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chapter 8
Diversification Strategies
Arthur A. Thompson
The University of Alabama
Copyright © 2020 by Arthur A. Thompson and Glo-Bus
Software, Inc.
All rights reserved. Not for distribution to non-registrants
without permission.

An e-book published and distributed
by McGraw Hill Education
Sixth Edition of Strategy: Core Concepts and Analytical
Approaches (2020-2021). Arthur A. Thompson, The University
of Alabama. Published and distributed by McGraw Hill
Education. Image of globe comprised of puzzle pieces with
several pieces dislodged and scattered below the globe. Chapter
5 The Five Generic Competitive Strategy Options: Which One
to Employ
1
“I think our biggest achievement to date has been bringing back
to life an inherent Disney synergy that enables each part of our
business to draw from, build upon, and bolster the others.”
8–2
Software, Inc..
Michael Eisner,
former CEO, Walt Disney Company
2
“Fit between a parent and its businesses is a two-edged sword:
A good fit can create value; a bad one can destroy it.”
8–3
Software, Inc..
Andrew Campbell,
Michael Gould, and
Marcus Alexander

3
“Make winners out of every business in your company. Don’t
carry losers.”
8–4
Software, Inc..
Jack Welch,
former CEO, General Electric
4
Learning Objectives
Understand when to diversify and how to test whether a move to
diversify into a new business is sound.
Learn the strategic difference between related and unrelated
diversification strategies.
Gain an understanding of the pros and cons of related
Gain an understanding of the pros and cons of unrelated
Gain command of the analytical approaches to evaluating a
company’s diversification strategy.
Become familiar with a diversified company’s principal
strategic options after it has diversified.
8–5
Software, Inc..

5
What Does Crafting a Diversification Strategy Entail?
When and Why Diversification Makes Good Strategic Sense
Choosing the Diversification Path: Related versus Unrelated
Businesses
The Case for Diversifying into Related Businesses
The Case for Diversifying into Unrelated Businesses
Evaluating a Diversified Company’s Strategy—The Six
Analytical Steps
8–6
Software, Inc..
Chapter 8 Roadmap
6
8–7
Software, Inc..
What Is Meant by “Diversification”?
A firm is diversified when it operates in two or more lines of
business that are in distinctly different industries
Diversification complicates the strategy-making task because it
requires:
Assessing the multiple industry environments of a collection of
individual businesses
Developing a separate business strategy for each industry arena
(or line of business) in which the diversified firm operates
Devising a companywide (or corporate) strategy for improving
the attractiveness and performance of the company’s overall
business lineup and for making a rational whole out of its
diversified collection of individual businesses and individual
business strategies

What Does Crafting a Diversification Strategy Entail?
Strategy-making in a diversified firm requires:
Picking new industries to enter and deciding whether to enter
the industry by start-up, acquisition, or a joint venture or
strategic alliance with another firm
Pursuing opportunities to leverage cross-business value chain
relationships and strategic fits into competitive advantage
Evaluating the growth and profitability prospects for each
business, establishing investment priorities for each business,
and then using these priorities to steer corporate resources to
individual businesses
Initiating actions to boost the combined performance of the
corporation’s collection of businesses
8–8
Software, Inc..
FIGURE 8.1 Identifying a Diversified Company’s Strategy
Access alternative text for slide image.
8–9
Software, Inc..
9
When to Consider Diversifying

There’s no urgency for a single-business firm to diversify into
other businesses so long as it has ample opportunities for
growth and profitability in its present industry
But it is risky for a single-business firm to continue to remain
in one industry when, for whatever reason, its long-term
prospects for continued good performance start to dim
A single-business firm becomes a prime candidate for
diversifying when:
Conditions in its present industry turn sour and are expected to
be long-lasting
There are opportunities to expand into industries whose
technologies and products complement its present business
Its current competencies and capabilities are key success factors
and valuable competitive assets for competing in another
business
Diversifying into closely related businesses will reduce its costs
It has a powerful and well-known brand name that can be
transferred to the products of other businesses and help drive
the sales and profits of such businesses to higher levels
8–10
Software, Inc..
A firm can diversify:
Into closely-related or totally-unrelated businesses
Its present revenue and earning base to a small extent or to a
major extent
Into a one or two large new businesses or a greater number of
small ones
By acquiring an existing firm in a business/industry it wants to
enter
By forming a new startup subsidiary in a promising industry
By forming joint ventures with other firms to enter new

businesses
8–11
Software, Inc..
Diversification Possibilities
11
Core Concept
Creating added long-term value for shareholder
via diversification requires building a multibusiness firm where
the whole is greater than the sum of its parts—such 1 + 1 = 3
effects across different businesses are called synergy.
8–12
Software, Inc..
12
8–13
Software, Inc..
Will Diversification Produce Added Long-Term Value for
Shareholders?
The Cost-of-Entry
Test
The Industry
Attractiveness Test
The Better-Off
Test
Diversifying in Ways

That Build Long-Term Value
for Shareholders
13
To produce added long-term economic value for shareholders,
diversifying must pass three tests:
Industry Attractiveness Test
Industry conditions must be conducive to good profitability
Cost-of-Entry Test
High cost of entering cannot spoil the profit opportunities
Better-Off Test
Diversifying must offer potential for the firm’s businesses to
perform better together under a single corporate umbrella than
they would perform as independent stand-alone businesses
Moves to Diversify into a New Business
Should Pass Three Tests
8–14
Software, Inc..
8–15
Software, Inc..
Why The “Better-Off” Test Is So Important
Creating added long-term value for shareholders via
diversification requires building a multi-business firm where the
whole is greater than the sum of its parts.
Suppose Firm A diversifies by purchasing Firm B in another
industry.

If A and B’s consolidated future profits are no greater than what
each could have earned on its own, then A’s diversification
produces a 1 + 1 = 2 result that does not create added value
because A’s shareholders could have achieved the same 1 + 1 =
2 result by merely purchasing stock in B.
Rule
Diversification does not produce added long-term value for
shareholders unless it produces a 1 + 1 = 3 effect where the
firm’s different businesses perform better together than they
would as independent enterprises.
15
Related Diversification
Involves diversifying into businesses whose value chains
possess competitively valuable “strategic fits” with the value
chain(s) of the firm’s present business(es)
Unrelated Diversification
Involves diversifying into businesses having no competitively
valuable value chain match-ups or strategic fits with the value
chain(s) of the firm’s present business(es)
8–16
Software, Inc..
Choosing the Diversification Path: Related versus Unrelated
Businesses
16
FIGURE 8.2 The Three Fundamental Strategy Alternatives

for Pursuing Diversification
8–17
Software, Inc..
17
Core Concept
Strategic fit exists when the value chains of different businesses
present opportunities for cross-business resource transfer, lower
costs through combining the performance of related value chain
activities, cross-business use of a potent brand name, and/or
cross-business collaboration to build new or stronger
competitive capabilities.
Capturing such opportunities puts sister businesses in position
to perform better financially together as parts of one firm than
as independent enterprises, thus producing 1 + 1 = 3 benefits
that boost shareholder value.
8–18
Software, Inc..
18
What makes related diversification an attractive strategy is the
opportunity to convert cross-business strategic fits into
competitive advantage over business rivals with operations
lacking comparable strategic fit benefits.
The greater the relatedness among a diversified firm’s sister
businesses, the bigger a firm’s window for converting strategic
fits into competitive advantage via:

Transferring competitively valuable resources and capabilities
from one business to enhance the competitiveness and
performance of a sister business.
Combining the related value chain activities of separate
businesses into a single operation to achieve lower costs
Exploiting cross-business use of a well-known and
competitively potent brand name
Cross-business collaboration to create altogether new
competitively valuable resources and capabilities
The Case for Diversifying into
Related Businesses
8–19
Software, Inc..
19
FIGURE 8.3 Related Businesses Possess Related Value Chain
Activities and Competitively Valuable Cross-Business Strategic
Fits
Software, Inc..
8–20
20
Core Concept
Economies of scope stem from successful managerial efforts to
capture cost-saving strategic fits along the value chains of
related businesses.

