Strategic Management Exam 3

Benefits of International Strategy

1. Access to new customers 2. Lowering costs 3. Diversification of business risk

Three Tests for Diversification

1. How attractive is the industry that a firm is considering entering? Unless the industry has strong profit potential, entering it may be very risky. 2. How much will it cost to enter the industry? Exit? Executives need to be sure that their firm can recoup the expenses that it absorbs in order to diversify. 3. Will the new unit and the firm be better off? Unless one side or the other gains a competitive advantage, diversification should be avoided.

Three Concentration Strategies

1. Market Penetration 2. Market Development 3. Product Development Firms can use one or any combination of these strategies to grow within an industry

Three Main International Strategies

1. Multidomestic 2. Global 3. Transnational

Creating a Wholly Owned Subsidiary

A business operation in a foreign country that a firm fully owns (e.g., Intel's IPLS - a WHS in Ireland that manages research throughout Ireland) Allows for direct control over all aspects of operating in a foreign market but can be quite risky since the firm must bear all the expense of establishing the business in the foreign country A firm can develop a ________ through a greenfield adventure (establishing in a foreign subsidiary from the ground up via internal development is based on the firm's prior experience with foreign market operations) Another possibility is purchasing an existing operation from a local company or another foreign operator (acquiring either a struggling or successful foreign local firm is the most feasible and direct path to overcoming market-specific entry barriers) Regardless of whether a firm builds a ______ "from scratch" or acquires an existing operation, having a ______ can be attractive because the firm maintains complete control over the operation and gets to keep all of the profits that the operation makes Many firms are reluctant to spend such sums in more volatile countries because they fear they may never recoup their investments

Multinational Corporation (MNC)

A firm that has operations in more than one country E.g., Walmart

Greenfield Adventure

A foreign operation that a firm creates entirely by itself

Portfolio Planning

A process that helps executives make decisions involved their firms' various industries Useful tool Offers suggestions about what to do within each industry Provides ideas for allocating resources

Just-In-Time Inventory Management (JIT)

A production system that conserves space and lowers costs by requiring inputs to arrive at the moment they are needed

Core Competency

A skill set that is difficult for competitors to imitate, can be leveraged in different businesses, and contributes to the benefits enjoyed by customers within each business (create a competitive advantage) E.g., Apple has a core competency in innovation; this innovation lies at the heart of Apple's success with computers, smartphones, and tablets

Forward Vertical Integration

A strategy that involves a supplier entering the industry that it supplies into Involves a firm moving further down the value chain to enter a buyer's business Can be useful for neutralizing the effect of powerful buyers

Backward Vertical Integration

A strategy that involves the buyer entering the industry that it purchases goods and services from Involves a firm moving back along the value chain and entering a supplier's business Some firms use this strategy when executives are concerned that a supplier has too much power over their firms

Concentration Strategies

Actions that firms use to try to compete successfully only within a single industry Very sensible E.g., McDonald's, Starbucks, and Subway are three firms that have relied heavily on concentration strategies to become dominant players

The Diamond Model (Porter's Diamond Framework)

Also referred to as Porter's Determinants of National Advantage, includes four key dimensions that help explain why firms located in certain countries are more successful than others in particular industries Four Conditions: 1. Demand Conditions 2. Factor Conditions 3. Related and Supporting Industries 4. Strategy, Structure, and Rivalry

Microfranchising

Also referred to as social franchising, is helping to bring needed products and services to the developing world Takes the traditional franchise model and adapts it to fit very small businesses While becoming a traditional franchisee can cost hundreds of thousands of dollars, joining a microfranchise requires little money

Market Penetration

An attempt to gain additional share of existing markets using existing products Often firms will rely on advertising to attract new customers with existing markets E.g., Nike, McDonald's, Sheets Brand Energy Strips

