Business

Level
Strategy
Business-Level Strategy
•An integrated and coordinated set of
commitments and actions the firm uses to
gain a competitive advantage by exploiting
core competencies in specific product
markets
Business-Level Strategy
Key Issues
Which good or
service to provide

Business-level How to
Strategy manufacture it

How to
distribute it
Customers: Who, What, Where
• Firms must manage all aspects of their relationship with customers
• Reach: firm’s success and connection to customers
• Richness: depth and detail of two-way flow of information between the firm
and the customer
• Affiliation: facilitation of useful interactions with customers
Customer Needs—Who?
Determining the Customers to Serve

Consumer Industrial
Customers
Markets Markets

Market Segmentation
Market Segmentation: Consumer Markets
Demographic factors
(age, income, gender, etc.)

Socioeconomic factors (social

Perceptual Demographic
class, stage in family life cycle)

Consumer
Consumption Socioeconomic Geographic factors (cultural,
Markets regional, and national differences)

Psychological Geographic Psychological factors

(lifestyle, personality traits)

Consumption patterns (heavy,

moderate, and light users)

Perceptual factors (benefit segmentation, perceptual mapping)

Market Segmentation: Industrial Markets
End-use segments

Product segments
(based on technological differences Customer size End-use
or production economics)
Industrial
Geographic segments
(defined by boundaries between
Common Markets Product
buying factor
countries or by regional differences
within them)
Common buying factor Geographic
segments (Similarities in final
products and geographic segments)

Customer size segments

Customer Needs—What?
• Customer Needs to Satisfy
• Customer needs are related to a product’s benefits and features
• Customer needs are neither right nor wrong, good nor bad
• Customer needs represent desires in terms of features and performance
capabilities
Customer Needs—How?

• Determining the Core Competencies Necessary to Satisfy Customer

Needs
• Firms use core competencies to implement value creating strategies that
satisfy customers’ needs
• Only firms with capacity to continuously improve, innovate and upgrade their
competencies can expect to meet and/or exceed customer expectations
across time
Types of Business-Level Strategy
• Business-Level Strategies
• Are intended to create differences between the firm’s position relative to
those of its rivals
• To position itself, the firm must decide whether it intends to:
• Perform activities differently or
• Perform different activities as compared to its rivals
Types of Potential Competitive Advantage
• Achieving lower overall costs than rivals
• Performing activities differently (cheaper process)
• Possessing the capability to differentiate the firm’s product or service
and command a premium price
• Performing different (valuable) activities
Two Targets of Competitive Scope
• Broad Scope
• The firm competes in many customer segments
• Narrow Scope
• The firm selects a segment or group of segments in the industry and tailors its
strategy to serving them at the exclusion of others
Five Business-Level
Strategies
Cost Leadership Strategy
• An integrated set of actions taken to produce goods or services with
features that are acceptable to customers at the lowest cost, relative
to that of competitors with features that are acceptable to customers
• Relatively standardized products
• Features acceptable to many customers
• Lowest competitive price
Cost Leadership Strategy
• Cost saving actions required by this strategy:
• Building efficient scale facilities
• Tightly controlling production costs and overhead
• Minimizing costs of sales, R&D and service
• Building efficient manufacturing facilities
• Monitoring costs of activities provided by outsiders
• Simplifying production processes
How to Obtain a Cost Advantage

Determine and Reconfigure, if

control needed
Cost Drivers Value Chain

 Alter production process  New raw material

 Change in automation  Forward integration
 New distribution channel  Backward integration
 New advertising media  Change location relative to
 Direct sales in place of suppliers or buyers
indirect sales
Examples
of Value-
Creating
Activities
Associated
with the Cost
Leadership
Strategy

4–18
Cost Leadership Strategy: New Entrants
The Threat of • Can frighten off new entrants
Potential Entrants due to:
• Their need to enter on a large
scale in order to be cost
competitive
• The time it takes to move down
the learning curve
Cost Leadership Strategy: Suppliers
Bargaining Power • Can mitigate suppliers’ power
of Suppliers by:
• Being able to absorb cost
increases due to low cost position
• Being able to make very large
purchases, reducing chance of
supplier using power
Cost Leadership Strategy: Buyers
Bargaining Power • Can mitigate buyers’ power by:
of Buyers • Driving prices far below
competitors, causing them to exit,
thus shifting power with buyers
back to the firm
Cost Leadership Strategy: Substitutes
Product Substitutes • Cost leader is well positioned
to:
• Make investments to be first to
create substitutes
• Buy patents developed by
potential substitutes
• Lower prices in order to maintain
value position
Cost Leadership Strategy: Competitors
Rivalry with • Due to cost leader’s
Existing Competitors advantageous position:
• Rivals hesitate to compete on basis
of price
• Lack of price competition leads to
greater profits
Cost Leadership Strategy (cont’d)
• Competitive Risks
• Processes used to produce and distribute good or service may become
obsolete due to competitors’ innovations
• Focus on cost reductions may occur at expense of customers’ perceptions of
differentiation
• Competitors, using their own core competencies, may successfully imitate the
cost leader’s strategy
Differentiation Strategy
• An integrated set of actions taken to produce goods or services (at an
acceptable cost) that customers perceive as being different in ways
that are important to them
• Nonstandardized products
• Customers value differentiated features more than they value low cost
How to Obtain a Differentiation Advantage
Control if needed Reconfigure to
maximize