Economies of scope can be achieved only if a diversified firm
operates in two or more related businesses with cost-related
strategic fits in one or more value chain activities.
Often these cost-saving efficiencies are captured by combining
the cost-related value chain activities of related businesses into
a single, more cost-efficient operation.
When economies of scope exist, sister businesses can be
operated more cost-efficiently as part of the same firm than they
could operate as stand-alone businesses.
8–21
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21
Economies of scope are achieved by capturing cost-saving
strategic fits along the value chains of related businesses;
examples of such cost-saving efficiencies include:
Production-related strategic fits that enable two or more related
businesses to use the same manufacturing facility to perform
their production activities (using a single plant is likely to be
more cost-effective than having multiple plants) and/or
Distribution-related strategic fits that enable two or more
related businesses to share use of the same distribution centers
(utilizing a common distribution centers is cheaper than having
separate distribution centers for each business) and/or
Sales- and customer-related strategic fits that enable two or
more related businesses to use a common sales force to sell
their products to customers (a single sales force is more cost-
efficient than having separate sales forces) and/or
The ability of two or more related businesses to share use of the
same administrative infrastructure and thus spread admin costs
over a bigger sales volume and revenue base
Economies of scale are cost savings that occur because a large-

scale operation is more cost-efficient than a small-scale
operation
8–22
Software, Inc..
Economies of Scope Are Different
from Economies of Scale
The greater the cost-savings associated with cost-related
strategic fits among the value chains of sister businesses, the
greater the potential for a related diversification strategy to
yield a low-cost competitive advantage over
Undiversified competitors
Competitors whose own diversification efforts
do not offer equivalent cost-saving benefits
Why Achieving Economies of Scope in Related Businesses Is
Competitively Valuable
Software, Inc..
8–23
23
Diversified firms having sister businesses with multiple
strategic fits among their value chain activities have a larger
opportunity for cross-business resource transfer, cost reduction,
cross-business use of a respected and potent brand name, and/or
cross-business collaboration to:
Enhance the overall competitive strength of the various sister
firms
Boost the profitability and performance of the firm’s collection

of related businesses
Achieve a competitive advantage over rivals whose own
operations
do not offer equivalent strategic fit benefits
Such strategic-fit benefits can be substantial and capturing them
are what enables a firm pursuing related diversification to
achieve 1 + 1 = 3 financial performance and enhanced
shareholder value.
Strategic Fit and Competitive Advantage: The Keys to Added
Profitability and Gains in Shareholder Value
8–24
Software, Inc..
Unrelated diversification strategies involve
Entering any industry and operating any business where there is
opportunity to realize consistently good financial results
No deliberate effort to diversify into businesses with strategic
fits
Acquiring an established company rather than forming a start-up
subsidiary or collaborating in a joint venture to get into a new
business
Making acquisitions that can pass both the industry
attractiveness and cost-of-entry tests and that have good
prospects for above-average financial performance
The Case for Diversifying into
Unrelated Businesses
8–25
Software, Inc..

Core Concept
The basic premise of unrelated diversification is that any firm
or business that can be acquired on good financial terms and
that has satisfactory growth and earnings potential represents a
good acquisition and a good business opportunity.
8–26
Software, Inc..
26
FIGURE 8.4 Unrelated Businesses Have Unrelated Value
Chains
and No Cross-Business Strategic Fits
Software, Inc..
8–27
27
What Is Appealing about Unrelated Diversification?
Business risk is scattered over a set of truly diverse industries.
The firm’s financial resources are employed to maximum
advantage by:
Investing in whatever industries offer the best profit prospects
(as opposed to considering only opportunities in industries with
related value chain activities)
Diverting cash flows from its businesses with low growth and

profit prospects to acquiring and expanding firms with higher
growth and profit potentials
When managers are exceptionally astute at spotting bargain-
priced firms with big upside profit potential, shareholder wealth
is enhanced by:
Buying distressed businesses at low prices, turning their
operations around quickly with cash infusions and managerial
know-how from the parent firm
Then either riding the crest of the profit increases generated by
newly-turned around businesses or else enjoying the capital
gains of selling a once-distressed business for an amount far
above its purchase price
8–28
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28
Enhancing shareholder value via unrelated diversification
requires:
Acquiring companies in any industry with growth and earnings
prospects that can satisfy the industry attractiveness test and/or
acquiring undervalued or underperforming businesses that
present appealing opportunities for being overhauled in ways
that will result in big gains in profitability. Both types of
acquisitions raise the chances of passing the attractiveness test
and the better-off test.
Being disciplined enough to acquire companies at prices
sufficiently low to pass the cost of entry test.
Developing and nurturing outstanding corporate parenting
capabilities (successful deployment of such capabilities also
raises the chance of enhancing business unit performance
enough to yield 1 + 1 = 3 results and thus pass the better-off
test).

8–29
Software, Inc..
The Pathway to Enhancing Shareholder Value via Unrelated
Diversification
Core Concept
A diversified company has a parenting advantage when it has
superior corporate parenting capabilities relative to other
diversified companies and thus can boost the combined
performance of its individual businesses through
Close oversight and timely advice from corporate executives
with first-rate business acumen and
Corporate parent contributions of needed resources/capabilities
8–30
Software, Inc..
Utilize the business acumen of certain corporate executives in
identifying undervalued or underperforming companies and then
further rely on the skills and expertise of these or other
corporate executives in pinpointing achievable ways that the
operations of such companies can be overhauled and
streamlined to produce dramatic increases in profitability.
Utilize the bargaining skills of corporate executives to
successfully negotiate a low price and other favorable terms in
acquiring any new business the corporate parent decides to enter
(thereby helping satisfy the cost-of-entry test)
Utilize the skills and business acumen of corporate executives
to do such a superior job of overseeing, guiding, and otherwise
parenting the firm’s business subsidiaries that the subsidiaries
perform at a higher level than they would otherwise be able to

do as a stand-alone enterprise (thus satisfying the better-off
test)
Astutely allocating financial resources across the company’s
businesses by shifting funds from businesses with excess cash
to cash-short businesses with appealing growth opportunities
and/or using the corporation’s financial strength and credit
rating to supply needed funds to individual businesses.
2–31
Software, Inc..
Strong Corporate Parenting Capabilities That Can Help Build
Shareholder Value
The Two Big Drawbacks of Unrelated Diversification
Software, Inc..
8–32
Limited Competitive
Advantage Potential
Demanding Managerial
Requirements
Likely outcome is 1 + 1 = 2,
rather than desired 1 + 1 = 3!
Unrelated
Diversification Strategy
32
A widely diverse collection of unrelated businesses makes it
harder for top executives to:
Discern good acquisitions from bad ones
Have in-depth knowledge about each of the businesses
Hard to judge soundness of strategic proposals of business-unit

managers
Hard to select capable managers to manage the diverse
requirements of each business
Hard to know what to do if a business stumbles
Avoid big mistakes
Misjudging competitive forces, impact of driving forces, and
identification of key success factors
Discovering that problems of an acquired business will require
more time and resources to correct than expected
Being too optimistic about a newly acquired firm’s future
prospects
It is wise to avoid casting a wide net in pursing unrelated
diversification—experience shows diversifying into a few
unrelated businesses often results in better overall firm
performance than diversifying into many unrelated businesses
The Demanding Managerial Requirements Are a Serious Issue
8–33
Software, Inc..
33
Unrelated diversification’s lack of cross-business strategic fits
reduces its competitive advantage potential to what each
separate business can generate on its own
With no ability to capture cross-business strategic fits, it takes
very astute management for the consolidated performance of an
unrelated group of businesses to reach 1 + 1 = 3 outcome levels
Given the demanding requirements it takes to successfully
manage a collection of unrelated businesses, pursuing a strategy
of unrelated diversification is chancy and unreliable—it is far
tougher than it might seem to achieve 1 + 1 = 3 results.
8–34

Software, Inc..
Limited Competitive Advantage Potential Is a Major
Shortcoming
34
Unrelated Diversification Strategies
Often Result in “Ho-Hum” Performance
Without the added competitive advantage potential that cross-
business strategic fit (and perhaps superior parenting) provides,
it is hard for the consolidated performance of an unrelated
group of businesses to be any better than the sum of what the
individual business units could achieve if they were
independent.
Software, Inc..
8–35
Strategy
Lesson
There are significant challenges in building long-term
shareholder value via a strategy of unrelated diversification—1
+ 1 = 2 outcomes (or worse) are far more likely than 1 + 1 = 3
outcomes.
35
CONCLUSION: Relying solely on the expertise of corporate
executives to astutely manage a set of unrelated businesses is a
much weaker foundation for enhancing shareholder value than is
a strategy of related diversification (where successful capture of

strategic fits enhances competitive strength, boosts profitability,
and offers potential competitive advantage—outcomes that raise
the chances of 1 + 1 = 3 results for shareholders).
A strategy of unrelated diversification is a riskier and more
problematic approach to diversifying than is a strategy of
related diversification.
8–36
Software, Inc..
Related versus Unrelated Diversification Strategies
The business make-up of diversified firms varies considerably:
Dominant-business firms: Have one major core firm that
accounts for 50-80 percent of total revenues, with several small
related or unrelated firms accounting for the remainder of total
revenues
Narrowly diversified firms: Have a few (2-5) related or
unrelated businesses
Broadly diversified firms: Have a wide-ranging collection of
either related or unrelated businesses or a mixture of both
Diversified firms: have diversified into unrelated areas with a
collection of related firms within each area—thus giving them a
portfolio of several unrelated groups of related firms
Combination Related-Unrelated Diversification Strategies
8–37
Software, Inc..
37

Step 1: Assess long-term attractiveness of each industry in
which the firm has a business
Step 2: Assess competitive strength of each of the firm’s
business units
Step 3: Evaluate competitive advantage potential of cross-
business strategic fits among the various business units
Step 4: Check whether firm’s resources fit requirements of its
present businesses
Step 5: Rank performance prospects of businesses and
determine priority for resource allocation
Step 6: Craft new strategic moves to improve overall
company performance
Evaluating and Improving a Diversified Firm’s Strategy: The
Six Steps
8–38
Software, Inc..
Step 1: Assessing Industry Attractiveness
How attractive are the various industries into which the firm has
diversified?
Does each industry represent a good industry to be in?
Which industries are most attractive and which are least
attractive?
How appealing is the whole group of industries in which the
firm has businesses?
The more attractive the industries (both individually and as a
group) a diversified firm is in, the better its prospects for good
long-term performance.
8–39
Software, Inc..

