Strategic - Chapter 2, 3, 8 Summary

8/10/2019 Strategic - Chapter 2, 3, 8 Summary

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Chapter 2

Environmental change can be fatal for organisations. The example of Encyclopedia

Britannica which after 200 years of prosperity was nearly sweep out of existence by the rise

of electronic information sources such as Microsofts Encarta.

There are a series of levels in an organisation:

. Macro Environment (highest layer):This includes a wide range of environmental factors

that impact organisations. The PESTELframework is used to identify trends. It is useful

because it provides the broad 'data' form which to identify key drivers to change. The

PESTEL analysis includes political, environmental, social, technological, economic and legal

factors. Political such as government support for national carriers, security controls.

Economicsuch as national growth rates and fuel prices. Socialsuch as rise in travel by

elderly and student international study exchanges. Technologicalsuch as fuel-efficientengines and airframes and security check technologies, teleconferencing. Environmental

such as noise pollution controls and energy consumption controls. Legalsuch as restrictions

on mergers and preferential airport rights for some carriers. Through this analysis one

points out the key drivers for change, these are the high impact factors likely to affect the

success or failure of a strategy. These vary in different industries and sectors.

Scenario analysis is carried out in order to enable for different possibilities and help prevent

managers from closing their minds to alternatives. Scenarios are useful where there are a

limited number of key drivers influencing the success strategy where there is a high level of

uncertainty about such influences and where outcomes could be different.

. Industries and sectors:Porters five forces framework applies here and this was originally

developed as a way of assessing the attractiveness of different industries. This framework

provides a useful starting point for strategic analysis where profit criteria may not apply; in

most parts of the public sector each of the forces has its equivalents. These include: The

Threat of entry, threat of substitutes, power of buyers of the industrys products or services,

power of suppliers in industry and the extent of rivalry between competitors in the industry.

The Threat of Entry:Depends on barriers to entry, these include scale and experience:

regarding economies of scale, also due to experience curve which gives incumbents a cost

advantage because they have learnt how to do things more efficiently than an

inexperienced new entrant could possibly do.Access to supply or distribution channels.

Expected retaliation:as a result of a firm considering entering an industry. Existing firms

would retaliate to the extent that the entry would become too costly. Legislation or

government action. Differentiation.

Competitive Rivalry:Competitive rivals are organisations with similar products and services


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aimed at the same customer group (that is, not substitutes). Factors affecting degree of

competitive rivalry: Competitive balance:where competitors are of equal size there is no

danger of intense competition as one competitor tries to gain dominance position over

others. Industry growth rate:strong growth results in firm growing in market but in

situations of low growth or decline, any growth is by the means/expense of rivals. High fixedcosts:Industries with high fixed costs would require big investments. High exit barriers:

Existence of high barriers to exit results in an increase in rivalry. Exit barriers may be high

due to high redundancy costs or high investment in specific assets such as plant and

equipment that others would not buy. Low differentiation

Implications and Issues of five forces framework

The analysis prompts the investigation of the implications of the forces. Example: Which

industries to enter (or leave)? What influence can be exerted? How are competitors

differently affected?

Five forces framework it is important to keep in mind to define the right industry

converging industries complementary products

The Industry Life Cycle

This involves the first stage which is Development: Here there is low rivalry, high differentiation and

innovation is key. Second stage is Growth: Here there is high growth, weak buyers, low barriers to

entry and growth ability is key. Third stage is Shake-out:Here there is increasing rivalry, slower

growth and some exists, managerial and financial strength is key here. Fourth stage is Maturity:here

there is stronger buyers, low growth and standard products, high entry barriers and market share

and cost is key. Final stage is Decline: Here there is extreme rivalry, there is price competition and

cost and commitment is key.

Hyper Competitive Cycles

Cycles of competition refers to the sequences of move and counter move by competitors. In

some industries, these interactions become so intense and fast that industry structures are

constantly undermined. Such industries are hypercompetitive. The cycle of competition

concept underlines the fact that industry structures are not natural but are often created

and reshaped by the deliberate strategies of competitors.

