Strategic and International Management Summary.pdf

CHAPTER 1: STRATEGIC MANAGEMENT AND STRATEGIC COMPETITIVENESS Strategy: is an integrated and coordinated set of commitments and actions designed to exploit core competencies and gain a competitive advantage. Competitive advantage: A firm has a competitive advantage when by implementing a chosen s...

CHAPTER 1: STRATEGIC MANAGEMENT AND STRATEGIC COMPETITIVENESS Strategy: is an integrated and coordinated set of commitments and actions designed to exploit core competencies and gain a competitive advantage. Competitive advantage: A firm has a competitive advantage when by implementing a chosen strategy, it creates superior value for customers and when competitors are not able to imitate the value the firm’s products create or find it too expensive to attempt imitation Above-average returns are returns in excess of what an investor expects to earn from other investments with a similar amount of risk Average returns are returns equal to those an investor expects to earn from other investments possessing a similar amount of risk. Risk is an investor’s uncertainty about the economic gains or losses that will result from a particular investment. Strategic competitiveness is achieved when a firm successfully formulates and implements a value creating strategy. Hyper-competition is a condition where competitors engage in intense rivalry, markets change quickly and often, and entry barriers are low. In these environments, firms find it difficult to maintain a competitive advantage. Rivalry in hypercompetitive environments tends to occur among global competitors who innovate regularly and successfully. A global economy is one in which goods, services, people, skills, and ideas move freely across geographic borders. Relatively unfettered by artificial constraints, such as tariffs, the global economy significantly expands and complicates a firm’s competitive environment. Globalization is the increasing economic interdependence among countries and their organizations as reflected in the flow of products, financial capital, and knowledge across country borders. Globalization is a product of a large number of firms competing against one another in an increasing number of global economies. Leads to: new markets, new sources, greater interdependence, novel risks. The rate of technology diffusion, which is the speed at which new technologies become available to firms and when firms choose to adopt them, is far greater than was the case a decade or two ago Disruptive technologies: technologies that destroy the value of an existing technology and create new markets - surface frequently in today’s competitive markets. Technology changes lead to: Increased speed, perpetual innovation, digitalization; negative externalities. Strategic flexibility is a set of capabilities firms use to respond to various demands and opportunities existing in today’s dynamic and uncertain competitive environment. Strategic flexibility involves coping with uncertainty and its accompanying risks.74 Firms should try to develop strategic flexibility in all areas of their operations The industrial organization (I/O) model of above-average returns explains the external environment’s dominant influence on the choice of strategy and the actions associated with it. The logic of the I/O model is that a set of industry characteristics, including economies of scale, barriers to market entry, diversification, product differentiation, the degree of concentration of firms in the industry, and market frictions, determine the profitability potential of an industry or a segment of it as well as the actions firms should take to operate profitably. Industry characteristics in that sense:  Economies of scale Barriers to market entry Product differentiation Concentration of firms The resource-based model of above-average returns assumes that each organization is a collection of unique resources and capabilities. The uniqueness of resources and capabilities is the basis of a firm’s strategy and its ability to earn above-average returns Resources are inputs into a firm’s production process. Capabilities enable resources to perform a task/ the capacity for a set of resources to perform a task or an activity in an integrative manner Core competencies are those capabilities that serve as a source of competitive advantage Company’s vision: Vision is a picture of what the firm wants to be and, in broad terms, what it wants to achieve Company’s mission: The vision is the foundation for the firm’s mission. A mission specifies the businesses in which the firm intends to compete and the customers it intends to serve. The firm’s mission is more concrete than its vision. Similar to the vision, a mission should establish a firm’s individuality and should be inspiring and relevant to all stakeholders Stakeholders: individuals, groups, and organizations that can affect the firm’s vision and mission, are affected by the strategic out- comes achieved, and have enforceable claims on the firm’s performance. Their ability to withhold participation that is essential to the firm’s survival, competitiveness, and profitability is the source of stakeholders’ ability to enforce their claims against an organization. Strategic leaders: people located in different areas and levels of the firm using the strategic management process to select actions that help the firm achieve its vision and fulfil its mission. Regardless of their location in the firm, successful strategic leaders are decisive, committed to nurturing those around them, and committed to helping the firm create value for all stakeholder groups. Good strategic leaders are: decisive, nurture the ones around them, help the firm create value. Organizational culture refers to the complex set of ideologies, symbols, and core values that individuals throughout the firm share and that influence how the firm conducts business. Organizational culture is the social energy that drives—or fails to drive—the organization. The strategic management process is a rational approach firms use to achieve strategic competitiveness and earn above-average returns CHAPTER 2 -THE EXTERNAL ENVIRONMENT, OPPORTUNITIES, THREATS, INDUSTRY COMPETITION, AND COMPETITOR ANALYSIS. The general environment is composed of dimensions in the broader society that influence an industry and the firms within it. We group these dimensions into seven environmental segments: demographic, economic, political/legal, sociocultural, technological, global, and sustainable physical. Examples of elements analysed in each of these segments are shown. The industry environment is the set of factors that directly influences a firm and its competitive actions and responses: the threat of new entrants, the power of suppliers, the power of buyers, the threat of product substitutes, and the intensity of rivalry among the competing firms. Competitor analysis: how companies gather and interpret information about their competitors An opportunity is a condition in the general environment that, if exploited effectively, helps a company reach strategic competitiveness. A threat is a condition in the general environment that may hinder a company’s efforts to achieve strategic competitiveness External Environment Analysis: Scanning: Scanning entails the study of all segments in the general environment. Through scanning, firms identify early signals of potential changes in the general environment and detect changes that are already under way. Scanning often reveals ambiguous, incomplete, or unconnected data and information that require careful analysis. Monitoring: When monitoring, analysts observe environmental changes to see if an important trend is emerging from among those spotted through scanning. Critical to successful monitoring is the firm’s ability to detect meaning in environmental events and trends Forecasting: Scanning and monitoring are concerned with events and trends in the general environment at a point in time. When forecasting, analysts develop feasible projections of what might happen, and how quickly, as a result of the events and trends detected through scanning and monitoring Assessing: When assessing, the objective is to determine the timing and significance of the effects of environmental changes and trends that have been identified. Without assessment, the firm has data that may be interesting but of unknown competitive relevance. Even if formal assessment is inadequate, the appropriate interpretation of that information is important. Industry Environment Analysis: An industry is a group of firms producing products that are close substitutes Porter’s five forces: Threat of New Entrants: Identifying new entrants is important because they can threaten the market share of existing competitors. Barriers to Entry: Economies of Scale: derived from incremental efficiency improvements through experience as a firm grows larger. Therefore, the cost of pro- ducing each unit declines as the quantity of a product produced during a given period increases. A new entrant is unlikely to quickly generate the level of demand for its product that in turn would allow it to develop economies of scale. Product Differentiation: Over time, customers may come to believe that a firm’s product is unique. This belief can result from the firm’s service to the customer, effec- tive advertising campaigns, or being the first to market a good or service. Greater levels of perceived product uniqueness create customers who consistently purchase a firm’s products. To combat the perception of uniqueness, new entrants frequently offer products at lower prices. This decision, however, may result in lower profits or even losses. Capital Requirements: Competing in a new industry requires a firm to have resources to invest. In addition to physical facilities, capital is needed for inventories, marketing activities, and other critical business functions. Even when a new industry is attractive, the capital required for successful market entry may not be available to pursue the market opportunity Switching costs: Switching costs are the one-time costs customers incur when they buy from a different supplier. The costs of buying new ancillary equipment and of retrain- ing employees, and even the