39
Market size and projected growth
Intensity of industry competition
Emerging opportunities and threats
Presence of cross-industry strategic fits
Resource requirements
Seasonal and cyclical factors
Social, political, regulatory, and environmental factors
Industry profitability
Industry uncertainty and business risk
Factors to Consider in Calculating
Industry Attractiveness Scores
8–40
Software, Inc..
Once industry attractiveness measures are selected, quantitative
attractiveness scores are calculated by:
Assigning importance weights to each industry attractiveness
measure (the measures are unlikely to be equally important)
Sum of weights must equal 1.0
Rating each industry on each attractiveness measure, using a
scale of 1 to 10 (where 1 = very unattractive, 5 = average
attractiveness, and 10 = very attractive)
Multiplying the importance weight by the assigned
attractiveness rating to obtain a weighted attractiveness score
Summing the weighted ratings for each industry to obtain an
overall weighted industry attractiveness score

Calculating Attractiveness Scores
for Each Industry
8–41
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TABLE 8.1 Calculating Weighted Industry Attractiveness
Scores
Software, Inc..
8–42
[Rating scale: 1 = Very unattractive to company; 10 = Very
attractive to company]
42
Industries with a score below 5.0 do not pass the attractiveness
test
The group of industries into which the firm has diversified
grows decidedly less attractive as the number of industries with
scores below 5.0 increases (especially if those industries with
low scores account for a sizable fraction of the diversified
firm’s revenues)
If a firm’s industry attractiveness scores are all above 5.0, the
industry group in which it operates is attractive as a whole
To be a strong performer, a diversified firm’s principal
businesses should be in attractive industries—those with a good
outlook for growth and above-average profitability
8–43

Software, Inc..
Interpreting the Industry Attractiveness Scores
43
Doing an appraisal of each business unit’s competitive strength
and market position in its industry
Reveals each unit’s chances for industry success
Provides a basis for ranking the units from competitively
strongest to competitively weakest and sizing up the
competitive strength of all the business units as a group
The procedure involves selecting a set of measures of
competitive strength and calculating quantitative competitive
strength scores using essentially the same methodology as was
used to arrive at the industry attractiveness scores
Step 2: Assessing Business Unit Competitive Strength
8–44
Software, Inc..
Relative market share
Costs relative to competitors
Ability to match or beat rivals on key product attributes
Ability to benefit from strategic fits with sister businesses
Ability to exercise bargaining leverage with key suppliers or
customers
Brand image and reputation
Other competitively valuable resources and capabilities
Profitability relative to competitors

Potential Measures of Business-Unit Competitive Strength
8–45
Software, Inc..
A firm’s relative market share is the ratio of its market share to
its largest rival’s market share, with market share measured in
unit volume, not dollars
If Firm A has a 15% market share and its largest rival has a
30% share, Firm A’s relative market share is 0.50
For a market-leader firm, relative market share equals its
market share divided by the next largest rival’s market share
If Firm B has a market-leading share of 40% and its largest
rival has 30%, Firm B’s relative market share is 1.33
Only market share leaders in their respective industries can
have relative market shares greater than 1.0
The higher is a given business’s relative market share, the
greater is its implied competitive strength
What Is “Relative Market Share”
and How Is It Calculated?
8–46
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46
Strategic Insight
Using relative market share to measure competitive strength is
analytically superior to using straight-percentage market share.

8–47
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The further a firm’s relative market share falls below 1.0, the
weaker its competitive strength and market position vis-à-vis
the industry leader.
For example: A firm with a 10% market share is in a weaker
competitive market position
When the leader’s market share is 50% (in which case the firm’s
relative market share is only 0.20)
as compared to when
The firm has a 10% market share and the market leader’s share
is 12% (in which case the firm’s relative share is 0.83)
A firm with a relative market share of 0.83 is in a much
stronger competitive position vis-à-vis the market leader
than is a firm with a relative market share of 0.20.
Relative Market Share Signals Competitive Strength or
Weakness
8–48
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48
Firms with a large industry-leading market share (greater than
1.0) are in a much stronger overall competitive position vis-à-
vis their rivals.
A firm with a 30% market share has considerably more
competitive strength when its next largest rival only has a

market share of 10% (which means the leader’s relative market
share is 3.0) as compared to when its next-largest rival has a
market share of 25% (which means the leader’s relative market
share is 1.2).
Relative Market Share Signals Competitive Strength or
Weakness (continued)
8–49
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49
Relative market share is a very telling measure of a firm’s
competitive strength vis-à-vis rival firms (and should typically
be assigned a high importance weight in determining its
competitive strength)
8–50
Software, Inc..
Conclusions: Relative Market Share Versus Percentage Market
Share
50
8–51
Software, Inc..
Calculating Competitive Strength Scores
Competitive strength scores are calculated by:
Assigning importance weights to each competitive strength

measure (measures are unlikely to be equally important)
Sum of weights must equal 1.0
Rating each business unit on each strength measure relative to
its rivals, using a scale of 1 to 10 (where 1 = very weak, 5 =
average or on a par, and 10 = very strong)
Multiplying the importance weight by the assigned strength
rating to obtain a weighted score
Summing the weighted scores for each business unit to obtain a
weighted overall competitive strength score
51
TABLE 8.2 Calculating Weighted Competitive Strength Scores
for a Diversified Company’s Business Units
8–52
Software, Inc..
[Rating scale: 1 = Very weak; 10 = Very strong]
52
Firms with ratings above 6.7 are typically strong market
contenders
Higher scores are indicative of a diversified firm’s prospects for
good financial performance (unless the units are in unattractive
industries)
Firms with ratings in the 3.3 to 6.7 range have moderate
competitive strength vis-à-vis rivals
Firms with ratings below 3.3 are in competitively weak market
positions

As the number of business units in relatively weak competitive
positions with scores below 5.0 increases, a diversified firm
becomes less likely to be a strong performer, most especially
when the combined revenues of these units account for a large
percentage share of the firm’s total revenues
8–53
Software, Inc..
Interpreting Competitive Strength Scores
53
The industry attractiveness scores (Table 8.1) and competitive
strength scores (Table 8.2) can be used to portray the strategic
positions of each business unit in a diversified firm (Figure
8.5).
Industry attractiveness scores are plotted on the vertical axis
Competitive strength scores are plotted on the horizontal axis
A nine-cell grid is created by dividing the vertical axis into
three regions (high, medium, and low attractiveness) and the
horizontal axis into three regions (strong, average, and weak
competitive strength)
Each unit’s industry attractiveness and competitive strength
scores determine its location on the matrix, shown as a circle or
“bubble”
Size of each business unit’s bubble is scaled to represent the
percentage of total corporate revenues that the business unit
generates
8–54
Software, Inc..
Using a Nine-Cell Matrix to Simultaneously Portray Industry
Attractiveness and Competitive Strength

FIGURE 8.5 A Nine-Cell Industry Attractiveness–Competitive
Strength Matrix
8–55
Software, Inc..
55
Strategic Insight
The nine-cell attractiveness–strength matrix provides strong
logic for fully funding the resource needs of competitively
strong businesses in attractive industries, investing selectively
in businesses with intermediate positions on the grid, and
getting rid of competitively weak businesses in unattractive
industries unless they generate sizable cash flows that can be
redeployed elsewhere.
8–56
Software, Inc..
8–57
Software, Inc..
Interpreting the Attractiveness-Strength Matrix
Locations of the business units on the attractiveness–strength
matrix provide guidance in concentrating corporate resources
and focusing strategic attention on units having the greatest
competitive strength and positioned in highly attractive

industries
Businesses in the three upper left cells merit top priority
Businesses in the three diagonal cells merit medium priority
Businesses in the three lower right merit the lowest priority and
are candidates to be divested or else managed to produce
maximum cash flows from operations
The greater the competitive value of cross-business strategic
fits, the more competitively powerful is a firm’s related
diversification strategy
Requires an evaluation of how much benefit a diversified firm
can gain from value chain matchups that present opportunities
to:
Reduce costs by combining the performance of certain activities
and thereby capture economies of scope
Transfer skills, technology, or intellectual capital from one
business to boost the performance of another business
Share the use of a corporate parent’s umbrella brand name or
corporate reputation
Employ cross-business collaboration among sister businesses to
create attractive new competitive capabilities that could lead to
significant performance gains for one or more sister businesses
Step 3: Evaluating the Competitive Value of Cross-Business
Strategic Fits
(this step is bypassed for diversified firms with all unrelated
businesses)
8–58
Software, Inc..