The first point in this cycle is that of a new entrant attacking an incumbentsestablished

market, (defended by entry barriers). The new entrant sensibly attacks a particularly soft

segment of the overall market. If there is no retaliation from the incumbent, then the new

entrant widens its attack to adjacent segments of the incumbents market. The danger here

is increased industry rivalry and rapidly falling profits.

Multi-point competition is known as the competitive dynamics between organisationscompeting in different product or geographical markets. Multi-point competition does not


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increase competitive rivalry necessarily, it can indeed reduce competitive rivalry by raising

the costs and risks of aggressive moves and counter moves.

Hyper competition occurs where the frequency, boldness and aggressiveness of dynamic

movements by competitors accelerate to create a condition of constant disequilibrium and

change. In hyper competitive conditions, it may not be worth investing heavily in building up

barriers to entry or trying to reduce rivalry, perhaps by acquisition of competitor companies.

Strategic groups

Strategic groups are organisations within an industry with similar strategic characteristics,

following similar strategies or competing on similar bases. The characteristics differ across

industries and sectors.

Characteristics that distinguish between groups:

. Scope of an organisations activities (product range, geographical coverage, etc..)

. Resource commitment (brands, marketing spend, etc..)

The strategic group concept is useful in 3 ways:

. Understanding competition: Managers can focus on their direct competitors within their

particular strategic group, rather than the whole industry. They can also produce the

dimensions that differentiate them most from other groups.

. Analysis of strategic opportunities: Strategic groups can identify the most attractive

strategic spaces; within an industry. Some spaces on the map may be white space,

relatively under-occupied.

. Analysis of mobility barriers: Strategic groups are characterised by mobility barriers, these

are obstacles to movement from one strategic group to another.

Market segments

A market segment is a group of customers who have similar needs that are different fromcustomer needs in other parts of the market.

. Customer needs may vary for a number of different reasons. Segmentation can occur by

behaviour, lifestyle, etc...

. Relative market share: Organisations that have built up most experience in servicing a

particular market segment should not only have lower costs in doing so, but also have built

relationships which may be difficult for others to break down.

. How market segments can be identified and serviced is influenced by a number of trends inthe business environment. E.g. the wide availability of consumer data and the ability to


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process it electronically combined with increased flexibility of companies operations allows

segmentation to be undertaken at a micro-level even down to individual consumers.

Identifying the Strategic Consumer

The strategic consumer is the person(s) at whom the strategy is primarily addressed

because they have the most influence over which foods or services are purchased. It is the

desires of the strategic customer that provide the starting point for strategy.

Critical Success Factors

CSFs are those product features that are particularly valued by a group of customers and

therefore, where the organisation must excel to outperform competition.

Figure 2.8 for details in relation to their example

Opportunities and Threats

Strategic gap is an opportunity in the competitive environment that is not being fully

exploited by competitors. W. Chan Kim and Renee Mauborgne argue that if organisations

simply concentrate on competing head to head with competitive rivals then this will lead to

competitive convergence where all players find the environment tough and threatening.

This was described as the red ocean strategy. Red because of the bloodiness of the

competition and the red ink caused by financial losses. They instead urge managers to

attempt blue ocean strategies which is searching for, creating wide open spaces free fromexisting competition. These blue ocean are strategic gaps in the market. Blue ocean

strategies are characterised by low rivalry and are likely to be better opportunities than red

ocean strategies with many rivals.

Strategic gaps can be identified with the use of Porters five forces, strategic group maps ad

strategy canvas.

Opportunities in Substitute Industries

Substitution provides opportunities. In order to identify gaps a realistic assessment has tobe made of the relative merits of the product

Opportunities in other strategic groups or strategic spaces

Opportunities can be identified by looking across strategic groups, in particular if changes in

the macro environment make new market spaces economically viable.

Opportunities in targeting buyers


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It could be worth targeting health and safety executives e.g. at a customer organisation,

they might be willing to pay more for a safe product/service than the usual buyers in the

purchasing department typically more focused on cost.

