Managerial Economics

STRATEGIC MANAGEMENT
DLMBSME01
MASTHEAD
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DLMBSME01
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2
TABLE OF CONTENTS
Introduction
Signposts Throughout the Course Book . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Required Reading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Further Reading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Learning Objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Unit 1
What is Strategy? 13
1.1 What is a Corporate Strategy? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

1.2 What Has To Be Taken Into Consideration When Making Strategic Decisions? . . . . . . 16
1.3 Who Takes Part in Developing a Strategy? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
1.4 What is Included in a Solid Strategic Plan? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Unit 2
The Strategic Environment 21
2.1 Where Are We in the Market Place? The Macroenvironment . . . . . . . . . . . . . . . . . . . . . . 22

2.2 Where Are We in the Market Place? The Microenvironment . . . . . . . . . . . . . . . . . . . . . . . 25
2.3 Analysis, Strategic Capabilities, and the Five Forces Model . . . . . . . . . . . . . . . . . . . . . . . 29
Unit 3
The Position in the Market 35
3.1 Why Do We Exist? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

3.2 What is Our Position in the Market? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
3.3 What Information Does the Company Need? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
3.4 What Capabilities Does the Company Have? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
3.5 What Capabilities Do Others Have? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Unit 4
What Strategic Options Are Available to the Strategic Business Unit (SBU)? 51
4.1 What Strategic Options Does the SBU Have? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

4.2 Interactive Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
4.3 Product Life Cycle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
3
Unit 5
What Strategic Options are Available to the Corporation? 63
5.1 Areas to Consider When Formulating a Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66

5.2 Strategic Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
5.3 Outsourcing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
5.4 Product Portfolio Analysis Using the BCG Matrix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
5.5 Product Portfolio Analysis Using the GE-McKinsey Matrix . . . . . . . . . . . . . . . . . . . . . . . . 79
Unit 6
What International Strategies are Available? 83
6.1 Why Do Companies Go International? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88

6.2 What Factors Contribute to the Decision About Which Country to Invest In? . . . . . . . . 91
6.3 How Can a Company Invest Internationally? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95
Unit 7
Do-It-Yourself, Buy, or Ally? 99
7.1 Do-It-Yourself . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101

7.2 Mergers and Acquisitions (M&A) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102
7.3 Strategic Alliances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
7.4 How to Decide Whether to Buy, Ally, or Do-It-Yourself? . . . . . . . . . . . . . . . . . . . . . . . . . 108
Unit 8
How to Evaluate Strategies? 113
8.1 How to Evaluate Strategy? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116

8.2 Implementing Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118
Appendix
List of References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122
List of Tables and Figures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124
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INTRODUCTION
WELCOME
SIGNPOSTS THROUGHOUT THE COURSE BOOK
This course book contains the core content for this course. Additional learning materials
can be found on the learning platform, but this course book should form the basis for your
learning.
The content of this course book is divided into units, which are divided further into sec-
tions. Each section contains only one new key concept to allow you to quickly and effi-
ciently add new learning material to your existing knowledge.
At the end of each section of the digital course book, you will find self-check questions.
These questions are designed to help you check whether you have understood the con-
cepts in each section.
For all modules with a final exam, you must complete the knowledge tests on the learning
platform. You will pass the knowledge test for each unit when you answer at least 80% of
the questions correctly.
When you have passed the knowledge tests for all the units, the course is considered fin-
ished and you will be able to register for the final assessment. Please ensure that you com-
plete the evaluation prior to registering for the assessment.
Good luck!
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REQUIRED READING
UNIT 1
Porter, M. (1996). What is strategy? Harvard Business Review, 74(6), 61–78. http://search.eb
scohost.com.pxz.iubh.de:8080/login.aspx?direct=true&db=bsu&AN=9611187954&site
=eds-live&scope=site
UNIT 2
Porter, M. (2008). The five competitive forces that shape strategy. Harvard Business Review,
86(1), 78–93. http://search.ebscohost.com.pxz.iubh.de:8080/login.aspx?direct=true&d
b=bsu&AN=28000138&site=eds-live&scope=site
UNIT 3
Zook, C. (2007). Finding your next CORE business. Harvard Business Review, 85(4), 66–75. h
ttp://search.ebscohost.com.pxz.iubh.de:8080/login.aspx?direct=true&db=bsu&AN=24
263845&site=eds-live&scope=site
UNIT 4
Kim, W. C., & Mauborgne, R. (2005). Blue ocean strategy: From theory to practice. California
Management Review, 47(3), 105–121. http://search.ebscohost.com.pxz.iubh.de:8080/l
ogin.aspx?direct=true&db=bsu&AN=17070054&site=eds-live&scope=site
UNIT 5
Levitt, T. (2004). Marketing myopia. Harvard Business Review, 82(7/8), 138–149. http://searc
h.ebscohost.com.pxz.iubh.de:8080/login.aspx?direct=true&db=cmedm&AN=15252891
&site=eds-live&scope=site
UNIT 6
Kaplan, R. S., Norton, D. P., & Rugelsjoen, B. (2010). Managing alliances with the balanced
scorecard. Harvard Business Review, 88(1/2), 114–120. http://search.ebscohost.com.px
z.iubh.de:8080/login.aspx?direct=true&db=edb&AN=47193908&site=eds-live&scope=s
ite
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UNIT 7
Christensen, C. M., Alton, R., Rising, C., & Waldeck, A. (2011). The new M&A playbook. Har-
vard Business Review, 89(3), 48–57. http://search.ebscohost.com.pxz.iubh.de:8080/logi
n.aspx?direct=true&db=edswis&AN=edswis.ECON65389015X&site=eds-live&scope=sit
e
UNIT 8
Mintzberg, H. (2009). Rebuilding companies as communities. Harvard Business Review,

87(7/8), 140–143. http://search.ebscohost.com.pxz.iubh.de:8080/login.aspx?direct=tru
e&db=bsu&AN=41998792&site=eds-live&scope=site
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FURTHER READING
UNIT 1
Baghai, M., Smit, S., & Viguerie, P. (2009). Is your growth strategy flying blind? Harvard
Business Review, 87(5), 86–96. http://search.ebscohost.com.pxz.iubh.de:8080/login.as
px?direct=true&db=edswis&AN=edswis.ECON602151244&site=eds-live&scope=site
UNIT 2
Grundy, T. (2006). Rethinking and reinventing Michael Porter’s five forces model. Strategic
Change, 15(5), 213–229. http://search.ebscohost.com.pxz.iubh.de:8080/login.aspx?dir
ect=true&db=bsu&AN=22930081&site=eds-live&scope=site
UNIT 3
Likierman, A. (2009). The five traps of performance measurement. Harvard Business

Review, 87(10), 96–101. http://search.ebscohost.com.pxz.iubh.de:8080/login.aspx?dire
ct=true&db=edswis&AN=edswis.MIND87224&site=eds-live&scope=site
Prahalad, C. K. (2010). Best practices get you only so far. Harvard Business Review, 88(4),
32–32. http://search.ebscohost.com.pxz.iubh.de:8080/login.aspx?direct=true&db=bsu
&AN=48736750&site=eds-live&scope=site
UNIT 4
Kim, W. C., & Mauborgne, R. (2014). Blue ocean leadership. Harvard Business Review, 92(5),
60–72. http://search.ebscohost.com.pxz.iubh.de:8080/login.aspx?direct=true&db=bsu
&AN=95639019&site=eds-live&scope=site
UNIT 5
Burke, A., van Stel, A., Thurik, R. (2010). Blue ocean vs. five forces. Harvard Business
Review, 88(5), 28. http://search.ebscohost.com.pxz.iubh.de:8080/login.aspx?direct=tru
e&db=edsbas&AN=edsbas.19D78611&site=eds-live&scope=site
Quinn, J. B. (1999). Strategic outsourcing: Leveraging knowledge capabilities. MIT Sloan

Management Review, 40(4), 9–21. http://search.ebscohost.com.pxz.iubh.de:8080/login
.aspx?direct=true&db=bsu&AN=2107641&site=eds-live&scope=site
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UNIT 6
Meyer, E. (2015). When culture doesn’t translate. Harvard Business Review, 93(10), 1–6. http
://search.ebscohost.com.pxz.iubh.de:8080/login.aspx?direct=true&db=bsu&AN=10933
8458&site=eds-live&scope=site
UNIT 7
Gomes, E. et al. (2013). Critical success factors through the mergers and acquisitions proc-
ess: Revealing pre- and post-M&A connections for improved performance. Thunderbird
International Business Review, 55(1), 13–35. http://search.ebscohost.com.pxz.iubh.de:
8080/login.aspx?direct=true&db=bsu&AN=84540683&site=eds-live&scope=site
UNIT 8
Douglas, S., & Craig, C. (2011). Convergence and divergence: Developing a semi global
marketing strategy. Journal of International Marketing, 19(1), 82–101. http://search.eb
scohost.com.pxz.iubh.de:8080/login.aspx?direct=true&db=bsu&AN=58009555&site=e
ds-live&scope=site
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LEARNING OBJECTIVES
Developing a strategy is a company’s main priority as it is a strategy that will act as a map
for the future. The course Strategic Management will demonstrate the significance of a
corporate strategy and explore who is involved in developing it.
You will discover what information companies require to develop a strategy and how to
generate this information. Furthermore, you will gain insight into various models, analy-
ses, and techniques that help in collating this data.
Using various case studies from different fields of practice, you will learn what foundations
should be established in order to develop a strategy and what considerations influence
the decision-making process.
Moreover, you will become more familiar with the international business environment and
the strategic opportunities it offers companies. In addition, you will learn how strategies
are evaluated and what is essential for the successful implementation of a strategy.
The recommended reading will add a further dimension to the concepts that constitute
this course by introducing you to the most important authors and articles in the field of
strategy.
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UNIT 1
WHAT IS STRATEGY?
STUDY GOALS
On completion of this unit, you will have learned …
– the various definitions of strategy.

– what is important when making strategic decisions.
– which organizational level is responsible for which strategic decisions.
– what information is necessary in order to develop a solid strategic plan.
1. WHAT IS STRATEGY?
Case Study
CASE STUDY
The German-based company Alfred is a medical equipment manufacturer. The
Components equipment Alfred manufactures consists of various components. One compo-
These are additional nent is Alfred’s core technology for which Alfred is the market leader. However,
parts, which are inte-
grated to make a final in order to make this core component applicable for medical treatment, it is
product. necessary to integrate it with three additional components which are supplied
Core technology by three different manufacturers from the USA, Italy, and Germany. Alfred has
This is the main techno-
been very happy with two of the suppliers, but there are continuous issues
logy around which a
product is developed. regarding the quality of components supplied by the US manufacturer.
A quality control check is carried out when the purchased components are sup-
plied; only if the components are supplied as specified does Alfred integrate
them into their system. The integration process is very complex as all compo-
nents have to be adjusted to provide a functional final product.
Xion provides a similar component to Alfred’s US supplier. However, Xion is nei-

ther a supplier to Alfred, nor does it provide a product for the same market seg-
ment as Alfred. Xion is two hours away from Alfred and faces bankruptcy.
Alfred’s management sees this as an opportunity and buys Xion, with one of the
goals being to replace the US supplier and integrate Xion’s component into all its
systems.
After two years, a full integration of the Xion systems still has not been carried
out. Furthermore, the hospital market now requires additional data manage-
ment systems. Alfred has not developed any expertise in data management as
their entire focus was on the integration of the acquired company Xion. Alfred is
forced to close Xion due to the increased financial burden.
What happened?
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1.1 What is a Corporate Strategy?
A corporate strategy is like a map that an organization draws in order to reach a specific Corporate strategy
goal in the future. The strategy therefore shows the long-term direction of the organiza- A corporate strategy
defines the future goals of
tion. A strategic plan is never static as the environment and the markets are constantly an organization.
changing. This requires organizations to review strategic plans and make adjustments and
changes in order to meet these new demands.
The three leading corporate strategists – Alfred Chandler, Michael Porter, and Henry Min-
tzberg – define strategy as follows:
• Alfred Chandler: “Strategy can be defined as the determination of the basic long-term
goals and objectives of an enterprise, and the adoption of courses of action and the
allocation of resources necessary for carrying out these goals” (Chandler, 1963, p. 13). Resources
These are means that are
available to an organiza-
This means that if an organization starts producing one product or a product line and the tion.
demand for the product increases, the size of the organization and its complexity increa- Product line
ses accordingly. Eventually, the structure of the organization will also have to change in A product line is a group
of products with a similar
line with the new strategic outlook. If the structure of an organization is not adapted to its purpose.
strategy, the organization will face major problems.
• Michael Porter: Strategy is defined in relation to competition. “Strategy is the creation

of a unique and valuable position, involving a different set of activities” (Porter, 1996,
p. 1).
Michael Porter takes a different view when it comes to defining the purpose of a corporate
strategy. It is not the long-term view itself that is important in a strategy but the goal of
developing a competitive advantage over time. A corporate strategy should focus on Competitive advantage
developing and maintaining a competitive advantage that is based on one clear, distinc- A competitive advantage
provides the organization
tive feature. with a better position in
the market compared to
• Henry Mintzberg: Strategy is “a pattern in a stream of decisions” (Mintzberg, 2007, p. 3). its competitors.
In Mintzberg’s view, it all starts with a vision that is fully understood. The decision patterns
required to reach the vision constitute the corporate strategy. If the environment changes
or an extraordinary opportunity arises and the envisioned goal becomes unattainable, the
vision may need adjusting. Often, the more flexible and adaptable the corporate strategy,
the better it is for the organization. An explicit strategy is often too rigid and cannot be
changed easily. Such a strategy ties organizations psychologically to their predefined
goals, even if these could lead to disadvantages. Therefore, it is necessary to keep a corpo-
rate strategy flexible and open to changes.
If we apply these definitions to our case study at the beginning of this chapter, we can see
that Alfred did not adapt its structure to a new strategy. On the contrary, it changed the
corporate structure by acquiring Xion and then tried to develop a strategy out of this new
situation.
15
If we look at our example through the eyes of Michael Porter, Alfred did not develop a
competitive advantage by investing in its core competency or by developing a competency
in data management systems, which was a trend visible on the horizon. The company
invested in a component that did not add any value for the customer, thus forgoing the
opportunity of developing a competitive advantage in the long term.
Many corporate decisions are made too fast, without a thorough analysis of all factors and
scenarios available at the time. In order to develop successful strategies, companies need
detailed information and adequate time to analyze it.
A corporate strategy has many aspects. To develop a sound strategic plan, management
needs to study and analyze all these aspects. In the following chapters, you will learn vari-
ous techniques that were developed to enable managers to take a closer look at various
corporate issues and market developments in order to make better decisions for the
future.
1.2 What Has To Be Taken Into

Consideration When Making Strategic
Decisions?
When managers make strategic decisions they look at the following:
• long-term orientation of the organization

• purpose of the organization
• attainment of a competitive advantage
• adaptability to changes
• expandability of resources and the efficiency of the organization
Corporate philosophy • corporate philosophy
The corporate philosophy • expectations of stakeholders
defines the main princi-
ples by which an organi-
zation functions. It would be interesting to find out Alfred’s long-term orientation. Looking at the long-term
Vertical integration vision might have answered the question about whether a vertical integration, in this
This means that a com- case purchasing a component manufacturer, made sense and whether it was a good fit for
pany acquires a supplier
or a distributor. the company strategy. A different option could have been to increase the pressure on the
US supplier of the component to supply the component at a consistently higher quality.
The purpose and the markets of the two companies, Alfred and Xion, were too different to
integrate. Both supplied products for hospitals and private practices, but they were serv-
ing very different segments and very different customers.
Alfred’s competitive advantage is clearly its core technology, which made it the market
leader in the company’s specific field. The additional components to this core technology
did not add value for the customer in order for Alfred to gain a further share of the market.
16
In this specific case, the changes in the market did not take place in the components that
were acquired by Alfred. The company should have looked at the entire environment and
where new developments were taking place, namely in data management systems. The
company invested in the wrong technology and therefore showed very little adaptability
to change.
Looking at the expandability of resources and the efficiency of the two organizations,
there was little competence in either company that could bridge the two technologies or
corporate cultures. The technical integration of the products from Alfred and Xion caused
major problems as the systems are complex and the core competences of the two compa-
nies lay in two very different areas.
Companies have very different cultures and philosophies; it is often difficult to integrate
them in the event of an acquisition. In our case, this was part of the reason why the take-
over failed.
Alfred’s stakeholders favored the acquisition as it expanded the range of products; how-
ever, they underestimated the integration problems. Additionally, the distribution net-
works of both companies were different as they served varying market segments. There
was no possibility of increasing efficiency by combining the distribution networks.
A clear corporate strategic plan could have circumvented many of the problems faced by
Alfred. Sound strategic decisions are based on a solid strategic plan.
1.3 Who Takes Part in Developing a

Strategy?
Depending on the size of the organization, there are various levels of strategic develop-
ment. These various levels all contribute to the strategic planning process.
Figure 1: Strategic Levels
Source: Created on behalf of IU (2015).
17
The upper level of strategic planning is the corporate level. Decisions regarding the overall
purpose and the development of the organization are made at this level. This level defines
the vision and the mission as well as the purpose of the organization. The corporate level
Strategic business unit analyzes the strategic business units (SBUs) in terms of their growth potential in the
A strategic business unit future, and decisions are made accordingly regarding the budgets for the SBUs. The more
is a unit of a business that
could act independently promising SBUs are allocated larger budgets, the more they receive greater financial sup-
of the other units in the port.
market place.
The SBUs look at the threats (risks) and opportunities in their respective business environ-
ments. They also analyze the strengths and weaknesses of their own resources and con-
tribute competitive analyses to the strategic plan.
The marketing plans are developed at the product level. These include situation analyses,
the marketing strategy, and business plans for the respective products. They also define
the mechanisms required to implement these plans.
All levels are involved in the strategic planning process. Therefore, all managers at each
level, from top to bottom, need to be familiar with the strategic planning process. Strate-
gic plans are either developed internally by the organization itself or coached and man-
aged by external consultants.
1.4 What is Included in a Solid Strategic

Plan?
To develop a solid strategic plan, an organization has to answer important questions
regarding their position in the market and their strategic resources and possibilities as
well as how to implement the strategy. Strategic planning is a long-term process as it takes
time to assemble all the information required in order to develop a solid overall strategy.
The strategic position of the company in the market place
In order to understand the strategic position in its entirety, it is important to analyze
• the strengths and weaknesses of your organization,

• the opportunities and threats present in the business environment,
• the influence of the corporate strategy on the environment and the corporate culture,
• whether the existing resources can sufficiently support the strategic goals of the organi-
zation, and
• whether the strategic plan fits the purpose (mission) of the organization.
The strategic capabilities
In order to understand the availability of the strategic resources, it is important to analyze
• whether the portfolio of the business units fits well with the strategic objectives,
18
• whether the business units are adequately positioned in the market place to support
the strategy,
• the international markets in which the organization aims to operate,
• what strategic alliances should be formed, and
• whether the organization is active in the right areas of innovation.
The implementation
In planning the implementation of the strategic plan, it is important to analyze
• what process is necessary to develop a strategy,

• what strategy is a good fit for the organization and what is feasible,
• what corporate structure and systems in the organization are necessary to implement
the strategic plan,
• how best to manage the implementation process,
• how to evaluate the strategy, and
• who is responsible for the implementation process.
SUMMARY
The strategic plan can be compared to a road map that an organization
draws up in order to reach its strategic goals. The strategic goals show
where the organization wants to be in the near future.
Three leading business strategists – Chandler, Porter, and Mintzberg –

look at strategy from different perspectives; for Chandler, it is important
that the structure of the organization fits its strategy while Porter looks
at strategy in comparison to the organization’s competitors, and Min-
tzberg sees strategy as a dynamic process.
Many different factors influence the strategic outlook of an organization.

Therefore, the managers of any organization need to be familiar with the
organization itself and the markets in which the organization operates in
order to make sound strategic decisions.
All levels of an organization participate in the strategic planning process:

the corporate level defines the mission and vision of the organization,
the strategic business units evaluate the strengths and weaknesses of
the organization and the opportunities and threats in its environment,
and the product management level draws up the marketing plans for
the products.
19
A solid strategic planning process requires an analysis of the company’s
position in the market place, an evaluation of its strategic capabilities,
and a detailed implementation plan.
20
UNIT 2
THE STRATEGIC ENVIRONMENT
STUDY GOALS
– what factors in the macroenvironment influence the strategy.

– what a PESTEL analysis is.
– what factors in the microenvironment influence the strategy.
– how Porter’s Five Forces model works.
– how to critically evaluate Porter’s Five Forces model.
2. THE STRATEGIC ENVIRONMENT
Case Study
CASE STUDY
One of the strategic business units of the Lars Bank deals with financing real
Real estate estate. Turkey announces major changes in the legal framework for financing
This refers to property property sales. These changes will make it easier for European banks to finance
such as land, buildings,
and apartments which real estate in Turkey. The manager of the Lars Bank orders one of the employees
cannot be moved. to investigate further factors that influence the real estate financing business in
Turkey and to draw up a list of questions that include all the necessary informa-
tion. The employee draws up a preliminary list of questions:
1. What business opportunities will open up for foreign financial services pro-
viders as a result of the change in the legal framework?
2. Is the market economically attractive?
3. Would Turkish customers accept foreign financial service providers?
4. Which customers should we target: private investors or real estate compa-
nies?
5. How could the customers influence the financing terms of the bank?
6. What competition already exists in the Turkish market?
7. What other European competitors might become active in the Turkish mar-
ket? To what extent and how?
8. What alternative financing options are available to Turkish customers?
9. How are real estate projects sold? Who mediates real estate projects in Tur-
key?
10. Would the Turkish market be of interest to Lars Bank?
2.1 Where Are We in the Market Place?