Core Concepts
A company’s related diversification strategy derives its power
in large part from the presence of competitively valuable
strategic fits among its businesses and forceful company efforts
to capture the benefits of these fits.
The greater the value of cross-business strategic fits in
enhancing a firm’s performance in the marketplace or on the
bottom line, the more competitively powerful is its
strategy of related diversification.
8–59
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8–60
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Step 4: Checking for Resource Fit
A diversified firm’s collection of businesses exhibit resource fit
when
Each company business had adequate access to the resources
and capabilities it needs to be competitively successful (these
resources can either be internal to its own operations or
supplied by its corporate parent)
The parent company has adequate financial resources and
parenting capabilities to support its entire group of businesses
without spreading itself too thin.

Core Concept
Resource fit concerns whether each company
business has adequate access to the resources
and capabilities needed to be competitively
successful and whether the corporate parent has
the financial means and parenting capabilities to
support its entire group of businesses.
There are two types of resource fit:
Financial resource fit
Nonfinancial resource fit (which includes managerial,
administrative, and other parenting capabilities)
8–61
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61
Core Concept
Resource fit concerns whether each company business has
adequate access to the resources needed to be competitively
successful and whether the corporate parent has the financial
means and parenting capabilities to support its entire group of
businesses.
8–62
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Core Concepts
A cash hog business generates cash flows that are too small to
fully fund its operations and growth; a cash hog business
requires cash infusions to provide additional working capital
and finance new capital investment.

A cash cow business generates cash flows over and above its
internal requirements, thus providing a corporate parent with
funds for investing in cash hog businesses, financing new
acquisitions, or paying dividends.
8–63
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63
To remain financially healthy, a diversified firm must generate
internal cash flows sufficient to fund its capital requirements,
pay dividends, and meet its debt and financial obligations.
A cash hog business generates insufficient cash flows to fully
fund its current needs for working capital and new capital
investment.
A cash cow business generates surplus cash flows for use in
investing in cash hog businesses, financing new acquisitions, or
paying dividends
A diversified firm’s businesses exhibit good financial resource
fit when the excess cash generated by its cash cow businesses is
sufficient to fund the investment requirements of promising
cash hog businesses, pay down its debt, pay dividends, and help
pay
for new acquisitions.
Financial Resource Fits:
Cash Cows versus Cash Hogs
8–64
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8–65
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What To Do with Cash Hog Businesses
Does it make good financial and strategic sense to keep pouring
new money into a business that continually needs cash
infusions?
Strategic Options:
Invest in promising cash hogs to grow them into star businesses
(strong, profitable market contenders)
Divest cash hogs with questionable promise (either because of
low industry attractiveness or a weak competitive position)
Redeploy resources from divested cash hogs to better advantage
elsewhere
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Why Cash Cow Businesses Are Valuable
The surplus cash flows that cash cow businesses generate can be
used to:
Provide funds for investing in the firm’s promising cash hogs
Finance acquisitions
Pay corporate dividends and help fund other corporate activities
It makes good financial and strategic sense to keep cash cows in
healthy condition so that they are able to:
Fortify and defend their market position
Preserve their cash-generating capabilities over the long term to
provide an ongoing source of financial resources to deploy
elsewhere

Other Financial Resource Fit Considerations
Two other financial considerations are pertinent in determining
financial resource fit:
Do any of the company’s individual businesses not contribute
adequately to achieving companywide performance targets?
Subpar profitability?
Slow or declining revenue growth?
A poor image with customers?
Does the company have adequate financial strength to fund its
different businesses, pursue growth via new acquisitions, and
maintain a healthy credit rating?
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Nonfinancial Resource Fits
A diversified firm must have a sufficiently large and talented
pool of managerial, administrative, and resource capabilities to
support all of its businesses.
Revealing an inadequacy of nonfinancial resources:
Is there any evidence indicating that any of the firm’s business
units are resource deficient—either because needed resources
and/or capabilities cannot be transferred in or shared with sister
businesses or missing resources and/or capabilities cannot be
supplied by the corporate parent?
Are the corporate parent’s resources and parenting capabilities
poorly matched to the resource requirements of one or more
businesses it has diversified into?
Are the firm’s nonfinancial resources and capabilities being
stretched too thinly by the resource/capability requirements of
one or more of its businesses?

8–68
Software, Inc..
As a rule, business units with the brightest profit and growth
prospects, attractive positions in the nine-cell matrix, and solid
strategic and resource fits should receive top priority for
allocation of corporate resources.
There may also be merit in considering each business’s past
performance in arriving at resource allocation decisions
Sales and profit growth
Contribution to company earnings
Return on capital invested in business
Cash flows from operations
Medium priority should go to units with satisfactory prospects
for growth and profitability (units in the diagonal cells and cash
cow units in the lower-right cells of the attractiveness-strength
matrix)
Step 5: Ranking the Performance Prospects of Business Units
and Assigning a Priority for Resource Allocation
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For a firm to make the best use of its limited pool of resources,
both financial and nonfinancial, top executives must be diligent
in:
Steering resources to those businesses with the best
opportunities and performance prospects

Allocating few, if any, additional resources to businesses with
weak prospects
When a corporate parent has nonfinancial resources that
particular business units will find uniquely valuable in
strengthening their performance and/or accelerating their
growth, allocating such resources to these business units should
be automatic—they usually represent 1 + 1 = 3 opportunities
that should not be missed.
8–70
Software, Inc..
The Importance of Resource Allocation
70
FIGURE 8.6 The Chief Strategic and Financial Options for
Allocating a Diversified Company’s Financial Resources
Strategic Options for Allocating Company Financial Resources
Invest in ways to strengthen or grow existing businesses
Make acquisitions to establish positions in new industries or to
complement existing businesses
Fund long- range R&D ventures aimed at opening marketing
opportunities in new or existing businesses
Financial Options for Allocating Company Financial Resources
Pay off existing long-term or short-term debt
Increase dividend payments to shareholders
Repurchase shares of the company’s common stock
Build cash reserves; invest in short-term securities
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71
Strategic options to improve a diversified firm’s overall
performance fall into five broad categories of actions:
Sticking closely with the existing business lineup and pursuing
the opportunities these businesses present
Broadening the firm’s business scope by making acquisitions in
new industries
Divesting underperforming businesses and retrenching to a
narrower base of business operations
Restructuring the firm’s business lineup and putting a whole
new face on the firm’s business makeup
Pursuing multinational diversification and striving to globalize
the operations of the firm’s business units
Step 6: Crafting New Strategic Moves to Improve Overall
Corporate Performance
8–72
Software, Inc..
This option is sensible when present businesses:
Offer attractive growth opportunities
Can be counted on to generate good earnings and cash flows
As long as the company’s set of existing businesses have good
prospects for enhancing corporate performance and these
businesses have good strategic and/or resource fits, then major
changes in the company’s business mix are usually unnecessary.
Executives can concentrate their attention on
Getting the best performance from each of its businesses
Steering corporate resources into those areas of greatest
potential and profitability
Identifying and pursuing good acquisition prospects

8–73
Software, Inc..
Sticking with the Existing Business Lineup
73
Factors motivating firms to build positions in new related or
unrelated industries:
Sluggish growth prospects for current business lineup
The potential for transferring resources and capabilities in
existing businesses to newly-acquired related or complementary
businesses
Rapidly changing conditions (either favorable or unfavorable)
in one or more of a firm’s core businesses that make it desirable
to expand into other industries
The presence of opportunities to acquire certain new businesses
that will complement and strengthen the market position and
competitive capabilities of one or more present businesses
8–74
Software, Inc..
Broadening the Firm’s Business Scope
74
Retrenching to a narrower diversification base merits
consideration when:
Resources are stretched too thin and overall performance can be
improved by concentrating on building stronger positions in
fewer core businesses and industries

Market conditions in a once-attractive business have badly
deteriorated
A weakly-positioned business lacks cultural, strategic or
resource fit, is a cash hog with poor long-term potential for a
decent return on investment
An acquired business is simply not profitable—mistakes were
made in foreseeing how a new line of business would actually
evolve
Subpar performance in some business units raises questions of
whether to divest them or keep them and attempt a turnaround
Certain businesses, despite adequate financial performance,
have a culture that does not mesh well with the rest of the
firm’s businesses
A useful guide to divesting a business subsidiary is to ask, “If
we were not in this business today, would we want to get into it
now?” When the answer
is “no” or “probably not”, divestiture should be considered.
8–75
Software, Inc..
Retrenching to a Narrower Diversification Base
75
Restructuring involves divesting some businesses and acquiring
others to put a whole new face on a company’s business lineup
Restructuring makes sense when a firm’s financial performance
is being weakened by:
Mismatches between the businesses it has diversified into and
the parent firm’s resources and parenting capabilities
Too many businesses in slow-growth, declining, low-margin, or
otherwise unattractive industries
Too many competitively weak businesses
The emergence of new technologies that threaten the survival of

one or more important businesses
Ongoing declines in the market shares of one or more major
business units that are falling prey to more market-savvy
competitors
Excessive debt with interest costs that eat deeply into
profitability
Ill-chosen acquisitions that have not lived up to expectations
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Restructuring a Firm’s Business Lineup
Offers two major avenues for growing revenues and profits:
Growth by entering additional businesses
Growth by extending the operations of existing businesses into
additional country markets
Pursuing both growth avenues at the same time can provide a
diversified firm with exceptional competitive advantage
potential
8–77
Software, Inc..
Pursuing Multinational Diversification
Using multinational diversification to pursue both growth
avenues helps create competitive advantage in five ways:
Facilitating full capture of economies of scale and
learning/experience curve effects and thus drive down unit costs
by expanding sales to additional country markets

