MGT 409 Exam Lecture

Benefits of Vertical Integration

1. A secure source of raw materials or distribution channels. If in volatile industry, locks in supplies and increases security. Locking in critical dist. chains increases security 2. Protection of and control over valuable assets. Ex: in diamond industry investing in mines, control over tech 3. Proprietary access to new technologies developed by the unit. Controlled and owned and rivals don't have access to it 4. Simplified procurement and administrative procedures. May be simpler to earn instead of contracting with outsider. Can reduce transaction/contract costs

Risks of Alliances

1. Appropriation of knowledge or technology 2. Destructive incompatibility -Cultural differences -Strategic differences 3. Adverse Selection-picking a bad partner that might not have the necessary competencies 4. Moral Hazard-partner has mixed motives. Maybe in their economic incentive to cheat on alliance. 5. Holdup-partner says we have a deal but they need to renegotiate. Squeezing partner by continuous renegotiation. 6. Additional-Sharing authority reduces flexibility and returns. Spillover effect occurs if something bad happens to partner which affects your brand

Benefits of Differentiation

1. Brand loyalty (allowing premium pricing)-Lessens rivalry and power of buyers-increases entry barriers 2. Decreased threat of substitutes-more differentiation less utility subs can provide. Specialized utility 3. Attract prestigious buyers-signal to market that your brand is worth having. (ex: what brand tiger woods uses for golfing) 4. Critical supplier or customer-reduces supplier or buyer power because we have become to be seen as high value and buyers lack alternatives 5. Provides higher margins thus avoiding low-cost position which decreases supplier power

Market Strategies

1. Broad-within the industry or setting, we are trying to provide all types of products for all customers. (GM is broad) 2. Narrow-serving a narrow set of customers, may only be meeting some of the needs of all customers. (Honda has a narrow set of cars.) 3. Standard perceived value-normal nothing special. 4. Superior perceived value-customers think your product is better Low Cost MUST have at least standard value. However low cost does not mean low price

Attributes of Successful Alliances 2

1. Commitment & Integration -Credible commitments: Equity stakes (builds trust), Long term contracts, Cost participation (share costs) -Human investment: Board membership (put members on each others board), Working groups (commit people in our staffs to work together, firms may hire people to ensure collaboration) -Mutual hostages-you rely on me for something, so ill find a way that you can rely on me for something 2. Compatibility -Leadership -Strategic posture -Administrative heritage & practices -Cultural heritage

Making M&As Work

1. Concrete value creation-Synergies, economies of scope, market power 2. Disciplined valuation and willingness to walk away: No bidding wars 3. Appropriate targets -Close geographically (similar ops, networks, can coordinate) -Close in market space (compete in close industries and related geographic markets) -Similar Cultures -1/3 as large or smaller-equal companies bicker 4. Diligent integration planning and implementation-have plan Caution: learning is difficult-first acquisition usually creates value but next create less and less value. No acquisitions are the same so just because something worked out doesn't mean it always will

Non-Value Enhancing Motives for Diversification

1. Current poor performance/limited growth 2. Use of excess debt capacity and/or available cash 3. Core industry is volatile-risk reduction through investment in other businesses. This only creates value for management 4. Desire for increased compensation and/or power-Or the narcissistic desires of CEOs-doing for glory or ego 5. Bandwagon pressures-my competitors are doing it and I follow their lead. 6. Tax benefits-modest/short 7. Internal capital markets-want to be able to generate revenue in house instead of going to external markets. Bad thing about internal capital markets is investing decisions can be political (CEO doesn't like me so no funding). Or business doesn't have enough money.

Questions to Ask or International Expansion

1. Do our resources transfer into the markets we are considering entering? 2. Are our products/services appropriate for this market? 3. What are the opportunity costs? 4. What are the structural barriers that we will have to overcome? (e.g. Political/regulatory, social network)

Foundations for Cost Advantage

1. Efficiency in Production System -Economies of sPcale: lower cost per unit and labor and marketing (Budweiser) -Learning Advantages: (Pixar/Boeing) -Technology in production: automated lower costs 2. Preferential Access to factors of production-input needed is cheaper. Can have this due to contract and relationships and ideal facility locations (Volkswagen in Chattanooga) 3. Preferential Access to Distribution Networks-May have market power over distributor which allows cheaper dist. costs. May have greater timing which allows you to get best contracts earlier. Disintermediation means cutting out wholesaler/retailer. (dell sell directly, Southwest no travel agents) 4. Firm infrastructure and overhead- small corporate structure. (Vizio has cheaper overhead then Apple) 5. Product attributes-fewer attributes means less cost. Less complex products that are simpler. Crankable windows in new cars

