• Mastering Strategic Management
• Generic Bus Strategies
Chapter 5
Selecting Business-Level Strategies
• SWOT – Your Public Library
• Learning Objectives
Understanding the four main generic strategies,
and their limitation
• Advantages & disadvantages of a cost
leadership or best-cost strategy, &
economies of scale
• Differentiation, focussing on a target
market
• Describe the nature of focused cost
leadership and focused differentiation
• Combining – A Best-Cost Strategy
• What does it mean to be ‘Stuck in the
middle’?
• Is understanding your Strategy really
important?
“Would you tell me, please,
which way I ought to go from
here?” said Alice.
“That depends a good deal on
where you want to get to,” said
the Cheshire cat.
“I don’t much care care where…”
said Alice.
‘Then it doesn’t matter which
way you go,” said the cat.
- Lewis Carroll’s Alice in Wonderland
• 5.1 Generic Strategies
A general way of positioning a firm’s business level
strategy within an industry
• Focusing on generic strategies allows
executives to concentrate on the core
elements of firms’ business-level strategies
• Builds on the strategic resources available
to the firm
• The most popular set of generic strategies
is based on the work of Professor Michael
Porter HBR
• Strategies
Strategy - a road map of the actions an
entrepreneur draws up to achieve a company’s
mission, goals, and objectives. It is the company’s
game plan for gaining a competitive advantage.
• Three basic strategies:
• Beer Strategies…
Two competitive dimensions are key:
• Source of competitive advantage
• keep costs down or
• offer something unique in market
• Scope of operations
• target all possible customers or
focus on a smaller segment or
sub-section of market
• Economics In Action
What is your favorite restaurant?
What’s their strategy? cost leadership or niche
Effective strategy must offers low prices, provides
satisfactory quality, & attract enough customers to
be profitable.
• Key Takeaways
Business-level strategies examine how firms
compete in a given industry
• Generic strategies based on source of
competitive advantage - price or
differentiation, &
• Scope of operations targets a broad or
narrow market
Section 5.2 Cost Leadership
• Cost Leadership
• Cost leadership: Generic strategy that offers
products or services with acceptable quality
and features to a broad set of customers at
a low price
• Economies of scale: Exists when the costs
of offering goods and services decreases as
the firm is able to sell more items
• Expenses are distributed across a
greater number of items
• From Theory to Reality (Porter)
Cost Leadership
• Become the low cost producer in its industry
• Sources of cost advantage are varied and
depend on the structure of the industry, may
include pursuit of economies of scale,
proprietary technology, preferential access
to raw materials and other factors
• Low cost producer must find and exploit all
sources of cost advantage to achieve and
sustain overall cost leadership
• Leads to above average performance in its
industry
 • Assuming can set prices at or near industry
average
• Overall Cost Leadership
Integrated tactics
• Aggressive construction of efficient-scale
facilities
• Vigorous pursuit of cost reductions from
experience
• Tight cost and overhead control
• Avoidance of marginal customer accounts
• Cost minimization in all activities in the
firm’s value chain, such as R&D, service,
sales force, and advertising
• Cost Leadership gone bad - Remembering
the Yugo…
• How do you make a Yugo go faster? A
towtruck
• What do you call a Yugo’s shock
absorbers? Passengers
• How can you get a Yugo to do 60 miles an
hour? Push it over a cliff
• The new Yugo has an air bag. When you
sense an impending accident, start
pumping real fast.
• A friend went to a dealer the other day
and said, "I'd like a gas cap for my
Yugo." The dealer replied, "Okay.
Sounds like a fair trade.”
• Two guys in a Yugo were arrested last
night in Oakland following a push-by
shooting incident
• Cost Leadership & Economics
Economics tells use cost leadership less effective
when
• Small percentage of consumer’s overall
budget (salt)
• Low volume of purchases (i.e. PSE)
• Few alternatives (gasoline)
• Higher search costs
• You (generally) get what you pay for!!
• Economics In Action
Think of three industries where a cost leadership
strategy would be very difficult to develop or
implement
agriculture, arms industry, and nuclear industry.
• Key Takeaways
Cost leadership is an effective business-level
strategy to the extent that a firm offers low prices,
provides satisfactory quality, and attracts enough
customers to be profitable.
Section 5.3 Differentiation
• Differentiation
Differentiation strategy: A generic strategy that
attempts to convince customers to pay a premium
price for its good or services by providing unique
and desirable features
• Using a differentiation strategy firm compete
based on uniqueness, rather than price
(only)
• Success depends on offering unique
features that CUSTOMERS value!
• and communicating this enhanced value to
the potential customers
• Colman Stove
Differentiation strategy:
• 7 Decades, same basic design!
• Higher quality, & higher price
• Value includes reduced risk of
• failure… (1 moving part!)
