MGT 409 Exam 2

maturity stage

-Aggregate industry demand slows -Market becomes saturated, few new adopters -Direct competition becomes predominant -Marginal competitors begin to exit

cost reduction or adaption to local markets

Assumptions may be incorrect. Product markets DO vary widely between nations - local adaptations work. There is a growing interest in multiple product features, product quality, & service. Technology permits flexible production; cost of production may not be critical to product cost; and a firm's strategy should not be solely product driven. "One size fits all" does NOT generally apply.

Portfolio management

BCG growth/share matrix

integrating low cost and differentiation

Firms' integrations of various strategies can provide multiple types of value to customers. A combination low-cost and differentiation strategy enables a firm to provide two types of value to customers: differentiated abilities ( e.g., high quality, brand identification, reputation) and lower prices (because of the firm's lower costs in value creating activities).

Pooled negotiating power

Gaining greater bargaining power with suppliers & customers

three generic strategies

Both casual observation and research supports the notion that firms that identify with one or more of the forms of competitive advantage outperform those that do not. According to the above study, businesses combining multiple forms of competitive advantage (differentiation and overall cost leadership) outperformed businesses that used only a single form. The lowest performers were those that did not identify with any type of advantage. They were classified as "stuck in the middle."

internal development

Corporate entrepreneurship & new venture internal development motives: No need to share the wealth with alliance partners. No need to face difficulties associated with combining activities across the value chains. No need to merge diverse corporate cultures. No need for external funding for new development. Limitations: Time-consuming Need to continually develop new capabilities

how do corp. achieve synergy

Corporations can also achieve synergy by sharing activities across their business units. Sharing tangible & value-creating activities can provide payoffs. Cost savings through elimination of jobs, facilities & related expenses, or economies of scale Revenue enhancements through increased differentiation & sales growth, (Starbucks purchase of a small bakery chain; Target expanded into groceries.)

globalization

Globalization has to do with the rise of market capitalization around the world. International exchanges have increased. Trade in goods & services Exchange of money, information, & ideas Laws, rules, norms, values, and ideas are growing more similar across countries. One is the increase in international exchange, including trade in goods and services as well as exchange of money, ideas, and information. Two is the growing similarity of laws, rules, norms, values, and ideas across countries.

managerial motives

Managerial motives: Managers may act in their own self interest, eroding rather than enhancing value creation. Growth for growth's sake Top managers gain more prestige, higher rankings, greater incomes, more job security. It's exciting and dramatic! Excessive egotism Use of antitakeover tactics

managing international expansion risks f

Managing economic risk can be done through global dispersion of value chains. Various activities of the firm's value chain can be spread across several countries & continents via Outsourcing Offshoring

mergers and acquisitions

Mergers involve a combination or consolidation of two firms to form a new legal entity. On a relatively equal basis Relatively rare Acquisitions involve Firm X buying Firm Y either through stock purchase, cash, or the issuance of debt. Firm Y then ceases to exist.

Dimond of national advantage

Michael Porter's diamond of national advantage explains why some nations and their industries outperform others. Factor endowments Demand conditions Related and supporting industries Firm strategy, structure, & rivalry

differentiation implies

Products and/or services that are unique & valued Emphasis on nonprice attributes for which customers will gladly pay a premium -a firm's generic strategy based on creating differences in the firm's product or service offering by creating something that is perceived industrywide as unique and valued by customers. **Firms may differentiate themselves in both primary and support activities.

The corporate parenting advantage

Providing competent central functions

what are the four attributes in the diamond

Factor endowments = a nation's position in factors of production. Demand conditions = the nature of home-market demand for the industry's product or service. Related and supporting industries = the presence, absence and quality in the nation of supplier industries and other related industries that supply services, support, or technology to firms in the industry value chain. Firm strategy, structure, and rivalry = the conditions in the nation governing how companies are created, organized, and managed, as well as the nature of domestic rivalry.

Differentiation achieve and sustain

Firms achieve and sustain differentiation advantages and attain above-average performance when their price premiums exceed the extra costs incurred in being unique, but a differentiator cannot ignore cost. Differentiators must reduce costs in all areas that do not affect differentiation.

pitfalls of cost leadership ext.

Firms need to pay attention to all activities in the value chain. Managers should explore all value-chain activities, including relationships among them, as candidates for cost reductions. Firms can also be vulnerable to price increases in the factors of production. A firm's strategy may consist of value-creating activities that are easy to imitate.

diversification can be accomplished via

There are three basic means by which a firm can diversify: -Mergers & acquisitions -Strategic alliances & joint ventures -Internal Development through -Corporate entrepreneurship -New venture development Through mergers and acquisitions, corporations can directly acquire another firm's assets and competencies. A firm can also divest previous acquisitions.

pitfalls of cost leadership

Too much focus on one or a few value chain activities Increase in the cost of the inputs on which the advantage is based Strategy can be too easily imitated A lack of parity on differentiation Reduced flexibility Obsolescence of the basis of a cost advantage

pitfalls of combination strategy

Firms that fail to attain both overall low-cost and differentiation strategies may end up with neither and become "stuck in the middle." Firms can also underestimate the challenges and expenses associated with coordinating value-creating activities in the extended value chain. Firms can also miscalculate sources of revenue and profit pools in the firm's industry. A key issue in strategic management is the creation of competitive advantages that enable the firm to enjoy above average returns.

