CPIM 8.0- Module 1- Strategic Scope and Objectives
multidomestic strategy
each country market is self-contained. Customers have unique product expectations that are addressed by local production capabilities. (cosmetic company, skincare needs of the country) The expression "think local, act local" relates to this strategy because the organization is highly decentralized. All divisions operate independently, and products vary from one market to the next. The organization is responsive to local conditions and needs.
strategic drivers
factors that influence business unit and manufacturing strategies." These may be external factors, such as potential markets that are not being served (or are being underserved) by competitors or intense levels of competition that will require close control of costs. They may be internal factors, such as capacity, expertise, and resources that can be used more fully to create a competitive advantage.
Forward integration- Movie industry example
forward integration provides an opportunity to gain more control over the distribution and sale of their products or services. In the early days of the movie industry, major studios created their own theater chains. This gave them needed capacity (screens for their product), opportunities for distinctive competitive advantage (the movie palaces with opulent decor), and the ability to counter rivals (by showing only their own movies). Eventually this level of vertical integration was judged to be monopolistic.
vertically integrated firm
functions that were previously performed by suppliers...are now done internally." A vertically integrated firm grows in terms of what it makes or what activities it performs.
subcontracting,
is defined as "sending production work outside to another manufacturer."
Challenges with vertical integration
1. Difficulty in mastering new technology, skills, 2. Increased risk caused by changes in industry practices. 3. Uncertain cost efficiency advantages 4. Capacity imbalances
What are the 3 reasons why a global strategy is attractive
1. It can provide access to new customers (This is attractive to organizations that face saturated demand in their home market (e.g., from imitators). 2. It can lower costs and improve competitive position 3. It can be a response to negative conditions in the home country. This is attractive to organizations that face saturated demand in their home market (e.g., from imitators).
More on vertical integration challenges
1. It cannot be assumed that the new competencies will come naturally, easily, or quickly. If the baby food producer decides to purchase its own organic farms, it is entering an activity with entirely different technology, skill sets, and knowledge. 2. It increases investment in the industry and, therefore, exposure to changes or negative trends. If technology or customer preferences change, the organization may lose the value of its investment in the added capability. 3. If the activity is not significant to the organization's operations, the output may not make its acquisition cost-efficient. Purchasing a printing company that makes the baby food manufacturer's labels will be cost-effective only if labels represent a significant portion of costs. 4. Capacities may not match optimally. For example, if the baby food manufacturer acquires its own farms, there is a risk that the farms' production will not meet or will exceed demand and factory capacity utilization rates.
Outsourcing as an integration strategy
1. Opposite of integration: Activities are added to the value chain 2. Good idea when activities can be performed more cheaply and quickly with at least equal quality 3. Increase risk from loss of control 4. Core competencies should not be outsourced 5. Alternatives include various types of partnerships/alliances
Strategic fit exists when
1. There is a potential for sharing expertise or assets that will have synergistic effects. For example, say that a baby food manufacturer has effective market research. This expertise can be transferred to children's apparel market research. 2. Assets can be shared to lower costs. For example, the same plant can produce lawnmowers and snowblowers, providing seasonality offset. 3. Brand identity can be transferred to support consumer recognition.
There are at least two major obstacles to a successful merger or acquisition strategy:
1. There may be insufficient due diligence into the transaction. An acquired business may, for example, have more dated technology and assets than the purchaser realized. Capabilities may be overstated. It may have legal liabilities that will cause significant expense in the future—for example, the discovery of environmental pollution that will require costly remediation. 2. There may be a mismatch of organizational cultures, which can extend from leaders downward through the entire organization. A workforce used to having more decision-making authority and fewer rules will not adapt smoothly to a more-regimented organization.
What two strategies can help reduce the risk of diversification
1. industry expert opinions and analysis prior to internal investment in capabilities, acquisition of partners/unrelated businesses, or formation of strategic alliances. 2. It is also critical that the opportunity's potential is assessed accurately. A third-party analysis of the market or a third-party audit of a potential acquisition/partner can help address this risk.
Why does a business choose to grow outside its current market
A business may choose to grow outside its current market. Perhaps the customer base in the current geographical market has been completely saturated. The only way to grow share is to use unsustainable competitive tactics against rivals. Or the business's leaders see that the current industry has plateaued in terms of growth and will offer reduced opportunities. In these situations, the business may choose one of these growth strategies:
Low industry attractiveness/strong business unit competitive position (lower left)
A fine-dining restaurant chain reliably produces decent profits, but other restaurant chains compete intensively, requiring regular investment in remodeling and advertising. The holding company may divest this holding or revise it—for example, reposition it, such as to fast-casual dining.
