Globalization and International Strategy

Globalization

• Globalization is linked to the increase in market capitalization worldwide.
• Michael Porter’s diamond of national advantage explains why some nations and their industries outperform others.
• International exchanges have increased, including trade in goods and services, and the exchange of money, information, and ideas.
• Laws, rules, norms, values, and ideas are becoming more similar across countries.
• Challenges include balancing between emerging markets and developed markets, and meeting the needs of customers at very different income levels.

Globalization Defined

• Globalization has two primary meanings:
  • Increase in international exchange (trade, money, ideas, information).
  • Growing similarity of laws, rules, norms, values across countries.
• Globalization creates business opportunities for multinational corporations.
• A key challenge is meeting the needs of customers with varying income levels.
• "Bottom of the pyramid" refers to targeting goods/services to the nearly 5 billion poor people in developing countries.

Factors Affecting a Nation’s Competitiveness

• Factor endowments.
• Demand conditions.
• Related and supporting industries.
• Firm strategy, structure, and rivalry.
• Understanding these factors helps firms gain a competitive advantage internationally.

Diamond of National Advantage

• Framework for explaining why countries foster successful multinational corporations.
• Composed of four factors:
  • Factor endowments.
  • Demand conditions.
  • Related and supporting industries.
  • Firm strategy, structure, and rivalry.
• These attributes determine the playing field for industries within a nation.

Factor Endowments

• A nation’s position in factors of production (e.g., skilled labor, infrastructure) necessary to compete in a given industry.

Demand Conditions

• The nature of home-market demand for the industry’s product or service.
• Demanding consumers drive firms to:
  • Meet high standards.
  • Upgrade products and services.
  • Create innovative products and services.
  • Anticipate future global demand.
  • Proactively respond to product/service requirements.

Related and Supporting Industries

• The presence, absence, and quality of supplier industries and other related industries that are internationally competitive.

• Enable firms to manage inputs more effectively via:

  • Competitive supplier base (reduces manufacturing costs).
  • Close working relationships with suppliers (joint R&D).
  • Development of related industries (forces cost control, innovation).
  • Strong consumer demand, strong supplier base, and high new entrant potential from related industries.

Firm Strategy, Structure, and Rivalry

• The conditions in the nation governing how companies are created, organized, and managed, as well as the nature of domestic rivalry.
• Domestic rivalry leads to a search for new markets.
• Intense domestic competition is a strong indicator of global competitive success.
• Tax and antitrust legislation that protect the dominant players in the industry.

Factor Endowments in Detail

• Involve factors of production (land, capital, labor).
• Factors of production must be industry and firm-specific.
• Must be rare, valuable, difficult to imitate, and rapidly/efficiently deployed.
• Factors of production are the building blocks that create usable consumer goods and services.
• Companies in advanced nations create many of these factors.
• A country dependent on scientific innovation needs a skilled human resource pool created through investment.
• The island nation of Japan is given as an example.
• Firm-specific knowledge and skills created within a country that are rare, valuable, difficult to imitate, and rapidly and efficiently deployed are the factors of production that ultimately lead to a nation’s competitive advantage.

Demand Conditions in Detail

• Demanding consumers drive firms to:
  • Meet high standards.
  • Upgrade existing products and services.
  • Create innovative products and services.
  • Better anticipate future global demand.
  • Proactively respond to product and service requirements.
• Consumers who demand highly specific, sophisticated products and services force firms to create innovative, advanced products and services to meet the demand.
• Countries with demanding consumers drive firms in that country to meet high standards, upgrade existing products and services, and create innovative products and services. The conditions of consumer demand influence how firms view a market. This, in turn, helps the nation’s industries to better anticipate future global demand conditions and proactively respond to product and service requirements.
• Denmark is given as an example.

Related and Supporting Industries in Detail

• A competitive supplier base.
• Close working relationships with suppliers.
• Development of related industries.
• A home country’s industries can become a source of competitive advantage when related and supporting industries are developed.
• Combined, these give the home country’s industries a source of competitive advantage.
• The Italian footwear industry is given as an example.
• A competitive supplier base helps a firm obtain inputs using cost effective, timely methods, thus reducing manufacturing costs. Also, close working relationships with suppliers provide the potential to develop competitive advantages through joint research and development and the ongoing exchange of knowledge.
• Related industries create the probability that new companies will enter the market, increasing competition and forcing existing firms to become more competitive through efforts such as cost control, product innovation, and novel approaches to distribution.

