1. Business Strategy 050 322 Week 9 Instructor: Michael Cooke
Address:
Office: IC room 817
Class hours: Friday 09:00-12:00
Class Location: IC room 822

2. Term Project Thai silk Thai rubber and rubber products Thai rice
Likely Project Topics
Thai silk
Thai rubber and rubber products
Thai rice
Thai shrimp
Thai cassava
Thai tourist industry
Choose a topic and a partner by 7-December
Advise minute presentation form, papers accepted
Look at the business using the Five Forces framework
Suggest and support a strategy
Due 1 February

3. Means for Achieving Strategies
Alliances and cooperation
Joint ventures
Globalization is often a driver
Need clear agreements to succeed
Merger / acquisition
First mover advantages
Outsourcing

4. Cooperation among Competitors

5. Two Competitors
In November 2012 Samsung has hiked the price of its mobile processors by 20 percent, but to only one of the Korean technology giant's customers: Apple.
Apple bought roughly 130 million Samsung-made mobile processors last year (2011) and more than 200 million chips this year to keep up with demand for the iPhone 5 and the new iPads.
Apple first disapproved it, but finding no replacement supplier, it accepted the increase.
Apple and TSMC will be testing the waters to see if TMSC can deliver enough solid processors to handle demand and accommodate Apple's notoriously high standards for chip quality.
If TSMC can pull it off, Samsung might be pushed out. If not, Apple might have to go back to the drawing board.
apple-our-chips-will-cost-you-more/?tag=nl.e703&s_cid=e703

6. When a Partner Becomes a Competitor MSFT and the RT Operating System
The way Microsoft works with its hardware manufacturers changed with the release of Windows RT. Longtime partners are thinking about how to react.
Windows RT and the chips running the operating system are different from past software and hardware. Microsoft had to control the partners. Successful products, like those from Apple, have integration of hardware and software.
Microsoft took control of partners working with the new Windows RT for low-power ARM chips.
It held regular meetings with the companies in its development program and dictated their collaborators.
Microsoft demanded partner hardware product designs and samples.
"We were required at various points to get their approval on designs and on the development of our product," one hardware executive said.
Yet Microsoft was secretly developing its own Surface tablet which would compete with the partners'.
Microsoft invited companies to a mysterious press event in June, where it revealed it was working on the Surface tablet. The Surface would be the company's first push into making computer hardware.
The news shocked Microsoft's chip and PC partners. Some knew Microsoft was working on its own hardware to sell in its stores, but Microsoft didn't say anything about a tablet or using Windows RT.
"We were absolutely surprised they were doing that," another hardware executive said. "Compete with us if you like, but you need to provide a higher degree of clarity in where the line is drawn between the guys...who are our friends and those who are not.“
For the PC makers, it means their relationship with Microsoft and consumers will change.
While many executives said they want more clarity on when Microsoft is a rival and when it's a friend, Microsoft isn't likely to share details about its future products with partners.
In a July regulatory filing MSFT said Surface will compete with the other RT device makers and may reduce computer makers' commitment to Windows.
In contrast, Google works with partners to create Google-brand devices instead of building their own.
If a PC maker wants to move away from Microsoft, the options are limited.

7. Cooperation among Competitors
To succeed both firms must contribute something
Contributions might be complementary, such as one firm has distribution capabilities while the other has manufacturing capacity
Globalization may cause competitors to enter into an alliance
US companies use cross-border alliances try to reduce the cost of entering markets
Asian firms tend to use alliances as a means of learning from partners
Due to high cost of product development, companies might pool resources
Some alliances involve distribution channels and trademarks
Kimberly Clarks Huggies are made and distributed through an alliance with Lever Brothers in India
In other instances a company will buy another for access to distribution
Dangers are unintended information transfers (employees working together) and changes in the nature of the rivalry
Alliance agreements might be vague or incomplete
Company firewalls might crumble (a firewall is supposed to keep one part of a company from influencing another part)
Changes in the balance of power between the companies