Diversifying into related businesses offering economies of
scope arising from cost-saving strategic fits among related
business units paves the ways for realizing a low-cost advantage
over less diversified rivals
Transferring competitively valuable resources and capabilities
both from one business unit to another and from one country to
another
Enabling full leverage of a well-known and powerful brand
name across both businesses and countries to gain marketing
and advertising advantages over rivals with lesser-known brands
Using cross-business unit collaboration to develop and leverage
competitively valuable resources and capabilities for one or
more sister business in one or more countries
All five paths to competitive advantage can be pursued
simultaneously when a company elects to pursue related
multinational diversification.
Building Competitive Advantage through Multinational
Diversification
8–78
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78
Core Concept
A strategy of multinational diversification into related
businesses has more built-in potential for competitive advantage
than any other diversification strategy because all five
approaches to securing competitive advantage over rivals can be
pursued simultaneously:
Increased capture of economies of scale
Increased capture of economies of scope
Cross-business and cross-country transfer of valuable

resources/capabilities
Exploitation of a competitively powerful brand name
Cross-business collaboration to develop/leverage valuable new
resources/capabilities for one or more sister businesses in one
or more country markets
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Accessibility Content: Text Alternatives for Images
FIGURE 8.1 Identifying a Diversified Company’s Strategy,
Text Alternate
Return to parent slide.
Questions to ask to determine a diversified company’s strategy:
Is the company’s diversification based narrowly in a few
industries or broadly in many industries?
Are the businesses the company has diversified into related,
unrelated or a mixture of both?
Is the scope of company operations mostly domestic,
increasingly multinational, or global?
Any recent moves to strengthen the company’s positions in
existing businesses?
Any recent moves to build positions in new industries?
Any recent moves to divest weak business units?
Any effort to capture the benefits of cross-business value chain
relationships?
What is the company’s approach to allocating investment capital
and resources across its present businesses?

FIGURE 8.5 A Nine-Cell Industry Attractiveness–Competitive
Strength Matrix, Text Alternate
The x axis is competitive strength and or market position going
from strong to average to weak. And the y axis is industry
attractiveness, going from low to medium to high.
Three cells at the bottom. The bottom strong cell goes up to 6.7.
The average to 3.3.
In the center of the y axis is medium, between 3.3 and 6.7.
Business A in Industry A sits at 7.85 on the Strong continuum
and the High end of industry attractiveness. It is in the area for
high priority for resource allocation.
Business C in Industry C sits in the middle of both y and x axis
at 5.25 average competitive strength and or market position and
5.10 in industry attractiveness. It is in the area for medium
priority for resource allocation.
Business B in Industry B sits at 2.95 on the x axis and 3.15 on
the y axis. It is in the area for low priority for resource
allocation.
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chapter 7
Strategies for
Competing Internationally
or Globally
Arthur A. Thompson
The University of Alabama
Software, Inc.
All rights reserved. Not for distribution to non-registrants
without permission.
An e-book published and distributed
by McGraw Hill Education
Sixth Edition of Strategy: Core Concepts and Analytical
Approaches (2020-2021). Arthur A. Thompson, The University
of Alabama. Published and distributed by McGraw Hill
Education. Image of globe comprised of puzzle pieces with
several pieces dislodged and scattered below the globe. Chapter
5 The Five Generic Competitive Strategy Options: Which One
to Employ
1
“You have no choice but to operate in a world shaped by
globalization and the information revolution. There are two
options: Adapt or die.”
7–2

Software, Inc.
Andrew S. Grove
former Chairman and CEO,
Intel Corporation
2
“You do not choose to become global. The market chooses for
you; it forces your hand.”
7–3
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Alain Gomez
former CEO, Thomson, S.A.
3
“[I]ndustries actually vary a great deal in the pressures they put
on a company to sell internationally.”
7–4
Software, Inc.
Niraj Dawar and Tony Frost
Professors, Richard Ivey School of Business
4
Learning Objectives

Learn why companies decide to enter foreign markets.
Understand why competing across national borders makes
strategy-making more complex.
Learn the difference between multi-country competition and
global competition.
Gain command of the strategic options for establishing a
competitive presence in foreign markets.
Become familiar with the three main strategic approaches to
competing internationally.
Learn how multinational competitors can use their international
operations to improve their competitiveness.
Learn about profit sanctuaries and global strategic offensives.
7–5
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5
Chapter 7 Roadmap
Why Companies Decide to Enter Foreign Markets
Why Competing across National Borders Makes Strategy-
Making More Complex
The Concepts of Multicountry Competition and Global
Competition
Strategy Options for Entering and Competing in International
and Global Markets
The Quest for Competitive Advantage in Global Markets
Profit Sanctuaries and Global Strategic Offensives
7–6
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6
Whether to customize the firm’s offerings in different country
markets to match local buyer preferences or offer mostly
standardized products worldwide
Whether to employ the same basic competitive strategy in all
countries or to modify the strategy country by country to better
match local market and competitive conditions
Where to locate facilities, distribution centers, and service
operations to realize the greatest locational advantages
When and how to efficiently transfer some of a firm’s
competitively powerful resources and capabilities from its
operations in some countries to its operations in one or more
other countries in order to better spearhead the company’s
strategic offensives to enter new country markets and to more
effectively battle local rivals for sales and market share
Strategic Issues Unique to Competing across National Borders
7–7
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7
Competing Across National Borders
7–8
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Strategic Issues Unique To Competing Across National Borders
Whether to customize the firm’s offerings in each country
market or to offer a mostly standardized product worldwide
Whether to employ the same basic competitive strategy in all
countries or modify the strategy
country by country
Where to locate the firm’s operations

to realize the greatest location-related advantages.
When and how to transfer some of a firm’s competitively
powerful resources and capabilities from its operations in some
countries to its operations in one or more other countries in
order to compete more effectively against local rivals
8
A firm that competes in relatively few foreign countries is an
international or multinational competitor
A global competitor has operations on several continents, is
actively marketing its products or services in many different
parts of the world, and is pursuing a strategy of expanding into
additional countries
Typically, a firm will start to compete internationally by
entering one or two foreign markets and then expand gradually
or perhaps rapidly into the markets of other countries over time.
7–9
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International Competitors versus Global Competitors—What’s
the Difference?
9
Why Companies Decide to Enter Foreign Markets
7–10
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To gain access to

new customers
To achieve lower costs and thereby become more cost
competitiveness
To further exploit competitively valuable resources and
capabilities
To spread business risk across a wider market base
To meet their customers’ needs abroad and retain their position
as a key supply chain partner.
10
The presence of important cross-country differences in buyer
tastes, market sizes, and growth potential
The existence of sizable cross-country differences in wages,
worker productivity, inflation rates, energy costs, taxes, and
other factors that impact a firm’s costs and profit prospects
Differing cross-country governmental policies and regulations
that make the business climate more favorable in some countries
than others
The need to consider ways to mitigate the risks of adverse shifts
in currency exchange rates
Why Competing Across National Borders Causes Strategy
Making to Be More Complex
7–11
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11
Cross-Country Differences in Buyer Tastes, Market Sizes, and
Growth Potential
Many cross-country factors affect an international or global

competitor’s strategic decisions:
Country-to-country differences in population sizes, income
levels, and other demographic factors that help drive market
size and rates of growth in market demand
Country-to-country differences in buyer tastes
Country-to-country differences in distribution channels,
competitive conditions, and other market-related factors
Perhaps the biggest market-related issue:
Whether and how much to customize offerings to match local
buyers’ tastes and preferences in each different country market
OR
Whether to pursue a strategy of offering a mostly standardized
product worldwide
7–12
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Core Concept
The tension between the market pressures to localize a firm’s
product offerings country by country and the competitive
pressures to lower costs by offering mostly standardized
products in all countries where it competes is one of the big
strategic issues that firms operating in few or many country
markets must address.
The managerial challenge in operating internationally or
globally is tailoring a firm’s strategy to take a variety of
country-to-country differences into account.
7–13
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13
Cross-Country Differences in
Operating Costs and Profitability
Country-to-country differences are often so large that a firm’s
operating costs and profitability are significantly impacted by
local factors such as:
Wage rates • Worker productivity
Inflation rates • Energy costs
Tax rates • Government regulations
Cost advantages are gained by locating operations in countries
with:
Low wage rates • Less costly government regulations
Low taxes • Low energy costs
Cheaper access to natural resources
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14
The Impact of Host Government Policies
on the Local Business Climate
Host government policies and attitudes of toward business
create a favorable or unfavorable business climate for local
firms and foreign firms.
“Pro-business” governments
Provide incentives for expansion-minded firms (lower tax rates,
site location and site development assistance, government-
sponsored worker training, seek the advice and counsel of
business leaders)