• Part branding/marketing
• Differentiation
Seeks to be unique in its industry along some
dimension(s) that are widely valued by buyers
Typically, firm identify & improves this aspect of
product & Markets and sells at a price premium
• Differentiation
Differentiation can take many forms
• Prestige/brand
• Quality
• Technology
• Innovation
• Features
• Customer service
• Dealer network
• Missed Opportunity!!
• Tilley – A Canadian Success Story
• Adventurer clothing
• Hats sold by 2,000+ retailers around the
world, & 1,500 USA retailers
• Differentiation
• Potential Pitfalls of Differentiation Strategies
 • Uniqueness/differentiation that add little
valuable
• Too much differentiation
• Too high a price premium
• Differentiation that is easily imitated
• Dilution of brand identification through
product-line extensions, especially reduced
price extensions of brands (i.e. levis jeans
at Walmart)
• Failing to focus on Buyers perceptions of
value (not the sellers)
• Feature creep (too complex)
• The Internet
How has the arrival of the Internet created many
new low-cost options?
How has it changed the low-cost game?
Key Takeaways
 Differentiation can be an effective business-
level strategy to the extent that a firm offers
unique features that convince customers to
pay a premium for their goods and services.
Section 5.4
Focused Cost Leadership &
Focused Differentiation
• Focused Cost Leadership and Focused
Differentiation
Focus strategies: The generic focus strategy rests
on competing (only) within a sub-section of the
potential buyers instead of across all consumers
within an industry.
• Firms select a target population in the
industry and tailors its strategy to serving
them to the (possible) exclusion of others
• Focused cost leadership:
competing based on price, but only
within a narrow market
• Focused differentiation: offering
unique features that fulfill the
demands of a sub-group of
consumers
• Focussed Cost Leadership
Not cheapest everywhere, just cheapest here…
• Focused Cost Leadership
Firms that charge relatively low prices for a sub-
group of the overall marketplace. Could be based
on geography, demographics, channel (internet
only) or features
• Difficult to execute - Creating unique
features and communicating to customers
why these features are useful generally
raises a firm’s costs of doing business
• Similar to overall Cost Leadership lower
overhead costs and economies of scale
useful
• Depending on niche, may be open to
duplication by competitors
• Focused Cost Leadership
Could be based on:
• Demographics (young women)
• Geographic (small communities)
• Service (Drive through, no seating)
• Degree of Consumer involvement (Ikea self-
assembly)
• Sales Channels (Home purchase – Avon,
Mary Kay)
• Price level marketing (Dollar Stores)
• (For clarity), Generic vrs Focused Cost
Leadership
• Key difference between overall Cost
Leadership & Focused Cost Leadership is
that while both groups use price as primary
source of competitive advantage,
• Focused cost leadership strategy requires
competing based on price only within a
narrow or limited marketplace
• A firm following this strategy does
not necessarily charge the lowest
prices in industry
• Instead, it charges low prices
relative to the other firms that
compete within narrow target market
• Nature /size of target market varies
across market segment targeted
• Focused Differentiation Leadership
Focused differentiation strategy requires offering
unique features that fulfill demands of a narrow
market
• While a differentiation strategy involves
offering unique features that appeal to a
variety of customers, the need to satisfy the
desires of a narrow market means that the
pursuit of uniqueness is often take to the
proverbial “next level” by firms using a
focused differentiation strategy.
• The unique features provided by firms
following a focused differentiation strategy
are often very specialized
• Focused Differentiation Leadership
Could be based on:
 • Higher quality product/service
• Extensive R&D
• Demographics (late middle age men)
• Geographic (‘warm’ retirement
communities)
• Buying experience (Financial Services,
Cadillac)
• Degree of Consumer Sophistication (high
end stereo)
• After-sales support (Nordstrom's, HOG)
• Focused Differentiation Strategies
• Advantages:
• Higher prices can be charged
• Firms often develop tremendous
expertise about niche products
(camping gear), & reputation (MEC)
• Disadvantages:
• Limited demand available within
niche may limit growth
• Once its target market is being well
served, expansion may require
developing new skills / products /
markets
• Niche could disappear or be taken
over by competitors
• Damaging attacks may come not
only from larger firms but smaller
ones that adopt an even narrower
focus
• Lights!
You are selling lights. What are 3 different
demographics that firms might target to establish
a focused strategy?
Now, think of 3 different target or niche markets
that your firm could focus on that use lights (i.e.
airport landing strips)
• Worth Noting…
No business level strategy can overcome a product
or service which is poorly designed FOR THE
MARKET IT WISHES TO SERVE or COMPETE
IN…..
