & sectors, competitors & markets where
the firm competes for resources & consumers.
Industry/sector structure a key element. Boundaries are fuzzy
& can change through industry convergence.
Strategic Groups are relevant - industry competition is dynamic
& can change rapidly.

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What industry are you in? Consider Ferrari and Ford
A focus on a broad industry may lead to inaccurate
understanding of the market and the nature of competition.
Indeed, using the word “industry” may be unhelpful because it
is very broad.
Firms need to properly understand their industry, which can be
achieved by identifying critical success factors and conducting
a strategic group analysis.
Understanding your industry.
Industry Analysis.
Defining an industry involves knowing:-
a). customers & their needs
b). who the competitors are
c). the nature of competitive forces
The outcome is “attractiveness” i.e. how profitable the industry
is for firms.
“The basic premise (of) industry analysis is that…industry
profitability is neither random nor the result of entirely
industry-specific influences, but is determined…by the
systematic influence of industry structure.” (Grant, 1998)
20
Critical Success Factors (CSFs).
INDUSTRY factors customers particularly value. They answer:

“What do firms in the industry have to do well to succeed?”
Grant (1998) gives two keys:-
Industries have different CSFs (e.g. low cost airlines have
punctuality & price, full service airlines are about quality of
service).
Firms without competitive advantage based on key industry
CSFs will not succeed.
What do our customers want?
How do we survive competition?
21
Strategic Groups.
Strategic group analysis is about identifying firms with similar
strategies or those competing on similar bases.
It helps to understand the nature of competition and
profitability within an industry sub-group and provides better
information about where to invest or what type of strategic
action to expect from competitors.
A good predictor of strategic groups are “mobility barriers”,
which prevent other firms entering the strategic group and
threatening the existing members.
Strategic groups can be mapped as “segments” & can be useful
tools of analysis.
22
Example: Strategic Groups in the global car industry
Understanding Porter’s Five Forces.

Michael Porter suggested that managers must understand the
underlying economic and technical characteristics of their
industry or strategic group.
The Five Forces Model (1985) is still popular and assumes that
industry attractiveness and the firm’s competitive position in an
industry are influenced by five competitive forces.
The Five Forces model can be used to analyse a firm’s
competitive position in a specific market segment or similar
market segments.
24
Source: Adapted with the permission of The Free Press, a
Division of Simon & Schuster Adult Publishing Group, from
Competitive Strategy: Techniques for Analyzing Industries and
Competitors by Michael E. Porter. Copyright © 1980, 1998 by
The Free Press. All rights reserved
The Five Forces Framework.
25
Barriers to Entry.
Barriers to entry are obstacles, which potential newcomers
would encounter when entering the market.
High barriers to entry help maintain a firm’s profitability.
Barriers to entry include:
Capital Requirements
Economies of Scale

Product Differentiation
Access to Distribution Channels
Government Policy
Expected Retaliation
26
Bargaining Power of Buyers and Suppliers.
Buyers push firms to sell products at the lowest possible price.
Suppliers push firms to buy at the highest possible price.
So both buyers and suppliers can reduce firm profitability.
Their bargaining power depends on:
Buyer/Supplier Concentration
Buyer Switching Costs
Product Differentiation
Price/Total Purchases
Threat of vertical integration
Buyer information
Impact on Quality/Performance
International expansion
27
Rivalry Between Competitors.
Rivalry encourages innovation, but it also reduces profits. In
intensely competitive markets, firms are forced to lower prices
or invest in new R&D, just to keep up with competitors; so
intense rivalry leads to lower profits.
The intensity of rivalry is influenced by:
Concentration
Diversity of Rivals
Product Differentiation and Switching Costs

Industry Growth
Fixed Costs and Storage Costs
Exit Barriers
Excess Capacity
28
The Threat of Substitutes
Don’t confuse “Substitutes” with “Competitors”!
A substitute product is a good or service, which buyers regard
as interchangeable. If substitutes are available, buyers will
switch to substitutes when the price of the product increases
(e.g. new plastic for steel; mobile phones vs. land lines).
The existence of substitutes provides a limit as to how much the
seller can charge for a product, so the threat of substitutes
ultimately constrains the profitability of a firm.
The the threat of substitutes depends on:
relative price performance of a substitute
2) switching costs for the buyer
3) buyer’s propensity to substitute
29
Issues in Five Forces Analysis.
Apply at the appropriate level – maybe not a whole industry.
E.g. European low cost airlines rather than global airlines.
Note the convergence of industries – particularly in the high
tech sectors (e.g. digital - phones/cameras/mp3 players).
Note importance of government actions in the near environment.
Maybe a 6th force?

30
The Industry Life Cycle.
31
Session Summary.
Week 4 Seminar groups will use these ideas to examine the
Competitive forces on RYANAIR.
We introduced Environmental Analysis, industry CSFs &
Strategic Groups.
We explained the Far Environment, PESTLE analysis &
Scenarios.
We explained the Near Environment & Porter’s Five Forces
Analysis.
32
Corporate Strategy.
Week 4: Seminar.
Competitive Forces on RYANAIR.

Today’s seminar uses ideas from our lecture to analyse Far &
Near Environment issues facing RYANAIR.
Prepare by reviewing Wk4 notes plus Moodle resources on
RYANAIR.
Again there will be class group work. Results should be kept for
your assessment revision.
1. Define Ryanair’s industry. What are the key Critical Success
Factors (CSFs) in that industry which Ryanair must address?
2. Undertake a PESTLE analysis on Ryanair in the current
environment. Which are the most important Factors & Impacts?
3. Apply Porter’s Five Forces analysis to Ryanair’s industry.
Which forces have the most impact on their business model?

ALL CHANGE AT TEVA
Expansion under Eli Hurvitz and Shlomo Yanai
After a series of consolidations within the Israeli home
market, in 1976 the company became Teva Pharmaceutical
Industries Ltd, Israel's largest healthcare company, and
appointed EliHurvitz as the first CEO and President, a role
he was to keep until 2002, when he took on the role of
chairman until his departure from ill health in 2010.
Under Hurvitz's control Teva's revenue would grow from
$30m in 1976 to $16bn in 2010, strongly focused on
generic pharmaceuticals. Hurvitz identified the huge
opportunity for generic medicines in the USA and Europe
when the USA passed laws in 1984 encouraging the sale
of generic drugs after patents had expired, if the manufac
turer could prove they were equivalent to the origina
molecule. This rapid growth was achieved through a series
of European and US acquisitions focused on generic phar-
maceutical companies, moving Teva away from domi-
nating the local lsraelimarket to eventually becoming the
uvorld's largest generic pharmaceutical company.
In the 1980s, a series of collaborations with Israeli
university research departments, saw Teva beginning to
develop non-generic or branded pharmaceuticals. By the
mid-1990s, Teva's first non-generic drug, Copaxone® for
the treatment of multiple sclerosis (MS), was approved in
Europe and in the USA. Copaxone® still accounted for
around 20 per cent of Teva's turnover and 50 per cent of
profit in 2015. One of the cornerstones for the successfu
expansion strategy was a strong focus on cost savings
and the very rapid integration of acquired companies.