Firm Strategy, Structure, and Rivalry in Detail

• Strong consumer demand.
• Strong supplier base.
• High new entrant potential from related industries.
• Domestic rivalry leads to a search for new markets.
• Intense domestic competition is a strong indicator of global competitive success.
• Firms that have experienced intense domestic competition are more likely to have designed strategies and structures that allow them to successfully compete in world markets.
• Firms that succeed in global markets have first succeeded in intensely competitive home markets. Competitive advantage for global firms typically grows out of relentless, continuing improvement and innovation.
• The European grocery retail industry is given as an example.
• The Indian software industry offers a clear example of how the attributes in Porter’s “diamond” interact to lead to the conditions for a strong industry to grow.

International Expansion: Motivations

• Increase the size of potential markets.
• Reinvigorate the product life cycle.
• Attain economies of scale.
• Spread fixed costs such as R&D over a larger volume of production.
• Take advantage of arbitrage opportunities.
• Optimize the location of value chain activity.
• Enhance a product’s growth potential.
• Take advantage of learning opportunities.
• Explore reverse innovation.
• To enhance performance.
• To reduce cost.
• To reduce risk.

Multinational Firms

• Firms that manage operations in more than one country.
• Expanding a firm’s global presence also automatically increases its scale of operations, providing it with a larger revenue and asset base, which potentially enables the firm to attain economies of scale.

Arbitrage Opportunities

• An opportunity to profit by buying and selling the same good in different markets.
• Involves buying something cheap and selling it where it's more expensive.
• Can be applied to any factor of production and every stage of the value chain.
• Walmart is an example.
  Enhancing the growth rate of a product that is in its maturity stage in a firm’s home country, but that has greater demand potential elsewhere is another benefit of international expansion.

Location Decisions

• A firm has to decide where to locate the various activities that it must engage in to produce products and services.
• Primary activities, such as inbound logistics, operations, and marketing, as well as support activities, such as procurement, R&D, and human resource management must be located in areas where the firm can see performance enhancement, cost reduction, and risk reduction. Location decisions can affect the quality with which any activity is performed in terms of the availability of needed talent, speed of learning, and the quality of external and internal coordination.
• Nike’s manufacture of shoes in Asia is an example.

Reverse Innovation

• New products developed by developed-country multinational firms for emerging markets that have adequate functionality at a low cost.
• Products developed for emerging markets can find success in value segments in wealthy countries.

International Expansion: Risks

• Multinational firms encounter risks.
• Destruction of property.
• Disruption of operations.
• Non-payment for goods and services.
• Arbitrary government decisions.
• Political risk.
• Economic risk.
• Currency risk.
• Management risk.

Political Risk

• Potential threat to a firm’s operations due to ineffectiveness of the domestic political system; can lead to destruction of property, disruption of operations, non-payment, or arbitrary government decisions.
• Countries with high political risk are less attractive.

Rule of Law

• A characteristic of legal systems where behavior is governed by rules that are uniformly enforced.
• Another source of political risk in many countries is the absence of the rule of law.
• The laws, and the enforcement of laws, associated with protection of intellectual property rights can be a major potential economic risk in entering new countries.

Economic Risk

• Potential threat to a firm’s operations due to economic policies and conditions, including property rights laws and enforcement of those laws; can lead to piracy and counterfeiting.
  Firms rich in intellectual property have encountered financial losses as piracy or imitations of their products have grown due to a lack of law enforcement of intellectual property rights.

Counterfeiting

• Selling of trademarked goods without the consent of the trademark holder. Counterfeiting, a direct form of theft of intellectual property rights, is a significant and growing problem.

Currency Risk

• Potential threat to a firm’s operations due to fluctuations in the local currency’s exchange rate; affects cost of production or net profit.
• Even a small change in the exchange rate can result in a significant difference in the cost of production or net profit when doing business overseas.

Management Risk

• Potential threat to a firm’s operations due to problems that managers have making decisions in the context of foreign markets; can be due to culture, customs, language, income level, customer preferences, distribution systems; could lead to the need for local adaptation of apparently standard products.
• Managers must respond to the inevitable differences that they encounter when doing business in multiple countries.
• Cultural differences can pose unique challenges. Even in the case of apparently standard products, some degree of local adaptation may become necessary.

