Chapter 4 of Great ChoiceFire Bullets, Then Cannonballs

• http://www.youtube.com/watch?v=Y1Nxv0FUux8

• Sean Haight-Disney and Class Applications• Weston Waldo-Introduction and iEra• Matt McKanna-PSA• Jack Johns-What is a bullet and Amgen

Bullets

• A bullet is an empirical test aimed at learning what works and that meets 3 criteria:

• 1) A bullet is low cost. Note: the size of the bullet grows as the enterprise grows; a cannonball for a million dollar enterprise might be a bullet for a billion enterprise.

• 2) A bullet is low risk. Low risk does not mean high probability of success; low risk means that there are minimal consequences if the bullet goes awry or hits nothing.

• A bullet is low distraction. This means low distraction from the overall enterprise; it might be very high distraction for one or a few individuals.

Embrace the “fire bullets, then cannonballs”

• Fire bullets• Assess: Did the bullets hit anything?• Consider: Do any of your successful bullets

merit conversion to a big cannonball?• Convert: Concentrate resources and fire a

cannonball once calibrated.• Don’t fire uncalibrated cannonball• Terminate bullets that show no evidence of

eventual success

PSA

• Pacific Southwest Airlines-Giant, Flying Smile Machine in the Sky

• http://www.youtube.com/watch?v=NH7QUSnNCtE

• Founded in 1949 by Kenny Friedkin with a $1000 a month leased Douglas DC-3

• First flight from San Diego via Burbank to Oakland

In 1968 it launched a “cannonball” called Fly-Drive-SleepMoved into the Hotel and Rent-A-Car BusinessBought 25 year leases on hotels, including the permanently docked ocean liner Queen Mary.Rapidly bought 20 locations and more than 2000 cars.Generated losses every single year“We’re damn poor hotel operators” PSA Chairman J. Floyd Andrews

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• Early 1970s PSA fired another cannonball when it bought 5 L1011 super-wide-body jumbo jets at a price of 1.2 times its total stockholders’ equity

• PSA was a short turn, short haul perform up and down the California corridor, these jets take a long time to fill and board.

• Had to make special modifications such as widen exit doors, no food-preparation galley (which makes it hard to sell to other airlines if PSA needed cash)

• Lots of upfront investment in new towing tractors, maintenance equipment, boarding equipment, and training

• Arab oil embargo caused jet fuel prices to double just as PSA was putting its L1011s into service

• Economy fell into a recession as inflation drove costs up • California Public Utlilities Commission (which regulated

airline prices) would only grant PSA a 6.5% fare increase as PSA wanted a 16% fare increase

• Machinists Union went on strike• PSA senior vice president in 1975 on its finances “We

have come very very close to insolvency”• Eventually the L1101s never flew again with the PSA fleet

• PSA never recovered and fired more cannonballs• Tried to launch a joint venture with Braniff Airlines, hoping for a

short cut, in becoming a national carrier. (Braniff went bankrupt)

• Deregulation exposed PSA to more competition• A lawsuit with Lockheed over their L1101s created financial

uncertainty• Shut down for 52 days because of a pilot strike• Unexpected delays when it shifted over to McDonnell Douglas

DC-9-80s, leaving them short of aircraft just as the pilot strike ended clashing with their on time reliable reputation

• Tried to move into the oil and gas business

• Tragically a Cessna student-trainer airline hit a PSA 727 descending into San Diego, sending both airplanes to the ground.

• “Tower, we’re going down,” said the pilot, “This is PSA.”

• December 8, 1986 PSA was bought out by US Air

• In 1971 investors from Texas decided to from a airplane business and their business model was “to copy PSA”

PSA welcomed the owners and sold them flight and operations trainingIn pre-deregulation days Southwest would be constrained to Texas and PSA would still be the California King

• Flew in jump seats and took notes on every detail of gate and backroom operations

• Returned to Texas with notes and operating manuals that mimicked PSA’s model to the smallest details including the zany culture.

• Lamar Muse said creating his operations was a “cut-and-paste procedure” as he almost photocopied PSA

• People remember the Disney successes like the many different Disney princesses but even Disney fires cannonballs that fail miserably

• http://www.youtube.com/watch?v=yeEMbPhgy64

John Carter Fiasco

• Production Cost $250 Million• Marketing Costs $100 Million• To Breakeven the film had to make $700

Million Worldwide• Made $282,778,100• Disney Took a $200 Million Operating Loss in

the second fiscal quarter of 2012• Rich Ross, then head of Walt Disney Studios,

was forced to resign

John Carter Fiasco

• Andrew Stanton, who directed WALL-E and Finding Nemo lobbied to direct the film, pitched it as “Indiana Jones on Mars” and had never directed a live action film before, and didn’t want any major stars attached to the film

• Disney executives said they were confused by the script• Stanton took advice from guys at Pixar instead of people

who had done live action movies while filming took place

• Rich Ross, the new head of Disney Studios, had no film experience, only television

John Carter Fiasco• Stanton rejected ideas from Disney’s

marketing team• Used his own ideas, trailer showed billboard

imagery that failed to resonate with audiences, didn’t try to appeal to a certain demographic

• Stanton “Is it just me, or do we actually know how to do this better than live action crews?”

