Lo2(2)

LO2: Analysis of the process of
strategy formulation and examine
various strategies adopted by
businesses

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LO2_a

Examine the framework that managers
can use to analyze the external
environment of their company.

External Analysis
The purpose of external analysis is to identify
the strategic opportunities and threats in the
organization’s operating environment.
External Analysis requires an assessment of:
 Industry environment in which company operates
• Competitive structure of industry
• Competitive position of the company
• Competitiveness and position of major rivals
 The country or national environments
in which company competes
 The wider socioeconomic or macroenvironment
that may affect the company and its industry
• Social • Legal • Technological
• Government • •
International Macroeconomic

External Analysis:
Opportunities and Threats
Analyzing the dynamics of the industry in which
an organization competes to help identify:
Opportunities Threats
Conditions in the Conditions in the
environment that a environment that
company can take endanger the integrity
advantage of to and profitability of
become more the company’s
profitable business


Industry Analysis: Defining an
Industry
 Industry
• A group of companies offering products or services that are
close substitutes for each other and that satisfy the same
basic customer needs
• Industry boundaries may change as customer needs evolve
and technology changes
 Sector
• A group of closely related industries (eg. Computer Hardware,
component, and software industries)
 Market Segments
• Distinct groups of customers within an industry
• Can be differentiated from each other with distinct attributes
and specific demands
Industry analysis begins by focusing on
the overall industry – before
considering market segment or sector-level issues

The Computer Sector:
Industries and Segments
Figure 2.1


Porter’s Five Forces Model

Risk of Entry by Potential Competitors
Industry Rivalry
Bargaining Power of Buyers
Bargaining Power of Suppliers
Threat of Substitutes


How the Five Forces Shape
Competition within an Industry
The stronger that each of these five forces is, the more
limited is the ability of established companies to raise
prices and earn greater profits within their industry.
• A weak competitive force
» may be viewed as an opportunity as it
allows company to earn greater profits
• A strong competitive force
» may be viewed as a threat as it
depresses industry profits
• Strength of forces may change
as industry conditions change


 Risk of Entry by Potential
Competitors
Potential Competitors are companies that are not
currently competing in an industry but have the capability
to do so if they choose. Barriers to new entrants include:
1. Economies of Scale – as firms expand output unit costs fall via:
 Cost reductions – through mass production
 Discounts on bulk purchases – of raw material and standard parts
 Cost advantages/savings – of spreading costs over large volume
2. Brand Loyalty
 Achieved by creating well-established customer preferences
 Difficult for new entrants to take market share from established brands
3. Absolute Cost Advantages – relative to new entrants
 Accumulated experience – in production and key business processes
 Control of particular inputs required for production
 Lower financial risks – access to cheaper funds
4. Customer Switching Costs for Buyers – where significant
5. Government Regulation
 May be a barrier to enter certain industries


 Rivalry Among Established
Companies
Competitive Rivalry refers to the competitive struggle
between companies in the same industry to gain market
share from each other. Intensity of rivalry is a function of:
1. Industry Competitive Structure
 Number and size distribution of companies
 Consolidated (high entry barrier) versus fragmented industries (low entry barrier)
2. Demand Conditions
 Growing demand – tends to moderate competition and reduce rivalry
 Declining demand – encourages rivalry for market share and revenue
3. Cost Conditions
 High fixed costs – profitability leveraged by sales volume
 Slow demand and growth – can result in intense rivalry and lower profits
4. Height of Exit Barriers – prevents companies from leaving industry
 Write-off of investment in assets  High fixed costs of exit
 Economic dependence on industry  Emotional attachment to industry
 Maintain assets  Bankruptcy regulations

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 Bargaining Power of Buyers
Industry Buyers may be the consumers or end-users who
ultimately use the product or intermediaries that distribute or
retail the products. These buyers are most powerful when:
1. Buyers are dominant.
 Buyers are large and few in number.
 The industry supplying the product is composed of many small companies.
2. Buyers purchase in large quantities.
 Buyers have purchasing power as leverage for price reductions.
3. The industry is dependant on the buyers.
 Buyers purchase a large percentage of a company’s total orders.
4. Switching costs for buyers are low.
 Buyers can play off the supplying companies against each other.
5. Buyers can purchase from several supplying companies at once.
6. Buyers can threaten to enter the industry themselves.
 Buyers produce themselves and supply their own product.
 Buyers can use threat of entry as a tactic to drive prices down.