• Can include over developed for low-cost
market…
• Poorly thought out niches; too broad, too
narrow
• Value that consumer do not appreciate (with
$$)
• Poor value proposition for consumers
Key Takeaways
• Focus strategies can be effective business-
level strategies to the extent that a firm can
match their goods and services to specific
niche markets
Section 5.5
Best-Cost Strategy
Best-Cost Strategy
• A best-cost strategy can be an effective
business level strategy to the extent that a
firm offers differentiated goods and services
at relatively low prices.
• This strategy difficult to execute in part
because creating unique features and
communicating to customers why these
features are useful generally raises a firm’s
costs of doing business.
• Firms that manage to implement an
effective best-cost strategy are often very
successful!
Stuck in the Middle
• A situation where business level strategy
• does not offer features that are
unique enough to motivate
consumers
• And, prices are too high to
effectively compete on price
• Usually, firms become stuck in the middle
not because they lack a well-defined
strategy But because firms are simply
outmaneuvered by rivals
Key Takeaways
• When executing a business-level strategy, a
firm must not become stuck in the middle
between viable generic business-level
strategies by neither offering unique
features nor competitive pricing.
Stages of Industry Life Cycle
• Stages of Industry Life Cycle
• Stages of Industry Life Cycle
• Stages of Industry Life Cycle
• Strategies in Introduction Stage
• Products are unfamiliar to consumers
• Market segments not well defined
• Product features not clearly specified
• Competition tends to be limited
• Strategies in the Growth Stage
• Characterized by strong increases in sales
• Attractive to potential competitors
• Primary key to success is to build consumer
preferences for specific brands
• Strategies in the Maturity Stage
• Aggregate industry demand slows
• Market becomes saturated, few new
adopters
• Direct competition becomes predominant
• Marginal competitors begin to exit
• Strategies in the Decline Stage
• Industry sales and profits begin to fall
• Strategic options become dependent on the
actions of rivals
Generic business strategies in clothing
industry?
1. Cost leadership strategy
• provide clothing at low prices with
basic designs
2. Differentiation strategy
• provide clothes created by well-
acclaimed designers, high quality,
high price
3. Focused cost leadership strategy
• Competing on price but narrow
market – i.e. safety
4. Focused differentiating strategy
• unique features fulfill demands of
narrow market – biking
5. Best Cost strategy
• Firms charge relatively low prices &
still offer substantial differentiation
valued by consumers
• The Best Online Firm
(StellaService.com)
1. They make sure customers can reach a
human being easily: How easily? The
average time to a live agent for the highest-
rated subset of the 100 companies is 23
seconds. Not minutes, seconds.
2. They respond to inbound messages with
lightning speed: Average time to reply to
an email for the best companies is 1 hour
and 24 minutes. "We'll make every effort to
respond to you within 24-48 hours" definitely
doesn't cut it.
• The Best Online Firm
(StellaService.com)
3. They ship crazy fast: Average delivery
time is is less than 2 days from order to
receipt. Before you say "give me a break,
we can't do that," the stat is presumably
skewed by Amazon Prime & Zappos'
legendary free overnight delivery. Clearly
many, if not most of us can't afford this, so a
few more days isn’t critical, But the best
companies stress the critical need for
maximum speed.
4. They give money back as quickly as they
take it: Among the peak performers, the
average time from return initiation to
processed refund is three days. Customers
don't want to wait for their money any more
than they want to wait for their orders.
• In Conclusion,
This chapter explained generic business-level
strategies including low-cost, differentiation, or a
broad or narrow market focus strategy
Perhaps the best strategy, best cost, occurs when
firms can offer relatively low prices while still
managing to differentiate goods or services
Between Globalization and Internet, competition
continues to increase, which suggests that
consistently sticking to their strategy is a good
predictor of firm success
Whatever the strategy, avoid being “stuck in the
middle” by not offering sufficiently unique features
or competitive prices
• Mastering Strategic Management
Chapter 6
Supporting the Business-Level Strategy:
Competitive and Cooperative Moves
• Learning Objectives
Understand
• Different competitive moves commonly used
by firms
• When and how do firms respond to
competitive actions taken by their rivals
• Cooperate strategies to create mutual
benefits (joint ventures, strategic alliances,
etc.)
• Making Competitive Moves
The study of competitive moves draws from military
history, including Sun Tzu’s classic book, The Art of
War
Business strategists are familiar with a number of
competitive moves that may help guide their firms
to victory.
• First Mover Advantage
• Disruptive Innovations
• Footholds
• Blue Ocean Strategy
• Bricolage
• First Mover – Advantage or Not?
• First Mover Advantage
A first-mover advantage exists when making the
initial move into a market allows a firm to establish
a dominant position that other firms struggle to
overcome
Recall - a strategic resource is an asset that is
valuable, rare, difficult to imitate, and non-
substitutable.