Cost Drivers Value Chain

 Lower buyers’ costs

 Raise performance of product or service
 Create sustainability through:
 Customer perceptions of uniqueness
 Customer reluctance to switch to non-unique
product or service
Examples
of Value-
Creating
Activities
Associated
with the
Differentiation
Strategy

4–27
Differentiation Strategy: New Entrants
The Threat of • Can defend against new
Potential Entrants entrants because:
• New products must surpass
proven products
• New products must be at least
equal to performance of proven
products, but offered at lower
prices
Differentiation Strategy: Suppliers
Bargaining Power • Can mitigate suppliers’ power
of Suppliers by:
• Absorbing price increases due
to higher margins
• Passing along higher supplier
prices because buyers are loyal
to differentiated brand
Differentiation Strategy: Buyers
Bargaining Power • Can mitigate buyers’ power
of Buyers because well differentiated
products reduce customer
sensitivity to price increases
Differentiation Strategy: Substitutes
Product Substitutes • Well positioned relative to
substitutes because
• Brand loyalty to a differentiated
product tends to reduce
customers’ testing of new
products or switching brands
Differentiation Strategy: Competitors
Rivalry with • Defends against competitors
Existing Competitors because brand loyalty to
differentiated product
offsets price competition
Competitive Risks of Differentiation
• The price differential between the differentiator’s product and the cost leader’s
product becomes too large
• Differentiation ceases to provide value for which customers are willing to pay
• Counterfeit goods replicate differentiated features of the firm’s products
Focus Strategies
• An integrated set of actions taken to produce goods or services that
serve the needs of a particular competitive segment
• Particular buyer group (e.g. youths or senior citizens)
• Different segment of a product line (e.g. professional painters versus do it-
yourselfers)
• Different geographic markets (e.g. East coast versus West coast)
Focus Strategies (cont’d)
• Types of focused strategies
• Focused cost leadership strategy
• Focused differentiation strategy
• To implement a focus strategy, firms must be able to:
• Complete various primary and support activities in a competitively superior
manner, in order to develop and sustain a competitive advantage and earn
above-average returns
Factors That Drive Focused Strategies
• Large firms may overlook small niches.
• A firm may lack the resources needed to compete in the broader market
• A firm is able to serve a narrow market segment more effectively than can its
larger industry-wide competitors
• Focusing allows the firm to direct its resources to certain value chain activities to
build competitive advantage
Competitive Risks of Focus Strategies
• A focusing firm may be “outfocused” by its competitors
• A large competitor may set its sights on a firm’s niche market
• Customer preferences in niche market may change to more closely resemble
those of the broader market
Integrated Cost Leadership/
Differentiation Strategy
• A firm that successfully uses an integrated cost
leadership/differentiation strategy should be in a
better position to:
• Adapt quickly to environmental changes
• Learn new skills and technologies more quickly
• Effectively leverage its core competencies while
competing against its rivals
Integrated Cost Leadership/
Differentiation Strategy (cont’d)
• Commitment to strategic flexibility is necessary for
implementation of integrated cost
leadership/differentiation strategy
• Flexible manufacturing systems
• Information networks
• Total quality management (TQM) systems
Flexible Manufacturing Systems
• Computer-controlled processes used to produce a variety of products
in moderate, flexible quantities with a minimum of manual
intervention
• Goal is to eliminate the “low-cost-versus-wide product-variety” tradeoff
• Allows firms to produce large variety of products at relatively low costs
Information Networks
• Link companies electronically with their suppliers, distributors, and
customers
• Facilitate efforts to satisfy customer expectations in terms of product quality
and delivery speed
• Improve flow of work among employees in the firm and their counterparts at
suppliers and distributors
Total Quality Management (TQM) Systems
• Emphasize total commitment to the customer through continuous
improvement using:
• Data-driven, problem-solving approaches
• Empowerment of employee groups and teams
• Benefits
• Increases customer satisfaction
• Cuts costs
• Reduces time-to-market for innovative products
Risks of the Integrated Cost
Leadership/ Differentiation Strategy
• Often involves compromises
• Becoming neither the lowest cost nor the most
differentiated firm
• Becoming “stuck in the middle”
• Lacking the strong commitment and expertise that
accompanies firms following either a cost leadership or a
differentiated strategy
 Corporate
Level
Strategy –
Diversification
Two Strategy Levels
• Business-level Strategy (Competitive)
• Each business unit in a diversified firm chooses a business-level strategy as its
means of competing in individual product markets
• Corporate-level Strategy (Companywide)
• Specifies actions taken by the firm to gain a competitive advantage by
selecting and managing a group of different businesses competing in several
industries and product markets
The Role of Diversification
• Diversification strategies play a major role in the
behavior of large firms
• Product diversification concerns:
• The scope of the industries and markets in which the
firm competes
• How managers buy, create and sell different businesses
to match skills and strengths with opportunities
presented to the firm
Corporate-Level Strategy: Key Questions
• Corporate-level Strategy’s Value