 Bargaining Power of Suppliers
Suppliers are organizations that provide inputs such as
material and labor into the industry. These suppliers are
most powerful when:

1. The product supplied is vital to the industry and has few
substitutes.
2. The industry is not an important customer to suppliers.
 Suppliers are not significantly affected by the industry.
3. Switching costs for companies in the industry are significant.
 Companies in the industry cannot play suppliers against each other.
4. Suppliers can threaten to enter their customers’ industry.
 Suppliers can use their inputs to produce and compete with
companies already in the industry.
5. Companies in the industry cannot threaten to enter their
suppliers’ industry by making their own inputs.

 Substitute Products
Substitute Products are the products from
different businesses or industries that can satisfy
similar customer needs.

1. The existence of close substitutes is
a strong competitive threat.
 Substitutes limit the price that companies
can charge for their product.

2. Substitutes are a weak competitive
force if an industry’s products have few
close substitutes.
 Other things being equal, companies in
the industry have the opportunity to raise
prices and earn additional profits.


Group Assignment 2
• Identify the industry of your chosen company
• Perform Porter’s 5 forces model analysis
• List the main threats and opportunities in the
external environment

LO2_b

Examine the competitive advantage
of business firms by analyzing why
some companies outperform others.
Internal Analysis

Internal Analysis:
Strengths and Weaknesses
Internal analysis, along with the external analysis of
the company’s environment, gives managers the
information to choose the strategies and business
model to attain a sustained competitive advantage.

Strengths Weaknesses
Assets that boost Liabilities that
profitability depress profitability


Internal Analysis
The purpose of internal analysis is to pinpoint the
strengths and weaknesses of the organization.

It includes assessments of:
 The firm’s resources (tangible [land, buildings, equipments,
etc] and intangible [brand name, reputation, knowledge, skills, intellectual
property)
and capabilities (skills at coordinating resources)
Distinctive competencies (e.g. Toyota
Manufacturing)

Building and sustaining a competitive advantage
requires a company to achieve superior:
• Efficiency • Innovations
• Quality • Responsiveness to customers

Strategy, Resources,
Capabilities, and Competencies
Figure 3.1


Competitive Advantage,
Value Creation, and Profitability
How profitable a company becomes
depends on three basic factors:
1. Value or utility the customer gets from
owning the product
2. Price that a company charges for its
products
3. Costs of creating that product
 Consumer surplus is the “excess” utility a
consumer captures beyond the price paid
Basic Principle: the more utility that consumers
get from a company’s products or services, the
more pricing options the company has.

The Value Chain
Figure 3.5
A company is a chain of activities for transforming
inputs into outputs that customers value –
including the primary and support activities.


Building Blocks
of Competitive Advantage
Figure 3.6


Efficiency
 Measured by the quantity of inputs it
takes to produce a given output:
Efficiency = Outputs / Inputs
 Productivity leads to greater efficiency
and lower costs:
• Employee productivity
• Capital productivity
Superior efficiency helps a company
attain a competitive advantage
through a lower cost structure.

Quality
 Quality products are goods and services that are:
• Reliable and
• Differentiated by attributes that customers
perceive to have higher value
 A perception of quality allows a firm to
differentiate its products in the eyes of its
customers.