In April 2002, Hurvitz took on the role of Chairman
and appointed another Teva insider, Israel Makov, who
had joined Teva in 1995, as CEO. Although some acqui-
sitions were made by Makov, it was a period of relative
quiet for the company albeit with rumours of board
room disagreements between Hurvitz and Makov.
According to the journalist Mina Kimes, Eli Hurvitz still
has a significant influence over Teva: '. . black and
white portraits of him hang on the walls. Employees
quote his favoured aphorisms, such as, "It's better to get
a speeding ticket than a parking ticket." The company
maintains an empty office in Hurvitz's memory at lts
Jerusalem facility.':
following the resignation of Israel Makov in 2007, Teva
recruited a high-ranking member of the Israeli defence
forces, Shlomo Yanai. as Teva's President and CEO.
Working with Hurvitz as Chairman. Yanaistated that Teva's
aim was to achieve a sales revenue of around $33bn by
2015. Together they oversaw a doubling of sales revenue
In lust three years, from $8bn in 2007 to $16bn in 2010.
This was achieved by a dual approach of aggressive acqui-
sition of competitor generic companies and diversifying
the company into over-the-counter (OTC) medicines and
looking for branded pharmaceuticals to replace the aging
Copaxone®. Aggressive growth in generics was accom-
plished by the acquisition of Barr in the USA, Ratiopharm
in Europe and Taisho and Taiyo in Japan. The company
also announced an OTC joint venture with Procter &
Gamble.
CASE
STUDY
All change at Teva

Justin Boar and Sarah Holland
Purchase of Cephalon and share price collapse
Af ter a period of ill health, Hurvitz stepped down in 2010
and the first non-Israeli Chairman, Philip Frost, a
US-based billionaire, was appointed in his place. In May
2011, af ter a short bidding war, Teva successfully
trumped a rival hostile bid from Valeant Pharmaceuticals
to acquire Cephalon, a research-based pharmaceutical
company of around 4000 employees located in
Pennsylvania, USA, in a deal worth $6.8bn.
Cephalon posted sales of$2.76bn in 2010, up 28 per
cent, and adjusted net income of $657m, an increase of
40 per cent. Growth was driven by the sleep disorder
drug Provigil® and its follow-up long acting drug
Nuvigil®, the cancer drug Treanda® and the cancer
painkiller Fentora®. Cephalon also boasted a large
research portfolio in several key areas central nervous
system ('CNS'), oncology, respiratory and women's
health, the most promising but highest risk being its
proprietary stem celltechnology.
Valeant, an aggressively acquisitive Canadian pharma-
ceutical company, had seen in Cephalon's established
products an opportunity for further revenue growth and
increased profitability, and had bid $5.7bn, but had
discounted the value of the therapies in development.
The takeover by Teva was welcomed by the board of
Cephalon, which saw Teva as an organisation that valued
their pipeline and would support their ambitious research
and development plans. As Cephalon CEO Kevin Buchi
said at the time: 'Teva shares our strong commitment to
R&D, and we believe our pipeline will thrive under their
leadership.'3 Mr Yanai added;

Introduction
After less than 18 tumultuous months as the head of
Teva, the world's largest generic pharmaceuticals
company, in October 2013 Jeremy Levin stepped down
as CEO. He had been brought into the company in
January 2012 to change Teva's strategy from that of the
outgoing CEO and President Shlomo Yanai. a former
high-ranking army officer, when it seemed clear that the
target of achieving global sales of US$D 33bni by 2015
was no longer achievable, and the share price had subse-
quently collapsed. lts third CEO within two years was
appointed in 2014: Erez Vigodman, a company insider.
who announced that Teva would introduce its third new
global strategy in three years with a focus on product
rationalisation, organic growth and cost saving.
£
M
a
0
>
g
Teva in a nutshell
p World's number one generic company
e 15th largest pharmaceutical company
e Sales of $19.7bn in 2015
e Product portfolio of over 1000 molecules
e Active in 120 countries
e 73 manufacturing sites
B 45,000 employees

Teva's operating results for the years 2011-2015 are
shown in the Appendix at the end of the case.
Sot/nce: Clynt Garnham Medical/Alamy Images.
Founding of Teva
Teva was founded in 1901 in Jerusalem as a small drug
wholesale business that distributed imported medica-
tions. It moved to manufacturing pharmaceuticals in the
1930s and had a considerable boost in the Second World
War supplying allied troops with medical supplies. By
1951, it was being listed on the lsraelistock exchange.
'0ur newly-expanded portf ono in CNS, Oncology,
Respiratory and Women's Health along with our robust
pipeline of more than 30 late-stage products truly
cements our position as a leader in specialty
pharma. . . . We are welcoming many of Cephalon's
talented employees into the Teva family. The combina-
tion of our two winning teams will position Teva to
create maximum value for our patients and customers."+
This case was prepared by Justin Blag an
of good or bad practice. © Justin Boag and Sarah Holland 2016.
Not to be reproduced ar quoted without permission. -'"'
Teva and Cephalon executives said they saw particular
potential in a stem cell therapy for congestive heart failure
under development with Mesoblast Ltd, in reslizumab
690
691

ALL CHANGE AT TEVA ALL CHANGE AT TEVA
for asthma and in the lung-cancer treatment obatoclax.
Ori Hershkovitz, a partner at Sphera Global Healthcare
Fund in Tel Aviv commented in an interview at the time:
'Teva's making four or five shots on goal with a very high-
risk, high-reward kind of profile. If they pull off the stem
cell product, they're in the clear. But if they pull off two
or three of the others, it would also be a very good deal.'s
The company, however, had a number of significant chal-
lenges: the rapid inorganic expansion in generic pharmaceu-
ticals from 2007 10 meant that the manufacturing base
was not consolidated, with over 100 manufacturing sites
spread across a large number of countries. Supply chain and
quality-control issues had also meant that, in the USA,
crucial supplies of two generic drugs had not been made in
2009. The patent protection on Copaxone® was nearing
expiry and, ironically for a generics company, around 20 30
per cent of the sales revenue and a significant amount of
profit was at risk in the next two to three years of generic
erosion with no obvious replacement in view.
The share price began to slide and a number of
shareholders called for a significant reduction in costs
and expressed dissatisfaction with the decision to
purchase Cephalon. In response to this criticism and
the falling share price, Philip Frost accepted the resin
nation of Shlomo Yaniv and appointed Jeremy Levin, a
South African born, UK-educated pharmaceutical
executive with a highly successful track record at two
major pharmaceutical companies. For the first time
since its creation, Teva was headed by two outsiders.

both non-Israeli citizens and with no previous experi-
ence of Teva.
actively seeking new products as a replacement for
Copaxone®. This strategy it was claimed would reshape
the company into 'the most indispensable medicines
company in the world ' and provide significant value to
shareholders.7
Teva began a series of rationalisations and econo.
mien. aimed at reducing costs by around $2bn per
year, involving around 700 job losses in Israel. With
the CEO working alongside the new Chairman it
appeared the company had moved into a new era. As
Philip Frost stated: 'Teva also must act like a global
pharmaceutical company. There's a lot of nostalgia for
the good old days when it was a family company and
the board got together for a little lunch. That's not
what Teva is nowadays.'' Levin said Teva would sustain
'profitable growth ' but confirmed that the company
would not achieve the ambitious previous target of
$33bn revenue by 2015.
Key elements of the new strategy included:
. Tailoring the product offering to address regional
needs. With its diversified portfolio, Teva was well
placed to focus on high-value generics in the USA and
Japan, but consumer OTC products in Latin America
and Russia, for example.
e Rationalisation of the marketed generic product port-
folio. Less profitable products were to be culled, while
price increases were implemented for others.

e Globalizing key functions to streamline operations and
gain economies of scale, cutting costs by $1.5 to
$2bn per year.
. New R&D focus on high-value generics. Teva planned
to leverage its huge portfolio of over 1400 medicines,
and its extensive formulation and drug delivery exper-
tise. to create new combination products that would be
harder to imitate than traditional generics. These would
offer medical value through improved efficacy or
compliance, or reduced side-effects, in order to justify
higher prices. For the first time, Teva would incorporate
formal medical input to its generics business.
. Ref ocusing the R&D pipeline, with a strong emphasis
on CNS and respiratory products. The oncology product
obatoclax developed by Cephalon was discontinued.
. Formation of a drug discovery network comprising all
the academic centres in Israel.
The announcement did not meet with shareholder
approval and the share price dropped by nearly seven per
cent. Cost cutting and consolidation continued, mostly
without major workplace disruption, except in Israel
where a number of sites threatened strike action. ,
lilt :l£l=«£: jill ' It ';:. ':=w
management team. Dispute apparently came from two
directions:
. The Israeli board members who felt that the new CEO
working alongside the Chairman failed to understand

