Lo2(2)

LO2: Analysis of the process of strategy formulation and examine

various strategies adopted by businesses

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LO2_a

Examine the framework that managers can use to analyze the external environment of their company.


External Analysis requires an assessment of: Industry environment in which company operates

• Competitive structure of industry• Competitive position of the company• Competitiveness and position of major rivals

The country or national environments in which company competes

The wider socioeconomic or macroenvironment that may affect the company and its industry• Social• Government

• Legal• International

• Technological• Macroeconomic

External Analysis

The purpose of external analysis is to identify the strategic opportunities and threats in the organization’s operating environment.


External Analysis: Opportunities and Threats

Analyzing the dynamics of the industry in which an organization competes to help identify:

Opportunities Conditions in the environment that a company can take

advantage of to become more

profitable

Threats Conditions in the environment that

endanger the integrity and profitability of

the company’s business


Industry Analysis: Defining an Industry

Industry• A group of companies offering products or services that are

close substitutes for each other and that satisfy the same basic customer needs

• Industry boundaries may change as customer needs evolve and technology changes

Sector• A group of closely related industries (eg. Computer Hardware,

component, and software industries)

Market Segments• Distinct groups of customers within an industry• Can be differentiated from each other with distinct attributes

and specific demands

Industry analysis begins by focusing on the overall industry – before

considering market segment or sector-level issues


The Computer Sector: Industries and Segments

Figure 2.1


Porter’s Five Forces Model

Risk of Entry by Potential CompetitorsIndustry RivalryBargaining Power of BuyersBargaining Power of SuppliersThreat of Substitutes


How the Five Forces Shape Competition within an Industry

The stronger that each of these five forces is, the more limited is the ability of established companies to raise prices and earn greater profits within their industry.

• A weak competitive force » may be viewed as an opportunity as it

allows company to earn greater profits

• A strong competitive force » may be viewed as a threat as it

depresses industry profits

• Strength of forces may change as industry conditions change


Potential Competitors are companies that are not currently competing in an industry but have the capability to do so if they choose. Barriers to new entrants include:

Risk of Entry by Potential Competitors

1. Economies of Scale – as firms expand output unit costs fall via: Cost reductions – through mass production Discounts on bulk purchases – of raw material and standard parts Cost advantages/savings – of spreading costs over large volume

2. Brand Loyalty Achieved by creating well-established customer preferences Difficult for new entrants to take market share from established brands

3. Absolute Cost Advantages – relative to new entrants Accumulated experience – in production and key business processes Control of particular inputs required for production Lower financial risks – access to cheaper funds

4. Customer Switching Costs for Buyers – where significant5. Government Regulation

May be a barrier to enter certain industries


1. Industry Competitive Structure Number and size distribution of companies Consolidated (high entry barrier) versus fragmented industries (low entry barrier)

2. Demand Conditions Growing demand – tends to moderate competition and reduce rivalry Declining demand – encourages rivalry for market share and revenue

3. Cost Conditions High fixed costs – profitability leveraged by sales volume Slow demand and growth – can result in intense rivalry and lower profits

4. Height of Exit Barriers – prevents companies from leaving industry Write-off of investment in assets Economic dependence on industry Maintain assets

Rivalry Among Established Companies

Competitive Rivalry refers to the competitive struggle between companies in the same industry to gain market share from each other. Intensity of rivalry is a function of:

High fixed costs of exit Emotional attachment to industry

Bankruptcy regulations


Industry Buyers may be the consumers or end-users who ultimately use the product or intermediaries that distribute or retail the products. These buyers are most powerful when:

Bargaining Power of Buyers

1. Buyers are dominant. Buyers are large and few in number. The industry supplying the product is composed of many small companies.

2. Buyers purchase in large quantities. Buyers have purchasing power as leverage for price reductions.

3. The industry is dependant on the buyers. Buyers purchase a large percentage of a company’s total orders.

4. Switching costs for buyers are low. Buyers can play off the supplying companies against each other.

5. Buyers can purchase from several supplying companies at once. 6. Buyers can threaten to enter the industry themselves.

Buyers produce themselves and supply their own product. Buyers can use threat of entry as a tactic to drive prices down.


