formulating strategy(2).pps

Formulating Strategies 1

Formulating Strategy

PowerPoint slides by:R. Dennis Middlemist

Colorado State UniversityAdapted for BA 485 by:

Dr. Eliot ElfnerSt. Norbert College

Copyright © 2004 South-Western. All rights reserved. Formulating Strategies

The Strategic

Management Process


Topics to be Covered

Business Level Strategies Corporate Level Strategies Mergers, Acquisitions and

Takeovers International Strategic Approaches Cooperative Strategies


Business-Level Strategy (Defined)

An integrated and coordinated set of commitments and actions the firm uses to gain a competitive advantage by exploiting core competencies (i.e. A Strategy) in specific product markets


Key Issues

Business-Level Strategy

Business-levelBusiness-levelStrategyStrategy

Which good or Which good or service to provideservice to provide

How toHow tomanufacture itmanufacture it

How toHow todistribute itdistribute it


Core Competencies and Strategy

Resources and superior capabilities that are sources of competitive advantage over a firm’s rivals

Providing value to customers and gaining competitive advantage by exploiting core competencies in individual product markets

Core Core CompetenciesCompetencies

StrategyStrategy

Business-level Business-level StrategyStrategy

An integrated and coordinated set of actions taken to exploit core competencies and gain competitive advantage


Customers: Business-Level Strategic Issues

Customers are the foundation of successful business-level strategy Who will be served by the strategy?

What needs those target customers have that the strategy will satisfy?

How those needs will be satisfied by the strategy?


Customers: Who, What, Where Firms must manage all aspects of

their relationship with customers Reach: firm’s success and connection

to customers Richness: depth and detail of two-way

flow of information between the firm and the customer

Affiliation: facilitation of useful interactions with customers


Customer—Who?

Determining the Customers to Serve

CustomersCustomers IndustrialIndustrialMarketsMarkets

ConsumerConsumerMarketsMarkets

Market Segmentation


Basis for Customer Segmentation

Consumer Markets 1. Demographic factors (age, income, sex, etc.)2. Socioeconomic factors (social class, stage in

the family life cycle)3. Geographic factors (cultural, regional, and

national differences)4. Psychological factors (lifestyle, personality traits)5. Consumption patterns (heavy, moderate, and

light users)6. Perceptual factors (benefit segmentation, perceptual mapping)

SOURCE: Adapted from S. C. Jain, 2000, Marketing Planning and Strategy, Cincinnati: South-Western College Publishing, 120.

Table 4.1Table 4.1


Basis for Customer Segmentation (cont’d)

Industrial Markets1. End-use segments (identified by SIC code)2. Product segments (based on technological differences or production economics)3. Geographic segments (defined by boundaries between countries or by regional differences within them)4. Common buying factor segments (cut across product market and geographic segments)5. Customer size segments

SOURCE: Adapted from S. C. Jain, 2000, Marketing Planning and Strategy, Cincinnati: South-Western College Publishing, 120.

Table 4.1Table 4.1


Market Segmentation: Consumer Markets

Demographic factors

Socioeconomic factors

Geographic factors

Psychological factors

Consumption patterns

Perceptual factors

ConsumerMarkets

Demographic

Socioeconomic

GeographicPsychological

Consumption

Perceptual


IndustrialMarkets

End-use

Product

Geographic

Commonbuying factor

Customer size

Market Segmentation: Industrial Markets

End-use segments

Product segments

Geographic segments

Common buying factor segments

Customer size segments


Customer Needs—What?(What the customer wants)

Customer Needs to Satisfy Customer needs are related to a

product’s benefits and features

Customer needs are neither right nor wrong, good nor bad

Customer needs represent desires in terms of features and performance capabilities


Determining the Core Competencies Necessary to Satisfy Customer Needs Firms use core competencies to

implement value creating strategies that satisfy customers’ needs

Only firms with capacity to continuously improve, innovate and upgrade their competencies can expect to meet and/or exceed customer expectations across time

Customer Needs—What?


Types of Business-Level Strategy

Business-Level Strategies Are intended to create differences

between the firm’s position relative to those of its rivals

To position itself, the firm must decide whether it intends to: Perform activities differently or Perform different activities as

compared to its rivals


Types of Potential Competitive Advantage Achieving lower overall costs than rivals

Performing activities differently (cheaper process)

Possessing the capability to differentiate the firm’s product or service and command a premium price Performing different (valuable) activities


Two Targets of Competitive Scope

Broad Scope The firm competes in many customer

segments

Narrow Scope The firm selects a segment or group of

segments in the industry and tailors its strategy to serving them at the exclusion of others


Five Business-Level Strategies

Figure 4.1Figure 4.1

SOURCE: Adapted with the permission of The Free Press, an imprint of Simon & Schuster Adult Publishing Group, from Competitive Advantage: Creating and Sustaining Superior Performance, by Michael E. Porter, 12. Copyright © 1985, 1998 by Michael E. Porter.


