Escolar Documentos
Profissional Documentos
Cultura Documentos
Reasons for Recent International Growth – from Carrier Pigeons to the Internet
In recent years growth in international trade was much faster, reasons are:
→ Expansion of technology
− communications and transportation technology sophisticated and enables people to
travel and communicate (e.g. planes, internet)
− costs for communication and transportation have risen more slowly than costs in
general, thus disadvantages of international trade like higher operating costs and less
control can be solved easier today
→ Liberalization of cross-border movements
− trade across borders is restricted: makes international business more expensive and
riskier as regulations can change
− restrictions have been lowered because travelling for citizens becomes easier,
domestic producers become more efficient through foreign competition, and other
countries are induced to follow
− companies can take advantage of international opportunities easier, but people have to
work harder under more competition (recent protests against globalisation could
influence government again)
Authors: J. Albrecht, S. Bauwens, A. Benken, V. Franke, S. Heinrichs, S. Huth, D. Nussbaum, K. Pietrek, B. Pörner
EFM Academy - P&R Competitive Strategy,8th + D&R&S International Business,10th
Investments
Ownership of foreign property in exchange for financial return:
→ Direct investment
− controlling interest in foreign company: foreign direct investment (FDI)
Authors: J. Albrecht, S. Bauwens, A. Benken, V. Franke, S. Heinrichs, S. Huth, D. Nussbaum, K. Pietrek, B. Pörner
EFM Academy - P&R Competitive Strategy,8th + D&R&S International Business,10th
− joint venture: two or more companies share ownership, mixed venture: government
joins company in FDI – partial ownership
− way to access resources or to reach market abroad
→ Portfolio investment
− non-controlling interest in a company or ownership of loan to another party
− two forms: stock in a company or loan to a company or country (bonds, bills, notes)
− usage: short-term financial gain (earn more money with relative safety) – important
for companies with extensive international operations
Patterns of Expansion
→ Passive to active expansion
− most think of domestic needs and operations only
− passive expansion after foreign requests to export, only then active expansion in
foreign markets
Authors: J. Albrecht, S. Bauwens, A. Benken, V. Franke, S. Heinrichs, S. Huth, D. Nussbaum, K. Pietrek, B. Pörner
EFM Academy - P&R Competitive Strategy,8th + D&R&S International Business,10th
Leapfrogging of Expansion
− many new companies are beginning with a global focus (managerial knowledge and
advancements in communication enable them)
− sensible to concentrate on emerging markets which seem to have greatest opportunities
Countervailing Forces
Ethical Dilemma
− relativism: adapt to local, foreign standards when entering international trade
− normativism: universal standards of behaviour based on values
− possibility to create competitive advantage by adhering to standards to create customer
loyalty or cost-focus by using relativism as ‘lowered’ standard
Authors: J. Albrecht, S. Bauwens, A. Benken, V. Franke, S. Heinrichs, S. Huth, D. Nussbaum, K. Pietrek, B. Pörner
EFM Academy - P&R Competitive Strategy,8th + D&R&S International Business,10th
Introduction
The major problems of cultural collision in international business are when:
• A company implements practices that work less well than intended
• A company’s employees encounter distress because of an inability to accept or adjust to
foreign behaviour
Cultural awareness
• Culture consists of specific learned norms based on attitudes, values, and beliefs, all of
which exist in every nation
• Businesspeople agree that cultural differences exist but disagree on what they are
• Culture cannot easily be isolated from such factors as economic and political conditions
• Problem areas that can hinder managers’ cultural awareness are: subconscious reactions
to circumstances, the assumption that all societal subgroups are similar
• Researching descriptions of specific culture can be instructive
• Making mistakes ( e.g. by addressing people) may be construed by foreign
businesspeople as ignorance or rudeness, which may jeopardize a business arrangement
• A company’s need for cultural knowledge increases as: its number of foreign functions
increases, the number of countries of operations increases
• It moves from external to internal handling of operations
• If the operations are contracted to a company abroad, then each company needs some
cultural awareness to anticipate and understand the other company’s reactions
Authors: J. Albrecht, S. Bauwens, A. Benken, V. Franke, S. Heinrichs, S. Huth, D. Nussbaum, K. Pietrek, B. Pörner
EFM Academy - P&R Competitive Strategy,8th + D&R&S International Business,10th
• Because countries see language as an integral part of their cultures, they sometimes
regulate their languages- for example, by requiring that all business transactions be
conducted and all “ made in…” labels printed in their languages
Religion s a cultural stabilizer
• Not all nations that practice the same religion have the same constraints on business
Motivation
• Interest in motivation because higher productivity reduces production costs
Materialism and leisure
• In the most economically developed countries, most people work to satisfy materialistic
needs
Authors: J. Albrecht, S. Bauwens, A. Benken, V. Franke, S. Heinrichs, S. Huth, D. Nussbaum, K. Pietrek, B. Pörner
EFM Academy - P&R Competitive Strategy,8th + D&R&S International Business,10th
• Good international managers know that the motives for working vary in different
countries
• Employees’ work attitudes may change as they achieve economic gains
• Max Weber: predominantly protestant countries were the most economically developed
Æ people preferred to transform productivity into material gains rather than into leisure
time
• Some societies take less leisure time than others
• Today: most people consider personal economic achievement to be commendable
regardless of whether they live in wealthy or poor countries
Expectation of success and reward
• People are more eager to work if: rewards for success are high, there is some uncertainty
of success
• In areas such as Cuba, where public policies distribute output from productive to
unproductive workers, enthusiasm for work is low
Assertiveness
• The average interest in career success varies substantially among countries e.g.
masculinity
Need hierarchy
• Hierarchy of needs is motivation theory
• People try to fulfil lower- order needs sufficiently before moving on to higher ones
• Basic needs are physiological
• Highest order need is that for self-actualisationÆ becoming all that is is possible for one
to become
• Ranking of needs differs among countries
Relationship preferences
Power distance
Æ describes the relationship between superiors and subordinates
• Where power distance is high, people prefer little consultation between superiors and
subordinatorsÆ usually wanting and having an autocratic or paternalistic management
style in their organizations
Individualism versus collectivism
• Safe work environment motivate collectivists. Challenges motivate individuals
• Attributes of individualism: low dependence, desire for personal time, freedom, challenge
• The degree of individualism an collectivism also influences how employees interact with
their colleagues
• people may vary their individualism depending on circumstances
• Where collectivism is high, companies find their best marketing success when
emphasizing advertising themes that express group values
Future orientation
• Where future orientation is higher, companies may be able to better motivate workers
through delayed compensation, such as retirement programs
Fatalism
• Belief in fatalism, that every event is inevitable, may prevent people from accepting this
basis cause-and effect relationship
• Effect on business in countries with a high degree of fatalism: people plan less for
contingencies
Authors: J. Albrecht, S. Bauwens, A. Benken, V. Franke, S. Heinrichs, S. Huth, D. Nussbaum, K. Pietrek, B. Pörner
EFM Academy - P&R Competitive Strategy,8th + D&R&S International Business,10th
Culture shock
• Some people get frustrated when entering a different culture
• People working in a very different culture may pas through stages
Authors: J. Albrecht, S. Bauwens, A. Benken, V. Franke, S. Heinrichs, S. Huth, D. Nussbaum, K. Pietrek, B. Pörner
EFM Academy - P&R Competitive Strategy,8th + D&R&S International Business,10th
Introduction
Location-specific advantages:
→ Factor conditions (production factors): inputs to the production process
− Human (education, skills)
− Physical (existence of waterways, availability of minerals and agricultural products)
− Knowledge (research and development)
− Capital resources and infrastructure (availability of debt and equity capital)
⇒ Crucial for investments concerning production of goods
→ Demand conditions (market potential):
− Composition of home demand (quality of demand – nature of buyer needs)
− Size and growth of demand (quantity of demand)
− Internationalization of demand
⇒ Crucial for market-seeking investments
→ Gross national income (GNI): market value of final goods and services newly produced
by domestically owned factors of production (per capita GNI = GNI / total population)
→ Gross domestic product (GDP): value of production that takes place within a country
→ The World Bank: a multilateral lending institution that provides investment capital to
(poor) countries (focuses on social aspects, environment, strengthens governments, etc.)
− Build infrastructure, promote economic growth and stability, improving quality and
quantity of demand
→ Per capita income classifications: low income ($755 or less), middle income ($756-
$9265), high income ($9266 or more)
→ Developing countries: low- and middle-income countries (emerging economies)
→ High-income countries: also known as developed or industrial countries
→ High-income countries generate 80 percent of the world’s GNI, developing countries
make up about 80 percent of total population / number of countries
→ Purchasing power parity (PPP) per capita GNI
− Measure of wealth
− Number of units of a country’s currency required to buy the same amount of goods
and services in the domestic market as $1 would buy in the United States
Authors: J. Albrecht, S. Bauwens, A. Benken, V. Franke, S. Heinrichs, S. Huth, D. Nussbaum, K. Pietrek, B. Pörner
EFM Academy - P&R Competitive Strategy,8th + D&R&S International Business,10th
→ Mixture between
− Ownership: who owns the resources engaged in economic activity (can be public
sector, private sector, or both)
− Control: whether resources are allocated and controlled by the public or the private
sector
→ Factors that determine economic freedom
− Trade policy − Banking and finance
− Fiscal burden of government − Wages and prices
− Government intervention in the economy − Property rights
− Monetary policy − Regulation
− Capital flows and investment − Black market activity
→ Countries with the freest economies have the highest annual growth in GNI
Types of economy based on ownership and control:
→ Market economy: resources are allocated and controlled by consumers (consumer
sovereignty and freedom for companies, law of supply and demand)
→ Command economy (centrally planned economy): all dimensions of economic activity
(pricing and production decisions) are determined by a central government plan
(government allocates resources)
→ Mixed economy: different degrees of ownership and control best describe most countries
− State capitalism: a condition in which some developed countries, such as Japan and
Korea, have intervened in the economy to direct allocation and control of resources
− Market socialism: the state owns significant resources, but allocation comes from the
market price mechanism (e.g. France, Sweden)
→ Managers should understand direction and speed of change in countries like China with
transition to market conditions – degree of government interference
→ The global economy can affect company profits and operating strategy
Economic Growth
→ General economic slowdown forces companies to gain market share instead of relying on
growth of overall market, new investors hesitate to put money into emerging markets
→ High growth rates in GNI and GNI per capita make foreign markets more attractive
→ Strong economic growth in Asia from 1990 to 1997 did not help forecast troubles that
occurred in 1997 and beyond – predictions are difficult
Authors: J. Albrecht, S. Bauwens, A. Benken, V. Franke, S. Heinrichs, S. Huth, D. Nussbaum, K. Pietrek, B. Pörner
EFM Academy - P&R Competitive Strategy,8th + D&R&S International Business,10th
Inflation
→ Inflation: a condition in which prices are going up (percentage increase in price) – occurs
when aggregate demand is greater than aggregate supply or when money supply increases
→ Consumer price index (CPI): an index that measures a fixed basket of goods and
compares its price from one period to the next
→ High inflation results in higher interest rates for two reasons:
− Banks need to offer high interest rates to attract money
− Governments (Fed or ECB) raise interest rates to slow down economic growth
→ High inflation results in weaker currencies because increasingly expensive exports
eventually drop and relatively cheaper imports rise
→ The latter part of the 1990s and into 2002 resulted in lower inflation worldwide, with the
exception of a few countries – managers have to take this into account
→ Most command economies are going through the process of transition to market
economies; transition economies are in Asia, Europe, or Latin America
→ Transition implies (p. 126, Figure 4.3):
− Liberalizing economic activity, prices, and market operations, along with reallocating
resources to their most efficient use
− Developing indirect, market-oriented instruments for macroeconomic stabilization
− Achieving effective enterprise management and economic efficiency, usually through
privatization
− Imposing hard budget constraints, which provide incentives to improve efficiency
Authors: J. Albrecht, S. Bauwens, A. Benken, V. Franke, S. Heinrichs, S. Huth, D. Nussbaum, K. Pietrek, B. Pörner
EFM Academy - P&R Competitive Strategy,8th + D&R&S International Business,10th
− Establishing an institutional and legal framework to secure property rights, the rule of
law, and transparent market-entry regulations
→ As countries continue the transition process, more opportunities for trade and investment
should open up for MNEs
→ Russian Transition
− Includes political and economic transition at the same time
− Initial transition steps resulted in steep economic decline
− The transition has involved massive, although not altogether effective, privatization
− Soft budgets: subsidies and other government-supporting activities have continued
− Hard administrative constraints have disappeared and are being replaced with
connections and corruption
− Debts and deficits – both internal and external – are a real challenge
→ China’s Transition
− Chinese growth has been far stronger than for other countries in transition
− China has maintained totalitarian political control while loosening the economy
− A major challenge is privatizing state-owned enterprises
→ Continued macro stability: macroeconomic stability, fiscal stability, stable exchange rates
→ Maintaining economic growth: domestic demand still a challenge
→ Continued improvement in institutional and structural areas: protection of property
rights, functionality of the legal system, liberalization, reduction of administrative
barriers, development of an effective banking structure
→ The solution of social issues such as poverty, child welfare, and HIV/AIDS
Ethical Dilemma
Authors: J. Albrecht, S. Bauwens, A. Benken, V. Franke, S. Heinrichs, S. Huth, D. Nussbaum, K. Pietrek, B. Pörner
EFM Academy - P&R Competitive Strategy,8th + D&R&S International Business,10th
- international trade will not begin unless companies within a country have competitive
advantages and they foresee profits in exporting and importing
- only if companies perceive that their international opportunities will be greater than
the domestic ones, they will divert their resources to foreign sectors
- existence of 4 conditions does not guarantee that industry will develop in a given
locale
- limitations of diamond:
1. many companies face favourable conditions for more than one of their
business lines, however comparative advantage theory states that resource
limitations may cause companies in a country to avoid competing in some
industries even though an absolute advantage exists
2. increased ability of companies to attain market info., production factors, and
supplies form abroad -> more competition from foreign production
Authors: J. Albrecht, S. Bauwens, A. Benken, V. Franke, S. Heinrichs, S. Huth, D. Nussbaum, K. Pietrek, B. Pörner
EFM Academy - P&R Competitive Strategy,8th + D&R&S International Business,10th
Introduction
− U.S. (50 different states) as example of perfect economic integration: common currency,
perfect labour and capital mobility
− WTO offers same foreign trade principles for all its members (improvement slowly)
− but faster changes in regional economic integration: RTA (regional trade agreements) can
depart from WTO – many of these are bilateral
− trade as cornerstone of economic integration and commodity agreements
− companies need to adjust organization structure and operating strategy to take advantage
of regional trade groups
Authors: J. Albrecht, S. Bauwens, A. Benken, V. Franke, S. Heinrichs, S. Huth, D. Nussbaum, K. Pietrek, B. Pörner
EFM Academy - P&R Competitive Strategy,8th + D&R&S International Business,10th
− Largest and most comprehensive regional groups: common currency and European
Parliament make it most ambitious regional trade group
− History: European Economic Community (EEC), later European Community (EC),
formed European Union (EU) – economic cooperation to avoid political conflict
− Single European Act was designed to eliminate the remaining nontariff barriers to trade
− In spite of significant progress, there are still barriers to trade that need to be eliminated
− EU accounts for a fifth of world trade, formidable economic bloc after NAFTA
− U.S. is largest trading partner, but barriers still exist: tariffs, differences in legal and
regulatory systems, absence of international standards (several protectionist conflicts)
− Trade agreements with MERCOSUR (e.g. Chile, Argentina, Brazil) to improve political,
economic, and trade relations, but moving slowly due to economic and political problems
− EU concentrated on economic integration first, but now includes common foreign policy
− National attitudes are still the driving force behind European policy
The Euro
− Treaty of Maastricht (1992): political union and European Monetary Union (EMU)
− Applicants have to meet stability and growth pact criteria, i.e. reduce public deficits and
debts as well as inflation and interest rates (p. 212 for detailed list)
− European Central Bank (ECB) administers Euro, monetary policy, exchange-rate system
− Common currency established in 1999, new bank notes in 2002
Authors: J. Albrecht, S. Bauwens, A. Benken, V. Franke, S. Heinrichs, S. Huth, D. Nussbaum, K. Pietrek, B. Pörner
EFM Academy - P&R Competitive Strategy,8th + D&R&S International Business,10th
EU Expansion
→ Facts
− Preceded by free trade agreements between the U.S. and Canada
− Includes Canada, the U.S., and Mexico – established in 1994
− Large trading bloc, but includes countries of different sizes and wealth
→ Rationale: U.S.-Canadian trade is largest bilateral trade worldwide, U.S. is Mexico’s and
Canada’s largest trading partner
→ Aims at…
− Elimination of tariff and nontariff barriers (either directly or phased out)
− Harmonization of trade rules
− Liberalization of restrictions on services and foreign investment
− Enforcement of intellectual property
− Dispute settlement process
→ Results in static effects (e.g. lower-cost agricultural products from Mexico), dynamic
effects (e.g. growing Mexican market for U.S. companies), and trade diversion (e.g. U.S.
