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MGX5181
International Business Strategy
Week 5
Strategic Planning Framework
• Corporate strategies
• Business strategies
International Corporate Strategy
• Start with the basics:
Does our vision/mission statement incorporate international
opportunities?
Strategic intent:
• Can we leverage the firm’s internal resources, capabilities and core
competencies to accomplish the firm’s goals in a competitive
international environment?
• Internal resources and capabilities – must have some that are
valuable, rare , costly to imitate and non-substitutable
(Barney, 1991; Geroski, 1999).
• Core competencies are resources and capabilities that provide a
competitive advantage over rivals – often related to functional skills
(e.g marketing, management, product, service, innovation etc)
(Hanson et al, 2005).
Strategy Development • Mintzberg and Waters (1985) suggest that the
pattern in a stream of strategic decisions
tend to be as “emergent” as they are
“deliberate”.
Emergent strategies are constantly being
adjusted and reviewed in light of experience
Deliberate strategies are those both intended
and realised (implemented).
Deliberate
Emergent
Realised Strategy
Corporate Strategy
• Corporate strategy is concerned with adding
value in respect to :
overall scope of the organisation’s activities
and corporate parenting.
Overall scope means the business the
organisation wants to be in (may mean it gets
out of things it should not be doing). Becomes
international to the extent an organisation’s
activities are influenced by:
• competition
• currency, and
• country
Corporate Strategy Cont.
Competition
• pressures from international competition forces
organisations to defend local markets and seek
international opportunities
Currency
• FX markets make currency values volatile impacting
on international costs and sales
Country
• Political risk, trade protection reducing country and
entry options
Corporate Strategy Cont. Corporate Parenting: How the head office
manages the various businesses within the
organisation
Good and Campbell (1989) suggest the following
principles exist regarding corporate parenting:
• parent companies add value to their business
portfolio as HQ team have some special skill to help
the businesses or create synergy between businesses
• A Co should add a business to its portfolio if it can
add more parenting value than others
• A Co should divest a business in its portfolio if it
would perform better independently or sold
to others
Corporate Strategy Options
• Forward Integration
Gaining ownership or increased control closer to your customers
• Eg over distributors or retailers
• Backward Integration
Seeking ownership or increased control of a firm’s suppliers
• Horizontal Integration
Seeking ownership or increased control over competitors
Corporate Strategy Options Cont.
• Market Penetration
Seeking increased market share for present products or services in current markets via greater marketing efforts
• Market Development
Taking present products or services into new geographical areas
• Eg Fosters into China, India, Vietnam
• Product Development
Seeking to increase sales via new or improved products
Corporate Strategy Options
• Joint Venture
Two or more sponsoring firms forming a
separate organisation for cooperative purposes.
• Retrenchment
Regrouping through cost and asset reduction to
reverse declining sales and profit.
• Divestiture
Selling a division or part of an organisation.
• Liquidation
Selling all the company’s assets for their
tangible worth.
Corporate Strategy Options
• Related Diversification
Adding new but related products or services
• Ccan use existing competencies - knowledge, understanding, skills
• eg Philip Morris buying Miller and increasing sales via existing marketing expertise
• Unrelated diversification
Adding new but unrelated products or services.
• move into new products-markets where new competencies are required in order to be an effective competitor
– eg British American Tobacco buying a financial services company
• Horizontal Diversification
Adding new unrelated products or services for present customers
Diversification in detail
• Definition
When a firm chooses to diversify its operations
beyond a single industry and to operate
businesses in several industries it is said to be
pursuing a corporate level strategy of
diversification.
Diversification
• A diversified firm has two levels of
strategy
Business level (competitive - local) strategy
Corporate level (company-wide) strategy
• Two key questions
What businesses should the firm be in?
How can the corporate office manage its group
of businesses?
Aim of Diversification: Synergy
• Aim of diversification should be to create
value or wealth in excess of what firms
would enjoy without diversification.
• Synergy: the value of the combined firm
after acquisition should be greater than the
value of the two firms prior to acquisition.
Obtained in three ways:
• Exploiting economies of scale.
– Unit costs decline with increases in production.
Aim of Diversification: Synergy (cont.)
• Exploiting economies of scope.
– Using the same resource to do different things.
• Efficient allocation of capital.
– Many assets in acquired firms are undervalued --
managers seek to exploit these opportunities and improve
their operations and add value to their businesses.