Thankfully for Disney

• Stanton went back to animation and is now working on Finding Nemo 2

• A few months later Disney released The Avengers which ended up making $1,511,757,910 worldwide and Pixar’s Brave which made $535,383,207 and Wreck-It Ralph in the fall making $392,004,376 helping Disney recuperate their losses and turn around and make profits

Amgen

• On April 14th, 1980 venture capitalist William K. Bowes and scientist Winston Salser brought a small group of scientists and investors to a meeting to discuss newly incorporated Biotechnology company

• It had a little more than a scientific advisory board and a group of people willing to invest just under $100,000

Amgen

• Their idea was simple, get the best people they could find and fund them money.

• 6 months later they started firing bullets• Bullet: Leukoctye interferon, for viral diseases• Bullet: Hepatitis B vaccine• Bullet: Epidermal growth factor, for wound healing and

gastric ulcers• Bullet: Hybridization probes for diagnostics in cancer,

infectious disease, and genetic disorders• Bullet : Erythropoietin (EPO) for treating anemia in chronic

kidney disease

Amgen

• Bullet: Chicken growth hormone, to build better chickens

• Bullet: Bovine growth hormone, to get more milk from cows

• Bullet: Growth-hormone-releasing factors• Bullet: Porcine-parvovirus vaccine, to increase

reproductive rates in pigs• Bullet: Transmissible-gastroenteritis-virus vaccine,

for intestinal infections in piglets• Bullet: Bioengineered indigo to dye blue jeans.

Amgen• In 1984 erythropoietin ( stimulates red-blood cell

production) showed promise• Amgen scientists isolated the EPO gene.• Amgen fired a cannonball, building testing facilities

allocating capital to manufacturing and assembling a launch team

• EPO became the first super blockbuster bioengineered product in history

• Amgen fired a handful of bullets that thumped into the dirt, punctuated by a handful of cannonballs that smashed into their targets

Apple’s Rebirth

• Steve Jobs forced out of Apple in 1985• Steve Jobs came back to Apple in 1997 to a failing

company, that in his absence tried dabbling in products such as digital cameras, speakers, TV appliances etc.

• Steve Jobs founded NeXT and figured out how to run a business

• In Steve Jobs absence Apple’s stock fell more than 60% behind the general market and CEOs during that time failed to understand what made Apple great in the first place

Steve Jobs’ Returns as CEO

• Steve Jobs first increased discipline• Steve Jobs brought in world class supply chains

expert, Tim Cook, and together they formed a perfect team of creativity and discipline.

• Cut perks, stopped funding the corporate sabbatical program

• Improved Operating Efficiency• Lowered Overall Cost Structure• Got people focused on work all day and all night

Starts the iEra

• To test his bullets Jobs looked at Napster and saw a need for accessible music

• Jobs opens itunes, ipod, imac• The Empirical Evaluation came when he

fired his cannon to make his product Windows accessible

Applications to Other Classes

• In Finance taught Capital Budgeting including Net Present Value

• Can look at a new revenue enhancing project and see is it a good investment

• NPV=Present Value of Inflows-Cost=Net gain in wealth

• If projects are independent, accept if the project NPV>0

Applications to Other Classes• In accounting taught different ratios to evaluate how well the company is doing• ROE (Return on Equity)= Net Income • -------------------------------------------- • Average Stockholders' Equity

• Net Working Capital= Current Assets – Current Liabilities • • Net Working Capital Ratio = Net Working Capital

• -------------------------- • Total Assets

• Profit Margin = Net Income• ----------------- • Sales

Is the Lucasfilm acquisition cannonball a bust or a good investment?

• Disney saw a need to tab into the male market share and continue to dominate in the family market share.

• Disney acquired Pixar in 2006 for 7.4 billion, since the acquisition Pixar films have averaged $671 millions at the Box Office compared to the $537 million before hand.

• Acquired Marvel in 2009 for $4.24 billion and this includes multiple divisions including toys, comics, animation, MVL production in Canada and the Netherlands.

• The Avengers movie alone made over $1.5 billion at the box office and includes rights to franchises such as X-Men, Spiderman, Captain America, and many more

• These two cannon balls fired have worked favorably for Disney

Past Acquisitions of Marvel and Pixar

• With the Lucasfilm Ltd. acquisition for $4.06 billion Disney acquires

multiple divisions including:• Industrial Light & Magic — visual effects• Skywalker Sound — post-production sound design• LucasArts — video and computer games• Lucasfilm Animation — animation• Lucasfilm Animation Singapore — animation• Lucas Books — Book publishing imprint of Del Rey Books,

licensed from Lucasfilm• Lucas Licensing — licensing and merchandising• Lucas Online — websites• They have to expand upon the Indiana Jones and Star Wars

Franchises which include films and TV series like The Clone Wars

Disney Plans for Lucasfilm

• Will play The Clone Wars on its cartoon channel and produce new episodes and air reruns from episodes shown on Cartoon Network

• In 2015 Star Wars Episode 7 will hit theaters with plans to release a new Star Wars film every 2 or 3 years, and planned spin offs are in the works

• Possible television series, other sequels to different franchises, and theme park expansions