psychological costs of ending a relationship, may be incurred in switching to a new supplier. In some cases, switching costs are low, such as when the consumer switches to a different brand of soft drink. Access to Distribution Channels: Over time, industry participants commonly learn how to effectively distribute their products. After building a relationship with its distributors, a firm will nurture it, thus creating switching costs for the distribu- tors. Access to distribution channels can be a strong entry barrier for new entrants, particularly in consumer nondurable goods industries Cost Disadvantages Independent of Scale: Sometimes, established competitors have cost advantages that new entrants cannot duplicate. Proprietary product tech- nology, favorable access to raw materials, desirable locations, and government subsi- dies are examples. Successful competition requires new entrants to reduce the strategic relevance of these factors. Government policy: Through their decisions about issues such as the granting of licenses and permits, governments can also control entry into an industry. Liquor retailing, radio and TV broadcasting, banking, and trucking are examples of industries in which government decisions and actions affect entry possibilities. Expected Retaliation: Companies seeking to enter an industry also anticipate the reactions of firms in the industry. An expectation of swift and vigorous competitive responses reduces the likelihood of entry.Vigorous retaliation can be expected when the existing firm has a major stake in the industry. Bargaining power of Suppliers: Increasing prices and reducing the quality of their products are potential means sup- pliers use to exert power over firms com- peting within an industry. If a firm is unable to recover cost increases by its suppliers through its own pricing structure, its profit- ability is reduced by its suppliers’ actions. Some buyers attempt to manage or reduce suppliers’ power by developing a long- term relationship with them Bargaining power of Buyers: Firms seek to maximize the return on their invested capital. Alternatively, buyers (customers of an industry or a firm) want to buy products at the lowest possible price—the point at which the industry earns the lowest acceptable rate of return on its invested cap- ital. To reduce their costs, buyers bargain for higher quality, greater levels of service, and lower prices Threat of Substitute Products: Substitute products are goods or services from outside a given industry that perform similar or the same functions as a product that the industry produces In general, product substitutes present a strong threat to a firm when customers face few if any switching costs and when the substitute product’s price is lower or its quality and performance capabilities are equal to or greater than those of the competing product. Intensity of Rivalry among Competitors: Because an industry’s firms are mutually dependent, actions taken by one company usually invite responses. Competitive rivalry intensifies when a firm is challenged by a competitor’s actions or when a company recognizes an opportunity to improve its market position Numerous or Equally Balanced Competitor: With multiple competitors, it is common for a few firms to believe they can act without eliciting a response. However, evidence suggests that other firms generally are aware of competitors’ actions, often choosing to respond to them. At the other extreme, industries with only a few firms of equivalent size and power also tend to have strong rivalries. The large and often similarsized resource bases of these firms permit vigorous actions and responses. Slow Industry Growth: When a market is growing, firms try to effectively use resources to serve an expanding customer base. Markets increasing in size reduce the pressure to take customers from competitors. However, rivalry in no-growth or slow-growth markets becomes more intense as firms battle to increase their market shares by attracting competitors’ customers. The instability in the market that results from these competitive engagements may reduce the profitability for all firms engaging in such battles. High Switching Costs or High Storage Costs: when many firms attempt to maximize their productive capacity, excess capacity is created on an industry-wide basis. To then reduce inventories, individual companies typically cut the price of their product and offer rebates and other special discounts to customers. However, doing this often intensifies competition. The pattern of excess capacity at the industry level followed by intense rivalry at the firm level is frequently observed in industries with high storage costs Lack of Differentiation or Low Switching Costs: When buyers find a differentiated product that satisfies their needs, they frequently purchase the product loyally over time. Industries with many companies that have successfully differentiated their products have less rivalry, resulting in lower competi tion for individual firms. Firms that develop and sustain a differentiated product that cannot be easily imitated by competitors often earn higher returns. However, when buyers view products as commodities, rivalry intensifies. In these instances, buyers’ purchasing decisions are based primarily on price and, to a lesser degree, service High Strategic Stakes: Competitive rivalry is likely to be high when it is important for several of the com- petitors to perform well in the market High Exit Barriers: Sometimes companies continue competing in an industry even though the returns on their invested capital are low or even negative. Firms making this choice likely face high exit barriers, which include economic, strategic, and emotional factors causing them to remain in an industry when the profitability of doing so is questionable. Common exit barriers that firms face include the following: o Spexialized assets o Fixed cost of exit o Strategic interrelationships o Emotional barriers o Government and social restrictions Interpretation of an Industry analyses: Analysis of the five forces within a given industry allows the firm to determine the industry’s attractiveness in terms of the potential to earn average or above- average returns. In general, the stronger the competitive forces, the lower the potential for firms to generate profits by implementing their strategies. An unattractive industry has low entry barriers, suppliers and buyers with strong bargaining positions, strong competitive threats from product substitutes, and intense rivalry among competitors. Alternatively, an attractive industry has high entry barriers, sup- pliers and buyers with little bargaining power, few competitive threats from product substitutes, and relatively moderate rivalry Strategic group: A set of firms emphasizing similar strategic dimensions and using a similar strategy is called a strategic group.121 The competition between firms within a strategic group is greater than the competition between a member of a strategic group and companies outside that strategic group. Competitor analysis: The competitor environment is the final part of the external environment requiring study. Competitor analysis focuses on each company against which a firm competes directly. CHAPTER 3-THE INTERNAL ORGANIZATION RESOURCES, CAPABILITIES, CORE COMPETENCIES, AND COMPETITIVE ADVANTAGES Analyzing the Internal Organization: Creating Value: Firms use their resources as the foundation for producing goods or services that will create value for customers.14 Value is measured by a product’s performance characteristics and by its attributes for which customers are willing to pay. Firms create value by innova- tively bundling and leveraging their resources to form capabilities and core competencies. The stronger these firms’ core competencies, the greater the amount of value they’re able to create for their customers The Challenge of Analysing the Internal Organization: When studying the internal organization, managers face uncertainty because of a number of issues, including those of new proprietary technologies, rapidly changing economic and political trends, transformations in societal values, and shifts in customers’ demands.34 Environmental uncertainty increases the complexity and range of issues to examine when studying the internal environment Resources: Tangible resources are assets that can be observed and quantified Intangible resources are assets that are rooted deeply in the firm’s history, accumulate over time, and are relatively difficult for competitors to analyze and imitate Capabilities: The firm combines individual tangible and intangible resources to create capabilities. In turn, capabilities are used to complete the organizational tasks required to produce, distribute, and service the goods or services the firm provides to customers for the purpose of creating value for them Core competencies emerge over time through an organizational process of accumulating and learning how to deploy different resources and capabilities. Core competencies are capabilities that serve as a source of competitive advantage for a firm. They are the “crown jewels” of a firm, the activities that a firm performs exceptionally well. The Four Criteria of Sustainable Competitive Advantage: VRIN Valuable Rare Inimitable (costly to imitate) Nonsubstitutable Value Chain Analysis: Value chain analysis allows the firm to understand the parts of its operations that cre- ate value and those that do not. The value chain is a template that firms use to analyze their cost position and to identify the multiple means that can be used to facilitate implementation of a chosen strategy Outsourcing: purchase of a value-creating activity or a support function activity from an external supplier Firms engaging in effective outsourcing increase their flexibility, mitigate risks, and reduce their capital investments And if outsourcing is to be used, firms must recognize that only activities where they cannot create value or where they are at a substantial disadvantage compared to competitors should be outsourced. CHAPTER 4: BUSINESS LEVEL STRATEGY Business-level strategy is an integrated and coordinated set of commitments and actions the firm uses to gain a competitive advantage by exploiting core competencies in specific product markets. When selecting a business-level strategy the firm determines 1. who will be served 2. what needs those target customers have that it will satisfy 3. how those needs will be satisfied Customers: Their relationship with business-level strategies Who: Determining the Customers to Serve Deciding who the target customer is that the firm intends to serve with its business-level strategy is an important decision. Companies divide customers into groups based on differences in the customers’ needs Dividing customers into groups based on their needs is called market segmentation. Market segmentation is a process used to cluster people with similar needs into individual and identifiable groups What: Determining Which Customer Needs to Satisfy After the firm decides who it will serve, it must identify the targeted customer group’s needs that its goods or services can satisfy. In a general sense, needs (what) are related to a product’s benefits and features. Successful firms learn how to deliver to customers what they want, when they want it. Examples of needs: special features, high quality, branding, low costs.  