transaction cost perspective

Transaction cost perspective = a perspective that the choice of a transaction's governance structure, such as vertical integration or market transaction, is influenced by transaction costs, including search, negotiating, contracting, monitoring, and enforcement costs, associated with each choice. Transaction costs are the sum of the above costs.

limitations to transnational strategy

Unique challenges in determining optimal locations of activities to ensure cost and quality. Unique managerial challenges in fostering knowledge transfer.

what forms can combining low cost and differentiation

-Automated and flexible manufacturing systems allow for mass customization. -Data analytics allows firms to customize product and services while using resources efficiently. -Exploitation of the profit pool concept creates a competitive advantage. -Using information technology, firms can integrate activities throughout the extended value chain. -Many firms have also achieved success by integrating activities throughout the extended value chain by using information technology to link their own value change with the value chains of their customers and suppliers.

A firm may diversify into unrelated businesses.

-Benefits derive from hierarchical relationships. -Value creation derived from the corporate office -Leveraging support activities in the value chai

A firm may diversify into related businesses:

-Benefits derive from horizontal relationships. -Sharing intangible resources such as core competencies in marketing -Sharing tangible resources such as production facilities, distribution channels via vertical integration

focus strategy has two variants

-Cost focus -Differentiation focus A narrow focus by itself is not sufficient for above average performance. Firms must choose either a cost or a differentiation focus. Both variants of the focus strategy rely on providing better service than broad-based competitors who are trying to serve the focuser's target segment.

Cost focus

-Creates a cost advantage in its target segment -Exploits differences in cost behavior

overall focus strategy

-Creates higher entry barriers due to cost leadership or differentiation or both -Can provide higher margins that enable the firm to deal with supplier power -Reduces buyer power because the firm provides specialized products or services -Focused niches less vulnerable to substitutes Provide defenses against each competitive force.

Differentiation focus

-Differentiates itself in its target market -Exploits the special needs of buyers

pitfalls of focus

-Erosion of cost advantages within the narrow segment -Highly focused products and services still subject to competition from new entrants and from imitation -Focusers too focused to satisfy buyer needs

the decline stage

-Industry sales and profits begin to fall. -Price competition increases. -Industry consolidation occurs. Strategies: Maintaining the product position Harvesting profits and reducing costs Exiting the market Consolidating or acquiring surviving firms

industry life cycle

-Introduction -Growth -Maturity -Decline Generic strategies, functional areas, value-creating activities, and overall objectives all vary over the course of an industry life cycle. Managers must strive to emphasize the key functional areas during each of the four stages and to attain a level of parity in all functional areas and value-creating activities.

what are the strategies for decline stage

-Maintaining the product position -Harvesting profits and reducing costs -Exiting the market -Consolidating or acquiring surviving firms

How does Diversification initiatives must create value for shareholders through

-Mergers and acquisitions -Strategic alliances -Joint ventures -Internal development -Diversification should create synergy.

Related businesses gain market power by:

-Pooled negotiating power -Vertical integration

what forms can differentiation strategy make

-Prestige or brand image -Quality -Technology -Innovation -Features -Customer service -Dealer network

Limitations of portfolio models:

-SBUs are compared on only two dimensions & each SBU is considered a standalone entity. -Are these the only factors that really matter? -Can every unit be accurately compared on that basis? What about possible synergies? -An oversimplified graphical model is no substitute for managers' experience. -Following strict & simplistic rules for resource allocation can be detrimental to a firm's long-term viability.

pitfalls of focus cont.

-The advantages of a cost focus strategy may be fleeting if the cost advantages are eroded over time. -Some firms adopting a focus strategy may enjoy temporary advantages because they select a small niche with few rivals. However, this strategy can be imitated. -Finally, some firms attempting to attain advantages through a focus strategy may have too narrow a product or service.

pitfalls of differentiation

-Uniqueness that is not valuable -Too much differentiation -Too high a price premium -Differentiation that is easily imitated -Dilution of brand identification through product line extensions -Perceptions of differentiation may vary between buyers and sellers

overall cost leadership involves:

-aggressive construction of efficient scale facilities -vigorous pursuit of cost reducations from experience -tight cost and overhead control -avoidance of marginal customer accounts -cost minimization in all activities in the firms value chain, such as R&D, service, sales force, and advertising

overall cost leadership is based on:

-creating low-cost position relative to a firms peers -managing relationships throughout the entire value chain to lower costs *requires a tight set of interrelated tactics

what are the most common factors producing the experience curve

-workers getting better at what they do -product designs being simplified as the product matures -production processes being automated and streamlines

overall differentiation strategy

1. Creates higher entry barriers due to customer loyalty 2. Provides higher margins that enable the firm to deal with supplier power 3. Reduces buyer power because buyers lack suitable alternatives 4. Establishes customer loyalty and hence less threat from substitutes

improving competitive position: cost leadership

1. Protects a firm against rivalry from competitors, because lower costs allow a firm to earn returns even if its competitors eroded their profits through intense rivalry. 2. Buyers can exert power to drive down prices only to the level of the next most efficient producer because there are relatively few competitors that can provide a comparable cost/value proposition. 5. Because the cost advantage can be applied across all operations, a low-cost position puts the firm in a favorable position with respect to substitute products introduced by new and existing competitors.