International Expansion: Managing Risks

Global Dispersion of Value Chains

• To manage economic risk, firms can disburse their value chains across several countries and continents.

Outsourcing

• Using other firms to perform value-creating activities that were previously performed in-house.
• The firm may be perfectly capable of doing this activity but chooses to have someone else perform it for cost or quality reasons.

Offshoring

• Shifting a value-creating activity from a domestic location to a foreign location.
• Value-creating activities should be performed in the location where the cost is lowest or where the quality is the best.

Hidden Costs of Offshoring

• Higher total wage and indirect costs, wage inflation.
• Increased inventory due to longer lead time.
• Reduced market responsiveness.
• Increased coordination costs.
• Cost of protecting intellectual property.
• Disruption of global supply chains.
• Firms need to take into account all of these costs in determining whether or not to move their operations offshore.

Managing Risks: Opposing Pressures

• Cost reduction or adaptation to local markets?

Standardization vs. Adaptation

• Many years ago, the famed marketing strategist Theodore Levitt advocated strategies that favored global products and brands. He suggested that firms should standardize all of their products and services for all of their worldwide markets.
• Such an approach would help a firm lower its overall costs by spreading its investments over as large a market as possible. Levitt suggested strategies that favor global products and brands should do the following:
  • Standardize all products for all markets.
  • Reduce overall costs by spreading investments over a larger market.
    These resting on three key assumptions:
  • Customers have homogenous needs and interests.
  • People prefer lower prices at high quality.
  • Global markets produce economies of scale.
    Technology permits flexible production; cost of production may not be critical to product cost; a firm’s strategy should not be solely product driven.

Incorrect Assumptions

• “One size fits all” does NOT generally apply; markets vary, interest grows in multiple products, technology permits flexible production.
• There is a growing interest in multiple product features, product quality, and service.
• Assumptions may be incorrect.
• Product markets DO vary widely between nations - local adaptations work.
• Based on the above, we would have a hard time arguing that it is wise to develop the same product or service for all markets throughout the world.

International Strategies: Balancing Pressures

• Competitive pressures require firms to lower unit costs and be responsive to local pressures.
  On the one hand, competitive pressures require that firms do what they can to lower unit costs so that consumers will not perceive their product and service offerings as too expensive. This may lead them to consider locating manufacturing facilities where labor costs are low and developing products that are highly standardized across multiple countries. In addition to responding to pressures to lower costs, managers must also strive to be responsive to local pressures in order to tailor their products to the demand of the local market in which they do business. This requires differentiating their offerings and strategies from country to country to reflect consumer tastes and preferences and making changes to reflect differences in distribution channels, human resource practices, and governmental regulations.

Four Basic Strategies

The two opposing pressures result in four different basic strategies that companies can use to compete in the global marketplace:

• International.
• Global.
• Multidomestic.
• Transnational.
  The strategy that a firm selects depends on the degree of pressure that it is facing for cost reductions and the importance of adapting to local markets.

International Strategy

• Requires diffusion and adaptation of the parent company’s knowledge and expertise to foreign markets.
• The primary goal is worldwide exploitation of the parent firm’s knowledge and capabilities.
• All sources of core competencies are centralized.
• Pressure for both local adaptation and low costs are rather low.
• This strategy is most suitable in situations where a firm has distinctive competencies that local companies in foreign markets lack.
• International strategy = a strategy based on a firm’s diffusion and adaptation of the parent company’s knowledge and expertise to foreign markets, used in industries where the pressures for both local adaptation and lowering costs are low.

International Strategy: Benefits and Drawbacks

• Benefits: Leverages and diffuses parent firm's knowledge, leading to lower costs.
• Drawbacks: Limited ability to adapt to local markets, misses benefits of distributed value chain.
  A lack of local responsiveness may result in the alienation of local customers, and the firm’s inability to be receptive to new ideas and innovation from its foreign subsidiaries may lead to missed opportunities globally.

