Strategic Management: Concepts and Cases 9e

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Strategic Management: Concepts and Cases 9e

  1. 1. Strategic Management:Concepts and Cases 9e Part I: Strategic Management InputsChapter 1: Strategic Management and Strategic Competitiveness ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  2. 2. Chapter 1: Strategic Management andStrategic Competitiveness• Overview: Eight content areas – Nature of Competition – The Strategic Management Process – The Competitive Landscape – I/O Model of Above-Average Returns (AAR) – Resource-Based Model of AAR – Vision and Mission – Stakeholders – Strategic Leaders ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  3. 3. Nature of Competition: Basic concepts• Strategic Competitiveness – Achieved when a firm formulate & implements a value- creating strategy• Strategy – Integrated and coordinated set of commitments and actions designed to exploit core competencies and gain a competitive advantage• Competitive Advantage (CA) – Implemented strategy that competitors are unable to duplicate or find too costly to imitate• Above Average Returns – Returns in excess of what investor expects in comparison to other investments with similar risk ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  4. 4. Nature of Competition: Basic concepts(Cont’d)• Risk – Investor’s uncertainty about economic gains/losses resulting from a particular investment• Average Returns – Returns equal to what investor expects in comparison to other investments with similar risk• Strategic Management Process (SMP) – Full set of commitments, decisions and actions required for a firm to achieve strategic competitiveness and earn above average returns ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  5. 5. The Strategic Management Process©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  6. 6. The Competitive Landscape• Introduction: The Competitive Landscape (CL) – Pace of change is rapid – Industry boundaries are blurring – Financial capital is more scarce and markets are increasingly volatile – Other CL characteristics: Economies of scale, advertising budgets not as effective as before, change in managerial mind-set from “traditional” to more flexible and innovative ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  7. 7. The Competitive Landscape (Cont’d)• Introduction: The Competitive Landscape (CL) – Hypercompetition – extremely intense rivalry among competing firms, characterized by • Escalating & increasingly aggressive competitive moves • Assumptions of market stability replaced with notion of INstability and change – Two primary drivers of the competitive landscape: • The global economy • Technology ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  8. 8. The Competitive Landscape (Cont’d)• The Global Economy – Goods, services, people, skills and ideas move freely across geographic borders – Europe, through the European Union (EU) is the world’s largest single market • EU vs U.S. GDP: 35% higher – Emerging major competitive forces: China & India – In summary: globalization increased economic interdependence among countries as reflected in the flow of goods and services, financial capital, and knowledge across country borders ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  9. 9. The Competitive Landscape (Cont’d)• Technology and Technological Changes – 3 categories: • 1. Technology diffusion & disruptive technologies • 2. The information age • 3. Increasing knowledge intensity ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  10. 10. The Competitive Landscape (Cont’d)• Technology and Technology Changes (Cont’d) – Technology diffusion • Perpetual innovation: describes how new information-intensive technologies are replacing older forms • Speed to market may be primary competitive advantage • 12 – 18 month timeframe to gather info re: competitor R&D – Disruptive technologies • Technologies that – Destroy value of existing technology – Create new markets ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  11. 11. The Competitive Landscape (Cont’d)• Technology and Technology Changes (Cont’d) – The information age • Dramatic changes over last several years • Major technological developments effect how information is used and disseminated • Internet provides infrastructure for information anytime, anywhere – Increasing knowledge intensity • Defined as information, intelligence & expertise and is the basis of technology and its application • Gained through experience, observations and inferences • Strategic Flexibility – set of capabilities used to respond to various demands and opportunities existing in a dynamic and uncertain competitive environment ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  12. 12. Industrial Organizational (I/O) Model ofAbove-Average Returns (AAR)• Basic Premise – to explain the dominant influence of the external environment on a firms strategic actions and performance ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  13. 13. Industrial Organizational (I/O) Model ofAbove-Average Returns (AAR)• Underlying Assumptions – External environment imposes pressures and constraints that determine the strategies resulting in AAR – Most firms compete within a particular industry/segment • Control similar strategically relevant resources • Pursue similar strategies in light of those resources – Resources for implementing strategies are highly mobile across firms • Therefore any resource differences between firms will be short-lived – Organizational decision makers are rational and committed to acting in the firms best interests, as shown by their profit-maximizing behaviors ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  14. 14. Industrial Organizational (I/O) Model ofAbove-Average Returns (AAR)• Five-Forces Model (Michael Porter) – The 5 Forces includes • Suppliers, buyers, competitive rivalry, product substitutes and potential entrants – Reinforces the importance of economic theory – Analytical tool previously lacking in the field of strategy – Determines the nature/level of competition and profit potential in an industry • Suggests an industry’s profitability is an interaction between these 5 forces ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  15. 15. The Resource-Based Model of AAR©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  16. 16. The Resource-Based Model of AAR (Cont’d)• Basic Premise - a firms unique [internal] resources & capabilities, in combination, are the basis for firm strategy and AAR – Each firm’s performance difference across time emerges (vs industry’s structural characteristics) – Combined uniqueness should define the firms’ strategic actions – Resources are tangible and intangible ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  17. 17. The Resource-Based Model of AAR (Cont’d)• Resources – Inputs into a firms production process • Includes capital equipment, employee skills, patents, high- quality managers, financial condition, etc. – Basis for competitive advantage: When resources are valuable, rare, costly to imitate and nonsubstitutable – Internal/firm-specific resources can be classified into three categories: • Physical – Things you can touch/feel = tangible • Human – People / employees • Organizational capital – Relative to the firm itself ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  18. 18. The Resource-Based Model of AAR (Cont’d)• Capability – Capacity for a set of resources to perform a task or activity in an integrative manner• Core Competency – A firm’s resources and capabilities that serve as sources of competitive advantage over its rival• Summary – A firm has superior performance because of • Unique resources and capabilities, and the combination makes them different, and better, than their competition – driving the competitive advantage ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  19. 19. Vision and Mission• Vision – Picture of what the firm wants to be and, in broad terms, what it ultimately wants to achieve – An effective vision statement is the responsibility of the leader who should work with others to form it – Foundation for the mission• Mission – Specifics business(es) in which firm intends to compete and customers it intends to serve – More concrete than the vision ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  20. 