106BB Strategy I

Chapter 1 – International Business: An Overview Introduction to the Field of International Business − International business: all commercial transactions (private and governmental) between

two or more countries − Goal of private businesses: increase or stabilize profits partly depending on foreign sales

and resources (government may or may not be profit motivated) − International business is large and growing portion of total business – foreign competition

and also trade are important − Operating efficiently depends on modes of business (such as importing and exporting)

which make international business necessary − External environment becomes more diverse: factors are physical, societal, and

competitive – influence firm’s operations Why Companies Engage in International Business Company’s mission, objectives and strategy are affected – reasons for going international: → Expand sales

− sales dependent on consumers’ interest in products and willingness or ability to buy them: higher for world market which increases firm’s potential market

− assuming that higher sales increase profits → Acquire resources

− foreign products, services, components and also foreign capital, technologies, information: cost reduction possible

− improve product quality, differentiate: potentially increasing market share and profit → Minimize risk

− minimize swings in sales and profits: set off recessions and expansions to take advantage for business cycle

− supplies of product or component from different countries avoids full impact of price swings or shortages

− reasons to enter are defensive: counter advantages competitors can gain in foreign markets which hurt domestic markets – strengthen competitive position

Reasons for Recent International Growth – from Carrier Pigeons to the Internet In recent years growth in international trade was much faster, reasons are: → Expansion of technology

− communications and transportation technology sophisticated and enables people to travel and communicate (e.g. planes, internet)

− costs for communication and transportation have risen more slowly than costs in general, thus disadvantages of international trade like higher operating costs and less control can be solved easier today

→ Liberalization of cross-border movements − trade across borders is restricted: makes international business more expensive and

riskier as regulations can change − restrictions have been lowered because travelling for citizens becomes easier,

domestic producers become more efficient through foreign competition, and other countries are induced to follow

− companies can take advantage of international opportunities easier, but people have to work harder under more competition (recent protests against globalisation could influence government again)

EFM Academy - P&R Competitive Strategy,8th + D&R&S International Business,10th

Authors: J. Albrecht, S. Bauwens, A. Benken, V. Franke, S. Heinrichs, S. Huth, D. Nussbaum, K. Pietrek, B. Pörner

→ Development of supporting services − companies and governments create services to ease international business and make it

less risky (barter is still done, but time-consuming, risky, and expensive) − today easy payment in cash because of bank credit agreements, clearing arrangements

(bank transaction with currency exchange), and insurance to cover damages – also easy transport of mail

→ Consumer pressures − innovations let consumers know about products and services available internationally − global discretionary income created demand for those products − companies respond by searching worldwide, spending on research and development to

offer differentiated and innovated products → Increase in global competition

− pressure of increased foreign competition persuades companies to expand into international markets – others follow

− they can respond rapidly and transport is efficient to adapt to shifts in demand − companies can produce internationally

Modes of International Business Merchandise Exports and Imports − Merchandise exports are tangible products (goods) sent out of a country, merchandise

imports are goods brought into a country, often called visible exports and imports − Major source of international revenues and expenditures Service Exports and Imports Service exports and imports generate non-product international earnings (company or individual receiving payment is making service export, company or individual paying is making a service import) – examples are: → Tourism and transportation

− transport and hotel offered by companies is a service export, to use these services counts as a service import

− can make up large share of foreign trade (influences employment, profits, and foreign-exchange earnings)

→ Performance of services − services like banking, insurance, rentals, engineering count as earning in form of fees − turnkey operations: construction, performed under contract, of facilities that are

transferred to the owner when they are ready to start operating − management contracts: company provides personnel to perform general or specialized

management functions → Use of assets

− licensing agreements: companies allow others to use assets (trademarks, patents, expertise) under contract, earnings are called royalties

− franchising: mode of business in which one party allows another party to use trademark and ongoing services

− dividends and interest paid on foreign investments is also treated as service exports and imports because they represent the use of assets (capital)

Investments Ownership of foreign property in exchange for financial return: → Direct investment

− controlling interest in foreign company: foreign direct investment (FDI)



− joint venture: two or more companies share ownership, mixed venture: government joins company in FDI – partial ownership

− way to access resources or to reach market abroad → Portfolio investment

− non-controlling interest in a company or ownership of loan to another party − two forms: stock in a company or loan to a company or country (bonds, bills, notes) − usage: short-term financial gain (earn more money with relative safety) – important

for companies with extensive international operations International Companies and Terms to Describe Them − Collaborative arrangements: all types of international activity, strategic alliance: more

narrow, agreement of critical importance for competitive viability − Multinational enterprise (MNE): global approach to foreign markets and production, uses

most of types discussed above − Synonyms: Multinational corporation (MNC) (but corporation is narrower), Transnational

company (TNC) (organization differing by country but integrated into global operations) − Global company or globally integrated company: integrates operations, most decisions

made in home country, branches used for components, global product − Multidomestic company or locally responsive company: independent national operations − Degree of integration differs – combination possible External Influences on International Business − External environment influences strategies and means to implement it Understanding a Company’s Physical and Societal Environments → Managers in international business must understand social science disciplines and how

they affect all functional business fields − Politics shape business worldwide – political leaders control how business takes place,

political conflicts harm international business, managers should understand laws − Domestic and foreign laws affect business (taxation, employment, foreign-exchange

transactions) – agreements among countries set international laws − Anthropology, sociology, and psychology give inside in values, attitudes, and beliefs − Economics gives analytical tool to analyse international environment − Geography determines location, quantity, quality, and availability of resources

The Competitive Environment − Major advantage in price, marketing, innovation, or other factors (competitive strategies) − Number and comparative capabilities of competitors (and competitive ranking) − Competitive differences by country, size of home and foreign market Evolution of Strategy in the Internationalization Process − Status affects available strategic alternatives: risk-minimizing at the beginning, expansion

after being more familiar with foreign market Patterns of Expansion → Passive to active expansion

− most think of domestic needs and operations only − passive expansion after foreign requests to export, only then active expansion in

foreign markets



→ External to internal handling of operations − intermediaries for foreign operations used first to minimize risk − successful growth creates need for own staff to handle foreign market activities (less

risky, internal capabilities justified through higher volume of business) → Deepening mode of commitment

− least formal commitment: limited foreign functions (mainly import and export) at an early stage

− greater international commitment: limited foreign production and multiple functions (own production facilities or shared ownership in foreign facilities)

− extensive production abroad with foreign direct investment and all functions (infusion of capital, personnel, and technology)

→ Geographic diversification − over time number of countries in which company operates increases − degree of similarity between foreign and domestic market high at the beginning,

decreases over time (physical proximity, cultural closeness) Leapfrogging of Expansion − many new companies are beginning with a global focus (managerial knowledge and

advancements in communication enable them) − sensible to concentrate on emerging markets which seem to have greatest opportunities Countervailing Forces Globally Standardized versus Nationally Responsive Practices − advantages vary by product, function, and country of operation − globally standardized practices tend to lower costs (gains from economies of scale) − nationally responsive practices enable companies to adjust to unique local conditions Country versus Company Competitiveness − countries moderate companies’ fulfilment of global efficiency objectives because of those

countries’ rivalry with other countries − globalizing company can harm domestic country by outsourcing activities, but little

evidence for company-country-performance relationship − high-value activities: activities producing high profits or are done by high-salaried

employees (increasing wage inequality possible) − manager with dual roles: global efficiency objectives versus national societal values Sovereign versus Cross-National Relationships − countries reluctantly cede some sovereignty (freedom from external control) because of

coercion, international conflicts − countries willingly cede some sovereignty to gain reciprocity (e.g. flyover rights given and

received), attack problems jointly (e.g. interest rate, cross-border highways), deal with extraterritorial concerns (e.g. space, minerals on sea ground)

− bilateral or multilateral treaties to protect interests (e.g. G8) Ethical Dilemma − relativism: adapt to local, foreign standards when entering international trade − normativism: universal standards of behaviour based on values − possibility to create competitive advantage by adhering to standards to create customer

loyalty or cost-focus by using relativism as ‘lowered’ standard



International Business Chapter 2: the cultural environments facing business Introduction The major problems of cultural collision in international business are when:

• A company implements practices that work less well than intended • A company’s employees encounter distress because of an inability to accept or adjust to

foreign behaviour Cultural awareness

• Culture consists of specific learned norms based on attitudes, values, and beliefs, all of which exist in every nation

• Businesspeople agree that cultural differences exist but disagree on what they are • Culture cannot easily be isolated from such factors as economic and political conditions • Problem areas that can hinder managers’ cultural awareness are: subconscious reactions

to circumstances, the assumption that all societal subgroups are similar • Researching descriptions of specific culture can be instructive • Making mistakes ( e.g. by addressing people) may be construed by foreign

businesspeople as ignorance or rudeness, which may jeopardize a business arrangement • A company’s need for cultural knowledge increases as: its number of foreign functions

increases, the number of countries of operations increases • It moves from external to internal handling of operations • If the operations are contracted to a company abroad, then each company needs some

cultural awareness to anticipate and understand the other company’s reactions Identification and dynamics of culture

• People simultaneously belong to national, ethic, professional, and organizational cultures The nation as a point of reference

• The nation is a useful definition of society because: similarity among people is a cause and effect of national boundaries, laws apply primarily along national lines

• Managers find country- by- country analysis difficult because: not everyone in a country is alike, variations within some countries are greater

• Similarities can link group from different nations more closely than groups within a nation

Cultural formation and dynamics • Cultural value systems are set early in life but may change through: choice or imposition,

contact with other cultures • Basic values: evil versus good, dirty versus clean,… • Individual and societal values and customs may evolve over time • Change by choice may take place as a reaction to social and economic changes that

present new alternatives • Cultural imperialism: has changed by imposition occurs when countries introduced their

legal systems into their colonies by prohibiting established practices and defining them as criminal

Language as a cultural stabilizer • A common language within countries is a unifying force • When people from different areas speak the same language, culture spreads easily • When people speak only a language with few speakers, especially if those peakers

concentrated in a small geographic area, they tend to adhere to their culture because meaningful contact with others is difficult

• Commerce can occur easily with other nations that share the same language because expensive and time- consuming translation is necessary



• Because countries see language as an integral part of their cultures, they sometimes regulate their languages- for example, by requiring that all business transactions be conducted and all “ made in…” labels printed in their languages

Religion s a cultural stabilizer • Not all nations that practice the same religion have the same constraints on business

Behavioural practices affecting business

• There are thousands of possible ways of relating culture to business Social stratification systems

• Every culture values some people more highly than others, and such distinctions dictate a person’s class or status within that culture

• Group affiliations can be ascribed or acquired, a reflection of class and status • What determines the ranking varies from country to country • Ascribed group membership: affiliation determined by birth based on gender family, age,

ethic, racial or national origin • Acquired group membership: not determined by birth based on religion, political affairs,

and professional and other association • Managers must consider local stratification systems when hiring personnel

Performance orientation • Some nations reward people for performance improvement and excellence more than

others do (e.g. in the US, New Zealand) • Whatever factor has primary importance- whether seniority, as in Japan, or humaneness

will largely influence a person’s eligibility for certain positions and compensation • Even when individuals qualify for certain positions and there are no legal barriers to

hiring them, social obstacles, such as public opinion in a company’s home country against the use of child labour, may make companies wary of employing them abroad

• Business reward performance highly in some societies • Egalitarian societies place less importance on ascribed group membership

Country-by-country attitudes vary toward: male and female roles, respect for age, family ties Gender-based groups

• Even among countries in which women constitute a large portion of the working population, vast differences exist in the types of jobs regarded as “male” and “female”

Age-based groups • Many cultures assume that age and wisdom are correlated • In the US: youth has the professional advantage

Family-based groups • In some societies, the family is the most important group membership • In societies in which there is low trust outside the family, such as in China and southern

Italy, small family-run companies are more successful than large business organizations Occupation

• The perception of what jobs are “best” varies somewhat among countries • This perception usually determines the numbers and qualifications of people who will

seek employment in a given occupation • International difference: citizen’s desire to work as entrepreneurs rather than for an

organization • Importance of personal independence in Belgium and France

Motivation

• Interest in motivation because higher productivity reduces production costs Materialism and leisure

• In the most economically developed countries, most people work to satisfy materialistic needs



• Good international managers know that the motives for working vary in different countries

• Employees’ work attitudes may change as they achieve economic gains • Max Weber: predominantly protestant countries were the most economically developed

people preferred to transform productivity into material gains rather than into leisure time • Some societies take less leisure time than others • Today: most people consider personal economic achievement to be commendable

regardless of whether they live in wealthy or poor countries Expectation of success and reward

• People are more eager to work if: rewards for success are high, there is some uncertainty of success

• In areas such as Cuba, where public policies distribute output from productive to unproductive workers, enthusiasm for work is low

Assertiveness • The average interest in career success varies substantially among countries e.g.

masculinity Need hierarchy

• Hierarchy of needs is motivation theory • People try to fulfil lower- order needs sufficiently before moving on to higher ones • Basic needs are physiological • Highest order need is that for self-actualisation becoming all that is is possible for one

to become • Ranking of needs differs among countries

Relationship preferences Power distance

describes the relationship between superiors and subordinates • Where power distance is high, people prefer little consultation between superiors and

subordinators usually wanting and having an autocratic or paternalistic management style in their organizations

Individualism versus collectivism • Safe work environment motivate collectivists. Challenges motivate individuals • Attributes of individualism: low dependence, desire for personal time, freedom, challenge • The degree of individualism an collectivism also influences how employees interact with

their colleagues • people may vary their individualism depending on circumstances • Where collectivism is high, companies find their best marketing success when

emphasizing advertising themes that express group values Risk taking behaviour

• Nationalities differ in how happy people are to accept things the way they are and how they feel about controlling their destinies

Nationalities differ in Uncertainty avoidance

• In countries with highest score on uncertainty avoidance, employees prefer set rules that are not to be broken even if breaking them is sometimes in the company’s best interest few costumers re prepared to take the risk of trying a new product first

Trust • Where trust is high, there tends to be lower cost of doing business because managers do

not have to spend time foreseeing every possible contingency and then monitoring every action for compliance in business relationships



Future orientation • Where future orientation is higher, companies may be able to better motivate workers

through delayed compensation, such as retirement programs Fatalism

• Belief in fatalism, that every event is inevitable, may prevent people from accepting this basis cause-and effect relationship

• Effect on business in countries with a high degree of fatalism: people plan less for contingencies

Information and task processing

• People do perceive and reach conclusion differently- so do cultures Perception of cues • All languages are complex and reflective of environment. Without knowing the language

of the area, a manager may not perceive the subtleties of that environment • We perceive cues selectively • The cues people use to perceive things differ among societies

Obtaining information• Low-context cultures: most people consider relevant only firsthand information that bears

directly on the decision they need to make • High-context cultures: most people believe that peripheral information is valuable to

decision making and infer meanings from things said indirectly • It helps managers to know whether cultures favour: focused or broad information,

sequential or simultaneous handling of situations, handling principles or small issues first Information processing

• Information processing is universal insofar as all cultures categorize, plan, and quantify • Monochromic: in such cultures, people prefer to work sequentially ( people will finish

with one customer before dealing with another) • Polychronic: southern European are more comfortable when working simultaneously on

all the tasks they face • Some cultures tend to focus first on the whole and then on the parts, whereas others do

the opposite • Some cultures determine principles before they try to resolve small issues (idealism),

other cultures focus more on details rather than principles (pragmatism) Strategies for dealing with cultural differences Making little or no adjustment

• Host cultures do not always expect foreigners to adjust to them Communications

• Cross-border communications do not always translate as intended • Some words do no have a direct translation • Languages and the common meaning of words are constantly evolving • Words mean different things in different context • Grammar and pronunciation are complex • A poor translation may have tragic consequences • Good international business managers use rules (p.63)

Silent language • Silent language includes colour association, sense of appropriate distance, time and status

cues, and body language • Managers should know that perceptual cues- especially those concerning time and status-

differ among societies • Silent language barrier- personals position in a company



Culture shock • Some people get frustrated when entering a different culture • People working in a very different culture may pas through stages

Company and management orientations Polycentrism

• Policentrist management is so overwhelmed by national differences that it won’t introduce workable changes

• Control is decentralized Ethnocentrism

• Is the belief that one’s own culture is superior to others • Ethnocentrists management overlooks national differences and: ignores important factors,

believes home-country objectives should prevail, thinks change is easy Geocentrism

• Exists when a company bases its operations on an informal knowledge of home- and host- country needs, capabilities, and constraints

• Geocentric management often uses business practices that are hybrids of home and foreign norms

Strategies for instituting change Value system

• The more a change upsets important values, the more resistance it will engender • It is much easier to adapt to things that do not challenge our value system than to things

that do • The more a change disrupts basic values, the more people affected will resist it

Cost benefit of change • The cost of change may exceed its benefit

Resistance to too much change • Resistance to change may be lower if the number of changes is not too great

Participation • Employees are more willing to implement change when they take part in the decision to

change • One way to avoid problems that could result from change is to discuss a proposed change

with stakeholders in advance Reward sharing

• Employees are more apt to support change when they expect personal or groups rewards Opinion leaders

• Managers seeking to introduce change should first convince those who can influence others

Timing• Companies should time change to occur when resistance is likely to be low

Learning abroad • International companies should learn things abroad that they can apply at home

Cultures are becoming more similar in some respects but not in others Two scenarios for future international cultures are: Smaller cultures will be absorbed by national and global ones Subcultures will transcend national boundaries



Chapter 4 – The Economic Environment Introduction → Company managers need to understand economic environments to predict trends that

might affect their performance (type of economic system – size, growth, and stability of market – public and private sector – government support and control)

→ Key economic forces include: − General economic framework of a country − Economic stability − Existence and influence of capital markets − Factor endowments − Market size − Availability of infrastructure

An Economic Description of Countries Location-specific advantages: → Factor conditions (production factors): inputs to the production process

− Human (education, skills) − Physical (existence of waterways, availability of minerals and agricultural products) − Knowledge (research and development) − Capital resources and infrastructure (availability of debt and equity capital) ⇒ Crucial for investments concerning production of goods

→ Demand conditions (market potential): − Composition of home demand (quality of demand – nature of buyer needs) − Size and growth of demand (quantity of demand) − Internationalization of demand ⇒ Crucial for market-seeking investments

Countries Classified by Income → Gross national income (GNI): market value of final goods and services newly produced

by domestically owned factors of production (per capita GNI = GNI / total population) → Gross domestic product (GDP): value of production that takes place within a country → The World Bank: a multilateral lending institution that provides investment capital to

(poor) countries (focuses on social aspects, environment, strengthens governments, etc.) − Build infrastructure, promote economic growth and stability, improving quality and

quantity of demand → Per capita income classifications: low income ($755 or less), middle income ($756-

$9265), high income ($9266 or more) → Developing countries: low- and middle-income countries (emerging economies) → High-income countries: also known as developed or industrial countries → High-income countries generate 80 percent of the world’s GNI, developing countries

make up about 80 percent of total population / number of countries → Purchasing power parity (PPP) per capita GNI

− Measure of wealth − Number of units of a country’s currency required to buy the same amount of goods

and services in the domestic market as $1 would buy in the United States



Countries Classified by Region → Major geographic regions (developing countries):

− East Asia and Pacific − Latin America and Caribbean − The Middle East and North Africa

− South Asia − Sub-Saharan Africa

→ Importance of regional groupings of countries − Similar economic conditions − Mirrors the way companies organize their firms geographically

→ Organization for Economic Cooperation and Development (OECD): high-income nations Countries Classified by Economic System → Mixture between

− Ownership: who owns the resources engaged in economic activity (can be public sector, private sector, or both)

− Control: whether resources are allocated and controlled by the public or the private sector

→ Factors that determine economic freedom − Trade policy − Fiscal burden of government − Government intervention in the economy − Monetary policy − Capital flows and investment

− Banking and finance − Wages and prices − Property rights − Regulation − Black market activity

→ Countries with the freest economies have the highest annual growth in GNI Types of economy based on ownership and control: → Market economy: resources are allocated and controlled by consumers (consumer

sovereignty and freedom for companies, law of supply and demand) → Command economy (centrally planned economy): all dimensions of economic activity

(pricing and production decisions) are determined by a central government plan (government allocates resources)

→ Mixed economy: different degrees of ownership and control best describe most countries − State capitalism: a condition in which some developed countries, such as Japan and

Korea, have intervened in the economy to direct allocation and control of resources − Market socialism: the state owns significant resources, but allocation comes from the

market price mechanism (e.g. France, Sweden) → Managers should understand direction and speed of change in countries like China with

transition to market conditions – degree of government interference Key Macroeconomic Issues Affecting Business Strategy → The global economy can affect company profits and operating strategy Economic Growth → General economic slowdown forces companies to gain market share instead of relying on

growth of overall market, new investors hesitate to put money into emerging markets → High growth rates in GNI and GNI per capita make foreign markets more attractive → Strong economic growth in Asia from 1990 to 1997 did not help forecast troubles that

occurred in 1997 and beyond – predictions are difficult



Inflation → Inflation: a condition in which prices are going up (percentage increase in price) – occurs

when aggregate demand is greater than aggregate supply or when money supply increases → Consumer price index (CPI): an index that measures a fixed basket of goods and

compares its price from one period to the next → High inflation results in higher interest rates for two reasons:

− Banks need to offer high interest rates to attract money − Governments (Fed or ECB) raise interest rates to slow down economic growth

→ High inflation results in weaker currencies because increasingly expensive exports eventually drop and relatively cheaper imports rise

→ The latter part of the 1990s and into 2002 resulted in lower inflation worldwide, with the exception of a few countries – managers have to take this into account

Surpluses and Deficits → Balance of payments: a record of a country’s international transactions

− External deficit: country’s cash outflows exceed its inflows − Internal deficit: government expenditures exceed government revenues

→ Current account: trade in goods and services and income from assets abroad − Merchandise trade balance: the net balance of exports minus imports of merchandise

(deficit: imports exceed exports – surplus: exports exceed imports) − Services are transactions like transportation, royalties, or fees − Payment on assets are income receipts from FDI abroad − Unilateral transfers: less significant like income transferred abroad

→ Capital account: transactions in real or financial assets between countries, such as the sale of real estate to a foreign investor (e.g. Daimler Benz acquired Chrysler)

→ Companies monitor the balance of payments to watch for factors that could lead to currency instability or government actions to correct an imbalance

→ External debt: corrective governmental action to reduce debt slows down economic growth and thus should be monitored by managers − Amount of money borrowed from foreign public or private sector banks − Major debtor nations: Brazil, Mexico, Indonesia, China, Argentina, and Russia − African countries have the highest debt as a percentage of GNI in the world

→ Internal deficits: excess of government expenditures over tax receipts; debt is the accumulation of deficits over time

→ Privatization: sale of state-owned enterprises to the domestic or foreign private sector; this process helps governments reduce internal debt

Transition to a Market Economy → Most command economies are going through the process of transition to market

economies; transition economies are in Asia, Europe, or Latin America → Transition implies (p. 126, Figure 4.3):

− Liberalizing economic activity, prices, and market operations, along with reallocating resources to their most efficient use

− Developing indirect, market-oriented instruments for macroeconomic stabilization − Achieving effective enterprise management and economic efficiency, usually through

privatization − Imposing hard budget constraints, which provide incentives to improve efficiency



− Establishing an institutional and legal framework to secure property rights, the rule of law, and transparent market-entry regulations

→ As countries continue the transition process, more opportunities for trade and investment should open up for MNEs

The Process of Transition → Russian Transition

− Includes political and economic transition at the same time − Initial transition steps resulted in steep economic decline − The transition has involved massive, although not altogether effective, privatization − Soft budgets: subsidies and other government-supporting activities have continued − Hard administrative constraints have disappeared and are being replaced with

connections and corruption − Debts and deficits – both internal and external – are a real challenge

→ China’s Transition − Chinese growth has been far stronger than for other countries in transition − China has maintained totalitarian political control while loosening the economy − A major challenge is privatizing state-owned enterprises

The Future of Transition → Continued macro stability: macroeconomic stability, fiscal stability, stable exchange rates → Maintaining economic growth: domestic demand still a challenge → Continued improvement in institutional and structural areas: protection of property

rights, functionality of the legal system, liberalization, reduction of administrative barriers, development of an effective banking structure

→ The solution of social issues such as poverty, child welfare, and HIV/AIDS Ethical Dilemma → Have developed countries an obligation to assist developing countries?

