Competitive Dynamics

Transcription

1 Chapter 5 Competitive Dynamics Dr. Candace Petersen BA 495 BA Petersen 1

2 Factors Leading to More Complex Rivalry Declining emphasis on single, domestic markets and increasing emphasis on global markets Advances in communication technology make coordination easier across multiple markets Advances in technology and innovation have increased competitiveness of small and medium sized firms National barriers are falling due to the number and scope of trade agreements (GATT, NAFTA, EEC) BA Petersen 2

3 Competitive Dynamics Results from a series of competitive actions and competitive responses among firms competing within a particular industry Competitive Rivalry Exists when two or more firms jockey with one another in the pursuit of better market position BA Petersen 3

4 A firm s strategic conduct is dynamic in nature Actions taken by one firm elicit responses from competitors Competitive Dynamics Actions and responses shape the competitive positions of each firm s business level strategy Competitive responses lead to additional actions from the firm that acted originally BA Petersen 4

5 Model of Interfirm Rivalry: Likelihood of Attack and Response Drivers of Competitive Behavior Awareness Motivation Capability Competitor Analysis Market Commonality Resource Similarity Interfirm Rivalry: Attack & Response Likelihood of Attack First Mover Incentives Likelihood of Response Type of Competitive Action Actor s Reputation Dependence on the Market Resource Availability Feedback Ability for Action and Response Relative Size Speed Innovation Quality Outcomes Competitive Market Types Slow, Standard or Fast Cycle Competitive Outcomes Sustained Competitive Advantage Temporary Advantage Evolutionary Outcomes Entrepreneurial Growth-Oriented or Market-Power Actions BA Petersen 5

6 Model of Interfirm Rivalry: Likelihood of Attack and Response Drivers of Competitive Behavior Awareness Motivation Capability BA Petersen 6

7 Model of Interfirm Rivalry: Likelihood of Attack and Response Drivers of Competitive Behavior Awareness Motivation Capability Do managers understand the key characteristics of competitors? BA Petersen 7

8 Model of Interfirm Rivalry: Likelihood of Attack and Response Drivers of Competitive Behavior Awareness Motivation Capability Does the firm have appropriate incentives to attack or respond? BA Petersen 8

9 Model of Interfirm Rivalry: Likelihood of Attack and Response Drivers of Competitive Behavior Awareness Motivation Capability Does the firm have the necessary resources to attack or respond? BA Petersen 9

10 Model of Interfirm Rivalry: Likelihood of Attack and Response Drivers of Competitive Behavior Awareness Motivation Capability Competitor Analysis Market Commonality Resource Similarity Interfirm Rivalry: Attack & Response Likelihood of Attack First Mover Incentives Likelihood of Response Type of Competitive Action Actor s Reputation Dependence on the Market Resource Availability Feedback Ability for Action and Response Relative Size Speed Innovation Quality Outcomes Competitive Market Types Slow, Standard or Fast Cycle Competitive Outcomes Sustained Competitive Advantage Temporary Advantage Evolutionary Outcomes Entrepreneurial Growth-Oriented or Market-Power Actions BA Petersen 10

11 Model of Interfirm Rivalry: Likelihood of Attack and Response Competitor Analysis Market Commonality Resource Similarity BA Petersen 11

12 Model of Interfirm Rivalry: Likelihood of Attack and Response Competitor Analysis Market Commonality Do firms compete with each other in multiple markets? Resource Similarity BA Petersen 12

13 Model of Interfirm Rivalry: Likelihood of Attack and Response Competitor Analysis Market Commonality Resource Similarity Multipoint competition tends to reduce competitive interactions, but increases the likelihood of response where interaction occurs For example, airlines price flights similarly, but respond quickly when competitors introduce promotional prices BA Petersen 13

14 Model of Interfirm Rivalry: Likelihood of Attack and Response Competitor Analysis Market Commonality Resource Similarity Do competitors possess similar types or amounts of resources? BA Petersen 14

15 Model of Interfirm Rivalry: Likelihood of Attack and Response Competitor Analysis Market Commonality Resource Similarity Firms are less inclined to attack a firm that is likely to retaliate Firms with similar resources are more likely to be aware of each other s competitive moves Firms with dissimilar resources are more likely to attack BA Petersen 15

