Corporate Strategy PDF

CHAPTER 5 CORPORATE STRATEGY STRATEGIC MANAGEMENT UAB Index CORPORATE STRATEGIES 5.1. Development strategies 5.1.1. Directions of development ▪ Diversification ▪ Vertical integration 5.1.2. Methods of development ▪ Cooperation 5.2. Firm internationalization DEFININIG THE SCOPE OF THE FIRM (pro...

CHAPTER 5 CORPORATE STRATEGY STRATEGIC MANAGEMENT UAB Index CORPORATE STRATEGIES 5.1. Development strategies 5.1.1. Directions of development ▪ Diversification ▪ Vertical integration 5.1.2. Methods of development ▪ Cooperation 5.2. Firm internationalization DEFININIG THE SCOPE OF THE FIRM (products - markets where to compete) CORPORATE STRATEGIES DIRECTIONS OF DEVELOPMENT -Consolidation -Expansion -Diversification -Vertical integration -Restructuring DEVELOPMENT STRATEGIES (changing the scope of the firm over time) •Internal METHODS OF DEVELOPMENT •External (mergers, acquisitions, cooperation) 5.1. DEVELOPMENT STRATEGIES 5.1.1. Directions of development To identify directions of development → Use the definition of the scope of the firm and consider the following alternatives: 1) 2) 3) 4) Whether or not there is a change in the scope of the firm. Whether there is growth or not. Whether or not the company offers the same products and serves the same markets. Whether or not the new products and markets are related to traditional ones. 5.1. DEVELOPMENT STRATEGIES PRODUCT EXISTING NEW EXISTING Market penetration Product development NEW Market development Diversification MARKET Ansoff’s Directions of Development (Ansoff, 1965) 5.1. DEVELOPMENT STRATEGIES 5.1.1. Directions of development Navas & Guerras (2013, p. 179) 5.1. DEVELOPMENT STRATEGIES 5.1.1. Directions of development Consolidation DIRECTIONS OF DEVELOPMENT Current markets with current products No growth Market penetration Current markets, current products Growth Product development New products, existing markets Market development Diversification Vertical integration Restructuring Existing products, new markets New products, new markets Activities related to the whole production cycle Withdrawal (divestment) from present activities 5.1.1. Directions of development ▪Diversification Diversification is defined as a strategy that takes an organization away from both its existing markets and its existing products (Johnson, 2008, p. 262) → New products + new markets → Change in the scope of the firm General environment FACTORS THAT DETERMINE DIVERSIFICATION Specific environment Firm characteristics 5.1.1. Directions of development ▪Diversification Risk reduction Saturation of traditional market REASONS FOR DIVERSIFICATION Excess of resources and capabilities Investment opportunities Generation of synergies Other reasons (growth, image, etc.) 5.1.1. Directions of development ▪Diversification 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: Generation of synergies, sharing assets or the knowledge acquired across businesses→ Competitive advantage - Risks of related diversification Coordination costs, synergies do not exist, inflexibility (exit barriers) 5.1.1. Directions of development ▪Diversification RELATED DIVERSIFICATION IN “PARADORES” Th firm embarked upon a process of diversification oriented towards new activities related to the hospitality business → increase growth. ✓ ✓ ✓ ✓ Catering service “Paradores Escuela”, to train future employees Local stores specialized in traditional cuisine High quality Spa treatments, sport facilities (ej. Paradores Golf). 5.1.1. Directions of development ▪Diversification Unrelated diversification - Moving into new product 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 finantial resources, manager’s objectives. - Risks of unrelated diversification: Absence of synergies across businesses, difficulty to obtain specific skills and competences, managerial problems, overcome barriers to entry in new industries. 5.1.1. Directions of development ▪Diversification UNRELATED DIVERSIFICATION IN “EL POZO” Traditional business: meat processing. Later, “El Pozo” started engaging in unrelated activities: - Profusa (constuction sector) Vishoteles (hotels) Aemedsa (producer of medical white oils) Terra Natura (exploitation of natural parks) ONO (telecommunications sector) Sacyr (construction sector) 5.1.1. Directions of development ▪Vertical integration 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, 2010; 354). Backward integration Forward integration Acquisition by a car manufacturer of a component supplier For a car manufacturer, this could be distribution, repairs and servicing 5.1.1. Directions of development ▪Vertical integration REASONS FOR VERTICAL INTEGRATION COST ADVANTAGES BASED ON THE COMPETITIVE POSITION • Economies of scope • Access to inputs • Simplification of the production/distribution process • Possibility to reinforce differentiation • Costs reduction (coordination and control) • Elimination of transaction costs • Less intermediaries • Ability to affect prices • Market power increase (compared to nonintegrated competitors) •Creation of barriers to entry (difficult to overcome by non-integrated competitors) 5.1.1. Directions of development ▪Vertical integration 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 DIRECTIONS OF DEVELOPMENT -Consolidation -Expansion -Diversification -Vertical integration -Restructuring DEVELOPMENT STRATEGIES (changing the scope of the firm over time) •Internal