Home Uncategorized mgmt 7.8

Uncategorized

mgmt 7.8

Ch 7 Strategies for Competing in International Markets and Ch 8 Corporate Strategy Diversification

Media Research – “Tell me something I don’t know” article that might affect the attractiveness of that market
Select an article from any media source that might affect business – using Ch Chapter 7 Strategies for competing in International Markets and Ch 8 Corporate Strategy concepts
Use 2 L.O.s from Ch 7 and 2 L.O.s from Ch 8 to analyze the company’s management (each L.O. should have 3 examples at 100 words per example).
Apply the concepts toward your final paper.

CHAPTER 7 WILL HELP YOU UNDERSTAND: with audio

1. The primary reasons companies choose to compete in international markets2. How and why differing market conditions across countries influence a company’s strategy choices in international markets3. The five major strategic options for entering foreign markets4. The three main strategic approaches for competing internationally5. How companies are able to use international operations to improve overall competitiveness6. The unique characteristics of competing in developing-country markets

CHAPTER 8 WILL HELP YOU UNDERSTAND:

1. When and how business diversification can enhance shareholder value2. How related diversification strategies can produce cross-business strategic fit capable of delivering competitive advantage3. The merits and risks of unrelated diversification strategies4. The analytic tools for evaluating a company’s diversification strategy5. What four main corporate strategy options a diversified company can employ for solidifying its strategy and improving company performance

CHAPTER 8 Corporate Strategy: Diversification and the Multibusiness Company

LEARNING OBJECTIVES
THIS CHAPTER WILL HELP YOU UNDERSTAND:
When and how business diversification can enhance shareholder value
How related diversification strategies can produce cross-business strategic fit capable of delivering competitive advantage
The merits and risks of unrelated diversification strategies
The analytic tools for evaluating a company’s diversification strategy
What four main corporate strategy options a diversified company can employ for solidifying its strategy and improving company performance

WHAT DOES CRAFTING A DIVERSIFICATION STRATEGY ENTAIL?
Step 1 Picking new industries to enter and deciding on the means of entry
Step 2 Pursuing opportunities to leverage cross-business value chain relationships and strategic fit into competitive advantage
Step 3 Establishing investment priorities and steering corporate resources into the most attractive business units

STRATEGIC DIVERSIFICATION OPTIONS
Sticking closely with the existing business lineup and pursuing opportunities presented by these businesses
Broadening the current scope of diversification by entering additional industries
Retrenching to a narrower scope of diversification by divesting poorly performing businesses
Broadly restructuring the entire firm by divesting some businesses and acquiring others to put a whole new face on the firm’s business lineup

WHEN TO CONSIDER DIVERSIFYING
A firm should consider diversifying when:
Growth opportunities are limited as its principal markets reach their maturity and buyer demand is either stagnating or set to decline.
Changing industry conditions—new technologies, inroads being made by substitute products, fast-shifting buyer preferences, or intensifying competition—are undermining the firm’s competitive position.

HOW MUCH DIVERSIFICATION?
Deciding how wide-ranging diversification should be
Diversify into closely related businesses or into totally unrelated businesses?
Diversify present revenue and earnings base to a small or major extent?
Move into one or two large new businesses or a greater number of small ones?
Acquire an existing company?
Start up a new business from scratch?
Form a joint venture with one or more companies to enter new businesses?

OPPORTUNITY FOR DIVERSIFYING
Strategic diversification possibilities
Expand into businesses whose technologies and products complement present business(es).
Employ current resources and capabilities as valuable competitive assets in other businesses.
Reduce overall internal costs by cross-business sharing or transfers of resources and capabilities.
Extend a strong brand name to the products of other acquired businesses to help drive up sales and profits of those businesses.

BUILDING SHAREHOLDER VALUE: THE ULTIMATE JUSTIFICATION FOR DIVERSIFYING
The industry attractiveness
test
The
cost-of-entry
test
The
better-off
test
Testing Whether Diversification
Will Add Long-Term Value
for Shareholders

In order to determine whether diversification will add long-term value for shareholders, the following three tests should be performed:
The industry attractiveness test
The cost-of-entry test
The better-off test

THREE TESTS FOR BUILDING SHAREHOLDER VALUE THROUGH DIVERSIFICATION
The attractiveness test
Are the industry’s profits and return on investment
as good or better than present business(es)?
The cost of entry test
Is the cost of overcoming entry barriers so great as to long delay or reduce the potential for profitability?
The better-off test
How much synergy (stronger overall performance) will be gained by diversifying into the industry?

Strategic Management Principle (1 of 9)
To add shareholder value, diversification into a new business must pass the three tests of corporate advantage
The industry attractiveness test
The cost of entry test
The better-off test

Core Concept (1 of 15)
Creating added value for shareholders via diversification requires building a multibusiness company in which the whole is greater than the sum of its parts; such 1 + 1= 3 effects are called synergy.

BETTER PERFORMANCE THROUGH SYNERGY
Evaluating the
Potential for Synergy through Diversification
Firm A purchases Firm B in another industry. A and B’s profits are no greater than what each firm could have earned on its own.
Firm A purchases Firm C in another industry. A and C’s profits are greater than what each firm could have earned on its own.
No Synergy
(1+1=2)
Synergy
(1+1=3)

In the first example, Firm A purchases Firm B in another industry. A and B’s profits are no greater than what each firm could have earned on its own. Thus, there is no synergy gained from this purchase.
In the second example, Firm A purchases Firm C in another industry. A and C’s profits are greater than what each firm could have earned on its own. Thus synergy is achieved through this purchase.

APPROACHES TO DIVERSIFYING THE BUSINESS LINEUP
Existing business acquisition
Internal new
venture (start-up)
Joint
venture
Diversifying into
New Businesses

Existing business acquisition
Internal new venture (start-up)
Joint venture

DIVERSIFICATION BY ACQUISITION OF AN EXISTING BUSINESS
Advantages:
Quick entry into an industry
Barriers to entry avoided
Access to complementary resources and capabilities
Disadvantages:
Cost of acquisition—whether to pay a premium for a successful firm or seek a bargain in a struggling firm
Underestimating costs for integrating acquired firm
Overestimating the acquisition’s potential to deliver added shareholder value

Core Concept (2 of 15)
An acquisition premium, or control premium, is the amount by which the price offered exceeds the preacquisition market value of the target company.

ENTERING A NEW LINE OF BUSINESS THROUGH INTERNAL DEVELOPMENT
Advantages of new venture development
Avoids pitfalls and uncertain costs of acquisition
Allows entry into a new or emerging industry where there are no available acquisition candidates
Disadvantages of intrapreneurship
Must overcome industry entry barriers
Requires extensive investments in developing production capacities and competitive capabilities
May fail due to internal organizational resistance to change and innovation

Core Concept (3 of 15)
Corporate venturing, or new venture development, is the process of developing new businesses as an outgrowth of a firm’s established business operations. It is also referred to as corporate entrepreneurship or intrapreneurship since it requires entrepreneurial-like qualities within a larger enterprise.

WHEN TO ENGAGE IN INTERNAL DEVELOPMENT
Availability of
in-house skills and resources
Ample time to develop and launch business
Cost of acquisition higher than internal entry
Added capacity
affects supply
and demand balance
Low resistance of incumbent firms
to market entry
Factors Favoring
Internal Development

Five factors favoring internal development are:
Low resistance of incumbent firms to market entry
Availability of in-house skills and resources
Ample time to develop and launch business
Cost of acquisition is higher than internal entry
Added capacity does affect supply and demand balance

WHEN TO ENGAGE IN A JOINT VENTURE
Evaluating
the Potential for a Joint Venture
Is the opportunity too complex, uneconomical, or risky for one firm to pursue alone?
Does the opportunity require a broader range of competencies and know-how than the firm now possesses?
Will the opportunity involve operations in a country that requires foreign firms to have a local minority or majority ownership partner?

Three questions to be asked when evaluating the potential for a joint venture are:
Is the opportunity too complex, uneconomical, or risky for one firm to pursue alone?
Does the opportunity require a broader range of competencies and know-how than the firm now possesses?
Will the opportunity involve operations in a country that requires foreign firms to have a local minority or majority ownership partner?