Opportunities for complementary products and services

This involves taking into consideration the potential value of complementary products and

services

Opportunities in new market segments

Searching for new market segments can provide opportunities but product/service features

may need to change. If the emphasis is on selling emotional appeals the alternative may be

to provide a no-frills model that costs less and would appeal to another potential market.

E.g. Body Shop does this,

Opportunities Over Time

It is important to take into consideration how changes in the macro and micro environment

are going to affect consumers. From this, firms can gain the first-mover advantage as

discussed earlier.


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Chapter 3

Strategic capabilities are the resources and competences of an organisation needed for it to

survive and prosper.

Tangible resources are physical assets of organisations such as plant, people, finance and

knowledge. An organisation is considered under these categories:

. Physical resources:such as the machines, or buildings

. Financial resources:such as capital or cash

. Human resources:such as skills and knowledge of employees

. Intellectual capital:intangible resources such as patents and brands

Competence is the skills and abilities by which resources are deployed effectively through

an organisations activities and processes. There needs to be a distinction between

capabilities that are at threshold level and those that might help the organisation achieves

competitive advantage and superior performance. Threshold capabilities are defined as

those capabilities needed for an organisation in order to meet the necessary requirements

to compete in a given market. These can either be threshold resources or threshold

competences.

The identification and management of threshold capabilities raises 2 significant challenges:

.Threshold levels of capability will change as critical success factors change or through

activities of competitors and new entrants.

. Trade offs may need to be made to achieve the threshold capability required for different

sorts of customers.

While threshold capabilities are important, they do not themselves create competitive

advantage or the basis of superior performance. They are dependent on an organisation

having distinctive or unique capabilities that competitors will find difficult to imitate. This

may have been due to organisation having unique resources which are those resources that

critically underpin competitive advantage and that others cannot easily imitate or obtain.

Then there is core competences which are the skills and abilities by which resources are

deployed through an organisations activities and processes such as to achieve competitive

advantage in ways that others cannot imitate or obtain.

Cost efficiency studies are of great importance towards managers. Customers benefit from

cost efficiencies in terms of lower prices or more product features for the same prices. The

management of the cost base of an organisation could also be a basis for achieving

competitive advantage. However, for many organisations management of costs is becominga threshold strategic capability because:


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. Customers do not value product features at any price

. Competitive rivalry will continually require the driving down of costs because competitors

will be trying to reduce their cost so as to under price their rivals while offering similar value

. Economies of scale are important in manufacturing organisations. This is due to the factthat high capital costs of the plant need to be recovered over a high volume of output.

. Supply costs can be an integral important part. The location may influence the supply

costs, which is why, historically; steel and glass manufacturing were close to raw materials

or energy sources. Such costs are of great importance to firms that act as intermediaries

where the value added through their own activities is low and the need to identify and

manage input costs is critically important to success.

. Product/process design is another factor that influences costs. Improvements in capacity-

fill. Labour productivity, yield, working capital all improves the efficiency in gains in

production processes.

. Experience is another factor that gives firm cost efficiency and there is evidence it provides

a competitive advantage in particular in terms of the relationship between the cumulative

experience gained by an organisation and its unit costs (experience curve).

. Growth is not optimal in many markets. Competitors gain a cost advantage in the longer

term if an organisation decides on growing slower than the competition.

. Unit costs should decline year on year due to cumulative experience. Organisations who

fail to achieve this are more vulnerable to suffering at the hands of competitors who do.

. First mover advantage can be of great importance. A firm that moves down the experience

curve by getting into a market first would be able to reduce its cost base because of the

accumulated experience it builds up over its rivals by being first.

Basically in a few words, if the capabilities of an organisation do not meet customer needs,

at least to a threshold level, the organisation cannot survive, and if managers do not

manage costs efficiently and continue to improve on this, it will be vulnerable to those whocan.

If a firm seeks to build a competitive advantage then it must have capabilities that are of

value to its customers. A competitive advantage can be achieved if a competitor possesses a

unique pr rare capability which could take the form of unique resources. Competitive

advantage can also be based on rare competences, e.g. unique skills developed over time.

