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build-borrow-or-buy framework

build-borrow-or-buy framework

How firms achieve growth

Build

internal organic growth through development

Borrow

external growth through a contract/strategic alliance

Buy

External growth through acquiring new resources, capabilities, and competencies

Resource bundle

When acquiring a firm, you buy this and it forms the basis of a competitive advantage

relevancy, tradability, closeness, integration

Main Issues in the Build-Borrow-or-Buy Framework

Relevant

Internal resources are _________ -They are similar to those the firm needs to develop. -They are superior to those of competitors in the targeted area

Develop internally

If the firm's internal resources are highly relevant, what should the firm do?

Borrowed

If a resource is highly tradable, then it should be ______

Strategic alliance, through an equity alliance or joint venture

If a resource is not highly tradeable, then it should be _______

Equity alliances and joint ventures

Moderate closeness is achieved through ______ & ______ and enables resource borrowing

Mergers and acquisitions

are the most costly, complex, and difficult to reverse strategic option. This implies that only if extreme closeness to the resource partner is necessary to understand and obtain its underlying knowledge

low relevancy, low tradability, and high need for closeness

3 conditions needed when integrating the target firm through Mergers and Acquisitions

Strategic Alliance

a voluntary arrangement between firms that involves the sharing of knowledge, resources, and capabilities with the intent of developing processes, products, or services

Strengthen Competitive Position

Why do firms enter Strategic Alliances to *change industry structure to the firm's favor *influence industry standards

real-options perspective

approach to strategic decision making that breaks down a larger investment decision into a set of smaller decisions that are staged sequentially over time

co-opetition strategy

cooperation by competitors to achieve a strategic objective

Strategic Alliances

What can help influence industry standards?

non-equity alliance

Partnership based on contracts between firms. The most frequent forms are supply agreements, distribution agreements, and licensing agreements.

equity alliance

One partner takes partial ownership in the other

joint venture

a standalone organization created and jointly owned by two or more parent companies

Non equity, joint venture

The most frequent alliance type is ____ and the least frequent is _____

Post-Formation Alliance Management

To create VRIO resource combinations: Build capability through repeated experiences over time repeated alliance exposure improves learning

Merger

the joining of two independent companies to form a combined entity

acquisition

the purchase of a company by another company

takeover

An acquisition in which the target firm did not solicit the acquiring firm's bid for outright ownership.

Benefits of M&A's

Reduction in competitive intensity, lower costs and increased differentation

Access to new markets and distribution channels & Access to new capabilities and competencies

2 other reasons for M&A's

Synergies

when assets are worth more when used in conjunction with each other than when they are used separately

managerial hubris

a form of self-delusion in which managers convince themselves of their superior skills in the face of clear evidence to the contrary

Destory

Deals, on average are more likely to create or destroy value?

50%

How many M&As fail? %

Overpayment

Reason why M&As fail, Ineffective due diligence may result in paying an excessive premium for the target company. Managerial hubris exacerbates this problem

The winner's curse

The most optimistic bidder usually over-estimates the true value of the firm

To grow firms must:

-Possess VRIO resources, capabilities, and/or core competencies. -Leverage existing resources often in conjunction with partners and build new ones.

Strategic alliances, M&As

Are the key tools strategists use to grow and compete sustainably

Globalization

The process of closer integration and exchange between different countries and peoples worldwide, made possible by falling trade and investment barriers, advances in telecommunications, and reductions in transportation costs.

Global Strategy

Part of a firm's corporate strategy to: •Gain and sustain a competitive advantage. •Compete against foreign and domestic companies.

Foreign Direct Investment

Investments in value chain activities abroad

Multinational Enterprise (MNE)

Deploys resources and capabilities in the procurement, production, and distribution in at least two countries

Globalization 1.0 (1900-1941)

-Sales, operations, and some procurement -Strategy flowed from HQ to international sites

Globalization 2.0 (1945-2000)

-To reconstruct damage from the war -Focus on European countries, Japan, and Australia -Greater local-responsiveness -HQ set goals, international sites influenced tactics

Globalization 3.0 (2000-present)

• Business function locations are based on costs, capabilities, and PESTEL factors

• Companies can operate 24/7, 365 days a year

10-25% total

The world is only semi-globalized, by what %?

Advantages of going global

-gain access to a larger market -gain access to low-cost input factors -develop new competencies

Gain access to a larger market

Helps MNEs with economies of scale and scope

Gain Access to Low-Cost Input Factors

• helps MNEs that pursue a low-cost leadership strategy

• examples of low-cost raw materials:

• lumber, iron ore, oil, and coal

-Was a key driver of globalizaiton 1.0 and 2. *during globalization 3.0, firms benefit from lower labor costs in manufacturing and services

Develop New Competencies

-helps MNEs that pursue a differentiation strategy

• foreign direct investments provide access to: *communities of learning: often contained in specific geographic regions *location economies: benefits from locating value chain activities in optimal geographies

Disadvantages of Going Global

-liability of foreignness -loss of reputation -loss of intellectual property

Liability of Foreignness

-Unfamiliar cultural environment -Unfamiliar economic environment

Loss of Reputation

• one of the most valuable resources that firm may possess

• innovation reputation

• can be due to low wages, long hours, and poor working and living conditions overseas

• local government may be corrupt -minimum safety standards may not be enforceable

Loss of Intellectual Property

It can be difficult to protect IP in foreign markets. •Particularly software, movies, and music and copyrights

CAGE distance framework

• Guides MNE decisions on which countries to enter Greater distance= more difficult to expand internationally

cultural, administrative, geographic, economic

What does CAGE stand for?