The Macroenvironment
Organizations do not exist in isolation – they exist within the environment in which they
operate. The environment, in turn, influences the corporate strategy. A comparison can be
made with the solar system, with our organization being the center and various factors
orbiting around it, just as the planets move around the sun. Each of these factors influen-
ces our strategic plan.
22
The factors closer to the organization – namely competitors, substitute products, suppli- Substitute products
ers, and buyers – are in the microenvironment. The macroenvironment consists of politi- These can be used as
replacements for existing
cal, economic, social, technological, environmental, and legal factors that influence how products.
business is conducted.
Figure 2: The Macroenvironment of an Organization
The PESTEL analysis can be used to analyze the macroenvironment of our organization.
PESTEL is an acronym of the first letters of all the factors in the macroenvironment of an
organization:
• political factors
• economic factors
• social factors
• technological factors
• environmental or ecological factors
• legislative or legal factors
The PESTEL analysis is a strategic and qualitative method that helps to align the organi- Qualitative methods
zation with its environment or with developments in the environment. It also looks at These involve interpret-
ing and understanding
changes in the environment that may influence the future success or failure of the organi- connections.
zation.
PESTEL Analysis of an Airline
The following section applies a PESTEL analysis to an airline, exploring what is considered
in each category.
23
Political factors
This involves an analysis and forecast of political developments and trends. If the govern-
ment enforces higher security standards in the airline industry, our company will have to
invest more in its security measures. Investments in other projects will therefore need to
be reduced or cut completely. This has a direct impact on the company strategy.
Economic factors
This involves an analysis and forecast of economic developments and trends. Changes in
the price of oil will influence the price of aviation gasoline. Since the price of gasoline is a
critical factor for airline profitability, the oil price will have an influence on the bottom line
of an airline company. If gas prices go up, airlines are forced to increase ticket prices. This
could lead to a decline in air travel, which impacts the strategy of an airline.
Social factors
This involves an analysis and forecast of sociocultural developments such as trends in the
Demography areas of demography or changes in values of the customers. In the Western world, the
This looks at the develop- population is aging, and many retire earlier. As such, there are many more elderly people
ment of a population in
terms of age, structure, traveling today than in the past. Airlines have to accommodate this customer group and
etc. cater to their specific needs by providing wheelchairs and luggage services.
Technological factors
This involves an analysis and forecast of technological developments and trends. The
Check-in check-in process for flights has changed through the widespread use of the Internet for
This is the process of reg- this procedure. A few years ago, a traveler had to be at the airport on time in order to go
istering travelers and
their luggage in order to through the check-in process at the airline counter. There were often long lines in front of
confirm their presence on the check-in counters. Today, most airlines offer online check-in in order to process the
the flight. passengers at the airport faster. Airlines are forced to invest in the technology required to
support online check-in procedures, which again influences the strategic plan.
Ecological factors
This involves an analysis and forecast of ecological developments and trends. The airline
industry is faced with flight restrictions over certain areas such as larger cities and nuclear
power plants. Therefore, they are forced to reroute planes and engage in major planning
efforts to align operations with ecological developments. This leads to stronger invest-
ments in the planning department and takes resources away from other departments.
Legal factors
This involves an analysis and forecast of legal developments regionally, domestically, or

internationally. Domestic airlines are often given preference when it comes to airport
access. Smaller airlines are thus forced to resort to smaller, more remote airports. Cheaper
charter airlines, such as Irish company Ryanair, build this factor into their strategy and
operate from smaller airports.
24
The PESTEL analysis is comprehensive and extensive. Its usage is not limited to one organ-
ization or one competitive situation; it can also be applied to a team or a department
within the organization. A brainstorming session often forms part of a PESTEL analysis
with the goal of finding specific features or trends in any of the six areas. These can then
be evaluated to inform a specific decision or situation. The PESTEL analysis is therefore a
tool that can be used for location decisions as well as for strategic decisions, such as the
product portfolio or technological innovations.
In our case study, the first three questions concern the macroenvironment of Lars Bank.
The first question, “What business opportunities will the change in the legal framework
open up for foreign financial services providers?”, addresses the political and legal aspects
of such an investment in Turkey. The changes in the legal framework for financing real
estate should make it easier for European banks to finance real estate in Turkey.
The second question, “Is the market economically attractive?”, looks at the economic
aspects of an investment decision. Even if the legal framework supports foreign invest-
ments, it might not be economically lucrative for the organization.
The third question, “Would Turkish customers accept foreign financial service providers?”,
looks at the sociocultural implications of the investment. Financial services companies
need to establish a relationship of trust with the customer in order to succeed. Despite
today’s global markets, it might be difficult for a foreign bank to gain the trust of Turkish
customers. This question needs to be explored further before making the decision to enter
the Turkish market.
2.2 Where Are We in the Market Place?

The Microenvironment
The direct environment in the market place impacting an organization is called the micro-
environment. This includes the buyers or customers of an organization, the competitors,
possible substitute products, and the suppliers.
The Five Forces Model
Michael Porter’s (1979) Five Forces model takes a look at the microenvironment and helps
analyze various strategies for the strategic planning process. This model is built on the fol-
lowing assumptions:
• The market’s attractiveness is defined by its structure.

• The structure of the market in turn impacts the strategic behavior of an organization
operating in this market.
• Since the market structure is defined by the competition, the competitive strategy of an
organization is decisive for its success.
25
Porter’s model analyzes the forces in the microenvironment that impact a specific market.
The information gained through this model analysis allows organizations to make deci-
sions regarding activities that influence forces in their microenvironment.
The attractiveness of a business is identified by the following five forces:
1. Buyers/customers: analysis of their buying power

2. Competitors: analysis of the degree of rivalry among existing competitors
3. New market entrants: analysis of threats from new competitors
4. Substitutes: analysis of threats from substitute products
5. Suppliers: analysis of their negotiating power
The stronger these five forces are, the less attractive the business is and the more difficult
it is for an organization to build and maintain a competitive advantage. These forces are
now explained in greater depth.
Buyers/customers
Customers are the direct buyers of the products or services of an organization; however,
Consumer they are not necessarily the consumers. When buyers are powerful (i.e., they buy large
The consumer is the indi- amounts), they can enforce lower prices for the products. This would lead to a decrease in
vidual using the product
or service. In many fami- the profits of the organization.
lies, mothers are often the
grocery shoppers who Buyers have purchasing power over an organization when
buy the chocolate. In this
instance, the mother is
the direct buyer; however, • they buy large quantities,
it is the children who are
• the producer has high fixed costs and little flexibility in lowering the price for the prod-
the consumers of the
chocolate. uct or service,
• the product is undifferentiated and can easily be replaced by substitute products,
• the switch to an alternative product is simple and inexpensive,
Margin • the margins are relatively small,
This is the difference • the customers could produce the product or service themselves,
between the production
costs and the sales price. • the product or service is not of high value to the customer,
• the customer knows the production cost of the product, or
Backward integration • a backward integration is possible for customers.
This means that the cus-
tomers produce the prod-
uct or service themselves Competition
by buying the company or
developing it. This force describes the intensity of the competition among the current players in the mar-
ket. High competitive pressure, which is often reflected in price competition, leads to
shrinking margins and profits for all the organizations in the business.
The competitive pressure in a business is high when
• there are numerous companies of similar size in the market,

• the companies have similar strategies,
• the business sector shows little growth, and therefore, an increase in sales is only possi-
ble if business is taken away from a competitor,
26
• the products or services offered in the market are undifferentiated, and therefore, all
companies compete on price,
• the exit barriers for the organization to leave the business and switch to a different busi-
ness are very high (e.g., highly specialized machines or personnel are required to pro-
duce the product or service).
New market entrants
When the competitive pressure by new market entrants on existing organizations is higher,
the easier it is for new companies to enter a certain sector. Important elements in the mar-
ket such as market share, price levels, customer base, etc. can be changed when new com-
panies enter the market. There is a constant pressure on the existing organizations to
react and adjust to this pressure. The threat of new market entrants is defined by business
specific market entry barriers.
Market entry barriers are high if there are
• economies of scale (i.e., organizations need to be a certain size in order to be more Economies of scale
efficient), These occur when the
production volume
• high initial costs and high fixed costs, depends on the number
• cost advantages of existing organizations through experience effects or through of production factors
employment of depreciated but still functioning machines and equipment, deployed. Production
costs do not necessarily
• brand-loyal customers, decrease when the pro-
• patents and licenses which protect the intellectual property of organizations, duction volume increa-
ses.
• scarce resources (e.g., qualified human resources),
Brand-loyal customers
• controlled resources by existing organizations, These have a close rela-
• controlled distribution channels by existing organizations, tionship to a company or
• close customer relationships through service or maintenance contracts, brand.
• high switching costs for customers who want to change suppliers in the business. Switching costs
These are the costs
involved when a cus-
Substitutes tomer switches to a differ-
ent supplier. These costs
The threat of substitute products is critical if the substitute is cheaper or more effective are monetary and psych-
ological.
than the current product. These may then replace a large portion of the sales volume of
the existing product and thus reduce sales and profit of existing organizations.
Similar to the threats of new market entrants, the threat of substitute products depends
on various factors such as
• the degree of customer loyalty,

• the intensity of the customer relationship, Intensity
• how high the switching costs are for the customer. This describes the degree
and frequency of the cus-
tomer contact.
27
Suppliers
Suppliers are all the supply sources that are necessary for an organization to be able to
Input produce the product or service. Suppliers provide the necessary input to make the prod-
This includes all efforts uct. Powerful suppliers can increase the prices for their products and therefore reduce the
such as materials, person-
nel, etc. that are neces- profit of the organization to which they supply the product.
sary to produce the prod-
uct or service. Suppliers are powerful if
• the market is dominated by few large suppliers,

• the product supplied is highly specialized or rare,
• the company that buys from the supplier is small and insignificant to the supplier,
• there are no substitutes for this specific input,
• the switching costs to a new supplier are high,
• a forward integration is feasible for the supplier, meaning that the supplier could buy
the company to whom it supplies.
The example of forward integration is evident in the case of charter airlines. Many airlines
do not sell through travel agents as a distribution channel but rather sell directly to the
traveler via the internet. This example demonstrates how these airlines have forward-inte-
grated their distribution.
If a supplier is powerful, the businesses that operate in this market experience a high pres-
sure on their profit margins. It is more difficult to maintain a profitable business. The rela-
tionship with important suppliers can have a strong impact on the strategic plan of an
organization.
Let us return to our case study of the Lars Bank, which is looking at opportunities for
financing real estate in Turkey. Questions four to ten on the employee’s list concern Por-
ter’s Five Forces model.
Firstly, the questions “Which customers should we target, private investors or real estate
companies?” and “How could the customers influence the financing terms of the bank?”
look at the customer and how much power he has. Small private customers who are buy-
ing a home will certainly have less power than large real estate companies. Real estate
companies regularly invest in large apartment buildings and therefore have a great deal
more power in negotiating financing terms with the bank. The bank has to decide who
their customer is.
The next questions, “What is the competition like in the Turkish market?” and “What other
European competitors might become active in the Turkish market? To what extent and
how?”, evaluate both the existing competitive situation in Turkey and potential new com-
petitors. Certainly, Lars Bank will not be the only bank to consider entering the Turkish
market once the legal changes are finalized. Therefore, a possible strategy has to look at
the competitive landscape.
28
The next question, “What alternative financing options are available to Turkish custom-
ers?”, is concerned with possible substitutes or, in this case, other financing options. Other
financing options may be available in Turkey, such as loans supported by the employer.
The second to last question, “How are real estate projects sold? Who mediates real estate
projects in Turkey?”, looks at the supply situation. In this case, the bank needs to find out
where and how to get information on real estate projects.
2.3 Analysis, Strategic Capabilities, and

the Five Forces Model
The analysis of Porter’s Five Forces in business can be used for three areas of a strategic
plan:
1. Analysis of the market attractiveness (static): The model helps to define the market
attractiveness of a business. It helps with decisions concerning entering or remaining
in a specific market segment. The model also allows the analysis of the influence of
the forces on the individual organization and on its competitors. This helps to deter-
mine the organization’s position in the market. Different companies have different
resources and competences that permit different strategic decisions. The strategic
decisions of the companies in turn influence the competitive structure of a business.
2. Analysis of the development of the market attractiveness (dynamic): Together
with the PESTEL analysis, the Five Forces model can show developments and changes
in a business. This trend analysis can be used to look at the attractiveness of the busi-
ness in the future. The political, economic, social, technological, ecological, and legal
developments can influence one or several of the five forces. This can significantly
influence the distribution of power of the forces.
3. Analysis of the strategic possibilities: The analysis of the intensity of the different
forces on the organization provides insight into opportunities to influence or use the
forces to the organization’s advantage. This might lead to a completely new strategic
orientation, which could influence the position of the organization in the market Position
place, or the differentiation of the products or services, or even the decision to form This is the active commu-
nication of a product or
strategic partnerships. In our case study, the Lars Bank is investigating the question brand to the market
“Would the Turkish market be of interest to Lars Bank?” This is the basic strategic place.
question that follows the macro- and microanalysis of the environment.
Thus, Porter’s model allows a systematic and structured analysis of the competitive situa-
tion and position of an organization. As stated earlier, the model can be used to analyze a
specific situation, a specific market segment, or a specific region.
29
What Are The Strategic Options For an Organization?
After thoroughly examining the current and possibly future development of the five forces,
the organization can develop strategies to influence one or several of the forces. Possible
strategies should not just take the environment into account but should also look at the
internal resources, capabilities, and goals of the organization.
The following strategies are available to organizations:
Reducing the power of the suppliers
• The organization can form partnerships with companies that use the same supplier,
enabling them to buy higher quantities at lower prices. Edeka is a buying partnership of
several supermarkets in Germany. The partnership started in 1898, and Edeka is now
Germany’s largest food retailer.
• Systems integration: organizations can try to integrate (i.e., computer systems, ordering
processes, etc.) with their supplier. This will streamline the process and make it cheaper
for both companies. At the same time, it will become more difficult and more costly for
the supplier to switch customers. Systems integration consolidates the relationship
between companies.
• An example of successful systems integration is Wal-Mart, a US-based retailer. In June
2003, Wal-Mart announced that its 100 largest suppliers would have to supply all their
products with radio frequency identification (RFID) technology by January 2005. RFID
allows products to be identified and located automatically. The reordering process is
therefore automated as the system recognizes when the shelf is empty and products
need to be reordered.
• Companies can try to obtain knowledge regarding the production costs and methods of
the supplier in order to use this information in negotiations.
• The organization can try to backward-integrate (i.e., it can try to purchase the supplier).
For example, a shoe manufacturer could acquire a leather supplier to ensure consistent
quality and deliveries.
Reducing the power of buyers
• Organizations can form partnerships with other suppliers to reduce the buying power of
customers. These cooperatives can be seen in many areas. For example, olive farmers in
Italy deliver the olives together to the oil producer to guarantee the same prices for all
farmers.
• System integration works in both directions: from buyer to supplier and from supplier
to buyer. It leads to optimized processes and lowers the costs for both parties. It makes
switching more difficult for both supplier and buyer. In the medical equipment market,
some manufacturers of medical imaging equipment also supply data management sys-
tems to hospitals. The imaging systems are then compatible with the patient data man-
agement system of the hospital. This creates a close relationship between manufacturer
and hospital.
• Increasing customer loyalty will also reduce the power of buyers and tie the buyer to the
organization. Loyal customers who buy repeatedly reduce the purchasing costs of an
organization as they are familiar with the process and know how to order. This decrea-
30
ses the process costs and increases the profitability of the organizations. Organizations
can increase loyalty by consolidating relationships and by offering loyalty benefits to
the customer.
• The decision to purchase a specific product should not be based on the price. Apple
understood that the highly competitive consumer electronics market is price-driven.
However, through excellent marketing, they created a trendy image for their products
and evaded price competition with the many other electronic companies in the market.
• Organizations can also try to bypass influential distributors and sell directly to the cus-
tomers. We have already provided the example of charter airlines that no longer sell
tickets through travel agencies but directly to the customer.
Reducing the threat of new market entrants
• Organizations can weaken the threat of new market entrants by building a brand and
creating customer loyalty. Both will make it more difficult for new entrants to establish a
customer base.
• Patents and licenses protect products and processes for a limited time and make it
impossible for new entrants to sell similar products in the respective markets.
• Organizations can increase the barriers to entry (see above).
• Alliances with complementary products and services can improve customers’ choice of Alliance
product from a single source. Travel agencies often have alliances with insurance com- An alliance is a partner-
ship between two com-
panies to be able to offer travel insurance policies to their customers. panies with similar inter-
• Alliances with suppliers or distributors build closer relationships, making it more diffi- ests and goals.
cult for new companies to enter the market.
• Increasing efficiency in producing the product or service will give the organization cost
and time advantages over new entrants. This can be attained through constant quality
and process management.
Reducing the threat from substitutes
• In order to reduce the threat from substitutes, organizations can again integrate sys-
tems with their customers to make it more difficult for them to switch to substitute
products.
• Creating industry standards makes it difficult for substitutes to gain a market share.
Wal-Mart’s RFID technology has expanded in the retail business in the US and has
become an industry standard.
• Forming alliances is another strategy to protect the organization from possible substi-
tutes.
• Market research and constant analyses of customer preferences can also protect from
substitutes.
• Organizations may decide to enter the substitute market themselves. Some manufac-
turers of glass bottles have invested in the production of plastic containers.
Reducing the pressure from existing competitors
• Companies should avoid price competition.

• Differentiating products from competitive products as Apple has done with many of
their products, avoids direct competition.
31
• Taking over a competitor is another strategy to ease the pressure as the organization
becomes larger.
• Focusing on specific market segments (niche marketing) will avoid head-on competi-
tion in these smaller market segments.
• Communicating with competitors establishes better relationships and avoids fierce
competition.
Critical Issues
Porter’s Five Forces model has received some criticism. Its main weakness is a result of the
historic context it was created in. At the beginning of the 1980s, the world economy was
shaped by strong competition and cyclical growth patterns. Therefore, organizations’ pri-
mary goal was to guarantee their existence and profitability. They had to optimize their
strategy in relation to the competition.
Today’s market is quite different. It is much more dynamic and less stable and predictable
in its development. Therefore, the Five Forces model has limited applicability in today’s
market place.
• The model is based on a stable and static market structure. It is difficult to apply it to
today’s dynamic markets. The technological advances and aggressive new market
entries by companies from different businesses change the markets constantly. The
internet as a selling tool has put many established brick-and-mortar companies that
ignored this trend completely out of business.
• The Five Forces model is best used to analyze simply-structured markets. It is difficult to
analyze complex businesses with many intertwined structures and networks, products,
and distribution structures using this model.
• Moreover, the model is also based on the classic free market. The stronger a business is
regulated, the less effectively the model can be used to design sound strategies.
MORE INFORMATION
Porter’s answer to such criticism can be found in Porter (2008).
SUMMARY
Each organization exists within an environment which influences its
strategy. The environment can be divided into the microenvironment
(direct influences) and the macroenvironment (factors in the wider envi-
ronment of the organization). There are various methods of analyzing
these factors.
32
The PESTEL analysis helps to examine the macroenvironment. It looks
at factors in the wider environment, such as trends and developments
that influence the company strategy. The PESTEL analysis looks at politi-
cal, economic, social, technological, ecological, and legal aspects that
influence strategic decisions. The PESTEL analysis is broad and can be
used to make decisions on locations, product portfolios, technological
concepts, and other projects.
Michael Porter’s Five Forces model helps to analyze the strategy of an

organization and make planning decisions. The basic assumption of the
model is that the business structure influences the attractiveness and
the strategic behavior of companies operating in the business. The
attractiveness of the market is influenced by five factors: buyers, com-
petitors, new market entrants, substitutes, and suppliers.
A thorough analysis of the five forces and their scope of influence allows
organizations to evaluate the attractiveness of the market. In combina-
tion with the PESTEL analysis, a company can also evaluate trends in the
market. Thus, the company can define the strategic possibilities and try
to influence one or several of the five forces. The goal is to weaken sup-
pliers’ and customers’ power over the organization, to minimize the
threat from new market entrants and substitutes, and to minimize the
pressure from existing competitors on the organization.
Porter’s model has been criticized as it is based on static and stable mar-
ket conditions. Therefore, it cannot be applied to today’s complex and
dynamic markets.
33
UNIT 3
THE POSITION IN THE MARKET
STUDY GOALS
– the difference between a mission, a vision, and a statement of values.

– how to define goals.
– what the organization’s position in the market means.
– how to segment consumer and business markets.
– how to carry out a SWOT (strengths, weaknesses, opportunities, and threats) analysis.
– what benchmarking is.
3. THE POSITION IN THE MARKET
Case Study
The Bar School Takes a New Direction
The board of a private school continues to have different views about the strategic focus
of the school from those of the school’s president and leadership team. The board (repre-
senting the parents) finds the attitude among the students and between the student and
teachers unacceptable. The president and the leadership team are mainly concerned with
a higher quality education. The task of a school is to educate children in the best possible
way. In the parents’ opinion, education encompasses not just academic learning but also
the social and emotional development of students.
In order to find a common future direction, the school and the board decide to develop a
strategic plan together. Five days are set aside for this task, and the school leadership,
board representatives, teachers, parents, and students take part in developing a plan that
is supported by all parties.
The participants agree on the following mission statement: “The mission of the Bar School
is to inspire and empower students to become balanced, responsible, and global-minded
members of society. This is accomplished by offering a high-quality, internationally accep-
ted education.”
The mission statement always reflects the values of the organization. The values of the Bar
School have been defined in the following way:
• Every person is of value and has unique potential.

• Good conduct, teamwork, cooperation, and respect are important factors for success;
education is a partnership between students, parents, and teachers.
After the mission statement, the goals for the future are generated:
• All students display behavior that reflects the mission and the values of the school.
• The students’ performance in three years will be above the level of similar schools.
Next, the school looks at all the factors that influence the strategy of the school by carry-
ing out a SWOT analysis. The group generates a list of factors in a brainstorming session.
Smaller groups then sort the results of the brainstorming session by common topic. The
topics are then prioritized and aligned with the goals. Finally, the topics are grouped into
action plans, which will be enacted over the three years by assigned groups.
The strategic plan is a success due to the support by all constituents. After one year, atti-
tudes within the school have improved; after two years, the students’ performance starts
to improve.
36
3.1 Why Do We Exist?
The top level of an organization, the founders or the corporate level, formulate the guiding
philosophy. This guiding philosophy defines the values of the organization and dictates
how the organization should view itself. It also formulates the future direction of the
organization. The guiding philosophy provides an internal orientation for the employees,
guidance for their behavior, and motivation. To the outside world, the guiding philosophy
shows what the organization stands for. It is the basis for corporate identity. Corporate identity
This defines the identity
of an organization. The
Mission identity is defined
through all the character-
istics of an organization
The mission is the heart of a strategy; it explains why the organization exists and provides that distinguish it from
clarity to its purpose. It defines the organization to all who are directly or indirectly con- other organizations.
nected to it: employees, suppliers, customers, distributors, shareholders, etc., otherwise
referred to as stakeholders. Stakeholders
These are individuals or
organizations that are
The mission answers the following five questions: connected to or affected
by the organization.
1. Why do we exist?
2. What is our purpose?
3. Why are we different from others?
4. What do we want to achieve?
5. How do we achieve it?
The Bar School provides us with an example of a good mission statement. The first part,
“The mission of the Bar School is to inspire and empower students to become balanced,
responsible and global-minded members of society,” answers the question of why the
school exists and what its purpose is. The second part of the mission statement, “This is
accomplished by offering a high-quality, internationally accepted education,” describes
how the school will accomplish its mission.
Vision
While the mission statement looks at the purpose of an organization from the present-day
perspective, the vision looks at the future of an organization and where it aims to be. The
vision should inspire and unite everyone involved with the organization and should chal-
lenge the organization’s resources.
The vision answers the following questions:
• What do we want to accomplish in the future?

• Where do we see our organization in five, ten, 15, or even 20 years?
The vision is the guiding philosophy of the organization, which must reflect the values of
an organization and is influenced by the strengths and weaknesses of the organization.
37
An example of a vision: “We will provide the highest quality product/service in the mar-
ket.”
Values
The value statement communicates the values and principles of an organization. It defines
its guidelines for conducting business. These values should not change or be adapted as
they provide the basis for each strategy.
The values of the Bar School are:
1. Every person is of value and has unique potential.

