Seminar 2: External Environment Analysis

External Environment: PESTLE + G

Objective: Anticipate how macro trends affect market or industry forces
- Global perspective – e.g. whether to expand into a new market)

Political / Legal Anti-trust laws, taxation laws, deregulations philosophies, labour training laws,
educational philosophies and policies, audit, trading, tobacco, alcohol, utility,
construction, oil and gas, banking, healthcare

Economic Inflation rates, interest rates, trade and budget deficits / surpluses, GDP,
person and business savings rates

Sociocultural Attitudes, beliefs, cultural values, lifestyle – e.g. consumer electronic, fitness,
(cultural/ F&B, apparel, health care
demographics) Workforce diversity, shift in work preferences

Technological Product innovations, IT, software, e-commerce, advertisement, marketing,

media, content delivery, education, biotechnological

Demographic Population size, age structure, geographic distribution, ethnic mix, income
distribution – e.g. F&B, apparel, advertisement

Environmental Actual and potential changes in physical environment

Energy consumption, renewable energy, minimising firm’s environmental
footprint, reacting to natural / man-made disasters

Globalization Oil and gas, commodities, telecommunication, aviation, shipping, trading,

headhunters, industrialization, cultural attributes

Industry Environment: Porter’s Five Forces

Objective: Evaluate attractiveness of market or industry (overall profitability potential)
- Industry-specific – e.g. whether to introduce new product or whether to enter a specific market

Bargaining 1. High dependency on suppliers

Power of - Supplier’s industry is dominated by a few large companies and is more
Suppliers concentrated than the industry to which it sells
- Few satisfactory substitute suppliers available
(To increase - Suppliers products are critical to buyers’ products / services
prices and - High switching costs to another supplier group
reduce quality of 2. Low supplier dependency upon industry firms
their products) - Industry firms are not significant buyers for suppliers’ products
3. High threat of suppliers integrating forward into the buyers’ industry (dependency
upon the firm to continue the value chain decreases)
- Suppliers have substantial resources and provide a highly differentiated
product
Bargaining 1. Price-sensitive
Power of - Low differentiation, low switching costs
Buyers - Forms a significant portion of buyers’ cost
- Buyer purchase a large portion of an industry’s total output
(Demand for - Product is indispensable to buyers
higher quality, - Save buyers’ money
greater level of 2. Low buyer switching costs to substitute products / service
services and 3. Buyer group is concentrated or purchase in large quantities
lower prices)
- Sales of purchased product account for a significant portion of the seller’s
annual revenue
4. High threat of buyer integrating backward (Ability to produce themselves)
5. ↑ Information on manufacturer’s costs and other alternatives available

Intensity of 1. Competitors
Rivalry Among - Numerous: Firms believe they can act without eliciting a response from other
Competitors competitors
- Equally matched in size/power: Similar-sized resource base permits vigorous
(Firms are actions and responses
challenged by - No diversity in competitors’ origins or goals
competitors’ 2. No / slow industry growth: ↑ pressure to increase market share by attracting
actions / competitors’ customers, ↑ instability in the market
recognises an
3. High fixed cost / storage costs: ↑ attempt to maximise individual firm’s productive
opportunity to
improve its capacity, ↑ excess capacity created in industry, ↑ price competition (price cut)
market position) 4. High exit barriers: E.g. Specialised assets, fixed costs of exit (labour agreements),
strategic interrelationship and emotional barriers, government and social restrictions
5. Capacity augmented in large increments (Forced to produce in large quantity,
hence supply > demand, therefore more competition)
6. Products / Service
- Lack of differentiation: ↑ differentiated product, ↓ imitation, ↓ rivalry
↓ differentiation, ↑ buyers’ reliance on price to make purchasing decisions
- Low switching costs
7. High strategic stakes: Important for firm to perform well in the market / firms are
committed to establish facilities in a geographic location

Threat of 1. Low price-performance ratio offered by substitutes: ≥ quality / performance

Product capabilities for ↓ price
Substitute - Important to differentiate along dimensions of quality, after-sales service and
location
(Refer to 2. Low switching costs to substitutes (time, effort, money)
products 3. Substitutes are produced by industries earning high profit
OUTSIDE the - Competitors have more cash to invest into R&D, cut price to draw new
industry that customers, ability to produce additional substitutes
performs similar
functions e.g.
Cars vs
Scooters)
 Threat of New 1. Barriers to Entry
Entrants - Capital requirements: ↑ capital, ↑ ability to pursue market opportunities
- Product differentiation: ↑ perceived product uniqueness, ↑ customer loyalty
(Threaten the - Switching cost: ↑ customer loyalty programs, ↑ switching costs
market share of - Government policy
existing - Economies of scale: Derived from incremental efficiency improvements
competitors by through experience (marketing, manufacturing, R&D, purchasing). Existing
increasing
players in market cannot produce at a much lower cost → no cost advantage
production
capacity) - Access to distribution channels: Ability to compete on the same platform as
existing competitors to distribute their products effectively, without resorting to
price breaks or cooperative advertising which will eat into their profits. New
entrants can sell their products on the Internet, which further reduces the
barrier to entry.
- Cost disadvantages independent of scale: E.g. desirable locations, proprietary
product technology, favourable access to raw materials, government
subsidies)
2. Expected retaliation from incumbents ↑ when
- ↑ incumbents’ stake in industry – e.g. fixed assets with few alternative uses
- Low industry growth
- Incumbents have little resources or capabilities
∴ Need to locate market niches

Potential Low
profitability Strong competitive forces→ lower potential to generate profits by implementing their
strategies.
*look at general environment / any complementors or alliance

Ambiguities: Does not include: Government Policies, Complementary Products industry, Blurring of
industry boundaries. Information is only useful in predicting current industry attractiveness - Subject to
changes in the external environment

Competitors’ Analysis
Objective: To determine positioning of firm and determining the firm’s future actions and objectives in response to its
competitors
● Future Objectives (market commonality)
➢ How do our goals compare with our competitor’s goals? Response
➢ Where will emphasis be placed in the future? ● What will our
➢ What is the attitude toward risk? competitor do in
● Current Strategy (market commonality) the future?
➢ How are we currently competing? ● Where do we
➢ Does their strategy support changes in the competitive structure? hold an
● Assumptions advantage over
➢ Do we assume the future will be volatile? our competitors?
➢ Are we operating under a status quo? ● How will this
➢ What assumptions do our competitors hold about the industry and themselves? change our
● Capabilities (resource similarity) relationship with
➢ What are our strengths and weaknesses? our competitors?
➢ How do we rate compared to our competitors?
Strategic Group Analysis
Used for understanding an industry’s competitive structure ( ↑ competitive rivalry may threaten a firm’s profitability)
Strategic group refers to a set of firms emphasising similar dimensions using a similar strategy.
Plot actions / response along strategic dimensions such as pricing decisions, product quality, distribution
channels etc
→ offer similar products to the same customers
→ similar strengths of 5 forces
→ greater likelihood of rivalry
 Seminar 3: Internal Environment

Core competencies: capabilities that serve as a source of competitive advantage for a firm over its rivals.
- Resources (tangible, intangible)
- Capabilities (integrated set of resources that are used to achieve a specific task or set of tasks)

When do we use each framework? Depends on:

- Type of industry (Service firms/smaller firms do not have certain functions
- Objective of the analysis

Value Chain Analysis

Objectives:
Identify activities in firm that create value and those that do not
Identify the capabilities/ resources a firm has
Value adding activities are differentiation drives (increase willingness to pay) or cost drivers that increases
the firm’s potential returns

Value Chain Activities Capabilities

Supply-chain management - Social capital: Effective alliance with suppliers→ access to

resources and knowledge transfer
- Receive raw materials and convert them into final products
Specific Activities:
- Sourcing, procurement, conversion, inbound logistic
management

Operations - Change raw materials into finished products

Specific Activities:
- Developing employees’ work schedules
- Designing physical layout of operations’ facilities
- Determining production capacity needs selecting and
maintaining production equipment
- Design and production skills and processes
- Product design and quality
- Miniaturisation of components and products

Distribution - Getting the final product to the customer

- Logistics management techniques
Specific Activities:
- Handling customers’ orders
- Choosing the optimal delivery channel
- Arrange for customers’ payments for delivered goods (work
together with Finance)

Marketing (Including Sales) - Segmenting target customers on the basis of their unique
needs and satisfying their needs
- Retaining customers and locating additional customers
- Innovative merchandising
- Promotion of brand-name products
- Customer service
Specific Activities:
- Advertising campaigns, developing and managing product
 brands, appropriate pricing, training and supporting a sales
force

Follow-Up Service/ customer - Increase a product’s value for customers

support Specific activities:
- Surveys to receive feedback about customers’ satisfaction
- Offering technical support after the sale
- Fully complying with product’s warranty

Support Functions Capabilities

Finance - Acquiring and managing financial resources

Specific activities:
- Securing financial capital, investing and managing relationship
with those providing financial capital