Value Enhancing Motives for Diversification

1. Exploit opportunities for economies of scope (strategic synergies) -cost savings from leveraging core competencies or sharing related activities among businesses in a corporation. 2. Sharing of Intangible Resources-Nike has 1 brand so they don't have to advertise for all their products businesses. Reduced marketing costs. Human resources can do multiple designs for many products across multiple businesses 3. Sharing of tangible resources-Meijer can open a gas station in front of its store (can have convenience store and subway inside, same real estate just using more fully). This is economies of scope, leveraging real estate more efficiently. GM gets economies of scope by efficient production plants that serve multiple brands. KFC taco bell have common warehouse distributing to different stores. Leveraging trucks.

Methods of Expanding Firm Scope

1. Greenfield (internal development)-build ourselves 2. Merger or Acquisition 3. Strategic Alliance

M&A

1. Inadequate due diligence 2. Failure to integrate businesses: Overestimating synergies (may have overestimated value), Culture clashes (fight over who dominates) 3. Failure because the action was driven by personal characteristics -Narcissism-ego, want to run big business and overpays -Overconfidence -Regulatory Focus (promotion orientation-drive to succeed and win which means you become more risky and end up overpaying and failing) 4. Loss of managerial attention-as you acquire other businesses you lose focus of core businesses. 5. Loss of critical resources-most commonly human capital. Often time employees from company that's being acquired leaves. Customers may follow.

Pitfalls of Low-Cost

1. Increase in the cost of inputs on which the advantage is based 2. Easily imitated-plant in the south can be easily imitated because it advantage is only based on location 3. -Lack of parity in differentiation-can become so focused on cost you can make a product people aren't interested in McDonalds did this. 4. Reduced Flexibility- If I invest in large scale ops, it reduces my ability to change in marketplace if demand changes. Firm built for a specific environment 5. Obsolescence of the basis of cost advantage-Basis goes away 6. Too much focus on one or a few value-chain activities

Reasons for Expanding Internationally

1. Increase market size: US makes up small part of global pop, and their is a growing affluence in developing markets 2. Enhancing Growth Potential -Maturing Domestic Market: Maintenance of growth rate (can obtain new areas of growth), product life extension (revert to earlier stage in different environment) 3. Improve Efficiency -Cost Reduction: lower labor costs and lower tariff areas -Global economies of scale -Closer to raw materials -possibly to avoid environmental restrictions (lower costs but bad effects) 4. To Control Core Competencies and image: response to the globalization of brand names and demand, to gain control of image response to the pitfalls of importers and gray marketers 5. In response to demands of customers-customers may want you to service them in multiple markets 6. To Diversify Risk: limit exposure to regional recession and limit impact of competition in a single country on corporate profits (can use other mkt funds to fund attacks)

Vertical Integration Pitfalls

1. Increased capital investment and overhead costs. If doing it yourself you need to invest more for necessary resources. 2. Loss of flexibility from large scale investments. Increases firm risk because everything commonly owned so you can't easily switch due to investment in a vertical chain and if demand changes hard to meet it 3. Higher administrative costs associated with more complex set of activities: Coordination costs (coordinating business units) 4. Reduced efficiency over time (also excess production possible): "low power incentives"-in house suppliers not threatened that they will lose business if quality/price not good enough because we are required to buy from them because they are in house 5. Unbalanced capacities along the value chain

Benefits of Low Cost Strategy

1. Lowers the danger from price wars-can match anyone price if low cost -Rivalry and new entry threats are less likely because firms will have to match your efficiency 2. Better able to weather vertical challenges -Supplier and buyer threats-Can be flexible and weather supplier increases in costs and buyers can only push down prices to the level of the next most efficient producer 3. Lessens threat of substitutes-less likely to challenge me by having a lower cost item. 4. Price discretion and increased returns-More capable of being flexible with price if low cost and can drive others out of business

Pitfalls of Niche Strategy

1. Niche disappears as product matures- ex: graphics computers faded and are replaced by basic computers 2. Niche grows-attracts more and larger competitors. 3. Competitively vulnerable to new entrants (usually low barriers to niche)-small firm in a niche market can be out scaled and out funded by big competitors due to their success in other places 4. Limited growth potential-staying inside niche means you can only grow so much. But if you grow outside it you lose efficiency and other service advantages. 5. Firms can be too focused to meet evolving customer needs-can be so focused on the niche and then it becomes difficult to meeting evolving customer needs 6. Cost advantages may erode within the narrow market segment