trade and investment shifted from Asia to Mexico due to new advantages)
Authors: J. Albrecht, S. Bauwens, A. Benken, V. Franke, S. Heinrichs, S. Huth, D. Nussbaum, K. Pietrek, B. Pörner
EFM Academy - P&R Competitive Strategy,8th + D&R&S International Business,10th
− Rules of origin: goods and services must originate in North America to get access to lower
tariffs
− Regional content: percentage of value of a product that must be from North America for
the product to be considered “North American” in terms of country of origin (50-62.5 %)
NAFTA Expansion
− Representatives from 34 countries are in negotiations to form the Free Trade Area of the
Americas (FTAA)
− EU entered free trade agreement with Mexico, Mexico and Canada cooperate with Chile
− NAFTA is causing MNEs to look at the region differently in terms of trade and investment
(one big regional market – rationalization is key objective)
− Intertwined production on the one hand, outsourcing to Mexico as cheap production area
on the other hand
− U.S. companies have not run Canadian and Mexican companies out of business (lack of
protection has forced companies to become more competitive and adapt strategy)
− Mexico as a market for exports from U.S. and Canada and not only low-cost production
− Central and South American free trade agreements were established to increase market
size through economic cooperation and integration
− MERCOSUR is a customs union between Brazil, Uruguay, Paraguay, and Argentina: slow
in developing common external tariff (economic problems of member countries)
− ASEAN is a relatively successful free trade area in Southeast Asia that relies more on the
U.S. market for exports than on each other
− APEC is comprise of 21 countries that border the Pacific Rim; progress toward free trade
is hampered by size of and the geographic distance between member counties
− Several African trade groups, but they rely more on their former colonial powers and other
developed markets for trade than they do on each other
Authors: J. Albrecht, S. Bauwens, A. Benken, V. Franke, S. Heinrichs, S. Huth, D. Nussbaum, K. Pietrek, B. Pörner
EFM Academy - P&R Competitive Strategy,8th + D&R&S International Business,10th
Commodity Agreements
− Commodity agreement is designed to stabilize the price and supply of a good; it takes the
form of a producers’ alliance or an international commodity control agreement
The Environment
− Pollution poses a threat to future of the planet – governments, companies, and individuals
are concerned
− Many environmental problems require national solutions, but many involve cross-national
boundaries and need to be solved through treaties and agreements
− The United Nations is a 189-member-country organization that deals with many social,
political, and environmental issues
− Kyoto protocol as result of meeting to reduce greenhouse gas emissions
− Major types of environmental degradation: ozone depletion, air pollution, acid rain, water
pollution, waste disposal, and deforestation
− For corporations cooperation with environmental agreements can improve profits and
helps to avoid criticism
Ethical Dilemma
Authors: J. Albrecht, S. Bauwens, A. Benken, V. Franke, S. Heinrichs, S. Huth, D. Nussbaum, K. Pietrek, B. Pörner
EFM Academy - P&R Competitive Strategy,8th + D&R&S International Business,10th
INTRODUCTION
• Factors of production increasingly move internationally (capital movements, people
movements…) ⇒ Country’s relative factor endowment may change
• FDI (foreign direct investment) important in international business + factor mobility
FACTOR MOBILITY
• Governments worry that this control will lead to decisions contrary to their countries’ best
interests
Political motives
• governments give incentive to their companies to make direct investments in order to
o gain supplies to strategic resources (process of gaining control of resources, home
countries also acquire much political control)
o develop spheres of influence
• most successful domestic companies, especially with unique advantages, invest abroad
Assets employed
• direct investments usually involve some capital movements (or other types of assets)
(when anticipated return – accounting for risk factor + cost of transfer – is higher overseas
than at home)
• retained earnings are a major means of expanding abroad
• may use funds it earns in a foreign country to establish an investment – companies can
borrow all (rarely) or part (frequently) of the funds in the host country to male an
investment
Buy-versus-build decision
• companies can acquire interest in an existing operation / construct new facilities
Reasons for buying
• acquisitions may reduce costs, risks and time
• the advantages of acquiring an existing operation include:
o adding no further capacity to the market
INVESTORS’ ADVANTAGES
• direct investment usually improves a company’s performance
• company will not move unless it expects a higher return
• company invest directly only if they think they hold some supremacy
o advantage results from
monopoly advantage = foreign company’s ownership of some resources
foreign company’s currency has higher buying power
could add production capacity more cheaply abroad than at home
sell most efficiently (to maintain domestic competitiveness, they frequently must
sell on a global basis)
Location of ownership
• industrial countries account for a little over 90% of all direct investment outflows
(because more companies from those countries are likely to have the capital, technology,
and managerial skills needed to invest abroad)
• for worldwide FDI almost all ownership is by companies from developed countries
Location of investment
• most FDI occurs in developed countries because they have the biggest markets, lowest
perceived risk, least discrimination toward foreign companies
Introduction
→ The sheer size of MNEs is an issue: they have considerable power when negotiating
− Some have sales larger than many countries’ GNPs
− Some MNE executives deal directly with heads of state
→ Pressure groups push to restrict MNEs’ activities at home and abroad
→ FDI as a means of a company’s international operations is subject to home-country and
host-country enhancements and restrictions
→ The effort to create favourable investment environments has led many countries to replace
obstacles to FDI with incentives for FDI (e.g. from opposition to suspicion to cooperation)
→ The growing prevalence of FDI requires a better understanding of the views of home and
host countries – benefits of FDI should outweigh its costs
→ The effects of an MNE’s activities may be simultaneously positive for one national
objective and negative for another (countries rank their objectives)
→ In an international transaction
− both parties may gain or both parties may lose
− one party may gain and the other lose
− even when both parties gain, they may disagree over the distribution of the benefits
→ Countries want a greater share of benefits from MNE’s activities
Cause-Effect Relationships
Authors: J. Albrecht, S. Bauwens, A. Benken, V. Franke, S. Heinrichs, S. Huth, D. Nussbaum, K. Pietrek, B. Pörner
EFM Academy - P&R Competitive Strategy,8th + D&R&S International Business,10th
Balance-of-Payments Effects
→ Countries want capital inflows (FDI can bring inflows or outflows which can cause a
negative net balance-of-payments effect)
→ Place in the Economic System: the more capital inflow a country receives, the more it
can import and the more it can run a trade deficit
− one country’s surplus is another’s country’s deficit (zero sum game); however, long-
and short-term economic goals differ (government intervention can influence FDI)
→ Effect of Individual FDI: the effect of an individual FDI may be positive (reinvest profit
in a host-country to satisfy demand) or negative (dividends go to home-country now)
− simple formula to determine effects, but data to be used may be estimated:
B (balance-of-payments effect) = (m – m1) + (x – x1) + (c – c1)
m = import displacement x = export stimulus c = capital inflow
m1 = import stimulus x1 = export reduction c1 = capital outflow
− net import change (m – m1): m represents how much would be imported in the absence
of a plant (difficult to estimate), m1 should include equipment, components, materials
imported, and the marginal propensity to import (percentage of increased national
income by capital inflows)
− net export effect (x – x1): plant in host-country merely substitutes exports from home-
country, no net export effect for host-country, but for home-country there is negative
effect because of export reduction, under defensive reasons it is only an export
replacement (loss) for the home-country
− net capital flow (c – c1): controlled by central banks, difficulty is time lag between
outward flows and inward flows (reinvestment, borrowing, and exchange-rate
considerations influence capital flow)
→ Aggregate Assumptions and Responses:
− balance-of-payments effects of FDI are initially positive for the host country and
negative for the home country, but change later on (reason: initial investment high, but
dividends over time lead to reversal)
− Home and host countries make policies to try to improve short- or long-term effects
(home countries establish outflow restrictions, host countries impose repatriation
restrictions, asset-valuation controls, and conversion to debt as opposed to equity)
→ Growth and employment effects are not a zero-sum game because MNEs may use
resources that were unemployed or underemployed
→ Home-Country Losses: home-country labour claims that jobs are exported through FDI,
technology transfer and average wages are said to have negative effects
→ Host-Country Gains: possible gains are
− more optimal use of production factors
− use of unemployed resources
− upgrading of resource quality
→ Host-Country Losses: possible losses if investments by MNEs
− replace local companies
− take the best resources (MNEs can reduce their capital cost relative to local
competitors and then pay higher wages to secure best labour as resource)
Authors: J. Albrecht, S. Bauwens, A. Benken, V. Franke, S. Heinrichs, S. Huth, D. Nussbaum, K. Pietrek, B. Pörner
EFM Academy - P&R Competitive Strategy,8th + D&R&S International Business,10th
− destroy local entrepreneurship (affecting national development, but often MNEs can
stimulate entrepreneurs as they need supply or serve as role models for local talents)
− decrease local R&D undertakings (R&D enhances country’s competitive capability –
some countries are dependent on external R&D through FDI)
− use up local funds by borrowing (governments sometimes try to limit this)
→ General Conclusions: FDI is more likely to generate growth
− when the market is prepared to support business growth
− when the product or process is highly differentiated
− when the foreign investors have access to scarce resource (which local competitors
cannot easily acquire)
− in the more advanced developing countries (better prepared to absorb ideas)
Extraterritoriality
→ Extraterritoriality occurs when governments apply their laws to their domestic companies’
foreign operations
→ Trade Restrictions: prevent foreign subsidiaries of companies from making sales to
unfriendly countries based on political conflicts
→ Antitrust Laws: governments are especially inclined to apply antitrust policies when
concerned about possible harm to consumers (mainly against cartels that set prices or
production quotas, or exclusive distributorship, joined R&D or manufacturing operations)
MNE Independence
→ MNEs can play one country against another but are reluctant to abandon fixed resources
(e.g. two members of a trade agreement where to locate new production site)
Host-Country Captives
Authors: J. Albrecht, S. Bauwens, A. Benken, V. Franke, S. Heinrichs, S. Huth, D. Nussbaum, K. Pietrek, B. Pörner
EFM Academy - P&R Competitive Strategy,8th + D&R&S International Business,10th
Bribery
→ Payments to government officials have been widespread and have been intended to
− secure business from competitors (e.g. government contracts)
− facilitate services (which could be delayed otherwise)
− ensure the safety of employees and facilities
→ Often done via intermediary persons – in cash or including products
→ High levels of corruption are associated with lower growth and lower levels of income, in
addition it can erode legitimacy a of government and inflates costs for MNEs
→ The U.S. legislation on bribery is controversial because
− some payments to expedite compliance with law are legal, but others are not
− extraterritoriality issues emerge
− business may be lost
→ There are several other efforts to stop bribery by: government agencies, regional
associations, private organizations
Ethical Dilemma
Future Outlook
Authors: J. Albrecht, S. Bauwens, A. Benken, V. Franke, S. Heinrichs, S. Huth, D. Nussbaum, K. Pietrek, B. Pörner
EFM Academy - P&R Competitive Strategy,8th + D&R&S International Business,10th
Bargaining view:
- Bargaining school theory: negotiated terms for a foreign investor’s operations depend
on how much the investor and host country need the other’s assets
- If one company possesses assets that are unique or the other party strongly desires,
negotiation will be one-sided
- Alternative sources for acquiring resources affect company and country bargaining
strengths: if bargaining relationships are zero-sum game (one party’s win = other
party’s loss), relationships may conflict because adversarial parties both believe they
will lose by making concessions; if relationships are positive-sum (both parties
benefit), parties might cooperate because of interdependence
Authors: J. Albrecht, S. Bauwens, A. Benken, V. Franke, S. Heinrichs, S. Huth, D. Nussbaum, K. Pietrek, B. Pörner
EFM Academy - P&R Competitive Strategy,8th + D&R&S International Business,10th
Authors: J. Albrecht, S. Bauwens, A. Benken, V. Franke, S. Heinrichs, S. Huth, D. Nussbaum, K. Pietrek, B. Pörner
EFM Academy - P&R Competitive Strategy,8th + D&R&S International Business,10th
1. Introduction
- companies lack resources to take advantage of all international opportunities
- the choice of where to operate is a big part of a business strategy
- companies need to determine the order of country entry + set the rates of resource allocation
among countries
- imitation lag: first move to those countries which catch up to the innovative advantage
soon, and later to other countries → in the innovative countries, a local producer can
gain a cost advantage over imported goods
- companies can also develop strategies to find countries in which there is least likely to
be significant competition
- companies may gain advantages in locating where competitors are → just follow
competitors on a “free ride” + profit from clusters / agglomerations
Ethical Dilemma
- relativists maintain it would be unethical to prohibit foreign sales because the sales are
considered ethical where they are made
- normativists maintain that it is unethical for a government to permit its companies to do
abroad what it prohibits them from doing domestically
- MNEs favour locations with repressive regimes because of easier working conditions
- sometimes MNEs move into a country just to weaken a competitor there
- MNEs just look for government incentives from a monopoly position
→ Should countries work toward regulating FDI with global efficiency as their objective or
should they continue to serve its own interests by competing for FDI
b) Matrices
i. Opportunity-Risk Matrix [Fig 13.5]
- a company can decide on indicators and weight them
- it can evaluate each country on the weighted indicators
- it can plot to see relative placements
c) Environmental scanning
- the systematic assessment of external conditions that might affect operations
- most efficient, if scanning is tied to the planning process + integrate information
world-wide
Product and Market Factors affecting choice between Diversification + Concentration strategies
Product or Market Factor Diversification Concentration
1. Growth rate of each market Low High
2. Sales stability in each market Low High
3. Competitive lead time Short Long
4. Spillover effects High Low
5. Need for product adaptation Low High
6. Need for communication + distribution adaptation Low High
7. Program control requirements Low High
8. Extent of constraints Low High
Introduction
- companies must choose an international operating mode to fulfill their objectives and
carry out their strategies
- international operations are frequently run through collaborative forms, which lesson their
control
- Strategic Alliance: collaboration that has a large impact total performance of one or more
companies, but often describes various collaborations whether or not they are of strategic
importance
3. Diversify Geographically:
- sales and earnings can be smoothed because business cycles occur at different times
within different countries
- collaboration offers faster initial means of entering multiple markets
1. Control:
- the more a company depends in collaborative arrangements, the more likely it is to lose
control over decisions (especially with respect to quality, new product directions and
where to expand output)
- external arrangements imply the sharing of revenues and information is passed more
rapidly to potential competitors
Licensing:
- under a licensing agreement, a company (licensor) grants rights to intangible property to
another company (licensee) to use in a specified geographic area for a specified period
- licensee pays a royalty to the licensor
- licensing right may be exclusive (the licensor can give rights to no other company) or
nonexclusive (it can give away rights)
