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7/31/2019 Module 5 - Generic Competitive Strategies
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7/31/2019 Module 5 - Generic Competitive Strategies
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Competitive strategy is about being
different. It means deliberately
choosing to perform activities
differently or to perform different
activities than rivals to deliver aunique mix of value.
Michael E. Porter
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Chapter Roadmap
Five Competitive Strategies
Low-Cost Provider Strategies
Differentiation Strategies
Best-Cost Provider Strategies
Focused (or Market Niche) Strategies
The Contrasting Features of the Five GenericCompetitive Strategies: A Summary
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Strategy and
Competitive Advantage
Competitive advantageexists when a firmsstrategy gives it an edge in
Attracting customers and
Defending against competitive forces
Convince customers firms product / serviceoffers superior value
A good productat a low price
A superior productworth paying more for
A best-value product
Key to Gaining a Competitive Advantage
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What Is
Competitive Strategy?
Deals exclusively with a companysbusinessplans to compete successfully
Specific efforts toplease customers
Offensive and defensive movesto counter maneuvers of rivals
Responses to prevailing market conditions
Initiatives to strengthen its market position
Narrower in scope than business strategy
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Fig. 5.1: The Five Generic
Competitive Strategies
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Low-Cost Provider Strategies
Make achievement ofmeaningful lower costs
than rivals the themeof firms strategy
Includefeatures and services in product
offering that buyers consider essential
Find approaches to achieve a cost advantage
in ways difficultfor rivals to copy or match
Low-cost leadership means low
overall costs, not just low
manufacturing or production costs!
Keys to Success
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Options: Achieving a
Low-Cost Advantage
Option 1: Use lower-cost edge to
Underprice competitors and attractprice-sensitive buyers in enough
numbers to increase total profits
Option 2: Maintain present price, be content withpresent market share, and use lower-cost edge to
Earn a higher profit margin oneach unit sold, therebyincreasing total profits
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Nucor Corporations
Low-Cost Provider Strategy
Eliminate some production processes from value chain used by traditionalintegrated steel mills; cut investment in facilities and equipment
Strive hard for continuous improvement in the efficiency of its plants andfrequently invest in state-of-the art equipment to reduce unit costs
Carefully select plan sites to minimize inbound and outbound shipping costsand to take advantage of low rates for electricity
Hire a nonunion workforce that uses team-based incentive compensationsystems
Heavily emphasize consistent product quality and maintain rigorous qualitysystems
Minimize general and administrative expenses by maintaining a lean staff atcorporate headquarters and allowing only 4 levels of management
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Approaches to Securing
a Cost Advantage
Do a better job than rivals of
performing value chain activities
efficiently and cost effectively
Revamp value chain to bypass cost-
producing activities that add little
value from the buyers perspective
Approach 1
Approach 2
Controlcosts!
By-passcosts!
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Approach 1: Controlling
the Cost Drivers
Capture scale economies; avoid scale diseconomies
Capture learning and experience curve effects
Manage costs of key resource inputs
Consider linkages with other activities in value chain
Find sharing opportunities with other business units
Compare vertical integration vs. outsourcing
Assess first-mover advantages vs. disadvantages
Control percentage of capacity utilization
Make prudent strategic choices related to operations
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Approach 2: Revamping
the Value Chain
Make greater use of Internet technology applications
Use direct-to-end-user sales/marketing methods
Simplify product design
Offer basic, no-frills product/service Shift to a simpler, less capital-intensive, or more
flexible technological process
Find ways to bypass use of high-cost raw materials
Relocate facilities closer to suppliers or customers
Drop something for everyone approach and focus ona limited product/service
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Keys to Success in Achieving
Low-Cost Leadership
Scrutinize each cost-creating activity, identifying cost drivers
Use knowledge about cost drivers to manage
costs of each activity down year after year
Find ways to restructure value chain to eliminatenonessential work steps and low-value activities
Work diligently to create cost-conscious corporate cultures
Feature broad employee participation in continuous cost-
improvement efforts and limited perks for executives
Strive to operate with exceptionally small corporate staffs
Aggressively pursue investments in resources and capabilities
that promise to drive costs out of the business
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Characteristics of a
Low-Cost Provider
Cost conscious corporate culture
Employee participation in cost-control efforts
Ongoing efforts to benchmark costs
Intensive scrutiny of budget requests
Programs promoting continuous costimprovementSuccessful low-cost producerschampion
frugalitybut wisely and aggressively
invest in cost-saving improvements !
