Module 2 (ism)

International strategic management

FFORMULATINGORMULATING S STRATEGYTRATEGY

Strategic Formulation Process

The global formulation process parallels the domestic process, but it is more complex because of the greater difficulty in gaining accurate and timely information, the diversity of geographic locations, and the differences in political, legal, cultural, market, and financial processes. The strategic planning process identifies potential opportunities for (1) appropriate market expansion, (2) increased profitability, and (3) new ventures for exploiting strategic advantages.

This figure demonstrates the process is comprised of two primary phases: planning and implementation.

In reality, the stages depicted in this slide are rarely so linear. Instead, the process in continuous and intertwined.

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Strategic Decision-Making Models

This figure summarizes three leading strategic models.

Global, regional, and country factors and risks are part of the considerations in an institution-based theory of existing and potential risks and influences on the host area.

The firm’s competitive position in its industry can be reviewed using Porter’s industry-based five-force model. The five forces are (1) the level of competition already in the industry, (2) ease of entry into the field, (3) how much power suppliers in the industry have, (4) how much power buyers in the industry have, and (5) the extent of substitute products available.

The resource based-view entails considering the unique value of the firm’s competencies and that of its products or services.

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Strategic Choice – A

The strategic choice of one or more entry strategies will depend on (1) evaluation of the advantages (and disadvantages) of each in relation to the firm’s capabilities, (2) the critical environmental factors, and (3) the contribution that each choice would make to the overall mission and objectives of the company. Additionally, specific factors relating to that firm’s situation must be taken into account.

After considering these factors and what is legal and desirable in a given location, some entry strategies will fall out of the feasibility zone. Among the remaining options, planners must decide which factors are more important to the firm than others. Pan and Tse found that managers tend to follow a hierarchy of decision-sequence in choosing an entry mode. Managers must first decide between equity and non-equity based, and the remaining options follow. Pan and Tse found that the level of country risk was the primary influence in deciding between equity and non-equity based options.

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Strategic Choice – B

Similarly, Gupta and Govindarajan suggest firms must first decide the extent they will export or produce locally, then the extent of ownership control over activities that will be performed locally in the target market. There is an array of choice combinations within these two dimensions.

Entry strategies require a long-term perspective and need to be conceived as part of a well-designed, overall plan. Often companies will decide on a particular means of entry only to find it was shortsighted.

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LEVELS OF STRATEGYLEVELS OF STRATEGY

A market refers to the place where goods and services are exchanged.

Terms:

Industry

Value Chain

Company

Department

Person

Corporation

Division / Strategic Business Unit (SBU)

Company

Rumelt's Typology of Diversification:

1. Single Product: 95% of revenues from a single product line

2. Dominant Product: 70-94% of revenue from a single product line

3. Related Product: Less than 70% of revenue from a single product line and and the remainder of revenues from a related product domain

4. Unrelated Product: Less than 70% of revenue from a single product and remainder of revenues from an unrelated product domain

SOME LEVELS OF STRATEGYSOME LEVELS OF STRATEGY

The Impact of IT on strategy is dramatically different depending on the level of strategy. On what level is your paper?

1. Corporate

2. Business

3. Functional

4. Operational

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1.1. CORPORATE LEVEL STRATEGYCORPORATE LEVEL STRATEGY

What businesses are we in? What businesses should we be in?

Four areas of focus

Diversification management (acquisitions and divestitures)

Synergy between units

Investment priorities

Business level strategy approval (but not crafting)

• Single-Business Strategy

• Related Diversification

• Unrelated Diversification

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FirmStatus

Valuablestrengths

Criticalweaknesses

Environmental StatusAbundant

environmentalopportunities

Criticalenvironmental

threats

Corporategrowth

strategies

Concentric Diversification(Economies of Scope)

ConglomerateDiversification(Risk Mgt.)

Corporateretrenchment

strategiesCan still go for business-level growth (economies

of scale)

Corporatestability

strategies


Corporate Level Issues:

• Product Diversity

• Corporate Parenting Roles

• Managing the Portfolio

• International Diversity

The Multi Business Organization:

Three levels of strategy:

• Corporate Strategy

• Business/ Competitive Strategy

• Functional Strategy

Corporate Strategy:

An action taken to gain a competitive advantage through the selection and management of a mix of businesses competing in several industries or product markets

• What should be the nature and values of the enterprise in the broadest sense ?

• What businesses should we be in?

• What structure, systems and processes will be necessary to link the various businesses to each other?

• How can corporate centre add value?

Three major components:

• Growth Strategy

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Corporate Parent

Businesses Businesses Businesses


• Portfolio Strategy

• Corporate Parenting Strategy

Product / Market Diversity:

• Diversification is a strategy that takes the organization into both new markets and products or service.

