Strategic Management 05-06-07_08 Functional Business Competitive Industry Global Strategies

Chapter 5Chapter 5

Functional Level StrategyFunctional Level Strategy

StrategicStrategic Charles W. L. HillCharles W. L. Hill

ManagementManagement Gareth R. JonesGareth R. Jones

Fifth EditionFifth Edition

PowerPoint Presentation PowerPoint Presentation by Charlie Cookby Charlie Cook

An Integrated ApproachAn Integrated Approach

4-2

Production and EfficiencyProduction and Efficiency

Economies of scaleEconomies of scaleLower unit costs due to large Lower unit costs due to large scale production volumes.scale production volumes.

Learning effectsLearning effectsCost reductions due to Cost reductions due to learning by doing.learning by doing.

The experience curveThe experience curveSystematic unitSystematic unit--cost reductions that are the result of cost reductions that are the result of accumulated output.accumulated output.

4-3

FIGURE 5.1

Production and Efficiency: Production and Efficiency: Economies of ScaleEconomies of Scale

A typical longA typical long--run run unitunit--cost curve:cost curve:

4-4

FIGURE 5.3

Production and Efficiency: Production and Efficiency: The Experience CurveThe Experience Curve

A typical experience curve:A typical experience curve:

4-5

FIGURE 5.2

Production and Efficiency: Production and Efficiency: Learning EffectsLearning Effects

Economies of scaleEconomies of scale and learning effects:and learning effects:

4-6

FIGURE 5.4

Production and Efficiency:Production and Efficiency: The Experience CurveThe Experience Curve

Unit production costs in an Unit production costs in an integrated steel mill and a integrated steel mill and a minimillminimill..

4-7

Production and Efficiency: Production and Efficiency: Manufacturing and Mass CustomizationManufacturing and Mass Customization

Flexible manufacturing technology (lean production)Flexible manufacturing technology (lean production)Reduced setup timesReduced setup timesIncreased machine utilizationIncreased machine utilizationImproved quality controlImproved quality controlLower inventory levelsLower inventory levels

Mass customizationMass customizationLow cost and product customizationLow cost and product customization

Flexible machine cellsFlexible machine cellsIncreased variety of operationsIncreased variety of operations

4-8

FIGURE 5.5

Production and Efficiency: Flexible ManufacturingProduction and Efficiency: Flexible Manufacturing

The tradeoff betweenThe tradeoff between costs and product varietycosts and product variety

4-9

Marketing and EfficiencyMarketing and Efficiency

Marketing strategy:Marketing strategy:Product designProduct designAdvertisingAdvertisingPromotionPromotionPricingPricingDistributionDistribution

4-10

FIGURE 5.6

The Relationship Between Average The Relationship Between Average Unit Costs and CustomerUnit Costs and Customer Defection RatesDefection Rates

4-11

FIGURE 5.7

The Relationship Between Customer The Relationship Between Customer Loyalty and ProfitLoyalty and Profit per Customerper Customer

4-12

Materials Management, JIT, and Materials Management, JIT, and EfficiencyEfficiency

Materials managementMaterials managementGetting materials into and through Getting materials into and through the production process and out the production process and out through the distribution system through the distribution system to the end user.to the end user.

JustJust--InIn--Time (JIT)Time (JIT)Reduce inventory holding costs by having materials Reduce inventory holding costs by having materials arrive JIT to enter the production process.arrive JIT to enter the production process.JIT risk: There are no buffer stocks for JIT risk: There are no buffer stocks for nondeliverynondelivery or or unanticipated increases in demand.unanticipated increases in demand.

4-13

R&D Strategy and EfficiencyR&D Strategy and Efficiency

Design easyDesign easy--toto--manufacture productsmanufacture productsReduce numbers of parts per unit.Reduce numbers of parts per unit.Reduce assembly time.Reduce assembly time.Closely coordinate R&D Closely coordinate R&D and production activities.and production activities.

