Synopsis of Google Google is an iconic example of a multi-sided platform (searchers, advertisers, affiliates) with an impressive dynamic growth cycle based on innovations in products and processes. The business is based on a search algorithm developed by Brin and Page at Stanford in the late 1990s. The algorithm is an innovative approach to estimating the most “central” node in an enormous network, composed in Google’s case of websites indexed by keywords. The benefit of this approach, called Page Rank, is that it produces an ranking of sites determined by user behavior as opposed to by payments to the Google by advertisers. In theory, user determined rankings would be more useful and so was a critical selling point. The platform depends on the two-sided network externality between searchers and advertisers: the more companies that advertise, the more useful searching on Google will be; in turn, the more searchers on Google, the more companies will advertise. In addition, Google offered a lower cost per click (CPC) to advertisers than Overture (its main competitor), drawing more business. The combination of Page Rank, the lower CPC, and the two-sided externality was sufficient to launch the business. Then, Google developed two innovations that grew its advertiser base. First, it created a pricing model that adjusted the CPC by the predicted productivity of the ad based on its click-through-rate (CTR). More productive ads (whose actual to predicted CTRs were higher) cost the advertiser more, but that was only fair since they yielded more revenue. Google was able to develop this methodology because it had carefully built a sufficiently large data base of search behavior by keyword and had the statistical skills to analyze these data in a way that had legitimacy to advertisers. Consequently, the size of the advertiser base grew more. Second, the company then introduced a range of software applications and services, called Google Analytics, to help advertisers improve their choice of keywords. This suite of products helped both to improve search productivity, benefiting users and advertisers, and to lock advertisers into Google as a provider of online search services. Google attracted more affiliates (e.g., SMU) by offering them a higher percentage of revenues than Overture. This kind of strategic pricing was eminently reasonable given the very strong scale economies in search. Google was thus outcompeting Overture on every dimension. One needs therefore to split Google’s business into two interacting parts: each with its own set of value drivers. Users benefit from Google’s superior search technology (speed, quality), the externality of which they are a part, the free ancillary software that Google provides (a kind of line breadth), and perhaps Google’s brand. Advertisers benefit from the externality and from Google’s productivity services. Google’s cost drivers are, very importantly, economies of scale and scope, and one imagines, a significant learning curve in many processes, as well as the practices the company has developed in its IT infrastructure. There is nothing holding a searcher to Google – no switching costs, nor are advertisers tied to the company strongly. As for imitation, property rights and sunk costs are important barriers. Google’s investments in its ecosystem are primarily defensive. Microsoft, Apple and other large, rich software/hardware companies could exclude Google from access to searchers on a variety of devices if Google did not counter repeatedly. So we see these firms in a kind of multipoint competition, struggling to achieve dominance, segment by segment. But Google’s main focus, by far, is search.
Synopsis of Apple 2012 Apple has succeeded through its moderately long history by designing and marketing high end (but not the highest end) personal computers and now electronic devices that share common software and hardware components. After having been almost destroyed in the mid 1990’s by the Wintel standard and its manufacturers, the company restarted under its founder, Steve Jobs, as a much smaller, but better capitalized, and more focused business. Jobs deserves/d credit for planning and executing a classic turnaround. The new personal computers were innovative enough to rebuild the brand in the consumer segment and regenerate a focus on design and marketing. The Apple we know really began with the iPod (and iTunes), which was tied initially to Apple personal computers (the digital hub) but then, with the increasing pervasiveness of the internet and WiFi, were untethered and became free-standing. The follow-on devices (iPod Touch and Nano, iPhone, and iPad) build on roughly the same platform and, as the charts shown in class demonstrate, are the dominant contributors, by far, to Apple’s revenues. Apple has also innovated in computers, notably by improving design and by switching its chip to Intel, thus allowing its machines to run Windows (this switch must have been part of the package of goodies Jobs offered Gates for the paltry $150M). How does Apple compete as a multi-business (multi-P & L) firm? The devices (iPod touch, iPhone and iPad) all share the following value drivers: high quality (materials), strong aesthetics (design, look and feel), the Apple brand, and significantly a strong two-sided platform with users on one side and aps on the other, including the iTunes distribution system. They also benefit from the rise of