Global Strategy

• Competitive strategy is centralized and controlled by the corporate office.
• Products are standardized, operations centralized, producing economies of scale.
• Worldwide volume supports research and development.
• There’s a standard level of quality worldwide.
• Pressure for reducing cost is high; pressure for adaptation to local markets is weak.
• Since the primary emphasis is on controlling costs, the corporate office strives to achieve a strong level of coordination and integration across the various businesses.
• Firms following a global strategy strive to offer standardized products and services as well as to locate manufacturing, R&D, and marketing activities in only a few locations.
  Many industries requiring high levels of R&D, such as pharmaceuticals, semiconductors, and jet aircraft, follow global strategies.
  Although costs may be lower, the firm following a global strategy may, in general, have to forgo opportunities for revenue growth since it does not invest extensive resources in adapting product offerings from one market to another.

Global Strategy: Benefits and Drawbacks

• Benefits: strong coordination and integration across businesses with cost control, standardized products and services in only a few locations
• Drawbacks: Concentration of activities may result in higher transportation and tariff costs.

Multidomestic Strategy

• Decisions are decentralized.
• Products and services are tailored to local use.
• Consider language, culture, income levels, customer preferences, distribution systems.
• Markets can expand rapidly.
• Prices are differentiated by market.
• Pressure for local adaptation is high; pressure for lowering costs is low

A multidomestic strategy is appropriate where the pressure for local adaptation is high and the pressure for lowering costs is low.
This can result in enhanced revenue due to a firm’s carve-out of attractive niches in a given market.
However, local adaptation of products and services may increase a company’s cost structure, so managers must determine the trade-off between adaptation and cost.

Multidomestic Strategy: Adaptation and Trade-offs

Differences in language, culture, income levels, customer preferences, and distribution systems are only a few of the many factors that must be considered. Even in the case of relatively standardized products, at least some level of local adaptation is often necessary.

Transnational Strategy

• Efficiency versus local adaptation versus organizational learning.
• Assets and capabilities disbursed according to the most beneficial location for a specific activity; some value chain activities centralized, some decentralized.
  Economies of scale, increased knowledge flows.
  Pressures for both local adaptation and lowering costs high

Transnational Strategy: Key Aspects

The firm seeks efficiency not for its own sake, but as a means to achieve global competitiveness. It recognizes the importance of local responsiveness, but as a tool for flexibility in international operations. Innovations are regarded as an outcome of a larger process of organizational learning that includes the contributions of everyone in the firm.

International Strategies: Global or Regional?

• It may be unwise for companies to rush into full-scale globalization.
• Distance still matters.
  Distance matters. The effects of geographic distance can be multiplied by distance in terms of culture, language, religion, and legal and political systems between two countries.
  Regionalization = increasing international exchange of goods, services, money, people, ideas, and information; and the increasing similarity of culture, laws, rules, and norms within a region such as Europe, North America, or Asia.

Trading Blocs

• Groups of countries agreeing to increase trade between them by lowering trade barriers.
  A number of regional agreements have been created that facilitate the growth of business within these regions by easing trade restrictions, taxes, and tariffs.
  Regional economic integration has progressed at a faster pace than global economic integration, and trade and investment patterns of the largest companies reflect this reality.

Entry Modes

A domestic corporation considering expanding into international markets for the first time will typically consider licensing or franchising its operations.
Options for international market expansion:

• Exporting.
• Licensing or franchising.
• Strategic alliance or joint venture.
• Wholly owned subsidiary.

International Strategies: Entry Modes Options Analysis

• Greatest control, highest returns; but expensive, greater potential for mis-steps.
• Low risk, locals know more; but products may not meet local needs.
  The key tradeoff in each of these strategies is the level of investment or risk versus the level of control

Exporting

• Producing goods in one country to sell to residents of another country. This strategy enables the firm to invest the least amount of resources in terms of its product, its organization, and its overall corporate strategy. However, the firm has a limited ability to tailor its products to meet local market needs.

Licensing

• A contractual arrangement in which a company receives a royalty or fee in exchange for the right to use its trademark, patent, trade secret, or other valuable intellectual property.
  An advantage of licensing is that the firm granting a license incurs little risk, since it does not have to invest any significant resources into the country itself. In turn, the licensee (the firm receiving the license) gains access to the trademark, patent, and so on, and is able to potentially create competitive advantages. However, the licensor gives up control of its product and forgoes potential revenues and profits.

