Chapter 6: Corporate Level Strategy: Creating Value through Diversification, Chapter 5: Business-Level Strategy: Creating and Sustaining Competitive Advantages, Ch. 7: International Strategy: Creating Value in Global Markets

Market Power

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

Porter's Diamond

explain why some nations and their industries outperform others

Basic Entry Strategies (Modes) of International Expansion

(From Lowest Investment Risk and Lowest Degree of Control) - Exporting - Licensing and Franchising - Strategic Alliances and Joint Ventures -Wholly Owned Subsidiaries

Transnational Strategy

*HIGH cost HIGH adaptation* -based on firms' optimizing the trade-offs associated with efficiency, local adaptation, and learning -used in industries where the pressures for both local adaptation and lowering costs are high. -Firm's assets and liabilities are dispersed according to the most beneficial location for a specific activity.

Global Strategy

*HIGH cost LOW adaptation* -based on forms' centralization and control by the corporate office -primary emphasis on controlling costs -used in industries where the pressure for local adaptation is low and the pressure for lowering costs is high. -Emphasizes economies of scale. -one global market.

Multi-Domestic Strategy

*LOW cost HIGH adaptation* -based on firms' differentiating their products and services to adapt to local markets -used in industries where the pressure for local adaptation is high and the pressure for lowering costs is low. -decentralization, meaning more likelihood of local production. -One benefit of this is reduced shipping and transportation costs.

International Strategy

*LOW cost LOW adaptation* based on a firm's diffusion and adaption of the parent companies' knowledge and expertise to foreign markets -Primary goal: Worldwide exploitation of the parent firm's knowledge and capabilities. (-Different activities in the value chain have different optimal locations. -Susceptible to higher levels of currency and political risk.)

4 Factors Affecting a Nation's Competitiveness

*PORTER'S DIAMOND* - Factor Endowments (Conditions) - Demand Conditions - Related and Supporting industries - Firm Strategy, Structure, and Rivalry

Licensing and Franchising

-A contractual arrangement in which a company receives a royalty or fee in exchange for the right to use its patent, trademark, trade secret, or other valuable intellectual property. -A contractual arrangement in which a company receives a royalty or fee in exchange for the right to uses its intellectual property; it usually involves a longer time period than licensing and includes other factors, such as monitoring of operations, training, and advertising. -Advantages: -Limited Risk Exposure -Expanded revenue base -Disadvantages: -Loss of control over its product -Licensee may become a competitor -Threat to brand name and reputation of products

Strengths of Multi-Domestic Strategy

-Ability to adapt products and services to local market conditions. -Ability to detect potential opportunities for attractive niches in a given market, enhancing revenue.

Strengths of Transnational Strategy

-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.

Management Risks

-Culture -Customs -Language -Income levels -Customer preference -Distribution system

Weaknesses of Multi-Domestic Strateg

-Decreased ability to realize cost savings through scale economies. -Greater difficulty in transferring knowledge across countries. -May lead to "over-adaptation" as conditions change.

Motives for International Expansion

-Increase in size of potential markets -Attain economies of scale -Extend the life cycle of the product -Optimize the physical location for every activity in its value chain: -Performance enhancement -Cost reduction -Risk reduction

Weaknesses of Global Strategy

-Limited ability to adapt to local markets. -Concentration of activities may increase dependence on a single facility. -Single locations may lead to higher tariffs and transportation costs.

Currency Risk

-Potential threat to a firm's operations in a country due to fluctuations in the local currency's exchange rate.

Political and Economic Risk

-Social unrest -Military turmoil -Demonstrations -Violent conflicts and terrorism -Laws and their enforcement

Strengths of Global Strategy

-Strong integration across various businesses. -Standardization leads to higher economies of scale, which lowers costs. -Helps create uniform standards of quality thoughout the world.