- Intangible Property Categories (as defined by US Internal Revenue Service)
a) patents, inventions, formulas, processes, designs, patterns
b) copyrights for literacy, musical or artistic compositions
c) trademarks, trade name, brand names
d) franchises, licenses, contracts
e) methods, programs, procedures, systems
- licensor usually obliged to furnish technical information and assistance and the licensee is
obliged to exploit the rights effectively and to pay compensation to the licensor
Payment:
- amount and type of payment for licensing arrangements vary
- Figure 14.4 p.421 shows major factors that determine the payment amount, namely
agreement specific factors (higher value with higher sales) and environment-specific
factors
- some developing countries set price controls on what licensees can pay pr insist that
licensees be permitted to export licensed goods Æ licensors demand higher royalties in
turn, as they can sell fewer license contracts
- companies negotiate a front-end payment to cover transfer costs when licensing
technology and then follow with fees based on actual or projected use
- many companies transfer technology at an early or even development stage so that
products hit different markets simultaneously
3 S. Huth, D. Nussbaum, K. Pietrek, B. Pörner
Authors: J. Albrecht, S. Bauwens, A. Benken, V. Franke, S. Heinrichs,
EFM Academy - P&R Competitive Strategy,8th + D&R&S International Business,10th
Franchising:
- is a specialized form of licensing in which the franchisor assists the business on a
continuing basis
- franchising includes providing an intangible asset and continually infusing necessary
assets
- franchisor and franchisee act almost like a vertically integrated company because the
parties are interdependent and each produces part of the product or service that ultimately
reaches the customer
- acceptance of the franchising concept depends on the existence of high levels of income,
education, mass media and an entrepreneurial spirit
Organization of Franchising:
- franchisor may penetrate a foreign market by dealing with franchisees directly or by
setting up a master franchise and giving that organization the right to pen outlets on its
own
- master franchise system is favoured when companies are not confident about evaluating
potential franchisees
- people are usually willing to make investments in known franchises because the name is a
guarantee of quality and attracts customers
Operational Modifications:
- franchisors face a dilemma: - the more global standardization, the potentially lower
acceptance in the foreign country
- good locations for franchises can be problematic
- government and legal restrictions make it difficult to gain satisfactory operating
permission
- franchisors need to develop sufficient cash and management depth before considering
foreign expansion
- success factors: service standardization, high identification through promotion and
effective cost controls Æ there may be difficulties in transferring success factors
Management Contracts:
- used primarily when the foreign company can manage better than the owners
- company receives income without having to make a capita outlay
Turnkey Operations:
- a company is contracted to build complete, ready-to-operate facilities
- usually industrial-equipment manufacturers and construction companies, but also
consulting firms and manufacturers that decide an investment on their own behalf if the
country is infeasible
- customer of turnkey operations if often a government agency
- turnkey operations are characterized by a huge site of contracts and mainly large
companies are contracted (N.B. these are very vulnerable to economic downturns)
- important factors to gain turnkey contracts: public relations, price, export financing,
managerial + technological quality, experience, reputation
- payment occurs in stages as project develops
- it is important to have contractual agreements on what is considered as satisfactory
4 S. Huth, D. Nussbaum, K. Pietrek, B. Pörner
Authors: J. Albrecht, S. Bauwens, A. Benken, V. Franke, S. Heinrichs,
EFM Academy - P&R Competitive Strategy,8th + D&R&S International Business,10th
Joint Ventures:
- more than one organization owns a company (various combinations of ownership)
- consortium: more than two organizations participate
- various combinations of partners are possible in a joint venture (e.g. two companies from
the same country working in a foreign market, a foreign company with a local company,
private company and local government, private company with a government owned
company in a third country)
- the more companies in the joint venture, the more complex the management of the
arrangement will be
- companies favourable of joint ventures are usually new at foreign operations or have
decentralized domestic decision- making
Equity Alliances:
- collaborative arrangement in which at least one of the collaborating companies takes an
ownership position
- the purpose is to solidify a collaborating contract, such as a supplier-buyer contract, so
that it is more difficult to break
Differing Objectives:
- objectives may evolve differently over time
- one partner might want to reinvest earnings for growth whereas the other wants to get
dividends; performance standards might substantionally differ
Control Standards:
- by sharing assets with another company, one company may lose some control on the
extent or quality of the asset’s use
- some companies with well known trademarked names are licensed abroad for the
production of some products that they have never produced or had expertise with Æ
problems in one country are quickly communicated to another country
- when no single company has control of a collaborative arrangement, the operation may
lack direction
5 S. Huth, D. Nussbaum, K. Pietrek, B. Pörner
Authors: J. Albrecht, S. Bauwens, A. Benken, V. Franke, S. Heinrichs,
EFM Academy - P&R Competitive Strategy,8th + D&R&S International Business,10th
- when one company dominates it must consider the others interests
Differences in Culture:
- success is evaluated differently (U.S.: performance judged on basis of profit, market share
and specific financial benefits; Japan: evaluate on how operation helps to build its
strategic position; Europe: balance between profitability and achieving social objectives
- differences in corporate cultures may also create problems within joint ventures
Negotiating Process:
- contracts historically have included provisions that he recipient will not divulge this
information
- controversial area of negotiation is the secrecy surrounding arrangements’ financial terms
Contractual Provisions:
- transferring rights to an asset can create control problems, such as poor product quality
- contracts should be spelled out in detail and include:
o how to terminate the agreement if the parties do not adhere to the directives
o methods of testing for quality
o geographical limitations on the asset’s use
o which company will manage which parts of the operation outlined in the agreement
o what each company’s future commitments will be
o how each company will buy from, sell to, or use intangible assets that come from the
collaborative agreement
Performance Assessment:
- mutual goals should be set – expectations should be spelled out in the contract
- continuing assessment of the partner’s performance
- assess periodically whether the type of collaboration should change
Introduction
- control questions facing all companies:
1. Where should decision-making power reside?
2. How should foreign operations report to headquarters?
3. How can the company ensure that it meets its global objectives?
- control is management’s planning, implementation, evaluation and correction of
performance to ensure that the organization meets its objectives (keep direction or strategy
on track & prevent individuals from making decisions that endanger whole company)
- toughest challenge for management: balance company’s global needs with need to adapt
to country-level differences
- foreign control is usually more difficult than domestic control because of:
o distance – it takes more time and expense to communicate
o diversity – country differences make it hard to compare operations
o uncontrollables – there are more dissimilar outside stockholders and government
influences (e.g. objectives between stockholders in home country differ from host-
country government)
o degree of certainty – there are data problems and rapid changes in the environment
(industry data maybe inaccurate in some countries; political & economic uncertainty)
1. Planning
- planning is essential for managerial control: adapt resources and objectives to different and
changing international markets
The Planning Loop:
- in planning, companies must mesh objectives with internal resources and external
environments and set means to implement, report, analyze and correct
- planning implies 5 steps (p.445):
A) develop long-range strategic intent: objective or mission that will hold the
organization together over a long period while it builds global competitive viability;
helps set priorities and is often published (e.g. dominating domestic market)
B) analyze internal resources with environmental factors in home country: companies
must find fit between what they need and what they are good at (e.g. small comp. need
to collaborate)
C) set overall objectives for its international activities: must be examined in conjunction
with means of competing (e.g. low cost focus)
D) local analysis
E) selection among alternatives: determines extent to which a company follows global,
Transnational or Multidomestic strategy
Î alternatives include: location of value-added functions, location of sales targets,
level of involvement, product/service strategy, marketing, competitive moves,
factor movement and start-up strategy
F) implement and modify (if resources availability changes) strategy
Î through timely analysis, corrective action -> constant loop from F to B
- strategic plans: outline major commitments, less subject to re-evaluation (e.g. what
businesses a company is in); similar to step A
- operating plans: short term objectives and means to carry them out
Uncertainty Planning:
- a company’s international operations have more complexity and uncertainty than its
domestic ones
Authors: J. Albrecht, S. Bauwens, A. Benken, V. Franke, S. Heinrichs, S. Huth, D. Nussbaum, K. Pietrek, B. Pörner
EFM Academy - P&R Competitive Strategy,8th + D&R&S International Business,10th
2. Organizational structure
- internat. Comp. set up organizational structures to group individuals and units in strategic
ways
- structure affects taxes, expenses and control and thus fulfilment of corporate objectives
Separate vs. Integrated International Structures
- international division structure: • groups each internat. business activity into its own
division, puts internationally specialized personnel together to handle export
documentation, foreign-exchange transactions and relations with foreign governments
• creates a critical mass of international expertise
• may have problems getting resources from domestic divisions
Î structure is best suited for Multidomestic strategies with little integration and
standardization
- functional division structure: • integration of international operations (e.g. marketing in
Europe reports to overall marketing department)
• are popular among companies with narrow product lines
- product division structure: • group people according to product groups
• popular among international companies with diverse products
• best suited for global strategies because foreign and domestic operations for 1
product report to same manager
• product lines can be easily spun off, but groups cannot learn from each other and
synergies within one country are reduced
- geographic (area) division structure: • popular if comp. has large foreign operations, but
business isn’t dominated by a single country or region
- matrix division structure: • gives functional, product and geographic groups a common
focus (a subsidiary reports to more than 1 group)
• groups become interdependent, exchange info. and resources
• drawbacks: groups compete for scarce resources and people aren’t sure who has
responsibilities for which tasks
Dynamic nature of structures:
- structure evolves as its business evolves: if international operations grow more
departments and more independence is needed
Mixed nature of structures:
- due to the fact that growth is dynamic, companies only seldom get their activities grouped
into 1 organizational structure -> most have a mixed structure
- overall structure gives an incomplete picture of divisions
Non-traditional structures:
evolve to deal with new complexity of companies’ operations:
- Network organizations:
• network alliance: each comp. is supplier to and customer
of other companies
• some products, functions and areas are handled and owned by company, others are
outsourced
• due to increase in alliances among companies, control increasingly must come from
negotiation and persuasion rather than from authority of superiors and subordinates
Î heterarchy: ambiguous location of control
• Japanese keiretsus are network alliances (either vertical or horizontal): managers
have strong personal long-term relationships, exchange info., lobby together for
government legislation
• however networks retard efficiency
- lead subsidiary organizations: • due to different factor endowments comp. move
headquarters for certain divisions to foreign countries
• also managers from home country must report to them
Authors: J. Albrecht, S. Bauwens, A. Benken, V. Franke, S. Heinrichs, S. Huth, D. Nussbaum, K. Pietrek, B. Pörner
EFM Academy - P&R Competitive Strategy,8th + D&R&S International Business,10th
3. Location of Decision making
- centralization implies higher-level decision making (global (ethnocentric) strategy), usually
above the country level; decentralization implies lower-level decision making (Multidomestic
(polycentric) strategy) and a combination of the two implies both (Transnational (geocentric)
strategy)
- companies should choose location based on:
a) pressures for global integrations vs. local responsiveness
- high pressure for integration ->centralization; low pressure for integration ->
decentralization
reasons:
- resource transference: • decisions on moving goods or other resources internationally
are more likely to be made centrally because they require info. that is only available at
headquarters
• subsidiaries might focus too much on own projects
- standardization: • global standardization usually reduces costs, but some revenue may be
lost in the process
• product uniformity gives company greater flexibility when supply problems in some
countries arise (e.g. strikes) – production can shift to another country
• the more the foreign environment requires adaptations, the more pressure to decentralize
- systematic dealings with stakeholders: • stakeholders are increasingly aware of what the
company does in other countries of operation -> concessions in one country must also be
granted in others
• centralized decision making is necessary to ensure that operations in different countries
operate towards achieving global objectives (e.g. same prices)
• dealings with potential global customers and competitors need centralized decision
making because headquarter is only place where info. on all countries is gathered
- Transnational strategies: • describes a company that thrives on the process of seeking
out uniqueness that it might exploit elsewhere or that might complement existing
operations
• implies gaining knowledge and capabilities from anywhere in the organization
• two-way info. flows both horizontally and vertically (comp. tries to weaken decision-
making partitions) -> if subsidiaries are ignored, comp. suffers
• cross-cultural teams between subsidiaries in different countries: chosen people with
certain skills and expertise -> more and better ideas
b) Capabilities of headquarters vs. subsidiary personnel
- the more confidence there is in foreign managers, the more delegation occurs
- in some cases centralization may hurt local managers because they
o cannot perform as well (not motivated if not involved in decisions)
o do not acquire training through increased responsibility
c) Decision expediency and quality
a poor decision may be better than a good one that comes late
- cost and expediency: comp. must consider how long it takes to get help from
headquarters in relation to how rapidly decision must be made
- importance of the decision: • more important decisions are made at higher organization
levels
• rather than telling what decisions a locals can make, comp. can set limits on
expenditure amounts -> local autonomy for small outlays
4. Control mechanisms
- mechanisms that help ensure that control is implemented:
Corporate culture
- corporate culture: certain common values that employees in a company share
- is an implicit control mechanism
- in global companies, managers cannot easily rely on corporate culture for control because
different countries have different norms -> comp. try to encourage a worldwide corporate
culture
- people trained at headquarters are more likely to think as headquarters personnel
Coordinating methods
- because each type of organizational structure has advantages and disadvantages, comp.
have tried to combine some of functional, geographic and product perspectives without
abandoning existing structures
- e.g.: developing teams from different countries for building future scenarios; using more
management rotation; developing liaisons among subsidiaries within same country etc….
