chapter 1 WHAT IS STRATEGY AND WHY IS IT IMPORTANT? McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. LO1 Understand why every company needs a sound strategy to compete successfully, manage its business operations, and strengthen its prospects for long-term success. LO2 Develop an awareness of the five most dependable strategic approaches for setting a company apart from rivals and winning a sustainable competitive advantage. LO3 Understand that a company’s strategy tends to evolve over time because of changing circumstances and ongoing management efforts to improve the company’s strategy. LO4 Learn why it is important for a company to have a viable business model that outlines the company’s customer value proposition and its profit formula. LO5 Learn the three tests of a winning strategy. 1-2 Strategy’s Three Central Questions u Where are we now? Ø Current financial performance Ø Market standing Ø Competitive resources and capabilities Ø Changing industry conditions u Where do we want to go from here? Ø What buyer needs to try to satisfy? Ø Which growth opportunities to emphasize? Ø How to change the business makeup? u How are we going to get there? Ø Which competitive moves and business approaches to use as a strategy? 1-3 What Do We Mean By Strategy? uA firm’s strategy is all about how: Ø How to attract and please customers. Ø How to compete against rivals. Ø How to position the firm in the marketplace to capitalize on attractive growth opportunities. Ø How best to respond to changing economic and market conditions. Ø How to manage each functional piece of the business. Ø How to achieve the firm’s performance targets. 1-4 FIGURE 1.1 Elements of a Company’s Strategy 1-5 è Core Concept ç A company’s strategy consists of the competitive moves and business approaches management has developed to attract and please customers, compete successfully, capitalize on opportunities to grow the business, respond to changing market conditions, conduct operations, and achieve performance objectives. 1-6 Strategy and the Quest for Competitive Advantage u Gaining a sustainable competitive advantage requires: Ø Choosing to compete differently by doing what rivals don’t do or can’t do. Ø Appealing to buyers in ways that set the firm apart from its rivals. Ø Staking out a market position that is not crowded with strong rivals. 1-7 McDonald’s Strategy in the Quick-Service Restaurant Industry Key initiatives of the Plan-to-Win strategy included: • Improved restaurant operations • Affordable pricing • Wide menu variety and beverage choices • Convenience and expansion of dining opportunities • Ongoing restaurant reinvestment and international expansion 1-8 è Core Concept ç A firm achieves sustainable competitive advantage when an attractively large number of buyers develop a durable preference for its products or services over the offerings of competitors, despite the efforts of competitors to overcome or erode its advantage. 1-9 è Concept to Action ç Mimicking the strategies of successful industry rivals—with either copycat product offerings or efforts to stake out the same market position— rarely works. A creative, distinctive strategy that sets a firm apart from rivals and yields a competitive advantage is a firm’s most reliable ticket for earning above-average profits. 1-10 Choosing a Strategic Approach 1. A low-cost provider strategy 2. A broad differentiation strategy 3. A focused low-cost strategy 4. A focused differentiation strategy 5. A best-cost provider strategy 1-11 Choosing a Strategic Approach low-cost provider broad differentiation focused differentiation focused low-cost best-cost provider 1-12 Why Strategy Evolves Over Time uA strategy changes over time as: Ø Competitors make unexpected moves Ø The needs and preferences of buyers change Ø New market opportunities emerge Ø Managers develop new ideas to improve the strategy Ø Evidence mounts that the strategy is not working well uA strategy evolves: Ø Incrementally or dramatically Ø Proactively and adaptively 1-13 è Concept to Action ç Changing circumstances and ongoing management efforts to improve the strategy cause a company’s strategy to evolve over time—a condition that makes the task of crafting a strategy a work in progress, not a onetime event. 1-14 FIGURE 1.2 A Company’s Strategy Is a Blend of Planned Initiatives and Unplanned Reactive Adjustments 1-15 The Relationship Between a Firm’s Strategy and Its Business Model u Business Model Ø Management’s blueprint for delivering a product or service to customers that will generate revenues sufficient to cover costs and yield an attractive profit. u Business Model Elements Ø The firm’s customer value proposition for satisfying buyer wants and needs at a perceived good value. Ø The firm’s profit formula sets out how the firm’s cost structure will allow for acceptable profits given the pricing tied to its customer value proposition. 1-16 è Core Concept ç A firm’s business model sets forth how its strategy and operating approaches will create value for customers, while at the same time generate ample revenues to cover costs and realize a profit. The two elements of a firm’s business model are (1) its customer value proposition and (2) its profit formula. 1-17 Netflix And Redbox: Two Contrasting Business Models Netflix Redbox Value Proposition Convenient delivery of movies to customers’ mailboxes or streamed to their PCs, Macs, or TVs. Economical 24-hour movie rentals and purchases that could be picked up at conveniently located DVD kiosks. Profit Formula Revenue Generation: Monthly subscription fees from millions of subscribers Revenue Generation: Customers could rent DVDs and purchase DVDs from Redbox’s DVD vending machine kiosks. Cost structure: Fixed and variable costs associated with DVD acquisitions, licensing fees and revenue sharing agreements, development of movie selection software, website operation and maintenance, Internet streaming capabilities, distribution center operations, and administrative activities. Profit Margin: Netflix’s profitability was dependent on attracting a sufficiently large number of subscribers to cover its costs and provide for attractive profits. Cost Structure: Fixed and variable costs associated with the kiosk purchases and deployment, DVD acquisitions, licensing fees and revenue sharing agreements, website operation and maintenance, kiosk stocking, and administrative activities. Profit Margin: Redbox’s profitability was dependent on generating sufficient revenues from DVD rentals and sales to cover costs and provide for a healthy bottom line. 1-18 The Three Tests of a Winning Strategy Fit How well does the strategy fit the firm’s situation? Competitive Advantage Is the firm achieving sustainable competitive advantage? Performance Is the strategy producing good company performance? 1-19 è Concept to Action ç A winning strategy must fit the firm’s external and internal situation, build sustainable competitive advantage, and improve company performance. 1-20 Measuring the Caliber of a Firm’s Strategy u Is the strategy producing good performance? Ø Is the firm gaining in profitability and financial strength? Ø Is the firm gaining in competitive strength and market standing? u Assessing current and proposed strategies: Ø Do they have good fit? Ø Do they offer a sustainable competitive advantage? Ø Are they capable of contributing to above-average performance or performance improvements? 