• Economies of Scope

• Corporate Managerial Capability

• Increase market power

• Hedge risks

Related Diversification:

• Is strategy development beyond current products and markets , but within the capabilities or value network of the organization

Nature and Scope of Corporate Strategies:

• Stability Strategies

• Growth Strategy

• Retrenchment Strategy

• Combination Strategy

Stability Strategy:

• Decides to serve the same markets

• Pursue same objectives with incremental improvement of functional performance

• Concentrates resources in a narrow product market for developing competitive advantage

When Stability Strategy:

• The economy or industry is in turmoil

• Environmental turbulence is minimal

• Just off a period of growth

• Growth ambitions modest

• Industry in mature stage

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Approaches to Stability:

• Holding Strategy

• Stable Growth

• Harvesting Strategy

• Profit or End Game Strategy

Expansion Strategies

• When the firm has lofty growth objectives

• When new opportunities are emerging

• Firm is the leader

• Firm has surplus resources

• Diversification fulfils growth objectives

• Expansion through intensification – Ansoff’s product market expansion grid

• Expansion through Integration

Ansoff’s Product Market Expansion Grid

Markets / Products Current Markets New Markets

Current Product Market Penetration Market Development

New Products Product Development Diversification

Market Penetration

• Motivating Existing Customers to buy more frequently

• Increase efforts to attract it’s competitions’ customers

• Targeting new customers – price concessions , better customer service

Market Development Strategy

• Tries to achieve growth by introducing existing products in new markets

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• Can move to new geographical areas

• Can attract different market segments

Product Development Strategy

• Development of a new/ improved product for it’s current markets

• Likely to succeed when the products have low brand loyalty

• Carries risk with it.

Diversification

• Mergers & Acquisitions : Outright purchase of a company by another eg Tech Mahindra buys Satyam

• Strategic Alliance & Joint Venture : Agreements between companies to form collaborative partnership example: Maruti-Suzuki

• Internal Development : Organic growth into other LOBs ex. Reliance, ITC

Advantages of related diversification

• Transferring skills, expertise, and capabilities from one business to another

• Combining the value chain

• Leveraging strong brand names

• Creating stronger capabilities

Integration:

• Vertical Integration – either forward or backward into adjacent activities in the value network. Eg buying a car component company by a car manufacturer is BI whereas buying of a repair centre is FI.

• Horizontal Integration is development to activities which are complementary to present activities.

When to Vertically Integrate?

• Are our existing suppliers / customers meeting the needs of end customers? Ex Nike outsourcing production units to SA& it’s logistics to FedEx .

• How volatile is the current situation

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• Is it possible to influence of our upstream/ downstream businesses?

• Will Vertical Integration enhance the structural position of the business? Ex. GCI integrated forward via www.saregama.com

Advantages of Vertical Integration:

• Build Entry Barriers

• Reduce Transaction Costs

• Better control & coordination of operations

• Spread fixed costs / overheads over large number of products/ services

Limitations of Vertical Integration:

• Balancing the line

• Forcing companies to commit to technologies / products and risk losing flexibility

• Problem of integrating significantly different LOB into a coherent whole

Unrelated Diversification:

• Is the development of products or services beyond the current capabilities or value network

• Pays off by exploiting dominant logic

• Conglomerate may be effective in countries with underdeveloped markets

Advantages of Unrelated Diversification:

• Spreading business risks

• Optimization of financial investments

• Exploiting corporate resources and management capabilities

Forms of Diversification

• Vertical : Diversification across value chain

• Horizontal : Diversification into complementary businesses

• Geographic : Firms expand into other geographic areas

International Expansion

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1. Exporting

2. Licensing

3. Joint Venture

4. Direct Investment

1. Exporting

• Marketing of domestically produced goods in a foreign country

• Advantage – minimizes risk , ensures speed of entry m maximizes scale using existing resources

• Disadvantage – trade barriers and tariff add to cost , limits access to local market information , seen as outsider

2. Licensing

• Licensing permits a company in the target country to use the property of the licensor eg trademarks , patents , and production techniques

• Advantage – high ROI, able to circumvent trade barriers

• Disadvantage – lack of control over use of assets, license period is limited

3. Joint Ventures

• Partners strategic goal converge but competitive goal diverge

• Partners size, resources , market power are small compared to the industry leaders

• Advantage – viewed as insider, potential for learning , overcomes cultural distance

• Disadvantage – Dilution of control, Knowledge spillovers, higher risk

4. Direct Investment

• It is the ownership of facilities in the target country

• Greater knowledge of local market

• Viewed as insider

• Higher risk than other modes

• Require more resources and commitment

Reasons for international diversity

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• Globalization of Markets and Competition

• Suppliers follow customers

• Bypass limitations in home market

• Gain arbitrage on differences

• Internationalizing of value added activities

International Strategy

• Multi domestic strategy- Value adding activities are located in national individual markets served by the organization

• Global Strategy Standardized products exploiting economies of scale.