(p. 458/459)
Reports
- use of reports to evaluate the performance of subsidiary personnel in order to reward and
motivate them
- reports must be timely in order for managers to respond to info. (allocate resources,
correct plans, reward personnel)
- reports important in international businesses because of low contact between subsidiary
and headquarter
types of reports: • reports are intended to evaluate 1st operating units and 2nd management in
those units
• reports for foreign operations mostly resemble domestic report systems (have proven
effective, familiar system, easier to compare)
visits to subsidiaries: - corporate managers should have a good timing for visits of foreign
subsidiaries in order to not upset local managers (not too often) and should conduct a good
analysis of operations (not just social activities) -> “rules” for conducting visits
management performance evaluation: • comp. should evaluate managers on things that
they can control (separately from subsidiaries performance)
• however what is within manager’s control varies from subsidiary to subsidiary (local
conditions) and from company to company (decision-making processes)
• companies must evaluate results in comparison to budgets
cost and accounting comparability: • it is hard to compare countries using standard
operating ratios (management must compare relevant costs)
evaluative measurements • a system that relies on a combination of measurements is more
reliable than one that doesn’t (not just financial)
Authors: J. Albrecht, S. Bauwens, A. Benken, V. Franke, S. Heinrichs, S. Huth, D. Nussbaum, K. Pietrek, B. Pörner
EFM Academy - P&R Competitive Strategy,8th + D&R&S International Business,10th
• most important criteria: “budget compared with profit” and “budget compared with sales
value”
information systems: • discussion about what info. managers need to evaluate performance
of subsidiaries
• info. on e.g. external conditions, new R&D development of subsidiary are important to
headquarters
• 3 problems in acquiring information: cost of information compared to value, redundant
information, information that is irrelevant
-> management should re-evaluate info. sources they use periodically and ensure efficient use
• new info. technology enables comp. to share info. more quickly and more easily
Export Strategy
Characteristics of Exports
− Probability of being an exporter increases with size, as defined by revenues or the size of
a company (yet not all export decisions depend on the company’s size)
− Export intensity: percentage of total revenues coming from exports (not positively
correlated with company size – greater percentage means greater intensity) - the largest
companies are the biggest exporters, but small companies are expanding their capability
Authors: J. Albrecht, S. Bauwens, A. Benken, V. Franke, S. Heinrichs, S. Huth, D. Nussbaum, K. Pietrek, B. Pörner
2. get expert counselling:
EFM Academy - P&R Competitive Strategy,8th + D&R&S International Business,10th
a. governments provide assistance (i.e. information about foreign export markets) for
their domestic companies, extent of commitment varies by countries
b. more accurate information is provided by specialized assistants, such as banks,
lawyers, export management companies
3. select a market or markets:
a. key part of strategy
b. identify foreign markets with the help of trade statistics, visit seminars, etc. (actively)
c. learn of markets by responding to requests from abroad (passively)
4. formulate and implement an export strategy:
a. company considers its export objectives
b. what specific tactics
c. when to be finished (deadlines to achieve objectives)
d. what kind of resources are needed
→ export business plan (done by senior management or export department): p. 513
→ international business transaction chain: p. 512
Import strategy
→ bringing of goods and services into a country that results in importer paying money to the
exporter in a foreign country
→ Two basic types of imports
− industrial and consumer goods to independent individuals and companies Æ no
relationship to foreign exporter
− intermediate goods and services that are part of the firm’s global supply chain
→ companies import goods because they can be sold cheaper in the domestic market than
products which are produced in the domestic market
→ Three broad types of importers
− Looking for any product around the world to import and sell (by simply scanning the
globe for any product that will generate positive cash flow for them)
− Looking for foreign sourcing to get their products at the cheapest price
− Using foreign sourcing as part of their global supply chain
→ Importing requires a certain expertise in dealing with institutions and documentation:
external handling can be done through and import broker, which is an intermediary who
helps an importer clear customs
Import Documentation
− Importers must submit documents to customs that determine whether the shipment is
released and what duties are assessed (take title of the shipment)
− Take title means the importer receives the products without purchasing them – that is
Authors: without
J. Albrecht,laying out A.
S. Bauwens, any money
Benken, V. Franke, S. Heinrichs, S. Huth, D. Nussbaum, K. Pietrek, B. Pörner
Third Party Intermediaries
EFM Academy - P&R Competitive Strategy,8th + D&R&S International Business,10th
→ Third party intermediaries: companies that facilitate the trade of goods but that are not
related to either the exporter or the importer
→ Some essential activities must be satisfied and must be handled (as this can be cost
intensive companies use external specialists for expanding before developing internal
capabilities):
− Stimulate sales, obtain orders, do market research
− Make credit investigations and perform payment-collection activities
− Handle foreign traffic and shipping
− Act as support for the companies overall sales, distribution, and advertising staff
→ Direct export: goods and services are sold to an independent party outside of the
exporter’s home country
→ Indirect exports: goods and services are sold to an intermediary in the domestic market,
which then sells the goods in the export market
Direct Selling
→ Direct selling involves selling through representatives to distributors, or to retailers and
final end users
− A sales representative sells products in foreign markets on a commission basis,
without assuming risk or responsibility
− Sales representatives have certain rights, they operate on a commission basis
− A distributor is a merchant who purchases the products from the manufacturer and
sells them at a profit
− Aspects that a company should consider about sales representative or distributor: sales
records, analysis of territory, product mix, marketing policies, customer profile etc.
→ if a company decides to sell its product directly to the customer it must setup a solid
organization: separate international division, separate international company, or direct sale
to foreign retailers or end users
Indirect selling
− exporter sells goods directly to or through and independent domestic intermediary in the
exporter’s home country that exports the products to foreign markets (two major types of
indirect intermediaries are EMC and ETC)
Export Documentation
→ Freight forwarders can help to fill out exporting documents – one of these documents is an
export licence (allows products to be shipped to specific countries)
→ Key export documents:
− A pro forma invoice is an invoice, like a letter, from the exporter to the importer that
outlines the selling terms
− A commercial invoice is a bill for the goods from the buyer to the seller.
− Bill of lading is a receipt for goods delivered to the common carrier for transportation,
a contract for the service rendered by the carrier, and a document of title
− Consular invoice is sometimes required by a country as a means of monitoring
imports
− Certificate of origin declares origin of product (where it was produced)
− Shipper’s export declaration is used by the exporter’s government to monitor exports
and to compile trade statistics
− Export packing list itemizes the material in each individual package
Export financing
Authors: J. Albrecht, S. Bauwens, A. Benken, V. Franke, S. Heinrichs, S. Huth, D. Nussbaum, K. Pietrek, B. Pörner
Methods of Payment
EFM Academy - P&R Competitive Strategy,8th + D&R&S International Business,10th
→ cash in advance
→ letter of credit: obligates the buyer’s bank to pay the exporter
− a revocable letter of credit may be changed by any of the parties to the agreement.
− An irrevocable letter of credit requires all parties to agree to a change in the
documents
− A confirmed irrevocable letter of credit adds an obligation to pay for the exporter’s
bank
→ draft or bill of exchange
− documentary draft: an instrument instructing the importer to pay the exporter if certain
documents are presented
− sight draft: payments must be made immediately
− time draft: payments is to be made at a future date
→ open account: the exporter bills the importer but does not require formal payment
documents; usually for members of the same corporate group
Financing Receivables
→ Export can get financing from the banks and through factoring of forfeiting
− Factoring: the discount of a foreign account receivable
− Forfeiting: similar of factoring but usually for longer time periods and with the
guarantee from a bank in the importer’s country
Insurance
− Insurance on transportation risks, such as weather or rough handling carriers
− Political, commercial, and foreign-exchange risk that keep the exporter from collecting
from importer
Countertrade
→ Some countries have so much difficulty generating enough foreign exchange to pay for
imports Æ need to find other ways to get products they want
− Reasons are not enough cash or insufficient lines of credit
→ One way is countertrade, that is when goods and services are traded for each other
− Barter: based on clearing arrangements used to avoid money-based exchange, that is
when goods and services are traded for goods and services
− Buybacks: these are products the exporter receives as payment that are related to or
originate from original export
Offset Trade
→ In offset trade, the exporter sells goods for cash but then undertakes to promote exports
from the importing country in order to help it earn foreign exchange
→ another type of countertrade
→ occurs when an exporter sells products for cash and then helps the importer find
opportunities to earn hard currency
→ most often used for big ticket items, two types are which mainly occur:
− Direct offsets: include any business that relates directly to the export
− Indirect offsets: include all business unrelated to the export, generally the exporter is
asked by the importer’s government to buy a country’s goods or invest in an unrelated
business
Authors: J. Albrecht, S. Bauwens, A. Benken, V. Franke, S. Heinrichs, S. Huth, D. Nussbaum, K. Pietrek, B. Pörner
EFM Academy - P&R Competitive Strategy,8th + D&R&S International Business,10th
vii. Three levels of strategy (typically three levels → exhihibit 1-2 p.7)
- Corporate level: board of directors, CEO, administrative officers → strategic
managers try to exploit the firm’s competencies by adopting a portfolio approach
to the management + long-term plans (“doing the right things”)
- Business level: business + corporate managers → translate statements into
concrete objectives for the SBUs + strategies how the firm will compete in the
selected product-market arena (“doing the right things”)
- Functional level: managers of product, geographic, functional areas → annual
objectives + short-term strategies; implement + execute the firm’s strategic plans
(“doing things right”)
viii. Characteristics of strategic management decisions
- decisions at the corporate level are more value oriented, conceptual, less concrete
(greater risk, cost, profit potential, need for flexibility, longer time horizons)
- business-level decisions help bridge decisions at the corporate + functional levels
(costs, risks, and potential profit lie between those of corporate + functional levels)
- functional-level decisions are action-oriented, short range, low risk (modest costs,
concrete, quantifiable [close + easy supervision possible], profit potential low)
Hierarchy of Objectives and Strategies Strategic Decision Makers
Ends (What is to Means (How is to Board of Corporate Business Functional
be achieved?) be achieved?) Directors Managers Managers Managers
Mission (goals, ■■ ■■ ■
philosophy)
Long-term objectives Grand strategy ■ ■■ ■■
Annual objectives Short-term strategies ■ ■■ ■■
and policies
Note: ■ ■ indicates a principal responsibility; ■ indicates a secondary responsibility
b. Formality in Strategic Management
- Formality refers to the degree to which participants, responsibilities, authority,
discretion in decision making are specified
- often formality is associated with the size of the firm + with its stage of development
- Entrepreneurial mode: especially in smaller firms, one single individual control it
- Planning mode: very large firms, formal planning system with evaluation
- Adaptive mode: medium-sized firms in stable environment, new strategies are closely
related to existing one (all three modes were identified by Henry Mintzberg)
→ The Strategy Makers
- ideal strategic management team includes decision makers from all three levels
- planning departments are common in large companies
- top management is responsible for all major elements of strategic planning
- general managers are responsible for developing environmental analysis, business
objective, business plans prepared by staff groups
- CEO has a dominant role → best to integrate other managers in decisions + to have
efficient interaction with the board of directors
c. Benefits of Strategic Management
higher profitability of strategic plans is one point, other points to pay attention to:
1. Strategy formulation activities + attention of subordinates can prevent problems
2. Group-based strategic decisions take more alternatives into considerations + will
find better results than single perspectives
3. The involvement of employees in strategy formulation → more motivation
4. Gaps + overlaps in activities among individuals + groups are reduced because
strategy formulation clarifies differences in roles
5. Resistance to change is reduced because of involvement
2. Formulating a mission
- fundamental beliefs of an owner-manager’s sense of mission:
→ the product/service of the business can provide benefits as least equal to its price
→ the product/service can satisfy a customer need of specific market segments that is
currently not being met adequately
→ the technology that is to be used in production will provide a cost- and quality-
competitive product/service
→ with hard work + support of other, the business can not only survive but also grow
and be profitable
→ the management philosophy of the business will result in a favourable public image
+ will provide financial + psychological rewards for those who are willing to
invest their labour + money in helping the business to succeed
→ the entrepreneur’s self-concept of the business can be communicated to + adopted
by employees and stockholders
- components of a mission statement:
a) Basic Product or Service; Primary Market; Principal Technology
- in combination they describe the company’s business activity
- this segment clearly indicates to all readers the basic products, primary markets,
and principal technologies (often the most known product is mentioned)
b) Company Goals: Survival, Growth, Profitability
- almost every business organisation has these three goals mentioned above
- long-term aspects have to be considered to secure survival
- short-term profit has to be achieved but more important is the “over the long term”
- growth in market share is correlated with profitability, other forms of growth exist, too
- growth means change + proactive change is essential in a dynamic business environment