USING JOINT VENTURES TO ACHIEVE DIVERSIFICATION
Joint ventures are advantageous when diversification opportunities:
Are too large, complex, uneconomical, or risky for one firm to pursue alone
Require a broader range of competencies and know-how than a firm possesses or can develop quickly
Are located in a foreign country that requires local partner participation or ownership

DIVERSIFICATION BY JOINT VENTURE
Joint ventures have the potential for developing serious drawbacks due to:
Conflicting objectives and expectations of venture partners
Disagreements among or between venture partners over how best to operate the venture
Cultural clashes among and between the partners
Dissolution of the venture when one of the venture partners decides to go their own way

CHOOSING A MODE OF MARKET ENTRY
The Question of Critical Resources and Capabilities Does the firm have the resources and capabilities for internal development?
The Question of Entry Barriers Are there entry barriers to overcome?
The Question of Speed Is speed of the essence in the firm’s chances for successful entry?
The Question of Comparative Cost Which is the least costly mode of entry, given the firm’s objectives?

Core concept (4 of 15)
Transaction costs are the costs of completing a business agreement or deal of some sort, over and above the price of the deal. They can include the costs of searching for an attractive target, the costs of evaluating its worth, bargaining costs, and the costs of completing the transaction.

CHOOSING THE DIVERSIFICATION PATH: RELATED VERSUS UNRELATED BUSINESSES
Related
Businesses
Unrelated Businesses
Both Related
and Unrelated Businesses
Which Diversification
Path to Pursue?

Core Concepts (5 of 15)
Related businesses possess competitively valuable cross-business value chain and resource matchups.
Unrelated businesses have dissimilar value chains and resource requirements, with no competitively important cross-business relationships at the value chain level.

Core Concept (6 of 15)
Strategic fit exists whenever one or more activities constituting the value chains of different businesses are sufficiently similar in present opportunities for cross-business sharing or transferring of the resources and capabilities that enable these activities.

DIVERSIFICATION INTO RELATED BUSINESSES
Strategic fit opportunities
Transferring specialized expertise, technological know-how, or other resources and capabilities from one business’s value chain to another’s
Sharing costs by combining related value chain activities into a single operation
Exploiting common use of a well-known brand name
Sharing other resources (besides brands) that support corresponding value chain activities across businesses
Engaging in cross-business collaboration and knowledge sharing to create new competitively valuable resources and capabilities

PURSUING RELATED DIVERSIFICATION
Generalized resources and capabilities:
Can be deployed widely across a broad range of industry and business types
Can be leveraged in both unrelated and related diversification situations
Specialized resources and capabilities:
Have very specific applications which restrict their use to a narrow range of industry and business types
Can typically be leveraged only in related diversification situations

FIGURE 8.1 Related Businesses Provide Opportunities to Benefit from Competitively Valuable Strategic Fit

Two different businesses are shown sharing the same representative value chain activities (supply chain activities; technology; operations; sales and marketing; distribution; customer service)
and support activities.
These activities share or transfer valuable specialized resources and capabilities at one or more points along the value chains of both businesses.

IDENTIFYING CROSS-BUSINESS STRATEGIC FITS ALONG THE VALUE CHAIN

R&D and technology activities
Supply
chain
activities
Manufacturing-related
activities
Distribution-related
activities
Customer service
activities
Sales and marketing activities
Potential
Cross-Business Fits

Potential cross-business fits include:
supply chain activities;
manufacturing-related activities;
distribution-related activities;
customer service activities;
sales and marketing activities;
and R&D and technology activities.

STRATEGIC FIT, ECONOMIES OF SCOPE, AND COMPETITIVE ADVANTAGE
Transferring specialized and generalized skills or knowledge
Combining related value chain activities
to achieve
lower costs
Leveraging
brand names
and other differentiation resources
Using cross-business collaboration
and knowledge sharing
Using Economies of Scope to Convert
Strategic Fit into Competitive Advantage

Four economies of scope used to convert strategic fit into competitive advantage are:
Transferring specialized and generalized skills or knowledge
Combining related value chain activities to achieve lower costs
Leveraging brand names and other differentiation resources
Using cross-business collaboration and knowledge sharing

Core Concepts (7 of 15)
Economies of scope are cost reductions that flow from operating in multiple businesses (a larger scope of operation).
Economies of scale accrue from a larger-size operation.

ECONOMIES OF SCOPE DIFFER FROM ECONOMIES OF SCALE
Economies of scope
Are cost reductions that flow from cross-business resource sharing in the activities of the multiple businesses of a firm
Economies of scale
Accrue when unit costs are reduced due to the increased output of larger-size operations of a firm

FROM STRATEGIC FIT TO COMPETITIVE ADVANTAGE, ADDED PROFITABILITY AND
GAINS IN SHAREHOLDER VALUE
Builds more shareholder value than owning a stock portfolio
Only possible
via a strategy
of related diversification
Yields value in the application
of specialized resources and capabilities
Requires that management
take internal actions to
realize them
Capturing the Cross-Business Strategic-Fit
Benefits of Related Diversification

Related diversification creates the following cross-business strategic-fit benefits
It builds more shareholder value than owning a stock portfolio.
It is only possible via a strategy of related diversification.
It yields value in the application of specialized resources and capabilities.
It requires that management take internal actions to realize them.

Strategic Management Principle (3 of 9)
Diversifying into related businesses where
competitively valuable strategic-fit benefits can be captured
puts a firm’s businesses in position to perform better financially
as part of the firm than they could have performed as independent enterprises,
thus providing a clear avenue for boosting shareholder value and satisfying the better-off test.

THE EFFECTS OF CROSS-BUSINESS FIT
Fit builds more value than owning a stock portfolio of firms in different industries
Strategic-fit benefits are possible only via related diversification
The stronger the fit, the greater its effect on the firm’s competitive advantages
Fit fosters the spreading of competitively valuable resources and capabilities specialized to certain applications and that have value only in specific types of industries and businesses

The Kraft-Heinz Merger: Pursuing the Benefits of
Cross-Business Strategic Fit
Why did Kraft choose to seek a merger with Heinz rather than starting its own food products subsidiary?
What are the anticipated results of the merger?
To what extent is decentralization required when seeking cross-business strategic fit?
What should Kraft-Heinz do to ensure the continued success of its related diversification strategy?

DIVERSIFICATION INTO UNRELATED BUSINESSES
Evaluating the acquisition of a new business or the divestiture of an existing business
Can it meet corporate targets
for profitability and return on investment?
Is it in an industry with attractive profit and growth potentials?
Is it is big enough to contribute significantly to the parent firm’s bottom line?

The acquisition of a new business or the divestiture of an existing business can be evaluated by the following questions:
Can it meet corporate targets for profitability and return on investment?
Is it in an industry with attractive profit and growth potentials?
Is it big enough to contribute significantly to the parent firm’s bottom line?

BUILDING SHAREHOLDER VALUE VIA UNRELATED DIVERSIFICATION
Astute corporate
parenting by management
Cross-business allocation of financial
resources
Acquiring and restructuring undervalued companies
Using an Unrelated Diversification
Strategy to Pursue Value

Unrelated diversification strategy can be used to pursue value in the following ways:
Astute corporate parenting by management
Cross-business allocation of financial resources
Acquiring and restructuring undervalued firms

BUILDING SHAREHOLDER VALUE VIA UNRELATED DIVERSIFICATION
Astute corporate
parenting by management Provide leadership, oversight, expertise, and guidance
Provide generalized or parenting resources that lower operating costs and increase SBU efficiencies
Cross-business allocation of financial
resources Serve as an internal capital market
Allocate surplus cash flows from businesses to fund the capital requirements of other businesses
Acquiring and restructuring undervalued companies Acquire weakly performing firms at bargain prices
Use turnaround capabilities to restructure them to increase their performance and profitability

Core Concept (8 of 15)
Corporate parenting is the role that a diversified corporation plays in nurturing its component businesses through the provision of:
Top management expertise
Disciplined control
Financial resources
Other types of generalized resources and capabilities such as long-term planning systems, business development skills, management development processes, and incentive systems

Core Concept (9 of 15)
A diversified firm has a parenting advantage when
it is more able than other firms to boost the combined performance of its individual businesses through
high-level guidance,
general oversight,
and other corporate-level contributions.

Strategic Management Principle (4 of 9)
An umbrella brand is a corporate brand name that can be applied to a wide assortment of business types.
As such, it is a generalized resource that can be leveraged in unrelated diversification.

Core Concept (10 of 15)
Restructuring refers to overhauling and streamlining the activities of a business:
combining plants with excess capacity,
selling off underutilized assets,
reducing unnecessary expenses,
and otherwise improving the productivity and profitability of the firm.