• What businesses should

the firm be in?

• How should the corporate

office manage the
group of businesses?

Business Units
Levels and Types of Diversification
Strategic Motives for Diversification
• Value Creating
• Value Neutralizing
• Value Reducing
1. Strategic Motives for Diversification (Value Creating)

To Enhance Strategic Competitiveness:

• Economies of scope (related diversification)
Sharing activities
Transferring core competencies
• Market power (related diversification)
Blocking competitors through multipoint competition
Vertical integration
• Financial economies (unrelated diversification)
Efficient internal capital allocation
Business restructuring
1. Value-creating
Strategies of
Diversification:
Operational and
Corporate
Relatedness
• Value is created from
• Operational relatedness in sharing activities
• Corporate relatedness in transferring skills or corporate core competencies
among units
• The difference between sharing activities and transferring
competencies is based on how the resources are jointly used to
create economies of scope
Sharing Activities
• Operational Relatedness
• Created by sharing either a primary activity such as inventory delivery
systems, or a support activity such as purchasing
• Activity sharing requires sharing strategic control over business units
• Activity sharing may create risk because business-unit ties, create links
between outcomes. For example if demand for one business’ product is
reduced, it may not generate sufficient revenues to cover the fixed cost
required to operate the shared facility.
Transferring Corporate Competencies
• Corporate Relatedness
• Using complex sets of resources and capabilities to link different businesses
through managerial and technological knowledge, experience, and expertise
Corporate Relatedness
• Creates value in two ways:
• Eliminates resource duplication in the need to allocate resources for a second
unit to develop a competence that already exists in another unit
• Provides intangible resources (resource intangibility) that are difficult for
competitors to understand and imitate
• A transferred intangible resource gives the unit receiving it an immediate
competitive advantage over its rivals
1. Value-creating
Strategies of
Diversification:
Operational and
Corporate
Relatedness
Related Diversification
• Firm creates value by building upon or extending its:
• Resources
• Capabilities
• Core competencies
• Economies of scope
• Cost savings that occur when a firm transfers capabilities and competencies
developed in one of its businesses to another of its businesses
1. Value-creating
Strategies of
Diversification:
Operational and
Corporate
Relatedness
Related Diversification: Market Power

• Market power exists when a firm can:

• Sell its products above the existing competitive level and/or
• Reduce the costs of its primary and support activities below the competitive
level
Related Diversification: Market Power

• Multipoint Competition
• Two or more diversified firms simultaneously compete in the same product
areas or geographic markets
• Vertical Integration
• Backward integration—a firm produces its own inputs
• Forward integration—a firm operates its own distribution system for
delivering its outputs
1. Value-creating
Strategies of
Diversification:
Operational and
Corporate
Relatedness
Unrelated Diversification
• Financial Economies
• Are cost savings realized through improved allocations of financial resources
• Based on investments inside or outside the firm
• Create value through two types of financial economies:
• Efficient internal capital allocations
• Purchasing other corporations and restructuring their assets
Unrelated Diversification (cont’d)
• Efficient Internal Capital Market Allocation
• Corporate office distributes capital to business divisions to create value for
overall company
• Corporate office gains access to information about those businesses’
actual and prospective performance
Unrelated Diversification: Restructuring
• Restructuring creates financial economies
• A firm creates value by buying and selling other firms’ assets in the external
market
• Resource allocation decisions may become complex, so success often
requires:
• Focus on mature, low-technology businesses
• Focus on businesses not reliant on a client orientation
1. Value-creating
Strategies of
Diversification:
Operational and
Corporate
Relatedness
Related Diversification: Complexity
• Simultaneous Operational Relatedness and Corporate Relatedness
• Involves managing two sources of knowledge simultaneously:
• Operational forms of economies of scope
• Corporate forms of economies of scope
• Many such efforts often fail because of implementation difficulties
2. Incentives and Resources for Diversification (Value Neutral)