Pioneer process innovationsPioneer process innovationsInnovations create competitive Innovations create competitive advantage through gains in process efficiencies.advantage through gains in process efficiencies.

4-14

Achieving Superior InnovationAchieving Superior Innovation

Causes of the high failure rate of innovation:Causes of the high failure rate of innovation:UncertaintyUncertainty

Quantum innovationQuantum innovationIncremental innovationIncremental innovation

Poor commercializationPoor commercializationPoor positioning strategyPoor positioning strategyTechnological myopiaTechnological myopiaSlowness in marketingSlowness in marketing

4-15

Achieving Superior Customer Achieving Superior Customer ResponsivenessResponsivenessDeveloping a customer focus:Developing a customer focus:

Top leadership commitment to customers.Top leadership commitment to customers.Employee attitudes toward customers.Employee attitudes toward customers.Bringing customers into the company.Bringing customers into the company.

Satisfying customer needs:Satisfying customer needs:Customization of the features of products and services to meet Customization of the features of products and services to meet the unique need of groups and individual customers.the unique need of groups and individual customers.Reducing customer response times:Reducing customer response times:

Marketing that communicates with production.Marketing that communicates with production.Flexible production and materials management.Flexible production and materials management.Information systems that support the process.Information systems that support the process.

LecLec 44

BusinessBusiness--Level StrategyLevel Strategy






4-17

What Is BusinessWhat Is Business--Level Strategy?Level Strategy?

BusinessBusiness--level strategylevel strategyA plan of action to use the firmA plan of action to use the firm’’s resources and s resources and distinctive competencies to gain competitive distinctive competencies to gain competitive advantage.advantage.

AbellAbell’’s s ““Business DefinitionBusiness Definition”” processprocessCustomer needs Customer needs –– product differentiation (what)product differentiation (what)Customer groups Customer groups –– market segmentation (who)market segmentation (who)Distinctive competencies Distinctive competencies –– competitive actions (how)competitive actions (how)

4-18

Choosing a Generic BusinessChoosing a Generic Business--Level StrategyLevel Strategy

Product/Market/DistinctiveProduct/Market/Distinctive--Competency Choices Competency Choices and Generic Competitive Strategiesand Generic Competitive Strategies

Cost LeadershipCost Leadership DifferentiationDifferentiation FocusFocus

ProductProduct DifferentiationDifferentiation

LowLow (principally(principally by price)by price)

HighHigh (principally by (principally by uniqueness)uniqueness)

Low to highLow to high (price or (price or uniqueness)uniqueness)

MarketMarket SegmentationSegmentation

LowLow (mass market)(mass market)

HighHigh (many market (many market segments)segments)

LowLow (one or a few (one or a few segments)segments)

DistinctiveDistinctive CompetencyCompetency

ManufacturingManufacturing and materials and materials managementmanagement

Research and Research and development, sales development, sales and marketingand marketing

Any kind of Any kind of distinctive distinctive competencycompetency

TABLE 6.1

4-19

FIGURE 6.1

Types of BusinessTypes of Business--Level StrategiesLevel Strategies

4-20

Choosing a BusinessChoosing a Business--Level StrategyLevel Strategy

CostCost--leadership strategyleadership strategy success is affected by:success is affected by:Competitors producing at equal or lower costs.Competitors producing at equal or lower costs.The bargaining strength of suppliers.The bargaining strength of suppliers.Powerful buyers demanding lower prices.Powerful buyers demanding lower prices.Substitute products moving into the market.Substitute products moving into the market.New entrants overcoming entry barriers.New entrants overcoming entry barriers.

4-21


Differentiation strategyDifferentiation strategy success is achieved success is achieved through:through:

An emphasis on product or service quality.An emphasis on product or service quality.Innovation in providing new features for which Innovation in providing new features for which customers will pay a premium price. customers will pay a premium price. Responsiveness to customers after the sale.Responsiveness to customers after the sale.Appealing to the psychological desires of customers.Appealing to the psychological desires of customers.