Cost Leadership Strategy An integrated set of actions taken to

produce goods or services with features that are acceptable to customers at the lowest cost, relative to that of competitors with features that are acceptable to customers Relatively standardized products Features acceptable to many customers Lowest competitive price


Cost Leadership Strategy Cost saving actions required by this

strategy: Building efficient scale facilities Tightly controlling production costs and

overhead Minimizing costs of sales, R&D and service Building efficient manufacturing facilities Monitoring costs of activities provided by

outsiders Simplifying production processes


How to Obtain a Cost Advantage

Cost DriversCost Drivers Value ChainValue Chain

Determine and control

Reconfigure, if needed

Alter production processAlter production process

Change in automationChange in automation

New distribution channelNew distribution channel

New advertising mediaNew advertising media Direct sales in place of Direct sales in place of

indirect salesindirect sales

New raw materialNew raw material

Forward integrationForward integration

Backward integrationBackward integration Change location relative Change location relative

to suppliers or buyersto suppliers or buyers


Cost Leadership Strategy The Threat of Potential Entrants

Can frighten off new entrants due to: Their need to enter on a large scale in order to be cost

competitive The time it takes to move down the learning curve

Bargaining Power of Suppliers Can mitigate suppliers’ power by:

Being able to absorb cost increases due to low cost position Being able to make very large purchases, reducing chance of

supplier using power Bargaining Power of Buyers

Can mitigate buyers’ power by: Driving prices far below competitors, causing them to

exit, thus shifting power with buyers back to the firm


Cost Leadership Strategy (cont’d) Product Substitutes

Cost leader is well positioned to: Make investments to be first to create substitutes Buy patents developed by potential substitutes Lower prices in order to maintain value position

Rivalry with Existing Competitors Due to cost leader’s advantageous position:

Rivals hesitate to compete on basis of price Lack of price competition leads to greater profits


Cost Leadership Strategy (cont’d) Competitive Risks

Processes used to produce and distribute good or service may become obsolete due to competitors’ innovations

Focus on cost reductions may occur at expense of customers’ perceptions of differentiation

Competitors, using their own core competencies, may successfully imitate the cost leader’s strategy


Differentiation Strategy

An integrated set of actions taken to produce goods or services (at an acceptable cost) that customers perceive as being different in ways that are important to them Nonstandardized products

Customers value differentiated features more than they value low cost


How to Obtain a Differentiation Advantage

Cost DriversCost Drivers Value ChainValue Chain

Control if needed Reconfigure to maximize

Lower buyers’ costsLower buyers’ costs

Raise performance of product or serviceRaise performance of product or service

Create sustainability through:Create sustainability through:

Customer perceptions of uniquenessCustomer perceptions of uniqueness Customer reluctance to switch to non-Customer reluctance to switch to non-

unique product or serviceunique product or service


Differentiation Strategy Potential Entrants

Can defend against new entrants because: New products must surpass proven products New products must be at least equal to

performance of proven products, but offered at lower prices

Power of Suppliers Can mitigate suppliers’ power by:

Absorbing price increases due to higher margins Passing along higher supplier prices because

buyers are loyal to differentiated brand


Differentiation Strategy Power of Buyers

Can mitigate buyers’ power because well differentiated products reduce customer sensitivity to price increases

Product Substitutes Well positioned relative to substitutes because

Brand loyalty to a differentiated product tends to reduce customers’ testing of new products or switching brands

Rivalry Defends against competitors because brand

loyalty to differentiated product offsets price competition


Competitive Risks of Differentiation The price differential between the

differentiator’s product and the cost leader’s product becomes too large

Differentiation ceases to provide value for which customers are willing to pay

Experience narrows customers’ perceptions of the value of differentiated features

Counterfeit goods replicate differentiated features of the firm’s products


Focus Strategies An integrated set of actions taken to

produce goods or services that serve the needs of a particular competitive segment Particular buyer group (e.g. youths or

senior citizens Different segment of a product line

(e.g. professional craftsmen versus do-it-yourselfers

Different geographic markets (e.g. East coast versus West coast)


Focus Strategies (cont’d) Types of focused strategies

Focused cost leadership strategy Focused differentiation strategy

To implement a focus strategy, firms must be able to: Complete various primary and

support activities in a competitively superior manner, in order to develop and sustain a competitive advantage and earn above-average returns