METHODS OF DEVELOPMENT •External -Mergers, -Acquisitions -Cooperation/Alliances 5.1.2. Methods of development ▪Cooperation ▪Cooperation: Agreement between two or more firms that, remaining independent organizations, share some resources and / or capabilities to pursue a strategy and reinforce their competitive advantage. - No subordinate relationship between firms that cooperate - Coordination to undertake future actions BASIC CHARACTERISTICS - Certain loss of organizational autonomy in decision making - Interdependence between partners to achieve success - Partners pursue a commoan goal (difficult to achieve without the agreement) 5.1.2. Methods of development ▪Cooperation Advantages • Obtain resources required • Greater balance between efficiency and flexibility • Limits some risks • Learning from partners Disadvantages • Undermine a firm’s competitive position • Loss of autonomy • Costs (time, organizational complexity) • Divergent interests • Lack of trust and commitment among partners 5.1.2. Methods of development ▪Cooperation Contractual agreements Shareholder agreements Interorganizational networks - Contracts between companies that do not involve ownership, the exchange of shares, or capital investments in a new business - Types: long-term contracts, franchise, license, subcontracting, consortia - Involve acquisition of shares -Types: Joint ventures, share swap, minority shareholder - Plurality of cooperation agreements between firms (all the types analyzed 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. REASONS FOR INTERNATIONALIZATION Internal factors • Cost reduction •Search for resources •Minimum efficient size •Reduce risk •Exploit resources and capabilities in other countries External factors • Industry life cycle • External demand • Follow the customer • Industry globalization 5.2. Firm internationalization PATTERNS OF INTERNATIONAL COMPETITION (Porter, 1986) MULTIDOMESTIC INDUSTRY •Competition in each country is independent of competition in other countries. •National industries compete autonomously; competitive advantages are country specific GLOBAL INDUSTRY ▪The firm’s competitive position in one country is closely related to its competitive position in other countries. •Linked industries, worldwide basis. •Portfolio of domestic strategies •Global competitive advantage Example: Wine industry Example: Commercial aircraft 5.2. Firm internationalization Pressures to reduce costs High INTERNATIONAL STRATEGIES Global strategy Transnational strategy •Global strategy •Multidomestic strategy •Transnational strategy Low Multidomestic strategy Low High Pressures for local adaptation Dess & Lumpkin (2003); Navas & Guerras (2013) 5.2. Firm internationalization INTERNATIONAL STRATEGIES Global strategy ▪Competitive strategy is centralized and controlled by corporate office ▪Emphasizes cost reduction and economies of scale (larger production plants) ▪ Products are standardized ▪Limited ability to adapt to local markets Multidomestic strategy Transnational strategy ▪Authority is decentralized local decision making ▪Balance efficiency – local adaptation ▪ Emphasis is differentiating ▪Firm’s assets are products and services to adapt dispersed according to the to local markets most beneficial location for a specific activity ▪Customized products to meet local customers’ specific ▪Provide greater demands knowledge flows and learning ▪Limited ability to reduce costs through economies of ▪ “Think global, act local” scale Dess & Lumpkin (2003); Navas & Guerras (2013) 5.2. Firm internationalization INTERNATIONAL STRATEGY AT IKEA Global strategy - Standardized products Cost reduction and economies of scale Problems in the U.S.A ✓ Strategy redefinition → Transnational ✓ 30% of products offered where adapted to local demands 5.2. Firm internationalization INTERNATIONAL ENTRY MODES Foreign market characteristics FOREIGN MARKET SELECTION Decisions: “where” and (macroeconomic conditions, country risk, etc.) How difficult it is to operate in the foreign market (cultural gap, local conditions, etc). EXPORTING “how” ENTRY MODES CONTRACTUAL AGREEMENTS FOREIGN DIRECT INVESTMENT Licensing Franchising Joint ventures Wholly-owned subsidiaries 5.2. Firm internationalization INTERNATIONAL ENTRY MODES Low intensity EXPORTING High intensity Products are sourced from the home country and sold in foreign countries. 5.2. Firm internationalization INTERNATIONAL ENTRY MODES Low intensity LICENSING - Arrangement in which the owner of intellectual property (IP) grants another firm the right to use that property for a specified period of time in exchange for royalties or other compensation (Cavusgil et al., 2008) High intensity CONTRACTUAL AGREEMENTS 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 (Cavusgil et al., 2008) 5.2. Firm internationalization INTERNATIONAL ENTRY MODES Low intensity JOINT VENTURES Shared investment High intensity FOREIGN DIRECT INVESTMENT WHOLLY OWNED SUBSIDIARIES Totally controlled by the firm ACQUISITION Firm that already exists NEW SUBSIDIARY New one A firm invests directly in facilities to produce and/or market a product in a foreign country 5.2. Firm internationalization REFERENCES • GRANT, R. (2016). Contemporary Strategy Analysis, Text and Cases. 9th edition, Wiley: London. • NAVAS, J.E.; GUERRAS, L.A. (2018). Fundamentals of Strategic Management. 2nd edition, Thomson ReutersCivitas: Madrid.