Suppliers are organizations that provide inputs such as material and labor into the industry. These suppliers are most powerful when:

Bargaining Power of Suppliers

1. The product supplied is vital to the industry and has few substitutes.

2. The industry is not an important customer to suppliers. Suppliers are not significantly affected by the industry.

3. Switching costs for companies in the industry are significant. Companies in the industry cannot play suppliers against each other.

4. Suppliers can threaten to enter their customers’ industry. Suppliers can use their inputs to produce and compete with

companies already in the industry.

5. Companies in the industry cannot threaten to enter their suppliers’ industry by making their own inputs.


Substitute Products are the products from different businesses or industries that can satisfy similar customer needs.

Substitute Products

1. The existence of close substitutes is a strong competitive threat. Substitutes limit the price that companies

can charge for their product.

2. Substitutes are a weak competitive force if an industry’s products have few close substitutes. Other things being equal, companies in

the industry have the opportunity to raise prices and earn additional profits.

Group Assignment 2

• Identify the industry of your chosen company• Perform Porter’s 5 forces model analysis• List the main threats and opportunities in the

external environment

LO2_b

Examine the competitive advantage of business firms by analyzing why

some companies outperform others.Internal Analysis


Internal Analysis: Strengths and Weaknesses

Internal analysis, along with the external analysis of the company’s environment, gives managers the

information to choose the strategies and business model to attain a sustained competitive advantage.

StrengthsAssets that boost

profitability

WeaknessesLiabilities that

depress profitability


The firm’s resources (tangible [land, buildings, equipments, etc] and intangible [brand name, reputation, knowledge, skills, intellectual property)

and capabilities (skills at coordinating resources)

Distinctive competencies (e.g. Toyota Manufacturing)

Internal Analysis

The purpose of internal analysis is to pinpoint the strengths and weaknesses of the organization.

It includes assessments of:

Building and sustaining a competitive advantage requires a company to achieve superior:

• Efficiency• Quality

• Innovations• Responsiveness to customers


Strategy, Resources, Capabilities, and Competencies

Figure 3.1


Competitive Advantage, Value Creation, and Profitability

1. Value or utility the customer gets from owning the product

2. Price that a company charges for its products

3. Costs of creating that product Consumer surplus is the “excess” utility a

consumer captures beyond the price paidBasic Principle: the more utility that consumers

get from a company’s products or services, the more pricing options the company has.

How profitable a company becomes depends on three basic factors:


The Value Chain

A company is a chain of activities for transforming inputs into outputs that customers value –

including the primary and support activities.

Figure 3.5


Building Blocks of Competitive Advantage

Figure 3.6


Efficiency

Measured by the quantity of inputs it takes to produce a given output:

Efficiency = Outputs / Inputs Productivity leads to greater efficiency

and lower costs:• Employee productivity• Capital productivity

Superior efficiency helps a company attain a competitive advantage

through a lower cost structure.


Quality

Superior quality = customer perception of greater value in a product’s attributesForm, features, performance, durability, reliability, style, design

Quality products are goods and services that are:• Reliable and• Differentiated by attributes that customers

perceive to have higher value A perception of quality allows a firm to

differentiate its products in the eyes of its customers.


Innovation

Innovation is the act of creating new products or new processes• Product innovation

» Creates products that customers perceive as more valuable and

» Increases the company’s pricing options• Process innovation

» Creates value by lowering production costs

Successful innovation can be a major source of competitive advantage – by giving a company something unique.


Customer Responsiveness

Enhanced customer responsiveness: Customer response time, design,

service, after-sales service and support

Superior responsiveness to customers differentiates a company’sproducts and services and leads tobrand loyalty and premium pricing.

Identifying and satisfying customers’ needs – better than the competitors do.


A business model encompasses how the company will:

Company’s Business Model

Utilize company’s distinctive competencies to differentiate its products and/or lower its cost

structure

• Select its customers• Define and differentiate its

product offerings• Create value for its

customers• Acquire and keep

customers• Produce goods or services• Lower costs

• Deliver those goods and services to the market

• Organize activities within the company

• Configure its resources• Achieve and sustain a high

level of profitability• Grow the business over

time


Competitive Advantage Competitive Advantage

• A firm’s profitability is greater than the average profitability for all firms in its industry.

