Strategic Management
1.a. What is strategy?
Ans: A
strategy is an action that a company takes to attain one or more of its goals.
ü
It is a large-scale, future oriented plan for
interacting with the competitive environment to achieve objectives
ü
It is a
framework for managerial decisions
ü
It
consists of competitive moves and business approaches to produce successful
performance.
1.b What is strategic management?
Ans: Strategic Management is the set of
decisions and actions that result in the formulation and implementation of
plans designed to achieve a company’s objectives. It is about identifying and
describing the strategies that managers can pursue to attain superior
performance and a competitive advantage for their organization.
·
It involves long-term, future-oriented,
complex decision making and requires considerable resources, top management
participation is essential.
·
Strategic management is a three-tier process
involving corporate-, business-, and functional-level planners, and support
personnel. At each progressively lower level, strategic activities were shown
to be more specific, narrow, short term, and action oriented, with lower risks
but fewer opportunities for dramatic impact.
1.c. Explain the strategic management process of an organization.
Ans: Strategic
management is the process by which managers choose a set of strategies for a
company that will allow it to achieve superior performance.
The
major components of the strategic management process are:
·
defining the vision, mission and major goals
of the organization;
·
analyzing the external and internal
environments of the organization;
·
choosing a business model and strategies that
align or fit an organization's strengths and weaknesses with external
environmental opportunities and threats; and
·
adopting organizational structures and
·
control system to implement the organization's
chosen strategy.
The first component of strategic management
process is crafting the organization‘s vision, mission and major goals. The
first step is to develop a realistic vision for the business. This should be
presented as a pen picture of the business in three or more years time in terms
of its likely physical appearance, size, activities etc.
The corporate success depends on the vision
articulated by the chief executive or the top management. For a vision to have
any impact of the employees of an organization it has to be conveyed in a
dramatic and enduring way. The most effective visions are those that inspire,
usually asking employees for the best, the most or the greatest. Make sure you
keep stretch in your vision, communicate it constantly, and keep linking the
events of today to your vision, underscoring the relationship between the two.
At General Electric (GE) the vision is ‘We
bring good things to life’. The Ford Motor Company vision is ‘to become the
world's leading consumer company for automotive products and services’.
2.
a. Distinguish between internal and external environment.
internal Environment
1.
Depicts quantity and quality of company’s
financial, human, and physical resources
2.
Asses company/’s strengths and weaknesses
3.
Contrasts past successes and concerns with
current capabilities to identify future capabilities
External Environment
1.
Consists of all conditions and forces affecting
firm’s strategic options and define its competitive situation
2.
includes three interactive segments w remote,
industry, and operating environments
2. b. Write strategic
implications of the following-
i. Value chain model
The term value chain describes a way of
looking at a business as a chain of activities that transform inputs into
outputs that customer’s value.
·
Focuses on how a business creates customer
value by examining contributions of different internal activities to that
value.
·
Divides a business into a set of activities
within the business
-
Starts with inputs a firm receives
-
Finishes with firm’s products or services and after-sales service to customers
·
Allows for better identification of a firm’s
strengths and weaknesses since the business is viewed as a process
Value Chain Analysis describes the activities
that take place in a business and relates them to an analysis of the
competitive strength of the business. Influential work by Michael Porter
suggested that the activities of a business could be grouped under two
headings:
(1)
Primary Activities - those that are directly concerned with
creating and delivering a product (e.g. component assembly); and
(2)
Support Activities, which whilst they are not directly involved
in production, may increase effectiveness or efficiency (e.g. human resource
management). It is rare for a business to undertake all primary and support
activities.
Value Chain Analysis is one way of identifying
which activities are best undertaken by a business and which are best provided
by others ("out sourced").
The Value
Chain
- Support
Activities General Administration
- Human Resource Management
- Research, Technology, and Systems
Development
- Procurement
- Inbound logistics- Operations - Outbound
logistics- Marketing and Sales – Services
ii. Resource based view (R
& V) model
Ans: Firms
differ in fundamental ways because each firm possesses a unique “bundle” of
resources —- tangible and intangible assets and organizational capabilities to
make use of those assets
The Three
Basic Resources
a) Tangible assets/resources are those
which are the easiest to identify and often found on a firm’s balance sheet.