Franchising

An organization (called a franchisor) grants the rights to use its brand name, products, and processes to other organizations (known as franchisees) in exchange for an up-front payment (a franchise fee) and a percentage of franchisees' revenues (a royalty fee) "renting" a firm's brand name and business process to local entrepreneurs (e.g., Anytime Fitness is a business with over 475 international locations) Often better suited to the global expansion efforts of service and retailing enterprises Franchises are only successful if franchisees are provided with a simple and effective business model Executives need to avoid expanding internationally through franchising until their formula has been perfected Microfranchising

Boston Consulting Group (BCG) Matrix

Best-known approach for portfolio planning Includes the dimensions of market share and market growth Assessing a firm's prospects for success within the industries in which it competes Categorizes businesses as high or low along two dimensions: the firm's market share in each industry and the growth rate of each industry Suggestions are then offered about how to approach each industry Cash Cows, Dogs, Stars, Question Marks

Business Strategy

Concerns the question of "how to compete" in a single product market Firms pursue competitive advantages through either a differentiation or cost-leader generic strategy As firms grow, they are frequently expanding their business activities through seeking out new markets by offering new products and/or services and competing in different geographic regions In response, managers must formulate a corporate strategy - addresses the question "Where do we compete?"

Exporting Advantages

Conservative way to test international waters Minimizes both risk and capital requirements

Spin-Off

Creating a new company whose stock is owned by investors out of a piece of a bigger company Firm investors receive shares in the new company based on share ownership in the parent company

Exporting

Creating goods within a firm's home country and then shipping them to another country where they are sold to customers by a local firm Involves using domestic plants as a production base for exporting to foreign markets (e.g., Commercial aircrafts are among the top 10 US exports) Once they goods reach foreign shores, the exporter's role is over Many firms that expand overseas start out as exporters because exporting offers a low-cost method to find out whether a firm's products are appealing to customers in other lands LOW-COST OPTION Once a firm's products are found to be viable in a particular country, exporting often becomes undesirable An exporter only makes money when it sells its goods to a local firm, not when end users buy the goods

Product Development

Creating new products to serve existing markets E.g., In the 1940s, Disney expanded its offerings within the film business by going beyond cartoons and creating movies featuring real actors E.g., McDonald's has gradually moved more and more of its menu toward healthy items to appeal to customers who are concerned about nutrition, and they have introduced coffee and smoothies (McCafe) E.g., Starbucks introduced VIA in 2009, an instant coffee variety that executives hoped would appeal to their customers when they do not have easy access to a Starbucks store or a coffeepot E.g., Coca-Cola and Pepsi regularly introduce new varieties, such as Coke Zero and Pepsi Cherry Vanilla, in an attempt to take market share from each other and from their smaller rivals E.g., Seattle-based Jones Soda Co. has taken a novel approach to product development by introducing a holiday-themed set of unusual flavors

Cultural Distance

Cultural disparity between a firm's home country and the target host country Include differences in language, ethnicity, religion, and social norms Hofstede also discusses cultural elements such as power distance, individualism, masculinity-femininity, and uncertainty avoidance Distance between two countries increases with different languages, ethnicities, religions, social norms and dispositions; lack of connective ethnic or social networks; lack of trust and mutual respect Distance most affects industries or products with high linguistic content (TV); related to national and/or religious identity (foods); carrying country-specific quality associations (wines)

International Strategy

Describes firms action that seek to internationalize some part of the value chain A firm sells the same products or services in both domestic and foreign markets Enables firms to leverage their home-based core competencies in global markets Older type of global strategy Frequently the first step in internationalization uji; Easy to implement because of low pressure for cost reductions and low pressures for local responsiveness (e.g., Harley-Davidson, Rolex, Starbucks) The Harley-Davidson motorcycles in China are the same as those sold in the US Limited local responsiveness is a STRENGTH and a WEAKNESS (lower cost but products may be easier to imitate or steal) Commonly internationalized stages of the value chain include manufacturing, sales, after-sales service, and information systems US MNEs have a disproportionately high impact on the US economy