4-22


Differentiation strategyDifferentiation strategy success is affected by:success is affected by:Competitors imitating features and services.Competitors imitating features and services.Increases in supplier costs exceeding differentiatorIncreases in supplier costs exceeding differentiator’’s s price premium. price premium. Buyers becoming less brand loyal.Buyers becoming less brand loyal.Substitute products adding similar features.Substitute products adding similar features.New entrants overcoming entry barriers related to New entrants overcoming entry barriers related to differentiatordifferentiator’’s competitive advantage.s competitive advantage.

4-23


Focus strategyFocus strategy success is affected by:success is affected by:Competitor entry into focuserCompetitor entry into focuser’’s market segment.s market segment.Suppliers capable of increasing costs affecting only Suppliers capable of increasing costs affecting only the focuser.the focuser.Buyers defecting from market segment. Buyers defecting from market segment. Substitute products attracting customers away from Substitute products attracting customers away from focuserfocuser’’s segment.s segment.New entrants overcoming entry barriers that are the New entrants overcoming entry barriers that are the source of the focusersource of the focuser’’s competitive advantage.s competitive advantage.

4-24

Strategic Groups and BusinessStrategic Groups and Business--Level Level StrategyStrategy

Implications for businessImplications for business--level strategylevel strategyImmediate competitors are companies pursuing same Immediate competitors are companies pursuing same strategy within the same strategic group.strategy within the same strategic group.Different strategic groups can have a different Different strategic groups can have a different standing with respect to the effects of the five standing with respect to the effects of the five competitive forces.competitive forces.

First mover advantageFirst mover advantageBenefits are first choice of customers and suppliers, Benefits are first choice of customers and suppliers, setting standards, building entry barriers.setting standards, building entry barriers.

4-25

Choosing an Investment Strategy at Choosing an Investment Strategy at the Business Levelthe Business Level

Investment strategyInvestment strategyThe resources (human, functional, and financial) The resources (human, functional, and financial) required to gain sustainable competitive advantage.required to gain sustainable competitive advantage.

Competitive positionCompetitive positionMarket share is an indicator of competitive strength.Market share is an indicator of competitive strength.Distinctive competencies are competitive tools. Distinctive competencies are competitive tools.

Life Cycle EffectsLife Cycle EffectsAn industryAn industry’’s life cycle stage affects its attractiveness s life cycle stage affects its attractiveness to investment prospects.to investment prospects.

4-26

Choosing an Investment Strategy at the Choosing an Investment Strategy at the Business LevelBusiness Level

Stage of the Stage of the Industry Life CycleIndustry Life Cycle

Strong CompetitiveStrong Competitive PositionPosition

Weak CompetitiveWeak Competitive PositionPosition

EmbryonicEmbryonic Share buildingShare building Share buildingShare building

GrowthGrowth GrowthGrowth Market concentrationMarket concentration

ShakeoutShakeout Share increasingShare increasing Market concentration or Market concentration or harvest/liquidationharvest/liquidation

MaturityMaturity HoldHold--andand--maintain or profitmaintain or profit Harvest or Harvest or liquidation/divestitureliquidation/divestiture

DeclineDecline Market concentration or Market concentration or harvest (asset reduction)harvest (asset reduction)

Turnaround, liquidation,Turnaround, liquidation, or divestitureor divestiture

TABLE 6.2

Copyright © 2001 Houghton Mifflin Company. All rights reserved.

Chapter 6Chapter 6

BusinessBusiness--Level StrategyLevel Strategy






Copyright © 2001 Houghton Mifflin Company. All rights reserved. 6-28

What Is BusinessWhat Is Business--Level Strategy?Level Strategy?

BusinessBusiness--level strategylevel strategyA plan of action to use the firmA plan of action to use the firm’’s resources and s resources and distinctive competencies to gain competitive distinctive competencies to gain competitive advantage.advantage.