the internet as a complement. In turn, the computers compete on quality, design and brand, and increasingly, it is said, on aps as well. Apple has no real cost drivers internally but relies on its suppliers to develop economies of scale and scope, follow a steep learning curve for the production of each new component and be based in a low cost input location (China). Apple’s aps are specific to its machines, raising the costs of switching to competitors. The company prevents imitation (entry) through 1) sunk investments in brand and technology development, 2) its patents (always be litigating), 3) somewhat, its dedicated investments in material suppliers (high grade aluminum), and 4) perhaps some difficulty in copying the company’s ability to offer consistently successful new products that share the characteristics of its market position. Is this strategy sustainable? Apple faces significant, increasing competition in each of its markets, primarily from lower priced products with weaker brands, but not necessarily less functional machines. It is probable that all of Apple’s products are in the growth stage of industry evolution since entry remains strong and few competitors have exited (see Chapter 4). There is no doubt that Apple will survive the shakeout in each category, when it comes, but at what level of return? As the recent financials show, Apple’s operating margins are flattening, suggesting pricing pressure worldwide and perhaps rising costs in China. Further, Apple’s brand is strong only with repeated (impressive) innovation. Without a significant new product introduction every two –three years, the Apple cache’ may decline, giving competitors an opening and increasing price pressure even more. Apple TV? Or what (your thought here)?
Synopsis of Nypro Nypro is a superior example of an innovative strategy developed in a highly competitive, mature industry. Gordon Lankton created a combination of capabilities, mostly imitable separately, but arduous to copy as a suite, that produces a unique market position that has a substantial competitive advantage. The company’s value drivers are classic: highly responsive service, strong technology, both geographical breadth (global) and co-location with customers, identical plants, customization, high quality, and a strong reputation for achieving customer goals. As for costs, Nypro invests in a series of process innovations to increase efficiency and manages plant capacity utilization to achieve economies of scale. The company has formidably high retention rates within each project, determined by high levels of responsiveness and customization, and probably reasonable retention across projects (within a customer) due to the company’s strong reputation. The problem Nypro faces at the end of the case is that competition is encroaching and potentially taking advantage of increasing customer desire for faster delivery. The Novoplast machine, which Lankton saw for the first time on a trip to Japan, was in part a way to address this challenge. Novoplasts have lower set up times than the Nestal machines Nypro has traditionally used and therefore could be used for jobs that Nypro had not bid on previously (prototype, small lot, quick response). Interestingly, getting Novoplast machines into the company’s operations was inconsistent with Nypro’s strategy execution methodology. To produce its value and cost drivers, Nypro relied on a system of decentralized, highly competitive plants that were heavily focused on serving current customers’ needs through product development and continuous improvement teams. Plant managers were rigorously benchmarked against each other and the rewards for performance were substantial, including an ownership stake in the company. Consequently, almost without exception, innovations originated at the plant level and diffused throughout the company. A top-down implementation of Novoplast in this context was therefore very difficult. The B case describes how Lankton overcame this challenge. One can ask whether the Novoplast machine is disruptive in Christensen’s sense (he wrote the case). Disruptive technologies in his definition have the following characteristics: 1) they are first introduced in a niche by startups; 2) products based on the new technology offer lower value to customers, and a much lower price, than products based on the incumbent technology; 3) initially, the customers in the core of the market don’t want what the new technology has to offer; 4) then, customers begin to appreciate the new products because of their low price, forgiving their lower functionality, and start to buy them; 5) the startups grow and move into the core of the market; 6) incumbent firms can’t stop them and, unable to change fast enough, all die. Novoplast has some of these characteristics, but not all. It is in a niche and customers may be moving towards it, but the plant managers do not perceive this movement as significant. Is Novoplast low-cost/low price? To the extent it has lower set-up costs than Nestal machines, the answer is yes, but its full cost structure is not clear. Also, whether Novoplast as a process technology can compete successfully in the core market remains uncertain; the reason is that the application that the single plant that has adopted it is specialized. Finally, Novoplast offers faster delivery, an important emerging value driver, so its appeal is not just cost/price driven.