Human Resources - Management of firm’s human capital

Specific activities:
- Selecting, training, compensating, motivating, empowering and
retaining employees

Management Information - Activities used to obtain and manage information and

System / Knowledge knowledge throughout the firm
Management - Ensures that people with the different knowledge share them
for innovation
Specific activities:
- Identifying and utilizing sophisticated technologies
- Determining optimal ways to collect and distribute knowledge
- Linking relevant information and knowledge to organizational
functions

Capabilities for VRIN analysis but not part of Value Chain

R&D - Innovative technology, digital technology

- Transforming technology into new products and processes

Management - Ability to envision the future, effective organisation structure

Possible solutions to activities that are Non-Value Adding or are at a substantial disadvantage
compared to competitors:
Outsourcing
- Purchasing a value-creating activity or a support function activity from an external supplier
● Increase flexibility
● Mitigate risks
● Reduce capital investments
● Fully concentrate on those areas in which it can create value
● Learn capabilities from outsource suppliers
- Issues with outsourcing
● Potential loss in innovative ability
● Loss of jobs within company
R&D
- Might not have resource to develop the technologies internally
Cooperative strategy (Seminar 9)

Ambiguities:
- Lack of standardised measurement metrics for ‘value’
- Lack of actionable steps to increase value once the analysis has been conducted
- Does not account for additional value from partnerships (especially important in a network
economy) e.g. suppliers
- Does not capture the value from successful interactions / integration across function

VRIN
Objective: Evaluate if capabilities are core competencies to attain sustainable competitive advantage

Valuable: allows the firm to exploit opportunities or neutralize threats in the external environment
Rare: not possessed by many competitors
Costly to imitate: Historical (unique and valuable culture or brand name); causally ambiguous (unclear
causes and uses); social complexity (interpersonal relationships, trusts, friendships among stakeholder,
culture, reputation)
Non- substitutable: no strategic equivalent (intangible or invisible capabilities)

Valuable Rare Costly to Non-Substitutable Competitive Performance Implications

Imitate Consequences

Most Highest No alternative but

basic level can easy imitate

N N N N Competitive Below Average Returns

Disadvantage

Y N N Y/N Competitive Parity Average Returns

Y Y N Y/N Temporary Comp Above Average to

Advantage Average Returns

Y Y Y Y/N Sustainable Comp Above Average

Advantage Returns

Ambiguities:
- Framework cannot be used to systematically identify resources that are or can be use sources of
competitive advantage
- Lack the conception of time, what may be rare today, may not be rare in a week, month, year and
in the future (length of time a firm can expect to create value by using its core competencies is a
function of how quickly competitors can successfully imitate a good, service or process)
- Characteristics of the resources cannot be quantified - cannot benchmark effectively
 Seminar 4: Business Level Strategy

Cost Leadership Strategy

Business Model Products and services at the lowest price, relative to competitors

Products/ emphasis ● Standardised, acceptable features to many customers, lowest

competitive price
● Process innovation to operate more efficiently
● Outsourcing to low cost suppliers
● Plant efficiency
● Tight cost control

Examples Budget airlines e.g. Scoot

● No-frills, frills at extra cost (e.g. check-in, meals, seat selection etc)

Internal Purpose: Gain competitive advantage in logistics - To simplify processes and

Environment procedures, reduce costs, achieve efficiency and monitor costs
(Explain how their Value-Chain Activities
resources and
● Supply-chain management: Form effective relationships with suppliers
capabilities align
with their strategy to maintain efficient flow of supplies for operations
using Value Chain) ● Operations: Build economies of scale and efficient operations (e.g.
production processes)
● Distribution: Low cost modes of transporting goods and delivery times
that produce lowest costs
● Marketing (including Sales): Selective advertising and low prices for
high sales volumes
● Follow-up service: Efficient follow-up to reduce product returns
Support functions
● Finance: Manage financial resources to ensure positive cash flow and
low debt costs
● HR: Efficient hiring and retention policies to keep costs low. Implement
training to ensure high employee efficiency
● Management Information System: Develop and maintain cost-
effective MIS operations

External Porter’s Five Forces

Environment Rivalry with existing competitors
(How the company ● Reduce rivalry through joint ventures
align its actions with
● Could compete on basis of price to increase market share
the external
opportunities and Bargaining power of buyers
threats) ● Mitigate buyers’ power through sharing of information, building trust and
participate in joint problem solving with customers
Bargaining power of suppliers
● Invest time and effort to build a good relationship and trust
● Operates with margins greater than those of competitors by driving
costs lower→ make it possible to absorb price increase of suppliers
 ● Increase suppliers’ dependency on firm through bulk purchase → Since
large portion of their revenue is dependent on firm
Potential Entrants
● Reduce threat of new entrants by
- Increasing barriers to entry by increasing efficiency (gain EOS) that
enhances profit margin
- Large distribution scale to reap EOS
- Compete on price - Avoid pricing so low that they cannot compete
profitably
- Require time on learning curve on brand-building and setup
Product substitutes
● Mitigate substitutes by lowering prices to maintain value position

Risks ● Imitation (Technological innovation allows competitors to learn how to

imitate value chain)
● Obsolete process (Made redundant by dramatic technological changes)
● Tunnel vision (Focusing on efficiency could result in the overlooking of
changes in customer preferences)
● Perceived differentiation lost

Differentiation strategy

Business Model Product and services at a price premium

Products ● Unique, non-standardised, appropriate when customers value

differentiated features more than cost
● Constant product innovation to create value (can be real or perceived)
● Focus on marketing and after sales service
● Make use of knowledge capital (customers and employees) to provide
customers with a differentiated product that provides them with
superior value

Examples Unique features, responsive customer services, rapid product innovations,

technological leadership, perceived prestige and status, different tastes and
engineering design and performance

Internal Environment Objectives:

(Explain how their ● Gain competitive advantage in marketing, customer service and R&D
resources and ● Establish quality, speed responsiveness, meeting customer needs
capabilities align Value Chain Analysis
with their strategy ● Supply-Chain Management: Develop and maintain positive relation
using Value Chain) with major suppliers. Ensure the receipt of high quality supplies (raw
materials and other goods)
● Operations: Manufacture high-quality goods. Develop flexible system
that allow rapid response to customers’ changing needs.
● Distribution: Provide accurate and timely delivery of goods to
customers
 ● Marketing (Including Sales): Build strong positive relationships with
customers. Invest in effective promotion and advertising program.
● Follow-up Service: Have specially trained unit to provide after-sales
service. Ensure high customer satisfaction.

External Rivalry with existing competitors

Environment ● Mitigate rivalry by building brand loyalty through customer
(How the company engagement, greater product differentiation and constant innovation to
align its actions with satisfy customers’ needs → customers are less price-sensitive and
the external there is higher switching cost
opportunities and Bargaining power of buyers
threats) ● Ensure perceived differentiation over its competitor’s offering
Bargaining power of suppliers
● Mitigate power of suppliers with its high profit margin that partially
insulate it from the influence of higher suppliers costs or firms could
pass the increase in costs to consumers by increasing the price of its
unique product since they are relatively insensitive to prices
● Firms could be dependent on the supplier if they outsource a large
portion of their functions
Potential Entrants
● Mitigate new entrants by establishing reputation and brand loyalty over
time (entry barriers)
● Potential entrants need to overcome the uniqueness of differentiated
product

Product Substitutes
● Mitigate substitutes by brand loyalty (high switching cost)

Risks ● Perception of value - customer may view price differential between the
differentiated product and cost leader’s product is too large (not willing
to pay)
● Value of differentiation - Proposed differentiation is not valuable
anymore
● Learning by customers - experience may reduce customer’s
perceptions of value of differentiated features of firm’s products
● Imitation by rivals - e.g counterfeit goods

Focus Strategies
Definition: Integrated set of actions taken to produce goods and service that serve the needs of a particular
competitive segment – Different segment of product / different geographic market
Purpose:
● For startup to avert competition with big firms
● Limited resources and knowledge to target broad market
● Do not possess an industry wide competitive advantage
Risks:
● Big companies enter and “out-focus” as they have more resources
● Invasion of lucrative niche market by larger rivals
● Changes in consumer preferences-- customers develop preferences that are more similar to the
industry wide customers
● Smaller market share, less diversification → high risk
Ambiguities:
● Business-level strategies does not react to changes over time e.g. competitors’ actions
● Strategies are not isolated - There may be overlap between cost leadership & differentiation
● Integrated cost leadership & differentiation is a fluid concept, it may not be a “stuck in the middle”
strategy.

Integrated Cost Leadership / Differentiation Strategy

Refer to page 123 for features (Flexible Manufacturing Systems, Information Networks, Total Quality
Management Systems) and risks.