A global organization with a profit sanctuary
A global organization with a profit sanctuary can afford to compete more aggressively against its domestic rivals—for example, by cutting prices and margins—because of the profits from outside the domestic market. The domestic rivals are forced to respond but lack the same resources.
Global Strategy and global perspectives
A global strategy's challenges include a need for leaders who have global perspectives and cultural sensitivity. Management is complex, since integration takes more thought and time. Product may be moving around more, leading to increased costs for transportation and cross-border tariffs. The organization also trades the ability to adapt to local markets for the strengths of global brands.
High industry attractiveness/weak business unit competitive position (upper right)
A heavy-construction equipment manufacturer experiences a growing industry. However, its factories use older, inefficient machinery. Management is stuck reacting to short-term problems. Since the industry is healthy, the holding company may invest further or change the company's management.
High industry attractiveness/strong business unit competitive position (upper left)
A manufacturer of frozen organic foods enjoys a growing market. The company has very strong brand value, excellent management, and cost efficiencies that generate good profit margins. This is a high-value asset.
mergers and acquisitions
A merger is defined in the Dictionary as "the acquisition of the assets and liabilities of one company by another." In a merger, a new entity is formed; in an acquisition, one entity absorbs another.
Low industry attractiveness/weak business unit competitive position (lower right)
A regional newspaper chain is in a declining industry with declining advertising revenue. This company has a poor reputation for quality journalism. Management has weakened the company's finances through constant fights with unions. This is not an attractive investment to hold or an easy one to sell.
Related Diversification Strategies
A related diversification strategy focuses on industries with value chain activities similar to the organization's own, which is called strategic fit. The similarities can be anywhere along the value chain, from research and development through production to distribution and customer service. Shared capabilities enable economies of scale.
Transnational Strategy
A transnational strategy aims at achieving some degree of both standardization and local responsiveness. This orientation is referred to as "think global, act local." This may be appropriate for an organization whose products and services will be more competitive in local markets if they appeal to distinctively local needs and the customization can be accomplished cost-effectively, such as by postponement or assemble-to-order. (Mcaloo, fast food global)
Tailoring the company's competitive approach and product offering to fit specific market conditions in each host country would be an example of: A. a localized multicountry strategy. B. a broad differentiation strategy. C. a focused differentiation strategy. D. a focused low-cost provider strategy.
A. a localized multicountry strategy. A localized or multicountry strategy is one in which a company varies its product offering and competitive approach from country to country in an effort to be responsive to differing buyer preferences and market conditions.
Acquiring elements of the finished goods distribution channel is called: A. forward integration. B. alliance development. C. backward integration. D. a partnership.
A. forward integration. Forward integration is the process of buying or owning elements of the production cycle and the channel of distribution forward toward the final customer.
diversification strategy
An expansion of the scope of the product line to exploit new markets. A key objective of a diversification strategy is to spread the company's risk over several product lines in case there should be a downturn in any one product's market.
Global strategy and borders
An organization pursuing a global strategy will benefit from the transfer and sharing of capabilities across borders.
Industry attractiveness
Analysts can use the five forces framework to assess the intensity of competitive forces and market growth trends. The industry's environment can be scanned to identify potential threats and opportunities.
A food producer and distributor of processed meats is considering purchasing a poultry business. This is an example of: A. horizontal integration. B. vertical integration. C. green manufacturing. D. sustainable business practices.
B. vertical integration. Vertical integration is the degree to which a firm has decided to directly produce multiple value-adding stages from raw material to the sale of the product to the ultimate consumer.
A company with a long history in the marketplace is considering acquiring a start-up that has technology the company believes will expand its business. What is one of the major obstacles the company will have to overcome if the acquisition occurs? A. Explaining the acquisition to the board of directors B. Explaining the acquisition to the financial media C. Mismatch of organizational cultures D. Bringing the new employees into the 401(k) plan
C. Mismatch of organizational cultures There may be a mismatch of organizational cultures, which can extend from the leaders downward through the entire organization. A workforce used to more decision-making authority and fewer rules will not adapt smoothly to a more regimented organization. The other answers are insignificant compared to the culture issue.
A manufacturer's decision to extend the degree of forward integration should be influenced by its desire to do which of the following? A. Reduce the uncertainty of demand. B. Reduce the number of processes to be controlled. C. Reduce the uncertainty of demand and erect barriers to potential competitors. D. Reduce the uncertainty of demand, erect barriers to potential competitors, and reduce the number of processes to be controlled.