They include physical and financial assets. For example, land, buildings,
plant, equipment, inventory, money, production facilities, raw materials and
financial resources
Company
Examples: Hampton Inn’s reservation, Ford Motor’s cash reserves, 3M‘s
patents, Georgia Pacific’s land holdings
b) Intangible assets/resources are the
non-physical entities that are the creation of a company and its employees,
such as brand names, reputation, employee knowledge gained from experience, and
the intellectual property of the company, including patents, copyrights, and
trademarks
Company
Examples: Budweiser’s brand name, Dell Computer’s reputation, Nike's
advertising with LeBron James, Katie Couric as NBC‘s “Today” host
c) Organizational capabilities are the
skills that are used to transform inputs into outputs by combining assets,
people, and processes. For example, Dell Computer’s customer service,
Wall-mart’s purchasing and inbound logistics, Sony’s product development
process, and Coke-’s global distribution coordination.
Summary of
Resource-Based Model of Above-Average Returns
|
Identity
& Study –
Resources
|
Inputs into a firm’s production process.
|
|
Determine-
Capability
|
Capacity of an integrated set of resources
to integratively perform a task or activity.
|
|
Determine-
Competitive
Advantage
|
Ability
of a firm to outperform its rivals
|
|
Locate-
An
attractive industry
|
An industry with opportunities that can be
exploited by the firm’s resources and capabilities
|
|
Select
& Act-
Strategy
Formulation and Implementation
|
Strategic
actions taken to earn above-average returns.
|
|
Enjoy—Superior returns
|
|
3. short notes:
3. a. Valuable resources
Firms differ in fundamental ways because each
firm possesses a unique “bundle” of resources —- tangible and intangible assets
and organizational capabilities to make use of those assets
The Three Basic
Resources
a) Tangible assets/resources are those
which are the easiest to identify and often found on a firm’s balance sheet.
They include physical and financial assets. For example, land, buildings,
plant, equipment, inventory, money, production facilities, raw materials and
financial resources
Company Examples:
Hampton Inn’s reservation, Ford Motor’s cash reserves, 3M‘s patents, Georgia
Pacific’s land holdings
b) Intangible assets/resources are the
non-physical entities that are the creation of a company and its employees,
such as brand names, reputation, employee knowledge gained from experience, and
the intellectual property of the company, including patents, copyrights, and
trademarks
Company Examples:
Budweiser’s brand name, Dell Computer’s reputation, Nike's advertising with
LeBron James, Katie Couric as NBC‘s “Today” host
c) Organizational capabilities are the
skills that are used to transform inputs into outputs by combining assets,
people, and processes. For example, Dell Computer’s customer service,
Wall-mart’s purchasing and inbound logistics, Sony’s product development
process, and Coke-’s global distribution coordination.
3.b Corporate Strategy - is
concerned with the overall purpose and scope of the business to meet
stakeholder expectations. This is a crucial level since it is heavily
influenced by investors in the business and acts to guide strategic
decision-making throughout the business. Corporate strategy is often stated
explicitly in a "mission statement".
3.c Operational Strategy - is
concerned with how each part of the business is organized to deliver the
corporate and business-unit level strategic direction. Operational strategy
therefore focuses on issues of resource, process, people etc.
3.d. Strategic alliance/
partnership
Strategic alliances are cooperative agreements
between companies from different countries that are actual or potential
competitors.
- Agreement between companies of different
countries that may also be competitors
- Agree to cooperate on a particular problem (e.g.
developing a new product)
- e.g. Motorola and Toshiba to produce
microprocessors, Eastman Kodak and Canon to produce copiers for Kodak.
The advantages
of alliances are that they facilitate entry into foreign markets, enable
partners to share the fixed costs and risks associated with new products and
processes, facilitate the transfer of complimentary skills between companies,
and help companies establish technical standards.
The drawback of a strategic alliance are that
the company risks giving away technological know-how and market access to its
alliance partner while getting very little in return. The disadvantages
associated with alliances can be reduced if the company selects partners
carefully, paying close attention to reputation, and structures the alliance so
as to avoid unintended transfers of know-how.
3.e. Strategic business unit (SBU)
Strategic
business unit (SBU) is a profit center which focuses on product offering and
market segment. SBUs typically have a discrete marketing plan, analysis of
competition, and marketing campaign, even though they may be part of a larger
business entity.
An
SBU may be a business unit within a larger corporation, or it may be a business
unto itself. Corporations may be composed of multiple SBUs, each of which is
responsible for its own profitability. General Electric is an example of a
company with this sort of business organization. SBUs are able to affect most
factors which influence their performance. Managed as separate businesses, they
are responsible to a parent corporation.