8. Strategic Alliances Success factors
Coalition of organizations to achieve goals for mutual benefit
Can be licensing, joint ventures, R&D partnerships
Can be informal
Types of Strategic Alliances
Simple licensing agreements between two partners
Market-based alliances (distribution channels, trademarks)
Operations and logistics alliances
Operations-based alliances (sharing of manufacturing ideas)
The Logic Behind Strategic Alliances
Defend leading position by access to new ideas, markets, etc
Catch-Up by joining forces
Remain in a leading business that is not core to the parent
Restructure a non-core business (which may be acquired by the alliance partner)
Success factors
Partners of equal strength
Alliance must have independent management with authority
Shared vision and support from top management in the parent organizations

9. Licensing Licensor receives royalties for use of knowledge assets
Licensee pays royalties fees to use the assets
Cross licensing is where companies share intellectual property
With patent cross licensing each company has a portfolio of patents
Rather than have endless and costly ‘patent wars’ companies agree to cross license
These agreements are common among technology firms
Benefits of licensing
Low commitment of resources
Appealing to small companies that lack resources
No import barriers
Low exposure to political and economic risks
Rapid penetration of global markets
Risks from licensing
Revenue may be lower than with other entry modes
Licensee may not be committed
Lack of control over licensee can result in bad image
Licensee may become a future competitor
Reduce risks through patents, trademarks, analysis, and carefully worded contracts

10. Other Means to Achieve Strategies Patent Litigation
What was said to be a fight over whether the Samsung infringed specific Apple patents, was appropriately seen as corporate warfare waged through courts. This was a consequence of Steve Jobs’ vow to “go thermonuclear” on Google’s Android operating system, which powers Samsung phones.
Today it’s practically impossible to build anything without violating a patent of some kind—and risking a multimillion-dollar lawsuit for your troubles.
Large companies built patent stockpiles as a defensive measure. They were hesitated to sue one another because they knew their target likely had patents that covered similar territory and they could be countersued quickly.
“Typically there’s a cross-license that keeps companies from having to assert literally 10,000 or 20,000 patents against each other,” Google general counsel Kent Walker says.
Companies have begun banding together to buy costly patent portfolios at the expense of a rival.
In 2011 while telecom giant Nortel Networks was going bankrupt, it was valued at less than a billion dollars. Its patents ended up selling at auction for $4.5 billion to a group of companies
The group included Microsoft and Apple, two companies famous for their rivalry. Google, a third competitor, dropped out of the bidding at $3.14 billion.
Trolling is a multibillion-dollar industry in which Non-performing Entities (NPEs) buy patents.
A famous patent-troll case came in 2006, when an NPE said that the RIM BlackBerry infringed on patents.
RIM asked the Patent Office to reexamine the patents,
Before the patent office could reach a decision, the judge had to decide whether to grant an injunction, which could have shut down RIM’s entire business.
Fearing the worst, RIM settled for $612.5 million.
Not long after the case was settled, the Patent Office ruled that many of the disputed patents were indeed invalid.

11. Tax Strategies and Government Support
Grant Thornton tax accountant Peter Vale, who works with multinationals in Ireland says the corporate tax rate of 12.5% may not be a critical factor for companies like Google. Google uses Ireland as a conduit for revenues that end up going to another country where the intellectual property is registered. For Google this country is Bermuda. An investigation conducted by Bloomberg and UK-based tax accountant Richard Murphy last year uncovered a highly efficient tax structure across six territories that meant Google paid just 2.4% tax on operations outside the US. (1) Note: The US tax rate is 35%.
Google, the owner of the world's most popular search engine, uses a strategy that is popular among such companies as Facebook Inc. and Microsoft Corp. The method takes advantage of Irish tax law to legally shuttle profits into and out of subsidiaries there, largely escaping the country's 12.5% income tax. The earnings wind up in island havens that levy no corporate income taxes at all. Google's transfer pricing contributed to international tax benefits that boosted its earnings by 26% last year, company filings show. (Bloomberg News )
The tactics of Google and Facebook depend on "transfer pricing," paper transactions among corporate subsidiaries that allocate income to low tax areas and attribute expenses to higher-tax countries. This typically involves registering intellectual property in low tax areas such as Cayman Islands. The attraction of Ireland for some companies is that Irish tax law allows flexibility in transfer pricing, in addition to relatively low tax rates and some incentives to locate R&D in Ireland. Global companies retain tax advisory firms (ref. GTLaw.com) to stay within complex home country and Irish laws.
Tech companies are able to easily shift “intellectual property, and the profit that goes along with it, to tax havens,” said a former Treasury Department economist, Martin A. Sullivan. “Apple went out of its way to try and ensure that its tax savings didn’t attract too much public attention, because tax avoidance of that magnitude — even though it’s legal and permissible — isn’t in keeping with the image of a socially progressive company.” (NY Times )
US Senate investigators are looking into the technology industry, to see if have been broken. The subcommittee is known to be looking at Apple, Google, Hewlett-Packard, Microsoft and firms in such fields as biotechnology.
Governments and regions often provide incentives or support to investors or businesses. Sometime the support is indirect. For instance, large banks enjoy an implicit government subsidy from low cost of funds due to the ‘too big to fail’ concept. Recently, the Japanese government has proposed buying factories from Japanese companies in distress, and then leasing those factories back. Political jurisdictions from China to US states offer loans or subsidies for certain types of investment.

