Competitive Dynamics:

Industry life cycle:

Strategies across life cycle:

Market Development and Customer Group:

Factors that accelerate customer demand:
Business Strategies in Mature Industry:

Strategies to Deter Entry in Mature Industry:

Strategies to Manage Rivalry

Capacity Control:
Companies devise strategies to control or benefit from capacity expansion programs.
Factors causing excess capacity.

• New technologies that produce more than the old ones.

• New entrants in an industry.
• Economic recession that causes global overcapacity.
• High growth of and demand in an industry that triggers rapid expansion.
Developing Corporate Strategy

• The decisions & actions taken to gain & sustain competitive advantage in several industries and
markets simultaneously.
• Addresses where to compete along three dimensions:
1. Products and services (Corporate Diversification)
2. Industry value chain (Vertical Integration vs Outsourcing vs Alliances)
3. Geography (regional, national, or global markets)
• Performance Evaluation
How well Corporate HQ is allocating resources vis-à-vis Capital Market?
Diversification:
Increase in:

• The variety of products / services a firm offers, or

• The markets / geographic regions in which it competes
Can be targeted towards:

• Products
• Geography
• Product-Market
Diversifying into Multiple Business:
Strategic Fit:

• Transferring specialized expertise, technological know-how, or other resources and capabilities

from one business’s value chain to another’s.
• Cost sharing between businesses by combining their related value chain activities into a single
operation.
• Exploiting common use of a well-known brand name.
• Sharing other resources (besides brands) that support corresponding value chain activities
across businesses.
Corporate Diversification and Firm’s Performance:
Synergy in Diversification:
Internalisation
Internalization occurs when a business decides to handle a transaction internally rather than route it
out-of-house to another entity to handle.
Benefits:
• Internal Capital Market
1. Mix of net Cash generating and net Cash consuming businesses
2. Lesser dependence on Capital Markets
• Internal Labor Market
1. Better information about employees for cross-organizational hiring
2. Reputational benefits
Corporate Parenting

There are basically three styles of corporate parenting as follows:

1. Financial control. Under this style the role of the corporate parent is to monitor and evaluate
the financial performance of investment portfolio of the respective business units. The
corporate managers act as agents on behalf of shareholders and financial markets to identify
and acquire viable assets and businesses. The business unit managers are given the
autonomy to carry out business activities and make decisions at their level. However the
corporate parent sets performance standards for control purposes.
2. Strategic planning. Under this style the role of the corporate parent is to enhance synergies
across the business units. This may be achieved through: envisioning to build a common
purpose, facilitating cooperation across businesses and providing central services and
resources.
3. Strategic control. Under this style the corporate parent leverages its resources and
competences to build value for its businesses. For example, a corporate could have a valuable
brand or a specialist skill. The corporate parent uses its parenting capabilities to seize
opportunities for growth.
Test for Diversification:
• Attractiveness Test: The industries chosen for diversification must be structurally attractive or
capable of being attractive
• The Cost of Entry test: The cost of entry must not capitalize all future profits
• The better off test: Either the new unit must gain advantage from its link with corporation or vice
versa
• Parenting Test: The Corporate parent must be able to add value to the business

Corporate Restructuring:
Corporate restructuring refers to the process of reconfiguring a company’s hierarchy, internal
structure, or operations procedures. Companies undergo restructuring to achieve certain aims, such
as to become more competitive or to respond to changes in the market.
Factors Leading to Corporate Restructuring:
• Too many businesses in unattractive industries
• Too many competitively weak businesses
• Ongoing declines in the market shares of business units due to more market-savvy
competitors
• Debt and interest costs that sap profitability
• Acquisitions that haven’t lived up to expectations
• Reallocation of assets to strengthen the lineup
• Businesses with poor resource or strategic fit
Divestitures:
A divestiture is the partial or full disposal of a business unit through sale, exchange, closure, or
bankruptcy. A divestiture most commonly results from a management decision to cease operating a
business unit because it is not part of a company's core competency.
Factors Motivating Business Divestitures:
• Improvement of long-term performance by concentrating on stronger positions in fewer
core businesses and industries.
• Business is now in a once-attractive industry where market conditions have badly deteriorated.
• Business has either failed to perform as expected and\or is lacking in cultural, strategic or
resource fit.
• Business has become more valuable if sold to another firm or as an independent spin-off firm.