Incentives and Resources with Neutral

Effects on Strategic Competitiveness
• Antitrust regulation
• Tax laws
• Low performance
• Uncertain future cash flows
• Risk reduction for firm
• Tangible resources
• Intangible resources
External Incentives to Diversify
Anti-trust • Antitrust laws in 1960s and 1970s
Legislation discouraged mergers that created
increased market power (vertical or
horizontal integration
• Mergers in the 1960s and 1970s thus
tended to be unrelated
• Early 2000 antitrust concerns seem
to be emerging and mergers now
more closely examined
External Incentives to Diversify (cont’d)
Anti-trust • High tax rates on dividends cause a
Legislation corporate shift from dividends to
buying and building companies in
high-performance industries
Tax Laws
• 1986 Tax Reform Act
 Reduced individual ordinary income
tax rate from 50 to 28 percent
 Treated capital gains as ordinary
income
 Thus created incentive for
shareholders to prefer acquisition
investments
Internal Incentives to Diversify
Low • High performance eliminates
Performance the need for greater
diversification
• Low performance acts as
incentive for diversification
• Firms plagued by poor
performance often take higher
risks (diversification is risky)
Internal Incentives to Diversify (cont’d)
Low • Diversification may be
Performance
defensive strategy if:
Uncertain  Product line matures
Future Cash
Flows  Product line is threatened.
 Firm is small and is in
mature or maturing
industry
Internal Incentives to Diversify
Low • Synergy exists when the value
Performance created by businesses working
together exceeds the value created
Uncertain by them working independently
Future Cash • … but synergy creates joint
Flows interdependence between business
units
Synergy and
• A firm may become risk averse and
Risk
constrain its level of activity sharing
Reduction
• A firm may reduce level of
technological change by operating in
more certain environments
Resources and Diversification
• A firm must have both:
• Incentives to diversify
• Resources required to create value through diversification
• Cash
• Tangible resources (e.g., plant and equipment)
• Value creation is determined more by appropriate use of resources
than by incentives to diversify
3. Managerial Motives for Diversification (Value Reducing)

Managerial Motives (Value Reduction)

• Diversifying managerial employment risk
• Increasing managerial compensation
Summary Model of the
Relationship between
Firm Performance and
Diversification
Cooperative Strategy
Cooperative Strategy
• Cooperative Strategy
• A strategy in which firms work together to achieve a shared objective
• Cooperating with other firms is a strategy that:
• Creates value for a customer
• Exceeds the cost of constructing customer value in other ways
• Establishes a favorable position relative to competitors
Strategic Alliance
• A primary type of cooperative strategy in which firms combine some
of their resources and capabilities to create a mutual competitive
advantage
• Involves the exchange and sharing of resources and capabilities to co-develop
or distribute goods and services
• Requires cooperative behavior from all partners
Strategic Alliance Behaviors
• Examples of cooperative behavior known to contribute to alliance
success:
• Actively solving problems
• Being trustworthy
• Consistently pursuing ways to combine partners’ resources and capabilities to
create value
• Competitive advantage developed through a cooperative strategy is
called a collaborative or relational advantage
Strategic Alliance
Firm A Firm B
Resources Resources
Capabilities Capabilities
Core Competencies Core Competencies
Combined
Resources
Capabilities
Core Competencies

Mutual interests in designing, manufacturing,

or distributing goods or services
Three Types of Strategic Alliances
• Joint Venture
• Two or more firms create a legally independent company by sharing some of
their resources and capabilities
• Equity Strategic Alliance
• Partners who own different percentages of equity in a separate company they
have formed
• Nonequity Strategic Alliance
• Two or more firms develop a contractual relationship to share some of their
unique resources and capabilities
Example…..Starbucks Coffee
• In 1993, did alliance with Barnes & Noble (Book store chain) for
providing in house coffee.
• 1996, partnered with Pepso co to bottle, distribute and sell popular
coffee brand, Frappacino.
• Partnered with United Airlines for serving coffee on flight.
• Partnered with kraft foods for coffee to be marketed in grocery
stores.
• Did joint venture with Tata Global Beverages to form Tata starbucks
ltd to open starbucks outlets in India.
Reasons for Strategic Alliances
Market Reason
Slow Cycle • Gain access to a restricted market
(Restricted and • Establish a franchise in a new market
slow moving • Maintain market stability (e.g.,
market) establishing standards)
Reasons for Strategic Alliances (cont’d)
Market Reason
Fast Cycle • Speed up development of new goods
(Unstable, or service
unpredictable and • Speed up new market entry
complex) • Maintain market leadership
• Form an industry technology
standard
• Share risky R&D expenses
• Overcome uncertainty
Reasons for Strategic Alliances (cont’d)
Market Reason
Standard Cycle • Gain market power (reduce industry
overcapacity)
• Gain access to complementary
resources
• Establish economies of scale
• Overcome trade barriers
• Meet competitive challenges from
other competitors
• Pool resources for very large capital
projects
• Learn new business techniques
Business-Level Cooperative Strategies
• Complementary strategic alliances
• Vertical
• Horizontal
• Competition response strategy
• Uncertainty reducing strategy
• Competition reducing strategy
Business-Level Cooperative Strategies
• Combine partner firms’ assets
Complementary
Alliances in complementary ways to
create new value
• Include distribution, supplier or
outsourcing alliances where
firms rely on upstream or
downstream partners to build
competitive advantage
Vertical Complementary Strategic Alliances