the unique culture of Teva.
p Rumoured disputes between Frost and Levin over the
size and speed of cost cutting.
The relationship between board and directors was often
challenging and at one point there were even stories that
Levin had hired a private detective agency, which had
used a polygraph test on board members to identify the
source of boardroom leaks to the press.9
worked with Teva in the past. In July 2014, Teva
announced a new commercial structure, effectively
dividing the company into two business units, the Global
Specialty Medicines group and the Global Generic
Medicines group. They stated that this would bring a
heightened focus on profitable and sustainable business,
driven through organic growth of it two business units
and in defending Copaxone® from generic competitors
by launching a new higher dose formulation. They also
stated they would increase their focus on key markets
and on key products. The company stated that it would
continue its cost-saving drive but would also look for
appropriate business development opportunities
In April 2015, Teva launched a $40bn hostile bid to
buy Mylan, a Netherlands-based rival generic pharma-
ceutical manufacturer. The combined companies would
have a turnover of around $30bn and a profitability of
around $8bn. Teva argued that cost-saving synergies of
around $2bn could be achieved by the acquisition. Teva
believed that: 'The combined company would leverage its
significantly more efficient and advanced infrastructure,
with enhanced scale. production network, end-to-end
product portfolio, commercialization capabilities and
geographic reach '.:: Mylan rejected Teva's offer and took

the unusual step of publishing the text of a letter sent
from its CEO, Robert Coury, to Teva's Erez Vigodman,
saying that he hoped Teva's culture would change and
they would have more credibility in their future business
dealings but that the Mylan board did not want to inflict
Teva's problems on Mylan's shareholders. Coury went on
to say:
Levin departs and Teva enters a new era
n October 2013, following further press speculation and
a press story that the management team had sent a memo
to the controlling board asking them not to intervene so
heavily in management decisions, Jeremy Levin left Teva
and the Finance Director was appointed as temporary
CEO. The already-lowered share price reduced by a further
seven per cent. In an investor call shortly af ter Levin's
departure, Philip Frost stated; 'Since Levin's arrival, the
board and management saw eye to eye when formulating
the strategy. . However, differences of opinion arose
between us as to how the strategy will be implemented. In
the last few weeks we had talks with Levin and decided
that it would be better for our ways to part.':o
Other insiders reported that the problems for Levin
ran much deeper, not least a failure to understand the
unique lsraelicharacter of Teva. As Eldad Tamir, from an
Israel-based investment group stated:
$
g
$
8

©:
$
%
%
$
Levin's short tenure 'Levin entered a difficult situation. The
need for a
cultural and communicational connection to Israeli
society is critical for Teva. This company is among the
cornerstones of the local industry and its products can
be found in every home. . . . Teva had an open relation-
ship with its investors, employees and Israeli society.
Instead of continuing the cultural tradition they brought
in someone else, and it didn't work. There was no conti-
nuity for the rootedness. Everything became cold and
alienated. Teva needs a local leader.'n
'Since 2007, your Board has churned through three
different Chief Executive Officers, running the only one
with the global pharmaceutical experience, which we
think is critical to the position, out of town within 18
months of being on the job. Any investor should be
gravely concerned that an experienced lead executive
could be dismissed over "slight differences" of opinion
with the Board. We believe that these rapid changes in
a short period of time have left the company with a
complete lack of long-term strategic focus. While I
recognize that you are fairly new to your position, I
cannot ignore the fact that you were present on Teva's
Board during some of the company's most turbulent and
"dysfunctional" times. . . . Ten years of acquisitions
and a flip-flopping strategy have left Teva with a smat-

tering of assets in specialty, generics, biotech and
consumer. You claim to want to "redefine the generics
industry", but what faith can we have that you have any
clear vision for the industry at all? And how can inves-
tors be assured this "redefinition" will not be aban-
doned for yet another new strategy?'''
On the announcement of his appointment, Teva's share
price increased, major shareholders seeing Levin's strong
pharmaceuticalbackground as a good fit for the company.
Levin told journalists on his appointment;
& 'Teva is a company with a unique culture. In the time I
have been here, I have had the opportunity to meet the
leadership and talent that has made Teva the successful
company that it is today. In my experience, Teva has
some of the best people in the industry with a level of
drive, determination and innovation that is second to
none. . . . We will continue to be innovative by focusing
not only on how we commercialize but also on how we
discover, develop and manufacture - all of which start
from the same point - world-class R&D.''
$
Erez Vigodman: a new/old strategy for Teva?
After an extensive international search, a local leader, the
Israeli turnaround specialist Erez Vigodman, became
Teva's President and CEO in February 2014. He had
joined Teva's Board of Directors in 2009. Shortly after-
wards, following rumours of disagreements with the new
CEO, Frost resigned and a new Chairman was appointed
in his place: Yitzhak Peterburg, an lsraelicitizen who had

ALL CHANGE AT TEVA
The board of Teva replied that they rejected many of
the statements in the letter and reiterated their interest
in the purchase of Mylan.
Teva's strategic future?
I :i:i: zl * ilu;nile'::E:i+
expansion in generic pharmaceuticals through aggressive
acquisition of competitor manufacturers, as originally
laid down by Eli Hurvitz. With closely cooperating lsraeH
Chairman and CEO, and a stock market eager for further
growth, further inorganic growth in the coming years was
anticipated. Time will tell, however, if Teva is able to
follow the other part of Hurvitz's former strategy: rapid
integration of new companies and consolidation and
rationalisation of the manufacturing capacity.
Notes and references
1. $1 - £0.6 : €0.75.
2. M. Kimes, 'Teva returns to roots after outside CEO faces
"nuthouse"
B/oomherg, 4 March, 2014
3. Teva, 'Teva to acquire Cephalon in $6.8 billion transaction ',
press
release, 2 May 2011
4. Teva, 'Teva completes acquisition of Cephalon ', press
release, 14
October 2011
5. N. Kresge and R. Langreth, 'Teva bets on stem cells, cancer
in $6.2
billion bid for Cephalon ', £3/oom6eng, 3 May 2011

6. S. Griver, 'Meet Jeremy Levin, the new head of drugs firm
Teva ', ./ew7sh
Ch/on/c/e, 17 May 2012.
7. B. Berkrot, 'Teva CEO promises to reshape, refocus company
', /?eufen.
11 December 2012.
8. D. Wainer, 'Billionnaire doctor prescribes small Teva deals
for Israeli
giant ', £3/oomheng, 5 March 2013.
9. T. Staton, 'Teva's ex-Ceo reportedly forced polygraph tests
on board to
plug media leaks', f7encePh.am?a, 5 November 2013.
10. A. Weisberg, 'Teva chairman: "the company is stronger than
ever"', 30
October 2013, http://www.jerusalemonline.com/finance/teva-
chair-
ma n -the-com pa ny-is-stronge r-tha n-eve r-2 162 .
11. N. Zommer, 'Can foreign CEO make it here?', Hnefnews, ll
March.
12. Teva. 'Teva proposes to acquire Mylan for $82.0C) per share
in cash
and stock ', press release, 21 April 2015.
13. Mylan, 'Mylan board unanimously rejects unsolicited
expression of
interest from Teva ', press release, 27 April, 2015.
14. M. de la Merced and C. Bray, 'Teva pharmaceuticals to buy
Allergan's

generics business', /VeK ' Honk 77mes, 27 July 2015.
15. Teva, 'Teva to acquire Allergan generics for $40.5 billion
dollars creat-
ing a transformative generics specialty company well positioned
to win
in global healthcare ', press release, 27 July 2015.
2013
CASE
STUDY
Mondeliz International: 'Are you going to stick around, Irene?'
Acquisition, de-merger, divestment and governance in the
growth strategy of Mondeliz International
Eric CassellsE
Teva buys Allergan's generic business
In a surprise move in July 2015, Teva announced that
they were dropping the attempt to buy Mylan, as they had
instead entered into a definitive agreement to acquire
Allergan's global generic pharmaceuticals business for
$40.5bn, with Allergan receiving $33.75bn in cash and
$6.75bn in Teva stock. Under the agreement, Teva would
acquire Allergan's globalgenerics business, including the
US and international generic commercial units, a third
party supplier, global generic manufacturing operations.
the global generic R&D unit, the international over-the-
counter (OTC) commercial unit (excluding OTC eye-care
products) and some established international brands.
The acquisition would mean that around 70 per cent of
future turnover would be from the sale of generics.
The deal, the largest in Israel's corporate history. was

