Module III

STRATEGIC FORMULATION

10/17/2024 DR. BHUMIKA ACHHNANI, FMS, MARWADI UNIVERSITY

Business Level Strategy

10/17/2024 DR. BHUMIKA ACHHNANI, FMS, MARWADI UNIVERSITY

Business-Level Strategy
Business-level strategy: an integrated and coordinated set of
commitments and actions the firm uses to gain a competitive
advantage by exploiting core competencies in specific product
markets

3
Core Competencies and Strategy
Core The resources and capabilities that have been
competencies determined to be a source of competitive advantage
for a firm over its rivals

An integrated and coordinated set of actions taken

Strategy to exploit core competencies and gain a
competitive advantage

Actions taken to provide value to customers and gain a

competitive advantage by exploiting core competencies
Business-level
strategy in specific, individual product markets

4
Key Issues of Business-Level
Strategy
What good or service to offer customers
How to manufacture or create the good or service
How to distribute the good or service in the marketplace

5
 The Central Role of Customers
In selecting a business-level strategy, the firm
determines
1. who it will serve
2. what needs those target customers have that it will
satisfy
3. how those needs will be satisfied

6
Managing Relationships With
Customers
Customer relationships are strengthened by offering them superior
value
◦ help customers to develop a new competitive advantage
◦ enhance the value of existing competitive advantages

7
Managing Relationships With Customers
Establish a competitive advantage along these dimensions:
Reach
◦ the firm’s access and connection to customers
Richness
◦ the depth and detail of the two-way flow of information between the firm
and customers
Affiliation
◦ facilitating useful interactions with customers

8
Market Segmentation

Custom
Consumer ers Industrial
Markets Markets

9
 Types of Business-Level
Strategies
Business-level strategies are intended to create differences between
the firm’s position relative to those of its rivals
To position itself, the firm must decide whether it intends to
perform activities differently or to perform different activities as
compared to its rivals

10
Five Generic Strategies
Competitive Advantage
Cost Uniqueness

Cost Leadership Differentiation

Competitive Scope
Broad
target
Integrated Cost
Leadership/
Narrow Differentiation
target

Focused Cost Focused

Leadership Differentiation

11
Cost Leadership Strategy
An integrated set of actions designed to produce or deliver goods or
services at the lowest cost, relative to competitors with features that
are acceptable to customers
◦ relatively standardized products
◦ features acceptable to many customers
◦ lowest competitive price

12
 Cost Leadership Strategy
Cost saving actions required by this strategy:
◦ building efficient scale facilities
◦ tightly controlling production costs and overhead
◦ minimizing costs of sales, R&D and service
◦ building efficient manufacturing facilities
◦ monitoring costs of activities provided by outsiders
◦ simplifying production processes

13
How to Obtain a Cost Advantage
Determine and control Reconfigure, if needed

Cost Drivers Value Chain

• Alter production process • New raw material

• Change in automation • Forward integration
• New distribution channel • Backward integration
• New advertising media • Change location relative to
• Direct sales in place of suppliers or buyers
indirect sales
14
 Factors That Drive Costs
● Economies of scale ● Product features
● Asset utilization ● Performance
● Capacity utilization pattern ● Mix & variety of products
• Seasonal, cyclical ● Service levels
● Interrelationships ● Small vs. large buyers
● Order processing ● Process technology
and distribution ● Wage levels
● Value chain linkages ● Product features
• Advertising & sales ● Hiring, training, motivation
• Logistics & operations

15
Questions Leading to Lower Costs
1. How can an activity be performed differently or even
eliminated?
2. How can a group of linked value activities be regrouped or
reordered?
3. How might coalitions with other firms lower or eliminate
costs?