Synopsis of Siemens The Siemens MED case is a good of example of a consultant (BCG) led turnaround in a multi-business unit. The fact that MED is part of a larger corporation is irrelevant for our purposes. The turnaround is guided by a relatively straightforward plan, which is not described in the case as such. So to identify what the plan looked like we must pull its elements out of the case. Our goal is to lay out these pieces in a way that maps onto a traditional planning framework, which will enable us to speculate about which of them remain relevant after the turnaround is over and therefore about how planning will help the unit manage itself. To lay out MED’s plan we need to identify, if possible, its goals, competitive context, and strategic initiatives. It would be too much to expect that the programs under the initiatives were visible in the case. As for goals, the best we can do is Reinhardt’s statement that he wanted the unit to be profitable in one year and achieve 8% in ROS in three years. As for the competitive context, the case describes many trends, most of which were probably identified by BCG. MED had suffered under an FDA restriction for two years because of low quality manufacturing, and during this time its productivity fell behind the competition. BCG also discovered that MED was underperforming in sales and service. Customers were becoming more price-sensitive, due to government and third party constraints on hospital costs and the corresponding increase in the presence of administrators, rather than medical professionals, in purchasing decisions. Also, products were more durable, stretching out the replacement cycle. Entrants were establishing niche markets that drew demand from the traditional core, and volume in Europe and the U.S. was dropping, while it was rising in the BRIC nations. These factors made it more difficult for MED to compete effectively. To fix the unit, Reinhardt, his lieutenants and BCG came up with a long list of initiatives that we can extract from the case. Specifying this list involves limiting ourselves to no more than say ten initiatives, all of which should be at about the same level of abstraction or conceptualization. My cut is the following: 1) cost reduction, including outsourcing, the consolidation of operations, and headcount reduction; 2) product line rationalization; 3) sales force reorganization; 4) continuous improvement in operations; 5) an increased focus on the customer to increase customer satisfaction; 6) product innovation; 7) business diversification, especially into services; 8) Increase market share in U.S.; and 9) management reorganization and development to increase skills and commitment. Implemented through a disciplined monitoring system called BIC, these initiatives were sufficient to improve performance markedly and bring MED’s product units to dominant positions in their industries. One must ask how relevant these initiatives were after the turnaround was achieved. The answer is that many of them became obsolete. The cost reduction components, product line fixes, and the reorganizations of sales and management were achieved, and no longer applied. The remaining initiatives, however, could still constitute a reasonable plan to go forward. How they should be assigned to line and staff managers is an interesting and important question.

Synopsis of Fafco Fafco is a small startup that makes a solar heating product for swimming pools, primarily in California and the Southwest, including Texas. The industry is in the early growth stage, undoubtedly before the chasm has been crossed, and Fafco is a notable early mover. The case focuses on two major problems: should the company backward integrate into manufacturing plastic panels, a critical component of the final product, and should it forward integrate into the product’s sales and distribution? Fafco guarantees the durability of the black panels in its heating system and roughly 30% of them are failing each year at a cost of about $10 each. As Fafco’s business grows, this cost will become a very serious problem. Also, pervasive panel failure creates a bad reputation for quality, which will make crossing the chasm to more demanding customers quite difficult. Fafco’s supplier, the Hercules Corporation, is not responsive to Fafco’s requests for improving the panel quality. Hercules is a very large (in context) chemical company, and it invested in the panel extrusion process expecting to use it to produce corrugated paperboard, a much larger market. This did not work out, and the Fafco business was all that was left. Hercules delivers late and is threatening to raise its price, which now is $0.23 below Fafco’s projected variable cost to produce the panels in-house. The situation for Fafco has no positive scenario. Fafco has looked for another supplier to no avail and so will be forced to vertically integrate to save its business, assuming it will be able to scale up the prototype process it has developed to replace Hercules. Ominously, Hercules has threatened to stop production completely if Fafco’s volume drops. At the same time, Fafco has concerns about the effectiveness of system sales and installation, which are performed by