Chapter 7: Strategy in High-Technology Industries

I. Overview

II. Technical Standards and Format Wars

Technical standards are important in many high-tech industries: they guarantee compatibility,
reduce confusion in the minds of customers, allow for mass production and lower costs, and reduce
the risks associated with supplying complementary products.

Owning a standard can be a source of sustained competitive advantage.

A. Examples of Standards
B. Benefits of Standards
C. Establishment of Standards
D. Network Effects, Positive Feedback, and Lockout

III. Strategies for Winning a Format War

Establishing a proprietary standard as the industry standard may require the company to win a
format war against a competing and incompatible standard. Strategies for doing this include
producing complementary products, leveraging killer applications, aggressive pricing and
marketing, licensing the technology, and cooperating with competitors.

A. Ensure a Supply of Complements

B. Leverage Killer Applications
C. Aggressively Price and Market
D. Cooperate with Competitors
E. Licensing the Format

IV. Costs in High-Technology Industries

Many high-tech products are characterized by high fixed costs of development but very low or
zero marginal costs of producing one extra unit of output. These cost economics create a
presumption in favor of strategies that emphasize aggressive pricing to increase volume and drive
down average total costs.

A. Comparative Cost Economics

B. Strategic Significance

V. Managing Intellectual Property Rights

Many digital products suffer from very high piracy rates due to the low marginal costs of
copying and distributing such products. Piracy can be reduced by the appropriate combination of
strategy, encryption software, and vigorous defense of intellectual property rights.

A. Intellectual Property Rights

B. Digitalization and Piracy Rates
C. Strategies for Managing Digital Rights
VI. Capturing First-Mover Advantages
It is very important for a first mover to develop a strategy to capitalize on first-mover advantages. A
company can choose from three strategies: develop and market the technology itself, to do so
jointly with another company, and license the technology to existing companies. The choice
depends on the complementary assets required to capture a first-mover advantage, the height of
barriers to imitation, and the capability of competitors.

A. First-Mover Advantages
B. First-Mover Disadvantages
C. Strategies for Exploiting First-Mover Advantages
1. Complementary Assets
2. Height of Barriers to Imitation
3. Capable Competitors
4. Three Innovation Strategies

VII. Technological Paradigm Shifts

Technological paradigm shifts occur when new technologies come along that revolutionize the
structure of the industry, dramatically alter the nature of competition, and require companies to
adopt new strategies in order to survive.

Technological paradigm shifts are more likely to occur when progress in improving the established
technology is slowing due to diminishing returns and a new disruptive technology is taking root in
a market niche.

Established companies can deal with paradigm shifts by hedging their bets with regard to
technology or setting up a stand-alone division to exploit the technology.

A. Paradigm Shifts and the Decline of Established Companies

1. The Natural Limits to Technology
2. Disruptive Technology
B. Strategic Implications for Established Companies
C. Strategic Implications for New Entrants

Chapter 8: Strategy in the Global Environment

I. Overview

II. Increasing Profitability Through Global Expansion

For some companies, international expansion represents a way of earning greater returns by
transferring the skills and product offerings derived from their distinctive competencies to markets
where indigenous competitors lack those skills.

Because of national differences, it pays a company to base each value creation activity it performs
at the location where factor conditions are most conducive to the performance of that activity. This
strategy is known as focusing on the attainment of location economies.
By building sales volume more rapidly, international expansion can assist a company in the process
of moving down the experience curve.

A. Location Economies
1. Some Caveats
B. The Experience Curve
C. Transferring Distinctive Competencies
D. Leveraging the Skills of Global Subsidiaries

III. Pressures for Cost Reductions and Local Responsiveness

The best strategy for a company to pursue may depend on the kind of pressures it must cope with:
pressures for cost reductions or for local responsiveness. Pressures for cost reductions are greatest
in industries producing commodity-type products, where price is the main competitive weapon.
Pressures for local responsiveness arise from differences in consumer tastes and preferences, as
well as from national infrastructure and traditional practices, distribution channels, and host
government demands.

A. Pressures for Cost Reductions

B. Pressures for Local Responsiveness
1. Differences in Customer Tastes and Preferences
2. Differences in Infrastructure and Traditional Practices
3. Differences in Distribution Channels
4. Host Government Demands

IV. Choosing a Global Strategy

Companies pursuing an international strategy transfer the skills and products derived from
distinctive competencies to foreign markets, while undertaking some limited local customization.

Companies pursuing a multidomestic strategy customize their product offering, marketing strategy,
and business strategy to national conditions.

