Strat 390 exam (Modules 1 - 6)

Competitive Strategy / Business Strategy

Focuses on a single market: How do we compete today and what activity choices will give us an advantage in this specific space?[cite: 37]

Corporate Strategy

Looks at the whole portfolio: In which markets should we compete, and how does our ownership of these businesses ensure their competitiveness?[cite: 37]

Corporate Advantage

Occurs when the corporate center improves the average competitiveness of its individual business units, helping them create and capture more value together than they would on their own[cite: 39].

three ways diversification creates value

• Portfolio Management: Requires the firm to have an informational advantage over outside investors.

• Restructuring: Improving a business without needing linkages to other units.

• Synergies: Exploiting active linkages across businesses

The Four Tests of Corporate Advantage

Attractiveness Test
Cost of Entry Test
The Better-Off Test
The Ownership Test

what are competitive strategy tests

attractiveness and cost of entry

what are corporate strategy tests

Better Off and ownership

Attractiveness Test

A competitive strategy test evaluating if the industry being targeted for entry is potentially profitable and structurally sound, heavily influenced by PESTEL factors[cite: 42, 55].

Cost of Entry Test

A competitive strategy test ensuring that the future profits of entering a new market justify the initial cost of acquiring or building the business[cite: 42].

Better-Off Test

A corporate strategy test that asks: Does the corporation's presence in a market improve the total competitive advantage of the business units over what they could achieve individually?[cite: 58]

Ownership Test

A corporate strategy test that asks: Does owning the business unit outright produce a greater competitive advantage than an alternative arrangement, such as a contract or partnership?[cite: 59]

What happens when you have a + Better-off test with a - ownership test

A positive Better-Off test with a negative Ownership test means the firm should maintain a presence in the industry, but through a partnership or contract, not an outright acquisition.

Horizontal Scope

asks how wide a range of products a firm should supply (related vs. unrelated).

When diversifying horizontally, the Better-Off test is satisfied in two primary ways:

Economies of scope (lower costs)
Cross-Selling Benefits (Higher WTP)

Economies of Scope

Satisfies the Better-Off test (Horizontal)

when the total cost of producing two goods jointly is less than producing them separately, usually by sharing multi-purpose assets or R&D[cite: 59].

example of economies of scope

Example: Honda uses its core competency in lightweight, reliable engines to power both personal watercraft and snowblowers, sharing innovation activities to drive down costs.

Economies of Scale vs. Economies of Scope

Both reduce costs, but the key difference is the source of the reduction: Economies of Scale reduce costs by increasing the output of a SINGLE product, whereas Economies of Scope reduce costs by increasing the output of MULTIPLE products using shared resources[cite: 104]

Cross-Selling Benefits

Satisfies the Better-Off test (Horizontal)

when diversification increases the customer's willingness to pay (WTP), often through one-stop-shop models or shared brand reputation[cite: 47, 48, 60].

example of cross selling benefits

IBM provides a complete IT solution combining hardware, software, and services. A corporate client's WTP for this integrated package is higher because it gives them a single point of contact for sales and support, rather than dealing with three separate vendors[cite: 48, 60].

Fundamental Paradox of Information

A market failure where a buyer will not pay for an intangible asset (like a secret recipe or proprietary algorithm) until they know its value, but once the seller reveals it to prove its value, the buyer no longer needs to pay for it. This is the primary reason firms pass the Ownership Test and choose to acquire rather than contract[cite: 61].

example of Fundamental Paradox of Information

If Coca-Cola tried to license their secret formula to a new bottler, the bottler would demand to see the formula to ensure it’s actually valuable before paying millions. If Coca-Cola shows them the recipe, the bottler can just memorize it and walk away without paying. This paradox is why companies often choose outright acquisition over contracting

this is so stupid

Costs of Ownership

Multi-business operations are not free. Corporate advantage must outweigh the inherent costs of ownership, which include:

• The cost of headquarters facilities and the C-suite.

• The cost of coordination, which requires significant time and expertise.

• The cost of distraction, as diversified companies often waste resources on doomed products.