Superior quality = customer perception
of greater value in a product’s attributes
Form, features, performance, durability, reliability, style, design


Innovation
Innovation is the act of creating
new products or new processes
• Product innovation
» Creates products that customers
perceive as more valuable and
» Increases the company’s pricing options
• Process innovation
» Creates value by lowering production costs
Successful innovation can be a major
source of competitive advantage –
by giving a company something unique.


Customer Responsiveness
Identifying and satisfying customers’
needs – better than the competitors do.
 Enhanced customer responsiveness:
Customer response time, design,
service, after-sales service and support

Superior responsiveness to
customers differentiates a company’s
products and services and leads to
brand loyalty and premium pricing.


Company’s Business Model
Utilize company’s distinctive competencies to
differentiate its products and/or lower its cost
structure
A business model encompasses how the company will:
•Select its customers • Deliver those goods and
•Define and differentiate its services to the market
• Organize activities within
•Create value for its customers the company
•Acquire and keep customers • Configure its resources
•Produce goods or services • Achieve and sustain a high
•Lower costs level of profitability
• Grow the business over
time

Competitive Advantage
 Competitive Advantage
• A firm’s profitability is greater than the
average profitability for all firms in its
industry.
• Excellent business model, distinctive
competencies, and excellent strategies lead
to competitive advantage and superior
profitability
 Sustained Competitive Advantage
• A firm maintains above average and
superior profitability and profit growth for a
number of years.

Analyzing Competitive
Advantage and Profitability
To identify strengths and weaknesses effectively, a
company needs to compare, or benchmark, the
performance of their company with respect to historic
performance and competitors. This helps determine
whether
1. They are more or less profitable than competitors and
whether performance has been improving or
deteriorating over time
2. Their company’s strategies are maximizing the value
being created
3. Their cost structure is out of line with those of
competitors
4. They are using the resources of the company to the
greatest effect


Why Companies Fail
 Inertia
• Companies find it difficult to change their strategies and
structures
 Prior Strategic Commitments
• Limit a company’s ability to imitate and cause competitive
disadvantage
 The Icarus Paradox
• A company can become so specialized and inner-directed
based on past success that it loses sight of market realities

When a company loses its competitive advantage,
its profitability falls below that of the industry.
 It loses the ability to attract and generate resources.
 Profit margins and invested capital shrink rapidly.

Avoiding Failure:
Sustaining Competitive Advantage
1. Focus on the Building Blocks of Competitive
Advantage
Develop distinctive competencies and superior performance in:
 Efficiency  Quality
 Innovation  Responsiveness to Customers
2. Institute Continuous Improvement and
Learning
3. Track Best Practice and Use Benchmarking
4. Overcome Inertia

Luck may play a role in success,
so always exploit a lucky break - but remember:
“The harder I work, the luckier I seem to get.”
J P Morgan


Differences in Industry
and Company Performance
A Company’s Profitability and
Profit Growth are determined by
two main factors:
The overall performance
of its industry relative
to other industries

Its relative success in its
industry as compared to the
competitors

Performance in Nonprofit
Enterprises
Nonprofit entities such as government
agencies, universities, and charities:
• Are not in business to make a profit
• BUT…still need to use their resources
efficiently and effectively
• Must meet goals
• Set strategies to achieve goals and compete
with other nonprofits for scarce resources

A successful strategy gives potential
donors a compelling message as to
why they should contribute.

Group Assignment 3
• Perform internal analysis of reviewing the
resources, capabilities, and competencies of a
company. Then evaluate the building blocks of
competitive advantage
• List all the strengths and weaknesses of each
of the items above (resources, capabilities,
quality, innovation, efficiency, customer
responsiveness)

LO2_c

Examine how functional level
strategies can help to achieve
efficiency, innovation and customer
responsiveness.

SWOT Analysis
 SWOT analyses help to identify strategies that align
a company’s resources and capabilities to its
environment – in order to create and sustain a
competitive advantage.
 Analyze all internal strength
 Analyze all internal weaknesses
 Analyze all external opportunities
 Analyze all external threats


Functional-Level Strategies
Functional-level strategies are strategies aimed
at improving the effectiveness of a company’s
operations.
 Functional-level strategies aim to give a firm
superior:
• Efficiency
• Quality
• Innovation
• Customer responsiveness

This leads to a competitive advantage
and superior profitability and profit growth.