Companies pursuing a global strategy focus on reaping the cost reductions that come from
experience curve effects and location economies.

Many industries are now so competitive that companies must adopt a transnational strategy. This
involves a simultaneous focus on reducing costs, transferring skills and products, and local
responsiveness. Implementing such a strategy may not be easy.

A. International Strategy
B. Multidomestic Strategy
C. Global Strategy
D. Transnational Strategy

V. Basic Entry Decisions

The most attractive foreign markets tend to be found in politically stable developed and developing
nations that have free market systems and where there is not a dramatic upsurge in either inflation
rates or private sector debt.
Several advantages are associated with entering a national market early, before other international
businesses have established themselves. These advantages must be balanced against the pioneering
costs that early entrants often have to bear, including the greater risk of business failure.

A. Which Overseas Markets to Enter

B. Timing of Entry
C. Scaling of Entry and Strategic Commitments

VI. The Choice of Entry Mode

There are five different ways of entering a foreign market: exporting, licensing, franchising,
entering into a joint venture, and setting up a wholly owned subsidiary. The optimal choice among
entry modes depends on the company's strategy.

A. Exporting
B. Licensing
C. Franchising
D. Joint Ventures
E. Wholly Owned Subsidiaries
F. Choosing Among Entry Modes
1. Distinctive Competencies and Entry Mode
2. Pressures for Cost Reduction and Entry Mode

VII. Global Strategic Alliances

Strategic alliances are cooperative agreements between actual or potential competitors. The
advantages of alliances are that they facilitate entry into foreign markets, enable partners to share
the fixed costs and risks associated with new products and processes, facilitate the transfer of
complementary skills between companies, and help companies establish technical standards.

The drawbacks of a strategic alliance are that the company risks giving away technological know-
how and market access to its alliance partner while getting very little in return.

A. Advantages of Strategic Alliances

B. Disadvantages of Strategic Alliances

VIII. Making Strategic Alliances Work

The disadvantages associated with alliances can be reduced if the company selects partners
carefully, paying close attention to reputation, and structures the alliance so as to avoid unintended
transfers of know-how.

A. Partner Selection
B. Alliance Structure
C. Managing the Alliance

Chapter 9: Corporate Strategy: Horizontal Integration, Vertical Integration,

and Strategic Outsourcing

I. Overview
A corporate strategy should enable a company, or one or more of its business units, to perform one
or more of the value creation functions at a lower cost or in a way that allows for differentiation and
a premium price.

II. Horizontal Integration

Horizontal integration can be understood as a way of trying to increase the profitability of a
company by

A. reducing costs,

B. increasing the value of the company's product offering through differentiation,

C. managing rivalry within the industry to reduce the risk of price warfare, and

D. increasing bargaining power over suppliers and buyers.

A. Benefits of Horizontal Integration

1. Reducing Costs
2. Increasing Value
3. Managing Industry Rivalry
4. Increasing Bargaining Power
B. Drawbacks and Limits of Horizontal Integration. There are two drawbacks associated with
horizontal integration: the numerous pitfalls associated with mergers and acquisitions and
that the strategy can bring a company into direct conflict with the antitrust authorities.

III. Vertical Integration

Vertical integration can enable a company to achieve a competitive advantage by helping build
barriers to entry, facilitating investments in specialized assets, protecting product quality, and
helping to improve scheduling between adjacent stages in the value chain.

The disadvantages of vertical integration include cost disadvantages if a company's internal source
of supply is a high-cost one and lack of flexibility when technology is changing fast or demand is
uncertain.

A. Increasing Profitability Through Vertical Integration

1. Building Barriers to Entry
2. Facilitating Investments in Specialized Assets
3. Protecting Product Quality
4. Improved Scheduling
B. Arguments Against Vertical Integration
1. Cost Disadvantages
2. Technological Change
3. Demand Unpredictability
C. Bureaucratic Costs and the Limits of Vertical Integration

IV. Alternatives to Vertical Integration: Cooperative Relationships

Entering into a long-term contract can enable a company to realize many of the benefits associated
with vertical integration without having to bear the same level of bureaucratic costs. However, to
avoid the risks associated with becoming too dependent on its partner, it needs to seek a credible
commitment from its partner or establish a mutual hostage-taking situation.