Advantages Risks

Can adapt quickly to Often involves compromises -- neither the lowest cost nor the
environmental changes most differentiated firm

Learn new skills and technologies May get “stuck in the middle” -- lacking the strong commitment
more quickly and expertise that accompanies firms following either a cost
leadership or a differentiated strategy

Effectively leverage its core

competencies while competing
against its rivals
Steps to determining a business-level strategy (End goal: Attain competitive advantage)
Step 1: Understand the value drivers of the customers
Conduct Market Segmentation
1. Group customers based on their value drivers (i.e., important and significant differences in their
needs, attitudes, and buying practices)
· Consumer buyers
v Demographic factor: Age, income, gender
v Socio-economic factor: social class, stage in the family life cycle
v Consumption patterns factor: heavy, moderate and light users
v Geographic factor: cultural, regional and national differences
v Psychological factor: personality traits, lifestyle
v Perceptual factors: benefit segmentation, perceptual mapping
· Industrial buyers
v End-use segments: Industry area
v Product segments: based on technological differences or production economics
v Geographic segment
v Common buying factor segment: Cut across product market and geographic segment
v Customer size segment
After market segmentation, the firm can:
• develop a product to suit the needs of each customer grouping OR
• concentrate on one customer grouping

Step 2: Examine the attractiveness of the segment(s)

Attractiveness of Market Segments
1. Tools in external environment analyses will be useful in determining environmental opportunities
and threats and, thus, segment attractiveness.
v Porter’s Five Forces Model
v General Environment Analysis
v Competitor Analysis
v Strategic Competitor Analysis
1. Generally, a firm should choose to compete in a more attractive market segment or segments
(provided the firm has the necessary resources and capabilities to have a sustainable competitive
advantage in that segment or segments). These frameworks can be used as a control to test whether
the processes and resources are adequate and company can modify its response accordingly
v Value-chain analysis v VRIN

Step 3: Examine internal strengths and weaknesses

Assessment of Internal Strengths and Weaknesses
Based on the value drivers of the customer segment and results of the external analyses (e.g.,
opportunities and threats of that segment), a firm should determine what is the most appropriate business
strategy to compete in that segment.
v Feasibility Test:
Does the firm have the available resources and capabilities to execute the intended business strategy?
v Test of Sustainable Competitive Advantage:
Do these resources and capabilities provide a sustainable competitive advantage?
 Seminar 5: Corporate-level strategy

Different types of product diversification strategy

Low Diversification High Diversification

Single Business Dominant Related Related Linked Unrelated (E.g.

Business Constrained Conglomerate)

Operational Corporate
relatedness relatedness

- >95% revenue - 70-95% - <70% revenue - <70% revenue - <70% revenue from
from single revenue from from single from dominant dominant business
business single business business - No common linkages
- Focus on core business - All businesses - Limited between businesses
business to - Can be share product, product, tech,
maintain strategic related or not tech, distribution distribution
control linkages

Example:
How do you decide whether this is an appropriate corporate strategy by x?
Financial ratios
● Revenue
● Profit margin
● Return on investment
Market power
● Market share
● Attractiveness to partners (leverage on partners)
Portfolio diversity
● Number of consumer segments
● Range of suppliers / partners
Strength of core competencies
● VRIN
● VCA
● SWOT

Reasons for low level of diversification

- Develop capabilities useful for these markets
- Provide superior service to their customers
- Fewer challenges in managing a small set of businesses→ gain EOS and efficiently use their
resources
Motives for product diversification

Value-Creating Diversification
Related Diversification
1. Economies of scope (to derive synergy)
a. Sharing activities (Operational Relatedness)
- Sharing of primary activities (inventory delivery system) or support activities (purchasing practices)
→ Creates EOS → Increase in performance and returns
- Create links between outcomes → could be risky
- Requires careful coordination(strong corporate headquarters to facilitate it)
b. Transferring Core Competence (Corporate Relatedness)
- Sharing of core competencies such as managerial and technological knowledge, experience and
expertise through moving key people into new management positions
- Eliminates the need for the company to allocate resources to develop the competence
- Difficult for competitors to understand and imitate → Can gain immediate competitive advantage
over its rivals
- Requires willingness to share competencies across competing business units
- Dependence on outsourcing may reduce the usefulness of transferability to other business units

2. Market Power (to derive synergy)

a. Fend off competitors in multipoint competition
b. Vertical integration
- Firm develops the ability to save on its operations, avoid market costs, improve product quality,
protect its technology from imitation by rivals, potentially exploit underlying capabilities in the
market place
- Access to more knowledge and information that are complementary
- However, might be expensive (outside suppliers produce at a lower costs), reduce flexibility
(substantial investment in specific technologies that become obsolete) and create balance and
coordination problems

Unrelated Diversification
1. Efficient internal capital allocation
- Corporate headquarters with access to detailed and accurate information are able to distribute
capital more effectively to business to create value for the overall corporation
- Competitors can imitate financial economies more easily than value
2. Business Restructuring
- Buy assets at low prices, restructure and sell them to generate a positive return on the firm’s
invested capital
- Difficult to restructure intangible assets such as human capital and effective relationships
Value-Neutral Diversification
1. Antitrust Regulation
- Laws preventing companies from merging but incentivise diversification)
2. Tax Laws
- In the past, dividends were tax more heavily and hence shareholders encourage companies to
diversify to increase firm size so that they can benefit through appreciation of stock value instead.
For now, people diversify to gain depreciable asset from the company and reduce taxable income
which reduce tax expense)
3. Low Performance
- High performance = no need diversify
- Therefore, low performance encourage diversification
- Although low performance can be an incentive to diversify, firms that are more broadly diversified
compared to their competitors may have lower performance
4. Uncertain future cash flows
- If product line matures/threatened, diversification is a defensive strategy.
- Doing so, reduces the uncertainty about a firm’s future cash flows and ensure long-term survival
5. Risk Reduction for firm
- Risk of technological change → opt for related diversification
- Risk of joint interdependence between businesses that constrains the firm’s flexibility to respond→
opt for unrelated diversification (and forgo benefits of synergy)
6. Resources
- Availability of resources
- Diversification based on tangible resources is less likely to create value on long term basis (more
imitable), can only be used for closely related products (less flexible assets)

Value-Reducing Diversification
1. Empire building
- obtain greater power and authority within an organization for the purposes of self- aggrandizement,
particularly by having extra staff or subordinate
2. Diversifying managerial employment risk
- If one of the business fails, the management does not face total failure as there are still other
businesses
3. Increasing managerial compensation
- Diversification increases size, complexity and difficulty of the firm which increase managerial
compensation
Portfolio management tool (BCG matrix, GE matrix)
- Example Questions:
- Analyze the company line of business using the McKinsey matrix. What decisions would you make
regarding investment strategies and resource allocation?

GE/McKinsey Matrix
Market attractiveness
● Porter’s Five Forces / PESTLE + G (Qualitative)
● Market growth rate, competitive rivalry (Quantitative)
Business Position
● Market share, profitability (Return on share)

Interpretation

Stars ● Operate in high growth industries and maintain high market

share
● Cash generators and cash users
● Expected to become cash cows and generate positive cash flows
● However, not all stars generate positive cash flows, especially in
rapidly changing industries, where new innovative products can
soon be outcompeted by new technological advancements, so a
star becomes a dog
● Strategic choices: Vertical integration, horizontal integration,
market penetration, market development, product development

Dogs ● Low market share

● Operate in a slowly growing market
● Sunset industries
● Generate low or negative cash returns
 ● However, some dogs may be profitable for long period of time,
they may provide synergies for other brands or SBUs or simple
act as a defense to counter competitors moves
● Strategic choices: Divest, Liquidate, Retain

Question Marks ● Low market share in fast growing markets

● Consumes large amount of cash and incurring losses
● May become star or dog
● Require close consideration to decide if they are worth investing
in or if firm has the competitive advantage
● Strategic choices: Market penetration, market development,
product development, divestiture

Cash Cows ● Most profitable brands and provide a lot of cash

● Cash gained from “cows” can be invested into stars to support
their further growth.
● However, cash cows are usually large corporations or SBUs that
are capable of innovating new products or processes, which may
become new stars. If there would be no support for cash cows,
they would not be capable of such innovations.
● Strategic choices: Product development, diversification,
divestiture, retrenchment

https://www.strategicmanagementinsight.com/tools/bcg-matrix-growth-share.html

Ambiguities of BCG/McKinsey
- Business growth is not considered in Mckinsey
- Declining business growth is not considered in BCG
- Liquidating dogs does not always work in real life
→ A dog may be a dog for now, as it could be situated in an industry that is still grow e.g.
technology firms
→ Synergies between departments are not considered
- New business units’ position cannot be effectively depicted e.g new company in new industry is
low low, however that action to take divest and it is not sensible
- Industry business strength and position is judgemental
- Core competencies are not reflected in these 2 matrices (firm might have the core competency to
move from one category to another-- need to use VRIN / VCA)
 Seminar 6: International Strategy