Assessment Using Financial Data:

• Estimate segment wise net profit: (Operating Profit-Overheads* % of Sales)
• Estimating segment wise equity invested: Total Networth*% of Sales
• Estimated Segment wise ROE: Net Profit of the Segment/Equity in the segment
• Compare return generated on equity (R) and growth rate of capital invested (g), and cost of
capital (K)
1. Best Performing Business: ROE>K
2. Average Performing Business: ROE>= g but <=K
3. Worst Performing Business: ROE<g
International Strategy:
Reasons for international strategy:
Four primary reasons
1. Increased market size:
• Domestic market may lack the size to support efficient scale manufacturing facilities
2. Return on Investment (ROI):
• Large investment projects may require global markets to justify the capital outlays.
• Weak patent protection in some countries implies that firms should expand overseas
rapidly in order to preempt imitators.
3. Economies of Scale and Learning
• Expanding size or scope of markets helps to achieve economies of scale in
manufacturing as well as marketing, R&D, or distribution.
• Costs are spread over a larger sales base
• Profit per unit is increased
4. Location advantages: Low-cost markets may
• aid in developing competitive advantage
• achieve better access to critical resources: i.e., raw materials, lower cost labor, key
customers, energy
Strategic Competitive Outcomes:
• International diversification and returns
• As international diversification increases, firms’ returns initially decrease, but then
increase quickly as the firm learns to manage international expansion
• International diversification and innovation
• Exposure to new products and markets
• Opportunity to integrate new knowledge into operations
• Generation of resources to sustain innovation efforts
• Complexity of managing multinational firms
• Geographic dispersion
• Costs of coordination
• Logistical costs
• Trade barriers
• Cultural diversity
• Host government
Risks in International Environment:
• Political risks
• Government instability
• Conflict or war
• Government regulations
• Conflicting and diverse legal authorities
• Potential nationalization of private assets
• Government corruption
• Changes in government policies
• Economic risks
• Differences and fluctuations in currency values
• Investment losses due to political risks
• Limits to international expansions: management problems
• Geographic dispersion
• Trade barriers
• Logistical costs
• Cultural diversity
• Other differences by country
• Relationship between organization and host country
Environmental Trends
Two new trends
• 1. Liability of foreignness
• Increased after terrorists’ attacks and Iraq War
• Global strategies not as prevalent today, still difficult to implement even with Internet-
based strategies
• Regional focus allows firms to marshal resources to compete effectively in regional
markets
• 2. Regionalization
• Focus to a particular region of the world
• Increases understanding of market
• Achieve some economies
• Trade agreements (i.e., EU, OAS, NAFTA) promote flow of trade across country
boundaries with their respective regions
Factors Impacting Internationalisation:
1. Attractiveness: Similarities and Trade

2. CAGE Distance Framework

CAGE is an acronym for different types of distance

• Cultural
• Administrative and political
• Geographic
• Economic

a. Cultural Distance:
Disparity between a firm’s home country and its targeted host country
a. Social norms and morals, beliefs, and values
b. Differentiation among human groups
Cultural distance increases with:
a. Different languages, ethnicities, religions, social norms, and dispositions
b. Lack of connective ethnic or social networks
c. Lack of trust and mutual respect

b. Administrative and political:

Captured in factors such as:
a. Shared monetary or political associations
b. Political hostilities
c. Weak or strong legal and financial institutions
Administrative and Political distance increases with:
a. Absence of trading bloc
b. Absence of shared currency, monetary or political association
c. Absence of colonial ties
d. Political hostilities
 e. Weak legal and financial institutions

c. Geographic
• Does not imply only physical distance
• Geographical distance increases with:
a. Size
b. Lack of common border, waterway access, adequate transportation, or communication
links
c. Physical remoteness
d. Different climates and time zones

d. Economic
• Wealthy countries trade with wealthy countries.
a. To benefit from economies of experience, scale, scope, and standardization
i. Due to similar infrastructure & resources
• Wealthy countries trade with poor countries.
b. To access low-cost input factors
• Economic distance increases with:
c. Different consumer incomes
d. Different costs and quality of natural, financial, and human resources
e. Different information or knowledge