- should outline the conditions under which the firm might depart from ongoing operations
→ strategy should include opportunities with an acceptable rate of long-term growth and
profitability, with acceptable degree of risk
c) Company Philosophy
- often called company creed
- it reflects basic beliefs, values, aspirations, philosophical priorities to which
strategic decision makers are committed in managing the company
- general philosophy: unwritten code of behaviour – self-regulation
- many statements are similar in their content
- it should address strategic concerns at all three levels of the organisation
d) Public Image
- present + potential customers attribute certain qualities to particular businesses
- mission statement should reflect the public’s expectations+
- a negative image can prompt firms to re-emphasise the beneficial aspects of mission
e) Company Self-Concept
- the firm realistically must evaluate its competitive strengths + weaknesses → to
achieve its proper place in a competitive situation = company self-concept
- a firm acts on its members → but they can set aims different from the aims of their
members → this can lead to higher motivation = positive self-image
1
Authors: J. Albrecht, S. Bauwens, A. Benken, V. Franke, S. Heinrichs, S. Huth, D. Nussbaum, K. Pietrek, B. Pörner
EFM Academy - P&R Competitive Strategy,8th + D&R&S International Business,10th
4. Agency theory
- separation of the owners (principals) + the managers (agents) = agency theory
- whenever authority is delegated, an agency relationship exists between two parties
- there can be differences in the interests
- owners seek stock value maximisation + managers are often interested to increase their
personal payoffs (if they do not possess stocks) and not those of shareholders
- self-interest managers are risky because owners loose potential gain + have costs of monitoring
- cost of agency problems + of actions to reduce these = agency costs
- agency costs occur also when there are different self-interests between e.g. owners + managers
a) How agency problems occur
- owners have access to a small portion of information + executives are much better
informed (can pursue their own interests) = moral hazard problem or shirking
→ executives can manipulate business decisions or results
- stockholders have to precisely determine the competencies/priorities of executives at
the time that they are hired (which is often not possible) = adverse selection
- most popular solution is to align agents with the company through bonus plans
- Schemes as stock options do not eliminate self-interest in executive decision
b) Problems that can result from agency
- from strategic management perspective there are five problems:
2
Authors: J. Albrecht, S. Bauwens, A. Benken, V. Franke, S. Heinrichs, S. Huth, D. Nussbaum, K. Pietrek, B. Pörner
EFM Academy - P&R Competitive Strategy,8th + D&R&S International Business,10th
3
Authors: J. Albrecht, S. Bauwens, A. Benken, V. Franke, S. Heinrichs, S. Huth, D. Nussbaum, K. Pietrek, B. Pörner
EFM Academy - P&R Competitive Strategy,8th + D&R&S International Business,10th
i. The Debate
- on the one side, the position which is supported by Friedman
- on the other side, business depends upon its environment
- stockholders can have various interests e.g. not only financial interests but also social
- best way to maximise shareholder wealth is to act in a socially responsible manner
→ illegal ≠ unethical (e.g. eBay can post unethical products, which is not illegal)
ii. CSR and the Bottom Line
- social costs and benefits are not quantifiable
- CSR + profit are no competing concepts → they go inline
- difficult to make a cost-benefit analysis of CSR:
→ some CSR activities incur no dollar costs at all (e.g. donations) + philanthropic
activities of corporations are undertaken at discounted costs (lower taxes) [Exh. 2-15]
→ socially responsible behaviour does not come at a prohibitive cost (missing CSR
can lead to higher costs after e.g. an environmental disaster)
→ socially responsible practices may create savings + increase profits
- CSR costs are offset in the long run by an improved image + community goodwill
iii. Performance
- critics argue that companies with CSR should perform more poorly financially
- no clear evidence yet for a positive relationship between CSR and profit
- however, among experts, a sense remains that a relationship exists
iv. CSR Today
- CSR has become a priority with American business – three trends are responsible:
v. The Resurgence of Environmentalism
- after Valdez incident, a coalition was formed to establish new environmental
standards → by signing these principles companies do more than the laws require
vi. Increasing Buyer Power
- consumers are better informed through organisations that promote CSR
- investors: social investment movement has continued its rapid growth (has only an
impact when a group of investors vote their share in behalf of pro-CSR issues)
- banks have introduced funds which invest only in CSR friendly companies
- religious organisations search for acceptable institutional investing possibilities
- large-scale social investing can be broken down into two areas:
→ guideline portfolio investing: investors use ethical guidelines as screens to identify
possible investments (e.g. excluding tobacco companies); largest + fast growing part
→ shareholder activism: seek to directly influence corporate social behaviour through
voting right (relatively small number of people)
vii. The Globalisation of Business
- different cultural views, high barriers facing international CSR including differing
corporate disclosure practices, inconsistent financial data + reporting methods, lack of
CSR research → lead to even more difficulties to find a consensus on what CSR is
c) CSR’s Effect on the Mission Statement
- it is essential that the mission statement recognize the legitimate claims of its internal +
external stakeholders → some companies are proactive in their approach to CSR (making
it an integral part of their raison d’être) others are reactive (act only when they must)
d) Social Audit
- it attempts to measure a company’s actual social performance against the social
objectives it has set for itself (an outside consultant can minimise biases)
- results can publish the results separately or in their annual report
- it can be used to scan the external/internal environment
- consumer groups conduct social audits themselves to evaluate companies
4
Authors: J. Albrecht, S. Bauwens, A. Benken, V. Franke, S. Heinrichs, S. Huth, D. Nussbaum, K. Pietrek, B. Pörner
EFM Academy - P&R Competitive Strategy,8th + D&R&S International Business,10th
Authors: J. Albrecht, S. Bauwens, A. Benken, V. Franke, S. Heinrichs, S. Huth, D. Nussbaum, K. Pietrek, B. Pörner 1
EFM Academy - P&R Competitive Strategy,8th + D&R&S International Business,10th
Authors: J. Albrecht, S. Bauwens, A. Benken, V. Franke, S. Heinrichs, S. Huth, D. Nussbaum, K. Pietrek, B. Pörner 2
EFM Academy - P&R Competitive Strategy,8th + D&R&S International Business,10th
- they highlight the critical strengths and weaknesses of the company, animate the
positioning of the company in its industry, clarify the areas where strategic changes
may yield the greatest payoff and highlight the places where industry trends promise
to hold the greatest significance as either opportunities or threats
Contending Forces:
- every industry has an underlying structure o a set of fundamental economic and
technological characteristics that gives rise to these competitive forces
Threat of Entry:
- the seriousness of the threat of entry depends on the barriers present and on the
reaction from existing competitors that the entrant can expect
i) Economies of Scale: (aspirant is forced to enter on a large scale or accept a cost
disadvantage; can act as hurdles)
ii) Product Differentiation: (brand identification creates a barrier by forcing entrants
to spend heavily to overcome customer loyalty; advertising, customer service,
being first in the industry and product differences foster brand identification)
iii) Capital Requirements: (capital is necessary for customer credit, inventories,
absorbing start-up losses)
iv) Cost Disadvantages independent of Size
v) Access to Distribution Channels: (the more limited the wholesale or retail channels
are, and the more that existing competitors have these tied up, the tougher the
entry into the industry will be)
vi) Government Policy: (government can limit or foreclose entry to industries with
license requirements and limits on access to raw materials, but also by imposing
and water pollution standards and safety regulations)
Powerful Suppliers:
- suppliers can exert bargaining power by raising prices or reducing the quality of
purchased goods and services
- they can squeeze profitability out of an industry which is unable to recover cost
increases in its own prizes
- a supplier group is powerful if:
o it is dominated by a few companies
o is more concentrated than the industry it sells and if its product is unique or highly
differentiated
o it has built up switching costs
o not obliged to contend with other products for sale to the industry
o poses a credible threat of integrating forward into the industry’s business
o the industry is not an important customer of the supplier group
Powerful Buyers:
- customers can force down prices, demand higher quality of more service
- a buyer group is powerful if:
o it is concentrated or purchases in large volumes
o the product it purchases from the industry are standard of undifferentiated
o the products form a component of its product and present a significant fraction of
its cost
o earns low profits which create the incentive to lower its purchasing costs
o the industry’s product is unimportant to the quality of the buyer’s products
o the industry’s product does not safe the buyer money
o buyers pose a credible threat of integrating backward to make the industry’s
product
Authors: J. Albrecht, S. Bauwens, A. Benken, V. Franke, S. Heinrichs, S. Huth, D. Nussbaum, K. Pietrek, B. Pörner 3
EFM Academy - P&R Competitive Strategy,8th + D&R&S International Business,10th
- consumers tend to be more prize sensitive if they are purchasing products that are
undifferentiated, expensive relative to their incomes and of a sort where the quality is
not very important
Substitute Products:
- by placing a ceiling on the prices, substitute products limit the potential of an industry
- substitute products that deserve the most attention are subject to trend improving their
price-performance trade-off with the industry’s product or are produced by industries
earning high profits
Jockeying for Position:
- using tactics like price competition, product introduction and advertising slugfests
- this kind of rivalry is related to the presence of a number of factors:
o competitors are numerous or roughly equal in size
o industry growth is slow
o product or service lacks differentiation or switching costs
o fixed costs are high or the product is perishable, creating strong temptation to cut
prices
o capacity is normally augmented in large increments
o exit barriers are high
o rivals are diverse in strategies, origins and personalities; they have different ideas
about how to compete and continually run head-on into each other in the process
Authors: J. Albrecht, S. Bauwens, A. Benken, V. Franke, S. Heinrichs, S. Huth, D. Nussbaum, K. Pietrek, B. Pörner 4
EFM Academy - P&R Competitive Strategy,8th + D&R&S International Business,10th
Industry Structure:
- structural attributes are the enduring characteristics that give an industry its distinctive
character
- Variations among industries can be explained by:
i) Concentration:
refers to the extent to which industry sales are dominates by only a few firms
in a highly concentrated industry, the intensity of competition declines over
time
high concentration serves as a barrier to entry into an industry
ii) Economies of Scale:
refers to the savings that companies within an industry achieve due to
increased volume
economies of scale result from technological sources (i.e. higher level of
mechanization and greater modernity of plant and facilities) and non-
technological sources (i.e. better managerial coordination of production
functions and processes, long-term contractual agreements with suppliers and
enhanced employee performance
Æ can charge lower prices and can create barriers of entry
iii) Product Differentiation:
refers to the entent to which customers perceive products or services offered by
the industry as different
real differentiation (i.e. products differed significantly in their technology and
performance) versus perceived differentiation (i.e. results from the positioning
of the products)
real and perceived differentiation often intensify competition but successful
differentiation poses a competitive advantage
iv) Barriers to Entry:
are the obstacles a firm must overcome to enter an industry
tangible barriers to entry include capital requirements, technological know-
how, resources, laws regulating entry into an industry
intangible barriers to entry include reputations of existing firms, the loyalty of
consumers to existing brands, access to managerial skills
entry barriers increase and reflect the level of concentration, economies of
scale and product differentiation
industry regulations are a key element of industry structure
Competitive Analysis:
How to identify competitors:
- how do other firms define the scope of their market?
- How similar are the benefits the customers derive from the products and services that
other firms offer
- How committed are other firms to the industry
Common Mistakes:
- overemphasis on current, large and known competitors, while ignoring the small ones
and entrants as well as international competitors
Operating Environment:
- comprises factors in the competitive situation that affect a firm’s success in aquiring
needed resources or in profitability marketing its goods and services
Authors: J. Albrecht, S. Bauwens, A. Benken, V. Franke, S. Heinrichs, S. Huth, D. Nussbaum, K. Pietrek, B. Pörner 5
EFM Academy - P&R Competitive Strategy,8th + D&R&S International Business,10th
Competitive Position:
- assessing the competitive position improves a firm’s chances of designing strategies
that optimize its environmental opportunities
- included criteria: market share, breadth of product line, effectiveness of sales
distribution, proprietary and key-account advantages, prize competitiveness,
advertising and promotion effectiveness, location and age of facility, capacity and
productivity, experience, raw materials costs, financial position, relative product
quality, R&D advantage position, calibre of personnel, general images, customer
profile, patents and copyrights
- once appropriate criteria have been selected, they are weighted to reflect their
importance to a firm’s success, and are then multiplied by their weight
Customer Profiles:
- developing a profile of a firm’s present and prospective customers improves that
ability of its managers to plan strategic operations, to anticipate changes in the site of
markets and to reallocate resources so as to support forecast shifts in demand patterns
- customer profiles are constructed on geographic, demographic, psychographic and
buyer behaviour information
- assessing consumer behaviour is a key element in the process of satisfying your target
market needs
Suppliers:
- dependable relationships between a firm and its suppliers are essential to the firm’s
long term survival and growth
- supplier’s prices competitive, quantity discounts, shipping charges competitive terms
of production standards
- supplier’s abilities, reputations and services
Creditors:
- assessment of suppliers and creditors is critical
- do creditors fairly value and willingly accept the firm’s stock collateral?
- do creditors perceive the firm as having an acceptable record of past payments?
- are creditor’s loan terms compatible with the firm’s profitability objectives?
- are creditors able to extend the necessary lines of credit?