Integrated Cost Leadership/

Differentiation Strategy

A firm that successfully uses an integrated cost leadership/differentiation strategy should be in a better position to: Adapt quickly to environmental changes Learn new skills and technologies more

quickly Effectively leverage its core

competencies while competing against its rivals


Integrated Cost Leadership/ Differentiation Strategy (cont’d)

Commitment to strategic flexibility is necessary for implementation of integrated cost leadership/differentiation strategy Flexible manufacturing systems

Information networks

Total quality management (TQM) systems


Total Quality Management (TQM) Systems

Emphasize total commitment to the customer through continuous improvement using: Data-driven, problem-solving approaches Empowerment of employee groups and

teams Benefits

Increases customer satisfaction Cuts costs Reduces time-to-market for innovative

products


Supply Chain Emphasis to Managing Processes

Supply chain management is concerned with the efficient integration of suppliers, factories, warehouses and stores so that merchandise is produced and distributed: In the right quantities To the right locations At the right time

In order to Minimize total system cost Satisfy customer service requirements


Corporate Level Strategies


The Role of Diversification Diversification strategies play a major

role in the behavior of large firms Product diversification concerns:

The scope of the industries and markets in which the firm competes

How managers buy, create and sell different businesses to match skills and strengths with opportunities presented to the firm


Two Strategy Levels Business-level Strategy (Competitive)

Each business unit in a diversified firm chooses a business-level strategy as its means of competing in individual product markets

Corporate-level Strategy (Companywide) Specifies actions taken by the firm to gain a

competitive advantage by selecting and managing a group of different businesses competing in several industries and product markets


Corporate-Level Strategy: Key Questions

Corporate-level Strategy’s Value The degree to which the businesses in

the portfolio are worth more under the management of the company thanthey would be under other ownership

What businesses should the firm be in?

How should the corporate office manage the group of businesses? Business Units

Levels and Types of Diversification


Diversifying to Enhance Competitiveness Related Diversification

Economies of scope Sharing activities Transferring core competencies Market power Vertical integration

Unrelated Diversification Financial economies

Efficient internal capital allocation Business restructuring


Reasons for Diversification Incentives and Resources with Neutral

Effects on Strategic Competitiveness: Antitrust regulation Tax laws Low performance Uncertain future cash flows Risk reduction for firm Tangible resources Intangible resources


Reasons for Diversification (cont’d)

Managerial Motives (Value Reduction) Diversifying managerial employment

risk

Increasing managerial compensation


Strategic Motives for Diversification

To Enhance Strategic Competitiveness:

• Economies of scope (related diversification)Sharing activitiesTransferring core competencies

• Market power (related diversification)Blocking competitors through multipoint competitionVertical integration

• Financial economies (unrelated diversification)Efficient internal capital allocationBusiness restructuring

Value-creating Strategies of Diversification:Operational and Corporate Relatedness


Sharing Activities

Operational Relatedness Created by sharing either a primary

activity such as inventory delivery systems, or a support activity such as purchasing

Activity sharing requires sharing strategic control over business units

Activity sharing may create risk because business-unit ties create links between outcomes


Transferring Corporate Competencies

Corporate Relatedness Using complex sets of resources and

capabilities to link different businesses through managerial and technological knowledge, experience, and expertise


Unrelated Diversification Financial Economies

Are cost savings realized through improved allocations of financial resources

Based on investments inside or outside the firm

Create value through two types of financial economies:

Efficient internal capital allocations Purchasing other corporations and

restructuring their assets


Unrelated Diversification (cont’d)

Efficient Internal Capital Market Allocation Corporate office distributes capital to

business divisions to create value for overall company

Corporate office gains access to information about those businesses’ actual and prospective performance

Conglomerates have a fairly short life cycle because financial economies are more easily duplicated by competitors than are gains from operational and corporate relatedness


Unrelated Diversification: Restructuring

Restructuring creates financial economies A firm creates value by buying and selling

other firms’ assets in the external market Resource allocation decisions may

become complex, so success often requires: Focus on mature, low-technology

businesses Focus on businesses not reliant on a

client orientation


Incentives to Diversify

External Internal

Anti-trust Anti-trust LegislationLegislation

Tax LawsTax Laws

Low Low PerformancPerformanc

ee

Uncertain Uncertain Future Future

Cash FlowsCash Flows

Synergy Synergy and Risk and Risk

ReductionReduction


Resources and Diversification

A firm must have: Incentives to diversify Resources required to create value

through diversification Cash Tangible resources (e.g., plant and

equipment) Managerial Motives to Diversify Value creation is determined more by

appropriate use of resources than by incentives to diversify


Competitive Dynamics and Competitive Rivalry


Definitions Competitors

Firms operating in the same market, offering similar products and targeting similar customers