Porter’s Competitiveness of Nations

• Factor Conditions:
a. A country’s endowments:
Natural, human, and other resources
Resource rich countries: focus on commerce
Resource lacking countries: focus on human capital
b. Other important factors:
o Capital markets
o A supportive institutional framework
o Research universities
o Public infrastructure (airports, roads, schools, health care system, etc.)
 • Demand Conditions:
The characteristics of demand
From a firm’s domestic market
Customers hold companies to high standards of value creation.
o Developments in research
o Cost containment
o Other marketplace applications
Competitive Intensity in a Focal Industry
• Highly competitive environments lead to better firm performance.
• Example: Fierce environment for German car companies helped prepare them for global
competition
• Fierce domestic competition
• Require top-notch engineering of chassis and engines
• High gas prices put pressure on low fuel consumption
• Demanding customers
Related and Supporting Industries/Complementors
• Leadership in related and supporting industries
• Fosters complementors in downstream industries
• Firms that provide an additional good or service
• Combined with the primary product
• Leads customers to value the focal firm’s offering more
• Further strengthens national competitive advantage
Internationalization: Strategic Options
Staging of Global Strategy:
Pressures in Internationalization

Pressures in Internationalization:
 1. Pressures for cost reductions
• To respond to them, a firm must try to lower the costs of value creation.
• Pressures are intense:
a. in industries producing commodity-type products.
b. for products that serve universal needs.
c. when major competitors are based in low-cost locations, there is excess capacity, and
consumers face low switching costs.
2. Pressures for Local Responsiveness
• To respond to them, a firm must differentiate its products and marketing strategy from
country to country.
• Raises a company’s cost structure.
• Occurs as a result of:
a. differences in customer tastes and preferences.
b. differences in infrastructure and traditional practices.
c. differences in distribution channels.
d. host government demands.
e. the rise of regionalism.

Choosing a Global Strategy

1. Global Standardization Strategy:

Business model based on pursuing a low-cost strategy on a global scale.
• Companies market standardized products worldwide to reap maximum benefit from
economies of scale.
• Most appropriate when:
• pressures for cost reductions are strong.
• demand for local responsiveness is minimal.
2. International Strategy:
Occurs when:
a. companies establish manufacturing and marketing functions in each major country
they do business in.
b. local customization of product offering and marketing strategy is limited in scope.
Most appropriate when:
 a. product serves universal needs.
b. companies are not confronted with cost pressures.
3. Localization Strategy
Focuses on increasing profitability by customizing a company’s goods to provide a favorable
match to preferences in different national markets.
Most appropriate when:
a. consumer tastes and preferences differ across nations.
b. cost pressures are not very strong.
Benefit - Product value raises in the local market.
Limitation - Cost reduction by mass-producing a standardized product is not possible.
4. Transnational Strategy
Simultaneously:
a. achieves low costs.
b. differentiates the product offering across geographic markets.
c. fosters a flow of skills between global subsidiaries.
Difficult to pursue because it places conflicting demands on a company.

Changes in Strategy Overtime:

International Entry Modes:

Five main entry modes
1. Exporting:
a. Involves low expense to establish operations in host country
b. Often involves contractual agreements
c. Involves high transportation costs
d. May have some tariffs imposed
e. Offers low control over marketing and distribution
2. Licensing:
a. Involves low cost to expand internationally
b. Allows licensee to absorb risks
c. Has low control over manufacturing and marketing
d. Offers lower potential returns (shared with licensee)
e. Involves risk of licensee imitating technology and product for own use
f. May have inflexible ownership arrangement

3. Strategic Alliances:
a. Involve shared risks and resources
b. Facilitate development of core competencies
c. Involve fewer resources and costs required for entry
d. May involve possible incompatibility, conflict, or lack of trust with partner
e. Are difficult to manage

4. Acquisitions:
a. Allow for quick access to market
b. Involve possible integration difficulties
c. Are costly
d. Have complex negotiations and transaction requirements

5. New Wholly-Owned Subsidiary:

a. Is costly
b. Involves complex processes
c. Allows for maximum control
d. Has the highest potential returns
e. Carries high risk
f. Greenfield venture: Establish entirely new subsidiary