experience firms will _________ if the firm __________ and __________

1. only be the foundation for a cost advantage 2. knows the source of cost reduction 3. can keep those gains proprietary

what are Porter's three generic strategies

1. overall cost leadership 2. differentiation 3. focus

overall low-cost position

1. protect firm against rivalry from competitors 2. protects the firm against powerful buyers 3. provides more flexibility to cope with demand from powerful suppliers who want to increase input costs 4. provides substantial entry barriers due to economies of scale and cost advantages 5. puts the firm in a favorable position with respect to substitute

integrated/combination overall low cost and differentiation strategy

Firms that successfully integrate both differentiation and cost advantages create an enviable position. -This dominant competitive position serves to erect high entry barriers to potential competitors that have neither the financial nor physical resources to compete head-to-head. -The organization's larger size can provide enormous bargaining power over suppliers. -Low pricing and wide selection can reduce the power of buyers because there are relatively few competitors that can provide a comparable cost/value proposition. -This overall value proposition also makes potential substitute products a less viable threat.

transnational strategy

A transnational strategy is appropriate in industries where the pressures for both local adaptation and lowering costs are high. When an organization adopts a transnational strategy, it can adapt to all competitive situations by capitalizing on communication and knowledge flows throughout the organization. It also achieves economies of scale by locating activities in optimal locations. However the choice of a seemingly optimal location cannot guarantee that the quality and cost of factor inputs (labor and materials) will be optimal. Managers must ensure that the relative advantage of the location is actually realized, not squandered because of weaknesses in productivity and the quality of internal operations. Also, although knowledge transfer can be a key source of competitive advantage, it does not take place automatically. For knowledge transfer to take place from one subsidiary to another, it is important for the source of the knowledge, the target units, and the corporate headquarters to recognize the potential value of such unique know-how. Firms must create mechanisms to systematically and routinely uncover the opportunities for knowledge transfer.

transnational strategy strength

Ability to attain economies of scale. Ability to adapt to local markets. Ability to locate activities in optimal locations. Ability to increase knowledge flows and learning.

mergers and acquisitions motives

Acquisitions can help a firm leverage core competencies, share activities, and build market power.

strengths and limitations to international strategy

Although an international strategy does leverage and diffuse a parent firm's knowledge and core competencies, leading to lower costs because of less need to tailor products and services, it does mean a firm has a limited ability to adapt to local markets, and, therefore, it cannot take advantage of new ideas and innovations occurring in that market. The international strategy, with its tendency to concentrate most of its activities in one location, fails to take advantage of the benefits of an optimally distributed value chain. The lack of local responsiveness may result in the alienation of local customers, and the firm's inability to be receptive to new ideas and innovation from its foreign subsidiaries may lead to missed opportunities globally.

international strategy

An international strategy requires diffusion & adaptation of the parent company's knowledge & expertise to foreign markets. The primary goal is worldwide exploitation of the parent firm's knowledge & capabilities. All sources of core competencies are centralized. Pressure for both local adaptation & low costs are rather low.

antitakeover tactics include:

Antitakeover tactics include: Greenmail Golden parachutes Poison pills Can benefit multiple stakeholders - not just management Can raise ethical considerations because the managers of the firm are not acting in the best interests of the shareholders

In restructuring the parent intervenes.

Asset restructuring involves the sale of unproductive assets. Capital restructuring involves changing the debt-equity mix, adding debt or equity. Management restructuring involves changes in the top management team, organizational structure, & reporting relationships.

Restructuring to redistribute

Asset, capital, & management restructuring

diamond criticisms

When Porter developed the model, he didn't look at undeveloped countries, however, the India example illustrates how an undeveloped country might position itself. The model doesn't represent factors outside the home country that might influence success, especially as the world becomes more global. The model doesn't predict success. You can check all of these boxes but still not be successful. When Porter developed the model, he didn't include any service industry firms; however, the India example illustrates the models application to a service industry

Rule of law =

a characteristic of legal systems where behavior is governed by rules that are uniformly enforced.

Strategic alliance

a cooperative relationship between two or more firms.

related diversification

a firm entering a different business in which it can benefit from leveraging core competencies, sharing activities, or building market power.

unrelated diversification

a firm entering a different business that has little horizontal interaction with other businesses of a firm. enables a firm to benefit from vertical or hierarchical relationships between the corporate office & individual business units through...

A consolidation strategy

a firm's acquiring or merging with other firms in an industry in order to enhance market power and gain valuable as

core competencies

a firm's strategic resources that reflect the collective learning in the organization. *the glue that binds existing businesses together, achieved by transferring accumulated skills and expertise across business units in a corporation.

Portfolio management =

a method of (a) assessing the competitive position of a portfolio of businesses within a corporation, (b) suggesting strategic alternatives for each business, and (c) identifying priorities for the allocation of resources across the businesses

international strategy explained

a strategy based on a firm's diffusion and adaptation of the parent company's knowledge and expertise to foreign markets, used in industries where the pressures for both local adaptation and lowering costs are low. With an international strategy, country units are allowed to make some minor adaptations to products and ideas coming from the head office, but they have far less independence and autonomy compared to multidomestic companies. There are only a small number of industries in which this strategy still applies. With increasing pressures to reduce costs due to global competition, especially from low-cost countries, opportunities to successfully employ international strategy are becoming more limited. This strategy is most suitable in situations where a firm has distinctive competencies that local companies in foreign markets lack.

unrelated diversification cont.