Competitive rivalry The ongoing set of competitive actions and

responses occurring between competitors Competitive rivalry influences an individual

firm’s ability to gain and sustain competitive advantages


Definitions Competitive behavior

The set of competitive actions and competitive responses the firm takes to build or defend its competitive advantages and to improve its market position

Competitive dynamics The total set of actions and responses

taken by all firms competing within a market

Multimarket competition Firms competing against each other in

several product or geographic markets


From Competitors to Competitive Dynamics


A Model of Competitive Rivalry


Drivers of Competitive Behavior (cont’d)

Resource Resource DissimilaritDissimilarit

yy

AwarenessAwareness

MotivationMotivation

Market Market CommonaliCommonali

tyty

AbilityAbility


Factors Affecting Likelihood of Attack

First Mover First movers allocate funds for:

Product innovation and development Aggressive advertising Advanced research and development

First movers can gain: The loyalty of customers who may become committed to the firm’s goods or services Market share that can be difficult for competitors to take during future competitive rivalry

Second Mover Second mover responds to the first mover’s competitive action, typically through imitation:

Studies customers’ reactions to product innovations Tries to find any mistakes the first mover made, and avoid them Can avoid both the mistakes and the huge spending of the first-movers May develop more efficient processes and technologies

Late Mover Late mover responds to a competitive action only after considerable time has elapsed Any success achieved will be slow in coming and much less than that achieved by first and second movers Late mover’s competitive action allows it to earn only average returns and delays its understanding of how to create value for

customers Organizational Size

Small firms are more likely: To launch competitive actions To be quicker in doing so

Small firms are perceived as: Nimble and flexible competitors Relying on speed and surprise to defend competitive advantages or develop new ones while engaged in competitive

rivalry Having the flexibility needed to launch a greater variety of competitive actions

Quality (product and Service)


Mergers, Acquisitions and Takeovers


What are the Differences?

Merger A strategy through which two firms agree to

integrate their operations on a relatively co-equal basis

Acquisition A strategy through which one firm buys a

controlling, or 100% interest in another firm with the intent of making the acquired firm a subsidiary business within its portfolio

Takeover A special type of acquisition when the target firm

did not solicit the acquiring firm’s bid for outright ownership


Acquisitions

Cost new product development/increased

speed to market

Increased diversification

Increased market power

Avoiding excessive competition

Overcoming entry barriers

Learning and developing new

capabilities

Lower risk compared to

developing new products

Reasons for Acquisitions and Problems in Achieving Success


Acquisitions: Increased Market Power

Factors increasing market power When there is the ability to sell goods or

services above competitive levels When costs of primary or support

activities are below those of competitors When a firm’s size, resources and

capabilities gives it a superior ability to compete

Acquisitions intended to increase market power are subject to: Regulatory review Analysis by financial markets


Acquisitions: Increased Market Power (cont’d)

Market power is increased by: Horizontal acquisitions

Vertical acquisitions

Related acquisitions


Market Power Acquisitions Acquisition of a company in

the same industry in which the acquiring firm competes increases a firm’s market power by exploiting: Cost-based synergies Revenue-based synergies

Acquisitions with similar characteristics result in higher performance than those with dissimilar characteristics

Horizontal Horizontal AcquisitionAcquisition

ss


Market Power Acquisitions (cont’d)

Acquisition of a supplier or distributor of one or more of the firm’s goods or services Increases a firm’s

market power by controlling additional parts of the value chain


ssVertical Vertical

AcquisitionAcquisitionss


Market Power Acquisitions (cont’d)

Acquisition of a company in a highly related industry Because of the difficulty in

implementing synergy, related acquisitions are often difficult to implement


ssVertical Vertical

AcquisitionAcquisitionss

Related Related AcquisitionAcquisition

ss


Acquisitions: Overcoming Entry Barriers

Factors associated with the market or with the firms currently operating in it that increase the expense and difficulty faced by new ventures trying to enter that market Economies of scale Differentiated products

Cross-Border Acquisitions


Acquisitions: Cost of New-Product Development and Increased Speed to Market

Internal development of new products is often perceived as high-risk activity Acquisitions allow a firm to gain access to

new and current products that are new to the firm

Returns are more predictable because of the acquired firms’ experience with the products


Acquisitions: Lower Risk Compared to Developing New Products An acquisition’s outcomes can be

estimated more easily and accurately than the outcomes of an internal product development process

Managers may view acquisitions as lowering risk


Acquisitions: Increased Diversification

Using acquisitions to diversify a firm is the quickest and easiest way to change its portfolio of businesses