• Transnational : Seeks the best of both Multi Domestic and global strategy

Creating value through corporate strategy

• Reducing Risk

• Maintaining growth

• Balancing Cash Flows

• Sharing Infrastructure

• Increasing Market power

• Capitalizing on core competence

The BCG “Portfolio” Matrix

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2.2. BUSINESS LEVEL STRATEGYBUSINESS LEVEL STRATEGY

Introduction:

Strategy: Increasingly important to a firm’s success and concerned with making choices among two or more alternatives.

Choices dictated by

External environment (O and T)

Internal resources, capabilities and core competencies (S and W)

Business level-strategy: Integrated and coordinated set of commitments and actions the firm uses to gain a competitive advantage by exploiting core competencies in specific product markets/industry

How we intend to compete in a specific industry

Business-Level Strategies:

Purpose: To create differences between position of a firm and its competitors

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High

Low

High LowMarket Share

Stars

?? ?? ?? ??Question Marks

Cash Cows Dogs


Firm must make a deliberate choice to

Perform activities differently

Perform different activities

Impacts how value chain activities will be performed to create unique value

No strategy better than others

Contingent on internal and external environment

Two types of competitive advantage firms must choose between

Cost (Are our costs LOWER than rivals costs?)

Uniqueness (Are we DIFFERENT than rivals?)

Two types of ‘competitive scope’ firms must choose between

Broad target

Narrow target

These combine to yield 5 different generic business level strategies

Can potentially be used by any organization competing in any industry

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Five Business-Level Strategies

Types of Business-Level Strategies

Cost Leadership Strategy

Competitive advantage: THE low-cost leader and operates with margins greater than competitors

Competitive scope: Broad

Integrated set of actions designed to produce or deliver goods or services with features that are acceptable to customers at the lowest cost, relative to competitors

No-frills, standardized or commodity-like product

Must have competitive levels of quality, service, and other features and lowest overall costs

Continuously reduce the costs / increase the efficiency of value chain activities

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Examples of Value-Creating Activities Associated with the Cost Leadership Strategy

Cost Leadership Strategy

In relationship to the 5 Forces:

1. Existing Rivalry

Rivals hesitate to compete on the basis of price

2. Bargaining Power of Buyers (Customers)

Powerful buyers can force cost leader to reduce prices up to a point

3. Bargaining Power of Suppliers

Cost leaders can absorb suppliers price increases

4. Potential Entrants

Efficiency can serve as a barrier to entry

5. Product Substitutes

Can reduce prices when faced with substitutes

Thus built in defense against all 5 forces

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Competitive Risks

1. Innovations by competitors can quickly eliminate cost advantage.

2. Too much focus on cost reduction versus competitive levels of differentiation.

3. Competitors may learn how to successfully imitate a cost leader’s strategy.

Differentiation

Competitive advantage: Differentiation/uniqueness

Competitive scope: Broad

Integrated set of actions designed by a firm to produce or deliver goods or services at an acceptable cost that customers perceive as being different/unique in ways that are important to them

Targeted customers perceive product value

Customized products – differentiating on as many features as possible

Can differentiate in many ways and in many value chain areas

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Examples of Value-Creating Activities Associated with the Differentiation Strategy

Differentiation

In relationship to the 5 Forces:

1. Existing Rivalry

Customers are loyal purchasers of differentiated products

2. Bargaining Power of Buyers (Customers)

Uniqueness and loyalty reduces customer’s sensitivity to price increases

3. Bargaining Power of Suppliers

Provide high quality components, driving up firm’s costs

Cost may be passed on to customer

4. Potential Entrants

Substantial barriers (see above) and would require significant resource investment

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5. Product Substitutes

Customer loyalty effectively positions firm against product substitutes

Risks

1. Can charge too high of a price premium

2. Differentiation theme no longer valuable to customers

3. Over-differentiating

Customer experience shows differentiation not worth the cost

4. Counterfeiting

Focus strategies

Competitive advantage: Cost Leadership or Differentiation

Competitive scope: Narrow

An integrated set of actions taken to produce goods or services that serve the needs of a particular competitive segment

Attractive when:

1. Firm lacks resources to compete in the broader market

2. Firm may be able to more effectively serve a narrow market segment than larger industry-wide competitors

3. Niche is attractive

4. Large firms may overlook small niches

Focus strategy examples

Buyer groups

1. Youths/senior citizens

Product line segments

1. Professional painter groups

Geographic markets

1. West vs. East coast

Focused Cost Leadership

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Competitive advantage: Low-cost