20. Stakeholders• Basic Premise – a firm can effectively manage stakeholder relationships to create a competitive advantage and outperform its competitors• Stakeholders are both individuals and groups – They can affect, and are affected by, the strategic outcomes/performance a firm achieves• Firms are not equally dependent on all stakeholders ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  21. 21. The Three Stakeholder Groups©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  22. 22. Stakeholders (Cont’d)• Classifications of Stakeholders – Capital Market • Expect returns commiserate with risk accepted by investments • Higher the dependency relationship, the more direct and significant firm’s response – Product Market • Customers, suppliers, host communities, unions – Organizational • The employees ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  23. 23. Strategic Leaders• People located in different parts of the firm using the strategic management process to help the firm reach its vision and mission – Decisive and committed to nurturing those around them – Organizational culture emerges from & sustained by leaders • Complex set of ideologies, symbols and core values shared throughout the firm • Affects leaders/their work which in-turn shapes culture • Influences how the firm conducts business ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  24. 24. Strategic Leaders (Cont’d)• The Work of Effective Strategic Leaders – Hard work, thorough analysis, desire for accomplishment, tenacity – Must be able to “think seriously and deeply…about the purposes of the organizations they head or functions they perform, about strategies, tactics,…..and people…and about the important questions … they need to ask.”• Predicting Outcomes: Profit Pools (PP) – Anticipates their decisions relative to the PP – PP entails the total profits earned in an industry at all points along the value chain ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  25. 25. Strategic Management: Concepts and Cases 9e Part I: Strategic Management InputsChapter 2: The External Environment: Opportunities, Threats, Industry Competition and Competitor Analysis ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  26. 26. Chapter 2: The External Environment:Opportunities, Threats, Industry Competitionand Competitor Analysis• Overview: – General and industry environment – External environment analysis process activities – General environment segments – Porter’s 5 Competitive Forces – Strategic groups: Definition and influence – Competitor Analysis: Intelligence and ethics ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  27. 27. External Environment:General, Industry and Competitor• Three External Environments include: – General – Industry – Competitor ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  28. 28. External Environment:General, Industry and Competitor (Cont’d)• The General Environment – The broader society dimensions that influence an industry and the firms within it – Grouped into 7 dimensions OR ‘environmental segments’• Industry Environment – Set of factors directly influencing • A firm’s competitive actions/responses • Relates to Porter’s 5 Forces • Competitor analysis: gather and interpret competitor information• Competitor Environment – Gives details about • A firm’s direct and indirect competitors • The competitive dynamics expected to impact a firms efforts to generate above-average returns ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  29. 29. External Environment Analysis• Opportunity – General environment condition that, if exploited, helps a company achieve strategic competitiveness• Threat – General environment condition that may hinder a companys efforts to achieve strategic competitiveness• 4 components of External Environment Analysis – Scanning – Monitoring – Forecasting – Assessing ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  30. 30. Industry Environment Analysis• Industry – Definition: Group of firms producing products that are close substitutes – Industry environment, in comparison to the general environment, has more direct effect of firm’s • Strategic competitiveness and • Above-average returns – Intensity of industry competition and industry’s profit potential are a function of 5 forces ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  31. 31. Industry Environment Analysis (Cont’d)• Porter’s 5 Forces – 1/5: New entrants • Can threaten market share of existing competitors • May bring additional production capacity • Function of two factors – 1: Barriers to entry » Economies of scale » Product differentiation » Capital requirements » Switching costs » Access to distribution channels » Cost disadvantages independent of scale » Gov’t policy – 2: Expected retaliation – 2/5: Threat of substitute products • Goods or services outside of given industry perform same or similar functions at a competitive price (i.e., plastic has replaced steel in many applications) ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  32. 32. Industry Environment Analysis (Cont’d)• Porter’s 5 Forces – 3/5: Bargaining power of suppliers • They are powerful when … – 1. Few large companies and more concentrated – 2. No substitutes – 3. Industry firms not significant customer to supplier – 4. Supplier’s goods are critical to buyer’s success – 5. High switching costs due to effectiveness of supplier’s products – 6. Threat of forward integration – 4/5: Bargaining power of buyers • They are powerful when … – 1. Purchase large portion of industry’s total output – 2. Product sales accounts for significant seller annual revenue – 3. Low switching costs (to other industry product) – 4. Industry products are undifferentiated or standardized and threat of backward integration ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  33. 33. Industry Environment Analysis (Cont’d)• Porter’s 5 Forces – 5/5: Intensity of Rivalry Among Competitors • Numerous or equally balanced competitors • Slow industry growth • High fixed costs or high storage costs • Lack of differentiation or low switching costs • High strategic stakes • High exit barriers ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  34. 34. Strategic Groups• Strategic Groups – Set of firms emphasizing similar strategic dimensions to use a similar strategy – Implications • Because firms within a group compete (offer similar products) rivalry can be intense – the greater the rivalry the greater the threat to each firm’s profitability • Strengths of the 5 forces differs across strategic groups • The closer the strategic groups, in terms of strategy, the greater the likelihood of rivalry ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  35. 35. Competitor Analysis• Competitor analysis and organization response: – What drives competitors • Shown by organizations future objectives – What the competitor is doing and can do • Revealed in organizations current strategy – What the competitor believes about the industry • Shown in organizations assumptions – What the competitor’s capabilities are • Shown by organizations strengths and weaknesses ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  36. 36. Competitor Analysis Components©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  37. 37. Competitor Analysis (Cont’d)• Competitor intelligence – Set of data and information the firm gathers to better understand and anticipate competitors objectives, strategies, assumptions, and capabilities• Follow ethical practices when gathering competitor intelligence – Obtain public information – Attend trade fairs and shows and collect brochures, view exhibits, listen to their discussions• Some practices may be legal, but unethical• Unethical tactics can include – Blackmail – Trespassing – Eavesdropping – Stealing drawings, samples or documents ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  38. 38. Strategic Management: Concepts and Cases 9e Part I: Strategic Management Inputs Chapter 3: The Internal Organization:Resources, Capabilities, Core Competencies and Competitive Advantages ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  39. 