Local Responsiveness

Despite the move toward homogeneity, firms must still evaluate the pressure for _________ The need to tailor products and services to fit local customer preferences and host country requirements Limited local responsiveness is a STRENGTH and a WEAKNESS (lower cost but products may be easier to imitate or steal) Many knock-off luxury cars are being produced in Thailand

Mutual Benefits of Cross-Border Alliances

Facilitation of entry into foreign markets Strengthening a firm's competitiveness in world markets Capturing of economies of scale in production and marketing Filling of gaps in technical expertise and local market knowledge Sharing of distribution facilities, dealer networks, and mutual access to customers Attacking of mutual rivals and providing for mutual assistance Building of working relationship with local political and host-country governmental entities Gaining of agreements on technical and process standards

Administrative and Political Distance

Factors such as the absence or presence of shared monetary or political associations, political hostilities, and legal and financial institutions Lack of political/legal protection and other barriers such as tariffs, trade quotas, FDI restrictions, among others increase costs and risks Distance between two countries increases with absence of trading bloc; absence of shared currency, monetary or political association; absence of colonial ties; political hostilities; weak legal and financial institutions Distance most affects industries or products that a foreign government views as staples (electricity), as building national reputations (aerospace), or as vital to national security (telecommunications)

National Competitive Advantage

Firms from countries with a _________ tend to be the strongest global competitors Demand conditions, factor conditions, competitive intensity in focal industry, and related and supporting industries/complementors all play into _______

Franchising Advantages

Franchisee bears many of the costs and risks of establishing foreign locations Franchisor has to expend only the resources to recruit, train, and support franchisees Attractive way to enter foreign markets because it requires little financial investment by the franchisor

Stars

High market share units with fast-growing industries These units have high prospects and thus are good candidates for growth Should be funded and encouraged to grow Earnings: high, stable, or growing Cash flow: neutral Strategy: hold or invest for growth

Cash Cows

High market share units with slow-growing industries Because their industries have bleak prospects, profits from cash cows should not be invested back into cash cows but rather diverted to more promising businesses Should be "milked" to supply funds to more promising businesses Earnings: high, stable Cash flow: high, stable Strategy: hold

Lowering Costs

Higher sales volume increases economies of scale Gain cost advantages Offshoring business operations can also reduce costs and tax liabilities However, offshoring can backfire if doing business oversees becomes difficult or cost savings never materialize (~21% of the US firms reshoring) Reshoring E.g., Carbonite found that US-based call centers were able to deliver considerably better customer service than those in India E.g., ATMs made overseas by NCR weigh more than 2,000 lbs, so the firm opened a manufacturing plant in Columbus, GA

Integration Responsiveness Framework

How a firm internationalizes can be determined using the _______ Juxtaposes opposing pressures for cost reduction and local responsiveness to derive four different global strategies: 1. International Strategy 2. Multidomestic Strategy 3. Global-Standardization Strategy 4. Transnational Strategy

Geographic Distance

How easy is a country to access? Costs rise with geographic distance Distance between two countries increases with lack of common border, waterway access, adequate transportation, or communication links; physical remoteness; different climates and time zones Distance most affects industries or products with low value-to-weight ratio (cement); that are fragile or perishable (glass, meats); in which communications are vital (financial services)

Creating a Joint Venture or Strategic Alliance

In some cases, executives find it beneficial to work closely with one or more local partners in a joint venture or strategic alliance In a joint venture, two or more organizations each contribute to the creation of a new entity In a strategic alliance, firms work together cooperatively, but no new organization is formed In both cases, the firm and its local partner or partners share decision-making authority, control of operation, and any profits that the relationship creates Joint ventures and strategic alliances are especially attractive when a firm believes that working closely with locals will provide it important knowledge about local conditions, facilitate acceptance of their involvement by government officials, or both

Diversification Strategies

Involve a firm entering entirely new industries (moving into new value chains) Many firms accomplish this through a merger or an acquisition, while other expand into new industries without the involvement of another firm (greenfield entry, joint venture, etc.)

