MGX5181

International Business Strategy

Week 5

Strategic Planning Framework

• Corporate strategies

• Business strategies

International Corporate Strategy

• Start with the basics:

Does our vision/mission statement incorporate international

opportunities?

Strategic intent:

• Can we leverage the firm’s internal resources, capabilities and core

competencies to accomplish the firm’s goals in a competitive

international environment?

• Internal resources and capabilities – must have some that are

valuable, rare , costly to imitate and non-substitutable

(Barney, 1991; Geroski, 1999).

• Core competencies are resources and capabilities that provide a

competitive advantage over rivals – often related to functional skills

(e.g marketing, management, product, service, innovation etc)

(Hanson et al, 2005).

Strategy Development • Mintzberg and Waters (1985) suggest that the

pattern in a stream of strategic decisions

tend to be as “emergent” as they are

“deliberate”.

Emergent strategies are constantly being

adjusted and reviewed in light of experience

Deliberate strategies are those both intended

and realised (implemented).

Deliberate

Emergent

Realised Strategy

Corporate Strategy

• Corporate strategy is concerned with adding

value in respect to :

overall scope of the organisation’s activities

and corporate parenting.

Overall scope means the business the

organisation wants to be in (may mean it gets

out of things it should not be doing). Becomes

international to the extent an organisation’s

activities are influenced by:

• competition

• currency, and

• country

Corporate Strategy Cont.

Competition

• pressures from international competition forces

organisations to defend local markets and seek

international opportunities

Currency

• FX markets make currency values volatile impacting

on international costs and sales

Country

• Political risk, trade protection reducing country and

entry options

Corporate Strategy Cont. Corporate Parenting: How the head office

manages the various businesses within the

organisation

Good and Campbell (1989) suggest the following

principles exist regarding corporate parenting:

• parent companies add value to their business

portfolio as HQ team have some special skill to help

the businesses or create synergy between businesses

• A Co should add a business to its portfolio if it can

add more parenting value than others

• A Co should divest a business in its portfolio if it

would perform better independently or sold

to others

Corporate Strategy Options

• Forward Integration

Gaining ownership or increased control closer to your customers

• Eg over distributors or retailers

• Backward Integration

Seeking ownership or increased control of a firm’s suppliers

• Horizontal Integration

Seeking ownership or increased control over competitors

Corporate Strategy Options Cont.

• Market Penetration

Seeking increased market share for present products or services in current markets via greater marketing efforts

• Market Development

Taking present products or services into new geographical areas

• Eg Fosters into China, India, Vietnam

• Product Development

Seeking to increase sales via new or improved products

Corporate Strategy Options

• Joint Venture

Two or more sponsoring firms forming a

separate organisation for cooperative purposes.

• Retrenchment

Regrouping through cost and asset reduction to

reverse declining sales and profit.

• Divestiture

Selling a division or part of an organisation.

• Liquidation

Selling all the company’s assets for their

tangible worth.

Corporate Strategy Options

• Related Diversification

Adding new but related products or services

• Ccan use existing competencies - knowledge, understanding, skills

• eg Philip Morris buying Miller and increasing sales via existing marketing expertise

• Unrelated diversification

Adding new but unrelated products or services.

• move into new products-markets where new competencies are required in order to be an effective competitor

– eg British American Tobacco buying a financial services company

• Horizontal Diversification

Adding new unrelated products or services for present customers

Diversification in detail

• Definition

When a firm chooses to diversify its operations

beyond a single industry and to operate

businesses in several industries it is said to be

pursuing a corporate level strategy of

diversification.

Diversification

• A diversified firm has two levels of

strategy

Business level (competitive - local) strategy

Corporate level (company-wide) strategy

• Two key questions

What businesses should the firm be in?

How can the corporate office manage its group

of businesses?

Aim of Diversification: Synergy

• Aim of diversification should be to create

value or wealth in excess of what firms

would enjoy without diversification.

• Synergy: the value of the combined firm

after acquisition should be greater than the

value of the two firms prior to acquisition.

Obtained in three ways:

• Exploiting economies of scale.

– Unit costs decline with increases in production.

Aim of Diversification: Synergy (cont.)

• Exploiting economies of scope.

– Using the same resource to do different things.

• Efficient allocation of capital.

– Many assets in acquired firms are undervalued --

managers seek to exploit these opportunities and improve

their operations and add value to their businesses.