16 Model of Interfirm Rivalry: Likelihood of Attack and Response Drivers of Competitive Behavior Awareness Motivation Capability Competitor Analysis Market Commonality Resource Similarity Interfirm Rivalry: Attack & Response Likelihood of Attack First Mover Incentives Likelihood of Response Type of Competitive Action Actor s Reputation Dependence on the Market Resource Availability Feedback Ability for Action and Response Relative Size Speed Innovation Quality Outcomes Competitive Market Types Slow, Standard or Fast Cycle Competitive Outcomes Sustained Competitive Advantage Temporary Advantage Evolutionary Outcomes Entrepreneurial Growth-Oriented or Market-Power Actions BA Petersen 16

17 Model of Interfirm Rivalry: Likelihood of Attack and Response Interfirm Rivalry: Attack & Response Likelihood of Attack First Mover Incentives Likelihood of Response Type of Competitive Action Actor s Reputation Dependence on the Market Resource Availability BA Petersen 17

18 Model of Interfirm Rivalry: Likelihood of Attack and Response Interfirm Rivalry: Attack & Response Likelihood of Attack First Mover Incentives Likelihood of Response Type of Competitive Action Actor s Reputation Dependence on the Market Resource Availability Firm Mover advantage can be substantial BA Petersen 18

19 First Mover Firms that take an initial competitive action Generally possess the resources and capabilities that enable them to be pioneers in new products, new markets or new technologies BA Petersen 19

20 First Mover Firms that take an initial competitive action Generally possess the resources and capabilities that enable them to be pioneers in new products, new markets or new technologies Can earn above average profits until competitors respond Gain customer loyalty, helping to create a barrier to entry by competitors Advantage depends upon difficulty of imitation BA Petersen 20

21 Second Second Mover Mover Firms that respond to a First Mover s actions Second Movers frequently imitate First Movers Speed of response often dictates success Should evaluate customers response before moving Fast Second Movers can capture some of initial customers and develop some brand loyalty Avoid some of the risks associated with First Move Must possess necessary capabilities to imitate BA Petersen 21

22 Model of Interfirm Rivalry: Likelihood of Attack and Response Interfirm Rivalry: Attack & Response Likelihood of Attack First Mover Incentives Likelihood of Response Type of Competitive Action Actor s Reputation Dependence on the Market Resource Availability Whether a competitor is likely to respond depends on several key factors BA Petersen 22

23 Types of Competitive Actions Strategic Actions Example Significant commitments of specific & distinctive organizational resources Difficult to implement Difficult to reverse Major Acquisition Tactical Actions Undertaken to fine tune strategy Relatively easy to implement Relatively easy to reverse BA Petersen 23

24 Gauging the Likelihood of Response Market Dependence Firms that are more dependent on a single industry are more likely to respond than are diversified firms Industry dependent firms will likely respond to either strategic or tactical actions Competitor Resources Smaller firms are more likely to respond to tactical actions Limited resources may lead to alternatives such as Strategic Alliances BA Petersen 24

25 Model of Interfirm Rivalry: Likelihood of Attack and Response Drivers of Competitive Behavior Awareness Motivation Capability Competitor Analysis Market Commonality Resource Similarity Interfirm Rivalry: Attack & Response Likelihood of Attack First Mover Incentives Likelihood of Response Type of Competitive Action Actor s Reputation Dependence on the Market Resource Availability Feedback Ability for Action and Response Relative Size Speed Innovation Quality Outcomes Competitive Market Types Slow, Standard or Fast Cycle Competitive Outcomes Sustained Competitive Advantage Temporary Advantage Evolutionary Outcomes Entrepreneurial Growth-Oriented or Market-Power Actions BA Petersen 25

26 Model of Interfirm Rivalry: Likelihood of Attack and Response Ability for Action and Response Relative Size Speed Firm size can have opposing effects on competitive dynamics Innovation Quality BA Petersen 26

27 Model of Interfirm Rivalry: Likelihood of Attack and Response Ability for Action and Response Relative Size Speed Innovation Quick response is crucial to both the first mover and the fast second mover Quality BA Petersen 27

28 Model of Interfirm Rivalry: Likelihood of Attack and Response Ability for Action and Response Relative Size Speed Innovation Quality Consistent innovation is required for market leadership in many dynamic industries BA Petersen 28

29 Model of Interfirm Rivalry: Likelihood of Attack and Response Ability for Action and Response Relative Size Speed Innovation Quality Exceeding customer expectations is a necessity to compete in the 1990s BA Petersen 29