• The cost of social comparison, where employees across different units feel treated unfairly

Amgen Case: The Strategic Problem

Amgen's pioneer biologic patents were expiring, forcing leadership to decide if they should pivot from being purely a pioneer drug innovator to also imitating competitors' off-patent drugs to generate new revenue[cite: 68].

Amgen Case: Passing the Better-Off Test

Entering biosimilars passed the test because Amgen could share its world-class manufacturing plants, proprietary R&D processes, and regulatory expertise to achieve massive Economies of Scope over startup competitors[cite: 73, 78].

Amgen Case: Passing the Ownership Test

Amgen could not safely contract out its highly complex biologic manufacturing expertise to generic firms without risking IP theft (Fundamental Paradox of Information), meaning they had to own the biosimilar production themselves[cite: 78, 79].

Amgen Case: Failing the Costs of Ownership (Risks)

Amgen had spent years lobbying regulators that biosimilars were dangerous and required strict clinical trials. A commercial executive noted the internal conflict: how could they argue against biosimilars for years, only to suddenly start marketing them as safe?

Amgen Case: Passing the Attractiveness Test

The biosimilar market was incredibly lucrative with ~$45 billion in vulnerable revenue as blockbuster drugs went off-patent. Furthermore, extreme technical barriers to entry kept low-cost generic companies out, protecting high margins for sophisticated players[cite: 79, 88].

Amgen Case: Passing the Cost of Entry Test

Developing a pioneer biologic costs upwards of $1.5 billion with an abysmal success rate, whereas developing a biosimilar costs around $200 million with an 80% success rate since the underlying molecule is already proven. The future profits easily justified this lower cost and risk[cite: 72, 91].

Related Diversification

Type of Horizontal Diversification

Enables a firm to leverage horizontal relationships across businesses to reduce costs (supply-side, economies of scope) or increase revenue (demand-side, cross-selling) - passing better off test

Unrelated Diversification

Type of Horizontal Diversification

Entering a different business that has little to no horizontal interaction with the firm's other businesses[cite: 117].

Risk Reduction (Diversification Rationale)

A bad rationale for unrelated diversification; shareholders can diversify their own risk much more efficiently and cheaply by investing in index funds they dont need the CEO of a business diversifying risk by buying an unrelated asset

Attractive Industry (Diversification Rationale)

A bad rationale for unrelated diversification; even if an industry is highly profitable, the acquiring firm still needs a specific competitive advantage to succeed there

Agency Behavior

When managers build unrelated corporate empires to increase their own status, power, and pay, rather than creating actual shareholder value[cite: 121].

Resource-Based View (RBV) - VRIO

To drive value and create competitive advantage, the resources you share across your related businesses must be VRIO (Valuable, Rare, Inimitable, and Organizationally relevant).

Tangible Resources (RBV)

Physical/financial assets like property or cash; easily observable and relatively easy for competitors to acquire[cite: 107].

Intangible Resources (RBV)

Non-physical assets like brand reputation, patents, and customer relationships; difficult for competitors to see, value, or copy[cite: 107].

Organizational Capabilities (RBV)

A firm's ability to deploy and coordinate resources through embedded routines, processes, and know-how (e.g., supply chain management)[cite: 107].

Asset Specificity (Example)

Buying a custom machine that only builds seats for one specific Tesla model. If Tesla cancels the contract, the machine is completely worthless because it cannot be used to make seats for Ford or Toyota[cite: 98].

Tesla has all the leverage, and the supplier is totally vulnerable.

But here is the twist. Because the supplier knows they will get screwed, they simply refuse to buy the $5 million machine in the first place. The open market completely fails to make the deal happen.

So the supplier doesn't vertically integrate. Instead, Tesla is the one who vertically integrates.

Since Tesla desperately needs those custom seats and no independent supplier is willing to take the financial risk, Tesla has to build the seat factory themselves or buy the supplier's company outright. By bringing the seat production in-house through backward integration, joint ownership solves the problem and eliminates the hold-up risk entirely.