Weaknesses of Transnational Strategy

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

Disadvantages associated with a firm's expansion into international markets

-challeges dealing with governments w/o businees friendly policies, -poor/illiterate populations, unstable infrastructure and currencies, -subject to competition (may hurt profits in the short-term, can be advantage in long-term as it improves technology, products, services, productivity)

Advantages associated with a firm's expansion into international markets

-gain revenue -lower transportation + input costs -access knowledge from human capital worldwide -access to world-class suppliers, human resources, technology, customers

Strengths (Advantages) of International Strategy

-leverage and diffusion of a parent firm's knowledge and core competencies -lower costs b/c of less need to tailor products and services

Weaknesses of International Strategy

-limited ability to adapt to local markets -inability to take advantage of new ideas and innovations occuring in local markets

3 Assumptions of 2 Opposing Pressures

1) Customer needs and interests worldwide are becoming more homogeneous. 2) People are willing to sacrifice product preference for lower prices at high quality. 3) Economies of scale in production and marketing can be achieved through supplying global markets.

Four Basic Strategies

1) International 2) Global 3) Multidomestic 4) Transnational

THREE Generic Strategies

1) Overall cost leadership is based on: Creating a low-cost position relative to a firm's peers Managing relationships throughout the entire value chain to lower costs 2) Differentiation implies: Products and/or services that are unique & valued Emphasis on non- price attributes for which customers will gladly pay a premium 3) A focus strategy requires: Narrow product lines, buyer segments, or targeted geographic markets Advantages obtained either through differentiation or cost leadership.

2 Opposing Forces/Pressures of International Expansion

1) Reducing Costs: -Reduce cost by spreading investments over a larger market. 2) Adapting to Local Markets -Standardize all of the firm's products for all worldwide markets.

Pitfalls of Differentiation

1) Uniqueness that is not valuable. 2) Too much differentiation. 3) Too high a price premium. 4) Differentiation that is easily imitated. 5) Dilution of brand identification through product line extensions. 6) Perceptions of differentiation may vary between buyers and sellers. 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.

By estimates, 70 to ________% of acquisitions destroy shareholder value

90%

Reverse Positioning

A break in industry tendency to continuously augment products, characteristics of the product life cycle, by offering products with fewer product attributes and lower prices. **Decrease the features of your product and offer it at a lower price.

Breakaway Positioning

A break in industry tendency to incrementally improve products along specific dimensions, characteristic of the product life cycle, by offering products that are still in the industry but that are perceived by customers as being different. **Position your product ENTIRELY different from other rivals to cater to the existing segments and attract new demand and sales.

Wholly Owned Subsidiaries

A business in which a multinational company owns 100% of the stock. -Acquire an existing company in the home country. -Develop a totally new operation (greenfield venture). -Most expensive and risky of all global entry strategies. -Greatest control over all activities.

Combination Strategies: Integrating Low Cost & Differentiation

A firms' integrations of various strategies to 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: a) differentiated abilities ( e.g., high quality, brand identification, reputation) and, b) lower prices (because of the firm's lower costs in value creating activities). For example, superior quality can lead to lower costs because of less need for rework in manufacturing, fewer warranty claims, a reduced need for customer service personnel to resolve customer complaints, and so forth. Integration of low-cost and differentiation strategies makes it difficult for competitors to duplicate or imitate strategy. The goal of a combination strategy is to provide unique value in an efficient manner.

Strategic Alliance/Joint Venture

A cooperative relationship between two or more firms. 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. Finally, corporations may diversify into new products, markets, and technologies through internal development. Strategic alliances and joint ventures are assuming an increasingly prominent role in the strategy of leading firms, both large and small. A strategic alliance can help firms better understand customer needs, acquire know-how for promoting the product, acquire access to the proper distribution channels Strategic alliances may also be used to build jointly on the technological expertise of two or more companies, enabling them to develop products beyond the capability of other companies acting independently. POTENTIAL ADVANTAGES: Ability to enter new markets through. - Greater financial resources. - Greater marketing expertise. - Ability to reduce manufacturing or other costs in the value chain. - Ability to develop & diffuse new technologies. LIMITATIONS: Despite their promise, many alliances and joint ventures fail to meet expectations for a variety of reasons. The proper partner is essential. The 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

Competitive Parity

A firm's achievement of similarity or being "on par" with competitors with respect to low-cost, differentiation, or other strategic product characteristics. Competitive parity on the basis of differentiation permits the cost leader to translate cost advantages directly into higher profits than competitors. Thus, the cost leader earns above-average returns. A business that strives for a low-cost advantage must attain an absolute cost advantage relative to its rivals. This is typically accomplished by 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. However such a strategy may fail if the firm is unable to attain parity on important dimensions of differentiation such as quick responses to customer requests for services or design changes.