39. Chapter 3: The Internal Organization:Resources, Capabilities, Core Competenciesand Competitive Advantages• Overview: – Importance of understanding internal organization – Value: Definition and importance – Tangible vs intangible resources – Capabilities: Definition and development – Core competencies: Criteria – Value Chain Analysis – Outsourcing: Definition and “why?” – Internal organization assessment and strategic decisions ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  40. 40. Analyzing the Internal Organization (IO) (Cont’d)• Context of Internal Analysis – ‘Global mind-set’ • Ability to study an internal environment in ways that do not depend on the assumptions of a single country, culture, or context – Analyze firm’s portfolio of resources and bundle heterogeneous resources and capabilities • Understand how to leverage these bundles – An organizations core competencies creates and sustains its competitive advantage• Creating Value – Develop core competencies that lead to competitive advantage – Value: measured by a products performance characteristics and by its attributes for which customers are willing to pay ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  41. 41. Analyzing the Internal Organization (IO) (Cont’d)• The Challenge of Analyzing the IO – Strategic decisions are non-routine, have ethical implications and influence the organization’s above- average returns • Involves identifying, developing, deploying and protecting firms’ resources, capabilities and core competencies – Managers face uncertainty on many fronts -- • Proprietary technologies • Changes in economic and political trends, societal values and shifts in customer demands • Environment – increases complexity – Intraorganizational conflict • Due to decisions about core competencies and how to nurture them ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  42. 42. Components of Internal Analysis Leading toCompetitive Advantage and StrategicCompetitiveness©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  43. 43. Conditions Affecting Managerial DecisionsAbout Resources, Capabilities, and CoreCompetencies©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  44. 44. Resources, Capabilities and CoreCompetencies• Competitive Advantage (CA) foundation includes – Resources • Bundled to create organizational capabilities • Tangible and intangible (As seen in Figure 3.1) – Capabilities • Source of a firm’s core competencies and basis for CA • Purposely integrated to achieve a specific task/set of tasks – Core Competencies • Capabilities that serve as a source of CA for a firm over its rivals • Distinguish a company from its competitors – the personality ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  45. 45. Resources, Capabilities and Core Competencies• Tangible Resources – Assets that can be seen, touched and quantified – Examples include equipment, facilities, distribution centers, formal reporting structures – Four specific types• Intangible Resources – Assets rooted deeply in the firm’s history, accumulated over time – In comparison to ‘tangible’ resources, usually can’t be seen or touched – Examples include knowledge, trusts, organizational routines, capabilities, innovation, brand name, reputation – Three specific types ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  46. 46. Building Core Competencies:Criteria and Value Chain Analysis• Two tools firms use to identify and build on their core competencies – Four specific criteria of Sustainable CA – Value Chain Analysis ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  47. 47. Building Core Competencies:Criteria and Value Chain Analysis• Four specific criteria of sustainable competitive advantage – capabilities that are: – Valuable – Rare – Costly-to-imitate – Nonsubstitutable capabilities• Competitive consequences: – Focus on capabilities that yield competitive parity and either temporary or sustainable competitive advantage• Performance implications include: – Parity = average returns – Temporary advantage = avg. to above avg. returns – Sustainable advantage = above average returns ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  48. 48. Building Core Competencies:Criteria and Value Chain Analysis• Value Chain Analysis – Primary activities • Involved with product’s physical creation, sales and distribution to buyers, and service after the sale – Support activities • Provide assistance necessary for the primary activities to take place ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  49. 49. Outsourcing• Definition: Purchase of a value-creating activity from an external supplier – Effective execution includes an increase in flexibility, risk mitigation and capital investment reduction – Trend continues at a rapid pace – Firms must outsource activities where they cannot create value or are at a substantial disadvantage compared to competitors• Can cause concerns – Usually revolves around innovative ability and loss of jobs ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  50. 50. Internal Organization Assessment andStrategic Decisions• Firms must identify their strengths and weaknesses• Appropriate resources and capabilities needed to develop desired strategy and create value for customers/other stakeholders• Tools (i.e., outsourcing) can help a firm focus on core competencies as the source for CA• Core competencies have potential to become core rigidities – Competencies emphasized when no longer competitively relevant can become a weakness• External environmental conditions and events impact a firm’s core competencies ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  51. 51. Strategic Management:Concepts and Cases 9e Part II: Strategic Actions: Strategy Formulation Chapter 4: Business-Level Strategy ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  52. 52. Chapter 4: Business-Level Strategy• Overview: – Defining business-level strategy – Relationship between customers and strategy – Differences in business-level strategies – 5-Forces – Risks of business-level strategies ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  53. 53. Introduction• Strategy: Increasingly important to a firm’s success and concerned with making choices among two or more alternatives. Choices dictated by – External environment – Internal resources, capabilities and core competencies• Business level-strategy: Integrated and coordinated set of commitments and actions the firm uses to gain a competitive advantage by exploiting core competencies in specific product markets – Purpose: To create differences between position of a firm and its competitors – Firm must make a deliberate choice to • Perform activities differently • Perform different activities ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  54. 54. Customers: Their Relationship with Business-Level Strategies (Cont’d)• Satisfying customers is the foundation of successful business strategies – 1. Effectively managing relationships w/ customers – 2. Reach, richness and affiliation – 3. Who: Determining the customers to serve – 4. What: Determining which customer needs to satisfy – 5. How: Determining core competencies necessary to satisfy customer needs ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  55. 55. Purpose of Business-Level (BL) Strategies (con’t)• Two types of competitive advantage firms must choose between – Cost (Are we LOWER than others?) – Uniqueness (Are we DIFFERENT? How?)• Two types of ‘competitive scope’ firms must choose between – Broad target – Narrow target• These combine to yield 5 different BL strategies ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  56. 56. Types of Business-Level Strategies1. Cost Leadership (CL) – Competitive advantage: THE low-cost leader and operates with margins greater than competitors – Integrated set of actions designed to produce or deliver goods or services with features that are acceptable to customers at the lowest cost, relative to competitors – No-frill, standardized goods – Continuously reduce costs of value chain activities – Low-cost position is a valuable defense against rivals ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  57. 