• Firms agree to use their skills and

capabilities in different stages of the
value chain to create value for both
firms
• Outsourcing
 Horizontal Complementary Strategic Alliances

• Partners combine resources and skills to create value in

the same stage of the value chain
• Focus is on long-term product development and
distribution opportunities
• Partners may become competitors
Competition Response Strategy
Complementary • Occur when firms join forces to
Alliances respond to a strategic action of
another competitor
Competition • Because they can be difficult to
Response Alliances reverse and expensive to
operate, strategic alliances are
primarily formed to respond to
strategic rather than tactical
actions
Uncertainty Reducing Strategy
Complementary • Are used to hedge against risk
Alliances and uncertainty
• These alliances are most
Competition noticed in fast-cycle markets
Response Alliances • An alliance may be formed to
reduce the uncertainty
Uncertainty associated with developing new
Reducing Alliances product or technology
standards
Competition Reducing Strategy
Complementary • Created to avoid destructive or excessive
Alliances competition
• Explicit collusion: when firms directly
negotiate production output and pricing
Competition agreements in order to reduce
Response Alliances competition (illegal)
• Tacit collusion: when firms in an industry
indirectly coordinate their production
Uncertainty
and pricing decisions by observing other
Reducing Alliances
firm’s actions and responses
• For eg. OPEC
Competition
Reducing Alliances
Assessment of Business-level Cooperative
Strategies
• Complementary business-level strategic alliances, especially
the vertical ones, have the greatest probability of creating a
sustainable competitive advantage
• Horizontal complementary alliances are sometimes difficult to
maintain because they are often between rival competitors
• Competitive advantages gained from competition and
uncertainty reducing strategies tend to be temporary
Corporate-Level Cooperative Strategies
Corporate-Level Cooperative Strategy
• Corporate-level strategies
• Help the firm diversify in terms of:
• Products offered to the market
• The markets it serves
• Require fewer resource commitments
• Permit greater flexibility in terms of efforts to diversify partners’ operations
Diversifying Strategic Alliances
Diversifying
• Expand into new product or
Strategic Alliance market areas without completing
a merger or an acquisition
• Assess benefits of future merger
between the partners
Synergistic Strategic Alliances
Diversifying • Joint economies of scope
Strategic Alliance between two or more firms
• Synergy across multiple
Synergistic functions or multiple businesses
Strategic Alliance between partner firms
Franchising
Diversifying • Spreads risks and uses resources,
Strategic Alliance capabilities, and competencies
without merger or acquisition
Synergistic • A contractual relationship (the
Strategic Alliance franchise) is developed between
the franchisee and the franchisor
• Alternative to growth through
Franchising
mergers and acquisitions
Assessment of Corporate-Level Cooperative
Strategies
• Compared to business-level strategies
• Broader in scope  More complex
• More costly
• Can lead to competitive advantage and value when:
• Successful alliance experiences are internalized
• The firm uses such strategies to develop useful
knowledge about how to succeed in the future
International Cooperative Strategies
• Cross-border Strategic Alliance
• A strategy in which firms with headquarters in different nations combine their
resources and capabilities to create a competitive advantage
• A firm may form cross-border strategic alliances to leverage core
competencies that are the foundation of its domestic success to expand into
international markets
Competitive Risks of Cooperative Strategies
• Partners may act opportunistically
• Partners may misrepresent competencies brought to the partnership
• Partners fail to make committed resources and capabilities available
to other partners
• One partner may make investments that are specific to the alliance
while its partner does not
Managing Risks in Cooperative Strategies
Managing Cooperative Strategies
• Cost minimization management approach
• Formal contracts with partners
• Specify
• How strategy is to be monitored
• How partner behavior is to be controlled
• Goals that minimize costs and prevent opportunistic
behavior by partners
Managing Cooperative Strategies (cont’d)
• Opportunity maximization approach
• Maximize partnership’s value-creation opportunities
• learn from each other
• explore additional marketplace possibilities
• less formal contracts, fewer constraints
Acquisition
and
Merger
Mergers, Acquisitions, and Takeovers:
What are the Differences?
• Merger
• Two firms agree to integrate their operations on a relatively
co-equal basis.
• Acquisition
• One firm buys a controlling, or 100% interest in another
firm with the intent of making the acquired firm a
subsidiary business within its portfolio.
• Takeover
• A special type of acquisition when the target firm did not
solicit the acquiring firm’s bid.
Acquisitions are increasing….