How: Determining Core Competencies Necessary to Satisfy Customer Needs Firms need to determine how to: 1. use their resources, capabilities, and core competencies 2. to develop products 3. that satisfy their customers’ needs Business Models: describes what a firm does to to create deliver and capture value for its stakeholders A business model is a Framework for how the firm will create ,deliver and capture values while a business level strategy is the set of commitments and actions that yield a path a firm intend to follow to gain competitive advantage by exploring its core competencies in a specific market. Examples of a business model: franchise, subscription, freemium, advertising model Business-level strategy is the path to the goals of a firm’s business model. Types of Business-Level Strategies: Cost Leadership Strategy: The cost leadership strategy is an integrated set of actions taken to produce goods or services with features that are acceptable to customers at the lowest cost, relative to that of competitors. Firms using the cost leadership strategy commonly sell standardized goods or services. Process innovations are critical, source from the lowest suppliers, constantly drive costs down. Differentiation Strategy: The differentiation strategy is an integrated set of actions taken to produce goods or services (at an acceptable cost) that customers perceive as being different in ways that are important to them. Products that customers perceive as being different in ways that are important to them (at acceptable costs). Product innovations are critical; Constantly upgrade differentiated features.; Change product lines frequently. Focus Strategy: Products that serve the needs of a particular segment of customers. Segments may be a particular: Buyer group Segment of a product line Geographic market. Focused Cost Leadership Strategy : Cost leadership strategy for a narrow market segment. Ikea uses focused cost leadership strategy. Highlighting the focused cost leadership strategy is the firm target market : young buyers desiring style at low cost Focused Differentiation Strategy: Differentiation strategy for a narrow market segment. Competitive Risks of Focus Strategies: Being “out-focused” Competitive entry Customer needs become similar Integrated Cost Leadership/Differentiation Strategy: simultaneously pursue low cost and differentiation. The objective of using this strategy is to efficiently produce products with some differentiated features Achieving this through: Flexible manufacturing systems  Information networks (CRM, ERP) Total quality management (TQM) Total quality management is a managerial process that emphasizes an organization’s commitment to the customer and to continuous improvement of all processes through problem-solving approaches based on empowerment of employees. Firms develop and use TQM systems to 2. cut costs, and 3. reduce the amount of time required to introduce innovative products to the marketplace.112 1. increase customer satisfaction, 2. cut costs, and 3. reduce the amount of time required to introduce innovative products to the marketplace. Risk of Integrated Cost Leadership/Differentiation Strategy: Getting stuck in the middle firms find it difficult to perform primary value-chain activities and support functions in ways that allow them to produce relatively inexpensive products with levels of differen- tiation that create value for the target customer. CHAPTER 5-COMPETITVE RIVALY AND COMPETITVE DYNAMICS Competitive rivalry is the ongoing set of competitive actions and competitive responses that occur among firms as they maneuver for an advantageous market position Competitors operate in the same market, offer similar products, and target similar customers. Competitors crucially determine the strategy of firms. Competitive rivalry are the ongoing competitive actions and reactions. Competitive behavior is the set of competitive actions and responses a firm takes to build or defend its competitive advantages and to improve its market position Firms competing against each other in several product or geographic markets engage in multimarket competition. Competitive dynamics is the total set of competitive actions and responses taken by all firms competing within a market Model of Competitive Rivalry: Competitor Analysis: Market Commonality: Firms sometimes compete against each other in several markets, a condition called market commonality. More formally, market commonality is concerned with the number of markets with which the firm and a competitor are involved jointly and the degree of importance of the individual markets to each Resource Similarity: Resource similarity is the extent to which the firm’s tangible and intangible resources compare favourably to a competitor’s in terms of type and amount Drivers of competitive behaviour: Awareness: Awareness affects the extent to which the firm understands the consequences of its competitive actions and responses. A lack of awareness can lead to excessive competition, resulting in a negative effect on all competitors’ performance Motivation: which concerns the firm’s incentive to take action or to respond to a competitor’s attack, relates to perceived gains and losses Ability: relates to each firm’s resources and the flexibility they provide. Without available resources (such as financial capital and people), the firm is not able to attack a competitor or respond to its actions Resource dissimilarity: also influences the competitive actions and responses firms choose to take. The reason is that the more significant is the difference between resources owned by the acting firm and those against whom it has taken action, the longer is the delay by the firm with a resource disadvantage Competitive Rivalry: The ongoing competitive action/response sequence between a firm and a competitor affects the performance of both companies Strategic and tactical actions: Firms use both strategic and tactical actions when forming their competitive actions and competitive responses in the course of engaging in competitive rivalry. A competitive action is a strategic or tactical action the firm takes to build or defend its competitive advantages or improve its market position. A competitive response is a strategic or tactical action the firm takes to counter the effects of a competitor’s competitive action A strategic action or a strategic response is a market-based move that involves a significant commitment of organizational resources and is difficult to implement and reverse A tactical action or a tactical response is a market-based move that firms take to fine-tune a strategy; these actions and responses involve fewer resources and are relatively easy to implement and reverse. Likelihood of attack: First mover: firm that takes an initial competitive action to build or defend its competitive advantages or to improve its market position In general, first movers emphasize research and development (R&D) as a path to developing innovative products that customers will value. First mover can gain: loyalty, market share, revenue, reputation. Second Mover: a firm that responds to the first mover’s competitive action, typically through imitation. He gets to avoid the mistakes of the first mover and lower the costs. Late mover: a firm that responds to a competitive action a significant amount of time after the first mover’s action and the second mover’s response. On occasion, late movers can be successful if they develop a unique way to enter the market and compete For firms from emerging economies, this often means a niche strategy with lower-cost production and manufacturing (mass market) Organizational Size: affects the likelihood it will take competitive actions as well as the types and timing of those actions Large firms: likely to initiate a larger total number of competitive actions and strategic actions during a given period Small firms: ’ flexibility and nimbleness allow them to develop variety in their competitive actions; large firms tend to limit the types of competitive actions used Quality: outcome of how a firm competes through its value chain activities and support functions Product Quality Dimensions Service Quality Dimensions 1. Performance: operating characteristics 1. Timeliness: performed in the promised 2. Features: important special period of time characteristics 2. Courtesy: performed cheerfully 3. Flexibility: meeting operation 3. Consistency: giving all customers specifications over some period of time similar experiences each time 4. Durability: amount of use before 4. Convenience: accessibility to customers performance deteriorates 5. Completeness: fully serviced, as 5. Conformance: match with pre- required established standards 6. Accuracy: performed correctly each 6. Serviceability: ease and speed of repair time 7. Aesthetics: how a product looks and feels 8. Perceived quality: subjective assessment of characteristics Likelihood of Response: The success of a firm’s competitive action is a function of the likelihood that a competitor will respond to it as well as by the