Competitive scope: Narrow industry segment

1. Motel 6, Kia

Focused Differentiation

Competitive advantage: Differentiation

Competitive scope: Narrow industry segment

1. Ritz-Carlton, Apple, Rolls Royce

Focus strategies

Risks

Same basic risks as broad cost leadership or broad differentiation plus:

A competitor may be able to focus on a more narrowly defined competitive segment and "out focus” the focuser

A company competing on an industry-wide basis may decide that the market segment served by the focus strategy firm is attractive and worthy of competitive pursuit

Customer needs within a narrow competitive segment may become more similar to those of industry-wide customers as a whole

Integrated Cost Leadership/Differentiation

Efficiently produce products with differentiated attributes

Efficiency: Sources of low cost

Differentiation: Source of unique value

Involves engaging in primary and support activities that allow a firm to simultaneously pursue low cost and differentiation

Low price with somewhat highly differentiated features

More value for the money

Often called best-cost strategy

Examples: Toyota, Target

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Risks of Integrated Strategies

Harder to implement than other strategies

Must simultaneously reduce costs while increasing differentiation

Can get ‘stuck in the middle’ resulting in no advantages and poor performance

Other Business-Level Strategies

Strategic Alliances and Partnerships (Chapter 9)

Mergers and Acquisitions (Chapter 7)

Vertical Integration (Chapter 6)

Outsourcing (Chapter 3)

Offensive and Defensive Strategies (Chapter 5)

First-Mover Advantages and Disadvantages (Chapter 5)

How do we support the corporate strategy?

How do we compete in a specific business arena?

Three types of business level strategies:

Low cost producer

Differentiator

Focus

Four areas of focus

Generate sustainable competitive advantages

Develop and nurture (potentially) valuable capabilities

Respond to environmental changes

Approval of functional level strategies

• Differentiation

• Overall Cost Leadership

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• Focus

FUNCTIONAL / OPERATIONAL LEVEL STRATEGYFUNCTIONAL / OPERATIONAL LEVEL STRATEGY

• A functional strategy is a short term game plan for a key functional area within a company.

• Functional strategy must be consistent with long term objectives and the grand strategy

Characteristics of functional strategy

• Time horizon – annual

• Specificity – key function - subunit

• Participation – functional manager

Functional Strategy in Marketing

• The role of the marketing function is to increase sales of the product/service and thus increase revenue generation of the company

• Marketing managers develop marketing strategies determining who will sell what , where to whom and in what quantity.

Key Functional Strategy Key consideration

Price • Type of product• Key contributor to profitability• Product image

Price • Price as a basis of competition• Gross profit margin

Place • geographic areas• Key distribution channel• Sales force org

Promotion • Advertising and communication priorities• Media

Functional strategy in Finance

• Financial strategies direct the use of resources in supporting long term goals and objectives

Key consideration

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Capital acquisition • Cost of capital• Levels and form of leasing

Capital allocation • Priorities in allocation• Capital allocation authority

Dividend and WC management • Dividend payout ratio• Cash flow requirements

Functional Strategy in R&D

R&D Decision Area Key Consideration

Basic research versus commercial development • Extent of innovation Vis a vis product dev

• New projects

Time horizon • Emphasis on short or long term

Organization fit • Nature of research• Departmental structure

Basic R&D Posture • Offensive or Defensive

Functional: How do we support the business level strategy?

Operational: How do we support the functional level strategy?

An example.

Business L.S.: Become the low cost producer of widgets

Functional L.S. (Mfg.): Reduce manufacturing costs by 10%

Operational (Plant #1): Increase worker productivity by 15%

• Financial

• Marketing

• Operations

• Human Resource

• R&D

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A Simple Organization Chart (Single Product Business)

A Simple Organization Chart(Dominant or Related Product Business)

An example of an Unrelated Product Business(Note: By itself, an SBU can be considered a related product business)

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Business

Research andDevelopment

ManufacturingMarketing HumanResources

Finance

FunctionalLevelStrategy

BusinessLevelStrategy

MultibusinessCorporation

Corporate Level

Business 1(Related)

Business 2(Related)

Business 3(Related)

BusinessLevel

Research andDevelopment

ManufacturingMarketing HumanResources

Finance

FunctionalLevel


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KKNOWLEDGENOWLEDGE M MANAGEMENTANAGEMENT ININ I INTERNATIONALNTERNATIONAL J JOINTOINT V VENTUREENTURE (IJV (IJVSS))

Managing the performance of an IJV for the long term, as well as adding value to the parent companies, necessitates managing the knowledge flows within the IJV network. Thus, managers must recognize that it is critical to overcome cultural and system differences in managing knowledge flows in order to gain advantage for the alliance.