3.f. Strategic planning is the
managerial process of developing and maintaining a viable fit between the
organization’s objectives, skills, resources and its changing market
opportunities.
The
aim of strategic planning is to shape the company’s businesses and products so
that they yield target profits and growth.
The
most large companies consist of four organizational levels:
ü
Corporate level
ü
Division level
ü
Business Level
ü
Product Level
3. g. Backward, forward and
horizontal integration
Backward
Integration is a type of Vertical
Integration in which a consumer of raw material acquires its suppliers, or sets
up its own facilities to ensure a more reliable or cost – effective supply of
inputs.”
The process of Backward Integration involves in integrating
of the supply chain within the corporate family. Decision
of Backward Integration is made usually considering the following:
1. In the strategy development process, Backward Integration
may be considered as a strategic choice.
2. When analyzing industry dynamics, using Porter’s five
forces model, Backward Integration is an action to decrease the bargaining
power of the supplier.
3. Backward Integration may be a path for reducing
Transaction Costs.
Forward Integration
is a business model whereby a company takes direct control of how its products
are distributed. For example, a company may market its products directly to
consumers rather than selling them to a retailer. Alternatively, forward
integration may involve the company simply acquiring the retailer.
Horizontal
integration: The term horizontal integration describes a type of ownership and
control. It is a strategy used by a business or corporation that seeks to sell
a type of product in numerous markets. Horizontal integration in marketing is
much more common than vertical integration is in production. Horizontal
integration occurs when a firm is being taken over by, or merged with, another
firm which is in the same industry and in the same stage of production as the
merged firm, e.g. a car manufacturer merging with another car manufacturer. In
this case both the companies are in the same stage of production and also in
the same industry. This process is also known as a "buy out" or
"take-over". The goal of horizontal integration is to consolidate
like companies and monopolize an industry.
4.a.
How could you assess the impact of micro environmental factors on your
business? Explain Michel Porter’s five forces model.
Ans. The main
technique used to analyze competition in the industry environment is the five
forces model. Five forces model a framework developed by Michael E. Porter that
focuses on the five forces that shape competition within an industry: risk of
entry by potential competitors; intensity of rivalry among established
companies in an industry; bargaining power of buyers; bargaining power of
suppliers; and threat of substitute products. The five Forces are ---
i.
the risk of new entry by potential competitors,
ii.
the extent of rivalry among established firms,
iii.
the bargaining power of buyers,
iv.
the bargaining power of suppliers, and
v.
the threat of substitute products.
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The stronger each force is, the more competitive
the industry and the lower the rate of return that can be earned.
i) The
risk of entry by potential competitors is a function of the height of
barriers to entry. The higher the barriers to entry are, the lower is the risk
of entry and the greater are the profits that can be earned in the industry.
Barriers
to entry factors make it costly for companies to enter an industry. Risk
of Entry by Potential Competitors
1. Brand Loyalty: brand loyalty buyers’ preference for the products of any established
companies.
2. Absolute Cost Advantages: absolute cost
advantage "superior position relative to potential entrants who cannot
expect to match the established company’s lower cost structure; derives from
superior production operations, control of particular inputs for production,
and access to cheaper funds.
3. Economies of Scale: economies of scale the relative cost advantages associated with
large volumes of production that lower a company/’s cost structure
4. Customer Switching Costs: switching costs "the costs (in
terms of time, energy, and money) to the consumer of switching from the
products offered by one company to the products offered by a new entrant, or
from a product based on one technological standard to a product based on
another.
5. Government Regulation
ii) The
extent of rivalry among established companies is a function of an industry's
competitive structure, demand conditions, and barriers to exit. Strong demand
conditions moderate the competition among established companies and create opportunities
for expansion. When demand is weak, intensive competition can develop,
particularly in consolidated industries with high exit barriers.
Rivalry the
competitive struggle between companies in an industry to gain market share from
each other.
Rivalry among Established Companies
a.
industry Competitive Structure: competitive structure the number and size
distribution of companies in an
industry
b.
Industry Demand
c.
Exit Barriers: exit barriers "economic, strategic, and emotional factors
that keep companies from leaving
an industry
iii)
Bargaining power of buyers the ability of buyers to bargain down prices
charged by companies in the industry or to raise the costs of companies in the
industry by demanding better product quality and services.