Achieving Superior Efficiency

 Economies of scale
Unit cost reductions associated with a large scale of output
• Ability to spread fixed costs over a large production
volume
• Ability of companies producing in large volumes to
achieve a greater division of labor and specialization
• Specialization has favorable impact on productivity by
enabling employees to become very skilled at performing
a particular task
 Diseconomies of scale
Unit cost increases associated with a large scale of output
• Increased bureaucracy associated with large-scale
enterprises
• Resulting managerial inefficiencies


Economies and Diseconomies
of Scale
Figure 4.2


Learning Effects
Learning Effects are cost savings that come
from learning by doing.
• Labor productivity
Learn by repetition how to best carry out the task
• Management efficiency
Learn over time how to best run the operation
• Realization of learning effects implies a
downward shift of the entire unit cost
curve
As labor and management become more efficient
over time at every level of output
The Experience Curve is the systematic lowering of the cost
structure and consequent unit cost reductions that occur over
the life of a product

Flexible Manufacturing
and Mass Customization (Response)
 Flexible Manufacturing Technology
“Lean Production” technology that:
• Reduces setup times for complex
equipment
• Improves scheduling to increase
use of individual machines
• Improves quality control at all
stages of the manufacturing process
• Increases efficiency and lowers unit costs
 Mass Customization
Ability to use flexible manufacturing technology to
reconcile two goals that were once thought incompatible:
• Low cost and
• Differentiation through product customization

Materials Management and
Supply Chain
 Materials Management encompasses the activities
necessary to get inputs and components to a production
facility, through the production process, and through the
distribution system to the end-user
• Many sources of cost in this process
• Significant opportunities for cost reduction through more
efficient materials management
• Just-in-Time (JIT) Inventory System to economize holding costs:
» Have components arrive to manufacturing just prior to need in
production process
» Have finished goods arrive at retail just prior to stock out
 Supply Chain Management is the task of managing the
flow of inputs to a company’s processes to minimize
inventory holding and maximize inventory turnover


Achieving Superior Innovation
Building distinctive competencies that result in
innovation is the most important source of
competitive advantage.
 Innovation can:
• Result in new products that better satisfy
customer needs
• Differentiate products and charge a
premium price and lower cost structure
• Improve the quality of existing products
• Reduce costs
 Innovation can be imitated -

Successful new product
So it must be continuous launches are
major drivers of superior profitability.

Marketing
• Marketing strategy refers to the position that a
company takes regarding: Pricing, Promotion,
Advertising, Product Design, Distribution
• Marketing strategy can reduce costs by lowering
customer defection rates and increasing loyalty

Quality
• TQM (Continuous Improvement)
• Six Sigma


R&D Strategy
 Research and Development (R&D)
Roles of R&D in helping a company achieve greater
efficiency and lower cost structure:
1. Boost efficiency by designing products that
are easy to manufacture
• Reduce the number of parts that make up a product –
reduces assembly time
• Design for manufacturing – requires close coordination
with production and R&D
1. Help a company have a lower cost structure by
pioneering process innovations
• Reduce process setup times
• Flexible manufacturing
• An important source of competitive advantage


Human Resource Strategy
Goal: to improve employee productivity.
 Hiring strategy
Assures that the people a company hires have the attributes
that match the strategic objectives of the company
 Employee training
Upgrades employee skills to perform tasks faster and more
accurately
 Self-managing teams
Members coordinate their own activities and make their own
hiring, training, work, and reward decisions
 Pay for performance
Linking pay to individual and team performance can help to
increase employee productivity