type of action (strategic or tactical) and the effectiveness of that response Type of Competitive Action: Competitive responses to strategic actions differ from responses to tactical actions. These differences allow the firm to predict a competitor’s likely response to a competitive action that a firm took against it. Strategic actions commonly receive strategic responses and tactical actions receive tactical responses Actors reputation: In the context of competitive rivalry, an actor is the firm taking an action or a response, while reputation is “the positive or negative attribute ascribed by one rival to  another based on past competitive behavior. Competitors are more likely to respond to strategic or tactical actions when market leaders take them. Market Dependence: Market dependence denotes the extent to which a firm derives its revenues or profits from a particular market. In general, competitors with high market dependence are likely to respond strongly to attacks threatening their market position. Competitive dynamics: competitive dynamics concerns the ongoing actions and responses among all firms competing within a market for advantageous positions. Thus, United and Delta engage in competitive rivalry while the competitive actions and responses taken by United, Delta, American, Southwest, British Airways, Lufthansa, and Emirates Airways (and many others) form the competitive dynamics of the airline passenger industry. Slow cycle markets: markets in which competitors lack the ability to imitate the focal firm’s competitive advantages that commonly last for long periods, and where imitation would be costly Because no competitive advantage is sustainable permanently, firms competing in slowcycle markets can expect eventually to see a decline in the value their competitive advantage creates for target customers. Fast cycle markets: competitors can imitate the focal firm’s capabilities that contribute to its competitive advantages and where that imitation is often rapid and inexpensive. Thus, competitive advantages are not sustainable in fast-cycle markets. Standard cycle markets: markets in which some competitors may be able to imitate the focal firm’s competitive advantages and where that imitation is moderately costly. Model of Competition CHAPTER 6-CORPORATE-LEVEL STRATEGY Corporate-level strategies, which are strategies firms use to diversify their operations from a single business competing in a single market into several product markets—most commonly, into several businesses Corporate-level strategy specifies actions a firm takes to gain a competitive advantage by selecting and managing a group of different businesses competing in different product markets. Corporate-level strategies help com- panies to select new strategic positions— positions that are expected to increase the firm’s value. Levels of Diversification: Reasons for Diversification: Economies of scope are cost savings a firm creates by successfully sharing resources and capabilities or transferring one or more corporate-level core competencies that were developed in one of its businesses to another of its businesses. Related Constrained and Related Linked Diversification Operational Relatedness: Sharing Activities - Firms can create operational relatedness by sharing either a primary activity (e.g., inventory delivery systems) or a support activity (e.g., purchasing practices) Corporate Relatedness: Transferring of Core Competencies - Over time, the firm’s intangible resources, such as its know-how, become the foundation of core competencies. Corporate-level core competencies are complex sets of resources and capabilities that link different businesses, primarily through managerial and tech- nological knowledge, experience, and expertise Market Power: Firms using a related diversification strategy may gain market power when successfully using a related constrained or related linked strategy. Market power exists when a firm is able to sell its products above the existing competitive level or to reduce the costs of  its primary and support activities below the competitive level, or both In addition to efforts to gain scale as a means of increasing market power, firms can foster increased market power through multipoint competition and vertical integration. Multipoint competition exists when two or more diversified firms simultaneously compete in the same product areas or geographical markets. Some firms using a related diversification strategy engage in vertical integration to gain market power. Vertical integration exists when a company produces its own inputs (backward integration) or owns its own source of output distribution (forward inte- gration) Simultaneous Operational Relatedness and Corporate Relatedness: some firms simultaneously seek operational and corporate relatedness to create economies of scope. The ability to simultaneously create economies of scope by sharing activities (operational relatedness) and transferring core competencies (corporate relatedness) is difficult for competitors to understand and learn how to imitate Unrelated Diversification: Firms do not seek either operational relatedness or corporate relatedness when using the unrelated diversification corporate-level strategy. An unrelated diversification strategy can create value through two types of financial economies. Financial economies are cost savings realized through improved allocations of financial resources based on investments inside or outside the firm Efficient Internal Capital Market Allocation: In large diversified firms, the corporate headquarters office distributes capital to its businesses to create value for the overall corporation. Restructuring of Assets: As in the real estate business, buying assets at low prices, restructuring them, and selling them at a price that exceeds their cost generates a positive return on the firm’s invested capital. This is a strategy that has been taken up by private equity firms, who successfully buy, restructure, and then sell, often within a four-or five-year period Value-Neutral Diversification: Incentives and Resources: The objectives firms seek when using related diversification and unrelated diversification strategies all have the potential to help the firm create value through the corporate-level strategy. Different incentives to diversify sometimes exist, and the quality of the firm’s resources may permit only diversification that is value neutral rather than value creating Incentives to Diversify Antitrust regulation and tax laws Low performance: Low Performance Some research shows that low returns are related to greater levels of diversification. If high performance eliminates the need for greater diversification, then low performance may provide an incentive for diversification. Research evidence and the experience Uncertain future cash flows: Diversifying into other product markets or into other businesses can reduce the uncertainty about a firm’s future cash flows Synergy and firm risk reduction: Diversified firms pursuing economies of scope often have investments that are too inflexible as they try to realize synergy among business units. As a result, a number of problems may arise. Synergy exists when the value created by business units working together exceeds the value that those same units create working independentl Resources and Diversification: Although both tangible and intangible resources facilitate diversification, they vary in their ability to create value. Indeed, the degree to which resources are valuable, rare, difficult to imitate, and nonsubstitutable influences a firm’s ability to create value through diversification Intangible resources are more flexible than tangible physical assets in facilitating diversification. Although the sharing of tangible resources may induce diversification, intangible resources such as tacit knowledge could encourage even more diversification Value-Reducing Diversification: Managerial Motives to Diversify - 6-6 Value-Reducing Diversification: Managerial Motives to Diversify Managerial motives to diversify can exist independent of value-neutral reasons (i.e., incentives and resources) and value-creating reasons (e.g., economies of scope). The desire for increased compensation and reduced managerial risk are two motives for top- level executives to diversify their firm beyond value-creating and value-neutral levels. Summaru Model of the Relationship between Diversification and Firm Performance CHAPTER 7-MERGER AND ACQUISITION STRATEGIES A merger is a strategy through which two firmsagree to integrate their operations on a relatively coequal basis. An acquisition is a strategy through which one firm buys a controlling, or 100 per- cent, interest in another firm with the intent of making the acquired firm a subsidiary business within its portfolio. After the acquisition is completed, the management of the acquired firm reports to the management of the acquiring firm. Although most mergers that are completed are friendly in nature, acquisitions can be friendly or unfriendly. A takeover is a special type of acquisition where the target firm does not solicit the acquiring firm’s bid; thus, takeovers are unfriendly acquisitions Horizontal Acquisitions: The acquisition of a company competing in the same industry as the acquiring firm is a horizontal acquisition. Horizontal acquisitions increase a firm’s market power by exploiting cost-based and revenue-based synergies Vertical Acquisitions: refers to a firm acquiring a supplier or distributor of one or more of its products. Through a vertical acquisition, the newly formed firm controls addi- tional parts of the value chain which is how vertical acquisitions lead to increased market power. Related Acquisitions: Acquiring a firm in a highly related industry is called a related acquisition. Through a related acquisition, firms seek to create value through the synergy that can be generated by integrating some of their resources and capabilities Effective Acquisitions 1. Complementary 2. Fast and effective integration 3. Good due diligence 4. Beneficial financing 5. Low debt 6. Flexibility and adaptability Restructuring: a strategy through which a firm changes its set of businesses or its financial structure Downsizing is