Transnational Strategy

Involves balancing the desire for efficiency with the need to varying preferences across countries Combines the benefits of localization on the lowest attainable cost position Besides harnessing economies of scale and location, it aims to benefit from global learning Incorporate country-specific variations in products to satisfy local needs/wants Make adjustments to production, distribution, and marketing that are needed to respond to local conditions that are shared across units Generally used by MNEs that pursue an integration strategy by trying to reconcile product/service differentiation at lower cost MNEs typically require a matrix structure which can be difficult Managerial mantra: THINK GLOBALLY, ACT LOCALLY Seeks a middle ground between multidomestic strategy and global strategy High pressure for cost reductions and high pressure for local responsiveness (e.g., ABB, Bertelsmann, P&G) E.g., Nestle (some products are available worldwide while others are only sold in select markets) E.g., McDonald's and KFC

Impediments to the Success of Alliances

Language and cultural barriers Differences in ethical standards, partner values and objectives, corporate strategies, and operating practices Development of trust, coordination, and effective communications between partners Interpersonal conflict among partners' managers Overdependence on foreign partners for essential expertise and competitive capabilities

Question Marks

Low market share units with fast-growing industries Executives must decide whether to build these units into stars or to divest them Should be resolved by executives by deciding whether to foster or sell these units Earnings: low, unstable, or growing Cash flow: negative Strategy: increase market share or harvest/divest

Dogs

Low market share units with slow-growing industries These units are good candidates for divestment Should be sold of possible and abandoned if necessary Earnings: low, unstable Cash flow: neutral or negative Strategy: harvest/divest

Cage Distance Framework

MNEs can use the _______ to help decide WHERE in the world to compete 1. Cultural Distance 2. Administrative and Political Distance 3. Geographic Distance 4. Economic Distance

Exporting Vulnerabilities

Manufacturing costs in the home country are higher than in foreign countries where rivals have plants The costs of shipping the product to distant markets are relatively high Adverse shifts can occur in currency exchange rates

Globalization Hypothesis

Many firms opt to expand internationally as a result of the _______ Consumer needs and preferences are converging, thus becoming more homogenous

Licensing

One organization grants another the right to create its product, often using patented technology, in exchange for a fee (e.g., Coca-Cola licenses the use of their secret formula to local bottlers) Most frequently used in manufacturing industries Makes sense when a firm has valuable technical know-how or a patented product but has neither the internal capabilities nor resources to enter foreign markets; wants to avoid the risks of committing resources to country markets that are unfamiliar, politically volatile, economically unstable, or otherwise risky; seeks to generate income from potential royalties A firm that grants a license avoids absorbing a lot of costs, but its profits are limited to the fees that it collects from the local firm The firm also loses some control over how its technology is used

Limitations to Portfolio Planning

Oversimplifies the reality of competition by focusing on just two dimensions when analyzing a company's operation within an industry Many dimension are important to consider when making strategic decisions, not just two Can create motivational problems among employees If workers know that their firm's executives believe the BCG matrix and that their subsidiary is classified as a dog, then they may give up on any hope for the future Does not identify new opportunities

Individual Partner Benefits of Alliances

Preservation of each partner firm's independence Avoidance of the firm's use of scarce financial resources to fund acquisitions Retention of the firm's flexibility to readily disengage once the purpose of the alliance has been served Option to withdraw from the alliance if its benefits prove elusive to the more permanent arrangement required by an acquisition

Why Firms Engage in M&A

Principal-agent problems (incentives such as higher pay/benefits, increased power/prestige may incent managers to grow the firm using M&A; may also be a function of managerial hubris) The desire to overcome competitive disadvantage (E.g., to more effectively compete with Nike, #2 Adidas acquired #3 Reebok, which allowed them greater economies of scale and scope unachievable when both operated independently) Superior acquisition and integration capability (some firms are better managing/negotiating acquisitions than others)