1-21 The Road Ahead u Strategy is about asking and answering a most important question: Ø What must managers do, and do well, to make a company a winner in the marketplace? Ø The answer is that doing a good job of managing requires good strategic thinking and good management of the strategy-making, strategyexecuting process. Ø Best wishes for your success in the class!! 1-22 chapter 2 CHARTING A COMPANY’S DIRECTION: VISION AND MISSION, OBJECTIVES, AND STRATEGY McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. LO1 Grasp why it is critical for company managers to have a clear strategic vision of where a company needs to head and why. LO2 Understand the importance of setting both strategic and financial objectives. LO3 Understand why the strategic initiatives taken at various organizational levels must be tightly coordinated to achieve companywide performance targets. LO4 Become aware of what a company must do to achieve operating excellence and to execute its strategy proficiently. LO5 Become aware of the role and responsibility of a company’s board of directors in overseeing the strategic management process. 2-2 What Does the Strategy-Making, Strategy-Executing Process Entail? 1. 2. 3. 4. Developing a strategic vision Setting objectives Crafting a strategy Implementing and executing the chosen strategy 5. Monitoring developments, evaluating performance, and initiating corrective adjustments 2-3 FIGURE 2.1 The Strategy-Making, Strategy-Executing Process 2-4 TABLE 2.1 Factors Shaping Decisions in the Strategy-Making, Strategy-Executing Process External Considerations Internal Considerations Does sticking with the company’s present strategic course present attractive opportunities for growth and profitability? Does the company have an appealing customer value proposition? What kind of competitive forces are industry members facing and are they acting to enhance or weaken the company’s prospects for growth and profitability? What are the company’s competitively important resources and capabilities and are they potent enough to produce a sustainable competitive advantage? What factors are driving industry change and what impact on the company’s prospects will they have? Does the company have sufficient business and competitive strength to seize market opportunities and nullify external threats? How are industry rivals positioned and what strategic moves are they likely to make next? Are the company’s prices and costs competitive with those of key rivals? What are the key factors of future competitive success and does the industry offer good prospects for attractive profits for companies possessing those capabilities? Is the company competitively stronger or weaker than key rivals? 2-5 Factors Shaping Strategic Decisions u External Considerations Ø What are the industry’s economic characteristics? Ø How strong are the competitive forces at play? Ø What forces are driving change in the industry? Ø What market positions do rivals occupy and what moves are they likely to make next? Ø What are the key factors for future competitive success? Ø What are the company’s external opportunities? 2-6 Factors Shaping Strategic Decisions u Internal Considerations Ø How well is the present strategy working? Ø What are the company’s competitively valuable resources, capabilities, and internal weaknesses? Ø Are the company’s prices and costs competitive? Ø Is the company competitively stronger or weaker than key rivals? 2-7 Stage 1: Developing a Strategic Vision, a Mission, and Core Values u Strategic Vision Ø Is top management’s views about the firm’s direction and future product-market-customer-technology focus Ø Provides a panoramic view of “where we are going” Ø Is distinctive and specific to a particular organization Ø Avoids use of innocuous uninspiring language that could apply to most any firm Ø Definitively states how the company’s leaders intend to position the firm beyond where it is today 2-8 Characteristics of Effectively Worded Vision Statements u Graphic u Ø Paints a picture of the kind of firm that management is trying to create u Directional Ø Is not so focused that it makes it difficult to adjust u u Focused is possible u Desirable Ø Indicates why the directional Ø Is specific enough to provide guidance in decision making Feasible Ø Is within the realm of what Ø Is forward looking to change Flexible path makes sense u Easy to Communicate Ø Can be explained in simple terms 2-9 TABLE 2.2 Characteristics of Effectively Worded Vision Statements Graphic Paints a picture of the kind of company that management is trying to create and the market position(s) the company is striving to stake out. Directional Is forward looking; describes the strategic course that management has charted and the kinds of product-market-customer-technology changes that will help the company prepare for the future. Focused Is specific enough to provide managers with guidance in making decisions and allocating resources. Flexible Is not so focused that it makes it difficult for management to adjust to changing circumstances in markets, customer preferences, or technology. Feasible Is within the realm of what the company can reasonably expect to achieve. Desirable Indicates why the directional path makes good business sense. Easy to communicate Is explainable in 5 to 10 minutes and, ideally, can be reduced to a simple, memorable “slogan” 2-10 TABLE 2.3 Common Shortcomings in Company Vision Statements Vague or incomplete Short on specifics about where the company is headed or what the company is doing to prepare for the future. Not forward looking Doesn’t indicate whether or how management intends to alter the company’s current product-market-customer-technology focus. Too broad So all-inclusive that the company could head in most any direction, pursue most any opportunity, or enter most any business. Bland or uninspiring Lacks the power to motivate company personnel or inspire shareholder confidence about the company’s direction. Not distinctive Provides no unique company identity; could apply to firms in any of several industries (including rivals operating in the same market arena). Too reliant on superlatives Doesn’t say anything specific about the company’s strategic course beyond the pursuit of such distinctions as being a recognized leader, a global or worldwide leader, or the first choice of customers. 2-11 Concepts and Connections 2.1 Examples of Strategic Visions—How Well Do They Measure Up? 2-12 Concepts and Connections 2.1 Examples of Strategic Visions—How Well Do They Measure Up? 2-13 Examples of Vision Statements To be the global leader in customer value. Provide a global trading platform where practically anyone can trade practically anything. Red Hat To extend our position as the most trusted Linux and open source provider…through a complete range of enterprise software, a powerful Internet platform, and associated support and services. 2-14 è Core Concept ç Strategic Inflection Points A change in vision is required when it becomes evident to management that the industry has changed in a significant way that renders the company’s current vision obsolete. 2-15 The Importance of Communicating the Strategic Vision u An engaging, inspirational vision Ø Challenges and motivates the workforce Ø Articulates a compelling case for “where we are going and why” Ø Evokes positive support and excitement Ø Arouses a committed organizational effort to move in a common direction 2-16 Expressing the Essence of the Vision in a Slogan u Nike Ø To bring innovation and inspiration to every athlete in the world u The Mayo Clinic Ø The best care to every patient every day u Greenpeace Ø To halt environmental abuse and promote environmental solutions. 