Strategy Muse

How they boost income: 22-July-08

Big Pharmaceutical Companies, facing fewer prescriptions filled, patent expirations, and FDA rejections of new drugs:
1. They are continuing to consoldate (Roche has bid $44 billion for Genentech, Teva Pharmaceutical Industries has bid $7 billion for rival Barr Pharmaceuticals).
2. They are trying desperately to come up with substitutes for big products facing patent expirations while the Food & Drug Administration has become increasingly picky and cautious in granting approvals.
3. They are diversifying well beyond prescription drugs so that no one product or business is likely to dominate the results

[Click here for full story at Businessweek.com]

Synergy + new products + wider income streams = more income

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Barry Callebaut AG, the world's biggest contract manufacturer and supplier of bulk chocolate, fighting a 40 percent jump in cocoa prices:
1. It will focus on contract manufacturing and producing ingredients such as cocoa butter and cocoa powder.
2. It bought or leased 10 factories, bringing the total to about 40.
3. It has started factories in Russia and China
4. It will seek to benefit from the current outsourcing trend. It has signed its biggest outsourcing deal in 2007 with Hershey and won new orders from Nestle SA, Cadbury Plc and Japan's Morinaga & Co. boosting annual sales by about 13 percent
5. It may win enough orders to operate the new factories near full volume in three to five years

[Click here for full story at Bloomberg.com]

B2B transactions = easier inflationary pricing = more income
More production = more income (only if demand exceeds supply)

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Lion Capital LLP, the London-based leveraged buyout firm:
1. It targets investments in consumer products. Its holdings range from Kettle Chips to Wagamama noodle restaurants.
2. It will buy FoodVest Group, the owner of Findus frozen foods, which makes frozen ready-meals and fish fingers, for $2 billion from CapVest Ltd., another LBO fund.
statement.
3. It is hiring JPMorgan Chase & Co. to arrange for loans to fund the takeover.

[Buyout firms use a combination of their own funds and debt to pay for takeovers and then seek to improve profit by boosting sales, selling assets and cutting costs. The firms typically sell the companies to other funds or investors within five years.]

[Click here for full story at Bloomberg.com]

Adding value to businesses = source of income
Playing the core competence realm = ability to add more value to businesses

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Apple, converging technology company:
1. It has forecast lower margins in the future because of a product transition.

[Analysts have inferred the following:
a) It may cut prices for more impressive market-share gains in the PC market.
b) It may refresh its notebooks with the latest Intel Centrino 2 processors to improve performance and increase battery life
c) It may introduce a larger-screen MacBook.
d) It may upgrade Apple TV, a device that lets users play video downloaded from the Web, with a much larger hard drive or the ability to record TV shows the way a TiVo does.
e) It may expand its iTunes Store and online rental capacity by buying more servers and more Internet-serving capacity
f) It may absorb rise in prices of materials Apple uses in its products like aluminum and plastics and components like DRAM computer memory.]

2. It announced its back-to-school promotion that involves giving a free iPod to customers who buy a Mac

[Click here for full story at Businessweek.com]

Price cuts and promotions = more income, but at a cost that may be alleviated by volume gains (and sometimes necessary for industry icons also)

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TomTom NV, Europe's largest maker of car-navigation devices:
1. It bought Tele Atlas, the world's second-largest maker of maps used in navigation devices, for 2.9 billion euros to expand into the global market for digital maps.
2. It took out a five-year loan of 1.59 billion euros to finance the purchase.
3. It cut prices before unveiling new models.

[Click here for full story at Bloomberg.com]

Vertical integration = steadier production + more income from other usages of the integrated component

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Independent coffee shops in the U.S. competing with Starbucks are taking approaches that Starbucks hasn't:
1. Some are serving coffee differently from Starbucks.
[Lakota Coffee Co. in Missouri serves a latte in a signature large green bowl that requires two hands to hold and create a more at-home atmosphere than Starbucks down the street. It also gives customers real latte mugs.]

2. Some give customers free refills on coffee.
[Tocio's Sundance Café in Naples, Fla., offers customers unlimited refills for the $1.50 they pay for a 12-ounce coffee. When a Starbucks opened inside a Target next door it offered free coffees to Target employees on break, since they weren't offered Starbucks discounts.]

3. Some serve a different type of product and have their own unique style and brand.
[Jammin' Java, in Fayetteville, Ark., offers everything from breakfast burritos to turkey sandwiches along with their coffee. Since a Starbucks opened nearby several years ago, it has expanded the menu to include beer and wine.]

4. Some have a nimble management team to implement changes more quickly than bureaucratic corporations.
[Flying Star Café and Satellite Coffee in Albuquerque, keeps changing things to constantly offer something fun and unique. When Starbucks opened nearby it picked up on several of Starbucks' shortcomings and offered blended concoctions to complement coffee drinks.]

5. Some differentiate by paying meticulous attention to the coffee itself.
[Caffe Calabria in San Diego grinds coffee beans at different settings, based on the amount of moisture in the air, since water passes through the grounds differently when the humdity is higher.]

6. Some work to create loyal customer bases by emphasizing local ties.
[Coffee by Design in Portland, Me., sponsors local arts organizations and offers a grant each year to a Massachusetts artist (last year's grant was $2,800). It has given the store a unique following among local artists.]

[Click here for full story at Businessweek.com]

Income is in the focus, the differentiation, the freebies, the nimbleness, the relationships.
Can't big business implement such strategies at the local level by offering store employees rewards for doing things out of the box that flood the income stream without upsetting the giant corporation itself in any way?