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When Does a Low-Cost
Strategy Work Best?
Price competition is vigorous
Product is standardized or readily availablefrom many suppliers
There are few ways to achieve
differentiation that have value to buyers Most buyers use product in same ways
Buyers incur low switching costs
Buyers are large and have
significant bargaining power Industry newcomers use introductory low prices to
attract buyers and build customer base
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Pitfalls of Low-Cost Strategies
Being overly aggressive in cutting price
Low cost methods are easily imitated by rivals
Becoming too fixated on reducing costs
and ignoring
Buyer interest in additional features
Declining buyer sensitivity to price
Changes in how the product is used
Technological breakthroughs open up costreductions for rivals
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Differentiation Strategies
Incorporate differentiating features that causebuyers topreferfirmsproduct or service overbrands of rivals
Find ways to differentiate that create value for
buyers and are not easily matchedor cheaplycopiedby rivals
Not spending more to achieve differentiationthan theprice premium that can be charged
Objective
Keys to Success
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Benefits of Successful Differentiation
A product / service with unique, appealing
attributes allows a firm to
Command apremium priceand/or
Increase unit salesand/or
Buildbrand loyalty
= Competitive Advantage
Whichhat is
unique?
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Types of Differentiation Themes
Unique taste -- Dr. Pepper
Multiple features -- Microsoft Windows and Office
Wide selection and one-stop shopping -- Home Depot andAmazon.com
Superior service -- FedEx, Ritz-Carlton Spare parts availability-- Caterpillar
More for your money-- McDonalds, Wal-Mart
Prestige -- Rolex
Quality manufacture -- Honda, Toyota
Technological leadership -- 3M Corporation
Top-of-line image -- Ralph Lauren, Chanel, Cross
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Sustaining Differentiation: Keys to
Competitive Advantage
Most appealing approaches to differentiation
Those hardest for rivals to match or imitate
Those buyers will find most appealing
Best choices to gain a longer-lasting, moreprofitable competitive edge
New product innovation
Technical superiority
Product quality and reliability Comprehensive customer service
Unique competitive capabilities
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Where to Find Differentiation
Opportunities in the Value Chain
Purchasing and procurement activities
Product R&D and product design activities
Production process / technology-relatedactivities
Manufacturing / production activities
Distribution-related activities
Marketing, sales, and customer serviceactivities
Internally
Performed
Activities,
Costs, &
Margins
Activities,
Costs, &
Margins of
Suppliers
Buyer/User
Value
Chains
Activities, Costs,
& Margins of
Forward Channel
Allies &
Strategic Partners
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How to Achieve a
Differentiation-Based Advantage
Approach 1
Incorporate features/attributes that raise theperformance a buyer gets out of the product
Approach 2
Incorporate features/attributes that enhance buyersatisfaction in non-economic or intangible ways
Approach 3
Compete on the basis ofsuperior capabilities
Approach 4
Incorporate product features/attributes thatlower buyers overall costs of using product
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Importance of Perceived Value
Buyers seldom pay for value that is not perceived
Price premium of a differentiation strategy reflects
Value actually deliveredto the buyer and
Value perceivedby the buyer
Actual and perceived value can differ when buyersare unable to assess their experience with aproduct
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Signaling Value as Well
as Delivering Value
Incomplete knowledge of buyers causes them tojudge value based on such signals as
Price
Attractive packaging
Extensive ad campaigns
Ad content and image Characteristics of seller
Facilities
Customers
Professionalism and personality of employees
Signals of value may be as important as actual value when Nature of differentiation is hard to quantify
Buyers are making first-time purchases
Repurchase is infrequent
Buyers are unsophisticated
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When Does a Differentiation
Strategy Work Best?
There are many ways to differentiate a productthat have value and please customers
Buyer needs and uses are diverse
Few rivals are following a similardifferentiation approach
Technological change andproduct innovation are fast-paced
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When Does a Differentiation
Strategy Work Best?