A. Short-Term Contracts and Competitive Bidding

B. Strategic Alliances and Long-Term Contracting
C. Building Long-Term Cooperative Relationships
1. Hostage Taking
2. Credible Commitments
3. Maintaining Market Discipline

V. Strategic Outsourcing
The strategic outsourcing of noncore value creation activities may allow a company to lower its
costs, better differentiate its product offering, and make better use of scarce resources, while also
enabling it to respond rapidly to changing market conditions. However, strategic outsourcing may
have a detrimental effect if the company outsources important value creation activities or becomes
too dependent on key suppliers of those activities.

A. Benefits of Outsourcing
1. Reducing Costs Through Outsourcing
2. Differentiation Through Outsourcing
3. Focus Through Outsourcing
B. Identifying and Managing the Risks of Outsourcing
1. Holdup
2. Scheduling of Activities
3. Loss of Information

Chapter 10: Corporate Strategy: Diversification, Acquisitions, and Internal New

Ventures

I. Overview Managers often first consider diversification when their company is generating free
cash flow, which are financial resources in excess of those necessary to maintain a competitive
advantage in the company's original, or core, business.

II. Expanding Beyond a Single Industry

A. A Company as a Portfolio of Distinctive Competencies

1. Fill-in-the-Blanks
2. Premier Plus 10
3. White Spaces
4. Mega-Opportunities
B. The Multibusiness Model

III. Increasing Profitability Through Diversification

A diversified company can create value by

A. transferring competencies among existing business,

B. leveraging competencies to create new businesses,

C. sharing resources to realize economies of scope,

 D. using diversification as a means of managing rivalry in one or more industries, and

E. exploiting general organizational competencies that enhance the performance of all business
units within a diversified company.

The bureaucratic costs of diversification are a function of the number of independent business units
within the company and the extent of coordination between those business units.

Diversification motivated by a desire to pool risks or achieve greater growth is often associated
with the dissipation of value

A. Transferring Competencies
B. Leveraging Competencies
C. Sharing Resources: Economies of Scope
D. Managing Rivalry: Multipoint Competition
E. Exploiting General Organizational Competencies
1. Entrepreneurial Capabilities
2. Effective Organization Structure and Controls
3. Superior Strategic Capabilities

IV. Types of Diversification There are three vehicles that companies use to enter new business
areas: internal ventures, acquisition, and joint ventures.

V. The Limits of Diversification

A. Bureaucratic Costs and Diversification Strategy

1. Number of Businesses
2. Coordination Among Businesses
3. Limits of Diversification
4. Related or Unrelated Diversification?
B. Diversification That Dissipates Value

VI. Entry Strategy: Internal New Ventures

Internal new venturing is typically employed as an entry strategy when a company has a set of
valuable competencies in its existing businesses that can be leveraged or recombined to enter the
new business area.
Many internal ventures fail because of entry on too small a scale, poor commercialization, and poor
corporate management of the internal venture process. Guarding against failure involves a
structured approach toward project selection and management, integration of R&D and marketing
to improve commercialization of a venture idea, and entry on a significant scale.

A. The Attractions of Internal New Venturing

B. Pitfalls of New Ventures
1. Scale of Entry
2. Commercialization
3. Poor Implementation
C. Guidelines for Successful Internal New Venturing

VII. Entry Strategy: Acquisitions

Many acquisitions fail because of poor postacquisition integration, overestimation of the value that
can be created from an acquisition, the high cost of acquisition, and poor preacquisition screening.
Guarding against acquisition failure requires structured screening, good bidding strategies, positive
attempts to integrate the acquired company into the organization of the acquiring one, and learning
from experience

A. Attractions of Acquisitions
B. Acquisition Pitfalls
1. Post-Acquisition Integration
2. Overestimating Economic Benefits
3. The Expense of Acquisitions
4. Inadequate Preacquisition Screening
C. Guidelines for Successful Acquisition
1. Identification and Screening
2. Bidding Strategy
3. Integration
4. Learning from Experience

VIII. Entry Strategy: Joint Ventures

Joint ventures may be the preferred entry strategy when (a) the risks and costs associated with
setting up a new business unit are more than the company is willing to assume on its own and (b)
the company can increase the probability of successfully establishing a new business by teaming up
with another company that has skills and assets complementing its own.

IX. Restructuring
Why Restructure? Restructuring is often a response to

A. excessive diversification,

B. failed acquisitions, and

C. innovations in management process that have reduced the advantages of vertical integration
and diversification.

Exit Strategies .

Exit strategies include divestment, harvest, and liquidation. The choice of exit strategy is
governed by the characteristics of the relevant business unit.

1. Divestment
2. Harvest and Liquidation