Company Strategy Analysis: IT M&A, Zara, GE, Ryanair, Tesla
Answers to Tom and Jerry
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Goodwill in IT Sector Mergers and Acquisitions
Companies in the IT sector are often growing businesses whose value does not lie solely in their current operations, but rather in their potential future activities and earnings. A prime example is WhatsApp and the price Facebook paid for its acquisition. Facebook did not pay based on WhatsApp’s Book Value or Free Cash Flows at the time; instead, it bought users and the potential gains the communication company could achieve through its services.
Regarding goodwill, IT acquirers also pay for intellectual property and brand recognition, as seen with WhatsApp. Facebook acquired WhatsApp’s way of working, even allowing it to operate independently while leveraging Facebook’s resources, with the primary goal of user growth. It’s important to note that each user WhatsApp gains is ultimately also a Facebook user, contributing to advertising revenue, which constitutes almost all of Facebook’s income. This is why companies pay more for IT firms than their strict current valuation. In financial markets, as discussed in strategic and financial management, investors invest based on expectations, not just current value. This applies here: companies are bought based on expectations, creating Market Value and Acquisition Value beyond the mere Book Value, acknowledging room for growth.
Irizar’s Talent Attraction and Retention Challenges
Irizar faces difficulties in attracting and retaining talented managers for several reasons:
- Compensation: Salaries are significantly lower than those offered by competitors. Irizar had, by ‘law’, a maximum salary difference of only three times between the lowest and highest earners. This makes it difficult to retain talent, as many eventually move to companies offering better salary conditions.
- Recognition: Achieving recognition is challenging. Since titles like ‘boss’, ‘manager’, and similar terms that confer recognition are forbidden, talented individuals who should be leading may find it difficult to stay in a company that doesn’t grant them that status over less experienced colleagues.
- Career Development: The flat organizational structure empowers everyone, especially new hires. However, gaining further empowerment and decision-making power can be difficult in such a structure. Consequently, as talented individuals grow, they might find it difficult to see a clear path for career development, which is crucial for talent retention.
Zara’s Low Failure Rate vs. Traditional Textiles
Zara achieves a significantly lower failure rate (1%) compared to the traditional textile industry (10%) due to several factors:
- Store Empowerment and Feedback: Zara gave significant empowerment to its stores, enabling them to quickly identify and respond to the latest market trends. Store managers, often promoted internally and knowledgeable about Zara’s operations and the fashion industry, had the responsibility to identify which clothing items did not sell well and report this back to the headquarters in Galicia. This allowed Zara to recognize underperforming items much faster than competitors.
- Controlled Production Volume: Zara produced precise quantities for its offerings, deliberately aiming never to exceed demand. Even if they didn’t fully meet potential demand for an item (with rare exceptions for total successes), they avoided overproduction, minimizing unsold inventory.
- In-Store Testing: Zara conducted trials of new items in representative stores first. If an item performed well in these test markets, it would then be produced for the rest of the stores. This was possible due to their flexible, just-in-time system, allowing for fast production organization to meet demand quickly.
- Creating Scarcity: Zara fostered a sense of scarcity. Customers knew that items might not be available the following week, prompting them to decide on purchases immediately. This sense encouraged impulse purchases and further prevented the failure rate from rising by ensuring faster stock turnover.
General Electric’s Corporate University Rationale
General Electric (GE) established a corporate university primarily to develop its future leaders – individuals who would align with the company’s objectives and vision. In this university, participants were taught how to become employees who not only reach objectives but also surpass them, adding significant value to the company.
Essentially, GE created its corporate university to build managerial talent and secure long-term value and growth. The goal was developing individuals capable of leading and adapting to new situations, regardless of the specific department or discipline facing challenges within the company.
Ryanair’s Profitability Despite Low Fares
Ryanair managed to generate revenue and profit despite its low fares for several reasons:
- High Volume Strategy: Ryanair achieved high passenger volume through low prices. They fitted more seats onto their airplanes than competitors (creating more discomfort but increasing capacity per flight). They utilized secondary airports, which typically have lower fees and less congestion, enabling better on-time performance and allowing for more flights per plane per day. Furthermore, their flights were mostly short-haul, permitting even more flights daily. This focus on volume improved the company’s Return on Assets (ROA) and the total revenue generated per flight, prioritizing overall flight revenue over margin per seat. Notably, they cut complimentary drinks and food to make space for more seats.
- Aggressive Cost Cutting: Secondly, Ryanair improved margins by rigorously cutting costs. Examples include eliminating free onboard refreshments and using cheaper secondary airports. All of this contributed to lower operating expenses per flight.
- Ancillary Revenue Generation: Thirdly, cabin crew were trained and incentivized through commissions to maximize onboard sales of items like drinks, food, and other ancillary products – items often complimentary on competitor airlines. This significantly increased revenue per flight, as these products carried high margins.
- Advertising Revenue: Finally, Ryanair was open to placing advertising on its planes (e.g., Jaguar, Kilkenny beer), generating additional revenue streams.
Overall, this demonstrates a company focused on aggressively cutting costs while maximizing volume, enabling reasonable margins and a good return on assets.
Tesla’s Entry into the Automotive Industry
Tesla entered the established car industry without the vast resources of competitors like Nissan or BMW. Consequently, they had to develop their company by cutting costs wherever possible while simultaneously achieving innovation comparable to or exceeding that of competitors.
- Brand Awareness and Marketing: For brand awareness and marketing, Tesla leveraged Elon Musk’s public profile and reputation to build visibility, attract capital, and generate media attention. This approach allowed the company to gain significant notice through its charismatic owner, arguably at a lower direct cost than traditional marketing campaigns, achieving awareness levels potentially higher than some established automakers.
- Resource and Development Strategy: In research and development (R&D), particularly for battery technology (the most challenging and expensive component), Tesla hired talent from Silicon Valley and formed a crucial partnership with Panasonic. Therefore, for the most capital-intensive aspects, they collaborated with Panasonic, a company with existing expertise in battery production, mitigating risk and resource requirements.