generally welcomed by shareholders and stock market
analysts: 'Allergan's business is more high-end [than
Mylan]. It's a more interesting business . . . a profitable
business and it's well managed,' said Gilad Alper, an
analyst at brokerage Excellence Nessuah.i4
Yitzhak Peterburg said:
This case explores corporate strategy as it emerges over time,
through the example of Mondeliz International.
The origins of Mondeliz lie in the long-term growth strategy to
create a global snacks business within what was
the Kraft food group. The case focuses on the initial major
acquisition of Cadbury PLC by Kraft as a means to
achieve scale and global coverage in snacks, the subsequent de-
merger from Kraft's slow-growing grocery
business, and the divestment of the more volatile coffee
business into an equity alliance ('JDE ') to allow the
creation of a focused Mondeliz snacks business. All of these
events occur against the backdrop of pressures to
deliver against corporate forecasts built on expectations of
growth in a volatile marketplace, and the pressures
on the corporate managers dealing with activist and short-term
investors is also considered in some detail.
The ChicagoBusiness.com line on 6 August 2015 was
attempting to put Irene Rosenfeld in play, with the ques
lion: 'Are Monde16z CEO Irene Rosenfeld's days
numbered?' it followed a period of market speculation
over whether Pepsico (or another competitor) would
acquire Mondelaz, and the announcement of a 7.5 per
cent stake acquisition in Monde16z by 'activist ' share-
holder William Ackman and his Pershing Square Capital
Management on 5 August. Come 23 December, Irene
was very much stillin place at Mondelez, and CNNMoney
nominated her as one of their top ten 'Best CEOS of the

year ' for 'coping with activists'. A few days earlier in the
UK. the arena of her bitter acquisition of Cadbury in
2009 10, the /ndepe/7dent newspaper profiled her as
'the ( . . . ) chocolate boss with a hard centre '.
entire Kraft group. In 2011, Kraft announced it would
de-merge, with its North American grocery business
retaining the Kraft name, and its larger international
snacks and confectionery business being named
Monde16z. Irene Rosenfeld chose to stay as the CEO of
Monde16z.
Ms Rosenfeld is recognised as a powerful business-
woman (ranked 17 in 2014 in Forbes' annual list of 'The
World's 100 Most Powerful Women '). Less welcome
recognition, perhaps, is her honourable mention in 2013
in F7columnist Lucy Kellaway's annual business Golden
Flannel Awards, in the Chief Obfuscation Champion cate
gory. Her profile in the /ndependenf (December 2014),
however, notes her 'legendary ' reputation for attention to
detail, an ultra-competitive streak derived in part from a
sporting background, her boldness in making brave
moves, and her willingness to 'face off . . formidable
foes.' it also reports views that she can be 'remote and
clinical '.
'This acquisition will result in significant and sustained
value creation for our stockholders, reinforces our
strategy, accelerates the fulfilment of a new business
model. strongly supports top-line growth and opens a
new set of possibilities for Teva. Together with Allergan
Generics, Teva will have a much stronger, more effi-
cient platform to achieve our goals - both financially
and strategically - with the right platform for future
organic and inorganic growth."5

The rise oflrene Rosenfeld
Born in 1953, Ms Rosenfeld spent the first decade of her
career accumulating degrees (including a PhD in
Marketing and Statistics) from Cornell University. Af ter a
brief spell in advertising. she joined General Foods, at
the start of a 30-year plus career in the food and
beverage industry. In time, General Foods was acquired
by Kraf t, and Ms Rosenfeld has largely stayed within this
one evolving group ever since. Arguably, her key career
break came on the one occasion she ventured outside
the Kraft group in 2004, to become chair and CEO of
Pepsico's large snacks business - Frito-Lay. By June
2006, Kraft had wooed her back to become CEO of the
APPENDIX: Teva's operating data Transforming Kraft
PLC
the acquisition of Cadbury
For the year ended 31 December Prior to the de-merger of the
Kraft Corporation in 2011.
Irene Rosenfeld was at the centre of one of the most
controversial hostile acquisitions of recent decades.
Between August 2009 and February 2010, Kraft fought
a hard battle to acquire the UK confectionery giant,
Cadbury PLC, eventually acquiring it for f11.5bn
(€13.8bn, $17.3bn).: Cadbury was a pillar of the British
2015 2014 2013 2012 2011
US$m (except share and per share amounts)
Netrevenues
Cost of sales

Gross profit
Research and development expenses
Selling and marketing expenses
General and administrative expenses
Impairments, restructuring and others
Legal settlements and loss contingencies
Operating income
The case was prepared by Eric Cassells. of the Business and
Management Department at Oxford Brookes University
Business
School. UK. It is intended as a basis for class discussion and
not as an illustration of good or bad practice. © Eric Cassells.
2016
Not to be reproduced or quoted without permission.
Source: 2015 Annual Report of Teva Pharmaceutical Industries
Ltd.
694 695
19.652 20,272 20,314 20,317 18,312
8,296 9,216 9,607 9,665 8,797
11,356 11,056 l0,707 l0,652 9,515
1,525 1,488 1,427 1,356 1,095
3,478 3.861 4,080 3,879 3,478
1,239 1,217 1,239 1.238 932
1,131 650 788 1,259 430
631 (1 1 1) 1,524 715 471
3,352 3.951 1,649 2,205 3,109
MONDELEZ INTERNATIONAL: 'ARE YOU GOING TO

STICK AROUND, IRENE? MONDELEZ INTERNATIONAL
'ARE YOU GOING TO STICK AROUND, IRENE?
Table I
cited that: 'The Kraft takeover of Cadbury has proved to
be an event which is likely to shape future public policy
towards takeovers and corporate governance.'3 The report
was highly critical of the behaviour of Kraft, and bloggers
gleefully described MPs as 'fighting each other to lay into
Kraft.' MP Lindsay Hoyle, at one point queried whether
Kraft is 'remote, smug, and . . . duplicitous'.
The more measured tones of the Committee's report
focused on two issues primarily:
1. Kraft made a promise (made during the takeover
battle) to reverse Cadbury's recent announced decision
to close its Somerdale factory and move that produc-
tion to Poland. The promise (to reverse the closure) was
subsequently withdrawn by Kraft less than three weeks
after it took control of Cadbury, and production moved
to Poland regardless. The Committee's formal conclu
sign was measured but damning, opining that: 'Kraft
acted both irresponsibly and unwisely in making its
original statement . . . (and) has left itself open to the
charge that either it was incompetent in its
approach . . . or that it used a "cynical ploy" to improve
lts public image during its takeover of Cadbury.':
2. The Committee also expressed their 'disappointment '
that: 'Irene Rosenfeld, the Chairman and CEO of Kraft
foods Inc. did not give evidence in person. Her
attendance at our evidence session would have given
an appropriate signal of Kraft's commitment to
Cadbury in the UK and provided the necessary

authority to the specific assurances Kraft have now
given to the future of Cadbury.':
Neither that refusal to attend, nor the manner of it
reflected well on Kraft . . . '4
Kraft strategic priorities The importance of the Cadbury
acquisition
Focus on growth categories to transform Kraft into a leading
snack, confectionery and quick meal company.
Expand its footprint and scale in growing developing markets.
:::=i:'£E:?:' £!::' b 7:a=;- '-: ..-'..-:.-;i;='
Cadbury oilers Kraft a complementary presence in developing
markets, with Kraft strength and channels in Brazil, Chinaand
Russia, and Cadbury in India, Mexico and South Africa.
Kraft's strength lay in traditional grocery channels, whereas
Caan....-
was well placed in 'instant consumption ' channels. '' ''"duly
The Cadbury acquisition as part of a longer-term
strategy
Warren Buffet reduced his holding in Kraft from 9.5 per
cent to nearer 6 per cent in the immediate aftermath of
the bid. His comments at the time reflected the belief
that bidders of ten overpay to the detriment of their share-
holders, and that Kraft would suffer the 'winner's curse
(of having paid too much for synergies that would take
much longer to deliver, or of ignoring the real costs of
post-acquisition integration).
On the release of Kraft's fourth quarter results for
2010, commentators believed that shareholders were still

