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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
Formulating Strategies 3
Topics to be Covered
Business Level Strategies Corporate Level Strategies Mergers, Acquisitions and
Takeovers International Strategic Approaches Cooperative Strategies
Formulating Strategies 4
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
Formulating Strategies 5
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
Formulating Strategies 6
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
Formulating Strategies 7
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?
Formulating Strategies 8
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
Formulating Strategies 9
Customer—Who?
Determining the Customers to Serve
CustomersCustomers IndustrialIndustrialMarketsMarkets
ConsumerConsumerMarketsMarkets
Market Segmentation
Formulating Strategies 10
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
Formulating Strategies 11
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
Formulating Strategies 12
Market Segmentation: Consumer Markets
Demographic factors
Socioeconomic factors
Geographic factors
Psychological factors
Consumption patterns
Perceptual factors
ConsumerMarkets
Demographic
Socioeconomic
GeographicPsychological
Consumption
Perceptual
Formulating Strategies 13
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
Formulating Strategies 14
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
Formulating Strategies 15
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?
Formulating Strategies 16
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
Formulating Strategies 17
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
Formulating Strategies 18
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
Formulating Strategies 19
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.
Formulating Strategies 20
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
Formulating Strategies 21
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
Formulating Strategies 22
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
Formulating Strategies 23
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
Formulating Strategies 24
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
Formulating Strategies 25
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
Formulating Strategies 26
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
Formulating Strategies 27
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
Formulating Strategies 28
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
Formulating Strategies 29
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
Formulating Strategies 30
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
Formulating Strategies 31
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)
Formulating Strategies 32
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
Formulating Strategies 33
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
Formulating Strategies 34
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
Formulating Strategies 35
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
Formulating Strategies 36
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
Formulating Strategies 37
Corporate Level Strategies
Formulating Strategies 38
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
Formulating Strategies 39
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
Formulating Strategies 40
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
Formulating Strategies 42
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
Formulating Strategies 43
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
Formulating Strategies 44
Reasons for Diversification (cont’d)
Managerial Motives (Value Reduction) Diversifying managerial employment
risk
Increasing managerial compensation
Formulating Strategies 45
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
Formulating Strategies 47
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
Formulating Strategies 48
Transferring Corporate Competencies
Corporate Relatedness Using complex sets of resources and
capabilities to link different businesses through managerial and technological knowledge, experience, and expertise
Formulating Strategies 49
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
Formulating Strategies 50
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
Formulating Strategies 51
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
Formulating Strategies 52
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
Formulating Strategies 53
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
Formulating Strategies 54
Competitive Dynamics and Competitive Rivalry
Formulating Strategies 55
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
Formulating Strategies 56
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
Formulating Strategies 57
From Competitors to Competitive Dynamics
Formulating Strategies 58
A Model of Competitive Rivalry
Formulating Strategies 59
Drivers of Competitive Behavior (cont’d)
Resource Resource DissimilaritDissimilarit
yy
AwarenessAwareness
MotivationMotivation
Market Market CommonaliCommonali
tyty
AbilityAbility
Formulating Strategies 60
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)
Formulating Strategies 61
Mergers, Acquisitions and Takeovers
Formulating Strategies 62
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
Formulating Strategies 63
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
Formulating Strategies 64
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
Formulating Strategies 65
Acquisitions: Increased Market Power (cont’d)
Market power is increased by: Horizontal acquisitions
Vertical acquisitions
Related acquisitions
Formulating Strategies 66
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
Formulating Strategies 67
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
Horizontal Horizontal AcquisitionAcquisition
ssVertical Vertical
AcquisitionAcquisitionss
Formulating Strategies 68
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
Horizontal Horizontal AcquisitionAcquisition
ssVertical Vertical
AcquisitionAcquisitionss
Related Related AcquisitionAcquisition
ss
Formulating Strategies 69
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
Formulating Strategies 70
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
Formulating Strategies 71
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
Formulating Strategies 72
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
Formulating Strategies 73
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
Formulating Strategies 74
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
Formulating Strategies 75
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
Formulating Strategies 76
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
Formulating Strategies 77
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
Formulating Strategies 78
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
Formulating Strategies 79
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
Formulating Strategies 80
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
Formulating Strategies 81
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
Formulating Strategies 82
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
Formulating Strategies 83
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
Formulating Strategies 85
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
Formulating Strategies 86
Restructuring and Outcomes
Formulating Strategies 87
INTERNATIONAL STRATEGY
Formulating Strategies 88
Opportunities and Outcomes of International Strategy
Formulating Strategies 89
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
Formulating Strategies 90
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
Formulating Strategies 91
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
Formulating Strategies 92
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
Formulating Strategies 93
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
Formulating Strategies 94
Determinants of National Advantage
Formulating Strategies 95
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
Formulating Strategies 96
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
Formulating Strategies 97
Determinants of National Advantage (cont’d)
Related and supporting industries: supporting services, facilities, suppliers and so on Support in design
Support in distribution
Related industries as suppliers and buyers
Formulating Strategies 98
Determinants of National Advantage (cont’d)
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
Formulating Strategies 99
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
Formulating Strategies 100
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
Formulating Strategies 105
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
Formulating Strategies 107
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
Formulating Strategies 108
Dynamics of Mode of Entry
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
What’s the best solution?What’s the best solution?