Human Resources: Nature of the Labour Market:
- firm’s ability to attract and hold capable employees is essential to its success
- access to needed personnel is determined by three factors: the firm’s reputation as an
employer, local employment rates, ready availability as well as the availability of
people with the needed skills
Authors: J. Albrecht, S. Bauwens, A. Benken, V. Franke, S. Heinrichs, S. Huth, D. Nussbaum, K. Pietrek, B. Pörner 6
EFM Academy - P&R Competitive Strategy,8th + D&R&S International Business,10th
In less than 20 years, rich industrial countries will be overshadowed by developing countries
in their produced share of the word’s output
Proactive:
Advantage/ opportunities:
• additional resources
• lowered costs
• incentives
• new, expanded markets
• exploitation of firm-specific advantages
• taxes
• economies of scale
• synergy
• power and prestige
• protect home market through offence in competitor’s home
Reactive:
Outside occurrence
• trade barriers
• international customers
• international competition
• regulations
• chance
Authors: J. Albrecht, S. Bauwens, A. Benken, V. Franke, S. Heinrichs, S. Huth, D. Nussbaum, K. Pietrek, B. Pörner
EFM Academy - P&R Competitive Strategy,8th + D&R&S International Business,10th
Authors: J. Albrecht, S. Bauwens, A. Benken, V. Franke, S. Heinrichs, S. Huth, D. Nussbaum, K. Pietrek, B. Pörner
EFM Academy - P&R Competitive Strategy,8th + D&R&S International Business,10th
Global industry:
• Competition crosses national boarder
• A firm’s strategic moves in one country can be significantly affected by its
competitive position in another country
• Strategic management planning must be global for at least 6 reasons:
1. the increased scope of the global management task
2. the increased globalization of firms
3. the information explosion
4. the increase in global competition
5. the rapid development of technology
6. strategic management planning breeds managerial confidence
• maximize capabilities through worldwide strategy
• high degree of centralized decision making
• factors that creates a global industry: economies of scale, high level of R&D
expenditures, presence in the industry of predominantly global firms, presence of
homogeneous product needs across markets, low level of trade regulations
• 6 factors which drive global companies: global management team, strategy, operations
and products, technology and R&D, financing, marketing (p.108)
Global challenge:
Location and coordination of functional activities
• typical functional activities of the firm include purchases of input resources,
operations, research and development, marketing and sales, after-sales service
Authors: J. Albrecht, S. Bauwens, A. Benken, V. Franke, S. Heinrichs, S. Huth, D. Nussbaum, K. Pietrek, B. Pörner
EFM Academy - P&R Competitive Strategy,8th + D&R&S International Business,10th
Franchising:
• Specialization from of licensing
• Allows the franchisee to sell a highly published product, using the parent’s brand
name of trademark, developed procedures, and marketing strategies
Joint ventures:
• Begin with a mutually agreeable pooling of capital, reduction, etc.
• Share management
Foreign branching
• An extension of the company in its foreign market
• Separated located strategic business
Authors: J. Albrecht, S. Bauwens, A. Benken, V. Franke, S. Heinrichs, S. Huth, D. Nussbaum, K. Pietrek, B. Pörner
EFM Academy - P&R Competitive Strategy,8th + D&R&S International Business,10th
Introduction:
- a strategy must be consistent with conditions in a firm’s competitive environment, it must
pose realistic requirements on the firm’s resources and it must be carefully executed
- problem with implementation of a strategy: managers rely too heavily on past
experiences and disregard signals that change is needed -> apply resource based view
when conducting an internal analysis and creating new strategic objectives
• Underlying premise:
firms differ in fundamental ways because each possesses a unique “bundle” of resources
(tangible/intangible assets and organizational capabilities) -> different bases for
competitive advantages
• Is a useful starting point for understanding internal analysis
Three basic resources: tangible assets, intangible assets, and organizational capabilities
• Core competence (historical assumption) = capability/skill that once identified,
nurtured, and deployed throughout the firm became the basis
for lasting competitive advantage
• RBV makes the core competence concept more focused and measurable
-> RBV created basic types of resources that form the building blocks for distinctive
competencies:
1. tangible assets = are physical and financial means a company uses to
provide value (often on balance sheet)
include production facilities, raw materials, financial
resources …
2. intangible assets = cannot be touched/seen
critical in creating competitive advantage
include brand names, company reputation, patents and
trademarks …
3. organizational capabilities = skills - the ability/ways of combining
assets, people and processes that a company
uses to transform inputs into outputs more
efficiently than its competitors
What makes a resource valuable?
Some key guidelines to identify a valuable asset, capability, or competence:
1. Competitive superiority: does the resource help fulfill a customer’s need better than those
of the firm’s competitors?
• It is important to recognize that only resources that contributed to competitive
superiority were valuable (aspects that distinguish company from competitors; e.g.
location of restaurants …)
2. Resource scarcity: is the resource short in supply?
• Resource scarcity contributes value when it can be sustained over time
3. Inimitability: is the resource easily copied or acquired?
• If a resource can be easily copied it only generates a temporary value
Î important to identify isolating mechanisms which make resources difficult to
imitate:
a) physically unique resources are virtually impossible to imitate like patents
(Mickey Mouse), mineral rights …
Authors: J. Albrecht, S. Bauwens, A. Benken, V. Franke, S. Heinrichs, S. Huth, D. Nussbaum, K. Pietrek, B. Pörner
EFM Academy - P&R Competitive Strategy,8th + D&R&S International Business,10th
SWOT ANALYSIS
• Acronym for the internal strengths and weaknesses of a firm and the environmental
opportunities and threats facing the firm
• Creates a quick overview of a company’s strategic situation
• Has implications for the design of a successful strategy
• Most common way is to use it as a logical framework guiding systematic discussion of a
firm’s resources and basic alternatives
• Complementation to RBV, which identifies the strengths/weaknesses
Opportunities
• major favorable situations in a firm’s environment (e.g. key trends, technological
changes, previously overlooked market segments…)
Threats
° major unfavorable situations in a firm’s environment (e.g. entrance of new competitors,
slow market growth…)
Strengths
• Resource/competency advantage to competitors
Distinctive competence: when it gives the firm a comparative advantage in the
marketplace (arise from available resources/competencies)
Authors: J. Albrecht, S. Bauwens, A. Benken, V. Franke, S. Heinrichs, S. Huth, D. Nussbaum, K. Pietrek, B. Pörner
EFM Academy - P&R Competitive Strategy,8th + D&R&S International Business,10th
Weaknesses
• Limitation/deficiency in resources/competencies relative to competitors; impedes a firm’s
effective performance
-> look at graph p.136: strategies that fit to combinations of SWOT analysis
Authors: J. Albrecht, S. Bauwens, A. Benken, V. Franke, S. Heinrichs, S. Huth, D. Nussbaum, K. Pietrek, B. Pörner
EFM Academy - P&R Competitive Strategy,8th + D&R&S International Business,10th
• compare the firm’s status with meaningful standards to determine which of its value
activities are strengths/weaknesses
Authors: J. Albrecht, S. Bauwens, A. Benken, V. Franke, S. Heinrichs, S. Huth, D. Nussbaum, K. Pietrek, B. Pörner
EFM Academy - P&R Competitive Strategy,8th + D&R&S International Business,10th
Long-Term Objectives:
- short-run profit maximization is rarely the best approach to achieving sustained corporate
growth and profitability
- instead, managers favour to distribute a small amount of profit for the moment but sow most
of it to increase the likelihood of a long-term supply
- in order to achieve long-term prosperity, strategic managers establish long-term objectives in
seven areas:
i) Profitability: (have a profit objective, expressed in earnings per share or return on
equity)
ii) Productivity: (the strive for increased productivity of the systems results in an increased
profitability; commonly used productivity objectives are the number of items produced)
iii) Competitive Position: (measure of corporate success is relative dominance in the
marketplace and may indicate the firm’s long-term priority)
iv) Employee Development: (employees value education and training, as this leads to
increased compensation and job security)
v) Employee Relations: (good employee relations are highly important; productivity is
linked to employee loyalty and the appreciation of managers’ interest in employee
welfare)
vi) Technological Leadership: (firms must decide whether to lead or follow in the
marketplace; Internet has become in integral aspect of corporate long-term planning)
vii) Public Responsibility: (managers recognize their responsibilities to customers and to
society at large; many firms seek to exceed government requirements)
Authors: J. Albrecht, S. Bauwens, A. Benken, V. Franke, S. Heinrichs, S. Huth, D. Nussbaum, K. Pietrek, B. Pörner 1
EFM Academy - P&R Competitive Strategy,8th + D&R&S International Business,10th
- surrounding the vision and strategy, there are 4 additional boxes, where each box contains
the objectives, measures, targets and initiatives for one of the four perspectives (Æ see
Exhibit 6.2, p. 159)
- the objectives and measures of the four perspectives are linked by cause-and-effect
relationships that lead to the successful implementation of the strategy
- a properly constructed scorecard is balanced between short- and long-term measures;
financial and non-financial measures; and internal and external performance perspectives
Generic Strategies:
- is the believe that a long-term or grand strategy must be based on a core idea about how the
firm can best compete in a marketplace
- any long-term strategy should derive from a firm’s attempt to seek a competitive advantage
based on one of the three generic strategies:
Generic Strategy Risks
Overall Cost - not sustained
Leadership - competitors imitate
- technology changes
- other bases of cost leadership erode
- proximity in differentiation is lost
- cost focuser achieve even lower costs in segments
Differentiation - not sustained
- competitors imitate
- bases of differentiation become less important to buyers
- cost proximity is lost
- differentiation focusers achieve even greater differentiation in segments
Focus - focus is imitated
- target segment turns unattractive (structure erodes, demand disappears
- broadly targeted competitors overwhelm segment
- new focusers subsegment the industry
Low-Cost Leadership:
- depend on fairly unique capabilities to achieve and sustain their low-cost position
- they usually excel at cost reductions and efficiencies
- maximise economies of scale
- can charge lower prices or enjoy a higher profit margin Æ can effectively defend itself
against prices wars, can attack competitors on price in order to gain market share
Differentiation:
- designed to appeal to customers with a special sensitivity for a particular product attribute
- attempts to build customer loyalty
Focus:
- attempts to attend to the needs of a particular market segments, which are usually those that
are ignored by marketing appeals
- willing to serve isolated areas or tailor the product to somewhat unique demands oo the
small- or medium-sized customer
1) Concentrated Growth:
o the strategy that directs its resources to the profitable growth of a single product, in a
single market with a single dominant strategy
o rationale is that the firm thoroughly develops and exploits its expertise in a delimited
competitive area
Authors: J. Albrecht, S. Bauwens, A. Benken, V. Franke, S. Heinrichs, S. Huth, D. Nussbaum, K. Pietrek, B. Pörner 2
EFM Academy - P&R Competitive Strategy,8th + D&R&S International Business,10th
o leads to enhanced performance; characteristic are the ability to access market needs,
know buyer behaviour, customer price sensitivity and the effectiveness of promotion
o firm grows by building on its competences and it achieves a competitive edge by
concentrating in the product-market segment it knows best
o the firm aims for the growth that results from increased productivity, better coverage of
its actual product-market segment and more efficient use of its technology
- Favoured by:
o firm’s industry is resistant to major technological advancements (which is the case in the
late growth and maturity stage of the product life cycle)
o the targeted markets are not product saturated (markets with competitive gaps leave the
firm with alternatives for growth, other than taking market share away from competitors
o the firm’s product markets are sufficiently distinctive to dissuade competitors in adjacent
product markets from trying to invade the firm’s segment
o firm’s inputs are stable in price and quantity and are available in the amounts and at the
times needed
o the market is stable, without the seasonal or cyclical swings that would encourage a firm
to diversity
o firm enjoys competitive advantage based on efficient production or distribution channels
o market generalists who creates conditions without making special appeals to distinct
customer groups
- Risks and Rewards:
o in a changing environment the risks are particularly high
o concentrating on a single product market makes the firm particularly vulnerable to
changes in the segment
o entrenchment in a specific product market tends to make a concentrating firm more adept
than competitors at detecting new trends
o it is vulnerable to the high opportunity costs that result from remaining in a specific
product market and ignoring all other options that could employ the firm’s resources
more efficiently
- Viable Option:
o only limited additional resources are necessary to implement the strategy; therefore very
good for firms with limited funds
o limited risks involved
o firm directs its resources to the profitable growth of a narrowly defined product and
focuses on a dominant technology
o they are able to extract the most from their technology and market knowledge and are
thus able to minimize the risks associated with unrelated diversification
2) Market Development:
- consists of marketing present products, with only cosmetic modifications, to customers in
related market areas by adding channels of distribution or by changing the content of
advertising or promotion
- it allows the firm to practice a form of concentrated growth by identifying new uses for
existing products and new demographically, psychographically or geographically defined
markets
- ranks second as the least costly and least risky of the 15 grand strategies
3) Product Development:
- involves the substantial modification of existing products or the creation of new but
related products that can be marketed to current customers through established channels
- it is often adopted to prolong the life cycle of current products or to take advantage of a
favourite reputation or brand name
Authors: J. Albrecht, S. Bauwens, A. Benken, V. Franke, S. Heinrichs, S. Huth, D. Nussbaum, K. Pietrek, B. Pörner 3
EFM Academy - P&R Competitive Strategy,8th + D&R&S International Business,10th
4) Innovation:
- it is seaked to reap the initially high profits associated with customer acceptance of a new
or greatly improved product
- the underlying rationale is to create a new product life cycle and thereby make similar
existing products obsolete
- most growth-oriented firms appreciate the need to the innovative occasionally, but few
firms use it as their fundamental way of relating to their markets
- very few innovative ideas prove profitable because or R&D and premarketing costs
- less than 2% of the innovative projects initially considered reach the market place
5) Horizontal Integration:
- growth that is to be achieved through the acquisition of one or more similar firms
operating at the same stage of the product-marketing chain
- competitors are eliminated and the acquiring firm is provided with access to new markets
- risks stems from an increased commitment to one type of business
6) Vertical Integration:
- firm acquires the firm that supplies the inputs or the firm that are customers of its outputs
- Backward Vertical Integration: the acquired firm operates at an earlier stage of the
production-marketing process; the dependability of the supply or the quality of the raw
materials is increased
- Forward Vertical Integration: the acquired firm operates at a later stage of the product-
marketing process; preferred if great advantages accrue to stable production
- by integrating vertically, the acquiring firm can greatly expand its operations and thereby
achieving greater market share; improve its economies of scale and increases the
efficiency of used capital
- benefits are achieved with a moderately increased risk, since the success of the expansion
is dependent on proven abilities
- risks result from the firm’s expansion into areas requiring strategic managers to broaden
the base of their competences and assume additional responsibilities
7) Concentric Diversification:
- involves the acquisition of businesses that are related to the acquiring firm in terms of
technology, markets or products
- selected new business possesses high degree of compatibility with firm’s current
businesses
- motivations for acquiring a firm:
o increase the firm’s stock value
o increase the growth rate of a firm
o make an investment that represents better use of funds
o improve the stability of earnings
o balance or fill out the product line
o diversify the product line when the life cycle of current products has peaked
o quick acquisition of needed resources
o achieve tax savings
o increases the efficiency and profitability
Authors: J. Albrecht, S. Bauwens, A. Benken, V. Franke, S. Heinrichs, S. Huth, D. Nussbaum, K. Pietrek, B. Pörner 4
EFM Academy - P&R Competitive Strategy,8th + D&R&S International Business,10th
- an ideal concentric diversification occurs when the combined company profits increase
the strength and opportunities while decreasing the weaknesses and risks
8) Conglomerate Diversification:
- occurs when a firm acquires a business because it represents the most promising
investment opportunity available
- it is principally bases on profit considerations
- NB: the majority of such acquisitions fail to produce the desired results for the
9) Turnaround:
- a firm may face declining profits due to recessions, production inefficiencies and
innovative breakthroughs by competitors
- turnaround is a grand strategy based on the belief that a firm can survive and eventually
recover if a centred effort is made over a period of a few years to fortify its distinctive
competences
- turnaround is initiated by two forms of retrenchment: cost reduction (decreasing of
workforce, leasing rather than purchasing equipment) or by asset reduction (sale of
property that is not essential to the basic activity of the firm
- Situation Severity: the immediacy of the resulting threat to company survival posed by
the turnaround situation
- Turnaround Responses consist of:
o Retrenchment: consists of cost-cutting and asset-reducing activitiesÆstabilizes
the firm’s financial position
o Recovery Response: recovery is achieved when economic measures indicate that
the firm has regained its pre-downturn levels of performance
- Exhibit 6.10, p. 174 Model of the Turnaround situation
10) Divesture:
- involves the sale of a firm or a major component of a firm
- Marketing for Sale: finding a buyer that is willing to pay a premium above the value of a
going concern’s fixed assets
- reasons for divesture:
o partial mismatches between the acquired firm and the parent corporation
o corporate financial needs
o government antitrust action when a firm is believed to monopolised
11) Liquidation:
- the firm is sold in parts
- the owners and the managers admit failure and recognize that this action is likely to result
in great hardships to themselves and their employees
- it minimizes the losses of the stockholders
12) Bankruptcy:
- Liquidation Bankruptcy:
o all assets are distributed to creditors, who will only receive back a small faction of
the amount they are owed
o business cannot pay its debts so it must close down
o investors lose their money, employees their jobs and managers their credibility
o in owner-managed firms, company and personal bankruptcy go hand in hand
o owner are personally liable for all business debts not covered by the sale of the
business assts; shareholders of corporations are not liable for corporate debt; they
simply terminate operations
Authors: J. Albrecht, S. Bauwens, A. Benken, V. Franke, S. Heinrichs, S. Huth, D. Nussbaum, K. Pietrek, B. Pörner 5
EFM Academy - P&R Competitive Strategy,8th + D&R&S International Business,10th
o court appoints a trustee, who collects the property of the company, reduces it to
cash and distributes the proceeds proportionally to creditors on a pro rata basis
- Reorganization Bankruptcy:
o firm attempts to persuade its creditors to temporarily freeze their claims while it
undertakes to recognize and rebuild the company’s operations more profitably
o if the plan is successful this option offers the maximum repayment of debt
- if creditors file lawsuits or schedule judicial sales to enforce liens, the company can seek
protection of the Bankruptcy Court; sufficient time is then provided to work out the
reorganization
15) Consortia:
- defined as large interlocking relationships between businesses of an industry
- Japanese Keiretsu: an undertaking involving up to 50 different firms that are joined
around a large trading company or bank and are coordinated through interlocking
directories and stock exchanges; it is designed to use industry coordination to minimize
risks of competition in part through cost sharing and increased economies of scale
- South Korean Chaebol: resembles a consortium and kreiretsu except that they are
finances through government banking group and largely run by professional managers
trained by participating firms for the job
- the selection of long-range objectives and grand strategies involves simultaneous rather
than sequential decisions
Authors: J. Albrecht, S. Bauwens, A. Benken, V. Franke, S. Heinrichs, S. Huth, D. Nussbaum, K. Pietrek, B. Pörner 6
EFM Academy - P&R Competitive Strategy,8th + D&R&S International Business,10th
• What strategies are most effective at building sustainable competitive advantages for
single business units?
