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1. Earn greater return from their distinctive competencies 2. 2. realize what we refer to as location economies by dispersing individual value recreation activities to those locations where they can be performed most efficiently and 3. ride down the experience curve ahead of competitors thereby lowering the costs of value creation.
consumers tastes and preferences infrastructure and traditional practices distribution channels demands of the local government
Differences in Infrastructure &/or Traditional Practices This creates a need to customize products accordingly. Fulfilling this need may require the delegation of manufacturing and production functions to foreign subsidiaries.
Implications
Pressures for local responsiveness imply that it may not be possible for a company to realize the full benefits from experience - curve effects and location economies.
STRATEGIC CHOICE
Companies use four (4) basic strategies to enter and compete in the international environment: An international strategy A multidomestic strategy A global strategy & A trans-national strategy
1. 2. 3. 4.
International Strategy
Companies that pursue an international strategy try to create value by transferring valuable skills and products to foreign markets where indigenous competitors lack those skills and products. This strategy makes sense if the company faces relatively weak pressures for local responsiveness and cost reductions.
Multidomestic Strategy
Companies pursuing a multi domestic strategy orient themselves toward achieving maximum local responsiveness. A weakness of this strategy is that many multidomestic companies have developed into decentralized federations in which each national subsidiary functions in a largely autonomous manner. Consequently, after a time they begin to lose the ability to transfer the skills and products derived from distinctive competencies to their various national subsidiaries around the world.
Global Strategy
Companies that pursue global strategy focus on increasing profitability by reaping the cost reductions that come from experience curve effects and location economies. Global companies tend not to customize their product offering and marketing strategy to local conditions, because customization raises costs since it involves shorter production runs and the duplication of functions. This strategy makes most sense in those cases in which there are strong pressures for cost reductions and where demands for local responsiveness are minimal.
Transnational Strategy
Christopher Bartlett and Sumantra Ghoshal argue that in todays intense climate, in order to survive companies must; exploit experiencebased cost economies & location economies, transfer distinctive competencies within the company and at the same time pay attention to pressures for local responsiveness. The strategy aimed at doing all of the above simultaneously is termed the transnational strategy.
Exporting
Exporting has two(2) distinct advantages: 1. It avoids the costs of establishing manufacturing operations in the host country, which are often substantial. 2. It may be consistent with realizing experience-curve cost economies and location economies.
Exporting (cont.)
On the other hand there are a number of drawbacks to exporting: 1. High transport costs can make exporting uneconomical, particularly in the case of bulk products 2. Tariff barriers can make exporting uneconomical, and the threat to impose tariff barriers by the government of a country the company is exporting to can make the strategy very risky..
Licensing
International licensing is an arrangement whereby a foreign licensee buys the rights to produce a companys products in the licensees country for a negotiated fee. The advantage of licensing is that the company does not have to bear the development costs and risks associated with opening up a foreign market. Licensing has three(3) serious drawbacks.
Licensing Drawbacks
It does not give a company the tight control over manufacturing. Competing in a global marketplace may make it necessary to coordinate strategic moves across countries so that the profits earned in one country can be used to support competitive attacks on another. The risk associated with technological knowhow to foreign companies.
Licensing (cont.)
Cross Licensing Agreement Under a cross Licensing Agreement, a firm might license some valuable, intangible property to a foreign partner, but in addition to a royalty payment a firm might also request that the foreign partner license some of its valuable know-how to the firm.
Franchising
Whereas licensing is a strategy pursued primarily by manufacturing companies, franchising which resembles it in some respects, is a strategy employed chiefly by service companies. The advantages of franchising are similar to those of licensing. The franchiser does not have to bear the development costs or risks of opening up a foreign market on its own. The franchisee typically assumes these costs & risks. A significant disadvantage of franchising is the lack of quality control.
Joint Ventures
Establishing a joint venture with a foreign company has long been a favoured mode for entering a new market, and this has a number of advantages: A company may feel it can benefit from a local partners knowledge of a host countrys competitive conditions, culture, language, political & business systems. High opening costs and risks are shared with a local partner.