Incentives
1. Extend a product’s life cycle
- Increase product demand for the product
2. Gain easier access to raw materials
- E.g minerals, energy and low labor cost
3. Opportunities to integrate operations on a global scale
- As nations industrialise, the demand for some products and commodities become more
similar due to growing similarities in lifestyle in developed countries. Increase in global
communications also facilitate the ability of people in different countries to visualise and
model lifestyles in different cultures.
- Firms can produce on a global scale to achieve economies of scale and drive down costs,
which would be less attainable if there was only domestic market demand.
4. Opportunities to better use rapidly developing technologies
- Technology permits greater integration of trade, capital, culture and labour
5. Gain access to consumers in emerging markets
- Potential of large demands for goods and services e.g China and India
- Must factor in differences between cultures

Benefits
1. Increased market size
- Establish stronger position in markets outside their domestic market e.g. through gain in
distribution capability
- Additional consumers and higher potential returns with lower risks
- Limited growth opportunities in the domestic market
2. Economies of scale and learning
- EOS in their manufacturing operations→ reduce costs and increase value
- Exploit core competencies in international markets through resource and knowledge
sharing between units and network partners across country borders→ create synergy
- New learning opportunities eg in terms of R&D (however firms need to already have a
strong R&D system to absorb knowledge resulting from effective R&D activities
3. Location advantage
- Reduce cost (Access to lower-cost labour, natural resources, critical supplies and
customers in a timely manner)
- Physical distance
- Cultural influences (The greater the advantage when there is a strong match between the
culture within the location and the strategy being implemented)
4. Strategic competitiveness
- International Diversification and Return
- Returns might decrease initially but then increase quickly when it learns how to
manage the increased geographical diversification
- Stabilisation of returns helps reduce a firm’s overall risks
- Enhanced innovation
- Resources required for large scale R&D operations can be generated
- Culturally diverse top management have a greater knowledge of international
markets and their idiosyncrasies
 - Improves the ability to generate returns on their innovations through larger and
more numerous markets before competitors can overcome the initial competitive
advantage created by innovation
- Reduce substantial risks of R&D investments
- Exposed to new products and processes→ integrate knowledge into their
operations→ further develop innovation
- Returns generated from these relationships increase through effective managerial
practices

International business level strategy

Porter’s Diamond
To determine the competitiveness of a country → Establish how it affects a company’s external
environment and internal environment (Value Chain) → Decide on a suitable business level strategy →
Competitive advantage
1. Factors of production (inputs necessary for a firm to compete in any industry)
- Basic factors: oil, labor cost, land, natural resources, capital and infrastructure
- Advanced factors: digital communication systems and highly educated workforce
- Generalized factors: highway systems and supply of debt capital
- Specialized factors: skilled personnel in a specific industry such as the workers in a port
that specialize in handling bulk chemicals

2. Firm strategy, structure and rivalry (emphasize the structural characteristics of a specific economy
that contribute to some degree to national advantage and influence the firm’s selection of an
international business-level strategy)
- Foster the growth of certain industries
- Dynamics of competition in the industry (use Porter’s 5 Forces)
- E.g. different cultural norms and political influences

3. Demand conditions (Nature and size of the customers’ needs in the home market)
- Market size and sophistication of consumers’ perception
- Large demand can help a firm develop scale-efficient facilities, refine capabilities and core
competencies
- Social factors e.g. consumer behavior (Norway = salmon industry)

4. Related and supporting industries (How the supporting industries adds value to a firm’s value
chain)
- E.g Singapore has successful inter-related clusters made up of the shipping, port, maritime
industries, as well as a cluster comprising chemical and energy industries.

Ambiguities of Porter’s Diamond

- Does not consider regional influences (eg ASEAN, NAFTA) and government policies (eg tax)
- Lacks time factor (Does not consider changes to a country’s resources)
International Corporate-Level Strategy
Types of geographic diversification
1. Multidomestic
- Strategic and operating decision are decentralized to the strategic business units in individual
countries or regions for the purpose of allowing each unit the opportunity to tailor products to the
local market

2. Transnational (achieve both global efficiency and local responsiveness)

- Balances efficiency but also adjust to local preferences

3. Global Strategy (strategies business units are to use in each country/region

- Focus on efficiency, do not consider local preferences/requirements

Multi-Domestic Strategy (MTV, Transnational Strategy (e.g. Global Strategy (e.g Apple, Samsung,
Heinz) Mcdonald, Kraft Foods, Mondelez) Walt Disney)
Sacrifices efficiency,focus on Balances efficiency but also adjust to Focus on efficiency, do not consider local
local preferences local preferences preferences/requirements

Decisions Decentralised, Autonomy Decentralised, Autonomy Centralised in HQ

Products Localised (Customised) Both Standardised, 1 R&D Center

SBUs Independent, low knowledge Interdependent, share resources Interdependent, share resources and
and resources sharing → Low and knowledge → High coordination knowledge → High coordination &
coordination & cooperation & cooperation cooperation

International Low (Competition Focus) Mid High

Focus

Assumptions Markets differ and are Markets share some similarities Markets share significant similarities
therefore segmented by across country boundaries across country boundaries
country boundaries

Characteristics • Decentralized strategic and • Flexible coordination through an • Standardization of products across
operating decisions integrated network (shared vision country markets
• Focus on localization (local and individual commitment) • Efficient operations
factors of influence) • Conflicting goals between global • Enhance role of corporate HQ
• Tailored products and domestic requirements • increased productivity

Potential • High need for local • Dual benefits from both global and • Strong economies of scale → cost
Outcomes responsive domestic approaches savings, higher productivity, freeing
• Little need for global • Various issues arising from up of resources
integration implementation complexity • Strong corporate HQ
• Lack of economies of scale→ • Global efficiency and local • Ability to leverage innovation across
more costly responsiveness country boundaries
• Weak corporate HQ • manage connections with • Weak localization capabilities
customers and suppliers more • high need of global integration
efficiently Low need for local responsiveness
Environmental trends affecting a firm’s international strategies

1. Liability of Foreignness: A set of costs associated with various issues firms face when entering
foreign markets e.g. unfamiliar operating environments, economic, administrative and cultural
differences and challenges of coordination over distances (geographic)

Political Landscape Legal Landscape Social Landscape

● Differences in role of ● Differences in ● Differences in cultural

government business practices dimensions
● Differences in ● Differences in court ● Differences in social norms
political stability systems ● Differences in ethical practices

2. Regionalisation
● Regional focus allows firms to marshal their resources to compete effectively rather than spreading
their limited resources across multiple country specific international markets.
● Allows firms to better understand the cultures, legal and social norms and other factors that are
important for effective competition especially if international markets differ greatly.
● Allows the coordination and sharing of resources for markets that are similar across boundaries.
● Development of trade agreements promote the use of regional strategies. Trade agreements
facilitate free trade across country borders by loosening restrictions. Further, greater unity is created
across the regional markets.
 3. Risks
● Political:
○ Uncertainties created by government regulation; existence of many, possibly legal authorities
and corruption; potential nationalisation of private assets; political instability; security
instability
○ Could lead to delays in foreign direct investments and weak access to financing
○ Companies can exploit political weaknesses to implement questionable practices
● Economic:
○ Fundamental weakness in a country’s economy with the potential to cause adverse effects
on firm’s effort to successfully implement their international strategies.
○ Perceived security risk - e.g. terrorism
○ Difference in fluctuations in the value of currencies
● Other limitations
○ Size and complexity of operations become virtually unmanageable
■ Arise from differences in logistical costs, access to raw materials, employee skill
levels, capital costs
○ Increases costs beyond the value created by the international strategies
■ Cost of coordination between units and distribution of products
○ Implementation difficulties caused by differences in culture and institutional practices →
Prevent the transfer of a firm’s core competencies from one market to another → Need to
redesign their marketing programs and distribution networks
○ Mitigation:
■ Strong managerial abilities to deal with ambiguity and complexity
■ International operations based in locations that are geographically close and have
similar culture → Lesser trade barriers → Easier to launch products into new markets
■ Forming strategic alliances to overcome difference in host countries’ governmental
policies, practices and local customs

Link between product and geographic diversification

High operational and corporate relatedness→ global strategy
Low operational and corporate relatedness→ multinational strategy

Both product and geographical diversification are subject to the availability of resources, firm’s unique
strengths and weaknesses as well as the potential impacts of various external factors
Possible Entry Modes
To decide based on the industry’s competitive conditions, the country’s situation and government policies
and the firm’s unique set of resources, capabilities and core competencies.