• Often requires significant R&D, & product
testing costs
• A first-mover cannot be sure that
customers will embrace its offering, making
a first move inherently risky
• First movers must be willing to commit
sufficient resources to follow through on
their pioneering efforts
• First Movers
Good News – Real disruptions usually takes some
time to catch on. Container shipping needed both
ships, railcars and trucks equipped to deal with
containers and container ports to load them
Bad News – very hard to identify what might be
invented soon…
• First Mover – How to Fail….
• Does the product/service provide a truly
sustainable competitive resource
• Or is Innovation easy to copy, or worse
improve on...
• Can company preferably continue to
improve product, or at a minimum, match
product improvements (which are almost
surely going to appear)
• Failure to market aggressively (it’s new,
consumers will not know its value for them)
• Disruptive Innovations,1902
Can you think of any?
• Disruptive
• Big change!
• Affects whole market or industry
• Very hard to predict, but usually slow to
develop
• Market is always evolving, difficult to pick
out which are truly disruptive amongst
market ‘noise’
• Includes creating brand new market where
none existed before (i.e. Smart phone apps)
• As market emerges or develops, other firms
must decide how to respond, embrace or
compete
• (Relatively) Recent Disruptions!
• Energy Efficient light bulbs
• Kindle (Gaming)
• Electric & Driverless cars
• E-cigarettes
• iphone apps/mobile computing/texting
• Robots - vacuum cleaners, lawn mowers
too!
• Social Media - U-Tube, Facebook,
Pinterest, etc.
• Modern Container Shipping
• Foothold (Beach-head) Strategy
Value often far exceeds small size & costs of
maintenance
Test market & faster expansion if things go well
Can deter competitors & make harder to predict
next move
• Blue Ocean Strategy
Involves creating a new, untapped market rather
than competing with rivals in an existing market
Creating a brand new market place
• Coffee Shops, Women’s underwear stores
• Transportation - Mom Vans / SUV /
Electronic
• Voluntourism
• Traditional Circus!
Circus
• Rides, side-shows & big tent
• Mobile
• Increased competition from all other forms
of entertainment
• High costs (animals, travel)
• Star performers
• But, Animal Activists,
Focus on Adults
Combine Theatre, ballet & Acrobat
Keep the clowns!
Dramatic experience / theme, org. music
• Build a Better Mouse Trap?
Good luck with that…
• Bricolage
• Most innovation are improvements to
existing products (including new uses)
• Many others, Bricolage, are joining two
products or services together to create
something new
Just how do we know what they’re up to anyways?
• And, A few are true Blue Ocean events!
Corporate Intelligence
• Innovative vs Incremental
Regional Hub Model
• Baking Soda
How many uses can you think of?
• Use as an antacid
• Underarm deodorant
• Keep cut flowers fresh longer (add teaspoon
to vase)
• Put out small fires on rugs, upholstery,
clothing & wood
• Put open container in fridge to absorb odors
• Turn baking soda into modeling clay by
adding 1 1/4 cups of water to 1 cup of
cornstarch
• Wipe your windshield with it to repel rain
Other ideas -
http://lifehackery.com/2008/07/22/home-4/
• Key Takeaways
Firms can take advantage of a number of
competitive moves to shake up or otherwise get
ahead in an ever-changing business environment.
• First mover advantage
• Disruptive Innovation
• Blue ocean thinking
• Foothold
• Bricolage
For teaching in two 90-minute classes/wk,
possible break point
• 6.2 - Responding to Other’s Moves
• Speed and Multipoint Competition
• Mutual Forbearance
• Fighting Brands
• Making Cooperative Moves
• In addition to choosing their own firm’s
strategic actions, executives also have to
decide whether and how to respond to
rival’s moves
• Research indicates that three factors
determine the likelihood that a firm will
respond to a competitive move: awareness,
motivation, & capability ->
• Razor Wars!
• PS – Competitors…
• gathering data & information
• Everything from dumpster diving to satellite
monitoring
• Media monitoring, press releases, comp.
websites!
• (the absence of) Speed Kills… (6.2.1)
• In hyper-competitive world, firms must cope
with rapid-fire barrage of attacks from rivals
• head-to-head advertising
campaigns, price cuts, innovation &
attempts to grab key customers
• Speed is essential in responding (or
competitor may capture market…)
• Jack Welsh - success in most competitive
rivalries “is less a function of grandiose
predictions than it is a result of being able to
respond rapidly to real changes as they
occur. That’s why strategy has to be
dynamic and anticipatory.”