Focus

A firm's generic strategy based on appeal to a narrow market segment within an industry. A firm following this strategy selects a segment or group of segments and tailors its strategy to serve them. The essence of focus is the exploitation of a particular market niche. A focus strategy has TWO variants: 1) Cost focus: - Creates a cost advantage in its target segment. - Exploits differences in cost behavior. 2) Differentiation focus: - Differentiates itself in its target market. - Exploits the special needs of buyers. FOCUS requires that a firm either have a low cost position with its strategic target, high differentiation, or both. These positions provide defenses against each competitive force because of higher margins or more specialized products or services. Focus is also used to select niches that are least vulnerable to substitutes or where competitors are weakest. ADVANTAGES: Creates HIGHER entry barriers due to both cost leadership & differentiation. 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 are less vulnerable to substitutes.

Differentiation Strategy

A firm's generic strategy based on creating differences in the firm's product or service offering by creating something that is perceived industry-wide as unique and valued by customers. Firms may differentiate themselves in both PRIMARY and SUPPORT activities. Can take many forms: - Prestige or brand image - Quality - Technology - Innovation - Features - Customer service - Dealer network REQUIRES: 1) A level of COST PARITY relative to competitors. The cost of making your product should be the same as other competitors. Produce at a low cost and sell at a premium. 2) 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. 3) Differentiation along several different dimensions at once. Differentiation provides protection against rivalry since brand loyalty lowers customer sensitivity to price and raises customer switching costs. Higher entry barriers result because of customer loyalty and the firm's ability to provide uniqueness in its products or services. By increasing the firm's margins, differentiation also avoids the need for a low-cost position, and enables the firm to deal with supplier power. Suppliers would also probably desire to be associated with prestige brands, thus lessening their incentives to drive up prices. Differentiation reduces buyer power, because buyers lack comparable alternatives and are therefore less price sensitive. Differentiation enhances customer loyalty, thus reducing the threat from substitutes.

Core Competencies

A firm's strategic resources that reflect the collective learning in the organization. This collective learning includes how to coordinate diverse production skills, integrate multiple streams of technologies, and market diverse products and services. Core competencies = the glue that binds existing businesses together, achieved by transferring accumulated skills and expertise across business units in a corporation. 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, as at Apple. The value chain elements in separate businesses require similar skills. Finally, core competencies must be difficult for competitors to imitate or find substitutes for.

Pitfalls of Combination Strategies

A key issue in strategic management is the creation of competitive advantages that enable the firm to enjoy above average returns. Some firms may become "stuck in the middle" if they try to attain both cost and differentiation advantages. While integrating activities across a firm's value chain, firms must consider the expenses linked to technology and investment, managerial time and commitment, and the involvement and investment required by the firm's customers and suppliers. The firm must be confident that it can generate a sufficient scale of operations and revenues to justify all associated expenses. Finally, firms may fail to accurately assess sources of revenue and profits in their value chain. **Firms can miscalculate sources of revenue and profit pools in the firm's industry.

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. 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. Portfolio analysis allows the corporation to: (1) to allocate resources among the business units according to prescribed criteria (i.e. use cash flows from the "cash cows" to fund promising "stars"); (2) identify attractive acquisitions; (3) provide financial resources on favorable terms; (4) provide high-quality review and coaching for the individual businesses; (5) provide a basis for developing strategic goals and rewards/evaluation systems for business managers.

Business Level Strategies

A strategy designed for firm or a division of the firm that competes within a single business. Business level strategies typically require a choice: How to overcome the five forces and achieve competitive advantage? SUGGESTION: Use Porter's THREE generic strategies: 1) Overall cost leadership 2) Differentiation 3) Focus

Corporate Level Strategy

A strategy that focuses on gaining long-term revenue, profits, and market value through managing operations in multiple businesses. Determining how to create value through entering new markets, introducing new products, or developing new technologies is a vital issue in strategic management, but maintaining a focus on "creating value" is essential to long-term success.