C. Reduce the uncertainty of demand and erect barriers to potential competitors. Forward integration provides a greater level of control of forward supply channel processes.
What are the 4 things that a competitive advantage does
Competitive advantage can come from a variety of sources: 1. Increasing revenue with the same production costs lowers unit costs and creates economies of scale. 2. Larger operations have more bargaining power with suppliers. 3. New locations can lower transportation costs by shortening distances to raw materials or customers. 4. Certain markets have less expensive labor or access to specialized skills or new technologies.
Global Strategy and competitiveness
Competitiveness is helped by a strong, globally recognized brand, with features carefully planned for a global (not local) market. Economies of scale and/or local proximity could be advantages.
Multidomestic strategy example
Consider a cosmetics company with cross-border subsidiaries. Local businesses develop products and packaging that are aligned with local shoppers' needs. The products are marketed using local competitive practices such as focusing on small shops. This approach allows local businesses to act quickly on threats and opportunities. It does not, however: Promote local-to-global innovation, organizational learning, and competencies. Use the increased customer base for economies of scale or brand recognition.
Merger and Acquisitions objectives
Creating cost efficiencies Expanding geographical coverage Extending product offerings Gaining access to technology, resources, or capabilities Supporting the organization's ability to adapt to the evolution of its industry (e.g., the evolution of publishing from conventional methods to digital media)
In an emerging market for a new product, financially strong companies pose which of the following risks to initial frontrunners? A. Reducing the barriers to entry B. Increasing the complexity of products C. Increasing the velocity of distribution channels D. Acquiring operations of weaker competitors
D. Acquiring operations of weaker competitors Financially strong organizations have the ability to reduce competition by buying weaker marketplace rivals.
A diversified company is typically a collection of businesses. Which of the following is a strategy-making challenge for such a company? A. Becoming a decentralized organization that allows each business to formulate its own corporate strategy B. Making small incremental changes in individual business units based on current market direction C. Gathering local marketing data for each industry and for the businesses within that industry D. Assessing multiple industry strategies, one for each industry arena in which the company operates
D. Assessing multiple industry strategies, one for each industry arena in which the company operates Because a diversified company is a collection of individual businesses, the strategy-making challenge involves assessing multiple industry strategies, one for each industry arena in which the company operates.
A company's final process is currently outsourced. The five-year forecast suggests that the company's shipment volumes will quickly cause the subcontractor to allocate time between all of its customers, extending lead time by 25%. What is a possible solution? A. Finite scheduling B. Less-than-truckload (LTL) shipping C. Backward integration D. Forward integration
D. Forward integration Forward integration is the process of buying or owning elements of the production cycle and the channel of the supply chain toward the final customer.
For a make-to-stock company, what strategy would be appropriate for growth in an existing market when the organization doesn't want to increase its aggregate inventory levels and its products are still in the growth phase? A. Diversification B. Market development C. Product development D. Market penetration
D. Market penetration In the Ansoff product-market growth matrix, four quadrants are formed using existing markets and new markets on one axis and existing products and new products on the other axis. The company wants to grow in existing markets, and this could involve either market penetration or product development. Product development would expand aggregate inventory if new product lines are added. Replacement products are also not needed due to the current products being in the growth phase. Therefore, market penetration is the growth strategy.
Culture and integration
Differences in cultures must be acknowledged and strategies for managing the differences implemented. This includes defining new reporting lines, developing collaboration methods, altering job classifications, and reviewing compensation. The purchaser must also right-size the workforce to remove redundant functions
Fair Trade agreements (FTA)
Fair trade agreements, such as those monitored by the World Trade Organization, aim at protecting markets from extreme competitive practices such as dumping. In dumping, an organization sells its goods into a foreign market at prices well below normal or well below its costs of production.
Horizontal scope of operations- 3 types of ways to accomplish growth
For example, an organization may begin as a producer of baby foods, but it may over time broaden its market offerings to include products for different age groups or needs (e.g., children with allergies, teething products). The organization may accomplish this growth in different ways: By developing its new capabilities entirely in-house. By acquiring new capabilities. By outsourcing the capability.
Horizontal scope of operations- develop its new capabilities in house
For example, an organization may begin as a producer of baby foods, but it may over time broaden its market offerings to include products for different age groups or needs (e.g., children with allergies, teething products). The organization may accomplish this growth in different ways: By developing its new capabilities entirely in-house. It may, for example, research, develop, produce, and market a line of organic foods to appeal to a specific group of consumers. This approach requires significant time and resources and will be hard if rivals are preparing to compete in this same area.