• So…We Meet Again (6.2.2)
• With multipoint competition, firms faces
same rival in multiple markets. Competitive
moves in one market can affect other
markets
• Cigarette makers R. J. Reynolds (RJR) &
Philip Morris compete in many countries
• In early 1990s, RJR introduced lower-priced
cigarette brands. Philip Morris cut USA
prices to protect market share which started
a price war, ultimately hurt both
• 2nd, Philip Morris started competing in
Eastern Europe where RJR had established
a strong position.
• Combination of moves forced RJR to
protect its market share in USA & neglect
Eastern Europe
• Mutual forbearance
Mutual forbearance occurs when rivals do not act
aggressively because each recognizes that the
other can retaliate in multiple markets
• In late 1990s, Southwest Airlines & United
competed in some but not all markets
• United announced plans to compete on
other routes
• Southwest threatened to retaliate in shared
markets & United backed down
• Recognizing & acting on potential
forbearance can lead to better performance
through firms not competing away their
profits, while failure to do so can be costly
• Responding to Disruptive Innovation (6.2.3)
• When rival introduces disruptive innovation,
firm have 3 choices
• 1st, executives may believe that innovation
will not replace established offerings entirely
& choose to focus on traditional business
models, ignoring disruption
• For example, traditional bookstores
did initially consider Amazon to be a
competitive threat until online sales
began to grow
• 2nd, firm counter challenge by attacking
along a different dimension
• For example, Apple responded to
direct sales of cheap computers by
Dell & Gateway by adding power
and versatility
• 3rd possibility is to simply match
competitor’s move
• Merrill Lynch, for example,
confronted online trading by forming
its own Internet-based unit. Here the
firm risks cannibalizing its traditional
business, but executives may find
that their response attracts an
entirely new segment of customers
• Price Wars & Fighting Brands (6.2.4)
• Lowering prices, price wars, can be
effective strategy in the short term
• But, may create long-term problem of trying
to return to original price level, with new
consumer expectations
• Creation of fighting brand is one strategy
that can prevent/reduce this problem
• Fighting brand is a lower-end lower-cost
brand that a firm introduces to try to protect
the firm’s market share without damaging
the firm’s existing brands.
• Fighting Brands – GM & Geo
• By late 1980s, GM challenged by small,
inexpensive Japanese cars
• GM wanted to recapture lost sales, without
harming existing brands, Chevrolet, Buick,
& Cadillac, by putting their names on low-
end cars
• Solution – Geo brand
• Interestingly, several Geo models
produced in joint ventures – Metro
& Tracker joint venture with
Suzuki
• By 1998, market revolved around
higher-quality vehicles, Geo
brand discontinued
• Fighting Brands - Airlines
• Some fighting brands are rather short lived.
• Two major airlines experienced similar
futility.
• In response to the growing success of
discount airlines such as Southwest,
AirTran, Jet Blue, and Frontier, both United
Airlines and Delta Airlines created fighting
brands.
• United launched Ted in 2004,
discontinued 2009.
• Delta’s Song only lasted from 2003
to 2006.
• Southwest’s acquisition of AirTran in 2011
created a large airline that may make United
and Delta lament that they were not able to
make their own discount brands successful.
• Key Takeaways
When threatened by the competitive actions of
rivals, firms possess numerous ways to respond,
depending on the severity of the threat including:
• Multipoint competition
• Mutual forbearance
• Responses to disruptive innovation
• Fighter brands
• Speed of response
6.3 Making Cooperative Moves
• Making Cooperative Moves
• In addition to competitive moves, firms can
benefit from cooperating with each other
• Cooperative moves such as forming joint
ventures and strategic alliances may allow
firms to enjoy successes that might not
otherwise be reached
 • Share (rather than duplicate)
resources
• Learn from each other’s strengths
• Four types of Cooperative Moves
• Joint venture is a cooperative arrangement
that involves two or more firms each
contributing to the creation of a new entity
• Strategic alliance is a cooperative
arrangement between two or more
organizations that does not involve the
creation of a new entity
• Co-location occurs when goods and
services offered under different brands are
located very close to each other
• Co-opetition refers to a blending of
competition and cooperation between firms
• Joint Ventures
Cooperative arrangement that involves 2 or more
firms each contributing to the creation of a new
entity.
• The partners share decision-making
authority, control of the operation, & any
profits
• Advantages & Disadvantages of Joint
Ventures
• Advantages
• Enter related businesses or new
geographic markets or gain new
technological knowledge
• Access to resources, specialized
staff & technology
• Sharing of risks with a venture
partner
• Disadvantages
• Time and effort to build the
relationship, challenges:
• The objectives of the venture are not
100% clear and communicated to
everyone involved.
• There is an imbalance in levels of
expertise, investment or assets
brought into the venture by partners.
• Strategic Alliances
Cooperative arrangement between 2 or more orgs
that does not involve creation of new entity
• Advantages & Disadvantages of Strategic
Alliances
• Advantages
• Allowing each partner to concentrate
on activities that best match their
capabilities.