16
Cost Leadership Strategy and the Five Forces
of Competition

a
f
t o duc
ts R
Co ivalr
mp y A
Rivalry Among Competing
re ro eti m
Th te P
s tit
u ng on
Fir g
ms
Firms
S ub
Can use cost leadership strategy to
advantage since:

of Bu g Power
Thre trants

Five Forces of

yers
En
at o

Competition ● competitors avoid price wars with

ainin
f Ne

cost leaders, creating higher

Barg
w

Bargaining Power
of Suppliers
profits for the entire industry

17
Cost Leadership Strategy and the Five Forces
of Competition

f
t o duc
ts R
Co ivalr
Bargaining Power of Buyers
a mp y A
re ro
Th te P
tit
u
eti m
ng on
Fir g
Can mitigate buyers’ power by:
s ms
ub
S ● driving prices far below

competitors, causing them to

of Bu g Power
Thre trants

Five Forces of
exit and shifting power with
yers
En
at o

Competition
ainin
f Ne

buyers back to the firm

Barg
w

Bargaining Power
of Suppliers

18
Cost Leadership Strategy and the Five
Forces of Competition

t of uct
d
s R
Co ivalr
mp y A
Bargaining Power of Suppliers
rea Pro eti m
h
T te
tit
u ng on
Fir g
Can mitigate suppliers’ power by:
s ms
ub
● being able to absorb cost increases
S

due to low cost position

of Bu g Power
Thre trants

Five Forces of
yers ● being able to make very large
En
at o

Competition
ainin
f Ne

purchases, reducing chance of

Barg
w

Bargaining Power supplier using power

of Suppliers

19
Cost Leadership Strategy and the Five Forces
of Competition

s R
t of uct Co ivalr
d mp y A
rea Pro
h
T te
tit
u
eti m
ng on
Fir g
Threat of New Entrants
s ms
ub
S
Can frighten off new entrants due to:
● their need to enter on a large scale in
of Bu g Power
Thre trants

Five Forces of
yers
order to be cost competitive
En
at o

Competition
ainin
f Ne

● the time it takes to move down the

Barg
w

Bargaining Power learning curve

of Suppliers

20
Cost Leadership Strategy and the Five
Forces of Competition

s R
Threat of Substitute Products
t of uct Co ivalr
mp y A
rea ro
Th te P
d
eti m
ng on
Cost leader is well positioned to:
u Fir g
tit
Su
bs ms ● make investments to be first to

of Bu g Power create substitutes

Thre trants

Five Forces of
● buy patents developed by potential
yers
En
at o

Competition
ainin

substitutes
f Ne

Barg
w

● lower prices in order to maintain

Bargaining Power
of Suppliers value position

21
Major Risks of Cost Leadership Strategy
Dramatic technological change could take away your cost advantage
Competitors may learn how to imitate value chain
Focus on efficiency could cause cost leader to overlook changes in
customer preferences

22
Differentiation Strategy
An integrated set of actions designed by a firm to produce or deliver
goods or services (at an acceptable cost) that customers perceive as
being different in ways that are important to them
◦ price for product can exceed what the firm’s target customers are willing to
pay
◦ nonstandardized products
◦ customers value differentiated features more than they value low cost

23
Differentiation Strategy
Value provided by unique features and value characteristics
Command premium price
High customer service
Superior quality
Prestige or exclusivity
Rapid innovation

24
 Differentiation Strategy
Differentiation actions required by this strategy:
◦ developing new systems and processes
◦ shaping perceptions through advertising
◦ quality focus
◦ capability in R&D
◦ maximize human resource contributions through low turnover and high motivation

25
How to Obtain a Differentiation Advantage
Control if needed Reconfigure to maximize

Cost Drivers Value Chain

• Lower buyers’ costs

• Raise performance of product or service
• Create sustainability through: customer perceptions of
uniqueness
• customer reluctance to switch to non-unique product
26
Factors That Drive Differentiation
Unique product features
Unique product performance
Exceptional services
New technologies
Quality of inputs
Exceptional skill or experience
Detailed information

27
Differentiation Strategy and the Five Forces
of Competition
s R
t of uct Co ivalr
d mp y A
rea ro
Th te P
tit
u
eti m
ng on
Fir g
Rivalry Among Competing Firms
b s ms
Su
Can defend against competition
of Bu g Power
because:
Thre trants