− Allow access to domestic markets − Foreign aid − Forgiveness of debts or restructuring repayment

Looking to the Future → Opportunity of recovery of world economies against threat of continued low growth



Ch. 5, p.161 ff.: Why companies trade internationally

- international trade will not begin unless companies within a country have competitive advantages and they foresee profits in exporting and importing

- only if companies perceive that their international opportunities will be greater than

the domestic ones, they will divert their resources to foreign sectors The Porter Diamond

- Porter diamond (see p.163) shows that 4 conditions are important for competitive superiority: demand conditions; factor conditions; related and supporting industries; and firm strategy, structure and rivalry

- How these conditions combine affects development and existence of competitive adv. - Porter’s diamond is a useful tool for understanding how and where globally

competitive companies develop Points and limitations of the Porter Diamond

- PLC and country similarity theory state that new products or industries usually arise from a companies’ observation of need or demand (usually in home country)

- Companies’ development of internationally competitive products depend on their domestic:

demand conditions - companies start up production near observed market factor conditions – skilled labour, capital, technology, equipment have to be available related and supporting industries – have to exist for supply and purchase of products firm strategy, structure and rivalry – favourable circumstances needed (e.g. low entry barriers)

- existence of 4 conditions does not guarantee that industry will develop in a given

locale - limitations of diamond:

1. many companies face favourable conditions for more than one of their business lines, however comparative advantage theory states that resource limitations may cause companies in a country to avoid competing in some industries even though an absolute advantage exists

2. increased ability of companies to attain market info., production factors, and supplies form abroad -> more competition from foreign production

absence of one of 4 conditions from diamond domestically doesn’t inhibit companies from becoming globally competitive

a lack of demand in home country can be compensated for via exports into foreign countries

domestic factor conditions can change: advancements in transportation and procurement and relaxation in import restrictions enable companies to receive supply parts for a product from various countries

companies react not only to domestic rivals but also to foreign-based rivalry



Chapter 7 – Regional Economic Integration and Cooperative Agreements Introduction − U.S. (50 different states) as example of perfect economic integration: common currency,

perfect labour and capital mobility − WTO offers same foreign trade principles for all its members (improvement slowly) − but faster changes in regional economic integration: RTA (regional trade agreements) can

depart from WTO – many of these are bilateral − trade as cornerstone of economic integration and commodity agreements − companies need to adjust organization structure and operating strategy to take advantage

of regional trade groups Regional Economic Integration → Geographic proximity is an important reason for economic integration, reasons are:

− Shorter distances for transportation of goods − Similar consumer trends and distribution channels can be easily established − Common history and interests make them willing to coordinate policy

→ Major types of economic integration: − Free trade area (FTA): abolish all tariffs over time is central part, other cooperation

possible, external tariffs against non-members are kept (e.g. NAFTA) − Customs union: common external tariff on imports of non-members, no advantages to

export goods via third countries to avoid tariffs (e.g. EU) − Common market: also allowing free mobility of production factors (labour, capital),

no visa necessary for immigration to member countries (e.g. EU) − Economic integration: adoption of common economic policies (fiscal or monetary

policies), degree of political integration leads to loss of sovereignty (e.g. EU) The Effects of Integration → Regional integration has social, cultural, political, and economic effects → Two types of effects for member countries:

− Static effects: shifting of resources from inefficient to efficient companies as trade barriers fall

− Dynamic effects: overall growth in market and impact on company by expanding production and ability to achieve greater economies of scale

→ Static effects develop under following conditions: − Trade creation: production shifts to more efficient producers for reasons of

comparative advantage, allowing consumers access to more goods at lower prices − Trade diversion: trade shifts to countries in the group at the expense of trade with

countries not in the group (competitive edge for countries within FTA) → Dynamic effects are: economies of scale (cost per unit falls as number of units produced

rises, based on market growth) – increased competition leads to increasing efficiency Major Regional Trading Groups − By location: Europe, North America, Asia, Africa – by type: as discussed above − Offers location-specific advantages to foreign investors due to increased market size − Interests in: markets, sources of raw materials, production location (larger and wealthier

markets attract attention of investor countries and companies)



The European Union − Largest and most comprehensive regional groups: common currency and European

Parliament make it most ambitious regional trade group − History: European Economic Community (EEC), later European Community (EC),

formed European Union (EU) – economic cooperation to avoid political conflict The EU’s Organizational Structure Governing bodies of the EU which MNEs need to understand: → European Commission

− Political leadership and direction (intended as supra-national government) − Functions: initiate proposals for legislation, guardian of treaties, manager (e.g. annual

budget) and executor of Union policies and of international trade relationships − Significant amount of power, but criticism, power shifts to Council today

→ European Council − Council of Ministers is collection of 25 different councils representing different

ministries in each country (democratic approach: members are elected officials) − Consists of heads of state and government of each member country − Have final say over legislation in conjunction with Parliament − Importance: sets priorities, gives political direction, resolves issues of Council of

Ministers (more influence and support by individual members good for integration) → European Parliament

− Functions: legislative power, control over budget, supervision of executive decisions − Elected every five years, membership is based on country population (626 members)

→ European Court of Justice − Ensures consistent interpretation and application of EU treaties − Individuals, firms, and organizations can lodge appeals (deals mostly with economics)

The Single European Market − Single European Act was designed to eliminate the remaining nontariff barriers to trade − In spite of significant progress, there are still barriers to trade that need to be eliminated Common Trade and Foreign Policy − EU accounts for a fifth of world trade, formidable economic bloc after NAFTA − U.S. is largest trading partner, but barriers still exist: tariffs, differences in legal and

regulatory systems, absence of international standards (several protectionist conflicts) − Trade agreements with MERCOSUR (e.g. Chile, Argentina, Brazil) to improve political,

economic, and trade relations, but moving slowly due to economic and political problems − EU concentrated on economic integration first, but now includes common foreign policy − National attitudes are still the driving force behind European policy The Euro − Treaty of Maastricht (1992): political union and European Monetary Union (EMU) − Applicants have to meet stability and growth pact criteria, i.e. reduce public deficits and

debts as well as inflation and interest rates (p. 212 for detailed list) − European Central Bank (ECB) administers Euro, monetary policy, exchange-rate system − Common currency established in 1999, new bank notes in 2002



EU Expansion − Major challenge is expansion of EU: expand to at least 13 more countries − Economic output, area, and population can further increase − Control of countries like Germany may weaken, but EU can become bigger than NAFTA − Additional free trade agreements make EU biggest trading bloc (market) worldwide Implications of the EU on Corporate Strategy − Mergers, takeovers, and spinoffs increase efficiency in still fragmented EU market − Market opportunities are high, but economic outlook, regulations, and strong Euro make

exports and competitive position for companies difficult − Forces to lower costs to become competitive are beneficial in the long run − National differences (language, culture) still prevail and should be part of strategy Where Next for the EU? → Fundamental shifts with dramatic effects on future:

− Inversion of Franco-German balance (Germany important leader today) − Capacity for collective military action separate from NATO − Introduction of the Euro + planned enlargement of EU − Weakening of European Commission and national governments’ prevalence

→ Proposals on the road of integration: − Abolish right of individual country to run own foreign policy (‘one voice’) − Right to raise direct taxes + influence national governments’ budgets more strongly − Common border control + European police force − Create a European president (elected by national leaders) to run Council of Ministers

North American Free Trade Agreement (NAFTA) → Facts

− Preceded by free trade agreements between the U.S. and Canada − Includes Canada, the U.S., and Mexico – established in 1994 − Large trading bloc, but includes countries of different sizes and wealth

→ Rationale: U.S.-Canadian trade is largest bilateral trade worldwide, U.S. is Mexico’s and Canada’s largest trading partner

→ Aims at… − Elimination of tariff and nontariff barriers (either directly or phased out) − Harmonization of trade rules − Liberalization of restrictions on services and foreign investment − Enforcement of intellectual property − Dispute settlement process

→ Results in static effects (e.g. lower-cost agricultural products from Mexico), dynamic effects (e.g. growing Mexican market for U.S. companies), and trade diversion (e.g. U.S. trade and investment shifted from Asia to Mexico due to new advantages)



Rules of Origin and Regional Content − Rules of origin: goods and services must originate in North America to get access to lower

tariffs − Regional content: percentage of value of a product that must be from North America for

the product to be considered “North American” in terms of country of origin (50-62.5 %) Special Provisions of NAFTA − Workers’ rights: improving working rights and living standards − Environment: sustainable development, environmental laws and policies − Dispute resolution mechanism Impact of NAFTA on Trade, Investment, and Jobs − Trade between countries increased substantially − Investment into Mexico increased due to lower labour costs and geographical proximity − To take advantage of NAFTA, countries like Germany and Japan also invest in Mexico NAFTA Expansion − Representatives from 34 countries are in negotiations to form the Free Trade Area of the

Americas (FTAA) − EU entered free trade agreement with Mexico, Mexico and Canada cooperate with Chile Implications of NAFTA on Corporate Strategy − NAFTA is causing MNEs to look at the region differently in terms of trade and investment

(one big regional market – rationalization is key objective) − Intertwined production on the one hand, outsourcing to Mexico as cheap production area

on the other hand − U.S. companies have not run Canadian and Mexican companies out of business (lack of

protection has forced companies to become more competitive and adapt strategy) − Mexico as a market for exports from U.S. and Canada and not only low-cost production Regional Economic Groups in Latin America, Asia, and Africa − Central and South American free trade agreements were established to increase market

size through economic cooperation and integration − MERCOSUR is a customs union between Brazil, Uruguay, Paraguay, and Argentina: slow

in developing common external tariff (economic problems of member countries) − ASEAN is a relatively successful free trade area in Southeast Asia that relies more on the

U.S. market for exports than on each other − APEC is comprise of 21 countries that border the Pacific Rim; progress toward free trade

is hampered by size of and the geographic distance between member counties − Several African trade groups, but they rely more on their former colonial powers and other

developed markets for trade than they do on each other



Commodity Agreements − Commodity agreement is designed to stabilize the price and supply of a good; it takes the

form of a producers’ alliance or an international commodity control agreement Producers’ Alliances and ICCAs → Producers’ alliances: exclusive membership agreements between producing and

exporting countries, such as OPEC → ICCAs (international commodity control agreements): agreements between producing and

consuming countries → Stabilization of prices to enable planning

− Monopolistic producer or producer cartel uses market power to stabilize price − Risk-management instruments (commodities futures) to stabilize revenue − Precautionary savings funds Compensatory financing − Export taxes or tariffs, marketing boards, domestic stockpiles and stabilization funds

→ Quota system: determines how producing and consuming countries divide total output and sales; used by OPEC (cooperation among countries needed, effectiveness difficult)

The Organization of Petroleum Exporting Countries (OPEC) − Example of producer cartel – political issues important − Price control by production cuts (quota decisions dependent on supply and demand) The Environment − Pollution poses a threat to future of the planet – governments, companies, and individuals

are concerned − Many environmental problems require national solutions, but many involve cross-national

boundaries and need to be solved through treaties and agreements − The United Nations is a 189-member-country organization that deals with many social,

political, and environmental issues − Kyoto protocol as result of meeting to reduce greenhouse gas emissions − Major types of environmental degradation: ozone depletion, air pollution, acid rain, water

pollution, waste disposal, and deforestation − For corporations cooperation with environmental agreements can improve profits and

helps to avoid criticism Ethical Dilemma − Environmental issues have to go along with EU and NAFTA − Higher income means people who are concerned about environment can pay for it − But trade can harm environment − Combination of higher trade together with environmentally friendly solutions necessary Looking to the Future → Regional integration can help the WTO to achieve its aims:

− liberalization of issues not covered by WTO − more flexible as fewer members with similar conditions − regional deals lock in liberalization (in developing countries)



Chapter 8 – Factor Mobility and Foreign Direct Investment INTRODUCTION• Factors of production increasingly move internationally (capital movements, people

movements…) ⇒ Country’s relative factor endowment may change • FDI (foreign direct investment) important in international business + factor mobility FACTOR MOBILITY Why production factors move• Capital (short-term -> more mobile, especially direct investments) and labor move

internationally to o Gain more income, flee adverse political/economic situations (perception of risk)

• People are internationally mobile o Permanently/temporarily move o Work in another country for economic reasons o Also move for political reasons

(sometimes it is difficult to distinguish between political/economic motives) Effects of factor movements • Factor movements alter factor endowments

e.g., immigrants bring human capital with them –> add to the base of skills -> enable country to be newly competitive o countries lose potential productive factors when factors leave, but they gain from

foreign earnings on those factors (Ecuador, Dominican Republic) o Factor movements are substantial for many countries

• Labor + capital are intertwined The relationship of trade and factor mobility • Factor mobility = alternative to trade (may be a more efficient allocation of resources) • Inability to gain sufficient access to foreign production factors -> stimulate efficient

methods of substitution (like development of alternatives for traditional production methods)

• Finished goods + production factors are partially mobile internationally Substitution • Pressure for most abundant factors to move to an area of scarcity -> command a better

return • There are restrictions on factor movements -> they are only partially mobile international • Increase / reduction in the extent of restriction can greatly alter how + where goods may

be produced most cheaply • But lowest cost occur when trade + production factors are both mobile Complementarity • Factor mobility via direct investment often stimulate trade because of

o The need of components o The parent’s ability to sell complementary products o The need for equipment for subsidiaries

• Many of exports would not occur if overseas investment did not exist FOREIGN DIRECT INVESTMENT AND CONTROL• Companies want to control their foreign operations -> operations will help achieve their

global objectives

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• Governments worry that this control will lead to decisions contrary to their countries’ best interests

The concept of control • Control must accompany the investment -> direct investment takes place

(Otherwise, it is a portfolio investment) • Direct investment usually implies an ownership share of at least 10 or 25% • Governments may jeopardize the owner’s control • Governments + international organizations define direct investment differently -> difficult

to be definitive about FDI statistics • Those who control resources may also exert substantial influence on the company The concern about control • Government + companies are concerned with the issue of control Governmental concern • When foreign investors control a company -> decisions of national importance may be

made abroad -> host country’s interest may suffer Investor concern • Investors who control an organization

o More willing to transfer technology + other competitive assets o Usually use cheaper + faster means of transferring assets

• Control inherent in FDI may lower a company’s operating costs + increase its rate of technological transfer o Parent + subsidiary usually share a common corporate culture o Company may use its own managers o Company can avoid protracted negotiations with other company o Company can avoid problems of enforcing an agreement

• Appropriability theory = idea of denying rivals access to resources • Internalization = control through self-handling of operations (internal to the organization) • Disadvantage: companies may lack resources to control all aspects of its operations COMPANIE’S MOTIVES FOR FDI• Business + governments are motivated to engage in FDI in order to: expand sales, acquire

resources, minimize competitive risk • Governments may also be motivated by some desired political advantage • Other modes (like exporting/importing, collaborating) are less risky than FDI -> company

has to expose fewer resources in a foreign country -> company must possess some advantages to compensate for the liability

• Liability of foreignness = disadvantage relative to local companies that understand how to better, operate in the environment

Factors affecting the choice of FDI for sales expansion Transportation • May raise costs to much -> becomes impractical to export some products -> must produce

abroad if they want to sell abroad • Horizontal expansion = direct investments-> companies move abroad to produce basically

products they produce at home Excess capacity • Usually leads to exporting rather than new direct investment • May be competitive because of variable cost pricing • Growing companies eventually find it advantageous to acquire assets abroad (= FDIs)

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Scale economies and product alternations • In large-scale process technology companies’ exports reduce costs by spreading fixed

costs over more units of output • In small-scale process technology companies’ country-by-country production reduces

costs by minimizing transportation expenses • The more product has to be altered for the foreign markets -> production shift abroad Trade restrictions • if imports are highly restricted, companies

o often produce locally to serve the local market o more likely to produce locally if market potential is highly relative to scale economies

• removing trade restrictions among a group of countries also may attract direct investment Country-of-origin effect • consumers sometimes prefer domestically produced goods because of

o nationalism o a belief that these products are better o a fear that foreign-made goods may not be delivered on time

• consumer desires also may dictate limitations • companies should place FDI where their output will have the best acceptance Changes in comparative costs • least-cost production location changes -> inflation, regulations, transportation costs, and

productivity Factors affecting motives to require resources through FDI Vertical integration • vertical integration = is a company’s control of the different stages of making its product • in international vertical integration raw materials, production, and marketing are often

located in different countries • advantages of vertical integration may accrue through market-oriented (forward

integration) or supply-oriented (backward integration) investments • buying/selling within the family of companies -> foreign direct investors have greater

flexibility in shifting funds, taxes, and profits among countries • many companies have been moving away from vertical integration -> they concentrate

their efforts on those links in the value chain Rationalized production • rationalized production = different components/portions of a product line are made in

different parts of the world • advantages

o factor-cost differences: each plant can gain scale economies -> take advantage of different input costs that result in different total production cost

o long production run o smoother earnings when exchange rate fluctuate

• it is becoming harder to determine the nationality of a product Access to knowledge • company may establish a presence in a country in order to improve its access of

knowledge (seeking knowledge abroad, that is not satisfactorily available in the home country)

• resembles vertical + rationalized production but it is different insofar: business gains some capabilities for its organization as a whole

The product life cycle theory • the product life cycle theory explains why

o new products are produced in mainly industrial countries

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o mature products are more likely to be produced in emerging economies production often moves from one country to another as a product moves through its life cycle

Governmental investment incentives • encourage direct investment inflows by offering tax concessions / other subsidies / offer

direct-assistance incentives to gain jobs -> affect the comparative cost of production + entice companies to invest in a particular country to serve national and international markets ⇒ may shift the least-cost production location

Risk minimization objectives • reduce risks by operating internationally – through sales diversification • move funds from risky home environment • transportation costs, foreign import restrictions, and foreign consumer desires for product

alterations may make FDI the preferred mode for sales diversification Following customers • companies can keep customers by following them abroad • important customer makes a FDI -> supplier may have compelling reason to make FDI as

well, reasons are: would like to get that customer’s business its competitors could becomes suppliers in the foreign location -> dangerous:

competitor may improve its chances of serving the customer’s domestic market prohibitions to serving the foreign market through exports

Preventing competitor’s advantage • in oligopolistic industries, competitors tend to make direct investments in a given country

about the same time ⇒ decision to invest depends not so much on the benefits its gain but rather on what it could lose by not entering the field

Political motives • governments give incentive to their companies to make direct investments in order to

o gain supplies to strategic resources (process of gaining control of resources, home countries also acquire much political control)

o develop spheres of influence • most successful domestic companies, especially with unique advantages, invest abroad RESOURCES AND METHODS FOR MAKING FDI Assets employed • direct investments usually involve some capital movements (or other types of assets)

(when anticipated return – accounting for risk factor + cost of transfer – is higher overseas than at home)

• retained earnings are a major means of expanding abroad • may use funds it earns in a foreign country to establish an investment – companies can

borrow all (rarely) or part (frequently) of the funds in the host country to male an investment

Buy-versus-build decision• companies can acquire interest in an existing operation / construct new facilities Reasons for buying • acquisitions may reduce costs, risks and time • the advantages of acquiring an existing operation include:

o adding no further capacity to the market

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o less than the cost of new construction o avoiding start-up problems o immediate cash flow o easier financing o gives not only labor + management but also an existing organizational structure

Reasons for building • companies may choose to build if

o no desired company is available for acquisition o acquisition will lead to carry-over problems (often don’t succeed) o acquisition is harder to finance o local government may prevent acquisition o acquiring company tries to institute many changes (different management styles +

practices, different personal + labor relations …) INVESTORS’ ADVANTAGES • direct investment usually improves a company’s performance • company will not move unless it expects a higher return • company invest directly only if they think they hold some supremacy

o advantage results from monopoly advantage = foreign company’s ownership of some resources foreign company’s currency has higher buying power could add production capacity more cheaply abroad than at home sell most efficiently (to maintain domestic competitiveness, they frequently must

sell on a global basis) DIRECT INVESTMENT PATTERNS Location of ownership • industrial countries account for a little over 90% of all direct investment outflows

(because more companies from those countries are likely to have the capital, technology, and managerial skills needed to invest abroad)

• for worldwide FDI almost all ownership is by companies from developed countries Location of investment • most FDI occurs in developed countries because they have the biggest markets, lowest

perceived risk, least discrimination toward foreign companies Economic sectors of FDI • trends in the distribution of FDI generally conform to long-term economic changes in

home + host countries • highest recent growth in FDI has been in services FDI IN COMPANIES’ STRATEGIES • direct investment is an integral way to carry out global, multidomestic, and transnational

strategies • direct investment help to serve the goal of global efficiency by transferring resources to

where they can be used more effectively • countries distort movements of resources by restricting the inward / outward flow of direct

investments

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Chapter 11 – Government Attitudes toward Foreign Direct Investment Introduction → The sheer size of MNEs is an issue: they have considerable power when negotiating

− Some have sales larger than many countries’ GNPs − Some MNE executives deal directly with heads of state

→ Pressure groups push to restrict MNEs’ activities at home and abroad → FDI as a means of a company’s international operations is subject to home-country and

host-country enhancements and restrictions Evaluating the Impact of FDI → The effort to create favourable investment environments has led many countries to replace

obstacles to FDI with incentives for FDI (e.g. from opposition to suspicion to cooperation) → The growing prevalence of FDI requires a better understanding of the views of home and

host countries – benefits of FDI should outweigh its costs Trade-offs Among Constituencies → Firms must satisfy stakeholders (stockholders, employees, customers, society at large)

with interests differing by group and by country → Management decisions made in one country have repercussions elsewhere Trade-offs Among Objectives → The effects of an MNE’s activities may be simultaneously positive for one national

objective and negative for another (countries rank their objectives) → In an international transaction

− both parties may gain or both parties may lose − one party may gain and the other lose − even when both parties gain, they may disagree over the distribution of the benefits

→ Countries want a greater share of benefits from MNE’s activities Cause-Effect Relationships → It is extremely hard to determine whether MNEs’ actions cause societal conditions → Other influencing factors are technological developments, competitors’ actions,

government policies, etc. Individual and Aggregate Effects → The philosophy, actions, and goals of each MNE are unique → To evaluate MNEs individually is time-consuming and costly – to have same policies and

control mechanisms to all MNEs eliminates bureaucracy Potential Contributions of MNEs → MNEs’ resources which contribute to host-country objectives are investment, human

resources, technology, trade, and environment (p. 324)



Economic Impact of the MNE → Effects of MNEs on countries (possibly positive or negative) are… Balance-of-Payments Effects → Countries want capital inflows (FDI can bring inflows or outflows which can cause a

negative net balance-of-payments effect) → Place in the Economic System: the more capital inflow a country receives, the more it

can import and the more it can run a trade deficit − one country’s surplus is another’s country’s deficit (zero sum game); however, long-

and short-term economic goals differ (government intervention can influence FDI) → Effect of Individual FDI: the effect of an individual FDI may be positive (reinvest profit

in a host-country to satisfy demand) or negative (dividends go to home-country now) − simple formula to determine effects, but data to be used may be estimated:

B (balance-of-payments effect) = (m – m1) + (x – x1) + (c – c1) m = import displacement x = export stimulus c = capital inflow m1 = import stimulus x1 = export reduction c1 = capital outflow

− net import change (m – m1): m represents how much would be imported in the absence of a plant (difficult to estimate), m1 should include equipment, components, materials imported, and the marginal propensity to import (percentage of increased national income by capital inflows)

− net export effect (x – x1): plant in host-country merely substitutes exports from home-country, no net export effect for host-country, but for home-country there is negative effect because of export reduction, under defensive reasons it is only an export replacement (loss) for the home-country

− net capital flow (c – c1): controlled by central banks, difficulty is time lag between outward flows and inward flows (reinvestment, borrowing, and exchange-rate considerations influence capital flow)

→ Aggregate Assumptions and Responses: − balance-of-payments effects of FDI are initially positive for the host country and

negative for the home country, but change later on (reason: initial investment high, but dividends over time lead to reversal)

− Home and host countries make policies to try to improve short- or long-term effects (home countries establish outflow restrictions, host countries impose repatriation restrictions, asset-valuation controls, and conversion to debt as opposed to equity)

Growth and Employment Effects → Growth and employment effects are not a zero-sum game because MNEs may use

resources that were unemployed or underemployed → Home-Country Losses: home-country labour claims that jobs are exported through FDI,

technology transfer and average wages are said to have negative effects → Host-Country Gains: possible gains are

− more optimal use of production factors − use of unemployed resources − upgrading of resource quality

→ Host-Country Losses: possible losses if investments by MNEs − replace local companies − take the best resources (MNEs can reduce their capital cost relative to local

competitors and then pay higher wages to secure best labour as resource)



− destroy local entrepreneurship (affecting national development, but often MNEs can stimulate entrepreneurs as they need supply or serve as role models for local talents)

− decrease local R&D undertakings (R&D enhances country’s competitive capability – some countries are dependent on external R&D through FDI)

− use up local funds by borrowing (governments sometimes try to limit this) → General Conclusions: FDI is more likely to generate growth

− when the market is prepared to support business growth − when the product or process is highly differentiated − when the foreign investors have access to scarce resource (which local competitors

cannot easily acquire) − in the more advanced developing countries (better prepared to absorb ideas)

Political and Legal Impact of the MNE → Countries are concerned that MNEs are

− foreign-policy instruments of their home-country government − independent of any government − agents of their host-country government

Extraterritoriality → Extraterritoriality occurs when governments apply their laws to their domestic companies’

foreign operations → Trade Restrictions: prevent foreign subsidiaries of companies from making sales to

unfriendly countries based on political conflicts → Antitrust Laws: governments are especially inclined to apply antitrust policies when

concerned about possible harm to consumers (mainly against cartels that set prices or production quotas, or exclusive distributorship, joined R&D or manufacturing operations)

Key Sector Control → Political concerns include fear of

− influence over or disruption of local politics (or MNE as instrument of foreign policy for home-country)

− foreign control of sensitive sectors of the local economy (those regarded as important for stability of economy or national security)

→ Companies tend to favour home-country interests over host-country interests as they have majority of assets, sales, employees, managers, and stockholders there

MNE Independence → MNEs can play one country against another but are reluctant to abandon fixed resources

(e.g. two members of a trade agreement where to locate new production site) Host-Country Captives → Lobbying by MNEs at their home-country government to adapt legislation to host-country

requirements → E.g. trade restrictions of home-country can lead to retaliation of host-country



Bribery → Payments to government officials have been widespread and have been intended to

− secure business from competitors (e.g. government contracts) − facilitate services (which could be delayed otherwise) − ensure the safety of employees and facilities

→ Often done via intermediary persons – in cash or including products → High levels of corruption are associated with lower growth and lower levels of income, in

addition it can erode legitimacy a of government and inflates costs for MNEs → The U.S. legislation on bribery is controversial because

− some payments to expedite compliance with law are legal, but others are not − extraterritoriality issues emerge − business may be lost

→ There are several other efforts to stop bribery by: government agencies, regional associations, private organizations

Ethical Dilemma → Complaints concerning bribery are:

− Governments can make payments in form of foreign aid, in expectation of political concessions in return

− Some bribes are allowed, others are not − Relativist opinion states that judgement should be based on host-country

Differences in National Attitudes toward MNEs → Completely restrictive or laissez-faire positions towards MNEs possible → Most are somewhere in-between, current development is toward laissez-faire → Countries are more concerned about large companies due to their higher impact Future Outlook → FDI may be less welcome in the longer term → Criticism that MNEs act in own corporate rather than national interest



Chapter 12 (p.349-352): Government versus company strength in negotiations

- negotiations between businesses and governments influence government

enhancements and restrictions that determine companies’ operating terms - governments may refuse companies operating permission & impose constraints on an

MNEs operations within the host country - on the other hand companies will not operate unless the terms of business are

beneficial Government versus company strength in negotiations

- home- and host country policies influence the terms under which companies operate abroad (strength of parties depends on available resources, competitive changes & joint efforts with other parties)

- companies have different viewpoints on how much they can influence operating terms - degree of government intervention varies from one MNC to another (within same host

country) - operating terms of internat. Companies shift as priorities shift and as the strengths of

parties change Hierarchical view of government authority

- companies accept regulations as “givens”, they 1. comply: if regulations don’t constrain mode of operations, benefits are

attractive, or when they can alter regulations to their advantage. or 2. circumvent: if regulations are unacceptable, circumvention through illegal

or legal loopholes; e.g.: company makes side agreement with local partner not to vote for its shares of stock in order for company to control a foreign subsidiary in spite of a country’s for shared ownership

or 3. avoid: company decides not to operate in given locale because of

restrictions Bargaining view:

- Bargaining school theory: negotiated terms for a foreign investor’s operations depend on how much the investor and host country need the other’s assets

- If one company possesses assets that are unique or the other party strongly desires, negotiation will be one-sided

- Alternative sources for acquiring resources affect company and country bargaining strengths: if bargaining relationships are zero-sum game (one party’s win = other party’s loss), relationships may conflict because adversarial parties both believe they will lose by making concessions; if relationships are positive-sum (both parties benefit), parties might cooperate because of interdependence

- The biggest country bargaining strengths are 1. large markets 2. less business risk 3. political stability -> all 3 most likely in developed countries; the latter therefore don’t need to make concessions to attract MNEs



- The biggest company bargaining strengths 1. technology (contributes to host country’s economic development) 2. marketing expertise (strong bargaining power if a company has strong

global brand recognition, these companies are beyond the immediate control of host governments)

3. export performance (fortified negotiating position if exports go to other units, controlled by parent company and if exports help build export capabilities of host country)

4. product diversity (MNEs that make a variety of products locally can support import substitution and boost local employment)

5. value of FDI (fierce competition among countries to attract FDI, gives MNES stronger bargaining positions)

in general companies have different abilities to influence host governments, but bargain struck depends often on number of companies offering similar resources (industries like sciences or microelectronics often have high bargaining positions, ownership in agriculture is mostly unwelcome)