30 Model of Interfirm Rivalry: Likelihood of Attack and Response Drivers of Competitive Behavior Awareness Motivation Capability Competitor Analysis Market Commonality Resource Similarity Interfirm Rivalry: Attack & Response Likelihood of Attack First Mover Incentives Likelihood of Response Type of Competitive Action Actor s Reputation Dependence on the Market Resource Availability Feedback Ability for Action and Response Relative Size Speed Innovation Quality Outcomes Competitive Market Types Slow, Standard or Fast Cycle Competitive Outcomes Sustained Competitive Advantage Temporary Advantage Evolutionary Outcomes Entrepreneurial Growth-Oriented or Market-Power Actions BA Petersen 30

31 Model of Interfirm Rivalry: Likelihood of Attack and Response Outcomes Competitive Market Types Slow, Standard or Fast Cycle Competitive Outcomes Sustained Competitive Advantage Temporary Advantage Evolutionary Outcomes Evolutionary Actions Growth-Oriented Actions Market-Power Actions Fast cycle markets are intensely dynamic and a first mover advantage is often unsustainable Firms may cannibalize older generation products while introducing new innovative premium products Sustainable competitive advantage is unilkely BA Petersen 31

32 Some Firms Maintain Competitive Advantage in Fast-Cycle Markets by Seizing the Initiative 1 2 Disrupting the Status Quo Identify new opportuntites to serve the customer by shifting the rules of competition through speed and variety Creating Temporary Advantage Use superior knowledge of the customer, technology and the future to enhance customer orientation and empower workers 3 4 Seizing the Initiative Move aggressively into new areas of competition to create new advantage and undermine a competitor s old advantage Sustaining the Momentum Take several actions in a row in order to seize the initiative and create momentum to develop new advantages BA Petersen 32

33 Model of Interfirm Rivalry: Likelihood of Attack and Response Outcomes Competitive Market Types Slow, Standard or Fast Cycle Competitive Outcomes Sustained Competitive Advantage Temporary Advantage Evolutionary Outcomes Evolutionary Actions Growth-Oriented Actions Market-Power Actions Strategies may be determined by the life cycle of the industry Younger firms and emerging industries are generally characterized by entrepreneurial actions Growth-oriented and Market-power strategies dominate established or mature industries BA Petersen 33

34 Model of Interfirm Rivalry: Likelihood of Attack and Response Drivers of Competitive Behavior Awareness Motivation Capability Competitor Analysis Market Commonality Resource Similarity Interfirm Rivalry: Attack & Response Likelihood of Attack First Mover Incentives Likelihood of Response Type of Competitive Action Actor s Reputation Dependence on the Market Resource Availability Feedback Ability for Action and Response Relative Size Speed Innovation Quality Outcomes Competitive Market Types Slow, Standard or Fast Cycle Competitive Outcomes Sustained Competitive Advantage Temporary Advantage Evolutionary Outcomes Entrepreneurial Growth-Oriented or Market-Power Actions BA Petersen 34

35 An Action-Based Model of the Industry Life Cycle Key Task Key Task Key Task Firm Resource & Market Strength Exploiting Open Niches (Blind Spots) and Competitive Uncertainty Exploiting Factors of Production Exploiting Market Position Market-Power Actions Growth-Oriented Actions Entrepreneurial Actions Emerging Stage Growth Stage Mature Stage Time BA Petersen 35

36 Chapter 6 Corporate-Level Strategy Dr. C. Petersen BA 495 BA Petersen 36

37 A Diversified Company has 2 levels of strategy Business-Level Strategy (Competitive Strategy) How to create competitive advantage in each business in which the company competes - low cost - focused low cost - differentiation - focused differentiation - integrated low cost/differentiation Corporate-Level Strategy (Companywide Strategy) How to create value for the corporation as a whole BA Petersen 37

38 Corporate Strategy concerns 2 key questions: What businesses should the corporation be in? How should the corporate office manage the array of business units? Corporate Strategy is what makes the corporate whole add up to more than the sum of it business unit parts BA Petersen 38

39 Firms Vary by Degree of Diversification Low Levels of Diversification Single-business Dominant-business Moderate to High Levels of Diversification Related-Diversified High Levels of Diversification Unrelated-Diversified > 95% of revenues from a single business unit Between 70% and 95% of revenues from a single business unit <70% of revenues from a single business unit Businesses share product, technological or distribution linkages Business units not closely related BA Petersen 39

40 Reasons for Diversification Resources Incentives Motives to Enhance Strategic Competitiveness Economies of Scope Market Power Financial Economies Managerial Motives BA Petersen 40