2-17 Why a Sound, Well-Communicated Strategic Vision Matters 1. It crystallizes senior executives’ own views about the firm’s long-term direction. 2. It reduces the risk of rudderless decision making by management at all levels. 3. It is a tool for winning the support of employees to help make the vision a reality. 4. It provides a beacon for lower-level managers in forming departmental missions. 5. It helps an organization prepare for the future. 2-18 Strategic Vision versus Mission Statement uA strategic vision concerns a firm’s future business path—“where we are going” u The mission statement of a firm focuses on its present business purpose—“who we are and what we do” Ø Markets to be Ø Current product and pursued Ø Future product/ market/customer/ technology focus service offerings Ø Customer needs being served 2-19 Developing a Company Mission Statement u Ideally, a company mission statement is sufficiently descriptive to: Ø Identify the company’s products or services. Ø Specify the buyer needs it seeks to satisfy. Ø Specify the customer groups or markets it is endeavoring to serve. Ø Specify its approach to pleasing customers. Ø Give the company its own identity. 2-20 Example of a Mission Statement The mission of Trader Joe’s is to give our customers the best food and beverage values that they can find anywhere and to provide them with the information required for informed buying decisions. We provide these with a dedication to the highest quality of customer satisfaction delivered with a sense of warmth, friendliness, fun, individual pride, and company spirit. 2-21 Examples of Mission Statements To help people and businesses throughout the world realize their full potential. To organize the world’s information and make it universally accessible and useful. 2-22 Strategic Mission, Vision, and Profit u Firms sometimes state that their mission is to simply earn a profit. ØProfit is the obvious intent of every commercial enterprise. u Profit is not “who we are and what we do.” u Profit is more correctly an objective and a result of what a firm does. 2-23 Linking the Strategic Vision and Mission with Company Values CORE CONCEPT A firm’s values are the beliefs, traits, and behavioral norms that the firm’s personnel are expected to display in conducting the firm’s business and pursuing its strategic vision and mission. 2-24 CONCEPTS & CONNECTIONS 2.2 ZAPPOS MISSION AND CORE VALUES Deliver Wow through Service Embrace and Drive Change Create Fun and a Little Weirdness Be Adventurous, Creative, and Open Minded Pursue Growth and Learning Build Open and Honest Relationships with Communication Build a Positive Team and Family Spirit Do More with Less Be Passionate and Determined Be Humble 2-25 Stage 2: Setting Objectives u Why set objectives? Ø To convert the strategic vision into specific performance targets Ø To create yardsticks to track progress and measure performance u Objectives should: Ø Be well-stated (clearly worded) Ø Be challenging, yet achievable in order to stretch the organization to perform at its full potential Ø Be quantifiable (measurable) Ø Contain a specific deadline for achievement 2-26 è Core Concept ç Objectives are an organization’s performance targets—the results management wants to achieve. 2-27 Stage 2: Setting Objectives (cont’d) u What Kinds of Objectives to Set Ø Financial objectives v Communicate management’s targets for financial performance v Are lagging indicators that reflect the results of past decisions and organizational activities v Relate to revenue growth, profitability, and return on investment 2-28 Stage 2: Setting Objectives (cont’d) u What Kinds of Objectives to Set Ø Strategic objectives v Are related to a firm’s marketing standing and competitive vitality v Are leading indicators of a firm’s future financial performance and business prospects. v If achieved, indicate that a firm’s future financial performance will be better than its current or past performance. 2-29 è Core Concept ç The balanced scorecard is a widely used method for combining the use of both strategic and financial objectives, tracking their achievement, and giving management a more complete and balanced view of how well an organization is performing. 2-30 TABLE 2.4 The Balanced Scorecard Approach to Performance Measurement Financial Objectives Strategic Objectives • An x percent increase in annual revenues • Winning an x percent market share • Annual increases in earnings per share of x percent • Achieving customer satisfaction rates of x percent • An x percent return on capital employed (ROCE) or shareholder investment (ROE) • • Bond and credit ratings of x • • Internal cash flows of x to fund new capital investment • • • Increase percentage of sales coming from new products to x percent • Improve information systems capabilities to give frontline managers Achieving a customer defect information in retention rate of x percent x minutes Acquire x number of new • Improve teamwork by customers increasing the number of Introduction of x number projects involving more of new products in the than one business unit next three years to x Reduce product development times to x months 2-31 Examples of Financial Objectives u X% increase in annual revenues u X% increase annually in after-tax profits u Profit margins of X% u X% return on capital employed (ROCE) u Sufficient internal cash flows to fund 100% of new capital investment 2-32 Examples of Strategic Objectives u Winning an X% market share u Achieving a customer retention rate of X% u Acquire X number of new customers u Reduce product defects to X% u Introduction of X number of new products in the next three years u Increase employee training to X hours/year u Reduce turnover to X% per year 2-33 Examples of Company Objectives General Motors Ø Reduce the percentage of automobiles using internal combustion engines through the development of hybrids, range-extended electric vehicles, and hydrogen fuel cell electric engines. Ø Reduce automotive structural costs to benchmark levels of 23% of revenue by 2012 from 34% in 2005. Ø Reduce annual U.S. labor costs by an additional $5 billion by 2011. 2-34 Examples of Company Objectives The Home Depot u Be the number one destination for professional contractors. u Improve in-stock positions so customers can find and buy exactly what they need. u Deliver differentiated customer service and the know-how that our customers have come to expect. u Repurchase $22.5 billion of outstanding shares during 2008. u Open 55 new stores with 5 store relocations in 2008. 2-35 Short-Term and Long-Term Objectives u Short-Term Objectives Ø Targets to be achieved soon Ø Milestones or stair steps for reaching long-range performance u Long-Term Objectives Ø Targets to be achieved within 3 to 5 years 2-36 The Need for Objectives at All Organizational Levels u Objectives Are Needed at All Levels 1. Set business-level objectives 2. Establish functional-area objectives 3. Set operating-level objectives last u Long-term objectives take precedence over short-term objectives 2-37 Stage 3: Crafting a Strategy u Crafting a strategy means asking: Ø How to attract and please customers Ø How to compete against rivals Ø How to position the firm in the marketplace and capitalize on attractive opportunities to grow the business Ø How best to respond to changing economic and market conditions Ø How to manage each functional piece of the business Ø How to achieve the firm’s performance targets 2-38 A Firm’s Strategy-Making Hierarchy uA firm’s strategy is a collection of initiatives undertaken by managers at all levels in the organizational hierarchy u Crafting strategy is a collaborative effort that: Ø Involves managers from various levels of the organization Ø Is rarely something only high- level executives engage in Ø Requires choosing among the various strategic alternatives 2-39 è Concept to Action ç In most firms, crafting strategy is a collaborative team effort that includes managers in various positions and at various organizational levels. Crafting strategy is rarely something only highlevel executives do. 2-40 è Concept to Action ç Corporate strategy establishes an overall game plan for managing a set of businesses in a diversified, multibusiness firm. Business strategy is primarily concerned with strengthening the firm’s market position and building competitive advantage in a single business company or a single business unit of a diversified multibusiness corporation. 