2. Good conduct, teamwork, cooperation, and respect are important factors for success;
education is a partnership between students, parents, and teachers.
Goals
Many organizations have neither a mission, vision, nor a value statement. However, every
organization has goals. Goals are specific to each layer or department of the organization,
as illustrated in the following figure.
Figure 3: Goal Hierarchies
38
The corporate or strategic goals should be specific to what should be attained. They can
be developed around many criteria such as the following:
• market position goal (i.e., market share, sales volume, developing new markets)
• profit goals (i.e., profit margin, return on sales)
• financial goals (i.e., level of liquidity, credit-worthiness)
• social goals (i.e., employee satisfaction, employment security)
• goals relating to power and prestige (i.e., image building, changing dependency on
other organizations)
These corporate goals are then translated into goals for the SBUs. The SBUs are most often
separate entities responsible for respective profits or losses, and therefore, each SBU will
have goals specific to their unit.
The corporate goals could also be translated into functional goals (e.g., human resource
goals, financial goals, and production goals). A functional goal for human resources could
be to increase employee satisfaction.
Below the goals for the SBUs are the marketing goals specific to actions or measures.
These marketing goals are specific to activities within the marketing mix. These goals are Marketing mix
more short-term and usually outnumber corporate goals. These goals serve to guide the The marketing mix
includes activities regard-
individual marketing activities of an organization and allow for the measurement of these ing product, price, distri-
activities. Typical examples are the response rate to a specific mailing to customers, the bution, and promotion.
increase in sales due to a special promotion, or the increase in brand awareness due to an
advertising campaign.
The goals of the Bar School are specific to the original problem encountered by the
school. The goals of the board were different from the goals of the school’s leadership. The
board was concerned regarding the interaction patterns within the school, and the presi-
dent was concerned about the performance of the students. This led the school to set two
goals:
1. All students display behavior that reflects the mission and the values of the school.
2. The students’ performance in three years will be above the level of similar schools.
Integrating these goals into the strategic plan of the school helped to change them from
conflicting goals to complementing goals. The systematic approach of the strategic plan,
which was designed by the entire school community, helped to reach the first goal after
one year and the second goal after three years.
3.2 What is Our Position in the Market?

Each organization occupies a specific position in the marketplace in which it operates. The
position depends on the market itself and the competitors operating in this industry. This
means that if the market changes, for example, through technological changes such as
introduction of the Internet, the position of companies operating within this market
39
changes. Organizations that adapt faster to the new technology gain a better position than
those that adapt slowly. The better-adjusted competitors then put pressure on the strate-
gic position of the organization.
To show the position of an organization in comparison to its competitors, companies draw

positioning maps. Positioning maps place the products or services of a company along-
side those of their competitors on a chart. The chart has two axes; these axes may have
different dimensions and depict specific characteristics or customer preferences (i.e.,
price, quality, speed of service, etc.), which are generated through a thorough target
Target group group preference analysis. The distance of the products or services show fairly realistically
A target group is a spe- the differences perceived by the target group.
cific, homogeneous group
of customers, which can
be defined and reached Figure 4: Positioning Map (Case Study: Palace Hotel)
with a specific marketing
communication mix.
The development and implementation of a positioning strategy is a company-controlled

method of building a specific reputation in the market. It is based on customer experien-
ces and preferences as well as the communication strategy of the company.
Companies should actively manage their reputation or image compared to the competi-
tion. A clear positioning strategy gives organizations a competitive advantage. Positioning
a product or service is therefore a controlled process to build an image in the market
40
place. The position is defined and communicated to the main target groups. Positioning is
a strategic process that influences the actions of the organization and affects all functions
of an organization.
Organizations with a clear market position are usually more successful than their competi-
tors. However, it often happens that companies make the mistake of giving up a clearly
successful position. The market leader for copying machines, Xerox, decided to enter the
personal computer market a few years ago. A great deal of financial capital and energy
went into building the new business. At the same time, the market share in the core busi-
ness of the copying machine business continued to decline. Core business
The core business is the
company’s main busi-
Most companies offer several products or services. The complexity of a positioning strat- ness, which usually also
egy becomes evident in companies that offer several product lines. Lufthansa is a large provides the largest finan-
organization. It lends its name to many areas of its business that reflect the Lufthansa cial contribution to the
overall business.
image of high quality and exclusivity (i.e., Lufthansa Technik, Lufthansa Cargo, etc.). Other
Lufthansa companies that do not match that image carry different names, such as the
charter airline Germanwings, which is also part of the Lufthansa group.
When designing a positioning strategy, organizations should adopt a structured approach.

This requires an analysis of their strengths and weaknesses as well as anticipation of
trends and changes in the market using quantitative and qualitative methods. Information
should be collected internally and externally. In the process, the position or the desired
position should be communicated through a positioning statement. This positioning
statement should be clear, understandable, unique, and reflect customer needs. It should
be realistic and differentiate the product or service from the competition.
The customer needs are defined by analyzing their preferences. These preferences are
evaluated for the company as well as for the competition and are projected onto the posi-
tioning map.
3.3 What Information Does the Company

Need?
Quantitative Market and Customer Analysis
The first step in a thorough market and customer analysis is the quantitative recording of
relevant data. The quantitative analysis is fairly straightforward as the recorded data on
customers and the market is usually available. It does not require expansive and expen-
sive research as the data is usually available through internal sources or can be easily
acquired externally. Internal sources are employees with market or customer data, sales
information, distributors, etc. External sources are umbrella organizations, government Umbrella organization
or business statistics, industry experts, annual reports of competitors, etc. An umbrella organization
can be either specific to a
business or to a region.
41
Independent of the business, global indicators (such as gross national product or popula-
tion growth) can also be used as indicators for a market analysis. A market analysis
employs the following key figures:
• market volume (market size, monetary or volume size)

• market potential (maximum size of the market including all segments)
• market growth (annual growth rate in %)
• market share of the main competitors (monetary or volume)
• degree of concentration of the competition (percentage of sales of the ten largest com-
petitors)
Return on sales • average return on sales in a specific business (can be deducted from the annual reports
This describes the ratio of of the competitors)
profit to sales. It shows
how much profit an • size of the main customer segments (i.e., private customers/business customers)
organization generates
compared to its sales over Market Segmentation
a given period of time.
The market of an organization is divided into so-called market segments. A market seg-
ment consists of customers that have similar needs or preferences. Market segments can
Business-to-business be defined for both consumer and business-to-business markets according to the follow-
This describes the busi- ing criteria:
ness relationship of two
companies with each
other. Table 1: Market Segments
Business-to-Business
Factor of Segmentation Consumer Market Market
Personal characteristics/business • age and gender • industry

characteristics • income • location
• size of the household • size
• stage in the life cycle • technology
• place of residence • profitability
• lifestyle • management
Purchase situation/ • purchasing volume • purchasing volume

usage • loyalty • purchase process
• purpose of use • purpose of use
• purchase behavior • frequency of purchase
• value of the product • value of the product
• product choice criteria • product choice criteria
• distribution channel (direct or
intermediary)
User preferences • brand preferences • brand preferences

• desired properties • desired properties
• quality • quality
• price preferences • service
• comparability of the product • product requirements
• support requirements (i.e., by
intermediaries)
42
In the consumer market, we segment according to sociodemographic characteristics such
as age, gender, stage in the lifecycle, where they live, etc. We could also segment by usage,
for example, how much the customer buys, whether the customer buys repeatedly and is
loyal, what the product is used for (e.g., the product is a present for someone else), how
much value does the product have for the customer, and what are important choice crite-
ria.
Another way to segment the consumer market is by user preferences. We have to investi-
gate how our products compare to competitive products, what are the customer’s price or
brand preferences, and what properties are sought after in the product. Finally, the quality
of the product or service also plays a role.
In today’s crowded markets, organizations spend fewer resources on mass marketing, and
instead they focus more on microsegmenting their markets. This means that companies
segment by using several of these criteria, i.e., families who purchase in larger quantities
and are price sensitive.
In business-to-business markets, companies segment their customers as well, but some of

the criteria differ from consumer market segmentation. Segmentation criteria look at
business characteristics such as the type of industry, location (i.e., domestic or interna-
tional), the size of the company, the technological standard (e.g., do they use a similar
software that can be integrated?), the profitability (e.g., is the company profitable and is it
advisable to expand the cooperation?), or the management (e.g., is it privately owned?).
We can also segment by usage, such as defining the value of the product (i.e., is it impor-
tant?), the purchase volume or frequency (i.e., do they order continuously or twice a
year?), how they order (i.e., internet or telephone), why they choose our product, and
what distribution channels do they use (i.e., direct or distributors).
Another way to segment in business-to-business marketing is by user preferences. These

criteria are product or support requirements (i.e., do they require online service), what are
brand preferences and what product properties are required. This category also includes
the quality requirements of the product or service.
When segmenting, it is important to consider that the segments can be measured and
may be differentiated from each other. Moreover, the segments have to be reachable
through the available communication channels and should be sufficiently large, such that
it is worthwhile for the company to define a marketing mix for the specific segment.
3.4 What Capabilities Does the Company

Have?
As a next step, an organization has to understand its own capabilities and resources. The
SWOT analysis is a tool in the evaluation of a company or a specific project.
43
SWOT
The SWOT analysis requests a thorough analysis of the strengths and weaknesses of the
organization as well as the opportunities and threats in the environment. The organization
carries out this analysis internally.
Internal resources are
• physical resources such as machines, equipment, buildings, raw materials, patents,

computers, etc., that determine the efficiency, productivity, and flexibility of the organi-
zation;
Cash flow • financial resources such as the balance sheet, cash flow, and financial support that
The cash flow looks at the determine the financial management of the organization and whether financial support
liquidity that an organiza-
tion has in a specific is available (i.e., from banks);
period of time. • human resources such as employees, managers, partners, etc. that determine whether
an organization has the right people, what training is required, or how the organization
can motivate its employees.
The analysis of all these factors provides an understanding of the capabilities of the organ-
ization and what strategic possibilities are available for and compatible with the organiza-
tion. The SWOT matrix can also be used for a competitive analysis to look at the strengths
and weaknesses of the competitors in the market and compare these with one’s own
organization.
The analysis of opportunities and threats scrutinizes developments in the micro- and mac-
roenvironment of the organization that influence strategic decisions. Opportunities and
threats refer to trends in the market. This part of the SWOT analysis can be supported by
the PESTEL analysis and Porter’s Five Forces model.
The following questions are helpful for this part of the analysis:
• What important trends does the company have to follow in order to continue to exist in
this market?
• What are the biggest risks? How can the company minimize these risks?
• Who are the competitors? What do the existing competitors do? Are there potential new
market entrants or substitutes?
Here is a SWOT analysis of a university that wants to offer an online distance learning pro-
gram and has no experience in this specific field. One factor is listed for each category of
the SWOT as an example. There are usually many factors in each category.
The SWOT analysis is mostly carried out in a brainstorming session with members from
different parts of the organization, as in the case study of the Bar School. The ideas gener-
ated in the brainstorming session are then organized into specific topics. In the example of
the Bar School, topics included how to improve the school atmosphere and goal-setting
among students, topics that arose in relation to the unacceptable attitude of students and
the students’ performance.
44
Table 2: Case Study: SWOT Analysis of a University
Strengths Weaknesses
experience in existing study programs no existing online program in the field to use as a
model
Opportunities Risks
little competition in the online study program ensuring accreditation of the program
market in this specific field
Topics are then prioritized, which is frequently a problematic process in organizations as

the various departments have different priorities and often consider the issues affecting
their own department more urgent than those of other departments. However, prioritiza-
tion is important and allows management to see what needs to be done first. Each organi-
zation has limited resources and therefore projects need to be prioritized.
The SWOT analysis has some disadvantages. The brainstorming session can generate long
lists of topics, and it is often difficult to set priorities. Frequently, the input is purely opin-
ion, and the moderator has to be careful that the brainstorming does not turn into a griev-
ance session. As already mentioned, different departments view strengths and weak-
nesses in the organization differently and often hide their own departments’ shortfalls.
They also see priorities differently. In order to address these shortfalls, there should be a
general analysis of issues before the SWOT analysis is done. This helps to identify real
issues and generates indicators and figures to support particular arguments.
Defining Core Competency
In order to conduct an effective strategic planning cycle, a company has to know its core
competencies. A core competency is a capability of the organization that is unique or
superior to the competition. This core competency is a competitive advantage for the
organization. Therefore, many organizations focus on their core competencies as a strat-
egy, especially in a difficult economic environment.
MORE INFORMATION
Core competency is discussed in the article by Chris Zook (2008), which is rec-
ommended reading.
If an organization has a core competency, this means that the company has resources and
capabilities that
• increase the value of the product or service to the customer,

• differentiate the organization from the competition, and
• can be expanded in the future.
45
This results in a competitive advantage.
3.5 What Capabilities Do Others Have?

Benchmarking
Benchmarking is a method that enables specific comparisons between companies and

Reference selects the best one as a reference in order to optimize the company’s performance.
This means to relate the These comparisons may help an organization to better understand itself, identify superior
company to another
organization. methods and practices utilized by other organizations, and allow certain processes to be
adapted.
There are four types of benchmarking:
1. Internal benchmarking
2. Competitive benchmarking
3. Functional benchmarking
4. Generic benchmarking
Internal benchmarking
Internal benchmarking is performed within your organization. An example is an interna-

tional building material manufacturer comparing the cement production units of its own
manufacturing units. The advantage of internal benchmarking is that the data, figures,
and numbers, are readily available. A comparison of the indicators within the same organ-
ization is straightforward as the processes and structures between the units are similar.
One disadvantage might be the lack of acceptance of such a benchmarking process as
managers might feel that it is not the processes or units but their management practices
that are being compared. It could be seen as an open criticism, which might compromise
the working relationships.
Another form of internal benchmarking is corporate benchmarking. This type of bench-

marking is not limited to the same business, as in the example of the building material
manufacturer. Corporate benchmarking extends into the entire organization – for exam-
ple, the production unit of the medical division could be compared to the production unit
of telecommunications in the same organization. However, quantitative comparisons are
limited because the units belong to different businesses and are therefore structured dif-
ferently.
Competitive benchmarking
Benchmarking partners are companies that operate in the same industry and service the
same or similar markets. In both cases, important figures or indicators are compared. This
might prove difficult as competitive information could be limited or not available at all. In
some industries, competitive benchmarking is a commonplace practice – for example,
46
most car manufacturers provide new models to their competition to compare these in
terms of technical development, features, and handling with their own models in that spe-
cific category.
Competitive benchmarking needs much preparation work. Moreover, it requires an open

communication between competitors in order to be effective. It is important that the par-
ticipants give and receive an equal amount of information. The advantage of competitive
benchmarking is that it provides organizations with a clear picture of their position in the
market. However, it is often difficult to compare key figures and processes with direct
competitors. Furthermore, the information gained through competitive benchmarking
with existing products has no novelty and does not contribute much to innovation or
address future trends and developments.
Functional benchmarking
Here, companies compare organizational functions such as comparing their own logistics
department with the logistics of an online shop. This type of benchmarking allows for
much learning and innovation and provides organizations with new ideas and sugges-
tions.
Generic benchmarking or best practice benchmarking
Generic benchmarking goes beyond the functional areas of the organization and the
industry it operates within to comparing unrelated companies in unrelated industries.
Southwest Airlines in the USA carried out a classic example of generic benchmarking. The
airline compared the turnaround time of their airplanes, which includes unloading and
reloading, refueling, cleaning, and safety checks, to the pit stops of racing cars at Formula
One car races. This analysis enabled Southwest Airlines to reduce the turnaround time of
their planes by 50%. More than 20 years on, the airline is still benefiting from this process
of improvement.
A value chain analysis is a prerequisite for benchmarking processes. The value chain anal-
ysis looks at which steps in the process of creating a product add value for the customer
and thus contribute to the value creation of the organization. At Apple, production is
responsible for product quality, the logistics department is responsible for the speed of
delivering the product to the customer, and the marketing and communication depart-
ment is responsible for the creation of emotional aspects for the consumer. The value
chain is an analysis process that connects effectiveness (i.e., what creates value from the
perspective of the customer) and efficiency (i.e., where can processes that waste resources
be eliminated).
Standard process for benchmarking
The process of a benchmarking project can be divided into the following four phases and
its steps:
1. Goal-setting/preparation phase
47
a) definition of the problem and internal analysis
b) selecting the benchmarking partners and appointing the benchmarking team
2. Comparison phase (quantitative benchmarking)
a) definition of the figures and numbers and indicators to be investigated
b) data generation
c) data analysis
d) ranking
e) selection of ‘best performers’
3. Analysis phase (qualitative benchmarking)
a) analysis of the best processes and strategies
b) deduction of the ‘best practices’
4. Improvement and implementation phase
a) definition of the improvement measures
b) implementation of the improvement measures
c) controlling progress and results
It is vital that the features or processes important to the customer are accurately identified
in order to select the most relevant competitors and benchmarking partners for compari-
son. Additional considerations should be made when benchmarking against poorly per-
forming competitors; if an organization fares better in some areas than its competitors, it
should not be assumed that the organization in fact exceeds customer expectations.
SUMMARY
It is advisable to define a vision and mission for the organization before
starting a strategic planning cycle. Together with the corporate values,
the vision and the mission are the guiding philosophies for the strategic
plan. The goals of the organization are divided into a few corporate
goals, goals for the SBUs, and many marketing goals at the product
level.
When developing strategic options, a company has to understand its

own position in the market. This position depends on the sector it oper-
ates in and on the competition. A structured approach using quantita-
tive and qualitative market research is necessary to define the position
of an organization. Organizations must understand customer preferen-
ces and use this information to compare themselves with the competi-
tion. Positioning maps provide a visual representation of an organiza-
tion’s market position in relation to its competitors.
Quantitative market research provides information such as market vol-

ume, potential, growth, market share, degree of competitive concentra-
tion, average return on sales in the sector, and the size of its market seg-
ments. Qualitative market research further defines the market segments
and extracts information about consumers’ needs and product/service
preferences. Market segments in the consumer and business-to-busi-
48
ness markets are defined by looking at personal or business characteris-
tics, the purchase situation or usage, and user preferences. The seg-
ments have to be measurable, distinguishable, and reachable, and they
should be of a certain size.
The capabilities of an organization may be analyzed by means of a SWOT

analysis. The analysis of strengths and weaknesses examines the organi-
zation internally, while the analysis of opportunities and threats exam-
ines the organization’s environment.
In order to conduct a thorough SWOT analysis, an organization must

know its core competencies. Core competencies help differentiate an
organization from the competition and provides a competitive advant-
age.
Finally, benchmarking is a management method with the goal of opti-

mizing processes by making comparisons with other organizations.
There are four types of benchmarking: internal, competitive, functional,
and generic benchmarking. Companies can compare their departments
or processes with other organizations. A solid benchmarking process
requires setting goals, conducting comparisons and data analyses, and
then using the data to optimize processes.
49
UNIT 4
WHAT STRATEGIC OPTIONS ARE AVAILABLE
TO THE STRATEGIC BUSINESS UNIT (SBU)?
STUDY GOALS
– what strategic options are available to the SBU.

– what cost leadership, differentiation, and focus strategy mean.
– which strategies are available in a market that is hypercompetitive.
– what type of alliances exist.
– the phases of the product life cycle (PLC).
4. WHAT STRATEGIC OPTIONS ARE
AVAILABLE TO THE STRATEGIC BUSINESS
UNIT (SBU)?
Case Study
Bhutan’s Decision
Bhutan is a small country sandwiched between Tibet and India. It has a population of
approximately 700,000. In 2008, Bhutan changed from being a kingdom to a constitutional
monarchy with the king as head of state and a prime minister. Bhutan’s economy is mainly
based on agriculture and forestry, tourism, and hydropower. Most of the electricity from
hydropower is exported to India. Agriculture is still the main source of income for 80% of
the population. Bhutan had a gross national product of $1.4 billion (2008; $8.7 billion in
2021) according to the World Bank (Germany’s GNP in 2008 was $3,400 billion; $4.26 bil-
lion in 2021) and a per capita income of $2,082 (2008; $3,298 in 2021) (Germany’s per cap-
ita income in 2010 was $40,300; $51,204 in 2021). Bhutan exports electricity, crafts, and
spices. The total export was approximately $170 million (2000; $345 million in 2021).
Imports such as gas, grain, machinery, cars, etc. were $215 million (2000; $1.12 billion in
2021).
Paro airport was the first international airport in Bhutan. Paro is located in the west of the
country, which has a better infrastructure than the eastern part of the country. The general
infrastructure of Bhutan is not very good; there are few roads, which are in poor condition
due to the harsh climate, and the roads through the mountains are under constant repair.
However, Bhutan opened three more airports (Yongphulla, Bathpalathang, and Gelephu)
to improve the country's infrastructure. The Lateral Road is Bhutan’s main road, which
extends east to west and connects the southwest of the country with the eastern districts.
The road passes through many towns, which slows down traffic. The Lateral Road, like
many other Bhutanese roads, has safety issues due to the poor road surface, hairpin
curves, slopes, weather, and landslides.
Bhutan has a unique and rich cultural heritage that has been well preserved due to the
isolated location of the country. The main attractions for tourists are the culture and tradi-
tions of the people, which are deeply rooted in their Buddhist heritage.
Bhutan’s mission
Bhutan is a model of proactive environmentalism in Asia. It is internationally recognized

for its commitment to preserve its diversity of species and for declaring 40% of its land as
national parks.
52
Gross national happiness
A prior king of Bhutan introduced the evaluation of the country’s performance in terms of
gross national happiness (GNH) instead of gross domestic product (GDP). The GNH serves
to capture the progress of the quality of life of the Bhutanese population and to comple-
ment the purely financial view of the GDP. The GNH is captured by conducting regular
interviews with the residents of Bhutan. The questionnaires are extensive and investigate
the following areas of daily life:
• psychological well being (e.g., life enjoyment vs. distress)

• health (e.g., disabilities, number of healthy days per month)
• time use (e.g., tracking time use for sleep, education, religious acts)
• education (e.g., education attainment, folk and historical literacy)
• culture (e.g., dialect use, traditional sports, artisan skill, value transmission)
• good governance (e.g., government efficacy, honesty, quality, human rights, corruption)
• ecology (e.g., natural resources available, pressures on ecosystem, afforestation)
• community vitality (e.g., safety, family life, trust, social support)
• standard of living (e.g., income, room ratio, house ownership, food security)
The results of the regular surveys serve to provide information for political decision-mak-
ing, such as whether the government should build more hospitals or invest in the infra-
structure of the country.
Tourism has become a large source of income for the country. In 1974, 287 tourists travel-
led to Bhutan; in 2008 the figure was 27,636 and in 2022 it was 40,665. Today, tourists can
book a trip to Bhutan through international and national agents. The target group of tou-
rists to Bhutan is the high-end traveler who is educated, has an interest in the country’s
culture, and is environmentally conscious. Every tourist who travels to Bhutan has to
spend $200 per person per day. The expenses are charged by the travel agencies and cover
hotel costs, excursions, transportation, trekking, camping equipment, guides, etc. Travel-
ling in Bhutan is only possible with local guides. Due to the $200 tariff, the travel providers
compete on service rather than price. Therefore, the tourists enjoy excellent service when
visiting Bhutan, and feedback is positive despite the high costs.
4.1 What Strategic Options Does the SBU