'wondering whether they bit off more than they could chew
when they put up f11.5bn for Cadbury last year.'5 Net
profits had fallen 24 per cent to $540m in the quarter,
reflecting the scale of integration costs, and a 'disap
pointing ' 2.2 per cent rise in Cadbury's like-f or-like sales,
well behind the 5 per cent sales growth that Cadbury had
posted in its last period of independence. The deal had
certainly not yet shown itself to be the transformational
move that Ms Rosenfeld staked her reputation on. Kraft's
next move to transform itself was less expected.
When interviewed on Bloomberg TV on 16 September
2010, Ms Rosenfeld re-affirmed that Cadbury was 'a
critical piece of the puzzle we have been trying to
complete.' On 4 August 2011, Kraft announced its inten
bon to split into two separate corporations, and the crit-
icality of the Cadbury acquisition became more obvious.
Kraft said these two businesses, 'differ in their future
strategic priorities, growth profiles and operational
focus.'s The lower-growth North American grocery foods
business was to include brands such as Kraft cheeses,
Maxwell house coffee and Capri Sun, with revenues of
$16bn. At the same time, a more focused but globally
spread snacks and confectionery business (including
Trident gum, Oreo cookies, Milka chocolate and Cadbury)
would have estimated revenues of $36bn, with over
100,000 employees in 80 countries. This snacks busi-
ness was poised to take advantage of the perceived shifts
in consumer behaviour towards snacking, rather than
cooking two or three meals each day.
Within the confectionery arm of that global snacks
business, Cadbury brands represented over 80 per cent
of revenues. The rationale for the global snacks business
remained that which drove the Cadbury acquisition; to

move into higher growth segments as a 'snack, confec-
tionery, and instant consumption ' company, and to
increase footprint and 'white space ' synergies for 'iconic
brands' in fast-growing emerging markets.
Increase presence in 'instant consumption ' channels as they
continued to grow relative to traditional grocery channels in the
established US and EU markets.
Pursue margin growth, through improved portfolio mix,
reducing
costs and investing in quality.
The higher exposure to confectionery of a post-acquisition Kraft
would provide Kraft shareholders with an improved portf ono of
higher-margin growth products.
business establishment and had a history as a benevo-
lent employer, noted, for example, for pioneering
employee pensions. The company was rooted in the
communities it operated in (notably at Cadbury's head-
quarters in Bourneville, south of Birmingham, where a
model village was constructed after 1893 to show how
employees could be better housed in the factory age).
Kraft's rationale for acquiring Cadbury was laid out in
its bid offer documents (see Table I).
Kraft's bid did not attract the uniform support of its
own investors. The largest shareholder in Kraft was
Berkshire Hathaway, led by the prominent investor
Warren Buffet, arguably the most influential and best-
known investor in the world, and a favourite of the US
financial news channels. On 16 September 2009, Buffet
warned that Kraft must not 'overpay ' for Cadbury,
expressing concern at the offer to Cadbury of an 'attrac-

tive' EBITDA multiple of 13.9 times. Buffet was a long-
term supporter of the Kraft corporation, holding 9.4 per
cent of shares. More provocatively, perhaps, on
Bloomberg's business news channel on 19 January,
whilst describing Kraft CEO Irene Rosenfeld as a 'good
person ', Buffet described the increased final takeover
offer as a 'bad deal '. He dismissed the potential synergy
benefits identified in Kraft's offer document, saying he
was distrustful of unrealized benefits. He stated that, 'If
I had a chance to vote on this, I'd vote no '. Referring to
the proposed acquisition of Cadbury, he concluded, 'l
feel poorer '. Kraft's shares fell two per cent on his inter-
vention.2 Irene Rosenfeld was asked about Buffet's inter-
vention on Bloomberg TV. Refusing to be drawn, she
stated that she believed Buffet was evaluating the deal
from the basis of existing cash flow and that he was
ignoring the potential transformational synergies that
were at the heart of the strategy to acquire Cadbury.
In addition to the 'transformational ' rationale put
forward by Kraft for the deal, the offer documents iden-
tified potential cost savings of $625m. The $625m was
to come from savings and scale economies in procurement.
manufacturing, customer service, logistics and R&D
($300m), generaland administrative costs($200m), and
marketing and selling costs ($125m). These savings esti-
mates were in line with historic transaction experience
for the sector at 6.5 per cent of revenues.
Resistance to the deal in the UK was led by the trade
unions (concerned that up to 7000 jobs might be lost as
part of those 'savings'). by the nationalist heritage lobby
(concerned by the impact on Cadbury's communities.
and concern for national prestige with the loss of a large

global corporation headquartered in the UK), and by
Cadbury family members (concerned that a distinctive
'values-led ' corporation would be destroyed). Local and
UK national governments also expressed their concern
that Cadbury's base in the UK (including its R&D
centres), and its status as a global leader in confec-
tionery, might be subverted.
In the event, Kraft was forced to raise its offer for
Cadbury by over 12 per cent (Warren Buffet's 'bad deal ')
to secure the recommendation of the Cadbury board, and
concluded the deal in late January 2010. Their case may
have been helped in no small measure by the interven-
tions of short-term traders and hedge funds, increasing
their aggregate holdings in Cadbury from about five per
cent in August 2009 at the start of the bid, to an esti-
mated 40 per cent by the end. Cadbury argued that the
actions of these short-term arbitraging investors effec-
tively de-stabilised Cadbury's defence. Concerns over
their behaviour and interests were also raised by UK
politicians during and af ter the acquisition.
8
$
g Indeed, during the proceedings, MPs simply demanded'where's
Irene?' and lambasted Kraft's senior represent-
ative at the hearing, Marc Firestone, as an 'apologist ' for
her. calling her absence a 'sizeable discourtesy'.3 The
Da/P ne/egraph newspaper quoted Ms Rosenfeld's robust
response that: 'Attendance would not be the best use of
my personal time.'
As to the commitments Kraft made to the BIS, in

December 2010 a plan to shed 200 jobs at Cadbury's
Bourneville plant was announced. At the same time,
Kraft announced a £17m investment in research at its
designated sole global 'Centre of Excellence for
Chocolate ', now located in Bourneville. The BIS
Committee revisited events in April 2011 to monitor
Kraft's commitments. Concern was expressed at poor
engagement between Kraft and the trade unions, and the
perception that strategic decisions over the Cadbury
brands were being made in Kraft's European headquar-
ters in Zurich. More personal criticism followed for Ms
Rosenfeld: 'In a repeat of our predecessors' experience,
Irene Rosenfeld (. .) refused to give evidence despite
repeated requests from us that she should appear.
©
$
@
}
MONDELEZINTERNATIONAL 'ARE YOU GOING TO STICK
AROUND, IRENE? MONDELEZ INTERNATIONAL 'ARE
YOU GOING TO STICK AROUND, IRENE?
The de-merger took place on I October 2012 when
the North American grocery business started trading as
Kraft Foods Group Inc., whilst the global snacks business
became Monde16z International, with Ms Irene Rosenfeld
firmly at its helm. Benefits from the Kraft de-merger
were to be 'evident in the first year '.' The Kraft Foods
Group commenced trading on NASDAQ, and gained 2.99
per cent in the day's trading to reach $45.42. On the

same day, shares in Monde16z International opened at
$28.42, before softening to $28.01.
1:::=:' £:lT; T= 1::i::,i='t:T-::-"-
.H£= =: "i:;: :$;=:*:J:J=: !:::=;":::
analysts approved.:' Particular comments were made on
Monde16z's focus on emerging markets, with their three.
cluster priority strategy of targeting: first, the BRIC
markets, followed by 'next wave ' markets (Indonesia
Middle East and Africa), and finally 'scale ' market Oppor-
tunities in Australia, Japan, Mexico and Central Europe.
Whilst Cadbury had provided much-needed presence in
the Indian market, strength in the Chinese market carne
from the dominance of the Oreo cookie in the biscuit/
cookies market. In May 2013, it was reported that
$600m was to be channelled into advertising and supply
chain improvements in these markets over the following
three years.
Writing about the wider 'packaged foods' sector in
March 2014, Skelly:: noted that Monde16z (with 2.2 per
cent global maket share) faced strong competitors in
Nest16 (3.4 per cent), Pepsico (2.1 per cent), Unilever
(1.7 per cent), Danone (1.4 per cent), Mars (1.4 per
cent) and others such as Kraft Foods, Kellogg, Genera
Mills and Lactalis, all of which were aware of the impor-
tance of the emerging markets. MondelQz's key strengths
were seen as; a more even global distribution of their key
brands (see Figure 1); owning nine globally recognised
'power brands' (see Figure 2); expertise and potential for
'cross-branding ' to leverage those power brands and fil
in the market 'white space '; a strong supporting network
of manufacturing and distribution facilities in Latin