Distinctive Competencies and Entry Mode For companies pursuing an international strategy, the optimal entry mode depends to some degree on the nature of their distinctive competency. In particular, we need to distinguish between companies with a distinctive competency in technological know-how and those with a distinctive competency in management knowhow.
1. Competencies in Technological Know-How Licensing and joint venture arrangements should be avoided in order to minimize the risk of losing control of that technology. 2. Competencies in Management Know-How Since the risk of losing control of management skills is not great, many service companies favour a combination of franchising and subsidiaries to control franchisees.
Pressures for Cost Reduction and Entry Mode The greater the pressures for cost reductions, the more likely it is that a company will want to pursue some combination of exporting and wholly owned subsidiaries.
Partner Selection
One of the keys to making a strategic alliance work is to select the right kind of partner. A good partner has three principal characteristics: 1. The partner must have capabilities that the company lacks and that it values. 2. A good partner shares the firms vision for the purpose of the alliance. 3. A good partner is unlikely to try to exploit the alliance opportunistically for its own ends.
Alliance Structure
The alliance should be structured so that the companys risk of giving too much away to the partner is reduced to an acceptable level. Designing it in such a way that is it difficult, if not impossible, to transfer technology not meant to be transferred. Contractual safeguards can be written into alliance agreements. Both parties can agree in advance to swap skills & technology, ensuring equitable gain.
CHAPTER 9
Corporate Strategy Vertical Integration, Diversification and Strategic Alliances
The principal concern of corporate strategy is identifying the business areas in which a company should participate in order to maximize its long-run profitability.
VERTICAL INTEGRATION
A strategy of vertical integration means that a company is producing its own inputs (backwards, or upstream, integration) or is disposing of its own outputs (forward, or downstream, integration).
1. 2. 3. 4.
There a four (4) main arguments for pursuing a vertical-integration strategy. Vertical Integration: Builds Barriers to New Companies Facilitates the investments in efficiency enhancing specialized assets. Protects product quality Results in improved scheduling
Improved Scheduling
It is sometimes argued that strategic advantages arise from the easier planning, coordination and scheduling of adjacent processes made possible in vertically integrated organizations. Such advantages can be particularly important to companies trying to realize the benefits of just-in-time (JIT) inventory systems.
3. Demand Uncertainty Vertical integration can also be risky in unstable or unpredictable demand conditions. When demand is stable, higher degrees of vertical integration might be managed with relative ease. Unstable conditions cause achieving close coordination among vertically integrated activities difficult.
Hostage Taking
Hostage taking is essentially a means of guaranteeing that a partner will keep its side of the bargain.
Credible Commitments
A credible commitment is a believable commitment to support the development of a long-term relationship between companies.
Maintaining Market Discipline A company that has entered into a long-term relationship can become too dependent on an inefficient partner. Since it does not have to compete with other organizations in the marketplace for the companys business, the partner may lack the incentive to be cost efficient. Consequently, a company entering into a cooperative long-term relationship must be able to apply some kind of market discipline to its partner.
Disadvantages One is that a company that outsources an activity loses both the ability to learn from that activity and the opportunity to transform that activity into a distinctive competence of that company. A company may become too dependent upon a particular supplier. In its enthusiasm for strategic outsourcing, a company might go too far and outsoruce value creation activities that central to the maintenance of its competitive advantage.
DIVERSIFICATION
There are two (major) types of diversification: Related Diversification is diversification into a new business activity that is linked to a companys existing business activity or activities by commonality between one or more components of each activitys value chain. Unrelated Diversification - is diversification into a new business area that has no obvious connection with any of the companys existing areas.
Transferring Competencies
Companies that base their diversification strategy on transferring one or value creation functions, such as manufacturing, marketing, materials management and R&D. Philip Morris transfer of marketing skills to Miller Brewing, is perhaps one of the classic examples of how value can be created by competency transfers.
More generally, a large number of academic studies support the conclusion that extensive diversification tends to depress rather than improve a companys profitability. One reason for the failure of diversification to achieve its aims is that all too often the bureaucratic costs of diversification exceed the value created by the strategy. The level of bureaucratic costs in an organization is a function of two factors (1) the number of businesses in a companys portfolio and (2) the extent of coordination required among the different businesses of the company in order to realize value from a diversification strategy.