The Hold-Up Problem

A form of market extortion. It occurs when you make a custom investment for a specific partner, leaving you trapped. The partner can then opportunistically threaten to cancel the contract to force you to accept worse financial terms

what are the 7 value drivers

scale economies

network economies

counter-positioning

switching costs

branding

cornered resource

process expertise

Scale Economies (7 Powers)

Reductions in unit costs as volume increases; utilizes tangible resources and organizational capabilities to spread fixed costs[cite: 106, 108].

Network Economies (7 Powers)

When a product's value grows with its user base; utilizes intangible resources to extend a network into adjacent markets[cite: 106, 108].

Value created for a product when there are more and more users (COD - better when there are more players online, game is more fun, matchmaking by skill, less bots)

Counter-Positioning (7 Powers)

Deploying a disruptive new business model in categories where incumbents are paralyzed and cannot follow[cite: 106, 108].

Switching Costs (7 Powers)

Leveraging an installed base's data and relationship stickiness into new product lines, resulting in a high cost for users to leave[cite: 106, 108].

Branding (7 Powers)

Utilizing durable consumer trust and reputational capital to successfully extend into new product categories[cite: 106, 108].

Cornered Resource (7 Powers)

Having exclusive access to key inputs or unique talent, and deploying that unique asset in markets where it confers an advantage[cite: 106, 108].

Process Power / expertise (7 Powers)

Embedded organizational activities and culture delivering superior output; the hardest power to transfer but the most durable if successfully extended[cite: 106, 108].

Value Chain

A sequence of activities that transform raw materials into finished products and deliver them to the end consumer. Firms can focus on one step or integrate across multiple steps[cite: 200].

Vertical Integration (Make)

A firm's ownership and control of multiple vertical stages in the supply of a product, internalizing activities within the hierarchy of the firm[cite: 202, 203].

Upstream (Backward) Integration

Moving ownership of activities backward along the value chain, toward the raw materials or inputs (e.g., AWS designing its own silicon chips)[cite: 206, 207].

Downstream (Forward) Integration

Moving ownership of activities forward along the value chain, closer to the end consumer (e.g., Pepsi buying its bottling and distribution operations)[cite: 204, 205].

Efficient Market Hypothesis

The theory that markets are more efficient than individual firms because they aggregate information quickly, drive competitive efficiency, and facilitate rapid price discovery[cite: 212, 213, 214].

Coase Theorem

The framework stating that firms exist because markets have Transaction Costs. A firm will choose to "Make" (Integrate) if Transaction Costs are greater than Coordination Costs, and "Buy" (Outsource) if Transaction Costs are lower than Coordination Costs[cite: 215, 216].

Transaction Costs (Costs of Buying)

The costs of using the market, which include searching, bargaining, negotiating, haggling, and enforcing contracts[cite: 218].

Transaction costs arise from 3 behaviors

OPPORTUNISM

BOUNDED RATIONALITY

UNCERTAINTY

Opportunism

A driver of transaction costs occurring when asymmetric information allows one party to take advantage of another (dishonesty)[cite: 220].

Bounded Rationality

A driver of transaction costs stemming from the fact that humans have limited memory and decision-making ability to handle complex information[cite: 220].

Drivers of High Transaction Costs

Asset Specificity and Need for Significant Coordination

Asset Specificity

Making a custom investment that is only useful for one specific partner. Because the asset loses its value if the relationship ends, the investor is trapped and vulnerable to extortion (the Hold-Up Problem). To avoid this risk, firms vertically integrate and just M&A and own their own

Need for Significant Coordination

Occurs when the cost of managing and sharing information with an external third party is higher than doing it within the firm[cite: 227]. While this cost can sometimes be lowered using technology, it remains a major driver of transaction costs[cite: 227].

Coordination Costs (Costs of Making)

The administrative and bureaucratic inefficiencies of internalizing transactions and managing businesses in very different industries across the value chain[cite: 187, 191].

Low-Powered Incentives

An administrative cost of vertical integration where internal employees and divisions lack the "skin in the game" or economic pressure of the open market, leading to shirking or reduced quality[cite: 188, 189].