The following points must be taken into account in relation to the extent of which rarity of

competences might provide sustainable competitive advantage: These include ease of

transferability, sustainability and core rigidities (as referred to by Dorothy Leonard-Barton).


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Core competences of a firm may be difficult to imitate/copy due to the fact that they are

complex. This would be because:

. Internal linkages:It may be the ability to link activities and processes that, together,

deliver customer value.

. External interconnectedness:Firms can develop activities together with the customer on

which the customer is dependent on them, this makes it difficult for others to imitate or

gain the firms bases of the competitive advantage.

Core competences can become embedded in an organisations culture and this may not

necessarily be understood by managers explicitly. Thus, there is a need for coordination

between carious activities that occur naturally due to people knowing their part in the

wider picture or because it is taken for granted that activities are done in specific ways.

Causal ambiguity is where competences may be difficult to copy because competitors find it

hard to discern the causes and effects underpinning an organisations advantage. Causal

ambiguity can exist in two different forms:

. Characteristic ambiguity:this is where the significance of the characteristic itself is difficult

to discern or comprehend, perhaps because it is based on tacit knowledge or rooted in the

organisations culture.

. Linkage ambiguity:Where competitors cannot discern which activities and processes are

dependent on which others to form linkages that create core competences.

Substitution is a risk for organisations. Providing value to consumers and holding

competences that are complex, culturally embedded and causally ambiguous may mean

that it is very difficult for organisations to copy them. This substitution take two forms:

. Product or service substitution:

. Competence substitution:E.G. task based industries have often suffered because of an

over reliance on the competences of skilled craft workers that have been replaced by expert

systems and mechanisms.

Strategic capabilities can provide sustainable competitive advantage over time that they are

durable. Conversely, managers claim that hypercompetitive conditions are becoming

increasingly evident and that technology is giving rise to innovation at a faster pace and thus

there is greater capacity for imitation and the substitution of existing products and services.

David Teece discussed the term dynamic capabilities. These are an organisations abilities to

renew and recreate its strategic capabilities to meet the needs of a changing environment.

These capabilities ma be formal, e.g. systems for NPD. They may also take the form of major

strategic moves, e.g. alliances or buy outs. These capabilities may also be informal such as

the way in which decisions are taken faster than usual when a fast response is needed.


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Overall, in stable conditions competitive advantage might be achieved by building

capabilities that may be durable over time, in more dynamic conditions competitive

advantage requires the building of capacity to change, innovate and learn in order to build

dynamic capabilities.

Organisational knowledge is the collective experience accumulated through systems,

routines and activities of sharing across the organisation. There is great emphasis on this

term for a number of reasons. Firstly, as organisations become more complex and larger,

the need to share what people know becomes more of a challenge. Secondly, information

systems have started to provide more sophisticated ways of doing this. Thirdly, it is less

likely that organisations will achieve competitive advantage through their physical resources

and more likely that it will be achieved through the way they do thing and their

accumulated experience.

. Explicit and tacit organisational knowledge: Nonaka and Takeuchi differentiate between

two types of knowledge. Explicit knowledge is codified and objective knowledge is

transmitted in formal systematic ways. Tacit knowledge on the other hand is personal,

contest, specific and therefore hard to formalise and communicate. The more formal and

systematic the system of knowledge, the greater is the danger of imitation and therefore

the less valuable the knowledge becomes in a competitive strategy terms.

.Communities of practice: Communities of practice are relied on when the sharing of

knowledge and experiences in an organisation is set about. This may happen through formal

systems such as the internet.

Organisational knowledge may be beneficial but needs to develop as the environment

changes. As such, organisational knowledge and learning are closely linked concepts.

Value chain

A value chain describes the categories of activities with and around an organsitaion, which

together create a product or service. Primary activities are directly concerned with the

creation or delivery of a product or service, e.g. manufacturing business:

. Inbound logistics: Activities include receiving, storing and distribution of inputs to product

or service

. Operations: Transformation of inputs into final product or service, packaging, testing etc...