2-41 FIGURE 2.2 A Company’s Strategy-Making Hierarchy 2-42 Corporate Strategy versus Business Strategy Corporate strategy is orchestrated by the CEO and other senior executives and establishes an overall game plan for managing a set of businesses in a diversified, multibusiness company. u Business strategy is primarily concerned with building competitive advantage in a single business unit of a diversified company or strengthening the market position of a nondiversified single business company. u 2-43 The Strategy-Making Hierarchy Corporate strategy • Is orchestrated by the CEO and other senior executives and establishes an overall game plan for managing a set of businesses in a diversified, multibusiness company. • Addresses the questions of how to capture cross-business synergies, what businesses to hold or divest, which new markets to enter, and how to best enter new markets—by acquisition, creation of a strategic alliance, or through internal development. Business strategy • Is primarily concerned with building competitive advantage in a single business unit of a diversified company or strengthening the market position of a nondiversified single business company. Functional-area strategies • Are concerned with the strategies specifically related to particular functions or processes within a business (marketing strategy, production strategy, finance strategy, customer service strategy, product development strategy, and human resources strategy). Operating strategies • Are relatively narrow strategic initiatives and approaches of limited scope for managing key operating units (plants, distribution centers, geographic units) and specific operating activities such as materials purchasing or Internet sales. 2-44 Stage 4: Implementing and Executing the Chosen Strategy u Managing the strategy execution process involves: Ø Staffing the organization to provide needed skills and expertise. Ø Allocating ample resources to activities critical to good strategy execution. Ø Ensuring that policies and procedures facilitate rather than impede effective execution. Ø Installing information and operating systems that enable personnel to perform essential activities. 2-45 Stage 4: Implementing and Executing the Chosen Strategy (con’d) u Managing the strategy execution process involves: Ø Pushing for continuous improvement in how value chain activities are performed. Ø Tying rewards and incentives directly to the achievement of performance objectives. Ø Creating a company culture and work climate conducive to successful strategy execution. Ø Exerting the internal leadership needed to propel implementation forward. 2-46 Stage 5: Evaluating Performance and Initiating Corrective Adjustments u Triggering change as needed: Ø Monitoring new external developments Ø Evaluating the firm’s progress Ø Making corrective adjustments u Managing strategy is an ongoing process, not an every-now-and-then task Ø A firm’s vision, objectives, strategy, and approach to strategy execution are never final 2-47 Corporate Governance: The Role of the Board Of Directors u The Role of the Board Of Directors in the StrategyMaking, Strategy-Executing Process: 1. Oversee the firm’s financial accounting and reporting practices. 2. Diligently critique and oversee the company’s direction, strategy, and business approaches. 3. Evaluate the caliber of senior executives’ strategy-making and strategy-executing skills. 4. Institute a compensation plan for top executives that rewards them for actions and results that serve shareholder interests. 2-48 Strong Boards Lead to Good Corporate Governance uA Strong, Independent Board of Directors: Ø Is well informed about the company’s performance Ø Guides and judges the CEO and other top executives Ø Has the courage to curb management actions it believes are inappropriate or unduly risky Ø Certifies to shareholders that the CEO is doing what the board expects Ø Provides insight and advice to management Ø Is intensely involved in debating the pros and cons of key decisions and actions 2-49 Leading the Strategic Management Process u The Strategic Management Process calls for six managerial actions: 1. Making sure the company has a good strategic plan 2. Stay on top of what is happening (MBWA) 3. Putting constructive pressure on organizational units to achieve good results 2-50 Leading the Strategic Management Process (cont’d) u The Strategic Management Process calls for six managerial actions: 4. Pushing corrective actions to improve both the firm’s strategy and how well it is being executed 5. Leading the development of better competitive capabilities 6. Displaying ethical integrity and leading social responsibility initiatives 2-51 Making Sure a Firm Has a Good Strategic Plan u Responsibility of CEO Ø Effectively communicate the vision, objectives, and major strategy components Ø Exercise due diligence in reviewing lower-level strategies for consistency with higher-level strategies 2-52 Staying on Top of How Well Things Are Going u Stay connected to the field by managing by walking around (MBWA) u Insist that top managers spend time in the trenches to exchange information and ideas through face-to-face contact with employees u Prevent overly abstract thinking and getting disconnected with reality of what’s happening 2-53 Pushing for Good Results and Operating Excellence u Fosters a results–oriented, high-performance culture Ø Treat employees with dignity and respect Ø Encourage employees to use initiative and creativity in performing their work Ø Set stretch objectives and clearly communicate expectations Ø Focus attention on continuous improvement Ø Reward high performance Ø Celebrate successes 2-54 Initiating Corrective Actions to Improve Strategy and Execution u The leadership challenge of making corrective adjustments is twofold: Ø Deciding when adjustments are needed Ø Deciding what adjustments to make u Leader’s responsibility is to step forward and push corrective actions 2-55 Leading Social Responsibility u The strength of management commitment determines whether a company will implement and execute a full-fledged strategy of social responsibility that: Ø That protects the environment Ø Actively participates in community affairs Ø Supports charitable causes Ø Supports workforce diversity and the overall well-being of employees 2-56 Displaying Ethical Integrity u The CEO and other senior executives must set an excellent example in their own ethical behavior. u Top management must declare unequivocal support of the company’s ethical code. u Top management must be prepared to act swiftly and decisively in punishing ethical misconduct. 