Knowledge management is the active management of creating, disseminating, evolving, and applying knowledge to strategic ends. As defined by Berdow and Lane, these processes are:

Transfer: managing the flow of existing knowledge between parents and from parents to the IJV.

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Transformation: managing the transformation and creation of knowledge within the IJV through its dependent activities.

Harvest: managing the flow of transformed and newly created knowledge from the IJV back to the parents.

Those companies found to be most successful in developing and harvesting information for the benefit of the parents were those that had personal involvement by the principals of the parent company in shared goals, in the activities and decisions being made, and in encouraging joint learning and coaching.

Equity IJVs may be defined as:

“Partnerships by which two or more firms create an entity to carry out a productive economic activity and take an active role in decision-making”

• Are different from contractual JVs in three main respects: There is

– a sharing of ownership (i.e. a capital commitment by two or more partners)

– the establishment of a separate legal entity (i.e. the ‘child’)

– Some sharing of management control, as well as ownership

Equity IJVs: Traits

• Manufacturing JVs

• JVs in the service sector

• Functional JVs (eg marketing, distribution, technology)

• JVs between developed country MNEs

• JVs between developed country MNE and local enterprise in emerging economy

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Parent Company A

Joint VentureChild

Parent Company B


• East/West JVs

• Minority, majority, shared ownership JVs

• Shared control vs passive JVs

Trends in IJVs

• Huge increase in numbers during 1960s/1970s

• Very often due to host government controls

– Restrictive FDI policy demanded that MNEs wishing market access had to form an IJV with a local partner

• Since then host country legislation has become more liberal

• Yet IJVs remain very popular

– But now often MNEs choose to form IJVs

– They recognise that they need assistance from local partner

– The competitive imperative has become the key driver rather than the political or legal imperative

Advantages of IJVs

• Expansion geographically at lower cost than establishing wholly-owned subsidiaries

• Reduced management commitment by decentralising some control locally

• Synergistic benefits - each partner has what the other lacks

• Lower political risk through partnership with well-connected local rival

Performance of IJVs

• Very often the benefits prove elusive

• There is a high incidence of failure or ‘divorce’

• Given that each has what the other needs they need to trust each other

– However a lack of trust is common, so each party is reluctant to provide the partner with its key competence

• Problems arise over the control of the IJV

• And also with the operating strategies, policies, and methods

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Motivation for IJV Formation: Internal Uses

• Cost and risk sharing

• Economies of scale benefits

• Intelligence - access to new technologies and customers

• Innovative managerial practices

Motivation for IJV Formation: Competitive Uses

• Influence industry structure’s evolution

• First-mover advantages

• Defensive response to blurring industry boundaries and globalisation

• Creation of more effective competitors

Motivation for IJV Formation: Strategic Uses

• Creation and exploitation of synergies

• Technology (or other skills) transfer

• Market diversification

Stages in Planning, Negotiating and Managing JVs

• Establish JV objectives

• Conduct cost/benefit analysis

– Is this the best entry mode?

– Financial commitment

– Synergy

– Management commitment

– Risk reduction

– Control

– Long-run market penetration

– Other advantages/disadvantages

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• Selecting partner(s)

– Profile of desired partner(s)

– Identify and screen partners to prepare a short-list

– Initial contact/discussion

– Choice of partner

• Develop business plan

• Achieve broad agreement on:

• Partner’s inputs

• Venture outputs

• Management style and decision-making processes

• Performance evaluation system

• R&D policy

• Production and procurement policies

• Marketing policies and practices

• Personnel policies

• Negotiation of IJV agreement

– Final agreement on business plan

– However negotiating styles may vary dramatically

• Direct Vs indirect

• Slow pace Vs fast pace

• Small number in negotiating team Vs large number in team etc

• Contract writing

– Incorporation of agreement in legally binding contract allowing for subsequent modifications to the agreement

• Performance evaluation

• Establish control system for measuring IJV performance

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Major Aspects of an IJV Agreement

• Purpose and character of the IJV

– Major goals/strategy of the foreign partner

– Major goals/strategy of the local partner

– Products/industries/markets/customers served

Major Aspects of an IJV Agreement: Contributions of each partner

• Capital

• Existing land, plant, warehouse, offices, other facilities

• Manufacturing design, processes, technical know-how

• Product know-how

• Patents and trademarks

• Managerial, production, marketing, financial, organisational and other expertise

• Technical assistance and training

• Management development

• Local relationships with government, financial institutions, customers, suppliers etc

Major Aspects of an IJV Agreement: Responsibilities and Obligations of each partner

• Procurement and installation of machinery and equipment

• Construction, modernisation of machinery and equipment

• Production operations

• Recruitment & training of workers and foreman

• Quality Control

• Relationships with labour unions

• R&D

• General, financial, marketing, personnel and other management

• Continuous training of personnel

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Major Aspects of an IJV Agreement: Equity Ownership

• Ownership share of each partner

• Equity granted to foreign partner for manufacturing and product technology & intellectual property rights

• Equity granted to local partner for land, plants, warehouse, facilities etc.