There are many ways to differentiate a productthat have value and please customers
Buyer needs and uses are diverse
Few rivals are following a similardifferentiation approach
Technological change andproduct innovation are fast-paced
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Pitfalls of
Differentiation Strategies
Buyers see little value in unique attributes of product
Appealing product features are easily copied by rivals
Differentiating on a feature buyers do not perceive aslowering their cost or enhancing their well-being
Over-differentiating such that productfeatures exceed buyers needs
Charging a price premiumbuyers perceive is too high
Not striving to open up meaningful gaps in quality,service, or performance features vis--vis rivalsproducts
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Best-Cost Provider Strategies
Combine a strategic emphasis on low-costwith astrategic emphasis on differentiation
Make an upscale product at a lower cost
Give customers more value for the money
Deliver superior value by meeting or exceedingbuyer expectations on product attributes andbeating their price expectations
Be the low-cost provider of a product with good-to-excellent product attributes, then use costadvantage to underprice comparable brands
Objectives
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Competitive Strength of a
Best-Cost Provider Strategy
A best-cost providers competitive advantagecomes from matchingclose rivals on key productattributes and beating them on price
Success depends on having the skills andcapabilities toprovide attractive performanceand
features at a lower cost than rivals
A best-cost producer can often out-compete both
a low-cost provider and a differentiator when Standardized features/attributes
wont meet diverse needs of buyers
Many buyers are price and value sensitive
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Risk of a Best-Cost
Provider Strategy
A best-cost providermay get squeezedbetween strategies of firms using low-costand
differentiation strategies
Low-cost leaders may be able to siphon
customers away with a lower price
High-end differentiators may be able to
steal customers away with better product
attributes
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Focus / Niche Strategies
Involve concentrated attention on a narrow piece ofthe total market
Serve niche buyers better than rivals
Choose a market niche where buyers have distinctivepreferences, special requirements, or unique needs
Develop unique capabilities to serve needs of targetbuyer segment
Objective
Keys to Success
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Approaches to Defining
a Market Niche
Geographic uniqueness
Specialized requirements in
using product/service
Special product attributes
appealing only to niche buyers
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Examples of Focus Strategies
eBay Online auctions
Porsche
Sports cars Jiffy Lube International
Maintenance for motor vehicles
Pottery Barn Kids
Childrens furniture and accessories Bandag
Specialist in truck tire recapping
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Focus / Niche Strategies
and Competitive Advantage
Achieve lower costs than
rivals in serving the segment --
A focused low-cost strategy
Offer niche buyers something
different from rivals --
A focused differentiation strategy
Approach 1
Approach 2 Whichhat is
unique
?
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What Makes a Niche
Attractive for Focusing?
Big enough to be profitable and offers good growthpotential
Not crucial to success of industry leaders
Costly or difficult for multi-segment competitorsto meet specialized needs of niche members
Focuser has resources and capabilitiesto effectively serve an attractive niche
Few other rivals are specializing in same niche
Focuser can defend against challengers via superiorability to serve niche members
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Risks of a Focus Strategy
Competitors find effective ways to matcha focusers capabilities in serving niche
Niche buyers preferences shift towards productattributes desired by majority of buyers nichebecomes part of overall market
Segment becomes so attractive it becomescrowded with rivals, causing segment profits tobe splintered
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Deciding Which Generic Competitive
Strategy to Use
Each positions a company differently in its marketand competitive environment
Each establishes a central theme for how acompany will endeavor to outcompete rivals
Each creates some boundaries for maneuveringas market circumstances unfold
Each points to different ways of experimentingwith the basics of the strategy
Each entails differences in product line,production emphasis, marketing emphasis, andmeans to sustainthe strategy
d h h
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Deciding Which Generic Competitive
Strategy to Use
Each positions a company differently in its market
Each establishes a central theme for how a company will
endeavor to outcompete rivals
Each creates some boundaries for maneuvering as market
circumstances unfold
Each points to different ways of experimenting with the
basics of the strategy
Each entails differences in product line, productionemphasis, marketing emphasis, and means to sustain the
strategyThe big risk Selecting a stuck in the middlestrategy!
This rarely produces a sustainable competitive
advantage or a distinctive competitive position.
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Fig 6 1: A Companys Menu of Strategy Options
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Fig. 6.1: A Company s Menu of Strategy Options
S i Alli d C ll b i
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Strategic Alliances and Collaborative
Partnerships
Companies sometimes use
strategic alliances or
collaborative partnerships to
complement their own strategicinitiatives and strengthen their
competitiveness. Such
cooperative strategies go beyond
normal company-to-company
dealings but fall short of merger
or full joint venture partnership.