57. Types of Business-Level Strategies (Cont’d)1. Cost Leadership (CL) (Cont’d) – Cost leaders are in a position to • Absorb supplier price increases and relationship demands • Force suppliers to hold down their prices – Continuously improving levels of efficiency and cost reduction • Can be difficult to replicate and • serve as significant entry barriers to potential competitors – Cost leaders hold an attractive position in terms of product substitutes, with the flexibility to lower prices to retain customers – Examples: Greyhound Bus, Big Lots Inc., Wal-Mart• Competitive Risks of the cost leadership strategy – Source of cost advantage becomes obsolete – Focus on cost may cause the firm to overlook important customer preferences – Imitation ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  58. 58. Types of Business-Level Strategies (Cont’d)2. Differentiation – Competitive advantage: Differentiation – Competitive scope: Broad – Integrated set of actions designed by a firm to produce or deliver goods or services at an acceptable cost that customers perceive as being different in ways that are important to them – Target customers perceive product value – Customized products – differentiating on as many features as possible – Examples: Apple’s iPod ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  59. 59. Types of Business-Level Strategies (Cont’d)2. Differentiation (Cont’d) – In relationship to the 5 Forces: • Rivalry against existing competitors: Customers are loyal • Bargaining Power of Buyers (Customers): Inverse relationship between loyalty/product price sensitivity • Bargaining Power of Suppliers: Provide high quality components, driving up firm’s costs; Cost may be passed on to customer • Potential Entrants: Substantial barriers; require significant resource investment • Product Substitutes: Customer loyalty effectively positions firm against product substitutes• Competitive Risks of the differentiation strategy – Customers determine that the cost of differentiation is too great – The means of differentiation may cease to provide value for which customers are willing to pay – Experience can narrow customers’ perceptions of the value of a product’s differentiated features – Counterfeiting ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  60. 60. Types of Business-Level Strategies (Cont’d)• There are two “Focus” strategies – In general, the firms’ core competencies used to serve the need of a particular industry segment or niche to the exclusion of others. • May lack resources to compete in the broader market • May be able to more effectively serve a narrow market segment than larger industry-wide competitors • Firms may direct resources to certain value chain activities to build competitive advantage – Large firms may overlook small niches • Risk of using “Focus” strategies – A competitor may be able to focus on a more narrowly defined competitive segment and "outfocus” the focuser – A company competing on an industry-wide basis may decide that the market segment served by the focus strategy firm is attractive and worthy of competitive pursuit – Customer needs within a narrow competitive segment may become more similar to those of industry-wide customers as a whole ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  61. 61. Types of Business-Level Strategies (Cont’d)5. Integrated CL/Differentiation – Efficiently produce products with differentiated attributes • Efficiency: Sources of low cost • Differentiation: Source of unique value – Can adapt to new technology and rapid changes in external environment – Simultaneously concentrate on TWO sources of competitive advantage: cost and differentiation – consequently… – …must be competent in many of the primary and support activities – Three sources of flexibility useful for this strategy: • Flexible manufacturing systems (FMS) • Information networks • Total Quality Management (TQM) systems ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  62. 62. Types of Business-Level Strategies (Cont’d)• Competitive Risks of Integrated Strategies – Although becoming more popular the RISK is getting ‘stuck in the middle’ • Cost structure is not low enough for attractive pricing of products and products not sufficiently differentiated to create value for target customer – therefore, fail to successfully implement either low cost or differentiation strategy • Result: Don’t earn above-average returns ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  63. 63. Strategic Management: Concepts and Cases 9e Part II: Strategic Actions: Strategy FormulationChapter 5: Competitive Rivalry and Competitive Dynamics ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  64. 64. Chapter 5: Competitive Rivalry andCompetitive Dynamics• Overview: – Competitors, competitive rivalry, competitive behavior and competitive dynamics – Market commonality and resource similarity: Building blocks of competitor analysis – Competitive actions: Awareness, motivation and ability – Factors driving competitor’s competitive actions – Competitor’s response to actions taken against it – Competitive dynamics in slow, fast and standard-cycle markets ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  65. 65. Introduction and Definitions• Competitors – Firms operating in the same market, offering similar products and targeting similar customers• Competitive Rivalry – Ongoing set of competitive actions and competitive responses occurring between competitors as they contend with each other for an advantageous market position• Competitive Behavior – Set of competitive actions and competitive responses the firm takes to build or defend its competitive advantages and to improve its market position• Multimarket Competition – Firms competing against one another in several product or geographic markets• Competitive Dynamics – Total set of actions and responses of all firms competing within a market ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  66. 66. From Competitors to Competitive Dynamics©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  67. 67. Model of Competitive Rivalry• Model of Competitive Rivalry – Over time firms take competitive actions/reactions – Pattern shows firms are mutually interdependent – Firm level rivalry is usually dynamic and complex – Foundation for successfully building and using capabilities and core competencies to gain an advantageous market position ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  68. 68. Competitor Analysis• Market Commonality: Each industry composed of various markets which can be subdivided into (segments)• Resource Similarity: Extent to which firm’s tangible/intangible resources are comparable to competitor’s in type and amount• Market commonality & resource similarity influence three drivers of competitive behavior – Awareness – Motivation – Ability• Other influences include resource dissimilarity – The greater the resource imbalance between acting firm and competitors or potential responders, the greater will be the delay in response ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  69. 69. Competitive Rivalry• Important to understand competitor’s awareness, motivation and ability in order to predict the likelihood of an attack – study ‘likelihood of attack’ factors• What are the strategic and tactical actions? – Strategic actions/responses: market-based moves that signify a significant commitment of organizational resources to pursue a specific strategy • Difficult to implement and reverse – Tactical actions/responses: market-based moves that involve fewer resources to fine-tune a strategy that is already in place • Easy to implement and reverse ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  70. 70. Interfirm Rivalry: Likelihood of Attack• Three possible ‘likelihood of response’ actions – 1. First Mover Incentives – 2. Organizational Size – 3. Quality• Additional factors affect the likelihood a firm will competitively respond to a competitor’s actions: – 1. Types and effectiveness of the competitive action – 2. Actor’s Reputation – 3. Dependence on the Market• Finally, if the action significantly strengthens or weakens the firms competitive position ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  71. 