. Outbound logistics: Collection, storage and distribution of the product to customers, e.g.

warehousing, materials handling etc...

. Marketing and sales:Provide the means whereby consumers are aware of the product or

service and are able to purchase it. E.g. advertising, selling etc...


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. Service:Activities that enhance or maintain the value of the product/service, e.g.

installation, repair, training, etc...

Each of the sections of primary activities is linked to support activities. Support activities

help to improve the effectiveness of efficiency of primary activities. These include:

. Procurement:These are the processes that occur in many parts of the firm for acquiring

the various resource inputs to the primary activities.

. Technology development:All value activities have a technology, even if it is just the

know-how.

. Human resource management:Concerned with activities involved in recruiting, managing,

training, developing and rewarding people within the organisation.

Infrastructure:The formal systems of planning, finance, quality control, informationalmanagement and the structures and routines that are part of an organisations culture.

Value chains are helpful in the analysis of the strategic position of an organisation in 2 ways:

. As generic descriptions of activities that can help managers understand if there is a cluster

of activities providing benefit to customers located within particular areas of the value

chain.

. In terms of the cost and value of activities. Showing what is more profitable than what. E.g.

Uganda fish farmers used value chain analysis and identified what they should focus on indeveloping a more profitable business model.

The value network is the set of interorganisational links and relationship[s that are

necessary to create a product or service. Thus, organisations must be clear about what

activities it ought to undertake itself and which it should not (outsource?). Managers need

to understand the whole process and how they can manage the linkages and relationships

to improve customer value, this is because much of the cost and value creation will ovvur in

the supply and distribution chains.

Four key issues arise:

Which activities are centrally important to an organisations strategy capabilities and which

less central?

Where are the profit pools (Profit pools are the different levels of profit available at

different parts of the value network)?

The make or by decision for a particular activity or component is therefore critical

Partnering: Developing relationships with suppliers etc...


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Activity Maps

If the strategic capability is to be managed proactively, then finding a way of identifying and

understanding capabilities and the linkages that are likely to characterise competence is

important. One way of undertaking such a thing is by a means of an activity map. This shows

how different activities of an organisation are linked together.

Lessons to learn from activity maps about how competitive advantage is achieved:

. Consistency and reinforcement

. Difficulties of imitation:

. Trade-offs

Benchmarking

Benchmarking is another way of understanding how an organisations strategic capability

compares with those of other organisations.

The different approaches to benchmarking:

. Historical benchmarking: Firms can take into consideration their performance in past

years, this can identify any significant changes. However, the disadvantage of this is that it

can result in complacency since it is the rate of improvement compared with that of

competitors that is really important.

. Industry/sector benchmarking: Looking at the comparative performance of other

organisations in the same industry or sector provides performance indicators. However, a

danger of this is that the whole industry may be performing badly and losing out

competitively to other industries that can satisfy customers needs in different ways.

Another danger is that the boundaries of industries are blurring through competitive activity

and industry convergence.

. Best-in-class benchmarking: This compares an organisations performance against best-in-

class performance, and this seeks to overcomes the limitations of the other benchmarking

approaches. It can aid challenge managers mind frames that acceptable improvements in

performance will result from incremental change in resources or competences.

Disadvantages of Benchmarking

. Measurement distortion: It can lead to a situation where you get what you measure and

this may not be what is intended strategically. It can therefore result in changes in

behaviour that are unintended or dysfunctional.


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. Surface comparisons:Benchmarking compares inputs outputs or outcomes, however, it

does not identify the reasons for the good or poor performance of firms since the process

does not compare competences directly.

SWOT Analysis

SWOT summarises the key issues from the businese environment and the strategic

capability of an organisation that are most likely to impact on strategy developments. The

aim is to identify the extent to which strengths and weaknesses are relevant to or capable of

dealing with the changes taking place in the business environment. SWOT stands for

strengths, weaknesses, opportunities and threats.