Major Aspects of an IJV Agreement: Capital Structure

• Equity capital

• Loan capital, national and foreign

• Working capital

• Provisions for raising future loan funds

• Loan guarantees by partners

• Future increase in equity capital

• Transfers of shares of stock, including limitations

Major Aspects of an IJV Agreement: Management

• Appointment/composition/authority of the board of directors

• Appointment and authority of executive officers

• Expatriate managers, technicians and staff

• Right of veto of appointment of officers and key decisions

• Development of local managers, including time schedule

• Organisation

• Strategic & operational planning

• Information system

• Control procedures

Major Aspects of an IJV Agreement: Other

• Supplementary agreements

• Managerial policies

– Export markets & commitments

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• Accounting & financial statements

• Settlement of disputes

– Arbitration

• Legal matters

Equity Joint Ventures

• Political imperative

• Competitive Imperative

• With liberalisation the political imperative has become much less important

• But MNCs have simultaneously realised that often they underestimated the competitive imperative

GGLOBALLOBAL A ALLIANCESLLIANCES ANDAND S STRATEGYTRATEGY I IMPLEMENTATIONMPLEMENTATION

Strategic Alliances

Partnerships between two or more firms that combine financial, managerial, and technological resources and their distinctive competitive advantages to pursue mutual goals

Also referred to as cooperative strategies

Alliances are transition mechanisms that propel the partners’ strategies forward faster than would be possible for each company alone.

Categories of Alliances

Joint Ventures

PSA Peugeot-Citroen Group and Toyota

Equity strategic alliances

TCL-Thompson Electronics

Non-equity strategic alliances

UPS and Nike

Global strategic alliances

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Covisint

Joint ventures (JVs) are independent entities jointly created and owned by two or more parent companies. An international joint venture (IJV) is a joint venture among companies in different countries. The JV form for a firm may comprise a majority (more than 50% equity), a minority (less than 50% equity), or may be 50-50 (equal equity). An example of a 50-50 IJV is between France’s PSA Peugeot-Citroen Group and Japan’s Toyota in the Czech Republic. From this IJV Toyota gains knowledge of suppliers and their capabilities from one of Europe’s biggest indigenous car makers. Peugeot-Citroen gains experience from Toyota’s manufacturing system.

In equity strategic alliances two or more partners have different relative ownership shares in the new venture. An example is TCL-Thompson Electronics. France’s Thompson owns 33% of the combined company and China’s TCL owns 67%. Most global manufacturers have equity alliances with suppliers, sub assemblers, and distributors.

Motivations and Benefits of Global and Cross-Border Alliances

To avoid import barriers, licensing requirements, and other protectionist legislation

To share costs of research and development

Toshiba

To gain access to markets that favor domestic companies

To reduce political risk

To gain rapid entry into a new or consolidating industry

In the semi-conductor industry each new generation of memory chips is estimated to cost more than $1 billion to develop and technological evolution is rapid. In this and similar industries, such endeavors usually require the resources of more than one firm. For example, Toshiba has more than two dozen major joint ventures and strategic alliances around the world.

Challenges in Implementing Global Alliances

Many alliances fail or end up in takeover

Choosing the right form of governance

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The benefits of cooperation vs. the dangers of new competition

A recent survey by McKinsey & Company of 150 companies in alliances found that 75% had been taken over by Japanese partners. Many of the issues associated with international activities already discussed also contribute to the difficulty of creating successful alliances. These include problems with shared ownership, differences in national cultures, the integration of different structures and systems, the distribution of power, and conflicts about the locus of decision making and control.

Choice of governance—either contractual agreement or joint venture—often depends on the desire to control information about proprietary technology. Joint ventures provide greater control and coordination in high-technology industries.

Often cross-border partnerships become a “race to learn,” with the faster learner later dominating the alliance and rewriting its terms. Partners also often have problems with mistrust and secrecy when it comes to competitively sensitive areas. The cumulative learning gained through an alliance can potentially be applied to other products or industries beyond the alliance.