Have?
A strategic business unit is a unit that provides specific products or services in a specific
business or market. Small companies often consist of one strategic business unit, whereas
larger corporations have many SBUs. Strategic business units are defined by having simi-
lar customers or competitors or by having similar strategic capabilities. An example of a
SBU is the medical division of a large corporation which serves hospitals.
53
SBUs make decisions on product portfolios and on the markets they serve. They can make
decisions about which strategy to use in their markets in order to meet corporate goals.
They are the experts in their markets and know their customers. SBUs are evaluated on
the sales and profits they generate and are responsible for the results of their business.
The strategies that the SBUs pursue are either generic (i.e., strategies regularly employed
by organizations) or interactive (i.e., the organization’s direct response to changes in the
market or the competitive environment). The interactive strategy influences the market
itself and necessitates a high level of flexibility by the organization to react quickly to
these changes. The strategy serves to make marketing decisions for the individual SBUs of
an organization.
Generic Strategies
Michael Porter (1996) coined the term ‘generic strategy’ to describe those strategies most
often deployed by organizations. He systemized possible strategies that lead to a competi-
tive advantage in the market. Porter classifies the defined strategies according to the stra-
tegic goals that organizations set for themselves and by the strategic advantage the com-
pany pursues in order to reach its goal. From Porter’s point of view, there are three main
strategies:
1. Cost leadership (being cheaper)

2. Differentiation (being different)
3. Focus (being better)
Cost/price leadership
In order to pursue cost leadership, companies have to produce the product or service at
the lowest costs in the market so as to provide the lowest prices to the customers. Cost
leadership can be reached by ...
• ... low purchasing costs: the more a company purchases from a supplier, the more pres-
sure they can exert on the supplier and the purchase prices.
• ... economies of scale: the more a product or service is produced by a company, the
more the product or service improves. This is called economies of scale because failure
rates and costs go down.
• ... experience: the more experience an organization gains, the better it gets at anticipat-
ing market fluctuations and reacting to them. By analyzing accumulated experience,
companies can look to optimize internal processes and save costs.
CASE STUDY: ALDI

One example of a successful implementation of the cost/price leadership strat-
ALDI egy is the retailer ALDI. ALDI pursues several principles, the main being to guar-
This is a German-based antee low prices to its customers. To drive down purchasing costs, the company
discount retailer that
operates worldwide. has an international purchasing department, negotiates low transportation
costs, and offers a limited product range in its stores. Further cost savings are
54
achieved through very simple, sparse layout of their stores and their cheap loca-
tion at the periphery of cities and towns where the rent is affordable. ALDI con-
sistently strives to optimize and simplify internal processes. It has neither a con-
trolling nor a staff unit. Instead of forecasting, ALDI runs its business on current
data.
Differentiation
A differentiation strategy forces organizations to offer something unique. This unique

product or service has to be of such value to the customers that they are willing to pay a
higher price for the product or service.
One advantage of this strategy is that companies create a unique market position, which
allows them to operate with high profit margins due to higher prices charged. Disadvan-
tages are the relatively high investment costs to build an image and brand in the market
and the risk that others will copy the strategy and the company will lose its unique posi-
tion.
CASE STUDY: SOUTHWEST AIRLINES

Southwest Airlines is one of the most successful airlines in the US. Southwest
excels due to its service attitude and punctuality. Even though the airplanes are
equipped with just one seating class, no seating reservations are possible, and
only snacks are served during flights, the service is well received by the custom-
ers as all Southwest staff are trained to be extremely friendly. Punctuality is
excellent as the turnaround time for the airplanes was drastically reduced via a
major company initiative. This strategy has rewarded Southwest Airlines with a
positive balance sheet. It has created a unique position in the crowded US air-
line market and differentiated itself from the competition.
The focus strategy
Companies pursuing a focus strategy direct their attention towards a small market seg-
ment or niche and offer a product or service that is designed specifically for this small
group of customers. The position in a small market niche protects the organization from
the competition. It can concentrate fully on its customers and charge higher prices as it
offers high-quality products and services. The disadvantages of this strategy are that
growth may be limited and changes in the market will impact sales of these high-end
products or services.
Generic strategies can be combined. Southwest Airlines does not just excel by reason of its
service and punctuality but also by offering low prices. Bhutan also combines strategies by
setting itself apart from other tourist destinations, offering superior service and focusing
on a very specific market segment. Different SBUs in a corporation can pursue different
55
generic strategies, depending on their cost structure and the markets they serve. Luf-
thansa has a high-quality image and is positioned in the high-end segment of air travel.
Nevertheless, the company decided to enter the low-cost air travel market when buying
the charter airline Germanwings.
Moreover, technological developments influence the cost efficiency of companies and the
quality of the products and services offered. This could change the generic strategy of an
organization.
MORE INFORMATION
Additional strategic options for SBUs can be found in the article by Porter (1996).
4.2 Interactive Strategies

Interactive strategies require an organization to react to the strategies pursued by its com-
petitors. Interactive strategies can be observed in highly competitive and volatile markets.
In these markets, companies compete in two areas – namely, price and quality. If a com-
pany reduces its prices for a specific product, all the competitors follow suit. The same
holds true for product quality or new functions. If, for example, one company integrates a
camera into its mobile phones, other mobile phone manufacturers are forced to do the
same in order to compete in this market.
Hypercompetition
A business environment with fierce competition is called a hypercompetitive environ-

ment. In a hypercompetitive environment, competitive advantages are created and
destroyed at a fast pace. Companies that operate in a hypercompetitive market cannot
defend their competitive edge for long and are forced to compete on price and quality.
To be successful in this market environment, organizations have to be flexible, react fast,

and be prepared to take risks. Even outstanding organizations may fail if they hold onto
success strategies of the past instead of looking to the future. A prime example of a hyper-
competitive market is the consumer electronics market. The following excerpt describes
the battle between the two giants, Samsung and Apple.
BATTLE OF THE TECH GIANTS

Mobile platforms are hitting critical mass across smartphones and tablets. Glob-
ally in the fourth quarter (Q4) of 2010, smartphone and tablet shipments excee-
ded desktop and PC shipments. In 2011, it is estimated that approximately 480
56
million smartphones and tablets were shipped as opposed to approximately 380
million desktop and PCs. As the mobility trend heats up, we see the mobile tech
giants battle it out to try and gain more market share in the industry.
With the Samsung Galaxy Nexus banned in the United States, consumers are los-
ing out as it hampers competition and innovation. The patent wars between
Apple and Samsung have gone on for a while now and have assumed ridiculous
proportions.
For Apple, this is a fight for survival and profitability, since Samsung is quite
capable of flooding the worldwide market with quality alternatives to the iPad,
that too at varying price points – something Apple has yet to do.
Samsung has already done this quite successfully if you take a look at the sales
of its Galaxy SII smartphone and Galaxy tablet devices. This is expected to con-
tinue for some time if there is no intervention from government or regulatory
authorities [such as the recent verdict against Samsung].
What this brings into question is the legality of seemingly generic patents that
have been filed by all manufacturers over the years, and not just Apple, some-
thing that does not look like it will get settled soon.
Source: Frost & Sullivan (2012).
Strategic Alliances
In order to reduce the number of competitors in an environment of hypercompetition,

companies can form strategic alliances, which are a type of partnership between compa-
nies. Alliances allow companies to bring together competencies. The primary goal of an
alliance is to combine the strengths of the organizations to develop a competitive advant-
age in existing or new markets.
Successful strategic alliances require an analysis of
• the fundamental fit of the organizations (i.e., forming the partnership results in a com-
petitive advantage),
• the strategic fit (i.e., the strategies and goals of both partners are similar or identical),
and
• the cultural fit (i.e., the corporate cultures of the two organizations can be united with-
out much friction).
57
CASE STUDY: STAR ALLIANCE
In 1997, the first network of international airlines was formed under the name
Star Alliance. Due to national restrictions, it was not permitted for foreign air-
lines to serve domestic routes in a country. The Star Alliance allowed passengers
to book connecting flights in foreign countries through the domestic airline. The
larger the Star Alliance became, the more positive the effects for the network
Horizontal alliance and its passengers. This horizontal alliance of airlines is today the largest net-
Horizontal strategic part- work of airlines worldwide.
nerships are alliances
between companies at
the same economic stage.
The Star Alliance is a so-called horizontal alliance. Vertical alliances can be formed in two
directions, either upstream or downstream from the perspective of the organization;
upstream means with a supplier, downstream means with a distributor. An example of an
upstream alliance is the cooperation of a pharmaceutical company in the area of research
and development. The pharmaceutical organization partners with a research institute to
conduct research for specific projects. A downstream alliance would be an internet shop
PayPal cooperating with PayPal as a form of payment method offered on their internet platform.
This is a digital payment
system that allows online
shoppers to pay through
an online PayPal account.
4.3 Product Life Cycle
In order to make decisions on the product level, companies can analyze their products
according to the model of the product life cycle (PLC). The product life cycle model pre-
sumes that products follow a similar cycle to living beings. The cycle starts with the devel-
opment of the product, then it watches the product grow and mature, and finally, it ends
with its decline.
The product life cycle is an important marketing concept and provides information on the
competitive dynamics of a product. It helps make decisions on prices, the product portfo-
lio, markets, technology, capacity, and marketing and promotional measures.
Let us look at the phases in the product life cycle:
58
Figure 5: Product Life Cycle
Each phase has opportunities and threats regarding the marketing strategy. Even though
few products actually follow the exact product life cycle, the model is used for forecasting
sales and formulating strategies.
Development Phase
The product or service is born and enters the market. This phase can take a long time and
often shows low growth rates. The high marketing costs to launch, establish, and distrib-
ute the product eat up the profit in this phase. There are usually few competitors in the
market, especially when the product is new to the world. In this phase, the organization
needs a well-defined marketing plan that takes into consideration all the parts of the mar-
keting mix (product, price, promotion, and distribution) and which clearly positions the
product in the market.
Growth Phase
A successfully introduced product moves into the growth phase. Sales increase in line with
the demand for the product. The number of competitors also increases as the market for
the product or service grows. The increase in sales and production of the product or serv-
ice reduces the production costs. The company benefits from these economies of scale
and profits rise. Companies try to prolong this phase as it promises profits. To keep the
product interesting, companies need to increase marketing and promotional expendi-
tures.
59
Maturity Phase
The product or service is established and accepted in the market. The growth curve flat-
tens and the climax of profitability is reached. Competition becomes fierce and products
are less differentiated. Companies must therefore fight for market share.
Organizations try to extend this phase by introducing improvements or by introducing

new marketing measures such as relaunches. The relaunch is a reintroduction of the prod-
uct that was modified. A relaunch helps stabilize the slow growth in this phase. Further
reasons for a product relaunch may be that customer preferences change or the company
has to adjust the product or service to meet new regional demands if the product is sold
internationally. Developing new markets or new market segments for the product prolong
the duration of this phase.
Decline Phase
Sales decline during this phase as the product or service is considered outdated or cus-
tomer preferences have changed. In this phase, it is important for companies to monitor
and control sales, costs, and profit margins in order to be able to make strategic product
decisions.
The company has several options in this phase. It can take the product or service off the
market or it can drive down the costs of production to increase the profit margin and keep
the product in the market. If a company can maintain this strategy long enough, it might
see rival products leave the market until their product is the only one available to a small
segment of loyal buyers. A third strategy is for companies to just introduce a product that
succeeds the old one once it is taken off the market.
SUMMARY
The strategic business units (SBUs) make decisions regarding products
and markets. The strategies for specific businesses may be categorized
into generic strategies which most organizations pursue and interactive
strategies which react to competitive market moves. Generic strategies
are price/cost leadership, differentiation, and the focus strategy.
Companies that use an interactive strategy adjust their strategies in line

with competitive action. Interactive strategies are mostly seen in highly
competitive and volatile markets, which force competitors to compete
on price and quality. To be successful in these markets, companies have
to be flexible, fast, and risk takers.
60
In hypercompetitive markets, strategic alliances offer an opportunity to
reduce the number of competitors. These partnerships can be formed
between companies at the same economic stage, which is called a hori-
zontal alliance, or with suppliers or buyers, which is called a vertical alli-
ance.
According to the product life cycle model, products follow a similar life
cycle as living beings. An analysis of the stages in the product life cycle
helps companies make strategic and marketing decisions. The phases of
the product life cycle for products and services are divided into the
developing, growth, maturity, and decline stages.
61
UNIT 5
WHAT STRATEGIC OPTIONS ARE AVAILABLE
TO THE CORPORATION?
STUDY GOALS
– what strategic options are available at the corporate level.

– what is meant by market penetration, product and market development, and diversifi-
cation.
– what advantages can be gained by outsourcing.
– how to analyze product and business portfolios.
– how to make strategic decisions regarding the areas of the company to invest in.
5. WHAT STRATEGIC OPTIONS ARE
AVAILABLE TO THE CORPORATION?
Introduction
WHAT DO MEDICAL OUTSOURCING TRENDS MEAN FOR

HOSPITALISTS?
X-ray has left the building
Medical outsourcing is a growing trend in American hospitals, driven by short-

ages of on-call radiologists and intensivists, economic pressures, and advances
in telemedicine. Hospitalists will likely encounter – if they have not already –
outsourced services that range from off-site medical transcription and language
interpreters to long-distance radiology and, increasingly, electronic intensivist
services. What are the implications for quality patient care and collegial inter-
face when hospitals contract with outsourced providers? What are the advan-
tages, possible disadvantages, and opportunities for hospitalists as teleradiol-
ogy and eICUs become facts of life? […]
Off-site X-ray reads common
According to the American College of Radiology, teleradiology has become a fix-

ture in most practices and hospitals. Some institutions have retained their own
radiologists, who take advantage of teleradiology by reading digitized radio-
graphs and CT scans from home instead of within the hospital building. A short-
age of radiologists has led others to contract with off-site providers of teleradiol-
ogy services. Those who provide services at night are sometimes called
“nighthawk” companies. Outsourcing radiology, Dr. Wachter believes, is a logical
step due to technological advances, although he admits that visiting the radiol-
ogy department in his hospital often yields educational and collegial opportuni-
ties that online X-ray reading does not.
At Saint Clare’s Hospital in Weston/Wasau, Wis., a new, 107-bed, state-of-the-art

facility built by Ministry Health Care, Richard Bailey, MD, is medical director of
Inpatient Care and Hospitalist Services. Radiology and other ancillary specialist
services are provided by the Diagnostic and Treatment Center (DTC), jointly
owned by Ministry Health Care and the Marshfield Clinic. The DTC, through a
relationship with a radiology group in Hawaii, provides night coverage for full
reads of radiographs and scans from 5 p.m. to 5 a.m. The interactions are virtu-
ally seamless, according to Dr. Bailey. “We don’t even notice they’re in Hawaii,”
when conferring with radiologists on the phone, he reports.
64
Off-site radiology also created an opportunity for his hospitalist group, says
Dr. Bailey. Saint Clare’s hospitalist group provides supervision of contrast
administration when needed during night and weekend coverage times. “This is
one more way our hospitalist program supports the hospital and provides value
beyond just seeing patients,” he says.
Overseas outsourcing a ‘hot button’
Using an overseas teleradiology company offers many advantages, says Sunita

Maheshwari, MD, a consulting pediatric cardiologist and director of Teleradiol-
ogy Solutions, a four-year-old teleradiology company located in Bangalore,
India. The company’s radiologists mostly carry out preliminary night-reads but
also do final-reads on approximately 20% of their cases. If contrast must be
administered for an imaging study at the client hospital, a local tech, emergency
department physician, or resident usually handles the procedure, with the Tele-
radiology Solutions radiologist in constant voice contact.
“The time zone advantage is huge,” says Dr. Maheshwari. With the 12.5-hour
time difference between the United States and India, Teleradiology Solutions’
radiologists work regular day shifts and are able to cover 10–20 hospitals simul-
taneously, depending on how busy their client hospitals are.
You don’t have to have one radiologist who stays up all night to be able to read
two CT scans and one X-ray, who will [then] be groggy the next morning for his
[or her] regular day shift,” she says. It makes a great deal of sense from the
standpoint of human resource efficiency to not waste several nights of several
doctors covering multiple hospitals.
Dr. Maheshwari reports that American hospital staff are often pleasantly sur-
prised to find a “cheerful, awake” radiologist on the other end of the phone.
Despite these benefits, however, Dr. Maheshwari and her colleagues have
noticed a political backlash stemming from the outsourcing of US jobs to Asia
that colors Americans’ reactions to overseas teleradiology. In her company’s first
two years, some physicians questioned the company’s level of quality and
lashed out because it is located in India, reports Dr. Maheshwari.
“Our work speaks for itself,” she says. “We have not lost a client, and, in fact, our
hospitals have managed to grow because they have been able to take their radi-
ologists off the night shift, and they take on more day work.”
Like several overseas teleradiology companies, Teleradiology Solutions retains a

staff of US-trained radiologists and goes through the same licensing and creden-
tialing (they are JCAHO-accredited) as American companies.
The company now has 40 US hospitals as clients and includes in its client mix
some remote hospitals in India and Singapore, where the Ministry of Health is
experiencing a similar shortage of radiologists. […]
65
Source: Henkel (2006).
5.1 Areas to Consider When Formulating a

Strategy
Strategy planning is a demanding entrepreneurial task, which decides whether the organi-
zation or the strategic business unit will be successful in the future. Planning strategy does
not provide the management of an organization with one ideal strategic decision. Strategy
planning always involves looking at various alternatives and scenarios. Deciding which
path to take lies with the management. The history of the organization, its culture, and its
management are the factors usually influencing strategic decisions.
MORE INFORMATION
An excellent overview of this topic can be found in the article by Levitt (1960).
In order to plan the strategic process systematically, management has to define individual
tasks that should be performed. There are several areas that need to be included in the
strategy planning process.
Customer-Oriented Strategies
The most important aspect of the marketing strategy is focusing on customer orientation.
This means how the organization deals with its customers. The main decision is whether
the organization markets to all customers and segments (e.g., Coca-Cola) or whether it
should focus on specific market segments (e.g., Schweppes).
Competitive Strategies
Besides the customers, the competition also plays a major role in the strategic process.
The organization has to decide how it plans to deal with its competitors. One strategic
option to gain a market share is to challenge a competitor directly by targeting their cus-
tomers.
A contrary option is to draw up a cooperation strategy that attempts to secure the exis-
tence of all organizations in the market. One such example in the German market was the
so-called Rail Cartel, which was composed of several steel corporations. Corporations in
this cartel were fined by the Federal Cartel Office for having come to a joint agreement
regarding prices for rails and points. Examples of legal cooperation include airline alli-
ances, like Star Alliance. This type of cooperation may serve to prevent an overly intensive
price competition.
66
A further approach for companies is to avoid direct competition by specializing in serving
small niche markets. Small market niches usually have fewer competitors as larger organi-
zations focus on the large market segments.
Distribution Strategies
Depending on the sector, distributors or trading companies may play a major role in terms
of strategy planning. An example is the consumer goods market in Germany. The grocery
retail market is dominated by large organizations and buying groups such as Edeka. These
large buyers wield a great deal of power over the consumer goods companies. As they buy
in large quantities, they often dictate the price and packaging of the products, which
reduces the flexibility of the consumer goods companies to respond to changes in the
market place.
Stakeholder Strategies
Stakeholders have enormous influence over consumers and the environment of an organi-
zation. Managing the stakeholders of an organization is a critical component of the corpo-
rate strategy.
The strategic options for managing stakeholder interests are manifold and extend from
open confrontation to cooperation. Open confrontation is often used by environmental
(e.g., Greenpeace) or consumer protection agencies (e.g., Stiftung Warentest in Germany
or the FTC in the USA). The risk of major damage to the company’s reputation due to nega-
tive information in the media is high.
When employing a cooperative strategy, there are various possibilities for organizations to
work with stakeholders. One option is to integrate critical stakeholders into your own
organization. In 2008, the German Schufa Holding AG, an organization that was viewed Schufa Holding AG
critically by many stakeholders, founded a consumer advisory council that consists of pol- This is a protection
agency for the general
iticians, scientists, and members of protection agencies. insurance of the credit
business. It provides
A company can choose to operate in an environment in which there are few critical stake- credit information on
individuals and organiza-
holders. This is often the case in business-to-business environments where there is little or tions.
no involvement of consumers. Negative word-of-mouth or damaging media campaigns
are therefore rare in these environments.
5.2 Strategic Options

It is not only large corporations that look for new areas to expand into; small companies
also try to obtain broader market exposure in order to minimize their risk. When operating
in multiple markets, companies can compensate the decline in sales in one area with
increases in another. For example, if a construction company serves both the private and
the public sectors, it can offset government budget cuts for public building projects by
focusing on the private sector and vice versa. Thus, its existence is not compromised if one
area experiences a strong decline.
67
When an organization expands its current range of products or services into new markets
Diversification or sectors, this is referred to as diversification. Companies can diversify in four directions
Product diversification with regards to products and markets:
means increasing the
range of products offered.
1. Market penetration
2. Developing new products or services
3. Developing new markets
4. Diversification
Market Penetration
The first strategic option for expansion is market penetration where companies try to
increase the market share of their current products or services. The company can rely on
its current resources and capabilities to increase its presence in the market by increasing
its market share. An increase in market share equals an increase in power over the market
itself and over its distributors. Market penetration can be implemented by lowering costs
and increasing profit margins through economies of scale. However, the risk is that the
competitors will increase their pressure on the organization and a battle over prices might
ensue. Furthermore, most countries have legal restrictions for monopolistic behavior and
monopolies are tightly regulated.
Developing New Products or Services
Companies can also expand by offering modified or new products or services in their exist-
ing markets. This allows them to increase sales by acquiring new customers or by getting
existing customers to buy more products. For example, bookstores today are being forced
to find new ways of selling books. Many try to sell through online stores, which is an
expensive and risky option. The competence of small bookstores lies in providing informa-
tion and advice to the consumer. The following article illustrates the battle of survival of
large bookstores in the US.
WHY BORDERS FAILED WHILE BARNES & NOBLE SURVIVED