Diversification
• Value of diversification
Some suggest few corporate level strategies
create value. (Markides & Williamson, 1996)
When managed effectively corporate level
strategies enhance a firm’s strategic
competitiveness and contribute to its ability to
earn above average returns (Barney, 1997)
Levels of Diversification
• Low levels of diversification
Single business
• More than 95% of revenue comes from a single business
Dominant business
• Between 70-95% of revenue comes from a single business eg Kellogg breakfast cereals and snack food
• Moderate to high levels of diversification
Related constrained
• Less than 70% of revenue comes from the dominant business, and all businesses share product, technological and distribution linkages
Related linked (mixed related and unrelated)
• Less than 70% of the revenue comes from the dominant business, and there are only limited links between businesses eg General Electric and Johnson & Johnson
Levels of Diversification
• Very high levels of diversification
Unrelated
• Less than 70% of revenue comes from dominant
business and there are no common links between
businesses eg Samsung
The Trend Over Time: Diversified
Companies among the Fortune 500
Percentage of Specialized Companies (single-business,
vertically-integrated and dominant-business)
Percentage of Diversified Companies (related-business
and unrelated business)
BUT Since late 1970’s, diversification has declined.
1949 1954 1959 1964 1969 1974
70.2 63.5 53.7 53.9 39.9 37.0 29.8 36.5 46.3 46.1 60.1 63.0
Diversification and Performance:
The Score
• What is relationship between diversification
and firm performance?
Academics, consultants,and financial
community have dim view of diversification.
Some studies suggest that diversification
beyond a core business leads to lower
performance.
Diversification and Performance:
Empirical Evidence
• Diversification trends have been driven by beliefs rather than
evidence:- 1960s and 70s diversification believed to be profitable;
1980s and 90s diversification seen as value destroying.
• Empirical evidence inconclusive-- no consistent findings on impact of
diversification on profitability, or on related vs. unrelated
diversification.
• Some evidence that high levels of diversification detrimental to
profitability
• Diversifying acquisitions,
on average, destroy share-
holder value for acquirers
• Refocusing generates
positive shareholder returns 1 2 3 4 5 6
index of product diversity
3
2
1
retu
rn o
n n
et
as
se
ts (
%)
Diversification –Performance Link • Study by Palich,L. Cardinal, L and Miller, C
(2000) looked at studies over previous 20 years.
They found:
The inverted U model applied to single business
firms as they do not have the opportunity to exploit
between unit synergies or the portfolio effects
available only to moderately and highly diversified
firms.
• Based on both accounting and market based measures
diversification is positive for firms up to a point but past
a certain level seems to cause performance problems.
Diversification –Performance Link Cont.
Related diversification is superior to that
which is unrelated or conglomerate in nature.
• Related diversifiers have advantages whereby they can
convert underutilised assets and achieve economies of
scope by sharing resources and combining activities
along the value chain
Reasons for Diversification • Motives to enhance strategic
competitiveness
Economies of scope (related diversification)
• Sharing activities
• Transferring core competencies
Marketing power (related diversification)
• Blocking competitors through multi-point competition
• Vertical integration
Financial economies (unrelated diversification)
• Efficient internal capital allocation
• Business restructuring
Reasons for Diversification • Incentives and resources with neutral effects
on strategic competitiveness
Antitrust regulation
Tax laws
Low performance
Uncertain future cash flows
Risk reduction for the firm
Tangible resources
Intangible resources
• Managerial motives (value reduction)
Diversifying managerial employment risk
Increasing managerial compensation
Diversification and Performance: The Score Additional studies conclude that diversification
strategy rarely makes significant positive
contribution to shareholder value.
• Recent study (Babson College) is shown in Exhibit below:
– Note: 50/100 means neutral contribution to shareholder value, so
below 50 means detracts from shareholder value and above 50
means adds to shareholder value
46
47
47
46
Low-
Performing
Firms
Less
Diversified
High-
Performing
Firms
More
Diversified
Diversification and Performance: The
Score (cont.)
Exhibit suggests:
• Categorization of firms into the 4 diversification-
performance groups is remarkably balanced.
– High-performing firms are just as likely to be more
diversified as they are to be less diversified.
– Low-performing firms are just as likely to be less
diversified as they are to be more diversified.
• No significant performance differences between
high-performing more or less diversified firms.
Diversification and Performance: The
Score (cont.)
• Summary
Though diversification has been disastrous for
many firms, diversified firms can also be
successful.
Studies have found no obvious differences
between high- and low-performing diversified
firms along several important strategic
dimensions.
Conclusions
• Size alone does not guarantee firms an
advantage.
Coordination required to exploit economies of
scale and scope is not without cost.
Size creates additional challenges and
difficulties, including problems of
communication and coordination.
• Higher levels of diversification are not
incompatible with high performance -- nor
do they necessarily imply that firms will
suffer lower performance levels.
Conclusions (cont.)
• Critical factor in determining success is the
level of management expertise in
formulating and implementing corporate
strategy.
More difficult for diversified firms.
Managers of large diversified firms possess a
variety of well-developed mental models that
provide them with powerful understandings of
how to manage their firms.
War Game Strategy
• This approach it is all about market share. Therefore:
The more competitive venues the better
Only launch a market offensive if you are sure you can achieve domination
Remember market leaders provide a price umbrella from which they and others benefit
Even when the market is not global you still need global strategic coordination (Prahalad & Doz, 1987)
War Game Theory Cont.