• Learning from partners & developing
competences that may be more
widely exploited elsewhere.
• Better use of resources &
competencies to survive
• Disadvantages
• Potential to reduce future
opportunities - unable to enter into
agreements with partner’s
competitor
• Lack of commitment to the
partnership
• Risk of sharing too much knowledge
and the partner company becoming
a competitor
• Co-location
• Similar goods are located close to each
other
• Fast food, hotels, auto-malls (cars)
• The Mall
• “Co-opetition”
a blending of competition & cooperation between 2
firms
• Dis/Advantages Co-location & Co-opetition
• Co-location Advantage
• A bigger set of customers may be
attracted to a set of co-located firms
than (sum of) individual locations
• Co-location Disadvantage
• co-location can be very expensive
• Co-opetition Advantage
• reduction of transaction costs &
other savings and increasing
expectation among customers
• Co-opetition Disadvantage
• competition and cooperation may
not be always successful between
two firms
• In Conclusion,
This chapter has considered various competitive
and cooperative strategies commonly used by firms
• When and how can firms respond to
competitive actions taken by their rivals, and
the industry in general
 • Various cooperate strategies to create
mutual benefits (joint ventures, strategic
alliances, etc.)
• Mastering Strategic Management
Chapter 7
Competing in International Markets
• Learning Objectives
• Understand potential benefits & risks of
competing in international markets
• Porter’s “diamond model”, predictors of
success
• International strategies
• multi-domestic strategy
• global strategy
• transnational strategy
• Options for entering international market
• Strategy in Action
Why have India & China become such attractive
markets for International Strategies?
• 7.1 Entering the International Market
• Economies of Scale
More (international) customers lowers costs for
many goods
• Overhead (fixed costs) shared across more
sales
• Shared Marketing costs (with different
language!)
• Shared R&D
• Offshoring
• Offshoring involves relocating a business
activity (manufacturing) to another country
• It While it can reduce a firm’s costs of doing
business, the job losses in the firm’s home
country can devastate local communities,
bad publicity
• Increase delivery time & costs, sometimes
quality issues
• Complexity of operating in a foreign culture
and language
• Some recent trends to re-shoring
• Potential Benefits
• Much cheaper labour costs
• Diversification of Risk(s)
• Suppliers
• International production can increase
Supply Chain risk through longer
transportation times, export/import
regulations
• But, better bargaining position with existing
suppliers
• Stronger leverage when negotiating prices
with suppliers, and potential for access to
new suppliers (reduce both costs & risk)
• Lower costs from lower production costs
increases competitive potential
• Summary – Benefits of International
Presence
Benefits
• Increase the size of potential market(s)
• Economies of scale (lower average
costs/unit)
• Extend the life cycle of a product
• Optimize the physical location for every
activity in its value chain
• Performance enhancement
• Cost reduction
• Risk reduction
• International Market Risk
• Political Risk of government upheaval or
interference
• Unstable gov’ts make it difficult to
plan for future
• Hostile gov’t may impose new taxes
& regulations
• Nationalization: Seizure of privately-owned
businesses
• Economic risk: potential for adverse
change in country’s economic conditions &
policies, property rights protections,&
currency exchange harming viability of
business
• Cultural risk: potential for a company’s
operations in a country to struggle due to
differences in language, customs, norms
and customer preferences
• Natural disasters too!
• For example
• Natural disasters (Japan tsunami) and affect
on Japanese car manufactures
• NA smoking trends and cigarette companies
• ‘Arabic Spring’
 • Economic Risk
Economic risk refers to the potential for a country’s
economic conditions and policies, property rights
protections, and currency exchange rates to harm a
firm’s operations within a country.