71. Competitive Dynamics: 3 Market Cycles1. Slow-Cycle Markets – Markets in which the firms competitive advantages are shielded from imitation for long periods of time, and in which imitation is costly – Build a one-of-a-kind competitive advantage which creates sustainability – Once a proprietary advantage is developed, competitive behavior should be oriented to protecting, maintaining, and extending that advantage – Organizational structure should be used to effectively support strategic efforts ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  72. 72. Gradual Erosion of a Sustained CompetitiveAdvantage©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  73. 73. Competitive Dynamics: 3 Market Cycles(Cont’d)2. Fast-Cycle Markets – Markets in which the firms capabilities that contribute to competitive advantages are not shielded from imitation and where imitation is often rapid and inexpensive – Focus: learning how to rapidly and continuously develop new competitive advantages that are superior to those they replace (creating innovation) – Avoid loyalty to any one product, possibly cannibalizing their own current products to launch new ones before competitors learn how to do so through successful imitation – Continually try to move on to another temporary competitive advantage before competitors can respond to the first one ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  74. 74. Developing Temporary Advantages to CreateSustained Advantage©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  75. 75. Competitive Dynamics: 3 Market Cycles(Cont’d)3. Standard-Cycle Markets – Markets where firm’s competitive advantages are moderately shielded from imitation and where imitation is moderately costly – Competitive advantages partially sustained as quality is continuously upgraded – Seek to serve many customers and gain a large market share – Gain brand loyalty through brand names – Careful operational control / manage a consistent experience for the customer ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  76. 76. Strategic Management:Concepts and Cases 9e Part II: Strategic Actions: Strategy FormulationChapter 6: Corporate-Level Strategy ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  77. 77. Chapter 6: Corporate-Level Strategy• Overview: Seven content areas – Define and discuss corporate-level strategy – Different levels of diversification – Three primary reasons firms diversify – Value creation: related diversification strategy – Value creation: unrelated diversification strategy – Incentives and resources encouraging value-neutral diversification – Management motives encouraging firm overdiversification©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  78. 78. Introduction• Corporate-level strategy: Specifies actions a firm takes to gain a competitive advantage by selecting and managing a group of different businesses competing in different product markets – Expected to help firm earn above-average returns – Value ultimately determined by degree to which “the businesses in the portfolio are worth more under the management of the company then they would be under any other ownership • Product diversification (PD): primary form of corporate- level strategy©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  79. 79. Introduction GE Rolls-Royce PLC• 1st in aircraft-engine industry • 2nd in aircraft-engine industry• Involved in hundreds of businesses: • No longer makes luxury cars; operation manufacturing light bulb, medical devices; was parceled off to BMW and operating self-storage facilities; broadcasting (it Volkswagen in 1998. owns NBC) • 72% of its revenue coming from aircraft• Less than 10% of its revenue coming from engine aircraft engine Business-level: Within industry Both face the same competitive pressures: how to compete against Pratt & Whitney (3rd largest) Corporate-level GE faces strategic issues that are less relevant to Roll-Royce, in terms of managing the portfolio of business ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  80. 80. Levels of Diversification• 1. Low Levels – Single Business Strategy: firm generates 95% or more of its sales revenue from its core business area – Dominant Business Diversification Strategy: firm generates 70-95% of total sales revenue within a single business area• 2. Moderate to High Levels – Related Constrained Diversification Strategy • Less than 70% of revenue comes from the dominant business • Direct links between the firms businesses – Related Linked Diversification Strategy (Mixed related and unrelated) • Less than 70% of revenue comes from the dominant business • Mixed: Linked firms sharing fewer resources and assets among their businesses (compared with related constrained, above), concentrating on the transfer of knowledge and competencies among the businesses• 3. Very High Levels: Unrelated • Less than 70% of revenue comes from dominant business • No relationships between businesses©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  81. 81. Levels and Types of Diversification©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  82. 82. Reasons for Diversification• A number of reasons exist for diversification: – Value-creating – Value-neutral – Value-reducing©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  83. 83. Value-Creating Diversification Strategies:Operational and Corporate Relatedness©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  84. 84. Value-Creating Diversification (VCD): RelatedStrategies• Purpose: Gain market power relative to competitors• Related diversification wants to develop and exploit economies of scope between its businesses – Economies of scope: Cost savings firm creates by successfully sharing some of its resources and capabilities or transferring one or more corporate-level core competencies that were developed in one of its businesses to another of its businesses• VCD: Composed of ‘related’ diversification strategies including Operational and Corporate relatedness©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  85. 85. Value-Creating Diversification (VCD): RelatedStrategies (Cont’d)• 1. Operational Relatedness: Sharing activities – Can gain economies of scope – Share primary or support activities (in value chain) – Related constrained share activities in order to create value – Not easy, often synergies not realized as planned• 2. Corporate Relatedness: Core competency transfer – Complex sets of resources and capabilities linking different businesses through managerial and technological knowledge, experience and expertise – Two sources of value creation • Expense incurred in first business and knowledge transfer reduces resource allocation for second business • Intangible resources difficult for competitors to understand and imitate – Use related-linked diversification strategy©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  86. 86. Value-Creating Diversification (VCD): RelatedStrategies (Cont’d)• Market Power – Exists when a firm is able to sell its products above the existing competitive level, to reduce costs of primary and support activities below the competitive level, or both. – Multimarket (or Multipoint) Competition • Exists when 2 or more diversified firms simultaneously compete in the same product or geographic markets. – Related diversification strategy may include • Vertical Integration • Virtual integration©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  87. 87. Value-Creating Diversification (VCD):Unrelated Strategies• Creates value through two types of financial economies – Cost savings realized through improved allocations of financial resources based on investments inside or outside firm • Efficient internal capital market allocation – Restructuring of acquired assets • Firm A buys firm B and restructures assets so it can operate more profitably, then A sells B for a profit in the external market©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  88. 88. Value-Neutral Diversification:Incentives and Resources• Incentives to Diversify – Antitrust Regulation and Tax Laws – Low Performance – Uncertain Future Cash Flows – Synergy and Firm Risk Reduction – Resources and Diversification©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  89. 