41 Reasons for Diversification Resources Incentives Managerial Motives Incentives and Resources with Neutral Effects of Strategic Competitiveness Anti-Trust Regulation Tax Laws Low Performance Uncertain Future Cash Flows Firm Risk Reduction Tangible Resources Intangible Resources BA Petersen 41

42 Reasons for Diversification Resources Incentives Managerial Motives Managerial Motives Causing Value Reduction Diversifying Managerial Employment Risk Increasing Managerial Compensation BA Petersen 42

43 Summary Model of the Relationship between Firm Performance and Diversification Resources Incentives Diversification Strategy Managerial Motives BA Petersen 43

44 Adding Value by Diversification Diversification most effectively adds value by either of two mechanisms By developing economies of scope between business units in the firms which leads to synergistic benefits By developing market power which lead to greater returns BA Petersen 44

45 Alternative Diversification Strategies Related Diversification Strategies 1 Sharing Activities 2 Transferring Core Competencies Unrelated Diversification Strategies 3 Efficient Internal Capital Market Allocation 4 Restructuring BA Petersen 45

46 Alternative Diversification Strategies Related Diversification Strategies 1 Sharing Activities BA Petersen 46

47 Key Characteristics Sharing Activities Sharing Activities can enhance potential for or reduce the cost of differentiation Example: Shared order processing system may allow new features customers value or make more advanced remote sensing technology available Must involve activities that are crucial to competitive advantage Example: Procter & Gamble s sharing of sales and physical distribution for disposable diapers and paper towels is effective because these items are so bulky and costly to ship BA Petersen 47

48 Alternative Diversification Strategies Related Diversification Strategies 1 Sharing Activities 2 Transferring Core Competencies BA Petersen 48

49 Transferring Core Competencies Key Characteristics * Exploits Interrelationships among divisions * Start with Value Chain analysis Identify ability to transfer skills or expertise among similar value chains Exploit ability to share activities Two firms can share the same sales force, logistics network or distribution channels BA Petersen 49

50 Alternative Diversification Strategies Related Diversification Strategies 1 Sharing Activities 2 Transferring Core Competencies Unrelated Diversification Strategies 3 Efficient Internal Capital Market Allocation BA Petersen 50

51 Efficient Internal Capital Market Allocation Key Characteristics Firms pursuing this strategy frequently diversify by acquisition: Acquire sound, attractive companies Acquired units are autonomous Acquiring corporation supplies needed capital Portfolio managers transfer resources from units that generate cash to those with high growth potential and substantial cash needs Add professional management & control to sub-units Sub-unit managers compensation based on unit results BA Petersen 51

52 Efficient Internal Capital Market Allocation Assumptions Managers have more detailed knowledge of firm relative to outside investors Firm need not risk competitive edge by disclosing sensitive competitive information to investors Firm can reduce risk by allocating resources among diversified businesses, although shareholders can generally diversify more economically on their own BA Petersen 52

53 Alternative Diversification Strategies Related Diversification Strategies 1 Sharing Activities 2 Transferring Core Competencies Unrelated Diversification Strategies 3 Efficient Internal Capital Market Allocation 4 Restructuring BA Petersen 53

54 Key Characteristics Restructuring Seek out undeveloped, sick or threatened organizations or industries Parent company (acquirer) intervenes and frequently: - Changes sub-unit management team - Shifts strategy - Infuses firm with new technology - Enhances discipline by changing control systems - Divests part of firm - Makes additional acquisitions to achieve critical mass Frequently sell unit after making one-time changes since parent no longer adds value to ongoing operations BA Petersen 54

55 Restructuring Assumptions Requires keen management insight in selecting firms with depressed values or unforeseen potential Must do more than restructure companies Need to initiate restructuring of industries to create a more attractive environment BA Petersen 55

56 External Incentives Incentives to Diversify Relaxation of Anti-Trust regulation allows more related acquisitions than in the past Before 1986, higher taxes on dividends favored spending retained earnings on acquisitions After 1986, firms made fewer acquisitions with retained earnings, shifting to the use of debt to take advantage of tax deductible interest payments BA Petersen 56

57 Internal Incentives Incentives to Diversify Poor performance may lead some firms to diversify to attempt to achieve better returns Firms may diversify to balance uncertain future cash flows Firm may diversify into different businesses in order to reduce risk Managers often have incentives to diversify in order to increase their compensation and reduce employment risk, although effective governance mechanisms may restrict such abuses BA Petersen 57