Unrelated diversification = a firm entering a different business that has little horizontal interaction with other businesses of a firm. Benefits of unrelated diversification come from the vertical or hierarchical relationships, or creation of synergies from the interaction of the corporate office with the individual business units. The corporate office can contribute to parenting and restructuring of often acquired businesses or can add value by viewing the entire corporation as a family or portfolio of businesses and allocating resources to optimize corporate goals of profitability, cash flow, and growth.

business level strategy

designed for a firm or a division of a firm that competes within a single business

Selected market and product pruning

discontinue unprofitable product lines

related diversification

enables a firm to benefit from horizontal relationships across different businesses

factor endowment

endowments involve factors of production. Natural resources Climate Capital Labor (skilled) Infrastructure Factors of production must be industry & firm specific. Must be rare, valuable, difficult to imitate, and rapidly & efficiently deployed The actual pool of resources is less important than the speed and efficiency with which these resources are deployed. Firm-specific knowledge and skills created within a country that are rare, valuable, difficult to imitate, and rapidly and efficiently deployed are the factors of production that ultimately lead to a nation's competitive advantage.

Internal development

entering a new business through investment in new facilities, often called corporate entrepreneurship and new venture development.

what can change the course of an industry life cycle

factors such as generic strategies, market growth rate, intensity of competition, and overall objectives

market power

firms' abilities to profit through restricting or controlling supply to a market or coordinating with other firms to reduce investment.

Combination strategies

firms' integration of various strategies to provide multiple unique products in small quantities at low cost.

core competencies must be difficult

for competitors to imitate or find substitutes for.

unrelated businesses

have few similarities in products or industries, however the corporate office can add value through such activities as robust information systems or superb human resource practices.

sharing activities

having activities of two or more businesses' value chains done by one of the businesses. A firm can also enjoy greater revenues if two businesses attain higher levels of sales growth combined than either company could attain independently (this is the synergistic effect).

firms typically pay _____ premiums when they quire a target firm

higher

This collective learning includes

how to coordinate diverse production skills, integrate multiple streams of technologies, and market diverse products and services.

how can the foundation of the firms cost advantage become obsolete

if other firms develop new ways of cutting costs, leaving the old cost-leaders at a significant disadvantages

breakaway positioning =

incrementally improve products along specific dimensions, by offering products that are still in the industry but that are perceived by customers as being different. (Example: Swiss watches offered Swatch (a fashion watch).

These transaction costs can be avoided by

internalizing the activity, in other words, by producing the input in-house.

portfolio mangement

involves a better understanding of the competitive position of an overall portfolio or family of businesses by... Suggesting strategic alternatives for each business Identifying priorities for the allocation of resources Using Boston Consulting Group's (BCG) growth/share matrix

turnaround stage

involves reversing performance decline and reinvigorating growth toward profitability through Asset and cost surgery Selected market and product pruning Piecemeal productivity improvements The need for turnaround may occur at any stage in the life cycle but is more likely to occur during maturity or decline. Most turnarounds require a firm to carefully analyze the external and internal environments. Asset and cost surgery (outright sale or sale and lease back); cut inventories; speed up collection of receivables; outsource production

Focus

is based on the choice of a narrow competitive scope within an industry. A firm selects a segment or group of segments (or niche) and tailors its strategy to serve them. A firm achieves competitive advantages by dedicating itself to these segments exclusively. **The essence of focus is the exploitation of a particular market niche.

The key purpose of portfolio models

is to assist a firm in achieving a balanced portfolio of businesses. A balanced portfolio consists of businesses whose profitability, growth, and cash flow characteristics complement each other and add up to a satisfactory overall corporate performance.

offshoring

may be costly. Common savings from offshoring include: Lower wages, benefits, energy costs, regulatory costs, taxes Hidden costs from offshoring include: Higher total wage & indirect costs, wage inflation Increased inventory due to longer lead time Reduced market responsiveness Increased coordination costs Cost of protecting intellectual property

regionalization

may be more reasonable. Distance still matters. Commonalities of language, culture, economics, legal & political systems, and infrastructure all make a difference. Trading blocs and free trade zones ease trade restrictions, taxes, & tariffs. increasing international exchange of goods, services, money, people, ideas, and information; and the increasing similarity of culture, laws, rules, and norms within a region such as Europe, North America, or Asia.

what is the need for turnaround stage

may occur at any stage in the life cycle but is more likely to occur during maturity or decline. Most turnarounds require a firm to carefully analyze the external and internal environments.

Firms also can enhance the effectiveness of their differentiation strategies by

means of sharing activities among business units. A shared order-processing system, for example, may permit new features and services that a buyer will value.

what must a business do in order to strive for a low cost-advantage

must attain an absolute cost advantage relative to its rival

Firms striving to attain cost leadership advantages

must obtain a level of parity on differentiation.

Fouces typically have a ______ in mind

narrow target in market

joint ventures

new entities formed within a strategic alliance in which two or more firms, the parents, contribute equity to form the new legal entity.

corporations may diversify into

new products, markets, and technologies through internal development.