Risks in International Environment

1. Political Risks: governmental instability, wars, corruption/crime, trade disagreements, tariffs and taxes, investment regulations 2. Economic Risk: currency fluctuations, foreign exchange availability (some countries don't allow exchange), inflation rates 3. Management Risks: Complexity with being in more countries, coordination costs, social and cultural risks-language/translation issues, social customs (negotiating), misunderstanding market history, motivating workers and decision styles (individual or collective)

Potential Benefits of Niche Strategy

1. Reduced entry barriers-can move in at lower cost compared to large scale operator 2. Local monopoly benefits-not lots of players, have a cozy area. Not enough profit for big companies •Reduced rivalry-not enough profit for big companies •Reduced power of buyers-higher switching costs due to niche differentiation 3. More focused value chains and resource sets •Efficient-more efficient because only doing a few things and only serving small base. Lower costs for parts and training •Service advantages due to focused competencies-only focused on 1 thing so more competent on it than others. Employees have very focused skills and they are faster and more efficient

Reasons for M&A

1. Speed-don't need to fight and you know what mkt share and resource you're buying 2. Overcome entry barriers-if social network or regulatory barriers can get past it with M&A. Acquisition may already have social contacts 3. Tangible resources-really valuable resources owned by the company your acquiring. May not be able to build yourself.

Overall Cost Leadership

1. Tight cost and overhead control 2. Avoidance of marginal customer accounts-80/20 rule. Avoid high maintenance accounts. Keep must efficient customers. Retailers using AI to identify customers who return lots of products 3. Cost minimization in all activities in the firm's value chain-entire org and activities in chain emphasizes low cost. Do this by deciding to outsource activities (HR). 4. Aggressive construction of efficient-scale facilities (Largely scaled but efficient)

Pitfalls of Differentiation

1. Uniqueness that is not valuable-may lose perceived value 2. Too much differentiation-try to add too many elements and customers may decide there not interested 3. Too high a price premium-increases cost because you're trying to add to many things which reduces profitability 4. Dilution of brand identification through product-line extensions-can be diluted by trying to go into too many markets and leads to not being seen as unique any more. Can dilute by trying to broaden market (Porsche went from sports cars to to SUV) 5. Difference in perception of differentiation between buyer and seller/Product becomes a commodity-Customers do not value it because competitors comes out with a new product and everyone copies it. In tech industry new things became standard quick 6. Differentiation that is easily imitated

Fundamental Questions to Assess Value of Potential Diversification

1. What strategic resources do we have that will allow us to out-compete entrenched firms in this market? 2. What additional strategic resources do we need to succeed in this market? 3. With these resources, will we be able to beat incumbents at their own game or redefine the game to our benefit? 4. What effect would this diversification have on our existing businesses? (better or worse)

Determinants of National Competitive Advantage

1. factor conditions 2. demand conditions 3. related and supporting industries 4. firm strategy, structure, and rivalry *Just use textbook and review film industry examples

Value Enhancing Motives for Diversification 2

4. Leveraging Core Competencies: a firm's strategic resources that reflect the collective learning in the organization. -How to coordinate diverse production skills-across multiple units -How to integrate multiple streams of technologies -How to market diverse products and services 5. Developing Market Power-firms' abilities to profit through restricting or controlling supply to a market or coordinating with other firms to reduce investment. Ability to signal and control market with current power 6. Multi-point competition-when I compete with someone in a range of industry. We signal correlate with each other and are less rivalrous. Both sides get tired of tit for tat attacks in different markets. May face retribution from rival in another markets so reduced rivalry 7. Bargaining power (pooled negotiating power)-The improvement in bargaining position relative to suppliers and customers. Bigger I get the better my positioning is in bargaining.