AbellAbell’’s s ““Business DefinitionBusiness Definition”” processprocessCustomer needs Customer needs –– product differentiation (what)product differentiation (what)Customer groups Customer groups –– market segmentation (who)market segmentation (who)Distinctive competencies Distinctive competencies –– competitive actions (how)competitive actions (how)


Choosing a Generic BusinessChoosing a Generic Business--Level StrategyLevel Strategy

Product/Market/DistinctiveProduct/Market/Distinctive--Competency Choices Competency Choices and Generic Competitive Strategiesand Generic Competitive Strategies

Cost LeadershipCost Leadership DifferentiationDifferentiation FocusFocus

ProductProduct DifferentiationDifferentiation

LowLow (principally(principally by price)by price)

HighHigh (principally by (principally by uniqueness)uniqueness)

Low to highLow to high (price or (price or uniqueness)uniqueness)

MarketMarket SegmentationSegmentation

LowLow (mass market)(mass market)

HighHigh (many market (many market segments)segments)

LowLow (one or a few (one or a few segments)segments)

DistinctiveDistinctive CompetencyCompetency

ManufacturingManufacturing and materials and materials managementmanagement

Research and Research and development, sales development, sales and marketingand marketing

Any kind of Any kind of distinctive distinctive competencycompetency

TABLE 6.1


FIGURE 6.1

Types of BusinessTypes of Business--Level StrategiesLevel Strategies



CostCost--leadership strategyleadership strategy success is affected by:success is affected by:Competitors producing at equal or lower costs.Competitors producing at equal or lower costs.The bargaining strength of suppliers.The bargaining strength of suppliers.Powerful buyers demanding lower prices.Powerful buyers demanding lower prices.Substitute products moving into the market.Substitute products moving into the market.New entrants overcoming entry barriers.New entrants overcoming entry barriers.



Differentiation strategyDifferentiation strategy success is achieved success is achieved through:through:

An emphasis on product or service quality.An emphasis on product or service quality.Innovation in providing new features for which Innovation in providing new features for which customers will pay a premium price. customers will pay a premium price. Responsiveness to customers after the sale.Responsiveness to customers after the sale.Appealing to the psychological desires of customers.Appealing to the psychological desires of customers.



Differentiation strategyDifferentiation strategy success is affected by:success is affected by:Competitors imitating features and services.Competitors imitating features and services.Increases in supplier costs exceeding differentiatorIncreases in supplier costs exceeding differentiator’’s s price premium. price premium. Buyers becoming less brand loyal.Buyers becoming less brand loyal.Substitute products adding similar features.Substitute products adding similar features.New entrants overcoming entry barriers related to New entrants overcoming entry barriers related to differentiatordifferentiator’’s competitive advantage.s competitive advantage.



Focus strategyFocus strategy success is affected by:success is affected by:Competitor entry into focuserCompetitor entry into focuser’’s market segment.s market segment.Suppliers capable of increasing costs affecting only Suppliers capable of increasing costs affecting only the focuser.the focuser.Buyers defecting from market segment. Buyers defecting from market segment. Substitute products attracting customers away from Substitute products attracting customers away from focuserfocuser’’s segment.s segment.New entrants overcoming entry barriers that are the New entrants overcoming entry barriers that are the source of the focusersource of the focuser’’s competitive advantage.s competitive advantage.


Strategic Groups and BusinessStrategic Groups and Business--Level Level StrategyStrategy

Implications for businessImplications for business--level strategylevel strategyImmediate competitors are companies pursuing same Immediate competitors are companies pursuing same strategy within the same strategic group.strategy within the same strategic group.Different strategic groups can have a different Different strategic groups can have a different standing with respect to the effects of the five standing with respect to the effects of the five competitive forces.competitive forces.

First mover advantageFirst mover advantageBenefits are first choice of customers and suppliers, Benefits are first choice of customers and suppliers, setting standards, building entry barriers.setting standards, building entry barriers.


Choosing an Investment Strategy at Choosing an Investment Strategy at the Business Levelthe Business Level

Investment strategyInvestment strategyThe resources (human, functional, and financial) The resources (human, functional, and financial) required to gain sustainable competitive advantage.required to gain sustainable competitive advantage.