• Culture & Cultural Risk
• Cultural Risk
• Risk that ignorance of cultural aspects will
damage firm’s chances of success is a
foreign market
• Culture is the shared assumptions and
beliefs or a group of people, businesses to
nations
• Combination of visible and invisible - Hard
to notice, simply how we do things around
here…
• And, dynamic… keeps changing
• Examples
• Key Takeaways
Competing in international markets involves
important opportunities and daunting threats
• Opportunities include access to new
customers, lowering costs, and
diversification of business risk
• Threats include political risk, economic risk,
& cultural risk
• 7.2 Drivers of Success & Failure
• Friedman argues that advances in
technology, communications, and
transportation have leveled the playing field
into a “Flat World”
• Reduces the strategic element of geography
• But, research has NOT supporting all his
conclusions…
• Porter’s Diamond Model
• Firm strategy, Structure, & Rivalry (Diamond
Model)
How challenging it is to survive domestic
competition
• Companies that have survived intense
rivalry within their home markets are likely
to have developed strategies and structures
that will facilitate their success when
competing in international markets
• New fast-food restuarants are an example
• Companies that are monopolies face a lot
more risk in competing internationally
• Demand Conditions (Diamond Model)
Demand conditions: Developing excellence in
product, production, delivery, etc to serve domestic
market, can create a strategic advantage when
facing global market
• especially when domestic consumer have
high expectations of the goods & services
that they buy
• Car examples
• Japanese - high quality
• French – loyalty to French
companies
• Germans – driving pleasure
• Italian – styling
• USA - Big
• Factor Conditions (Diamond Model)
Factor conditions: The nature of raw material and
other inputs that firms need in order to create
goods and services
• Firms benefit when they have good access
to factor conditions and face challenges
when they do not
• Overcoming disadvantages in factor
conditions leads companies to develop
unique skills
• Just-in-time inventory management: A
production system that conserves space
and lowers costs, by requiring inputs to a
production process to arrive at the moment
they are needed
• Related & Supporting Industries (Diamond
Model)
• Degree of innovation, & flexibility
• Centers of Excellence – Silicon Valley, Drug
companies near Montreal
• Japanese excellence is space utilization
• Cars, Detroit & Windsor
• Univ Research Concentration
• Even cities are an example
• Related & Supporting Industries (Diamond
Model)
The likelihood that a firm will succeed in
international markets is shaped by 4 aspects of its
domestic market:
1. demand conditions
2. factor conditions
3. related and supporting industries
4. strategy, structure, & rivalry among
domestic competitors
For teaching in two 90-minute classes/wk,
possible break point
• 7.3 Types of International Strategies
Multinational corporation: A firm that has
operations in more than one country (KFC,
Walmart, Kia)
International strategy - used to guide a firm’s effort
in various countries
• These strategies vary in emphasis on
achieving efficiency around world &
responding to local needs
• There are 3 main international strategies
available:
• Multi-domestic
• Global
• Transnational
• Key Takeaways
When threatened by the competitive actions of
rivals, firms possess numerous ways to respond,
depending on the severity of the threat including:
• Multipoint competition
• Mutual forbearance
• Responses to disruptive innovation
• Fighter brands
• Speed of response
• The Tradeoff…
• Types of International Strategies
Multi-domestic strategy: Sacrifices efficiency in
favor of being responsive to local preferences
within each market.
• MTV customizes programming within each
county
• H. J. Heinz adapts its products to match
local tastes & preferences. Because some
Indians will not eat garlic & onion, Heinz
offers them a version without these two
ingredients
• Types of International Strategies
• Global Strategy: Sacrifices responsiveness
to local preferences in favor of efficient &
economies of scales at global level
[complete opposite of multi-domestic
strategy]
• Some minor local modifications may
be made, but offers essentially same
products or services in each market.
• Microsoft offers same software
programs globally, but adjusts for
local languages
• Procter & Gamble seek efficiency by
creating global brands
• Global strategies also can be very
effective for firms whose product or
service is largely hidden from the
customer’s view
• Types of International Strategies
• Transnational Strategy: Involves
balancing the desire for efficiency with
responding to local preferences
• Seeks a middle ground between a
multi-domestic strategy and a global
strategy
• McDonald’s & KFC rely on the same brand
names & core menu items around the world.
But make some concessions to local tastes
too
• In France, wine can be purchased at
McDonald’s, [wine is a central
element of French eating]
• What is the standard strategy? Why?
• Automobiles
• Takeout food
• Appliances
• Gas
• Key Takeaways
Multinational corporations choose from among
three basic international strategies:
1. Multidomestic
2. global
3. transnational
These strategies vary in their emphasis on
achieving efficiency around the world while
responding to local needs.
• 7.4 Entry Options for Competing in
International Markets
• Exporting
• Relatively inexpensive way to
enter foreign market
• Assemble goods at home, &
ship - Minimal risk
• Uses local sales companies
• Successful distributors
• Have complementary products
• Behave as if business partners
• Invest in training, info sys,
advertising & promo.
• Globalization depends Cheap Oil….