2-57 Leading the Development of Better Competitive Capabilities u Lead efforts to strengthen existing competitive capabilities u Anticipate changes in customer-market requirements u Proactively build new competencies and capabilities that hold promise for building an enduring competitive edge 2-58 FIGURE 3.1 The Components of a Company’s Macro-Environment FIGURE 3.2 The Five-Forces Model of Competition Concepts and Connections 3.1 Comparative Market Positions of Selected Retail Chains: A Strategic Group Map Application 3-3 Concepts and Connections 3.2 Business Ethics And Competitive Intelligence Those who gather competitive intelligence on rivals can sometimes cross the fine line between honest inquiry and unethical or even illegal behavior. For example, calling rivals to get information about prices, the dates of new-product introductions, or wage and salary levels is legal, but misrepresenting one’s company affiliation during such calls is unethical. Pumping rivals’ representatives at trade shows is ethical only if one wears a name tag with accurate company affiliation indicated. Avon Products at one point secured information about its biggest rival, Mary Kay Cosmetics (MKC), by having its personnel search through the garbage bins outside MKC’s headquarters. When MKC officials learned of the action and sued, Avon claimed it did nothing illegal because a 1988 Supreme Court ruling declared that trash left on public property (in this case, a sidewalk) was anyone’s for the taking. Avon even produced a videotape of its removal of the trash at the MKC site. Avon won the lawsuit—but Avon’s action, while legal, scarcely qualifies as ethical. 3-4 TABLE 4.1 Common Types of Tangible and Intangible Resources Tangible Resources Physical resources State-of-the-art manufacturing plants and equipment, efficient distribution facilities, attractive real estate locations, or ownership of valuable natural resource deposits Financial resources Cash and cash equivalents, marketable securities, and other financial assets such as a company’s credit rating and borrowing capacity Technological assets Patents, copyrights, superior production technology, and technologies that enable activities Organizational resources Information and communication systems (servers, workstations, etc.), proven quality control systems, and strong network of distributors or retail dealers TABLE 4.1 Common Types of Tangible and Intangible Resources Intangible Resources Human assets and intellectual capital An experienced and capable workforce, talented employees in key areas, collective learning embedded in the organization, or proven managerial know-how Brand, image, and reputational assets Brand names, trademarks, product or company image, buyer loyalty, and reputation for quality, superior service Relationships Alliances or joint ventures that provide access to technologies, specialized know-how, or geographic markets, and trust established with various partners Company culture The norms of behavior, business principles, and ingrained beliefs within the company A dynamic capability is developed when a company has become proficient in modifying, upgrading, or deepening its resources and capabilities to sustain its competitiveness and prepare it to seize future market opportunities and nullify external threats to its well-being. Are Company Resources and Capabilities Sufficient to Allow It to Seize Market Opportunities and Nullify External Threats? • SWOT represents the first letter in: – Strengths Weaknesses Opportunities Threats • A well-conceived strategy is: – Matched to the firm’s resource strengths and weaknesses – Aimed at capturing the firm’s best market opportunities and defending against external threats to its well-being FIGURE 4.1 A Representative Company Value Chain Concepts and Connections 4.1 Value Chain Activities and Costs for Just Coffee, a Producer of Fair Trade Organic Coffee 3-11 Steps in a Competitive Strength Assessment Step 1 List the industry’s key success factors and other measures of competitive strength or weakness (6 to 10 measures). Step 2 Assign a weight to each measure of competitive strength based on its importance in shaping competitive success. (The sum of the weights for each measure must add up to 1.0.) Step 3 Calculate strength ratings by scoring each competitor on each strength measure (use a scale where 1 is weak and 10 is strong) and multiplying the assigned rating by the assigned weight. Step 4 Sum the weighted strength ratings on each factor to get an overall measure of competitive strength for each company being rated. Step 5 Use the overall strength ratings to draw conclusions about the size and extent of the firm’s net competitive advantage or disadvantage and to take specific note of areas of strength and weakness. 4-12 TABLE 4.3 Illustration of a Competitive Strength Assessment FIGURE 5.1 The Five Generic Competitive Strategies The Five Generic Competitive Strategies Low-cost provider Broad differentiation Focused low-cost Striving to achieve lower overall costs than rivals and appealing to a broad spectrum of customers, usually by underpricing rivals Seeking to differentiate the firm’s product or service from rivals’ in ways that will appeal to a broad spectrum of buyers Concentrating on a narrow buyer segment (or market niche) and outcompeting rivals by having lower costs than rivals and thus being able to serve niche members at a lower price Focused differentiation Concentrating on a narrow buyer segment (or market niche) and outcompeting rivals by offering niche members customized attributes that meet their tastes and requirements better than rivals’ products Best-cost provider Giving customers more value for the money by satisfying buyers’ expectations on key quality/features/performance/service attributes while beating their price expectations 2-2 Choosing the Basis for Competitive Attack Attack the competitive weaknesses of rivals Offer an equal or better product at a lower price Adopt and improve on good ideas of other firms Principal Offensive Strategy Options Attack profitable market segments of key rivals Pursue continuous product innovation Capture unoccupied or less contested markets Leapfrog competitors to be the first to market Use hit-and-run or guerrilla marketing tactics Launch a preemptive strike on a market opportunity 8-3 Blue ocean strategies offer growth in revenues and profits by discovering or inventing new industry segments that create altogether new demand. Deciding Whether to Be an Early Mover or Late Mover • Key Issue: – Is the race to market leadership a marathon or a sprint? • Seeking first-mover competitive advantage involves addressing several questions: – Does market takeoff depend on development of complementary products or services not currently available? – Is new infrastructure required before buyer demand can surge? – Will buyers need to learn new skills or adopt new behaviors? – Are there influential competitors in a position to delay or derail the efforts of a first mover? Vertical Integration: Operating Across More Industry Value Chain Segments • Involves extending a firm’s competitive and operating scope within the same industry – Backward into sources of supply – Forward toward end users of final product • Can aim at either full or partial integration Outsourcing Strategies: Narrowing the Scope of Operations • Outsourcing an activity is a consideration when: – It can be performed better or more cheaply by outside specialists. – It is not crucial to achieve a sustainable competitive advantage and will not hollow out capabilities, core competencies, or technical know-how of a firm. – It improves organizational flexibility and speeds time to market. – It reduces a firm’s risk exposure