58 Issues to Consider Prior to Diversification What Resources, Capabilities and Core Competencies do we possess that would allow us to outperform competitors? What Core Competencies must we possess to succeed in a new product or geographic market? Is it possible to leapfrog competitors? Will diversification break up capabilities and competencies that should be kept together? Will we only be a player in the new product or geographic market or will we emerge as a winner? What can the firm learn through its diversification? Is it organized properly to acquire such knowledge? BA Petersen 58

59 Chapter 7 Acquisition and Restructuring Strategies Dr. C. Petersen BA 495 BA Petersen 59

60 Mergers and Acquisitions Merger A transaction where two firms agree to integrate their operations on a relatively coequal basis because they have resources and capabilities that together may create a stronger competitive advantage Acquisition A transaction where one firm buys another firm with the intent of more effectively using a core competence by making the acquired firm a subsidiary within its portfolio of businesses Takeover An acquisition where the target firm did not solicit the bid of the acquiring firm BA Petersen 60

61 Reasons for Acquisitions Increased Market Power Acquisition intended to reduce the competitive balance of the industry Borland s acquisition of Ashton-Tate Overcome Barriers to Entry Acquisitions overcome costly barriers to entry which may make start-ups economically unattractive Whirlpool buys Philips European appliance business Lower Cost and Risk of New Product Development Buying established businesses reduces risk of start-up ventures Ford s acquisition of Jaguar BA Petersen 61

62 Reasons for Acquisitions Increased Speed to Market Closely related to Barriers to Entry, allows market entry in a more timely fashion Diversification BMW s acquisition of Rover Quick way to move into businesses when firm currently lacks experience and depth in industry Seagram s acquisition of Universal Studios Avoiding Excessive Competition Firms may acquire businesses in which competitive pressures are less intense than in their core business BA Petersen General Electric s acquisition of NBC 62

63 Problems with Acquisitions Integration Difficulties Differing cultures can make integration of firms difficult Pillsbury and Burger King Inadequate evaluation of Target Winners Curse bid causes acquirer to overpay for firm Bridgestone acquisition of Firestone Large or Extraordinary Debt Costly debt can create onerous burden on cash outflows Campeau s acquisition of Federated Stores BA Petersen 63

64 Inability to Achieve Synergy Justifying acquisitions can increase estimate of expected benefits Problems with Acquisitions ATT and NCR Overly Diversified Acquirer doesn t have expertise required to manage unrelated businesses GE--prior to selling businesses and refocusing Managers Overly Focused on Acquisitions Managers lose track of core business by spending so much effort on acquisitions Conglomerates of 1960s Too Large Large bureaucracy reduced innovation and flexibility BA Petersen 64

65 Characteristics of Effective Acquisitions Complementary Assets or Resources Buying firms with assets that meet current needs to build competitiveness Friendly Acquisitions Friendly deals make integration go more smoothly Careful Selection Process Deliberate evaluation and negotiations is more likely to lead to easy integration and building synergies Maintain Financial Slack Provide enough additional financial resources so that profitable projects would not be foregone BA Petersen 65

66 Characteristics of Effective Acquisitions Low-to-Moderate Debt Merged firm maintains financial flexibility Flexibility Has experience at managing change and is flexible and adaptable Emphasize Innovation Continue to invest in R&D as part of the firm s overall strategy BA Petersen 66

67 Restructuring Activities Downsizing Wholesale reduction of employees General Motors cuts 74,000 workers and closes 21 plants Downscoping Selectively divesting or closing non-core businesses Reducing scope of operations Leads to greater focus Break up of ATT into three businesses in 1995 BA Petersen 67

68 Leveraged Buyouts Purchase involving mostly borrowed funds Generally occurs in mature industries where R&D and innovation are not central to value creation High debt load commits cashflows to repay debt, creating strong discipline for management Increases concentration of ownership Focuses attention of management on shareholder value Greater oversight by active investor board members Leads to more value-based decision making BA Petersen 68

69 Restructuring and Outcomes Alternatives Downsizing Short-Term Outcomes Reduced Labor Costs Long-Term Outcomes Loss of Human Capital Downscoping Reduced Debt Costs Lower Performance Leveraged Buyout Emphasis on Strategic Controls High Debt Costs Higher Performance Higher Risk BA Petersen 69

70 Chapter 8 International Strategy Dr. C. Petersen BA 495 BA Petersen 70

71 International Strategy Opportunities and Outcomes Identify International Opportunities Explore Resources and Capabilities International Strategies Use Core Competence Modes of Entry Management Problems and Risk Strategic Competitiveness Outcomes Increased Market Size Return on Investment Economies of Scale and Learning Location Advantage International Business-Level Strategy Multidomestic Strategy Global Strategy Transnational Strategy Exporting Exporting Strategic Alliances Acquisition Establishment of New Subsidiary Higher Performance Returns Innovation Management Problems and Risk BA Petersen 71