dedicated, but not Fafco-owned, distributors Each independent unit both sells and installs the systems, but these two activities require an uncommon mix of complex skills and may be better performed by Fafco itself. In fact, Fafco has one wholly owned distributor whose performance is better than the independents. One reason for this may be that the firm has superior control over training and employee retention. Another reason, however, may be that the unit is in a highly desirable market. To find out whether it is control or location, Fafco can add more in-house units sequentially. The decisions to integrate backward (panels) and forward (sales and installation) are similar in that they involve predicting the benefits of increased control over the activity. However, they are different in several ways. Fafco faces more uncertainty about its ability to produce panels in-house than about its ability to sell and install the systems. Also, panel production requires much higher capex ($150K). Finally, integrating the panels is much more important economically since continuing to source from Hercules only leads to more pain. A possible alternative to vertical integration of the panels would be to redesign the component to a more standard design (four 2 X 4’s, say, instead of one 4 by 8). There are undoubtedly many extruders that could produce the smaller panel. The risk here is that because the new panels shift Fafco’s market position down in terms of value, it is more exposed to the entrants that are after its business. Synopsis of Disney-Pixar Disney’s acquisition of Pixar has three important dimensions. It resolves a number of emerging conflicts about the vertical relationship (distribution, merchandising, rights to characters in theme parks, number of sequels). It broadens Disney’s product portfolio (including Pixar’s production technology). And it provides Disney with superior practices to rebuild its traditional animation business, which has lost its ability to produce strong revenues consistently, certainly at Pixar’s level. Pixar began as a hardware and software company when in 1986 Jobs bought the LucasFilm computer division where Catmull and Lasseter, key Pixar executive, both worked. Their ambition was to make an animated feature film. Over the next decade and more Pixar developed a formidable array of capabilities meshing hardware, software and aesthetic judgment. The developmental process was cumulative, working forward with each project, short films and features, so that new projects both benefited from the existing stock of knowledge and contributed new technique. Pixar went public in 1995, and one can assume that many in the firm became rich. Disney bought 5%. Disney’s relationship with Pixar began in 1991 with a feature film agreement (one, with an option of up to three), realized with Toy Story in 1995. Disney distributed Pixar’s films, contracted for the merchandising of its movies’ characters, and placed the characters in Disney theme parks. Disney also paid production costs and took most of the revenue. In 1997, this agreement was renegotiated for five movies, and Pixar took on more creative control, cost and revenue (50-50). Beginning in 2002, Jobs pushed hard for a new agreement with Disney (only distribution), giving Pixar even more control and a much higher return. It is clear that with its remarkable string of hits (all greater than $500M), Pixar holds the cards. It was logical that Jobs was pressuring Disney to come to the table again, especially since other studios were interested in distributing Pixar’s movies. Jobs and Michael Eisner, Disney’s CEO, had ceased to communicate effectively (euphemism), and in 2004 Pixar began to look at other studios as potential partners. Robert Iger replaced Eisner and had to respond to Jobs’ demands. Losing the distribution relationship with Pixar would severely reduce Disney’s revenues and profits and create a void in the firm’s pipeline. A solution to this problem was to buy Pixar. But such an acquisition would be non-standard in several ways. First, although it knew Pixar well, Disney had no edge in the transaction phase of the deal because of Pixar’s superior bargaining power. Pixar’s PE ratio was an order of magnitude higher than its competitors, and Disney would have to pay a lot, greatly diluting its equity. There is no way Disney can cover this basis for the deal, but shareholders liked the deal and the stock went up.
Second, integrating Pixar in the usual way for Disney would lead to the loss of Pixar’s talent and therefore its value. Better then to keep Pixar at arm’s length, except for finance and compliance. Moreover, after the integration stage, there were questions about Pixar’s ability to continue its very high level of performance. Competition in CG animation was increasing in number and quality (e.g., Dreamworks). Furthermore, Jobs was a known stirrer and might be disruptive on Disney’s conservative board. In the end, however, the deal was necessary for Disney, who must have made extreme assurances to Pixar about its continuing independence, even as Lasseter is brought in to manage Disney animation (Frozen). How Pixar will do as he spends more time away from it is a reasonable question.