Materials Management and
Supply Chain
 Materials Management encompasses the activities necessary to get
inputs and components to a production facility, through the production
process, and through the distribution system to the end-user
(Significant opportunities for cost reduction through more efficient
materials management )
• Just-in-Time (JIT) Inventory System to economize holding costs:
» Have components arrive to manufacturing just prior to need in
production process
» Have finished goods arrive at retail just prior to stock out
 Supply Chain Management

Information Systems
Information systems’ impact on productivity is wide-
ranging:
 Web-based information systems can automate many
activities and Automates interactions between
– Company and customers
– Company and suppliers


Group Assignment 4
• Perform SWOT Analysis
• Pick the best opportunity that capitalizes on
your strengths, eliminate weaknesses, and
limit your threats
• Suggest what your company should do in
terms of functional level strategies

LO2_d

Analyze the factors that facilitate
business level strategy to enable a
firm to compete effectively in the
market place.

Business-Level Strategy
A successful business model (company’s
conception of how various strategies pursued
by company fit together into a whole) results
from business-level strategies that create a
competitive advantage over its rivals.
Firms must decide/evaluate:
1. Customer needs –
WHAT is to be satisfied
2. Customer groups –
WHO is to be satisfied
3. Distinctive competencies –
HOW customers are to be satisfied

Formulating the Business Model:
Customer Needs and
Product Differentiation
 Customer needs
The desires, wants, or cravings that can be
satisfied through product attributes
 Customers choose a product based on:
1. The way the product is differentiated from
other products of its type
2. The price of the product

 Product differentiation
Designing products to satisfy customers’
needs in ways that competing products
cannot.

Formulating the Business Model:
Customer Groups and Market
Segmentation
 Market Segmentation
The way customers can be grouped based on
important differences in their needs or preferences
 Main Approaches to Segmenting Markets
1. Ignore differences in customer segments –
Make a product for the typical or average customer (company
decides to not differentiate its product but compete on cost)
2. Recognize differences between customer groups –
Make products that meet the needs
of all or most customer groups (customer responsiveness
is high and customization is important)
3. Target specific segments –
Choose to focus on and serve just
one or two selected segments (focus on low price
or differentiation)

Identifying Customer Groups
and Market Segments
Figure 5.1


Implementing the Business Model
Building Distinctive Competencies

To develop a successful business model, strategic
managers must devise a set of strategies that
determine:
• How to DIFFERENTIATE their product
• How to PRICE their product
• How to SEGMENT their markets
• How WIDE A RANGE of products to develop

A profitable business model depends on
providing the customer with the most value while
keeping cost structures viable.

Wal-Mart’s Business Model
Figure 5.3


Competitive Positioning at the
Business Level
Maximizing the profitability of the company’s business model is about making
the right choices with regard to value creation through differentiation, costs, and
pricing. Choose pricing option that compensate for extra cost of differentiation
but not too high that it chokes increases in expected demand

Figure 5.4

Source: Copyright © C. W. L. Hill & G. R. Jones,
“The Dynamics of Business-Level Strategy,”
(unpublished manuscript, 2002).


Cost Leadership
Cost leaders establish a cost structure that
allows them to provide goods and services
at lower unit costs than competitors. (can use
Chaining and Franchising to obtain advantage of cost leadership)

Strategic Choices
• The cost leader does not try to be the
industry innovator.
• The cost leader positions its products to
appeal to the “average” or typical customer.
• The overriding goal of the cost leader is to
increase efficiency and lower its costs
relative to industry rivals.

Advantages of
Cost Leadership Strategies
 Protected from industry competitors by
cost advantage
 Less affected by increased prices of
inputs if there are powerful suppliers
 Less affected by a fall in price of
inputs if there are powerful buyers
 Purchases in large quantities increase
bargaining power over suppliers
 Ability to reduce price to compete
with substitute products
 Low costs and prices are a barrier to entry
Cost leaders are able to charge a lower price
or are able to achieve superior profitability
than their competitors at the same price.

