Formulating Strategies

Formulating Strategies
Formulating Strategy PowerPoint slides by: R. Dennis Middlemist Colorado State University Adapted for BA 485 by: Dr. Eliot Elfner St. Norbert College Formulating Strategies

The Strategic Management Process
Copyright © 2004 South-Western. All rights reserved. Formulating Strategies

Topics to be Covered Business Level Strategies Corporate Level Strategies Mergers, Acquisitions and Takeovers International Strategic Approaches Cooperative Strategies Formulating 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 Formulating Strategies

Business-Level Strategy
Which good or service to provide Key Issues Business-level Strategy How to manufacture it How to distribute it Formulating Strategies

Core Competencies and Strategy
Resources and superior capabilities that are sources of competitive advantage over a firm’s rivals Strategy An integrated and coordinated set of actions taken to exploit core competencies and gain competitive advantage Business-level Strategy Providing value to customers and gaining competitive advantage by exploiting core competencies in individual product markets Formulating Strategies

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

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

Determining the Customers to Serve
Customer—Who? Determining the Customers to Serve Customers Industrial Markets Consumer Market Segmentation Formulating Strategies

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) Table 4.1 SOURCE: Adapted from S. C. Jain, 2000, Marketing Planning and Strategy, Cincinnati: South-Western College Publishing, 120. Formulating Strategies

Basis for Customer Segmentation (cont’d)
Industrial Markets 1. 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 Table 4.1 SOURCE: Adapted from S. C. Jain, 2000, Marketing Planning and Strategy, Cincinnati: South-Western College Publishing, 120. Formulating Strategies

Market Segmentation: Consumer Markets
Perceptual Demographic Demographic factors Socioeconomic factors Consumption Socioeconomic Geographic factors Psychological Geographic Psychological factors Consumption patterns Perceptual factors Formulating Strategies

Market Segmentation: Industrial Markets
Customer size End-use End-use segments Product segments Common buying factor Product Geographic segments Geographic Common buying factor segments Customer size segments Formulating Strategies

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

Customer Needs—What? 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 Formulating Strategies

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

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

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

Five Business-Level Strategies
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. Figure 4.1 Formulating Strategies

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

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

How to Obtain a Cost Advantage
Determine and control Reconfigure, if needed Cost Drivers Value Chain Alter production process New raw material Change in automation Forward integration New distribution channel Backward integration New advertising media Change location relative to suppliers or buyers Direct sales in place of indirect sales Formulating Strategies

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

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

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

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

How to Obtain a Differentiation Advantage
Control if needed Reconfigure to maximize Cost Drivers Value Chain Lower buyers’ costs Raise performance of product or service Create sustainability through: Customer perceptions of uniqueness Customer reluctance to switch to non-unique product or service Formulating Strategies

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

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

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

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

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

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

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

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

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

Corporate Level Strategies
Formulating 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 Formulating Strategies

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

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 than they would be under other ownership What businesses should the firm be in? How should the corporate office manage the group of businesses? Business Units Formulating Strategies

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 Formulating Strategies

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

Reasons for Diversification (cont’d)
Managerial Motives (Value Reduction) Diversifying managerial employment risk Increasing managerial compensation Formulating Strategies

Strategic Motives for Diversification
To Enhance Strategic Competitiveness: • Economies of scope (related diversification) Sharing activities Transferring core competencies • Market power (related diversification) Blocking competitors through multipoint competition Vertical integration • Financial economies (unrelated diversification) Efficient internal capital allocation Business restructuring Formulating Strategies

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 Formulating Strategies

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

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

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

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

Incentives to Diversify
Internal External Low Performance Anti-trust Legislation Uncertain Future Cash Flows Tax Laws Synergy and Risk Reduction Formulating Strategies

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

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 Formulating Strategies

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

From Competitors to Competitive Dynamics

A Model of Competitive Rivalry

Drivers of Competitive Behavior (cont’d)
Awareness Market Commonality Motivation Resource Dissimilarity Awareness is the extent to which competitors recognize the degree of their mutual interdependence that results from: Market commonality Resource similarity Motivation concerns the firm’s incentive to take action or to respond to a competitor’s attack and relates to perceived gains and losses Ability relates to each firm’s resources the flexibility these resources provide Without available resources the firm lacks the ability to attack a competitor or respond to the competitor’s actions Market Commonality A firm is more likely to attack the rival with whom it has low market commonality than the one with whom it competes in multiple markets Given the high stakes of competition under market commonality, there is a high probability that the attacked firm will respond to its competitor’s action in an effort to protect its position in one or more markets Resource Imbalance/Disimilarity The greater the resource imbalance between the acting firm and competitors or potential responders, the greater will be the delay in response by the firm with a resource disadvantage When facing competitors with greater resources or more attractive market positions, firms should eventually respond, no matter how challenging the response Ability Formulating Strategies

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

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 Formulating Strategies

Reasons for Acquisitions and Problems in Achieving Success
Cost new product development/increased speed to market Increased diversification Acquisitions Increased market power Avoiding excessive competition Lower risk compared to developing new products Overcoming entry barriers Learning and developing new capabilities Formulating Strategies