Make the transition to more costly and stringent regulations
business-friendly rather than adversarial
“Anti-business” governments
Tend to enact costly regulations and procedures, institute
burdensome taxes, impose tariffs and/or quotas on imports,
create uneven playing field that favors domestic companies, and
pursue various other policies that make the local business
climate less attractive to foreign firms
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15
Political Risks
Instability of weak governments
Civil unrest and revolt
Passage of anti-business legislation or regulations
Systemic corruption in governmental and business operations
Suspicion of foreign firms operating within their borders
Loss of assets to nationalization by socialist politicians
Economic Risks
Instability of the national economy and monetary system—
inflation rates, deficit-spending, and economic distress
Threat of piracy
Lack of intellectual property protection
The Impact of Host Government Policies
on the Local Business Climate (continued)
Software, Inc.
7–16

16
The Risks of Adverse
Exchange-Rate Shifts
Sizable shifts in currency exchange rates pose significant risks
for two reasons:
They are very hard to predict because of the variety of factors
involved and the uncertainties surrounding when and by how
much these factors will change
Shifting exchange rates affect which countries—either
temporarily or long term—represent the low-cost manufacturing
location and which rivals have a temporary or longer-term cost-
based competitive advantage because of the countries where
their production operations are located
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17
Core Concept
Firms that export goods to foreign countries always gain in
competitiveness when the currency of the producing country
grows weaker relative to the currencies of countries to which
the goods are exported.
A firm is competitively disadvantaged when the currency of
country where its products are produced grows stronger relative
to the currencies of countries to which its goods are exported
and marketed.
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18
Consider the case of a firm with manufacturing facilities in
Brazil (where the currency is reals—pronounced ray-alls) that
exports its Brazilian-made goods to European Union markets
(where the currency is euros).
Assume that the current exchange rate is 4 Brazilian reals for 1
euro and that the product made in Brazil has a manufacturing
cost of 4 Brazilian reals (or 1 euro).
Now suppose that the exchange rate shifts from 4 reals per euro
to 5 reals per euro (meaning that the real has declined in value
and that the euro is stronger).
The Brazilian-made product is now more cost-competitive
because a Brazilian-made good costing 4 reals has fallen to only
0.8 euros at the new exchange rate (4 reals divided by 5 reals
per euro = 0.8 euros). The producer of the Brazilian-made good
is better positioned to compete against European makers of the
same good.
On the other hand, if the value of the real grows stronger in
relation to the euro—resulting in an exchange rate of 3 reals to
1 euro—the same Brazilian-made good formerly costing 4 reals
(or 1 euro) now has a cost of 1.33 euros (4 reals divided by 3
reals per euro = 1.33), This puts a producer of the Brazilian-
made good in a weaker competitive position versus European
producers of the same good.
Clearly, manufacturing in Brazil to sell in Europe is more
attractive when the euro is strong (a rate of 1 euro for 5 reals)
than when weak and 1 euro exchanges for 3 reals.
Example: Who Gains and Who Loses
When Currency Exchange Rates Shift?
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19
When the exchange rate changes from 4 reals per euro to 5 reals
per euro:
The Brazilian-made good that formerly cost 1 euro and now
costs only 0.8 euros can be sold to European Union consumers
for a lower euro price than before.
In other words, the combination of a stronger euro and a weaker
real acts to lower the price of Brazilian-made goods in the
European Union. This spurs sales of Brazilian goods and boost
exports of Brazilian goods to Europe
Conversely, an exchange rate shift from 4 reals to 3 reals per
euro makes a Brazilian manufacturer less cost competitive with
European manufacturers of the same item—the Brazilian-made
good that formerly cost 1 euro and now costs 1.33 euros will
sell for a higher price in euros than before, weakens European
consumer demand for Brazilian-made goods and reduces
Brazilian exports to Europe.
Brazilian exporters experience (1) rising demand for their goods
in Europe whenever the Brazilian real grows weaker relative to
the euro and (2) falling demand for their goods in Europe
whenever the Brazilian real grows stronger relative to the euro.
Example: Who Gains and Loses When
Currency Exchange Rates Shift? (continued)
7–20
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20

The Impact of Exchange Rates on Domestic Competitors
Competing with Foreign Rivals
Weaker dollar policies best serve U.S. manufacturers affected
by low-cost foreign imports by:
Raising the dollar-costs of foreign goods produced in countries
whose currencies have grown stronger relative to the dollar
Making foreign goods more expensive to U.S. consumers—
curtailing demand for those goods and stimulating demand for
U.S. goods
Allowing U.S. goods to be sold at lower prices to consumers in
countries with strong currencies—thereby stimulating exports to
meet foreign demand for U.S. goods and creating U.S.-based
jobs
Increasing the dollar value of profits a firm earns in foreign
markets where local currencies are now stronger relative to the
dollar
7–21
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21
Core Concept
Domestic companies facing competitive pressure from lower-
cost foreign rivals benefit when their country’s currency grows
weaker in relation to currencies of countries where lower-cost
foreign rivals have their manufacturing plants.
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22
Questions for Company Co-Managers
When your simulation company is facing an unfavorable
exchange rate change that negatively affects profitability in one
or more geographic regions, should you and your co-managers:
Consider raising price or adjusting marketing efforts to
reduce/eliminate the negative impact on earnings?
Consider temporarily curtailing sales and marketing efforts in
the negatively affected regions and boosting sales efforts in
regions where profits are favorably impacted by the exchange
rate shifts?
Do nothing, absorb whatever adverse financial impact occurs,
and suffer the consequences of lower earnings?
Software, Inc.
7–23
23
When your simulation firm experiences a favorable exchange
rate change that positively affects profitability in one or more
geographic regions, should you and your co-managers:
Consider lowering price or boosting marketing efforts to
increase sales and further exploit the positive impact on
earnings in those regions where the exchange rate shifts are
favorable?
Consider temporarily boosting sales efforts in regions where
profits are favorably impacted by the exchange rate shifts and
curtailing sales and marketing efforts in regions with
unfavorable exchange rate impacts?
Do nothing and enjoy the benefits of whatever temporary boost
to earnings occurs?

Questions for Company Co-Managers (continued)
7–24
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24
Global
competition
There Are Two Importantly Different Patterns of Competition in
World Markets
7–25
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Multi-country
competition
25
Core Concepts
Multicountry competition exists when competition in one
national market is not closely connected to competition in any
other national market. There is no global or world market, only
a collection of self-contained country markets.
Global competition exists when competitive conditions across
national markets are linked strongly enough to form a true
international market and when leading competitors compete
head-to-head in many different countries.
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26
Traits of Multicountry Competition
The country’s market is localized to that country and not
closely connected to the market contest in other countries
Buyers in different countries are attracted to different product
attributes
The numbers and identities of rival sellers vary from country to
country
Industry conditions and competitive forces in each national
market differ in important respects
Rival firms battle for national championships
and winning in one country does not necessarily signal the
ability to fare well in other countries!
Software, Inc.
7–27
Traits of Global Competition
Prices and competitive conditions across country markets are
strongly linked
Leading competitors compete head-to-head
in many of the same country markets
A firm’s competitive position in one country both affects and is
affected by its position in other countries
A true global or world market exists
Competitive advantage is based on a firm’s world-wide

operations and global standing
Rival firms in globally competitive industries
vie for global leadership (world championships)!
Software, Inc.
7–28
Maintain a national (one-country) production base and export
goods to foreign markets
License foreign firms to use the firm’s technology or to produce
and distribute the firm’s products in foreign markets
Employ a franchising strategy in foreign markets
Rely upon acquisitions or internal startup ventures to gain entry
into foreign markets
Rely on strategic alliances or joint ventures with foreign firms
as the primary vehicle for entering foreign country markets
Strategy Options for Establishing
a Competitive Presence in Foreign Markets
7–29
Software, Inc.
Export Strategies
Using domestic plant capacity to produce goods for export to
foreign markets is a good initial strategy to pursue international
sales
Advantages
Is a conservative way to test the risks of international markets
Increases the utilization of existing capital investment in
production facilities

Minimizes direct investments in foreign countries
An export strategy is vulnerable when:
Home country manufacturing costs are higher than the
manufacturing costs that rivals incur in the countries where they
have plants
Product shipping costs to distant markets are high
Adverse shifts can occur quickly in currency exchange rates
Importing countries impose tariffs or erect other trade barriers
to protect local firms against competition from foreign-made
goods
7–30
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30
Licensing Strategies
Licensing makes sense when a firm
Has valuable technical know-how or a unique patented product
but lacks the organizational capability or resources to enter
foreign markets
Desires to avoid risks of committing resources to markets that
are unfamiliar, politically volatile, and/or economically
unstable.
Can earn considerable royalties from licensees who are
trustworthy and reputable
Disadvantage
Licensing firm risks providing valuable technical know-how to
foreign firms and losing control over its use—monitoring the
actions of foreign licensees and safeguarding the company’s
proprietary know-how is not always as easy as it might seem
7–31
Software, Inc.