Competitive positionCompetitive positionMarket share is an indicator of competitive strength.Market share is an indicator of competitive strength.Distinctive competencies are competitive tools. Distinctive competencies are competitive tools.

Life Cycle EffectsLife Cycle EffectsAn industryAn industry’’s life cycle stage affects its attractiveness s life cycle stage affects its attractiveness to investment prospects.to investment prospects.


Choosing an Investment Strategy at the Choosing an Investment Strategy at the Business LevelBusiness Level

Turnaround, liquidation,Turnaround, liquidation, or divestitureor divestiture

Market concentration or Market concentration or harvest (asset reduction)harvest (asset reduction)

DeclineDecline

Harvest or Harvest or liquidation/divestitureliquidation/divestiture

HoldHold--andand--maintain or profitmaintain or profitMaturityMaturity

Market concentration or Market concentration or harvest/liquidationharvest/liquidation

Share increasingShare increasingShakeoutShakeout

Market concentrationMarket concentrationGrowthGrowthGrowthGrowth

Share buildingShare buildingShare buildingShare buildingEmbryonicEmbryonic

Weak CompetitiveWeak Competitive PositionPosition

Strong CompetitiveStrong Competitive PositionPosition

Stage of the Stage of the Industry Life CycleIndustry Life Cycle

TABLE 6.2


Chapter 7Chapter 7

Competitive Strategy and the Competitive Strategy and the Industry EnvironmentIndustry Environment







Strategies in Fragmented IndustriesStrategies in Fragmented Industries

Fragmented industry characteristics:Fragmented industry characteristics:Localized markets with low entry Localized markets with low entry barriers (e.g., Mombarriers (e.g., Mom’’s Diner).s Diner).Few economies of scale Few economies of scale opportunities exist.opportunities exist.High transportation costs High transportation costs (e.g., sand) for products.(e.g., sand) for products.Focus strategies predominate Focus strategies predominate (e.g., customer group, region).(e.g., customer group, region).


Strategies in Fragmented IndustriesStrategies in Fragmented Industries

Competing in fragmented industries requires Competing in fragmented industries requires strategic consolidation by:strategic consolidation by:

Chaining (WalChaining (Wal--Mart)Mart)Franchising (McDonaldFranchising (McDonald’’s)s)Horizontal mergers (DillardHorizontal mergers (Dillard’’s)s)Using the Internet (Using the Internet (eBayeBay))


Strategies in Embryonic and Growth Strategies in Embryonic and Growth IndustriesIndustries

Three strategies for an innovator competing in Three strategies for an innovator competing in a newly emerging market/industry:a newly emerging market/industry:

Develop and market the technology itself.Develop and market the technology itself.Develop and market the technology jointly with Develop and market the technology jointly with another company through a strategic alliance.another company through a strategic alliance.License the technology to existing companies and let License the technology to existing companies and let them develop the market. them develop the market.


FIGURE 7.1

How an InnovatorHow an Innovator’’s Profitss Profits Can Be Competed AwayCan Be Competed Away

Num

ber o

f Com

petit

ors

in th

e M

arke

tMany

Few

Inno

vato

r’s P

rofit

Rat

e

High

Low

Time

Time


Strategies in Embryonic and Growth Strategies in Embryonic and Growth IndustriesIndustriesAn innovatorAn innovator’’s optimal choice of growth s optimal choice of growth industry strategy depends on:industry strategy depends on:

Complementary assets the innovator has that can be Complementary assets the innovator has that can be used to exploit and market the innovation.used to exploit and market the innovation.High barriers to imitation by competitors (e.g., High barriers to imitation by competitors (e.g., patents).patents).The capability of competitors to quickly imitate the The capability of competitors to quickly imitate the pioneering company.pioneering company.