• Because of….
• Globalization
• Deregulation of many industries in different
economies
• favorable legislation
Reasons for Acquisitions
Increased
market power
Learning and
Overcoming
developing
entry barriers
new capabilities

Making an Cost of new

Reshaping firm’s
Acquisition product
competitive scope
development

Increased Increase speed

diversification Lower risk than to market
developing new
products
Acquisitions: Increased Market Power
• Factors increasing market power when:
• There is the ability to sell goods or services above competitive levels.
• Costs of primary or support activities are below those of competitors.
• A firm’s size, resources and capabilities gives it a superior ability to compete.
• Acquisitions intended to increase market power are subject to:
• Regulatory review
• Analysis by financial markets
Acquisitions: Increased Market Power
(cont’d)
• Market power is increased by:
• Horizontal acquisitions: other firms in the same industry
• Vertical acquisitions: suppliers or distributors of the
acquiring firm
• Related acquisitions: firms in related industries
Market Power Acquisitions
Horizontal • Acquisition of a company in the
Acquisitions
same industry in which the
acquiring firm competes
increases a firm’s market power
by exploiting:
 Cost-based synergies
 Revenue-based synergies
• Acquisitions with similar
characteristics result in higher
performance than those with
dissimilar characteristics.
Market Power Acquisitions (cont’d)
Horizontal • Acquisition of a supplier or
Acquisitions
distributor of one or more of the
Vertical firm’s goods or services
Acquisitions  Increases a firm’s market
power by controlling additional
parts of the value chain.
Market Power Acquisitions (cont’d)
Horizontal • Acquisition of a company in a
Acquisitions
highly related industry
Vertical  Because of the difficulty in
Acquisitions implementing synergy,
Related related acquisitions are often
Acquisitions difficult to implement.
Acquisitions: Overcoming Entry Barriers
• Factors associated with the market or with the firms
currently operating in it that increase the expense and
difficulty faced by new ventures trying to enter that
market
• Economies of scale
• Differentiated products
• Cross-Border Acquisitions
Acquisitions: Cost of New-Product
Development and Increased Speed to
Market
• Internal development of new products is often
perceived as high-risk activity.
• Acquisitions allow a firm to gain access to new and current
products that are new to the firm.
• Returns are more predictable because of the acquired
firms’ experience with the products.
Acquisitions: Lower Risk Compared to
Developing New Products
• An acquisition’s outcomes can be estimated more
easily and accurately than the outcomes of an internal
product development process.
• Managers may view acquisitions as lowering risk associated
with internal ventures and R&D investments.
• Acquisitions may discourage or suppress innovation.
Acquisitions: Increased Diversification
• Using acquisitions to diversify a firm is the quickest and easiest way to
change its portfolio of businesses.
• Both related diversification and unrelated diversification strategies
can be implemented through acquisitions.
• The more related the acquired firm is to the acquiring firm, the
greater is the probability that the acquisition will be successful.
Acquisitions: Reshaping the Firm’s
Competitive Scope
• An acquisition can:
• Reduce the negative effect of an intense rivalry on a firm’s
financial performance.
• Reduce a firm’s dependence on one or more products or
markets.
• Reducing a company’s dependence on specific
markets alters the firm’s competitive scope.
Acquisitions: Learning and Developing
New Capabilities
• An acquiring firm can gain capabilities that the firm
does not currently possess:
• Special technological capability
• A broader knowledge base
• Reduced inertia (Inactiveness)
• Firms should acquire other firms with different but
related and complementary capabilities in order to
build their own knowledge base.
Problems in Achieving Acquisition Success
Integration
difficulties
Inadequate
Too large
target evaluation

Problems
Managers with
overly focused on Acquisitions
Extraordinary debt
acquisitions