It appears to be all over for the Borders bookselling chain. The company will be
liquidated – meaning sold off in pieces – and almost 11,000 employees will lose
their jobs. The chain’s 400 remaining stores will close their doors by the end of
September.
The retailer’s first bookstore opened in Ann Arbor, Mich., 40 years ago. Along
with competitor Barnes & Noble, Borders pioneered the book megastore busi-
ness. But Borders made some critical missteps over the years that cost it the
business.
68
The vast tracts of retail space that Borders will soon vacate speak to a gargan-
tuan business that essentially killed itself. At one time, size was its advantage.
Borders built a reputation on offering a huge variety of books – tens of thou-
sands of titles in a single store – at a time when most bookstores could afford to
stock a fraction of that.
Borders also had an early technical advantage: a superior inventory system that
could optimize, and even predict, what consumers across the nation would buy.
But in the mid-1990s, Borders lost its edge.
“It made a pretty big bet in merchandising. [Borders] went heavy into CD music
sales and DVD, just as the industry was going digital. And at that same time,
Barnes & Noble was pulling back,” says Peter Wahlstrom, who tracks Barnes &
Noble for the investment research firm Morningstar.
He says Barnes & Noble also invested in beefing up its online sales. Eventually, it
also developed its own e-reader, the Nook.
Borders did not. Instead, it expanded its physical plant, refurbished its stores,
and outsourced its online sales operation to Amazon.
“In our view, that was more like handing the keys over to a direct competitor,”
Wahlstrom says.
Indeed, outside a Borders bookstore in Arlington, Va., shoppers say they rarely
buy books the old-fashioned way.
“I’ll go to Borders to find a book, and then I’ll to go to Amazon to buy it, gener-
ally,” customer Jennifer Geier says.
With so many people going online to buy books, Borders lost out. The last time it
turned a profit was 2006. In February of this year, it filed for bankruptcy protec-
tion.
Those who bemoaned the rise of bookselling giants might see irony in Border’s
demise. With one of the major players gone, there might be some room, once
again, for the little guys.
“I think there are a bunch of different niches around that can still be sustained,
but I don’t think there’s a need for the mass-book seller to be as prevalent or as
apparent as they were five or 10 years ago,” Wahlstrom says.
Wahlstrom says Borders is disappearing at a time when, as consumers, readers

are more empowered than ever. He says he still reads paper books but also
reads on his iPhone, computer, or tablet.
69
“Just as I’m probably device agnostic, I am supplier agnostic. I can go online, I
can go to Barnes & Noble, I can go to Apple, or I can go to Google. Or I can bor-
row it from a friend or I can go to a library,” he says.
Dan Raff, a management professor at The Wharton School, argues that smaller-
town America will suffer from the loss of a chain bookstore.
“The big-box store was a glorious thing while it lasted. To people in many parts
of America, they were a kind of Aladdin’s cave,” Raff says. At Borders, people
could access literary variety, contrary to smaller, independent bookstores.
With Barnes & Noble staking its future on digital technology, Raff says, it’s likely
the big bookstore will only live on in big cities.
Source: Noguchi (2011).
Developing New Markets
Companies have the option of offering existing products in new markets in order to
expand the usage of the current product or service. One example is the use of the medical
laser to coagulate blood and stop bleeding during surgeries. Lasers have been used in this
area for many years. Through product modification, the lasers are now used also for the
removal of body hair and pigmentation marks.
In order to sell an existing product in a new market, companies have to either modify the
product or at least the product design and packaging to appeal to the new market seg-
ment. Often, an organization has to establish a new distribution network or a new market-
ing mix in order to reach the target market. When looking at our example of surgical lasers,
the customers were no longer the surgeons and hospitals but rather private practices,
plastic and cosmetic surgeons, and dermatologists. The medical companies had to
expand their distribution network drastically to meet the increase in customers. They also
had to hire sales people familiar with this new field. As evidenced in this example, devel-
oping new markets requires a large commitment on the part of the company.
Diversification
Corporate diversification describes the strategy of entering new markets with new prod-
ucts. Complete changes in company strategy are rarely successful, as seen in the unsuc-
cessful 2000 merger between Time Warner and AOL. The largest traditional media com-
pany, Time Warner, and the most successful new media provider at the time, AOL, merged.
The world was in an internet bubble and the merger was celebrated as a milestone for the
Old economy transformation of the old into the new economy (Institute of Media and Communications
These are the tradition- Policy, 2015). The merger was unsuccessful as the corporation failed to create synergy
ally operating companies.
between the two very different companies.
70
Despite the many risks, diversification strategies offer enormous opportunities if they are New economy
managed well. The three main reasons for companies to diversify are the following: This is a new economic
development shaped by
the globalization of mar-
1. Increase efficiency kets, computer technol-
2. Utilize management competencies ogy, and new media
channels.
3. Increase market power Synergy
This is the combination of
Increase efficiency two organizations in
order to take advantage
of common benefits. Posi-
Organizations have the opportunity of increasing efficiency by expanding their existing tive synergy effects occur
resources and capabilities into new markets, products, or services. Using current capabili- when the combination of
the two organizations cre-
ties to expand results is called the composite or network effect. If the organization has ates more value than
unused or underutilized resources or capabilities that cannot be sold to other users and each individual organiza-
do not contribute to generating profits, companies have the option to diversify into new tion added together.
markets or businesses. The network effect leads to cost savings and other advantages
through so-called synergy effects. Synergy describes the effect that bundling activities will
have on the efficiency of the process. Positive synergetic effects occur when the unity or
the bundling creates more value than each of the units or activities separately.
To illustrate this concept, let us look at McDonald’s McCafé. McDonald’s does not just sell
hamburgers and chicken nuggets but also coffee and pastries. The costs for McDonald’s to
offer both their standard restaurant and McCafé in one of its franchises are less than the
costs of running a separate hamburger booth alongside a coffee shop. The reason for the
lower costs are that all products are offered in the same restaurant by the same employ-
ees, whereas the hamburger booth and the coffee shop both pay rent and each have their
own employees, thereby duplicating many functions and activities.
Utilize management competencies
The competencies of an organization’s management team might also be used to develop

new markets, products, or services. Managers have the competency to not just manage
one but several products or services. The French luxury goods company Moët Hen-
nessy∙Louis Vuitton S.A., better known as LVMH, owns many companies and brands, from
champagne manufacturers to fashion labels and perfumes and even finance media com-
panies. All these companies use few common resources or production competencies.
However, LVMH increases the value of the organization by utilizing their management
competencies to build and maintain brands and to develop the creative potential among
their employees.
Increase in market power
The market power of an organization increases the larger it is. If a corporation owns and
operates a number of businesses, it can offset the businesses that do not generate as
much profit with other more profitable divisions. In this way, the company that operates
at a less profitable level receives financial support, which creates a competitive advantage
in the market. Its market power increases and it can threaten financially weaker competi-
tors. However, government regulations help reduce the market power of very large organi-
zations.
71
THE ANATOMY OF THE GE-HONEYWELL DISASTER
On the evening of Wednesday, June 13, Jack Welch, CEO of General Electric,
retreated to his room at the Conrad Hilton hotel in Brussels and wrestled with an
unfamiliar feeling – one of impending defeat. Just eight months before, he had,
it seemed, pulled off a stunning coup. Welch had always coveted Honeywell
International, whose business making advanced electronics for the aviation
industry, he thought, made a perfect fit with GE, one of three leading global
manufacturers of airplane engines. In October 2000, during a visit to the New
York Stock Exchange, he had learned that United Technologies Corp. – whose
Pratt & Whitney division is another huge engine maker – planned to buy Honey-
well. Within 45 minutes, on the phone from his car, Welch had lined up his board
to make a counter-offer. Two days later he had Honeywell in the bag; it would be
the largest ever merger between two industrial companies. Welch delayed his
retirement to oversee the integration of GE and Honeywell – and to set the cap-
stone on his legendary career.
And now, in the European capital, his last big deal was falling apart. On that day
in June, Welch had met twice with Mario Monti, the European Union’s Commis-
sioner for Competition. Monti believed that the combination of Honeywell’s
cockpit controls with GE’s engines and powerful aircraft financing division
would stifle competition. In other words, he viewed with suspicion precisely
those synergies that, for Welch, made the deal so attractive. Monti would
approve the merger only if Welch made the kind of concessions that, from GE’s
standpoint, wrecked its whole point. The next morning Monti called Welch once
more, to discuss how the apparent breakdown in talks should be handled. GE
issued a statement saying that attempts at compromise fell “far short” of Monti’s
“extraordinary demands.”
Welch placed a call to Andrew Card, chief of staff to President Bush, who was
about to sit down with European leaders in Goteborg, Sweden. As the GE boss
recounted the conversation to TIME, he told Card that he would appreci-
ate“whatever help you can give us”. In the formal meetings in Sweden, GE never
came up. But on June 15, in Warsaw, Bush said he was “concerned” that the
Europeans had rejected the merger. Monti was furious – not with Bush, he told
TIME, but with those who had sought the President’s help. Three days later
Monti said he “deplore[d] attempts to … trigger political intervention.” And
though the case dragged on for two more weeks, the deal was dying a slow
death.
Welcome to globalization. The collapse of the GE-Honeywell merger shows that

companies that benefit from a global market can now be governed in all they do
by any of the countries or regions in which they do business. There’s no settled
code of rules in the global marketplace, just a haphazard collection of local prac-
tices and habits. Still, the GE case is extraordinary. Never before have officials
outside the US nixed a merger between two giant American corporations
already approved by the DOJ. Never before have US companies lobbied so fero-
72
ciously against their U.S. rivals in a foreign capital. And that’s why, for any com-
pany that seeks to profit from globalization, there are abundant lessons in the
story of how Jack fell down.
For months, nobody thought he would. After Welch stole Honeywell from United
Technologies, he said: “This is the cleanest deal you’ll ever see.” Honeywell and
GE were both industrial conglomerates, but their product lines had few over-
laps. A combined company, however, would be a powerful force. So United
Technologies, Rolls-Royce of Britain – the third of the trio that dominates jet
engines – and other businesses were determined to stop the deal.
They didn’t find the going easy on either side of the Atlantic. “At the beginning,
we weren’t invited in the front door or the back door,” says an executive with a
competitor. (With legal actions still a possibility, many of those interviewed for
this story insisted on anonymity.) In Washington, the antitrust division of Justice
would wait until June 14 for the arrival of a new head – Charles James, Bush’s
nominee, who was considered to be pro-business. “The DOJ would not and did
not meet with us,” says John Briggs, who represented Rockwell, an American
competitor of Honeywell. “There was just no real constituency for taking on Jack
Welch without political leadership in place.”
Things looked no better in Brussels. Since 1990 the European Commission, the
executive arm of the 15-nation European Union, has exercised jurisdiction over
all mergers between firms with combined revenues of $4.2 billion, of which $212
million must be within Europe. The GE-Honeywell deal easily met the criteria.
When US lawmakers ask what business it is of the Europeans if two US compa-
nies want to merge, part of the answer is that GE alone employs 85,000 people
in Europe and collected $25 billion in revenue there last year.
Still, Commissioner Monti wasn’t looking for a fight. The Italian economics pro-
fessor is sufficiently conservative that he was offered the foreign ministry in Sil-
vio Berlusconi’s new right-wing Italian government. Moreover, Monti was proud
of the working relationship he had forged with his American counterparts; he
told TIME he had “profound respect” for the US regulators and described his
own agency as a “junior institution”. Before Christmas, when GE’s competitors
called on the case officer assigned to the merger, Enrique Gonzalez-Diaz, to per-
suade him to start a lengthy “phase two” investigation of the deal, Gonzalez-
Diaz accused them of whining.
That wasn’t good. For the merging companies and their opponents, Gonzalez-
Diaz was the man to see. The Spaniard, 39, a native of the Canary Islands, is
known as a brilliant mathematician and lawyer, hardworking and intensely
ambitious. One source (on the losing side of this case) also calls him “deeply
cynical about the motivation of business and a nightmare to deal with.” GE’s
opponents knew they would never convince Monti without first winning over
Gonzalez-Diaz. The principals came to a rough division of labor: Rolls-Royce
stressed the dangers of allowing GE to “bundle” engines and avionics in pack-
ages that other firms couldn’t match, and United Technologies concentrated on
73
GE’s role as a buyer of planes through GE Capital Aviation Services, its finance
and leasing subsidiary. GECAS, it was argued, would insist that those from
whom it bought aircraft should buy both GE engines and Honeywell avionics,
hence reducing consumer choice and stifling technological innovation.
“I got the impression that Enrique was interested when we explained to him that
GECAS was frequently a launch customer for airplanes,” said a lawyer. “He said,
‘Really? I thought they only dealt in secondhand machines.’” GECAS, according
to Welch, has only an 8% share of the new-plane market. Yet GE’s competitors
were starting to make headway. GE, for its part, was beginning to discover that
while Monti was always a gentleman, his staff could be as hard as nails. On Feb.
26, all parties met in Brussels. Monti, said Welch, “listened carefully to our case
… I thought we had a shot.” But at 6:30 that evening, GE and Honeywell were
called back to the Commission’s offices. Armed with answers to the detailed
questionnaires Gonzalez-Diaz’s staff had sent to competitors and customers,
Monti was going to phase two, a full-blown investigation.
The European capital then experienced the most intense politicking old hands
there have seen. “There were journalists, lobbyists, and lots of arbitragers from
Wall Street calling constantly,” says a lawyer.
Gonzalez-Diaz’s team visited Rockwell’s operations in Cedar Rapids, Iowa. By

this point, sources close to the case say, Monti’s team had not only heard an ear-
ful from GE’s competitors but had also registered concerns from 15 airlines,
whose identities were kept secret from GE. On May 8, the Commission issued a
155-page statement of objections to the merger, and on May 29, the parties
gathered for a two-day hearing.
Source: Elliott (2001).
5.3 Outsourcing
Outsourcing is a strategy where a company decides to have an outside organization per-
form an activity that the company has previously performed itself for a fee. In today’s
global world, outsourcing is a very successful strategic decision to reduce costs. With the
internet and the telecommunication capabilities, many service areas can be outsourced.
The case study at the beginning of the chapter about medical outsourcing illustrates the
advantages of this concept quite well.
India: A Hotbed for Outsourcing
India is a popular country for outsourcing services. Companies from English-speaking

countries in particular benefit from the language advantage of India, which was formerly
part of the British Empire. If you call the computer hotline of a US-based company, you
will most likely speak to a service employee in Bangalore, India. Many US tax consulting
74
companies have the standard tax procedures performed by tax consultants in India and
sent electronically to the US office, where the exceptions and more complicated parts are
added in. As described in the case study, if you check into a hospital in the US at night and
they need to take an X-ray image, there is often no radiologist on duty at that time. The
image is instead sent to India to a radiologist who assesses the image and sends the report
electronically back to the US hospital within the hour.
The reasons why India is so popular for outsourcing are manifold. India has a large, well-
educated, English-speaking workforce. At the same time, the wage level is significantly
below the level in developed countries. Wage-related costs are also lower. India offers sta-
ble economic and political conditions and a well-functioning IT infrastructure. Further-
more, India enforces laws to protect patents and intellectual property.
Disadvantages of Outsourcing
Outsourcing can compromise the quality of products and services and therefore their
position in the market. The US automotive industry has outsourced since the 1990s and,
since then, their competitive position in the automotive market has continued to decline.
Successful outsourcing has to be done carefully by developing relationships with the out-
sourcing partner firms. In 1991, the corporation General Motors (GM) outsourced most of
the production of its components. Its strong market position at the time was used to pres-
sure the new component suppliers to offer the products at the lowest price possible. This
reduced the costs of production for GM, but in 2007, GM reported huge losses. One of the
reasons for this development was that GM never built partnerships with their suppliers.
Many of GM’s automotive companies had open conflicts with their suppliers that extended
many years. They kept inviting tenders from different suppliers to obtain the lowest price
and provided little exchange of information. The suppliers, constantly pressured on prices,
did not invest in new technologies or align their systems with those of GM. This develop-
ment led to the poor quality of many American cars, which resulted in a large decline in
the demand for US-manufactured automobiles.
5.4 Product Portfolio Analysis Using the

BCG Matrix
Portfolio analysis is a planning tool that enables an organization to make recommenda- Portfolio
tions on how to allocate its resources (financial, human resources, etc.) to the various This describes the collec-
tion of all products
business units. The goal of the portfolio analysis is to decide on the optimal combination offered by a company.
of products for the organization, to reduce company risk through diversification of the
portfolio, and to assure long-term sources of revenue.
Portfolio analyses use information about environment and corporate resources to evalu-
ate the success of products and businesses. They provide answers as to which products or
businesses are the most promising and valuable for the organization to invest in. Portfolio
analyses provide a direction for investment and budget decisions and can be seen as a
preliminary step to the strategic plan.
75
The BCG matrix is a portfolio analysis that was invented by the Boston Consulting Group.
The model depicts the position of businesses in relation to their market share and growth
potential of the business. The relative market share is an internal indicator of the competi-
tiveness of the organization. It compares the companies’ own market share to their main
competitors. The underlying idea is that companies with a large market share benefit from
economies of scale and can offer their products at a lower and more competitive price
than the competition. The growth potential of the market is the external indicator of the
attractiveness of the market or business. Growth potential is derived from the product life
cycle model of markets, with a high growth rate being more attractive than markets with a
lower growth rate.
The three factors are considered in the matrix:
1. The growth potential of the business or market growth rate (Y axis)

2. The relative market share of the product or business (X axis)
3. The revenue contribution of the business or product to the organization (the size of
the circle around the product)
These parameters combined provide information about the strategic position of the
organization’s products, services, or businesses and the financial requirements of the indi-
vidual products/businesses to balance the company’s cash flow. The BCG matrix also indi-
cates the ideal situation with a balanced product portfolio. A balanced portfolio includes
enough products that generate profits (cash cows) for the organization to be able to
finance new products (stars and question marks).
Each of the four quadrants of the BCG matrix suggests standard strategies that can be
guidelines for strategic measures. The matrix will be further explained using a fictional
example from the consumer electronics market.
76
Figure 6: BCG Matrix (Case Study: Consumer Electronics Market]
Stars
Stars are products or businesses with a large share of a market that show high growth
potential – in other words, established products or services in an attractive market. Stars
often require high investment costs for marketing and promotional measures, but they
provide high earnings to the organization due to their high percentage of the market
share. In order to expand this position in the market, the company needs to strengthen
and secure their competitive advantage for these products or services.
A company should have enough stars in their portfolio so as to provide financial leverage
for the future. If the growth potential of the market flattens, the stars become the cash
cows. It is important for companies to develop large circles in the BCG matrix with their
stars and cash cows as these are the main revenue contributors. In the area of consumer
electronics, an example of a star would be electronic books (e-books). In today’s con-
sumer marketplace, e-books are a product with very large growth potential.
Question Marks
Question marks are products with a small share of a market with high growth potential.
These are mostly new products or services that need a large financial commitment to be
established in the market. The risk of failure is high in this quadrant, as is the possibility of
a market exit. Management have to decide which question marks will be successful in the
77
future and make the financial commitment required to build their market share. Manage-
ment also has to take the questions marks with little chance of success off the market. In
theory, question marks bring tomorrow’s growth and thus need further investment to
increase the market share. The financial means for this investment usually come from the
cash cows.
An example of a question mark technology in the consumer electronics market are Blu-ray
discs. The Blu-ray disc is a digital optical storage disc, which was developed as a high-defi-
nition medium to replace the DVD. Its benefits over the DVD are higher data volume and
storage capability. Blu-ray discs can be used to store movies with very high resolution and
offer the viewer outstanding image quality. Because of the need for high marketing costs,
which were not available to the companies producing Blu-ray discs, the technology had an
initial low growth rate. Despite rivals such as Apple’s iTunes, which directly competes with
Blu-ray, there has been a gradual upward trend ever since.
Cash Cows
Cash cows have a high share of a market with a lower growth rate. These are established
products or businesses in a market with a declining attractiveness. Due to their estab-
lished position in the market, the financial investments are fairly low for the organization
and the revenue situation is very good. Since the market does not grow much, the cash
flow surplus from these products or services should be used for the development of new
products. A company should have several cash cows to finance the question marks and
stars, which are the future revenue generators for the organization. The cash cows should
ideally have large areas in the BCG matrix that reflect a healthy revenue contribution to
the organization.
A cash cow in the area of consumer electronics is the flat screen television. Flat screen TVs
have been popular for many years and generated large sales numbers. Due to fierce com-
petition, the prices for flat screen TVs have gone down dramatically. Today, there is very
moderate growth in this sector and companies invest little in product improvements as
the market is all but sated.
Poor Dogs
Poor dogs are products or businesses showing low market growth and have a low market
share. These are unattractive products or services in unattractive markets with little future
potential. The revenue contribution of these products or services is negative or balanced,
but the organization does not make profit with a poor dog. Companies should not invest
in products in this quadrant. The financial surpluses should go into the stars and question
marks. The resources that go into the production of poor dogs should be freed up and
used for the production of more promising or successful products. The circles around the
poor dogs in the BCG matrix should be small as the revenue contribution is not significant.
In the sector of consumer electronics, the poor dogs are, for example, the Discman or a
portable disc player, which has been replaced by the MP3 player.
78
Critical Evaluation
The BCG matrix offers a picture of the product portfolio or even entire business portfolio
of a company that can facilitate planning decisions. It displays a great deal of complex
information in a simple matrix structure. It provides a good overview of the current prod-
uct portfolio in order to make strategic investment decisions.
A criticism of the BCG matrix is that it only considers the relative market share and the
market growth potential. Other important market or trend information is not included as
it has the potential to falsely influence decisions. Furthermore, the portfolio matrices do
not take into consideration connections between products or businesses (i.e., composite
effects). The BCG matrix focuses on currently existing products and provides no informa- Composite effects
tion on new products or market trends. Finally, the standardized strategies for the quad- These refer to the qualita-
tive impact of individual
rants provide very simplistic recommendations for strategic decisions. activities with regard to
several products at the
same time on the benefit
for the market partici-
5.5 Product Portfolio Analysis Using the

pants.
GE-McKinsey Matrix
Based on the BCG matrix, the consulting company McKinsey and the American corpora-
tion General Electric developed a matrix using two indicators: (1) market attractiveness,
and (2) competitive strengths. This matrix, like the BCG matrix, has the goal of facilitating
investment decisions for product or business developments. However, the external analy-
sis is not restricted to the growth potential of the market, as in the BCG matrix, but
includes many factors under the umbrella term market attractiveness, such as market vol-
ume, profitability, and the intensity of the competition. The internal analysis was also
developed further. Instead of just looking at the relative market share, as in the BCG
matrix, the GE-McKinsey matrix analyzes the relative competitive strengths of the organi-
zation over the competition. This includes not only the relative market share but also the
relative product quality, the image of the company, and its financial strength. Further-
more, the GE matrix with its 3 x 3 = 9 sections is more detailed than the BCG matrix with its
2 x 2 = 4 sections.
79
Figure 7: GE-McKinsey Matrix
Depending on the results of the analyses of the market attractiveness and the relative
competitive strength, the business units or the products of a company are depicted in one
of the nine sections of the matrix. The strategic recommendation from the matrix is: the
more attractive the market and the stronger the competitive position of the business or
product, the more should be invested. If the market attractiveness is low and the competi-
tive position weak, the business unit or product should be divested. The financial means
that are freed up from divesting unattractive products or businesses should be invested in
the more promising areas. The products and businesses that are positioned in the middle
segments of the matrix are more difficult to evaluate and more detailed analyses are
required in order to make a final decision as to whether to invest in the business or prod-
uct or whether to divest it.
Critical Evaluation
The main advantage of the GE-McKinsey matrix is that it concentrates a great deal of com-
plex information into a clear and comprehensible overview of the product portfolio of a
company. Thus the matrix can be utilized to facilitate strategic decisions regarding invest-
ments in various businesses or products/services.
However, there are several disadvantages to this matrix. One disadvantage is that a great
deal of complex information is concentrated within the matrix. Many products or busi-
nesses are in the middle segments which need further analysis. This does not allow for
immediate strategic decisions to be made. The concentration of information also leads to
a loss of individual data about the business or product that might be important for deci-
sion-making. Moreover, trends and future developments in the market are not included or
80
considered (e.g., changes in the technological sector, such as the internet, have had a
strong impact on the attractiveness of many sectors and yet are not considered in the
matrix).
A further disadvantage is that, just like the BCG matrix, connections between products or
businesses are not taken into consideration. There is the possibility that products from
different business units are produced on the same assembly line. If one of the products is
divested for cost reasons, the assembly line still has to be maintained to produce the other
product. The logic of the portfolio matrix does not hold for this example as the desired
cost savings cannot be realized in such situations.
SUMMARY
The strategic plan is one of the most important management tasks and
determines the future success or failure of a company. Areas to take into
consideration in strategic planning are customers, competitors, distribu-
tors, and stakeholders.
Expanding into new products or new sectors is called diversification.