Loss of Flexibility

An administrative cost of vertical integration where large, integrated hierarchies become too slow to respond to rapid technological changes or uncertain demand (Schumpeterian shocks)[cite: 193].

Compounding Risk

An administrative cost of vertical integration where a failure or demand drop at one stage of the internal value chain severely damages the profitability of all other stages[cite: 193].

Differences in Optimal Scale

An administrative cost of vertical integration occurring when a firm's internal need for a component is far below the volume required to manufacture that component efficiently (e.g., a small brewery shouldn't make its own glass bottles)[cite: 175].

Delta Case: The Strategic Problem

Delta was highly exposed to volatile jet fuel prices and the "crack spread" (the gap between crude oil and jet fuel prices) dictated by powerful oil companies[cite: 137].

Delta Case: The Solution & Tests

Delta backward-integrated by buying an oil refinery. This passed the Ownership test by insulating them from supplier bargaining power and supply disruptions, saving them $785M in 2022[cite: 137, 138].

Delta Case: Costs of Ownership (Hierarchy)

Delta suffered from Compounding Risk and the administrative costs of managing a strategically different business. When COVID destroyed airline demand, their refinery also lost $200M, and they had to sink $1.6B into capital upgrades and environmental liabilities[cite: 138].

Nvidia Case: The Strategic Problem

Nvidia faced a massive upstream bottleneck by relying entirely on TSMC to manufacture its GPUs, while simultaneously facing downstream threats as major cloud customers (Google, AWS) began designing their own AI chips[cite: 140, 142].

Nvidia Case: Forward Integration Solution

To capture more value and secure its end-users, Nvidia forward-integrated by building complete servers (DGX H100) and offering direct cloud services (DGX Cloud)[cite: 146].

Nvidia Case: Costs of Ownership (Competitive Effects)

By forward-integrating into servers and cloud computing, Nvidia became a direct competitor to its own largest OEM customers (like Dell and HP), risking that these partners might defect to rival chipmakers like AMD[cite: 140, 152].

Reasons for global expansion for a business

1) A firm can internationalize to access a larger market

2) Access resources and capabilities:

• From cheaper labor

• To raw materials

• To capabilities: to learn from an industry

What are some disadvantages to global exposure

• Liability of Foreignness

• Loss of Reputation

• Loss of Intellectual Property (IP)

Liability of Foreignness

The additional costs, risks, and challenges of doing business in an unfamiliar cultural and economic environment (e.g., Walmart failing in Germany because they ignored local consumer and employee norms)[cite: 234, 281].

Loss of Reputation

Partnering with overseas factories with poor labor conditions (like Apple and Foxconn) can destroy brand value.

Loss of Intellectual Property (IP)

Partnering with foreign firms can lead to them reverse-engineering and stealing your technology (like European train makers experienced in China).

CAGE Distance Framework

A decision framework that helps businesses evaluate the relative distance between their home country and target market along four dimensions: Cultural, Administrative, Geographic, and Economic[cite: 239, 284].

Cultural Distance (CAGE)

Differences in language, religion, and social norms. This distance heavily impacts industries with high linguistic content (TV/media) or high cultural content (food/wine)[cite: 240, 285].

Administrative Distance (CAGE)

The absence of shared political associations, treaties, or currency, as well as political hostility. Heavily impacts strategically important industries like telecom, energy, and defense[cite: 241, 285].

Geographic Distance (CAGE)

Physical remoteness, lack of shared borders, and poor transportation infrastructure. Heavily impacts products with low value-to-weight ratios (cement) or fragile/perishable goods[cite: 242, 285].

Economic Distance (CAGE)

Differences in consumer income, resources, and knowledge. Heavily impacts luxury goods (which rely on high consumer income) and labor-intensive goods (which rely on low-cost labor)[cite: 243, 285].

What is the AAA Framework

A global strategy framework used by firms to decide what strategy to deploy across the value chain once they enter a foreign market. It consists of three strategic choices: Adaptation (customizing to local tastes), Aggregation (standardizing for economies of scale), and Arbitrage (exploiting factor cost differences like cheap labor)[cite: 254, 262].