Buyers are most powerful when a company
depends on them for business but they themselves are not dependent on the
company. In such circumstances, buyers are a threat.
iv)
Bargaining power of suppliers the ability of suppliers to raise input
prices or to raise the costs of the industry in other ways. Suppliers are most
powerful when a company depends on them for business but they themselves are
not dependent on the company. In such circumstances, suppliers are a threat.
v)
Substitute products are the products of companies serving
customer needs similar to the needs served by the industry being analyzed. The
more similar the substitute products are to each other, the lower is the price
that companies can charge without losing customers to the substitutes.
Substitute
products the products of different businesses or industries that can
satisfy similar customer needs.
vi)
Complementary products: Some argue for a sixth competitive force of
some significance: the power, vigor, and competence of complementors. Powerful
and vigorous complementors may have a strong positive impact on demand in an
industry. ’
Complementors
"companies
that sell products that add value to (complement) the products of companies in
an industry because when used together, the products better satisfy customer
demands.
4.b. Briefly describe the
generic strategies.
Ans: Generic
strategies are the strategies that all businesses can pursue regardless of
whether they are manufacturing, service, or nonprofit. They can be pursued in
different kinds of industry environments and result from a company’s consistent
choices on product, market, and distinctive competencies. Generic strategies
may be of the following types:
a) Cost
Leadership
§
To establish a cost structure that allows the
company to provide goods and services at lower unit costs than competitors
§
For example --
o
if rivals charge similar prices, the cost
leader achieves superior profitability.
o
The cost leader is able to charge a lower
price than competitors.
b)
Differentiation
§
To create a product that customers perceive as
different or distinct in an important way
§
For example --
o
Premium price
o
increased revenues = superior profitability
c) Focus
§
Serving the needs of a specific market segment
o Geographic
o Type of
customer
o Segment of
the product line
§
After choosing a market segment, a focused
company positions itself using either
o Low-cost
OR differentiation
5.
Conduct PEST analysis to assess the impact of micro environmental factors on
business.
Ans: PEST
Analysis
The PEST analysis is a business measurement
tool. it is a useful tool for understanding market growth or decline, and as
such the position, potential and direction for a business.
PEST
analysis is used ---
·
in the workshop sessions.
·
in the brainstorming meetings.
·
in the business and strategic planning, marketing
planning, business and product development and research reports.
·
for team building games.
PEST analysis is concerned with the
environmental influences on a business. The acronym stands for the Political,
Economic, Social and Technological issues that could affect the strategic
development of a business.
Identifying PEST influences is a useful way of
summarizing the external environment in which a business operates. However, it
must be followed up by consideration of how a business should respond to these
influences.
The table below lists some possible factors
that could indicate important environmental influences for a business under the
PEST headings:
|
Political
/ Legal
|
Economic
|
Social
|
Technological
|
|
Environmental regulation and protection
|
Economic growth (overall; by industry
sector)
|
income distribution (change in distribution
of disposable income;
|
Government spending on research
|
|
Taxation (corporate;
consumer)
|
Monetary policy (interest rates)
|
Demographics (age
structure of the population;
gender; family size and composition;
changing nature of occupations)
|
Government and industry
focus on technological effort
|
|
International trade regulation
|
Government spending (overall level; specific
spending priorities)
|
Labor / social mobility
|
New discoveries and development
|
|
Consumer
protection
|
Policy towards unemployment (e.g
(minimum wage, unemployment benefits,
grants)
|
Lifestyle changes (e.g. Home working, single
households)
|
Speed of technology transfer
|
|
Employment Law
|
Taxation (impact on consumer disposable
income, incentives to invest in capital equipment corporation tax rates)
|
Attitudes to work and leisure
|
Rates of technological obsolescence
|
|
Government
Organization/attitude
|
Exchange rates (effects on
demand by overseas customers;
effect on cost of imported
components)
|
Education
|
Energy use and cost
|
|
Competition
regulation
|
Inflation (effect on costs and selling
prices)
Stage of the business cycle
(effect on short-term business performance)
Economic “mood”- consumer confidence
|
Fashions and fads
Health and welfare
Living conditions (Housing, amenities,
pollution)
|
Changes in material sciences
Impact of changes in information technology
Internet
|
6. a. A modern SBU
is customer oriented- Do you agree this statement? Why or why not?
Establishing Strategic Business Units
(SBUs)
·
Most companies operate several businesses.
·
Companies often define their businesses in
terms of products.