Diversification

• Value of diversification

Some suggest few corporate level strategies

create value. (Markides & Williamson, 1996)

When managed effectively corporate level

strategies enhance a firm’s strategic

competitiveness and contribute to its ability to

earn above average returns (Barney, 1997)

Levels of Diversification

• Low levels of diversification

Single business

• More than 95% of revenue comes from a single business

Dominant business

• Between 70-95% of revenue comes from a single business eg Kellogg breakfast cereals and snack food

• Moderate to high levels of diversification

Related constrained

• Less than 70% of revenue comes from the dominant business, and all businesses share product, technological and distribution linkages

Related linked (mixed related and unrelated)

• Less than 70% of the revenue comes from the dominant business, and there are only limited links between businesses eg General Electric and Johnson & Johnson

Levels of Diversification

• Very high levels of diversification

Unrelated

• Less than 70% of revenue comes from dominant

business and there are no common links between

businesses eg Samsung

The Trend Over Time: Diversified

Companies among the Fortune 500

Percentage of Specialized Companies (single-business,

vertically-integrated and dominant-business)

Percentage of Diversified Companies (related-business

and unrelated business)

BUT Since late 1970’s, diversification has declined.

1949 1954 1959 1964 1969 1974

70.2 63.5 53.7 53.9 39.9 37.0 29.8 36.5 46.3 46.1 60.1 63.0

Diversification and Performance:

The Score

• What is relationship between diversification

and firm performance?

Academics, consultants,and financial

community have dim view of diversification.

Some studies suggest that diversification

beyond a core business leads to lower

performance.

Diversification and Performance:

Empirical Evidence

• Diversification trends have been driven by beliefs rather than

evidence:- 1960s and 70s diversification believed to be profitable;

1980s and 90s diversification seen as value destroying.

• Empirical evidence inconclusive-- no consistent findings on impact of

diversification on profitability, or on related vs. unrelated

diversification.

• Some evidence that high levels of diversification detrimental to

profitability

• Diversifying acquisitions,

on average, destroy share-

holder value for acquirers

• Refocusing generates

positive shareholder returns 1 2 3 4 5 6

index of product diversity

3

2

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as

se

ts (

%)

Diversification –Performance Link • Study by Palich,L. Cardinal, L and Miller, C

(2000) looked at studies over previous 20 years.

They found:

The inverted U model applied to single business

firms as they do not have the opportunity to exploit

between unit synergies or the portfolio effects

available only to moderately and highly diversified

firms.

• Based on both accounting and market based measures

diversification is positive for firms up to a point but past

a certain level seems to cause performance problems.

Diversification –Performance Link Cont.

Related diversification is superior to that

which is unrelated or conglomerate in nature.

• Related diversifiers have advantages whereby they can

convert underutilised assets and achieve economies of

scope by sharing resources and combining activities

along the value chain

Reasons for Diversification • Motives to enhance strategic

competitiveness

Economies of scope (related diversification)

• Sharing activities

• Transferring core competencies

Marketing power (related diversification)

• Blocking competitors through multi-point competition

• Vertical integration

Financial economies (unrelated diversification)

• Efficient internal capital allocation

• Business restructuring

Reasons for Diversification • Incentives and resources with neutral effects

on strategic competitiveness

Antitrust regulation

Tax laws

Low performance

Uncertain future cash flows

Risk reduction for the firm

Tangible resources

Intangible resources

• Managerial motives (value reduction)

Diversifying managerial employment risk

Increasing managerial compensation

Diversification and Performance: The Score Additional studies conclude that diversification

strategy rarely makes significant positive

contribution to shareholder value.

• Recent study (Babson College) is shown in Exhibit below:

– Note: 50/100 means neutral contribution to shareholder value, so

below 50 means detracts from shareholder value and above 50

means adds to shareholder value

46

47

47

46

Low-

Performing

Firms

Less

Diversified

High-

Performing

Firms

More

Diversified

Diversification and Performance: The

Score (cont.)

Exhibit suggests:

• Categorization of firms into the 4 diversification-

performance groups is remarkably balanced.

– High-performing firms are just as likely to be more

diversified as they are to be less diversified.

– Low-performing firms are just as likely to be less

diversified as they are to be more diversified.

• No significant performance differences between

high-performing more or less diversified firms.

Diversification and Performance: The

Score (cont.)

• Summary

Though diversification has been disastrous for

many firms, diversified firms can also be

successful.

Studies have found no obvious differences

between high- and low-performing diversified

firms along several important strategic

dimensions.

Conclusions

• Size alone does not guarantee firms an

advantage.

Coordination required to exploit economies of

scale and scope is not without cost.

Size creates additional challenges and

difficulties, including problems of

communication and coordination.

• Higher levels of diversification are not

incompatible with high performance -- nor

do they necessarily imply that firms will

suffer lower performance levels.

Conclusions (cont.)

• Critical factor in determining success is the

level of management expertise in

formulating and implementing corporate

strategy.

More difficult for diversified firms.

Managers of large diversified firms possess a

variety of well-developed mental models that

provide them with powerful understandings of

how to manage their firms.

War Game Strategy

• This approach it is all about market share. Therefore:

The more competitive venues the better

Only launch a market offensive if you are sure you can achieve domination

Remember market leaders provide a price umbrella from which they and others benefit

Even when the market is not global you still need global strategic coordination (Prahalad & Doz, 1987)

War Game Theory Cont.