Joint company activities - host governments encourage joint company activities so as

• to strengthen national capabilities • to lessen dependence on foreign companies • to spread risk • to deal more strongly with other governments

government often gives assistance and given preference in (e.g. R&D) to own companies

many companies invest prefer to jointly invest a smaller amount in more countries than to invest majorly in one: reduces impact of loss and strengthens company in negotiations with host government

Home country needs

- home country is seldom neutral, it • has economic objectives on its own (e.g. increased tax revenues and employment) -> incentives for constraints or promotion on foreign expansion of home company • has direct political relations with host country: when political interests and stakes are high, companies’ home governments often help them negotiate

Other external pressures on negotiation outcomes

- decision makers in business and government must consider opinions of other affected groups

- host country constraints may come from 1. local companies that foreign investor will compete against 2. political opponents (“external” threat to incite voters) 3. critics who favour tougher government regulations

- home country constraints may come from

1. local pressure groups 2. conflicting demands from stockholders

government officials should understand strengths and goals of external groups because such groups may affect bargaining flexibility of each side



Chapter 13 – Country Evaluation and Selection 1. Introduction

- companies lack resources to take advantage of all international opportunities - the choice of where to operate is a big part of a business strategy - companies need to determine the order of country entry + set the rates of resource allocation

among countries

2. Choosing marketing and production sites, and geographic strategy - in choosing geographic sites, a company must decide: → Where to sell

→ Where to produce - Figure 13.3: Flowchart for Choosing Where to Operate

3. Scan for alternative locations

- without scanning, a company may: → overlook opportunities + risks → examine too many or too few possibilities - e.g. ‘peer pressure’ can influence managers to follow a strategy blindly

4. Choose and weight variables - the environmental climate is the external conditions in a host country - affect success or failure / consists of opportunities and risks

a. Opportunities i. Market Size

- expectation of a large market + sales growth is probably a major attraction - analysis is based on data (GNP, per capita income, growth rates, etc.) + on

demographic factors (age, gender, etc.) - or sales estimates have to be based on a similar/complementary product

ii. Ease and Compatibility of Operations - companies are highly attracted to countries that → are located nearby → share the same language → have market - companies often pare proposals to those countries that

→ offer size, technology, and other advantages familiar to company personnel → allow an acceptable percentage of ownership → permit sufficient profits to be easily remitted

iii. Costs and Resource Availability - costs (especially labour costs) are an importatn factor in companies’s production-

location decisions - companies should consider different ways to produce the same product

iv. Red Tape - e.g. difficulty of getting permissions, obtaining licenses → increase costs - the degree of red tape is not directly measurable

b. Risks i. Risk and Uncertainty

- return on investment (ROI) can be used to compare different considerations - investors tend towards lower ROI and higher probability - insuring can reduce risks of an project but is very costly - liability of foreigners: foreign companies have a lower survival rate than local ones - after overcoming early problems foreign companies have the same survival rates

ii. Competitive Risk (strategies for beeing competitive in a foreign market)

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- imitation lag: first move to those countries which catch up to the innovative advantage soon, and later to other countries → in the innovative countries, a local producer can gain a cost advantage over imported goods - companies can also develop strategies to find countries in which there is least likely to be significant competition - companies may gain advantages in locating where competitors are → just follow competitors on a “free ride” + profit from clusters / agglomerations

iii. Monetary Risk

► Liquidity preference: is the theory that investors usually want some of their holdings to be in highly liquid assets, on which they are willing to take a lower return - liquidity is sometimes needed to finance more profitable opportunities → investors accept lower projected ROI for projects in countries with strong

currencies than for those in countries with weak currencies - present capital controls + recent exchange-rate stability are useful indicators of countries’ monetary situation - future figures are necessary as well → some indicators for problems are negative trade balance, declining official reserves, high inflation, government budget deficits

► Political Risk: may come from wars + insurrections (Aufstände), takeover of property, changes in rules - managers use three approaches to predict political risk:

→ analyzing past patterns: government takeovers of companies have been highly selective in the last years + managers should predict the likely loss if political problems occur

→ rely on experts’ opinion: examine views of government decision makers + visit country to get a cross-section of opinions + use expert analysts who have experiences and sell commercial risk-assessment services

→ examine countries’ social + economic conditions: political instability does not always affect all foreign businesses in a country + time lag between a political event and an investor’s ability to react + time lag between the change in government and its effect + frustration can occur and can lead to strikes, replacement of government leaders + compare figures of aspiration (growth in urbanization) with indicators of welfare (infant survival rates) = frustration

Ethical Dilemma - relativists maintain it would be unethical to prohibit foreign sales because the sales are

considered ethical where they are made - normativists maintain that it is unethical for a government to permit its companies to do

abroad what it prohibits them from doing domestically - MNEs favour locations with repressive regimes because of easier working conditions - sometimes MNEs move into a country just to weaken a competitor there - MNEs just look for government incentives from a monopoly position → Should countries work toward regulating FDI with global efficiency as their objective or should they continue to serve its own interests by competing for FDI

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5. Collect and analyse data - information is needed at all levels of control - companies should compare the cost of information with its value

a) Problems with Research Results and Data - a lack + inaccuracy of data make location decisions complicated - in some countries you get detailed data from government agencies and then you can make questionnaires/marketing surveys to gain even more insight - many countries have agreed on standard collection of data through the IMF

i. Reasons for Inaccuracies - inability to collect data (especially for poor countries) - purposeful misleading information (e.g. to improve the country’s rank + file) - many studies are simply based on nonrepresentative samples or too small samples - illegal income does not appear in any statistic, which distorts reality

ii. Comparability Problems - differences in definitions and base years (e.g. “family income” is no clear group) - distortions in currency conversions (even if changes in exchange rates are ignored,

and when using PPP, this is a very imperfect mean of comparing national data)

b) External Sources of Information - specificity and cost of information vary by source – some sources:

a) Individualized Reports - most costly information source, very precise, reliability depends on agencies

b) Specialized Reports - for all companies interested, much cheaper, more general analysis

c) Service Companies - publish reports which reach a wide market of companies, lack of specificity, can

be used as background information – not for making a final decision d) Government Agencies

- report countries’ statistics, by that they can try to stimulate business e) International Organizations + Agencies

- UN, WTO, IMF, OECD, EU: collect basis statistics as well as prepare reports on common trends

f) Trade Associations - provide data of technical + competitive factors in their industry in journals

g) Information Service Companies - collect data from sources mentioned above + charge a fee for their catalogue

h) The Internet - rapid expanding data sources, difficult to find certain data, reliability?

c) Internal Generation of Data - MNEs may have to conduct studies abroad themselves - To gain market information/knowledge a company must be sometimes extremely

imaginative or observant because no traditional analysis methods would work

6. Country comparision tools a) Grids

- may depict acceptable or unacceptable conditions - rank countries by important variables - these variables + the weights depend on the company’s internal situation + its objectives

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b) Matrices i. Opportunity-Risk Matrix [Fig 13.5]

- a company can decide on indicators and weight them - it can evaluate each country on the weighted indicators - it can plot to see relative placements

ii. Country-Attractiveness-Company Strength Matrix [Fig 13.6] - highlights the fit of a company’s product to the country - countries which are most interesting + where there is a competitive advantage should

be favoured - difficult to separate attractiveness from a company’s position because often a

country seems attractive because of the company’s fit with it

c) Environmental scanning - the systematic assessment of external conditions that might affect operations - most efficient, if scanning is tied to the planning process + integrate information world-wide

7. Allocating among locations a) Reinvestment versus Harvesting

- a company may have to make new commitments to maintain competitiveness abroad

i. Reinvestment Decisions - often it is not possible to move a portion of the earnings elsewhere

- experienced personnel in the headquarters often are the best judges of what is neede for that country, so that managers may delegate certain investment decisions to them

ii. Harvesting or Divesting - companies must decide how to get out of operations if → they no longer fit the overall strategy → there are better alternative opportunities - (local) managers are less likely to propose divestments than investments - companies may divest by selling/closing facilities – selling offers some compensation - publicity + government restrictions have to be considered when ending an investment

b) Interdependence of Locations - profit figures from individual operations (e.g. in a foreign country) may obscure the real impact those operations have on overall company activities - sometimes it is not clear how profitable a unit really is: e.g. if a subsidiary sells products/ components which are produced in the parent company – how much has the subsidiary to pay for these products? → by that losses can be incurred to pay less taxes

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c) Geographic Diversification versus Concentration - strategies for ultimately reaching a high level of commitment in many countries are → diversification – go to many countries fast + then build up slowly in each → concentration – go to one or a few countries + build up fast before going to others → a hybrid of the two – a combination of both strategies - variables a company should consider when deciding which strategy to use

i. Growth Rate in each Market - high growth rates are costly because of expansion of output → concentration

ii. Sales Stability in each Market - the more stable sales + profits are, the less advantage there is from diversification

iii. Competitive Lead Time - long lead time → concentration + it can still beat competitors in other markets

iv. Spillover Effects - when marketing programs reach many countries + more awareness → diversification

v. Need for Product, Communication, and Distribution Adaptation - adaptation means additional costs for the company because it → may not have the resources to spread to many markets → cannot readily spread costs over sales in other countries to gain economies of scale

vi. Program Control Requirements - the more control needed, the more a company should develop a concentration strategy

vii. Extent of Constraints - constraints (resources) limit the chances to go to many locations simultaneously

Product and Market Factors affecting choice between Diversification + Concentration strategies Product or Market Factor Diversification Concentration

1. Growth rate of each market Low High 2. Sales stability in each market Low High 3. Competitive lead time Short Long 4. Spillover effects High Low 5. Need for product adaptation Low High 6. Need for communication + distribution adaptation Low High 7. Program control requirements Low High 8. Extent of constraints Low High 8. Making final country selections

- for new investments, companies need a much more detailed analysis - due to limited resources, some companies might store foreign investment proposals and then work the list down from the top – not very sensible - most companies examine proposals one at a time + accept them if they meet minimum-treshold criteria → because multiple feasibility studies seldom are finished simultaneously and there are pressures to act quickly - restrictions for comparing investment opportunities are cost and time - companies can not afford to let resources (including technical competence) lie idle

► Looking to the Future – Will locations and location-models change? - as yet, no comprehensive model exist to find an ideal international expansion strategy - limited resources will be constraints in the future, too – but opportunities will grow due to more privatization, more competition about FDI → allocation becomes even more difficult - information explosion will help analysts, but will complicate reliable recommendations - maybe there will be the possibility of officeless headquarters for international companies

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Chapter 14 – Collaborative Strategies Introduction - companies must choose an international operating mode to fulfill their objectives and

carry out their strategies - international operations are frequently run through collaborative forms, which lesson their

control - Strategic Alliance: collaboration that has a large impact total performance of one or more

companies, but often describes various collaborations whether or not they are of strategic importance

Collaborative Arrangements as International Business Operating Modes: Operation Means: Functions, Overlaying Alternatives, Modes (Self-Handling, Collaborative Arrangements) – Alternative Operating Modes for Foreign Market Expansion:

Production Ownership Production Location Home Country

Production Location Foreign Country

Equity Arrgangements a) exporting a) wholly owned operations b) partially owned with remainder widely held c) Joint Ventures d) Equity Alliances

Nonequity Arrangements a) Licensing b) Franchising c) Management Contracts d) Turnkey Operations

Motives for Collaborative Arrangements - reasons for establishing a collaborative arrangement may be similar on a domestic and

international basis, but may also be totally different - each participant in a collaborative arrangement has its own primary objective for

operating internationally and own motives for collaborating Relationship of Strategic Alliances to Companies’ International Operations Objectives of International Business: Sales Expansion, Resource Acquisition, Risk Minimization

Motives for Collaborative Arrangements: General Specific to International Business

- spread & reduce costs - specialize in competencies - avoid or counter competition - secure vertical & horizontal links - learn from other companies

- gain location - specific assets - overcome legal constraints - diversify geographically - min. exposure in risky environments

General Motives for Collaborative Arrangements: 1. Spread and Reduce Costs: - it is cheaper to get another company to handle work, especially when volume is small or

when the other company has excess capacity (may lower average costs by covering fixed costs)

- using excess capacity may reduce start-up time and thus providing earlier cash flows - contracted company may have environment specific knowledge - important to large companies especially when the costs of development and investment is

very high



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2. Specialize in Competencies: - resource based view of a firm: implies that each company has a unique combination of

competencies - company can improve its performance by concentrating on those activities that fit best its

competencies and depending on other firms for which it has lesser competencies

3. Avoid or Counter Competition: - in small markets companies may be forced to band together so that they do not have to

compete against each other - companies may also combine resources to fight a leader in the market or to raise

everyone’s profits

4. Secure Vertical and Horizontal Links: - vertical integration allows potential cost savings and supply assurances - horizontal links may provide finished products or components and for finished products

there may be economies of scope in distribution - allows a better smoothing of earnings through diversification into products with sales

fluctuations at different times

5. Learn from other Companies: - collaborative arrangements as means to learn about partners’ technology, operating

methods, etc so that their own strengths will broaden and making them more competitive in the future

International Motives for Collaborative Arrangements: 1. Gain Location Specific Assets - cultural, political, competitive and economic differences among countries create barriers

for companies that want to operate abroad - companies seek to collaborate with local companies that will help to manage local

operations

2. Overcome Governmental Constraints: - in countries where foreign ownership is limited, collaboration is inevitable - legal factors like tax rates further encourage collaborations - collaboration hinders nonassociated companies from pirating the asset (e.g. trademarks,

patents)

3. Diversify Geographically: - sales and earnings can be smoothed because business cycles occur at different times

within different countries - collaboration offers faster initial means of entering multiple markets

4. Minimize Exposure in Risky Environments: - political/economic changes will affect the safety of assets and their earning in their foreign

operations - loss can be minimized by minimizing the base of assets located abroad or to share them

and to place operations in a number of different countries Types of Collaborative Arrangements

- forms of foreign operations differ in the amount of resources committed to collaborations and the proportion of resources located at home rather than abroad

- there are always trade offs to be made



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- when a company has a desired, unique difficult-to-duplicate resource, it is in a good position to choose the operating form it would most like to use; when it lacks this bargaining strength, it faces the possibility of competition

- it may be difficult to find the right collaboration partner Some Considerations in Collaborative Arrangements: - two variables influence the manager’s choice of one type of arrangement over another

1. Control: - the more a company depends in collaborative arrangements, the more likely it is to lose

control over decisions (especially with respect to quality, new product directions and where to expand output)

- external arrangements imply the sharing of revenues and information is passed more rapidly to potential competitors

2. Prior Expansion of the Company: - when a company has already foreign operations, some of the advantages of contracting

another company to handles production or sales are not longer prevalent

Licensing: - under a licensing agreement, a company (licensor) grants rights to intangible property to

another company (licensee) to use in a specified geographic area for a specified period - licensee pays a royalty to the licensor - licensing right may be exclusive (the licensor can give rights to no other company) or

nonexclusive (it can give away rights) - Intangible Property Categories (as defined by US Internal Revenue Service)

a) patents, inventions, formulas, processes, designs, patterns b) copyrights for literacy, musical or artistic compositions c) trademarks, trade name, brand names d) franchises, licenses, contracts e) methods, programs, procedures, systems

- licensor usually obliged to furnish technical information and assistance and the licensee is obliged to exploit the rights effectively and to pay compensation to the licensor

Major Motives for Licensing: - for licensor: risk of operating facilities and holding inventory decreases - for licensee: costs of arrangement is less than if it developed the new product or process

on its own - cross- licensing: in industries with frequent technological changes, companies often

exchange technology rather than compete with each other on every product in every market

Payment: - amount and type of payment for licensing arrangements vary - Figure 14.4 p.421 shows major factors that determine the payment amount, namely

agreement specific factors (higher value with higher sales) and environment-specific factors

- some developing countries set price controls on what licensees can pay pr insist that licensees be permitted to export licensed goods licensors demand higher royalties in turn, as they can sell fewer license contracts

- companies negotiate a front-end payment to cover transfer costs when licensing technology and then follow with fees based on actual or projected use

- many companies transfer technology at an early or even development stage so that products hit different markets simultaneously



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Sales to Controlled Entities: - many licenses are given to companies owned in whole or part by the licensor - license need to transfer technology - separate licensing may be a means of compensating the licensor for contributions beynd

the mere investment in capital and managerial resources Franchising: - is a specialized form of licensing in which the franchisor assists the business on a

continuing basis - franchising includes providing an intangible asset and continually infusing necessary

assets - franchisor and franchisee act almost like a vertically integrated company because the

parties are interdependent and each produces part of the product or service that ultimately reaches the customer

- acceptance of the franchising concept depends on the existence of high levels of income, education, mass media and an entrepreneurial spirit

Organization of Franchising: - franchisor may penetrate a foreign market by dealing with franchisees directly or by

setting up a master franchise and giving that organization the right to pen outlets on its own

- master franchise system is favoured when companies are not confident about evaluating potential franchisees

- people are usually willing to make investments in known franchises because the name is a guarantee of quality and attracts customers

Operational Modifications: - franchisors face a dilemma: - the more global standardization, the potentially lower

acceptance in the foreign country - good locations for franchises can be problematic - government and legal restrictions make it difficult to gain satisfactory operating

permission - franchisors need to develop sufficient cash and management depth before considering

foreign expansion - success factors: service standardization, high identification through promotion and

effective cost controls there may be difficulties in transferring success factors Management Contracts: - used primarily when the foreign company can manage better than the owners - company receives income without having to make a capita outlay Turnkey Operations: - a company is contracted to build complete, ready-to-operate facilities - usually industrial-equipment manufacturers and construction companies, but also

consulting firms and manufacturers that decide an investment on their own behalf if the country is infeasible

- customer of turnkey operations if often a government agency - turnkey operations are characterized by a huge site of contracts and mainly large

companies are contracted (N.B. these are very vulnerable to economic downturns) - important factors to gain turnkey contracts: public relations, price, export financing,

managerial + technological quality, experience, reputation - payment occurs in stages as project develops - it is important to have contractual agreements on what is considered as satisfactory



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Joint Ventures: - more than one organization owns a company (various combinations of ownership) - consortium: more than two organizations participate - various combinations of partners are possible in a joint venture (e.g. two companies from

the same country working in a foreign market, a foreign company with a local company, private company and local government, private company with a government owned company in a third country)

- the more companies in the joint venture, the more complex the management of the arrangement will be

- companies favourable of joint ventures are usually new at foreign operations or have decentralized domestic decision- making

Equity Alliances: - collaborative arrangement in which at least one of the collaborating companies takes an

ownership position - the purpose is to solidify a collaborating contract, such as a supplier-buyer contract, so

that it is more difficult to break Control Complexity Related to Collaborative Strategy p. 426 Figure 14.5 Problems of Collaborative Arrangements - many collaborative arrangements break down primarily because partners:

o view arrangements’ importance differently o have different objectives for the arrangement o disagree on control issues or fail to provide sufficient direction o perceive they contribute more than their counterparts do o have incompatible operating cultures

- joint-venture divorce can be planned or unplanned, friendly or unfriendly, mutual or non mutual

- major strains on collaborative arrangements:

Collaboration’s Importance to Partners: - difference in attention may be due to different sizes of partners (smaller partner

contributes a larger portion and lacks resources to fight the larger company)

Differing Objectives: - objectives may evolve differently over time - one partner might want to reinvest earnings for growth whereas the other wants to get

dividends; performance standards might substantionally differ

Control Standards: - by sharing assets with another company, one company may lose some control on the

extent or quality of the asset’s use - some companies with well known trademarked names are licensed abroad for the

production of some products that they have never produced or had expertise with problems in one country are quickly communicated to another country

- when no single company has control of a collaborative arrangement, the operation may lack direction



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- when one company dominates it must consider the others interests Partners’ Contributions and Appropriations: - a partner’s ability to contribute technology, capital and some other assets may diminish

over time compared to the other’s ability

Differences in Culture: - success is evaluated differently (U.S.: performance judged on basis of profit, market share

and specific financial benefits; Japan: evaluate on how operation helps to build its strategic position; Europe: balance between profitability and achieving social objectives

- differences in corporate cultures may also create problems within joint ventures

Managing Foreign Arrangements - as the arrangement evolves, partners will need to reassess certain decisions - external environment changes - company continually needs to re-examine the fit between collaborations and its strategy

Dynamics of Collaborative Arrangements: - evolution to a different operating mode may be the result of experience, necessitate costly

termination fees, create organizational tensions - organizational tension may develop internally as a company’s international operations

change and grow - as companies enter more collaborative arrangements, the get better performance from

them

Finding Compatible Partners: - necessary to evaluate the potential partner not only for the resources it can supply but also

for its motivation and compatibility to work with the other company - can be found through social activities - the proven ability to handle similar types of collaboration is a key to professional

qualification

Negotiating Process: - contracts historically have included provisions that he recipient will not divulge this

information - controversial area of negotiation is the secrecy surrounding arrangements’ financial terms

Contractual Provisions: - transferring rights to an asset can create control problems, such as poor product quality - contracts should be spelled out in detail and include:

o how to terminate the agreement if the parties do not adhere to the directives o methods of testing for quality o geographical limitations on the asset’s use o which company will manage which parts of the operation outlined in the agreement o what each company’s future commitments will be o how each company will buy from, sell to, or use intangible assets that come from the

collaborative agreement

Performance Assessment: - mutual goals should be set – expectations should be spelled out in the contract - continuing assessment of the partner’s performance - assess periodically whether the type of collaboration should change



Chapter 15: Control strategies Introduction- control questions facing all companies:

1. Where should decision-making power reside? 2. How should foreign operations report to headquarters? 3. How can the company ensure that it meets its global objectives?

- control is management’s planning, implementation, evaluation and correction of performance to ensure that the organization meets its objectives (keep direction or strategy on track & prevent individuals from making decisions that endanger whole company)

- toughest challenge for management: balance company’s global needs with need to adapt to country-level differences

- foreign control is usually more difficult than domestic control because of: o distance – it takes more time and expense to communicate o diversity – country differences make it hard to compare operations o uncontrollables – there are more dissimilar outside stockholders and government

influences (e.g. objectives between stockholders in home country differ from host-country government)

o degree of certainty – there are data problems and rapid changes in the environment (industry data maybe inaccurate in some countries; political & economic uncertainty)

5 ASPECTS OF INTERNATIONAL CONTROL PROCESS 1. Planning - planning is essential for managerial control: adapt resources and objectives to different and changing international markets The Planning Loop: - in planning, companies must mesh objectives with internal resources and external

environments and set means to implement, report, analyze and correct - planning implies 5 steps (p.445):

A) develop long-range strategic intent: objective or mission that will hold the organization together over a long period while it builds global competitive viability; helps set priorities and is often published (e.g. dominating domestic market)

B) analyze internal resources with environmental factors in home country: companies must find fit between what they need and what they are good at (e.g. small comp. need to collaborate)

C) set overall objectives for its international activities: must be examined in conjunction with means of competing (e.g. low cost focus)

D) local analysis E) selection among alternatives: determines extent to which a company follows global,

Transnational or Multidomestic strategy alternatives include: location of value-added functions, location of sales targets, level of involvement, product/service strategy, marketing, competitive moves, factor movement and start-up strategy

F) implement and modify (if resources availability changes) strategy through timely analysis, corrective action -> constant loop from F to B

- strategic plans: outline major commitments, less subject to re-evaluation (e.g. what businesses a company is in); similar to step A

- operating plans: short term objectives and means to carry them out Uncertainty Planning: - a company’s international operations have more complexity and uncertainty than its

domestic ones



2. Organizational structure - internat. Comp. set up organizational structures to group individuals and units in strategic

ways - structure affects taxes, expenses and control and thus fulfilment of corporate objectives Separate vs. Integrated International Structures - international division structure: • groups each internat. business activity into its own

division, puts internationally specialized personnel together to handle export documentation, foreign-exchange transactions and relations with foreign governments • creates a critical mass of international expertise • may have problems getting resources from domestic divisions

structure is best suited for Multidomestic strategies with little integration and standardization

- functional division structure: • integration of international operations (e.g. marketing in Europe reports to overall marketing department) • are popular among companies with narrow product lines

- product division structure: • group people according to product groups • popular among international companies with diverse products • best suited for global strategies because foreign and domestic operations for 1 product report to same manager • product lines can be easily spun off, but groups cannot learn from each other and synergies within one country are reduced

- geographic (area) division structure: • popular if comp. has large foreign operations, but business isn’t dominated by a single country or region

- matrix division structure: • gives functional, product and geographic groups a common focus (a subsidiary reports to more than 1 group) • groups become interdependent, exchange info. and resources • drawbacks: groups compete for scarce resources and people aren’t sure who has responsibilities for which tasks

Dynamic nature of structures: - structure evolves as its business evolves: if international operations grow more

departments and more independence is needed Mixed nature of structures: - due to the fact that growth is dynamic, companies only seldom get their activities grouped

into 1 organizational structure -> most have a mixed structure - overall structure gives an incomplete picture of divisions Non-traditional structures: evolve to deal with new complexity of companies’ operations: - Network organizations:

• network alliance: each comp. is supplier to and customer of other companies • some products, functions and areas are handled and owned by company, others are outsourced • due to increase in alliances among companies, control increasingly must come from negotiation and persuasion rather than from authority of superiors and subordinates

heterarchy: ambiguous location of control • Japanese keiretsus are network alliances (either vertical or horizontal): managers have strong personal long-term relationships, exchange info., lobby together for government legislation • however networks retard efficiency

- lead subsidiary organizations: • due to different factor endowments comp. move headquarters for certain divisions to foreign countries

• also managers from home country must report to them



3. Location of Decision making - centralization implies higher-level decision making (global (ethnocentric) strategy), usually above the country level; decentralization implies lower-level decision making (Multidomestic (polycentric) strategy) and a combination of the two implies both (Transnational (geocentric) strategy) - companies should choose location based on: a) pressures for global integrations vs. local responsiveness - high pressure for integration ->centralization; low pressure for integration -> decentralization reasons: - resource transference: • decisions on moving goods or other resources internationally

are more likely to be made centrally because they require info. that is only available at headquarters • subsidiaries might focus too much on own projects

- standardization: • global standardization usually reduces costs, but some revenue may be lost in the process • product uniformity gives company greater flexibility when supply problems in some countries arise (e.g. strikes) – production can shift to another country • the more the foreign environment requires adaptations, the more pressure to decentralize

- systematic dealings with stakeholders: • stakeholders are increasingly aware of what the company does in other countries of operation -> concessions in one country must also be granted in others • centralized decision making is necessary to ensure that operations in different countries operate towards achieving global objectives (e.g. same prices) • dealings with potential global customers and competitors need centralized decision making because headquarter is only place where info. on all countries is gathered