a reduction in the number of a firm’s employees and, sometimes, in the number of its operating units; but, the composition of businesses in the company’s port- folio may not change through downsizing. Thus, downsizing is an intentional managerial strategy that is used for the purpose of improving firm performance When downsizing, firms make intentional decisions about resources to retain and resources to eliminate. Organizational decline, on the other hand, finds firms losing access to an array of resources, many of which are critical to current and future performance Downscoping refers to divestiture, spin-off, or some other means of eliminating businesses that are unrelated to a firm’s core businesses. Downscoping has a more positive effect on firm performance than does downsizing103 because firms commonly find that downscoping causes them to refocus on their core business. A leveraged buyout (LBO) is a restructuring strategy whereby a party (typically a private equity firm) buys all of a firm’s assets in order to take the firm private.110 Once a private equity firm completes this type of transaction, the target firm’s company stock is no lon- ger traded publicly. Traditionally, leveraged buyouts were used as a restructuring strategy to correct for managerial mistakes or because the firm’s managers were making decisions that primarily served their own interests rather than those of shareholders. Restructuring and outcomes: CHAPTER 9-COOPERATIVE STRATEGY A cooperative strategy is a means by which firms collaborate to achieve a shared objective.2 Cooperating with others is a strategy a firm uses to create value for a customer that it likely could not create by itself Types of Major Strategic Alliances: Joint ventures, equity strategic alliances, and nonequity strategic alliances are the three major types of strategic alliances that firms use Joint venture: a strategic alliance in which two or more firms create a legally independent company to share some of their resources to create a competitive advantage. Typically, partners in a joint venture own equal percentages and contribute equally to the venture’s operations. Often formed to improve a firm’s ability to compete in uncertain competitive environments, joint ventures can be effective in establishing long-term rela- tionships and in transferring tacit knowledge between partners  Equity strategic alliance: s an alliance in which two or more firms own different percentages of a company that they have formed by combining some of their resources to create a competitive advantage. As with most alliances, the partners are seeking complementary resources and/or capabilities, hopefully allowing them to learn from each other. Companies commonly form equity alliances because they want to ensure that they have control over assets that they commit to the alliance Non-equity strategic alliances: an alliance in which two or more firms develop a contractual relationship to share some of their resources to create a competitive advantage Empirical Findings of Alliances: 80% of Fortune 1000 CEOs estimate that alliances account for 26% of revenues. Most large companies have over 20% of their assets and 30% of R&D expenditures tied up in alliances. Alliances often fail: Studies show that 30% to 70% of alliances fail. Alliance termination rates are over 50%. Reasons Firms Develop Strategic Alliances: Cooperative strategies are an integral part of the competitive landscape and are quite important to many companies The first important reason firms form strategic alliances is to create value they couldn’t generate by acting independently and entering markets more rapidly. A second major reason firms form strategic alliances is that most (if not all) com- panies lack the full set of resources needed to pursue all identified opportunities and reach their objectives in the process of doing so on their own Reasons for Strategic Alliances by Market Type: Business Level Cooperative Strategy: A business-level cooperative strategy is a strategy through which firms combine some of their resources to create a competitive advantage by competing in one or more product markets Complementary strategic alliances are business-level alliances in which firms share some of their resources in complementary ways to create a competitive advantages Vertical and horizontal are the two dominant types of complementary strategic alliances Vertical Complementary Strategic Alliance: In a vertical complementary strategic alliance, firms share some of their resources from different stages of the value chain to create a competitive advantage Oftentimes, vertical complementary alliances are formed to adapt to environmental changes Horizontal Complementary Strategic Alliance A horizontal complementary strategic alliance is an alliance in which firms share some of their resources from the same stage (or stages) of the value chain for creating a competitive advantage Competition Response Strategy: trategic alliances can be used at the business level to respond to competitors’ attacks. Because they can be difficult to reverse and expensive to operate, strategic alli- ances are primarily formed to take strategic rather than tactical actions and to respond to competitors’ actions in a like manner. Uncertainty-Reducing Strategy Firms sometimes use business-level strategic alliances to hedge against risk and uncertainty, especially in fast-cycle markets.51 These strategies are also used where uncertainty exists, such as in entering new product markets, especially those within emerging economies. The development of new products to enter new markets and the entry into emerging markets often carry with them significant risks. Thus, to reduce or mollify these risks, firms often develop R&D alliances and alliances with emerging market firms, respectively Competition-Reducing Strategy Used to reduce competition, collusive strategies differ from strategic alliances in that collusive strategies are often an illegal cooperative strategy. Explicit collusion and tacit collusion are the two types of collusive strategies. Explicit collusion exists when two or more firms negotiate directly to jointly agree about the amount to produce as well as the prices for what is produced.54 Explicit collusion strategies are illegal in the United States and most developed economies Accordingly, companies choosing to explicitly collude with other firms should recognize that competitors and regulatory bodies likely will challenge the acceptability of their competitive actions. Assessing Business-Level Cooperative Strategies Firms use business-level cooperative strategies to develop competitive advantages that can contribute to successful positions in individual product markets. Evidence suggests that complementary business-level strategic alliances, especially vertical ones, have the greatest probability of cre Coorporate Level Cooperation Strategy: a strategy through which a firm collaborates with one or more companies to expand its operations. Diversifying alliances, synergistic alliances, and franchising are the most commonly used corporate-level cooperative strategies A diversifying strategic alliance is a strategy in which firms share some of their resources to engage in product and/or geographic diversification. Companies using this strategy typically seek to enter new markets (either domestic or outside of their home setting) with existing products or with newly developed products. A synergistic strategic alliance is a strategy in which firms share some of their resources to create economies of scope. Similar to the business-level horizontal complementary strategic alliance, synergistic strategic alliances create synergy across multiple functions or multiple businesses between partner firms Franchising: a strategy in which a firm (the franchisor) uses a franchise as a contractual relationship to describe and control the sharing of its resources with its partners (the franchisees). A franchise is a “form of business organization in which a firm that already has a successful product or service (the franchisor) licenses its trademark and method of doing business to other businesses (the franchisees) in exchange for an initial franchise fee and an ongoing royalty rate. International Cooperative Strategy: A cross-border strategic alliance is a strategy in which firms with headquarters in different countries decide to combine some of their resources to create a competitive advantage. Taking place in virtually all industries, the number of cross-border alliances firms are completing continues to increase. These alliances are sometimes formed instead of mergers and acquisitions, which can be riskier. Network Cooperative strategy: a strategy by which several firms agree to form multiple partnerships to achieve shared objectives. A network cooperative strategy is particularly effective when it is formed by geographically clustered firms. A stable alliance network is formed in mature industries where demand is relatively constant and predictable. Through a stable alliance network, firms try to extend their competitive advantages to other settings while continuing to profit from operations in their core, relatively mature industry. Dynamic alliance networks are used in industries characterized by frequent product innovations and short product life cycle Categorization of Strategic Alliance Strategy Competitive Risks with Cooperative Strategies: Monitoring Partners: Alliance contracts o Legally binding contract to ensure that partners ▪ are fully aware of their rights and obligations in the collaboration ▪ have legal remedies available if a partner violates the contract Equity ownership o Each partner contributes capital and owns a specified right to a percentage of the proceeds Relational governance o Self-enforcing norms based on goodwill, trust, and reputation o Often emerges through repeated experiences working together CHAPTER 8-INTERNATIONAL STRATEGY An international strategy is a strategy through which the firm sells its goods or ser- vices outside its domestic mark. In some instances, firms using an international strat- egy become quite diversified geographically as they compete in numerous countries or regions outside their domestic market. International