SituationSituation Optimal SolutionOptimal Solution
Formulating Strategies 109
Dynamics of Mode of Entry
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
What’s the best solution?What’s the best solution?
SituationSituation Optimal SolutionOptimal Solution
Formulating Strategies 110
Dynamics of Mode of Entry
The firm needs to reduce its risk through the sharing of costs.
The firm needs to reduce its risk through the sharing of costs.
Strategic AllianceStrategic Alliance
What’s the best solution?What’s the best solution?
SituationSituation Optimal SolutionOptimal Solution
Formulating Strategies 111
Dynamics of Mode of Entry
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.
Strategic AllianceStrategic Alliance
What’s the best solution?What’s the best solution?
SituationSituation Optimal SolutionOptimal Solution
Formulating Strategies 112
Dynamics of Mode of Entry
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
Formulating Strategies 113
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
Formulating Strategies 114
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
Formulating Strategies 115
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
Formulating Strategies 116
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
Formulating Strategies 117
Risk in the International Environment
Formulating Strategies 118
Risk in the International Environment
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
Formulating Strategies 119
Risk in the International Environment (cont’d)
Formulating Strategies 120
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
Formulating Strategies 121
Cooperative Strategies
Formulating Strategies 122
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
Formulating Strategies 123
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
Formulating Strategies 124
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
Core CompetenciesCore Competencies
ResourcesResourcesCapabilitiesCapabilities
Core CompetenciesCore Competencies
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
Formulating Strategies 126
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
Formulating Strategies 127
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)
Formulating Strategies 128
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)
Formulating Strategies 129
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)
Formulating Strategies 130
Business-Level Cooperative Strategies
Complementary strategic alliances Vertical Horizontal
Competition response strategy Uncertainty reducing strategy Competition reducing strategy
Formulating Strategies 131
Business-Level Cooperative Strategies
Figure 9.1Figure 9.1
Formulating Strategies 132
Business-Level Cooperative Strategies
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
Formulating Strategies 133
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
Formulating Strategies 134
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
Formulating Strategies 135
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
ComplementaryComplementaryAlliancesAlliances
Competition Competition Response AlliancesResponse Alliances
Formulating Strategies 136
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
ComplementaryComplementaryAlliancesAlliances
Competition Competition Response AlliancesResponse Alliances
UncertaintyUncertaintyReducing AlliancesReducing Alliances
Formulating Strategies 137
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
ComplementaryComplementaryAlliancesAlliances
Competition Competition Response AlliancesResponse Alliances
UncertaintyUncertaintyReducing AlliancesReducing Alliances
CompetitionCompetitionReducing AlliancesReducing Alliances
Formulating Strategies 138
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
Formulating Strategies 139
Corporate-Level Cooperative Strategies
Figure 9.3Figure 9.3
Formulating Strategies 140
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
Formulating Strategies 141
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
Formulating Strategies 142
Synergistic Strategic Alliances
Joint economies of scope between two or more firms
Synergy across multiple functions or multiple businesses between partner firms
DiversifyingDiversifyingStrategic AllianceStrategic Alliance
SynergisticSynergisticStrategic AllianceStrategic Alliance
Formulating Strategies 143
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
DiversifyingDiversifyingStrategic AllianceStrategic Alliance
SynergisticSynergisticStrategic AllianceStrategic Alliance
FranchisingFranchising
Formulating Strategies 144
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
Formulating Strategies 145
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
Formulating Strategies 146
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
Formulating Strategies 147
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
Formulating Strategies 148
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
Formulating Strategies 149
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
Formulating Strategies 150
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
Formulating Strategies 151
Managing Risks in Cooperative Strategies
Figure 9.4Figure 9.4
Formulating Strategies 152
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
Formulating Strategies 153
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
Copyright © 2004 South-Western. All rights reserved. Formulating Strategies
The Strategic
Management Process
Formulating Strategies 155
Formulating Strategy
THE ENDPowerPoint slides by:R. Dennis Middlemist
Colorado State UniversityAdapted for BA 485 by:
Dr. Eliot ElfnerSt. Norbert College