Both related diversification and unrelated diversification strategies can be implemented through acquisitions

The more related the acquired firm is to the acquiring firm, the greater is the probability that the acquisition will be successful


Acquisitions: Reshaping the Firm’s Competitive Scope

An acquisition can: Reduce the negative effect of an intense

rivalry on a firm’s financial performance Reduce a firm’s dependence on one or

more products or markets Reducing a company’s dependence

on specific markets alters the firm’s competitive scope


Acquisitions: Learning and Developing New Capabilities

An acquiring firm can gain capabilities that the firm does not currently possess: Special technological capability Broaden a firm’s knowledge base Reduce inertia

Firms should acquire other firms with different but related and complementary capabilities in order to build their own knowledge base


Acquisitions

Reasons for Acquisitions and Problems in Achieving Success

Integration difficulties

Inadequate evaluation of target

Large or extraordinary debt

Inability to achieve synergy

Too much diversification

Managers overly focused on acquisitions

Too large


Integration Difficulties Integration challenges include:

Melding two disparate corporate cultures Linking different financial and control

systems Building effective working relationships

(particularly when management styles differ)

Resolving problems regarding the status of the newly acquired firm’s executives

Loss of key personnel weakens the acquired firm’s capabilities and reduces its value


Inadequate Evaluation of the Target

Due Diligence The process of evaluating a target firm for

acquisition Ineffective due diligence may result in paying an

excessive premium for the target company Evaluation requires examining:

Financing of the intended transaction Differences in culture between the firms Tax consequences of the transaction Actions necessary to meld the two

workforces


Large or Extraordinary Debt

High debt can: Increase the likelihood of bankruptcy Lead to a downgrade of the firm’s credit

rating Preclude investment in activities that

contribute to the firm’s long-term success such as:

Research and development Human resource training Marketing


Inability to Achieve Synergy

Synergy exists when assets are worth more when used in conjunction with each other than when they are used separately Firms experience transaction costs when they

use acquisition strategies to create synergy

Firms tend to underestimate indirect costs when evaluating a potential acquisition


Too Much Diversification

Diversified firms must process more information of greater diversity

Scope created by diversification may cause managers to rely too much on financial rather than strategic controls to evaluate business units’ performances

Acquisitions may become substitutes for innovation


Managers Overly Focused on Acquisitions

Managers invest substantial time and energy in acquisition strategies in: Searching for viable acquisition candidates

Completing effective due-diligence processes

Preparing for negotiations

Managing the integration process after the acquisition is completed


Managers Overly Focused on Acquisitions

Managers in target firms operate in a state of virtual suspended animation during an acquisition Executives may become hesitant to make

decisions with long-term consequences until negotiations have been completed

The acquisition process can create a short-term perspective and a greater aversion to risk among executives in the target firm


Too Large

Additional costs of controls 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

Attributes of

Successful Acquisition

s


Restructuring A strategy through which a firm

changes its set of businesses or financial structure Failure of an acquisition strategy often

precedes a restructuring strategy Restructuring may occur because of

changes in the external or internal environments

Restructuring strategies: Downsizing Downscoping Leveraged buyouts


Restructuring and Outcomes


INTERNATIONAL STRATEGY


Opportunities and Outcomes of International Strategy


Identifying International Opportunities

International strategy A strategy through which the firm sells

its goods or services outside its domestic market

Reasons to having an international strategy International markets yield potential new

opportunities New market expansion extends product

life cycle Needed resources can be secured Greater potential product demand


Classic Rationale for International Diversification: Extend Product’s Life Cycle

Production is standardized and Production is standardized and relocated to low cost countries.relocated to low cost countries.

Product DemandProduct DemandDevelops and FirmDevelops and FirmExports ProductsExports Products

Firm IntroducesFirm IntroducesInnovation inInnovation in

Domestic MarketDomestic Market

ForeignForeignCompetitionCompetition

Begins ProductionBegins Production

Firm BeginsFirm BeginsProduction AbroadProduction Abroad


International Strategy Benefits

Increase market share Domestic market may lack the size to

support efficient scale manufacturing facilities

Return on investment 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


International Strategy Benefits (cont’d)

Economies of scale or learning Expanding size or scope of markets

helps to achieve economies of scale in manufacturing as well as marketing, R&D or distribution

Can spread costs over a larger sales base

Can increase profit per unit


International Strategy Benefits (cont’d)

Competitive advantage through location Low cost markets aid in developing

competitive advantage by providing access to:

Raw materials Lower cost labor Key customers Energy


Determinants of National Advantage


Determinants of National Advantage

Factors of production: the inputs necessary to compete in any industry Labor Land Natural resources Capital Infrastructure