THE PATH TO GREATER SHAREHOLDER VALUE THROUGH UNRELATED DIVERSIFICATION
Diversify into businesses that can produce consistently good earnings and returns on investment
Negotiate favorable acquisition prices
Provide managerial oversight and resource sharing, financial resource allocation and portfolio management,
and restructure underperforming businesses
The attractiveness test
The cost-of-entry test
Actions taken by upper management to create value and gain a
parenting advantage
The better-off test

The three tests to create value and gain a parenting advantage are:
The attractiveness test: diversify into businesses that can produce consistently good earnings and returns on investment
The cost-of-entry test: negotiate favorable acquisition prices
The better-off test: provide managerial oversight and resource sharing, financial resource allocation and portfolio management, and restructure underperforming businesses

THE DRAWBACKS OF UNRELATED DIVERSIFICATION
Limited Competitive Advantage Potential
Demanding Managerial Requirements
Monitoring and maintaining
the parenting
advantage
Potential lack of
cross-business
strategic-fit
benefits
Pursuing an Unrelated Diversification Strategy

The two main drawbacks are:
Demanding managerial requirements. This leads to a greater need for monitoring and maintaining the parenting advantage.
Limited competitive advantage potential. This leads to a potential lack of cross-business strategic-fit benefits.

MISGUIDED REASONS FOR PURSUING UNRELATED DIVERSIFICATION
Seeking a reduction of business investment risk
Pursuing rapid
or continuous growth for its own sake
Seeking stabilization to avoid cyclical swings in businesses
Pursuing personal managerial motives
Poor Rationales for
Unrelated Diversification

Poor rationales for unrelated diversification include:
Seeking a reduction of business investment risk
Pursuing rapid or continuous growth for its own sake
Seeking stabilization to avoid cyclical swings in businesses
Pursuing personal managerial motives

STRATEGIC MANAGEMENT PRINCIPLE (5 of 9)

Relying solely on leveraging general resources and the expertise of corporate executives to wisely manage a set of unrelated businesses is a much weaker foundation for enhancing shareholder value than is a strategy of related diversification.

Only profitable growth—the kind that comes from creating added value for shareholders—can justify a strategy of unrelated diversification.

COMBINATION RELATED-UNRELATED DIVERSIFICATION STRATEGIES
Dominant-business enterprises
Narrowly diversified
firms
Broadly
diversified
firms
Multi-business enterprises
Related-Unrelated Business
Portfolio Combinations

FIGURE 8.2 Three Strategy Options for Pursuing Diversification

STRUCTURES OF COMBINATION RELATED-UNRELATED DIVERSIFIED FIRMS
Dominant-business enterprises:
Have a major “core” firm that accounts for 50 to 80% of total revenues and a collection of small related or unrelated firms that accounts for the remainder
Narrowly diversified firms:
Are comprised of a few related or unrelated businesses
Broadly diversified firms:
Have a wide-ranging collection of related businesses, unrelated businesses, or a mixture of both
Multibusiness enterprises:
Have a business portfolio consisting of several unrelated groups of related businesses

EVALUATING THE STRATEGY OF A DIVERSIFIED COMPANY
Diversified Strategy
Attractiveness
of industries
Strength of business units
Cross-business strategic fit
Fit of firm’s resources
Allocation of resources
New strategic moves

Six factors to evaluate a diversified strategy are:
Attractiveness of industry
Strength of business units
Cross-business strategic fit
Fit of firm’s resources
Allocation of resources
New strategic moves

STEPS IN EVALUATING THE STRATEGY OF A DIVERSIFIED FIRM

Assess the attractiveness of the industries the firm has diversified into, both individually and as a group

Assess the competitive strength of the firm’s business units within their respective industries

Evaluate the extent of cross-business strategic fit along the value chains of the firm’s various business units

Check whether the firm’s resources fit the requirements of its present business lineup

Rank the performance prospects of the businesses from best to worst and determine resource allocation priorities

Craft strategic moves to improve corporate performance

STEP 1: EVALUATING INDUSTRY ATTRACTIVENESS
1. Does each industry represent a good market for the firm to be in?
2. Which industries are most attractive, and which are least attractive?
3. How appealing is the whole group of industries?
How attractive are
the industries in which
the firm has business operations?

The attractiveness of the industries in which a business has operations can be evaluated by the following three questions
Does each industry represent a good market for the firm to be in?
Which industries are most attractive, and which are least attractive?
How appealing is the whole group of industries?

CALCULATING INDUSTRY-ATTRACTIVENESS SCORES: KEY MEASURES
Market size and projected growth rate
The intensity of competition among market rivals
Emerging opportunities and threats
The presence of cross-industry strategic fit
Resource requirements
Social, political, regulatory, environmental factors
Industry profitability

CALCULATING INDUSTRY ATTRACTIVENESS FROM THE MULTI-BUSINESS PERSPECTIVE
The question of cross-industry strategic fit How well do the industry’s value chain and resource requirements match up with the value chain activities of other industries in which the firm has operations?
The question of resource requirements Do the resource requirements for an industry match those of the parent firm or are they otherwise within the company’s reach?

CALCULATING INDUSTRY ATTRACTIVENESS SCORES
Evaluating Industry Attractiveness
Deciding on appropriate weights for industry attractiveness measures
Gaining sufficient knowledge of the industry to assign accurate and objective ratings
Whether to use different weights for different business units whenever the importance of strength measures differs significantly from business to business

Industry attractiveness can be evaluated by the following actions:
Deciding on appropriate weights for the industry attractiveness measures
Gaining sufficient knowledge of the industry to assign accurate and objective ratings
Deciding whether to use different weights for different business units whenever the importance of strength measures differs significantly from business to business

TABLE 8.1 Calculating Weighted Industry-Attractiveness Scores
Remember: The more intensely competitive an industry is, the lower the attractiveness rating for that industry!

Remember: The more intensely competitive an industry is, the lower the attractiveness rating for that industry!

STEP 2: EVALUATING BUSINESS-UNIT COMPETITIVE STRENGTH
Relative market share
Costs relative to competitors’ costs
Ability to match or beat rivals on key product attributes
Brand image and reputation
Other competitively valuable resources and capabilities
Benefits from strategic fit with firm’s other businesses
Bargaining leverage with key suppliers or customers
Profitability relative to competitors

Strategic Management Principle (6 of 9)
Using relative market share to measure competitive strength is analytically superior to using straight-percentage market share.
Relative market share is the ratio of a business unit’s market share to the market share of its largest industry rival as measured in unit volumes, not dollars.

TABLE 8.2 Calculating Weighted Competitive-Strength Scores for a Diversified Company’s Business Units

FIGURE 8.3 A Nine-Cell Industry Attractiveness–Competitive Strength Matrix

The grid is defined by low, medium, or high industry attractiveness and the strong, average, or medium competitive strength/market position. Three businesses are depicted on the grid as circles, their sizes scaled to reflect the percentage of companywide revenues generated by the business unit.
Industry A’s business A, a medium-sized circle, is marked as a star for its high industry attractiveness and strong competitive strength/market position. Industry C’s business C is marked as a cash cow, as it has the largest presence on the grid, despite being of medium industry attractiveness and in the average competitive strength/market position. Industry B’s business B, the smallest-sized circle, falls lower than the other two, having a low-medium industry attractiveness, and a weak-average competitive strength/market position.
Also noted on the grid are three designations for resource allocation.
High priority for resource allocation:
Strong competitive strength/market position and medium industry attractiveness
Strong competitive strength/market position and high industry attractiveness
Average competitive strength/market position and high industry attractiveness
Medium priority for resource allocation:
Strong competitive strength/market position and low industry attractiveness
Average competitive strength/market position and medium industry attractiveness
Weak competitive strength/market position and high industry attractiveness
Low priority for resource allocation:
Average competitive strength/market position and low industry attractiveness
Weak competitive strength/market position and low industry attractiveness
Weak competitive strength/market position and medium industry attractiveness

STEP 3: DETERMINING THE COMPETITIVE VALUE OF STRATEGIC FIT IN DIVERSIFIED COMPANIES
Assessing the degree of strategic fit across its businesses is central to evaluating a company’s related diversification strategy.
The real test of a diversification strategy is what degree of competitive value can be generated from strategic fit.

STRATEGIC MANAGEMENT PRINCIPLE (7 of 9)
The greater the value of cross-business strategic fit in enhancing a firm’s performance in the marketplace or on the bottom line, the more competitively powerful is its strategy of related diversification.