12. Franchising
Franchisor gets royalty payments for use of intellectual property in a designated area for a specific time
Franchisee pays royalties and other payments
Note the supply chain clause in Papa John’s (Exhibit 9-6)
Potential for mark-up, also ensures quality of goods
Master franchising is often used in foreign markets
Master franchise gets right to sell local franchises in a territory
Master franchise usually commits to a target number
CP All has the master franchise for 7-11 Thailand
Benefits:
Expansion with a minimum investment
Franchisees’ profits tied to their efforts
Access to local franchisees’ knowledge of the local laws and customs
Risks:
Revenues may be lower than with other modes of expansion
Lack of a master franchisee in certain markets
Limited franchising opportunities in some locations
Lack of control over the franchisees’ operations
Cultural problems
Physical distance

13. Exhibit 9-6: International Franchising with Papa John’s
Chapter 9
Copyright (c) 2007 John Wiley & Sons, Inc.

14. Outsourcing
Business Process Outsourcing involves functional operations
Allows firm to focus on core competencies
Flexibility (if needs shift)
May be less expensive or of higher quality than internal providers (possible comparison shopping)
Can be difficult to unwind a relationship
These must be actively managed and control of information might be an issue
Total costs might be higher than expected, and quality lower
Companies specialize in manufacturing for other companies
Benefits:
Labor cost advantages
Tax, energy, raw materials, and overhead savings
Lower political and economic risk
Focus on core competencies (such as product design, marketing)
Access to manufacturing expertise
Quicker access to markets (no need to build factories)
Risks:
Contract manufacturer may become a future competitor
Conflicts of interest if the manufacturer has products
May lack flexibility (contractor often has other commitments)
Backlash from the company’s home-market employees regarding HR and labor issues
Issues of quality and production standards
Reducing the risks
Keep proprietary design item manufacture in-house
Have contingency plans for changes in demand

15. Contract Manufacturing (Outsourcing)
Qualities of An Ideal Subcontractor:
Flexible/geared toward just-in-time delivery
Able to integrate with company’s business
Able to meet quality standards
Solid financial footings
Must have contingency plans for changes in demand
Contract manufacturers typically have multiple clients
In most cases the manufacturer has to balance client needs
No conflicts of interest
Major contract manufacturers (electronics total $360bb in 2011):
Hon Hai (Foxconn) Taiwan Electronics $102BB
Flextronics Singapore Electronics $29BB
Jabil Circuit USA Electronics $17BB
TSMC Taiwan Semiconductors $14BB
Celestica Canada Electronics $7BB
Catalent USA Pharma $2BB

16. Joint Ventures JV Benefits: JV Risks: Cooperative joint venture
No equity in the venture
Involves collaboration
Common among large multinationals with emerging market partners
Equity joint venture – partners have equity stakes
JV Benefits:
Higher rate of return and more control over the operations
Shared capital and risk
Sharing of expertise and other resources
Access to host country distribution networks
Contact with local suppliers and government officials
JV Risks:
Lack of control
Government restrictions often forbid majority stake
Multinationals can deploy expatriates for greater control
Partner can become competitor
Conflicts arising over matters such as strategies, resource allocation, transfer pricing, and ownership of assets like technologies and brand names (Exhibit 9-7)
Well planned agreements help reduce conflict