Number Of Businesses
The Greater the number of the businesses in a companys portfolio, the more difficult it is for corporate management to remain informed about the complexities of each business.
Limits of Diversification
Although diversification can create value for a company, it inevitably involves bureaucratic costs. As is the case with vertical integration, the existence of bureaucratic costs places a limit on the amount of diversification that can profitably be pursued.
Research suggests that the average related company is, at best, only marginally more profitable than the average unrelated company. How can this be if related diversification is associated with more benefits than unrelated diversification?
The answer is quite simple. Bureaucratic costs arise from: 1.The number of companies in a companys portfolio 2.The extent of coordination required among the different businesses in order to realize the value from a diversification strategy. Because an unrelated company does not have to achieve coordination between business units, it has to cope with only the bureaucratic costs that arise from the number of businesses in its portfolio.
In contrast, a related diversified company has to achieve coordination between business units if it is to realize the value that comes from skill transfers and resource sharing.
CHAPTER 10
Corporate Development Building & Restructuring the Corporation Corporate development is concerned with identifying which business opportunities a company should pursue, how it should pursue those opportunities, and how it should exit from businesses that do not fit with the companys strategic vision.
Acquisitions involve buying an existing business, Internal ventures start a new business from scratch, and Joint ventures typically establish a new business with the assistance of a partner.
REVIEWING THE CORPORATE PORTFOLIO A central concern of corporate development is identifying which business opportunities a company should pursue.
Portfolio Planning
One of the most famous portfolio planning matrices is referred to as the growth-share matrix. The growth-share matrix has three(3) main steps: 1.Dividing a company into strategic business units (S.B.U.s) 2.Assessing and comparing the prospects of each S.B.U. 3.Developing strategic objectives for each S.B.U.
Identifying SBUs
A company must create an SBU for each economically distinct business area in which it competes. Normally a company defines its SBUs in terms of the product markets they compete in.
Assessing & Comparing SBUs Having identified SBUs, top managers then assess each according to two criteria: 1. The SBUs relative market share, and 2. The growth rate of the SBUs industry
Relative Market Share is the ratio of an SBUs market share to the market share held by the largest rival company in its industry. According to the BCG, market share gives a company cost advantages from economies of scale and learning effects. An SBU with a relative market share greater than 1.0 is assumed to be farther down the experience curve and, therefore, have a significant cost advantage over its rivals.
The center of each circle corresponds to the position of an SBU on the two dimensions of the matrix. The size of each circle is proportional to the sales revenue generated by each business in the company to the portfolio. The bigger the circle, the larger the SBU relative to total corporate revenues.
The matrix is divided into four (4) cells: 1. Stars the leading SBUs in a companys profile are the stars. 2. Question Mark/Problem Child Question marks are SBUs that a re relatively weak in competitive terms, but are based in high growth industries. A question mark can become a star if nurtured properly. To become a market leader, a question mark requires a substantial net injections of cash; it is cash hungry.
3. Cash Cows SBUs that have a high market share in low-growth industries are cash cows. Their competitive strength comes from being farthest down on the experience curve. They are the cost leaders in their industries. 4. Dogs SBUs that are in low-growth industries but have a low market share are called dogs. They have a weak competitive position in unattractive industries and thus are viewed as offering few benefits to a company.
The company should exit from any industry in which the SBU is a dog. If a company lacks sufficient cash cows, stars, or question marks, it should consider acquisitions and divestments to build a more balanced portfolio.
Fill in the Blanks The lower left quadrant represents the companys existing portfolio of competencies and products. Premier Plus 10 The upper-left quadrant is referred to as premier plus 10. the title is meant to suggest an important question: What new core competencies must be built today to ensure that the company remains a premier provider of its existing products in ten years time?
White Spaces the lower-right quadrant is referred to as white spaces. The question to be addressed here is how best to fill the white space by creatively redeploying or recombining current core competencies. Mega-Opportunities Opportunities represented by the upper-right quadrant of Figure 10.3 do not overlap with the companys current market position or its current competence endowment.
A great advantage of Hamel and Prahalads framework is that it focuses explicitly on how a company can create value by building new competencies or by recombining existing competencies to enter new business areas.