• What competitive strategy positions a business most effectively in its industry?
• Should dominant-product/service businesses diversify to build value and competitive
advantage?
• What grand strategies are most appropriate?
• Low-cost advantages that reduce the likelihood of pricing pressure from buyers
• Truly sustained low-cost advantages may push rivals into other areas, lessening price
competition
• New entrants competing on price must face an entrenched cost leader without the
experience to replicate every cost advantage
• Low-cost advantages should lessen the attractiveness of substitute products
• Higher margins allow low-cost producers to withstand supplier cost increases and
often gain supplier loyalty over time
• Many cost-saving activities are easily duplicated
• Exclusive cost leadership can become a trap
• Cost differences often decline over time
Authors: J. Albrecht, S. Bauwens, A. Benken, V. Franke, S. Heinrichs, S. Huth, D. Nussbaum, K. Pietrek, B. Pörner
EFM Academy - P&R Competitive Strategy,8th + D&R&S International Business,10th
• the analysis and choice to build competitive advantage can be enhanced by taking
industry conditions into account
• there are 5 “typical” industry settings and opportunities (3 of the 5 relate to the
industry life cycle)
Authors: J. Albrecht, S. Bauwens, A. Benken, V. Franke, S. Heinrichs, S. Huth, D. Nussbaum, K. Pietrek, B. Pörner
EFM Academy - P&R Competitive Strategy,8th + D&R&S International Business,10th
establish the firm’s technology as the dominant one, early acquisition of a core
group of loyal customers, ability to forecast future competitors
Authors: J. Albrecht, S. Bauwens, A. Benken, V. Franke, S. Heinrichs, S. Huth, D. Nussbaum, K. Pietrek, B. Pörner
EFM Academy - P&R Competitive Strategy,8th + D&R&S International Business,10th
Î strategists must carefully match their skills and resources with global industry structure
and conditions in selecting the most appropriate strategy option
there are 3 basic considerations:
1. recognize that their overall choice revolves around 3 sources of competitive advantage
(that require total and consistent commitment)
2. must carefully weigh skills, resources, organizational requirements, and risk
associated with each source of competitive advantage
3. consider the unique influence of generic industry environment
Authors: J. Albrecht, S. Bauwens, A. Benken, V. Franke, S. Heinrichs, S. Huth, D. Nussbaum, K. Pietrek, B. Pörner
EFM Academy - P&R Competitive Strategy,8th + D&R&S International Business,10th
overcome weakness
internal external
Maximize strength
Strong Weak
competitive competitive
position position
Authors: J. Albrecht, S. Bauwens, A. Benken, V. Franke, S. Heinrichs, S. Huth, D. Nussbaum, K. Pietrek, B. Pörner
EFM Academy - P&R Competitive Strategy,8th + D&R&S International Business,10th
profitable if firm is centred around a set of resources that creates a competitive adv. in
one industry, but is adaptable enough to also be applied to others; least profitable if
firm is centred around general resources that are applied in a variety of industries, but
seldom create a competitive adv.)
3. Is our combination of competencies unique/difficult to re-create? -> strategists look
for a combination of competencies to create a situation where seemingly easily
replicated competencies become unique, sustainable competitive adv.; often managers
create a concept for interrelated skills, but encounter problems when trying to
implement it
- market growth rate is projected rate of sales growth for market (usually measured by
percentage increase in a market’s sales or units volume over 2 most recent years)
- relative competitive position is expressed as market share of business divided by market
share of largest competitor -> provides basis for comparing relative strengths of
businesses in terms of positions in respective markets
- stars: rapidly growing markets with large market shares; best long run opportunities
(profitability and growth); require substantial investment to maintain (and expand)
dominant positions; investment requirement often in excess of funds that stars generate;
these businesses are often short term priority users of resources
- cash cows: high market share in low growth markets, strong positions and minimal
investment requirements often lead to capital in excess of cash needs; are “milked” as a
source of resources for deployment elsewhere; are yesterday’s stars and foundation of
corporate portfolios
- dogs: low market share and low growth, face mature markets with intense competition
and low profit margins, managed for short term cash flow (e.g. ruthless cost cutting) to
supplement resources, afterwards they are often divested or liquidated
- question marks (problem children): high growth rates give them appeal but low market
share makes profit potential uncertain; use a lot of cash because of high growth rate, but
generate just a little bit -> managers at corporate level must identify question marks that
can increase market share and move into star group with support of resources
Authors: J. Albrecht, S. Bauwens, A. Benken, V. Franke, S. Heinrichs, S. Huth, D. Nussbaum, K. Pietrek, B. Pörner
EFM Academy - P&R Competitive Strategy,8th + D&R&S International Business,10th
Authors: J. Albrecht, S. Bauwens, A. Benken, V. Franke, S. Heinrichs, S. Huth, D. Nussbaum, K. Pietrek, B. Pörner
EFM Academy - P&R Competitive Strategy,8th + D&R&S International Business,10th
- don’t address how value is created in business units – only relationship cash; tendency to
trivialize strategic thinking, not enough time for underlying analysis
- accurate measurement for matrix classifications not as easy as matrices portrayed,
identifying separate businesses not as precise
- relationship between market share and profitability (experience curve effect) varies across
industries and market segments – firms with low market share can generate superior
profitability
- limited strategic options, intended to describe flow of resources, were considered more as
basic strategic missions; false sense of what strategies are (especially average businesses)
- portray approach that firma need to be self-sufficient in capital -> ignores capital raised in
capital markets
- fails to compare competitive adv. a business receives from being owned by a particular
company with the costs of owning it
- constructing business portfolio matrices must be undertaken with limitations in mind
Î they provide one form of input to corporate managers seeking to balance financial
resources
Does our business portfolio achieve appropriate levels of risk and growth?
- diversification reduces risk in several ways:
1. balance of cyclical revenue streams to reduce earnings volatility
2. revenue growth can be enhanced
- managers should examine risk and growth when undertaking strategic analysis: is growth
always desirable? Can risk truly be managed most effectively by corporate management?
Authors: J. Albrecht, S. Bauwens, A. Benken, V. Franke, S. Heinrichs, S. Huth, D. Nussbaum, K. Pietrek, B. Pörner
EFM Academy - P&R Competitive Strategy,8th + D&R&S International Business,10th
- a firm in early stage of product life cycle must operate with more risk than firms in later
stages of cycle
- risk-oriented managers lean toward opportunistic strategies with higher payoffs
- risk-averse managers lean toward safe, conservative strategies with reasonable, highly
probable returns
6. Competitive reaction
- firms must anticipate competitors’ reactions to chosen strategies
- e.g. rival might implement an aggressive counterstrategy
Authors: J. Albrecht, S. Bauwens, A. Benken, V. Franke, S. Heinrichs, S. Huth, D. Nussbaum, K. Pietrek, B. Pörner
EFM Academy - P&R Competitive Strategy,8th + D&R&S International Business,10th
1
Authors: J. Albrecht, S. Bauwens, A. Benken, V. Franke, S. Heinrichs, S. Huth, D. Nussbaum, K. Pietrek, B. Pörner
EFM Academy - P&R Competitive Strategy,8th + D&R&S International Business,10th
2
Authors: J. Albrecht, S. Bauwens, A. Benken, V. Franke, S. Heinrichs, S. Huth, D. Nussbaum, K. Pietrek, B. Pörner
EFM Academy - P&R Competitive Strategy,8th + D&R&S International Business,10th
3
Authors: J. Albrecht, S. Bauwens, A. Benken, V. Franke, S. Heinrichs, S. Huth, D. Nussbaum, K. Pietrek, B. Pörner
EFM Academy - P&R Competitive Strategy,8th + D&R&S International Business,10th
► Summary:
three fundamental perspectives provide the basis for designing strategy control systems:
→ Strategic Control
→ Continuous Improvement
→ The Balanced Scoreboard
4
Authors: J. Albrecht, S. Bauwens, A. Benken, V. Franke, S. Heinrichs, S. Huth, D. Nussbaum, K. Pietrek, B. Pörner
EFM Academy - P&R Competitive Strategy,8th + D&R&S International Business,10th
• The value chain disaggregates a firm into its strategically relevant activities in
order to understand the behavior of costs and the existing and potential sources
of differentiation
• Firms gain competitive advantage by performing activities more cheaply than
its competitors
• Suppliers have value chains that create and deliver the purchased inputs used
in a firm’s chain
• Many products pass through the value chains of channels on their way to the
buyer
• Channels perform additional activities that affect the buyer as well as
influence the firm’s own activities
• Gaining and sustaining competitive advantage depends on understanding not
only a firm’s value chain but hw the firm fits in the overall value system
• One important difference is that a firm’s value chain may differ in competitive
scope from that of its competitors, representing a potential source of
competitive advantage
• The extent of integration plays a key role in competitive advantage
• Every firm’s value chain is composed of nine generic categories of activities
which are linked together in characteristic ways
• The generic chain is used to demonstrate how a value chain can be constructed
for a particular firm, reflecting the specific activities it performs
Authors: J. Albrecht, S. Bauwens, A. Benken, V. Franke, S. Heinrichs, S. Huth, D. Nussbaum, K. Pietrek, B. Pörner
EFM Academy - P&R Competitive Strategy,8th + D&R&S International Business,10th
Support activities:
• Procurement (function of purchasing inputs used in the firm’s value chain)
• Technology development (efforts to improve the product and the process)
• Human resource management (recruiting, hiring, training)
• Firm infrastructure (consists of a number of activities including general
management, planning, finance,…Æ supports the entire chain and not
individual activities)
Activity types:
• Direct (activities directly involved in creating value to the buyer)
• Indirect ( activities that make is possible to perform direct activities on a
continuing basis)
• Quality assurance( activities that ensure the quality of activities such as
monitoring, inspecting,...)