Pitfalls to this:

. It may generate very long lists of apparent, strengths, weaknesses, opportunities and

threats whereas what matters it to be clear about what is really important and what is less

important.

. There is the danger of overgeneralization.

Limitations in Managing Strategic Capabilities

. Competences are valued but not understood

. Competences are not valued

. Competences are recognised, valued and understood:

Developing Strategic Capabilities

. Adding and changing capabilities:

. Extending capabilities: Managers may identify capabilities that are in one geographic

business unit of a multinational and not present in other units.

. Stretching capabilities: Managers see the opportunity to build new product or services outof existing capabilities. Building new businesses in this way is the bases of related

diversification.

. Entrepreneurial bricolage: Evidence suggests that strategic capabilities may be built by

exploiting resources, skills and knowledge that gave been ignore or rejected by others,

indeed that this is often what entrepreneurs who develop new business models do.

. Ceasing activities: Current activities that are not central to the delivery of value to

customers could be done away with or outsourced which in turn reduces costs.


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. External capability development: Looking externally may develop capabilities. E.g.

managers seeking to develop or lean new capabilities by acquisition or by entering into

alliances and joint ventures.

Managing People for Capability Development

. Targeted Training and Development may be possible. Training should be done in order to

improve specific competences and not just general training. This is because improving the

competences of employees will give the firm of a base of competitive advantage.

. Staffing policies might be employed in order to develop particular competences. E.g. oil

industry building its competitive advantage around close relationships with customers in the

markets for industrial oil. By doing so ensuring that senior field managers with an aptitude

for this were promoted and sent to different parts of the world that needed to be

developed in such ways.

. Organisational learning may be recognised as central, particularly in fast changing

conditions. Firms that are successful here have dynamic capabilities.

. Develop peoples awareness that what they do in their jobs can matter at the strategic

level.


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Chapter 8

Internationalisation Drivers

The barriers to international trade, investment and migration are today much lower than

they were years ago. In addition to this, international regulation and governance have

improved, so that investing and trading overseas is less risky. Improvements in

communication and cheaper air travel have also aided in internationalisation. Given the

complexity of internationalisation, international strategy should be underpinned by a

careful study of the strength and direction of trends in particular markets.

George Yips drivers of globalisation framework provide a basis. Yips drivers can be thought

of simply as internationalisation drivers, these include:

. Market drivers: A critical factor for internationalisation is some standardisation of markets.Three components are needed for this. Firstly, the presence of similar customer needs and

tastes. Secondly, the presence of global consumers. Finally transferable marketing that

promote market globalisation.

. Cost drivers: Costs can be reduced by working internationally. The main factors for this

include. Firstly, increasing the volume beyond what a national market might support allows

for gaining scale economies. Secondly, internationalisation is promoted where it is possible

to take advantage of country-specific differences. Thus, making more sense to locate the

manufacturer etc...

. Government drivers: What this does is both facilitate and incubate internationalisation.

Policies and restrictions have great influence here which range from content requirements

to control over technology transfer.

. Competitive drivers: Competitive drivers have 2 elements. Firstly does interdependence

exist between country operations increases the pressure for global coordination. Secondly,

the presence of globalised competitors increases the pressure to adopt a global strategy in

response due to the fact that competitors may use one countrysprofits to cross subsidize

their operations in another. So a firm with loosely coordinated international strategy is

vulnerable to globalised competitors because it cantsupport country subsidiaries under

attack from targeted and subsidized competition.

Porters Diamond

An organisation can improve the configuration of its value chain and network by taking

advantage of county specific differences as highlighted by Bruce Kogut.

Internationalisation needs to b e based on the possession of some sort of competitive

advantage which has to be sustainable and substantial. Michael Porters Diamond suggests


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that there are inherent reasons why some nations are more competitive than others, and

why some industries within nations are more competitive than others. This diamond states

that there are four interacting determinants of national/local advantage. These are:

. Factor conditions: These are the factors of production (land labour, raw material. Such

advantages can be translated into general competitive advantages from national firms in

international markets.