Strategies for Profiting from InnovationStrategies for Profiting from Innovation

ManyManyLowLowNoNoLicense innovationLicense innovation

LimitedLimitedHighHighNoNoEntering into allianceEntering into alliance

FewFewHighHighYesYesGoing it aloneGoing it alone

Number of Number of Capable Capable CompetitorsCompetitors

Likely Likely Height of Height of Barriers to Barriers to ImitationImitation

Does Innovator Does Innovator Have All Required Have All Required Complementary Complementary Assets?Assets?

StrategyStrategy

TABLE 7.1


FIGURE 7.2

Strategy in Mature IndustriesStrategy in Mature Industries

Strategies for Deterring the Entry of RivalsStrategies for Deterring the Entry of Rivals


FIGURE 7.3

Product Product Proliferation Proliferation in the in the Restaurant Restaurant IndustryIndustry

McDonald’s


Strategies to Manage Rivalry in Mature Strategies to Manage Rivalry in Mature IndustriesIndustriesPrice signalingPrice signaling

Leading competitors use price changes to convey Leading competitors use price changes to convey their intentions to other competitors (i.e., tittheir intentions to other competitors (i.e., tit--forfor--tat).tat).

Price leadershipPrice leadershipOne company sets the industry price; other One company sets the industry price; other competitors reference their prices to that price.competitors reference their prices to that price.

NonpriceNonprice competitioncompetitionCompetition by any means other than price.Competition by any means other than price.


FIGURE 7.4

Four Four NonpriceNonprice Competitive StrategiesCompetitive Strategies


Strategies to Manage Rivalry in Mature Strategies to Manage Rivalry in Mature IndustriesIndustries

Capacity control strategiesCapacity control strategiesPreempt rival firms by building capacity ahead of Preempt rival firms by building capacity ahead of anticipated increases in demand.anticipated increases in demand.Indirect coordination with rival firms to keep industryIndirect coordination with rival firms to keep industry--wide capacity in line with demand.wide capacity in line with demand.


FIGURE 7.5

Changes in Industry Capacity and DemandChanges in Industry Capacity and Demand


Supply and Distribution Strategy in Supply and Distribution Strategy in Mature IndustriesMature Industries

Vertical integrationVertical integrationBackward towards input suppliers.Backward towards input suppliers.Forward into distribution to consumers.Forward into distribution to consumers.

Choice of integration depends on:Choice of integration depends on:Need for close relationships with suppliers.Need for close relationships with suppliers.

Japanese vs. American stylesJapanese vs. American stylesNeed to ensure customer relationships.Need to ensure customer relationships.

Complexity of productComplexity of productAmount of product information requiredAmount of product information required


Strategies in Declining IndustriesStrategies in Declining Industries

Leadership strategyLeadership strategyA firm seeks to become dominant in the industry.A firm seeks to become dominant in the industry.

Niche strategyNiche strategyFocuses on demand pockets declining more slowly than the Focuses on demand pockets declining more slowly than the industry as a whole.industry as a whole.

Harvest strategyHarvest strategyLimits investment and optimizes cash flow.Limits investment and optimizes cash flow.

Divestment strategyDivestment strategyCompany exits the industry by selling out early to others, Company exits the industry by selling out early to others, avoiding liquidation.avoiding liquidation.


FIGURE 7.6

Factors That Determine the Intensity of Factors That Determine the Intensity of Competition in Declining IndustriesCompetition in Declining Industries


FIGURE 7.7

Strategy Strategy Selection Selection in a in a Declining Declining IndustryIndustry


FIGURE 7.8

A Harvest StrategyA Harvest Strategy


Chapter 8Chapter 8

Strategy in the Global EnvironmentStrategy in the Global Environment







Profiting From Global ExpansionProfiting From Global Expansion

Earning high returns from transferring distinctive Earning high returns from transferring distinctive competencies to foreign markets.competencies to foreign markets.Realizing location economiesRealizing location economies

Using lowerUsing lower--cost locations reduces overall costs and fosters cost locations reduces overall costs and fosters product differentiation for premium pricing.product differentiation for premium pricing.

Moving down the experience curveMoving down the experience curveLarger global markets = more accumulated volume.Larger global markets = more accumulated volume.