This view of international strategy is based on

MNCs battles for market share of international

cash flows rather than international product

flows

Cash flows from one market can be used to

subsidise market share battles in other markets

Aggressive action must be taken in those

markets where a competitor is most vulnerable

to a cash flow siege.

Effective international strategies need to be

aggressive rather than purely defensive

Business Strategy Relates to how a business seeks to compete in

its chosen markets. (can be called competitive

strategy)

Where an SME does not have separate division

eg SBUs then Business and Corporate strategy

are effectively the same.

In large organisations the business strategy may

be on how to develop a sustainable

international competitive advantage

(outperform rivals consistently over time on

commonly accepted performance criteria).

Business Strategy Options

• Same Game

Characteristics

• identify market segments

• decide positioning within segments

• serve market more effectively and efficiently than

competitors

Strategic Intent

• to outcompete rivals using similar strategies to theirs

but better

Potential Outcomes

• parity or at best incremental competitive advantage

over rivals

Business Strategy Options Cont.

• New Game

Characteristics

• strategic innovation: product, process or market

discovery

• first mover advantage within a market

• avoidance of head-to-head competition

Strategic Intent

• outcompete rivals via new strategic recipes.

Emphasis on innovation and vision

Potential Outcomes

• competitive superiority to rivals. Takes a

fundamental approach to developing business

strategy

Comparing Strategies

• Issues in comparing same and new game

strategies according to Hamel & Prahalad

(1994)

too much time spent restructuring and re-

engineering existing business or delayering,

divesting parts of the business. Instead:

• Firstly, must compete for industry foresight and

intellectual leadership

– understand key external trends

– identify opportunities as new markets and industries

emerge

Comparing Strategies • Secondly, must exploit new markets and

industries by developing core competences

– core competences are a bundle of constituent skills and

technologies which integrate a variety of individual skills,

not a physical asset.

– Can be at corporate and business level

– need to consider which core competencies you have/don’t

have and extent to which these are essential/non essential

• Thirdly, must compete for market position and

share

– emerges from first two factors

– not necessarily helped by market research which has

limitations with new products

Comparing Strategies

Hamel and Prahalad say strategy is about

“stretch” and “fit”

• need to stretch resource position but fit in to

organisation’s current growth and function.

Strategy from inside out • What is better?

to seek out opportunities and then adjust the

internal competencies to take advantage of these

(M. Porter)

or

look at the inside competencies first and use these

to increase market share

• (Hamel and Prahalad)

• According to Miller, Eisenstat and Foote, 2002

there is another way to look at strategy from

the inside out:

building capability – creating organisations

Strategy from inside out • Authors suggest competitive advantage comes from

using organisational processes and designs to identify

emerging asymmetries and build them into capabilities.

• Internal asymmetries

Hard to copy ways to differ from competitors

May consist of:

• Outputs (products or solutions)

• Relationships and alliances

• Processes and routines

• Nascent skills and knowledge

Are not resources or core competencies

Must be continually identified and built

Strategy from inside out • Three Imperatives

1: Discover asymmetries and their potential

• How are we superior to rivals? (why our customers,

valued offerings)

• What resources/capabilities underlie these sources of

superiority?

• Which resources and capabilities would be hardest

for rivals to nullify?

• What capabilities and resources are most central now

and for the future to a firm’s competitive advantage?

Strategy from inside out

2. Create capability configurations – by design

• Look at key influencers: Leadership/ governance; values

and culture; structural mechanisms; systems and policies

• Embed capabilities within the organisation

• Enhance capabilities

• Shape capabilities to market opportunities

3. Pursue market opportunities that build on

and leverage capabilities

Types of business level strategy • Generic Strategies

According to Porter (1985) there are 4 generic strategies

Cost leadership

• Competitive advantage is cost and competitive scope is broad

Differentiation

• Competitive advantage is uniqueness and competitive scope is broad

Focused cost leadership

• Competitive advantage is cost and competitive scope is narrow

Focused differentiation

• Competitive advantage is uniqueness and competitive scope is narrow

Types of business level strategy

• Hill and Jones (2002) expanded on Porters (1985) concept

of generic strategy and produced 4 factors or generic

building blocks of competitive advantage:

Efficiency

• Labour productivity, capital intensity, economies of scale,

learning curve effects, company cost structure

Quality

• Standard of excellence and reliability

Innovation

• New products and processes

Customer Responsiveness

• Ultimate basis of competitive advantage (Muller, 1991)

• Customisation, response time, superior quality and design,

superior after-sales services

Relationship between Corporate, Business and

Functional Strategies and Business Performance

• Corporate

review organisational scope and corporate

parenting

• Business

review product-market strategy

• Functional

review implementation

• Business Performance

If performance unacceptable corrective

adjustment where required i.e all levels.