. Home demand conditions: The nature of domestic customers can become a source for

competitive advantage. This is because dealing with customers who are sophisticated and

demanding aids in the training of a company and its workforce to be effective and efficient

overseas.

. Related and supporting industries: Another source of competitive advantage is that of

local clusters of related and mutually supporting industries. An example of this would beSilicon Valley which forms a cluster of hardware, software, research, etc...

Firm strategy, industry structure and rivalry: This in different countries can be a base for

advantage. Example would ne German companies strategy of investing in technical

excellence allows them a characteristic advantage in engineering industries and creates

large pools of expertise.

Porters Diamong framework has been used by governments in order to increase the

competitive advantage of their local industries. There have been wide changes in policy

making in countries towards encouraging competition rather than defending and protecting

home based industries. This is done by the government through e.g. raising safety or

environment standards or encouraging cooperation between suppliers and buyers on a

domestic level.

The organisation values from Porters Diamond framework by identifying the extent to which

they can build on home-based advantages to create competitive advantage in relation to

others on a global front.

The International Value Network

Advantages can also be gained internationally from a firms value network. The different

resources and skills of countries around the world can be exploited in order to locate each

element of the value chain in the most effective country/region. This is possible through

joint ventures and global sourcing. Global sourcing is the purchasing of services and

components from the most appropriate suppliers around the world regardless of their

location.

The locational advantages:


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. Cost advantage: These include labour cost, transportation, communications cost, etc.. E.g.

American and European firms place high importance of labour costs.

. Unique capabilities:

National characteristics: This allows firms to develop differentiated product offerings aimedat different market segments.

International Strategies

The global-local dilemma relates to the extent to which products and services may be

standardised across national boundaries or need to be adopted to meet the requirements of

specific national markets. Television programming for example tastes still seem highly

nationally specific drawing companies to decentralise operations and control as near as

possible to the local market. There are four different international strategies which can be

applied, these include:

. Simple export: This involves the concentration of the activities in one country. The

marketing of the product is very loosely coordinated overseas. Pricing, packaging,

distribution and branding policies may be determined locally. Firms with a strong locational

advantage (Porter Diamond) will choose this.

. Multi domestic: This involves a dispersion overseas of various activities which include

manufacturing and sometimes product development. So, unlike exports products and goods

are produced locally in each national market which is created independently with the needsof each local domestic market given priority and so multi domestic. Such a strategy is

recommended where there are few economies of scale and strong benefits to adapting to

local needs. This strategy is attractive in professional services where local relationships are

important. However, it does carry risks towards brand and reputation if national practices

become too diverse.

. Complex export:This involves locating most activities in one country, however, with more

coordinated marketing. In manufacturing and R+D, economies of scale can be taken

advantage from while branding and pricing opportunities are more systematically managed.

. Global strategy: This is the most mature international strategy with highly coordinated

activities dispersed geographically around the world. Using international value networks to

the full, geographical location is chosen according to the specific locational advantage for

each activity in order for product development, manufacturing, marketing and headquarters

functions being located in different countries.

The choice of which strategy to choose will be influence by changes in the

internationalisation drivers that were discussed earlier. E.g. tastes are highly standardised,

companies will favour complex export or global strategies. And while economies of scale are

low, then multi domestic strategies.


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After managers decide on their sources of competitive advantage and internationalisation

drivers, managers now need to decide whether it is worth entering the country at all in the

first place. A PESTEL analysis is usually carried out, conversely, the specific determinants of

market attractiveness need to be analysed.

In comparing countries to enter, the following four elements of the PESTEL framework are

of importance:

.Political:Political environments vary greatly between different countries and can alter

rapidly. It is important to determine the level of political risk before entering a country.

. Economic:Comparing levels of gross domestic product and disposable income aid in

estimating the potential size of the market. China for example has had a great growth in the

creation of a high-consumption middle class. However, it must be noted that companies

must be aware of the stabilities of a countryscurrency which in turn affects its incomestream, this is referred to as currency risk.