Turnaround Strategy

A turnaround strategy involves reversing performance decline & reinvigorating growth toward profitability through: 1) Asset & cost surgery 2) Selected market & product pruning 3) Piecemeal productivity improvements Example = Ford Motor Company Example = Jamba Juice 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. The external analysis leads to identification of market segments and customer groups that may still find the product attractive. Internal analysis results in actions aimed at reduced costs and higher efficiency.

Which statement regarding competitive advantages is true?

A) If several competitors pursue similar differentiation tactics, they may all be perceived as equals in the mind of the consumer. B) With an overall cost leadership strategy, firms need not be concerned with parity on differentiation. C) In the long run, a business with one or more competitive advantages is probably destined to earn normal profits. D) Attaining multiple types of competitive advantage is a recipe for failure. ANSWER: A

As markets mature,

A) costs continue to increase. B) applications for patents increase C) differentiation opportunities increase. D) there is increasing emphasis on efficiency ANSWER: D

Divestment can be the common result of an acquisition. Divesting businesses can accomplish many different objectives. These include:

A) enabling managers to focus their efforts more directly on the firm's core businesses. B) providing the firm with more resources to spend on more attractive alternatives. C) raising cash to help fund existing businesses. D) all of the above. ANSWER: D

Shaw Industries, a giant carpet manufacturer, increases its control over raw materials by producing much of its own polypropylene fiber, a key input into its manufacturing process. This is an example of:

A) leveraging core competencies. B) pooled negotiating power. C) vertical integration. D) sharing activities. ANSWER: C

Sharing core competencies is one of the primary potential advantages of diversification. In order for diversification to be most successful, it is important that.....

A) the similarity required for sharing core competencies must be in the value chain, not in the product. B) the products use similar distribution channels. C) the target market is the same, even if the products are very different. D) the methods of production are the same. ANSWER: A

Vertical Integration

Am 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. Vertical integration occurs when a firm becomes its own supplier or distributor. The firm can incorporate more processes toward the original source of raw materials (BACKWARD integration) or toward the ultimate consumer (FORWARD integration). In making vertical integration decisions, FIVE issues should be considered: 1) Is the company satisfied with the quality of the value that its present suppliers & distributors are providing? 2) Are there activities in the industry value chain presently being outsourced or performed independently by others that are a viable source of future profits? 3) Is there a high level of stability in the demand for the organization's products? 4) Does the company have the necessary competencies to execute the vertical integration strategies? 5) Will the vertical integration initiatives have potential negative impacts on the firm's stakeholders?

Arbitrage Opportunities

An opportunity to profit by buying and selling the same good in different markets.

Improving Competitive Position: An Overall Low Cost Position

An overall low cost position enables the firm to achieve above average returns despite strong competition. It 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. 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. 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.

Antitakeover Tactics

Antitakeover tactics include: 1) GREEN MAIL: A payment by a firm to a hostile party for the firm's stock at a premium, made when the firm's management feels that the hostile party is about to make a tender offer. 2) GOLDEN PARACHUTES: A prearranged contract with managers specifying that, in the event of a hostile takeover, the target firm's managers will be paid a significant severance package. 3) POISON PILLS: Used by a company to give shareholders certain rights in the event of takeover by another firm. ^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.

Related Businesses/Diversification

Are those that share resources. RELATED DIVERSIFICATION: A firm entering a different business in which it can benefit from leveraging core competencies, sharing activities, or building market power. *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. **Related businesses gain market power by: Pooled negotiating power Vertical integration

Generic Strategies

Basic types of business level strategies based on breadth of target market (industry-wide versus narrow market segment) and type of competitive advantage (low-cost versus uniqueness).

Three Generic Strategies: EXAMPLES

Companies pursuing an overall cost leadership strategy include McDonalds and Walmart. Companies pursuing a differentiation strategy include Apple and Target. Companies pursuing a focus strategy include Ikea and Costco.