31
Franchising Strategies
Well suited to the global expansion efforts of service and
retailing enterprises
Advantages
Franchisee bears in-country costs and risks of establishing
foreign locations
Franchisor has to expend only the resources to attract, recruit,
train, support, and monitor franchisees
Disadvantage
Maintaining quality control when franchisees in certain
locations are not strongly committed to consistency and
standardization
Issue: To allow localization or not
Should franchisees be allowed to make modifications in the
franchisor’s product offering to better satisfy the tastes and
expectations of local buyers?
7–32
Software, Inc.
32
Acquisition Strategies
Acquiring a local business to compete internationally or
globally:
Is quicker than creating a new subsidiary and having to build a
new operating organization from the ground up
Is the least risky and most cost-efficient means of hurdling such
entry barriers as gaining access to local distribution channels,

building supplier relationships, and establishing relationships
with government officials and other constituencies
Allows acquirer to move directly to the tasks of transferring
resources and personnel, integrating and redirecting the
acquired firm into its own operations, putting its own strategy
in place, and building a stronger market position
The big issue an acquisition-minded firm must consider is
whether to pay a premium price to buy a successful local firm
or to buy a struggling competitor at a bargain price
(and then spend monies to boost its competitiveness).
7–33
Software, Inc.
33
Internal Startup Strategies
Creating an internal startup (greenfield venture) to build a new
business subsidiary from scratch makes sense when a firm:
Has foreign market operating experience in rapidly getting new
foreign subsidiaries up and running and overseeing their
operations
Can create the subsidiary for less cost than making an
acquisition.
Can add the subsidiary’s production capacity to the local market
without adversely impacting the supply–demand balance in that
market.
Can provide the subsidiary with the resources and capabilities
needed to achieve the cost structure and competitive strength to
battle local rivals head to head.
Can create a subsidiary with the resources and capability to gain
good distribution access (in part, perhaps, because of the firm’s
recognized brand name).
7–34

Software, Inc.
34
Collaborative Strategies—Alliances and
Joint Ventures with Foreign Partners
Advantages of a Collaborative Strategy:
Enables a firm to benefit from a foreign partner’s familiarity
with local government regulations, knowledge of the buying
habits and product preferences of local consumers, distribution
channel relationships, etc.
Facilitates capture of economies of scale in production and/or
marketing—cost reduction can be the difference that allows a
firm to be cost-competitive
Enables joint sharing of distribution facilities and dealer
networks which mutually strengthen each partner’s access to
buyers
Facilitates learning and competence-building from performing
joint research, sharing know-how, studying partner’s
manufacturing methods, and understanding how to tailor sales
and marketing approaches to fit local cultures and traditions
Directs partners’ competitive energies more toward mutual
rivals and less toward one another; working together
collaboratively both close the gap on leading companies
Encourages partners in reaching agreement on important
technical standards
7–35
Software, Inc.

Strategic Insight
Collaborative strategies involving alliances and/or joint
ventures with foreign partners are a popular way for companies
to gain entry into the markets of foreign countries (and, once it
establishes a strong enough market foothold, to discontinue its
participation in the alliance/joint venture and operate on its
own).
7–36
Software, Inc.
Strategic Insight
Cross-border alliances enable a growth-minded company to
widen its geographic coverage and strengthen its
competitiveness in foreign markets, while at the same time
offering flexibility and giving a company some leeway in
pursuing its own strategy and retaining some degree of
operating control.
7–37
Software, Inc.
Strategic Benefits of Cross-Border
Alliances and Partnerships
Alliances and partnerships allow a company:
To preserve its independence (which is not the case with a
merger)
To retain veto power over how the alliance operates
To avoid using scarce financial resources to fund acquisitions
To retain the flexibility to readily disengage once the purpose
of the alliance or partnership has been served or if its benefits
prove elusive and avoid the cost of an acquisition’s divestiture
7–38

Software, Inc.
Knowledge and expertise of local partners may prove less
valuable than expected
Communication, trust-building, and coordination costs are high
in terms of managerial time
The potential for discord to emerge among cross-border allies
Language and cultural barriers
Diverse or conflicting operating practices
Conflicting objectives and strategies, differences of opinion
about how to proceed, and/or differences in corporate values
and ethical standards
Trouble working together or reaching mutually agreeable ways
to proceed
It is risky to become overly dependent on another firm for
essential expertise and competitive abilities over the long-term
7–39
Software, Inc.
The Risks of a Collaborative Strategy
Strategic Issue:
Whether to vary a firm’s strategy and competitive approach to
fit specific market conditions and buyer preferences in each
host country OR
Whether to employ essentially the same strategy in all countries
where the firm competes
Employ any one of three competitive strategy approaches to
resolve this issue:
A localized multi-country strategy—a “think local, act local”

approach
A global strategy—a “think global, act global” approach
A hybrid strategy—a “think global, act local” approach
Competing in Foreign Markets: The Three Competitive Strategy
Approaches
7–40
Software, Inc.
40
Core Concept
Multicountry or localized strategies involve tailoring a
company’s product offering and competitive approach to match
differing buyer preferences, market conditions, and competitive
circumstances in each country where it choses to compete.
7–41
Software, Inc.
41
Strategic Insight
The bigger the competitive strategy variations from country to
country, the more an international competitor’s overall strategy
becomes a collection of localized country strategies.
7–42
Software, Inc.

Software, Inc.
7–43
FIGURE 7.1 The Three Strategic Options for Competing
Internationally: Option 1--Multicountry Strategies
43
Software, Inc.
7–44
Internationally: Option 2--Global Strategies (Continued)
44
Software, Inc.
7–45
Internationally: Option 3--Hybrid Strategies (Continued)

45
Multicountry Strategies—
A “Think Local, Act Local” Approach
A “Think Local, Act Local” approach is well-suited to
situations where:
There are significant country-to-country differences in
Customer preferences, buying habits, and the product features
required to be relevant and appealing to local buyers
Competitive circumstances (what it takes to compete effectively
against rivals)
Distribution channels and marketing methods
Host governments enact regulations requiring products sold
locally must be manufactured locally, meet strict manufacturing
specifications or performance standards
Trade restrictions of host governments are so diverse and
complicated they preclude a uniform, coordinated worldwide
market approach
7–46
Software, Inc.
46
The Pros and Cons of a “Think-Local, Act-Local” Approach to
Strategy-Making
Advantages
Accommodates the differing tastes and expectations of buyers in
each country to gain the most attractive market positions vis-à-
vis local rivals
Grows global sales and market share by making product

offerings more relevant and appealing to local buyers
Disadvantages
May raise production and distribution costs due to the greater
variety of designs and components, shorter production runs, and
the costs and complications of added inventory handling and
distribution logistics
Is not conducive to building a single worldwide competitive
advantage
Handicaps a firm in using its resources, competencies, and
capabilities to speed entry into additional country markets
because the assets required in one country may differ from
those needed in another country
7–47
Software, Inc.
47
Core Concept
A global strategy is one where a company
employs the same basic competitive approach
in all countries where it operates, sells much the
same products everywhere, strives to build global
brands, and coordinates its actions worldwide with
strong headquarters control.
It represents a think-global, act-global approach.
7–48
Software, Inc.

48
Global Strategies—
A “Think-Global, Act-Global” Approach
Best suited for globally competitive industries where the firm’s
competitive approach can be fundamentally the same in all
countries; such a high degree of similarity in cross-border
strategy:
Promotes building a global brand name, since a firm can sell its
brand name products everywhere (with minor local adaptations
when “necessary”)
Facilitates building and strengthening a collection of
competitively valuable resources and capabilities to underpin its
global strategy
Facilitates quick, smooth cross-border transfer of ideas, new
products, and competitively valuable resources and capabilities
Allows it to compete using the same capabilities, marketing,
and distribution channels approaches worldwide
Grows the numbers of personnel with experience and know-how
in implementing the strategy and conducting operations in
foreign markets
Enables tightly integrating and coordinating strategic moves
worldwide.
7–49
Software, Inc.
49
Reasons to Use a Global Strategy
When Market Conditions Permit
A globally standardized product offering:

Enables capture of scale economies in manufacturing
Allows a company to focus on establishing a global brand image
and reputation linked to the same product attributes in all
countries
Facilitates concentrated effort on building a competitively
powerful collection of resources and capabilities to secure a
sustainable low-cost or differentiation-based competitive
advantage over both local and global rivals
7–50
Software, Inc.
50
Software, Inc.
7–51
FIGURE 7.2 How a Multicountry or Localized Strategy Differs
from a Global Strategy
Access the alternate text for slide image.
51
Software, Inc.
7–52
FIGURE 7.2 How a Multicountry or Localized Strategy Differs
from a Global Strategy (continued)
Localized Multicountry Strategy