17. Exhibit 9-7: Conflicting Objectives in Chinese Joint Ventures
Chapter 9
Copyright (c) 2007 John Wiley & Sons, Inc.

18. Successful Joint Ventures
Screen for the right partner (Exhibit 9-8)
Obtain information about the partner
See if the partner has similar investment objectives
Establish clear objectives from the beginning
Bridge cultural gaps (perhaps with a middleman)
Gain top managerial commitment and respect
Use an incremental approach (start on small scale)
Create a launch team during the launch phase:
(1) Build and maintain strategic alignment
(2) Create a system for parent company oversight
(3) Manage the compensation of each parent
(4) Build the organization for the joint venture (assign responsibilities)

19. Exhibit 9-8: Starbuck’s Coffee’s Partner Criteria
Chapter 9
Copyright (c) 2007 John Wiley & Sons, Inc.

20. Wholly Owned Subsidiaries
Acquisitions and Mergers
Merger is when companies of similar size unit
Mergers come with issues about control of the resulting entity.
Can be a defensive move against a powerful rival.
An acquisition is when one company acquires another.
Usually no question about control
Management or private investors might ‘take a company private’ in an LBO
A hostile takeover is when management or the BOD of the target firm is against the transaction
Quick access to local markets by buying an existing company
Synergies, or economies of scale are often cited reasons for mergers
Cross border acquisitions are a way to get access to local brands or distribution networks
Funding is a key to acquisitions
Cash (either from borrowing or retained earnings)
Equity (use of shares as currency)
A combination of cash and equity is most common
A company with high share price may use the price to purchase weaker companies
If a earnings per share rise the acquisition is said to be accretive to EPS
Greenfield Operations
Entire operation is developed by the multinational
Offers the company more flexibility than acquisitions in the areas of human resources, suppliers, logistics, plant layout, and manufacturing technology.

21. Starbucks’ Comments to the IASB
Our business model is built on a dynamic portfolio of numerous, relatively small locations in a given market. Option periods enable us to lock in a site while preserving flexibility to exit the location if circumstances dictate. It is not a foregone conclusion that an option period will be exercised, and the assessment conducted near the end of the original lease term is very specific to the individual site, based not only on that store’s performance but also other factors such as a more desirable location becoming available nearby, changing traffic patterns, and the impact of other stores in the area. Consequently, the effort to assess the “more likely than not” lease term would be a very time-consuming and imprecise process, involving several hours of work for each lease at inception and again when a renewal or other trigger requires re-evaluation. The goal of achieving comparability across companies – or even among divisions of an individual company – would be difficult to obtain. *
Recall the bankruptcy of Tully’s, burdened with property when demand changed.
Businesses like flexibility, but an option (right to buy or sell that is not an obligation) always comes with consideration for the other party (cost) since they are giving up their own flexibility.
Options to buy or sell are commonly used in of business strategy. A company might place an option to buy on a property, for example.
* Financial Times

22. Issues of Risk and Control
Different means to strategy bring different degrees of control
In general lower investment brings less control
Higher investment brings more control
Firms with IP or brand equity tend to want control
Flexibility is an important consideration
Contractual arrangements or major investments might be hard to unwind
Note Starbucks approach to retail locations
Firms differ in their tolerance and taste for financial loss
Higher investment of resources can bring higher loss (risk)
A wealthy and diversified firm operating in familiar and stable environments can make bigger investments

23. A Summary of Risk and Control
Financial risk
Licensing – low control
Franchising – low control
Contract – limited control
JV – limited control
Acquisition – high control
Low cost = low risk
Little invested = low risk
Low investment = low risk
Risk sharing with partner
High risk

24. Henkel’s Entry into the USA
Henkel AG founded in Germany 1876
Silicate detergents
First major international expansion 1883
Armour and Company begins to make soap in Chicago 1888
By-product of Armour’s meat packing business
Note similarities with P&G’s origins in Cincinnati
Dial soap became very popular in the 1950s
Armour acquired by Greyhound Corporation 1970
Armour-Dial was the consumer products division
HQ moved from Chicago to Arizona in 1971
Dial Corporation created in 1996 restructuring
Dial Corporation had several top management changes
Henkel buys Dial Corporation in 2004 for $2.9BB (Dial sales $1.3BB)
Value for money segment *
Products well suited to developing markets
Dial soaps and detergents introduced in Russia and China 2005
Purchase of certain Proctor and Gamble product lines for $275MM in 2006 *