Divestments, the exit of the business from the firm's portfolio, are quite _____________.

Common

Economies of Scope

Cost savings from leveraging core competencies or sharing related activities among businesses in a corporation. Economies of scope allow businesses to: - Leverage core competencies - Sharing related activities - Enjoy greater revenues, enhance differentiation.

_______________ focus exploits differences in cost behavior in some segments, while ______________________ focus exploits the special needs of buyers in other segments.

Cost, Differentiation

Limitations of Portfolio Models

Limitations of portfolio models: comparing SBUs on only two dimensions, viewing each SBU as a stand-alone entity and ignoring synergies, treating the process as largely mechanical, relying on strict rules for resource allocation, making overly simplistic prescriptions and ignoring a firm's potential long-term viability.

Successfully executing strategies of vertical integration can be very _______________ and can require significant competencies.

Difficult **Managers must carefully consider the impact that vertical integration may have on existing and future customers, suppliers, and competitors.

Acquisition

The incorporation of one firm into another through purchase. Through mergers and acquisitions, corporations can directly acquire another firm's assets and competencies. A firm can also divest previous acquisitions.

Internal Development

Entering a new business through investment in new facilities, often called corporate entrepreneurship and new venture development. Compared to mergers and acquisitions, firms that engage in internal development capture the value created by their own innovative activities without having to share the wealth with alliance partners or face the difficulties associated with combining activities across the value chains of several firms or merging corporate cultures. On their own, firms can often develop new products or services that are relatively lower cost, and thus rely on their own resources rather than turning to external funding. However this may be time-consuming, so firms may forfeit the benefits of speed that growth through mergers or acquisitions can provide. In addition, firms that choose to diversify through internal development must develop capabilities that allow them to move quickly from initial opportunity recognition to market introduction. CORPORATE ENTREPRENEURSHP & new venture 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 LIMITATIONS: Time-consuming Need to continually develop new capabilities

Pitfalls of Focus

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

Combination Strategies

MASS CUSTOMIZATION: A firm's ability to manufacture unique products in small quantities at low cost. This is facilitated by advances in manufacturing technologies such as CAD/CAM. Andersen Windows is given as an example. Analysis of data on customer characteristics, purchasing patterns, employee productivity and physical asset utilization allows firms to better serve customers while more efficiently using company resources. PROFIT POOL: The the total profits in an industry at all points along the industry's value chain. The structure of the profit pool can be complex. The potential pool of profits will be deeper in some segments of the value chain than others, and the depths will vary within an individual segment. Segment profitability may vary widely by customer group, product category, geographic market, or distribution channel. Additionally, the pattern of profit concentration in an industry is often very different from the pattern of revenue generation. 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. ADVANTAGES: Creates HIGHER entry barriers due to both cost leadership & differentiation. Can provide higher margins that enable the firm to deal with supplier power. Reduces buyer power because of fewer competitors. An overall value proposition reduces threat from substitutes.

Transaction Cost Perspectiver

Every market transaction involves some transaction costs: Search costs Negotiating costs Contract costs Monitoring costs Enforcement costs Need for transaction specific investments Administrative costs Transaction costs are the sum of the above costs. These transaction costs can be avoided by internalizing the activity, in other words, by producing the input in-house. However, vertical integration gives rise to administrative costs as well. Coordinating different stages of the value chain now internalized within the firm causes administrative costs to go up. Decisions about vertical integration are, therefore, based on a comparison of transaction costs and administrative costs. If transaction costs are lower than administrative costs, it is best to resort to market transactions and avoid vertical integration. On the other hand, if transaction costs are higher than administrative costs, vertical integration becomes an attractive strategy.

Managerial Motives

Managers acting in their own self interest rather than to maximize long-term shareholder value. This can lead to eroding versus enhancing value creation through: 1) GROWTH FOR GROWTH's SAKE: managers' actions to grow the size of their firms not to increase long-term profitability but to serve managerial self-interest. There is a "tremendous allure to mergers and acquisitions," which can lead to desperate moves by top managers to satisfy investor demands for accelerating revenues, sometimes by engaging in unethical behavior. 2) EGOTISM: managers' actions to shape their firms' strategies to serve their selfish interests rather than to maximize long-term shareholder value. Egos can get in the way of a synergistic corporate marriage. 3) Use of ANTITAKEOVER TACTICS: managers' actions to avoid losing wealth or power as a result of a hostile takeover.