Franchising

• A contractual arrangement in which a company receives a royalty or fee in exchange for the right to use its intellectual property; it usually involves a longer time period than licensing and includes other factors, such as monitoring of operations, training, and advertising.
  Franchising has the advantage of limiting the risk exposure that a firm has in overseas markets while, at the same time, the firm is able to expand the revenue base of the company.

Strategic Alliances and Joint Ventures

• Allow firms to increase revenues and reduce costs as well as enhance learning and diffuse technologies.
  Strategic alliances and joint ventures allow firms to increase revenues and reduce costs as well as enhance learning and diffuse technologies. However, trust is a vital element.

Wholly Owned Subsidiary

• A business in which a multinational company owns 100% of the stock.
• This can be expensive and risky, and is most appropriate where a firm already has the appropriate knowledge and capabilities that it can leverage rather easily through multiple locations.
• Given the challenges associated with entry into international markets, many firms first start on a small-scale and then increase their level of investment and risk as they gain greater experience with the overseas market in question.
• The various types of entry form a continuum ranging from exporting (low investment and risk, low control) to a wholly owned subsidiary (high investment and risk, high control).

Entrepreneurial Strategy and Competitive Dynamics

Entrepreneurship

• Involves value creation and the assumption of risk.
• Even though entrepreneurial activity is usually associated with startup companies, new value can be created in many different contexts.
• Three ingredients are critical in order for an entrepreneurial startup to be successful, they are
  • a viable opportunity, available resources, and a qualified and motivated founding team.

New Values Can Be Created In

• Startup ventures.
• Major corporations.
• Family-owned businesses.
• Nonprofit organizations.
• Established institutions.

Ideas and Opportunities

• Can come from many sources.
• Change or chance can uncover unmet customer needs.
• Startup venture ideas can come from: current or past work experiences, hobbies or suggestions by friends or family.
• For established firms, opportunities can come from: existing customers, suggestions by suppliers, technological developments.
• For all firms, change or chance events can uncover unmet consumer needs.

Entrepreneurial Opportunity Analysis

• For an entrepreneurial venture to create new value, three factors must be present
  • an entrepreneurial opportunity
  • the resources to pursue the opportunity
  • and an entrepreneur or entrepreneurial team willing and able to undertake the opportunity.
    The entrepreneurial strategy that an organization uses will depend on these three factors.

Entrepreneurial Opportunity Recognition

• The process of discovering and evaluating changes in the business environment, such as a new technology, socio-cultural trends, or shifts in consumer demand, that can be exploited.
• Two phases of activity:
  • Discovery - Becoming aware of a new business concept.
  • Evaluation - Analyzing the opportunity to determine whether it is viable or feasible to develop further.

Entrepreneurial Opportunities: Discovery

• Many entrepreneurs report that their idea for a new venture came through some unexpected insight, often based on their prior knowledge, that gave them an idea for a new business.

• Ask:

  • Where are the new venture opportunities?
  • What might be a creative solution to a business problem?

• Deliberate search includes:

  • Frustrations with current products or processes.
  • Stakeholder's unmet needs.
  • Learning from other markets.

• Spontaneous and unexpected.

Entrepreneurial Opportunities: Evaluation

• Occurs after an opportunity has been identified and involves analyzing this opportunity to determine whether it is viable and strong enough to be developed into a full-fledged new venture.
• Talk to potential target customers.
• Conduct a feasibility analysis.
  What are the operational requirements?
• What is the market potential?
• Is the idea strong enough to create value, and therefore, profits?

Among the most important factors to evaluate is the market potential for the product or service. New ventures must first determine whether a market exists for the product or service they are contemplating.
Ideas developed by new product groups or in brainstorming sessions are tested by various methods, including talking to potential target customers and discussing operational requirements with production or logistics managers.

• Viable opportunities have the following qualities:
  • Attractive - market demand exists.
  • Achievable - practical and physically possible.
  • Durable - attractive long enough for development/deployment.
  • Value-creating - benefits surpass development costs.
• Resources need to be available – financial, human, social, and an entrepreneurial leader and team.

Entrepreneurial Resources

• Essential for entrepreneurial success.
  • Financial resources.
  • Human capital.
  • Social capital.
  • Government resources.