16
14 +Oreo
12
=R 8
g
8
Halls+ + Nabisco
Trident+' Milka
Mondeliz strategy after de-merger + Cadbury
The name 'Mondeldz ' was coined by two of the compo
ny's employees in response to a naming competition, a
composite of Romance/Latin words for 'world ' and 'deli-
cious'. It was chosen to evoke the global ambitions
needed to take on the 'global titans' of Pepsico's
snacks business, Frito-Lay, and Nest16 SA. The name
was intended only as a 'small print ' label, with the
famous brand names such as Ritz, Oreo, Cadbury and
Milka taking prominence for consumers. Despite the
intention that it was not to be a consumer brand, some
queried the failure to spend money to use a professional
naming agency, and others criticised the chosen name
as having meaning only in the Mediterranean Latin
countries of France, Spain, Italy and Portugal: 'l doubt
that its connotations are going to be so obvious to
English, German, Japanese, or Chinese speakers . . . it's
saving grace is that it's lust a name for a corporate
entity.''
The two main strands of the Monde16z strategy were

laid out by Tim Cofer, European president at Monde16z
International, speaking in October 2012: 'Forty-four per
cent of our revenue will come from the emerging markets,
benefitting from the growth there,' with Europe accounting
4 + Philadelphia
2 +LU
+ Ritz
0 1000 2000 3000 4000 5000 6000 7000 8000 9000
Retailvalue sales 2014(US$ million rsp)
figure 2 Monde16z billion dollar brands: retail value sales 2014
vs percentage growth 2013
bounce: Skelly/fu/onion/toc 2014.
0
.14
America, Asia Pacific, Eastern Europe, Middle East and
Africa; and a strong position to exploit future biscuit
growth in India. Set against these competitive strengths.
however, they had weaknesses in the US chocolate
confectionery market (where the historic rights to manu-
facture Cadbury products lay instead with Hershey), a
virtually complete reliance on sweet (rather than savoury)
snacks, and greater exposure to volatile cocoa and coffee
commodity prices.
The Monde16z power brands in the 'packaged foods'
sector were concentrated in the two categories, confec-
tionery and biscuits (see Figure 3). Monde16z was the

dominant manufacturer of biscuits in the world, with 18
per cent market share (six times larger than Kellogg in
second place), and with four of the top five labels (Oreo,
TUC, LU and Nabisco). With Cadbury, Milka and Trident,
it also accounted for the largest 14 per cent global
market share in confectionery
This narrowed product portfolio (by 'packaged food '
sector standards) was, of course, the very result of the
de-merger, and in pursuing these higher growth busi-
nesses, Monde16z had arguably increased its depend
ence on the performance of the confectionery and
biscuits markets. Within these categories, the heightened
M
@
@
©
B
W
W
g
$
8
6
5
4
3

2
l
0
l
0
0
-'+
0
CN
E
8
e Middle East and Africa
I Australasia 6EasternEurope
e Asia Pacific
4.0
S 3.00
6 2.0
8
1.5
0
~Latin America lce cream
© Sweet and savoury snacks
e© SpreadsSnack bars Biscuits j8confectioneryNorth. Americae

DairyWestern Europe
100 200 300 400 500
Market size 2014 (US$ billion)
600 700 800
50.000 100,000 150,000 200,000 250,000 300,000 350.000
400,000 450,000 500,000
Market size 2014(US$ million rsp)
figure I Monde16z's balanced geographic portfolio 2014 and
growth 2014 2019 by region
/Vote: Bubble size shows company shares of region in 2014;
range displayed 0.4-3.1%.
Source: Skelly/fu/onion/to/1 2014.
figure 3 Monde16z product category portfolio 2014 and growth
prospects 2014-2019 by category
/Vote: Bubble size shows company share of category in 2013;
range displayed 0.4--18.0%
bounce: Skelly/fu/oman/Zoc 2014.
@ 698 699
MONDELEZ INTERNATIONAL 'ARE YOU GOING TO STICK
AROUND, IRENE? MONDELEZINTERNATIONAL 'ARE YOU
GOING TO STICK AROUND, IRENE?
6
cn 5
0q 4-'+

E
8 1
Middle East and Africae Pressure CookerSnack-f ood maker
Monde16z International, after its split from Kraft Foods, has
been under pressurefrom two activist investors to im prove perf
ormance.
$50 a share
81 ;* "«.,'; "; -;''
a : e~.{-'-«.,'';
Eastern Europei
Austra lasia 2 Oct 2012:
MondelQz
Internationa
splits from
21Jan 2014
Nelson Peltz is
named a director in
return for dropping
5 Aug 2015: Pershing Square
Capital Management LP,
headed by William Ackman
discloses a 7.5% stake.
Western Europe
30,000 40,000 50,000 60,000
Market size 2014(US$ million rsp)
Figure 4 Mondeldz International Inc.: confectionery growth

prospects by region 2014-19
/Vote: Bubble size shows region's proportion of Monde16z %
value share in confectionery from 7.5% for Asia Pacific to
33.2% for Australasia
Source: Skelly/funomon/foc 2014.
0 lO,ooo 20,000 70,000
importance of the emerging markets can be seen by, for
example, the market growth prospects by region for
confectionery (see Figure 4).
economic growth played directly against Monde16z's
intended strategy and, for example, led to Monde16z's
revenue growth from the emerging markets slowing ta
only 8 per cent in 2012, with operating income from
these markets down 22 per cent. Further difficult
years were recorded in 2013 and 2014, with Ms
Rosenfeld noting in February 2014 that, 'frankly, we're
very disappointed that our performance was below
what we and our shareholders originally expected.'i2
Michael Silverstein of Boston Consulting Group hinted
at this dilemma: 'Everyone knows the growth is there,
but there is high year-to-year variability. One year of
turmoil does not really break long-term trends. No
company should be choosing to invest in developing
markets for a short-term bump. It's about riding the
IO-year doubling, tripling of market size.'::
by Nelson Peltz, discloses
a 2.5% stake
20
2012 1'13 14 '15