Disadvantages of
Cost Leadership Strategies
 Competitors may lower
their cost structures.
 Competitors may
imitate the cost
leader’s methods.
 Cost reductions may
affect demand (example
reducing costs on warranty and customer service
might lead customers to leave).


Differentiation
Companies with a differentiation strategy
create a product that is different or distinct
from its competitors in an important way.
Strategic Choices
• A differentiator:
» Stives to differentiate itself on as many
dimensions as possible.
» Focuses on quality, innovation, and
responsiveness to customer needs.
» May segment the market in many niches.
» Concentrates on the organizational functions that
provide a source of distinct advantages.


Advantages of
Differentiation Strategies
 Customers develop brand loyalty.
 Powerful suppliers are not a problem because the
company is geared more toward the price it can
charge than its costs.
 Differentiators can pass price increases on to
customers.
 Powerful buyers are not a problem because the
product is distinct.
 Differentiation and brand loyalty are barriers to entry.
 The threat of substitute products depends on
competitors’ ability to meet customer needs.
Differentiators can create demand for their
distinct products and charge a premium price,
resulting in greater revenue and higher profitability.

Disadvantages of
Differentiation Strategies
 Difficulty maintaining long-term
distinctiveness in customers’ eyes.
• Agile competitors can quickly imitate.
• Patents and first-mover advantage are
limited in their duration.
 Difficulty maintaining premium price.


Focus
The focuser strives to serve the need of a
targeted niche market segment where it has
either a low-cost or differentiated competitive
advantage.
Strategic Choices
• The focuser selects a specific market niche
that may be based on:
 Geography
 Type of customer
 Segment of product line
• Focused company positions itself as either:
 Low-Cost or
 Differentiator

Advantages of
Focus Strategies
 The focuser is protected from rivals to the
extent it can provide a product or service
they cannot.
 The focuser has power over buyers because
they cannot get the same thing from anyone
else.
 The threat of new entrants is limited by
customer loyalty to the focuser.
 Customer loyalty lessens the threat from
substitutes.
 The focuser stays close to its customers and
their changing needs.

Disadvantages of
Focus Strategies
 The focuser is at a disadvantage with regard
to powerful suppliers because it buys in
small volume (but it may be able to pass
costs along to loyal customers).
 Because of low volume, a focuser may have
higher costs than a low-cost company.
 The focuser’s niche may disappear because
of technological change or changes in
customers’ tastes.
 Differentiators will compete for a focuser’s
niche.


Competitive Positioning:
Strategic Groups
Strategic Groups are groups of companies that follow a
business model similar to other companies within their
strategic group (eg. LuLu, Coop and Carrefour all compete on low cost, they
become a strategic group), but are different from that of other
companies in other strategic groups.

Implications of Strategic Groups for
Competitive Positioning
• Strategic managers must:

1. Map their competitors
2. Better understand changes in the industry
3. Determine which strategies are successful
4. Fine tune or radically alter business models and
strategies to improve competitive position

Failures in
Competitive Positioning
 Many companies, through neglect, ignorance or
error:
• Do not work continually to improve their business model
• Do not perform strategic group analysis
• Often fail to identify and respond to changing opportunities
and threats in the industry environment
 Companies lose their position on the value
frontier when:
• They have lost their source of competitive advantage
• Their rivals have found ways to push out the value creation
frontier and leave them behind

There is no more important task than ensuring
that the company is optimally positioned against
its rivals to compete for customers.

Group Assignment 5
• Draft a Business Model figure similar to Wal-
Mart’s figure 5.3
• Discuss how you will position yourself in the
market place in term of positioning strategies
discussed (cost leadership, differentiation,
focus)

Copyright © Houghton Mifflin Company.
2 | 67
All rights reserved.