Strategic Alliances and Joint Ventures

Partnerships that enable firms to share risks and potential revenues and profits. Partners: -Gain exposure to new knowledge and technologies. -Develop core competencies that can lead to competitive advantages. -Gain information on local market conditions. Risks: -Needs to be clearly defined strategy supported by both partners. -Needs to be clear understanding of capabilities and resources that will be central to the partnership. -Must be trust between partners.

Unrelated Businesses/Diversification

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

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 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. Sharing tangible & value-creating activities can provide payoffs: 1) Cost savings through elimination of jobs, facilities & related expenses, or economies of scale. 2) Revenue enhancements through increased differentiation & sales growth. COST SAVINGS are generally highest when one company acquires another from the same industry in the same country. Sharing activities inevitably involve costs that the benefits must outweigh such as the greater coordination required to manage a shared activity. Sharing activities can also increase the EFFECTIVENESS of differentiation strategies. For instance, a shared order-processing system may permit new features and services that a buyer will value. However, sharing activities among businesses in a corporation can have a negative effect on a given business's differentiation. An example is when Ford owned Jaguar and customers found out it shared its basic design and manufacturing with the Mondeo; customers had a lower perceived value of Jaguar.

Unfriendly or ___________ takeovers can occur when a company's stock becomes undervalued.

Hostile

Corporate Entrepreneurship

Involves the leveraging and combining of the firm's own resources and competencies to create synergies and enhance shareholder value.

Cost Leadership

Involves: 1) Aggressive construction of efficient scale facilities. 2) Vigorous pursuit of cost reductions from experience. 3) Tight cost & overhead control . 4) Avoidance of marginal customer accounts. 5) Cost minimization in all activities in the firm's value chain, such as R&D, service, sales force, & advertising. **A a firm's generic strategy based on appeal to the industry-wide market using a competitive advantage based on low-cost. Cost leadership requires a tight set of interrelated tactics, including close scrutiny of the value chain.

Benefits derived from horizontal (related diversification) and hierarchical (unrelated diversification) relationships are not ____________ _______________ .

Mutually Exclusive

Reverse Innovation

New products developed by developed country multination firms for emerging markets that have adequate functionality at low cost.

Risks of International Expansion

Political and Economic Risk Currency Risks Management Risks

Exporting

Producing goods in one country to sell to another country. -Inexpensive way to enter foreign markets. -Minimal Risk.

BCG Matrix

Relative market share is measured by the ratio of the business units size to that of its largest competitor. Growth rate is estimated from market data. The FOUR quadrants of the grid include STARS: firms with long-term growth potential that should continue to receive substantial investment funding; QUESTION MARKS: SBUs operating in high-growth industries with relatively weak market shares where resources should be invested in them to enhance their competitive positions;CASH COWS: SBUs with high market shares in low-growth industries that have limited long-run potential but represent a source of current cash flows to fund investments in "stars" and "question marks"; DOGS: SBUs with weak positions and limited potential - most analysts recommend that they be divested.

Cost Leadership requires learning to lower costs through experience, ________________, as well as, ____________________.

The Experience Curve, Competitive Parity

Merger

The combining of two or more firms into one new legal entity. In certain industries speed is critical, so acquiring is faster than building. Example = Apple acquiring Siri Inc. Acquisitions can quickly add new technology to product offerings and meet changing customer needs. Example = Cisco Systems. Acquisitions can help a firm leverage core competencies, share activities, and build market power. Example = eBay's acquisition of GSI Commerce, StubHub and Gmarket allows it to become a full-service provider of online retailing systems. M&A can lead to consolidation within an industry, forcing other players to merge: ie; consolidation in the airline industry: Delta - Northwest, United - Continental. Corporations can also enter a new market segments by way of acquisitions. ie; Fiat acquired Chrysler to gain access to the U.S. auto market.