Global expansion and businessGlobal expansion and business--level strategieslevel strategiesLinked by cost reductions and value creation.Linked by cost reductions and value creation.


Pressures for Cost Reduction and Local Pressures for Cost Reduction and Local ResponsivenessResponsiveness

Pressures for cost reductionsPressures for cost reductionsGlobal competitors seek to minimize unit costs through Global competitors seek to minimize unit costs through location economies and attain lowlocation economies and attain low--cost competitor status.cost competitor status.In commodityIn commodity--type product industries, intense price type product industries, intense price competition predominates strategic concerns.competition predominates strategic concerns.

Pressures for local responsiveness arise from:Pressures for local responsiveness arise from:Differences in local consumer tastes and preferences.Differences in local consumer tastes and preferences.Differences in infrastructure and traditional practices.Differences in infrastructure and traditional practices.Differences in distribution channels among countries.Differences in distribution channels among countries.Host government economic and political demands.Host government economic and political demands.


Pressures for Cost Reduction and Local Pressures for Cost Reduction and Local ResponsivenessResponsiveness

FIGURE 8.1


Strategic ChoiceStrategic Choice

International strategyInternational strategyCreate value by transferring skills Create value by transferring skills and products abroad. and products abroad.

MultidomesticMultidomestic strategystrategyMaximize local responsiveness by Maximize local responsiveness by customizing products and marketing customizing products and marketing strategy for local markets.strategy for local markets.

Global strategyGlobal strategyPursue lowPursue low--cost status, offer standardized global products.cost status, offer standardized global products.

Transnational strategyTransnational strategyUse global learning to achieve lowUse global learning to achieve low--cost status, differentiation, cost status, differentiation, and local responsiveness simultaneously.and local responsiveness simultaneously.


Four Basic StrategiesFour Basic Strategies

FIGURE 8.2


Cost Pressures and Pressures for Local Cost Pressures and Pressures for Local Responsiveness Facing CaterpillarResponsiveness Facing Caterpillar

FIGURE 8.3


The Advantages and Disadvantages of Different The Advantages and Disadvantages of Different Strategies for Competing GloballyStrategies for Competing Globally

StrategyStrategy AdvantagesAdvantages DisadvantagesDisadvantages

InternationalInternational •• Transfer of distinctive competencies Transfer of distinctive competencies to foreign marketsto foreign markets

•• Lack of local responsivenessLack of local responsiveness•• Inability to realize location economiesInability to realize location economies•• Failure to exploit experienceFailure to exploit experience--curve curve

effectseffects

MultidomesticMultidomestic •• Ability to customize product offerings Ability to customize product offerings and marketing in accordance with and marketing in accordance with local responsivenesslocal responsiveness

•• Inability to realize location economiesInability to realize location economies•• Failure to exploit experienceFailure to exploit experience--curve curve

effectseffects•• Failure to transfer distinctive Failure to transfer distinctive

competencies to foreign marketscompetencies to foreign markets

GlobalGlobal •• Ability to exploit experienceAbility to exploit experience--curve curve effectseffects

•• Ability to exploit location economiesAbility to exploit location economies

•• Lack of local responsivenessLack of local responsiveness

TransnationalTransnational •• Ability to exploit experienceAbility to exploit experience--curve curve effectseffects

•• Ability to exploit location economiesAbility to exploit location economies•• Ability to customize product offerings Ability to customize product offerings

and marketing in accordance with and marketing in accordance with local responsivenesslocal responsiveness

•• Reaping benefits of global learningReaping benefits of global learning

•• Difficulties in implementation because Difficulties in implementation because of organizational problemsof organizational problems

TABLE 8.1


Basic Entry DecisionsBasic Entry Decisions

Which foreign markets?Which foreign markets?Politically and financially stablePolitically and financially stableDeveloped and developing nationsDeveloped and developing nationsFree market systemsFree market systems

Timing of entryTiming of entryPioneering costs versus Pioneering costs versus firstfirst--mover advantages.mover advantages.