STRA 6232 - Synopsis of Blockbuster Blockbuster is an outstanding example of a firm that succeeded by building a formidable competitive advantage in the growth and shakeout stages of its industry, only to falter and ultimately fail as technology-driven substitutes emerged in the late stage of industry maturity. The company developed, under Huizenga, a strong dynamic growth cycle based on improving customer value and lowering costs. As the industry grew, thanks in part to the drop in VCR and videotape prices (based on an improved learning curve and scale economies in production), Blockbuster invested in the following value drivers: location, breadth of titles, depth of titles, brand and reputation, store atmosphere and design, and perhaps the presence of ancillary products (candy, etc.) in the stores. As for costs, Blockbuster achieved significant economies of scale in purchasing DVD’s through its own agreement with the studios and in distribution through its facility in McKinney. The high value and lower costs created a shakeout by forcing weaker rental companies out the market and deterring entry. There are no factors inducing customer retention for Blockbuster, although brand constitutes an entry deterrent. This market position is the company’s strength and its weakness. As long as the industry (store video rental) isn’t threatened by new technologies, Blockbuster can continue to make a lot of money. This is why Redstone bought the company (i.e., for the cash). But as soon as innovations in media content delivery appeared, the company began to struggle. Note that we focus here on innovations that improve customer value (not that lower cost) as the determinant of potential incumbent failure. Blockbuster is hit by repeated waves of substitutes for its service. These substitutes can be categorized by whether they are a new process for delivering media content and whether they are a new content medium. For example, DVD’s are a new content medium, but not a new process, so Blockbuster can adapt rather easily to this innovation, simply by switching away from videotape. Internet-based rental (order online), however, is a new process but has nothing to do with a new medium, since Kozmo et al. rent DVD’s just like Blockbuster. Netflix is a new process, too. But, unlike the internet-based rental companies, it is a viable business because of its substantial scale economies. Like all successful technology substitutes, it attacks the incumbent technology (here Blockbuster) by trumping or neutralizing its value drivers. Further, because Netflix has no late fees, and Blockbuster makes a substantial amount of money off them and is therefore loath to abandon them, Netflix appeals to renters who can plan ahead. Netflix is therefore the first real threat to Blockbuster’s business. Finally, video on demand (VOD) in its various guises is both a new process and a new form of media content. Although VOD takes a long time to emerge as a viable substitute, when it finally does so, through the initiatives of multi-service operators (Verizon, ATT, Dish, DirectTV, Comcast, etc.), it is deadly for store rental companies. Blockbuster is in general late to respond to all of these new technologies and ultimately goes bankrupt, to be bought by Dish. How might the manager of the Blockbuster unit within Dish have developed his/her strategy? The unit clearly had four separate businesses: store rental; streaming; kiosks; and Blockbuster online. Each of these has different competitors and was in a different stage of the industry life cycle. So the plan for each will be relatively unique. In the end, only the streaming business is left, even though there is demand for the other businesses. Dish could not manage to shrink the business efficiently.