·
A business must be viewed as a
customer-satisfying process, not a goods-producing process.
·
Because products are transient; basic needs
and customer groups endure forever.
6.b.
Assess the overall business performance of a hypothetical company through BCG
matrix.
Boston Consulting Group Approach
|
|
Market
Growth Rate
|
High
|
Stars
|
Question
Marks
|
|
Low
|
Cash
Cow
|
Dogs
|
Relative Market Share
The
growth-share matrix is divided into
four cells, each indicating a different type of business:
Question Marks:
Question Marks are company businesses that
operate in high-growth markets but have low relative market shares. Most
businesses start off as a question mark in that the company tries to enter a
high-growth marker in which there is already a market leader. A question mark
requires a tot of cash, since the company has to add plants, equipments and
personnel to keep up with the fast-growing market, and additionally it wants to
overtake the market leaders. Such
business follows more investment policy.
Stars: If the
question mark business is successful, it becomes a star. A star is the market
leader in a high-growth market. If the company spends substantial funds to keep
up with the high market growth and fight off competitors‘attacks, Stars are
usually profitable and become the company’s future cash cows.
Cash Cow: When a
market’s annual growth rate falls to less than l0%, the stars becomes a cash
cow if it still has the largest relative market share. A cash cow produces a
lot of cash for the company. In such a situation the company does not have to
finance a lot of capacity expansion because the market’s growth rate has slowed
down. And since the business is the market leader, it enjoys economies of scale
and higher profit margins. The company
uses its cash cow businesses to pay its bills and support the stars, question
marks and dogs, which tend to be cash hungry.
Dogs: Dogs
describe company businesses that have weak market shares in low-growth markets.
Dogs typically generate low profits or losses. Dog businesses often consume
more management time than they are worth and need to be phased down or out.
Limitations of BCG Matrix
The BCG Matrix produces a framework for allocating resources among
different business units and makes it possible to compare many business units
at a glance. But BCG Matrix is not free from limitations, such as-
1. BCG matrix classifies businesses as low and high, but generally
businesses can be medium also. Thus, the true nature of business may not be
reflected.
2. Market is not clearly defined in this model.
3. High market share does not always leads to high profits. There are
high costs also involved with high market share.
4. Growth rate and relative market share are not the only indicators of
profitability. This model ignores and overlooks other indicators of
profitability.
5. At times, dogs may help other businesses in gaining competitive advantage.
They can earn even more than cash cows sometimes.
6. This four-celled approach is considered as to be too simplistic.
6.c.
Write the business implications at the Ansoff’s matrix.
To portray alternative corporate growth strategies, Igor
Ansoff presented a matrix that focused on the firm's present and potential
products and markets (customers). By considering ways to grow via existing
products and new products, and in existing markets and new markets, there are
four possible product-market combinations. Ansoff's matrix is shown below:
Ansoff Matrix
|
|
Existing Products
|
New Products
|
|
Existing Markets
|
Market
Penetration
|
Product
Development
|
|
New Markets
|
Market
Development
|
Diversification
|
Ansoff's matrix provides four different growth strategies:
- Market Penetration - the firm seeks to achieve growth with existing products in their current market segments, aiming to increase its market share.
- Market Development - the firm seeks growth by targeting its existing products to new market segments.
- Product Development - the firms develops new products targeted to its existing market segments.
- Diversification - the firm grows by diversifying into new businesses by developing new products for new markets.
Selecting a Product-Market Growth
Strategy
The market penetration strategy
is the least risky since it leverages many of the firm's existing resources and
capabilities. In a growing market, simply maintaining market share will result
in growth, and there may exist opportunities to increase market share if competitors
reach capacity limits. However, market penetration has limits, and once the
market approaches saturation another strategy must be pursued if the firm is to
continue to grow.
Market development options include the pursuit of additional market segments or
geographical regions. The development of new markets for the product may be a
good strategy if the firm's core competencies are
related more to the specific product than to its experience with a specific
market segment. Because the firm is expanding into a new market, a market
development strategy typically has more risk than a market penetration
strategy.
A product development strategy
may be appropriate if the firm's strengths are related to its specific
customers rather than to the specific product itself. In this situation, it can
leverage its strengths by developing a new product targeted to its existing
customers. Similar to the case of new market development, new product
development carries more risk than simply attempting to increase market share.