- Transnational strategies: • describes a company that thrives on the process of seeking out uniqueness that it might exploit elsewhere or that might complement existing operations • implies gaining knowledge and capabilities from anywhere in the organization • two-way info. flows both horizontally and vertically (comp. tries to weaken decision- making partitions) -> if subsidiaries are ignored, comp. suffers • cross-cultural teams between subsidiaries in different countries: chosen people with certain skills and expertise -> more and better ideas

b) Capabilities of headquarters vs. subsidiary personnel - the more confidence there is in foreign managers, the more delegation occurs - in some cases centralization may hurt local managers because they

o cannot perform as well (not motivated if not involved in decisions) o do not acquire training through increased responsibility

c) Decision expediency and quality a poor decision may be better than a good one that comes late - cost and expediency: comp. must consider how long it takes to get help from

headquarters in relation to how rapidly decision must be made - importance of the decision: • more important decisions are made at higher organization

levels • rather than telling what decisions a locals can make, comp. can set limits on expenditure amounts -> local autonomy for small outlays

Control in the Internationalization process- factors that influence the amount of control that a comp. needs at various stages of internationalization: a) Level of importance - the more important the foreign operations, the higher the level in organizational structure they report to



• 1st extreme: operation is insignificant, activities are handled at low level in corporate hierarchy: a comp. that merely exports through intermediary which takes all export details • 2nd extreme: operation is very significant, activities are handled at high level: a comp. that owns and manages foreign manufacturing and sales facilities b) changes in competencies - the larger the foreign operations, the more likely the headquarters have specialized staff - the larger the operations in a given country, the more likely that that country unit has

specialized staff (has expertise and is able to operate independently) - dilemma: subsidiary has high importance to comp. but is managed by specialized staff

independently c) changes in operating forms - move from 1 operating form (e.g. licensing) to another (e.g. FDI), requires need to change areas of responsibility in organization 4. Control mechanisms- mechanisms that help ensure that control is implemented: Corporate culture - corporate culture: certain common values that employees in a company share - is an implicit control mechanism - in global companies, managers cannot easily rely on corporate culture for control because

different countries have different norms -> comp. try to encourage a worldwide corporate culture

- people trained at headquarters are more likely to think as headquarters personnel Coordinating methods - because each type of organizational structure has advantages and disadvantages, comp.

have tried to combine some of functional, geographic and product perspectives without abandoning existing structures

- e.g.: developing teams from different countries for building future scenarios; using more management rotation; developing liaisons among subsidiaries within same country etc…. (p. 458/459)

Reports - use of reports to evaluate the performance of subsidiary personnel in order to reward and

motivate them - reports must be timely in order for managers to respond to info. (allocate resources,

correct plans, reward personnel) - reports important in international businesses because of low contact between subsidiary

and headquarter types of reports: • reports are intended to evaluate 1st operating units and 2nd management in those units • reports for foreign operations mostly resemble domestic report systems (have proven effective, familiar system, easier to compare) visits to subsidiaries: - corporate managers should have a good timing for visits of foreign subsidiaries in order to not upset local managers (not too often) and should conduct a good analysis of operations (not just social activities) -> “rules” for conducting visits management performance evaluation: • comp. should evaluate managers on things that they can control (separately from subsidiaries performance) • however what is within manager’s control varies from subsidiary to subsidiary (local conditions) and from company to company (decision-making processes) • companies must evaluate results in comparison to budgets cost and accounting comparability: • it is hard to compare countries using standard operating ratios (management must compare relevant costs) evaluative measurements • a system that relies on a combination of measurements is more reliable than one that doesn’t (not just financial)



• most important criteria: “budget compared with profit” and “budget compared with sales value” information systems: • discussion about what info. managers need to evaluate performance of subsidiaries • info. on e.g. external conditions, new R&D development of subsidiary are important to headquarters • 3 problems in acquiring information: cost of information compared to value, redundant information, information that is irrelevant -> management should re-evaluate info. sources they use periodically and ensure efficient use • new info. technology enables comp. to share info. more quickly and more easily 5. Control in special situations Acquisitions - an acquired comp. usually does not achieve a complete fit with the existing organization

(different cultures, management is used to autonomy) - centralization of decision making may result in distrust or resistance (also from

governments) Shared ownership - shared ownership usually makes control harder than it would be with wholly owned

operations, but there are mechanisms that can work: a) spreading remaining ownership among many shareholders b) stipulations that board decisions require more than a majority c) dividing equity into voting and nonvoting stock d) side agreements on who will control decision making

Changes in strategies - depending on the type of change (e.g. move from Multidomestic to Transnational

operations), reporting relationships, type of info. collected etc. might need to be altered - it is difficult to remove control if managers are accustomed to much autonomy The role of legal structures in control strategies- there are tax and liability differences between different legal forms when operating abroad

(subsidiaries and branches) Branch and subsidiary structure - foreign branch: foreign operation that is not legally separated from parent company

• branch operations are only possible if parent holds 100% ownership • usually subject to less public disclosure because covered by tight corporate restrictions

- foreign subsidiary: FDI that is legally a separate company, even if parent holds all voting stock

• parent controls subsidiary through voting stock and mechanisms above • major adv. of subsidiary: in legal affairs, winners of suits against subsidiaries do not have access to parent’s resources

both forms have dis-/advantages: company must consider objectives for control, secrecy, liability and taxes when deciding whether to use one of the forms

Types of subsidiaries and how they affect control strategies - when operating abroad, companies can choose between various alternative legal forms - each legal form has different operating restrictions - next to liability they vary in form of:

• ability of parent to sell ownership; no. of stockholders required to establish subsidiary; percentage of foreigners, able to serve on board of directors; amount of required public disclosure; types of businesses (products) that are eligible; min. capital required for establishing subsidiary and whether equity may be acquired by noncapital contributions, such as goodwill

-> MNE should consider facts before making a decision



IB Chapter 17 Export and Import Strategies Export Strategy → Entry mode depends on…

− Ownership advantages of the company: these are specific assets, international experience, ability to develop differentiated products

− Location advantage: combination of market potential (size and growth) and investment risk

− Internalisation advantages: benefits of holding on to specific assets or skills within the firm and integrating them into activities

→ companies with lower levels of ownership advantages use low risk strategies such as exporting (lower risk but also lower return) to enter the market or will not enter at all

→ allows better management operational control, but provides lower marketing control → strategic considerations affect the choice of exporting as entry mode → strategic questions (why to export) must take into account: global concentration global

industries have only a few major players and strategy depends on competition → global synergies company can use its home expertise in e.g. marketing abroad Characteristics of Exports − Probability of being an exporter increases with size, as defined by revenues or the size of

a company (yet not all export decisions depend on the company’s size) − Export intensity: percentage of total revenues coming from exports (not positively

correlated with company size – greater percentage means greater intensity) - the largest companies are the biggest exporters, but small companies are expanding their capability

Why Companies Export − Preliminary to increase sales revenues (expand sales) − Achieve economies of scale in production − Is less risky than FDI (lower commitment) − Allows company to diversify sales locations diversification strategy Stages of Export Development → companies start exporting by accident rather than by design encounter a number of

unforeseen problems good export strategy important → as companies move from initial to advanced exporting, they tend to export to more

countries and expect exports as a percentage of total sales to grow → Phases of export development

− preengagement (phase 1): selling solely in domestic market, consider exporting − initial exporting (phase 2): sporadic, marginal exporting, seeing lots of potential in

export markets, unable to cope with exporting demands − advanced (phase 3): regular exporters, extensive overseas experience, other strategies

for entering markets Potential Pitfalls of Exporting − to understand the elements in an export strategy you must need to take some pitfalls in

consideration: e.g. missing external expertise, insufficient commitment, etc. (p. 511) − language and other cultural factors are additional problems Designing an Export Strategy 1. assess export potential by examining its opportunities and resources

a. Determine if there is market for the product b. Make sure to have enough production capacity



2. get expert counselling: a. governments provide assistance (i.e. information about foreign export markets) for

their domestic companies, extent of commitment varies by countries b. more accurate information is provided by specialized assistants, such as banks,

lawyers, export management companies 3. select a market or markets:

a. key part of strategy b. identify foreign markets with the help of trade statistics, visit seminars, etc. (actively) c. learn of markets by responding to requests from abroad (passively)

4. formulate and implement an export strategy: a. company considers its export objectives b. what specific tactics c. when to be finished (deadlines to achieve objectives) d. what kind of resources are needed

→ export business plan (done by senior management or export department): p. 513 → international business transaction chain: p. 512 Import strategy → bringing of goods and services into a country that results in importer paying money to the

exporter in a foreign country → Two basic types of imports

− industrial and consumer goods to independent individuals and companies no relationship to foreign exporter

− intermediate goods and services that are part of the firm’s global supply chain → companies import goods because they can be sold cheaper in the domestic market than

products which are produced in the domestic market → Three broad types of importers

− Looking for any product around the world to import and sell (by simply scanning the globe for any product that will generate positive cash flow for them)

− Looking for foreign sourcing to get their products at the cheapest price − Using foreign sourcing as part of their global supply chain

→ Importing requires a certain expertise in dealing with institutions and documentation: external handling can be done through and import broker, which is an intermediary who helps an importer clear customs

The Role of Customs Agencies → Customs agencies assess and collect duties + ensure that import regulations are adhered to → Customs are the country’s import and export procedures and restrictions, not its cultural

aspects (e.g. duties, taxes and fees) → Importer needs to know how to clear goods, what duties to pay, what special laws exist

regarding the importing products → 4 ways a customs broker can help:

− value products to help them qualify for more favourable duty treatment − qualify for duty refunds through drawback provisions mostly a 99% refund on paid

duty if imported goods become part of a country’s export products − defer duties by using bonded warehouses and foreign trade zones (no duties on

imports stored in warehouses) − limit liability by properly marking an import’s country of origin

Import Documentation − Importers must submit documents to customs that determine whether the shipment is

released and what duties are assessed (take title of the shipment) − Take title means the importer receives the products without purchasing them – that is

without laying out any money



Third Party Intermediaries → Third party intermediaries: companies that facilitate the trade of goods but that are not

related to either the exporter or the importer → Some essential activities must be satisfied and must be handled (as this can be cost

intensive companies use external specialists for expanding before developing internal capabilities): − Stimulate sales, obtain orders, do market research − Make credit investigations and perform payment-collection activities − Handle foreign traffic and shipping − Act as support for the companies overall sales, distribution, and advertising staff

→ Direct export: goods and services are sold to an independent party outside of the exporter’s home country

→ Indirect exports: goods and services are sold to an intermediary in the domestic market, which then sells the goods in the export market

Direct Selling → Direct selling involves selling through representatives to distributors, or to retailers and

final end users − A sales representative sells products in foreign markets on a commission basis,

without assuming risk or responsibility − Sales representatives have certain rights, they operate on a commission basis − A distributor is a merchant who purchases the products from the manufacturer and

sells them at a profit − Aspects that a company should consider about sales representative or distributor: sales

records, analysis of territory, product mix, marketing policies, customer profile etc. → if a company decides to sell its product directly to the customer it must setup a solid

organization: separate international division, separate international company, or direct sale to foreign retailers or end users

Direct Exporting through the internet and e-commerce − Internet marketing allows all companies to engage in direct marketing quickly, easily and

cheaply (especially small companies that cannot afford to establish an elaborate sales network, e-commerce)

Indirect selling − exporter sells goods directly to or through and independent domestic intermediary in the

exporter’s home country that exports the products to foreign markets (two major types of indirect intermediaries are EMC and ETC)

EMC (Export Management Companies) − EMC acts as an export arm of a manufacturer − Operates on a contractual basis, usually as an agent of the exporter − Most EMCs are small, entrepreneurial ventures that specialise by product, function or

market area − They are more focused on supply of the product to the foreign country − Problem for the company is: if the EMC does not actively promote the product, the

company will not generate many exports ETC (Export Trading Companies) − ETCs are like EMCs, but they tend to operate on the basis of demand rather than on

supply: they identify suppliers who can fill orders in overseas markets. − ETCs represent a manufacturer − Tries to find as much as suppliers in a foreign country as possible



− Because, they should control the foreign distribution of products and collaborate with products of competing products, they could be open to antitrust allegations

− ETCs in the US are exempt from antitrust provisions in order to allow them to collaborate with other companies to penetrate markets

Non–US Trading Companies → The largest trading companies in the world are from Japan, South Korea, Germany, and

China NOT the US. → Japanese trading companies are known as sogo shoshas, they are the trading arms of the

large keiretsus, which are Japanese business groups that are networks of manufacturing, service and financial companies

→ Chaebols are Korean business groups that are similar to keiretsu and also contain a trading company as part of the group

→ Differences between keiretsus and Chaebols: − Sogo shoshas are loosely linked to the keiretsus and are most professional managed − Chaebols are managed by a family which has very big influence, the leaders and

managers are groomed by the families Foreign Freight Forwarders − A foreign freight forwarder is an export or import specialist dealing in the movement of

goods from producer to consumer. − The typical freight forwarder is the largest export intermediary in terms of value and

weight handled. − Freight Forwarder, especially the smaller ones, sometimes specialize in the mode used

and the geographical area served − Different transportation modes surface freight (truck and rail), ocean freight, airfreight − Intermodal transportation: the movement across different modes form origin to

destination − Factors favouring airfreight over ocean freight: more frequent shipment, lighter weight

shipments, higher value shipments Export Documentation → Freight forwarders can help to fill out exporting documents – one of these documents is an

export licence (allows products to be shipped to specific countries) → Key export documents:

− A pro forma invoice is an invoice, like a letter, from the exporter to the importer that outlines the selling terms

− A commercial invoice is a bill for the goods from the buyer to the seller. − Bill of lading is a receipt for goods delivered to the common carrier for transportation,

a contract for the service rendered by the carrier, and a document of title − Consular invoice is sometimes required by a country as a means of monitoring

imports − Certificate of origin declares origin of product (where it was produced) − Shipper’s export declaration is used by the exporter’s government to monitor exports

and to compile trade statistics − Export packing list itemizes the material in each individual package

Export financing → Product price related to export is influenced by:

− transportation costs − multiple wholesale

channels

− duties − antidumping laws − exchange rates

− insurance costs − banking costs



Methods of Payment → cash in advance → letter of credit: obligates the buyer’s bank to pay the exporter

− a revocable letter of credit may be changed by any of the parties to the agreement. − An irrevocable letter of credit requires all parties to agree to a change in the

documents − A confirmed irrevocable letter of credit adds an obligation to pay for the exporter’s

bank → draft or bill of exchange

− documentary draft: an instrument instructing the importer to pay the exporter if certain documents are presented

− sight draft: payments must be made immediately − time draft: payments is to be made at a future date

→ open account: the exporter bills the importer but does not require formal payment documents; usually for members of the same corporate group

Financing Receivables → Export can get financing from the banks and through factoring of forfeiting

− Factoring: the discount of a foreign account receivable − Forfeiting: similar of factoring but usually for longer time periods and with the

guarantee from a bank in the importer’s country Insurance − Insurance on transportation risks, such as weather or rough handling carriers − Political, commercial, and foreign-exchange risk that keep the exporter from collecting

from importer Countertrade → Some countries have so much difficulty generating enough foreign exchange to pay for

imports need to find other ways to get products they want − Reasons are not enough cash or insufficient lines of credit

→ One way is countertrade, that is when goods and services are traded for each other − Barter: based on clearing arrangements used to avoid money-based exchange, that is

when goods and services are traded for goods and services − Buybacks: these are products the exporter receives as payment that are related to or

originate from original export Offset Trade → In offset trade, the exporter sells goods for cash but then undertakes to promote exports

from the importing country in order to help it earn foreign exchange → another type of countertrade → occurs when an exporter sells products for cash and then helps the importer find

opportunities to earn hard currency → most often used for big ticket items, two types are which mainly occur:

− Direct offsets: include any business that relates directly to the export − Indirect offsets: include all business unrelated to the export, generally the exporter is

asked by the importer’s government to buy a country’s goods or invest in an unrelated business



BusinessWeek: Chapter 1 – Overview of Strategic Management

1. The Nature and Value of Strategic Management

Managing strategic decisions involve and lead to: - internal activities - immediate + remote external environment (e.g. competitors, PEST-analysis, etc.) - stakeholders (e.g. owners, employees) → reduce impact of environmental changes / of unexpected internal + competitive demands - after World War II: more sophisticated broad-scope, large-scale management

processes - in the 1970s: “long-range planning”, “new venture management”, “planning,

programming, budgeting” and “business policy” were united with external considerations → all-encompassing approach is known as strategic management

Strategic management: a set of decisions and actions that result in the formulation and implementation of plans designed to achieve a company’s objectives

- Strategic management consists of nine tasks: 1. Formulate the company’s mission (statements about its purpose, philosophy + goals) 2. Conduct an analysis that reflects the company’s internal conditions + capabilities 3. Assess the company’s external environment (competitive + general factors) 4. Analyse the company’s options by matching its resources with the external env. 5. Identify the most desirable options by evaluating each options in light of the company’s

mission 6. Select a set of long-term objectives + grand strategies that will achieve the best options 7. Develop annual objectives + short-term strategies that are compatible with the selected

set of long-term objectives + grand strategies 8. Implement the strategic choices by means of budgeted resource allocations in which the

matching of task, people, structures, technologies, reward systems is emphasized 9. Evaluate the success of the strategic process as an input for future decision making

- strategic management involves the planning, directing, organising, controlling of a company’s strategy-related decisions + actions

- by strategy, managers mean their large-scale, future oriented plans for interacting with the competitive environment to achieve company objectives → it is only a framework

a. Dimensions of Strategic Decisions i. Strategic issues require top-management decisions

only top-management has the perspective needed (→ one possibility: corporate headquarters are focused on strategic issues + more free choices for customer relations)

ii. Strategic issues require large amounts of the firm’s resources Strategic decisions involve substantial allocations of people, physical assets, money that either must be redirected from internal sources or secured from the outside

iii. Strategic issues often affect the firm’s long-term prosperity often long time plans (five years) → impact even longer: strategies determine a company’s image + position (for better or worse)

iv. Strategic issues are future oriented based on forecasts / best choice: a proactive (anticipatory) stance toward change

v. Strategic issues usually have multifunctional or multibusiness consequences huge impact → several strategic business units (SBUs) are affected

vi. Strategic issues require considering the firm’s external environment external conditions have to be considered

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vii. Three levels of strategy (typically three levels → exhihibit 1-2 p.7) - Corporate level: board of directors, CEO, administrative officers → strategic managers try to exploit the firm’s competencies by adopting a portfolio approach to the management + long-term plans (“doing the right things”) - Business level: business + corporate managers → translate statements into concrete objectives for the SBUs + strategies how the firm will compete in the selected product-market arena (“doing the right things”) - Functional level: managers of product, geographic, functional areas → annual objectives + short-term strategies; implement + execute the firm’s strategic plans (“doing things right”)

viii. Characteristics of strategic management decisions - decisions at the corporate level are more value oriented, conceptual, less concrete (greater risk, cost, profit potential, need for flexibility, longer time horizons) - business-level decisions help bridge decisions at the corporate + functional levels (costs, risks, and potential profit lie between those of corporate + functional levels) - functional-level decisions are action-oriented, short range, low risk (modest costs, concrete, quantifiable [close + easy supervision possible], profit potential low)

Hierarchy of Objectives and Strategies Strategic Decision Makers Ends (What is to be achieved?)

Means (How is to be achieved?)

Board of Directors

Corporate Managers

Business Managers

Functional Managers

Mission (goals, philosophy)

■ ■ ■ ■ ■

Long-term objectives Grand strategy ■ ■ ■ ■ ■ Annual objectives Short-term strategies

and policies ■ ■ ■ ■ ■

Note: ■ ■ i dicates a principal responsibility; ■ indicates a secondary responsibility n

b. Formality in Strategic Management - Formality refers to the degree to which participants, responsibilities, authority, discretion in decision making are specified - often formality is associated with the size of the firm + with its stage of development - Entrepreneurial mode: especially in smaller firms, one single individual control it - Planning mode: very large firms, formal planning system with evaluation - Adaptive mode: medium-sized firms in stable environment, new strategies are closely related to existing one (all three modes were identified by Henry Mintzberg) → The Strategy Makers - ideal strategic management team includes decision makers from all three levels - planning departments are common in large companies - top management is responsible for all major elements of strategic planning - general managers are responsible for developing environmental analysis, business objective, business plans prepared by staff groups - CEO has a dominant role → best to integrate other managers in decisions + to have efficient interaction with the board of directors

c. Benefits of Strategic Management higher profitability of strategic plans is one point, other points to pay attention to:

1. Strategy formulation activities + attention of subordinates can prevent problems 2. Group-based strategic decisions take more alternatives into considerations + will

find better results than single perspectives 3. The involvement of employees in strategy formulation → more motivation 4. Gaps + overlaps in activities among individuals + groups are reduced because

strategy formulation clarifies differences in roles 5. Resistance to change is reduced because of involvement

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d. Risks of Strategic Management Managers must be trained to guard against three types of unintended consequences: - time spend on strategic management does not have effects on other duties - formulators don’t pay attention to consequences → limit their promises - disappointment of participating subordinates over unattained expectations

e. Executives’ Views of Strategic Management - corporate America sees strategic management as instrumental to high performance, evolutionary in its ever-growing sophistication, action oriented, cost effective

2. The Strategic Management Process a. Key - Components of the Strategic Management Model

Due to the similarity among the general models of the strategic management process, it is possible to an eclectic model (→ Exhibit 1-5, p. 11) i. Company Mission

describes the company’s product, market, technological areas, values, priorities ii. Internal Analysis

quantity + quality of the company’s resources, strengths, weaknesses, results iii. External Environment

conditions + forces from the remote, industry, and operating environments iv. Strategic Analysis and Choice

opportunities have to be analysed and decision have to be made v. Long-Term Objectives

are the results than an organisation seeks over a multiyear period vi. Generic and Grand Strategies

generic strategy: characterises the market-orientation (low cost, differentiation etc.) grand strategy: indicates how the objectives are to be achieved

vii. Actions Plans and Short-Term Objectives actions plans translate generic + grand strategies into “action”

viii. Functional Tactics are detailed statements of the “means” or activities that will be used

ix. Policies That Empower Action are broad decisions that guide for repetitive or time sensitive managerial decisions

x. Restructuring, Reengineering, and Refocusing the Organisation the critical stage in strategy implementation

xi. Strategic Control and Continuous Improvement through feedback a continuous development process is created

b. Strategic Management as a Process the strategic management model represents a process (→ strategies that work): o change in any component will affect several other components o strategy formulation + implementation are sequential

- the rigidity (inflexibility) of the process must be qualified → strategic posture may have to be re-evaluated in response to changes in any factor → not every component of the strategic management process needs equal attention

o necessity of feedback to enhance future decision making (circle of development) o dynamic system due to constantly changing conditions (continuous monitoring)

i. Changes in the Process - strategic management process undergoes continual assessment + subtle updating - although the elements of the basic strategic management model rarely change, the relative emphasis that each element receives will vary with the decisions makers and the environment of their companies

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Chapter 2 – Defining the Company’s Mission and Social Responsibility 1. What is a company mission?

- it describes the firm’s product, market, technological area, values and priorities - no measurable targets but of attitude, outlook, and orientation

2. Formulating a mission - fundamental beliefs of an owner-manager’s sense of mission: → the product/service of the business can provide benefits as least equal to its price

→ the product/service can satisfy a customer need of specific market segments that is currently not being met adequately

→ the technology that is to be used in production will provide a cost- and quality- competitive product/service

→ with hard work + support of other, the business can not only survive but also grow and be profitable

→ the management philosophy of the business will result in a favourable public image + will provide financial + psychological rewards for those who are willing to invest their labour + money in helping the business to succeed

→ the entrepreneur’s self-concept of the business can be communicated to + adopted by employees and stockholders

- components of a mission statement: a) Basic Product or Service; Primary Market; Principal Technology

- in combination they describe the company’s business activity - this segment clearly indicates to all readers the basic products, primary markets,

and principal technologies (often the most known product is mentioned)

b) Company Goals: Survival, Growth, Profitability - almost every business organisation has these three goals mentioned above - long-term aspects have to be considered to secure survival - short-term profit has to be achieved but more important is the “over the long term” - growth in market share is correlated with profitability, other forms of growth exist, too - growth means change + proactive change is essential in a dynamic business environment - should outline the conditions under which the firm might depart from ongoing operations → strategy should include opportunities with an acceptable rate of long-term growth and profitability, with acceptable degree of risk

c) Company Philosophy - often called company creed - it reflects basic beliefs, values, aspirations, philosophical priorities to which strategic decision makers are committed in managing the company - general philosophy: unwritten code of behaviour – self-regulation - many statements are similar in their content - it should address strategic concerns at all three levels of the organisation

d) Public Image - present + potential customers attribute certain qualities to particular businesses - mission statement should reflect the public’s expectations+ - a negative image can prompt firms to re-emphasise the beneficial aspects of mission

e) Company Self-Concept - the firm realistically must evaluate its competitive strengths + weaknesses → to achieve its proper place in a competitive situation = company self-concept - a firm acts on its members → but they can set aims different from the aims of their members → this can lead to higher motivation = positive self-image

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f) Newest Trends in Mission Components (three new issues): i. Customers (more examples – p. 33)

- customer service a priority + consumer satisfaction which is continuously measured - quality customer service can be competitive advantage

ii. Quality - points to increase quality: o create constancy of purpose; adopt the new philosophy o cease dependence on mass inspection to achieve quality o end the practice of awarding business on price tag alone; instead, minimize total cost, often

accomplished by working with a single supplier o improve constantly the system of production and service o institute training on the job; institute leadership; drive out fear o break down barriers between departments o eliminate slogans, exhortations, numerical targets o eliminate work standards (quotas) and management by objective o remove barriers that rob workers, engineers, and managers of their right to pride of workmanship o institute a vigorous program of education and self-improvement o put everyone in the company to work to accomplish the transformation

iii. Vision Statement - to express the aspirations of the executive leadership - presents the firm’s strategic intent that focuses the energies + resources on achieving a desirable future + often combined with the mission statement

3. Overseeing the strategy makers

- top-managers at the corporate level are responsible for the company mission - major responsibilities of the board of directors:

→ to establish and update the company mission → to elect the company’s top officers, the foremost of whom is the CEO → to establish the compensation levels of the top officers, incl. their salaries + bonuses → to determine the amount and timing of the dividends paid to stockholders → to set broad company policy on such matters as labour-management relations,

product or service lines of business, and employee benefit packages → to set company objectives + to authorize managers to implement the long-term

strategies that the top officers + the board have found agreeable → to mandate company compliance with legal + ethical dictates

4. Agency theory

- separation of the owners (principals) + the managers (agents) = agency theory - whenever authority is delegated, an agency relationship exists between two parties - there can be differences in the interests - owners seek stock value maximisation + managers are often interested to increase their

personal payoffs (if they do not possess stocks) and not those of shareholders - self-interest managers are risky because owners loose potential gain + have costs of monitoring - cost of agency problems + of actions to reduce these = agency costs - agency costs occur also when there are different self-interests between e.g. owners + managers

a) How agency problems occur - owners have access to a small portion of information + executives are much better

informed (can pursue their own interests) = moral hazard problem or shirking → executives can manipulate business decisions or results - stockholders have to precisely determine the competencies/priorities of executives at

the time that they are hired (which is often not possible) = adverse selection - most popular solution is to align agents with the company through bonus plans - Schemes as stock options do not eliminate self-interest in executive decision

b) Problems that can result from agency - from strategic management perspective there are five problems:

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i. Due to status + compensations plans managers often pursue growth in company size rather than in earnings ≠ shareholders want to maximize earnings

ii. Managers diversify their corporate risk through different businesses + product lines ≠ stockholders want a “pure” quality of their firm as an investment

iii. Managers avoid risk (because they could get fired) + choose conservative strategies ≠ investors seek long-term returns from assuming greater risk (innovations)

iv. elegant offices, jets, large staffs, golf club membership, limousines, etc. for executive benefit are rarely good investments for stockholders

v. Managers act to protect their status (especially when their company expands) ≠ investors may prefer revolutionary advancement to gain most profit

c) Solutions to the agency problem - owners can pay executives a premium for their service (→ loyalty to stockholders) - executives can receive back loaded compensation (= bonuses are paid when the

impact in future will occur and not when the strategic actions are taken now) - through the use of executive teams personal goals are pushed back

5. The stakeholder approach to company responsibility - a company mission must recognize different interests by each group among the stakeholders - Ranking according to importance: customers, government, stockholders, employees, society - four steps to incorporate the interests of these groups into a mission statement:

i. Identification of the stakeholders - identify all of the stakeholder groups + weigh their relative rights and affects

ii. Understanding the stakeholders’ specific claims vis-à-vis the firm - understanding is necessary to satisfy the different demands of each group

iii. Reconciliation of the claims and assignment of priorities to them - different groups have opposing claims → reconciliation + priorities necessary

iv. Coordination of the claims with other elements of the company mission - demands of stakeholder groups have to be coordinated with other constraints

(e.g. product-market limitations) = claims must pass reality

a) Social Responsibility - two groups of stakeholders: inside + outside stakeholders - the amorphous set of outsiders makes the claim that the firm be socially responsible - e.g. outsiders demand that insiders’ claims be subordinated to the greater good of the

society → pollution, conservation of natural resources, etc. - ≠ insiders tend to believe that the competing claims of outsiders should be balanced against

one another in a way that protects the company mission - each firm regardless of size must decide how to meet its perceived social responsibility - new marketing strategies for future – the “4 E’s”: → make it easy for the consumer to be green → empower consumers with solutions → enlist the support of the consumer → establish credibility with all publics and help to avoid a backlash - many firms attempt to conduct business in a socially responsible manner ←social audits

b) Corporate Social Responsibility and Profitability - Milton Friedman: business has a duty to serve only for the well-being of its stockholders - Three reasons why managers should be concerned about socially responsible behaviour → a company’s right to exist depends on its responsiveness to the external environment → governments threaten increased regulation if business does not meet social standards → a CSR policy may enhance a firm’s long-term viability ► as a result of these factors long-run profit maximization is linked to CSR

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i. The Debate - on the one side, the position which is supported by Friedman - on the other side, business depends upon its environment - stockholders can have various interests e.g. not only financial interests but also social - best way to maximise shareholder wealth is to act in a socially responsible manner → illegal ≠ unethical (e.g. eBay can post unethical products, which is not illegal)

ii. CSR and the Bottom Line - social costs and benefits are not quantifiable - CSR + profit are no competing concepts → they go inline - difficult to make a cost-benefit analysis of CSR:

→ some CSR activities incur no dollar costs at all (e.g. donations) + philanthropic activities of corporations are undertaken at discounted costs (lower taxes) [Exh. 2-15] → socially responsible behaviour does not come at a prohibitive cost (missing CSR can lead to higher costs after e.g. an environmental disaster) → socially responsible practices may create savings + increase profits

- CSR costs are offset in the long run by an improved image + community goodwill

iii. Performance - critics argue that companies with CSR should perform more poorly financially - no clear evidence yet for a positive relationship between CSR and profit - however, among experts, a sense remains that a relationship exists

iv. CSR Today - CSR has become a priority with American business – three trends are responsible:

v. The Resurgence of Environmentalism - after Valdez incident, a coalition was formed to establish new environmental

standards → by signing these principles companies do more than the laws require

vi. Increasing Buyer Power - consumers are better informed through organisations that promote CSR - investors: social investment movement has continued its rapid growth (has only an

impact when a group of investors vote their share in behalf of pro-CSR issues) - banks have introduced funds which invest only in CSR friendly companies - religious organisations search for acceptable institutional investing possibilities - large-scale social investing can be broken down into two areas: → guideline portfolio investing: investors use ethical guidelines as screens to identify possible investments (e.g. excluding tobacco companies); largest + fast growing part → shareholder activism: seek to directly influence corporate social behaviour through voting right (relatively small number of people)

vii. The Globalisation of Business - different cultural views, high barriers facing international CSR including differing corporate disclosure practices, inconsistent financial data + reporting methods, lack of CSR research → lead to even more difficulties to find a consensus on what CSR is

c) CSR’s Effect on the Mission Statement - it is essential that the mission statement recognize the legitimate claims of its internal + external stakeholders → some companies are proactive in their approach to CSR (making it an integral part of their raison d’être) others are reactive (act only when they must)

d) Social Audit - it attempts to measure a company’s actual social performance against the social

objectives it has set for itself (an outside consultant can minimise biases) - results can publish the results separately or in their annual report - it can be used to scan the external/internal environment - consumer groups conduct social audits themselves to evaluate companies

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Chapter 3 – The External Environment External Environment comprises:

1. remote environment (global and domestic): economic, social, political, technological, ecological (i.e. PEST)

2. industry environment (global and domestic): entry barriers, supplier power, buyer power, substitute availability, competitive rivalry (i.e. Porter’s 5 Forces)

3. operating environment (global and domestic): competitors, creditors, customers, labour, suppliers

the combination of the factors analyzed in the different environments form the basis of the opportunities and threats that a firm faces in a competitive environment

1. The Remote Environment:

- the environment imposes opportunities, threats and constraints on the firm, however, a single firm rarely has a considerable influence on the environment

Economic Factors: - concern the nature and direction of the economy in which the firm operates - to be considered: general availability of credit, level of disposable income, propensity

of people to spend, prime interest rates, trends in the growth of GNP - recently new international power brokers (e.g. European Economic Community,

OPEC) changed the focus of economic environmental forecasting by e.g. eliminating quotas and establishing a tariff-free trade area for member states

Social Factors: - involve beliefs, values, attitudes, opinions, life-style of people in the firm’s external

environment as developed from cultural, ecological, demographic, religious, educational and ethnic conditioning

- social forces are dynamic, with constant change resulting from the efforts of individuals to satisfy their desires and needs by controlling and adapting to environmental factors

- most profound change of recent years has been the entry of large numbers of women into the labour market, the interest of consumers in quality-of-life issues and the shift in age distribution of the population

Political Factors: - define the legal and regulatory parameters in which the firm must operate - political constraints (e.g. fair-trade decisions, antitrust laws, tax programs, minimum

wage legislation, pollution and pricing polities, administrative jawboning) tend to reduce the potential profit of firms

- some political actions (e.g. patent laws, government subsidies, product research grants) benefit the firms

- political activity has significant impact on two governmental functions that influence the remote environment on firms: o i) Supplier Function: government decisions regarding the accessibility of private

businesses to government-owned natural resources and national stockpiles of agricultural products will affect the viability of the strategies of some firms

o ii) Customer Function: government demand for products and services can create, sustain, enhance or eliminate many market opportunities (JFK’s focus on the landing of men on the moon)

Technological Factors: - a firm must be aware of technological changes that might influence its industry in

order to avoid obsolescence

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- creative technological adaptations can suggest new product possibilities, improvements to existing products or manufacturing and marketing techniques

- technological forecasting can help protect and improve the profitability of firms in growing industries

- it alerts strategic managers to impending challenges and promising opportunities Ecological Factors: - Ecology: refers t the relationships among human beings and other living things and the

air, soil and water that support them - there is a reciprocal relationship between the business and the ecology - pollution is a great threat to our life-supporting environment, especially global

warming, loss of habitat and biodiversity - businesses are a major contributor to pollution and are now held responsible for

eliminating toxic by-products of its current manufacturing processes and for cleaning up the environmental damage that it did previously

- environmental legislation impacts corporate strategies around the globe - despite the cleanup efforts the job of protecting the ecology will continue to be a top

strategic priority o Benefits to Eco-Efficiency:

Eco-efficiency describes corporations that produce more useful goods and services while continuously reducing resource consumption and pollution

because of increases in government regulations and consumer environmental concerns, the implementation of environmental policy has become a point of competitive advantage

o Characteristics of eco-efficient corporations: firms are proactive not reactive eco-efficiency is designed in and not added on highly flexible eco-efficiency is encompassing not insular

The International Environment:

- monitoring the international environment involves assessing each nondomestic market on the same factors that are used in a domestic market

- while the importance of factors will differ, the same set of considerations can be used for each country

- the interplay for international market must be considered 2. The Industry Environment:

- Michael Porter propelled the concept of industry environment into the foreground of strategic thought and business planning

How competitive Forces Shape Strategy: - the essence of strategy formulation is coping with competition - customers, suppliers, potential entrants and substitute products are all competitors that

may be more or less prominent or active depending on the industry - the collective strength of these forces determines the ultimate profit potential of an

industry; the weaker the forces collectively the greater the opportunity for superior performance

- in a perfectly competitive industry, the barriers to entry are very low and therefore it offers the worst prospect for long-run profitability

- knowledge of these underlying sources of competitive pressure provides the groundwork for a strategic agenda of action

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- they highlight the critical strengths and weaknesses of the company, animate the positioning of the company in its industry, clarify the areas where strategic changes may yield the greatest payoff and highlight the places where industry trends promise to hold the greatest significance as either opportunities or threats

Contending Forces: - every industry has an underlying structure o a set of fundamental economic and

technological characteristics that gives rise to these competitive forces Threat of Entry: - the seriousness of the threat of entry depends on the barriers present and on the

reaction from existing competitors that the entrant can expect i) Economies of Scale: (aspirant is forced to enter on a large scale or accept a cost

disadvantage; can act as hurdles) ii) Product Differentiation: (brand identification creates a barrier by forcing entrants

to spend heavily to overcome customer loyalty; advertising, customer service, being first in the industry and product differences foster brand identification)

iii) Capital Requirements: (capital is necessary for customer credit, inventories, absorbing start-up losses)

iv) Cost Disadvantages independent of Size v) Access to Distribution Channels: (the more limited the wholesale or retail channels

are, and the more that existing competitors have these tied up, the tougher the entry into the industry will be)

vi) Government Policy: (government can limit or foreclose entry to industries with license requirements and limits on access to raw materials, but also by imposing and water pollution standards and safety regulations)

Powerful Suppliers: - suppliers can exert bargaining power by raising prices or reducing the quality of

purchased goods and services - they can squeeze profitability out of an industry which is unable to recover cost

increases in its own prizes - a supplier group is powerful if:

o it is dominated by a few companies o is more concentrated than the industry it sells and if its product is unique or highly

differentiated o it has built up switching costs o not obliged to contend with other products for sale to the industry o poses a credible threat of integrating forward into the industry’s business o the industry is not an important customer of the supplier group

Powerful Buyers: - customers can force down prices, demand higher quality of more service - a buyer group is powerful if:

o it is concentrated or purchases in large volumes o the product it purchases from the industry are standard of undifferentiated o the products form a component of its product and present a significant fraction of

its cost o earns low profits which create the incentive to lower its purchasing costs o the industry’s product is unimportant to the quality of the buyer’s products o the industry’s product does not safe the buyer money o buyers pose a credible threat of integrating backward to make the industry’s

product

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- consumers tend to be more prize sensitive if they are purchasing products that are undifferentiated, expensive relative to their incomes and of a sort where the quality is not very important

Substitute Products:- by placing a ceiling on the prices, substitute products limit the potential of an industry - substitute products that deserve the most attention are subject to trend improving their

price-performance trade-off with the industry’s product or are produced by industries earning high profits

Jockeying for Position: - using tactics like price competition, product introduction and advertising slugfests - this kind of rivalry is related to the presence of a number of factors:

o competitors are numerous or roughly equal in size o industry growth is slow o product or service lacks differentiation or switching costs o fixed costs are high or the product is perishable, creating strong temptation to cut

prices o capacity is normally augmented in large increments o exit barriers are high o rivals are diverse in strategies, origins and personalities; they have different ideas

about how to compete and continually run head-on into each other in the process Industry Analysis and Competitive Analysis: Industry Boundaries:

- an industry is a collection of firms that offer similar products (i.e. products that that consumers perceive to be suitable for one another) or services

- definition of industry boundaries helps executives determine the arena in which their firm is competing

- definition of industry boundaries focuses attention on the firm’s competitors and producers of substitute products, which is critically important to the firm’s design of its competitive strategy

- helps to determine key factors for success - questions can be asked: Do we have the skills it takes to succeed here? Can we

develop those skills Possible Problems in defining industry boundaries: - be cautious and imaginative - the evolution of new industries over time creates new opportunities and threats - industrial evolution creates industries within industries - industries are becoming global in scope Developing a Realistic Industry Definition: - define the industry in global terms, i.e. in terms that consider the industry’s

international components as well as the domestic ones - from the basis of a preliminary concept of the industry, flesh out its current

components - adopt a longitudinal perspective to understand the makeup of the industry - examine companies that offer different product families - Which part of the industry corresponds to our firm’s goals, what are the key

ingredients for success, are the necessary skills available or can they be generated, will the skills enable to seize emerging opportunities and deal with future threats, is the definition of the industry flexible enough to allow necessary adjustments to the business concept when the industry grows?

4



Industry Structure: - structural attributes are the enduring characteristics that give an industry its distinctive

character - Variations among industries can be explained by:

i) Concentration: refers to the extent to which industry sales are dominates by only a few firms in a highly concentrated industry, the intensity of competition declines over

time high concentration serves as a barrier to entry into an industry

ii) Economies of Scale: refers to the savings that companies within an industry achieve due to

increased volume economies of scale result from technological sources (i.e. higher level of

mechanization and greater modernity of plant and facilities) and non-technological sources (i.e. better managerial coordination of production functions and processes, long-term contractual agreements with suppliers and enhanced employee performance

can charge lower prices and can create barriers of entry iii) Product Differentiation:

refers to the entent to which customers perceive products or services offered by the industry as different

real differentiation (i.e. products differed significantly in their technology and performance) versus perceived differentiation (i.e. results from the positioning of the products)

real and perceived differentiation often intensify competition but successful differentiation poses a competitive advantage

iv) Barriers to Entry: are the obstacles a firm must overcome to enter an industry tangible barriers to entry include capital requirements, technological know-

how, resources, laws regulating entry into an industry intangible barriers to entry include reputations of existing firms, the loyalty of

consumers to existing brands, access to managerial skills entry barriers increase and reflect the level of concentration, economies of

scale and product differentiation industry regulations are a key element of industry structure

Competitive Analysis: How to identify competitors:

- how do other firms define the scope of their market? - How similar are the benefits the customers derive from the products and services that

other firms offer - How committed are other firms to the industry

Common Mistakes: - overemphasis on current, large and known competitors, while ignoring the small ones

and entrants as well as international competitors Operating Environment:

- comprises factors in the competitive situation that affect a firm’s success in aquiring needed resources or in profitability marketing its goods and services

5



Competitive Position: - assessing the competitive position improves a firm’s chances of designing strategies

that optimize its environmental opportunities - included criteria: market share, breadth of product line, effectiveness of sales

distribution, proprietary and key-account advantages, prize competitiveness, advertising and promotion effectiveness, location and age of facility, capacity and productivity, experience, raw materials costs, financial position, relative product quality, R&D advantage position, calibre of personnel, general images, customer profile, patents and copyrights

- once appropriate criteria have been selected, they are weighted to reflect their importance to a firm’s success, and are then multiplied by their weight

Customer Profiles: - developing a profile of a firm’s present and prospective customers improves that

ability of its managers to plan strategic operations, to anticipate changes in the site of markets and to reallocate resources so as to support forecast shifts in demand patterns

- customer profiles are constructed on geographic, demographic, psychographic and buyer behaviour information

- assessing consumer behaviour is a key element in the process of satisfying your target market needs

Suppliers: - dependable relationships between a firm and its suppliers are essential to the firm’s

long term survival and growth - supplier’s prices competitive, quantity discounts, shipping charges competitive terms

of production standards - supplier’s abilities, reputations and services Creditors: - assessment of suppliers and creditors is critical - do creditors fairly value and willingly accept the firm’s stock collateral? - do creditors perceive the firm as having an acceptable record of past payments? - are creditor’s loan terms compatible with the firm’s profitability objectives? - are creditors able to extend the necessary lines of credit? Human Resources: Nature of the Labour Market: - firm’s ability to attract and hold capable employees is essential to its success - access to needed personnel is determined by three factors: the firm’s reputation as an

employer, local employment rates, ready availability as well as the availability of people with the needed skills

Emphasis on Environmental Factors: - the forces in the external environment are so dynamic and interactive that the impact

of any single element cannot be wholly disassociated from the impact of other elements

- different external elements affect different strategies at different times and with varying strengths, the impact of the remote and operating environments will be uncertain until a strategy is implemented

- assessing the potential impact of changes in the external environment offers a real advantages; it enables decision makers to narrow the range of the available options and to eliminate options that are clearly inconsistent with the forecast opportunities

6



Chapter 4:The global environment: Strategic Consideration for multinational firms In less than 20 years, rich industrial countries will be overshadowed by developing countries in their produced share of the word’s output Development of a global corporation:

• The evolution of a global corporation often entails progressively involved strategy level

• 1st level: export-import activities minimal effect on existing management orientation or existing product lines

• 2nd level: involve foreign licensing and technology transfer requires little change • 3rd level: direct investment in overseas operations including manufacturing plants

requires large capital outlays and the development of global management skills multinational corporation

• some firms downplay their global nature ( to never appear distracted from their domestic operations)

Why firms globalize:

• global development makes sense as a competitive weapon • direct penetration of foreign markets can drain vital cash flows from foreign

competitor’s domestic operations • questions concerning globalization: Should a firm act before being forced to do so by

competitive pressure or after? Be proactive or reactive? Proactive: Advantage/ opportunities:

• additional resources • lowered costs • incentives • new, expanded markets • exploitation of firm-specific advantages • taxes • economies of scale • synergy • power and prestige • protect home market through offence in competitor’s home

Reactive:

Outside occurrence • trade barriers • international customers • international competition • regulations • chance

( Exhibit 4-4 p.100)



Strategic orientation of global firms: 1. ethnocentric orientation: believes that the values and priorities of the parent

organization should guide the strategic decisions making of all operations 2. polycentric orientation: the culture of the country in which a strategy is to be

implemented is allowed to dominate the decision-making process 3. regiocentric orientation: parent attempts to blend its own predisposition with those of

the region under consideration, thereby arriving at a region-sensitive compromise 4. geocentric orientation: adopts a global systems approach to strategic decision making,

thereby emphasizing global integration • more details: p.102

At the start of globalization:

• external and internal assessments are conducted before a firm enters global markets • internal assessment involves identification of the basic strengths of a firm’s operations • resources that should be analysed include: technical and managerial skills, capital,

labour, raw materials Complexity of the global environment:

• 5 factors increase complexity 1. globals face multiple political, economic, legal, social, and cultural environments as

well as various rates of changes within each of them 2. complex interaction between national and foreign environments (different social and

economic conditions) 3. communication problems ( e.g caused by geographic separation) 4. global face extreme competition, because of differences in industry structures 5. globals are restricted in their selection of competitive strategies by various regional

blocks and economic integrations ( e.g. European Economic Community) Control problems of the global firm:

• different financial environments make normal standards of company behaviour concerning the disposition of earnings it becomes difficult to measure the performance of international divisions

• in the global firm, planning is complicated by differences in national attitudes towards work measurement, and by difference in government requirements about disclosure of information

• Exhibit 4-8: Differences between factors which affect strategic management in the US and internationally

• Planning helps management of overseas affiliates become more actively involved in setting goals and in developing means to more effectively utilize the firm’s total resources

Global strategic planning:

• Managers cannot view global operations as a set of independent decisions • A recent trend toward increased activism of stakeholders has added to the complexity

of strategic planning for the global firm Multidomestic Industries and Global industries Multidomestic industries:

• Competition is essentially segmented from country to country



• Competition in one country is independent of competition in other countries • Examples: insurance, retailing, consumer finance

• Global strategies of such an industry is the sum of the strategies developed by

subsidiaries operating in different countries • Factors that increase the degree to which an industry is multinational include: meet the

tastes of customers, fragmentation of the industry, a lack of economies of scale, distribution channels unique to each country, low technological dependence of subsidiaries on R&D provided by global firm

Global industry:

• Competition crosses national boarder • A firm’s strategic moves in one country can be significantly affected by its

competitive position in another country • Strategic management planning must be global for at least 6 reasons: 1. the increased scope of the global management task 2. the increased globalization of firms 3. the information explosion 4. the increase in global competition 5. the rapid development of technology 6. strategic management planning breeds managerial confidence • maximize capabilities through worldwide strategy • high degree of centralized decision making • factors that creates a global industry: economies of scale, high level of R&D

expenditures, presence in the industry of predominantly global firms, presence of homogeneous product needs across markets, low level of trade regulations

• 6 factors which drive global companies: global management team, strategy, operations and products, technology and R&D, financing, marketing (p.108)

Global challenge: Location and coordination of functional activities

• typical functional activities of the firm include purchases of input resources, operations, research and development, marketing and sales, after-sales service

location and coordination issues:

• exhibit 4-10, p.109 • little coordination of functional activities across countries may be necessary in a

multinational industry • the most significant challenge for firms is the ability to adjust to a work force of varied

cultures and lifestyles and the capacity to incorporate cultural differences to the benefit of the company’s mission

market requirements and product characteristics:

• firms must assess two key dimensions of customer demand: customers’ acceptance of standardized products and the rate of product innovation desired

international strategy options:

• exhibit 4-12, p.111



competitive strategies for firms in foreign markets: • exhibit 4-13, p.112 • strategies for firms that are attempting to move toward globalization can be

categorized by the degree of complexity of each foreign market being considered and by the diversity in a company’s product line

• complexity refers to the number of critical success factors that are required to prosper in a given competitive arena

• diversity refers to the breedth of a firm’s business line ( when a company offers many product lines, diversity is high)

Niche market exporting

• primary niche market approach for the company is to modify select product performance or measurement characteristics to meet specific foreign demand ( copying product innovations)

Licensing/ Contract manufacturing

• involves the transfer of some industrial property right from US licensor to a motivated licensee.

• Patents, trademarks, technical know-how Franchising:

• Specialization from of licensing • Allows the franchisee to sell a highly published product, using the parent’s brand

name of trademark, developed procedures, and marketing strategies Joint ventures:

• Begin with a mutually agreeable pooling of capital, reduction, etc. • Share management

Foreign branching

• An extension of the company in its foreign market • Separated located strategic business

Wholly owned subsidiaries:

• High investment • Full ownership • Risks: • 1. managers must have extensive knowledge • 2. host country expects long-term commitment and portion of their nationals to be

employed in positions of management or operation • 3. changing standards mandated by foreign regulations may eliminate a company’s

protected market niche



Chapter 5 – Internal Analysis Introduction:

- a strategy must be consistent with conditions in a firm’s competitive environment, it must pose realistic requirements on the firm’s resources and it must be carefully executed

- problem with implementation of a strategy: managers rely too heavily on past experiences and disregard signals that change is needed -> apply resource based view when conducting an internal analysis and creating new strategic objectives

RESOURCE-BASED VIEW (RBV) OF THE FIRM • Underlying premise:

firms differ in fundamental ways because each possesses a unique “bundle” of resources (tangible/intangible assets and organizational capabilities) -> different bases for competitive advantages

• Is a useful starting point for understanding internal analysis Three basic resources: tangible assets, intangible assets, and organizational capabilities • Core competence (historical assumption) = capability/skill that once identified, nurtured, and deployed throughout the firm became the basis for lasting competitive advantage • RBV makes the core competence concept more focused and measurable -> RBV created basic types of resources that form the building blocks for distinctive competencies:

1. tangible assets = are physical and financial means a company uses to provide value (often on balance sheet) include production facilities, raw materials, financial resources …

2. intangible assets = cannot be touched/seen critical in creating competitive advantage include brand names, company reputation, patents and trademarks …

3. organizational capabilities = skills - the ability/ways of combining assets, people and processes that a company uses to transform inputs into outputs more efficiently than its competitors

What makes a resource valuable? Some key guidelines to identify a valuable asset, capability, or competence:

1. Competitive superiority: does the resource help fulfill a customer’s need better than those of the firm’s competitors?