Reasons for Expanding Internationally 2

7. To improve capabilities (learning opportunities) -improve product by competing in most highly developed markets-can compete elsewhere due to knowledge gained -access to advanced technology and/or production methods (learn better ways) -reverse innovation-learn from foreign markets and bring it back to domestic market. -access to educated work forces

Aims of Strategic Alliances

Access to capital-Small firms can get access to capital by aligning with big companies. Distressed companies work with other companies to get access to capital to be able to weather the storm in bad situations Vertical-if you work with dedicated supplier you are more able to coordinate activities and be more efficient and effective. Vertical integrations means more inefficient but strategic alliance allows you to negotiate and get good price and work well together and change terms based on contracts More likely to use alliance when transaction cause higher. Asset specificity-very specific to an organization or transaction. Not valuable to anyone else but me, item is very specific to me, supplier can't sell elsewhere. The more you make asset specific investments; an alliance would better allow you to facilitate those transactions. Likely to see an alliance when you are uncertain about when production starts, quantity, tech components needed. The more frequently I interact with you the more of a hassle it is to reorder, so you set up an alliance to have an automated flow of products.

Transnational Strategy

Balance for low costs/global integration and being adaptive. Coca-Cola is an example Central unit has back office operations and is done globally to be as efficient as possible. Geographic regions are trying to be decentralized in end market activities. You have global R&d but still tailor product for each market you are in and you develop market message for each market. May customize product so you need localized production. Trying to centralize back operations for efficiency and decentralize end market activities to be as resposnvie to those markets as much as possible. Arrows emphasize a heavy degree of communication across different regions Benefits: globally efficient and locally responsive, lots of learning and knowledge transfer (designs and innovations gets transferred across markets due to communication) Costs: Complex to manage, not as responsive as other firms nor are you as efficient as true global firms (this strategy is more of a compromise way of operating)

Stuck In Middle

Companies that don't identify with any of the strategies. Not low cost or differentiated or focusing on specific market needs. On average, the lowest performing firms

Corporate Level Strategy

Corporate level strategy revolves around the actions taken to gain a competitive advantage through the selection and management of a mix of businesses competing in several product markets or industries Based on 3 Questions 1. What business areas should a company participate in so as to maximize its long-run profitability? 2. What strategies should it use to enter into and exit from the business areas? 3. How should the firm foster coordination and cooperation across business units in order to maximize their values?

Foundations of Differentiation

Differentiation is about increasing switching costs. Real switching costs occurs when an airline manufacturer switch to another supplier. Psychological switching costs pain or challenge to switch because you like a brand but alternative may be just as good Product or Service Attributes-do people perceive the attributes or services to be better. Doesn't matter if actually better. Although it can't be only perception because it will erode over time. However, if product is better there is differentiation Bundling of products increases switching costs and thus differentiation Service level-competitors may not be able to match great service and response capabilities Distribution-better distribution and location. Beer vendor at a sports event has advtg. due to location and has high switching costs Identification-linking another brand or identity with your brand which raises the value of yours. Intel with computers. MJ and Air Jordan's. Mcdonalds and Pixar

Aims of Critical Resources and Core Competencies

Firms can have multiple of these core competencies but usually 1 or 2 1. Creating Superior Efficiency-leads to lower unit costs (faster and less parts and cheaper, e.g. Walmart) 2. Generating Superior Innovation-lower unit costs and higher unit prices. (fewer parts and more innovative so customers willing to pay more) Tesla, Google 3. Developing Superior Quality-lower unit costs and higher unit prices. (less scrap/rework so shorter warranties and people willing to pay more for higher quality) 4. Providing Superior Customer Responsiveness-Leads to higher unit prices and POSSIBLY lower unit costs. Customer responsiveness is meeting the needs of customers more effectively/providing high service levels or high customization or high availability like ATMs. More I meet you needs, the more you are willing to pay. There is some connection to lower costs. Companies that don't have after season sales because of good responsiveness have lower costs. (ex: Dell order system)

Multidomestic strategy

Has quasi independent companies competing in other markets. Each large circle could represent a large market like Asia or Europe (stand alone enterprises). Knowledge is created in local market and is shared to corporate office. Arrows inward Benefit: adaptive to local market, seen by locals and gov as a native company, low currency risk because each market is independent, low coordination costs Costs: not globally scaled (each market has owned operations and activities), not localized to minimize costs (not putting ops in most efficient place just in that market) , no learning between mkts, inconsistency in strategy/image (market can see themselves as different from org) Ex: Duncan Donuts

Aims of Strategic Alliances (2)

If tech uncertainty exists in mkt, you may want to use an alliance to retain options on a range of tech so you can experiment and manage uncertainty. May prelude an acquisition, if I align with you I'm keeping an option open on a tech that looks like a winner and I may go out and buy it. Growth management-grow faster through franchising without having to raise the capital and gain management skills Network Benefits-more for multilateral alliances. Easier to invest in tech that may cost billions if other firms are involved you can share costs and risks. Co development of standards-companies may come together to work on a common charging battery standard for electric cars. Big companies in a country may come together to lobby for the gov. to protect them from international entrants