Guidelines for Successful Alliances

Choose a partner with compatible strategic goals and objectives

Seek complementary skills, products, and markets

Work out how each partner will deal with proprietary knowledge or competitively sensitive information

Recognize that most alliances only last a few years

INTERNATIONAL STRATEGIC ALLIANCESINTERNATIONAL STRATEGIC ALLIANCES

• Distinctive traits of ISAs

• Trends in alliance formation

• ISA motivations

• Problems involved in managing ISAs

PLEASE NOTE ISAs DO NOT INVOLVE FDI

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International strategic alliances involve co-operation between two or more corporations, belonging to different countries, whereby each partner seeks to add to its competencies by combining its resources with those of other partners” (Jain, 1997)

International coalitions are formal, long-term alliances between firms that link aspects of their business but fall short of merger” (Porter, 1986)

Major Differences Between ‘Conventional’ Collaboration and ISAs

Conventional Collaboration Strategic AlliancesPartners Developed

economy/emerging economy

Developed economy/ Developed economy

Competition Limited Partners compete as well as collaborate

Contributions Imbalance in contributions – technology, capital etc Vs local market knowledge

Balanced contributions re, technology, manufacturing, marketing etc

Motivations Market access;Economies of scale; resource sharing

Strategic and competitive (global orientation)

Failure Consequences Limited to local market Reduced global competitiveness

Type of Coalition Comments

Technology development • Aims to reduce costs and sharing of risks• Pooling R&D• Transfer from ‘leaders’ to ‘followers’

Operations & Logistics • Aims at improving manufacturing/production efficiency through scale and/or learning economies

Marketing, sales & service • Motivated by the need for market accessMultiple-activity • Co-operation which involves some

combination of the aboveSingle country & multi-country • Refers to the geographical scope of the

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coalition

Motives for ISAs

Benefits of ISAs

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Growth of ISAs

Competitive

TechnologyGlobalisation

Governmental

Regionalisation


ISAs: The Costs

• Co-ordination costs; erosion of competitive position; creation of an adverse bargaining position (Porter)

• Mutual dependency (Jain)

• Competitive compromise; dependency spiral; distrust and conflict (Hamel, Doz and Prahalad)

ISAs: The Risks

• Imbalance in benefits

• Imbalance in commitment

• Communication problems

• Conflict between partners

• Retaliation from governments

• Costly divorce

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Growth of ISAs

RiskReduction

TechnologyDevelopment

Economies ofScale

ShapingCompetition

New MarketOpportunities


Reduce the risks….

• Make sure needs are complementary

• Make sure there are complementary strengths

• The objectives of each party should be compatible

• Share power

• Make sure the benefits of the ISA are evenly distributed

Four tips…..

• Collaboration is competition in a different form

– each partner needs to understand how the other’s objectives will effect their success

• Harmony is not essential

– a slight edge may be required to avoid surrender of core skills

• Companies must defend against competitive compromise

• Learning from partners is paramount

Traditional Determinants of FDI Location

• Access to natural resources

• Cost reduction

• Market access

• These continue to be important

– Hence investment flows to Big Emerging Markets (BEMs)

– And for emerging TNCs

Alternative Market Entry and Development Strategies

• ISAs assist in rapid internationalisation

• As do IJVs

• But the high costs in IAMs prohibit extensive simultaneous use of this mode of expansion

– However they potentially offer immediate delivery of benefits

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THE STRATEGIC MANAGEMENT PROCESSTHE STRATEGIC MANAGEMENT PROCESS

Logic of Corporate Level Strategy Applies

Corporate level strategy should create value:

1) Such that the value of the corporate whole increases.2) Such that businesses forming the corporate whole are worth more than they would be

under independent ownership.3) Those equity holders cannot create through portfolio investing.

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Mission Objectives

ExternalAnalysis

InternalAnalysis

StrategicChoice

StrategyImplementation

CompetitiveAdvantage

Corporate LevelStrategy

Which Businessesto Enter?

• Diversification

• Strategic AlliancesMode of Entry?

• Mergers & Acquisitions


MERGERS & ACQUISITIONS DEFINEDMERGERS & ACQUISITIONS DEFINED

Do Mergers and Acquisitions Create Value?

The Logic

Unrelated M&A Activity

There would be no expectation of value creation due to the lack of synergies between businesses.

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Mergers Acquisitions

• two firms are combined ona relatively co-equal basis

• one firm buys anotherfirm

• the words are often used interchangeably eventhough they mean something very different

• merger sounds more amicable, less threatening

• parent stocks are usuallyretired and new stock issued

• name may be one of the parents’ or a combination

• can be a controllingshare, a majority, or all of the target firm’sstock• can be friendly orhostile

Mergers Acquisitions

• usually done througha tender offer

• one of the parents usuallyemerges as the dominantmanagement


• There might be value creation due to efficiencies from an internal capital market.

• There might be value creation due to the exploitation of a conglomerate discount.

• A corporate raider who buys and restructures firms.

Mergers & Acquisitions Defined

Do Mergers and Acquisitions Create Value?

The Logic

Related M&A Activity

• Value creation would be expected due to synergies between divisions

• Economies of scale

• Economies of scope

• Transferring competencies

• Sharing infrastructure, etc.