Companies can pursue various expansion strategies, such as further
market penetration with the existing products, new product or service
development, new market development, or complete diversification
with new products in new markets. Companies diversify in order to
increase the efficiency of their operations, to exploit their management
competencies, or to increase the power in the market.
Another strategic decision to take into consideration is outsourcing.

When outsourcing, companies have activities that were previously provi-
ded internally, performed by an outside organization to save costs. Out-
sourcing is a very successful strategy in today’s global business environ-
ment. However, quality issues often occur when outsourcing, and
therefore, companies that outsource should have well-established qual-
ity management systems.
Portfolio analyses help managers make decisions on the optimal combi-

nation of products or businesses offered by an organization. They pro-
vide a great deal of information about the external business environ-
ment and illustrate the internal features of the organization in a clear,
comprehensible matrix. The BCG matrix, with the indicators market
growth and market share, segments the products into stars (in which the
company should invest), cash cows (which provide the financial means
to develop new products), poor dogs (which should be divested), and
question marks (whose development is still unclear).
81
Using the indicators market attractiveness and competitive strength, the
GE-McKinsey matrix offers a more detailed view with nine segments. In
addition, the two indicators for this matrix combine more information
than the BCG matrix.
Portfolio analyses offer a great overview over the product portfolio, but
they ignore connections between products, and therefore, clear deci-
sions are sometimes difficult.
82
UNIT 6
WHAT INTERNATIONAL STRATEGIES ARE
AVAILABLE?
STUDY GOALS
– why companies increasingly go international.

– what companies have to consider when pursuing an international strategy.
– which factors provide a competitive advantage.
– what options are available for an international strategy.
– what the advantages and the disadvantages of an international strategy are.
6. WHAT INTERNATIONAL STRATEGIES ARE
AVAILABLE?
Introduction
WAL-MART FINDS THAT ITS FORMULA DOESN’T FIT EVERY CULTURE

Three days after Wal-Mart Stores announced that it would pull out of Germany,
Roland Kögel was wandering through the aisles of a somewhat threadbare Wal-
Mart in a strip mall in this western German city.
“Why are they giving up now?” he asked. “They have good prices and a good
variety of products.”
Yet Mr. Kögel, 54, confessed that he never bought groceries at Wal-Mart. Food is
cheaper at German discount chains. He also does not visit this store often
because it is on the edge of town and he does not own a car. His one purchase
for the day was tucked under his arm: a neck pillow.
Shoppers like Roland Kögel help explain why Wal-Mart raised the white flag in
Germany, the site of the company’s first foray into Europe.
After nearly a decade of trying, Wal-Mart never cracked the country – failing to
become the all-in-one shopping destination for Germans that it is for so many
millions of Americans. Wal-Mart’s problems are not limited to Germany. The
retail giant has struggled in countries like South Korea and Japan as it discov-
ered that its formula for success – low prices, zealous inventory control and a
large array of merchandise – did not translate to markets with their own dis-
count chains and shoppers with different habits.
Over all, Wal-Mart is still expanding outside the United States, particularly in
markets where it entered by acquiring a strong retailer. Still, given Wal-Mart’s
formidable record at home, the company’s recent setbacks have exposed a rare
vulnerability overseas.
Some of Wal-Mart’s problems stem from hubris, a uniquely powerful American

enterprise trying to impose its values around the world. At Wal-Mart’s headquar-
ters in Bentonville, Ark., however, the message from these missteps is now regis-
tering loud and clear.
In particular, Wal-Mart’s experience in Germany, where it has lost hundreds of

millions of dollars since 1998, has become a sort of template for how not to
expand into a country.
84
“It is a good, important lesson, a turning point,” an international spokeswoman
for Wal-Mart, Beth Keck, said. “Germany was a good example of that
naïvete.”She added, “We literally bought the two chains and said, ‘Hey, we are in
Germany, isn’t this great?’”
Among other things, she said, Wal-Mart now cares less whether its foreign stores
carry the name derived from its founder, Sam Walton, as the German Wal-Marts
do. Seventy percent of Wal-Mart’s international sales come from outlets with
names like Asda in Britain, Seiyu in Japan or Bompreço in Brazil.
Wal-Mart is also trying to integrate acquisitions with more sensitivity – a process

that involves issues like deciding whether to consolidate multiple foreign head-
quarters and how aggressively to impose Wal-Mart’s corporate culture on non-
American employees.
In Germany, Wal-Mart stopped requiring sales clerks to smile at customers – a

practice that some male shoppers interpreted as flirting – and scrapped the
morning Wal-Mart chant by staff members.
“People found these things strange; Germans just don’t behave that way,” said
Hans-Martin Poschmann, the secretary of the Verdi union, which represents
5,000 Wal-Mart employees here.
Wal-Mart’s changes came too late for Germany but they could help it crack other
markets, like China, where it already has 60 stores and 30,000 employees. Far
from being chastened by its setbacks, Wal-Mart is forging ahead with an aggres-
sive program of foreign acquisitions.
In a single week last fall, Wal-Mart completed the purchase of the Sonae chain in
Brazil, bought a controlling stake in Seiyu of Japan and became a partner in the
Carcho chain in Central America. The deals added 545 stores and 50,000
employees to Wal-Mart’s overseas empire.
“I’m hard pressed to name a US-based general merchandise retailer that is

doing better than Wal-Mart International,” said Bill Dreher, who follows Wal-Mart
for Deutsche Bank in New York.
Starting from scratch 14 years ago, Wal-Mart International has grown into a $63
billion business. It is the fastest-growing part of Wal-Mart, with nearly 30 percent
sales growth in June, compared with the same month last year. Even subtracting
one-time gains from acquisitions, it grew at nearly 12 percent, about double the
rate of Wal-Mart’s American stores.
Sustaining that pace is critical for Wal-Mart because high fuel prices have helped
sap the buying power of Americans. In June, store traffic in its home market
declined. Wal-Mart estimated that its sales in the United States in stores open at
least one year would increase only one percent to three percent in July.
85
Wal-Mart Germany, with 85 stores and $2.5 billion in sales, is almost a footnote
for a company focused on Asia and Latin America. But the problems it encoun-
tered here have echoes elsewhere. For example, it never established comforta-
ble relations with its German labor unions.
“They didn’t understand that in Germany, companies and unions are closely
connected,” Mr. Poschmann said. “Bentonville didn’t want to have anything to
do with unions. They thought we were communists.”
Ms. Keck said Wal-Mart did cultivate good relations with the leaders of the
works’ council, which represents the unionized work force, and changed policies
in response to employee concerns.
Wal-Mart will soon get another chance to deal with organized labor, albeit of a
less independent sort. In China, the state-controlled All-China Federation of
Trade Unions is organizing workers in Wal-Mart’s stores.
Germany also provides a lesson in the perils of buying existing chains. Wal-
Mart’s purchase of Wertkauf and Interspar saddled it with stores in undesirable
locations. The Wiesbaden outlet is worlds away from a squeaky-clean American
Wal-Mart: nearby are a couple of sex shops.
“These were some of the least attractive of the big-box retailers out there,” said
James Bacos, director of the retail and consumer goods practice at Mercer Man-
agement Consulting in Munich.
Compounding the problem, Wal-Mart shut down the headquarters of one of the
chains, infuriating employees who opted to quit rather than move. Such a deci-
sion would have been routine in the United States, where Ms. Keck said, “mov-
ing is a big part of the Wal-Mart culture.” In Germany, she said, it prompted an
exodus of talented executives.
In South Korea, Wal-Mart had only 16 stores – a small presence that contributed
to its decision in May to sell out to a Korean discount chain. Many Koreans have
never heard of Wal-Mart. In Seoul, a sprawling area of 10 million, there is only a
single store.
This lack of scale causes another problem that has afflicted Wal-Mart in several
countries: its inability to compete with established discounters, like the ALDI
chain in Germany and E-Mart in Korea.
The obvious lesson is to try to bulk up. In Brazil, Wal-Mart opened only 25 stores
in its first decade there and struggled to compete against bigger local rivals.
Then, in 2004, it bought Bompreço, giving it a presence in the country’s poor,
but fast-growing, northeast.
86
Wal-Mart did not change the names of the stores, which range from neighbor-
hood grocers to large American-style hypermarkets. But with 295 stores in Brazil,
Wal-Mart now ranks third in the market, after Carrefour of France and the market
leader, Companhia Brasileira de Distribução.
Size has given Wal-Mart increased leverage with suppliers there, though analysts
say the company needs even more stores to be in a position to undercut local
discounters on the prices it offers customers.
At a Wal-Mart store in suburban Rio de Janeiro the other day, Ana Paula Cunha
de Almeida, a 26-year-old housewife, had loaded her shopping cart with rice,
beans, and flour. But she was also carrying a bag from a smaller grocery store,
where she had bought meat, cheese, and cold cuts.
“These are always cheaper somewhere else,” she said.
The grocery business has proven the most difficult for Wal-Mart to crack. ALDI,
with 4,100 stores in Germany, undercuts Wal-Mart on price, while still offering
high-quality food.
Even in Canada, where Wal-Mart steamrolled local department store chains

when it entered the country as a nonfood retailer in 1994, the grocery trade
looms as a challenge. Wal-Mart recently announced plans to build supercenters
that will also sell groceries. But analysts predicted Wal-Mart would face stiff
competition from Canada’s largest chain, Loblaw.
Bernie Skelding, a vacationer shopping at a Wal-Mart in Huntsville, Ontario,

north of Toronto, said he liked going to the store when he had a varied shopping
list. But he added, “If I’m looking for food, I go to Loblaw’s.”
Wal-Mart’s most successful markets, like Mexico, are those in which it started
big. There, the company bought the country’s largest and best-run retail chain,
Cifra, and has never looked back. This year, Wal-Mart is spending more than $1
billion in Mexico to open 120 new stores.
Taking over Cifra “gave them a critical mass to build from,” said Tufic Salem, an
analyst at Credit Suisse First Boston in Mexico City. “The management stayed,
and they knew the market very well.”
Perhaps the most striking example of a Wal-Mart success is Asda, which was Brit-
ain’s No. 1 discount chain when Wal-Mart acquired it in 1999. With sales of $26.8
billion, Asda now accounts for 43 percent of Wal-Mart’s international revenue.
Wal-Mart’s German experience also taught it to use local management. The com-
pany initially installed American executives, who had little feel for what German
consumers wanted.
87
“They tried to sell packaged meat when Germans like to buy meat from the
butcher,” Mr. Poschmann said.
Some of Wal-Mart’s missteps – selling golf clubs in Brazil, where the game is
unfamiliar, or ice skates in Mexico – are so frequently mentioned, they have
become the stuff of urban legend. But even more subtle differences in shopping
habits have tripped up the company.
In Korea, Wal-Mart’s stores originally had taller racks than those of local rivals,
forcing shoppers to use ladders or stretch for items on high shelves. Wal-Mart’s
utilitarian design – ceilings with exposed pipes – put off shoppers used to the
decorated ceilings in E-Mart stores.
Beyond the ambience, Wal-Mart’s shoes-to-sausage product line does not suit
the shopping habits of many non-American shoppers. They prefer daily outings
to a variety of local stores that specialize in groceries, drugs, or household
goods, rather than shopping once a week at Wal-Mart.
“They have stacks of goods in boxes,” said Lee Jin Sook, 46, a housewife sitting
on a subway in Seoul. “That may be good for some American housewives who
drive out in their own cars.” But Koreans, she said, prefer smaller packages:
“Why would you buy a box of shampoo bottles?”
“I heard Wal-Mart later tried to change their style,” Ms. Lee added, “but I guess it
was too late.”
Source: Landler & Barbaro (2006).
6.1 Why Do Companies Go International?

The world has grown closer together thanks to improvements in infrastructure and the
widespread growth of internet use. Even small organizations now have the opportunity to
go international. Going international and being successful requires a global strategy,
which defines where and in which form the company expands internationally from its
home country origins. The international expansion needs to be considered carefully and
Coordination planned in great depth as it requires a strong commitment to undertaking coordination
This is the organization of tasks.
human resources as well
as economic and techni-
cal tasks in an organiza- Increasingly, a greater number of companies are entering the international arena. The rea-
tion. sons for the increase in this international exposure of companies are manifold and include
the following:
• trade agreements
• unification
• economies of scale
88
• infrastructure
• local differences
• the world growing closer together
• standardization
• global marketing
Trade Agreements
An increasing number of international trade agreements have made it easier for compa- Trade agreements
nies to do business in other countries and across regions. For example, after many years of These regulate the trade
between countries.
poor economic relations, China and Taiwan agreed on an historic trade agreement in
2010. The agreement eliminates customs duties for more than 800 products. This will
accelerate the trade between mainland China and Taiwan.
Unification
There has been an increase in the formation of free trade zones between various coun- Free trade zone
tries. These unifications, such as the EU (European Union) or the NAFTA (North American A free trade zone allows
the free traffic of goods
Free Trade Agreement) that allow free trade between the countries within the union, lead and services between the
to the standardization of trade regulations. This in turn lowers the costs for organizations, countries included in the
for example, the common quality standards in the EU allow companies to offer one prod- union.
uct for all countries in the union. Patents, brand names, etc. do not have to be registered
in each individual country but can be registered for the entire union.
Economies of Scale
The possibility of offering one product to various countries without major adaptations for
each single market allows companies to benefit from economies of scale and increases
efficiency. In particular, companies that have high investment or development costs for
their products or services benefit from the opportunity to sell the product in many coun-
tries.
The case study clearly illustrates how economies of scale work for Wal-Mart in Mexico.
When they entered the market as a big chain with many stores, they were immediately
able to compete with local supermarkets due to the large volumes being sold.
Infrastructure
The infrastructure of worldwide trade has improved tremendously over the past decades. Infrastructure
The international container shipping business has profited from an enormous boom in This includes the trans-
portation and human
international trade. Container shipping is fairly cost efficient due to new technologies resources necessary to
speeding up the loading and unloading process. This has reduced the time and costs for run an economy.
the ships in the port. The efficiency of the shipping business has greatly reduced the costs
for transporting goods.
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Local Differences
Improvements in the infrastructure allow organizations to transport goods cheaply across

the globe. They can thus decide where they want certain processes performed. Most tex-
tiles today are made in Asia as the costs of production are much lower. However, the
design and marketing are still carried out and coordinated in the original home countries.
The World is Growing Closer Together
The Internet revolution of the 1990s brought the world even closer together. Today, con-
sumers can access and compare products and services worldwide. Trade coordinators
eBay such as eBay make it possible, for example, for a German resident to acquire a product
This is the world’s largest from a French designer via the US website from a seller in Belgium. The buyer should not
Internet auction house.
be surprised if the product is shipped from a location in Bulgaria.
Standardization
Uniform quality standards and quality systems enable companies to save costs. For exam-
ple, a Japanese car manufacturer can purchase a standardized component from an Italian
manufacturer and have it delivered to all its manufacturing plants worldwide for assem-
bly.
The opportunity to purchase products worldwide is called global sourcing. The benefit for
companies is that they can purchase at the lowest prices and take advantage of location
advantages, i.e., low-wage countries or local specializations.
Global Marketing
Globalization makes standardized marketing possible. McDonald’s and Coca-Cola are

global brands that are as easily recognized in Taiwan as they are in Turkey or Tunisia. How-
ever, most companies expanding into international markets will encounter the global–
local dilemma. Companies have to decide what can be standardized and what has to be
adapted to local standards, as the case study with Wal-Mart’s entry into the German mar-
ket illustrates. Global organizations have to “think global, act local” (i.e., have a global
strategy but adapt it to local conditions). For example, McDonald’s could design a global
advertising campaign featuring soccer, which is popular in almost all countries. From this
global theme it could then show local players in the advertisements for the respective
country.
However, international companies also face risks such as dependencies and global com-
petition.
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Dependencies
International companies are interlinked and therefore affected by fluctuations in remote

regions. In March 2011, when Japan was hit by an earthquake, a tsunami, and a nuclear
disaster, there were problems with the delivery of products from Japan. Toyota stopped
production in factories in England, France, and Turkey from April to May 2011 due to deliv-
ery shortages from Japan.
Global competition
The pressure from international companies is enormous because they have large financial
resources. However, the case study with Wal-Mart’s attempt to enter the German market
showed that even these large companies could fail due to the established and strong local
competition.
6.2 What Factors Contribute to the

Decision About Which Country to Invest
In?
General Factors
The answer to the question “Which markets would be interesting for companies?”
depends on a variety of factors. Just like the analysis of the micro- and macroenvironment
of the organization, companies have to research the international environment in order to
make informed strategic decisions.
Political situation
When companies make decisions on where to expand internationally, they need to look at
the political situation. There are many countries in which the political environment
changes quickly and governments rapidly alter the investment situation for foreign com-
panies. Companies that operate internationally need to be aware of the risks and weigh
their chance of success against that of failure.
Legal situation
Similar to the political situation, the legal situation plays an important role in the decision
to go international. There are large differences in the legal system of different countries,
and companies need to be well informed about the legal framework when entering a new
market. This can help in obtaining a better understanding of the risks involved, as Helmer-
ich and Payne learned in Venezuela:
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VENEZUELA TO NATIONALIZE US FIRM’S OIL RIGS
Venezuela will nationalize a fleet of oil rigs belonging to the US company Hel-
merich and Payne, the latest takeover in a move towards socialism as President
Hugo Chavez struggles with lower oil output and a recession.
A former soldier inspired by Cuba’s Fidel Castro, Chavez has made energy
nationalization the linchpin in his ‘revolution’. He has also taken over assets in
telecommunications, power, steel, and banking.
The eleven drilling rigs have been idle for months following a dispute over pend-
ing payments by the OPEC member’s state oil company PDVSA. Oil Minister
Rafael Ramirez said on Wednesday that the rigs, the Oklahoma-based compa-
ny’s entire Venezuelan fleet, were being nationalized to bring them back into
production.
Ramirez said companies that refused to put their rigs into production were part
of a plan to weaken Chavez’s government.
“There is a group of drill owners who have refused to discuss tariffs and services
with PDVSA and have preferred to keep this equipment stored for a year,” Ram-
irez told reporters in the oil producing state of Zulia. “That is the specific case
with US multinational Helmerich and Payne.”
The company was not immediately available for comment.
Chavez, who faces legislative elections in September, often pushes ahead with
radical plans during election campaigns.
The 55-year-old leader is having a hard time in his eleventh year in power. Vene-
zuela’s economy is the worst performing in Latin America this year, a problem
exacerbated by a drop in oil output since 2008, power outages, and soaring infla-
tion.
The takeover of Helmerich and Payne’s rigs was not a surprise, considering Cha-
vez’ penchant for nationalizations and the company’s refusal to work before
being paid the $49 million it has invoiced PDVSA.
Helmerich and Payne is a small player in the drilling industry but global giants
like Halliburton, Schlumberger, and Baker Hughes also have a presence in Vene-
zuela. Halliburton and Schlumberger have avoided public spats with the govern-
ment. Chavez has kept pressure up on the private sector in recent months,
blaming a “parasitic bourgeoisie” for Venezuela’s recession and 30 percent
annualized inflation.
92
He has threatened to nationalize Polar, the top brewer and food processor in the
country of 30 million. The government has also seized a bank belonging to an
owner of the leading opposition TV station and put an arrest warrant out for his
partner, who is now on the run.
In 2007, Chavez nationalized multi-billion dollar projects in Venezuela’s vast Ori-

noco oil region, persuading companies such as BP Plc, to accept minority stakes
in facilities they had built.
Last year, he ordered the takeover of dozens of smaller oil service companies as
PDVSA, reeling from a sharp plunge in oil prices, struggled to pay contractors.
When he was flush with oil cash during a boom in oil prices that ended in 2008,
Chavez often compensated nationalized companies fairly, although the 2007
takeovers led to lawsuits from ConocoPhillips and Exxon Mobil.
More recently, Venezuela has been slower in paying compensation.
Source: Rondon (2010).
Economic situation
The economic situation in the country provides information on the benefits of an invest-
ment. Generally, the GDP and the per capita income give an idea of the market size and
potential. A company should carry out a thorough analysis of the economic situation or
consult an external expert. The economic analysis should also provide an outlook to the
future, information on possible import or export restrictions, payment modalities and
practice, taxation, etc.
Social situation
When looking at international investments, an analysis of the social situation should not
be restricted to facts and figures. The number of inhabitants and the demographic struc-
ture provide a first impression, but the cultural and social factors are also extremely
important. The market might exist and be big enough, but what if the buying habits are
very different from your own country? Wal-Mart learned a very expensive lesson in Ger-
many, as our case study illustrates.
Factors That Lead to Competitive Advantages
Internationally successful companies often benefit from local competitive advantages.