Culture Distance

Disparity between a firm's home and host country, specifically social norms and morals, beliefs, and values.

Administrative & Political Distance

Captured in factors such as: -Shared monetary or political associations -Political hostilities -Weak or strong legal and financial institutions Ex. Countries in EU have low distance here

Geographic Distance

• does not imply only physical distance

• includes the following attributes: *physical size (canada vs. singapore)

• whitin-country distances to its borders *the countrys topography *time zones *whether the countries are contiguous to one another *access to waterways and the ocean

Economic Distance

-Wealth and per capita income of consumers -Wealthy countries tend to engage in more cross-border trade

Power distance

degree to which the less powerful members of a society accept and expect that power is distributed unequally

Individualism

preference for a loosely-knit social framework in which individuals are expected to take care of only themselves and their immediate families

Masculinity-feminity

preference in society for achievement, heroism, assertiveness and material rewards for success versus cooperation, caring, modest societies

Uncertainty avoidance

degree to which the members of a society feel uncomfortable with uncertainty and ambiguity

Long-term orientation

degree to which members of society focus on future challenges versus current challenges

Indulgence

degree to which society allows relatively free gratification of basic and natural human drives related to enjoying life and having fun

Contract-Based Approach (Exporting)

Least risky way of investment and control

wholly owned subsidiary (Acquisition, Greenfield)

Most risky way of investment and control

Exporting

Involves using domestic plants as a production base for exporting to foreign markets, excellent initial strategy to pursue international sales

Franchising and licensing

Often used when. firm has valuable resources but does not wish to commit their own resource to enter foreign markets

Joint Ventures & Equity Alliances

2 alliances that help with foreign companies to -Enter a foreign market -Strengthen a firm's competitiveness in world markets

Greenfield investment

A form of foreign direct investment where a company establishes operations in another country by constructing new facilities from scratch

Cost Reductions vs. Local Responsiveness

Two opposing forces in global competition: •_: key competitive weapon. •_: tailoring to specific preferences.

integration-responsiveness framework

Used to classify global strategies into four types: -International Strategy -Multidomestic Strategy -Global-Standardization Strategy -Transnational Strategy

International Strategy

Sells the same products or services in both domestic and foreign markets Ex. Harley Davidson in China

Multidomestic Strategy

-Used to try and maximize local responsiveness -MNEs hope that local consumers will perceive their products or services as local ones Ex. Kit Kat adapts different products for different markets according to consumer preferences

Global-Standardization Strategy

Attempts to reap significant: -Economies of scale & location economies -Through global division of labor where capabilities are at the lowest cost Ex. Apple sells the same product everywhere, and produces it in China where labor costs are the lowest

Transnational Strategy

strategy that attempts to combine the benefits of a localization strategy (high local responsiveness) with those of a global-standardization strategy (lowest-cost position attainable) Ex. Unilever focuses on different brands for different regions but has one corporate identity

Porter's Diamond Framework

It helps explain why some nations outperform others in certain industries

Factor Conditions

a country's endowments in terms of natural, human, and other resources, "home grown resouces"

Demand Conditions

the nature of home-market demand for the industry's product or service Ex. Denmark is known for environmental awareness, leads the world in water pollution control

Competitive Intensity

Highly competitive environments tend to stimulate firms to outperform others. Example: Fierce competition for German car companies helped prepare them for global competition

Related and Supporting Industry

Leadership in related and supporting industries fosters world-class competitors in downstream industry. Example: Switzerland's strong chemicals industry allowed it to grow into a hub for pharmaceuticals

Create and destroy value

What can innovation do to value?

idea, invention, innovation, imitation

Four I's

Idea

Abstract concepts or research findings

Invention

the transformation of an idea into a new product or process, or the modification and recombination of existing ones

Innovation

the commercialization of an invention

Imitation

copying a successful innovation

Entrepreneurship

The process by which change agents (entrepreneurs) undertake economic risk to innovate.

The industry Lifecycle

introduction, growth, shakeout, maturity, decline

Introduction Stage

-Core competency: research and development. -Necessary to create a product category that will attract customers -Barriers are high

Growth Stage

-Demand increases rapidly -Product service standards emerge

Product innovation

new or recombined aspects embodied in new products

Process innovation

New ways to produce a product

Shakeout Stage

-The rate of growth declines. -Firms begin to intensely compete. -Price is an important competitive weapon.

Maturity Stage

-Only a few large firms remain. -Demand: replacement or repeat purchases -Market has reached maximum size. -Industry growth is zero or negative Ex. Domestic airline industry

Decline Stage

Demand falls rapidly. •Innovation efforts cease. •If a breakthrough emerges, it leads to a new industry or resets the life cycle. •Strong pressure on prices. Ex. Tobacco Industry, DVD rentals

Crossing-the-Chasm Framework

shows how each stage of the industry life cycle is dominated by a different customer group

Technology Enthusiats

-Enter the market during the introductory stage. -Smallest market segment, 2.5% of the total market potential. -Proactively pursue new technology. -Enjoy using beta versions. Tinker with product

Early Adopters

-Enter the market during the growth stage. -Demand is driven by imagination and creativity.

early majority

-Enter the market during the shakeout stage -This group is key to catching the growth wave.