Exporting Licensing (e.g. Strategic Alliances Acquisition Wholly Owned

Franchise) Subsidiary

Characteristics A firm sends the Another firm Partnership with Buying over Internal growth
products it produces purchases the rights another firm to another firm to
in its domestic to manufacture and combine expertise gain entry
market to sell
international markets

Pros - Easy - Low cost - Shared cost - Quick access to - Maximum returns
- Fast - Low risks - Shared resource new markets - Full control
- Avoid costs of - Easier access to the - Shared risks - Greater control - Establish strong
establishing market if foreign firms - Develop new - BUT high cost presence
operations in host have trouble entering capabilities by - Establish strong
countries market due to learning from its presence
successful lobbying experienced
by local state-owned partners
firms
- Obtain larger market
to increase returns
from product
innovations

Cons - High cost - Little control over - Integration - Complex - High cost
(marketing, selling and (culture) negotiations - High risk
transportation, tariffs distribution -Compatibility and - Corporate - Long time(need to
and distribution) - Limited returns trust issues culture, legal acquire knowledge
- Low control - Risk of competitive requirements and and expertise about
-Require middlemen info exploitation by social the new market by
foreign firm differences→ hiring host country’s
unable to capture nationals)
synergy -Complex
- Costly (requires
debt financing)

Best use - No need for foreign - Firm needs to Firm needs to Firm needs quick Firm’s intellectual
manufacturing facilitate product connect with access to new property rights in an
expertise – requires improvements experienced market and has emerging economy
only distribution necessary to enter partner in target financial not well protected +
- Complemented with foreign markets market + reduce resources (buy need for global
the use of (purchase rights) risks through cost over) integration is high
international cost sharing - Operations are (internal growth)
leadership strategy - intellectual human capital - Business relies
to developed property rights in intensive significantly on the
countries & the emerging quality of capital
international economy are not intensive
differentiation well protected, manufacturing
strategy for emerging number of firms in facilities
economies the industry is
- Export to countries growing fast and
close to their the need for global
facilities integration is high

Strategic Options:
● Make small investments to see if the company can gain a foothold in the market
○ If it does not work, the company will not lose major resources
If it works, the company can invest greater resources to reinforce their competitive position
 Seminar 8: Merger and Acquisition

Merger: two firms agree to integrate their on operations on a relatively co-equal basis
Acquisition: one firms buys a controlling, or 100 percent, interest in another firm with the intent of making
the acquired firm a subsidiary business within its portfolio
Takeover: Unfriendly acquisition wherein the target firm does not solicit the acquiring firm’s bid

Motives and types of acquisitions

1. Acquisitions can be used to achieve specific organisational goals.

Situations Goals Actions

International diversification, but - To overcome liability of - Acquire established firm in host

the organization may lack the foreignness & other entry barriers country with content knowledge
content expertise/local knowledge → increasing consumers’ (E.g. Singtel acquiring Optus)
willingness of acceptance

Require new types of innovation - To develop new products and - Acquire a firm with specific core
and product development, introduce them faster and knowledge or competencies (E.g.
however, organization has limited successfully into the market. HP acquiring Indigo)
know-how or have met with road- - Reduces the burden of high risk
blocks. and uncertainty borne by the
organization and provides more
predictable returns than in internal
product development, since the
performance of the acquired firm’s
products can be assessed (avoids
the case where opportunity costs >
benefits)

Diversify/control its revenue - To remove fluctuations in revenue - Acquire a firm that provides new
stream e.g. for seasonality, streams revenue streams, strengthen current
geography, industry - develop new revenue streams and revenue streams (E.g. Prudential
manage risk / achieve control acquiring Bache and Company)
Reasons for Acquisition

1. Increased • Determined by size, resource, capabilities

market power • Superior ability to sell goods above competitive levels + Cost of value chain lower than com
• Subject to regulatory review and financial market analysis

• How: horizontal ,vertical, related acquisition

Horizontal: Increases cost-based and revenue-based synergies → increase competitiveness
Maximises performance if acquirer and acquiring firm have similar strategy, managerial styles
and resource allocation, plus integration efforts.
Vertical: Controls additional parts of value chain which leads to increased market power →
better predictability, less disruption
Related: Creates value through the synergy that can be generated by integrating some of
their resources and capabilities to exercise core competence and gain competitive advantage
in the primary market

2. Overcome • Factors that increase expense and difficulty to enter: EOS, brand loyalty, product familiarity
entry barriers and product differentiation)
• Gain immediate access to market

• How: Cross-border Acquisitions (break into market), Vertical Acquisition, Related Acquisition,
Unrelated Acquisition

3. Cost of new • Internal development = high risk, easily imitated, requires significant investment of resources
product such as time
development/ • Acquisition = gain access to new products and more predictable returns due to acquired
Speed to firm’s capability, established market, and knowledge reduced inertia, faster entry, less risky
market
• Substitute for firm’s R&D
4. Lower risk • Important for firm acquiring non-related industry firm
compared to
product
development

5. Increased • Quickest and easiest way to change biz portfolio especially if firm lacks experience and
diversification insights

• How: related and unrelated diversification, complementary acquisition

6. Avoid • Reduce negative effect of intense rivalry

competition/Re • Reduce firm’s dependence on single product/specific markets
shaping the
firm’s
competitive
scope

7. Learn and • Broaden knowledge base and acquire diverse talents → increase capabilities potential
develop new • Reduce inertia to learning from scratch
capabilities
• How: Related diversification (complementary capabilities)
Stages of a typical acquisition

Potential issues and remedies during the acquisition process

Problems in Achieving Success

1. Inadequate • Ineffective due diligence – poor evaluation of target firm

evaluation of target • May result in acquiring firm paying an excessive premium

• How: Examine financing of intended transactions, quality of strategic fit and the ability of
the acquiring firm to integrate the target to realise potential gains (culture differences, tax
consequences, actions to meld workforces)

2. Integration • Uncertainty and resistance due to different culture, financial and control system,
difficulties, managerial style, working relationship, talent loss
coordination issues • Problems due to status of newly acquired firm’s executives

• How: develop effective organisation structure, know the difference across countries/
industries

3. Too large • Increases complexity of management challenge and create diseconomies of scope
• Additional costs of controls (bureaucratic) and acquisition > benefits of EOS and market
power
• Less innovation and flexibility

• How: internal restructuring to reduce bureaucracy

4. Inability to • Definition of synergy: Assets worth more when used in conjunction with each other
achieve synergy than separately (C.A) as they are complementary
• Direct cost (legal fees and charges from investment banker who complete due diligence)
• Firms underestimate indirect transaction costs (managerial time, loss of
managers/employee)

• How: Understand each firm’s strengths and weaknesses; Understand how to integrate
firms
 5. Too much • Need to process more info of greater diversity
diversification • Increased op scope and reliance on financial controls (ST perf) than strategic controls
• Compromise R&D and innovation → Acquisition becomes substitutes for innovation
• Related diversification outperform unrelated

• How: understand own competitive scope/ focus

6. Managers overly • Too much time and energy to search for targets and managing process – Diverts
focused on attention from matters that are necessary for long term competitive success
acquisitions
• How: Reduce group bias by having more dissent in decision

7. Large debts • Increase likelihood of bankruptcy, downgrade of credit rating, preclude investment in HR
and R&D

• How: Firms ensure that their purchases do not create a debt load that overpowers the
company’s ability to accomplish its strategic objectives while remaining solvent (cost-
benefit analysis)

Attributes of a successful acquisition

Attributes Results

Acquired firm has assets or High probability of synergy and competitive advantage by maintaining strengths.
resources that are complementary - With complementary assets, the acquiring firm can maintain its focus on core
to the acquiring firm’s core businesses and leverage the complementary assets and capabilities from the
business acquired firm.

Acquisition is friendly Faster and more effective integration and possibly lower premiums.
- Through friendly acquisitions, firms work together to find ways to integrate their
operations to create synergy.

Acquiring firm conducts effective Firms with strongest complementarities are acquired and overpayment is avoided
due diligence to select target firms
and evaluate the target firm’s
health

Acquiring firm has financial slack Financing is easier and less costly to obtain

Merged firm maintains low to Lower financing cost, lower risk, and avoidance of trade-offs associated with higher
moderate debt position debt. Firms can also retain the financial flexibility to invest in long-term profitable
projects.