Chain Saw Cases Synopsis These cases give us a chance to examine an industry composed of thirteen firms (top and middle tier) many of which are owned by corporations (Textron, Black and Decker, Emerson, Kioritz, Skil, Roper, Stihl) and few that are not (Husqvarna, Partner, Jonsereds, Pioneer). These business units vary substantially in their capabilities and therefore their market positions. Our goal is to analyze the industry forces impinging on the profitability of these firms, their categorization into distinct groups based on their market positions (value and cost profiles), and their strategies, winning and losing. So far as industry forces are concerned, two are prominent in shaping firm behavior: competition and buyer power. Although firms in the industry have a wide range of capabilities, most compete increasingly intensely, especially on price, as the casual user market grows. The traditional chain saw market - professionals (loggers) and farmers - continues to poke along, driven by the business cycle and more general replacement trends. It is likely that pricing and feature innovation are coordinated implicitly across firms here. However, with the entry of Emerson through the acquisition of Beaird-Poulan, rivalry in the mass market is fierce. It is here that buyers also have the greatest power. Sears, Penney, Kmart, and the other large retailers need saws to sell and will favor those firms, like B-P, that can deliver. This pressure is substantial and leads to a remarkable rise in B-P’s market share. The firms are arrayed into essentially three strategic groups: the high end (Differentiators in Porter’s generic strategy terminology), composed of Stihl, Jonsereds, Partner, Husqvarna, and Solo ; the low end (Cost Leaders), specifically B-P, Remington, Roper and Echo; and the middle, Homelight and McCullough. We will ignore Skil and Pioneer. This structure is common in manufacturing, service and technology industries where firms can be compared in terms of value and cost. The benefit of looking at this particular industry is that the pejorative view of the middle turns out to be wrong (see below). The case covers two years, 1974 and 1978, so that we can see how the firms evolve to meet market opportunities and constraints. In 1978, B-P and Stihl have become dominant in their respective groups. B-P has succeeded by executing superbly, especially with large accounts (Sears). Its products are adequate quality and very cheap, andthat is what casual users want. Stihl, at the other end of the industry, has achieved full coverage of the U.S. market as Homelite and McCullough disinvest in their service dealer networks and produce more cheap saws. Electrolux has entered through acquiring the three Swedish firms, with an implicit plan to lower their costs through consolidating activities. What should the firms do going forward? First, B-P has to be very anxious about the future of the casual user market. If demand drops there, as sometime it will, B-P will experience overcapacity, higher costs, lower profits and a big problem with its parent company. So B-P needs to find ways to fill capacity in any way (go international, rebuild the service dealer network, buy a brand (Skil), diversify - weedeaters, edgers, etc.). Also, it needs to compete aggressively in its current market position (kill everyone in sight). Stihl has a different problem. With Electrolux now behind the Swedish brands, Stihl is probably facing a lower cost competitor and so must lower costs itself. In addition, it needs to defend its dealer network and continue aggressively to take dealers from Homelite and McCullough. What should Homelite do in turn? It really has no options since both B-P and Stihl are trying to kill it, and both of these firms are better executors. Interestingly, in the end Homelite is saved by the collapse of the casual user market and a strong trend of trading up in the middle where Homelite is strong. So in 1983, Homelite has the highest market share in the industry. Luck or patient capital? You choose.
Synopsis of Zara Zara gives us an opportunity to show how boundary decisions tie the firm’s factor (supplier) and product markets together. Vertical integration and outsourcing are part of strategy execution; they involve questions of control and competence (productivity). But to understand control, we need to ask what the firm wants to achieve in transactions throughout the value chain. Ultimately, Zara’s market position will be the key to answering this question. To start, how does Zara induce us to buy its clothes and accessories? Why do we buy at Zara? The first and most obvious answer is fast and scarce fashion, that is, stylish clothes that are on the shelves for not much more than around a month. To make this happen, the firm’s activities need to be focused on speed: large percentage (not all) of Zara’s clothes are designed and delivered to its stores within four to five weeks after the first signal of customer interest is sent from the field. The other drivers of demand – brand (a little), location (more important), store layout and atmosphere (also more important), and breadth of offering – do not have the same kind of impact on control across the value chain activities. Note that quality is not a focus; although Zara’s clothes are not poorly made, they can only be worn around ten times before looking ratty. Zara’s emphasis on fast fashion pertains to 40% of its products. These are made in-house. The 60% which do not require speed are manufactured externally. Seventy percent of these are sourced from twenty suppliers that have long-standing, relatively informal relationships with the company.