Too much Inability to

diversification achieve synergy
Problems in Achieving Acquisition
Success: Integration Difficulties
• Integration challenges include:
• Melding two disparate corporate cultures
• Linking different financial and control systems
• Building effective working relationships (particularly when
management styles differ)
• Resolving problems regarding the status of the newly
acquired firm’s executives
• Loss of key personnel weakens the acquired firm’s
capabilities and reduces its value
Problems in Achieving Acquisition
Success: Inadequate Evaluation of the
Target
• Due Diligence
• The process of evaluating a target firm for acquisition
• Ineffective due diligence may result in paying an excessive
premium for the target company.
• Evaluation requires examining:
• Financing of the intended transaction
• Differences in culture between the firms
• Tax consequences of the transaction
• Actions necessary to meld the two workforces
Problems in Achieving Acquisition
Success: Large or Extraordinary Debt
• High debt can:
• Increase the likelihood of bankruptcy
• Lead to a downgrade of the firm’s credit rating
• Preclude investment in activities that contribute to the
firm’s long-term success such as:
• Research and development
• Human resource training
• Marketing
Problems in Achieving Acquisition
Success: Inability to Achieve Synergy
• Synergy exists when assets are worth more when
used in combination with each other than when they
are used separately.
• Firms experience transaction costs when they use
acquisition strategies to create synergy.
• Firms tend to underestimate indirect costs when
evaluating a potential acquisition.
Problems in Achieving Acquisition
Success: Too Much Diversification
• Diversified firms must process more information of
greater diversity.
• Increased operational scope created by diversification may
cause managers to rely too much on financial rather than
strategic controls to evaluate business units’ performances.
• Strategic focus shifts to short-term performance.
• Acquisitions may become substitutes for innovation.
Problems in Achieving Acquisition
Success: Managers Overly Focused on
Acquisitions
• Managers invest substantial time and energy in
acquisition strategies in:
• Searching for viable acquisition candidates.
• Completing effective due-diligence processes.
• Preparing for negotiations.
• Managing the integration process after the acquisition is
completed.
Problems in Achieving Acquisition
Success: Too Large
• Additional costs of controls may exceed the benefits
of the economies of scale and additional market
power.
• Larger size may lead to more bureaucratic controls.
• Formalized controls often lead to relatively rigid and
standardized managerial behavior.
• The firm may produce less innovation.
Attributes of Successful Acquisitions
Restructuring
• A strategy through which a firm changes its set of businesses or
financial structure.
• Failure of an acquisition strategy often precedes a restructuring strategy.
• Restructuring may occur because of changes in the external or internal
environments.
• Restructuring strategies:
• Downsizing
• Downscoping
• Leveraged buyouts
Types of Restructuring: Downsizing
• A reduction in the number of a firm’s employees and sometimes in
the number of its operating units.
• May or may not change the composition of businesses in the company’s
portfolio.
• Typical reasons for downsizing:
• Expectation of improved profitability from cost reductions
• Desire or necessity for more efficient operations
Types of Restructuring: Downscoping
• A divestiture, spin-off or other means of eliminating businesses
unrelated to a firm’s core businesses.
• A set of actions that causes a firm to strategically refocus on its core
businesses.
• May be accompanied by downsizing, but not eliminating key employees from
its primary businesses.
• Smaller firm can be more effectively managed by the top management team.
Restructuring: Leveraged Buyouts (LBO)
• A restructuring strategy whereby a party buys all of a firm’s assets in
order to take the firm private.
• Significant amounts of debt may be incurred to finance the buyout.
• Immediate sale of non-core assets to pare down debt.
• Can correct for managerial mistakes
• Managers making decisions that serve their own interests rather than those
of shareholders.
• Can facilitate entrepreneurial efforts and strategic growth.
Restructuring and Outcomes
International Business
Strategies
Opportunities and Outcomes of International Strategy
Identifying International Opportunities
• International Strategy
• A strategy through which the firm sells its goods or
services outside its domestic market.
• Reasons to having an international strategy
• International markets yield potential new opportunities.
• New market expansion extends product life cycle.
• Needed resources can be secured.
• Greater potential product demand.
International Strategy Benefits
• Increased Market Size
• Domestic market may lack the size to support efficient
scale manufacturing facilities.
• Return on Investment
• 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 prevent
imitators.
International Strategy Benefits (cont’d)
• Economies of Scale (or Learning)
• Expanding size or scope of markets helps to achieve economies of scale in
manufacturing as well as marketing, R&D or distribution.
• Can spread costs over a larger sales base.
• Can increase profit per unit.
International Strategy Benefits (cont’d)
• Location Advantages
• Low cost markets aid in developing competitive advantage by providing
access to:
• Raw materials
• Transportation
• Lower costs for labor
• Key customers
• Energy
Determinants of National Advantage
Determinants of National Advantage
• Factors of production
• The inputs necessary to compete in any industry
• Labor Land Natural resources
• Capital Infrastructure
• Basic factors
• Natural and labor resources
• Advanced factors
• Digital communication systems and an educated workforce
Determinants of National Advantage (cont’d)
• Demand Conditions
• Characterized by the nature and size of buyers’ needs in the home market for
the industry’s goods or services.
• Size of the market segment can lead to scale-efficient facilities.
• Efficiency can lead to domination of the industry in other countries.
• Specialized demand may create opportunities beyond national boundaries.
Determinants of National Advantage (cont’d)
• Related and Supporting Industries
• Supporting services, facilities, suppliers and so on.
• Support in design
• Support in distribution
• Related industries as suppliers and buyers
• Firm Strategy, Structure and Rivalry
• The pattern of strategy, structure, and rivalry among firms.
• Common technical training
• Methodological product and process improvement
• Cooperative and competitive systems
International Corporate Strategy