• It is important to recognize that only resources that contributed to competitive superiority were valuable (aspects that distinguish company from competitors; e.g. location of restaurants …)

2. Resource scarcity: is the resource short in supply? • Resource scarcity contributes value when it can be sustained over time

3. Inimitability: is the resource easily copied or acquired? • If a resource can be easily copied it only generates a temporary value

important to identify isolating mechanisms which make resources difficult to imitate:

a) physically unique resources are virtually impossible to imitate like patents (Mickey Mouse), mineral rights …



b) path-dependent resources must be created over time in a manner that is frequently expensive and always difficult to accelerate like expertise, reputation, capabilities …

c) causal ambiguity is difficult for competitors to understand how a firm has created the advantage it enjoys (e.g. organizational capabilities, “personality” of a firm, combinations of assets, capabilities and culture) economic deterrence involves large capital investments in capacity to provide products/services in a given market that are scale sensitive

4. Appropriability: who actually gets the profit created by a resource? • Resources that one develops and controls are more valuable than resources that can

be easily bought, sold, or moved from one firm to another (e.g. money that must be paid to sports teams, joint ventures)

5. Durability: how rapidly will the resource depreciate? • The slower a resource depreciates, the more valuable it is

6. Sustainability: are other alternatives available? • If it is difficult to create alternatives, the more valuable it is

Using the RBV in internal analysis • (Before using RBV) a firm must first identify and evaluate its resources -> this provides

the basis for future competitive advantage • there are 4 helpful guidelines:

1. disaggregate resources – break them down into more specific categories -> more measurable assessment

2. utilize a functional perspective – looking at different functional areas, disaggregating (in-)tangible assets as well as organizational capabilities -> uncover important value-building resources/activities

3. look at organizational processes and combinations of resources 4. use the value chain approach – to uncover organizational capabilities, activities, and

processes that are valuable potential sources of competitive advantage meaningful analysis of those resources best take place in the context of the firm’s competitive environment (RBV only internal)

AND resources must be applied in an effective product market strategy to generate profit/competitive advantage

SWOT ANALYSIS

• Acronym for the internal strengths and weaknesses of a firm and the environmental opportunities and threats facing the firm

• Creates a quick overview of a company’s strategic situation • Has implications for the design of a successful strategy • Most common way is to use it as a logical framework guiding systematic discussion of a

firm’s resources and basic alternatives • Complementation to RBV, which identifies the strengths/weaknesses

Opportunities • major favorable situations in a firm’s environment (e.g. key trends, technological

changes, previously overlooked market segments…) Threats

° major unfavorable situations in a firm’s environment (e.g. entrance of new competitors, slow market growth…)

Strengths • Resource/competency advantage to competitors Distinctive competence: when it gives the firm a comparative advantage in the

marketplace (arise from available resources/competencies)



Weaknesses • Limitation/deficiency in resources/competencies relative to competitors; impedes a firm’s

effective performance -> look at graph p.136: strategies that fit to combinations of SWOT analysis VALUE CHAIN ANALYSIS (VCA) (functional approach for internal analysis)

• Attempts to understand how a business creates customer value by examining the contributions of different activities within the business to that value

• VCA looks at the business as a process (a chain of activities) • Value derives from 3 sources: product differentiation, activities which lower costs and

activities which meet customer needs quickly) • Divides activities within the firm into 2 broad categories:

1. primary activities (line functions) = activities involved in the physical creation of a product, marketing, transfer to buyer, after-sale service

2. support activities (staff or overhead functions) = activities that assist the firm as a whole by providing infrastructure or inputs that allow primary activities to take place on an ongoing basis

• includes a profit margin = markup above the cost of providing a firm’s value- adding activity (creates value that exceeds cost to generate return for effort)

Conducting a value chain analysis Identify activities

• divide operations into specific activities/business processes (into primary/support activities) -> within category find discrete activities that might present strengths or weaknesses (find sources for competitive (dis-)advantage)

Allocate costs • assign costs/assets to each activity • VCA provides a more meaningful analysis of the procurement function’s costs and

consequent value-added (benefit of activity-based information is substantial) Recognize the difficulty in activity-based cost accounting

• Time and energy to change to an activity-based approach can be formidable • Conducting VCA to analyze competitive advantages that differentiate the firm is

compatible with the RBV’s examination of intangible assets/capabilities as source of distinctive competences

Identify the activities that differentiate the firm • VCA also brings attention to several sources of differentiation advantage relative to

competitors (e.g. special services) Examine the value chain

• Identify activities that are critical to buyer satisfaction/market success • 3 consideration are important at this stage:

1. company’s basic mission (e.g. low-cost vs. differentiation) 2. nature of value chains and the relative importance of the activities within them

vary by industry 3. relative importance of value activities can vary by a company’s position (e.g. in

context with upstream suppliers or downstream customers) • therefore it is important that managers take their level of vertical integration into account

and the need for examining costs associated with activities provided by upstream/downstream companies

Compare to competitors • comparing the value chain/activities of key competitors



• compare the firm’s status with meaningful standards to determine which of its value activities are strengths/weaknesses

INTERNAL ANALYSIS: MAKING MEANINGFUL COMPARISONS

• strategists rely on 4 basic perspectives to evaluate 1. Comparison with past performance

• Historical experience as a basis for evaluating internal factors (problem that managers are strongly influenced by it)

• Can provide relevant evaluation framework BUT strategist must avoid tunnel vision in making use of it

• Using only historical experience as a basis for identifying strengths/weaknesses can prove dangerously inaccurate

2. Stages of industry evolution • Use changing requirements, which are associated with different stages of industry

evolution as a framework for identifying/evaluating the firm’s strengths/weaknesses

There are 4 stages of industry evolution and typical changes in functional capabilities 1. introduction (minimal growth in sales, R&D emphasis, rapid technological

change, operating losses -> need for sufficient resources to support temporary unprofitable operations)

2. growth (new competitors, key strengths: brand recognition, product differentiation, financial resources)

3. maturity (growth continues at decreasing rate, no. of industry segments expands, technological change in product design slows down -> competition more intense, key strengths: promotion/pricing advantages, differentiation, efficient production)

4. decline (strengths and weaknesses center on cost advantages, superior supplier/customer relationships, financial control, competitive advantage if firm serves market that competitors are choosing to leave)

see exhibit 5-13, page 146/147 • relative importance of various determinants of success differs across the stages of

industry evolution state of that evolution must be considered in internal analysis

3. Benchmarking – comparison with competitors • Major focus are resources/competencies in comparison with existing potential

competitors • Different internal resources can become relative strengths (or weaknesses)

depending on the strategy a firm chooses • Benchmarking (comparing the way a company performs a specific activity with a

competitor doing the same thing) o Has become central concern of managers in quality commitment companies

worldwide o is an effective way to continuously improve the activity o Objective: identify the best practices in performing an activity, learn how to

lower costs, fewer defects, or other outcomes linked to excellence are achieved

4. Comparison with success factors in the industry • Identify the factors associated with successful participation in a given industry

(use Porter’s 5 forces) • Strategist seeks to determine whether a firm’s current internal capabilities

represents strengths/weaknesses in new competitive areas



Chapter 6 – Formulating Long-Term Objectives and Grand Strategies Long-Term Objectives: - short-run profit maximization is rarely the best approach to achieving sustained corporate

growth and profitability - instead, managers favour to distribute a small amount of profit for the moment but sow most

of it to increase the likelihood of a long-term supply - in order to achieve long-term prosperity, strategic managers establish long-term objectives in

seven areas: i) Profitability: (have a profit objective, expressed in earnings per share or return on

equity) ii) Productivity: (the strive for increased productivity of the systems results in an increased

profitability; commonly used productivity objectives are the number of items produced) iii) Competitive Position: (measure of corporate success is relative dominance in the

marketplace and may indicate the firm’s long-term priority) iv) Employee Development: (employees value education and training, as this leads to

increased compensation and job security) v) Employee Relations: (good employee relations are highly important; productivity is

linked to employee loyalty and the appreciation of managers’ interest in employee welfare)

vi) Technological Leadership: (firms must decide whether to lead or follow in the marketplace; Internet has become in integral aspect of corporate long-term planning)

vii) Public Responsibility: (managers recognize their responsibilities to customers and to society at large; many firms seek to exceed government requirements)

Qualities of Long-Term Objectives: - seven criteria should be used in preparing long-term objectives

i) Acceptable: (pursue objectives that are consistent with their preferences; long-term corporate objectives frequently are designed to be acceptable to groups external to the firm)

ii) Flexible: (objectives should be adaptable to unforeseen or extraordinary changes in the firm’s competitive or environmental forecasts; however flexibility is increased at the expense of specificity)

iii) Measurable: (objectives must clearly and concretely state what will be achieved and when it will be achieved)

iv) Motivating: (people are most productive when objectives are set at a motivating level, high enough to challenge but not too high so that they frustrate or too low so that they are easily achieved)

v) Suitable: (objectives must be suited to the broad aims of the firm; each objective should be a step towards the attainment of overall goals)

vi) Understandable: (at all levels it must be understood what is to be achieved and by which criteria their performance will be evaluated)

vii) Achievable: (objectives must be possible to achieve) The Balanced Scorecard: - is a set of measures that are directly linked to the company’s strategy - it directs a company to link its long-term strategy with tangible goals and actions - allows managers to evaluate the company from 4 perspectives: financial performance,

customer knowledge, internal business processes and learning and growth - it contains a concise definition of the company’s vision and strategy

1



- surrounding the vision and strategy, there are 4 additional boxes, where each box contains the objectives, measures, targets and initiatives for one of the four perspectives ( see Exhibit 6.2, p. 159)

- the objectives and measures of the four perspectives are linked by cause-and-effect relationships that lead to the successful implementation of the strategy

- a properly constructed scorecard is balanced between short- and long-term measures; financial and non-financial measures; and internal and external performance perspectives

Generic Strategies: - is the believe that a long-term or grand strategy must be based on a core idea about how the

firm can best compete in a marketplace - any long-term strategy should derive from a firm’s attempt to seek a competitive advantage

based on one of the three generic strategies: Generic Strategy Risks Overall Cost Leadership

- not sustained - competitors imitate - technology changes - other bases of cost leadership erode - proximity in differentiation is lost - cost focuser achieve even lower costs in segments

Differentiation - not sustained - competitors imitate - bases of differentiation become less important to buyers - cost proximity is lost - differentiation focusers achieve even greater differentiation in segments

Focus - focus is imitated - target segment turns unattractive (structure erodes, demand disappears - broadly targeted competitors overwhelm segment - new focusers subsegment the industry

Low-Cost Leadership: - depend on fairly unique capabilities to achieve and sustain their low-cost position - they usually excel at cost reductions and efficiencies - maximise economies of scale - can charge lower prices or enjoy a higher profit margin can effectively defend itself

against prices wars, can attack competitors on price in order to gain market share Differentiation: - designed to appeal to customers with a special sensitivity for a particular product attribute - attempts to build customer loyalty Focus: - attempts to attend to the needs of a particular market segments, which are usually those that

are ignored by marketing appeals - willing to serve isolated areas or tailor the product to somewhat unique demands oo the

small- or medium-sized customer Grand Strategies (Master or Business Strategies): - they are the basis of coordinated and sustained efforts directed towards achieving long-term

objectives (provide a basic direction for strategic actions) - they indicated the time period over which long-range objectives are to be achieved - there are 15 Grand Strategies, often used in combination: 1) Concentrated Growth:

o the strategy that directs its resources to the profitable growth of a single product, in a single market with a single dominant strategy

o rationale is that the firm thoroughly develops and exploits its expertise in a delimited competitive area

2



o leads to enhanced performance; characteristic are the ability to access market needs, know buyer behaviour, customer price sensitivity and the effectiveness of promotion

o firm grows by building on its competences and it achieves a competitive edge by concentrating in the product-market segment it knows best

o the firm aims for the growth that results from increased productivity, better coverage of its actual product-market segment and more efficient use of its technology

- Favoured by: o firm’s industry is resistant to major technological advancements (which is the case in the

late growth and maturity stage of the product life cycle) o the targeted markets are not product saturated (markets with competitive gaps leave the

firm with alternatives for growth, other than taking market share away from competitors o the firm’s product markets are sufficiently distinctive to dissuade competitors in adjacent

product markets from trying to invade the firm’s segment o firm’s inputs are stable in price and quantity and are available in the amounts and at the

times needed o the market is stable, without the seasonal or cyclical swings that would encourage a firm

to diversity o firm enjoys competitive advantage based on efficient production or distribution channels o market generalists who creates conditions without making special appeals to distinct

customer groups - Risks and Rewards: o in a changing environment the risks are particularly high o concentrating on a single product market makes the firm particularly vulnerable to

changes in the segment o entrenchment in a specific product market tends to make a concentrating firm more adept

than competitors at detecting new trends o it is vulnerable to the high opportunity costs that result from remaining in a specific

product market and ignoring all other options that could employ the firm’s resources more efficiently

- Viable Option: o only limited additional resources are necessary to implement the strategy; therefore very

good for firms with limited funds o limited risks involved o firm directs its resources to the profitable growth of a narrowly defined product and

focuses on a dominant technology o they are able to extract the most from their technology and market knowledge and are

thus able to minimize the risks associated with unrelated diversification

2) Market Development: - consists of marketing present products, with only cosmetic modifications, to customers in

related market areas by adding channels of distribution or by changing the content of advertising or promotion

- it allows the firm to practice a form of concentrated growth by identifying new uses for existing products and new demographically, psychographically or geographically defined markets

- ranks second as the least costly and least risky of the 15 grand strategies

3) Product Development: - involves the substantial modification of existing products or the creation of new but

related products that can be marketed to current customers through established channels - it is often adopted to prolong the life cycle of current products or to take advantage of a

favourite reputation or brand name

3



- it attempts to attract satisfied customers to new products as a result of their positive experience with the firm’s initial offerings

- it is based on the penetration of existing markets by incorporating product modifications into existing items or by developing new products with a clear connection to the existing product line

4) Innovation:

- it is seaked to reap the initially high profits associated with customer acceptance of a new or greatly improved product

- the underlying rationale is to create a new product life cycle and thereby make similar existing products obsolete

- most growth-oriented firms appreciate the need to the innovative occasionally, but few firms use it as their fundamental way of relating to their markets

- very few innovative ideas prove profitable because or R&D and premarketing costs - less than 2% of the innovative projects initially considered reach the market place

5) Horizontal Integration: - growth that is to be achieved through the acquisition of one or more similar firms

operating at the same stage of the product-marketing chain - competitors are eliminated and the acquiring firm is provided with access to new markets - risks stems from an increased commitment to one type of business

6) Vertical Integration: - firm acquires the firm that supplies the inputs or the firm that are customers of its outputs - Backward Vertical Integration: the acquired firm operates at an earlier stage of the

production-marketing process; the dependability of the supply or the quality of the raw materials is increased

- Forward Vertical Integration: the acquired firm operates at a later stage of the product-marketing process; preferred if great advantages accrue to stable production

- by integrating vertically, the acquiring firm can greatly expand its operations and thereby achieving greater market share; improve its economies of scale and increases the efficiency of used capital

- benefits are achieved with a moderately increased risk, since the success of the expansion is dependent on proven abilities

- risks result from the firm’s expansion into areas requiring strategic managers to broaden the base of their competences and assume additional responsibilities

7) Concentric Diversification:

- involves the acquisition of businesses that are related to the acquiring firm in terms of technology, markets or products

- selected new business possesses high degree of compatibility with firm’s current businesses

- motivations for acquiring a firm: o increase the firm’s stock value o increase the growth rate of a firm o make an investment that represents better use of funds o improve the stability of earnings o balance or fill out the product line o diversify the product line when the life cycle of current products has peaked o quick acquisition of needed resources o achieve tax savings o increases the efficiency and profitability

4



- an ideal concentric diversification occurs when the combined company profits increase the strength and opportunities while decreasing the weaknesses and risks

8) Conglomerate Diversification:

- occurs when a firm acquires a business because it represents the most promising investment opportunity available

- it is principally bases on profit considerations - NB: the majority of such acquisitions fail to produce the desired results for the

9) Turnaround: - a firm may face declining profits due to recessions, production inefficiencies and

innovative breakthroughs by competitors - turnaround is a grand strategy based on the belief that a firm can survive and eventually

recover if a centred effort is made over a period of a few years to fortify its distinctive competences

- turnaround is initiated by two forms of retrenchment: cost reduction (decreasing of workforce, leasing rather than purchasing equipment) or by asset reduction (sale of property that is not essential to the basic activity of the firm

- Situation Severity: the immediacy of the resulting threat to company survival posed by the turnaround situation

- Turnaround Responses consist of: o Retrenchment: consists of cost-cutting and asset-reducing activities stabilizes

the firm’s financial position o Recovery Response: recovery is achieved when economic measures indicate that

the firm has regained its pre-downturn levels of performance - Exhibit 6.10, p. 174 Model of the Turnaround situation

10) Divesture: - involves the sale of a firm or a major component of a firm - Marketing for Sale: finding a buyer that is willing to pay a premium above the value of a

going concern’s fixed assets - reasons for divesture:

o partial mismatches between the acquired firm and the parent corporation o corporate financial needs o government antitrust action when a firm is believed to monopolised

11) Liquidation: - the firm is sold in parts - the owners and the managers admit failure and recognize that this action is likely to result

in great hardships to themselves and their employees - it minimizes the losses of the stockholders

12) Bankruptcy: - Liquidation Bankruptcy:

o all assets are distributed to creditors, who will only receive back a small faction of the amount they are owed

o business cannot pay its debts so it must close down o investors lose their money, employees their jobs and managers their credibility o in owner-managed firms, company and personal bankruptcy go hand in hand o owner are personally liable for all business debts not covered by the sale of the

business assts; shareholders of corporations are not liable for corporate debt; they simply terminate operations

5



o court appoints a trustee, who collects the property of the company, reduces it to cash and distributes the proceeds proportionally to creditors on a pro rata basis

- Reorganization Bankruptcy: o firm attempts to persuade its creditors to temporarily freeze their claims while it

undertakes to recognize and rebuild the company’s operations more profitably o if the plan is successful this option offers the maximum repayment of debt

- if creditors file lawsuits or schedule judicial sales to enforce liens, the company can seek protection of the Bankruptcy Court; sufficient time is then provided to work out the reorganization

13) Joint Ventures:

- commercial companies (children) created and operated for the benefit of the co-owners (parents)

- extends the supplier-consumer relationship and has strategic advantages for both partners - minimize the threat of foreign domination and enhance the skills, employment, growth

and profits of local firms - however, they often limit the discretion, control and profit potential - Joint Ownership: very appealing for domestic firms that join foreign firms - if historically national firms are to remain viable, the joint venture approach requires

greater attention due to increasing globalization

14) Strategic Alliances: - partnerships that exist for a defined period during which partners contribute their skills

and expertise to a cooperative project - relationships are tricky, as one can steal the other’s know how - synonymous to licensing: - Licensing:

o involves the transfer of some industrial property right from the US licensor to a motivated licensee abroad

o includes patents, trademarks, technical know-how which are granted for a certain amount of time and are returned for a royalty and avoiding tariffs or quotas

- Outsourcing: o a rudimentary approach to strategic alliances that enables firms to gain a

competitive advantage o done in order to improve business focus o access to world-class capabilities o accelerated reengineering benefits o shared risks, free resources for other purposes

15) Consortia: - defined as large interlocking relationships between businesses of an industry - Japanese Keiretsu: an undertaking involving up to 50 different firms that are joined

around a large trading company or bank and are coordinated through interlocking directories and stock exchanges; it is designed to use industry coordination to minimize risks of competition in part through cost sharing and increased economies of scale

- South Korean Chaebol: resembles a consortium and kreiretsu except that they are finances through government banking group and largely run by professional managers trained by participating firms for the job

- the selection of long-range objectives and grand strategies involves simultaneous rather than sequential decisions

6



Chapter 7 – Strategic analysis and choice in single- or dominant-product business: building sustainable competitive advantages

• What strategies are most effective at building sustainable competitive advantages for

single business units? • What competitive strategy positions a business most effectively in its industry? • Should dominant-product/service businesses diversify to build value and competitive

advantage? • What grand strategies are most appropriate?

EVALUATING AND CHOOSING BUSINESS STRATEGIES: SEEKING SUSTAINED COMPETITIVE ADVANTAGE

• Most prominent sources of competitive advantage are 1. business’s cost structure 2. ability to differentiate the business from competitors

• highest profitability level are found in businesses that possess both types of competitive advantage at the same time

Evaluating cost leadership opportunities

• Evaluate the sustainability of low-cost leadership advantages • Low-cost activities that are sustainable and that provide advantages relative to key

forces should become the basis for the business’s competitive strategy

• Low-cost advantages that reduce the likelihood of pricing pressure from buyers • Truly sustained low-cost advantages may push rivals into other areas, lessening price

competition • New entrants competing on price must face an entrenched cost leader without the

experience to replicate every cost advantage • Low-cost advantages should lessen the attractiveness of substitute products • Higher margins allow low-cost producers to withstand supplier cost increases and

often gain supplier loyalty over time • Many cost-saving activities are easily duplicated • Exclusive cost leadership can become a trap • Cost differences often decline over time

Evaluating differentiation opportunities

• Differentiation: buyer feels the additional cost to buy the product/service is well below what the product/service to other available alternatives

• Arises from activity/activities in the value chain • Sustainability of differentiation depends on:

1. continuation of high perceived value to buyer 2. lack of imitation by competitors

• strategists evaluate the sustainability of differentiation advantages by benchmarking • Rivalry is reduced when a business successfully differentiates itself • Buyers are less sensitive to prices for effectively differentiated products • Brand loyalty is hard for new entrants to overcome • Imitation narrows perceived differentiation, rendering differentiation meaningless • Technological changes that nullify past investments or learning • The cost difference between low-cost competitors and the differentiated business

becomes too great for differentiation to hold brand loyalty



Evaluating speed as a competitive advantage

• Speed is the driving force that everyone is after creating speed-based competitive advantage • speed involves the availability of rapid response • speed-based competitive advantage can be created around several activities:

1. customer responsiveness: quick response with answers, information, and solution to mistakes -> competitive advantage + builds customer loyalty

2. product development cycles: speedy product development from conception to production

3. product or service improvements: adapt their products/services in a way that benefits their customers and creates new costumers -> competitive advantage

4. speed in delivery or distribution: firm can get you what you need when you need it

5. information sharing and technology: speed in sharing information becomes the basis technology is used to speed up the information sharing -> create competitive advantage

BUT: it also have risks -> speeding up activities that haven’t been conducted in a fashion that prioritizes rapid response stable, mature industries that have very minimal levels of change – customers in such setting may prefer the slower pace

Evaluating market focus as a way to competitive advantage

• small companies usually thrives because they serve narrow market niches • focus allows to compete on the basis of low cost, differentiation, and rapid response • let a business “learn” its target customers -> establish personal relationship • the risk is: to attract major competitors,

to become a takeover target, and to slip into the illusion that it is focus itself

SELECTED INDUSTRY ENVIRONMENTS AND BUSINESS STRATEGY CHOICES

• the analysis and choice to build competitive advantage can be enhanced by taking industry conditions into account

• there are 5 “typical” industry settings and opportunities (3 of the 5 relate to the industry life cycle)

1. Competitive advantage in emerging industries

• Emerging industries are newly formed or re-formed industries (created by technological innovation, customer needs, or other economic/sociological changes)

• There are no “rules of the game” -> presents both risk and an opportunity • Business strategies must be shaped to accommodate the following characteristics:

competitor uncertainty, high initial costs, few entry barriers, need for high-risk capital, inability to obtain raw material/components, and first-time buyers require initial inducement to purchase

• For success business strategies require: ability to shape the industry’s structure, ability to rapidly improve product quality, advantageous relationships, ability to



establish the firm’s technology as the dominant one, early acquisition of a core group of loyal customers, ability to forecast future competitors

2. Competitive advantage in the transition to industry maturity

• As an industry evolves, its rate of growth eventually declines • The transition is accompanied by several changes in the competitive advantage:

competition for market share becomes more intense, sell increasingly to experienced repeat buyers, competition becomes more oriented to cost and service, new products/new applications are harder to come by, international competition, profitability falls (often permanently)

• Strategy elements of successful firms in maturing industries: pruning in product line, emphasis on process innovations, emphasis on cost reduction, careful buyer selection (focus on more closely tied to the firm), horizontal integration, and international expansion

• Business strategist must avoid several pitfalls: a) Must make a clear choice among the 3 generic strategies (no middleground

approach) b) Must avoid sacrificing market share too quickly for short-term profit c) Must avoid waiting to long to respond e.g. to price reductions …

3. Competitive advantage in mature and declining industries • Make products/services for which demand is growing slower/ is actually declining

(caused by technological substitution, demographic shifts, and shifts in needs) • Should choose strategies that emphasize: focus on segments that offer a chance for

higher growth/return, product innovation and quality improvement, production and distribution efficiency, and gradually harvest the business -> incorporate this, business can anticipate relative success (particular where industry’s decline is slow and profitable niches remain)

• Must avoid 3 pitfalls a) Being overly optimistic about the prospects of revival of industry b) Getting trapped in a profitless war of attrition c) Harvesting from a peak position

4. Competitive advantage in fragmented industries • No firm has a significant market share and can strongly influence industry

outcomes • Pursue low-cost, differentiation, or focus competitive advantage in one of the 5

ways: a) Tightly managed decentralization (high degree of professionalism into the

operations of local mangers <– need for intense local coordination) b) “formula” facilities (introduces standardized, efficient, low-cost facilities at

multiple locations -> build low-cost advantage over localized competitors) c) increased value-added (product/service is difficult to differentiate -> add value

e.g. by providing more service) d) specialization (segment the market into product type, customer type, type of

order, and geographic area – BUT specialization can risk limiting the firm’s potential sales volume)

e) bare bones/no frills (may build a sustainable cost advantage by use of low overhead, minimum wage employees, and tight cost control)



5. Competitive advantage in global industries • Firms are required to compete on a worldwide basis • 4 unique strategy-shaping features:

differences in a) price and costs (currency exchange fluctuation), wage and inflation rates … b) buyer needs c) competitors and ways of competing d) trade rules and governmental regulations

• unique features and global competition require that 1. the approach used to gain global market coverage and 2. the generic competitive strategy are addressed in the business strategy

• 3 options to pursue global coverage 1. license 2. maintain a domestic product base 3. establish foreign-based plants and distribution

• 4 generic global competitive strategies 1. broad-line global competition – compete worldwide with full product line -> achieve differentiation/overall low-cost position 2. global focus strategy – targeting a particular segment 3. national focus strategy – taking advantage of differences in national markets -> give firm an edge 4. protected niche strategy – seeking for countries that are advantageous to localized firms

strategists must carefully match their skills and resources with global industry structure and conditions in selecting the most appropriate strategy option

there are 3 basic considerations: 1. recognize that their overall choice revolves around 3 sources of competitive advantage

(that require total and consistent commitment) 2. must carefully weigh skills, resources, organizational requirements, and risk

associated with each source of competitive advantage 3. consider the unique influence of generic industry environment

DOMINANT PRODUCT/SERVICE BUSINES: EVALUATING AND CHOOSING TO DIVERSIFY TO BUILD VALUE The main questions:

• what grand strategies are best suited to continue build value? • Under what circumstances should they choose an expanded focus; steady

continued focus; or a narrowed focus? There are 2 ways to analyze a dominant product company’s situation:

1. Grand strategy selection matrix (exhibit 7-9, page 208) • Basic idea underlying: 2 variables are of central concern in the selection process

I. The principal purpose of the grand strategy II. The choice of an internal/external emphasis for growth/profitability



Concentrated growth Market development Product development Innovation

internal

(chapter 6, definitions and expla

2. Model of grand strateg• Is based on the idea

rate of the general m• When these factors a

categorized in one o

1. concentric diversification 2. conglomerate diversificatio3. joint ventures

1. concentrated growth 2. vertical integration 3. concentric diversificat

Strong competitive

position

Opportunities for building va• Useful tools to help dom

choices among alternativ• Manager must examine

usually found in market• Reducing costs, improvi

effectively than tradition


Authors: J. Albrecht, S. Bauwens, A. Benk

overcome weakness

Vertical integration Conglomerate diversification

Turnaround or retrenchment Divestiture Liquidation

Horizontal integration Concentric diversification Joint venture

external

Maximize strength

nations)

y clusters (exhibit 7-10, page 210) that the situation of a business id defined in terms of growth arket and the firm’s competitive position in the market re considered simultaneously, a business can be broadly

f these quadrants:

1. turnaround/retrenchment 2. concentric diversification 3. conglomerate diversification 4. divestiture 5. liquidation

n

1. reformulation 2. horizontal integration 3. divestiture 4. liquidation

in

Slow market growth

Rapid market growth

Weak competitive

position

lue as a basis for choosing diversification or integration inant product company managers evaluate + narrow their e grand strategies

whether opportunities to build value are present, they are -related, operating-related, and management activities ng margins, or providing access to new revenue sources most al internal growth options (via concentration …)

en, V. Franke, S. Heinrichs, S. Huth, D. Nussbaum, K. Pietrek, B. Pörner

Chapter 8: Strategic analysis and choice in the multibusiness company: rationalizing diversification and building shareholder value Rationalizing diversification and integration - if a single business company is transformed into a collection of numerous businesses

across several industries, strategic analysis becomes more complex - managers must set forth a corporate strategy that rationalizes the collection of businesses - 2 listening key audiences:

1. mangers within organization who want to understand their role and access to resources compared to other businesses in company

2. stockholders (of great importance) who want to understand how collection of businesses will build shareholder value more effectively than simply investing in separate businesses

- shareholder value in a diversified firm is determined by how well the various businesses perform and how compelling synergies and opportunities appear to be

- in general: diversification that shares skills and core competencies across businesses to strengthen value chains or create competitive adv. enhances shareholder value

strategic analysis and choice for corporate managers in multiple business companies is determining whether portfolio of business units captures synergies that were intended & how to respond & choose among future diversification and divesture options

Are opportunities for sharing infrastructure and capabilities forthcoming? - opportunities to build value via diversification, integration, or joint venture strategies are

found in market-related, operating-related and management activities - each business’s basic value chain becomes a source of synergy and competitive adv. for

another business in corporate portfolio - however each business opportunity and activity might yield impediments (table p.220) - good strategists try to avoid/minimize impact of impediments or they drop further

diversification - 2 elements needed for shared meaningful opportunities:

1. shared opportunities must be a significant proportion of value chain of businesses involved

2. businesses involved must truly have shared needs (need for same activity) –otherwise no basis for synergy

Are we capitalizing on our core competencies? - most compelling reason for diversification: core competencies (= key value building

skills) can be leveraged with other products or into markets that are not part of where they were created

- 3 basic considerations to evaluate whether companies are capitalizing on core competencies: 1. Is each core competency providing a relevant competitive adv. to the intended

business? -> core competency must assist intended business in creating strength relative to key competition; core competence must be transferable and provide a major source for competitive adv.