89. Value-Reducing Diversification:Managerial Motives to Diversify• Top-level executives may diversify in order to diversity their own employment risk, as long as profitability does not suffer excessively – Diversification adds benefits to top-level managers but not shareholders – This strategy may be held in check by governance mechanisms or concerns for one’s reputation©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  90. 90. Summary Model of the Relationship BetweenDiversification and Firm Performance©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  91. 91. Strategic Management:Concepts and Cases 9e Part II: Strategic Actions: Strategy Formulation Chapter 7: Merger and Acquisition Strategies ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  92. 92. Chapter 7: Acquisition and RestructuringStrategies• Overview: Six content areas – Popularity of acquisition strategies for firms competing in the global economy – Why firms use acquisition strategies – Seven problems working against developing a competitive advantage using an acquisition strategy – Attributes of effective acquisitions – Restructuring strategy vs. common forms – Short & long-term outcomes of different restructuring strategies©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  93. 93. Introduction: Popularity of M&A Strategies• Popular strategy among U.S. firms for many years• Can be used because of uncertainty in the competitive landscape – Increase market power because of competitive threat – Spread risk due to uncertain environment – Shift core business into different markets • Due to industry or regularity changes• Intent: increase firm’s strategic competitiveness and value• The reality, however, is returns are close to zero©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  94. 94. Introduction: Merger, Acquisition, and Takeover• Merger – Two firms agree to integrate their operations on a relatively co-equal basis• Acquisition – One firm buys a controlling, 100 percent interest in another firm with the intent of making the acquired firm a subsidiary business within its portfolio.• Takeover – Special type of acquisition strategy wherein the target firm did not solicit the acquiring firms bid • Hostile Takeover: Unfriendly takeover that is unexpected and undesired by the target firm©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  95. 95. Reasons for Acquisitions• Increased market power• Overcoming entry barriers• Cost of new product development and increased speed to market• Lower risk compared to developing new products• Increased diversification• Reshaping firm’s competitive advantage• Learning and developing new capabilities ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  96. 96. Reasons for Acquisitions and Problems inAchieving Success©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  97. 97. Problems in Achieving Acquisition Success• 1. Integration difficulties• 2. Inadequate evaluation of target• 3. Large or extraordinary debt• 4. Inability to achieve synergy – Synergy: Value created by units exceeds value of units working independently – Private synergy: Occurs when the combination and integration of acquiring and acquired firms assets yields capabilities and core competencies that could not be developed by combining and integrating the assets with any other company©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  98. 98. Problems in Achieving Acquisition Success• 5. Too much diversification• 6. Managers overly focused on acquisitions• 7. Too large –Additional costs may exceed the benefits of the economies of scale and additional market power –Larger size may lead to more bureaucratic controls –Formalized controls often lead to relatively rigid and standardized managerial behavior –Firm may produce less innovation Biggest Failed Mergers©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  99. 99. Effective Acquisitions• Complementary assets or resources• Friendly acquisitions facilitate integration of firms• Effective due-diligence process (assessment of target firm by acquirer, such as books, culture, etc.)• Financial slack• Low debt position – High debt can… • Increase the likelihood of bankruptcy • Lead to a downgrade in the firm’s credit rating • Preclude needed investment in activities that contribute to the firm’s long-term success• Innovation• Flexibility and adaptability©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  100. 100. Restructuring• Restructuring: Firm changes set of businesses or financial structure – 1. Downsizing: Reduction in number of firms’ employees (and possibly number of operating units) that may or may not change the composition of businesses in the companys portfolio – 2. Downscoping: Eliminating businesses unrelated to firms’ core businesses through divesture, spin-off, or some other means – 3. Leveraged buyouts (LBOs) – • One party buys all of a firms assets in order to take the firm private (or no longer trade the firms shares publicly) • Private equity firm: Firm that facilitates or engages in taking a public firm private • Why LBOs? – Protection against a capricious financial market – Allows owners to focus on developing innovations/bring them to market – A form of firm rebirth to facilitate entrepreneurial efforts©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  101. 101. Restructuring and Outcomes©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  102. 102. Strategic Management:Concepts and Cases 9e Part II: Strategic Actions: Strategy Formulation Chapter 8: International Strategy ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  103. 103. Chapter 8: International Strategy (IS)• Overview: Eight content areas – Traditional vs. emerging motives – Four major benefits of International Strategies (IS) – Four factors as basis for international business strategy – Three international corporate-level strategies – Environmental trends affecting IS – Five alternative modes for entering international markets – Effects of international diversification on returns & innovation – Two major risks of international diversification©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  104. 104. Introduction• Many firms choose direct investment in assets over indirect investment – Provides better protection for assets©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  105. 105. Identifying International Opportunities:Incentives to Use an International Strategy (IS)• International Strategy (IS): firm sells its goods or services outside the domestic market• Reasons for an IS – International markets yield potential new opportunities – International diversification: innovation occurs in home- country market, especially in an advanced economy, and demand for product develops in other countries, so exports provided by domestic organization – Multinational strategy: Secure need resources – Other motives exist (i.e., pressure for global integration, borderless demand for globally branded products)©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  106. 106. Identifying International Opportunities:Incentives to Use an International Strategy (IS)(Cont’d)• Four primary reasons – 1. Increased market size • Domestic market may lack the size to support efficient scale manufacturing facilities – 2. Return on Investment (ROI) • Large investment projects may require global markets to justify the capital outlays • Weak patent protection in some countries implies that firms should expand overseas rapidly in order to preempt imitators ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  107. 107. Identifying International Opportunities:Incentives to Use an International Strategy (IS)(Cont’d)• Four primary reasons (Cont’d) – 3. Economies of Scale and Learning • Expanding size or scope of markets helps to achieve economies of scale in manufacturing as well as marketing, R&D, or distribution • Costs are spread over a larger sales base • Profit per unit is increased – 4. Location advantages: Low cost markets may… • … aid in developing competitive advantage • … achieve better access to critical resources: – i.e., raw materials, lower cost labor, key customers, energy ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  108. 