High

Need for Global

Integration

Multi-
Domestic

Low
Low High
Need for Local Market Responsiveness
International Corporate Strategy

High

Global
Strategy

Need for Global

Integration

Multi-
Domestic

Low
Low High
Need for Local Market Responsiveness
International Corporate Strategy

High

Global Trans-
Strategy national

Need for Global

Integration

Multi-
Domestic

Low
Low High
Need for Local Market Responsiveness
Multidomestic Strategy
• Strategy and operating decisions are
decentralized to strategic business units (SBU) in
each country.
Multidomestic
strategy • Products and services are tailored to local
markets.
• Business units in one country are independent of
each other.
• Assumes markets differ by country or regions.
• Focus on competition in each market.
• Prominent strategy among European firms due to
broad variety of cultures and markets in Europe.
Global Strategy
• Products are standardized across national
markets.
Global
strategy • Business-level strategic decisions are
centralized in the home office.
• Strategic business units (SBU) are
assumed to be interdependent.
• Emphasizes economies of scale.
• Often lacks responsiveness to local
markets.
• Requires resource sharing and
coordination across borders (hard to
manage).
Transnational Strategy
• Seeks to achieve both global efficiency
and local responsiveness.
Transnational
• Difficult to achieve because of
strategy
simultaneous requirements:
• Strong central control and coordination to
achieve efficiency
• Decentralization to achieve local market
responsiveness
• Firm must pursue organizational learning
to achieve competitive advantage.
Environmental Trends
• Liability of Foreignness
• Legitimate concerns about the relative attractiveness of global strategies
• Global strategies not as prevalent as once thought
• Difficulty in implementing global strategies
• Regionalization
• Focusing on particular region(s) rather than on global markets
• Better understanding of the cultures, legal and social norms
 Choice of International Entry Mode

Type of Entry Characteristics

Exporting High cost, low control
Licensing Low cost, low risk, little control, low returns
Strategic alliances Shared costs, shared resources, shared
risks, problems of integration (e.g., two
corporate cultures)
Acquisition Quick access to new market, high cost,
complex negotiations, problems of merging
with domestic operations
New wholly owned subsidiary Complex, often costly, time consuming,
high risk, maximum control, potential
above-average returns
Dynamics of Mode of Entry
What’s the best solution?
Situation Optimal Solution
The firm has no foreign Export
manufacturing expertise
and requires investment
only in distribution.
Dynamics of Mode of Entry (cont’d)
What’s the best solution?
Situation Optimal Solution
The firm needs to Licensing
facilitate the product
improvements
necessary to enter
foreign markets.
Dynamics of Mode of Entry (cont’d)
What’s the best solution?
Situation Optimal Solution
The firm needs to Strategic Alliance
connect with an
experienced partner
already in the targeted
market.
Dynamics of Mode of Entry (cont’d)
What’s the best solution?
Situation Optimal Solution
The firm needs to Strategic Alliance
reduce its risk through
the sharing of costs.
Dynamics of Mode of Entry (cont’d)
What’s the best solution?
Situation Optimal Solution
The firm is facing Strategic Alliance
uncertain situations
such as an emerging
economy in its
targeted market.
Dynamics of Mode of Entry (cont’d)
What’s the best solution?
Situation Optimal Solution
The firm’s intellectual Wholly-owned
property rights in an Subsidiary
emerging economy are
not well protected, the
number of firms in the
industry is growing fast,
and the need for global
integration is high.
Risks in an International Environment
• Political Risks • Economic Risks
• Instability in national governments • Differences and fluctuations in the value
• War, both civil and international of different currencies
• Potential nationalization of a firm’s • Differences in prevailing wage rates
resources • Difficulties in enforcing property rights
• Unemployment

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?
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Risk in the International Environment
Limits to International Expansion:
Management Problems
• Cost of coordination across diverse geographical
business units
• Institutional and cultural barriers
• Understanding strategic intent of competitors
• The overall complexity of competition