Acquiring firm has sustained Maintain long term competitive advantage of markets
emphasis on R&D and innovation

Acquiring firm manages change Faster and more effective integration facilitates achievement of synergy
well and is flexible and adaptable - Top-level executives will be more skilled at adapting their capabilities to new
environments as well as more adept at integrating the two organisations.
Restructuring
● Definition: Change business or financial
● Caused by failure of acquisition or change in environment or poor financial performance
● Strategies:
1. Downsizing:
- Reduction in number of employees and number of operating units
- Firms fail to create the value anticipated, acquiring firm paid too much, newly formed firms
have duplicate organisational functions
- Necessary when the newly formed firm has duplicate organisational functions → prevent
the new firm from realising the cost synergies
- Need to ensure procedural justice and fairness in downsizing decisions
2. Downscoping:
- Divestiture of unrelated businesses to focus on their core business
- Managerial effectiveness increase due to increased focus and talents
- Used together with downsizing
- Firms need to avoid layoffs as it could lead to loss of core competencies
3. Leveraged Buyout:
- A party buys all of a firm’s assets in order to take the firm private
- Sale of non-core assets → to finance a buyout using debts
- Correct managerial mistakes → leads to higher entrepreneurial activity and growth →
stimulate strategic growth and productivity
- Three types of LBOs: Management buyouts, employee buyouts and whole-firm buyouts
- Advantages of PE firms
- Stronger alignment between owners and managers as debt obligations constrain
managerial discretion
- Provide growth capital for firms who cannot access public equity markets or other
sources of finance
- Facilitation consolidation of industries → Removing excess capacity in industries
- Disadvantages of PE firms
- High debt loads prevent portfolio firms from pursuing potentially valuable
opportunities
● Outcomes:
Alternatives Short-Term Outcomes Long-Term Outcomes

Downsizing Reduced labor -Loss of human capital (Employees with

experience and knowledge, dissatisfaction
of customer)
-Lower performance

Downscoping -Reduced debt cost Higher Performance

-Emphasis on strategic controls

Leveraged Buyout -Emphasis on strategic controls -Higher Performance

- Greater innovation -Higher Risk
-High debt cost -Creates short term and risk-averse
management focus
-Fail to invest adequately in R&D or take
major actions designed to maintain or
improve the company’s core competence
 Seminar 9: Cooperative Strategy
Collaboration for the purpose of working together to achieve a shared objective.
Which strategy to use is dependent on
- Goals of alliance
- Cost/ resources to commit
- Do other companies want the company’s resources

What is a strategic alliance?

- Firms combine some of their resources and capabilities to create a competitive advantage
- Leverage their existing resources and capabilities and while developing additional ones for new
competitive advantages

Types of major strategic alliance

1. Joint Venture
- Partners own equal percentage and contribute equally to the venture’s operations
- Firms create a legally independent company to share some of their resources and capabilities
- Allows firms to develop core competencies and create competitive advantage that is substantially
different from any they possess individually
- Improve a firm’s ability to compete in uncertain competitive environments
- Establish long term relationships and transfer tacit knowledge

2. Equity strategic alliance

- Two or more firms own different percentages of the company they have formed by combining
some of their resources and capabilities
- Can be primarily for capital infusions alone but also for changing one’s strategy

3. Non equity strategic alliance

- Two or more firms develop a contractual relationship
- E.g outsourcing, project based -- CSR purposes, cooperating with educational institutions
- Does not establish a separate independent company and therefore do not take equity positions.
- Less formal, demand fewer partner commitments than do joint ventures and equity strategic
alliance, do not foster an intimate relationship between partners
- prevent contracting partner or outsourcee from gaining too much knowledge or from sharing
certain aspects of the business the outsourcing firm does not want revealed

Reasons Firm Develop Strategic Alliance

● Enter markets more quickly and with greater market penetration possibilities
● Increase probabilities needed to reach firm-specific performance objectives
○ Create value that firms cannot create independently since they lack the full set of
capabilities and resources needed to reach their objectives
○ Especially with small business
● Increase revenue
● Compete more effectively as an alliance than individually through sharing of resources, knowledge
and risks
● Broaden the product offerings and distribution of their products without adding significant costs
Cooperative strategies vary by slow-cycle, fast-cycle and standard-cycle conditions.
1. Slow cycle markets
Firms’ CA are shielded from imitation for relatively long periods of time and where imitation is costly; close
to monopolistic conditions
● Enter restricted markets
● Establish franchises in new markets
● Maintain market stability (eg establishing standards)
● Transit from relatively sheltered markets to more competitive ones as firms recognise that they will
encounter situations that their CA will not be shielded
2. Fast-cycle markets
Unstable, unpredictable and complex, hypercompetitive
● Speed up the development of new goods or services
● Speed up entry into new markets
● Maintain market leadership
● Form an industry technology standard
● Share risky R&D expenses
● Overcome uncertainty
3. Standard-Cycle Markets
Alliances are likely made by partners with complementary resources and capabilities
● Gain market power (reduce industry overcapacity)
● Gain access to complementary resources (eg Marketing clout)
● Establish better economies of scale
● Overcome trade barriers
● Meet competitive challenges from other competitors
● Pool resources for very large capital projects
● Learn new business techniques

Specific types of cooperative strategies

Business-Level Cooperative Strategy

1. Complementary Strategic Alliances
- Business-level alliances in which firms share some resources and capabilities in complementary
ways to create a CA. that is sustainable as it focuses on creating value
Vertical Complementary Strategic Alliance (eg outsourcing)
- Greatest possibility of creating a sustainable C.A.
- Sharing of resources from different stages of the value chain.
- Stabilise relationship with upstream suppliers to ensure high-quality, reliable products
- Used to adapt to environmental changes while innovate at the same time
- Gain access to a new market
Horizontal Strategic Alliances
- Sharing of resources from the same stage of the value chain
- Focus on joint long term product development and distribution opportunities
- Leverage on partner’s reputation
- Gain access to a new market
- Share the development costs (e.g. legal and regulatory costs)
- Speed up the product development
- Partners may become competitors in future (compete at the same time as they are cooperating)
 2. Competition response strategy
- C.A. created is often temporary as it is not focused on creating value
- Respond to competitive attacks
- Primarily formed to take strategic rather than tactical actions
- Respond to competitors’ actions in a like manner

3. Uncertainty-reducing strategy
- C.A. created is often temporary as it is not focused on creating value
- Hedge against risk and uncertainty especially in fast markets (eg in new product development or
seeing technology standards)
- Used where uncertainty exists such as in entering new product markets and in emerging
economies

4. Competition-reducing strategy
- C.A. created is often temporary as it is not focused on creating value
- Used to reduce competition
- Lowest probability of creating a competitive advantage
- Collusive strategy are often illegal
- Explicit collusion: Firms negotiate directly to jointly agree about the amount to produce as well as
the prices for what is produced
- Tacit collusion: Firms indirectly coordinate their production and pricing decisions by observing each
other’s competitive actions and responses → results in production output below fully competitive
levels and above fully competitive prices → reduce service quality and performance
- Firms do not directly negotiate output and pricing decisions
- Mutual forbearance: Tacit collusion where firms do not take competitive actions against rivals in
multiple markets → Avoid destructive competition

Corporate-Level Cooperative Strategy

To enhance strategic competitiveness in the LR
Firms collaborate for the purpose of expanding their business
Broader in scope, more complex, challenging and costly to use
1. Diversifying Strategy Alliance
- Purpose: To engage in product/ geographic diversification
- Diversify risks of operations
- Reverse can also be done where firms from joint ventures dimp product lines it doesn’t want to
focus on anymore

2. Synergistic Strategic Alliance

- Purpose: To create economies of scope
- Synergy is created across multiple functions or businesses between partner firms
- Can be carried out at the same time as complementary alliance at the business until level

3. Franchising
- Uses a franchise as a contractual relationship → Franchisor transfers knowledge and skills to
franchisees, while franchisees provide feedback to the franchisor on how the unit could become
more efficient and effective
- Spreads risk and leverage resources, capabilities and competencies without merging or acquiring
another company
 - Success is dependent on how well the franchisee can replicate the strategy in a cost-effective
manner
- Alternative to pursue growth to gain large market share→ Particularly useful in fragmented industry
- Find ways to strengthen the core company’s brand name

International Cooperative Strategy

1. Cross Border Strategic Alliance
- Firms with HQ in different countries combine their resources and capabilities to create a C.A.
- Reasons for formation:
- Limited domestic growth opportunities
- Foreign government economic policies (Local ownership is an important national policy
objective as government policies reflect a strong preference to license local companies)
- Overcome liability of foreignness (e.g. lack of local culture & institutional norms, knowledge
about locals markets, sources of capital, legal procedures and politics)

Network Cooperative Strategy / Strategic Cooperative Network

Collaborating with multiple alliances instead of individual companies for the purpose of achieving
shared objectives
• E.g Toyota
• Gain resources, capabilities, information and knowledge from multiple sources to better innovate
and create value for customers by offering many goods and services in many geographic market
• Drive growth and differentiate its business by extending its capabilities to meet customer
requirements
• Particularly effective when:
- It is formed by geographically clustered firms
- Effective social relationships and interactions
- Strategic center firm often manages the network
• Expectations could burden and negatively affect the focal firm’s performance
• Alliance network types:
Stable alliance network
- Formed in mature industries where demand is relatively constant and predictable
- Firms try to extend their C.A. to other settings while continuing to profit from their core,
relatively mature industries
- Exploit the economies of scale and scope
Dynamic alliance network
- Characterized by frequent product innovations and short product life cycles
- Explore new ideas and possibilities with the potential to lead to product innovations, entries
to new markets, and the development of new markets
- Smaller firms can gain credibility by partnering larger partners
- Effective if a firm has a diverse set of partners in new areas & at the center of a linked
network
Competitive risks within strategic alliances and potential remedies

Competitive Risks Risks and Asset Management Desired Outcome

- Inadequate contracts Cost-minimisation approach Value creation:

- hold partners’ investment hostage - Detailed contracts (all - reduced friction,
- opportunistic behaviour (formal contract contingencies) [Expensive, Stifle enhanced cooperation
fails or alliance is based on a false innovation] - economies of scope
perception of partnership trustworthiness) - monitoring systems to ensure goals - development of new
- Hidden/Non-mutual agenda met and process proper resource/capability/com
- Misrepresentation of competencies [Expensive] petency by collaboration
- Failure to make available the - Incentive system to reward - set up base for future
complementary resources which it cooperation collaboration
committed - enhanced innovation/pdt
Opportunity-maximisation approach develop
Undesired outcomes: - Open and trusting communication
- Volatility of economic returns (uncertainty - understand partners’ competencies
of external environment) for success
- Different in cultures and management
styles (poor integration)
- Different expectations of the parties
- Conflict of interests
 Seminar 10: Corporate Governance

Set of mechanism used to manage relationships among stakeholders and to determine and control the
strategic direction and performance of organization.