These local competitive advantages occur as a result of regional factors. Some regions are
predestined for specific business sectors and promote their success. Michael Porter (1998)
identifies four factors that lead to a sustainable competitive advantage for companies:
1. Local factors
2. Local demand
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3. Supporting industry
4. Local strategy, structure, and competition
Local factors
Some regions are particularly well equipped to produce a specific product or service. They
have ready access to raw materials needed for production or have a supply of desired
resources, such as human resources or knowledge resources. Switzerland, for example, is
known for its banking industry. One factor that certainly promoted its growth was the
Banking secrecy law banking secrecy law and Switzerland’s status of neutrality. A further prerequisite for the
The banking secrecy law expansion of the private wealth sector is the linguistic ability of the Swiss population.
is a legal commitment to
maintain the secrecy of Three languages – German, French, and Italian – are spoken in this small country. This
bank customers and their capacity for providing services in multiple languages no doubt fostered the growth of the
financial information, financial business as discussing private wealth information is, for most people, very per-
protecting this informa-
tion even from govern- sonal, and they prefer to converse about it in their mother tongue. This is why Switzerland
ments. continues to be one of the countries of choice for private wealth management, despite the
fact that banking secrecy laws are not absolute (Caputo, n.d.).
Local demand
The local demand for certain products or services often favors the establishment of spe-
cific business in the area. The advantage for the business is that a part of the demand is
already satisfied locally. Therefore, the location advantage creates a competitive edge for
the local industry. In 1886, the German inventor Carl Benz filed a patent for the first motor-
ized vehicle, marking the birth of the modern automobile. A world-renowned car industry
was henceforth established in southern Germany. The strong connection of the German
people to locally produced automobiles (which still exists today), paired with the German
sense of quality, has led to and perpetuated the competitive advantage of German compa-
nies in the automotive industry.
Supporting industry
The development of an industry in a specific region often leads to the establishment of

suppliers in the same location. In the example of the German automobile industry, when a
company begins manufacturing cars in a region, adjunct businesses, such as engineers
who start up their own company, are often established soon after in the surrounding area.
The proximity of such supporting businesses to the producer facilitates cooperation and
enhances innovation. Thus, a location advantage is created for the industry.
Clustering An interesting example of such a development (which is called clustering) is located in the
This describes a local Italian village of Montebelluna. A hiking boot manufacturing business has developed into
aggregation of similar
businesses. a cluster of companies making ski boots. Today, there are about 400 companies in Monte-
belluna that cover an unbelievable 75% of the world market for ski boots.
94
Local strategy, structure, and competition
The characteristics of the local businesses, such as the focus of the German automobile
industry on quality and innovation, as well as the structure of the industry lead to a fur-
ther competitive advantage. Moreover, in an environment of aggregate businesses, the
local competition forces companies to constantly improve and develop in order to survive,
thus further fostering innovation.
6.3 How Can a Company Invest

Internationally?
There are various ways in which a company can expand internationally. Some options are
more risky than others. Each option of expanding internationally has advantages and dis-
advantages – companies have to decide on the degree of investment and what best
matches their strategy. We will now explore the following four options for international
expansion:
1. Exports
2. Joint ventures/alliances
3. Licenses
4. Foreign direct investments
Exports
Exporting is the easiest way to operate internationally. The product is created in the home
country, then marketed and sold in another country. Exporting is best suited to products
that can easily be transported. The advantage is that the company does not have to invest
in a production facility abroad, and the financial investment is relatively small. The com-
pany benefits from economies of scale in the home country due to the expansion and the
increase in sales. The internet facilitates communication with distributors and aids inter-
national marketing and sales efforts.
However, exporting also has disadvantages. Companies that export products or services
forgo the location benefits of many foreign countries. A company that does not make their
products in the foreign country gains no tax advantage or cost saving as a result of lower
employee wages abroad. Furthermore, companies are dependent on local distributors,
who might sell more than one product or service and may not realize the maximum possi-
ble sales. Exporting companies might also encounter trade barriers and have to pay cus-
toms fees, which will make the products more expensive compared to local products. An
additional cost factor that might make the product more expensive in the foreign country
are transport costs associated with distribution.
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Despite these disadvantages, exporting is the most popular way of being present in inter-
national markets. Often, companies will allow local distributors to make their own deci-
sions regarding prices, packaging, and marketing. This strategy can be used if a coordina-
ted marketing program does not add any value. Examples of this strategy are found in the
case of raw materials or agricultural products that are often marketed locally.
Joint Ventures/Alliances
Joint ventures Joint ventures or alliances with local companies have many advantages for companies
These are organizations who want to expand internationally. A partnership with a local company splits the invest-
that are founded by at
least two legally separate ment risk between two organizations. Both partners benefit from complementing compe-
entities. tencies and resources. Companies from abroad can, for example, provide the technical
know-how, and the local company provides the distribution and local market know-how.
In some countries, joint ventures or alliances are stipulated by law in order to enter the
market (e.g., China).
It is often not simple for companies to find a suitable partner, one who is trustworthy and
contributes in the same manner to a common goal and common success. To establish a
functioning partnership, companies have to be prepared to engage in relationship man-
agement and invest in the coordination of the partners. However, partnerships often have
problems associated with integration and coordination; the transfer of know-how can be
exploited by the local partner, which leads to a loss of the competitive advantage in this
particular market.
MORE INFORMATION
For additional information about successful alliances, please refer to the article
by Kaplan, Norton, and Rugelsjoen (2010).
Licenses
If companies do not want to sell their products or services directly in a foreign market,
License agreements they can use license agreements with foreign partners. The most popular license agree-
These define the rights ment is the so-called franchise agreement. A well-known example of a franchise system is
and regulations to market
or sell a product or serv- the fast food chain McDonald’s. Other brands that use the franchising system to sell their
ice. products are Mister Minit, Tchibo, or Baumarkt in Germany. The advantage of a franchising
system is that the partners share the risks and costs. The license agreement defines the
payments to the company in exchange for using the brand.
Especially in foreign countries, it can be difficult for companies to find good franchise part-
ners that respect the intellectual property rights of the brand, adhere to its quality stand-
ards, and try to maximize sales. A further disadvantage is that the company that wants to
expand internationally cannot exploit local benefits, such as low wages, as the franchising
or licensing partner reaps these benefits. Furthermore, the company may lose its competi-
96
tive edge in the market if the franchisee does not deliver the product or service that was
promised by the organization or if the franchisee copies the system and opens his or her
own business. Constant quality controls are the key to a successful franchise system.
Foreign Direct Investments
Foreign direct investments are capital investments made by a company in a foreign coun-
try. Thus the influence and control over the operation in the foreign country rests with the
investor. The investing company also transfers know-how and technology; revenue goals
are therefore key to the investment decision.
Advantages of the foreign direct investment include complete control over the operation
and the possibility of coordinating a full integration, which will show a long-term commit-
ment. The company has the opportunity of entering a new market quickly by investing
directly. An additional advantage is that foreign direct investments are often subsidized. Subsidy
This refers to governmen-
tal financial support for a
However, foreign direct investments usually require a large financial and coordination new operation which
commitment. The full integration of a foreign company often fails despite all efforts as does not need to be paid
companies have to contend with not only a different culture in the foreign country but back.
also a unique corporate culture. Foreign direct investments are thus a risky and expensive
option for organizations to expand internationally.
SUMMARY
The world has grown closer together, and improvements in the infra-
structure and the Internet have made it possible even for small compa-
nies to operate internationally. Trade agreements and free trade zones
facilitate the internationalization of businesses. Companies that operate
internationally benefit from economies of scale as they are able to
increase sales and may benefit from local differences, such as lower
wages. The globalization of business also has disadvantages, such as
interdependencies and increasing competition.
When companies decide to expand internationally, they should analyze

the political, legal, economic, and social factors in those regions they
want to invest in. Furthermore, local factors such as resources and the
local demand for the product or service need to be investigated. Local
suppliers and the local strategy, structure, and competition are factors
that can potentially offer a competitive advantage to producers.
Choosing an option for its international expansion depends on how

much risk the company is ready to take. Exporting is the easiest way of
offering products or services internationally. There is also the option of
founding a partnership with a local company in the form of an alliance
97
or a joint venture. Many companies use the franchise system to sell in
foreign countries through franchise partners. The most costly way to
invest in a foreign country is through foreign direct investments.
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UNIT 7
DO-IT-YOURSELF, BUY, OR ALLY?
STUDY GOALS
– the advantages and disadvantages of organic growth.

– what reasons lead to mergers and acquisitions.
– what strategies of integration are available for acquisitions.
– why companies form alliances.
– what factors influence the decision in favor of strategic growth.
7. DO-IT-YOURSELF, BUY, OR ALLY?
Introduction
TEN REASONS MERGERS AND ACQUISITIONS FAIL: THE MOST

COMMON CAUSES FOR COMPANIES FAILING TO INTEGRATE AND
PROFIT FROM M&A ACTIVITY.
Having spent the first 17 years of his career reshaping companies acquired by an
international group before focusing on M&A consultancy across several indus-
tries, Paul J. Siegenthaler has seen his fair share of M&A pitfalls. Here’s his take
on the most common causes behind the fact that the majority of company inte-
grations fail.
Ignorance. While the parties in a merger or acquisition cannot exchange com-

mercially sensitive information prior to being under common ownership, there
is enough crucially important and legally permissible preparation work to keep
an integration team busy for several months before day one. Most chief execu-
tives don’t know this and they waste time that could be put to good use while
waiting for clearance from the regulatory authorities. Good preparation means
the integration can kick off on day one. Speed matters.
No common vision. In the absence of a clear statement of what the merged

company will stand for, how the organization will operate, what it will feel like,
and what will be different compared to how things are today, there is no point of
convergence on the horizon and the organizations will never blend.
Nasty surprises resulting from poor due diligence. This sounds basic, but
happens so often.
Team resourcing. Resource requirements are very often underestimated. It can

take two or three months to release the best players from daily business to join
the integration team(s), find a backfill for them, sign up contractors to fill the
gaps, and set up the team’s infrastructure. Most companies start too late and are
not ready when the deal is completed.
Poor governance. Lack of clarity as to who decides what and no clear issue res-
olution process. Integrating organizations brings up a myriad of issues that need
fast resolution or else the project comes to a standstill. Again, speed matters,
but with a sound decision-making process.
Poor communication. Messages too frequently lack relevance to their audience

and often hover at the strategic level when what employees want to know is why
the organization is merging, why a merger is the best course action it could take,
100
how the company will be better after the merger, how it will ‘feel’, how the
merger will affect their work, and what support they will receive if they are
adversely impacted.
Poor program management. Insufficiently detailed implementation plans and

failure to identify key interdependencies between the many work streams brings
the project to a halt or requires costly rework, extends the integration timeline,
and causes frustration.
Lack of courage. Delaying some of the tough decisions that are required to inte-
grate two organizations can only result in a disappointing outcome. Making
those decisions will not please everyone but has the advantage of clarity and
honesty and allows those who do not find the journey and destination appeal-
ing to step off before the train gathers too much speed.
Weak leadership. Integrating two organizations is like sailing through a storm:

you need a strong captain, someone whom everyone can trust to bring the ship
to its destination, someone who projects energy, enthusiasm, clarity and who
communicates that energy to everyone. If senior managers do not walk the talk,
if their behavior and ways of working do not match the vision and values the
company aspires to, all credibility is lost and the merger’s mission is reduced to
meaningless words.
Lost baby with bathwater. Companies contemplating a merger or acquisition

too often omit to pinpoint what particular attributes make the other party
attractive and define how they will ensure those attributes do not get lost when
the organization and the culture have changed. Culture cannot be bought – it
needs to be embraced.
Source: Siegenthaler (2010).
7.1 Do-It-Yourself
In order to embark on the path of strategic growth, organizations have three different
options:
1. They can decide to grow organically.

2. They can merge with or acquire another organization.
3. They can form a strategic alliance.
This section looks at the organic growth option, otherwise known as the ‘do-it-yourself’
(DIY) approach.
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Organic growth is the investment into the development and growth of the company’s own
resources and capabilities. The advantages of this strategic growth option are that the
organization takes the time to grow into new areas and builds up its own experience. The
slow growth allows companies to spread the investment costs over time, making this
growth much easier to finance than other growth options. The company does not need to
find a suitable partner in order to form an alliance or merge. It stays independent and can
continue on its strategic path.
Amazon One example of an organization that decided to grow organically is Amazon. Amazon
This is an online store developed the e-book reader ‘Kindle’ and its own e-book store. This expansion into the e-
that started as a book-
store. Today, anything book market came through the internal development of the Kindle reading device. Ama-
can be purchased zon used its experience from the online book business and its software competence. After
through the Amazon web- many years of being an online store for all products, Amazon went back to its roots with
site.
this new technology. The Kindle is a hugely successful product and sales are growing con-
e-book
An e-book is a book that tinuously. Founder Jeff Bezos attributed the growth to the low price of the Kindle reader
is available in electronic compared to other devices (such as the Apple iPad), the large number of e-books available
form and can be accessed
with an e-book reading
to customers, and fast delivery. Organic growth, however, did not come without expense
device. for Amazon. The company invested a great deal of money in digital offers and e-books.
The example of Amazon clearly illustrates that organic growth is not easy. Often, the
resources to grow into innovative new markets, to diversify, or enter international markets
are not readily available. To succeed in growing organically, companies need an innovative
and entrepreneurial corporate culture. They also have to be prepared to invest heavily in
these new projects and wait a long time until the product or service is ready to enter the
market.
7.2 Mergers and Acquisitions (M&A)

In addition to organic growth as an option for expansion, companies can also grow by
merging with another organization or acquiring another organization. A merger is defined
as the formation of a larger organization by two companies that operate as more or less
equal partners. This is different to an acquisition of a company, which is the takeover of
one company by another. If it is supported by both organizations, this is known as a
‘friendly takeover’. A ‘hostile takeover’ is one that is not welcomed by the assumed target
and happens mostly by one company acquiring a majority of the shares of the other com-
pany.
Motives for Mergers and Acquisitions
There are various strategic reasons for mergers and acquisitions. In addition to these stra-
tegic reasons, there are usually financial implications and most often additional personal
reasons for deciding to merge with or acquire a company. As a general rule, all three fac-
tors will play a role in the decision.
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Strategic motives
Companies can expand their range of products through mergers and acquisitions. They
can also enter new markets and businesses or expand internationally into new countries
or regions. These strategic motives look at increasing the size of the organization in order
to benefit from economies of scale. In the example of the Chinese motor company Geely,
the acquisition of Volvo demonstrates an expansion into a different country.
GEELY BUYS VOLVO. BELIEVE IT OR NOT, IT COULD WORK

Mergers and acquisitions in the car business have a terrible record. Daimler-
Chrysler stands tall as the worst example of a bad marriage. General Motors
made a hash of Saab and Hummer and its tie-ups with Isuzu, Suzuki, and Subaru
didn’t yield much either. Tata has struggled with Jaguar and Land Rover and
now that Ford is sending Volvo off in a boat to China, we have to ask, can Geely
make a go of this?
It’s going to be a tough job. Geely is paying $1.8 billion for the brand. Volvo sales
of 335,000 globally are off 11% this year and 27% off their peak, according to this
Bloomberg story. The Swedish carmaker has lost $2.6 billion during the last two
years. The brand hasn’t been a real moneymaker for a very long time. Its costs
are high and prices are strong but Volvo doesn’t command luxury premiums for
its cars.
On paper, at least, this could be a very good deal for Volvo. Be clear about one
thing. Zhejiang Geely Holding Co., not the carmaker, is buying Volvo. This is an
important distinction, says Jim Hall, principal of 2953 Analytics in Birmingham,
Mich. It indicates that Volvo won’t just be folded into Geely and lose the brand’s
strong Nordic identity. Geely Chairman Li Shufu said with unintentional humor
that, “I see Volvo as a tiger. It belongs to the forest and shouldn’t be contained in
the zoo,” Li said in Mandarin. “The heart of the tiger is in Sweden and Belgium.”
Volvo will keep its own management team, board of directors and headquarters
in Gothenburg, Sweden. That would indicate that Volvo will keep its Swedish
heritage and cachet. European and American Volvo loyalists will still be buying
cars engineered in Gothenburg and built in Europe.
What that would mean, however, is that Geely is buying Volvo and lingering on
with the same money-losing structure. That’s where China comes in. The Chi-
nese luxury market is booming and still has room for some other players to
come in and build a brand. Geely will assemble Volvo cars in China using
cheaper manufacturing, Hall says. The brand is upscale and Geely ownership
might even be seen as preferable by Chinese consumers. So the company can
increase sales and get larger margins in China. That makes the business case
work better than it ever did either under Ford or as an independent carmaker.
103
After so many failed auto deals, this one has the makings of a success. Of course,
it means Geely can’t manhandle Volvo. They need to rely on Ford and the
Swedes for technology that will make the Chinese cars real Volvos. In short, they
should manage it as a separate subsidiary the way Volkswagen Group runs Audi
AG. Give it autonomy and let the tiger run. Volvo is a niche brand and will never
be a cash cow. But it certainly could work if Geely gives it some independence.
Source: Welch (2010).
Companies try to optimize their business model and become more efficient through a
merger or an acquisition. For example, departments such as administration or logistics
can often merge their resources and benefit from increased efficiencies. Increasing an
organization’s size through a merger or acquisition boosts its market power. If a company
acquires a competitor, the effect is multiplied: the organization reduces the competition
by means of the acquisition and augments its power to negotiate lower prices with suppli-
ers through its increased size. Through an increase in economies of scale, the company
sells larger quantities and can influence the market price for the product or service
offered, thus increasing its profit margin.
A further reason for mergers and acquisitions is the expansion of the company’s capabili-
ties. Amazon could have merged with an electronics company such as Sony or acquired
the smaller French pioneer Bookeen in the e-book business. In choosing this option, Ama-
zon would have acquired the capability instead of developing it. However, the organic
growth option made Amazon an expert in the e-book business.
Financial motives
In addition to strategic goals, mergers and acquisitions often have financial goals. Corpo-
rations may increase their financial efficiency by offsetting the profits of one entity with
losses from another. Thus, the entity that made a loss can pay its liabilities with the profits
of the other entity in the corporation. The corporation benefits from the growth in size by
acquiring the indebted entity and both sides benefit from the merger.
Further financial considerations for a merger or acquisition are possible tax advantages. A
company that operates in a country with high taxes may merge with or acquire a company
in a country with low taxes in order to pay their taxes in that country.
Hostile takeovers often aim at increasing the assets of the acquiring company. This is done
by breaking up the acquired entities into parts and selling these parts off. The individual
parts of the organization are often worth more than the entire company. As such, the
acquiring company makes a profit from the sale of these parts.
Personal/management motives
General management motives also influence the decision in favor of a merger or acquisi-
tion. The personal ambition of a CEO may play a role in M&A decisions. Managers are often
evaluated on short-term growth results and the target share price. To achieve the growth
104
goal fast, the company can merge with or acquire another company instead of trying to CEO
grow organically over a long period of time. Successful takeovers boost the reputation of This stands for Chief Exec-
utive Officer. The CEO is
the manager as the name appears in the media. At times, the pressure from the sharehold- the top manager of a cor-
ers might be strong if M&A are a trend in the industry and managers could succumb to the poration who defines and
pressure and participate in the trend. directs the overall strat-
egy.
What Criteria Play a Role in the Selection of a Company for M&A?
If companies want to grow through M&A, they should develop a strategy that defines
exactly what they are looking for. In order to integrate two organizations successfully, sim-
ilar corporate cultures are a prerequisite. Only through the cooperation of all parties
involved in the M&A can friction be avoided and common goals reached. Furthermore, an
analysis of the fundamental, strategic, and cultural fit between the organizations is
required.
Fundamental fit
The fundamental fit looks at the organizations’ willingness and readiness to merge. Basic
indicators such as size, history, and capabilities are checked for compatibility. If the com-
pany to be bought is generally opposed to the acquisition, the integration process of the
acquisition will most likely fail.
Strategic fit
The strategic fit describes the strategic goals of the organization to be acquired and its
management know-how in order to direct and implement these goals. Both organizations
need to know their core competencies and strengths as well as weaknesses. Furthermore,
the position in the market, the competitive environment, and related strategy play a
major role in evaluating the strategic fit. Before an M&A is decided, the company should
determine whether the strategies of the two organizations are compatible and could
strengthen their market position.
Cultural fit
The cultural fit includes questions regarding corporate cultures and their management.
The areas to analyze are communication style, openness, management style, the ability to
delegate and work in teams, and the mission, values, and vision of the organization. It is
very difficult to integrate companies with very different organizational cultures. Even the
integration of companies with similar cultures has to follow a detailed plan.
Integration Strategies
The integration process of two organizations depends on the strength of their strategic
interdependence and their need for organizational autonomy. Depending on how distinct
these two aspects are with respect to each of these organizations, the acquired organiza-
tion will either adapt fairly quickly to the new strategy, culture, and systems, or not at all.
There are four integration scenarios:
105
1. Maintenance
2. Symbiosis
3. Absorption
4. Holding
Maintenance
If merging companies have little strategic interdependence, maintenance (also called

preservation) is the strategy of choice. Often, these companies operate in different busi-
nesses and are not dependent on each other’s products or services. Moreover, the
acquired company has a high need for organizational autonomy, which means it is better
to preserve the strategies, corporate cultures, and systems of both organizations sepa-
rately. Integration occurs at a minimum level (e.g., common financial reporting), and both
companies continue to operate as separate entities.
Symbiosis
A strategy of symbiosis is recommended if the two companies show high strategic interde-
pendence and have a marked need for organizational autonomy. In this case, the two
companies are mutually dependent; certain processes and systems have to be integrated
in order to increase the efficiency of the M&A. The companies can learn and benefit from
each other’s strengths and build on the available capabilities. The symbiosis is a long and
difficult integration process.
Absorption
If merging companies are strategically very interdependent and have little need for organi-
zational autonomy, one company may completely absorb the other company. The integra-
tion process may happen fast and the company that is absorbed needs to be prepared to
adopt the strategy, culture, and processes of the new owner or company it merged with.
Holding
Holding describes a situation where the companies show little interdependence and need
for organizational autonomy. In this situation, integrating the company does not bring any
additional benefit or advantage. The company thus holds the new entity for a while and
sells it in due course. The acquired company does not undergo any changes. For example,
a manufacturing company buys a laser producer in order to optimize its own production
processes that require precision lasers. The acquired laser company happens to have a
medical laser division. This is of no extra value to the manufacturing company and will be
held before being sold, maybe to another medical company.
106
7.3 Strategic Alliances
A strategic alliance is formed when two companies share resources or activities to reach a
common goal. There are many types of strategic alliances. One example is a research and
development alliance where both companies benefit from sharing the costs for the
research and development of a product.
Types of Alliances
There are two types of strategic alliances in terms of the ownership structure: equity alli-
ances and non-equity alliances. An equity alliance describes the creation of a new entity,
which belongs to both alliance partners. For example, two pharmaceutical companies
invest together in a research institute. Non-equity alliances are partnerships that do not
involve a claim to a property, such as a research institute. Non-equity alliances are merely
contract bound. An example of a non-equity alliance is The Leading Hotels of the World
(LHW). LHW is an alliance of luxury hotels, resorts, and spas worldwide that offer member
hotels certain services, such as providing marketing measures for the group, consultation,
and a central reservation system. The expertise of LHW is quality analyses of the member
hotels, which guarantee hotel guests a specific quality standard.
Motives for Alliances
The motives for alliances are similar to those of M&A. However, an alliance requires a
much lower financial commitment from companies.
Alliances benefit from economies of scale. The LHW group provides centralized marketing,
consultation, reservation, and quality inspection to all the member hotels. This reduces,
for example, the costs of printing advertising material for each individual hotel as this is
provided by the LHW catalog of hotels or website.
Access alliances offer companies distribution channels in foreign countries. They can sell
their products or services through distribution partners and do not have to invest in a
direct sales force in these countries. The franchise system is a good example of an access
alliance of two partners. Companies like McDonald’s have expanded worldwide into all
regions through a franchise system. Investing in all the countries they are represented in
today would have been an impossible financial burden for the company.
Complementary alliances consist of individual companies that provide one component

each to the partnership. All components provided complement each other and form the
final product or service. These alliances exist in complex markets in which individual com-
panies are unable to provide all components or resources in order to be successful in the
market. Complementary alliances are successful if the increase in benefits through the
alliance outweighs the costs of coordinating the alliance partners. A complementary alli-
ance for example could be with medical imaging companies, i.e., ultrasound, X-ray, MRI
manufacturers, and a provider of digital hospital networks. All agree on a common inter-
face in order to facilitate the integration of all systems and make it possible to digitally
attach all images to the patients’ files.
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7.4 How to Decide Whether to Buy, Ally, or
Do-It-Yourself?
Deciding which strategic growth option is the best for the organization depends on various
factors. One factor is how fast a company wants to grow, which describes the urgency to
expand. Uncertainties in specific regional markets or technologies or market fluctuations
also influence which strategy to pursue. The types of capabilities to be acquired, i.e., soft
capabilities (such as employees or know-how) or hard capabilities (such as machines or
production facilities), play a major role in the strategic decision-making process. Finally,
Modularity the degree of modularity of the capabilities influences the decision.
This is the degree to
which something can be
separated into individual Urgency
parts.
If the growth strategy has a high degree of urgency, the organic growth option will take too
long. Therefore, an alliance or M&A would be the better, faster option. The Chinese auto
manufacturer Geely could have invested a lot of time and money to establish itself as a
reliable car manufacturer in the European market. It would have been very difficult to
build an image of high quality as a Chinese company. The decision to acquire Volvo
allowed Geely to be present in the European market immediately and start gathering mar-
ket information.
Uncertainty
If you try to enter uncertain or fluctuating markets, alliances represent the best option.
When forming an alliance, the partners usually share the risk. No company is solely
responsible for the success or failure of the business. If the alliance proves to be successful
over time, the company has the option of acquiring the alliance partner. In an environ-
ment of high uncertainty, companies should refrain from expanding independently and
making direct foreign investments as the investment costs are then fully borne by the
company and lost if the development fails. The example of Helmerich & Payne clearly illus-
trates how a do-it-yourself (DIY) strategy fails in uncertain markets. Helmerich & Payne lost
all its investments to the government of Venezuela. It would have been advisable to look
for a possible alliance partner in Venezuela, thereby sharing the risk of the investment
with a second company.
Type of Capabilities
If a company needs hard capabilities (such as machines or a production facility) in order to

grow, it would be advisable to acquire these through M&A. On the other hand, if the com-
pany needs soft capabilities (such as know-how) it would be best to take a DIY approach
and hire employees with expertise. If the company tries to form an alliance with or acquire
an organization that has the soft capabilities, it might encounter integration problems as
corporate cultures differ.
108
The following example illustrates the types of capabilities that led to a strategic alliance
between two quite different companies. After many years of partnership between the
Swiss pharmaceutical company Roche and the California-based Genentech, Roche deci-
ded to acquire the company in 2009. The Genentech employees have a very different cor-
porate culture from the conservative Swiss employees at Roche and enjoyed a great deal
of freedom, such as the opportunity to spend time on their personal research projects one
day a week. They describe themselves as cowboys. However, over the years of the partner-
ship, Roche has learned to accept the differences of corporate cultures. As Steven Burrill,
chief executive officer of a San Francisco life sciences venture firm, observed in the San
Francisco Chronicle: “The assets of Genentech walk out in tennis shoes every night, and
you hope they walk back in, in the morning” (Tansey, 2009).
ROCHE AGREES TO BUY GENENTECH FOR $46.8 BILLION