AAA Framework: Aggregation

A global strategy focused on exploiting similarities to achieve economies of scale. The firm sells a standardized product worldwide to keep costs as low as possible (also called a Global-Standardization strategy)[cite: 257, 291].

AAA Framework: Arbitrage

A global strategy focused on exploiting economic differences between countries, typically by locating supply chain activities overseas to take advantage of lower labor or raw material costs[cite: 256, 287].

AAA Framework: Adaptation

A global strategy focused on maximizing local relevance by customizing products and marketing to fit specific cultural preferences. It increases revenue but also increases costs (also called a Multidomestic strategy)[cite: 258, 291].

Transnational Strategy

The "Holy Grail" of global strategy that attempts to achieve both high local responsiveness (Adaptation) and low costs (Aggregation) simultaneously, usually through a complex global matrix structure ("Think globally, act locally")[cite: 292].

McDonald's India Case (AAA Application)

A prime example of extreme Adaptation. McDonald's utilized "Externalization" (partnering with local entrepreneurs/real estate managers) and "Variation" (inventing the McAloo Tikki and separating veg/non-veg kitchens with colored aprons) to survive a market where their core product (beef) was taboo and 1/5 Indians are vegitarian.

NFL Case: The Strategic Problem

FAILED AGGREGATION - Tried to keep NFL the same around the world and it isnt working.

Despite dominating the U.S., the NFL earns only 2% of its broadcast revenue internationally. They struggle with massive Cultural Distance (complex rules, uniquely American) and Geographic Distance (travel fatigue and a short 17-game season limit international viability)[cite: 297, 303, 305].

KitKat Japan Case: The Strategic Problem

Nestlé needed to revive KitKat in a stagnant Japanese market where consumers prefer less sweet items, smaller packaging for convenience stores, and do not traditionally gift chocolate for holidays

JAPAN culturally treats chocolate and candy differently than the states

KitKat Japan Case: The Solution

ADAPTATION

Nestlé executed a brilliant Adaptation strategy by leaning into Cultural Distance. Because "KitKat" sounds like "kitto katsu" ("surely win"), they rebranded the chocolate as an "omamori" (good-luck charm) for stressed students taking infamous university entrance exams[cite: 269, 270].

The Organizing Problem

As firms grow, specialization raises productivity but creates two problems: Coordination (getting interdependent specialists to integrate) and Cooperation (the agency problem of aligning employee goals with firm goals)[cite: 345].

Functional Structure (U-Form)

Organizing a company by specialized activity (R&D, Manufacturing, Sales)

For efficiency

MCDONALDS is an Example

Pros and Cons of Functional Structure (U-Form)

Pros: Highly efficient use of resources with no duplication, deep expertise.

Cons: Poor intergroup coordination, lacks flexibility, siloed goals (e.g., McDonald's).

Divisional Structure (M-Form)

Organizing a company by output (Product or Geography). More complex than U - Form (Functional)

For responsiveness

P&G is an example

Pros and Cons to Divisional Structure (M-Form)

• Pros: Good coordination, increased flexibility, clear accountability.

• Cons: Massive duplication of resources and scale inefficiencies (e.g., P&G having separate HR and R&D for Baby Care vs. Fabric Care).

Matrix Structure

Employees have dual reporting lines (e.g., reporting to both the Head of Europe and the Head of R&D)

a overall balanced structure

Unilever is an example

Pros and Cons to a Matrix Structure

Pros: Captures both economies of scale and local responsiveness simultaneously.

Cons: Dual authority causes severe conflict, stress, and political complexity; high cost to administer.

What is the issue with org charts

Org charts hide where the power is

A reporting chart tells you who reports to whom — not how resources, and therefore power, are actually allocated.

Global Entry: Exporting

The lowest-commitment mode of global entry. You produce at home and sell abroad. It is fast and easy to reverse, but exposes the firm to tariffs and offers zero local control[cite: 326].

Global Entry: Strategic Alliances

Moderate Commitment

• Licensing (granting rights for a fee)

• Franchising (licensing a whole business format)

• Joint Ventures (shared ownership)

• Leverages local partner knowledge but shares margins.