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A Strategic Alliance
A Strategic Alliance is a relationship between
two or more parties to pursue a set of agreed
upon goals or to meet a critical business need
while remaining independent organizations
A partnership is an arrangement where parties
agree to cooperate to advance their mutualinterests
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Alliances Can Enhance a
Firms Competitiveness
Alliances and partnerships can help companies copewith two demanding competitive challenges
Racing against rivals to build amarket presence in many
different national markets
Racing against rivals to seizeopportunities on the frontiersof advancing technology
Collaborative arrangements can help a companylowerits costs and/or gain access to needed expertiseand capabilities
C i h F ll P i l
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Capturing the Full Potential
of a Strategic Alliance
Capacity of partners to defuse organizational frictions Ability to collaborate effectively over time and work through
challenges
Technological and competitive surprises
New market developments
Changes in their own prioritiesand competitive circumstances
Collaborative partnerships nearly always entailan evolvingrelationship whose competitive value depends on
Mutual learning
Cooperation
Adaptation to changing industry conditions
Competitive advantage emerges when a company acquires valuablecapabilities via alliances it could not obtain on its own
Wh Are Strategic
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Why Are Strategic
Alliances Formed?
To collaborate on technology development or newproduct development
To fill gaps in technical or manufacturing expertise
To acquire new competencies
To improve supply chain efficiency
To gain economies of scale in
production and/or marketing
To acquire or improve market access via jointmarketing agreements
i l fi f lli hi
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Potential Benefits of Alliances to Achieve
Global and Industry Leadership
Get into critical country markets quickly to accelerateprocess of building a global presence
Gain inside knowledge about unfamiliar markets andcultures
Access valuable skills and competencies concentratedin particular geographic locations
Establish a beachhead to participate in target industry
Master new technologies and build new expertise
faster than would be possible internally Open up expanded opportunities in target industry by
combining firms capabilities with resources of partners
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Why Alliances Fail
Ability of an alliance to endure depends on How well partners work together Success of partners in responding
and adapting to changing conditions Willingness of partners to
renegotiate the bargain Reasons for alliance failure
Diverging objectives and priorities of partners Inability of partners to work well together
Changing conditions rendering purpose of allianceobsolete Emergence of more attractive technological paths Marketplace rivalry between one or more allies
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Merger and Acquisition Strategies
Merger Combination and pooling of equals, withnewly created firm often taking on a new name
Acquisition One firm, the acquirer, purchases andabsorbs operations of another, the acquired
Merger-acquisition
Much-used strategic option
Especially suited for situations wherealliances do not provide a firm with neededcapabilities or cost-reducing opportunities
Ownership allows for tightly integrated operations,creating more control and autonomy than alliances
Objectives of Mergers
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Objectives of Mergers
and Acquisitions
To pave way for acquiring firm to gain more marketshare and create a more efficient operation
To expand a firms geographic coverage
To extend a firms business into new productcategories or international markets
To gain quick access to new technologies
To invent a new industry and lead the convergence ofindustries whose boundaries are blurred by changingtechnologies and new market opportunities
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Joint Ventures
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Background
Joint venture is a separate business entity
Participants continue as separate firms
May be organized as partnership, corporation,
or any other form of business
Formal long-term contract of 8 to 12 years
duration
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Characteristics of Joint Ventures
Limited scope and duration
Generally involve only two firms
Involve only small fraction of participants' total
activities
Each participant offers something of value
Joint production of single products
No sharing of assets/information beyond venture
Need not affect competitive relationships
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Joint property interest in subject matter of venture
Right of mutual control or management of
enterprise
Right to share in cash flows of the enterprise
Limited risk
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Joint Ventures in Business Strategy
Goals/objectives of joint ventures
Risk sharing
Each participant diversifies risk
Reduces investment cost of entering risky new area
Realizes benefits of economies of scale, critical mass, learning curve
effects sooner
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Knowledge acquisition learning experience
for both partners
Shared technology
Shared managerial skills in organization, planning, and control
Successive integration joint venturing as a way to learn aboutprospective merger partners
Entry into new, expanded, foreign markets
Augments financial or technical capabilities
Reduces risk
Foreign country may require joint venture with local partner
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Financing to raise capital
Share investment expense
Small company has product idea but no cash
Joint venture with large company that has cash to develop product