72 1 Selling products or services outside of a firm s domestic market Firm Introduces Innovation in Domestic Market 5 International Strategy Lifecycle 2 Production Becomes Standardized and is Relocated to Low Cost Countries Product Demand Develops and Firm Exports Products 3 Foreign Competition Begins Production Firm Begins Production Abroad BA Petersen 72 4

73 Motivations for International Expansion Increase Market Share Domestic market may lack the size to support efficient scale manufacturing facilities Japanese electronics or automobile manufacturers Return on Investment Large investment projects may require global markets to justify the capital outlays Aircraft manufacturers Boeing or McDonnell Douglas Weak patent protection in some countries implies that firms should expand overseas rapidly in order to preempt imitators BA Petersen 73

74 Motivations for International Expansion Economies of Scale or Learning Expanding size or scope of markets helps to achieve economies of scale in manufacturing as well as marketing, R & D or distribution - Can spread costs over a larger sales base - Increase profit per unit Location Advantages Low cost markets may aid in developing competitive advantage May achieve better access to: - Raw materials - Lower cost labor - Key suppliers - Key customers - Energy - Natural resources BA Petersen 74

75 Porter s Determinants of National Advantage Home country of origin is crucial to International success Factor Conditions Basic Factors - Land, labor Advanced Factors - Highly educated workers - Digital communications Generalized Factors - Capital, infrastructure Specialized Factors - Skilled personnel Related & Supporting Industries - Japanese cameras & copiers - Italian shoes & leather Firm Strategy, Structure & Rivalry Intense rivalry fosters industry competition Demand Conditions Home country may support scale efficient operations by itself BA Petersen 75

76 International Strategy Opportunities and Outcomes Identify International Opportunities Explore Resources and Capabilities International Strategies Use Core Competence Modes of Entry Management Problems and Risk Strategic Competitiveness Outcomes Increased Market Size Return on Investment Economies of Scale and Learning Location Advantage International Business-Level Strategy Multidomestic Strategy Global Strategy Transnational Strategy Exporting Exporting Strategic Alliances Acquisition Establishment of New Subsidiary Higher Performance Returns Innovation Management Problems and Risk BA Petersen 76

77 Business-Level International Strategies International Low Cost Usually located in home country Export to international markets Low value added operations in foreign countries High value added operations in home country International Differentiation Countries with advanced or specialized factor conditions most likely to use this strategy Japan, Germany, U.S. BA Petersen 77

78 Business-Level International Strategies International Focus Strategies Technologically advanced firms follow focused low cost strategy Focused differentiation firms compete on the basis of image & design Third group competes on low price by imitating International Integrated Low Cost/Differentiation Can be most effective in dealing with diverse markets Often relies upon flexible manufacturing, total quality management or rapid communication networks BA Petersen 78

79 International Corporate Strategy Corporate-Level International Strategies Type of Corporate Strategy selected will have an impact on the selection and implementation of the business-level strategies Some Corporate strategies provide individual country units with flexibility to choose their own strategies Others dictate business-level strategies from the home office and coordinate resource sharing across units Three Corporate Strategies Multi-Domestic Strategy Global Strategy Transnational Strategy BA Petersen 79

80 International Corporate Strategy Corporate-Level International Strategies Multi-Domestic Strategy Strategy and operating decisions are decentralized to strategic business units (SBU) in each country Products and services are tailored to local markets Business units in each country are independent of each other Assumes markets differ by country or regions Focus on competition in each market Prominent strategy among European firms due to broad variety of cultures and markets in Europe BA Petersen 80

81 International Corporate Strategy Corporate-Level International Strategies Global Strategy Products are standardized across national markets Decisions regarding business-level strategies are centralized in the home office Strategic business units (SBU) are assumed to be interdependent Emphasizes economies of scale Often lacks responsiveness to local markets Requires resource sharing and coordination across borders (which also makes it difficult to manage) BA Petersen 81

82 International Corporate Strategy Corporate-Level International Strategies Transnational Strategy Seeks to achieve both global efficiency and local responsiveness Difficult to achieve because of simultaneous requirements for strong central control and coordination to achieve efficiency and local flexibility and decentralization to achieve local market responsiveness Must pursue organizational learning to achieve competitive advantage BA Petersen 82