Licensing Disadvantage

Providing technical know-how to foreign firms creates risks and difficulty in maintaining control over its use

Horizontal Integration

Pursuing a concentration strategy by acquiring or merging with a rival Aimed at lowering costs by achieving greater economies of scale (this was the reasoning behind several mergers of large oil companies, including BP and Amoco in 1998, Exxon and Mobil in 1999, and Chevron and Texaco in 2001 Executives in charge of these six corporations believe that greater efficiency could be achiever by combining forces with a former rival Considering _______ alongside Porter's five forces model highlights that such moves also reduce the intensity of rivalry among an industry and thereby make the industry more profitable Waves of ______ lead to industry consolidation

Retrenchment

Reducing the size of part of a firm's operations, often though laying off employees Often a means of cutting costs Firms following a ______ strategy shrink one or more of their business units Much like an army under attack, firms using this strategy hope to make just a small retreat rather than losing a battle for survival By shrinking the size of the firm, executives hope that the firm can survive as a profitable enterprise

Strategy, Structure, and Rivalry (Competitive Intensity in a Focal Industry)

Refers to how challenging it is for firms to survive domestic competition Companies in highly competitive environments tend to do better than others (e.g., fierce competition among German automakers/high fuel costs give BMW and Volkswagen a global advantage) The United States has an overall trade deficit, but it enjoys a trade surplus within the service sector Fierce domestic competition in industries such as hotels and restaurants has helped make American firms such as Marriott and Subway important players on the world stage

Cultural Risk

Refers to the potential for a company's operations in a country to struggle due to differences in language, customs, norms, and customer preferences E.g., In 1993, Chanel debuted a dress that used Arabic calligraphy lifted from the Quran E.g., RecycleBank was offended when British press referred to their business model as a "scheme", but scheme in the UK primarily refers to a "service" One Western company's operation in Asia was nearly burned down by an angry mob when the firm used an image of Buddha in an advertisement

Economic Risk

Refers to the potential for a country's economic conditions and policies, property rights protections, and currency exchange rate to harm a firm's operations International firms have to constantly evaluate the economic conditions in the countries in which they operate Economies are unpredictable, so economic risk presents executives with tremendous challenges Coca-Cola is active in dozens of countries, forcing Coca-Cola executives to carefully monitor economic trends and events in each

Political Risk

Refers to the potential for government upheaval or interference that could harm business operations within a country E.g., Annexation of Crimea region in Ukraine by Russian separatists in 2014 forced McDonald's to close its locations and layoff ~500 employees Political risk is greatest in countries with unstable governments and corruption is rampant, such as Somalia, Venezuela, and Iran Most executives are understandably wary of of making investments in unstable countries such as Afghanistan and Somalia Nationalization

Divestment

Selling off part of a firm's operations Can be used to help firms focus on more promising profit center In some cases, _______ reverses a forward vertical integration strategy (e.g., In 2005, Ford sold Hertz for $5.6B to focus on auto manufacturing) Can also be used to reverse backward vertical integration (e.g., GM divested its parts manufacturing business in Delphi in 1997 Spin-Off Serves as a means to undo diversification strategies Can be especially appealing to executives in charge of firms that have engaged in unrelated diversification Investors often struggle to understand the complexity of diversified firms, and this can result in relatively poor performance by the stocks of such firms Diversification Discount Executives sometimes attempt to unlock hidden shareholder value by breaking up diversified companies

Liquidation

Shutting down portions of a firm's operations, often at a tremendous financial loss Executives are sometimes forced to admit that the operations that they want to abandon have no value If selling off part of a business is not possible, the best option may be _______ Executives simply shut down portions of the firms operations Can be painful, but can help firms be more competitive in the long run Failing to cut-off a hemorrhaging business can jeopardize the whole company (e.g., Borders Group)

