Corporate Strategy PDF

CHAPTER 5: CORPORATE STRATEGY Scope: - Product: diversification… - Geographical: number of geographical areas where the firm is operating related to the internalisation of the firm - Vertical : the degree of ownership of vertically related activities. When companies become his ow...

CHAPTER 5: CORPORATE STRATEGY Scope: - Product: diversification… - Geographical: number of geographical areas where the firm is operating related to the internalisation of the firm - Vertical : the degree of ownership of vertically related activities. When companies become his own supplier or his own distributors. 5.1 Development strategies -Development: always to create value. Development and growth: - Firm is growing we have increases in the size of the firm, measured by the number of employees, - Development is about the evolution of the scope of the firm over time in qualitative and quantitative terms. - Quantitative: see if there is growth or not Qualitative: we need to assess the composition of the business portfolio, are we going to do the same activities or not. Always to create value for the firm. Is it possible to create value without growth? Companies may diversify too much, companies can create value without growth. 1. Directions of development: consolidation, expansion, diversification, vertical integration, restructuring. 2. Methods of development: how are we going to achieve the direction of the firm. 27  - Internal: we invest within the firm, organic growth - External: mergers, acquisition and cooperation. Ex: acquire a firm where I am going to operate. 5.1.1 Directions of development: - Expansion strategies: market penetration, product development, market development. - Product development: introducing new products in an existing market (change in the scope? Yes, it is changing the product) - Market development: existing products, new markets - Diversification: new products, new markets - Vertical integration: activities related to the whole production cycle, - Restructuring: withdrawal (divestment) from present activities, we are not increasing the size so there is no growth. The way to create value again. a) Diversification: is defined as a strategy that takes an organisation away from both its existing markets and its existing products → new products + new markets —> change in the scope of the firm Ex: use PESTEL, economical factors 28 Ex: competitive environment (porter’s) Ex: economies of scope, cost economies of multiple products, Why do you diversify ? manage risk, if you diversify the risk is reduced. - Risk reduction - Saturation of traditional market - Excess of resources and capabilities - Investment opportunities: - Generation of synergies: - Other reasons (growth, image, etc,): exploding the of the company Related diversification: - Relatedness has to do with the potential for sharing and transferring resources and capabilities between businesses (distribution channels, technologies, etc.). In related diversification there is some degree of relationship with current activities. - Reasons for related diversification: generating synergies, productive or commercial synergies. That can be shared or can be transferred, there is a potential to achieve economies of scope. Main reason to generate economies of scope. - Cost leadership: benefiting from technological competence, experience, valuable technology, benefit from brand image. - Risks of related diversification: Coordination cost, synergies do not exist, inflexiblity —> we cannot act inflexibly or autonomously without affecting the other activities. (exit barriers). - Ex: nokia No, we cannot transfer knowledge and resources, so no synergies. It is possible to manage financial synergies. We need to see the value chain and the potential synergies, whether resources can be If its related companies can create productive and synergies. The way to evaluate if they are related or not? If it can be transfer - Why for managers is relevant unrelated diversification? Managers have their own interests, so this is for them a great opportunity since it provides them to put in on the resumes, promotions, incentives, and strategic decision to diversify in a firm or market that we are not related to. 29  - So this is related to shareholders' goals? Not necessarily, because they search for long term sustain returns. Unrelated diversification: Moving into new products and new market activities that have no direct link with current activities. There is a clear break with the previous situation. - Reasons for unrelated diversification: ➔ Reduce firm risk, achieve greater earnings, better allocation of financial resources, manager’s objectives. - Risks or unrelated diversification: ➔ absence of synergies across business (production and commercial synergies, because the value chain ) ➔ difficulty to obtain specific skills and competence ➔ managerial problems ➔ overcome barriers to entry in new industries: b) Vertical integration : refers to a firm’s ownership of vertically related activities. The greater a firm’s ownership extends over successive stages of the value chain for its product, the greater its degree of vertical integration. (Grant) - Two types of integration: 1. Backward integration: acquisition by a car manufacturer of a component supplier. 