How did Mondeliz fare in the emerging markets? Figure 5
Monde16z share price performance, October 2012 December
2015
bounce: WSJ Market Data Group
The risks inherent in running an international business
had already been acknowledged by Kraft in September
2012, prior to the de-merger, where it was noted, for
example, that reported earnings in 2013 for Monde16z
would likely be lower than some forecasts due to the
strengthening of the US dollar (Monde16z's reporting
currency) against a basket of other international curren-
cies. At the same time, Tim Cofer had suggested that
Monde16z was 'well positioned to cope with volatile
commodity prices'.
Revenues from emerging markets had been soaring
by 23 per cent in 2011, as GDP in the BRICs countries
increased by 6.9 per cent. With US GDP growing at
only 1.8 per cent, the de-merger and divestment of
Kraft's slow-growing North American grocery business
from Monde16z made 'Ms Rosenfeld look genius'.:: The
growth rating that Monde16z was attracting has,
however, faltered in the short term, as emerging
market GDP growth dipped to 5.2 per cent in 2013
(recovering to 5.3 per cent in 2014, before dipping
once more to 4.4 per cent in 2015, with an estimate
of 4.9 per cent for 2016). At the same time, the devel-
oped world GDP (ied to some extent by the USA)
showed slightly enhanced growth in the 2.0 to 2.4 per
cent range.:; in addition, Mondeldz suffered from a
poor competitive performance with the failure of
expected sales growth in Brazil and Russia specifically,
and sales of the key Oreos cookies brand faltering in
2013 14 in China. This change in the balance of

and margin improvement, the company runs the risk of
becoming a target.':'
These comments were not new for 2015. This pres
sure to improve operating margins and reduce overheads
has been a near constant after Monde16z's de-merger
from Kraft was completed, since it became clear that
emerging market growth was more muted than expected.
Whilst Warren Buffet reduced his exposure to Kraft in the
wake of the Cadbury acquisition, one of the supporters of
that deal has proved more persistent. Nelson Peltz (and
his investment company, Trian Fund Management) liked
the idea of a global snacks and confectionery business so
much that on 17 July 2013 he announced his belief that
Pepsico should acquire Monde16z(which he criticised for
poor profit margins), merge it with its own Frito-Lay
snacks subsidiary, and divest its own slow-growing soft
drinks business (including its iconic 'Pepsi ' brands).
Trian was a shareholder in both companies (at 2.5 per
cent, the fourth largest Monde16z shareholder), but the
initial reaction from the market and other Pepsico share
holders was less than enthusiastic.
The intervention was unwelcome to Ms Rosenfeld,
regardless, effectively underlining the questions about
Monde16z's performance and seeking to put the company
'in play '. Peltz's campaign to persuade Pepsico to launch
a bid for Monde16z persisted until January 2014, when,
under pressure, Monde16z offered him a seat on the
board of the company. In exchange, Peltz dropped his
campaign, his threat of a proxy fight against the board to
put the company up for sale, and concentrated instead
on trying to persuade Pepsico to sell its drinks business.
The manoeuvre of offering Mr Peltz a seat on the

board seemed consistent with Ms Rosenfeld's strategy of
trying to engage with activists without ceding authority to
them in her words, keeping them 'inside the tent '. Mr
Peltz was not a 'typical board member ', however, asking
for detailed information about company spending by
country, and interviewing Ms Rosenfeld about expected
return on investment (ROI) data on large investments in
global plant modernization.
Even as Ms Rosenfeld invited Mr Peltz onto the
board, others were lining up to pressure Monde16z
management into further cuts. In April 2014, for
example, Ralph Whitworth of Relational Investors LLC,
stated he was joining Trian in pressing for better
margins::5 'We're working behind the scenes to try to
urge change there . Does the current management
have the ability to get the job done? That's a question
mark. If they don't, I think that you'll probably see
some changes there.' When asked in interview to
respond to Mr Whitworth's threat, Irene Rosenfeld
responded that, 'l run this company for the benefit of
Investor pressures to improve profit margins
Persuading all investors that a highly focused snacks and
confectionery business, geared to the growth of the
emerging markets, is a good investment, at the same
time as results deteriorate, has not been a straightfor-
ward task. According to data from the IVa// Sfneef Journo/
(see also Figure 5), Monde16z's shareholders had seen a
68 per cent total return in the period from October 2012
(the de-merger) to December 2015. The equivalent
return for the Standard & Poor 500 index was 55 per
cent. and sector returns were even less at 52 per cent.
Investors looking to the promise of emerging market
growth that failed to materialise appeared to want more.

In a September report by Sanford C. Bernstein & Co.,
analyst Alexia Howard wrote: 'If Monde16z fails to live UP
to the expectations of investors, or leaves money on the
table with respect to the potential for further cost-cutting
700 701
STICK AROUND, IRENE? MONDELEZ INTERNATIONAL
'ARE YOU GOING TO STICK AROUND, IRENE?
a[[ of our shareho]ders, [and] I am p]eased by the
progress we have made to date.':;
Out of all this (including the weaker results from
emerging markets), Monde16z has, nevertheless,
embarked upon a series of efforts, inter alia, to improve
margin and shareholder value:
1. Introducing a share buy-back scheme, which has
gradually increased to a plan to buy $13.7bn of shares
by 31 December 2018.
2. Introducing a zero-based budgeting system, of the
type championed by 3GCapital, and intended to
produce $1.5bn of annual savings.
3. A further scheme to save $1.5bn through headcount
cuts and supply chain improvements.
4. Consolidating its headquarters in Illinois.
5. Selling the corporate jet.
6. A series of budget cuts in order to maintain and

increase advertising budgets.
Brands . . . and route-to-market capabilities to drive
sustainable revenue growth and improve market shares '
One of the examples of such incremental investment is
the acquisition in July 2015 of an 80 per cent stake in
Kinh Do, Vietnam's leading snacks and biscuits business.
recognising the potential of the country's 90 million
consumers.
Equally, it did not take long for some to propose
Mondelez as a potential target for the synergy-seeking
3G Capital, and imagine a proposed (and possibly ironic)
re-integration of its snack businesses with the wider
foods and grocery businesses of Kraft Heinz. By
12 August 2015, Kraft Heinz had announced the first
wave of synergies in its Kraft businesses, eliminating
2500 jobs from its 46,000 strong workforce in North
America, and downsizing Kraft's Illinois headquarters.
margin more aggressively, reduce the number of
suppliers, reduce its portfolio of products, reduce prices
paid to retailers to stock product lines, and reduce adver-
tising from a planned ten per cent of revenue to eight per
cent. Ms Rosenfeld reportedly resisted the proposed new
wave cutting, and, in particular, the advertising cuts that
might impact revenue growth: 'all of our investors, even
Nelson [Peltz], support an increase in advertising '.:' Ms
Rosenfeld said that she 'chafed ' at the increasing pres-
sure on her to further boost the stock price (share value)
and profit margins quickly, while she is simultaneously
trying to increase sales for the long term.and more investor
pressure
shortly after Heinz's acquisition of Kraft (on 7 August
2015), Bill Ackman of Pershing Square Capital

Management announced his 7.5 per cent stake in
Mondelez, purchased for$5.57bn. Ackman rapidly got to
work to further pressurise Monde16z's management with
a reported agenda to either (i) grow revenues faster, (ii)
cut costs more aggressively, or (iii) sell itself to the
newly-formed Kraft Heinz or to Pepsico.
Within days of Pershing Capital's stake acquisition
land its attempt to put a 'for sale ' sign up on Mondelez),
Warren Buffett had, however, indicated that Kraft Heinz
already had a significant post-acquisition integration task
on its hands, and, more significantly, that poorer
margins or not the biggest hurdle to any takeover of
Monde16z is its 'rich valuation '. According to Bloomberg,
in August 2015 Monde16z's enterprise value was already
$92.4bn, with a value multiple of 17.1 times revenue.
making it difficult for another peer company such as
Pepsico, General Mills or Nest16 to contemplate a take-
over bid.i9
Which leaves Pershing Capital's profit margin improve-
ment agenda. It was assumed that, like Peltz and Trian,
Ackman (or his nominee) would seek a seat on the
Monde16z board to push for margin improvement initia-
tives. According to Ackman's colleague Ali Namvar::' 'We
think Mondeldz has by far the greatest cost saving oppor-
tunity among its peers - . we think the whole industry is
under change . . . 3G Capital is setting new benchmarks
for efficiency, organizational structure and profitability.'
The new benchmarks produced by 3G Capital's methods
were believed by many to offer savings that could
increase industry margins by up to eight per cent (Peter
Brabeck-Letmathe, chairman of Nest16, quoted in FT.
com).n Alexia Howard of Bernstein credits 3G with
squeezing an extra seven per cent of margin out of Heinz
between 2013 and 2015, 'more than twice Monde16z's