Business Level Strategy: Firms considering the use of any international strategy first develop domestic-market strategies (at the business level and at the corporate level if the firm has diversified at the product level). This is important because the firm may be able to use some of the capabilities and core competencies it has developed in its domestic market as the foundation for competitive success in international markets However, research results indicate that the value created by relying on capabilities and core competencies developed in domestic markets as a source of success in international markets diminishes as a firm’s geographic diversity increases Porter identifies four factors as determinants of a national advantage that some countries possess: Factors of production Demand Conditions Firm strategy, structure and rivalry Related and supporting industries International Corporate Level Strategy: International corporate-level strategy focuses on the scope of a firm’s operations through geographic diversification.36 International corporate-level strategy is required when the firm operates in multiple industries that are located in multiple countries or regions A multidomestic strategy is an international strategy in which strategic and operat- ing decisions are decentralized to the strategic business units in individual countries or regions, allowing each unit the opportunity to tailor products to the local market. In this strategy, the firm’s need for local responsiveness is high while its need for global integration is low A global strategy is an international strategy in which a firm’s home office determines the strategies that business units are to use in each country or region.42 This strategy indicates that the firm has a high need for global integration and a low need for local responsiveness. A transnational strategy is an international strategy through which the firm seeks to achieve both global efficiency and local responsiveness. AAA Strategy: Adaptation: product is adapted to suit the domestic market Aggregation: eg. Multiple head offices Arbitrage: using the differences to our benefit Liability of Foreigness: Cross Country Differences: Cultural distance Administrative distance Geographic distance Economic distance Cultural Dimensions: Power Distance Individualism Masculinity Uncertainty avoidance Long-term orientation Entry modes Exporting: For many firms, exporting is the initial mode of entry used.68 Exporting is an entry mode through which the firm sends products it produces in its domestic market to interna- tional markets. Exporting is a popular entry mode choice for small businesses to initiate an international strategy Licensing: an entry mode in which an agreement is formed that allows a foreign com- pany to purchase the right to manufacture and sell a firm’s products within a host coun- try’s market or a set of host countries’ markets.74 The licensor is normally paid a royalty on each unit produced and sold. The licensee takes the risks and makes the monetary investments in facilities for manufacturing, marketing, and distributing products. As a result, licensing is possibly the least costly form of international diversification. As with exporting, licensing is an attractive entry mode option for smaller firms, and potentially for newer firms as well. Firms can obtain a larger market for their innovative new products, which helps them to pay off the R&D costs to develop them and to earn a faster return on the innovations than if they only sell them in domestic markets. Licensing also has disadvantages. For example, after a firm licenses its product or brand to another party, it has little control over selling and distribution In addition, licensing provides the least potential returns because returns must be shared between the licensor and the licensee Strategic alliances: involves a firm collaborating with another company in a different setting in order to enter one or more international markets Firms share the risks and the resources required to enter international markets when using strategic alliances. Moreover, because partners bring their unique resources together for the purpose of working collaboratively, strategic alliances can facilitate developing new capabilities and possibly core competencies that may contribute to the firm’s strategic competitive- ness Acquisitions: When a firm acquires another company to enter an international market, it has completed a cross-border acquisition. Specifically, a cross-border acquisition is an entry mode through which a firm from one country acquires a stake in or purchases all of a firm located in another country. The ability of cross-border acquisitions to provide rapid access to new markets is a key reason for their growth. In fact, of the five entry modes, acquisitions often are the quickest means for firms to enter international markets. They often require debt financing to complete, which carries an extra cost. New Wholly Owned Subsidiary A greenfield venture is an entry mode through which a firm invests directly in another country or market by establishing a new wholly owned subsidiary. The process of creating a greenfield venture is often complex and potentially costly, but this entry mode affords maximum control to the firm and has the greatest amount of potential to contribute to the firm’s strategic competitiveness as it implements international strategies. The risks associated with greenfield ventures are significant in that the costs of establishing a new business operation in a new country or market can be substantial Dynamics of Mode of Entry Thus, to enter a global market, a firm selects the entry mode that is best suited to its situation. In some instances, the various options will be followed sequentially, begin- ning with exporting and eventually leading to greenfield ventures. In other cases, the firm may use several, but not all, of the different entry modes, each in different markets. The decision regarding which entry mode to use is primarily a result of the industry’s Risks in International Environment: Political Economic Sociological Technological Legal Environmental  CHAPTER 10-CORPORATE GOVERNANCE AS SAID Corporate governance is the set of mechanisms used to manage the relationships among stakeholders and to determine and control the strategic direction and performance of organizations An agency relationship exists when one or more persons (the principal or principals) hire another person or persons (the agent or agents) as decision-making specialists to perform a service. Thus, an agency relationship exists when one party delegates decision-making responsibility to a second party for compensation Product Diversification as an Example of an Agency Problem: One reason managers prefer more diversification compared to shareholders is the fact that it usually increases the size of a firm and size is positively related to executive compensation Curve S shows shareholders’ optimal level of diversification. As the firm’s owners, shareholders seek the level of diversification that reduces the risk of the firm’s total failure while simultaneously increasing its value by developing economies of scale and scope Agency Costs and Governance Mechanisms: The potential conflict between shareholders and top- level managers shown in Figure 10.2, coupled with the fact that principals cannot easily predict which managers might act opportunistically, demonstrates why principals establish governance mechanisms. However, the firm incurs costs when it uses one or more governance mechanisms. Agency costs are the sum of incentive costs, monitoring costs, enforcement costs, and individual financial losses incurred by principals because governance mechanisms cannot guarantee total compliance by the agent. Ownership Concentration: n is defined by the number of large-block shareholders and the total percentage of the firm’s shares they own. Large-block shareholders typically own at least 5 percent of a company’s issued shares. In general, diffuse ownership (a large number of shareholders with small holdings and few, if any, large-block shareholders) produces weak monitoring of managers’ decisions Institutional owners are financial institutions that control large-block shareholder positions.. Because of their prominent owner- ship positions, institutional owners, as large-block shareholders, have the potential to be a powerful governance mechanism. Board of directors: Shareholders elect the members of a firm’s board of directors. The board of directors is a group of elected individuals whose primary responsibility is to act in the owners’ best interests by formally monitoring and controlling the firm’s top-level managers Those elected to a firm’s board of directors are expected to oversee managers and to ensure that the corporation operates in ways that will best serve stakeholders’ interests, and particularly the owners’ interests. Helping board members reach their expected objectives are their powers to direct the affairs of the organization and reward and discipline top-level managers Though important to all shareholders, a firm’s individual shareholders with small ownership percentages are very dependent on the board of directors to represent their interests Generally, board members (often called directors) are classified into one of three groups Enhancing the Effectiveness of the Board of Directors: because of the importance of boards of directors in corporate governance and as a result of increased scrutiny from shareholders—in particular, large institutional investors—the performances of individual board members and of entire boards are being evaluated more formally and with greater intensity Among these changes are: - increases in the diversity of the backgrounds of board members (e.g., a greater number of directors from public service, academic, and scientific settings; a greater per- centage of ethnic minorities and women; and members from different countries on boards the strengthening of internal management and accounting control systems; of U.S. firms); establishing and consistently using formal processes to evaluate board members’ performance; -modifying the compensation of directors, especially reducing or eliminating stock options as