Benefits derived from horizontal (related diversification) and hierarchical (unrelated diversification) relationships are

not mutually exclusive

how is a business able to maintain absolute cost advantage relative to rivals

offering a no-frills product or service to a broad target market -using standardization to derive the greatest benefits from economies of scale and experience

reverse positioning =

offering products with fewer product attributes and lower prices or fewer product attributes and greater efficiency (e.g., Yahoo vs. Google; McDonalds vs. In & Out); or

Political risk

potential threat to a firm's operations in a country due to ineffectiveness of the domestic political system.

Economic risk

potential threat to a firm's operations in the country due to economic policies and conditions, including property rights laws and enforcement of those laws. Firms rich in intellectual property have encountered financial losses as piracy or imitations of their products have grown due to a lack of law enforcement of intellectual property rights.

differentiation provides

provides protection against rivalry since brand loyalty lowers customer sensitivity to price/raises customer switching costs creating higher entry barriers reduces the threat from substitutes. The resulting higher margins and lack of comparable alternatives avoids the need for a low-cost position.

Piecemeal productivity improvements

re-engineer business processes, benchmark against industry leaders, employee productivity improvement

Mergers

the combining of two or more firms into one new legal entity

Portfolio analysis allows the corporation:

the corporation: to allocate resources among the business units according to prescribed criteria (i.e., use cash flows from the "cash cows" to fund promising "stars"); identify attractive acquisitions; provide financial resources on favorable terms; provide high-quality review and coaching for the individual businesses; provide a basis for developing strategic goals and rewards/evaluation systems for business managers.

market power can lead to

the creation of value and synergy through...

Core competencies can lead to

the creation of value and synergy, but these core competencies must enhance competitive advantage(s) by creating superior customer value - by building on existing skills and innovations in a way that appeals to customers,

Divestment

the exit of a business from the firm's portfolio.

Corporate entrepreneurship involves the leveraging and combining of

the firm's own resources and competencies to create synergies and enhance shareholder value.

pooled negotiating power

the improvement in bargaining position relative to suppliers and customers. Be careful, though: acquiring related businesses can enhance a corporation's bargaining power, but it must be aware of the potential for retaliation.

Acquisitions

the incorporation of one firm into another through purchase.

Parenting advantage

the positive contributions of the corporate office to a new business as a result of expertise and support provided, and not as a result of substantial changes in assets, capital structure, or management.

Efforts in the growth stage are directed towards

timulating selective demand in which a firm's product offerings are chosen instead of a rival's. Revenues can increase at an accelerating rate because new consumers are trying the product and a growing proportion of satisfied consumers are making repeat purchases.

if transaction costs are higher than administrative costs,

vertical integration becomes an attractive strategy.

Diversification initiatives -

whether through mergers and acquisitions, strategic alliances and joint ventures, or internal development - must be justified by the creation of value for shareholders. But this is not always the case.

diversification initiatives

whether through mergers and acquisitions, strategic alliances and joint ventures, or internal development - must be justified by the creation of value for shareholders. But this is not always the case. Firms typically pay high premiums when they acquire a target firm.

what does the cost leader earn (overall low-cost leadership)

above-average returns

what do overall cost leadership and differentiation strategies strive to attain

advantages industry wide

economics of scope

allow businesses to: -Leverage core competencies -Share related activities -Enjoy greater revenues, enhance differentiation

partnering

allows the corporate office to create value through management expertise & competent central functions.

vertical integration

an expansion or extension of the firm by integrating preceding or successive production processes. Vertical integration occurs when a firm becomes its own supplier or distributor.

related business

are those that share resources.

why is difficult for firms to differentiate their offerings in maturity stage?

because users have a greater understanding of products and services.

vertical integration cont

becoming its own supplier or distributor through -Backward integration -Forward integration

what is the primary key to success in growth stage

build consumer preferences for specific brands.

goal of diversification

can reduce variability in revenues & profits over time. However... Stockholders can diversify portfolios at a much lower cost & economic cycles are difficult to predict

Decisions about vertical integration are, therefore, based on

comparison of transaction costs and administrative costs.

what two dimensions are generic strategies plotted on

competitive advantage and market served

strategic alliances and joint ventures: motives

cooperative relationships between two (or more) firms with potential advantages. Access to new customers Crossover referrals from strategic allies Pool resources, from people to technology Ability to reduce manufacturing or other costs in the value chain Ability to develop & diffuse new technologies

what does building consumer preferences for specific brands require

strong brand recognition, differentiated products, and the financial resources to support a variety of value chain activities such as marketing and sales, and research and development.

how would maintain absolute cost fail

such a strategy may fail if the firm is unable to attain parity on important dimensions of differentiation such as quick responses to customer request for services or design changes

international expansion: motivation

A company pursues international expansion for many reasons. A company decides to become a multinational firm in order to: Increase size of potential markets Attain economies of scale Take advantage of arbitrage opportunities Applied to every stage of the value chain Enhance a product's growth potential Reinvigorate the product life cycle Companies pursue international expansion in order to increase the size of potential markets for firms' products and services. Multinational firms = firms that manage operations in more than one country. Expanding a firm's global presence also automatically increases its scale of operations, providing it with a larger revenue and asset base, which potentially enables the firm to attain economies of scale. This can also spread fixed costs such as R&D over a larger volume of production. Arbitrage opportunities = an opportunity to profit by buying and selling the same good in different markets. In its simplest form, arbitrage involves buying something from where it is cheap and selling it somewhere where it commands a higher price. Arbitrage can be applied to virtually any factor of production and every stage of the value chain. Walmart is an example. Enhancing the growth rate of a product that is in its maturity stage in a firm's home country, but that has greater demand potential elsewhere is another benefit of international expansion.