25. First Movers and Timing of Entry
A first mover enters a market or develops a product before others
Products are not always pioneered in the home market
Firms tend to be early market entrants when
They are large firms
They have international expertise
They have a broad scope of products or services
When host countries have favorable risk dimensions
When market entry requires little capital
Firms tend to enter markets similar to markets in which they already have experience
Note all of the above factors tend to reduce risk to the firm
A firm can be a slow mover when products are easily imitated
First mover advantages when firms have similar resources
A larger company can often wait while a small first mover makes mistakes
Late entrants may have more favorable business conditions in developing countries

26. Exhibit 9-10: Wal-Mart’s International Expansion
Chapter 9
Copyright (c) 2007 John Wiley & Sons, Inc.

27. Strategy Analysis David Chapter 6
Strategy formulation generally encompasses three stages:
Input stage (such as external and internal factors)
Matching stage (SWOT, BCG, and other tools)
Decision stage
Formulation should not be mechanical.
Factor weightings require judgment
Analytical tools should facilitate communication
Admit the possibility of bad data
Follow up on anomalies in data
“The hierarchy of command in an organization, combined with the career aspirations of different people and the need to allocate scarce resources, guarantees the formation of coalitions of individuals who strive to take care of themselves first and the organization second or third.” (David p. 228)
“Successful strategists interject new faces and new views in the consideration of major changes. This is important because new employees and new managers have more enthusiasm… new employees do not act as screens against change.” (David p 229)
When firms merge, cultures may clash and plans must consider the linking of cultures and strategy.

28. Competitive Analysis SWOT
Strengths, Weaknesses, Opportunities, and Threats analysis (See SWOT Exhibit 8-6.) isolates issues that will be important to the future of the firm
SWOT analysis looks at internal and external factors, followed by matching.
Matching is difficult and requires judgment.
The purpose is to generate feasible alternatives.
Not all scenarios will be used.
Executives can construct alternative strategies from SWOT analysis.
For more on how to do SWOT analysis see David p 210.
SWOT is static (a view frozen in time) and will not show how to achieve advantage in dynamic environments.
Interrelationships among factors need consideration

29. Copyright (c) 2009 John Wiley & Sons, Inc.
Chapter 8
Copyright (c) 2009 John Wiley & Sons, Inc.

30. BCG Matrix The model is used in multi-division firms.
The BCG model is based on classification of products or business units into four categories based on market growth and market share relative to the largest competitor. (1)
The model is used in multi-division firms.
Divisions may compete in different industries
Focus on relative market-share position & industry growth rates
Each product has a product life cycle and each stage in product's life-cycle represents a different profile of risk and return.
According to the model a company should maintain a balanced portfolio of products. Having a balanced product portfolio includes both high-growth products as well as low-growth products.
However:
Portfolio theory states that companies do not need to diversity, investors do (market cap of less diversified AAPL is 15x HPQ’s).
Subsidizing one product with profit from another can expose the profitable product to competitor pricing action.

31. Product Life Cycle

32. BCG Matrix STARS (high growth, high market share)
- High market share in a growing market. - Stars need a lot of support for promotion and placement. - Stars may become cash cows later in the PLC.
QUESTION MARKS (high growth, low market share)
- Low market share in growing market. - These are new products and buyers have yet to discover them. - The marketing strategy is to get markets to adopt these products. - Resource intensive and low returns due to low market share. - Need to increase market share quickly or they become dogs. - Need investment to gain market share or need to divest them.
CASH COWS (low growth, high market share)
- High market share in a mature market. - Cash cows may have high profit margins and generate a lot of cash. - Because of the low growth additional marketing investment is low. - Investments in supporting infrastructure can improve efficiency and cash flow. - Cash cows are the products that businesses strive for.
DOGS (low growth, low market share)
- Dogs are in low growth markets and have low market share. - Dogs should be avoided and minimized. - Expensive turnaround efforts may be futile.