More on transnational Strategy
Global brand customized to local preferences localized policies and processes
How can diversification create new risk
However, diversification can create new risks. It may be difficult for leaders to assess an unfamiliar industry.
What are the risks associated with integration.
If integration is required for the strategy's success, the organization's ability to fold the acquisition into its existing structure and culture will affect the success of the integration. .
Problems with backward integration- example
Let's say that the baby food manufacturer has found a number of challenges with its strategy to expand its product line into organic items. It has not been able to lock in sufficient quantities to keep its new lines busy. It is also meeting resistance from consumer agencies that want greater proof of the organic status of ingredients. The manufacturer decides that it will acquire its own source of raw materials by establishing its own organic farms. It can implement a transparent code of practices that will satisfy outside agencies. It can set planting schedules according to its marketing forecasts.
Global Strategy
Mariott- A global strategy aims to "think global, act global." The organization is highly standardized in that it relies on the same products (with some minor customizations) sold under the same names, and it pursues the same business strategy. Decision making is centralized. The organization commits to building strong brands and uses common marketing channels and messages.
Competitive strength may be based on
Market share Costs and profitability relative to competitors' performance Product features relative to competitors' products Competitive advantages (e.g., strong brand, key supply chain relationships) Synergistic benefits from other enterprises in the portfolio.
Industry attractiveness is assessed based on multiple factors, including
Market size and growth trend Intensity of competition Emerging opportunities and threats Cross-industry strategic fit Resource requirements Macro-environmental effects Industry profitability.
Multi-Factorial Matrices
Matrix tools visualize the relative attractiveness of enterprises and of the entire portfolio of a multi-industry organization. These tools are useful in determining whether an acquisition is a good investment or which current investments remain promising. This can help with adding, maintaining, or divesting decisions.
Why do organizations tend to diversify to decrease volatility?
Organizations diversify to decrease volatility related to a single type of investment or operation in a single area. If management is uncertain about the future of the industry, market, or technology, diversification into multiple industries reduces the organization's vulnerability to changes. A market downturn in one industry may not affect another.
Why shouldn't core competencies be selected for outsourcing.
Organizations must be cautious about the activities they select for outsourcing. They should not be core competencies, those activities that distinguish the organization from its competitors. Integration alternatives to owning or outsourcing include various levels of partnerships with organizations, such as strategic alliances, joint ventures, and so on.
Why do organizations pursue diversification strategies
Organizations often pursue diversification strategies when their original markets are saturated or declining or when evolving macro-environment conditions (e.g., new technology, changes in consumer habits) are eroding market size and profitability. Alternatively they may find opportunities to leverage existing assets and capabilities.
What does unrelated diversification do?
Organizations that are well-managed may be able to invest their assets and skills to acquire and restructure undervalued businesses. Unrelated diversification does not offer an opportunity for synergy.
How can outsourcing be profitable
Outsourcing may also be advantageous when an organization can put its own resources to more profitable use—to developing new product lines, for example.
How can a pharmaceutical organization use profit sanctuaries?
Pharmaceutical organizations have used profit sanctuaries. When regulations and market size restricted growth in Europe, many companies entered the U.S. market, where they earned considerably more profit. These profits were directed into product and market development and competitive activities. .
Better-off test
The "better-off" test assesses whether diversifying the organization creates synergy. For example, a baby food manufacturer purchasing a children's apparel business would expect the returns of the new diversified company to exceed those of the original two businesses.
Risk and loss of control with outsourcing
The advantages of outsourcing do come with risks and a loss of control. Outsourced products or services may not meet time, quantity, or quality specifications. Prices may be increased, affecting the organization's costs and profit. In some cases, the supplier may have access to proprietary information, which creates the risk of lost assets and possibly competitive differential.
Vertical Integration
The degree to which a firm has decided to directly produce multiple value-adding stages from raw materials to the sale of the product to the ultimate consumer. The more steps in the sequence, the greater the vertical integration.
Horizontal scope of operations- New capabilities
The organization may discover an opportunity to purchase or merge with another organization that aligns well with the business strategy. For example, a company that has introduced a line of organic infant foods may need additional capital to meet its own strategic goals. Its owners agree to sell, allowing ready-made access to this customer group and additional capability. This approach also requires resources, but it offers the opportunity of enabling the organization to enter this market area quickly, building a market share and enjoying a period of uncontested competitive advantage. Analyzing potential mergers and acquisitions is complex. We discuss below some of the factors that an organization must consider in choosing this route to grow scope.