• Excellent business model, distinctive competencies, and excellent strategies lead to competitive advantage and superior profitability

Sustained Competitive Advantage• A firm maintains above average and superior

profitability and profit growth for a number of years.


Analyzing Competitive Advantage and Profitability

To identify strengths and weaknesses effectively, a company needs to compare, or benchmark, the performance of their company with respect to historic performance and competitors. This helps determine whether

1. They are more or less profitable than competitors and whether performance has been improving or deteriorating over time

2. Their company’s strategies are maximizing the value being created

3. Their cost structure is out of line with those of competitors

4. They are using the resources of the company to the greatest effect


Why Companies Fail Inertia

• Companies find it difficult to change their strategies and structures

Prior Strategic Commitments• Limit a company’s ability to imitate and cause competitive

disadvantage The Icarus Paradox

• A company can become so specialized and inner-directed based on past success that it loses sight of market realities

When a company loses its competitive advantage, its profitability falls below that of the industry. It loses the ability to attract and generate resources.

Profit margins and invested capital shrink rapidly.


Avoiding Failure: Sustaining Competitive Advantage1. Focus on the Building Blocks of Competitive

Advantage Develop distinctive competencies and superior performance in:

Efficiency Quality Innovation Responsiveness to Customers

2. Institute Continuous Improvement and Learning3. Track Best Practice and Use Benchmarking4. Overcome Inertia

Luck may play a role in success, so always exploit a lucky break - but remember:

“The harder I work, the luckier I seem to get.” J P Morgan


Differences in Industry and Company Performance

A Company’s Profitability and Profit Growth are determined by two main factors:

The overall performance of its industry relative to other industries

Its relative success in its industry as compared to the competitors


Performance in Nonprofit Enterprises

Nonprofit entities such as government agencies, universities, and charities:• Are not in business to make a profit• BUT…still need to use their resources

efficiently and effectively• Must meet goals• Set strategies to achieve goals and compete

with other nonprofits for scarce resources

A successful strategy gives potential donors a compelling message as to

why they should contribute.

Group Assignment 3

• Perform internal analysis of reviewing the resources, capabilities, and competencies of a company. Then evaluate the building blocks of competitive advantage

• List all the strengths and weaknesses of each of the items above (resources, capabilities, quality, innovation, efficiency, customer responsiveness)

LO2_c

Examine how functional level strategies can help to achieve

efficiency, innovation and customer responsiveness.


SWOT analyses help to identify strategies that align a company’s resources and capabilities to its environment – in order to create and sustain a competitive advantage. Analyze all internal strength Analyze all internal weaknesses Analyze all external opportunities Analyze all external threats

SWOT Analysis


Functional-Level Strategies

Functional-level strategies are strategies aimed at improving the effectiveness of a company’s operations.

Functional-level strategies aim to give a firm superior:

• Efficiency• Quality• Innovation • Customer responsiveness

This leads to a competitive advantage and superior profitability and profit growth.


Achieving Superior Efficiency

Economies of scaleUnit cost reductions associated with a large scale of output

• Ability to spread fixed costs over a large production volume

• Ability of companies producing in large volumes to achieve a greater division of labor and specialization

• Specialization has favorable impact on productivity by enabling employees to become very skilled at performing a particular task

Diseconomies of scaleUnit cost increases associated with a large scale of output

• Increased bureaucracy associated with large-scale enterprises

• Resulting managerial inefficiencies


Economies and Diseconomies of Scale

Figure 4.2


Learning EffectsLearning Effects are cost savings that come from learning by doing.

• Labor productivity Learn by repetition how to best carry out the task

• Management efficiency Learn over time how to best run the operation

• Realization of learning effects implies a downward shift of the entire unit cost curve

As labor and management become more efficient over time at every level of output

The Experience Curve is the systematic lowering of the cost structure and consequent unit cost reductions that occur over

the life of a product


Flexible Manufacturing and Mass Customization (Response) Flexible Manufacturing Technology

“Lean Production” technology that:• Reduces setup times for complex

equipment• Improves scheduling to increase

use of individual machines• Improves quality control at all

stages of the manufacturing process• Increases efficiency and lowers unit costs

Mass Customization Ability to use flexible manufacturing technology to reconcile two goals that were once thought incompatible:

• Low cost and• Differentiation through product customization


Materials Management encompasses the activities necessary to get inputs and components to a production facility, through the production process, and through the distribution system to the end-user• Many sources of cost in this process• Significant opportunities for cost reduction through more

efficient materials management • Just-in-Time (JIT) Inventory System to economize holding costs:

» Have components arrive to manufacturing just prior to need in production process

» Have finished goods arrive at retail just prior to stock out Supply Chain Management is the task of managing the

flow of inputs to a company’s processes to minimize inventory holding and maximize inventory turnover

Materials Management and Supply Chain


Achieving Superior Innovation

Innovation can:• Result in new products that better satisfy customer needs • Differentiate products and charge a premium price and

lower cost structure• Improve the quality of existing products• Reduce costs

Innovation can be imitated - So it must be continuous

Building distinctive competencies that result in innovation is the most important source of competitive advantage.

Successful new product launches are major drivers of superior profitability.


Marketing

• Marketing strategy refers to the position that a company takes regarding: Pricing, Promotion, Advertising, Product Design, Distribution

• Marketing strategy can reduce costs by lowering customer defection rates and increasing loyalty

Quality• TQM (Continuous Improvement)• Six Sigma


Research and Development (R&D)Roles of R&D in helping a company achieve greater efficiency and lower cost structure:

1. Boost efficiency by designing products that are easy to manufacture• Reduce the number of parts that make up a product –

reduces assembly time• Design for manufacturing – requires close coordination

with production and R&D

2. Help a company have a lower cost structure by pioneering process innovations• Reduce process setup times• Flexible manufacturing• An important source of competitive advantage

R&D Strategy


Human Resource Strategy

Hiring strategyAssures that the people a company hires have the attributes that match the strategic objectives of the company

Employee trainingUpgrades employee skills to perform tasks faster and more accurately

Self-managing teamsMembers coordinate their own activities and make their own hiring, training, work, and reward decisions

Pay for performanceLinking pay to individual and team performance can help to increase employee productivity

Goal: to improve employee productivity.


Information SystemsInformation systems’ impact on productivity is wide-

ranging: Web-based information systems can automate many

activities and Automates interactions between– Company and customers– Company and suppliers

Materials Management and Supply Chain

Materials Management encompasses the activities necessary to get inputs and components to a production facility, through the production process, and through the distribution system to the end-user (Significant opportunities for cost reduction through more efficient materials management )• Just-in-Time (JIT) Inventory System to economize holding costs:

» Have components arrive to manufacturing just prior to need in production process

» Have finished goods arrive at retail just prior to stock out Supply Chain Management

Group Assignment 4

• Perform SWOT Analysis• Pick the best opportunity that capitalizes on

your strengths, eliminate weaknesses, and limit your threats

• Suggest what your company should do in terms of functional level strategies

LO2_d

Analyze the factors that facilitate business level strategy to enable a firm to compete effectively in the

market place.


Business-Level Strategy

Firms must decide/evaluate:1. Customer needs – WHAT is to be satisfied2. Customer groups – WHO is to be satisfied3. Distinctive competencies – HOW customers are to be satisfied

A successful business model (company’s conception of how various strategies pursued by company fit together into a whole) results from business-level strategies that create a competitive advantage over its rivals.


Formulating the Business Model: Customer Needs and

Product Differentiation Customer needs The desires, wants, or cravings that can be

satisfied through product attributes Customers choose a product based on:

1. The way the product is differentiated from other products of its type

2. The price of the product

Product differentiation Designing products to satisfy customers’

needs in ways that competing products cannot.


Formulating the Business Model: Customer Groups and Market

Segmentation Market Segmentation

The way customers can be grouped based on important differences in their needs or preferences

Main Approaches to Segmenting Markets1. Ignore differences in customer segments –

Make a product for the typical or average customer (company decides to not differentiate its product but compete on cost)

2. Recognize differences between customer groups – Make products that meet the needs of all or most customer groups (customer responsiveness is high and customization is important)

3. Target specific segments –Choose to focus on and serve just one or two selected segments (focus on low price or differentiation)


Identifying Customer Groups and Market Segments

Figure 5.1


Implementing the Business Model Building Distinctive Competencies

To develop a successful business model, strategic managers must devise a set of strategies that determine:

• How to DIFFERENTIATE their product

• How to PRICE their product

• How to SEGMENT their markets

• How WIDE A RANGE of products to develop

A profitable business model depends on providing the customer with the most value while

keeping cost structures viable.


