IB (Part 2)

Levels of Strategy

• Corporate-level Strategy

• Business-level Strategy

• Operational-level Strategy

Corporate-level strategy

Quest for Economies of Scale

• How value is added by the different businesses of the entire organization

• ex. Disney leveraging its characters across movies, theme parks..

Business-level strategy

Quest for Competitive Advantage

• How single business unit positions itself against rivals

Operational-level strategy

Quest for Operational Effectiveness

• How functional components of an organization contribute to corporate and business level strategies in terms of resources, processes & people

• ex. HR systems improving employee capability & retention

Paths for companies to diversify

• Different industries

• Geographies

• Within-industry diversification

Different industries

• Reduce dependency on a single industry

• Spread risk

• Leverage existing resources & capabilities across industries

Geographies

• Access new customer base

• Benefit from global economies of scale

• Reduce exposure to local market risks

Within-industry diversification

• Product diversification

• Customer-segment diversification

• Vertical integration

• Horizontal integration

Globalization

• Globalization of markets: Merging oh historically distinct national markets into a single global marketplace

• Globalization of production: Sourcing G&S from around the world to take advantage of cost and quality differences (i.e. Apple designs in the US manufactures in China and sells globally)

Key Drivers of Globalization

• Technology Change

• Trade Liberalization

• Global Institutions

• Global Competition

Pro’s of Globalization

• Expands economic growth & job opportunities

• Increases consumer choice & lowers prices

• Encourages innovation & international collaboration

Con’s of Globalization

• Potential job losses in developed economies

• Environmental degradation & resource strain

• Cultural homogenization & loss of local identity

• Growing income inequality in some regions

International business challenges

• Cross-Cultural Differences: Strategies effective in one country may fall in another

• Varying Political, Legal, and Economy Systems: Political risk and policy instability can affect strategy and performance

• Global Coordination & Strategy: Need to balance global efficiency with local responsiveness

• Ethical & Social Responsibility Issues

Value creation & Appropriation along the vertical chain

Buyer’s Share

• Willingnes to pay (WTP): Firms can increase by improving product quality, customer experience, or offering unique features

• Price

• Price > WTP: Potential customer does not buy

• Price < WTP: Potential customer byuys + captures a non-zero value

Supplier’s Share

• Identify resources used & quantity of each resource

• Negotiated cost rate vs Opportunity cost rate per unit of resource

  • Cost = Quantity of resource * Negotiated Cost per unit of resource

  • Opportunity cost = Quantity of resource * Opportunity Cost per unit of resource

• Add up all costs

Generic Strategies for Going Abroad

• Deployment

• Development

• Deepening

Deployment

• Replication of competitive advantage from home country

• Mechanism of creation of value is by aggregating demand

• Target homogeneous segments (needs) of market across regions

• Standardization of services or products

Development

• Identifying where potential new capabilities reside

• Goal is to get integrated competitive advantage

• Locations should be different enough rather than too different

Deepening

• Widen competitive advantage, without changing primary business strategy

• Increase WTP by adjusting to local tastes

• Decreasing costs by aggregation of demand (non-buyers turning to buyers)

• Being internationally dispersed has value for stakeholders

Challenges in New Markets

• Liability of being a foreigner

• Paradix of being consistent

Liabilities of being a foreigner

• Local laws favor domestic firms

• Import/Export costs

• Cultural differences

• Caps on foreign investment

• Seperate time zones can be a liability

• Different contract structures

Paradox of being consistent

• Need for market adaptation

• Loss on internal consistency

• Dilution of competitive advantage

• Complex decision-making

• Risk of strategic misalignment

Strategy

Actions that managers take to attain the goals of the firm

Determinants of Enterprise value

Value Creation

Measured by difference between a firm’s costs of production and the quality that consumers receive in its products

• More value customers place on a firm’s product = high price firm can charged (V - C)

Porter’s strategies for creating value & attaining a competitive advantage

• Low cost

• Differentiation

To maximize profitability (Porter)