• All 3 types are present not only among primary activities but also among
support activities
• There are often tradeoffs between direct- and indirect activities- more
spending on maintenance lowers machine cost
Authors: J. Albrecht, S. Bauwens, A. Benken, V. Franke, S. Heinrichs, S. Huth, D. Nussbaum, K. Pietrek, B. Pörner
EFM Academy - P&R Competitive Strategy,8th + D&R&S International Business,10th
Vertical integration:
• The way supplier or channel activities are performed affects the cost or
performance of a firm’s activities
• The linkages between suppliers’ value chains and a firm’s value chain provide
opportunities for the firm to enhance its competitive advantage
• Is a relationship in which both can gain
• Coordination or optimizing linkages between a firm and its suppliers is a
function of supplier’s bargaining power and is reflected in supplier’s margins
• Coordination with suppliers and hard bargaining to capture the spoils are
important to competitive advantage
• Sometimes vertical linkages are easier to achieve with coalition partners than
with independent firms
Authors: J. Albrecht, S. Bauwens, A. Benken, V. Franke, S. Heinrichs, S. Huth, D. Nussbaum, K. Pietrek, B. Pörner
EFM Academy - P&R Competitive Strategy,8th + D&R&S International Business,10th
4. industry scope
• can include primary and support activities
• interrelations among business units can have a powerful influence on
competitive advantage Æ a shared logistical system may allow a firm
to reap economies of scale
Authors: J. Albrecht, S. Bauwens, A. Benken, V. Franke, S. Heinrichs, S. Huth, D. Nussbaum, K. Pietrek, B. Pörner
EFM Academy - P&R Competitive Strategy,8th + D&R&S International Business,10th
• Nation’s competitiveness depends on the capacity of its industry to innovate and upgrade
• Benefit from having strong domestic rivals (…) -> because of pressure + challenge
• Differences in national values, culture … contribute to competitive success
• Nations fundamentally misperceive true sources of competitive advantage
Î short-term appeal -> nations never achieve the real + sustainable competitive
advantage
Factor Demand
conditions conditions
Related and
supporting
industry
Factor Conditions
• factors of production determine the flow of trade
• nations do not inherit but create the most important factors of production
Authors: J. Albrecht, S. Bauwens, A. Benken, V. Franke, S. Heinrichs, S. Huth, D. Nussbaum, K. Pietrek, B. Pörner
EFM Academy - P&R Competitive Strategy,8th + D&R&S International Business,10th
• important: the rate + efficiency with which a nation created, upgrades, and deploys the
factors of production
• highly specialized factors of production -> support competitive advantage
(factors are more scarce + more difficult for foreign competitors to imitate)
• disadvantage can become an advantage by innovating and upgrading
under certain conditions
o must send companies proper signals about circumstances that will spread to other
nations
o there must be favourable circumstances elsewhere in the diamond (like active
domestic rivals -> create pressure to innovate, …)
Demand Conditions
• composition + character of home market -> disproportionate effect on how companies
perceive, interpret, respond to buyer needs
• home-demand conditions help build competitive advantage
• demand conditions provide advantage by forcing companies to respond to tough
challenges
Authors: J. Albrecht, S. Bauwens, A. Benken, V. Franke, S. Heinrichs, S. Huth, D. Nussbaum, K. Pietrek, B. Pörner
EFM Academy - P&R Competitive Strategy,8th + D&R&S International Business,10th
Î having been tested by fierce domestic competition -> the stronger companies are
well equipped to win abroad
Authors: J. Albrecht, S. Bauwens, A. Benken, V. Franke, S. Heinrichs, S. Huth, D. Nussbaum, K. Pietrek, B. Pörner
EFM Academy - P&R Competitive Strategy,8th + D&R&S International Business,10th
Deregulate competition
• regulation has 2 negative consequences
o it stifles rivalry + innovation
o it makes a industry a less dynamic + less desirable buyer/supplier
Authors: J. Albrecht, S. Bauwens, A. Benken, V. Franke, S. Heinrichs, S. Huth, D. Nussbaum, K. Pietrek, B. Pörner
EFM Academy - P&R Competitive Strategy,8th + D&R&S International Business,10th
o work with home-nation buyers, suppliers, and channels to help them upgrade +
extend their own competitive advantage
o create specialized factors like human resources, scientific knowledge, or
infrastructure
o speed innovations by putting their headquarters + other key operations
Authors: J. Albrecht, S. Bauwens, A. Benken, V. Franke, S. Heinrichs, S. Huth, D. Nussbaum, K. Pietrek, B. Pörner
EFM Academy - P&R Competitive Strategy,8th + D&R&S International Business,10th
Facility location = the process of determining a geographic site for a firm’s operations
• Managers must weigh many factors when assessing the desirability of a particular site
like desirability of a particular site, including proximity to customers and suppliers,
labor costs, and transportation costs
• Managers generally cans disregard factors that fail to meet at least one of the
following conditions
1. the factor must be sensitive to location
2. the factor must have a high impact on the company’s ability to meet its
goals
• managers can divide location factors into dominant + secondary factors
dominant factor = are those derived from competitive priorities (like cost, quality, time,
and flexibility) and have a particularly strong impact on sales or costs
secondary factor = also are important, but management may downplay / even ignore some
of them if other factors are more important
Authors: J. Albrecht, S. Bauwens, A. Benken, V. Franke, S. Heinrichs, S. Huth, D. Nussbaum, K. Pietrek, B. Pörner
EFM Academy - P&R Competitive Strategy,8th + D&R&S International Business,10th
materials between plants, insurance costs, competition from other firms for the
work force, local ordinances, community attitudes, and many others
• for global operations, firms are emphasizing local employee skills and education
and the local infrastructure
1. proximity to customers
• location is a key factor in determining how conveniently customers can carry on
business with a firm
-> influence of location on revenues tends to be the dominant factor
2. transportation costs and proximity to markets
• for warehousing and distribution operations, transportation costs and proximity to
markets are extremely important
• with a warehouse a firm can hold inventory closer to the customer -> reducing
delivery time and promoting sales (can be a competitive advantage)
3. location of competitors
• one complication in estimating the sales potential at different locations is the
impact of competitors
• in some industries firms should avoid areas where competitors are already well
established
• in other industries like new-car sales showrooms locating near competitors is
actually advantageous -> several competing firms clustered in one location attract
more customers
4. side-specific factors
• retailer also must consider the level of retail activity, residential density, traffic
flow, and site visibility
follow-the-leader strategy = if firms follow competitors -> several competing firms clustered
in one location
Authors: J. Albrecht, S. Bauwens, A. Benken, V. Franke, S. Heinrichs, S. Huth, D. Nussbaum, K. Pietrek, B. Pörner
EFM Academy - P&R Competitive Strategy,8th + D&R&S International Business,10th
Reader article 1: Competing in the global marketplace – Globalization
Introduction
- barriers to cross-border trade and investment are tumbling; perceived distance is shrinking
due to advances in transportation and telecommunications technology; material culture is
starting to look similar around the world; nat. economies are merging into an
interdependent global economic system
⇒ globalization refers to the shift towards a more integrated and interdependent world
economy. Globalization has 2 main components: globalization of markets & of production
What is globalization?
The globalization of markets
- refers to the merging of historically distinct & separate nat. markets into one huge global
marketplace
- enabled through falling barriers to cross-border trade
- not only conducted by large multinationals but also by smaller firms
- preferences of consumers in different nations are beginning to converge on some global
norm
- many firms offer a standardized product worldwide and thus help to create a global
market
- however several cultural differences remain present: these differences require that
marketing strategies, product features and operating practices be customized to best match
conditions in a country
- most global markets nowadays are not consumer markets, but markets for industrial goods
and materials that serve universal need throughout the world (e.g. wheat, oil)
- in many global markets the same firms frequently confront each other as competitors: if
one firm moves into a nation that is not yet served by rivals, the latter are eager to follow
in order to prevent their competitor from gaining a competitive advantage
Drivers of globalization
Declining trade and investment barriers
- International trade occurs when a firm exports goods/services to consumers in another
country
- Foreign direct investment occurs when a firm invests resources in business activities
outside its home country
- During 1920s/30s most common barrier to international trade: tariffs – aimed to protect
domestic industries from foreign competition -> however countries kept raising trade
barriers against each other and thus depressed world demand (contributed to Great
Depression in 1930s)
- After WWII barriers started to diminish, enforced by establishment of General Agreement
on Tariffs and Trade – GATT was supported by Uruguay Round (1933) which created
World Trade Organization (WTO)
- Average tariff rates have fallen significantly since 1950 (now at 3.9%)
Authors: J. Albrecht, S. Bauwens, A. Benken, V. Franke, S. Heinrichs, S. Huth, D. Nussbaum, K. Pietrek, B. Pörner
EFM Academy - P&R Competitive Strategy,8th + D&R&S International Business,10th
- In addition countries have progressively removed restrictions to foreign direct investment
between 1990 and 2000 -> large increase in number of bilateral investment treaties
designed to protect and promote investment between 2 countries also reflects
governments’ desire to facilitate FDI
- Lowering of barriers to trade enables firms to see world, rather than a single country as
market – lowering of Investment barriers allows a firm to base production at optimal
location for activity
- Firms might design a product in one country, produce component parts in two other
countries, assemble the products in yet another country and then distribute it around the
world
- Figure p.9: more firms are spreading overall production process to different locations to
drive down production costs and increase product quality; economies of the world’s
nation states are becoming more intertwined -> as trade expands, nations are becoming
dependent on each other with goods and services
- However increasing international trade increases the intensity of competition in home
markets (especially manufacturing and service industries)
Technological change
- technological change has made globalization a tangible reality
- since WWII major progress in communication, information processing and transportation
technology – most important internet and world wide web
- Microprocessors and telecommunications: major important innovation was
microprocessor, increased amount of info. that can be processed by individuals and firms;
costs microprocessors and telecommunications are continuing to fall -> lowers cost of
coordinating and controlling a global organization
- internet and www: forecasts suggest that internet will have more than 1.12 billion users in
2005 (starting with less than 1 mill. in 1990); will be information backbone of tomorrow’s
global economy (web-based transactions can rise to $6.8 trillion in 2004 – mostly business
to business (e-commerce) not business to customer); allows companies to expand global
presence at a lower cost than before -> makes it much easier for buyers and sellers to find
each other, no matter where they are located)
- transportation technology: major innovations since WWII: commercial jet aircraft (shrunk
the globe) and containerization (lowers costs of shipping goods over long distances –
much less labour needed than before, costs have plummeted) -> helps to drive
globalization of markets and production
- implications for the globalization of production: dispersal of production to geographically
dispersed areas became more economical – make it possible for firms to create and
manage globally dispersed production systems (e.g. e-mail and video conferences)
- implications for the globalization of markets: low-cost global communications networks
like www create electronic marketplaces, aircrafts enable people to travel between
countries -> reduced cultural distance and created convergence of consumer tastes and
preferences, media creates global culture
- however, national differences remain in culture, preferences and practices!
Authors: J. Albrecht, S. Bauwens, A. Benken, V. Franke, S. Heinrichs, S. Huth, D. Nussbaum, K. Pietrek, B. Pörner
EFM Academy - P&R Competitive Strategy,8th + D&R&S International Business,10th
- potential consequences for Western international businesses are enormous: China
represents a huge and largely untapped market, but Chinese firms can turn out to be very
strong competitors, being able to take the global market share away
- Latin American countries have been freed from dictatorship, but economies are in a very
desolate state; substantial opportunities are accompanied by substantial risks
Authors: J. Albrecht, S. Bauwens, A. Benken, V. Franke, S. Heinrichs, S. Huth, D. Nussbaum, K. Pietrek, B. Pörner
EFM Academy - P&R Competitive Strategy,8th + D&R&S International Business,10th
1. Introduction
- the reasons for going internal and the conditions und which firms choose to do so are complex
and have been the subject of much debate - layout of this chapter:
→ the history of internationalisation
→ the reasons firms choose to internationalise
→ the ways in which this has been done
→ the theoretical frameworks that seek to explain this process
- the South Korean chaebols are similar agglomerations, centred around a holding
company; dominated by founding families; funding from government + managed by
family
→ both benefit from government in the form of preferential interest rates + capital
allocations; linked together by networks + personal relationships → this fraternal
relationships are less common in the individualised cultures of the USA or UK
- consortia of these types are designed to maximise the potential benefits of joint ventures
- a long-term focus; risk is diversified because of many different industries
Type of global Benefits Costs Critical success factors Strategic human
alliance resources managements
Licensing – - early standardisation - new competitors - selection of licensee - technical knowledge
manufacturing of design created likely to become a - training of local
industries - ability to capitalise on - possible eventual exit competitor managers on-site
innovations from industry - enforcement of patents
- access to new - possible dependence + licensing agreements
technologies on licensee
- ability to control pace
of industry evolution
Licensing – - fast market entry - quality control - partners compatible in - socialisation of
servicing and - low capital cost - trademark protection philosophies/values franchisees + licensees
franchises - tight performance with core values
standards
Joint ventures – - learning a partner’s - excessive dependence - tight + specific - management
specialisation skills on partner for sills performance criteria development and
across partners - economics of scale - deterrent to internal - entering a venture as training
- quasi-vertical investment ‘student’ rather than - negotiation skills
integration ‘teacher’ to learn skills - managerial rotation
from partner
Joint ventures – - strengths of both - high switching costs - decentralisation + - team-building
shared value- partners pooled - inability to limit autonomy from - acculturation
adding - faster learning along partner’s access to corporate parents - flexible skills for
value chain information - long ‘courtship’ period implicit communication
- fast upgrading of - harmonisation of
technological sills management styles
Consortia, - shared risks + costs - skills + technologies - government -‘clan’ cultures
keiretsus, - building a critical that have no real market encouragement - fraternal relationship
chaebols mass in process worth - shared values among - extensive mentoring to
technologies - bureaucracy managers provide a common
- fast resource flows + - hierarchy - personal relationships vision and mission
sills transfers to ensure co-ordination across member
and priorities companies
- close monitoring of
member-company
performance
c. Political factors
i. Avoidance of trade barriers
- if there are import/export restraints it might become necessary to produce in the
foreign market itself in order to avoid these trade barriers
ii. Economic development incentives
- most governments wants to profit from fdi, so that they offer incentives to firms
(including tax reductions/ tax holidays, free/subsidised access to land/buildings,
specially constructed infrastructure, etc.)
iii. BOX: Government policies, exporting and fdi
- there are different views about a correlation between these items
→ the most important variable in increasing fdi investment was found to be not ‘trade
openness’ but ‘fdi openness’ – the more ‘open’ the easier it is to hire and fire labour,
change prices, use the justice system, protect intellectual property, etc. → there is
evidence that an increase in ‘fdi openness’ leads to a even stronger increase in fdi
d. Other factors
- the role of management (the ambitions play a crucial role)
- motives of the organisation (some commentators identify three motives: market seeking,
efficiency seeking, resource seeking)
- saturation of the home market (further growth requires new markets)
- the bandwagon effect (intense rivalry can mean that a one firm just follow its competitor)
- international product life cycle (which will govern the geographical location of productions)