FIGURE 8.4 Identifying the Competitive Advantage Potential of Cross-Business Strategic Fit

Jump to Appendix 23 long image description

The figure shows five separate businesses (A, B, C, D, and E) and their value chain activities (purchases from suppliers; technology; operations; sales and marketing; distribution; service). The figure then identifies potential cross-business strategic fits and denotes what opportunities can result
1. Businesses A and D share the purchases from suppliers value chain activity. Their cross-business strategic fit creates an opportunity to combine purchasing activities and gain more leverage with suppliers and realize supply chain economics.
2. Businesses A and E share the technology value chain activity. This strategic fit creates an opportunity for the businesses to share technology, transfer technical skills, and combine R&D.
3. Businesses A, C, D, and E all share the operations value chain activity. Their strategic fit opens the door to collaboration between the businesses to create new competitive capabilities.
4. Businesses B, C, and D share three value chain activities: sales and marketing, distribution, and service. Here, the strategic fit of the three businesses creates the opportunity to combine sales and marketing activities, use common distribution channels, leverage use of a common brand name, and/or combine after-sale service activities.

Core Concepts (11 of 15)
A company pursuing related diversification exhibits resource fit when its businesses have matching specialized resource requirements along their value chains.
A company pursuing unrelated diversification has resource fit when the parent company has adequate corporate resources (parenting and general resources) to support its businesses’ needs and to add value.

STEP 4: CHECKING FOR RESOURCE FIT
Financial resource fit
State of the internal capital market
Using the portfolio approach:
Cash hogs need cash to develop.
Cash cows generate excess cash.
Star businesses are self-supporting.
Success sequence:
Cash hog  Star  Cash cow
Nonfinancial resource fit
Does the firm have (or can it develop) the specific resources and capabilities needed to be successful in each of its businesses?
Are the firm’s resources being stretched too thin by the resource requirements of one or more of its businesses?

Core Concept (12 of 15)
A strong internal capital market allows a diversified firm to add value by shifting capital from business units generating free cash flow to those needing additional capital to expand and realize their growth potential.
A portfolio approach to ensuring financial fit among a firm’s businesses is based on the fact that different businesses have different cash flow and investment characteristics.

Core Concepts (13 of 15)

A cash cow business generates cash flows over and above its internal requirements, thus providing a corporate parent with funds for investing in cash hog businesses, financing new acquisitions, or paying dividends.

A cash hog business generates cash flows that are too small to fully fund its operations and growth and requires cash infusions to provide additional working capital and finance new capital investment.

STEP 5: RANKING BUSINESS UNITS AND ASSIGNING A PRIORITY FOR RESOURCE ALLOCATION

Ranking factors

Sales growth

Profit growth

Contribution to company earnings

Return on capital invested in the business

Cash flow

Steer resources to business units with the brightest profit and growth prospects
and solid strategic and resource fit

The Chief Strategic and Financial Options for Allocating a Diversified Company’s Financial Resources
Strategic options
Invest in ways to strengthen or grow existing business
Make acquisitions to establish positions in new industries or to complement existing businesses
Fund long-range R&D ventures aimed at opening market opportunities in new or existing businesses
Financial options
Pay off existing long-term or short-term debt
Increase dividend payments to shareholders
Repurchase shares of the company’s common stock
Build cash reserves; invest in short-term securities

STEP 6: CRAFTING NEW STRATEGIC MOVES TO IMPROVE OVERALL CORPORATE PERFORMANCE
Stick with
the existing business
lineup
Broaden the diversification base with new acquisitions
Divest and retrench to
a narrower diversification base
Restructure through divestitures
and
acquisitions
Strategy Options for a Firm
That Is Already Diversified

A Firm’s Strategic Alternatives After It Diversifies
Undiversified firm
Maintain existing business lineup
Makes sense when the current business lineup offers attractive growth opportunities and can generate added economic value for shareholders
Broaden diversification base
Acquire more businesses and build positions in new related or unrelated industries
Add businesses that will complement and strengthen the market position and competitive capabilities of businesses in industries where the firm already has a stake
Diversified firm
Narrow diversification base
Get out of businesses that are competitively weak or in unattractive industries, or lack adequate strategic and resource fit
Focus resources on businesses in a few select industry arenas
Restructure the firm’s business lineup through a mix of divestitures and new acquisitions
Use debt capacity and cash from divesting businesses that are in unattractive industries, or that lack strategic or resource fit and are noncore businesses to make acquisitions in more promising industries

BROADENING A DIVERSIFIED FIRM’S BUSINESS BASE

Factors motivating the addition of businesses

The transfer of resources and capabilities to related or complementary businesses

Rapidly changing technology, legislation, or new product innovations in core businesses

Shoring up the market position and competitive capabilities of the firm’s present businesses

Extension of the scope of the firm’s operations into additional country markets

DIVESTING BUSINESSES AND RETRENCHING TO A NARROWER DIVERSIFICATION BASE

Factors motivating business divestitures

Long-term performance can be improved by concentrating on stronger positions in fewer core businesses and industries.

Business is in a once-attractive industry where market conditions have badly deteriorated

Business has either failed to perform as expected or is lacking in cultural, strategic, or resource fit.

Business has become more valuable if sold to another firm or as an independent spin-off firm.

Core Concept (14 of 15)

A spinoff is an independent company created when a corporate parent divests a business either

by selling shares to the public via an initial public offering or

by distributing shares in the new company to shareholders of the corporate parent.

STRATEGIC MANAGEMENT PRINCIPLE (8 of 9)
Diversified companies need to
divest low-performing businesses or
businesses that do not fit
in order to concentrate on expanding existing businesses and entering new ones where opportunities are more promising.

RESTRUCTURING A DIVERSIFIED COMPANY’S BUSINESS LINEUP
Factors leading to corporate restructuring

A serious mismatch between the firm’s resources and capabilities and the type of diversification that it has pursued

Too many businesses in slow-growth, declining, low-margin, or otherwise unattractive industries

Too many competitively weak businesses

Ongoing declines in the market shares of major business units that are falling prey to more market-savvy competitors

An excessive debt burden with interest costs that eat deeply into profitability

Ill-chosen acquisitions that haven’t lived up to expectations

Core Concept (15 of 15)
Companywide restructuring (corporate restructuring) involves
making major changes in a diversified company
by divesting some businesses or acquiring others,
so as to put a whole new face on the company’s business lineup.

STRATEGIC MANAGEMENT PRINCIPLE (9 of 9)
Diversified firms should divest
low-performing businesses
or businesses that do not fit
in order to concentrate on expanding existing businesses and entering new ones where opportunities are more promising.

CHAPTER 7 Strategies for Competing in International Markets

LEARNING OBJECTIVES
THIS CHAPTER WILL HELP YOU UNDERSTAND:
The primary reasons companies choose to compete in international markets
How and why differing market conditions across countries influence a company’s strategy choices in international markets
The five major strategic options for entering foreign markets
The three main strategic approaches for competing internationally
How companies are able to use international operations to improve overall competitiveness
The unique characteristics of competing in developing-country markets

Why companies decide to enter foreign markets
To further exploit core competencies
To gain access to lower-cost inputs of production
To gain access to new customers and meet current customer needs
To achieve lower costs through economies of scale, experience, and increased purchasing power
To gain access to resources and capabilities located in foreign markets
WHY COMPANIES DECIDE TO ENTER FOREIGN MARKETS

To gain access to new customers
To achieve lower costs through economies of scale, experience, and increased purchasing power
To further exploit core competencies
To gain access to resources and capabilities located in foreign markets
To spread business risk across a wider market base

WHY COMPETING ACROSS NATIONAL BORDERS MAKES STRATEGY-MAKING MORE COMPLEX
1. Different countries with different home-country advantages in different industries
2. Location-based value chain advantages
for certain countries
3. Differences in government policies, tax rates, and economic conditions
4. Currency exchange rate risks
5. Differences in buyer tastes and preferences for products and services

FIGURE 7.1 The Diamond of National Advantage

The four factors that influence each other and a company’s home-country advantage are:
Demand conditions: home-market size and growth rate; buyers’ tastes
First strategy, structure, and rivalry: different styles of management and organization; degree of local rivalry
Factor conditions: availability and relative prices of inputs (e.g. labor, materials)
Related and supporting industries: proximity of suppliers, end users, and complementary industries

THE DIAMOND FRAMEWORK
Answers important questions about competing on an international basis by:
Predicting where new foreign entrants are likely to come from and their strengths
Highlighting foreign market opportunities where rivals are weakest
Identifying the location-based advantages of conducting certain value chain activities of the firm in a particular country

REASONS FOR LOCATING VALUE CHAIN ACTIVITIES ADVANTAGEOUSLY
Lower wage rates
Higher worker productivity
Lower energy costs
Fewer environmental regulations
Lower tax rates
Lower inflation rates
Proximity to suppliers and technologically related industries
Proximity to customers
Lower distribution costs
Available or unique natural resources

THE IMPACT OF GOVERNMENT POLICIES AND ECONOMIC CONDITIONS IN HOST COUNTRIES
Positives
Tax incentives
Low tax rates
Low-cost loans
Site location and development
Worker training
Negatives
Environmental regulations
Subsidies and loans to domestic competitors
Import restrictions
Tariffs and quotas
Local-content requirements
Regulatory approvals
Profit repatriation limits
Minority ownership limits

Core Concepts (1 of 6)
Political risks stem from instability or weaknesses in national governments and hostility to foreign business.
Economic risks stem from the stability of a country’s monetary system, economic and regulatory policies, the lack of property rights protections.