• Pick a position on the efficiency frontier that is viable

• Align internal operations to fully support that position

• Ensure firm has right organization structure in place to execute its strategy

Consistency across strategy, operations & organizations is essential for competitive advantage & superior profitability

International firms are able to

• Expand potential size of market for domestic products

• Realize location economies

• Realize greater cost economies from experience effects

• Earn greater return-on-investment

Expanding the market

Successful firms transfer core competencies to foreign markets where indigenous competitors lack comparable competencies

Location economies

Performing a value-creationg activity in the optimal location to lower costs or add value

• Cost reduction

• Differentiation

• Global web: Disperse value chain stages worlwide to maximize value or minimiza costs

Challenges:

• Transportation costs

• Trade barriers

• Political & economic risks

Experience effects

Experience curve describes how firm’s production costs decrease over the life of a product as the firm gains more experience producing it:

• A: Learning Effects - Labor productivity improves & Management becomes more efficient

• B: Economies of Scale - Producing more units spreads fixed costs over a larger output, reducing unit costs

Leveraging Subsidiary Skills

Using valuable skills developed in foreign subsidiaries and applying them across the firm’s global network to create value

Key steps for managers:

• Recognize valuable skills can emerge anywhere

• Incentivize local employees to acquire new skills

• Identify when new skills are created

• Facilitate skill transfer across the firm

Pressures for Cost Reductions

• Requires a firm to try to lower the costs of value creation

• Greater in industries producing commodity-type products (universal needs) & industries where major competitors are based in low-cost locations

Pressures for Local Responsiveness

• Differences in Customer Tastes & Preferences

• Differences in Infrastructure and Traditional Practices

• Differences in Distribution Channels

• Economic & Political demands by host-country governments

• Rise of Regionalism (tendency toward the convergence of tastes, preferences… with a broader region composed of 2 or more nations; i.e. EU, North America, Latin America)

4 basic strategies

1. International strategy (low pressures for local responsiveness & low pressures for cost reductions)

2. Global Standardization strategy (low pressures for local responsiveness & high pressures for cost reductions)

3. Localization Strategy (high pressures for local responsiveness & low pressures for cost reductions)

4. Transnational Strategy (high pressures for local responsiveness & high pressures for cost reductions)

Global Standardization strategy

Goal: Achieve low cost globally by standardizing products

• Concentrate productio, R&D and supply chain in a few lowest-cost locations

• Use economies of scale, learning effects, and location economies

• Avoid customization across countries

Use when: High pressur for cost reductions & low demand for local responsiveness

Localization strategy

Goal: Customize products to match local tastes & preferences in each national market

• Customization reduces ability to gain cost savings from mass production

Use when: Large differences in consumer preferences across countries & low cost pressures

As competitors emerge, it will become less viable and would need to shift to a transnational strategy

Transnational Strategy

Goal: Achieve low costs while differentiating products to meet local market needs

• Balance local customization with cost reduction is difficult

• Requires complex coordination and management

• Encourages multidirectional skill transfer between subsidiaries

Use when: Both cost pressures & local responsiveness is high

International strategy

Goal: Sell domestic products abroad with minimal customization

• R&D and product development centralized at home

• Manufacturing and marketing in each foreign market

• Low local adaptation

• Duplication of activities can raise cost

Use when: Cost pressures are not too high & low local responsiveness 

As competitors emerge, it becomes less viable and would need to shift to global standardization or transnational strategy

Global strategy challenge

Companies must choose the right strategy for competing on a global stage

3 key strategies

1. Aggregation

2. Adaptation

3. Arbitrage

Aggregation

Achieving economies of scale by standardizing operations across regions

Adaptation

Customizing processes and offerings to meet local market needs

Arbitrage

Exploiting differences, such as offshoring to countries with lower labor costs

Basic Entry Decisions

1. Which markets to enter?

2. When to enter those markets?

3. On what scale?

Choosing foreign markets

Factors for entry:

• Market size

• Spending power

• Costs & risks

• Value creation potential

  • Suitability of its products to that market

  • Nature of indigenous competition

Choosing timing of entry

First-mover advantages:

• Peempt rivals & build brand

• Capture demand & customer loyalty

• Build sales volume & experience curve

• Create switching costs

First-mover disadvantages:

• High learning costs

• Risk of business failure

• High promotion & customer education costs

Choosing Scale

• Large-scale entry: Shapes competition, high risk, less flexible

• Small-scale entry: Learn market gradually, lower risk

• Strategic commitment: Long-term, difficult to reverse

• No right scale: Depends on risk-reward tradeoff

Modes on entry

• Exporting

• Turnkey projects

• Licensing

• Franchising

• Joint ventures

• Wholly owned subsidiarie

Pro’s & Con’s of Exporting

Pro:

• No establishment costs

• Experience curve and location economies

Con:

• May be costly if cheaper production abroad exists

• High transport costs

• Tariff/import barriers

Pro’s & Con’s Turnkey projects

Pro:

• Less risky than FDI

Con:

• No ongoing interest in foreign market

• May create competitors

• Risk of giving away proprietary knowledge

Pro’s & Con’s Licensing

Pro:

• No development costs & risks

• No barriers to investment

• Good use of existing intellectual property

Con:

• No control over operations

• Limits firm’s ability to coordinate strategic moves

• Risks losing technology

Pro’s & Con’s of Franchising

Pro:

• Lower costs & risks

• Helps build a global presence quickly

Con:

• Set up subsidies

• Quality Control

• May inhibit firm’s ability to take profits out of one country to support attacks in another

Pro’s & Con’s Joint Ventures

Pro:

• Local partner’s knowledge of the host country

• Shared costs and risks

• Political considerations

Con:

• Loss of technology control

• Lack of control over subsidiaries

• Can lead to conflicts and battles for control between investing firms

Pro’s & Con’s Wholly Owned Subsidiaries

Pro:

• Reduces risk of losing control over technology

• Tightly control operations in different countries

• Location and experience curve economies

• 100% share of profits

Con:

• Bear full cost and risk 

• Problems associated with acquisitions

Acquisition

• Firm seeks to enter a market where there are already well-established incumben enterprises

• Global competitiors also interested in establishing presence

Pro:

• Fast market entry

• Can preempt competitors

• Often less risky than building from scratch

Con:

• Often produce disappointing results:

  • Risk of overpaying

  • Culture clashes during integration

Greenfield ventures

• No incumbent competitors to be acquired

• Good when competitive advantage relies on transferring unique routines or capabilities

Pro:

• Full control over building the subsidiary

Con:

• Slower to establish

• Risky but less risky than aquisitions

• Preemption by competitors

Factors influencing a mode of entry choice

• Core competencies and entry-mode

• Pressures for cost reductions and entry mode

Core competencies and entry-mode

Technological Know-How:

• Licensing or joint venutres are risky since foreign partner could learn the technology & become a competitior

• So company prefer wholly owned subsidiaries to protect their 

• Only license it if tech becomes outdated quickly

Management Know-How:

• Franchising or ventures are safe enough

• Less risk 

Pressures for Cost Reductions and Entry Mode

• High cost pressures prefer exporting and wholly owned subsidiaries

• Allows tight control over global operations

• Enables using profits from one market to support competition in another market

Strategic alliances for internationalization

Pro:

• May facilitate entry into a foreign market

• Allow firms to share the fixed costs

• Brings together complementary skills and assets

• May help the firm establish tech standards for the industry that will benefit the firm

Con:

• May give competitors a low-cost route to new tech and markets

Partner selection

A good partner:

• Helps the firm achieve its strategic goals

• Has capabilities the firms lacks

• Is unlikely to try to opportunistically exploit its partner

Choosing a partner:

• Collect as much info as possible

• Gather data from informed third parties

• Get to know the potential partner before committing

Alliance Structure

• Reduce the risk of giving away too much to partner

• Use contractual safeguards

• Agree in advance to swap skills and technologies

• Cross-licensing agreements

Managing the Alliance

• Be sensitive to cultural differences 

• Build trust

• Build relational capital