Multidomestic Strategy Useful When

Significant country-to-country differences exist in customer preferences, buying habits, distribution channels, or marketing methods Host governments enact local content requirements or trade restrictions that preclude a uniform, coordinated worldwide market approach

Horizontal Integration Disadvantages

Sources of Costs Integration failure (often difficult to integrate two organizations with potentially different strategies and structures) Reduced flexibility (as size increases, it becomes more difficult for firms to respond to change in the environment) Increase potential for legal trouble (as firms increase in market share, there is increased scrutiny by federal anti-trust organizations ) One study found that more than 60% of mergers and acquisitions erode shareholder wealth while fewer than one in six increase shareholder wealth Some of these moves struggle because the cultures of the two companies cannot be meshed Other acquisitions fail because the buyer pays more for a target company than that company is worth and the buyer never earns back the premium it paid In the end, between 30% and 45% of mergers and acquisitions are undone, often at huge losses

Horizontal Integration Advantages

Sources of Value Creation Reduction of competitive intensity (as the industry approaches an oligopolistic structure, surviving firms focus less on price competition, possibly increasing profitability) e.g., recent mergers in the airline industry have stabilized prices and competition Positively effects several Porter's five forces (Reduces power of buyers and suppliers, reduces the threat of firm entry, and reduces rivalry among existing competitors) Lower Costs (firms are able to lower costs through increased economies of scale) e.g., mergers among drug manufacturers allow firms to sell greater variety of drugs using the same sales force, reducing costs and increasing profits Increased differentiation (can help firms fill gaps in their product and service offerings) e.g., 2005 acquisition of PeopleSoft, a leading HRM systems software developer, by Oracle, a leading data management software firm, allowed them to offer a more complete suit of enterprise software solutions Some purchased firms are attractive because they own strategic resources such as valuable brand names Some purchased firms have market share that is attractive Can also provide access to new distribution channels

Franchising Disadvantages

The decision to franchise means that a firm will get to enjoy only a small portion of the profits made under its brand name Franchisees may behave in way that the franchisor does not approve Maintaining cross-border quality control Allowing franchisees discretion in adapting to local preferences and tastes

Related and Supporting Industries

The extent to which firms' domestic suppliers and other complementary industries are developed and helpful Leadership in related industries can help MNEs be more competitive globally (e.g., Toyota's success in the 1990s and 2000s has been in part due to the high-quality and efficient suppliers in Japan) Firms benefit when their domestic suppliers and other complementary industries are developed and helpful In extreme cases, the poor condition of ____________ can undermine an operation Italy's fashion industry is enhanced by the abundance of fine Italian leather and well-known designers

Merger

The joining of two similarly sized independent companies into one company to from a combined entity Tend to be friendly; the target firm tends to welcome the merger Stock from one firm is typically exchanged 1:1 for stock in the new firm Firms tend to be similar in size In most cases, M&As DO NOT create a competitive advantage Most mergers destroy shareholder value because anticipated synergies never materialize Escalation of commitment can be another problem (confirmation bias, reputation, misjudging the responses of others) E.g., AT&T and Time Warner merged last year for $85.4B E.g., Disney was much bigger than Miramax and Pixar when it joined with these firms in 1003 and 2006 respectively, thus these two horizontal integration moves are considered to be acquisitions

Demand Conditions

The nature of domestic customers, especially whether they have high expectations of the goods and services that they buy Characteristics of demand in a firm's domestic market (e.g., dense urban living, hot humid summers, and high energy costs contribute to Japan's demand for small, energy-efficient air conditioners) Firms benefit when their domestic customers have HIGH expectations Fussy domestic customers help firms prepare for the global arena Japanese firms must create excellent goods to meet Japanese consumers' high expectations about quality, aesthetics, and reliability