83 International Corporate Strategy When is each strategy appropriate? High Need for Global Integration Low Low High Need for Local Market Responsiveness BA Petersen 83

84 International Strategy Opportunities and Outcomes Identify International Opportunities Explore Resources and Capabilities International Strategies Use Core Competence Modes of Entry Management Problems and Risk Strategic Competitiveness Outcomes Increased Market Size Return on Investment Economies of Scale and Learning Location Advantage International Business-Level Strategy Multidomestic Strategy Global Strategy Transnational Strategy Exporting Exporting Strategic Alliances Acquisition Establishment of New Subsidiary Higher Performance Returns Innovation Management Problems and Risk BA Petersen 84

85 International Corporate Strategy Choice of International Entry Mode Exporting Common way to enter new international markets No need to establish operations in other countries Establish distribution channels through contractual relationships May have high transportation costs May encounter high import tariffs May have less control on marketing and distribution Difficult to customize products BA Petersen 85

86 International Corporate Strategy Choice of International Entry Mode Licensing Firm authorizes another firm to manufacture and sell its products Licensing firm is paid a royalty on each unit produced and sold Licensee takes risks in manufacturing investments Least risky way to enter a foreign market Licensing firm loses control over product quality and distribution Relatively low profit potential A significant risk is that licensor learns technology and competes when license expires BA Petersen 86

87 International Corporate Strategy Choice of International Entry Mode Strategic Alliances Enable firms to shares risks and resources to expand into international ventures Most joint ventures (JVs) involve a foreign company with a new product or technology and a host company with access to distribution or knowledge of local customs, norms or politics May experience difficulties in merging disparate cultures May not understand the strategic intent of partners or experience divergent goals BA Petersen 87

88 International Corporate Strategy Choice of International Entry Mode Acquisitions Enable firms to make most rapid international expansion Can be very costly Legal and regulatory requirements may present barriers to foreign ownership Usually require complex and costly negotiations Potentially disparate corporate cultures BA Petersen 88

89 International Corporate Strategy Choice of International Entry Mode New Wholly-Owned Subsidiary Most costly and complex of entry alternatives Achieves greatest degree of control Potentially most profitable, if successful Maintain control over technology, marketing and distribution May need to acquire expertise and knowledge that is relevant to host country Could require hiring host country nationals or consultants at high cost BA Petersen 89

90 International Strategy Opportunities and Outcomes Identify International Opportunities Explore Resources and Capabilities International Strategies Use Core Competence Modes of Entry Management Problems and Risk Strategic Competitiveness Outcomes Increased Market Size Return on Investment Economies of Scale and Learning Location Advantage International Business-Level Strategy Multidomestic Strategy Global Strategy Transnational Strategy Exporting Exporting Strategic Alliances Acquisition Establishment of New Subsidiary Higher Performance Returns Innovation Management Problems and Risk BA Petersen 90

91 International Corporate Strategy Strategic Competitiveness Outcomes International diversification facilitates innovation in the firm Provides larger market to gain more and faster returns form investments in innovation May generate resources necessary to sustain a largescale R&D program Generally related to above-average returns, assuming effective implementation and management of international operations International diversification provides greater economies of scope and learning BA Petersen 91

92 International Strategy Opportunities and Outcomes Identify International Opportunities Explore Resources and Capabilities International Strategies Use Core Competence Modes of Entry Management Problems and Risk Strategic Competitiveness Outcomes Increased Market Size Return on Investment Economies of Scale and Learning Location Advantage International Business-Level Strategy Multidomestic Strategy Global Strategy Transnational Strategy Exporting Exporting Strategic Alliances Acquisition Establishment of New Subsidiary Higher Performance Returns Innovation Management Problems and Risk BA Petersen 92

93 Major Risks of International Diversification Political Risk National government instability may create potential problems for internationally diversified firms Potential changes in attitudes or regulations regarding foreign ownership Legal authority obtained from previous administration may become invalid Potential for nationalization of private firms assets BA Petersen 93

94 Major Risks of International Diversification Economic Risk Economic risks are interdependent with political risks Differences and fluctuations in international currencies may affect value of assets and liabilities and affect prices and ultimately the ability to compete Differences in inflation rates may affect internationally diversified firms ability to compete Potential for nationalization of private firms assets BA Petersen 94

95 Chapter 9 Cooperative Strategy Dr. C. Petersen BA 495 BA Petersen 95

96 Strategic Alliances Partnerships between firms Firm A Firm B where their are combined to pursue mutual interests to Develop Resources Manufacture Capabilities Core Competencies Goods Distribute Services BA Petersen 96