a part of their package; and -creating the “lead director” role81 that has strong powers with regard to the board agenda and oversight of non-management board member activities. Executive Compensation: One of the three internal governance mechanisms attempts to deal with these issues. Specifically, executive compensation is a governance mechanism that seeks to align the interests of managers and owners through salaries, bonuses, and long-term incentives such as stock awards and options. The market for corporate control is an external governance mechanism that is active when a firm’s internal governance mechanisms fail. The market for corporate control is composed of individuals and firms that buy ownership positions in or purchase all of potentially undervalued corporations typically for the purpose of forming new divisions in established companies or merging two previously separate firms. Menagerial Defense Tactic: International Corporate Governance Corporate governance is an increasingly important issue in economies around the world, including emerging economies. Corporate Governance in Germany: In many private German firms, the owner and manager may be the same individual. In these instances, agency problems are not as prevalent German firms with more than 2,000 employees are required to have a two-tiered board structure, that places the responsibility for monitoring and controlling managerial (or supervisory) decisions and actions in the hands of a separate group.119 All the func- tions of strategy and management are the responsibility of the management board (the Vorstand); however, appointment to the Vorstand is the responsibility of the supervisory tier (the Aufsichtsrat). Employees, union members, and shareholders appoint members to the Aufsichtsrat. Proponents of the German structure suggest that it helps prevent corpo- rate wrongdoing and rash decisions by “dictatorial CEOs. Corporate Governance in Japan: The concepts of obligation, family, and consensus affect attitudes toward corporate governance in Japan. As part of a company family, individuals are members of a unit that envelops their lives; families command the attention and allegiance of parties through- out corporations Corporate Governance in China: China has a unique and large economy, mixed with both socialist and marketoriented traits. Over time, the government has done much to improve the corporate governance of listed companies, particularly in light of the increasing privatization of businesses and the development of equity markets. However, the stock markets in China remain young and are continuing to develop. Ethical Behaviour: As a whole, countries with weak institutions that have greater bribery activity tend to have fewer exports as a result. In addition, small- and medium-sized firms are the most harmed by bribery.  CHAPTER 11-ORGANIZATIONAL STRUCTURE AND CONTROLS Organizational structure and controls provide the framework within which strategies are implemented and used in both for-profit organizations and not-for-profit agencies. Organizational structure specifies the firm’s formal reporting relationships, procedures, controls, and authority and decision-making processes. A firm’s structure determines and specifies the decisions that are to be made and the work that is to be completed by everyone within an organization as a result of those decisions. Organizational routines serve as processes that are used to complete the work required by individual strategies Organizational controls are an important aspect of structure.27 Organizational controls guide the use of strategy, indicate how to compare actual results with expected results, and suggest corrective actions to take when the difference is unacceptable. It is difficult for a firm to successfully exploit its competitive advantages without effective organizational controls Strategic controls are largely subjective criteria intended to verify that the firm is using appropriate strategies for the conditions in the external environment and the com- pany’s competitive advantages. Thus, strategic controls are concerned with examining the fit between what the firm might do (as suggested by opportunities in its external envi ronment) and what it can do (as indicated by its internal organization in the form of its resources, capabilities, and core competencies). Financial controls are largely objective criteria used to measure the firm’s perfor- mance against previously established quantitative standards. When using financial con- trols, firms evaluate their current performance against previous outcomes as well as against competitors’ performance and industry averages. Accounting-based measures, such as return on investment (ROI) and return on assets (ROA), as well as market-based measures, such as economic value added, are examples of financial controls. Relationships between Strategy and Structure: Strategy and structure have a reciprocal relationship, and if aligned properly, performance improves.35 This relationship highlights the interconnectedness between strategy formulation and strategy implementation. In general, this reciprocal relationship finds structure flowing from or following selection of the firm’s strategy. Once in place though, structure can influence current strategic actions as well as choices about future strategies. STRUCTURE FOLLOWS STRATEGY and vice versa Evolutionary Patterns of Strategy and Organizational Structure Simple Structure The simple structure is a structure in which the owner-manager makes all major deci sions and monitors all activities, while the staff serves as an extension of the manager’s supervisory authority. Typically, the owner-manager actively works in the business on a daily basis. Informal relationships, few rules, limited task specialization, and unsophisticated information systems characterize this structure. The simple structure is matched with focus strategies and business-level strategies, as firms implementing these strategies commonly compete by offering a single product line in a single geographic market. Functional Structure The functional structure consists of a chief executive officer and a limited corporate staff, with functional line managers in dominant organizational areas such as production, accounting, marketing, R&D, engineering, and human resources This structure allows for functional specialization, thereby facilitating active sharing of knowledge within each functional area. Knowledge sharing facilitates career paths as well as professional development of functional specialists. However, a functional orientation can negatively affect communication and coordination among those representing different organizational functions. Multidivisional Structure With continuing growth and success, firms often consider greater levels of diversification. Successfully using a diversification strategy requires analysing substantially greater amounts of data and information when the firm offers the same products in different markets or offers different products in several markets. The multidivisional (M-form) structure consists of a corporate office and operating divisions, each operating division representing a separate business or profit center in which the top corporate officer delegates responsibilities for day-to-day operations and business-unit strategy to division managers. Each division represents a distinct, self-contained business with its own functional hierarchy Matches between Business-Level Strategies and the Functional Structure Firms use different forms of the functional organizational structure to support implementing the cost leadership, differentiation, and integrated cost leadership/differentiation strategies. The differences in these forms are accounted for primarily by different uses of three important structural characteristics: specialization (concerned with the type and number of jobs required to complete work, centralization (the degree to which decision-making authority is retained at higher managerial levels58), and formalization (the degree to which formal rules and procedures govern work Using the Functional Structure to Implement the Cost Leadership Strategy Firms using the cost leadership strategy sell large quantities of standardized products to an industry’s typical customer. Firms using this strategy need a structure that allows them to achieve efficiencies and deliver their products at costs lower than those of com- petitors. In terms of centralization, decision-making authority is centralized in a staff function to maintain a cost-reducing emphasis within each organizational function Jobs are highly specialized in the cost leadership functional structure; work is divided into homogeneous subgroups Using the Functional Structure to Implement the Differentiation Strategy Firms using the differentiation strategy seek to deliver products that customers perceive as being different in ways that create value for them. With this strategy, the firm sells non standardized products to customers with unique needs. Relatively complex and flexible reporting relationships, frequent use of cross-functional product development teams, and a strong focus on marketing and product R&D rather than manufacturing and process R&D. From this structure emerges a development-oriented culture in which employees try to find ways to further differentiate current products and to develop new, highly differentiated products. To support the creativity needed and the continuous pursuit of new sources of differentiation and new products, jobs in this structure are not highly specialized. Using the Functional Structure to Implement the Integrated Cost Leadership/Differentiation Strategy Firms using the integrated cost leadership/ differentiation strategy sell products that create value because of their relatively low cost and reasonable sources of differentiation. The cost of these products is low “relative” to the cost leader’s prices, while their differentiation is “reasonable” when compared to the clearly unique features of the differentiator’s products. The challenge of using this strategy is due largely to the fact that different value chain and support activities are emphasized when using the cost leadership and differentiation strategies. To