108. International Strategies (IS)• Firms choose one or both of two basic type of IS: Business level and/or corporate level• International business-level strategy – Follows generic strategies of cost-leadership, differentiation, focused or broad• International corporate-level strategy – Home country usually most important source of competitive advantage • Resources and capabilities frequently allow firm to pursue markets in other countries • The determinants of national advantage includes 4 factors©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  109. 109. Determinants of National Advantage©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  110. 110. International Corporate-Level Strategies©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  111. 111. International Strategies (IS) (Cont’d)• International corporate-level strategies (Cont’d)• 1. Multidomestic – Decentralized strategic & operating decisions by strategic business-unit (SBU) in each country allows units to tailor products to local markets – Focuses on variations of competition within each country – Customized products to meet local customers’ specific needs and preferences – Takes steps to isolate the firm from global competitive forces • Establish protected market positions • Compete in industry segments most affected by differences among local countries – Deals with uncertainty from differences across markets©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  112. 112. International Strategies (IS) (Cont’d)• 2. Global – Offers standardized products across country markets, with the competitive strategy being dictated by the home office – Emphasizes economies of scale – Facilitated by improved global reporting standards (i.e., accounting and financial) – Strategic & operating decisions centralized at home office – Involves interdependent SBUs operating in each country – Home office attempts to achieve integration across SBUs, adding management complexity – Produces lower risk – Is less responsive to local market opportunities – Offers less effective learning processes (pressure to conform and standardize) ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  113. 113. International Strategies (IS) (Cont’d)• 3. Transnational – Seeks to achieve both global efficiency and local responsiveness – these are competing goals! – Requires both global coordination and local flexibility with this strategy/structure combination • Flexible Coordination: Building a shared vision and individual commitment through an integrated network – Challenging, but becoming increasingly necessary to compete in international markets – Growing number of global competitors heightens need to keep costs down while greater information flow and desire for specialized products pressures firms to differentiate and even customize products – nonetheless, – Increasingly used as a strategy©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  114. 114. Environmental Trends• Transnational strategy hard to implement• Two new trends• 1. Liability of foreignness – Increased after terrorists’ attacks and Iraq War – Global strategies not as prevalent today, still difficult to implement even with Internet-based strategies – Regional focus allows firms to marshal resources to compete effectively in regional markets• 2. Regionalization – Focus to a particular region of the world • Increases understanding of market • Achieve some economies • Trade agreements (i.e., EU, OAS, NAFTA) promote flow of trade across country boundaries with their respective regions©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  115. 115. International Entry Modes• Follows the selection of an IS• Five main entry modes• 1. Exporting• 2. Licensing• 3. Strategic Alliances• 4. Acquisitions• 5. New Wholly-Owned Subsidiary©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  116. 116. International Entry Modes (Cont’d)• 1. Exporting – Involves low expense to establish operations in host country – Often involves contractual agreements – Involves high transportation costs – May have some tariffs imposed – Offers low control over marketing and distribution©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  117. 117. International Entry Modes (Cont’d)• 2. Licensing – Involves low cost to expand internationally – Allows licensee to absorb risks – Has low control over manufacturing and marketing – Offers lower potential returns (shared with licensee) – Involves risk of licensee imitating technology and product for own use – May have inflexible ownership arrangement©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  118. 118. International Entry Modes (Cont’d)• 3. Strategic Alliances – Involve shared risks and resources – Facilitate development of core competencies – Involve fewer resources and costs required for entry – May involve possible incompatibility, conflict, or lack of trust with partner – Are difficult to manage©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  119. 119. International Entry Modes (Cont’d)• 4. Acquisitions – Allow for quick access to market – Involve possible integration difficulties – Are costly – Have complex negotiations and transaction requirements©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  120. 120. International Entry Modes (Cont’d)• 5. New Wholly-Owned Subsidiary – Is costly – Involves complex processes – Allows for maximum control – Has the highest potential returns – Carries high risk – Greenfield venture: Establish entirely new subsidiary©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  121. 121. International Entry Modes (Cont’d)• Dynamics of Mode of Entry: Use the best suited to the situation at hand; affected by several factors – Export, licensing and strategic alliance: good tactics for early market development – Strategic alliance: used in more uncertain situations – Wholly-owned subsidiary may be preferred if • IP rights in emerging economy not well protected • Number of firms in industry is growing fast • Need for global integration is high – Acquisitions or greenfield ventures: secure a stronger presence in international markets©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  122. 122. Strategic Competitive Outcomes• International diversification: firm expands sales of its goods or services across the borders of global regions and countries into different geographic locations or markets• Implementation follows selection of international strategy and mode of entry• 1. International diversification and returns• 2. International diversification and innovation• 3. Complexity of managing multinational firms©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  123. 123. Strategic Competitive Outcomes (Cont’d)• 1. International diversification and returns – As international diversification increases, firms’ returns initially decrease, but then increase quickly as the firm learns to manage international expansion• 2. International diversification and innovation – Exposure to new products and markets – Opportunity to integrate new knowledge into operations – Generation of resources to sustain innovation efforts• 3. Complexity of managing multinational firms – Geographic dispersion – Costs of coordination – Logistical costs – Trade barriers – Cultural diversity – Host government©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  124. 124. Risk in the International Environment©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  125. 125. Risks in International Environment (Cont’d)• 1. Political risks – Government instability – Conflict or war – Government regulations – Conflicting and diverse legal authorities – Potential nationalization of private assets – Government corruption – Changes in government policies©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  126. 126. Risks in International Environment (Cont’d)• 2. Economic risks – Differences and fluctuations in currency values – Investment losses due to political risks• Limits to international expansions: management problems – Geographic dispersion – Trade barriers – Logistical costs – Cultural diversity – Other differences by country – Relationship between organization and host country©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  127. 127. Strategic Management:Concepts and Cases 9e Part II: Strategic Actions: Strategy Formulation Chapter 9: Cooperative Strategy ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  128. 