4) Firm Strategy, Structure, and Rivalry

The conditions governing how companies are created, organized, and managed as well as the nature of domestic rivalry. -Competitive rivalry increases the efficiency with which firms: 1) develop within the home country 2) market within the home country 3) distribute products and services within the home country.

Experience Curve

The decline in unit costs of production as cumulative output increases. A business can learn to lower costs as it gains experience with production processes. Among the most common factors producing the experience curve are workers getting better at what they do, product designs being simplified as the product matures, and production processes being automated and streamlined. However, experience curve gains will only be the foundation for a cost advantage if the firm knows the source of the cost reduction and can keep those gains proprietary.

Decline Stage

The decline stage is when: - Industry sales and profits begin to fall - Price competition increases - Industry consolidation occurs STRATEGIES include: MAINTAINING the product position, HARVESTING profits & reducing costs, Exiting the market, and CONSOLIDATING or acquiring surviving firms. In the decline stage, a firm's strategic options become dependent on the actions of rivals. If many competitors leave the market, sales and profit opportunities increase. On the other hand, prospects are limited if all competitors remain. Maintaining refers to keeping a product going without significantly reducing marketing support, technological development, or other investments, in the hope that competitors will eventually exit the market. 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. CONSOLIDATION STRATEGY: A firm's acquiring or merging with other firms in an industry in order to enhance market power and gain valuable assets. Firms can also resurrect old technologies by retreating to more defensible ground, using the new to improve the old, or improving the price-performance trade-off.

Divestment

The exit of a business from the firm's portfolio. By using a joint venture or strategic alliance, corporations can pool the resources of other companies with their own resource base. Divestment objectives include: 1) Cutting the financial losses of a failed acquisition 2) Redirecting focus on the firm's core businesses 3) Freeing up resources to spend on more attractive alternatives 4) Raising cash to help fund existing businesses Successful divestment requires a thorough understanding of a business unit's current ability and future potential to contribute to a firm's value creation. Since the decision to divest involves a great deal of uncertainty, it's very difficult to make such evaluations. In addition, because of managerial self interests and organizational inertia, firms often delay investments of underperforming businesses. The Boston Consulting Group has identified the following seven principles for successful divestiture: 1)Removing emotion from the decision 2) Knowing the value of the business you're selling 3) Timing the deal right 4) Maintaining a sizable pool of potential buyers 5) Telling a story about the deal 6) Running divestitures systematically through a project office 7)Communicating clearly and frequently

Growth Stage

The growth stage is: - Characterized by strong increases in sales - Attractive to potential competitors - When firms can build brand recognition STRATEGIES include: Creating branded differentiated products, stimulating selective demand, and providing financial resources to support value-chain activities. In the growth stage, the PRIMARY KEY to success is to build consumer preferences for specific brands. This requires 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. Efforts in the growth stage are directed towards stimulating selective demand in which a firm's products 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.

Pooled Negotiation 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.

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.

Introduction Stage

The introduction stage is when: - Products are unfamiliar to consumers - Market segments are not well-defined - Product features are not clearly specified - Competition tends to be limited STRATEGIES INCLUDE: Developing a product and get users to try it, and generate exposure so the product becomes "standard." 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. There's an advantage to being the "first mover" in a market.

Maturity Stage

The maturity stage is when: - Aggregate industry demand slows - Market becomes saturated, few new adopters - Direct competition becomes predominant - Marginal competitors begin to exit STRATEGIES include creating efficient manufacturing operations, lowering costs as customers become price-sensitive, and adopting reverse or breakaway positioning. 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. It also becomes more difficult for firms to differentiate their offerings, because users have a greater understanding of products and services. Firms can affect consumers' mental shifts through REVERSE POSITIONING or BREAKAWAY POSITIONING.

Three Generic Strategies

The overall cost leadership and differentiation strategies strive to attain advantages industry-wide, while focusers have a narrow target market in mind. Generic strategies are plotted on TWO dimensions: competitive advantage and market served.