Basic factors include natural and labor resources

Advanced factors include digital communication systems and an educated workforce


Determinants of National Advantage (cont’d)

Demand conditions: characterized by the nature and size of buyers’ needs in the home market for the industry’s goods or services Size of the market segment can lead to

scale-efficient facilities Efficiency can lead to domination of the

industry in other countries Specialized demand may create

opportunities beyond national boundaries



Related and supporting industries: supporting services, facilities, suppliers and so on Support in design

Support in distribution

Related industries as suppliers and buyers



Firm strategy, structure and rivalry: the pattern of strategy, structure, and rivalry among firms Common technical training

Methodological product and process improvement

Cooperative and competitive systems


Selecting an International Corporate-Level Strategy

The type of corporate strategy selected will have an impact on the selection and implementation of the business-level strategies Some strategies provide individual

country units with the flexibility to choose their own strategies

Others dictate business-level strategies from the home office and coordinate resource sharing across units


International Corporate-Level Strategy Focuses on the scope of operations:

Product diversification Geographic diversification

Required when the firm operates in: Multiple industries, and Multiple countries or regions

Headquarters unit guides the strategy But business or country-level managers

can have substantial strategic input

International Corporate-Level Strategies

Multidomestic Strategy Strategy and operating decisions

are decentralized to strategic business units (SBU) in each country

Products and services are tailored to local markets

Business units in one country are independent of each other

Assumes markets differ by country or regions

Focus on competition in each market

Prominent strategy among European firms due to broad variety of cultures and markets in Europe

Global Strategy Products are standardized across

national markets

Decisions regarding business-level strategies are centralized in the home office

Strategic business units (SBU) are assumed to be interdependent

Emphasizes economies of scale

Often lacks responsiveness to local markets

Requires resource sharing and coordination across borders (hard to manage)

Transnational Strategy Seeks to achieve both global

efficiency and local responsiveness

Difficult to achieve because of simultaneous requirements: Strong central control and

coordination to achieve efficiency Decentralization to achieve local

market responsiveness Must pursue organizational

learning to achieve competitive advantage


Environmental Trends

Liability of foreignness Legitimate concerns about the relative

attractiveness of global strategies Global strategies not as prevalent as once

thought Difficulty in implementing global strategies

Regionalization Focusing on particular region(s) rather

than on global markets Better understanding of the cultures, legal

and social norms

Choice of International Entry Mode

Type of EntryType of Entry CharacteristicsCharacteristics

ExportingExporting High cost, low controlHigh cost, low control

LicensingLicensing Low cost, low risk, little control, low Low cost, low risk, little control, low returnsreturns

Strategic alliancesStrategic alliances Shared costs, shared resources, shared Shared costs, shared resources, shared risks, problems of integrationrisks, problems of integration

AcquisitionAcquisition Quick access to new market, high cost, Quick access to new market, high cost, complex negotiations, problems of complex negotiations, problems of merging with domestic operationsmerging with domestic operations

New wholly owned New wholly owned subsidiarysubsidiary

Complex, often costly, time consuming, Complex, often costly, time consuming, high risk, maximum control, potential high risk, maximum control, potential above-average returnsabove-average returns


Dynamics of Mode of Entry

The firm has no foreign manufacturing expertise and requires investment only in distribution.

The firm has no foreign manufacturing expertise and requires investment only in distribution.

ExportExport

What’s the best solution?What’s the best solution?

SituationSituation Optimal SolutionOptimal Solution



The firm needs to facilitate the product improvements necessary to enter foreign markets.

The firm needs to facilitate the product improvements necessary to enter foreign markets.

LicensingLicensing





The firm needs to connect with an experienced partner already in the targeted market.

The firm needs to connect with an experienced partner already in the targeted market.

Strategic AllianceStrategic Alliance





The firm needs to reduce its risk through the sharing of costs.

The firm needs to reduce its risk through the sharing of costs.






The firm is facing uncertain situations such as an emerging economy in its targeted market.

The firm is facing uncertain situations such as an emerging economy in its targeted market.






The firm’s intellectual property rights in an emerging economy are not well protected, the number of firms in the industry is growing fast, and the need for global integration is high.

The firm’s intellectual property rights in an emerging economy are not well protected, the number of firms in the industry is growing fast, and the need for global integration is high.