Entry Strategy
Having reviewed the different businesses in the companys portfolio, corporate management might decide to enter a new business area. There are three (3) vehicles that companies use to enter new business areas: 1. Internal Ventures 2. Acquisition 3. Joint Ventures
Poor Commercialization
Many internal new ventures are hightechnology operations, To be commercially successful, sciencebased innovations must be developed with market requirements in mind. Many internal new ventures fail when a company ignores the basic needs of the market.
Poor Implementation
Some of the most common mistakes with managing the new-venture process are: 1. The shotgun approach of supporting many different internal new ventures. 2. Failure by corporate management to set the strategic context within which new-venture projects should be developed. 3. Failure to anticipate the time and costs involved in the venture process constitutes a third mistake.
Pitfalls of Acquisitions
Why do so many acquisitions apparently fail to create value? There appear to be four(4) major reasons: 1. Difficulty with Postacquisition Integration 2. Overestimating Economic Benefits 3. The Expense of Acquisitions 4. Inadequate Preacquisition Screening
Screening
Through acquisition screening increases a companys knowledge about potential takeover targets.
Bidding Strategy
The objective of bidding strategy is to reduce the price that a company must pay for an acquisition candidate.
Integration
Integration should center on the source of potential strategic advantages of the acquisition. Integration should also be accompanied by steps to eliminate any duplication of facilities or functions.
1. A joint venture allows a company to share the risks and costs of developing a new business but it also requires the sharing of profits if the new business succeeds. 2. A company that enters into a joint venture always runs the risk of giving critical know how away to its partner, which might use that know-how to compete directly with the company in the future. 3. The venture partners must share control, and if they have different business philosophies, investment preferences and so on could result in business failure.
RESTRUCTURING
In recent years, reducing the scope of the company through restructuring has become an increasingly popular strategy. In most cases, companies that are engaged in restructuring are divesting themselves of diversified activities in order to concentrate on their core businesses.
Why Restructure?
One reason for so much restructuring over the years is overdiversification. A second factor is that in the 1980s and 1990s many diversified companies found their core business areas under attack from new competition. A final factor of some importance is the innovation in management processes and strategy have diminished the advantages of vertical integration or diversification.
Exit Strategies
Companies can choose from three main strategies for exiting business areas; Divestment Harvest, and Liquidation.
Divestment
Divestment represents the best way for a company to recoup as much of its initially investment in a business unit as possible. The idea is to sell the business unit to the highest bidder. Three types of buyers are independent investors, other companies &and the management of the unit to be divested. Selling of a business unit to independent investors is normally referred to as spinoff. Selling off a unit to its management is referred to as management buyout (MBO).
TURNAOUND STRATEGIES
Many companies restructure their operations, divesting themselves of their diversified activities because they wish to focus on their core business area. An integral part of restructuring therefore is the development of a strategy for turning around the companys core or remaining business areas.
1. 2. 3. 4. 5. 6. 7.
Poor Management
Poor management covers a multitude of sins, ranging from sheer incompetence to neglect of core businesses to an insufficient number of good managers. Although not necessarily a bad thing, oneperson rule often seems to be at the root of poor management. One study found that the presence of a dominant and autocratic chief executive with a passion for empire-building strategies often characterizes many failing companies.
Overexpansion
The empire-building strategies of autocratic CEOs often involve rapid expansion and extensive diversification. Much of this diversification tends to be poorly conceived and adds little value to a company.
High Costs
Inadequate financial controls can lead to high costs. Beyond this, the most common cause of high-cost structure is low labour productivity.
New Competition
Competition in capitalist economies is a process characterized by the continual emergence of new companies championing new ways of doing business. In recent years few industries and few established industries have been spared the competitive challenge of powerful new competition.
Organizational Inertia
What is also required is an organization that is slow to respond to such environmental changes.
These are:
Improving Profitability
Improving the profitability of the operations that remain after asset sales and closure takes a number of steps to improve efficiency, quality, innovation and customer responsiveness.
Making Acquisitions
A somewhat surprising but quite common turnaround strategy is to make acquisitions, primarily to strengthen the competitive position of a companys remaining core operations.