Purpose
● Determine and control strategic direction and performance of organisation (ensure strategies are
well-executed)
● Manage relationships among stakeholders (Establish and maintain harmony between parties)
● Monitor or control or advise executive behaviours
● Connection or social network – resource collision
● Can lead to a competitive advantage for a firm

Separation of Ownership and Managerial Control:

● Basis of modern corporation – Annual reports, BOD profiles
● Efficient specialisation of tasks
● Agency problems change with different organisational stage (small firm = less separation)

Agency Relationship
When one party delegates decision-making responsibility to a second party for compensation
● Need for agent as
○ Owners do not have access to all the skills needed to effectively manage the firm and
maximise returns (need for owner specialisation of risk bearing and management
specialisation in decision making)
○ Firm seeks outside capital and thus give up some of its ownership to facilitate growth
● Agency Relationship:
○ Principal (stakeholders) = firm owner and risk bearing specialist
○ Agents (managers) = managerial decision-making specialist
● Agency Relationship Problems:
○ Shareholders and managers have divergent interests and goals
○ Shareholders lack direct control of large publicly traded corporations: Difficult or expensive
for shareholders to verify that managers have behaved appropriately – difficult to get first-
hand info of decision-making process as complex to understand rationale + performance is
a function of many other factors
○ Managerial opportunism
■ Seeking of self-interest with guile (cunning/deficit)
■ Seek to maximise personal welfare and minimise their personal risk
■ Prevents shareholder wealth maximisation
■ E.g. managers over-diversify to gain power in company, make use of acquisition
(not a sustainable competitive advantage), use of free cash flow (managers prefer
investments, shareholders prefer dividends)
 ○ Product Diversification causes agency problem
■ Shareholders prefer focused differentiation while managers prefer diversification
that maximises firm size and their compensation while reducing their employment
risk
■ Increase the size of a firm and size is positively related to executive compensation
■ Increases the complexity of managing a firm and its network of business, possibly
requiring additional managerial pay
■ Reduce top management employment risk (risk of job loss, loss of compensation
and loss of managerial reputation) because less vulnerable to reduction in demand
associated with a single or limited number of product lines or businesses.
■ Too much diversification can hamper a firm’s ability to innovate or divert managerial
attention from other important firm activities
○ Free cash flow
■ Managers prefer to invest these funds in additional product diversification which do
not have a strong possibility of creating additional value for stakeholders → Over-
diversification (unrelated diversification)
■ Shareholders prefer the funds as dividends so they control how the funds are
invested
○ Agency costs:
■ Sum of incentive costs, monitoring costs, enforcement costs and individual financial
losses incurred by principals because governance mechanisms cannot guarantee
total compliance by the agent.
■ Regulatory mechanisms include the implementation of SOX, Dodd-Frank Act to
align financial institutions’ actions with society’s interests

Internal Governance Mechanism

1. Ownership concentration
● Institutional owners (pension/ mutual funds)/ large block shareholders:
○ increasingly active in their demands that firms adopt managerial decisions so that they will
best represent owners’ interests
○ Make it worthwhile to spend time, effort and expense to monitor closely
○ May also obtain board seats which enhances their ability to monitor effectively
○ Has the ability to discipline managers and to enhance the likelihood of a firm taking future
actions that are in shareholders’ best interests
○ However, large institutional owners often go along with the desires of powerful CEO and
boards
● Diffuse ownership
○ Weak monitoring of manager’s decisions as it is difficult for owners to effectively coordinate
their actions
2. Board of Directors
● Group of elected individuals whose primary responsibility is to act in the owners’ best interests by
formally monitoring and controlling the firm’s top-level managers
○ Direct the affairs of the organisation
○ Punish and reward managers
○ Protect owners from managerial opportunism
○ Increasingly expected to provide resources (personal knowledge and expertise,
relationships with a wide variety of organisation) to the firm
○ Made up of insiders (firm’s CEO and other top executives), related outsiders (individuals
not involved with firm’s day-to-day ops but have r/s with the company) and outsiders
(individuals who are independent of the firm in terms of day-to-day operations and other r/s)
○ Separation of CEO and chairman role
○ Need for a knowledgeable and balanced board
■ Need for quality independent directors, who is willing to devote time, obtains
valuable information through interactions with inside board members and through
board meetings → Greater accountability
■ Need for insiders who are informed of the intended strategic initiatives → Focus
more on strategic controls → avoid managerial opportunism to maximise self-
interests & reduce employment risks due to emphasis on financial controls
○ Ways to enhance effectiveness of BOD:
■ Increase diversity of background of board members
■ Strengthen internal management and accounting control systems
■ Establish and consistently use formal process to evaluate the board’s performance
■ Modify the compensation of directors to reduce/eliminate stock options
■ Create a lead director role who has strong power over the board agenda and
oversight of non-management board member activities

3. Executive Compensation
● Seeks to align the interests of managers and owners through salaries, bonus and long term
incentives
● Ensures that top- level management will act in shareholders’ best interests
● Assumes that management’s pay and the firm’s performance are more properly aligned when
outsiders are the dominant block of a board’s membership
● Requires additional monitoring and potentially increasing the firm’s agency costs
● Factors complicating executive compensation
○ Strategic decisions by top level managers are complex and non routine→ ineffective to
judge the quality of their decision
○ Strategic decisions affect a firm over an extended period
○ Unpredictable changes in the general environment can affect firm’s performance
● Limits on the effectiveness of executive compensation
○ Top level managers’ compensation is linked to outcomes the board can easily evaluate
such as financial performance → subject to managerial manipulation
○ Difficult to assess the effects of their decisions on a regular basis → pursue short run
objectives eg decrease R&D investments
○ Long term incentive plans transfer risk to top executives
Market for Corporate Control
● External governance mechanism that is active when a firm’s internal governance mechanism fails
● Individuals/ firms buy or take over undervalued corporations
○ Ineffective managers are usually replaced → Loss of jobs
○ If managers remain, there is immense pressure to improve the firm’s performance
● Threat of hostile takeover may lead firm to operate more efficiently/ effectively and improve firm
performance
○ Signals managers are ineffective in fulfilling their responsibilities → Reputational loss
● Limits on the effectiveness of the market for corporate control
○ Managerial defense strategies increase the costs of mounting a takeover
■ Golden parachutes: CEO can receive up to three years’ salary if his or her firm is
taken over
■ Poison pills: Allows shareholders to convert shareholders’ rights into a large number
of common shares, which dilutes the potential acquirer’s existing stake → to
maintain/expand the ownership position, the potential acquirer must buy additional
shares at premium prices
■ Managerial entrenchment: Only one third of board members are up for reelection
each year through corporate charter amendment
 Seminar 11: Organisation Structure and control

Organisational structure:
- Specifies the firm's’ formal reporting relationships, procedures, controls and authority and decision
making process
- Facilitates the effective use of the firm’s strategies
● Structure influence current and future strategic actions
- Influences how managers work and decisions arising from that work
- Effective structure should have both structural stability and structural flexibility
● Structural stability provides the capacity for the firm to consistently and predictably manage
its daily work routines
● Structural flexibility provides the opportunity to explore competitive possibilities and then
allocate resources to activities that will shape the competitive advantages the firm will need
to be successful in the future

Organizational Controls:
- Guide the use of strategy
- Indicate how to compare actual results with expected results
- Suggest corrective actions to take when difference is unacceptable
- Provide clear insights regarding behaviors that enhance firm performance
- Important to properly balance the use of strategic and financial controls

Strategic Controls:
- Subjective
- Examining the fit between what the firm might do (suggested by the opportunities in the external
environment) and what it can do (indicated by its C.A.)
- Help firms understand what it takes to be successful, especially where significant strategic
change is needed.
- Demand rich communication between managers and those primarily responsible for
implementing the strategies
- Evaluate the degree to which the firm focuses on the requirements to implement its strategies
- Business level strategy: businesses with Differentiation strategy use VCA to verify that the
critical value chain and support activities are being emphasised and properly executed
(subjective measures of the effectiveness of product development teams)
- Corporate level: Related diversification strategy: used to verify the sharing of appropriate
strategic factors such as knowledge, markets and technologies across businesses.