Diversification is the most risky of the four growth strategies since it requires
both product and market development and may be outside the core competencies of
the firm. In fact, this quadrant of the matrix has been referred to by some as
the "suicide cell". However, diversification may be a reasonable
choice if the high risk is compensated by the chance of a high rate of return.
Other advantages of diversification include the potential to gain a foothold in
an attractive industry and the reduction of overall business portfolio risk.
7. a.
Define competitive advantage.
Ans: In
order to achieve a competitive advantage, a company needs to pursue strategies
that build on its existing resources and capabilities and formulate strategies
that build additional resources and capabilities (develop news competencies) .
The source of a competitive advantage is superior value creation. To create
superior value, a company must lower its costs or differentiate its product so
that it creates more value and can charge a higher price, or do both
simultaneously.
7.b.
Explain how competitive advantages can be developed so implication of
functional level strategies.
Ans: The
four generic building blocks of competitive advantage are efficiency, quality,
innovation, and responsiveness to customers. A company can build competitive
advantage through functional-level strategies in the following ways.
i) By Achieving Superior Efficiency
Superior efficiency enables a company to lower its costs. A company can
increase efficiency through a number of steps:
·
Exploiting economies of scale and learning
effects,
·
Adopting flexible manufacturing technologies,
·
Reducing customer defection rates,
·
Implementing just-in-time systems.
·
Getting the R&D function to design products
that are easy to manufacture,
·
Upgrading the skills of employees through
training,
·
Introducing self-managing teams,
·
Linking pay to performance,
·
Building a company wide commitment to efficiency
through strong leadership, and
·
Designing structures that facilitate cooperation
among different functions in pursuit of efficiency goals.
ii) By Achieving Superior
Quality
Superior
quality the customer’s perception of a product when there is greater value
in the attributes of that product compared to the same attributes in rival
products.
Superior quality can help a company lower its costs and differentiate
its product and charge a premium price. Achieving superior quality demands an
organization-wide commitment to quality and a clear focus on the customer. It
also requires ---
·
Metrics to measure quality goals and incentives
that emphasize quality,
·
Input from employees regarding ways in which
quality can be improved,
·
A methodology for tracing defects to their
source and correcting the problems that produce them,
·
Rationalization of the company's supply base,
·
Cooperation with the suppliers that remain to
implement total quality management programs.
·
Products that are designed for case of
manufacturing, and
·
Substantial cooperation among functions.
iii) By Achieving Superior
Innovation --- Innovation the act of creating new products or processes.
Superior innovation
The failure rate of new-product introductions is
high due to factors such as uncertainty, poor commercialization, poor
positioning strategy, slow cycle time, and technological myopia.
To achieve superior innovation, a company must
build skills in basic and applied research; design good processes for managing
development projects; and achieve close integration between the different
functions of the company, primarily through the adoption of cross-functional
product development teams and partly parallel development processes.
Process
innovation is the development of a new process for producing products and
delivering them to customers.
Product
innovation is the development of products that are new or have superior
attributes to existing products.
iv) By achieving Superior
Responsiveness to Customers
A. Customer Focus
1. Leadership
2. Employee Attitudes
3. Bringing Customers into the Company
B. Satisfying Customer Needs
l. Customization
2. Response Time
To achieve superior responsiveness to customers
often requires that the company achieve superior efficiency, quality, and
innovation. To achieve superior responsiveness to customers, a company needs to
give customers what they want when they want it. It must ensure a strong
customer focus, which can be attained through leadership; train employees to think
like customers and bring customers into the company through superior market
research; customize the product to the unique needs of individual customers or
customer groups; and respond quickly to customer demands.
8. a.
Define and illustrate the following strategies:
i.
International strategies
International strategy is a strategy by which
companies try to create value by transferring valuable competencies and
products to foreign markets where indigenous competitors lack those
competencies and products. Product development functions tend to be centralized
at home; manufacturing and marketing functions tend to be established in each
major country where business is done. Companies pursuing an international
strategy transfer the skills and products derived from distinctive competencies
to foreign markets, while undertaking some limited local customization. In case
of international strategy
- Usually product development is centralized and at
home country while manufacturing and marketing maybe established in the country
of business,
- Some local customization may be there
- Head office is fully in control of operations
- Suitable when low pressure for cost reduction and local
responsiveness
- e.g. McDonalds, IBM, Toys ‘R’ Us, etc.
ii.