Distribution/marketing
To obtain distribution channels
To obtain raw materials supply
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More favorable tax/political treatment
Foreign ventures
Antitrust issues joint ventures increase rather than reduce number
of firms
Long-run strategic planning spider's web
strategy
Provide countervailing power among rivals
Small firms in a concentrated industry do multiple joint ventures with
dominant firms to form self-protective networks
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Tax aspects of joint ventures
Contribution of a patent or licensable technology to ajoint venture may have better tax consequences than a
licensing arrangement with royalties
Examples:One partner contributes technology
Other partner contributes depreciable assets
Depreciation offsets revenues
Joint venture ends up with lower tax rate than any of its partners
Partners pay deferred capital gains if/when venture is terminated
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Joint ventures and restructuring
Joint ventures can be used as transitional mechanism
in a broad restructuring process
Buyer can use joint venture experience to better
determine value of seller's brands, distribution
systems, and personnel
Risk of making mistakes is reduced through direct
involvement with business
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Advantages
Customers are moved to buyer over a period of time in
which both seller and buyer continue to be involved
Buyer builds experience with new line of business
Buyer receives managerial and technical advice and
assistance from seller during transition period
Experience and knowledge developed during life of joint
venture enable buyer to obtain better understanding of the
value of acquisition
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International joint ventures
Widely used
Reduce risks of expanding into foreign environments
May be legal requirement of local joint venturer in
some foreign countries
Local partner's contribution likely to be in the form
of specialized knowledge about local conditions
Subject to clashes of different cultures
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Rationale for Joint Ventures
Transaction cost theory of the firm why
joint ventures over other contractualarrangements
Transaction costs
Involved in all exchanges and organizing activities
Affect allocation of resources
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Complementary production
Joint use of assets or inputs to produce outputs which
cannot be attributed to any single input
Synergy output is more than sum of inputs
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Specialization
Asset's productivity increases with its specialization to
other inputs used in production
Specialization increases risk of loss to owner of
complementary asset if other inputs are withdrawn
Nonrecoverable portion of investment cost of
complementary asset lost if other inputs withdrawn
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Leads to pre-investment arrangements to promote confidence in
joint use of assets
Choose transaction-cost-minimizing form of pre-investment
arrangements
The greater the transaction costs relative to output value, the
more critical the search for economizing organizational form
Contractual arrangements
Costly to write and enforce
Repetitive transactions would require repetitive contracting
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Joint ownership
More likely with greater frequency of exchange of inputs
Frequency of transaction improves prospects of recovering
investment cost of specialized asset
Joint ventures more appropriate than merger where:
Complementary production involves only small subset of
each participant's assets
Complementary assets have limited service life
Complementary production has limited life
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Reasons for failure
Inflexibility problems similar to other long-term contracts
Implementation requires substantial commitments of
managerial resources
Joint ventures do not last as long as planned
About 70% are disbanded before scheduled maturity
On average they do not last as long as one-half the term
of years stated in agreement
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Reasons for disbanding joint ventures
Inadequate preplanning
Technology did not develop as expected
Disagreement between parties on approaches to joint venture objectives
Refusal to share knowledge with counterparts in venture firms wants to
learn as much as possible but not to convey too much
Inability of parent companies to share control or compromise on difficult
issues
Public policy concerns conflict with firms' long-term strategies
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Joint Venture
Joint ventures are new enterprises owned by two or more
participants.
They are typically formed for special reasons for a limited duration.
This brings the participants into what is essentially a medium to
long term contract which is both specific and flexible.
Each participant expects to gain from the activity but also must
make contribution .
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EXAMPLE
GM- Toyota JV, GM hoped to gain new
experience in the management techniques
of the Japanese in building high quality, low
cost compact cars. Toyota was seeking to learn from the
management traditions that had made GM
the number one auto producer in the world
and in addition to learn how to operate an
auto company in the environment under the
conditions in the US.
Outsourcing Strategies
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Outsourcing Strategies
Outsourcing involves withdrawing from certain value
chain activities and relying on outsiders
to supply needed products, support
services, or functional activities
Concept
Internally
Performed
Activities
Suppliers
Support
Services
Functional
Activities
Distributors or
Retailers
When Does Outsourcing
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g
Make Strategic Sense?