THE RISKS OF ADVERSE EXCHANGE RATE SHIFTS
Effects of exchange rate shifts
Exporters experience a rising demand for their goods whenever their currency grows weaker relative to the importing country’s currency.
Exporters experience a falling demand for their goods whenever their currency grows stronger relative to the importing country’s currency.

STRATEGIC MANAGEMENT PRINCIPLE (1 of 6)
Fluctuating exchange rates pose significant economic risks to a firm’s competitiveness in foreign markets.

Exporters are disadvantaged when the currency of the country where goods are being manufactured grows stronger relative to the currency of the importing country.

STRATEGIC MANAGEMENT PRINCIPLE (2 of 6)
Domestic companies facing competitive pressure from lower-cost imports benefit when …
… their government’s currency grows weaker in relation to the currencies of the countries where the lower-cost imports are being made.

Thinking Strategically
What effects has the adoption of the euro had on the ability of European Union (EU) countries and firms to respond to changes in intra-national economic conditions given that they now share a common currency?
What should a EU firm do to respond to a adverse currency exchange rate shift in a non-EU country?
How will exiting the EU affect the United Kingdom’s ability to compete in world markets?

CROSS-COUNTRY DIFFERENCES IN DEMOGRAPHIC, CULTURAL, AND MARKET CONDITIONS
Whether to pursue a strategy of offering a mostly standardized product worldwide
Whether to customize offerings in each country market to match the tastes and the preferences of local buyers
Key Strategic
Considerations

Two key strategic considerations
To customize offerings in each country market to match the tastes and preferences of local buyers
To pursue a strategy of offering a mostly standardized product worldwide

STRATEGIC OPTIONS FOR ENTERING AND COMPETING IN INTERNATIONAL MARKETS
Maintain a home country production base and export goods to foreign markets.
License foreign firms to produce and distribute the firm’s products abroad.
Employ a franchising strategy in foreign markets.
Establish a subsidiary in a foreign market via acquisition or internal development.
Rely on strategic alliances or joint ventures with foreign companies.

EXPORT STRATEGIES
Advantages
Low capital requirements
Economies of scale in utilizing existing production capacity
No distribution risk
No direct investment risk
Disadvantages
Maintaining relative cost advantage of home-based production
Transportation and shipping costs
Exchange rates risks
Tariffs and import duties
Loss of channel control

LICENSING AND FRANCHISING STRATEGIES
Advantages
Low resource requirements
Income from royalties and franchising fees
Rapid expansion into many markets
Disadvantages
Maintaining control of proprietary know-how
Loss of operational and quality control
Adapting to local market tastes and expectations

FOREIGN SUBSIDIARY STRATEGIES
Advantages
High level of control
Quick large-scale market entry
Avoids entry barriers
Access to acquired firm’s skills
Disadvantages
Costs of acquisition
Complexity of acquisition process
Integration of the firms’ structures, cultures, operations, and personnel

Core Concept (2 of 6)
A greenfield venture is a subsidiary business that is established by setting up the entire operation from the ground up.

USING A GREENFIELD STATEGY FOR DEVELOPING A FOREIGN SUBSIDIARY
A greenfield strategy is appealing when:
Creating an internal startup is cheaper than making
an acquisition
Adding new production capacity will not adversely impact the supply-demand balance in the local market
A startup subsidiary has the ability to gain good distribution access
A startup subsidiary will have the size, cost structure, and resource strengths to compete head-to-head against local rivals

PURSUING A GREENFIELD STRATEGY
Advantages
High level of control over venture
“Learning by doing”
in the local market
Direct transfer of the firm’s technology, skills, business practices, and culture
Disadvantages
Capital costs of initial development
Risks of loss due to political instability or lack of legal protection of ownership
Slowest form of entry due to extended time required to construct facility

BENEFITS OF ALLIANCE AND JOINT VENTURE STRATEGIES
Gaining partner’s knowledge of local market conditions
Achieving economies of scale through joint operations
Gaining technical expertise and local market knowledge
Sharing distribution facilities and dealer networks, and mutually strengthening each partner’s access to buyers
Directing competitive energies more toward mutual rivals and less toward one another
Establishing working relationships with key officials in the host-country government

Strategic Management Principle (3 of 6)
Collaborative strategies involving alliances or joint ventures with foreign partners …
…are a popular way for companies to edge their way into the markets of foreign countries.

Strategic Management Principle (4 of 6)
Cross-border alliances enable a growth-minded firm to:
widen its geographic coverage and strengthen its competitiveness in foreign markets;
at the same time, they offer flexibility
and allow a firm to retain some degree of autonomy and operating control.

THE RISKS OF STRATEGIC ALLIANCES WITH FOREIGN PARTNERS
Outdated knowledge and expertise of local partners
Cultural and language barriers
Costs of establishing the working arrangement
Conflicting objectives and strategies or deep differences of opinion about joint control
Differences in corporate values and ethical standards
Loss of legal protection of proprietary technology or competitive advantage
Overdependence on foreign partners for essential expertise and competitive capabilities

INTERNATIONAL STRATEGY: THE THREE MAIN APPROACHES
Multidomestic Strategy
Global
Strategy
Transnational
Strategy
Competing
Internationally

Core Concepts (3 of 6)
An international strategy is a strategy for competing in two or more countries simultaneously.

A multidomestic strategy is one in which a firm
varies its product offering and competitive approach from country to country in an effort to be responsive to differing buyer preferences and market conditions.
It is a think-local, act-local type of international strategy, facilitated by decision making decentralized to the local level.

Core Concepts (4 of 6)
A transnational strategy is
a think-global,
act-local approach that incorporates elements of both multidomestic and global strategies.
A global strategy is one in which a firm employs the same basic competitive approach in all countries where it operates,
sells much the same products everywhere,
strives to build global brands,
and coordinates its actions worldwide with strong headquarters control. It represents a think-global, act-global approach.

FIGURE 7.2 Three Approaches for Competing Internationally

A grid is shown. The vertical axis, Benefits from Global Integration and Standardization, is labeled “high” at the top and “low” at the bottom. The horizontal axis, Need for Local Responsiveness, is labeled “low” on the left side and “high” on the right. Three strategies are charted on the graph:
Global strategy: think global, act global. High benefits; low need for local responsiveness.
Transnational strategy: think global – act local. Mid-high benefits; mid-high need for local responsiveness.
Multidomestic strategy: think local – act local. Low benefits; high need for local responsiveness.

INTERNATIONAL OPERATIONS AND THE QUEST FOR COMPETITIVE ADVANTAGE
Use international location to lower
cost or differentiate
product
Share resources
and capabilities
Gain cross-border coordination
benefits
Build Competitive Advantage
in International Markets

Three ways to build competitive advantage in international markets are:
Use international location to lower cost or differentiate product
Share resources and capabilities
Gain cross-border coordination benefits

TABLE 7.1 Advantages and Disadvantages of a Multidomestic Strategy
Multidomestic (think local, act local)
Advantages Disadvantages
Can meet the specific needs of each market more precisely Hinders resource and capability sharing or cross-market transfers
Can respond more swiftly to localized changes in demand Has higher production and distribution costs
Can target reactions to the moves of local rivals Is not conductive to a worldwide competitive advantage
Can respond more quickly to local opportunities and threats

TABLE 7.1 Advantages and Disadvantages of a
Global Strategy
Global (think global, act global)
Advantages Disadvantages
Has lower costs due to scale and scope economies Cannot address local needs precisely
Can lead to greater efficiencies due to the ability to transfer best practices across markets Is less responsive to changes in local market conditions
Increases innovation from knowledge sharing and capability transfer Involves higher transportation costs and tariffs
Offers the benefit of a global brand and reputation Has higher coordination and integration costs

TABLE 7.1 Advantages and Disadvantages of Transnational Strategy
Transnational (think global, act local)
Advantages Disadvantages
Offers the benefits of both local responsiveness and global integration Is more complex and harder to implement
Enables the transfer and sharing of resources and capabilities across borders Entails conflicting goals, which may be difficult to reconcile and require trade-offs
Provides the benefits of flexible coordination Involves more costly and time-consuming implementation

USING LOCATION TO BUILD COMPETITIVE ADVANTAGE
To pursue a strategy of offering
a mostly standardized product worldwide
To customize offerings in each country market to match tastes
and preferences of local buyers
Key Location
Issues

Two key location issues are:
To customize offerings in each country market to match tastes and preferences of local buyers
To pursue a strategy of offering a mostly standardized product worldwide

Strategic Management Principle (5 of 6)
Companies that compete internationally can….
… pursue competitive advantage in world markets by locating their value chain activities in whatever nations prove most advantageous.