Global Strategy
Customize the company’s competitive approach as needed to fit
market and business circumstances in each host country—strong
responsiveness to local conditions.
Sell different product versions in different countries under
different brand names—adapt product attributes to fit buyer
tastes and preferences country by country.
Either design manufacturing plants to cost effectively produce
many different product versions or else scatter plants across
many host countries, each making product versions for local
markets.
Use local suppliers when local governments have local content
requirements.
Adapt marketing and distribution to the prevailing local
customs, culture, and market circumstances.
Develop resources and capabilities appropriate to each
country’s localized strategy. Cross-border transfer of resources
is limited because of strategy variability.
Give country managers fairly wide strategy-making latitude and
autonomy over local operations.
Strive to gain local competitive advantages (the nature of any
such competitive advantages that are achieved will tend to vary
from country-to-country).
Pursue the same basic competitive strategy worldwide (low-
cost, differentiation, best-cost, focused low-cost, focused
differentiation)—minimal responsiveness to local conditions.
Sell the same products under the same brand name worldwide.
Concentrate on building global brands as opposed to

strengthening local/regional brands sold in local/regional
markets.
Locate plants on the basis of maximum locational advantage,
usually in countries where production costs are lowest but
plants may be scattered if shipping costs are high or other
locational advantages dominate.
Use the best suppliers from anywhere in the world.
Coordinate marketing and distribution worldwide; make minor
adaptations to local countries where needed.
Compete on the basis of the same resources and capabilities
worldwide. Stress rapid cross-country transfers of new
capabilities, products, and best practices.
Coordinate major strategic decisions worldwide. Expect local
managers to stick close to the global strategy.
Strive to achieve the same type of competitive advantage over
rivals in every country where the company competes.
52
A middle-ground approach
Entails utilizing the same basic competitive theme (low-cost,
differentiation, best-cost, or focused) in each country but
allowing local managers leeway to:
Incorporate minor country-specific variations in product
attributes to better satisfy local buyers
Make adjustments in production, distribution, and marketing

strategy elements to be responsive to local market conditions
and to compete more successfully against local rivals
7–53
Software, Inc.
Hybrid “Think Global, Act Local”
Strategy Approaches
53
Is your company pursuing a global strategy or a strategy that is
localized by geographic region?
Which of the following best characterizes your strategy?
Think local, act local
Think global, act global
Think global, act local
Have you studied rival companies enough to know which of
these three strategy options they are pursuing—most especially
your closest rivals?
7–54
Software, Inc.
Questions for Simulation Company
Co-Managers
54
Building Cross-Border Competitive Advantage
Ways to gain competitive advantage
(or counteract disadvantages):
Locate facilities and value chain activities in particular
countries to lower costs or achieve greater product

differentiation
Do a better job than rivals of efficiently and effectively
transferring competitively valuable resources and capabilities
across the borders of the countries in which it competes
7–55
Software, Inc.
55
Strategic Insight
Companies that compete internationally or globally can pursue
competitive advantages in world markets by locating their
different value chain activities in whatever nations prove most
advantageous.
7–56
Software, Inc.
Using Location to Build Competitive Advantage
To use location to build competitive advantage,
a firm must consider:
Whether it is more advantageous to concentrate each activity it
performs in a few select countries or to disperse performance of
the activity to many nations
In which countries to locate particular activities to boost the
company’s competitiveness vis-à-vis rivals and facilitate
achieving competitive advantage
7–57
Software, Inc.

When to Concentrate Activities
in a Few Locations
Activities should be concentrated when:
The costs of manufacturing or other value chain activities are
significantly lower in one location than in others
Significant scale economies in production or distribution are
associated with a particular location
Sizable learning and experience benefits accrue from
performing an activity at a particular location
A certain location has superior resources, allows better
coordination of related activities, or offers other valuable
advantages
7–58
Software, Inc.
58
When to Disperse Activities Across Many Locations
Activities should be dispersed when
They need to be performed close to buyers
High transportation costs, scale diseconomies, or trade barriers
make it too expensive to operate from a central location
It is strategically advantageous to disperse activities to hedge
against exchange rate risks, supply interruptions due to weather,
strikes or logistical delays, and adverse political developments
7–59
Software, Inc.

Cross-Border Sharing and Transfer of Resources and
Capabilities to Build Competitive Advantage
When a firm has succeeded in building a collection of
competitively valuable resources and capabilities, it can:
Use its competitively potent resources and capabilities to
spearhead a strategic offensive to enter additional country
markets or to compete more effectively against local rivals
Pursue cross-border transfer of powerful brands, superior
technology, core competencies, competitive capabilities, and
key personnel to strengthen its global market position and boost
its competitiveness vis-à-vis rivals in one or more countries
Use its dominating strength in a competitively valuable
capability, resource, or value chain activity as a basis for
winning a sustainable competitive advantage over rivals lacking
such resources and capabilities
7–60
Software, Inc.
60
The Concept of Profit Sanctuaries
Profit sanctuaries are country markets (or geographic regions)
where a firm earns substantial profits because of its strong or
protected market position
In most cases, a firm’s biggest and most strategically crucial
profit sanctuary is its home market, but international and global
firms may also enjoy profit sanctuary status in other nations
where they have a strong competitive position, big sales
volume, and attractive profit margins

Firms competing globally often have more profit sanctuaries
than firms that compete in only a few country markets
A domestic-only competitor has only one profit sanctuary
7–61
Software, Inc.
Core Concept
Firms with large, protected profit sanctuaries have an advantage
in competing against firms that don’t have a protected
sanctuary.
Firms with multiple profit sanctuaries have an edge in
competing head to head against firms with a single sanctuary.
7–62
Software, Inc.
A firm with multiple profit sanctuaries is well positioned to
attack an close rival when:
It has more or bigger profit sanctuaries than the rival it is
attacking
It has competitively valuable resources and capabilities that it
can divert from other countries to help power its offensive
attack
The financial strength of its profit sanctuaries in other locations
helps subsidize its razor-thin margins or even losses in the
market where the rival is being attacked—such tactics are called
cross-market subsidization.
Profit Sanctuaries Are a Valuable Competitive Asset in
Attacking Rivals
7–63
Software, Inc.

Core Concept
Cross market subsidization entails supporting competitive
offensives in one market with resources and profits diverted
from operations in another market.
Such a competitive tactic can be a powerful weapon against a
rival with only one profit sanctuary or limited resources and
capabilities.
7–64
Software, Inc.
Global Strategic Offensives: Option 1 for Attacking an
Important Rival
Attack a rival’s largest profit sanctuaries to force the rival to
take expensive defensive actions that raise its costs or reduce its
profit margins
While attacking a rival’s profit sanctuary violates the principle
of attacking competitor weaknesses instead of competitor
strengths, such an attack can prove useful when it poses a
serious threat to a rival’s business and forces it to devote added
time and attention to defending a market that is important to its
competitive well-being and overall profitability.
When a rival’s profits are significantly eroded in its chief profit
sanctuary, attacker can gain the upper hand and build market
momentum in other markets, not only in the market where the
offensive is being waged.
The bigger the potential payoff for such outcomes, the greater
the appeal of attacking an important rival’s biggest profit
sanctuary.
7–65
Software, Inc.

Global Strategic Offensives: Option 2 for Attacking One or
More Rivals
Dump goods at cut-rate prices in the markets of rivals
Involves selling goods in other countries at prices that are either
(1) well below the prices at which it normally sells elsewhere or
(2) well below its full costs per unit
Has appeal in two instances:
When it drives down the price so far in the targeted country that
local rivals are quickly put in dire financial straits
When a firm with unused production capacity finds that it is
cheaper to keep producing (as long as the selling prices cover
average variable costs per unit) than to incur the costs
associated with idle plant capacity
Problem: Dumping strategies run a high risk of host government
retaliation through the World Trade Organization on behalf of
the adversely affected domestic firms
7–66
Software, Inc.
Core Concept
A firm is said to be engaging in dumping when it sells its goods
in certain countries at prices that are either well below the
prices at which it normally sells elsewhere or else well below
its full costs per unit.
7–67
Software, Inc.
Questions for Company Co-Managers

Should you make an effort to analyze which geographic
regions/product segments your closest rivals are earning their
biggest profits?
Then should you deliberately launch an offensive attack on one
or more of these rivals in those geographic regions/product
segments where they have big profit sanctuaries?
Is such an attack even more advisable if two or more of your
close rivals’ profit sanctuaries happen to be in the same region
or product segment and if your profit sanctuaries are elsewhere?
Software, Inc.
7–68
Internationally: Multicountry Strategies, Alternate Text
Multicountry strategies, a think local, act local approach:
Employ localized strategies—one for each country market where
the company competes—and delegate lead responsibility for
crafting strategy to local managers.
• Tailor the company’s product offering in each country to local
buyers’ tastes and expectations.
• Adopt country-specific strategic initiatives and market
maneuvers to pursue emerging local market opportunities,
compete effectively against local rivals, and build a local
competitive advantage.
• Match marketing, advertising, sales promotion campaigns, and
distribution channel emphasis to fit local customs, cultures, and
market conditions.

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