Activity can be performed better or more cheaplyby outside specialists
Activity is not crucial to achieve a sustainablecompetitive advantage
Risk exposure to changing technology and/orchanging buyer preferences is reduced
Operations are streamlined to Cut cycle time Speed decision-making Reduce coordination costs
Firm can concentrate on core value chainactivities that best suit its resource strengths
Strategic Advantages
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g g
of Outsourcing
Improves firms ability to obtain high qualityand/or cheaper components or services
Improves firms ability to innovate by interactingwith best-in-world suppliers
Enhances firms flexibility should customer needsand market conditions suddenly shift
Increases firms ability to assemble diverse kindsof expertise speedily and efficiently
Allows firm to concentrate its resources onperforming those activities internally which it canperform better than outsiders
Pitf ll f O t i
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Pitfalls of Outsourcing
Farming out too manyor the wrong
activities, thus
Hollowing outcapabilities
Losing touch with activities and expertise that
determine overall long-term success
The Four Big Strategic Issues
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The Four Big Strategic Issues
in Competing Multi-nationally
Whether to customizea companys offerings in eachdifferent country market to match preferences of localbuyers or offer a mostly standardizedproduct worldwide
Whether to employ essentially the same
basic competitive strategyin all countriesor modify the strategy country by country
Where to locatea companys production facilities,distribution centers, and customer service operationsto realize the greatest location advantages
Whether and how to efficiently transfer acompanys resource strengths and capabilitiesfromone country to another to secure competitive advantage
What Is the Motivation
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What Is the Motivation
for Competing Internationally?
Gain access to
new customers
Capitalizeon core
competencies
Help
achieve
lower costs
Spreadbusiness riskacross widermarket base
Obtain access to
valuable natural
resources
Two Primary Patterns
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Multi-country
Competition
Global Competition
y
of International Competition
Characteristics of
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Characteristics of
Multi-Country Competition
Market contest among rivals in one country notclosely connected to market contests in other
countries
Buyers in different countries areattracted to different product attributes
Sellers vary from country to country
Industry conditions and competitive forces ineach national market differ in important
respects
Rival firms battle fornational championships
winning in one country does not necessarily signal
the ability to fare well in other countries!
Characteristics of
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Global Competition
Competitive conditions acrosscountry markets are strongly linked
Many of same rivals compete in
many of the same country markets A true international market exists
A firms competitive position in one country is
affected by its position in other countries
Competitive advantage is based on a firms world-
wide operations and overall global standingRival firms in globally competitive industries
vie forworldwide leadership!
Strategy Options for
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gy p
Competing in Foreign Markets
Exporting
Licensing
Franchising strategy
Multi-country strategy
Global strategy
Strategic alliances or joint ventures
Export Strategies
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Export Strategies
Involve using domestic plants as aproduction base forexporting to foreign markets
Excellent initial strategyto pursue international sales
Advantages
Conservative way to test international waters Minimizes both risk and capital requirements
Minimizes direct investments in foreign countries
An export strategyis vulnerable when Manufacturing costs in home country are higher
than in foreign countries where rivals have plants
High shipping costs are involved
Adverse fluctuations in currency exchange rates
i i i
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Licensing Strategies
Licensing makes sense when a firm Has valuable technical know-how or a patented
product but does not have international capabilities toenter foreign markets
Desires to avoid risks of committing resources tomarkets which are Unfamiliar
Politically volatile
Economically unstable
Disadvantage Risk of providing valuable technical know-how to
foreign firms and losing some control over its use
F hi i S i
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Franchising Strategies
Often is better suitedto global expansion effortsofservice and retailing enterprises
Advantages
Franchisee bears most of costs andrisks of establishing foreign locations
Franchisor has to expend only theresources to recruit, train, and support franchisees
Disadvantage Maintaining cross-country quality control
Multi Country Strategy
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Multi-Country Strategy
Strategyis matchedto local market needs Different country strategies are called for when
Significant country-to-country differences in customersneeds exist
Buyers in one country want a product differentfrom buyers in another country
Host government regulations precludeuniform global approach
Two drawbacks1. Poses problems of transferring
competencies across borders
2. Works against building a unified competitive advantage
Global Strategy
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Global Strategy
Strategyfor competing is similarin all countrymarkets
Involves
Coordinating strategic moves globally
Selling in many, if not all, nations where a significantmarket exists
Works best when productsand buyer requirements aresimilar from country to country
Fig. 7.1: How a Multi-country Strategy Differs from a Global Strategy
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The Quest for Competitive Advantage in
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The Quest for Competitive Advantage in
Foreign Markets
Three ways to gain competitive advantage
1.Locating activities among nations in ways that lowercosts or achieve greater product differentiation
2.Efficient/effective transferof competitivelyvaluable competencies and capabilities fromcompany operations in one country tocompany operations in another country
3.Coordinating dispersed activities inways a domestic-only competitor cannot
Locating Activities to Build a
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Global Competitive Advantage
Two issues
Whether to
Concentrate each activity in a
few countries or
Disperse activities to manydifferent nations
Where to locate activities Which country is best
location for which activity?