97 Types of Strategic Alliances Joint Venture Independent firm is created by the joining assets from two other firms where each contributes 50% of the total Dow Corning from Dow Chemical and Corning Inc. Equity Strategic Alliance Partnership where the two partners do not own equal shares Chrysler and Mitsubishi Automotive Non-Equity Strategic Alliance Contract is given to supply, produce or distribute a firm s goods or services (without equity sharing) Chrysler s supplier network BA Petersen 97

98 Slow Cycle Market Standard Cycle Market Fast Cycle Market Reasons for Alliances by Market Type * Gain access to a restricted market * Establish franchise in a new market * Maintain market stability * Gain market power * Gain access to complementary resources * Overcome trade barriers * Meet competitive challenge * Pool resources for large projects * Learn new business techniques * Increase speed of product, service or market entry * Maintain market leadership * Form an industry technology standard * Share risky R&D expenses * Overcome uncertainty BA Petersen 98

99 Types of Strategic Alliances Complementary Complementary Alliances Alliances Competition Competition Reduction Reduction Alliances Alliances Competition Competition Response Response Alliances Alliances Uncertainty Uncertainty Reduction Reduction Alliances Alliances Business- Business- Level Level Corporate- Level Diversification Alliances Synergistic Alliances Franchising BA Petersen 99

100 Types of Business-Level Strategic Alliances Complementary Strategic Alliances Supplier Value Chain Partnerships that build on the complementarities among firms that make each more competitive Buyer Value Chain Vertical Alliance Include distribution, supplier or outsourcing alliances where firms rely on upstream or downstream partners to build competitive advantage Japanese manufacturers rely on close relationships among suppliers to implement Just-In- Time inventory systems BA Petersen 100

101 Types of Business-Level Strategic Alliances Complementary Strategic Alliances Used to increase the strategic competitiveness of the partners Supplier Value Chain Horizontal Alliance Buyer Value Chain Product development agreements between Microsoft and Dreamworks SKG or Marketing agreements between Delta and SwissAir BA Petersen 101

102 Types of Business-Level Strategic Alliances Competition Reduction Strategies Avoiding competition by using tacit collusion such as price fixing OPEC petroleum cartel Competition Response Strategies Firms join forces to respond to a strategic action of another competitor DirecTV has agreement with Time Warner for exclusive programming Uncertainty Reduction Strategies Alliances can be used to hedge against risk and uncertainty ATT acquires Teleport, a provider of telecommunications services to business customers BA Petersen 102

103 Types of Corporate-Level Strategic Alliances Diversifying Alliances Allows a firm to expand into a new product or market area with an acquisition Samsung Group joins with Nissan to build new autos Synergistic Strategic Alliances Create economies of scope between two or more firms, creating synergy across multiple businesses between firms Sony shares development with many small firms Franchising Allows firms to grow and relatively strong centralized control without significant capital investments McDonald s or Century 21 BA Petersen 103

104 Allows risk sharing by reducing financial investment Host partner knows local market and customs However... International Cooperative Strategies International alliances can be difficult to manage due to differences in management styles, cultures or regulatory constraints Must gauge partner s strategic intent so they do not gain access to important technology and become a competitor BA Petersen 104

105 Network Strategies Network strategies involve a group of interrelated firms that work for the common good of all Japanese keiretsus or U.S. R&D consortia The three types of networks are: Stable Networks Dynamic Networks Internal Networks BA Petersen 105

106 Network Strategies Stable network Long term relationships that often appear in mature industries with largely predictable market cycles NIKE s relationships with suppliers and distributors Dynamic network Arrangements that evolve in industries with rapid technological change leading to short product life cycles Apple computer and Sharp electronics Internal network Management system used to coordinate a global web of suppliers and customers Asea Brown Boveri s network BA Petersen 106

107 Competitive Risks with Cooperative Strategies While cooperative systems can offer many advantages, there are also significant risks associated with them Poor contract development Misrepresentation of partners competencies Failure of partners to make complementary resources available Being held hostage through specific investments made with partner Misunderstanding a partner s strategic intent BA Petersen 107

108 Managing Risks in Cooperative Strategies Competitive Risks Risk and Asset Management Approaches Outcome * Inadequate contracts * * * Misrepresentation of competencies Partner fails to use complementary resources Holding alliance partner s specific investments hostage * * Detailed contracts and monitoring Developing trusting relationships Value Creation BA Petersen 108