LO2_e

Examine various ways in which
companies can profit from global
expansion

Global Strategy: Pressures for Cost Reductions and
Local Responsiveness

Figure 8.2
Company A: Global
Standardization Strategy
Company B: Localization
Strategy
Company C: Transnational
Strategy
Company D: International
Strategy

Company
D As Competitors emerge
Company D and B strategies
become less viable and
•Company B would seek
Company C strategy
•Company D would either
Copyright © Houghton Mifflin
8 | 69 seek A or C strategy
Company. All rights reserved.

Choosing a Global Strategy
 Standard Globalization Strategy
• Reaping the cost reductions that come from economies
of scale and location economies (marketing, production, R&D)
• Business model based on pursuing a low-cost strategy
on a global scale
Makes the most sense when there are strong pressures for
cost reduction and the demand for local responsiveness is
minimal
 Localization Strategy
• Customizing the company’s goods or services so that
thy provide a good match to tastes and preferences in
different national markets
Most appropriate when there are substantial differences
across nations with regard to consumer tastes and
preferences and where cost pressures are not too intense

Choosing a Global Strategy
 Transnational Strategy
• Company faces both strong cost pressure (Global Strategy)
and strong pressure on local responsiveness (Localization
Strategy)

• Business model that simultaneously:
» Achieves low costs » Differentiates across geographic
markets
» Fosters a flow of skills between subsidiaries
Building an organization capable of supporting a
transnational strategy is a complex and challenging task.
 International Strategy
• Multinational companies that sell products that serve
universal needs (minimal need to differentiate) and do not
face significant competitors (low cost pressure).
In most international companies the head office retains tight
control over marketing and product strategy.

Basic Entry Decisions
1. Which overseas markets to enter (WHERE)
• Assessment of long-run profit potential
• Balancing the benefits, costs, and risks associate
with doing business in a country
1. Timing of entry (WHEN)
• First-mover advantages: preempt and build share
• First-mover disadvantages: pioneering costs
1. Scale of Entry (HOW)
• Entering on a large scale is a major strategic
commitment
• Benefits and drawbacks of small-scale entry


The Choice of Entry Mode
1. Exporting
Most manufacturing companies begin their global expansion as
exporters and later switch to one of the other modes.
2. Licensing
A foreign licensee buys the rights to produce a company’s product
for a negotiated fee; licensee puts up most of the overseas capital.
3. Franchising
Franchising is a specialized form of licensing. The franchiser not
only sells intangible property, but also insists that franchisee agrees
to follow strict rules as to how it does business.
4. Joint Ventures
Typically a 50/50 venture – a favored mode for entering a new market
5. Wholly-Owned Subsidiaries
Parent company owns 100% of subsidiary’s stock – setup or acquire


Advantages and Disadvantages
of Different Entry Modes
Table 8.1


Global Strategic Alliances
Global Strategic Alliances are cooperative agreements between
companies from different countries that are actual or potential
competitors. They range from short-term contractual cooperative
arrangements to formal joint ventures with equity participation.
 Advantages
• Facilitate entry into a foreign market
• Share fixed costs and associated risks
• Bring together complementary skills and assets
• Set technological standards for its industry
 Disadvantages
• Give competitors a low-cost route to gain new
technology and market access
Some alliances benefit the company.
Beware, alliances can end up giving away technology
and market access with very little gained in return.

Group Assignment 6

Suppose you have the opportunity to
expand outside the boundaries of the
UAE, which strategy would you use and
why (Locate your self on the cost
pressure-local responsiveness chart)?


LO2_f

Analyze the strategies that
corporations pursue to build and
restructure their portfolio of
businesses.

Corporate-Level Strategy
Corporate-Level Strategy: How do we sustain competitive
advantages in our current business? What new businesses
or industries do we wish to enter?
Corporate strategy is used to identify:
1. Businesses or industries that the company should
compete in
2. Value creation activities that the company should
perform in those businesses
3. Methods to enter or leave businesses or industries
in order to maximize its long-run profitability

Companies must adopt a long-term perspective
in formulating a corporate-level strategy.