Concentrating Activities to Build a Global
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Competitive Advantage
Activities should be concentrated when Costs of manufacturing or other value chain activities
are meaningfully lower in certain locations than inothers
There are sizable scale economiesin performing the activity
There is a steep learning curve associatedwith performing an activity in a single location
Certain locations have
Superior resources
Allow better coordination of related activities or
Offer other valuable advantages
Dispersing Activities to Build a
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Global Competitive Advantage
Activities should be dispersed when
They need to be performed close to buyers
Transportation costs, scale diseconomies, ortrade barriers make centralization expensive
Buffers for fluctuating exchange rates, supplyinterruptions, and adverse politics are needed
Transferring Valuable Competencies to Build a
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Global Competitive Advantage
Transferring competencies, capabilities, and resourcestrengths across borders contributes to
Development of broader competencies and capabilities
Achievement of dominating depth in some competitively
valuable area
Dominating depth in a competitively valuablecapability is a strong basis for sustainable competitiveadvantage over
Other multinational or global competitors and
Small domestic competitors in host countries
Coordinating Cross-Border Activities to Build a
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Global Competitive Advantage
Aligning activities located in different countriescontributes to competitive advantage in several ways
Choose where and how to challenge rivals
Shift production from one location to another to take
advantage of most favorable cost or trade conditions orexchange rates
Use Internet technology to collect ideas for newor improved products and to determine whichproducts should be standardized or customized
Enhance brand reputation by incorporatingsame differentiating attributes in itsproducts in all markets where it competes
What Are Profit Sanctuaries?
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What Are Profit Sanctuaries?
Profit sanctuaries are countrymarkets where a firm
Has a strong, protected market
position and
Derives substantial profits
Generally, a firms most strategically
crucial profit sanctuary is its home marketProfit sanctuaries are a valuable
competitive asset in global industries!
Fig. 5.2: Profit Sanctuary Potential of Various
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Competitive Approaches
What Is Cross-Market Subsidization?
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What Is Cross Market Subsidization?
Involves supporting competitive offensives in one market withresources/profits diverted from operations in other markets
Competitive power of cross-market subsidization results from a
global firms ability to
Draw upon its resources and profits in other country markets tomount an attack on single-market or one-country rivals and
Try to lure away their customers with
Lower prices
Discount promotions
Heavy advertising
Other offensive tactics
Global Strategic Offensives
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Global Strategic Offensives
1. Direct onslaught Objective Capture a major slice of market share, forcing rival to
retreat
Involves
Price cutting
Heavy expenditures on marketing, advertising, and promotion
Efforts to gain upper hand in one or more distribution channels
2. Contest
More subtle and focused than an onslaught
Focuses on a particular market segment
unsuited to defenders capabilities and inwhich attacker has a new next-generation product
3. Feint
Move designed to divert the defenders attention away from
attackers main target
Three Options
Achieving Global
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Competitiveness via Cooperation
Cooperative agreements / strategic alliances withforeign companies are a means to
Enter a foreign market or
Strengthen a firms competitiveness
in world markets Purpose of alliances
Joint research efforts
Technology-sharing
Joint use of production or distribution facilities
Marketing / promoting one anothers products
Benefits of Strategic Alliances
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Benefits of Strategic Alliances
Gain scale economies in productionand/or marketing
Fill gaps in technical expertise
or knowledge of local markets
Share distribution facilities and dealer networks
Direct combined competitive energies toward defeating mutual
rivals
Take advantage of partners local market knowledge and
working relationships with key government officials in hostcountry
Useful way to gain agreement on important technical standards
Pitfalls of Strategic Alliances
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Pitfalls of Strategic Alliances
Different motives and conflicting objectives
Time consuming; slows decision-making
Language and cultural barriers
Mistrust when collaborating incompetitively sensitive areas
Clash of egos and company cultures
Becoming too dependent on another firm foressential expertise over the long-term