to changing technology and/or buyer preferences. – It allows a firm to concentrate on its core business, leverage its key resources and core competencies, and do even better what it already does best. A strategic alliance is a formal agreement between two or more companies to work cooperatively toward some common objective. A joint venture is a type of strategic alliance that involves the establishment of an independent corporate entity that is jointly owned and controlled by the two partners. Merger and Acquisition Strategies • An attractive strategic option for achieving operating economies, strengthening competencies, and opening avenues to new market opportunities: – Merger • The combining of two or more firms into a single entity, with the newly created firm often taking on a new name – Acquisition • The combination in which one firm, the acquirer, purchases and absorbs the operations of another, the acquired firm chapter 7 STRATEGIES FOR COMPETING IN INTERNATIONAL MARKETS McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. LO1 Develop an understanding of the primary reasons companies choose to compete in international markets. LO2 Learn why and how differing market conditions across countries influence a company’s strategy choices in international markets. LO3 Gain familiarity with the five general modes of entry into foreign markets. LO4 Learn the three main options for tailoring a company’s international strategy to crosscountry differences in market conditions and buyer preferences. 7-2 (cont’d) LO5 Understand how multinational companies are able to use international operations to improve overall competitiveness. LO6 Gain an understanding of the unique characteristics of competing in developingcountry markets. 7-3 Why Companies Expand into International Markets 1. To gain access to new customers 2. To achieve lower costs and enhance the firm’s competitiveness 3. To further exploit its core competencies 4. To gain access to resources and capabilities located in foreign markets 5. To spread its business risk across a wider market base 7-4 Factors That Shape Strategy Choices in International Markets 1. The degree to which there are important country differences in buyer tastes, market sizes, and growth potential 2. Whether opportunities exist to gain a locationspecific advantage based on wage rates, worker productivity, inflation rates, energy costs, tax rates, and other factors that impact cost structure 3. The risks of adverse shifts in currency exchange rates 4. The extent to which governmental policies affect the business environment 7-5 Country Differences in Buyer Tastes, Market Sizes, and Growth Potential u Differences in local buyer tastes Ø Raise manufacturing and distribution costs Ø Reduce scale economies and learning curve effects u Differences in market growth potential Ø Demographics, income levels, and cultural attitudes vary widely in emerging markets Ø Lack of infrastructure, distribution systems, and retail networks limits market growth u Differences in the intensity of local competition 7-6 How Market Demographics Differ from Country to Country Distribution channel emphasis Consumer tastes and preferences Consumer purchasing power Consumer buying habits Demographic Differences Demands for localized products Strength of local competitive rivalry 7-7 How Market Demographics Differ from Country to Country u Consumer tastes and preferences u Consumer purchasing power u Consumer buying habits u Distribution u Demands u Strength channel emphasis for localized products of local competitive rivalry 7-8 Opportunities for Location-Based Cost Advantages Wage rates Worker productivity Environmental regulations Location-Based Cost Advantages Energy costs Tax rates Inflation rates Industry subsidies 7-9 Opportunities for Location-Based Cost Advantages uA firm’s costs and profitability are impacted by the location of its activities due to: Ø Wage rates Ø Worker productivity Ø Energy costs Ø Environmental regulations Ø Tax rates Ø Inflation rates Ø Industry subsidies 7-10 The Risks of Adverse Exchange Rate Shifts u Exporters gain in competitiveness when the currency of the country in which the goods are manufactured is weak relative to the currency of the country to which the goods are to be exported. u Exporters are at a disadvantage when the currency of the country where goods are manufactured grows stronger relative to the country to which the goods are to be exported. 7-11 The Impact of Host-Government Policies on the Local Business Climate u Host-government policies that create a business climate favorable to foreign firms agreeing to construct or expand production and distribution facilities in the host country include: Ø Reduced taxes Ø Low-cost loans Ø Site-development assistance 7-12 The Impact of Host-Government Policies on the Local Business Climate (cont’d) Limits on repatriation of local funds Environmental regulations Customs requirements, tariffs and quotas Negative impact of government policies Local ownership or partner requirements Subsidies for domestic companies Local content requirements Requiring prior approval of capital spending projects 7-13 The Impact of Host-Government Policies on the Local Business Climate (cont’d) u Host-government policies negatively affecting foreign-based firms include: Ø Environmental regulations Ø Customs requirements, tariffs, and quotas Ø Local content requirements Ø Requiring prior approval of capital spending projects Ø Limits on repatriation of local funds Ø Local ownership or partner requirements Ø Subsidies for domestic companies 7-14 è Core Concept ç Political risks stem from instability or weakness in national governments and hostility to foreign business; economic risks stem from the instability of a country’s monetary system, changes in economic and regulatory policies, and the lack of property rights protections. 7-15 Strategy Options for Entering Foreign Markets 1. Maintain a national (one-country) production base and export goods to foreign markets. 2. License foreign firms to produce and distribute the company’s products. 3. Employ a franchising strategy. 4. Establish a subsidiary in a foreign market. 5. Rely on strategic alliances or joint ventures with foreign partners to enter new country markets. 7-16 Export Strategies u Exporting involves using domestic plants as a production base for exporting to foreign markets. u Advantages: Ø Conservative way to test international waters Ø Minimizes both risk and capital requirements u An export strategy is vulnerable when: Ø Manufacturing costs in the home country are higher than in foreign countries where rivals have plants. Ø The costs of shipping the product to distant markets are relatively high. Ø Adverse shifts can occur in currency exchange rates. 7-17 Licensing Strategies u Licensing makes sense when a firm: Ø Has valuable technical know-how or a patented product but has neither the internal capabilities nor resources to enter foreign markets. Ø Wants to avoid the risks of committing resources to country markets that are unfamiliar, politically volatile, economically unstable, or otherwise risky. Ø Seeks to generate income from potential royalties. u Disadvantage of licensing: Ø Providing technical know-how to foreign firms creates risks and difficulty in maintaining control over its use. 7-18 Franchising Strategies u Often better suited to the global expansion efforts of service and retailing enterprises u Advantages: Ø Franchisee bears many of the costs and risks of establishing foreign locations Ø Franchisor has to expend only the resources to recruit, train, and support franchisees u Disadvantage: Ø Maintaining cross-border quality control Ø Allowing franchisees discretion in adapting to local preferences and tastes 7-19 Establishing a Subsidiary in a Foreign Market u Allows for direct control over all aspects of operating in a foreign market. u Options for developing a subsidiary: Ø Acquiring either a struggling or successful foreign local firm is the most feasible and direct path to overcoming market-specific entry barriers. Ø Establishing a foreign subsidiary from the ground up via internal development is based on the firm’s prior experience with foreign market operations. 