Zara’s production value chain for the fast fashion 40% (excluding the stores) consisted of six basic activities: product design, fabric purchasing, fabric-dyeing and cutting, garment sewing, distribution and logistics. First, the company internalized product design to gain control over its schedule (the faster the better). Second, fabric purchasing is in-house to accelerate the speed of the process, again, and to lower costs through buyer power (scale in procurement). Third, fabric cutting is internalized for speed and scale economies. But fourth, sewing is outsourced; Zara’s production centers in Northern Spain are surrounded by many small job shops in Galicia and northern Portugal that compete heavily for the company’s business. Thus, in contrast to the other activities, control is achieved through market competition, not the employment relation, and, given that garments are sewn in small batches, there are no opportunities to lower costs through scale economies. The use of these sewing companies reflects a legacy commitment of Zara to its geographical roots. Last, distribution and logistics are in-house to facilitate fast shipments to the stores and gain efficiency through scale. Some transportation may be through (competitive) outside vendors to smooth scheduling.

This system, developed to support Zara’s market position in Europe and especially Spain, has served the company well. Although Zara doesn’t have the highest margins in the industry, its position is defendable and therefore sustainable. However, as the firm expands to the Americas and Asia, the effectiveness of using Spain as an operational base for fast fashion may be questioned because of the operational problems created by geographical distance. One option is to replicate the value chain activities, using say Guangdong province as a new regional hub. Is this possible? The answer is yes in general, but a sticking point could be the sewing ecosystem, which will be Chinese rather than Spanish. Now Zara’s ability to defend its market position from competitors relies only on its coordination practices and no longer on a dedicated asset (the local tailors, his old friends) that Ortega (Zara’s Chairman) exploited so well to build his company. Synopsis of Head Ski Head is a venerable ski (used by several current champions) but not a venerable company. A product is not a business. The case lays out first the firm’s rise from Howard Head’s “garage” to a major high end brand in skis in the middle 60’s and then its ideas about growth after this happy time. It should be noted that the firm was profitable but not at all impressive financially, primarily because of its high SG & A costs. At the time of the case, its goal was to expand its top line 20-25% per year, perpetuating its experience in its early years. The means to achieve this end was business diversification. To understand what happened to Head, it is important to understand what made it successful initially. Its skis tracked and turned unusually well, allowing beginners and intermediates to ski much better than they had before. Moreover, Head invested repeatedly in improving product performance and expanded its product line across ability levels so that expert and novice skiers shared a common ski technology. Head built its brand through careful advertising, and the product was sold only by experienced skiers in specialty stores. Head skis were also quite durable, and the firm fixed broken skis for free. Also, the increasing number of ski resorts raised demand for skis in general. Head had a number of patents on its technology, which along with its brand, defended the firm from other metal ski companies such as Hart. Along with its brand, Head brought the capabilities that produced this sustained market position to its new businesses as it diversified. Unfortunately, the company did not really understand this basic principle. Although Head was in a strong, relatively sustainable position against current competitors at the high end of the ski industry, it faced two threats. First, the growth rate of the number of skiers was decreasing so that, even though demand could be expected to increase for many years, it was beginning to plateau. This trend was one motivation for Head’s foray into diversification. Second, FRP was becoming an increasingly strong substitute material for Head’s metal technology. Howard Head dismissed FRP, but his objections may have been self-serving. To continue on its growth path, Head developed several new businesses: ski poles, an industrial plastics unit, and skiwear. Of these, only ski poles shared any value drivers and value chain activities with the core ski business. Plastics made no sense, given Head’s lack of experience and the very high level of competition in that industry. And skiwear was tied to Head only through the common brand; the business would be threatened by competition almost immediately, forcing Head into price competition, which the company had never faced before. Head’s plan for new business development was guided by a poor understanding of what it needed to compete successfully as a multi-business firm. Leveraging the brand was intuitive, but the rest of the firm’s criteria – innovativeness, engineering content, style, and patentable technology – were too vague. They did not articulate what Head would bring specifically to the new units to sustain or improve their market positions in their industries. It is not surprising then that the businesses it bought – trampolines, archery, javelins, sweaters, and a plastics company – only reduced its already low profitability and forced it to be sold to AMF in 1971. Lowering costs in skis was a much better option.