Wholly-owned Subsidiary

Wholly-owned Subsidiary

What’s the best solution?What’s the best solution?SituationSituation Optimal SolutionOptimal Solution


International Diversification and Returns Expanding sales of goods or services

across global regions and countries and into different geographic locations or markets: May increase a firm’s returns (such firms

usually achieve the most positive stock returns)

May achieve economies of scale and experience, location advantages, increased market size and opportunity to stabilize returns


International Diversification and Innovation Expansion sales of goods or services

across global regions and countries and into different geographic locations or markets: May yield potentially greater returns on

innovations (a larger market) Can generate additional resources for

investment in innovation Provides exposure to new products and

processes in international markets; generates additional knowledge leading to innovations


Complexity of Managing Multinational Firms

Expansion into global operations in different geographic locations or markets: Makes implementing international strategy

increasingly complex Can produce greater uncertainty and risk May result in the firm becoming

unmanageable May cause the cost of managing the firm to

exceed the benefits of expansion Exposes the firm to possible instability of

some national governments


Risk in the International Environment

Political risks include:Political risks include:

• Instability in national governmentsInstability in national governments

• War, both civil and internationalWar, both civil and international

• Potential nationalization of a firm’s resourcesPotential nationalization of a firm’s resources

Political Political RisksRisks

Economic Economic RisksRisks



Economic risks are interdependent with political risks and include:

• Differences and fluctuations in the value of different currencies

• Differences in prevailing wage rates• Difficulties in enforcing property rights• Unemployment

Political Political RisksRisks

Economic Economic RisksRisks


Risk in the International Environment (cont’d)


Limits to International Expansion

Management Problems Cost of coordination across diverse

geographical business units

Institutional and cultural barriers

Understanding strategic intent of competitors

The overall complexity of competition


Cooperative Strategies


Cooperative Strategy Cooperative Strategy

A strategy in which firms work together to achieve a shared objective

Cooperating with other firms is a strategy that: Creates value for a customer Exceeds the cost of constructing

customer value in other ways Establishes a favorable position

relative to competitors


Strategic Alliance

A primary type of cooperative strategy in which firms combine some of their resources and capabilities to create a mutual competitive advantage Involves the exchange and sharing of

resources and capabilities to co-develop or distribute goods and services

Requires cooperative behavior from all partners


Strategic Alliance Behaviors Examples of cooperative behavior

known to contribute to alliance success: Actively solving problems Being trustworthy Consistently pursuing ways to combine

partners’ resources and capabilities to create value

Competitive advantage developed through a cooperative strategy is called a collaborative or relational advantage

Strategic Alliance

CombinedCombinedResourcesResourcesCapabilitiesCapabilities

Core CompetenciesCore Competencies

ResourcesResourcesCapabilitiesCapabilities


ResourcesResourcesCapabilitiesCapabilities


Firm AFirm A Firm BFirm B

Mutual interests in designing, manufacturing,Mutual interests in designing, manufacturing,or distributing goods or servicesor distributing goods or services


Three Types of Strategic Alliances Joint Venture

Two or more firms create a legally independent company by sharing some of their resources and capabilities

Equity Strategic Alliance Partners who own different percentages of

equity in a separate company they have formed

Nonequity Strategic Alliance Two or more firms develop a contractual

relationship to share some of their unique resources and capabilities


Reasons for Strategic Alliances

Market Reason

Slow Cycle • Gain access to a restricted market

• Establish a franchise in a new market

• Maintain market stability (e.g., establishing standards)


Market Reason

Fast Cycle • Speed up development of new goods or service

• Speed up new market entry• Maintain market leadership• Form an industry technology

standard• Share risky R&D expenses• Overcome uncertainty

Reasons for Strategic Alliances (cont’d)


Market ReasonStandard Cycle • Gain market power (reduce

industry overcapacity)• Gain access to complementary

resources• Establish economies of scale• Overcome trade barriers• Meet competitive challenges

from other competitors• Pool resources for very large

capital projects• Learn new business techniques

Reasons for Strategic Alliances (cont’d)


Business-Level Cooperative Strategies

Complementary strategic alliances Vertical Horizontal

Competition response strategy Uncertainty reducing strategy Competition reducing strategy



Combine partner firms’ assets in complementary ways to create new value

Include distribution, supplier or outsourcing alliances where firms rely on upstream or downstream partners to build competitive advantage

ComplementaryComplementaryAlliancesAlliances


Vertical Complementary Strategic Alliances

• Firms agree to use their skills and capabilities in different stages of the value chain to create value for both firms

• Outsourcing

Adapted from Figure 9.2Adapted from Figure 9.2


Horizontal Complementary Strategic Alliances

• Partners combine resources and skills to create value in the same stage of the value chain

• Focus is on long-term product development and distribution opportunities

• Partners may become competitors


Competition Response Strategy

Occur when firms join forces to respond to a strategic action of another competitor

Because they can be difficult to reverse and expensive to operate, strategic alliances are primarily formed to respond to strategic rather than tactical actions