7-20 Developing a Wholly Owned Start-up Subsidiary in a Foreign Market u An internal start-up strategy is appealing when: Ø Creating an internal start-up is cheaper than making an acquisition. Ø Adding new production capacity will not adversely impact the supply–demand balance in the local market. Ø A start-up subsidiary can gain good distribution access (perhaps because of the firm’s recognized brand name). Ø A start-up subsidiary will have the size, cost structure, and resources to compete head-to-head against local rivals. 7-21 Using International Strategic Alliances and Joint Ventures to Build Competitive Strength in Foreign Markets u Mutual Benefits of Cross-Border Alliances: Ø Facilitation of entry into foreign markets Ø Strengthening of a firm’s competitiveness in world markets Ø Capturing of economies of scale in production and marketing Ø Filling of gaps in technical expertise and local market knowledge Ø Sharing of distribution facilities, dealer networks, and mutual access to customers Ø Attacking of mutual rivals and providing for mutual assistance Ø Building of working relationships with local political and host- country governmental entities Ø Gaining of agreements on technical and process standards 7-22 Using International Strategic Alliances and Joint Ventures to Build Competitive Strength in Foreign Markets (cont’d) u Individual Partner Benefits of Alliances: Ø Preservation of each partner firm’s independence Ø Avoidance of the firm’s use of scarce financial resources to fund acquisitions Ø Retention of the firm’s flexibility to readily disengage once the purpose of the alliance has been served Ø Option to withdraw from the alliance if its benefits prove elusive to the more permanent arrangement required by an acquisition 7-23 Concepts and Connections 7.1 Examples of Cross-Border Strategic Alliances 1. Verio, a subsidiary of Japan-based NTT Communications and one of the leading global providers of Web hosting services and IP data transport, has developed an alliance-oriented business model that combines the company’s core competencies with the skills and products of best-of-breed technology partners. Verio’s strategic partners include Arsenal Digital Solutions (a provider of worry-free tape backup, data restore, and data storage services), Internet Security Systems (a provider of firewall and intrusion detection systems), and Mercantec (which develops storefront and shopping cart software). Verio management believes that its portfolio of strategic alliances allows it to use innovative, best-of-class technologies in providing its customers with fast, efficient, accurate data transport and a complete set of Web hosting services. An independent panel of 12 judges recently selected Verio as the winner of the Best Technology Foresight Award for its efforts in pioneering new technologies. 2. The engine of General Motor’s growth strategy in Asia is its three-way joint venture with Wulung, a Chinese producer of mini commercial vehicles, and SAIC (Shanghai Automotive Industrial Corporation), China’s largest automaker. The success of the SAICGM-Wulung Automotive Company is also GM’s best hope for financial recovery since it emerged from bankruptcy July 10, 2009. While GM lost $4.8 billion overall before interest and taxes during the last six months of 2009, its international operations (everything except North America and Europe) earned $1.2 billion. Its Chinese joint ventures accounted for approximately one-third of that profit, due in part to the roaring success of the no-frills Wulung Sunshine, a lightweight minivan that has become China’s best-selling vehicle. In 2010, General Motors’ sales in China topped its U.S. sales—the first time that sales in a foreign market have done so in the 102-year history of the company. GM is now positioning its Chinese joint venture to serve as a springboard for the company’s expansion in India. 7-24 Concepts and Connections 7.1 (cont’d) Examples of Cross-Border Strategic Alliances 3. Cisco, the worldwide leader in networking components, entered into a strategic alliance with Finnish telecommunications firm Nokia Siemens Networks to develop communications networks capable of transmitting data across either the Internet or by mobile technologies. Nokia Siemens Networks was created through a 2006 international joint venture between German-based Siemens AG and the Finnish communications giant Nokia. The Cisco-Nokia Siemens alliance was created to better position both companies for convergence among Internet technologies and wireless communication devices that was expected to dramatically change how both computer networks and wireless telephones would be used. 4. European Aeronautic Defence and Space Company (EADS) was formed by an alliance of aerospace companies from Britain, Spain, Germany, and France that included British Aerospace, Daimler-Benz Aerospace, and Aerospatiale. The objective of the alliance was to create a European aircraft company capable of competing with U.S.-based Boeing Corp. The alliance has proved highly successful, infusing its commercial airline division, Airbus, with the knowhow and resources to compete head-to-head with Boeing for world leadership in large commercial aircraft (over 100 passengers). Developed with Mukund Kulashekeran. Sources: Company websites and press releases 7-25 The Risks of Strategic Alliances with Foreign Partners u Impediments to the Success of Alliances: Ø Language and cultural barriers Ø Differences in ethical standards, partner values and objectives, corporate strategies, and operating practices Ø Development of trust, coordination, and effective communications between partners Ø Interpersonal conflict among partners’ managers Ø Overdependence on foreign partners for essential expertise and competitive capabilities 7-26 Tailoring a Firm’s International Strategy to Country Differences in Market Conditions and Buyer Preferences u Choosing between localized multicountry strategies or a global strategy u Deciding upon the degree to vary competitive approach country by country depends on cross-country differences in buyer preferences and market conditions 7-27 è Core Concept ç A firm’s international strategy is its strategy for competing in two or more countries simultaneously. 7-28 FIGURE 7.1 7-29 Multidomestic Strategy—A Think Local, Act Local Approach to Strategy Making u Think Local, Act Local Ø A firm varies its product offerings and basic competitive strategy from country to country u Useful When: Ø Significant country-to-country differences exist in customer preferences, buying habits, distribution channels, or marketing methods Ø Host governments enact local content requirements or trade restrictions that preclude a uniform, coordinated worldwide market approach 7-30 è Core Concept ç A multidomestic strategy calls for varying a firm’s product offering and competitive approach from country to country in an effort to be responsive to significant country differences in customer preferences, buyer purchasing habits, distribution channels, or marketing methods. Think local, act local strategy-making approaches are essential when host-government regulations or trade policies preclude a uniform, coordinated worldwide market approach. 