Corporate-Level Strategy and
the Multibusiness Model
A multibusiness company must construct its
business model at two levels:
1. Business models and strategies
for each business unit or division in every industry in
which it competes
2. Higher-level multibusiness model
that justifies its entry into different businesses
and industries


Repositioning and Redefining
A Company’s Business Model
Corporate-level strategies are primarily directed toward
improving a company’s competitive advantage and profitability
in its present business or product line:
 Horizontal Integration (staying in the same industry)
• The process of acquiring or merging with industry
competitors
 Vertical Integration
• Expanding operations backward into an industry that
produces inputs for the company or forward into an
industry that distributes the company’s products
 Strategic Outsourcing
• Letting some value creation activities within a business
be performed by an independent entity


Horizontal Integration:
Single-Industry Strategy
Horizontal Integration: the process of acquiring or merging
with industry competitors in an effort to achieve the
competitive advantages that come with large scale and scope.
Staying inside a single industry allows a
company to:
 Focus resources

Resources devoted to competing
successfully in one area
 ‘Stick to the knitting’
Company stays focused on
what it does best

Benefits of Horizontal Integration
Profits and profitability increase when horizontal
integration:
1. Lowers the cost structure
• Creates increasing economies of scale
• Reduces the duplication of resources between two companies
2. Increases product differentiation
• Product bundling – broader range at single combined price (Vitamin C bottle
same price as Vitamin D)
• Total solution – saving customers time and money (a company purchases
competitors to bring to market a complete set of products (such as Multivitamins)
• Cross-selling – leveraging established customer relationships
3. Replicates the business model
• Replicate the business model success in other market segment
within the same industry
4. Reduces industry rivalry
• Eliminate excess capacity in an industry
• Easier to implement tacit price coordination among rivals
5. Increases bargaining power
• Increased market power over suppliers and buyers
• Gain greater control

Problems with
Horizontal Integration
A wealth of data suggests that the majority of mergers
and acquisitions DO NOT create value and that many
may actually DESTROY value.
 Implementing a horizontal integration is not an easy
task
• Problems associated with merging very different company
cultures
• High management turnover in the acquired company when the
acquisition is a hostile one
• Tendency of managers to overestimate the benefits to be had in
the merger
• Tendency of managers to underestimate the problems involved in
merging their operations
 The merger may be blocked if merger is perceived to:
• Create a dominant competitor
• Create too much industry consolidation
• Have the potential for future abuse of market power

Vertical Integration: Entering New
Industries
 Backward Vertical Integration
• Company expands its operations into an industry that
produces inputs to the company’s products
 Forward Vertical Integration
• Company expands into an industry that uses, distributes, or
sells the company’s products
 Full Integration
• Company produces all of a particular input from its own
operations
• Disposes of all of its completed products through its own
outlets
 Taper Integration
• In addition to company-owned suppliers, the company will
also use other suppliers for inputs or independent outlets in
addition to company-owned outlets

Full and Taper Integration
Figure 9.3


Alternative to Vertical Integration
Short-term contracts with suppliers
(competitive bidding)
• Suppliers are forced to compete on price
Strategic Alliances (Long-Term
Contracting)
• Cooperative relationship
• Work jointly
• Becomes substitute to vertical integration


Strategic Outsourcing
Strategic Outsourcing allows one or more of a company’s
value-chain activities or functions to be performed by
independent specialized companies that focus all their
skills and knowledge on just one kind of activity.
 Company is choosing to focus on a fewer
number of value-creation activities
 In order to strengthen its business model
 Companies typically focus on noncore or
nonstrategic activities
 In order to determine if they can be performed more
effectively and efficiently by independent specialized
companies
 Virtual Corporation
 Describes companies that have pursued extensive
strategic outsourcing

Strategic Outsourcing of Primary
Value Creation Functions
Figure 9.4


Group Assignment 7
In your newly developed UAE-based
company which of the following (you
can choose more than one) would you
pursue and why
• Horizontal Integration
• Vertical Integration
• Strategic Alliance
• Outsourcing


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