Entrepreneurial Financial Resources

• Varies based on venture stage/scale.
  • Initial, startup financing- Personal savings, family, and friends.
  • Early-stage financing.
  • Later-stage financing.
• Crowdfunding- Funding a venture by pooling small investments from many investors, often raised on the internet.
• Angel investors- Private individuals who provide equity investments for seed capital during the early stages of a new venture.
• Venture capitalists- Companies organized to place their investors’ funds in lucrative business opportunities. Through venture capitalists, entrepreneurs can raise money by selling shares of the new venture.

Entrepreneurial Human, Social, and Governmental Resources

• Strong, skilled management.
• Extensive social contacts & strategic alliances.
• Technology, manufacturing, or retail alliances.
• Government contracting.
• Loan guarantee programs (SBA).
• Training, counseling, and support services.
• New ventures founded by entrepreneurs who have extensive social contacts are also more likely to succeed.

Entrepreneurial Leadership

Leadership needs

• Courage.
• Belief in one’s convictions.
• Energy to work hard.
• Ability to build a dedicated team.

Leadership personality traits

• Higher self-confidence, conscientiousness, openness to new experiences, emotional stability.
• Lower agreeableness.

Leadership characteristics

• Vision
• Dedication and drive.
• Commitment to excellence.

Vision

• The entrepreneur has to envision realities that do not yet exist.
  Launching a new venture requires a special kind of leadership.

Commitment to Excellence

• Excellence requires entrepreneurs to commit to knowing the customer, providing quality goods and services, paying attention to details, and continuously learning.
• Entrepreneurs who achieve excellence are sensitive to how these factors work together.

Entrepreneurial Strategy

• Enables the skilled/dedicated entrepreneur, with a viable opportunity and access to sufficient resources, to successfully launch a new venture.

• New ventures must evaluate industry conditions, the competitive environment, and market opportunities in order to position themselves strategically.

• What are the industry conditions?

  • What are the barriers to entry? (Five-forces analysis)

• What is the competitive environment?

  • Might there be retaliation by established firms?

• What are the market opportunities?

  • How should the firm actually enter a new market?

• Firms must choose how to compete:

  • Entry strategies
  • Generic strategies
  • Combination strategies

Entry Strategies

New venture entry strategies need to:

• Quickly generate cash flow.
• Build credibility.
• Attract good employees.
• Overcome the liability of newness.

The entry strategy will vary depending on how risky and innovative the new business concept is.
choices include these new entries:

• Pioneering new entry.
• Imitative new entry.
• Adaptive new entry.

Pioneering New Entry

• Create new ways to solve old problems.
• Meet customers’ needs in a unique new way.
• Will it be accepted by consumers?
• Will it be disruptive to the status quo of an industry?
• Will the advantage be sustainable against imitators?

If the product or service is unique enough, a pioneering new entrant might actually have little direct competition. However, there is a strong risk that the product or service will not be accepted by consumers.

• A pioneering new entry is also potentially disruptive to the status quo of an industry

Imitative New Entry

• Imitators have a strong marketing orientation.
• Capitalize on proven market successes.
• Introduce the same basic product or service in another segment of the market.
• Can we do it better than an existing competitor?
• Will someone then imitate us?
  But success triggers imitation.

Adaptive New Entry

• Capitalizes on current market trends.

• Offers a product or service that is somewhat new and sufficiently different.

• Creates new value for customers.

• Captures market share.

• Does it do a superior job of meeting customer needs?

• Can it be easily imitated?

• How can we continue to keep it fresh and new?

• Adapting Existing Ideas for a Particular Situation. Such firms are adaptive in the sense that they are aware of marketplace conditions and conceive entry strategies to capitalize on current trends.

• Generic Strategies for New Ventures
  Use niche straA new entrant must decide what type of strategic positioning will work best as the business goes forward.

Overall Cost Leadership

• Has an advantage due to:
  • Simpler organizational structure and smaller size.
  • Cost control via quicker decisions to upgrade technology and integrate marketplace feedback.

Differentiation

• Successes are sometimes built on superior innovation or use of technology, which is challenging for young firms to implement relative to established competitors for small businesses because there is a natural fit between the narrow scope of the strategy and the small size of the firm.
  Offer a unique value proposition through innovation and superior use of new technology.