Wal-Mart’s Business ModelFigure 5.3


Competitive Positioning at the Business Level

Source: Copyright © C. W. L. Hill & G. R. Jones, “The Dynamics of Business-Level Strategy,”

(unpublished manuscript, 2002).

Maximizing the profitability of the company’s business model is about making the right choices with regard to value creation through differentiation, costs, and pricing. Choose pricing option that compensate for extra cost of differentiation

but not too high that it chokes increases in expected demand

Figure 5.4


Cost LeadershipCost leaders establish a cost structure that allows them to provide goods and services at lower unit costs than competitors. (can use

Chaining and Franchising to obtain advantage of cost leadership) Strategic Choices

• The cost leader does not try to be the industry innovator.

• The cost leader positions its products to appeal to the “average” or typical customer.

• The overriding goal of the cost leader is to increase efficiency and lower its costs relative to industry rivals.


Advantages of Cost Leadership Strategies

Protected from industry competitors by cost advantage

Less affected by increased prices of inputs if there are powerful suppliers

Less affected by a fall in price of inputs if there are powerful buyers

Purchases in large quantities increase bargaining power over suppliers

Ability to reduce price to compete with substitute products

Low costs and prices are a barrier to entry

Cost leaders are able to charge a lower price or are able to achieve superior profitability

than their competitors at the same price.


Disadvantages of Cost Leadership Strategies

Competitors may lower their cost structures.

Competitors may imitate the cost leader’s methods.

Cost reductions may affect demand (example reducing costs on warranty and customer service might lead customers to leave).


Companies with a differentiation strategy create a product that is different or distinct from its competitors in an important way. Strategic Choices

• A differentiator:» Stives to differentiate itself on as many

dimensions as possible.» Focuses on quality, innovation, and

responsiveness to customer needs.» May segment the market in many niches.» Concentrates on the organizational functions that

provide a source of distinct advantages.

Differentiation


Advantages of Differentiation Strategies

Customers develop brand loyalty. Powerful suppliers are not a problem because the

company is geared more toward the price it can charge than its costs.

Differentiators can pass price increases on to customers.

Powerful buyers are not a problem because the product is distinct.

Differentiation and brand loyalty are barriers to entry. The threat of substitute products depends on

competitors’ ability to meet customer needs.

Differentiators can create demand for their distinct products and charge a premium price,

resulting in greater revenue and higher profitability.


Difficulty maintaining long-term distinctiveness in customers’ eyes.

• Agile competitors can quickly imitate.• Patents and first-mover advantage are

limited in their duration. Difficulty maintaining premium price.

Disadvantages of Differentiation Strategies


Focus

The focuser strives to serve the need of a targeted niche market segment where it has either a low-cost or differentiated competitive advantage.

Strategic Choices• The focuser selects a specific market niche

that may be based on: Geography Type of customer Segment of product line

• Focused company positions itself as either: Low-Cost or Differentiator


Advantages of Focus Strategies

The focuser is protected from rivals to the extent it can provide a product or service they cannot.

The focuser has power over buyers because they cannot get the same thing from anyone else.

The threat of new entrants is limited by customer loyalty to the focuser.

Customer loyalty lessens the threat from substitutes.

The focuser stays close to its customers and their changing needs.


Disadvantages of Focus Strategies

The focuser is at a disadvantage with regard to powerful suppliers because it buys in small volume (but it may be able to pass costs along to loyal customers).

Because of low volume, a focuser may have higher costs than a low-cost company.

The focuser’s niche may disappear because of technological change or changes in customers’ tastes.

Differentiators will compete for a focuser’s niche.


Implications of Strategic Groups for Competitive Positioning

• Strategic managers must:

1. Map their competitors2. Better understand changes in the industry3. Determine which strategies are successful4. Fine tune or radically alter business models and

strategies to improve competitive position

Strategic Groups are groups of companies that follow a business model similar to other companies within their strategic group (eg. LuLu, Coop and Carrefour all compete on low cost, they

become a strategic group), but are different from that of other companies in other strategic groups.