global strategy

A global strategy implies a firm is interested in lowering costs. Competitive strategy is centralized & controlled by the corporate office. Products are standardized, operations centralized, producing economies of scale. Worldwide volume supports R&D. There's a standard level of quality worldwide. Pressure for reducing cost is high; pressure for adaptation to local markets is weak. a strategy based on firms' centralization and control by the corporate office, with the primary emphasis on controlling costs, and used in industries where the pressure for local adaptation is low and the pressure for lowering costs is high. Since the primary emphasis is on controlling costs, the corporate office strives to achieve a strong level of coordination and integration across the various businesses. Firms following a global strategy strive to offer standardized products and services as well as to locate manufacturing, R&D, and marketing activities in only a few locations. Although costs may be lower, the firm following a global strategy may, in general, have to forgo opportunities for revenue growth since it does not invest extensive resources in adapting product offerings from one market to another. Many industries requiring high levels of R&D, such as pharmaceuticals, semiconductors, and jet aircraft, follow global strategies.

Harvesting strategy

A harvesting strategy = a strategy of bringing as much profit as possible out of the business in the short to medium term by reducing costs. Exiting the market involves dropping the product from the firm's portfolio.

what does differentiation require

A level of cost parity relative to competitors Integration of multiple points along the value chain -Superior material handling operations to minimize damage -Low defect rates to improve quality -Accurate and responsive order processing -Personal relationships with key customers -Rapid response to customer service requests -Differentiation along several different dimensions at once

Can a narrow focus be sufficient enough for above average performance?

A narrow focus by itself is not sufficient for above average performance. Firms must choose either a cost or a differentiation focus. Both variants of the focus strategy rely on providing better service than broad-based competitors who are trying to serve the focuser's target segment.

opposing pressure

Cost reduction or adaptation to local markets? Strategies that favor global products & brands should do the following: Standardize all products for all markets. Reduce overall costs by spreading investments over a larger market. Assumes: Homogenous customer have needs & interests. People prefer lower prices at high quality. Global markets produce economies of scale. Firms face two opposing forces when they expand into global markets: cost reduction and adaptation to local markets. Many years ago, the famed marketing strategist Theodore Levitt advocated strategies that favored global products and brands. He suggested that firms should standardize all of their products and services for all of their worldwide markets. Such an approach would help a firm lower its overall costs by spreading its investments over as large a market as possible. This approach rested on three key assumptions: Customer needs and interests are becoming increasingly homogenous worldwide. People around the world are willing to sacrifice preferences in product features, functions, design, and the like for lower prices at high quality. Substantial economies of scale in production and marketing can be achieved through supplying global markets.

what are the strategies for maturity stage

Create efficient manufacturing operations Lower costs as customers become price-sensitive Adopt reverse or breakaway positioning

divestment objectives include

Cutting the financial losses of a failed acquisition Redirecting focus on the firm's core businesses Freeing up resources to spend on more attractive alternatives Raising cash to help fund existing businesses

what is diversification

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

options for international market expansion include

Exporting Low risk, locals know more; but products may not meet local needs Licensing or franchising Limits risk; but licensor gives up control & profit Strategic alliance or joint venture Shares risk; but trust & culture issues can lead to conflict Wholly owned subsidiary Greatest control, highest returns; but expensive, greater potential for miss-steps

Challenges of globalization

Globalization has undeniably created tremendous business opportunities. One of the challenges with globalization is determining how to meet the needs of customers at very different income levels. In many developing economies, distributions of income remain much wider than they do in the developed world, leaving many impoverished even as the economies grow. The concept "bottom of the pyramid" refers to the practice of targeting its goods and services to the nearly 5 billion poor people in the world who inhabit developing countries. It's not always clear what they need, however, Many firms have wasted time and resources trying to market products that are designed for the poor but that consumers do not actually want. A research with microfinance customers in rural India showed that when given a choice between beneficial products, such as solar-powered lanterns and low-energy stoves, and aspirational products like mobile phones and gold coins, 85 percent of customers opted for the phone or the coin. It is usually difficult to make the economics work for a product if demand must be generated, because marketing costs typically swamp efforts to keep prices extremely low. 1. Firms need to understand why they are successful and look for expansion opportunities with the similar resources.

varieties of mergers and acquisitions

Horizontal - share the same product lines/markets, e.g., airline consolidation Vertical - e.g., a cone supplier and ice cream maker Market-extension - two companies selling the same product in different markets Product-extension - two companies selling different but related products in the same market Conglomeration - two companies with no common business area

what statement regarding competitive advantage is true

If several competitors pursue similar differentiation tactics, they may all be perceived as equals in the mind of the consumer.

combination of strategies (low-cost and differentiation)

Integration of low-cost and differentiation strategies makes it difficult for competitors to duplicate or imitate strategy.

what does internal analysis lead to

Internal analysis results in actions aimed at reduced costs and higher efficiency.

vertical integration issues

Is the company satisfied with the quality of the value that its present suppliers & distributors are providing? Are there activities in the industry value chain presently being outsourced or performed independently by others that are a viable source of future profits? Is there a high level of stability in the demand for the organization's products? Does the company have the necessary competencies to execute the vertical integration strategies? Will the vertical integration initiatives have potential negative impacts on the firm's stakeholders?

pitfalls of differentiation ext.