Strategic Alliance

Long standing, cooperative relationships between multiple organizations for the purpose of developing, manufacturing, distributing, or selling products and/or services. (not single contract or acquisition, in between) Types 1. Contractual (non-equity) alliances-sign a contract to work with a company for a period. Used for simple agreements like marketing(3 year deal with cable company) 2. Equity alliances-I buy part of your company or vice versa or we both buy parts of each's company. Common ownership aligns interests facilitates trust and cooperation because both sides invested 3. Joint ventures-when we create new legal entity different from parent corp. Each side owns a stake in this. It runs as a quazzi independent business..

Characteristics of Market Niches

Possible to Have a Combination 1. Variety Based-Firms focus on narrow product or service segments in a wider industry. Ex: some auto repair companies do everything. Some auto places only do oil changes. 2. Needs Based-Targeting a narrow segment of customers. Ex: financial firms that specifically serve Chinese customers. Some boutique banks are aimed at high net worth individuals. 3. Access Based-Targeting based on geographic segments or distribution channels. Only sell in certain places. Amazon is access based because they ONLY DO 1 distribution channel, online. Local restaurants only serve local base.

Global Strategy

Puts marketing and R&D where it makes most sense to put it. Operating on global scale and doesn't see individual markets. Locate optimally to serve a global market. Benefits: got operations where they should be optimal location, globally scaled in all operations, consistent image, good flow of information in both directions from corporate HQ and units. Costs: we're not very globally responsive (message is pretty much the same on global basis), may have difficult governmental relations (If price for production goes up you move which leaves bad governmental relations), overly reliant on a single location for key activities (earthquake can knock down production, so out of business globally) (if tariffs increase its affects entire costs and you need to move), firms are slower because they need to coordinate all activities on a global scale

Basis for Strategic Advantage

Successful Differentiator-build a little cost structure into their product, but it generates a greater increase in customer willingness to pay. Successful low-cost firm does opposite of above-they greatly cut loss. Cost reduction must be greater than the drop-in willingness to pay. Dual Advantage-holy grail-reduce costs and increase willing to pay. To some degree Starbucks has done this. They mass purchase coffee beans and retain employees which lowers cost structure. The beans and service then leads to higher quality, but most firms typically don't have dual advantage

Business Level Strategy

The position firms strive to stake out in a single product market and the actions they take to support that positioning. Key Points 1. A single product market 2. Firm positioning relative rivals 3. Drawing on the firm's resources and capabilities

Why firms diversify and different types

The underlying motive should be to build economic value: To create economic value, a diversifying firm must get into businesses that can perform better under common management than they could perform as independent, stand-alone enterprises. 1. Dominant-Business that dominates the overall sales of the portfolio, at least 75% comes from A (1 bus. Unit) to be dominant and less than 25% for other businesses. 2. Related Constrained-More resource overlaps, business share many things. Not related in products just resources and value chain. Flexibility is constrained because resources are used among many brands. 3. Related linked-shares some resources but doesn't constrain EX: Nike shares brand across range of products. But tennis rackets shoes and clothing don't share sources of supply, not manufactured in same place, and not distributed thru same channel. They all just share the Nike brand. Can't release bad products because It will affect overall brand. Link limited If you can reuse primary activities on the horizontal chain/axis its related. If you're limited to support activities then it's an unrelated diversification 4. Unrelated-link is very limited. Ex: GE makes lots of products that have almost no relationship engines MRI. Don't really share a brand because there are sub-brands. GE sells to different customers so one product doesn't really affect others

International Strategy

Usually 1st step in globalization. Overall direction is done in one place the firms home market. Circles outside the big one are done outside the home market. All arrows going outwards Decision making and authority and knowledge flow from the center and out to the geographic units. *Benefits: low costs to implement and centralized international expertise. International division is responsible for everything outside the home market Downsides: limited emphasis, don't adapt products or marketing to the needs of the market, not localized to minimize the costs (only dist./prod. abroad), doesn't enhance learning

Vertical Integration

When a firm becomes its own supplier or distributor. -Integrating preceding or successive production processes in value chain Backward integration get us closer to raw materials/source, forward gets us closer to customer (ex: distribution channel).

Diversification

the process of firms expanding their operations by entering new businesses.