Competitive Positioning: Strategic Groups


Failures in Competitive Positioning

Many companies, through neglect, ignorance or error:• Do not work continually to improve their business model• Do not perform strategic group analysis• Often fail to identify and respond to changing opportunities

and threats in the industry environmentCompanies lose their position on the value

frontier when:• They have lost their source of competitive advantage• Their rivals have found ways to push out the value creation

frontier and leave them behind

There is no more important task than ensuring that the company is optimally positioned against

its rivals to compete for customers.

Group Assignment 5

• Draft a Business Model figure similar to Wal-Mart’s figure 5.3

• Discuss how you will position yourself in the market place in term of positioning strategies discussed (cost leadership, differentiation, focus)

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2 | 67

LO2_e

Examine various ways in which companies can profit from global

expansion

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8 | 69

Global Strategy: Pressures for Cost Reductions and Local Responsiveness

Figure 8.2

Company A: Global Standardization Strategy

Company B: Localization Strategy

Company C: Transnational Strategy

Company D: International Strategy

Company D As Competitors emerge

Company D and B strategies become less viable and

•Company B would seek Company C strategy

•Company D would either seek A or C strategy


Choosing a Global Strategy

Standard Globalization Strategy• Reaping the cost reductions that come from economies

of scale and location economies (marketing, production, R&D)

• Business model based on pursuing a low-cost strategy on a global scale

Makes the most sense when there are strong pressures for cost reduction and the demand for local responsiveness is minimal

Localization Strategy• Customizing the company’s goods or services so that

thy provide a good match to tastes and preferences in different national markets

Most appropriate when there are substantial differences across nations with regard to consumer tastes and preferences and where cost pressures are not too intense


Choosing a Global Strategy Transnational Strategy

• Company faces both strong cost pressure (Global Strategy)

and strong pressure on local responsiveness (Localization Strategy)

• Business model that simultaneously:» Achieves low costs » Differentiates across geographic

markets » Fosters a flow of skills between subsidiaries

Building an organization capable of supporting a transnational strategy is a complex and challenging task.

International Strategy• Multinational companies that sell products that serve

universal needs (minimal need to differentiate) and do not face significant competitors (low cost pressure).

In most international companies the head office retains tight control over marketing and product strategy.


Basic Entry Decisions

1. Which overseas markets to enter (WHERE)• Assessment of long-run profit potential• Balancing the benefits, costs, and risks associate

with doing business in a country2. Timing of entry (WHEN)

• First-mover advantages: preempt and build share• First-mover disadvantages: pioneering costs

3. Scale of Entry (HOW)• Entering on a large scale is a major strategic

commitment • Benefits and drawbacks of small-scale entry


The Choice of Entry Mode

1. Exporting Most manufacturing companies begin their global expansion as

exporters and later switch to one of the other modes.

2. Licensing A foreign licensee buys the rights to produce a company’s product

for a negotiated fee; licensee puts up most of the overseas capital.

3. Franchising Franchising is a specialized form of licensing. The franchiser not

only sells intangible property, but also insists that franchisee agrees to follow strict rules as to how it does business.

4. Joint Ventures Typically a 50/50 venture – a favored mode for entering a new market

5. Wholly-Owned Subsidiaries Parent company owns 100% of subsidiary’s stock – setup or acquire


Advantages and Disadvantages of Different Entry Modes

Table 8.1


Global Strategic Alliances

Advantages• Facilitate entry into a foreign market• Share fixed costs and associated risks• Bring together complementary skills and assets• Set technological standards for its industry

Disadvantages• Give competitors a low-cost route to gain new

technology and market access

Global Strategic Alliances are cooperative agreements between companies from different countries that are actual or potential competitors. They range from short-term contractual cooperative arrangements to formal joint ventures with equity participation.

Some alliances benefit the company. Beware, alliances can end up giving away technology

and market access with very little gained in return.

Group Assignment 6

Suppose you have the opportunity to expand outside the boundaries of the UAE, which strategy would you use and why (Locate your self on the cost pressure-local responsiveness chart)?


LO2_f

Analyze the strategies that corporations pursue to build and

restructure their portfolio of businesses.