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. Parenting relates to the positive contributions of the corporate office to a new business as a result of expertise and support provided in areas such as legal, financial, human resource management, procurement, and the like. Corporate parents also help subsidiaries make wise choices in their own acquisitions, divestitures, and new internal development decisions. The parent intervenes, often selling off parts of the business; changing the management; reducing payroll and unnecessary sources of expenses; changing strategies; and infusing the company with new technologies, processes, reward systems, and so forth. When the restructuring is complete, the firm can either "sell high" and capture the added value or keep the business and enjoy financial and competitive benefits. In order for this to work, the corporate parent must have the requisite skills and resources to turn the businesses around, even if they may be in new and unfamiliar industries.

3) Related and Supporting Industries

The presence, absence, and quality of supplier industries and other related industries that supply services, support, or technology to firms in the industry value chain. -Allows firms to manage inputs more effectively: -Stronger supplier base adds efficiency. -Competitive supplier base. -Creates probability that new firms will enter the market.

Diversification

The process of firms expanding their operations by entering new businesses. 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. Many firms that diversify into related areas benefit from information technology expertise in the corporate office. Similarly, unrelated diversifiers often benefit from the "best practices" of sister businesses even though their products, markets, and technologies may differ dramatically. An example would be a corporate parent with strong support activities in the value chain such as information systems or human resource practices.

Industry Life Cycle Stages

The stages of introduction, growth, maturity, and decline that typically occur over the life of an industry. Managers must become even more aware of their firm's strengths and weaknesses in many areas to attain competitive advantages. Factors such as generic strategies, market growth rate, intensity of competition, and overall objectives can change 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. **Products and services go through many cycles of innovation and renewal. Typically, only fad products have a single lifecycle. MATURITY STAGES of an industry can be transformed or followed by the stage of rapid growth if consumer tastes change, technological innovations take place, or new developments occur. The industry life cycle: 1) Introduction 2) Growth 3) Maturity 4) Decline Generic strategies, functional areas, value-creating activities, & overall objectives all vary over the course of an industry life cycle.

Pitfalls of Cost Leadership

Too much focus on one or a few value chain activities. Increase in the cost of the inputs (Raw Materials) on which the advantage is based. The strategy is imitated too easily. A lack of parity on differentiation - if you are NOT able to match your competitors on the level of differentiation, you will not be able to sustain. REDUCED FLEXIBILITY - you have to be prepared for shifts in demand, technology, etc....you need to keep up with competition. Because changing from one type of technology (Plant and machinery) to another is not easily done or afforded. Obsolescence of the basis of a cost advantage - if a new product hits, the low cost price may not be a large enough incentive to keep marketshare. Customers may purchase the most new and innovated product regardless of price. 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. Firms striving to attain cost leadership advantages must obtain a level of parity on differentiation. Building a 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. As a result they have difficulty responding to changes in the environment. Ultimately, the foundation of the firm's cost advantage may become obsolete. In these circumstances, other firms develop new ways of cutting costs, leaving the old cost-leaders at a significant disadvantage.

Firms can also underestimate the challenges & expenses associated with coordinating value-creating activities in the extended ___________________.

Value Chain

Downstream Primary Activities

closer to the customer (e.g., marketing and sales, and service) tend to require more decentralization in order to adapt to local market conditions (a multidomestic strategy)

2) Demand Conditions

demands that consumers place on an industry Drive firms to: -Meeting high standards -Upgrading existing products and services -Creating innovative products and services -better anticipate future global demand -proactively respond to product/service requirements

Offshoring

firm shifts an activity that they were previously performing in a domestic location to a foreign location.

Outsourcing

firm utilizes other firms to perform value-creating activities that were previously performed in-house.

Upstream Primary Activities

further away from the customer (e.g., logistics and operations) tend to be centralized (a global strategy). This is because there is less need for adapting these activities to local markets and the firm can benefit from economies of scale.

1) Factor Endowments

involve factors of production, such as land, labor, capital -To develop competitive advantage, factors of production must be developed industry specific and firm specific. -The pool of resources at a firm or country's disposal is less important than the speed and efficiency with which the resources are deployed.