WHEN TO CONCENTRATE ACTIVITIES IN A FEW LOCATIONS
The costs of manufacturing or other activities are significantly lower in some geographic locations than in others.
There are significant scale economies in production or distribution.
There are sizable learning and experience benefits associated with performing an activity in a single location.
Certain locations have superior resources, allow better coordination of related activities, or offer other valuable advantages.

WHEN TO DISPERSE ACTIVITIES ACROSS MANY LOCATIONS
Buyer-related activities can be conducted at a distance.
There are high transportation costs.
There are diseconomies of large size.
Trade barriers make a central location too expensive.
Dispersing activities reduces exchange rate risks.
Dispersion helps prevent supply interruptions.
Dispersion helps avoid adverse political developments.
Dispersion allows for location-based technology and production cost competitive advantages.

SHARING AND TRANSFERRING RESOURCES AND CAPABILITIES TO BUILD COMPETITIVE ADVANTAGE
Building a resource-based competitive advantage requires:
Using powerful brand names to extend a differentiation-based competitive advantage beyond the home market
Coordinating activities for sharing and transferring resources and production capabilities across different countries’ domains to develop market dominating depth in key competencies

Core Concepts (5 of 6)
Profit sanctuaries are country markets that provide a firm with substantial profits because of a strong or protected market position.
Cross-market subsidization—supporting competitive offensives in one market
with resources and profits diverted from operations in another market
—can be a powerful competitive weapon.

PROFIT SANCTUARY POTENTIAL OF DOMESTIC-ONLY AND INTERNATIONAL COMPETITORS

A domestic-only company only reaches out to the home market, and thus only has one profit sanctuary.
An international company, on the other hand, reaches out to the home market, as well as several other countries.
This means the company usually has a profit sanctuary in its home market but may also have other sanctuaries in other countries where it has a strong position and market share.

PROFIT SANCTUARY POTENTIAL OF GLOBAL COMPETITORS

A globally competitive company generally has a profit sanctuary in its home market
and frequently has several other profit sanctuaries in those countries where it is a market leader and enjoys a strong competitive position.

DUMPING AS A STRATEGY
Dumping
Selling goods in foreign markets at prices
that are either below normal home market prices or below the full costs per unit
Dumping is NOT a fair-trade practice.
Governments can be expected to retaliate against such practices by foreign competitors.
The World Trade Organization (WTO) actively polices dumping to discourage such practices.

Anti-dumping
If a company exports a product at a price lower than the price it normally charges on its own home market, it is said to be “dumping” the product. The WTO Agreement does not regulate the actions of companies engaged in “dumping”. Its focus is on how governments can or cannot react to dumping — it disciplines anti-dumping actions, and it is often called the “Anti-dumping Agreement”.
https://www.wto.org/english/tratop_e/adp_e/adp_e.htm

Technical Information on anti-dumping
https://www.wto.org/english/tratop_e/adp_e/adp_info_e.htm

USING PROFIT SANCTUARIES TO DEFEND AGAINST INTERNATIONAL RIVALS
International Firm A
International Firm B
Profit Sanctuary
Firm A moves against Firm B in Country B
Firm B counters with a response in Country C

Firm A moves against Firm B in Country B, where Firm B has a presence.
Firm B then counters by a response in Country C, where Firm A has a presence.

Core Concept (6 of 6)
When the same companies compete against one another in multiple geographic markets …
… the threat of cross-border counterattacks may be enough to deter aggressive competitive moves
… and encourage mutual restraint among international rivals.

STRATEGY OPTIONS FOR COMPETING IN THE MARKETS OF DEVELOPING COUNTRIES
Prepare to compete on the basis of low price.
Prepare to modify the firm’s business model or strategy to accommodate local circumstances.
Try to change the local market to better match the way the firm does business elsewhere.
Stay away from developing markets where it is impractical or uneconomical to modify the company’s business model to accommodate local circumstances.

DEFENDING AGAINST GLOBAL GIANTS: STRATEGIES FOR LOCAL COMPANIES IN DEVELOPING COUNTRIES
Develop a business model that exploits shortcomings in local distribution networks or infrastructure.
Utilize knowledge of local customer needs and preferences to create customized products or services.
Take advantage of aspects of the local workforce with which large multinational firms may be unfamiliar.
Use acquisition and rapid-growth strategies to defend against expansion-minded internationals.
Transfer company expertise to cross-border markets and initiate actions to contend on an international level.

Strategic Management Principle (6 of 6)
Profitability in developing markets rarely comes quickly or easily—
…new entrants must adapt their business models to local conditions and be patient in earning a profit.

Lazalde 10

Marissa Lazalde

Instructor – Anna Phillips

October 30, 2020

Management 3900 – Principles of Strategy

Learning Objectives for Chapters 7 and 8

Media Research Paper

Articles Used:

Chapter 7 – Strategies for Reaching Global Markets

Chapter 8 – To Diversify or Not To Diversify

Media Research Paper – The Walt Disney Company

In these two chapters, chapter seven – Strategies for Competing in International Markets and chapter eight – Corporate Strategy Diversification, work together to show you different aspects of strategies. In chapter seven we take a look at many different strategies used by huge, successful companies that compete in international markets. In chapter eight we take a look at why corporate strategy shouldn’t be linear, they need diversification to succeed in any market and help the company gain a competitive advantage.

Chapter 7 – Strategies for Competing in International Markets

Learning Objective #1 – The primary reasons companies choose to compete in international markets.

There are at the very least five main reasons why a company would chose to compete in the international market. The five main reasons are; to gain access to new customers and meet current customer needs, to further exploit core competencies, to gain access to resources and capabilities located in foreign markets, to gain access to lower-cost inputs of production, and to achieve lower costs through economies of scale, experience, and increased purchasing power. I’m going to focus on three that The Walt Disney Company utilizes.

1. To gain access to new customers and meet current customer needs

Once a company has started in their country and has become a success with a vast amount of income, their next move is to evaluate whether going international will work for their company or not. The one thing you have to remember about going international is that it is not for every business/company. Some business succeed very well in their origin of country for many reasons, such as, resources, culture, community, and the value of currency. Once a company has decided to go international, a company needs to look into different strategies, one that will benefit them and their company.

2. To gain access to resources and capabilities located in foreign markets

A company can only grow so big as long as it maintains access to resources in its place of origin. When a company goes international and moves into a foreign market they usually do so to gain more access to new consumers but also for more and new resources and capabilities. In 1953 The Walt Disney Company bought a 160 acres for $879,000, in today’s value it would be $8,568,768.54. In the 1960s for 27,400 for a little over 5 million, in today’s value it would be $53,615,730.34. But in 1982, The Walt Disney Company built Tokyo Disneyland. It was only 11 years after Walt Disney World’s Magic Kingdom, it was their first international theme park ever. In the 1980s they bought 200 acres and paid $1.4 billion for the land, in today’s value it would be $13,647,640,449.44. These statistics only go to show that while the land may not have been cheaper going international was a guaranteed risk that proved to be immensely profitable.

3. To further exploit core competencies

The core competencies are what define a company’s capability and or advantage that sets it apart from its competitors. A company’s core competencies can be further exploited by the company, which means a company utilizes and plays toward its advantages. The Walt Disney Company doesn’t only deal in the media and entertainment, it deals in quite a grand variety of other industries which gives the company its competitive edge against its competitors. One of The Walt Disney Company’s best move to exploit their core competencies was to take their company international, they became the first company from the United States to go international with their theme parks. They successfully currently have four international theme parks that operate successfully and maintain the company’s high standards in every way.

Learning Objective #4 – The three main strategic approaches for competing internationally

There are three main strategic approaches for competing internationally; Multi-Domestic Strategy, Global Strategy, and Transnational Strategy. All three of these are used by major corporations that do business internationally and are also successful on the international market.

1. Multi-Domestic Strategy

A multi-domestic strategy is used when a company offers a variety of its own products and or services. The company also aims for competitive edge from country to country as an effective way to be responsive and ever changing to fit the buyers’ preferences and the market’s conditions. This strategy is quite different from the others and quite interesting because it’s a think-local and act-local type of strategy but it’s still an international strategy. This strategy also clears the path for decision making that disperses to the local level. This strategy is definitely not utilized by The Walt Disney Company, all their actions tend to be thought out on an international level.