2. Are businesses in the portfolio related in ways that make the company’s core competences beneficial? -> Related diversification = businesses that rely on similar capabilities to attain competitive adv. in respective products/markets (products don’t have to be related, but some activities in their value chains must require similar skills in order to create competitive adv.) VS. Unrelated/ conglomerate diversification = businesses with no real overlapping capabilities other than financial resources (most



profitable if firm is centred around a set of resources that creates a competitive adv. in one industry, but is adaptable enough to also be applied to others; least profitable if firm is centred around general resources that are applied in a variety of industries, but seldom create a competitive adv.)

3. Is our combination of competencies unique/difficult to re-create? -> strategists look for a combination of competencies to create a situation where seemingly easily replicated competencies become unique, sustainable competitive adv.; often managers create a concept for interrelated skills, but encounter problems when trying to implement it

Does the company’s business portfolio balance financial resources? - different businesses generate and consume different levels of cash -> challenge for

managers to determine the best way to generate and use financial resources among the businesses within their company

- 1970s: Boston Consulting Group pioneered portfolio techniques that attempted to help managers balance cash resources among businesses and at the same time identifying their basic strategic purpose within overall portfolio

BCG growth share matrix (p.227)

Cash generation (market share) High Low

Star Problem child Cash use (growth rate)

Cash cow Dog

- market growth rate is projected rate of sales growth for market (usually measured by percentage increase in a market’s sales or units volume over 2 most recent years)

- relative competitive position is expressed as market share of business divided by market share of largest competitor -> provides basis for comparing relative strengths of businesses in terms of positions in respective markets

- stars: rapidly growing markets with large market shares; best long run opportunities (profitability and growth); require substantial investment to maintain (and expand) dominant positions; investment requirement often in excess of funds that stars generate; these businesses are often short term priority users of resources

- cash cows: high market share in low growth markets, strong positions and minimal investment requirements often lead to capital in excess of cash needs; are “milked” as a source of resources for deployment elsewhere; are yesterday’s stars and foundation of corporate portfolios

- dogs: low market share and low growth, face mature markets with intense competition and low profit margins, managed for short term cash flow (e.g. ruthless cost cutting) to supplement resources, afterwards they are often divested or liquidated

- question marks (problem children): high growth rates give them appeal but low market share makes profit potential uncertain; use a lot of cash because of high growth rate, but generate just a little bit -> managers at corporate level must identify question marks that can increase market share and move into star group with support of resources

The industry attractiveness-business strength matrix (p.230) - strategists find BCG growth matrix’s axes limiting to reflect business complexity -> Mc

Kinsey and Company at General Electric developed Industry attractiveness business strength matrix: uses multiple factors to assess industry attractiveness and business strength rather than single measures employed in BCG matrix

- company’s businesses are rated on factors such as: 1. industry attractiveness (broad range of external opportunities and threats): nature of competitive rivalry, bargaining power of



suppliers/customers, threat of substitute products/new entrants, economic factors, financial norms, socio-political considerations and 2. business strength (internal strengths and weaknesses): cost position, level of differentiation, response time, financial strength, human assets, public approval (p.229)

- position of a business is calculated by “subjectively” quantifying its rating along 2 dimensions on matrix -> one of following strategic approaches is suggested: 1.) invest to grow, 2.) invest selectively and manage for earnings and 3.) harvest or divest for resources.

- Improves BCG matrix in 3 ways: terminology is preferable because it is less offensive and more understandable, multiple measures associated with dimensions tap more factors relevant to business strength and industry attractiveness, and thus matrix makes for broader assessment during planning process, bringing considerations of importance in strategy formulation and implementation to light

The life-cycle competitive strength matrix (p.231) - first two matrices are criticized because of static quality – they portray business at one

point in time rather than as they evolve - life cycle matrix uses multiple factor approach to assess competitive strength (subjective

rating based on wide range of factors regarding likelihood of gaining and maintaining competitive adv.) as one dimension and stage of market life cycle as the other

- helps consider strategic issues associated with each life cycle stage - helps to address current strategies and those that could arise next BCG’s strategic environment matrix (p.231) - idea that it is the nature of competitive adv. in industry that determines strategies

available, which in turn determine structure of the industry - helps ensure that individual business strategies are consistent with strategies appropriate

for environment - matrix has 2 dimensions:

1. number of sources of competitive adv.: could be many with complex products and multiple opportunities for differentiation and cost (e.g. automobiles, financial services) or few with commodities and few opportunities for cost advantages (e.g. chemicals or microprocessors)

2. size of competitive adv.: how big is the advantage to the industry leader? - volume businesses: few sources of adv., but size is large – typically result of scale

economies; adv. in such a business may be transferable to another - stalemate businesses: few sources of adv. with most of those small -> very competitive

situation; skills in operational efficiency and cost management needed - fragmented businesses: many sources of adv., but they are small; differentiated products

with low brad loyalty, easily replicated technology and scale economies minimal; skills in market segments, ability to respond quickly to changes and low costs are critical

- specialization businesses: many sources of adv. and adv. are sizable; skills in achieving differentiation (design, branding, innovation etc.) needed

Limitations of portfolio approaches - advantages: convey large amounts of info. in simplified manner, illuminate similarities

and differences between business units, help convey logic behind corporate strategies in common vocabulary, simplify priorities for sharing resources and simple prescription of what managers should accomplish

several limitations of portfolio approaches:



- don’t address how value is created in business units – only relationship cash; tendency to trivialize strategic thinking, not enough time for underlying analysis

- accurate measurement for matrix classifications not as easy as matrices portrayed, identifying separate businesses not as precise

- relationship between market share and profitability (experience curve effect) varies across industries and market segments – firms with low market share can generate superior profitability

- limited strategic options, intended to describe flow of resources, were considered more as basic strategic missions; false sense of what strategies are (especially average businesses)

- portray approach that firma need to be self-sufficient in capital -> ignores capital raised in capital markets

- fails to compare competitive adv. a business receives from being owned by a particular company with the costs of owning it

- constructing business portfolio matrices must be undertaken with limitations in mind they provide one form of input to corporate managers seeking to balance financial resources

Does our business portfolio achieve appropriate levels of risk and growth? - diversification reduces risk in several ways:

1. balance of cyclical revenue streams to reduce earnings volatility 2. revenue growth can be enhanced

- managers should examine risk and growth when undertaking strategic analysis: is growth always desirable? Can risk truly be managed most effectively by corporate management?

Behavioral considerations affecting strategic choice - strategic decision makers are often confronted with viable alternatives rather than the

luxury of a clear cut strategic choice 6 factors influence strategic choice 1. role of current strategy - if managers have invested substantial time, resources and interest strategies they prefer a

choice that closely parallels or involves only incremental alterations of current strategy ° continuity with past strategy is reinforced throughout whole firm

- Henry Mintzberg: the older and more successful a strategy, the harder it is to replace - some companies replace top executives when performance was inadequate for an

extended period because replacing these executives lessens influence of unsuccessful past strategy in future strategic choice

2. degree of the firm’s external dependence - strategic alternatives must accommodate a firm’s dependence on the environment - the greater a firm’s dependence, the lower its range and flexibility - external dependence can restrict options, but aren’t necessarily a strategic threat -> firms

partner strategically: in order to enhance quality and cost firms “sole-source” certain suppliers which increases external dependence -> firms share information, improve and integrate product and process design and development

3. attitudes towards risk - attitudes that favor risk, expand range of strategic choice and high risk strategies are

acceptable and desirable - industry volatility influences propensity of managers towards risk: managers in volatile

industries operate with greater amounts of risk than their counterparts in stable industries



- a firm in early stage of product life cycle must operate with more risk than firms in later stages of cycle

- risk-oriented managers lean toward opportunistic strategies with higher payoffs - risk-averse managers lean toward safe, conservative strategies with reasonable, highly

probable returns 4. managerial priorities different from stockholder interests - agency theory suggests that managers frequently place own interests above those of

shareholders - the latter is especially the case when strategic decisions involve diversification:

stockholder value may be maximized, but managers in acquired company may lose their jobs

- “sharing core competencies” may encounter resistance from managers suspicious about diluting their valued capability

- “shared infrastructure” means fewer managers are needed - “balancing financial resources” means resources controlled by one management group

become shared to support other businesses - managers seek diversification to accelerate sales growth: “growth” achieved by combining

2 companies increases basis on which managers are compensated 5. Internal political considerations - major source of power is chief executive officer (CEO) -> if CEO favours a choice, it is

often selected - coalitions are power sources that influence strategic choice -> mutual interest draws

certain groups together to enhance their position on major strategic issues - strategists must recognize and manage political influence - politics is key ingredient in “glue” that holds an organization together - formal and informal negotiating between individuals, subunits and coalitions are

indispensable mechanisms for organizational coordination -> accommodating these mechanisms in choice of strategy results in more commitment

6. Competitive reaction - firms must anticipate competitors’ reactions to chosen strategies - e.g. rival might implement an aggressive counterstrategy



Chapter 11 – Strategic Control and Continuous Improvement - strategic control: is concerned with tracking a strategy as it is being implemented, detecting

problems or changes and making necessary adjustments (Are we moving in the proper direction? / How are we performing?) - due to accelerating change of the global marketplace → continuous improvement necessary 1. Establishing Strategic Controls

“steering control” can be subdivided into four basic types: a. Premise Control

- premise control is designed to check systematically + continuously whether the premises on which the strategy is based are still valid i. Environmental Factors

- these factors have huge impact on a company and can change often ii. Industry Factors

- the factors in a particular industry have to be considered as well → selection of premises necessary: - which will likely change? - which have a major impact?

b. Strategic Surveillance - strategic surveillance is designed to monitor a broad range of events inside + outside the firm that are likely to affect the course of its strategy - should be kept as unfocused as possible = a loose “environmental scanning”

c. Special Alert Control - a special alert control is the thorough, and often rapid, reconsideration of the firm’s strategy because of a sudden, unexpected event - in many firms, crisis teams handle the response to unforeseen events

d. Implementation Control - Implementation control is designed to assess whether the overall strategy should be changed in light of the results associated with the incremental actions that implement the overall strategy – two basic types: i. Monitoring Strategic Thrusts or Projects

- broad strategies are broken down ins narrow strategic projects = strategic thrusts - in order to control the progress one can determine critical factors in advance or one can use stop/go assessments (a series of thresholds)

ii. Milestone Reviews - at significant milestones of a project → full-scale reassessment of the strategy - purpose is to thoroughly scrutinize the firm’s strategy to control the strategy’s future

- implementation control is enabled through operational control systems (e.g. budgets etc.) - operational controls provide post action evaluation + control over short periods (max. 1 y) - four steps of an effective operational control system: 1. Set standards of performance 2. Measure actual performance 3. Identify deviations from standards set 4. Initiate corrective action → to find deviations and to correct these is the most important success factor [Exhibit 11-1]

1



Characteristics of the Four Types of Strategic Control

Types of Strategic Control Basic Characteristics Premise Control Implementation

Control Strategic

Surveillance Special Alert

Control Objects of control Planning premises

+ projections Key strategic thrusts + milestones

Potential threats + opportunities related to the strategy

Occurrence of recognizable but unlikely events

Degree of focusing High High Low High Data acquisition: Formalization Medium High Low High Centralization Low Medium Low High Use with: Environmental factors Yes Seldom Yes Yes Industry factors Yes Seldom Yes Yes Strategy-specific factors No Yes Seldom Yes Company-specific factors No Yes Seldom Seldom

2. The Quality Imperative: Continuous Improvement to build Customer Value

a. TQM – total quality management - was initiated in Japan after World War II - a new organizational culture + way of thinking: focus on customer satisfaction, accurate measurements of every variable, improvement of products, work relationships based on trust + teamwork – 10 elements:

1. Define quality and customer value quality means that the product is priced competitively (efficiency) + that you provide it quickly (responsiveness) /customer value includes quality, price, speed

2. Develop a customer orientation - talk to your customers directly (including the “internal” customers) → serve both with quality, efficiency, and responsiveness = value is added

3. Focus on the company’s business processes - break down every minute step in the process + look at ways to improve it - each process contributes value, which can be improved/ adapted to help other processes (internal customers) improve

4. Develop customer and supplier partnerships - view suppliers, internal process and customers in a horizontal flow

5. Take a preventive approach - management should be rewarded for being prevention oriented + seeking to eliminate nonvalue-added work

6. Adopt an error-free attitude - “good enough” is not good → “error-free” should become the imperative

7. Get the facts first - decisions have to be based on facts which come from accurate measurements

8. Encourage every manager and employee to participate - helps to support a commitment to customer value

9. Create an atmosphere of total involvement - quality management is not the job of a few managers → all areas are involved

10. Strive for continuous improvement - in order to stay competitive in the 21st century, continually improving quality, efficiency, and responsiveness are necessary

2



b. Six-Sigma Approach to Continuous Improvement - is a highly rigorous + analytical approach to quality + continuous improvement through defect reduction , yield improvement, improved consumer satisfaction and best-in-class performance - complements TQM philosophies such as management leadership, continuous education, customer focus while deploying a disciplined + structured approach of scientists - one approach is the DMAIC process (define, measure, analyse, improve, control)

How the Six-Sigma Statistical Concept Works Six-Sigma means a failure rate of 3.4 parts per million or 99.9997%. At the six standard deviation from the mean under a normal distribution, 99.9996% of the population is under the curve with not more than 3.4 parts per million defective. The higher the sigma value, the less likely a process will produce defects as excellence is approached.

- first achieving an understanding of customer expectations so that suitable tools can be employed to improve both the internal + external processes

c. ISO 9001 and the Era of International Standards - introduced in 1987, is an international quality management system standard - other standards ISO 14001 (environmental), ISO 18001 (health + safety) and sector-specific standards - ISO 9001 standard focuses on achieving customer satisfaction through continuous measurement, documentation, assessment, adjustment - requirements for a quality management system:

i. needs to demonstrate its ability to consistently provide product + services that meet customer requirements

ii. aims to enhance customer satisfaction through the effective application of the system, including processes for continual improvement of the system + the assurance of conformity to customer requirements

- The ISO 9001 Process Approach

3



- difference to other approaches: you need a formal certification → a competitive advantage + higher customer satisfaction - today it is common and no longer a unique program for a company - criticism targeted at ISO 9001:

i. ISO 9001 is a European standard + cannot be applicable to American firms - ISO 9001 has traceable American ancestry to military quality systems

ii. Implementing ISO 9001 is mandatory if you plan to do business in Europe - ISO has become desired, expected, and even required in certain markets

iii. ISO 9001 is all about paperwork - documentation support the value-added activity clearly + concisely, eliminating redundancy / the standard does not prescribe specific solutions = flexible

iv. ISO 9001 is inspection-based as opposed to prevention-based - implementation of the standard alone will not guarantee quality → management commitment + employee involvement are instrumental in the implementation process

→ focus on the organization’s network of activities

d. The Balanced Scorecard Methodology - was intended to provide a clear prescription as to what companies should measure in order to “balance” the financial perspective in implementation + control of strategic plans - viewed as a management system + its intention: to transform strategic planning from separate top management exercise into the nerve centre of an enterprise - adapts the TQM ideas of customer-defined quality, continuous improvement, employee empowerment, and measurement-based management/feedback into an expanded methodology that includes traditional financial data + results - “double-loop feedback” links quality operations + financial outcomes - four perspectives of the balanced scorecard:

i. The learning and Growth Perspective: How well are we continuously improving and creating value?

ii. The Business Process Perspective: What are our core competencies and areas of operational excellence?

iii. The Customer Perspective: How satisfied are our customers? iv. The Financial Perspective: How are we doing for our shareholders?

→ view Exhibit 11-7, 11-8 → the strategy of the business (long-term plans) can be linked with shareholder value creation while providing several measurable short-term outcomes that guide and monitor strategy implementation - reflects continuous improvement in management thought about how to better manage organizations

► Summary: three fundamental perspectives provide the basis for designing strategy control systems: → Strategic Control → Continuous Improvement → The Balanced Scoreboard

4



The Value chain and competitive advantage

• The value chain disaggregates a firm into its strategically relevant activities in order to understand the behavior of costs and the existing and potential sources of differentiation

• Firms gain competitive advantage by performing activities more cheaply than its competitors

• Suppliers have value chains that create and deliver the purchased inputs used in a firm’s chain

• Many products pass through the value chains of channels on their way to the buyer

• Channels perform additional activities that affect the buyer as well as influence the firm’s own activities

• Gaining and sustaining competitive advantage depends on understanding not only a firm’s value chain but hw the firm fits in the overall value system

• One important difference is that a firm’s value chain may differ in competitive scope from that of its competitors, representing a potential source of competitive advantage

• The extent of integration plays a key role in competitive advantage • Every firm’s value chain is composed of nine generic categories of activities

which are linked together in characteristic ways • The generic chain is used to demonstrate how a value chain can be constructed

for a particular firm, reflecting the specific activities it performs The value chain:

• A firm’s value chain and the way it performs individual activities are a reflection of its history, its strategy, its approach to implementing its strategy, and the underlying economics of the activities themselves

• An industry- or sector wide value chain is too broad, because it may obscure important sources of competitive advantage

• Differences among competitor value chains are a key source of competitive advantage

• Value is the amount buyers are willing to pay for what a firm provides them value is measured for example by total revenue

• Creating value for buyers that exceeds the cost of doing so is the goal of any generic strategy

• The value chain displays total value, and consists of value activities and margin

• Margin is the difference between total value and the collective cost performing the value activities

Identifying value activities

Primary activities: • Inbound logistic • Operations • Outbound logistic • Marketing and sales • Service



Support activities: • Procurement (function of purchasing inputs used in the firm’s value chain) • Technology development (efforts to improve the product and the process) • Human resource management (recruiting, hiring, training) • Firm infrastructure (consists of a number of activities including general

management, planning, finance,… supports the entire chain and not individual activities)

Activity types:

• Direct (activities directly involved in creating value to the buyer) • Indirect ( activities that make is possible to perform direct activities on a

continuing basis) • Quality assurance( activities that ensure the quality of activities such as

monitoring, inspecting,...) • All 3 types are present not only among primary activities but also among

support activities • There are often tradeoffs between direct- and indirect activities- more

spending on maintenance lowers machine cost Defining the value chain:

• Defining relevant value activities requires that activities with discrete technologies and economics be isolated

• Broad functions such as manufacturing or marketing must be subdivided into activities

• The appropriate degree of disaggregating depends on the economics of the activities and the purposes for which the value chain is being analyzed

• Basic principle: activities should be isolated and separated that: 1. have different economics 2. have a high potential impact of differentiation 3. represent a significant or growing proportion of cost

linkages within the value chain

• linkages are relationships between the way one value actively is performed and the cost or performance of another

• more complex than managing value activities themselves • linkages can lead to competitive advantages in two ways: optimization

(tradeoffs) and coordination ( on-time delivery) • the most obvious linkages are those between support activities and primary

activities represented by the dotted lines on the generic value chain • linkages among value activities arise from number of generic causes, among

them the following: 1. the same function can be performed in different ways 2. the cost or performance of direct activities is improved by greater efforts

in indirect activities 3. activities performed inside a firm reduce the need to demonstrate,

explain, or service a product in the field 4. quality assurance functions can be performed in different ways

• information systems are often vital to gaining competitive advantages from linkages



• recent developments in information systems technology are creating new linkages and increasing the ability to achieve old ones

Vertical integration:

• The way supplier or channel activities are performed affects the cost or performance of a firm’s activities

• The linkages between suppliers’ value chains and a firm’s value chain provide opportunities for the firm to enhance its competitive advantage

• Is a relationship in which both can gain • Coordination or optimizing linkages between a firm and its suppliers is a

function of supplier’s bargaining power and is reflected in supplier’s margins • Coordination with suppliers and hard bargaining to capture the spoils are

important to competitive advantage • Sometimes vertical linkages are easier to achieve with coalition partners than

with independent firms Buyer’s value chain:

• A firm’s product represent a purchased input to the buyer’s chain • Chains for representative households can provide an important tool for use in

differentiation analysis • Differentiation derives from creating value for the buyer through a firm’s

impact on the buyer’s value chain Competitive scope and the value chain

• Broad scope can allow a firm to exploit the benefits of performing more activities internally

• Narrow scope can allow the tailoring of the chain to serve a particular target segment, geographic area or industry to achieve lower cost or to serve the target in a unique way

• The competitive advantage of a narrow scope rests on differences among product varieties, buyers, or geographic regions within an industry in terms of the value chain best suited to serve them, or on differences in resources and skills of independent firms that allow them to perform activities better

There are 4 dimensions of scope that affect the value chain

1 .segment scope: • differences in the needs or value chains required to serve different

product or buyer segment can lead to a competitive advantage of focusing

2. vertical scope • defines the division of activities between a firm and its suppliers,

channels, and buyers • tends to be viewed in terms of physical products and replacing whole

supplier relationships rather than in terms of activities 3. geographic scope

• may allow a firm to share or coordinate value activities used to serve different geographic areas

• interrelationships can enhance competitive advantages if sharing or coordinating value activities lowers cost or enhances differentiation



4. industry scope • can include primary and support activities • interrelations among business units can have a powerful influence on

competitive advantage a shared logistical system may allow a firm to reap economies of scale

coalition and scope

• coalitions are ways of broadening scope without broadening the firm by contracting with an independent firm to perform value activities (e.g. supply agreements) or teaming up with an independent firm to share activities (e.g. joint ventures)

• vertical/ horizontal coalition • question: how can the benefits of coalition be divided?

Competitive scope and business definition

• the relationship between competitive scope and the value chain provides the basis for defining relevant business unit boundaries

• strong interrelationships between one business unit and another may imply that they should merge into one

The value chain and industry structure

• industry structure shapes the value chain of a firm and a reflection of the collective value chains of competitors

• capital requirements for competing in an industry are the result of the collective capital required in the chain

the value chain and the organizational structure

• organizational structure groups certain activities together under organizational units such as marketing or production

• separation of activities: differentiation • coordinate activities: integration • the need for integration among organizational units is a manifestation of

linkages • an organizational structure that corresponds to the value chain will improve a

firm’s ability to create and sustain competitive advantage



Porter – The Competitive Advantage of Nations • Nation’s competitiveness depends on the capacity of its industry to innovate and upgrade • Benefit from having strong domestic rivals (…) -> because of pressure + challenge • Differences in national values, culture … contribute to competitive success • Nations fundamentally misperceive true sources of competitive advantage

short-term appeal -> nations never achieve the real + sustainable competitive advantage

HOW COMPANIES SUCCEED IN INTERNATIONAL MARKETS• competitive advantage anticipate both domestic + foreign needs in international markets • competitive advantage achieved by acts of innovation

much innovation is mundane + incremental; sometimes ideas are not even “new” information = important role in process of innovation + improvement

• innovation can arise from: a new company with non-traditional background senior managers who are new to particular industry company diversifies, bringing new resources, skills, or perspectives to another industry another nation with different circumstances/different ways of competing

• competitive advantage can only be sustained through relentless improvements the only way is to upgrade it 2 additional prerequisites:

o must adopt a global approach to strategy o must make its existing advantage obsolete

⇒ tend to develop a bias for predictability + stability The Diamond of National Advantage Determinants of National Competitive Advantage

Firm strategy, structure, and rivalry

Factor conditions

Demand conditions

1. factor conditions: nation’s position (skilled labor, infrastructure,…)

Related and supporting industry

2. demand conditions: nature of home-market demand 3. related and supporting industries: nation of suppliers (that are internationally

competitive) 4. firm strategy, structure, and rivalry: conditions in the nation governing

these determinants create the national environment Factor Conditions • factors of production determine the flow of trade • nations do not inherit but create the most important factors of production



• important: the rate + efficiency with which a nation created, upgrades, and deploys the factors of production

• highly specialized factors of production -> support competitive advantage (factors are more scarce + more difficult for foreign competitors to imitate)

• disadvantage can become an advantage by innovating and upgrading under certain conditions

o must send companies proper signals about circumstances that will spread to other nations

o there must be favourable circumstances elsewhere in the diamond (like active domestic rivals -> create pressure to innovate, …)

Demand Conditions • composition + character of home market -> disproportionate effect on how companies

perceive, interpret, respond to buyer needs • home-demand conditions help build competitive advantage • demand conditions provide advantage by forcing companies to respond to tough

challenges Related and Supporting Industries • internationally competitive home-based suppliers create advantages

o deliver the most cost-effective inputs in an efficient, early, rapid way o provide in innovations + upgrading based on close working relationships o interconnected industries

• nation’s companies benefit most when suppliers are global competitors • but a nation need not to be competitive in all supplier industries to gain competitive

advantage • home-based competitiveness in related industries provides similar benefits • home-based related industry -> company embrace new skills + provide a source of

entrants (more competition) Firm Strategy, Structure, and Rivalry • national circumstances + context create strong tendencies

in how companies are created, organized, and managed and what the nature of domestic rivalry will be

• competitiveness results from: convergence of management practices + organizational modes and the source of competitive advantage

• countries differ markedly in goals that companies + individual seek to achieve reflect the characteristics of national capital markets + compensation practices for managers

• important to achieve competitive advantage: o individual motivation to work + expand skills -> outstanding talent is a scarce

resource of any nation o presence of strong local rivals

• domestic rivalry o powerful stimulating effect o dynamic improvement more important than static efficiency -> creates pressure

on companies to innovate + improve -> gain more sustainable advantage o geographic concentration magnifies its power -> the more localized the rivalry -

> the more intense -> the better • domestic competition pressures domestic companies to look at global markets + toughens

them to succeed in them



having been tested by fierce domestic competition -> the stronger companies are well equipped to win abroad