The Empirical Evidence

Research is based on stock market reaction to the announcement of M&A activity.

This reflects the market’s assessment of the expected value of the merger or acquisition

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Types of M&A ActivityFTC

CategoriesVertical

HorizontalProduct ExtensionMarket Extension

Conglomerate

» suppliers or customers» competitors

» complementary products» complementary markets

» everything else

Related

Unrelated


These studies look at what happens to the price of both the acquirer’s stock and the target’s stock.

Thus, we can see who is capturing any expected value that may be created

M&A Activity creates value, on average, as follows:

Related M&A activity creates more value than unrelated M&A activity.

M&A activity creates value, but target firms capture it

Expected versus Operational Value

April 2000: Wells Fargo offers to acquire First Security Bank for about $3 billion

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AcquiringFirms

TargetFirms

• no value created • value increases byabout 25%

Wells Fargo: down $0.25 to $39.50First Security: up $1.19 to $13.38

Stock Price Market Cap.12/1999 $40.44 $65.7 B12/2000 $56.69 $95.2 B12/2001 $43.60 $74.0 B12/2002 $46.87 $82.0 B12/2003 $58.89 $100.0 B12/2004 $62.15 $105.0 B

Stock values were: Wells Fargo: $43.69 First Security: $15.50

The Deal:

.355 shares of WF for eachshare of FS stock

Expected Operational


Why is M&A Activity So Prevalent?

If managers know that acquiring firms do not capture any value from M&A’s, why do they continue to merge and acquire?

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Survival

Free CashFlow• cash generating, normal return investment

• avoid competitive disadvantage• avoid scale disadvantages

AgencyProblems

ManagerialHubris

• managers benefit from increases in size• managers benefit from diversification

• managers believe they can beat the odds


Competitive Advantage

Can an M&A strategy generate sustained competitive advantage?

Yes, if managers’ abilities meet VRIO criteria

1. Managers may be good at recognizing & exploiting potentially value-creating economies with other firms.

2. Managers may be good at doing ‘deals’.3. Managers may be good at both.

Recognizing and Exploiting Economies of Scope

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Above NormalProfits

• proposed M&A activity may satisfythe logic of corporate level strategy

• managers may see economies thatthe market can’t see

• some M&A activity does generateabove normal profits (expected andoperational over the long run)


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Private Economies

Firm A

Firm B

Firm C

• Firm C’s recognizedvalue is $10,000

• Firm A can earn aprofit of $2,000only if the economyremains private

Bidders Target

• Firm A sees valueof $12,000 in Firm C

Costly-to-ImitateEconomiesFirm A

Firm B

Firm C

Bidders Target

• if the economybetween A & Cis costly to imitate,it doesn’t matterif other firms know• Firm A can still earna $2,000 profit


Doing the Deal:

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Firm A

Firm B

Firm C

Bidders Target

UnexpectedEconomies• Firm C has a market

value of $10,000• Firm A buys Firm Cfor $10,000• Firm C turns out to beworth $12,000

Bidding Firm’sPerspective

Search forRare EconomiesLimit Information

to Other BiddersLimit Information

to the TargetAvoid Bidding

Wars

Close theDeal Quickly

Seek ThinlyTraded Markets


Implementation Issues

Structure, Control, and Compensation

M&A activity requires responses to these issues:

m-form structure is typically used Management controls & compensation policies are similar to those used in diversification

strategies.

Managers must decide on the level of integration:

Target firm may remain somewhat autonomous Target firm may be completely integrated

Cultural Differences:

High levels of integration require greater cultural blending Cultural blending may be a matter of:

• Combining elements of both cultures • Essentially replacing one culture with the other

Integration may be very costly, often unanticipated. The ability to integrate efficiently may be a source of competitive advantage

International Issues

Government Policy:

Governments may constrain ownership by foreign firms

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Target Firm’sPerspective

Seek Informationfrom Bidders

Invite Other Bidders toJoin in Bidding Contest

Delay, But Do NotStop the Acquisition


Governments may restrict repatriation of profits Government labor policy may limit a firm’s ability to apply management practices to target

firm

Cultural Issues:

Summary:

M&A activity is a mode of entry for vertical integration and diversification strategies A firm’s M&A strategy should satisfy the logic of corporate level strategy M&A activity can create economic value at announcement, but target firms usually capture

that value. M&A activity can create value over the long term for the acquiring firm

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Time OrientationLong-term Short-term

Goal OrientationAggressive Passive

Uncertainty Orientation

Acceptance Avoidance

Power Orientation ToleranceRespect

Social OrientationIndividualism Collectivism

(Hofstede, 1980)


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Module 2 (ism)

Business

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