Multi-domestic strategies
Multi-domestic strategy is a strategy by which
companies try to achieve maximum local responsiveness by customizing both their
product offering and their marketing strategy to thatch different national
conditions. Production, marketing, and R&D; activities tend to be
established in each major national market where business is done. Companies
pursuing a multi-domestic strategy customize their product offering, marketing
strategy, and business strategy to national conditions.
- When maximum local responsiveness achieved
-They extensively customize product offering and marketing strategy in
different national conditions
- They establish complete set of value creation activities like
production, marketing and R&D in each country they operate.
- Can‘t realize experience curve and location economy and have to
charge high price.
- Each national subsidiary functions in autonomous manner
- Suitable when there is high pressure for local responsiveness and low
pressure for cost reduction
- e.g. HSBC, Caterpillar
iii.
Global strategies
Global strategy is a strategy by which companies
focus on increasing profitability by reaping the cost reductions that come from
experience curve effects and location economies; that is, their business model
is based on pursuing a low-cost strategy on a global scale.
- Focus on cost reduction through learning effect and location
economies
- Production, marketing and R&D are located in a few favorable
locations
- Low customization to benefit from experience curve
- Support aggressive pricing in world market
- Suitable when high pressure for cost reduction and low pressure for
local responsiveness
- E.g. lntel, Motorolla, Nokia etc.
iv.
Transnational strategies
Transnational strategy (MNC) "the strategy by
which companies simultaneously seek to lower costs, be locally responsive, and
transfer competencies through global learning. Many industries are now so
competitive that companies must adopt a transnational strategy. This involves a
simultaneous focus on reducing costs, transferring skills and products, and
local responsiveness. Implementing such a strategy may not be easy. The most
attractive foreign markets tend to be found in politically stable developed and
developing nations that have free market systems and where there is not a
dramatic upsurge in either inflation rates or private sector debt.
- Has concern for both cost reduction and local responsiveness
- Distinctive competencies found in one country are shared in other
county of business
- Flow of skills and product offerings and skills is in both way
- Suitable when high pressure for both cost reduction and customer
responsiveness
- e.g. Uniliver, BAT, etc.
8.b.
Explain how profitability can be achieved.
For some companies, international expansion
represents a way of earning greater returns by transferring the skills and
product offerings derived from their distinctive competencies to markets where
indigenous competitors lack those skills.
Profiting front global expansion
a. Realizing
location economies --- Location economies are the economic benefits that
arise from performing a value creation activity in the optimal location for
that activity, wherever in the world that might be. Because of national
differences; it pays a company to base each value creation activity it performs
at the location where factor conditions are most conducive to the performance
of that activity. This strategy is known as focusing on the attainment of
location economics. Locating a value creation activity in the optimal location
for that activity. Benefits are: Low cost of value creation, Enable
differentiation
b. Moving
down the experience curve --- By building sales volume more rapidly,
international expansion can assist n company in the process of moving down the
experience curve through economies of scale and learning effects.
c. Transferring distinctive
competencies --- Distinctive competencies are the unique strengths that
allow a company to achieve superior efficiency, quality, innovation, or
customer responsiveness, e.g. Pizza Hut,
McDonald’s.
d. Leveraging the Skills of
Global Subsidiaries
8.c.
Which modes are more effective to enter international market?
Ans:
There are live different ways of entering a foreign market: exporting,
licensing, franchising, entering into a joint venture, and setting up a wholly
owned subsidiary. The optimal choice among entry modes depends on the company's
strategy.
Choice of mode of entry
i. Exporting (can realize
location economy and experience curve, but high cost of transport and trade
barriers are there)
ii.
Licensing is an arrangement whereby a foreign licensee buys the rights to
produce a company’s products in the licensee’s country for a negotiated fee.
(Suitable for production oriented business, low development cost and risk, but
can’t realize location and experience curve and lack control over technology,
so easily copied)
iii. Franchising is a
specialized form of licensing in which the franchiser sells intangible property
(i.e. a trademark) to the franchisee, and also insists that the franchisee
agree to abide by rules as to how it does business. (Suitable For service
oriented business, low development cost and risk, but lack of control over quality)
iv. Joint
venture (gives access to local partner’s knowledge, low development cost
and risk, and political acceptability, but can’t realize experience curve and
location economy and lack of control over technology)
v. Wholly
owned subsidiary is a subsidiary of which the parent company owns l00
percent of the stock. (gives protection of technology, allows global strategic
coordination and can realize location and experience curve economy, but high
cost and risk)
Article is giving really productive information to everyone. Well done.
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