(Why Your World Is About to Get a Whole
Lot Smaller" by Jeff Rubin)
• Rising transportation costs favor local
economy (i.e. steel)
• Local market
• Reduced competition
• Smaller market
• Greater need for generalists
• 100 mile diet
• Exporting
• Once a firm’s products are found to be
viable in a particular country, exporting often
becomes less desirable
• A firm that exports its goods loses control of
them once they are turned over to a local
firm for sale locally
• But, local distributor may treat
customers poorly and thereby
damage the firm’s brand
• Distributors limited incentive for
loyalty…
• Also, exporters may want their firm rather
than a local distributor to enjoy the retail
profits, when products are sold to end
customers
• Licensing
• Franchisor receives a royalty or fee
• Franchisee gets to use trademark, patent,
trade secret or other valuable intellectual
property
• Disadvantages
• Loss of control over its product
• Licensee may become a competitor
• Threat to brand name and reputation
of products
• Advantages
• Limited risk exposure
• Expanded revenue base
• Licensing
• Licensing frequently used in manufacturing
• involves granting a foreign company
right to create a company’s product
within a foreign country in exchange
for a fee
• often center on patented technology
• License avoids absorbing a lot of costs, but
its profits are limited to the fees collected
• The firm also loses some control over how
its technology is used, risk of copying
• A historical example
• World War II crippled Japan’s industrial
infrastructure
• In response, Japanese firms imported a
great deal of technology, especially from
American firms
• By 1950s, during Korean War, American
military relied on Jeeps made in Japan
using licensed technology
• In just a few years, a mortal enemy had
become a valuable ally!
• Franchising
• Similar to licencing, except significantly less
investment
• Good control over quality of product /
service
• Franchising Contract protects, but legal
systems different around world
• Local franchisees may behave in ways that
the franchisor does not approve.
• For example, Kentucky Fried Chicken (KFC)
was angered by some of its franchisees in
Asia when they started selling fish dishes
without KFC’s approval.
• Often difficult to fix such problems because
laws in many countries are stacked in favor
of local businesses.
• Franchising
• Used by many firms, especially service
industries, to develop a worldwide presence
• Examples Subway, The UPS Store,
and Hilton Hotels
• Franchisee uses brand name,
products, & processes in exchange
for an upfront payment (franchise
fee) & a percentage of revenues
(royalty fees)
• Attractive, requires little investment by the
franchisor.
• But, only get a small portion of the profits
made under its brand name
• Last, franchises are only successful if
franchisees are provided with a simple and
effective business model. “Franchise
formula” must be perfected
• Joint Venture
Partnerships enable firms to share risks & potential
profits. Partners:
• gain exposure to new knowledge and
technologies
• Develop core competencies that can lead to
competitive advantages
• Gain information on local markets
conditions
• Wholly Owned Subsidiary
Local Business fully owned by a multinational
company
• Acquire an existing company in the home
country or develop a totally new operation
(greenfield venture)
• Most expensive and risky of all global entry
strategies
• Greatest control over all activities
Kia, for example, spent $1 billion to build its US
factory. Many firms are reluctant to spend such
sums in more volatile countries because they fear
that they may never recoup their investments.
• Wholly Owned Subsidiary
• Wholly Owned Subsidiary
• A wholly owned subsidiary is a business
operation in a foreign country that a firm
fully owns.
• Can be greenfield venture or through
purchasing an existing local
operation
• firm maintains complete control over
operation & keep all profits that the
operation makes
• A wholly owned subsidiary can be quite
risky, due to expenses required to set it up
and operate it.
• Kia, for example, spent $1 B to build
its US factory
• Many firms are reluctant to spend
such sums in more volatile countries
because they fear that they may
never recoup their investments.
• Policy in Action
What are risks & benefits a Canadian firm
partnering with an (external) international company
using:
1. Exporting
2. Creating a wholly owned subsidiary
3. franchising
4. licensing
5. creating a joint venture
• 2+ org each contribute to the
creation of a new entity
6. strategic alliance\
• firms work together cooperatively,
but no new org
• In 6 & 7, partners share decision
making authority, control of the
operation, & any profits
• Strengths & Limitations of International
Strategies
• Strengths & Limitations of International
Strategies
Key Takeaways
When entering a new country, executives choose
between
• exporting
• franchising
• licensing
• wholly owned subsidiary
• A joint venture or strategic alliance
The key issues of how much control a firm has over
its operation, how much risk is involved, and what
share of operation’s profits the firm retains
• In Conclusion
• Companies must consider benefits & risks
of entering international markets
• And, assess likelihood of success by
examining demand conditions, factor
conditions, related and supporting
industries, and strategy, structure, and
rivalry among its domestic competitors.
• If choosing to venture overseas,
international strategy will be multi-domestic,
global, or transnational.
• Then choose between exporting, creating a
wholly owned subsidiary, franchising,
licensing, or creating a joint venture or
strategic alliance.
• KFC
Do you believe that KFC would have as successful
in China today if executives had tried to make their
first store a wholly-owned subsidiary (instead of
Joint Venture)? Why or why not?
KFC would be unlikely as successful in China if
executives had tried to make their first store a
wholly owned subsidiary. The company had chosen
Beijing Corp. of Animal Production, Processing,
Industry & Commerce and Beijing Travel & Tourism
Corp. as their joint-venture partners. The success
of KFC can be traced to its use of local aspects,
local ingredients, both in its management team and
on its menus.