Financial Controls:
- Objective
- Used to measure the firm’s performance against previously established quantitative standards (as
well as competitors’ performance and industry averages)
- E.g ROI, ROA, EVA
- Corporate level: Evaluate the performance of the firm using the unrelated diversification strategy
- Business level: Cost leadership strategy (quantitative cost goals)
Types of Structures

Implementation of business-level strategy

Simple structure
● Flat structure
● Owner-manager makes all major decisions and monitors all activities (highly centralised) and staff
act as the agents
● Low specialisation of tasks (overlapping of roles)
● Coordination of tasks by direct supervision
● Low formalisation with few rules/regulations, informal relationships and communications and
informal evaluation and reward system
● Suitable for business-level: Focus strategies (Small firms in single business, offer single
product/service in a single geographic area)

Functional structure
● Consists of CEO, limited corporate staff and functional line managers
● Allows for functional specialisation which facilitates active sharing of knowledge within each
functional area (e.g. R&D, engineering and HR)
● Centralised: CEO needs to verify the decisions and actions of individual businesses promote the
entire firm rather than a single function (function are supposed to be complementary)
● Competition between functions to fight for resources
● Suitable for larger firms in single business or those using business-level & corporate level strategy
with low levels of diversification
 Cost Differentiation Integrated cost
Leadership leadership &
Differentiation

Formalisation (degree of which High Lower (More flexibility) Some formal, some
formal rules and procedures govern) informal job behaviours

Specialization (concerned with the High: Low Semi-specialised

type and number of jobs required to increased
complete work) efficiency→
reduce costs

Centralization (degree to which High Low (except marketing Partially centralised,

decision-making authority is and product R&D) partially decentralised
retained at higher managerial (More autonomy)
levels)

Emphasis Emphasis on Emphasis on marketing

operations and product R&D
and process (differentiating factor)
engineering

Implementation of corporate-level strategy

Multidivisional Structure (decentralised)

● Consists of a corporate office and operating divisions
● Top corporate officer delegates responsibilities for day-to-day operations and business-unit
strategy to division managers
● Each operating divisions represents a separate business or profit center
○ Has its own functional hierarchy (includes its own functional specialists typically organized
into departments.)
○ Relatively autonomous and consist of products and services that are different from those of
other divisions.
○ Division executives help determine product-market and financial objectives
 ● Used for related and unrelated diversification strategies
● Benefits:
- enabled corporate officers to more accurately monitor the performance of each business
(simplified control problems)
- facilitated comparison between divisions (improved resource allocation process)
- stimulated managers of poorly performing divisions to look for ways of improving
performance
- Separation of strategic and operating control.
- Allows units to adapt quickly to differences in products, regions, customers.
- Development of general management talent is enhanced
● Cons
- Dysfunctional competition among divisions.
- Eliminates economies of scale found in functional structure.
- Narrow functional specialization.

Cooperative SBU Competitive

Strategy Related Constrained Related Linked Unrelated

Suitable for
conglomerates

Centralisation of HQ SBU Division

Ops - Loss of managerial - Creates flexibility →
autonomy Each division works on
different projects and
technologies
simultaneously

Use of integration Direct contact between Medium Minimal

mechanisms division managers→
 Extensive resource
sharing → EOS

May be supported by
formal/informal integration
departments

Divisional Perf Emphasis on strategic Both Emphasise financial

Appraisal control control → competition

Divisional Linked to overall Mixed linkage to Linked to division

Incentive corporate performance corporate, SBU & performance
Compensation divisional
performance
Matrix structure
● Report to 2 managers with equal authority (dual)
● Conditions:
○ Pressure to share scarce resources across product and geographic lines
○ Dynamic/Complex environmental domain
■ Large amount of coordination and information
■ Two or more critical outputs (eg in depth functional knowledge and product/
geographic knowledge are required for decision making-- dual authority structure)
● Pros:
○ Use of specialised personnel, equipment, facilities
○ Provides professionals with a broader range of responsibility and experience
○ Improved coordination among a firm’s decision
● Cons
○ Uncertainty and power struggles
○ More complicated and longer decision-making
○ Conflict of interest/prioritisation issues
○ More accountability and reporting processes
● Suitable for big, complex organisations operating in dynamic environment which requires high level
of coordination between countries and functions & firms using related constrained strategy

Implementation of international-level strategy

Domestic Structure with International Division

● Transnational geographical diversification
● Low cost due to minimal modification/
adaptation (e.g. exporting, franchising)
● Minimal integration
Worldwide Product Divisional Structure
● Global geographical diversification
● Standardised products (increase
efficiency)
● Decision rights at the product level
managers
● Decision making authority centralised in
the HQ to coordinate and integrate
across business units
● HQ allocates financial resources cooperatively among divisions
● High need for global integration, low need for local adaptation → Direct contact between
managers, liaison roles between
departments

Worldwide Geographic Area Divisional Structure

● Multidomestic geographical
diversification
● Differentiation by local demand
● HQ allocates financial resources among
independent geographic divisions
● Little coordination between geographic
divisions
● Decision rights at the country level
managers
● Informal communication between divisions and HQ
● Disadvantages: Inability to create strong global efficiency
● High need for local adaptation, low need for global integration

Hybrid global or global matrix structure

● Transnational geographical diversification
● Global matrix:
○ Brings together both local market
and product expertise into teams that
develop and respond to the global
marketplace
○ Promotes flexibility in designing
products and responding to
customers needs
○ Employees are accountable to more
than one manager
● Hybrid global:
○ Some divisions are oriented toward products while others are oriented toward market areas
● High local responsiveness and high global integration
Implementation of cooperative strategy
● Strategic Network: Group of firms formed to create value by participating in multiple cooperative
arrangements
○ Facilitates discovery of opportunities beyond those identified by individual participants
○ Can be a source of C.A. when its operations create value that is difficult to imitate or create
by themselves
● Strategic center firm manages interactions among partners
● Incentives are provided to align interests of participants
● Tasks of strategic center firm:
○ Strategic outsourcing:
■ Outsources and partners with more firms than other network member
■ Create value through its cooperative work
○ Competencies:
■ Increase network effectiveness,
■ Firm Seek ways to support each member’s efforts to develop core competencies
with the potential of benefiting the network
○ Technology
■ Responsible for managing the development and sharing of technology-based ideas
among network members
■ Structural requirement that members submit formal reports detailing the technology-
oriented outcomes of their efforts to the firm
○ Race to learn
■ Emphasizes that the principal dimensions of competition are between value chains
and between networks of value chains

Organisational control systems

Address both formulation and implementation of strategy, as well as deviations from expected results
Informational Controls – “doing the right things”
● Definition: “fit” between firm’s internal environment with external strategic context
● Premise Control: check systematically and continuously whether premises (context) on which
strategy is based are still valid
○ Set of assumptions (i.e. under what) that rational decisions are made
○ Environmental-level premise: i.e. shouldn’t be another economic crisis for successful
implementation
○ Industry-level premise: i.e. current competitive environment remains the same (e.g.
constant demand)
○ Firm-level premise: i.e. do not expect layoff or change in leadership during implementation
● Strategic Surveillance: Monitor a broad range of events inside and outside the firm that could affect
its strategy
○ Environmental scanning e.g. business intelligence: monitor competitors’ moves, upcoming
trends
○ Sources: annual reports, news, market research, consultants, trade shows, conferences,
meetings
● Special Alert: Cope with sudden unexpected events – re-assessment of firm’s strategy and current
strategic situation
○ CEO succession, contingency planning for man-made errors or natural disasters

Behavioural Controls – “doing things right”

● Must align A to C to promote consistent behaviours
● Organisational Culture: system of norms, practices, communication to stakeholders on values and
beliefs (good for innovation)
○ Implicit boundaries of standards and practices (unspoken)
○ Behavioural norms can reduce monitoring costs
● Rewards and Incentives: extrinsic or intrinsic (good when measurement of output or performance if
straightforward)
○ Reinforce basic core values – enhance cohesion and commitment
○ Rewards must be perceived as equitable to market and internally and must be clearly
linked to performance and desired behaviour
● Boundaries: Explicit statements of standards or objectives through policies, codes (good for stable
and routine environment)
○ Focus efforts on strategic priorities by providing short-term objectives
○ Improve operational efficiency and effectiveness
○ Minimise improper and unethical conduct (e.g. code of conduct)

Implementation Controls
● Assess whether overall strategy should be changed in light of results associated with incremental
actions that implement overall strategy
● Balanced Scorecard: Implementation assessment tool (applicable to different levels in org –
function, division, org)
○ To assess firm’s performance – accuracy depends on accuracy of criteria chosen
Balance between financial (short term measurable outcome) and strategic controls (long
term perspective)