It's not enough just to be different. A differentiation strategy must provide unique bundles of products and/or services that customers value highly. Firms may also strive for quality of service that is higher than customers desire, thus they become vulnerable to competitors who provide an appropriate level of quality at a lower price. In addition customers may desire the product but are repelled by the price premium. Differentiation advantages can be eroded through imitation. Firms may also erode their quality brand image by adding products or services with lower prices and less quality, thus confusing the customer. Companies must also realize that although they may perceive their products and services as differentiated, their customers may view them as commodities (interchangeable with other commodities/products).

limitations to international strategy

Limited ability to adapt to local markets. Inability to take advantage of new ideas and innovations occurring in local markets.

strengths to international strategy

Lower costs because of less need to tailor products and services Leverage and diffusion of a parent firm's knowledge and core competencies.

International Risks

Multinational firms also encounter other risks. Currency risk due to fluctuations in the local currency's exchange rate Affects cost of production or net profit Management risk due to culture, customs, language, income level, customer preferences, distribution systems Could lead to the need for local adaptation of apparently standard products Currency risk = potential threat to a firm's operations in the country due to fluctuations in the local currency's exchange rate. Even a small change in the exchange rate can result in a significant difference in the cost of production or net profit when doing business overseas. An example includes the U.S. dollar appreciating against other currencies, making U.S. goods more expensive to consumers in foreign countries. Management risk = potential threat to a firm's operations in a country due to the problems that managers have making decisions in the context of foreign markets. Managers must respond to the inevitable differences that they encounter when doing business in multiple countries. Cultural differences can pose unique challenges. Even in the case of apparently standard products, some degree of local adaptation may become necessary.

a focus strategy requires

Narrow product lines, buyer segments, or targeted geographic markets Advantages obtained either through differentiation or cost leadership

joint ventures and alliances limitations

Need for the proper partner: Partners should have complementary strengths. Partner's strengths should be unique. Uniqueness should create synergies. Synergies should be easily sustained & defended. Partners must be compatible & willing to trust each other. Despite their promise, many alliances and joint ventures fail to meet expectations for a variety of reasons. The proper partner is essential. However, unfortunately, often little attention is given to nurturing the close working relationship and interpersonal connections that bring together the partnering organizations.

A company also decides to become a multinational firm in order to:

Optimize the location of value chain activity To enhance performance To reduce cost To reduce risk Take advantage of learning opportunities Explore reverse innovation Design & manufacture products locally Export no-frills products to developed markets A firm has to decide where to locate the various activities that it must engage in to produce products and services. Primary activities, such as inbound logistics, operations, and marketing, as well as support activities, such as procurement, R&D, and human resource management must be located in areas where the firm can see performance enhancement, cost reduction, and risk reduction. Location decisions can affect the quality with which any activity is performed in terms of the availability of needed talent, speed of learning, and the quality of external and internal coordination. Location decisions can affect the cost structure in terms of local manpower and other resources, transportation and logistics, and government incentives and the local tax structure. Nike's manufacture of shoes in Asia is an example. Erratic swings in the exchange ratios between global currencies requires firms to manage these currency risks by spreading the high cost elements of their manufacturing operations across a few select and carefully chosen locations around the world. In addition, by expanding into new markets, corporations expose themselves to differing market demands, R&D capabilities, functional skills, organizational processes, and managerial practices. This provides opportunities for managers to transfer the knowledge that results from these exposures back to their home office and to other divisions in the firm. Thus, expansion into new markets provides a range of learning opportunities. Reverse innovation = new products developed by developed-country multinational firms for emerging markets that have adequate functionality at a low cost. Many leading companies are discovering that developing products specifically for emerging markets can pay off in a big way. When products can deliver adequate functionality at a fraction of the cost, these products can subsequently find success in value segments in wealthy countries as well.

Multinational firms also encounter risk:

Political risk due to social unrest, military turmoil, demonstrations, terrorism, absence of the rule of law can lead to Destruction of property Disruption of operations Non-payment for goods and services Arbitrary government decisions Economic risk due to piracy and counterfeiting

Related and supporting industries

Related and supporting industries enable firms to manage inputs more effectively. A competitive supplier base Reduces manufacturing costs Close working relationships with suppliers Allows for joint research & development Development of related industries Forces existing firms to practice cost control, product innovation, better distribution methods A home country's industries can become a source of competitive advantage when related and supporting industries are developed. Countries with a strong supplier base benefit by adding efficiency to downstream activities. A competitive supplier base helps a firm obtain inputs using cost effective, timely methods, thus reducing manufacturing costs. Also, close working relationships with suppliers provide the potential to develop competitive advantages through joint research and development and the ongoing exchange of knowledge. Related industries create the probability that new companies will enter the market, increasing competition and forcing existing firms to become more competitive through efforts such as cost control, product innovation, and novel approaches to distribution. Combined, these factors give the home country's industries a source of competitive advantage. So, the success of 1 industry can be dependent on success of related industries or suppliers in a nation.