. Social:Availability of well trained workforce, size of demographic market segments, all

these cultural variations need to be considered.

. Legal:The extent, towards which a business can enforce contracts, protects intellectual

property, etc... all differ from country to country.

Pankaj Ghemawat stated that what matters is not just the attractiveness of different

countries relative to each other, but the compatibility of the possible countries with theinternationalising firm itself. This shows the argument that for firms coming from any

individual country, some countries are more distant than others being incompatible.

Ghemawat offers the CAGE framework in relation to the distance still matters statement.

. Cultural distance:The distance dimensions here relate to differences in language,

ethnicity, religion and social norms.

. Administrative and political distance:Distance here is in terms of incompatible

administrative, political or legal traditions. E.g. Chinese companies are increasingly able tooperate in parts of the world that American companies find harder, such as parts of the

Middle East or Africa.

. Geographical distance:This relates to the actual geographical characteristics of the

country such as size, sea access and the quality of communications infrastructure.

. Economic:Instead of assuming that a wealthy market is a good one to enter and a poor

one is bad to enter, this framework points out to the differing capabilities of companies

from different countries. An illustration of this would be multinationals from rich countries

are typically weak at serving consumers in poorer market (Unilever had this problem). And

in developing countries, multinationals often end up focusing on economic elites.


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Retaliation must always be taken into consideration. In the five forces framework,

retaliation potential related to rivalry, however mangers can make use of game theory. The

likelihood and ferocity of potential competitor reactions are added to the simple calculation

for relative market attractiveness. This is done by aligning the countrys market against two

axes. First is market attractiveness to the new entrant (based on PESTEL, CAGE and giveforce analyses). The second is the defenders reactiveness which is influenced by the markets

attractiveness to the defender but also by the extent to which the defender is working with

a globally integrated, rather than multi domestic strategy.

A defender will be more reactive of the markers are important to it and it has the

managerial capabilities to coordinate its response.

Entry modes

A business now needs to decide how it wants to enter the country. The main ways for thisare exporting, contractual arrangement through licensing and franchising, joint ventures

and alliance, and FDI. The entry modes are usually selected according to stages of

organisational development. Internationalisation is seen as a sequential process whereby

companies gradually increase their commitment to newly entered markets, accumulating

knowledge and increasing their capabilities along the way. This is a strategy of staged

international expansion. Staged international expansion is whereby firms initially use entry

modes that allow them to maximize knowledge acquisition whilst minimising the exposure

of their assets. Once firms have the sufficient knowledge and confidence then they can

sequentially increase their exposure.

born global firms is something being followed by many small firms today. Small firm

internationalise rapidly at early stages in their development using multiple modes of entry

to several countries.

Internationalisation And Performance

The relationship between internationalisation and performance is listed:

. An inverted U curve: It allows firms to realise economies of scale and scope, benefit fromthe locational advantages available in countries, and also giving rise to high levels of

organisational complexity as a result of the combination of diverse locations and diverse

business units.

.Service sector disadvantages: A number of studies have shown that internationalisation

may not lead to improved performance for service sector firms. Reasons for this are, firstly

the operations of foreign service firms in some sectors remain tightly regulated and

restricted in many countries (e.g. banking and accountants). Secondly, due to the intangible

nature of services. Thirdly, services typically require a significant local presence and reduce


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the scope for the exploitation of economies of scale in production compared with

manufacturing firms

. Internationalisation and Product Diversity: The interaction between internationalisation

and product diversification is an important element to look at.

Roles In An International Portfolio

Strategic leaders are subsidiaries that not only hold valuable resource and capabilities but

are also located in countries that are crucial for competitive success.

Contributors are subsidiaries with valuable internal resources but located in countries of

lesser strategic significance, which none the less play key roles in a multinational

organisations competitive success.

Implementers are executive strategies developed elsewhere and may generate surplusfinancial resources to help fund initiative elsewhere.

Black holes are subsidiaries located in countries that are crucial for competitive success but

with low-level resources or capabilities.

Documents

Strategic - Chapter 2, 3, 8 Summary