Outsourcing
The process of having suppliers provide goods and services that were previously provided internally. Outsourcing involves substitution—the replacement of internal capacity and production by that of the supplier.
Product development
This is when if a business chooses to grow within its current market. The organization focuses on growing within its existing market by introducing new products. For example, a camping goods manufacturer decides to add an outdoorsy clothing line, which still maintains its market focus. Another example is replacing a product in decline with a new product introduction that helps maintain market share by resetting the product life cycle.
market penetration
This is when if a business chooses to grow within its current market. The organization pursues a larger market share in the existing market with the same product, perhaps by focusing advertising on a new customer group, by being more aggressive with competitors, or by differentiating its product from its competitors' products. For example, a camping goods manufacturer decides to revise its advertising tactics to appeal to an older customer.
Market development
This is when- A business may choose to grow outside its current market. The organization decides to sell its existing products in a new market—for example, a new geographical market. The camping goods manufacturer opens a distribution channel in an overseas market.
Diversification
This is when- A business may choose to grow outside its current market. The organization decides to extend its scope, to start performing entirely new activities. The camping goods manufacturer acquires a chain of vacation-oriented motor home parks.
Unrelated Diversification Strategies
Unrelated diversification strategies involve organizations with different value chain activities and/or different types of resources. They can be seen as a form of corporate investment. For example, a camping goods manufacturer who acquires a chain of vacation-oriented rentals is implementing unrelated diversification. Assets and supply chain relationships will not be very helpful in promoting this new venture.
When would backward integration make sense
When an organization can produce raw materials, parts, or services with at least the same efficiency, reliability, and quality as suppliers, backward integration may make sense. It doesnt add risk by focusing on the core competencies It offers more control over the cost, timing, and quality of supplies—a valuable competitive advantage when there are few suppliers and they exert power over their customers
forward integration baby food example
When an organization depends on the goodwill of its distribution channel partners, it must be careful in its use of forward integration. It can create ill will and drive distributors away. For example, if the baby food manufacturer begins to market a sizable portion of products directly to consumers via its own internet site, retailers may retaliate by cutting the amount or quality of shelf space allotted to the manufacturer's products.
Cost of entry
Will the potential profit outweigh the investment? Barriers are generally higher in attractive industries; when low, there are more entrants.
market segmentation
a marketing strategy in which the total market is disaggregated into submarkets, or segments, that share some measurable characteristic based on demographics, psychographics, lifestyle, geography, benefits, and so forth.
profit sanctuary
a profit sanctuary is created when an organization expands into a foreign market and enjoys a strong and protected competitive position, which then supports competitive activities in the organization's domestic and foreign markets.
Intermediate customers
are not at the end of the supply chain. A raw material supplier may count several manufacturers among its intermediate customers, and one or more of these manufacturers could be grouped by similar requirements.
Ultimate customers
are the final recipients of the products or services. The ultimate customer could be an organization that is purchasing goods or services for its employees or constituents, in which case segmentation must also differentiate between organizational customers and end users.
horizontally integrated firm
as one that "produces or sells similar products in various geographical locations." The organization makes and sells the same kinds of things but in different geographical areas.
Raw material components and global strategy
or example, some components may be manufactured in countries where raw materials are closer or skills are more available. Assembly occurs close to the customers. If a disaster halts operations in one country or additional capacity is needed, another country may be able to step in.
forward integration
process of buying or owning elements of the production cycle; the channel of distribution forward toward the final customer. 1. An organization gains more control over distribution and the sales of there goods 2. Can be monopolistic or create or will with current distributor network
What does Diversification represent
represents a significant investment and the exposure of resources to a broader array of risks while reducing the volatility from investment in a single area. Diversification for the sole objective of growth is not necessarily wise. Sounder reasons include competitive need and the opportunity for mutual growth
Horizontal scope of operations- outsourcing
the organization may decide that it will purchase product from another producer who will manufacture, package, and distribute the product to the organization's specifications. This is, in effect, adding a supplier to the organization's value chain. It is a rapid and less resource-intensive way to acquire a capability, but it carries other risks. Will the partner deliver the required quantity and quality of goods/services in the required time frame?
customer segmentation
the practice of dividing a customer base into groups of individuals who are similar in specific ways relevant to marketing. Traditional segmentation focuses on identifying customer groups based on demographics and attributes such as attitude and psychological profiles.
backward integration
the process of buying or owning elements of the production cycle and channel of distribution back toward raw material suppliers.