Restructuring

Restructuring = the intervention of the corporate office in a new business that substantially changes the assets, capital structure, and/or management, including selling off parts of the business, changing the management, reducing payroll and unnecessary sources of expenses, changing strategies, and infusing the new business with new technologies, processes, and reward systems.

What are the market transaction cost

Search costs Negotiating costs Contract costs Monitoring costs Enforcement costs Need for transaction specific investments Administrative costs

Why should companies even bother with diversification initiatives?

So why should companies even bother with diversification initiatives? The answer is synergy, which means "working together," and synergistic effects should be multiplicative - one plus one should equal more than two.

Firm strategy, structure, & rivalry due to

Strong consumer demand Strong supplier base High new entrant potential from related industries Domestic rivalry drives innovation leading to new products and a search for new markets. Response to rivalry is a strong indicator of global competitive success.

divestment success

Successful divestiture involves: Removing emotion from the decision Knowing the value of the business you're selling Timing the deal right Maintaining a sizable pool of potential buyers Telling a story about the deal Running divestitures systematically through a project office Communicating clearly and frequently

mergers and acquisitions: limitations

Takeover premiums for acquisitions are typically very high. Competing firms can imitate advantages. Competing firms can copy synergies. Managers' egos get in the way of sound business decisions Cultural issues may doom the intended benefits. By estimates, 70 to 90% of acquisitions destroy shareholder value. Two times out of three, the stock price of the acquiring company falls once the deal is made public. Since the acquiring firm often pays a 30% or higher premium for the target company, the acquirer must create synergies and scale economies that result in sales and market gains exceeding the premium price. This is sometimes hard to do. Because competing firms can often imitate advantages or copy synergies, investors may not be willing to pay a high premium for the stock. M&A costs are paid for upfront. Conversely, firms pay for R&D, ongoing marketing, and capacity expansion over time. This stretches out the payments needed to gain new competencies, but investors want to see immediate results. If the M&A does not perform as planned, managers who pushed for the deal may find their reputation tarnished. Finally, creating a singular organizational culture from multiple national or business cultures can be very difficult.

what does external analysis lead to

The external analysis leads to identification of market segments and customer groups that may still find the product attractive.

the introduction stage is when:

The first stage of the industry life cycle is characterized by: 1. new products that are not known to customers, 2.poorly defined market segments, 3.unspecified product features, 4.low sales growth, 5.rapid technological change, 6.operating losses, and 7. a need for financial support. -Since there are few players and not much growth, competition tends to be limited. -Success requires an emphasis on research and development and marketing activities to enhance awareness. The challenge becomes one of developing the product and finding a way to get users to try it, and generating enough exposure so the product emerges as the "standard" by which all other rivals' products are evaluated.

what is the goal of combination strategy

The goal of a combination strategy is to provide unique value in an efficient manner

growth stage is:

The second stage of the product life cycle is characterized by: -strong increases in sales; -attractive to potential competitors , growing competition -when firms can develop strong brand recognition

maturity stage cont.

The third stage of the product life cycle is characterized by: -slowing demand growth, saturated markets, -direct competition, -price competition, and -strategic emphasis on efficient operations. As markets become saturated, there are few new adopters. Rivalry among existing rivals intensifies because of fierce price competition at the same time that expenses associated with attracting new buyers are rising. Advantages based on efficient manufacturing operations and process engineering become more important for keeping costs low as customers become more price sensitive.

demand conditions

refer to the demands that home market consumers place on an industry. Demanding consumers drive firms in that country to: Meet high standards. Upgrade existing products and services. Create innovative products and services. Better anticipate future global demand. Proactively respond to product & service requirements. Consumers who demand highly specific, sophisticated products and services force firms to create innovative, advanced products and services to meet the demand. Countries with demanding consumers drive firms in that country to [read bullets] A country with sophisticated home buyers who have an awareness and demand for advanced quality and innovative products can often create international competitiveness.

core competencies cont.

reflect the collective learning in organizations. Can lead to the creation of value and synergy if... -They create superior customer value. -Different businesses in the corporation must be similar in at least one important. -They are difficult for competitors to imitate or find substitutes for.

it is essential that one or more elements in the value chain

require similar essential skills

cost leadereship

requires learning to lower costs through experience (the experience curve) -with experience, unit costs of production processes decline as output increases -this strategy also requires competitive parity -being on par with competitors with respect to low cost, differentiation, or other strategic product characteristics -permits cost leaders to translate cost advantages directly into higher profits

If transaction costs are lower than administrative costs, it is best to

resort to market transactions and avoid vertical integration.

Firms can affect consumers' mental shifts through:

reverse positioning (B) breakaway positioning

Counterfeiting =

selling of trademarked goods without the consent of the trademark holder. Counterfeiting, a direct form of theft of intellectual property rights, is a significant and growing problem.

building low cost advantage often requires

significant investments in plant and equipment, distribution systems, and large, economically scaled operations. As result, firms often find that these investments limit their flexibility and have difficulty responding to changes in the environment.