Roche Holding’s agreement on Thursday to acquire full ownership of Genentech
for $46.8 billion is the third big drug industry merger this year. But it is different
from the other two – Pfizer’s $68 billion proposal to acquire Wyeth and Merck’s
$41 billion deal with Schering-Plough – in crucial ways.
Pfizer and Wyeth are strangers, and Merck and Schering have a joint venture on
cholesterol drugs but are otherwise not related. And in both those deals, execu-
tives describe potential costs savings as a big benefit.
But Roche has owned a majority of Genentech since 1990, and it says cost sav-
ings, expected to be $750 million to $850 million a year, are not the main goal of
the deal; the goal is to improve coordination on product development. That
could make it easier to integrate the two companies.
“It should be very easy because practically the entire portfolio is in common,”
said Viren Mehta, managing member of Mehta Partners, a consulting firm that
advises drug companies and investors. “These two companies have grown up
closer than any two independent companies could be expected to be.”
And yet the challenge for Roche, a big Swiss company, will be in integrating the
two companies without ruining Genentech’s freewheeling and innovative cul-
ture and sending its top managers and scientists out the door. The culture clash
between Roche and Genentech could be greater than that between Pfizer and
Wyeth or between Merck and Schering-Plough, all of which are traditional, big
drug companies.
Laurence Lasky, a Silicon Valley venture capitalist who spent 20 years as a scien-
tist at Genentech, said he expected top managers of Genentech to leave Roche.
“They’re Swiss and Genentech is a bunch of entrepreneurial California cow-
boys.”
Genentech, which was founded in 1976, said its executives would not comment.
109
After eight months of resistance, Genentech agreed Thursday to a deal in which
Roche will pay $95 a share for the 44 percent of Genentech that it does not own.
The deal would end the independent existence of what is widely considered the
world’s oldest and most successful biotechnology company.
Genentech shareholders must still tender their shares but they are expected to
do so because a committee of Genentech’s directors recommended the deal.
The new price is higher than the $89 Roche offered in July and a bit higher than
its offer last Friday of $93. While Genentech directors initially asked for $112,
they came to realize that price was unrealistic in the face of sharply falling world
stock markets, according to a regulatory filing by Genentech.
Franz B. Humer, Roche’s chairman, said in an interview that he would meet with
Arthur D. Levinson, Genentech’s chief executive, and Genentech’s top scientists.
One issue, he said, would be to come up with an alternative to the stock options
that have been a big financial incentive for Genentech employees.
Roche has said Genentech’s research and early clinical trial operations will
retain autonomy so the culture can be preserved. It has also said the combined
United States commercial business of both companies will be based at Genente-
ch’s headquarters in South San Francisco, Calif., rather than in Nutley, NJ, where
Roche’s American business is based. The drug portfolios of Roche will be sold
under the Genentech brand in the United States.
Pfizer and Merck have said their acquisitions will move them more into drugs
made by biotechnology, which have more protection from generic competition
than the chemical-based drugs companies now sell. Roche goes further, saying
its purchase of Genentech will make it the largest biotechnology company in the
world.
Pfizer and Merck will also get other diversification from their deals, picking up
vaccines in the case of Pfizer and consumer products in the cases of both Pfizer
and Merck. Some big drug companies have been hoping that consumer prod-
ucts, generic drugs, or medical devices might shield them from the storms buf-
feting their industry, with patent expirations, pricing pressures, and tougher reg-
ulatory hurdles.
Roche, by contrast, says it has no interest in generic drugs or consumer products

and wants to stick to its specialty.
“You go deep rather than broad,” Bill Burns, the head of Roche’s pharmaceutical
business, said in an interview last month. The one exception is that Roche has
become a leader in diagnostics, which increasingly will be used to tell which
patients should receive a drug.
Roche sells many of its own drugs and has others in development, such as ones
for rheumatoid arthritis and diabetes.
110
But Roche’s three best-selling drugs – the cancer medicines Avastin, Herceptin,
and Rituxan – come from Genentech. And many of the late-stage clinical trials
being conducted by Roche involve Genentech products. Roche’s main growth
could come from extended use of Avastin.
Roche now has first dibs on marketing rights outside the United States for drugs
developed by Genentech. That arrangement was set to expire in 2015, another
reason Roche wanted to own the whole company.
Source: Pollack (2009).
Modularity of Capabilities
In the event the capabilities that the company is seeking can be separated into smaller
parts, i.e., the capabilities are highly modular, alliances are the best option to pursue.
Joint ventures can, for example, be used to combine required capabilities with those exist-
ing in the company in order to create more value. The other parts of the companies are
managed as usual and operate in their established markets. An acquisition might lead to
problems as the entire operation will have to be acquired, which might lead to integration
problems. If capabilities are modular, it might be advantageous to do-it-yourself as the
company could build one separate department to develop the component. The advantage
of the modularity is that only part of the organization is affected by and involved in the
new development. Amazon did this when it developed the Kindle. The company still oper-
ated as an online store as usual, but it founded a separate department to develop the Kin-
dle.
The decision regarding which strategic growth option to pursue also depends on other fac-
tors, such as finding a suitable partner to work with, which is often difficult. In the case of
non-profit organizations or charities, a change of ownership is difficult to execute, which
limits their growth options to forming alliances and do-it-yourself.
SUMMARY
Companies have several growth options. The organic growth option, do-
it-yourself, offers the advantage that the company develops its own
competency in the field and can continue to pursue its strategy. How-
ever, organic growth takes time and requires an innovative and entre-
preneurial corporate culture.
Mergers and acquisitions are another growth option for companies. The
various motives for M&A are strategic motives (such as the development
of new markets), financial motives (such as reducing the tax burden), or
personal/management motives (such as short-term growth goals). When
choosing a company to acquire or to merge with, companies should
111
analyze the fundamental, strategic, and cultural fit. The fit often deter-
mines the success of the M&A. The integration of the two companies is
challenging and depends on their strategic interdependence and their
need for organizational autonomy.
Another option for companies to grow is through a strategic partnership

or alliance. Alliances can be equity alliances, which involve the invest-
ment of both partners in a new entity, or non-equity alliances, which are
contractual agreements. Alliances are formed for similar reasons as M&A
as companies try to benefit from economies of scale, access new mar-
kets, or complement their product offers.
Which growth option a company chooses depends on various factors.

The urgency of the expansion plays a major role as well as possible
uncertainties in the markets or technologies. Furthermore, the types of
capabilities a company is looking for, soft or hard, and the modularity of
these influence the strategic decision. Finally, the availability of a suita-
ble partner plays a role in the decision to grow.
112
UNIT 8
HOW TO EVALUATE STRATEGIES?
STUDY GOALS
– how to evaluate strategies.

– what suitability, acceptability, and feasibility mean in the context of evaluating a strat-
egy.
– what is important to consider when implementing strategies.
8. HOW TO EVALUATE STRATEGIES?
Introduction
SCHAEFFLER SELLS 10% CONTINENTAL STAKE FOR $2 BILLION

Schaeffler AG, a German industrial bearings maker, sold a 10.4 percent stake in
Continental AG (CON) for 1.6 billion euros ($2 billion) to reduce debt after a failed
takeover of the tire producer.
M.M. Warburg and Bankhaus Metzler disposed of the 20.8 million Continental
shares they were holding on Schaeffler’s behalf for 77.50 euros apiece, the Her-
zogenaurach-based company said today in a statement. That was 4.9 percent
less than Continental’s 81.49 euro closing price yesterday.
Family-owned Schaeffler gained control of Continental, Europe’s second-biggest

car-parts supplier, in 2008 at the height of the financial crisis. The takeover bid
backfired when more investors than Schaeffler expected accepted the offer as
markets collapsed, leaving it with more than 90 percent of the shares and more
than 10 billion euros in debt. Cash from the stake sale will cut debt at the
Schaeffler Holding parent company by 31 percent to 3.5 billion euros, it said
today.
“This share sale makes sense, because Schaeffler is still highly indebted,” Tim
Schuldt, an analyst with Frankfurt-based Equinet Bank AG, said today by phone.
“The dividend yield is less than their cash costs on the loans, which means that
they actually have to insert cash to service the debt.”
Stock Declines
Continental fell as much as 4.9 percent to 77.47 euros, the biggest intraday drop
since July 23, and was trading down 4.6 percent at 2:30 p.m. in Frankfurt. The
stock, which re-entered Germany’s benchmark DAX Index (DAX) yesterday, has
gained 62 percent this year, valuing the company at 15.6 billion euros.
Schaeffler’s bonds rose to a record and were the top three gainers in the Bank of
America Merrill Lynch high-yield index. The manufacturer’s 400 million euro 8.75
percent notes due 2019 gained 1.2 cents to 113.47 cents on the euro, pushing the
yield down to 6.3 percent, according to data compiled by Bloomberg.
The German bearing maker refinanced debt in February with about 8 billion
euros of loans, including a 1.4 billion euro loan sold to institutional investors,
and 2 billion euros of high-yield bonds, according to data compiled by Bloom-
berg. In June, the company added three banks to its loan facility, raising the
total to eleven. Schaeffler’s stock isn’t traded.
114
Banks’ Holdings
Schaeffler’s direct stake in Hanover, Germany-based Continental was limited to
just less than 50 percent under a four-year agreement between the two manu-
facturers in August 2008, intended to settle the takeover dispute. Banks held the
excess Continental stock that investors had sold to Schaeffler.
The share sale and the end of any contractual agreements between the two
banks and Schaeffler will reduce “complexity in the participation structure,”
Schaeffler Chief Financial Officer Klaus Rosenfeld said in today’s statement.
The amount of Continental’s freely traded stock increases to 50.1 percent from
39.7 percent. The Schaeffler family agreed to keep its current 49.9 percent hold-
ing in the auto-parts maker for the next six months, remaining its biggest share-
holder, the company said.
“Our participation in Continental is of long-term and strategic nature for the

Schaeffler family,” owners Maria-Elisabeth Schaeffler and Georg Schaeffler said
in the statement.
Cooperation Work
The companies are involved in more than 30 joint industrial projects at different
stages of development, including turbo chargers and an electronic parking
brake, said Hannes Boekhoff, a Continental spokesman. The manufacturers
have also teamed up in purchasing, which led to savings of 350 million euros to
400 million euros in the three years through 2011.
“Our successful cooperation in a variety of topics and projects continues as

before,” Boekhoff said by phone.
Continental, which is also Europe’s second-largest tire maker, raised its 2012 rev-
enue and profit forecasts in August after second-quarter earnings jumped
because of lower raw-material costs. The growth, and a 1.1 billion euro share
sale in 2010, helped Continental reduce debt to 6.88 billion euros in June from a
peak of 10.9 billion euros in 2007, following the acquisition of the VDO car-parts
business from Siemens AG.
Chief Executive Officer Elmar Degenhart said this month that he expects Conti-
nental to continue to grow faster than global car markets by four to five percent-
age points next year. Degenhart forecast an increase in worldwide light-vehicle
production of as much as three percent in 2013 as expansion in North America
and Asia offsets stagnation in Europe.
Schaeffler Forecast
Schaeffler reiterated its full-year forecast on Aug. 28 as demand outside Europe
helped sales rise. The company is targeting sales growth of more than five per-
cent to about 11.2 billion euros this year. Earnings before interest and taxes
should exceed 13 percent of sales
115
Source: Tschampa (2012).
8.1 How to Evaluate Strategy?

There will always be several strategic possibilities available for companies to consider.
However, management has to decide which strategy to pursue. Whether choosing a spe-
cific strategy was the right decision will only become evident later, after it has been imple-
mented. So how then can management limit the risk of implementing a strategy that
might fail?
There are various evaluation criteria that analyze the suitability, acceptability, and feasibil-
ity of the strategic options, which we will explore in this section.
Suitability
The suitability of a strategy evaluates whether it is a good fit for the strengths and weak-
nesses of the organization as well as the opportunities and threats of the market environ-
ment. The techniques described earlier in the course (the PESTEL analysis, Porter’s Five
Forces, SWOT analysis, an analysis of the strategic possibilities, the product life cycle,
benchmarking, and the definition of the competitive advantages) help in carrying out this
assessment. All this information makes it possible to rank the various strategic possibili-
ties and see which are best and worst suited for implementation.
Let us illustrate this with the example of Shell, which intends to pursue an expansion strat-
egy. If the oil price declines because the demand for oil goes down or there are substitute
products available in the market, it would not be advisable for Shell to expand through
large direct foreign investment.
The best strategies available to organizations are flexible and adaptable. If we take the
example of Shell, we would advise the company to choose a strategy that can be pursued
fairly independently of the oil price development. An expansion option that does not
require enormous investments would be an alliance with a contractual partner in order to
enter a foreign market. This leaves the option of acquiring the partner if the alliance
proves successful. Shell also has the flexibility to leave the alliance without great losses if
it is unsuccessful.
Acceptability
An acceptability evaluation looks at the expected performance results of the strategy. It

should meet the expectations of the stakeholders of the organization. It looks at the risk,
the return, and the reactions of shareholders.
116
The risk indicates whether and how accurately the strategy forecasts the expected results
of the strategy. Questioning and testing the assumptions of the strategic plan or analyzing
how the strategy influences the liquidity of the organization provides important informa-
tion on the risk level of the strategy.
Let us look at the example of Shell again. In order to decide how to expand, Shell should
analyze how far its liquidity will be reduced if it opts for a direct foreign investment. Then Liquidity
it should look at the impact of a sinking oil price on the organization’s results and at which This describes the finan-
cial means that are read-
price level the company would still be able to survive the crisis. ily available to an organi-
zation.
Return refers to the financial impact of the strategy on the shareholders. The ‘return on Shareholder
capital employed’ (ROCE) is a financial indicator that looks at how effectively and profita- The shareholder is the
owner of a share of an
bly the organization uses its invested capital. The question for Shell is how much it will organization.
gain in profits in the long term from using its liquid means for a direct foreign investment.
The company could then calculate the long-term profits of an alliance. This will show the
long-term financial situation of the organization and helps in weighing up the expansion
decision.
The financial situation of a company influences the share price and the dividends paid to Dividend
the shareholders. The shareholders have a strong interest in seeing their share of the com- This is the part of the
profit that is shared with
pany increase in value (i.e., the share price goes up). Managers are therefore responsible the shareholders as a
for justifying their strategic decisions to the shareholders as they are the direct beneficia- payment.
ries of potential profits.
Feasibility
A feasibility analysis looks at the capabilities and the resources of an organization to pur-
sue the strategy. The study of feasibility is preceded by a detailed SWOT analysis and a
product life cycle (PLC) analysis. The feasibility analysis looks at the financial means of an
organization but also at its human resources and capacity to realize a strategic decision.
The PLC looks at the product portfolio and asks how many products generate profits for
the organization in order to allow further investments.
Furthermore, the company needs to consider whether it has the right people to imple-
ment a strategy or whether it needs to hire further staff. Topics like training and develop-
ment of personnel as well as incentives and promotions need to be considered in order to
make a strategic decision. Some people might have to be sent to foreign countries for a
certain period of time – a budget will be required for this decision.
It is not easy to evaluate strategies. Often, conflicts can arise between managers and
shareholders as they have different goals for the organization. Management is responsible
for making decisions to the best of their knowledge that are in the best interests of the
entire organization as well as communicating such decisions to the shareholders and
stakeholders.
117
8.2 Implementing Strategy
In order to effectively implement the tasks of the strategic analysis and realize goals and
strategies, the structure and processes of the organization have to be considered and
redesigned. The formation of the internal structures and processes are part of the imple-
mentation plan. Four main areas need to be considered in this plan:
1. Organization
2. Human resource management
3. Controlling systems
4. Corporate culture
Organization
The structure and processes of the organization need to be aligned with the strategic
requirements. A central task in the implementation process is to appoint a team in charge
and define their status and range of authority. The team should take a central role as a
service provider of all planning and controlling tasks for the functions and divisions of the
organization. Cross-functional teams are recommended in order for the implementation
of the strategy to penetrate all departments of the organization.
Human Resource Management
A program needs to be developed that defines the necessary training, selection, and
development of new or current employees and reward systems in order to facilitate the
implementation. The effectiveness of the implementation depends on the employees in
the organization and their willingness to put the plan into action. Therefore, the employ-
ees need to be involved, evaluated, and rewarded in terms of the strategic implementa-
tion process.
Controlling Systems
Controlling It is also important to define the controlling methods which help the management to fol-
This is a financial man- low the implementation process through financial indicators as well as action plans. The
agement and steering
system for the manage- controlling system is a key part of the implementation process and needs to be defined
ment of an organization before the implementation process starts. For the internal controlling, this is a goal-orien-
in order to control the ted support system for the management to supervise the implementation process.
organization.
Corporate Culture
The infrastructure of the organization should be designed in such a way that the employ-
ees think, feel, and act according to the goals set by the organization. Therefore, manage-
ment has to clearly communicate what the company goals are and what values the organi-
zation stands for. Only by doing this will a supportive corporate culture be created that is
ready to put strategy into practice.
118
SUMMARY
In order to evaluate whether the strategies are suitable, the organization
has to look at various criteria. The suitability analysis provides informa-
tion as to whether the strategy fits with the strengths and weaknesses of
the organization and considers the opportunities and threats of the stra-
tegic decision. The best options for companies are flexible strategies
that can always be adjusted. The acceptability analysis looks at the
expected performance results of the strategy. It looks at the risk, the
long-term return, and the reaction of the shareholders with regards to
the strategy. The feasibility analysis deals with the capabilities and the
human resource potential of the organization. It provides information
on the financial means and the human resource potential of the organi-
zation with regards to the implementation of the strategy.
Once the strategic decision is made, the implementation phase starts.

The structure and processes of the organization have to be aligned with
the strategic goals. A team has to be nominated and the range of author-
ity of the team defined. The selection, development, and training of the
employees starts. At the same time, controlling methods have to be
defined to support the steering of the strategic implementation by the
management. It is important for management to communicate the val-
ues of the organization as well as the strategic goals in order to evaluate
the employees accordingly.
119
BACKMATTER
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LIST OF TABLES AND
FIGURES
Figure 1: Strategic Levels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Figure 2: The Macroenvironment of an Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Figure 3: Goal Hierarchies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Figure 4: Positioning Map (Case Study: Palace Hotel) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Table 1: Market Segments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Table 2: Case Study: SWOT Analysis of a University . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Figure 5: Product Life Cycle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
Figure 6: BCG Matrix (Case Study: Consumer Electronics Market] . . . . . . . . . . . . . . . . . . . . . 77
Figure 7: GE-McKinsey Matrix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
124
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STRATEGIC MANAGEMENT

© 2023 IU Internationale Hochschule GmbH

1.1 What is a Corporate Strategy? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

2.1 Where Are We in the Market Place? The Macroenvironment . . . . . . . . . . . . . . . . . . . . . . 22

3.1 Why Do We Exist? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

4.1 What Strategic Options Does the SBU Have? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

5.1 Areas to Consider When Formulating a Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66

6.1 Why Do Companies Go International? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88

7.1 Do-It-Yourself . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101

8.1 How to Evaluate Strategy? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116

Mintzberg, H. (2009). Rebuilding companies as communities. Harvard Business Review,

Likierman, A. (2009). The five traps of performance measurement. Harvard Business

Quinn, J. B. (1999). Strategic outsourcing: Leveraging knowledge capabilities. MIT Sloan

On completion of this unit, you will have learned …

– the various definitions of strategy.

Xion provides a similar component to Alfred’s US supplier. However, Xion is nei-

• Michael Porter: Strategy is defined in relation to competition. “Strategy is the creation

1.2 What Has To Be Taken Into

• long-term orientation of the organization

1.3 Who Takes Part in Developing a

Figure 1: Strategic Levels

Source: Created on behalf of IU (2015).

1.4 What is Included in a Solid Strategic

The strategic position of the company in the market place

In order to understand the strategic position in its entirety, it is important to analyze

• the strengths and weaknesses of your organization,

The strategic capabilities

In order to understand the availability of the strategic resources, it is important to analyze

In planning the implementation of the strategic plan, it is important to analyze

• what process is necessary to develop a strategy,

Three leading business strategists – Chandler, Porter, and Mintzberg –

Many different factors influence the strategic outlook of an organization.

All levels of an organization participate in the strategic planning process:

On completion of this unit, you will have learned …

– what factors in the macroenvironment influence the strategy.

2.1 Where Are We in the Market Place?

Figure 2: The Macroenvironment of an Organization

Source: Created on behalf of IU (2015).

PESTEL Analysis of an Airline

This involves an analysis and forecast of legal developments regionally, domestically, or

2.2 Where Are We in the Market Place?

The Five Forces Model

• The market’s attractiveness is defined by its structure.

The attractiveness of a business is identified by the following five forces:

1. Buyers/customers: analysis of their buying power

The competitive pressure in a business is high when

• there are numerous companies of similar size in the market,

New market entrants

Market entry barriers are high if there are

• the degree of customer loyalty,

• the market is dominated by few large suppliers,

2.3 Analysis, Strategic Capabilities, and

The following strategies are available to organizations:

Reducing the power of the suppliers

Reducing the power of buyers

Reducing the threat of new market entrants

Reducing the threat from substitutes

Reducing the pressure from existing competitors

• Companies should avoid price competition.

Michael Porter’s Five Forces model helps to analyze the strategy of an