achieve the cost leadership position, production and process engineering need to be emphasized, with infrequent product changes. To achieve a differentiated position, marketing and new product R&D need to be emphasized while production and process engineering are not. Matches between Corporate-Level Strategies and the Multidivisional Structure Using the Cooperative Form of the Multidivisional Structure to Implement the Related Constrained Strategy The cooperative form is an M-form structure in which horizontal integration is used to bring about interdivisional cooperation. Divisions in a firm using the related constrained diversification strategy commonly are formed around products, markets, or both. Sharing divisional competencies facilitates a firm’s efforts to develop economies of scope The cooperative structure uses different characteristics of structure (centralization, standardization, and formalization) as integrating mechanisms to facilitate interdivisional cooperation. Using the Strategic Business Unit Form of the Multidivisional Structure to Implement the Related Linked Strategy Firms with fewer links or less constrained links among their divisions use the related linked diversification strategy. The strategic business unit form of the multidivisional structure supports implementation of this strategy. The strategic business unit (SBU) form is an M form consisting of three levels: corporate headquarters, strategic business units (SBUs), and SBU divisions The SBU structure is used by large firms and can be complex, given associated organization size and product and market diversity. The divisions within each SBU are related in terms of shared products or markets or both, but the divisions of one SBU have little in common with the divisions of the other SBUs. Divisions within each SBU share product or market competencies to develop economies of scope and possibly economies of scale. In this structure, each SBU is a profit centre that is controlled and evaluated by the headquarters office. Although both financial and strategic controls are important, on a relative basis, financial controls are vital to headquarters’ evaluation of each SBU; strategic controls are critical when the heads of SBUs evaluate their divisions’ performances. Strategic controls are also critical to the headquarters’ efforts to evaluate the quality of the portfolio of businesses that has been formed and to determine if those businesses are being successfully managed. Sharing competencies among units within individual SBUs is an important characteristic of the SBU form of the multidivisional structure Using the Competitive Form of the Multidivisional Structure to Implement the Unrelated Diversification Strategy Firms using the unrelated diversification strategy want to create value through efficient internal capital allocations or by restructuring, buying, and selling businesses.81 The competitive form of the multidivisional structure supports implementation of this strategy. The competitive form is an M-form structure characterized by complete independence among the firm’s divisions that compete for corporate resources Unlike the divisions included in the cooperative structure, divisions that are part of the competitive structure do not share common corporate strengths. Accordingly, integrating mechanisms are not part of the competitive form of the multidivisional structure. The efficient internal capital market that is the foundation for using the unrelated diversification strategy requires organizational arrangements emphasizing divisional competition rather than cooperation.82 Three benefits are expected from the internal competition. First, internal competition creates flexibility (e.g., corporate headquarters can have divisions working on different technologies and projects to identify those with the greatest potential). Resources can then be allocated to the division appearing to have the most potential to drive the entire firm’s success. Second, internal competition challenges the status quo and inertia because division heads know that future resource allocations are a product of excellent current performance as well as superior positioning in terms of future performance. Third, internal competition motivates effort in that the challenge of competing against internal peers can be as great as the challenge of competing against external rivals. In this structure, organizational controls (primarily financial controls) are used to emphasize and support internal competition among separate divisions and as the basis for allocating corporate capital based on divisions’ performances. Characteristics of structures: Matches between International Strategies and Worldwide Structure Using the Worldwide Geographic Area Structure to Implement the Multidomestic Strategy The multidomestic strategy decentralizes the firm’s strategic and operating decisions to business units in each country so that product characteristics can be tailored to local preferences.92 Firms using this strategy try to isolate themselves from global competitive forces by establishing protected market positions or by competing in industry segments that are most affected by differences among local countries. The worldwide geographic area structure is used to implement this strategy. The worldwide geographic area structure emphasizes national interests and facilitates the firm’s efforts to satisfy local differences Using the multidomestic strategy requires little coordination between different country markets, meaning that formal integrating mechanisms among divisions around the world are not needed There is a key challenge associated with effectively using the multidomestic strategy/ worldwide geographic area structure match—namely, the inability to create global efficiencies Using the Worldwide Product Divisional Structure to Implement the Global Strategy With the corporation’s home office dictating competitive strategy, the global strategy is one through which the firm offers standardized products across country markets.96 The worldwide product divisional structure supports use of the global strategy. In the worldwide product divisional structure, decision-making authority is centralized in the worldwide division headquarters to coordinate and integrate decisions and actions among divisional business units. The disadvantages of the global strategy/worldwide structure combination are the difficulties involved with coordinating decisions and actions across country borders and the inability to quickly respond to local needs and preferences Using the Combination Structure to Implement the Transnational Strategy The transnational strategy calls for the firm to combine the multidomestic strategy’s local responsiveness with the global strategy’s efficiency. Firms using this strategy are trying to gain the advantages of both local responsiveness and global efficiency.97 The combination structure is used to implement the transnational strategy. The combination structure is a structure drawing characteristics and mechanisms from both the worldwide geographic area structure and the worldwide product divisional structure. The transnational strategy is often implemented through two possible combination structures: a global matrix structure and a hybrid global design The global matrix design brings together both local market and product expertise into teams that develop and respond to the global marketplace. The global matrix design promotes flexibility in designing products in response to customer needs. In this design, some divisions are oriented toward products while others are oriented toward market areas. Thus, in cases when the geographic area is more important, the division managers are area oriented. In other divisions where worldwide product coordination and efficiencies are more import- ant, the division manager is more product-oriented Matches between Cooperative Strategies and Network Structures The greater levels of environmental complexity and uncertainty facing companies in today’s competitive environment are causing more firms to use cooperative strategies such as strategic alliances Firms can form cooperative relationships with many of their stakeholders, including customers, suppliers, and competitors. When a firm becomes involved with combinations of cooperative relationships, it is part of a strategic network, or what others call an alliance constellation or portfolio. A strategic network is a group of firms that has been formed to create value by participating in multiple cooperative arrangements. An effective strategic network facilitates discovering opportunities beyond those identified by individual network participants  Strategic Outsourcing The strategic centre firm outsources and partners with more firms than other network members. At the same time, the strategic centre firm requires network partners to be more than contractors. Members are expected to find opportunities for the network to create value through its cooperative work.106 Competencies To increase network effectiveness, the strategic centre firm seeks ways to support each member’s efforts to develop core competencies with the potential of benefiting the network. Technology The strategic centre firm is responsible for managing the development and sharing of technology-based ideas among network members Race to Learn The strategic centre firm emphasizes that the principal dimensions of competition are between value chains and between networks of value chains. Because of these interconnections, an individual strategic network is only as strong as its weakest value-chain link. With its centralized decision-making authority and responsibility, the strategic centre firm guides participants in efforts to form network specific competitive advantages. The need for each participant to have capabilities that can be the foundation for the network’s competitive advantages encourages friendly rivalry among participants seeking to develop the skills needed to quickly form new capabilities that create value for the network. There is another part in this chapter, Implementing Business-Level Cooperative Strategies, but he didn’t include that with the presentations, so I didn’t include it here The end hope you liked it