THE DIAMOND AS A SYSTEM• the points of the diamond are also self-reinforcing: they constitute a system • greatest power to transform the diamond in a system: domestic rivalry (promotes

improvement) + geographic concentration (elevate + magnify the interaction) • diamond creates an environment that promotes clusters of competitive industries

competitive industries are linked together through vertical/horizontal relationships interconnections -> lead to new ways of competing + new opportunities clusters tend to be concentrated geographically entry from other industries within the cluster spurs upgrading

THE ROLE OF GOVERNMENT • government’s proper role = catalyst + challenger

o encourage/push companies to raise aspirations + move to higher levels of competitive performance

• has an indirect role -> cannot create competitive industries (only companies can do that) • government succeeds only when working with favourable underlying conditions in the

diamond • competitive time for companies + political time for governments are fundamentally at

odds • government should encourage change, promote domestic rivalry + stimulate innovations Focus on specialized factor creation • factors that translated into competitive advantage are advanced, specialized, and tied to

specific industries / industry groups mechanism like private investment, research efforts (…) create the factors

Avoid intervening in factor and currency markets • government should resist the temptation to push rising factor costs / higher exchange rate

back down work against the upgrading of industry + the search for more sustainable competitive advantage

Enforce strict product, safety, and environmental standards • stimulating + upgrading domestic demand (pressure companies to improve)

promote competitive advantage give a nation’s companies a head start in developing products/services that will be valuable elsewhere

Sharply limit direct cooperation among industry rivals • cooperation research can prove beneficial, but under certain limited conditions:

o project research should be in areas of basic product/process research o constitute only a modest portion of a company’s overall research program o channelled through independent organizations o organizational structures like university labs

most useful cooperation projects often involve fields that touch a number of industries



Promote goals that lead to sustained investment • manner in which capital markets are regulated, shapes the incentives of investors and the

behaviour of companies • government should encourage sustained investment in human skills, innovations, physical

assets tax incentive for long-term capital

Deregulate competition • regulation has 2 negative consequences

o it stifles rivalry + innovation o it makes a industry a less dynamic + less desirable buyer/supplier

Enforce strong domestic antitrust policies • is fundamental to innovations • real national competitiveness

o requires governments to disallow mergers, acquisitions + alliances that involve industry leaders

o same standards for mergers + alliances should apply to domestic and foreign companies

o government policy should favour internal entry over acquisition Reject managed trade • managed trade represents a growing + dangerous tendency for dealing with the fallout of

national competitiveness • government trade policy should pursue open market access • compensatory tariffs that punish companies for unfair trade practices are better than

market quotas impossible to craft remedies to unfair trade practices that avoid both reducing incentives for domestic to innovate + export + harming domestic buyers

THE COMPANY AGENDA• leadership that harnesses + amplifies the forces in the diamond to promote innovation +

upgrading -> leads competitive advantage • here are some company policies that will support that effort: Create pressures for innovation • should seek out pressure + challenge

take advantage of home nation to create the impetus for innovation Seek out the most capable competitors as motivators • capable competitors + respected rivals can be a common enemy

motivate organizational change (company stays dynamic) Establish early-warning systems • company can take actions that help them see the signals of change + act on them

getting a jump on the competition Improve the national diamond • companies have a vital stake in making their home environment a better platform for

international success o play an active role in forming clusters



o work with home-nation buyers, suppliers, and channels to help them upgrade + extend their own competitive advantage

o create specialized factors like human resources, scientific knowledge, or infrastructure

o speed innovations by putting their headquarters + other key operations Welcome domestic rivalry • to compete globally, a company needs capable domestic rivals + vigorous domestic

rivalry creates sustainable competitive advantage it is better to grow internationally than to dominate the domestic market

Globalize to tap selective advantages in other nations • tap selectively into sources of advantage in other nations’ diamonds

take advantage of foreign research • companies must also allow access to their own ideas

recognizing that competitive advantage comes from continuous improvement (not from protecting today’s secrets)

Use alliances only selectively • exact significant costs (like coordinating 2 separate operations …) -> costs make most

alliances short-term transitional devices • alliances as a broad-based strategy will only ensure a company’s mediocrity, not its

international leadership alliances are best used as a selective tool, employed on a temporary basis/involving non-core activities

Locate the home-base to support competitive advantage • nation in which to locate the home-base for each distinct business:

country that stimulates innovations + provides the best environment for global competitiveness

THE ROLE OF LEADERSHIP• goal for nations + business:

not just surviving, but achieving international competitiveness (continuously) • leaders

o believe in change o energize their organizations to innovate continuously o recognize the need for pressure + challenge



Factors affecting location decisions Facility location = the process of determining a geographic site for a firm’s operations

• Managers must weigh many factors when assessing the desirability of a particular site like desirability of a particular site, including proximity to customers and suppliers, labor costs, and transportation costs

• Managers generally cans disregard factors that fail to meet at least one of the following conditions

1. the factor must be sensitive to location 2. the factor must have a high impact on the company’s ability to meet its

goals • managers can divide location factors into dominant + secondary factors

dominant factor = are those derived from competitive priorities (like cost, quality, time,

and flexibility) and have a particularly strong impact on sales or costs secondary factor = also are important, but management may downplay / even ignore some

of them if other factors are more important Dominant factors in manufacturing (the factors are listed in order of importance) 1. favourable labour climate

• most important factor for labour-intensive firms in industries such as textiles, furniture, and consumer electronics

• labour climate is a function of: wage rates, training requirements, attitudes toward work, worker productivity, and union strength

2. proximity to markets • after determining where demand for goods / services is greatest -> selecting a

location that will supply that demand • locating near markets is particularly important when goods are bulky / heavy and

outbound transportation rates are high 3. quality of life

• is contributed by good schools, recreational facilities, cultural events, and an attractive life-style (makes the difference in location decisions)

4. proximity to suppliers and resources • if inbound transportation costs become a dominant factor • provides the ability to maintain lower inventories

5. proximity to the parent company’s facilities • actions which require frequent coordination and communication (become more

difficult as distance increases) 6. utilities, taxes, and real estate costs

• factors that may emerge include utility costs (telephone, energy, and water), local and state taxes, financing incentives offered by local / state governments, relocation costs, and land costs

7. other factors • also are important to consider like room for expansion, construction costs,

accessibility to multiple modes of transportation, the cost of shuffling people and



materials between plants, insurance costs, competition from other firms for the work force, local ordinances, community attitudes, and many others

• for global operations, firms are emphasizing local employee skills and education and the local infrastructure

Dominant factors in services 1. proximity to customers

• location is a key factor in determining how conveniently customers can carry on business with a firm -> influence of location on revenues tends to be the dominant factor

2. transportation costs and proximity to markets • for warehousing and distribution operations, transportation costs and proximity to

markets are extremely important • with a warehouse a firm can hold inventory closer to the customer -> reducing

delivery time and promoting sales (can be a competitive advantage) 3. location of competitors

• one complication in estimating the sales potential at different locations is the impact of competitors

• in some industries firms should avoid areas where competitors are already well established

• in other industries like new-car sales showrooms locating near competitors is actually advantageous -> several competing firms clustered in one location attract more customers

4. side-specific factors • retailer also must consider the level of retail activity, residential density, traffic

flow, and site visibility follow-the-leader strategy = if firms follow competitors -> several competing firms clustered

in one location



Reader article 1: Competing in the global marketplace – Globalization Introduction - barriers to cross-border trade and investment are tumbling; perceived distance is shrinking

due to advances in transportation and telecommunications technology; material culture is starting to look similar around the world; nat. economies are merging into an interdependent global economic system

⇒ globalization refers to the shift towards a more integrated and interdependent world economy. Globalization has 2 main components: globalization of markets & of production What is globalization? The globalization of markets - refers to the merging of historically distinct & separate nat. markets into one huge global

marketplace - enabled through falling barriers to cross-border trade - not only conducted by large multinationals but also by smaller firms - preferences of consumers in different nations are beginning to converge on some global

norm - many firms offer a standardized product worldwide and thus help to create a global

market - however several cultural differences remain present: these differences require that

marketing strategies, product features and operating practices be customized to best match conditions in a country

- most global markets nowadays are not consumer markets, but markets for industrial goods and materials that serve universal need throughout the world (e.g. wheat, oil)

- in many global markets the same firms frequently confront each other as competitors: if one firm moves into a nation that is not yet served by rivals, the latter are eager to follow in order to prevent their competitor from gaining a competitive advantage

The globalization of production - refers to the sourcing of goods and services from locations around the globe to take

advantage of national differences in the cost and quality of factors of production (such as labour, energy and land)

- companies lower overall cost structure and improve quality for effective competition - not only conducted my large multinationals but also by smaller firms - however, problems remain: formal and informal barriers to trade between countries,

barriers to foreign direct investment, transportation costs, issues associated with economic and political risk

Drivers of globalization Declining trade and investment barriers - International trade occurs when a firm exports goods/services to consumers in another

country - Foreign direct investment occurs when a firm invests resources in business activities

outside its home country - During 1920s/30s most common barrier to international trade: tariffs – aimed to protect

domestic industries from foreign competition -> however countries kept raising trade barriers against each other and thus depressed world demand (contributed to Great Depression in 1930s)

- After WWII barriers started to diminish, enforced by establishment of General Agreement on Tariffs and Trade – GATT was supported by Uruguay Round (1933) which created World Trade Organization (WTO)

- Average tariff rates have fallen significantly since 1950 (now at 3.9%)



- In addition countries have progressively removed restrictions to foreign direct investment between 1990 and 2000 -> large increase in number of bilateral investment treaties designed to protect and promote investment between 2 countries also reflects governments’ desire to facilitate FDI

- Lowering of barriers to trade enables firms to see world, rather than a single country as market – lowering of Investment barriers allows a firm to base production at optimal location for activity

- Firms might design a product in one country, produce component parts in two other countries, assemble the products in yet another country and then distribute it around the world

- Figure p.9: more firms are spreading overall production process to different locations to drive down production costs and increase product quality; economies of the world’s nation states are becoming more intertwined -> as trade expands, nations are becoming dependent on each other with goods and services

- However increasing international trade increases the intensity of competition in home markets (especially manufacturing and service industries)

Technological change - technological change has made globalization a tangible reality - since WWII major progress in communication, information processing and transportation

technology – most important internet and world wide web - Microprocessors and telecommunications: major important innovation was

microprocessor, increased amount of info. that can be processed by individuals and firms; costs microprocessors and telecommunications are continuing to fall -> lowers cost of coordinating and controlling a global organization

- internet and www: forecasts suggest that internet will have more than 1.12 billion users in 2005 (starting with less than 1 mill. in 1990); will be information backbone of tomorrow’s global economy (web-based transactions can rise to $6.8 trillion in 2004 – mostly business to business (e-commerce) not business to customer); allows companies to expand global presence at a lower cost than before -> makes it much easier for buyers and sellers to find each other, no matter where they are located)

- transportation technology: major innovations since WWII: commercial jet aircraft (shrunk the globe) and containerization (lowers costs of shipping goods over long distances – much less labour needed than before, costs have plummeted) -> helps to drive globalization of markets and production

- implications for the globalization of production: dispersal of production to geographically dispersed areas became more economical – make it possible for firms to create and manage globally dispersed production systems (e.g. e-mail and video conferences)

- implications for the globalization of markets: low-cost global communications networks like www create electronic marketplaces, aircrafts enable people to travel between countries -> reduced cultural distance and created convergence of consumer tastes and preferences, media creates global culture

- however, national differences remain in culture, preferences and practices! The Changing Demographics of the Global Economy - together with the process of globalization a change in the demographics of the global

economy came along The Changing World Output and the World Trade Picture - in the early 1960s the US was the world’s most dominant industrial power but in the

following years it faced a relative decline because of the emerging and fast-growing economies, especially in Asia

- by the end of the 1980s, the U.S. position as the world’s leading exporter was threatened by Germany, Korea, Japan and China



- the relative decline of the United States reflects the growing economic development and industrialization of the world economy (there is no absolute decline in the health of the US economy)

- South Korea, Brazil, Thailand, Indonesia, India and China greatly contribute to the rapidly rising share of world output

- World Bank estimates that today’s developing nations may account for over 60% of the world economic activity by 2020 while today’s developed nations (currently contribute 55%) will only account for 38% by 2020

Implications for international businesses: many of tomorrow’s economic opportunities may be found in the developing world and many of tomorrow’s most capable competitors will also emerge from these regions

The Changing Foreign Direct Investment Picture - in the early 60s US firms accounted for 66.3% of worldwide foreign investment - this was considered to be a huge threat for European economies and some European

governments wanted to limit inward investment of US firms - with the fall of trade barriers and an increased share of non-US world output, the other

countries started to make foreign investments - the motivation for foreign investment was the desire to spread production activities to

optimal locations and to build a direct presence in major foreign markets - also developing nations greatly contributed to foreign investment showing the trend that

firms from these nations tend to invest outside their domestic borders - there is a continued rapid growth in cross border flows of foreign investment and

developing nations are of great importance for foreign investment - in the 90s, the amount of investment directed at developing and developed nations

increased dramatically, showing the increasing internationalization of business corporations

The Changing Nature of the Multinational Enterprise - multinational enterprise: any business that has productive activities in two or more

countries - since the 1960s there are two trends in multinational enterprises: 1) the rise of non-US multinationals:

o in the 60s, global business activity was dominated by large US multinationals o the globalization of the world economy together with Japan’s rise to the top rank

economic powers has resulted in a relative decline in the dominance of US firms in the global marketplace

o today the ranks of the 100 world’s largest enterprises is still dominated by firms with origins in developed nations (for the first time 3 developing countries are on the list)

o for the future growth of new multinationals is expected from developing nations 2) the growth of mini-multinationals:

o there are increasingly more medium-sized and small-sized multinationals o rise of the Internet is lowering barriers of small firms to establish international sales

The Changing World Order - collapse of the Soviet systems in the early 1990s: if former communist countries commit

themselves to democratic politics and free market economies, chances for international businesses will be enormous, as they present various export and investment opportunities

- economies of most former Soviet countries are in poor condition risk involved in doing business in these countries is enormous

- China suppressed prodemocracy movement in 1989 but nevertheless continues to move towards free market economy within two decades China could be an economic superpower



- potential consequences for Western international businesses are enormous: China represents a huge and largely untapped market, but Chinese firms can turn out to be very strong competitors, being able to take the global market share away

- Latin American countries have been freed from dictatorship, but economies are in a very desolate state; substantial opportunities are accompanied by substantial risks

The Global Economy of the 21st Century - the volume of cross-border trade and investments has been growing more rapidly than

global output indicating that national economies are becoming more closely integrated into a single, interdependent, global economic system

- more nations are joining the ranks of the developed world - more and more countries are privatising their state-owned businesses, deregulation is

widespread, markets are opened for more competition, barriers to cross-border trade and investment are removed

- although the world is moving towards a more global economic system, globalization is not inevitable

- countries (e.g. Russia) may pull back from the recent commitment to liberal economic ideology if their expectations are not fulfilled

- greater globalization brings risks (e.g. financial crisis in Thailand spread quickly, pulling even the US into a recession)

The Globalization Debate - advocates of globalization believe that falling barriers of trade and investment will drive

the global economy to greater prosperity - they believe that globalization stimulates economic growth, raises the incomes of

consumers, helps to create jobs - evidence suggests that fears of anti-globalization effort are exaggerated, but this may not

have been communicated by politicians and businesspeople Claim: International Trade destroys manufacturing jobs in wealthy economies

benefits outweigh costs; free trade will result in specialization in production where each country pursues the economic activity it is best in

Claim: Wage rates of unskilled workers drop drop in real wages in not due to the migration of low-wage manufacturing job offshore.

Globalization advocates say that this phenomenon occurs due to a smaller demand of low-skilled workers which results from the technology shift (more skilled workers are requested)

Claim: free trade encourages firms from advanced nations to move manufacturing facilities to less developed countries that lack adequate regulations to protect labour and environment and use the cost advantage of this

environmental regulations and labour standards go hand in hand with economic progress by creating wealth and incentives for enterprises to produce technological innovations, the

free market system and free trade could make it easier for the world to cope with problems of pollution and population growth

it is possible to tie free trade agreements to the implementation of tougher environmental and labour laws in less developed countries

business firms are not amoral organizations Claim: today’s increasingly interdependent global economy shifts economic power

away from national governments and towards supranational organizations (WTO, UN) that are not democratically elected

the power of WTO, UN is limited to that which nations states collectively agree to grant organizations serve the collective interests of member states if these bodies fail to serve the collective interests of member states, those states will

withdraw their support and the organization will collapse



Reader article 4 – Internationalisation process by Wall, Rees 1. Introduction

- the reasons for going internal and the conditions und which firms choose to do so are complex and have been the subject of much debate - layout of this chapter: → the history of internationalisation → the reasons firms choose to internationalise → the ways in which this has been done → the theoretical frameworks that seek to explain this process

2. Methods of going international (three broad categories): a. Export-based methods

- most common way for internationalisation; production in the domestic market + exporting products to foreign markets (physical movements) - has been stimulated by lower trade barriers and technological advancements

i. Indirect exporting - a firm does not undertake any international activity but operates through intermediaries - the role of the intermediary may be played by export houses → an export house buys products from domestic firms + sells them abroad → a confirming house acts for foreign buyers + is paid on a commission basis → a buying house is similar but seeks out sellers which match the buyer’s needs better - no additional costs + knowledge needed but no direct control over local markets - leads more often to unexpected alliances than competition (competitors can use same distribution system – then both have access to a market + operating costs decline)

ii. Direct exporting - involve a firm in distributing + selling its own products to the foreign market (longer-term commitment, local agents + distributors, in-house expertise needed) - advantages → allows the exporter to closely monitor developments + competition

in the host market → promotes interaction between producer and end-user → involves long-term commitments, such as providing after-sales

services to encourage repeat purchases - less risky method of internationalisation (changes in exchange-rates are still risky)

b. Non-equity methods (investing): - firms sell technology/know-how under some form of contract (e.g. patents, trademarks,

copyrights = intellectual property rights – form a major part of international transactions) i. Licensing

- the licensee buys the right to exploit a limited set of technologies + know-how from the licensor = low-cost strategy - often found in industries with high R&D / high fixed costs - licensors may find themselves under pressure to continuously innovate in order to sustain the licensee’s dependence on them ← licensing can be costly

ii. Franchising (more for service industries) - the franchisee purchases the right to undertake business activity using the franchisor’s name or trademark rather than any patented technology - in first-generation franchising, the franchisor operates at a distance - in second-generation franchising, the franchisor exerts far more control on the day-to-day running (common in hotel, fast food restaurant, vehicle rental industries) → it establishes an immediate presence with relatively little direct investment → it employs a standard marketing approach helping to create a global image → it allows the franchisor a high degree of control

1



iii. Other contractual modes of internationalisation - can involve management contracting (management responsibility is transferred from one country to another one – from client to supplier) - technical service agreements (e.g. technical services from across borders) - contract-based partnership (between firms of different nationalities in order to share the cost of an investment – co-operation, co-research, co-development activities)

c. Equity methods (investing): - the use of foreign direct investments (fdi) - major advantage: the firm secures the greatest level of control over its proprietary information + technological advantages, profits need not to be shared

i. Joint ventures - creating a new identity in which both partners take active roles in strategy → can help to share + lower the costs of high-risk, technology-intensive developments projects → can help to gain economies of scale + scope in value-adding activities that can only be justified on a global basis → to secure access to a partner’s technology, its accumulated learning, proprietary processes or protected market position → to create basis for more effective future competition in the industry involved - common in high-technology industries – usually take one of two forms:

→ Specialised joint ventures: each partner brings a specific competency (e.g. one might produce + the other has got a market) – such ventures are organised around different functions

present an opportunity to share risks; but risks as well, if one partner exposes its competencies and the other one gains competitive advantages from that → Shared value-added joint ventures: both partners contribute to the same function or value-added activity partners can more easily lose their competitive advantage

- critical success factors for joint ventures: → Take time to assess the partners – extended courtship is often required → Understand that collaboration is a distinct form of competition – partners must

learn from each other’s strengths while preserving their own advantages → Learn from partners while limiting unintended information flows → Establish specific rules + requirements for joint venture performance at the outset → Give managers sufficient autonomy – e.g. decentralisation of decision-making - extensive training + team building is important – effective HRM consists of: → developing + training managers in negotiation + conflict resolution → acculturation (i.e. cultural in working with a foreign partner) → harmonisation of management styles

ii. Acquisitions and ‘greenfield’ investment - wholly owning a foreign affiliate can be achieved through acquisition of an existing firm or through establishing an entirely new foreign operation (‘greenfield’ investment) - acquisition allows a more rapid market entry (a ready access to knowledge of market) - there can be problems (cultural, legal, management issues) when setting up a ‘greenfield site’ in a foreign country → is avoided through acquisition (→ no competitive reaction)

iii. Consortia, keiretsus and chaebols - in the USA + Europe little success in building cross-industry consortia (only Airbus) - the Japanese keiretsu is a combination of 20-25 different companies around a large traditional company; integration through interlocking directorates, bank holdings, close personal ties between senior managers; financed from group banks + run by professional managers

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- the South Korean chaebols are similar agglomerations, centred around a holding company; dominated by founding families; funding from government + managed by family → both benefit from government in the form of preferential interest rates + capital

allocations; linked together by networks + personal relationships → this fraternal relationships are less common in the individualised cultures of the USA or UK

- consortia of these types are designed to maximise the potential benefits of joint ventures - a long-term focus; risk is diversified because of many different industries

Type of global alliance

Benefits Costs Critical success factors Strategic human resources managements

Licensing – manufacturing industries

- early standardisation of design - ability to capitalise on innovations - access to new technologies - ability to control pace of industry evolution

- new competitors created - possible eventual exit from industry - possible dependence on licensee

- selection of licensee likely to become a competitor - enforcement of patents + licensing agreements

- technical knowledge - training of local managers on-site

Licensing – servicing and franchises

- fast market entry - low capital cost

- quality control - trademark protection

- partners compatible in philosophies/values - tight performance standards

- socialisation of franchisees + licensees with core values

Joint ventures – specialisation across partners

- learning a partner’s skills - economics of scale - quasi-vertical integration

- excessive dependence on partner for sills - deterrent to internal investment

- tight + specific performance criteria - entering a venture as ‘student’ rather than ‘teacher’ to learn skills from partner

- management development and training - negotiation skills - managerial rotation

Joint ventures – shared value-adding

- strengths of both partners pooled - faster learning along value chain - fast upgrading of technological sills

- high switching costs - inability to limit partner’s access to information

- decentralisation + autonomy from corporate parents - long ‘courtship’ period - harmonisation of management styles

- team-building - acculturation - flexible skills for implicit communication

Consortia, keiretsus, chaebols

- shared risks + costs - building a critical mass in process technologies - fast resource flows + sills transfers

- skills + technologies that have no real market worth - bureaucracy - hierarchy

- government encouragement - shared values among managers - personal relationships to ensure co-ordination and priorities - close monitoring of member-company performance

-‘clan’ cultures - fraternal relationship - extensive mentoring to provide a common vision and mission across member companies

3. Why invest abroad? (motivating factors)

- the ‘bottom line’ may simply be an estimated higher present value of future profits a. Supply factors

- important for cost-orientated multinationals (= want to reduce cost by internationalising) i. Production costs

- foreign locations may be more attractive because of lower costs of skilled/unskilled labour, lower land prices, tax rates, commercial real estate rents - often lead to vertical integration → many US + European companies have integrated forwards by establishing assembly facilities in SE Asia - host countries for fdi are sometimes termed ‘production platforms’

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ii. Distribution costs - where high distribution costs make up most of total costs, firms may choose to produce from a foreign location rather than pay the costs of transportation

iii. Availability of natural resources - very important in certain industries (oil, minerals, etc.) - this leads to backwards vertical integration in search of cheaper + more secure inputs

iv. Access to key technology - many firms find it cheaper to invest in an existing firm rather than put together a new team of research specialists

b. Demand factors - for market-orientated multinationals (= their objective is to internationalise in order to get access to new markets and greater sales) → horizontal integration into new markets

i. Marketing advantages - the physical presence of a factory give a company visibility

ii. Preservation of brand names and trademarks - closer control over brand than over a licensee using e.g. inferior materials

iii. Customer mobility - a firm my move its operations close to a business

Figure 2.1 Evolution of a market-orientated multinational:

Export to overseas markets through independent channels (e.g. sales agents)

Establish sales outlet in overseas markets

a) by acquiring b) by setting up local firm new facility

Establish production facilities overseas

a) by acquiring b) by setting up local firm new facility

License foreign manufacturer to produce for overseas markets

Serve domestic market only

c. Political factors i. Avoidance of trade barriers

- if there are import/export restraints it might become necessary to produce in the foreign market itself in order to avoid these trade barriers

ii. Economic development incentives - most governments wants to profit from fdi, so that they offer incentives to firms (including tax reductions/ tax holidays, free/subsidised access to land/buildings, specially constructed infrastructure, etc.)

iii. BOX: Government policies, exporting and fdi - there are different views about a correlation between these items → the most important variable in increasing fdi investment was found to be not ‘trade openness’ but ‘fdi openness’ – the more ‘open’ the easier it is to hire and fire labour, change prices, use the justice system, protect intellectual property, etc. → there is evidence that an increase in ‘fdi openness’ leads to a even stronger increase in fdi

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d. Other factors - the role of management (the ambitions play a crucial role) - motives of the organisation (some commentators identify three motives: market seeking, efficiency seeking, resource seeking) - saturation of the home market (further growth requires new markets) - the bandwagon effect (intense rivalry can mean that a one firm just follow its competitor) - international product life cycle (which will govern the geographical location of productions)

4. Theoretical explanations (of the internationalisation process) a. Ownership-specific advantages

- focus on the assets owned by the firm which might give it a competitive edge over other firms operating in overseas markets (e.g. superior technology, etc.)

b. Internalisation - focus on the cost: the firm decides whether it is cheaper to own + operate a plant/ establishment overseas or to contract with a second firm

c. Location-specific advantages - focus on the ‘where’ question (e.g. price of natural + human resources, etc.)

d. Eclectic theory - combination of all three theories above → decision determined by a mixture of motives: ownership-specific, locational, and internationalisation factors

e. Sequential theory of internationalisation → intermittend exports → exports via agents → overseas sales via knowledge agreements with local firms (e.g. licensing/franchising) → fdi in overseas markets - in each stage more knowledge is gained → less risks for going international - starting point are culturally similar countries → later into culturally diverse areas

f. Simultaneous theory of internationalisation - based on global convergence (e.g. customer become homogenous worldwide) → leads to standardised products and economics of scale

g. Network theory - other firms + people themselves internationalise → explanation for internationalisation - based on building relationships (social focus) – three levels → Macro – the environment is seen as a set of diverse interests, powers, characteristics which may intrude on national and international business decisions → Inter-organisational – if one firm internationalises, this may draw other firms into the international arena → Intra-organisational – if a multinational has subsidiaries in other countries, this may influence a move into foreign countries

h. International product life cycle (IPLC) - internationalisation is a process: a firm has to follow this process in order to stay competitive

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106BB Strategy I

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Transcript of 106BB Strategy I