2. Forward integration: for a car manufacturer, this could be distribution, repairs and servicing. Reasons for vertical integration: Cost advantages Based on the competitive position - Economies of scope - Access to inputs - Simplification of the - Possibility to reinforce production/distribution process differentiation - Costs reduction ( coordination and - Ability to affect prices control) - Market power increase ( compared - Elimination of transaction costs to non-integrated competitors) - Less intermediaries - Creation of barriers to entry (difficult to overcome by non-integrated competitors) 30 Risks of vertical integration - Firm risk may increase - Higher exit barriers - Lack of flexibility - Less ability to develop autonomous innovations - Profit margins not achieved - Organizational complexity increases 5.1.2 Methods of development Cooperation: Agreement between two or more firms that, remaining independent organisations, share some resources and/ or capabilities to pursue a strategy and reinforce their competitive advantage. Basic characteristics: - No subordinate relationship between firms that cooperate - Independent but dependent - Coordinations to undertake future actions - Certain loss of organisational autonomy in decision making - Interdependence between partners to achieve success - Partners pursue a common goal ( difficult to achieve without the agreement ) Advantages: Risk is share, resources, increased their competitive position, explode a new market opportunity, reach new market. - Obtain resources required (open innovation)--> ex: covid vaccine - Greater balance between efficiency and flexibility → way of focusing internally in activities that we can perform well, and partner with external institutions - Limits some risks→ Ex: innovation, uncertain risky process, investment is really high. - Learning from partners→ - Reduced the time we need to introduce a product in the market: through collaborations 31 Disadvantages: - Undermine a firm’s competitive position→ showing sources that support our competitive advantage - Loss of autonomy - Costs ( time, organisational complexity) → time consuming, firms align with multiple firms ( alliance cooperation ) - Divergent interests → - Lack of trust and commitment among partners → Depending on the Nature of the cooperation, we have different cooperation agreements: Contractual agreements: - Contracts between companies that do not involve ownership, the exchange of shares, or capital investments in a new business. - Types: long-term contracts (long term relationship for a specific purpose) , franchise (Mcdonalds, the right to have the own business in a exchange for a fee) , licence ( let you use the knowledge that you can use to produce or sell a product in exchange to a fee) , subcontracting (outsourcing a specific activity in the value chain, subcontract the design or the marketing activity) , consortia ( usually uses multiple products that they work together for a single project) Shareholder agreements: - Involve acquisition of shares or even the creation of a new entity. - Types: joint ventures (two firms invest or collaborate in the creation a new venture) g, share swap (companies reciprocate subtract capital in , minority shareholder Interorganizational networks: - Plurality of corporations agreements between firms (all the types analysed before), multiple partners, and complex relationships. 5.2 Firm internationalization Multinational: firm that operates in two or more countries in order to maximize profits from a global perspective. - Corporate strategy we will also study international competitive strategies. - Maximize their benefits, - Internal factors: 32 Reasons for internalization: 1. Internal - Cost reduction : - Search for resources: specialises labour - Minimum efficient size: if you don't have enough demand, you sell the excess in foreign locations - Reduce risk: 2. External - Industry life cycle - External demand - Track the customer: if their customer is internazionale - Industry globalization: Expansion Market development, geographical scope. How companies compete in the international competition, and to determine how they compete we have to understand in which sector they compete. PATTERNS OF INTERNATIONAL COMPETITION (porter): 1. Multidomestic industry: -competition in each country is independent of competition in other countries. -National industries compete autonomously, competitive advantge are country specific. -Portfolio of domestic strategies, specific for each country, example: wine industry Ex: wine industry 2. Potentially global industries: 3. Global industry: the firm’s competitive positoon in one coutnry is closely related to its competitive positon in other countries. - Consider the world as a single market. - Global competitive advantage - Ex: Commercial aircraft Compare the main characteristics of global and multidomestic industries, in terms of: Global industry Multidomestic industry Location of players Only operate in few Around the world, they countries, USA and some are in different countries. countries of Europe 33  Minimum efficient size High→ they required high Small→ investment and facilities Number of firms in the Very few firms main A lot of firms in the industry players only Boeing and industry, EADS-Airbus Trade barriers No national barriers of High import tariffs to entry protect the domestic industries. Consumer behaviour Similar since the Heterogenous, approach is almost the same International competitive strategies: how firms will compete in international markets. Firms can compete in cost leadership or differentiation. Global strategy : if the