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

Acquisitions: Increased Market Power (cont’d)
Market power is increased by: Horizontal acquisitions Vertical acquisitions Related acquisitions Formulating Strategies

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 Acquisitions Formulating Strategies

Market Power Acquisitions (cont’d)
Horizontal Acquisitions 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 Vertical Acquisitions Formulating Strategies

Market Power Acquisitions (cont’d)
Horizontal Acquisitions Acquisition of a company in a highly related industry Because of the difficulty in implementing synergy, related acquisitions are often difficult to implement Vertical Acquisitions Related Acquisitions Formulating Strategies

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

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

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

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

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

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

Reasons for Acquisitions and Problems in Achieving Success
Too large Managers overly focused on acquisitions Acquisitions Integration difficulties Too much diversification Inadequate evaluation of target Large or extraordinary debt Inability to achieve synergy Formulating Strategies

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

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

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

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

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

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

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

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 Formulating Strategies

Attributes of Successful Acquisitions

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

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 Formulating Strategies

Production is standardized and relocated to low cost countries.
Classic Rationale for International Diversification: Extend Product’s Life Cycle Product Demand Develops and Firm Exports Products Foreign Competition Begins Production Firm Introduces Innovation in Domestic Market Firm Begins Production Abroad Production is standardized and relocated to low cost countries. Formulating Strategies

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

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

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

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 Formulating Strategies

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

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

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

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

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 Formulating Strategies

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 Formulating Strategies

Choice of International Entry Mode
Type of Entry Characteristics Exporting High cost, low control Licensing Low cost, low risk, little control, low returns Strategic alliances Shared costs, shared resources, shared risks, problems of integration Acquisition Quick access to new market, high cost, complex negotiations, problems of merging with domestic operations New wholly owned subsidiary Complex, often costly, time consuming, high risk, maximum control, potential above-average returns

Dynamics of Mode of Entry
What’s the best solution? Situation Optimal Solution The firm has no foreign manufacturing expertise and requires investment only in distribution. Export Formulating Strategies

What’s the best solution? Situation Optimal Solution The firm needs to facilitate the product improvements necessary to enter foreign markets. Licensing Formulating Strategies

What’s the best solution? Situation Optimal Solution The firm needs to connect with an experienced partner already in the targeted market. Strategic Alliance Formulating Strategies

What’s the best solution? Situation Optimal Solution The firm needs to reduce its risk through the sharing of costs. Strategic Alliance Formulating Strategies

What’s the best solution? Situation Optimal Solution The firm is facing uncertain situations such as an emerging economy in its targeted market. Strategic Alliance Formulating Strategies

What’s the best solution? Situation Optimal Solution 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 Formulating Strategies

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

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

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

Risk in the International Environment
Political Risks Economic Risks Political risks include: Instability in national governments War, both civil and international Potential nationalization of a firm’s resources Formulating Strategies

Political Risks Economic Risks 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 Formulating Strategies

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 Formulating Strategies

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 Formulating Strategies

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

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 Formulating Strategies

Strategic Alliance Firm A Firm B Resources Resources Capabilities
Core Competencies Resources Capabilities Core Competencies Combined Resources Capabilities Core Competencies Mutual interests in designing, manufacturing, or 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 Formulating Strategies

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

Reasons for Strategic Alliances (cont’d)
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 Formulating Strategies

Reasons for Strategic Alliances (cont’d)
Market Reason Standard 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 Formulating Strategies

Business-Level Cooperative Strategies
Complementary strategic alliances Vertical Horizontal Competition response strategy Uncertainty reducing strategy Competition reducing strategy Formulating Strategies

Figure 9.1 Formulating 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 Complementary Alliances Formulating Strategies

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 9.2 Formulating Strategies

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

Competition Response Strategy
Complementary Alliances 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 Response Alliances Formulating Strategies

Uncertainty Reducing Strategy
Complementary Alliances 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 Competition Response Alliances Uncertainty Reducing Alliances Formulating Strategies

Competition Reducing Strategy
Complementary Alliances 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 Competition Response Alliances Uncertainty Reducing Alliances Competition Reducing Alliances Formulating Strategies

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

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 Formulating Strategies

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 Formulating Strategies

Synergistic Strategic Alliances
Joint economies of scope between two or more firms Synergy across multiple functions or multiple businesses between partner firms Diversifying Strategic Alliance Synergistic Strategic Alliance Formulating Strategies

Diversifying Strategic Alliance Synergistic Strategic 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 Diversifying Strategic Alliance Synergistic Strategic Alliance Franchising Formulating Strategies

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

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

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

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

Network Cooperative Strategies (cont’d)
Stable Alliance Network Long term relationships mature industries where demand is relatively constant predictable Stable networks exploit economies (scale and/or scope) available between the firms Formulating Strategies

Network Cooperative Strategies (cont’d)
Stable Alliance Network 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 Dynamic Alliance Network Formulating Strategies

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

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 Formulating Strategies

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 Strategies

Formulating Strategy THE END PowerPoint slides by: R. Dennis Middlemist Colorado State University Adapted for BA 485 by: Dr. Eliot Elfner St. Norbert College Formulating Strategies

Formulating Strategies

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