2. Global Strategy

A global strategy is used to build a global brand on an international level. A brand and or company using a global strategy aims to sell a standardized product and it also works to establish efforts across country boundaries. A company with a global strategy also strives to establish a strong and independent headquarters to maintain its global activities. Global strategies are an extremely appropriate choice for a company when is in need of a specific product and or service and can be found in different countries without many differences. “This strategy is most definitely utilized by The Walt Disney Company. It is an international company that needs to make its products and or services attractive and ones that have competitive edges no matter what country they are offered in (Ward).”

3. Transnational Strategy

A transactional strategy is a think-global based strategy, with an act-local approach. It incorporates multiple elements of both multi-domestic and global strategies. Companies with a transactional strategies try to balance aspirations for effectiveness with the ability to adjust local preferences within a vast variety of countries. “Even though this seems impossible, it is actually perfectly doable when taking the whole value chain into considerations. Transnational companies often try to create economies of scale more upstream in the value chain and be more flexible and locally adaptive in downstream activities such as marketing and sales (International Business Strategy EXPLAINED with EXAMPLES: B2U).” This strategy is also not utilized by The Walt Disney Company because being an international they cannot afford to take any approach from a local point of view.

CHAPTER 8 – Corporate Strategy Diversification

Learning Objective #1 – When and how business diversification can enhance shareholder value.

There are three tests of corporate advantage that a company can use to determine when and how a business diversification can enhance shareholder value; Industry Attractiveness Test, the Cost of Entry Test, and the Better-Off Test.

1. Industry Attractiveness Test

The Industry Attractiveness Test asks the question of the industry, “Are the industry’s profits and return on investment as good or better than present business(es) (Thompson)?” To use this test, the industry it’s used for needs to be entered through diversification but it must also be structurally attractive, by the mean of the Porter’s Five Force Model. The five forces of this model includes; competitive rivalry, supplier power, buyer power, threat of substitution, and threat of new entry. This test is not used often at The Walt Disney Company because they are already established in their many different industries. Although the most recent time would have to be when they decided to construct their own streaming service.

2. Cost of Entry Test

The Cost of Entry Test asks the question of the industry, “Is the cost of overcoming entry barriers so great as to long delay or reduce the potential for profitability (Thompson)?” The cost of entry on any new market for any new company can range and it also can cause a company to take huge risks. Sometimes companies need to take risks, the greater the risks, the greater the reward. It’s always hard to break into a new industry for any company but especially new companies. The cost of entry for The Walt Disney Company when it was first founded in 1923 was immense and they were not for certain how to handle it. To quote Walt Disney himself from an interview conducted by Tony Thomas in 1959, “My brother was here, and in effect, the government helped subsidize us. And I’ll explain that to you. My brother was a veteran of the First World War and he had been hospitalized and things and so he was receiving a certain disability compensation. It amounted to about $85 a month. And we lived on that while we established the studio (Korkis).”

3. Better-Off Test

The Better-Off Test asks the question of the industry, “How much synergy (stronger overall performance) will be gained by diversifying into the industry (Thompson)?” When a company plans to diversify into a new business, the new business must offer amass potential for the company’s existing business and or businesses. The new business and or businesses the company plans on taking on has to work copacetic together under a single corporate umbrella. A corporate umbrella is a large and most times a successful brand name that oversees smaller companies belonging to the same corporation. When a company is opened under a corporate umbrella it gives the new startup company credibility and structure even though the company is a startup. The Walt Disney Company is most definitely a corporate umbrella and you would be surprised at the long list of assets they own.

Learning Objective #5 – What four main corporate strategy options a diversified company can employ for solidifying its strategy and improving company performance? (slide 72)

The four main corporate strategy options that a diversified company can employ for solidifying its strategy and improve their performance are; stick closely with the existing business lineup, broaden the diversification base, divest some businesses and retrench to a narrower diversification base, and restructure the company’s business lineup through a mix of divestures and new acquisitions. I’m going to focus on three that highly apply to The Walt Disney Company.

1. Stick closely with the existing business lineup

One of the most sure-fire things a company can do to solidify its existing strategy and improve their performance is to stick closely with the existing business lineup. The strategy option is safe but not very diversified. To stay with this decision usually leads to an undiversified firm. On the other hand, this strategy options makes perfect sense for business when the lineup offers alluring growth opportunities. With already established growth opportunities it sets up to generate added value for current, new, and future shareholders. The Walt Disney Company tends to stick to what they know best but on rare occasions they will venture out into new things.

2. Restructure the company’s business lineup through a mix of divestures and new acquisitions

This strategy option seeks to in a way refresh a company’s business lineup. It is used usually in the case that the business’s current lineup isn’t providing attractive growth opportunities. This strategy opts to use diversification by mixing up their lineup and also by acquiring new acquisitions. The Walt Disney Company has recently diversified its company ever so slightly by starting their own streaming service Disney+, which went live November 12, 2019. Their streaming service has been doing extremely well for multiple reasons. One being that the streaming service has exclusive shows and movies made especially to be aired on the service. The second is that Disney has been pulling all of their television shows and movies from other streaming services and exclusively made them available for their own streaming service.

3. Broaden the diversification base

This strategy option is solely to broaden the diversification base, this is done by acquiring more businesses. In doing so, the company can build positions in new related and unrelated industries, this will add alluring growth opportunities. “This strategy option will add businesses that will complement and strengthen the market position and competitive capabilities of businesses in industries where the firm already has a stake (Thompson).” The Walt Disney Company has stepped out of its comfort zone and have bought many new businesses to broaden their diversification base. In the past three decades they have acquired major businesses such as; ABC and ESPN both in 1995, Muppets in 2004, Marvel in 2009, LucasFilm in 2012, and 21st Century Fox in 2019.

Conclusion 3 Key Findings

My first main finding was from the “Strategies for Reaching Global Markets” article which informed me about the many different business deals that The Walt Disney Company conducts internationally. My second finding was from the “Tony Thomas Interviews Walt Disney January 1959” article/transcript of an interview. The interview with Walt Disney was a refreshing take on researching the company and the man himself because the words came directly from him. It gave me a new insight on the way this huge, successful company started off so rough and small. My third finding was from the “To Diversify or Not To Diversify” article from which I learned that even if a business is successful, if they never diversify their company then their success will in most cases fizzle away. Diversification brings new attractive growth opportunities.

My Opinion

Both of these article gave me a great insight on the way The Walt Disney Company does business and what strategies they use on an international level. This company simultaneously thinks, acts, and does business on a national and internationally level and tend to succeed almost all the time. The Walt Disney Company is one of the most successful company that started in the United States and went international they achieved them great success as well.

Work Cited

Administrator. “International Business Strategy EXPLAINED with EXAMPLES: B2U.” Business, 22 Mar. 2020,

www.business-to-you.com/international-business-strategy/

Korkis, Jim. “Tony Thomas Interviews Walt Disney January 1959.” MousePlanet, 17 June 2015,

www.mouseplanet.com/11052/Tony_Thomas_Interviews_Walt_Disney_January_1959

Markides, Constantinos C. “To Diversify or Not To Diversify.” Harvard Business Review, 1 Aug. 2014, hbr.org/1997/11/to-diversify-or-not-to-diversify.

Thompson et al. “Crafting and Executing Strategy.” Mc Graw-Hill Publishing. Web. 28 Apr. 2020.

Ward, Christion. “Strategies for Reaching Global Markets – Walt Disney By Christion Ward.” Google Sites, sites.google.com/a/email.vccs.edu/walt-disney-by-christion-ward/home/strategies-for-reaching-global-markets.

Hernandez 1

Thomson Crafting and Executing Strategies

Osiris Hernandez

Professor Phillips

MGMT 3900

10/21/20

In the following paper, I will be discussing chapters 7 and 8 as well as incorporating information that relates to my company of choice. In chapter 7, “ Strategies for competing in international markets”, speaks about why and how companies choose to go international as well as the precautions and strategies they take in order to be successful in those markets. In chapter 8 “Corporate strategy: diversification and multi-business company”, speaks about the benefits and the downsides to making a company diversify and the steps to take to be able to diversify successfully.

Chapter 7 Strategies for competing in international markets

LO 4 The three main strategic approaches for competing internationally

In learning objective 4 it speaks about the different strategic approaches the companies take in order to successfully compete internationally. The three approaches consist of multi-domestic strategy, global strategy, and transnational strategy.