Scale of entry and strategic commitmentsScale of entry and strategic commitmentsScale of entry affects the nature of competition in the nationalScale of entry affects the nature of competition in the nationalmarket. Implications of risks and benefits must be weighed market. Implications of risks and benefits must be weighed carefully.carefully.


The Choice of Entry ModeThe Choice of Entry Mode

ExportingExportingLicensingLicensing

FranchisingFranchisingJoint VenturesJoint Ventures

Wholly Owned SubsidiariesWholly Owned SubsidiariesDistinctive Competencies and Entry ModeDistinctive Competencies and Entry Mode

Pressures for Cost Reduction and Entry ModePressures for Cost Reduction and Entry Mode


The Advantages and Disadvantages of Different Entry The Advantages and Disadvantages of Different Entry ModesModesEntry ModeEntry Mode AdvantagesAdvantages DisadvantagesDisadvantages

ExportingExporting •• Ability to realize location and Ability to realize location and experienceexperience--curve economiescurve economies

•• High transport costsHigh transport costs•• Trade barriersTrade barriers•• Problems with local marketing agentsProblems with local marketing agents

LicensingLicensing •• Low development costs and risksLow development costs and risks •• Inability to realize location and Inability to realize location and experienceexperience--curve economiescurve economies

•• Inability to engage in global strategic Inability to engage in global strategic coordinationcoordination

•• Lack of control over technologyLack of control over technology

FranchisingFranchising •• Low development costs and risksLow development costs and risks •• Inability to engage in global strategic Inability to engage in global strategic coordinationcoordination

•• Lack of control over qualityLack of control over quality

Joint Joint venturesventures

•• Access to local partnerAccess to local partner’’s knowledges knowledge•• Shared development costs and risksShared development costs and risks•• Political dependencyPolitical dependency

•• Inability to engage in global strategic Inability to engage in global strategic coordinationcoordination

•• Inability to realize location and Inability to realize location and experienceexperience--curve economiescurve economies

•• Lack of control over technologyLack of control over technology

Wholly owned Wholly owned subsidiariessubsidiaries

•• Protection of technologyProtection of technology•• Ability to engage in global strategic Ability to engage in global strategic

coordinationcoordination•• Ability to realize location and Ability to realize location and

experienceexperience--curve economiescurve economies

•• High costs and risksHigh costs and risks

TABLE 8.2


Global Strategic AlliancesGlobal Strategic Alliances

AdvantagesAdvantagesFacilitate entry into foreign Facilitate entry into foreign markets.markets.Enable partners to share Enable partners to share fixed costs and risks fixed costs and risks associated with new associated with new products and processes.products and processes.Facilitate transfer of Facilitate transfer of complementary skills complementary skills between companies.between companies.Help establish Help establish technological standards.technological standards.

DisadvantagesDisadvantagesRisk of giving away Risk of giving away technological knowtechnological know--how.how.Risk of opening local Risk of opening local market access to foreign market access to foreign alliance partner.alliance partner.Risk of not getting Risk of not getting anything in return.anything in return.


Making Strategic Alliances WorkMaking Strategic Alliances Work

Partner selection when done well:Partner selection when done well:Helps the firm achieve Helps the firm achieve its strategic goals.its strategic goals.Results in a commonly Results in a commonly shared vision for the alliance.shared vision for the alliance.Reduces opportunistic Reduces opportunistic behaviors by the partners.behaviors by the partners.


Structuring Alliances to Reduce Structuring Alliances to Reduce OpportunismOpportunism

FIGURE 8.4

“Walling off”


Managing the AllianceManaging the Alliance

Maximizing the benefits of an alliance:Maximizing the benefits of an alliance:Develop a sensitivity to cultural differences.Develop a sensitivity to cultural differences.Build interpersonal relationships and networks among Build interpersonal relationships and networks among managers from different companies.managers from different companies.Learn from alliance Learn from alliance partners and put the partners and put the knowledge to use in knowledge to use in the organization.the organization.

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