Focus Strategies

• Focus means the ability to:
  • Focus may be considered to be an effective approach for a new entrant.
  • Young firms can often succeed best by finding a market niche where they can get a foothold and make small advances that erode the position of the existing competitors.

Pursuing Combination Strategies

• Pursuing combination strategies can combine the best features of low-cost, differentiation, and focused strategies.
  Entrepreneurial firms are often in a strong position to offer a combination strategy because they have the flexibility to approach situations uniquely.
  By combining the best features of low-cost, differentiation, and focus strategies, new ventures can often achieve something truly distinctive.
  Holding down expenses by having a simple structure.
  Creating high-value products and services by being flexible and innovative.
  Offering highly specialized products or superior customer service to a niche market.

Competitive Dynamics

• Helps explain why competitive strategies evolve and how to respond.
• Need to identify new competitive action.
• Engage in threat analysis.

Competitive dynamics = intense rivalry, involving actions and responses among similar competitors vying for the same customers in a marketplace. Intense rivalry among similar competitors has the potential to alter a company’s strategy.
Studying competitive dynamics helps explain why strategies evolve and reveals how, why, and when to respond to the actions of close competitors.

• Why launch new competitive actions?

Threat Analysis

• Competitive Dynamics Model identifies the factors competitors need to consider when determining how to respond to a competitive act.

Objectives to launch actions

Motivated to launch competitive challenges because they want to strengthen financial outcomes, capture some of the extraordinary profits that industry leaders enjoy, and grow the business. They also may want to build their reputation for innovation or efficiency. The likelihood that a competitor will launch an attack depends on many factors.

Incumbents

• Compite among incumbent rivals can involve “hardball” strategies: devasting rivals’ profit sanctuaries; plagiarizing with pride; deceiving the competition; unleashing massive and overwhelming force; raising competitors’ costs.

• Threat Analysis
  How serious is the threat?

• Motivation and capability to respond means asking:

  • What type of competitive response is necessary?
  • What resources are needed to fend off a competitive attack?
    What Type of competitive action should I take? Awareness of the threats posed by industry rivals allows a firm to understand what type of competitive response, if any, may be necessary.*
    Threat analysis = a firm’s awareness of its closest competitors and the kinds of competitive actions they might be planning.
    Market commonality = the extent to which competitors are vying for the same customers in the same markets.
    Resource similarity = the extent to which rivals draw from the same types of strategic resources.
    When any two firms have both a high degree of market commonality and highly similar resource bases, a stronger competitive threat is present.
    Once attacked, competitors are faced with deciding how to respond. What is their motivation and capability to respond?

Competitive Dynamics: Actions

• What actions can be used by small firms (entrepreneurial) ? Because they are young, however, startups may not have the financial resources needed to follow through with a competitive response.
• Types of competitive actions include:*
  • Strategic actions
  • Tactical actions

A competitor’s reaction may depend on
market dependence: If a company has a high concentration of its business in one industry, it has more at stake because it must depend on that industry’s market for its sales.

Small firms are more nimble and can respond quickly to competitive attacks because they are not well known, startups also have the advantage of the element of surprise in how and when they attack.

Whether a company should respond to a competitive challenge will also depend on who launched the attack against it

• Choosing not to respond is a choice and includes:
  Forbearance: a firm’s choice of not reacting to a rival’s new competitive action
  Co-opetition: a firm’s strategy of both cooperating and competing with rival firms.

Strategic Control and Corporate Governance

Strategic control = the process of monitoring and correcting a firm’s strategy and performance.

Strategic Control Mechanisms

• Informational-control systems.
• Behavioral-control systems.
• Corporate governance.

Traditional Approach to Strategic Control

• = feedback loop from performance measurement to strategy formulation
• involves lengthy time lags, “single-loop” learning
• is most appropriate when environment is stable and relatively simple
• The traditional approach to strategic control is based on a feedback loop from performance measurement to strategy formulation. This process typically involves lengthy time lags, often tied to a firm’s annual planning cycle.
• Such traditional control systems, termed “single–loop” learning simply compare actual performance to a predetermined goal.
• They are most appropriate when the environment is stable and relatively simple because predetermined goals and milestones can prevent the very adaptability that is required of a good strategy.

Contemporary Approach Model

• Informational control
• Behavioral control
  The relationships between strategy formulation, implementation, and