Example 1: Transnational approach. This approach is a “think global act local approach” it incorporates both elements of the other two strategic approaches. In this approach, the company will provide its services globally but will bring a home feeling in every new country that it decides to establish a location. Meaning it adapts to its environment. Mcdonalds uses this approach when establishing new locations. It provides different foods and services depending on its location. For example in India they offer a chicken maharaja burger complementing their culture, in France, they offer macaroons as a pastry, in china Chinese peoples preference is dark meat for their chicken so instead of using chicken breast in china McDonald’s uses thighs and legs to make its patties, and lastly, on Chinese new year they serve grilled chicken burgers with the Chinese zodiac for their customers showing that they respect every culture.

Example 2: Using location to build its competitive advantage companies customize its products to match the tastes and locations in each country it is established. Mcdonald’s has locations all around the world even in the most famous and luxurious cities McDonald’s manages to fit in. In its location in Milan Italy, its location is a 4 story building with the finest silverware all served with a fork and knife. In hong Kong, McDonald’s has launched what it calls its first prototype for what it plans to make its future McDonald’s restaurants. This location offers a gourmet outlet with a salad bar. It offers the widest selection of food that customers can choose from almost incorporating its menus from around the world.

Example 3: Building a resource-based competitive advantage requires you for example to use powerful brand names to extend a differentiation-based competitive advantage. One example of this would be Mcdonald’s collaboration with famous musical artists. Recently Mcdonalds has collaborated with singer/ rapper Travis Scott to make his go-to burger a meal for his fans and McDonald’s customers to try. Mcdonald’s chief marketing officer spoke about the reasons behind its collaboration saying that McDonald’s “the company’s goal is to reconnect with their multicultural and African-American consumers, and will be taking steps to do so.” This is a very powerful approach seeing as what is going on in the world right now with the BLM movement McDonald’s chose to empower this movement when creating this meal.

LO 3 The five major strategic options for entering foreign markets

In learning objective 3 it speaks about the different options you have in entering the competitive market globally. This includes maintaining production at home base, license foreign firms to create your products, employ franchising, establish subsidiary in a foreign market, and lastly rely on strategic alliances or joint ventures.

Example 1: licensing and franchising strategies. There are many advantages that come from using this approach. It requires low resource requirements, there is income from royalties and franchising fee’s without lifting a finger, and there is rapid expansion in the market. Mcdonalds is 93% franchised based and has the largest number of locations globally with over 38.5 thousand locations it ranks one of the most powerful companies in the world. They plan on making 95% of their locations franchised to increase revenue but for the most part, McDonald’s uses this strategy and they are very successful. The rapid expansion I due to this strategic approach.

Example 2: Export strategies. In this strategy, companies use resources from the country that their specific locations are at versus shipping their resources from their home country. Mcdonalds uses this approach while using its franchising strategy. Mcdonalds has removed some items from the menu’s across the world and incorporated items that are a part of those people’s lives and preferences. By incorporating those items McDonald’s starts using resources from those specific countries as well as franchising its restaurants allows owners from around the world to use resources from those specific countries of origin.

Example 3: Greenfield strategy for developing foreign subsidiary. The greenfield investment is starting a company from the ground up with no joint ventures or resources. Mcdonalds is known for taking this leap of faith as they call it. They are known to expand their business all across the world but their most recent project is in Ukrainian cities. They realized that Ukrainians have the biggest appetite when they established their first restaurant and it made huge sales within the first few weeks. They started establishing many restaurants over there and now the restaurants in that country are the ones that are making some of the top sales out of their entire 38,000 restaurants.

Chapter 8 Corporate Strategy: Diversification and the Multibusiness Company

LO 1 When and how business diversification can enhance shareholder value

Learning objective number 1 speaks about different ways that companies can diversify in order to be able to be more successful by receiving multiple streams of income.

Example 1: there are different ways to diversify as a company one of the ways is to diversify into something that is related to your company or really unrelated. Mcdonalds has owned many different companies completely unrelated to food like red box they owned red box until 2009. They currently own Krispy cream donuts which is one of the most famous donut bakeries in the US. They also currently own other sister companies called Ronald McDonald’s house and McD labs. Mc D labs is a company that specializes in technology for Mcdonald’s restaurants.

Example 2: Not all diversification is the best for your company so there is a justification for diversifying tests. The three tests consist of the attractiveness test which is are the industries profits as good as the present investment, the second one is the cost of entry test which is asking if it cost too much before you make any profits, and lastly, the better-off test which is evaluating how strong will this idea make the company. Mcdonalds had all of these trials and errors they began investing in companies in the mid-’90s but sold within 3 years of buying. They started Redbox but only kept it for a couple of years before they sold it as well. They realized that all the little companies it was investing in were not doing better than their mother company Mcdonalds. The only restaurant they have managed to keep was Krispy Kreme and that is because it has become one of the most famous donut shops in the US.

Example 3: Joint venture is when a company basically merges with another existing company and they both run both of the companies together. Mcdonalds did that before with Fazioli’s restaurants they had a joint venture that only lasted a couple of years when it was dissolved in 2003. Both of the companies had very different ideas on product plans and how the business should be run. In a way, the other company was bringing down Mcdonalds because when calculating its synergy through better performance, McDonald’s was the one that was bringing in all this knowledge to that company with little in return.

LO 5 what four main corporate strategy options a diversified company can employ for solidifying its strategy and improving company performance

In this learning objective, it talks about the four strategies for improving company diversification. These four strategies include stick with the existing business line up, broaden the diversification base, divest and retrench to narrower diversification and reconstruct through acquisitions.

Example 1: An example of divesting and retrenching your business diversification is Mcdonalds. When divesting you remove joint businesses that do not benefit you as much as your main business. Mcdonalds has been doing that in the past years. They have been going in and out of contracts buying and selling different restaurants but then they realize that these businesses don’t make them any more money than their main brand.

Example 2: sticking to narrower diversification is another way companies solidify their strategy to be successful in the business world. For example, McDonald’s used to have a large variety of restaurants that it co-owned making it harder for them to perfect their own restaurant as well as the restaurants it co-owned. It used to have businesses in technology, movies, and food. Now the only other restaurant that McDonald’s owns is Krispy Kreme, it has become one of the most famous restaurants in the united states and it is easier to manage because there is a limited menu and it is a food restaurant just like McDonald’s.

Example 3: Company reconstructing is also something that companies do, that is there completely change their entire company for example having a new face for their company as a logo or something completely different. Mcdonalds hasn’t done major changes like that in a while but when they were first starting off they didn’t have a mascot for their company so since they were targeting kids they decided to go for a clown mascot. The clown mascot brought McDonald’s more sales and became the new face of McDonald’s around that time.

In conclusion, both chapters 7 and 8 speak about diversification and how companies need to evaluate what strategies to take in order to become successful in a diverse environment.

Works Cited

“$1 $2 $3 Dollar Menu Items: McDonald’s.” $1 $2 $3 Dollar Menu Items | McDonald’s,

www.mcdonalds.com/us/en-us/full-menu/123dollarmenu.html

“McDonald’s Franchise Opportunities: McDonald’s.” McDonald’s Franchise Opportunities | McDonald’s, www.mcdonalds.com/us/en-us/about-us/franchising.html.

“McDonald’s U.S. Real Estate: McDonald’s.” McDonald’s U.S. Real Estate | McDonald’s, www.mcdonalds.com/us/en-us/about-us/franchising/real-estate.html.

“Ronald McDonald House Charities: McDonald’s.” Ronald McDonald House Charities | McDonald’s, www.mcdonalds.com/us/en-us/community/giving-back-with-ronald-mcdonald-house.html.

Turn in your highest-quality paper
Get a qualified writer to help you with

“ mgmt 7.8 ”

Get high-quality paper

NEW! AI matching with writer

Hire a Writer

Client Reviews

4.9

Sitejabber

4.6

Trustpilot

4.8

Our Guarantees

100% Confidentiality

Information about customers is confidential and never disclosed to third parties.

Original Writing

We complete all papers from scratch. You can get a plagiarism report.

Timely Delivery

No missed deadlines – 97% of assignments are completed in time.

Money Back

If you're confident that a writer didn't follow your order details, ask for a refund.

New to Your Trusted Assignment Help Service? Sign up & Save

Calculate the price of your order

Type of paper needed:

Pages:

You will get a personal manager and a discount.

Academic level:

We'll send you the first draft for approval by at

Total price:

$0.00

Power up Your Academic Success with the
Team of Professionals. We’ve Got Your Back.

Power up Your Study Success with Experts We’ve Got Your Back.

Order Now Order Now