7-31 Think Local, Act Local Strategies: Two Big Drawbacks 1. They can hinder transfer of a firm’s competencies and resources across country boundaries because localized strategies for competing in various host countries are grounded in different competencies and capabilities. 2. They do not promote building a single, unified competitive advantage, especially one based on low cost derived from either scale economies or learning curve effects. 7-32 Global Strategy—A Think Global, Act Global Approach to Strategy Making u Think Global, Act Global Strategy Ø Allows the firm’s strategic moves to be integrated and coordinated worldwide. Ø Focuses on establishing an identifiable brand image and reputation that is uniform from country to country. Ø Allows the firm to focus its full resources on securing a sustainable low-cost or differentiation-based competitive advantage over both domestic rivals and global rivals. 7-33 è Core Concept ç Global strategies employ the same basic competitive approach in all countries where a firm operates and are best suited to industries that are globally standardized in terms of customer preferences, buyer purchasing habits, distribution channels, or marketing methods. This is the think global, act global strategic theme. 7-34 Transnational Strategy—A Think Global, Act Local Approach to Strategy Making uA middle-ground approach that: Ø Utilizes the same basic competitive theme (low-cost, differentiation, or focused) in each country but allows local managers the latitude to: 1. Incorporate whatever country-specific variations in product attributes are needed to best satisfy local buyers. 2. Make whatever adjustments in production, distribution, and marketing are needed to respond to local market conditions and compete successfully against local rivals. 7-35 Using International Operations to Improve Overall Competitiveness uA firm gains competitive advantage by expanding outside its domestic market in two important ways: Ø Using its foreign operations and market locations to lower costs or help it achieve greater product differentiation. Ø Using cross-border coordination among its dispersed foreign operations in strategic ways that a domesticonly competitor cannot. 7-36 Using Location to Build Competitive Advantage u Multinational companies attempting to gain location-based competitive advantage should consider: Ø Whether to concentrate activities in a few countries or disperse performance of each process to many countries Ø Which countries offer the best locational advantage for each activity 7-37 When to Concentrate Internal Processes in a Few Locations u Concentrating activities and processes in a few countries makes sense when: Ø The cost of manufacturing or performing other activities is lower in a specific geographic location. Ø Significant scale economies can be achieved by concentrating particular activities. Ø There is a steep learning curve associated with performing an activity. Ø Certain locations offer superior resources or allow for better coordination of related activities. 7-38 When to Disperse Internal Processes Across Many Locations u Dispersing activities and processes makes sense when: Ø Buyer-related activities must take place close to buyers. Ø High transportation costs, diseconomies of large size, and trade barriers make it too expensive to operate from a central location. Ø Dispersing activities reduces the risks of fluctuating exchange rates and adverse political developments. 7-39 è Core Concept ç A transnational strategy is a think global, act local approach to strategy making that involves employing essentially the same strategic theme (low-cost, differentiation, focused, best-cost) in all country markets, while allowing some country-to-country customization to fit local market conditions. 7-40 Using Cross-Border Coordination to Build Competitive Advantage u Multinational and global competitors coordinate activities across borders to achieve competitive advantage by: Ø Sharing product knowledge, operating skills, and supply chain efficiencies across their markets Ø Shifting production between plants in different countries to take advantage of changes in exchange rates, energy costs, or in tariffs and quotas Ø Shifting production to locations having excess capacity or underutilized personnel 7-41 Concepts and Connections 7.2 Yum! Brands’ Strategy for Becoming the Leading Food Service Brand in China In 2011, Yum! Brands operated more than 38,000 restaurants in more than 110 countries. Its bestknown brands were KFC, Taco Bell, Pizza Hut, and Long John Silver’s. Its fastest revenue growth and 36 percent of its operating profit in 2010 came from its 3,700 restaurants in China. KFC was the largest quick-service chain in China with 3,200 units in 2010, while Pizza Hut was the largest casual dining chain with more than 500 units. Yum! planned to open at least 475 new restaurant locations annually in China, including new Pizza Hut Home delivery units and East Dawning units, which had a menu offering traditional Chinese food. All of Yum! Brands’ menu items for China were developed in its R&D facility in Shanghai. In addition to adapting its menu to local tastes and adding new units at a rapid pace, Yum! Brands also adapted the restaurant ambience and décor to appeal to local consumer preferences and behavior. The company changed its KFC store formats to provide educational displays that supported parents’ priorities for their children and to make KFC a fun place for children to visit. The typical KFC outlet in China averaged two birthday parties per day. In 2010, Yum! Brands operated 60 KFC, Taco Bell, Pizza Hut, A&W, and Long John Silver’s restaurants for every 1 million Americans. The company’s 3,200 units in China represented only three restaurants per 1 million people in China. Yum! Brands management believed that its strategy keyed to continued expansion in the number of units in China and additional menu refinements would allow its operating profits from restaurants located in China to account for more than 50 percent of systemwide operating profits by 2015. Sources: Yum! Brands 2010 10-K; information posted at www.yum.com. 7-42 Strategies for Competing in the Markets of Developing Countries u Developing-Economy Markets Ø China, India, Brazil, Indonesia, Thailand, Poland, Russia, and Mexico—countries where both business risks and opportunities for growth are huge as their economies develop and their living standards climb toward those of the industrialized world u Tailoring products to fit conditions in emerging markets often involves: Ø Making more than minor product adaptations Ø Becoming more familiar with local cultures and habits Ø Rethinking pricing, packaging, and product features 7-43 Strategy Options for Competing in Developing-Country Markets u Be prepared to compete on the basis of low price. u Be prepared to modify aspects of the firm’s business model to accommodate local circumstances. u Try to change the local market to better match the way the firm does business elsewhere. u Avoid emerging markets where it is impractical or uneconomical to modify the firm’s business model to accommodate local circumstances. u Adapt the business model and strategy to local conditions and be patient in earning a profit. 7-44
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