Factor Conditions

The nature of raw material and other inputs that firms need to create goods and conditions Describes\ a country's endowment in terms of natural, human, and other resources Examples include land, labor, capital markets, entrepreneurial ability and infrastructure Natural resource domination is not often needed to generate world-leading companies, but more based on human capital and know-how Consider some of the world's more resource-rich countries: Afghanistan, Iran, Iraq, Russia, Saudi Arabia, and Venezuela Consider some of the world's most resource-poor countries: Denmark, Finland, Israel, Japan, Singapore, Hong Kong, etc. Influences on human capital and knowledge resources include efficient capital markets, supportive institutional framework, research universities, etc. Firms benefit when they have good access to factor conditions and face challenges when they do not The inputs present in a country shape firms' global competitiveness The rapid growth of Chinese manufacturers has been fueled by the availability of cheap labor Just-In-Time Inventory Management (JIT)

Diversification of Business Risk

The potential that a business operation might fail Internationalized firms are not dependent on one country for sales An adverse event in one country is less damaging to international firms E.g., Japanese automakers would have been devastated by the earthquakes and tsunamis in Japan in 2011 if not internationalized Similarly, internationalizing can help firms escape changing economic, sociocultural, and regulatory environments E.g., US tobacco firms are expanding to international markets in which smoking remains popular It is dangerous for a firm to operate in only one country If a firm is completely dependent on one country, negative events in that country could ruin the firm Business risk is reduced when a firm is involved in multiple countries

Offshoring

The relocation of a business activity to another country A popular yet controversial means for trying to reduce costs While __________ can reduce the firm's cost of doing business, the job losses in the firm's home country can devastate local communities

Reshoring

The relocation to a firm's home country of business activity that had been sent overseas Jobs that had been sent overseas are returning home It could be that the quality provided by the workers overseas is not good enough It could be that the expected costs savings have not materialized

Nationalization

The seizure of privately owned business operations by a national government

Diversification Discount

The tendency of investors to undervalue the shares of a diversified form

Options for Competing in International Markets

These options vary in terms of how much control a firm has over its operation, how much risk is involved, and what share of the operation's profits the firm gets to keep 1. Exporting 2. Creating a Wholly Owned Subsidiary 3. Franchising 4. Licensing 5. Creating a Joint Venture or Strategic Alliance

Multidomestic Strategy Drawbacks

They can hinder transfer of a firm's competencies and resources across country boundaries They do not promote building a single, unified competitive advantage Costly and inefficient

Vertical Integration Advantages

This approach can be very attractive when a firm's suppliers or buyers have too much power over the firm and are becoming increasingly profitable at the firm's expense By entering the domain of a supplier of a buyer, executives can reduce or eliminate the leverage the supplier or buyer has over the firm Considering vertical integration alongside Porter's five forces model highlights that such moves create greater profit potential Securing critical supplies and distribution channels (e.g., HTC's backward integration into smartphone design through the acquisition of One & Co gave them access to scare talent and capabilities) Lowering costs Improving Quality Facilitating, scheduling, and planning (e.g., Pepsi's forward integration into bottling business gave them more control over pricing, quality, distribution, and in-store display) Firms can pursue vertical integration on their own, such as when Apple opened stores bearing its brand, or through a merger or acquisition, such as when eBay purchased PayPal Today, oil companies are among the most vertically integrated firms

Multidomestic Strategy

To sacrifice efficiency in favor of responsiveness to varying preferences across countries Maximize local responsiveness to make local customers see them as domestic company Tailor the company's offerings to fit specific market conditions and buyer preferences (CUSTOMIZE) Delegate strategy-making to local managers with first-hand knowledge of local conditions E.g., Coca-Cola offers different beverage options in foreign markets in addition to classic Coke Low pressure for cost reductions and high pressure for local responsiveness (e.g., Bridgestone, Nestle, Philips) E.g., Heinz (foods are customized to be responsive to local tastes)