Corporate-Level Strategy: How do we sustain competitive advantages in our current business? What new businesses or industries do we wish to enter?

Corporate-Level Strategy

Corporate strategy is used to identify: 1. Businesses or industries that the company should

compete in2. Value creation activities that the company should

perform in those businesses 3. Methods to enter or leave businesses or industries

in order to maximize its long-run profitability

Companies must adopt a long-term perspective in formulating a corporate-level strategy.


Corporate-Level Strategy and the Multibusiness Model

A multibusiness company must construct its business model at two levels:

1. Business models and strategies for each business unit or division in every industry in which it competes

2. Higher-level multibusiness model that justifies its entry into different businesses and industries


Horizontal Integration (staying in the same industry)

• The process of acquiring or merging with industry competitors

Vertical Integration• Expanding operations backward into an industry that

produces inputs for the company or forward into an industry that distributes the company’s products

Strategic Outsourcing• Letting some value creation activities within a business

be performed by an independent entity

Repositioning and Redefining A Company’s Business Model

Corporate-level strategies are primarily directed toward improving a company’s competitive advantage and profitability in its present business or product line:


Horizontal Integration:Single-Industry Strategy

Focus resources Resources devoted to competing successfully in one area

‘Stick to the knitting’ Company stays focused on what it does best

Horizontal Integration: the process of acquiring or merging with industry competitors in an effort to achieve the competitive advantages that come with large scale and scope.

Staying inside a single industry allows a company to:


Benefits of Horizontal IntegrationProfits and profitability increase when horizontal integration:1. Lowers the cost structure

• Creates increasing economies of scale• Reduces the duplication of resources between two companies

2. Increases product differentiation• Product bundling – broader range at single combined price (Vitamin C bottle

same price as Vitamin D)• Total solution – saving customers time and money (a company purchases

competitors to bring to market a complete set of products (such as Multivitamins)

• Cross-selling – leveraging established customer relationships

3. Replicates the business model • Replicate the business model success in other market segment

within the same industry

4. Reduces industry rivalry• Eliminate excess capacity in an industry• Easier to implement tacit price coordination among rivals

5. Increases bargaining power • Increased market power over suppliers and buyers• Gain greater control


Problems with Horizontal Integration

A wealth of data suggests that the majority of mergers and acquisitions DO NOT create value and that many may actually DESTROY value. Implementing a horizontal integration is not an easy

task• Problems associated with merging very different company

cultures• High management turnover in the acquired company when the

acquisition is a hostile one• Tendency of managers to overestimate the benefits to be had in

the merger• Tendency of managers to underestimate the problems involved in

merging their operations The merger may be blocked if merger is perceived to:

• Create a dominant competitor• Create too much industry consolidation• Have the potential for future abuse of market power


Vertical Integration: Entering New Industries

Backward Vertical Integration• Company expands its operations into an industry that

produces inputs to the company’s products Forward Vertical Integration

• Company expands into an industry that uses, distributes, or sells the company’s products

Full Integration• Company produces all of a particular input from its own

operations• Disposes of all of its completed products through its own

outlets Taper Integration

• In addition to company-owned suppliers, the company will also use other suppliers for inputs or independent outlets in addition to company-owned outlets


Full and Taper Integration

Figure 9.3

Alternative to Vertical Integration

Short-term contracts with suppliers (competitive bidding)• Suppliers are forced to compete on price

Strategic Alliances (Long-Term Contracting)• Cooperative relationship• Work jointly• Becomes substitute to vertical integration



Strategic Outsourcing

Company is choosing to focus on a fewer number of value-creation activities

In order to strengthen its business model Companies typically focus on noncore or

nonstrategic activities In order to determine if they can be performed more

effectively and efficiently by independent specialized companies

Virtual Corporation Describes companies that have pursued extensive

strategic outsourcing

Strategic Outsourcing allows one or more of a company’s value-chain activities or functions to be performed by independent specialized companies that focus all their skills and knowledge on just one kind of activity.


Strategic Outsourcing of Primary Value Creation Functions

Figure 9.4

Group Assignment 7

In your newly developed UAE-based company which of the following (you can choose more than one) would you pursue and why• Horizontal Integration• Vertical Integration• Strategic Alliance• Outsourcing


Lo2(2)

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