Competition Competition Response AlliancesResponse Alliances


Uncertainty Reducing Strategy

Are used to hedge against risk and uncertainty

These alliances are most noticed in fast-cycle markets

An alliance may be formed to reduce the uncertainty associated with developing new product or technology standards



UncertaintyUncertaintyReducing AlliancesReducing Alliances


Competition Reducing Strategy

Created to avoid destructive or excessive competition

Explicit collusion: when firms directly negotiate production output and pricing agreements in order to reduce competition (illegal)

Tacit collusion: when firms in an industry indirectly coordinate their production and pricing decisions by observing other firm’s actions and responses



UncertaintyUncertaintyReducing AlliancesReducing Alliances

CompetitionCompetitionReducing AlliancesReducing Alliances


Assessment of Cooperative Strategies Complementary business-level strategic

alliances, especially the vertical ones, have the greatest probability of creating a sustainable competitive advantage

Horizontal complementary alliances are sometimes difficult to maintain because they are often between rival competitors

Competitive advantages gained from competition and uncertainty reducing strategies tend to be temporary


Corporate-Level Cooperative Strategies



Corporate-Level Cooperative Strategy

Corporate-level strategies Help the firm diversify in terms of:

Products offered to the market The markets it serves

Require fewer resource commitments Permit greater flexibility in terms of

efforts to diversify partners’ operations


Diversifying Strategic Alliances

Expand into new product or market areas without completing a merger or an acquisition

Synergistic benefits of a merger or acquisition less risk greater flexibility

Assess benefits of future merger between the partners

DiversifyingDiversifyingStrategic AllianceStrategic Alliance


Synergistic Strategic Alliances

Joint economies of scope between two or more firms

Synergy across multiple functions or multiple businesses between partner firms


SynergisticSynergisticStrategic AllianceStrategic Alliance


Franchising Spreads risks and uses

resources, capabilities, and competencies without merger or acquisition

A contractual relationship (the franchise) is developed between the franchisee and the franchisor

Alternative to growth through mergers and acquisitions


SynergisticSynergisticStrategic AllianceStrategic Alliance

FranchisingFranchising


Assessment of Corporate-Level Cooperative Strategies

Compared to business-level strategies Broader in scope More complex More costly

Can lead to competitive advantage and value when: Successful alliance experiences are

internalized The firm uses such strategies to develop

useful knowledge about how to succeed in the future


International Cooperative Strategies Cross-border Strategic Alliance

A strategy in which firms with headquarters in different nations combine their resources and capabilities to create a competitive advantage

A firm may form cross-border strategic alliances to leverage core competencies that are the foundation of its domestic success to expand into international markets


International Cooperative Strategies (cont’d)

Synergistic Strategic Alliance Allows risk sharing by reducing financial

investment Host partner knows local market and

customs International alliances can be difficult to

manage due to differences in management styles, cultures or regulatory constraints

Must gauge partner’s strategic intent such that the partner does not gain access to important technology and become a competitor


Network Cooperative Strategy A cooperative strategy wherein

several firms agree to form multiple partnerships to achieve shared objectives Stable alliance network Dynamic alliance network

Keys to a successful network cooperative strategy Effective social relationships Interactions among partners


Network Cooperative Strategies (cont’d)

Long term relationships mature industries where

demand is relatively constant predictable

Stable networks exploit economies (scale and/or scope) available between the firms

Stable AllianceStable AllianceNetworkNetwork


Network Cooperative Strategies (cont’d)

Evolve in industries with rapid technological change leading to short product life cycles

Primarily used to stimulate rapid, value-creating product innovation and subsequent successful market entries

Purpose is often exploration of new ideas

Stable AllianceStable AllianceNetworkNetwork

Dynamic AllianceDynamic AllianceNetworkNetwork


Competitive Risks of Cooperative Strategies Partners may act opportunistically Partners may misrepresent

competencies brought to the partnership

Partners fail to make committed resources and capabilities available to other partners

One partner may make investments that are specific to the alliance while its partner does not


Managing Risks in Cooperative Strategies



Managing Cooperative Strategies

Cost minimization management approach Formal contracts with partners Specify

How strategy is to be monitored How partner behavior is to be controlled

Goals that minimize costs and prevent opportunistic behavior by partners


Managing Cooperative Strategies (cont’d)

Opportunity maximization approach Maximize partnership’s value-creation

opportunities learn from each other explore additional marketplace

possibilities less formal contracts, fewer constraints


Formulating Strategy

THE ENDPowerPoint slides by:R. Dennis Middlemist

Colorado State UniversityAdapted for BA 485 by:

Dr. Eliot ElfnerSt. Norbert College

formulating strategy(2).pps

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