This view of international strategy is based on
MNCs battles for market share of international
cash flows rather than international product
flows
Cash flows from one market can be used to
subsidise market share battles in other markets
Aggressive action must be taken in those
markets where a competitor is most vulnerable
to a cash flow siege.
Effective international strategies need to be
aggressive rather than purely defensive
Business Strategy Relates to how a business seeks to compete in
its chosen markets. (can be called competitive
strategy)
Where an SME does not have separate division
eg SBUs then Business and Corporate strategy
are effectively the same.
In large organisations the business strategy may
be on how to develop a sustainable
international competitive advantage
(outperform rivals consistently over time on
commonly accepted performance criteria).
Business Strategy Options
• Same Game
Characteristics
• identify market segments
• decide positioning within segments
• serve market more effectively and efficiently than
competitors
Strategic Intent
• to outcompete rivals using similar strategies to theirs
but better
Potential Outcomes
• parity or at best incremental competitive advantage
over rivals
Business Strategy Options Cont.
• New Game
Characteristics
• strategic innovation: product, process or market
discovery
• first mover advantage within a market
• avoidance of head-to-head competition
Strategic Intent
• outcompete rivals via new strategic recipes.
Emphasis on innovation and vision
Potential Outcomes
• competitive superiority to rivals. Takes a
fundamental approach to developing business
strategy
Comparing Strategies
• Issues in comparing same and new game
strategies according to Hamel & Prahalad
(1994)
too much time spent restructuring and re-
engineering existing business or delayering,
divesting parts of the business. Instead:
• Firstly, must compete for industry foresight and
intellectual leadership
– understand key external trends
– identify opportunities as new markets and industries
emerge
Comparing Strategies • Secondly, must exploit new markets and
industries by developing core competences
– core competences are a bundle of constituent skills and
technologies which integrate a variety of individual skills,
not a physical asset.
– Can be at corporate and business level
– need to consider which core competencies you have/don’t
have and extent to which these are essential/non essential
• Thirdly, must compete for market position and
share
– emerges from first two factors
– not necessarily helped by market research which has
limitations with new products
Comparing Strategies
Hamel and Prahalad say strategy is about
“stretch” and “fit”
• need to stretch resource position but fit in to
organisation’s current growth and function.
Strategy from inside out • What is better?
to seek out opportunities and then adjust the
internal competencies to take advantage of these
(M. Porter)
or
look at the inside competencies first and use these
to increase market share
• (Hamel and Prahalad)
• According to Miller, Eisenstat and Foote, 2002
there is another way to look at strategy from
the inside out:
building capability – creating organisations
Strategy from inside out • Authors suggest competitive advantage comes from
using organisational processes and designs to identify
emerging asymmetries and build them into capabilities.
• Internal asymmetries
Hard to copy ways to differ from competitors
May consist of:
• Outputs (products or solutions)
• Relationships and alliances
• Processes and routines
• Nascent skills and knowledge
Are not resources or core competencies
Must be continually identified and built
Strategy from inside out • Three Imperatives
1: Discover asymmetries and their potential
• How are we superior to rivals? (why our customers,
valued offerings)
• What resources/capabilities underlie these sources of
superiority?
• Which resources and capabilities would be hardest
for rivals to nullify?
• What capabilities and resources are most central now
and for the future to a firm’s competitive advantage?
Strategy from inside out
2. Create capability configurations – by design
• Look at key influencers: Leadership/ governance; values
and culture; structural mechanisms; systems and policies
• Embed capabilities within the organisation
• Enhance capabilities
• Shape capabilities to market opportunities
3. Pursue market opportunities that build on
and leverage capabilities
Types of business level strategy • Generic Strategies
According to Porter (1985) there are 4 generic strategies
Cost leadership
• Competitive advantage is cost and competitive scope is broad
Differentiation
• Competitive advantage is uniqueness and competitive scope is broad
Focused cost leadership
• Competitive advantage is cost and competitive scope is narrow
Focused differentiation
• Competitive advantage is uniqueness and competitive scope is narrow
Types of business level strategy
• Hill and Jones (2002) expanded on Porters (1985) concept
of generic strategy and produced 4 factors or generic
building blocks of competitive advantage:
Efficiency
• Labour productivity, capital intensity, economies of scale,
learning curve effects, company cost structure
Quality
• Standard of excellence and reliability
Innovation
• New products and processes
Customer Responsiveness
• Ultimate basis of competitive advantage (Muller, 1991)
• Customisation, response time, superior quality and design,
superior after-sales services
Relationship between Corporate, Business and
Functional Strategies and Business Performance
• Corporate
review organisational scope and corporate
parenting
• Business
review product-market strategy
• Functional
review implementation
• Business Performance
If performance unacceptable corrective
adjustment where required i.e all levels.