own ambitions at the time.' Some of the most ambitious
targets suggest Mondeldz could even pursue an oper-
ating margin of 20 per cent by 2020.
Ms Rosenfeld met Mr Ackman directly on 21
September, where he urged her to improve operating
Whatever happened to Kraft Foods? (.
is Warren Buffett up to?)
or, what
Managing the activist shareholders
Despite the resistance to Mr Ackman's demands, Irene
Rosenfeld did respond by ordering deeper cuts for 2016
operating budgets, and by accelerating savings originally
planned for 2018. Responding to Mr Ackman's request to
nominate a new board member to pursue his interests, she
agreed to look for a 'proven cost-cutter ' who would be
acceptable to both Ackman and herself. Ms Rosenfeld now
claims to be on 'speed dial ' for other CEOS learning to deal
with activist shareholders (keep them 'inside the tent ' and
avoid proxy fights, is her main advice). She states that
dealing with the detailed concerns of her two principal
activist shareholders now takes up about 25 per cent of
her time as CEO, to the extent that she was looking to
appoint a new 'Chief Commercial Officer ' in late 2015, to
focus entirely on the marketing and sales oversight she has
previously undertaken as CEO. She reportedly told her
senior management that she was 'doing everything in my
power to handle the distractions so you can stay focused
on the business.' She implies, however, that there is no
ceding of authority to the activists: 'l'm frustrated by inves
tora ' fascination with activists. I'm successfully running
Monde16z for all shareholders without the activists
help'.i ' The activities of the activist do seem to have some

impact, however, as reported in the Wa// Sfneef ./ourna/'s
in-depth study of Monde16z. From interviews with senior
directors, they note the instance where, in seeking to hire
a new director with a proven record to revive the global
chocolate business, Ms Rosenfeld was told by the target
executive that there was a 'cloud ' over Mondelez, and was
asked 'Are you going to stick around, Irene?'
The de-merged North American grocery business of
Kraft found itself on the receiving end of an acquisition
bid from H.J. Heinz, and succumbed on 2 July 2015, to
become a major part of Kraft Heinz Co. This was a new
company with about$28bn of annual revenue, with eight
'power brands' (each with global revenues of over $1bn
each), and counting as the fifth largest food and beverage
company worldwide.
Familiar names play a part in this story, as Heinz itself
had earlier been acquired in 2013 by a consortium of
Berkshire Hathaway (Warren Buffett's investment
company) and 3G Capital. Whereas Buffett has been wel
known in the US investment community over many years,
3G Capital has built up its reputation through a method-
ology of acquiring consumer brand corporations (such as
Budweiser and Burger King), and eliminating costs
through the introduction of techniques such as zero-
based budgeting, elimination of duplicate overhead
expenses, and other 'synergies'. This joint investment
partnership repeated 3G's pattern of margin Improve-
ment with Heinz from 2013 15, before launching the
larger deal to acquire Kraft Foods, promising potential
savings of $1.5bn of cost synergies. This deal (largely
based on a 'paper ' offer of shares in the new Kraft Heinz
Co) would leave 3G and Buffett with a controlling 51 per
cent stake of shares, and majority control of the board.

Importantly, analysts also saw the potential to replicate
this model of applying Buffett's financial engineering
skills in acquisition, with 3G's ability to find cost-saving
synergies integrating businesses throughout the sector:
with Buffet's cash-gushing Berkshire Hathaway as a
linchpin investor and financier to the combined company,
there's no telling where 3G may strike next. In a foods
industry where companies like Pepsico, Campbell's
Soup, General Mills and Kellogg are struggling and brand
conglomerates like Proctor & Gamble are divesting
assets, Kraft Heinz could emerge as an empire-building
consolidator.'i8
Selling coffee
While these actions might be more typical examples of
financial engineering, Monde16z has also moved deci-
sively with the divestment of its coffee business(including
such innovative brands as Milllcano) to form part of JDE,
a joint venture with JAB Holding's subsidiary Douwe
Egbert. The coffee business accounted for approximately
11 per cent of Monde16z's global revenues, and had Feta
tively high margins and growth prospects. The coffee
sector is potentially even more exposed to commodity
pace volatility, however, and predictions of world short
ages of coffee beans are potentially even more damaging
than possible cocoa bean volatility for the chocolate
business. In addition, it had been argued that Monde16z's
global snacks supply chain would be more easily inte-
grated without the coffee business, eliminating parallel
activities and potentially leading to further cost savings.
This new venture created a clear number two pure
play coffee competitor to Nest16 globally, with $7bn
revenues, a number one market position in over 24 coun

tries, stronger synergies and purchasing economies of
scale. The deal with JAB Holding, provided $5bn in cash
to Mondelez, whilst allowing Mondeldz to retain a 44 per
cent equity interest in JDE. The transaction, intended to
produce a stronger competitor to vie with Nescafe, also
removes a 'volatile asset ' from Monde16z's balance sheet.
The dealwas announced on 7 May 2014, and Monde16z's
shares rose 8.2 per cent that day.
©
Notes and references
1. £l : €1.2 - $1.5.
2. Z. Wood, S. Carrell and R. Wachman, 'Buffett blasts Kraft
bid for
Cadbury '. Guano/an, 20 January 2010.
3. House of Commons BIS Committee, 'Mergers, acquisitions
and take-
overs: the takeover of Cadbury by Kraft ', 9th report of session
2009-10,
London, Stationery Office, 2010
4. House of Commons BIS Committee, 'ls Kraft working for
Cadbury?' 6th
report of session 2010-12, London, Stationery Office, 2011
STICK AROUND, IRENE?
5. A. Webb and A. Wilson, 'Was Cadbury a sweet deal for
Kraft?',

ne/egnaph,24 Apri12011
6. 'Kraft to split into two companies', BBC /Vows, 4 August
2011
7. E. Thomasson, 'Demerged Kraft unit sees consumers hungry
for
snacks'. Healers, 2 October 2012.
8. S. Strom, 'For Oreo, Cadbury, and Ritz, a new parent
company ', /VeK '
york ames. 24 May 2012.
9. S. Ahmed, 'Emerging markets key to Kraft spinoff's success',
C/VBC, 2
October 2012.
10. A. Nieburg, 'Mantel analyst lauds Mondelez geographic
choices',
Confectionerynews.com, 13 September 2012
11. Skelly/funomon/toC 'Mondelez International Inc. in
packaged Food
World '. 2014.
12. L. Yue, 'Mondelez gets a lesson global economics'.
Chicagobusiness.
com, 15 February 2014.
13. '2016 Macroeconomic outlook ', Goldman Sachs, accessed 8
July 2016.
14. M. Langley, 'Activists put Mondelez CEO Irene Rosenfeld
on the Spot
bVa// SfreeZ' ./oc/rna/, 15 December 2015. '

15.D.D. Stanford, M. Boyle and C. Perry, 'Master blenders to
buy
h/ondelez coffee unit for $5B ', B/oom&erg, 7 May 2014. '
16. L. Whipp and S. Foley, 'Pressure on Mondelez to take a bit
out of costs'.
F7n.anc/a/ 77mes, 6 August 2015.
17. S. Neuwirth, 'Not so sweat: Cadbury owner Mondelez posts
eighth
consecutive quarterly revenue decline '. C/ZIHH.A4., 28
October 2015
18. A. Gaia, 'Why the Heinz-Kraft food merger is a rare kind of
Warren
Buffett deal ', Hordes, 25 March 2015
19. R. Collings, 'Mondelez too expensive for Nestle, General
Mills to
acquire?', TheStneef, 14 August 2015.
20. A. Gara, 'Bill Ackman didn't buy Mondelez just to dish it
off to Warren
Buffett and 3G Capital ', Hordes, 13 August 2015.
CRH plc: leveraging corporate strategy for value creation
and global leadership
Mike Moroney
Corporate strategy can be the driver of value generation, growth
and development, notwithstanding a chal-
lenging industry environment and a lean corporate centre. These
issues are explored in this case study on
CRH, which places acquisition-led corporate strategy at the
heart of its value creation model.

Corporate Strategy. Week 3 LectureOrganisational Purpo.docx

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