Global-Standardization Strategy

To sacrifice responsiveness to local preferences in favor of efficiency (EMPHASIZE EFFICIENCY) Reap economies of scale and location economies by pursuing global division of labor wherever best-of-class capabilities reside at lowest cost The result of high pressure to reduce costs but be locally responsive Common among MNEs organized as networks Synergistic with cost-leader business strategy Because of little to no differentiation, price is the main competitive weapon Mostly appropriate for firms with products with preferences that do not differ much between countries (otherwise, a firm risks being out of touch with local consumers) High pressure for cost reductions and low pressure for local responsiveness (e.g., Infosys, Lenovo, Seimens Energy) The complete opposite of Multidomestic Some minor modifications to products and services may be made in various markets, but a ______ strategy stresses the need to gain economies of scale by offering essentially the same products or services in each market Where minor or no modifications to products and services are made - is used by iconic products such as Tabasco E.g., Microsoft

Market Development

Trying to sell existing products within new markets One way to reach a new market is to enter a new retail channel E.g., Starbucks sells coffee beans in not only its stores but also grocery stores (they can reach consumers that do not visit coffeehouses) Entering new geographic areas is another way to pursue market development (e.g., Texas-based Blue Bell ice cream has progressively expanded sales of its popular products to states surrounding Texas) E.g., Philadelphia-based Tasty Baking Company

Access to New Customers

US represents only 5% of the global population In particular, China and India have become key emerging markets E.g., 64% of McDonald's revenues come from beyond the US

Vertical Integration Disadvantages

Venturing into new portions of the value chain can take a firm into very different businesses Moving up or down WITHIN an incumbent industry Can create complacency Increased costs (in-house suppliers may have higher costs because they are not exposed to market competition) Reduced quality (in-house suppliers don't necessarily have the same incentives to keep quality high) Reducing flexibility (when industry production methods change, it may be expensive for in-house suppliers to change production methods) e.g., US Steel was at a competitive disadvantage to Nucor and Chaparrel because their production methods were antiquated and expensive to change) Increasing the potential for legal repercussions (can increase concerns for monopolistic power)

Economic Distance

Wealth and per capita income of consumers Distance between two countries increases with different consumer incomes; different costs and quality of natural, financial, and human resources; different information or knowledge Distance most affects industries or products for which demand varies by income (cars); in which labor and other cost differences matter (textiles)

Unrelated Diversification

When a firm enters an industry that lacks any important similarities with the firm's existing industry or industries E.g., Coca-Cola acquired Columbia Pictures in 1982 for $750M, then sold it in 1989 for $3.4B E.g., Berkshire Hathaway owns dozens of businesses that range from fast food to insurance to utilities Successful _______ is difficult since firm competencies don't necessarily transfer to a different industry E.g., Harley-Davidson attempted a line of bottled water E.g., Starbucks expanded into the furniture business

Vertical Integration

When a firm gets involved in new portions of the value chain Can be attractive when a firm's buyers and suppliers have too much power and are becoming increasingly profitable at firm's expense

Related Diversification

When a firm moves into a new industry that has important similarities with the firm's existing industry or industries WISER Some firms that engage in related diversification aim to develop and exploit a core competency to become more successful E.g., Apple has diversified from computers to MP3 players to smartphone and tablets

Acquisition

When one company purchases another company Generally, the acquired company is smaller than the firm that purchases it Can be friendly or unfriendly - also called a hostile takeover In most cases, M&As DO NOT create a competitive advantage The potential value created is often assumed within the price of the acquisition (sometimes companies get swept up in a bidding war for an acquisition, resulting in winner's curse) Escalation of commitment can be another problem (confirmation bias, reputation, misjudging the responses of others) E.g., 2006 acquisition of Pixar by Disney for $7.4B was friendly E.g., 2005 acquisition of PeopleSoft by Oracle for $10.3B was not