128. Chapter 9: Cooperative Strategy• Overview: Seven content areas – Cooperative strategies and why firms use them – Three types of strategic alliances – Business-level cooperative strategies & their use – Corporate-level strategies in diversified firms – Cross-border strategic alliances’ importance as an international cooperative strategy – Competitive risks with cooperative strategies – Two approaches to manage cooperative strategies©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  129. 129. Introduction• Cooperative strategy – Firms work together to achieve a shared objective©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  130. 130. Primary Type of Cooperative Strategy:Strategic Alliances• Introduction: Strategic Alliance – Cooperative strategy in which firms combine resources and capabilities to create a competitive advantage• Three types of strategic alliances – 1. Joint venture – 2. Equity strategic alliance – 3. Nonequity strategic alliances, which include • Licensing agreements • Distribution agreements • Supply contracts • Outsourcing commitments©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  131. 131. Primary Type of Cooperative Strategy:Strategic Alliances (Cont’d)• 1. Joint venture – Two or more firms create a legally independent company to share resources and capabilities to develop a competitive advantage• 2. Equity strategic alliance – Two or more firms own a portion of the equity in the venture they have created• 3. Nonequity strategic alliance – Two or more firms develop a contractual relationship to share some of their unique resources and capabilities to create a competitive advantage©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  132. 132. Primary Type of Cooperative Strategy:Strategic Alliances (Cont’d)• Why firms might develop strategic alliances – Most firms lack the full set of resources and capabilities needed to reach their objectives – Cooperative behavior allows partners to create value that they couldnt develop by acting independently – Aligning stakeholder interests (both inside and outside of the organization) can reduce environmental uncertainty – Alliances can … • provide a new source of revenue • be a vehicle for firm growth • enhance the speed of responding to market opportunities, technological changes, and global conditions • allow firms to gain new knowledge and experiences to increase competitiveness©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  133. 133. Primary Type of Cooperative Strategy:Strategic Alliances (Cont’d)• In summary, strategic alliances … – …can reduce competition and enhance a firm’s competitive capabilities and – …create avenue for firm to gain access to resources – …allows firm to take advantage of opportunities, build strategic flexibility and innovate©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  134. 134. Reasons for Strategic Alliances by Market Type Market Reason Slow-Cycle • Gain access to restricted market • Establish a franchise in a new market • Maintain market stability (e.g., establishing standard) • Speed up development of new goods or services • Speed up new market entry Fast-Cycle • Maintain market leadership • Form an industry technology standard • Share risky R&D expenses • Overcome uncertainty • Gain market power (reduce industry overcapacity) • Gain access to complementary resources • Establish better economies of scales Standard-Cycle • Overcome trade barriers • Meet competitive challenges from other competitors • Pool resources for very large capital project • Learn new business techniques©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  135. 135. Business-Level Cooperative Strategy• Business level cooperative strategies are used to grow and improve firm performance in individual product markets.• Achieved through Complementary Strategic Alliances (CSA)©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  136. 136. Business-Level Cooperative Strategy (Cont’d)• Complementary Strategic Alliances (CSA) – Firms share some of their resources and capabilities in complementary ways to develop competitive advantages – Partners may have different • Learning rates • Capabilities to leverage complementary resources • Marketplace reputations • types of actions they can legitimately take – Some firms are more effective at managing alliances and deriving benefits from them – Two forms include vertical and horizontal©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  137. 137. Business-Level Cooperative Strategy (Cont’d) –2 Types of CSA: •1. Vertical CSA – partnering firms share resources & capabilities from different stages of the value chain to create a competitive advantage. •2. Horizontal CSA – partnering firms share resources & capabilities from the same stage of the value chain to create a competitive advantage – commonly used for long-term product development and distribution opportunities©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  138. 138. Business-Level Cooperative Strategy (Cont’d)• Competition response strategy – Competitors • initiate competitive actions to attack rivals • launch competitive responses to their competitor’s actions – Strategic alliances (SA) • can be used at the business level to respond to competitor’s attacks • primarily formed to take strategic vs. tactical actions • can be difficult to reverse • expensive to operate©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  139. 139. Business-Level Cooperative Strategy (Cont’d)• Uncertainty-reducing strategy – For example, entering new product markets, emerging economies and establishing a technology standard are unknown areas so by partnering with a firm in the respective industry, a firm’s uncertainty (risk) is reduced – Uncertainty reduced by combining knowledge & capabilities©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  140. 140. Business-Level Cooperative Strategy (Cont’d)• Competition-reducing strategy: Two Collusive Strategies – Collusive strategies (CS) differ from strategic alliances in that CS are usually illegal –1. Explicit collusion – Direct negotiation among firms to establish output levels and pricing agreements that reduce industry competition –2. Tacit collusion – Indirect coordination of production and pricing decisions by several firms, which impacts the degree of competition faced in the industry – Mutual forbearance: firms do not take competitive actions against rivals they meet in multiple markets©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  141. 141. Business-Level Cooperative Strategy (Cont’d)• Business-level cooperative strategy – assessment – Used to develop competitive advantages (CA) for contributing to successful positions & performance in individual product markets – Developing a CA using a strategic alliance, the integrated resources and capabilities must be valuable, rare, imperfectly imitable and nonsubstitutable – Vertical alliances have greatest probability of creating CA; horizontal are sometimes difficult to maintain since they are usually between competitors – SA’s designed to respond to competition and reduce uncertainty are more temporary than complementary (horizontal and vertical) strategic alliances – Competition-reducing has lowest probability of creating a sustainable CA©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  142. 142. Corporate-Level Cooperative Strategies• Corporate-level cooperative strategies (CLCS) help firm to diversify itself in terms of products offered, markets served or both• Common CLCS forms – 1. Diversifying strategic alliance • Firms share some of their resources & capabilities to diversify into new product or market areas – 2. Synergistic strategic alliance • Firms share some of their resources & capabilities to create economies of scope – 3. Franchising • Firm uses a franchise as a contractual relationship to describe and control the sharing of its resources and capabilities with partners – Franchise: contractual agreement between two legally independent companies whereby the franchisor grants the right to the franchisee to sell the franchisors product or do business under its trademarks in a given location for a specified period of time ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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