industry is global the firm will follow this strategy. Here the companies can offer standardized products (and sell in multiple countries) since the demand is homogeneous. → this could reduce costs. Multidomestic strategy: if the industry is multidomestic the firm will follow this strategy. The pressure to reduce cost is low ( high cost since customization is really costly) the pressure on local adaptation is high since the demand is heterogeneous. The firms cannot offer standardized products across the world. Transnational strategy: if the industry is potentially global the firm will follow this strategy. We will try to reduce cost as much as we can but we know that for certain aspects we need to adapt. Balance the benefits from both, think global but act local. Concentrate the operations in countries where it is cheaper, for example aircraft. Problems→ depend a lot in concrete location, Multidomestic→ local knowledge matters, differentiation but understood as customized the products, adapting the product to local needs of demand. Problems: limited ability to reduce costs. 34 Transnational → combination, standardised everything we can but at the same time there is a need of adapting some characteristics of the products. Balance of efficiency and Ikea: purely global to transnational Mcdonalds: not purely global, they have some characteristics they adapt to the country. Transnational strategy. Where and how? Penetration on the foreign market. a) Foreign market selection: - Foreign market characteristics: (macroeconomic conditions, country risk→ negative effects for the firms operating in a foreign market that could result in legal issues, political aspects associated with the country,etc.) Developing a pestle analysis, political factors, economics. Potential demand for the product. *Political risk→ free market economy, dictatorship or a democracy, the risk of a civil war, corruption in the government. 35  - How difficult it is to operate in the foreign market: how easy or difficult it is to operate in the particular market. Cultural gap, local conditions, etc. The greater the differences, the more difficult to operate. The greater the difficulty to adapt, the more difficult to operate. b) Entry modes: - Exporting: lower investment, lower risk. less profitable - Contractual agreements: - Foreign direct investment : more profitable - joint venture - wholly owned subsidiaries Companies would choose exporting and contractual agreements because it is less costly, when they gain experience and knowledge then they typically become more engaged in foreign direct investment. Classical path→ beginning with contractual agreements and then expand Born global firms→ companies that are present in multiple channels International entry modes: Exports: (low intensity) - Operating takes place in the home country and then you export to other countries. Advantages: - small size of the firm: Exporting is an ideal strategy for smaller firms with limited resources since it requires less capital investment compared to establishing operations in foreign countries. It allows firms to access international markets without significant infrastructure or management overhead abroad - Test international markets: Firms can gather insights about customer preferences, competition, and market conditions before committing to more resource-intensive modes like direct investment or joint ventures. - Scale economies: By focusing production in the home country, firms can achieve economies of scale, reducing per-unit costs. Centralized production ensures efficiency and consistency in product quality, which may not be possible when manufacturing is spread across multiple locations 36 Disadvantages: - Trade barriers: Transportation costs, tariffs - Cultural barriers: -Customization is not so critical -When the firm can benefit from the cost advantages from the home country Contractual agreements (medium intensity): - License: arrangement in which the owner of intellectual property grants another firm the right to use that property for a specified period of time in exchange for royalties or other compensation. Exchange for a fee. One of the partner would be in a foreign location. - Franchising: arrangement in which the firm allows another the right to use an entire business system in exchange for fees, royalties or other forms of compensation. - It could be in the home country but also it can be applied in the foreign market. Advantages: - Avoid trade barriers - Partner assumes some of the risk - Gain knowledge of the company (local conditions of the country) Disadvantages: - You cannot control the image of your firm in the foreign country, losing control as part of the agreement (image and quality ) - Transaction costs Foreign direct investment (high intensity): A firm invests directly in facilities to produce and/or market a product in a foreign country. Alone or with a partner. - Joint ventures: shared investment→ - Wholly owned subsidiaries (alone) → 1. Acquisition: firm that already exists in the foreign market 2. New subsidiary: new one, set up new facilities 37 Joint ventures: - Advantages: shared the risk, the cost and the investment, gain local knowledge for with we create the firm, greater ownership - Disadvantages: shared the profits, sharing assets, complexity in the negotiations Wholly owned subsidiaries: - Advantages: You have full control, autonomy - Disadvantages: high investment, higher the risk, higher the cost 38