Five Forces of
● brand loyalty to differentiated
yers
En
at o

Competition
ainin
f Ne

product offsets price competition

Barg
w

Bargaining Power
of Suppliers

28
Differentiation Strategy and the Five
Forces of Competition

s R
t of uct Co ivalr
d mp y A
rea ro eti m
Th te P ng on
tu Fir g
sti
S u b ms Bargaining Power of Buyers
Can mitigate buyer power because:
of Bu g Power
Thre trants

Five Forces of
● well differentiated products
yers
En
at o

Competition
ainin

reduce customer sensitivity to

f Ne

Barg
w

Bargaining Power
price increases
of Suppliers

29
Differentiation Strategy and the Five Forces of
Competition

s R
t of uct Co ivalr
d mp y A
rea ro
Th te P
tu
eti m
ng on
Fir g
Bargaining Power of Suppliers
bsti ms
Su
Can mitigate suppliers’ power by:
● absorbing price increases due to
of Bu g Power
Thre trants

Five Forces of
higher margins
yers
En
at o

Competition
ainin
f Ne

● passing along higher supplier prices

Barg
w

Bargaining Power because buyers are loyal to

of Suppliers
differentiated brand

30
Differentiation Strategy and the Five Forces of
Competition

of uct
s R
Co ivalr
Threat of New Entrants
t d mp y A
rea Pro
h
T te
u
eti m
ng on
Fir g
Can defend against new entrants because:
s tit ms
S ub ● new products must surpass proven

products or,
of Bu g Power
Thre trants

Five Forces of
● new products must be at least equal to
yers
En
at o

Competition
ainin
f Ne

performance of proven products, but

Barg
w

Bargaining Power offered at lower prices

of Suppliers

31
 Differentiation Strategy and the Five Forces
of Competition

t of uct
d
s R
Co ivalr
mp y A
Threat of Substitute Products
h rea Pro eti m
T te
s tit
u ng on
Fir g
Well positioned relative to substitutes
b ms
Su
because:
● brand loyalty to a differentiated
of Bu g Power
Thre trants

Five Forces of
yers

product tends to reduce customers’

En
at o

Competition
ainin
f Ne

testing of new products or switching

Barg
w

Bargaining Power brands

of Suppliers

32
Major Risks of Differentiation Strategy
Customers may decide that the price differential between the
differentiated product and the cost leader’s product is too large
Means of differentiation may cease to provide value for which
customers are willing to pay

33
Major Risks of Differentiation Strategy
Experience may narrow customer’s perceptions of the value of
differentiated features of the firm’s products
Makers of counterfeit goods may attempt to replicate differentiated
features of the firm’s products

34
Focused Business-Level Strategies
A focus strategy must exploit a narrow target’s differences
from the balance of the industry by:
◦ isolating a particular buyer group
◦ isolating a unique segment of a product line
◦ concentrating on a particular geographic market
◦ finding their “niche”

35
Factors That May Drive Focused
Strategies
Large firms may overlook small niches
Firm may lack resources to compete in the broader market
May be able to serve a narrow market segment more effectively
than can larger industry-wide competitors
Focus may allow the firm to direct resources to certain value chain
activities to build competitive advantage

36
Major Risks of Focused Strategies
Firm may be “outfocused” by competitors
Large competitor may set its sights on your niche market
Preferences of niche market may change to match those of broad
market

37
Advantages of Integrated Strategy
A firm that successfully uses an integrated cost
leadership/differentiation strategy should be in a better position to:
◦ adapt quickly to environmental changes
◦ learn new skills and technologies more quickly
◦ effectively leverage its core competencies while competing against its rivals

38
Benefits of Integrated Strategy
Successful firms using this strategy have above-average returns
Firm offers two types of values to customers
◦ some differentiated features (but less than a true differentiated firm)
◦ relatively low cost (but now as low as the cost leader’s price)

39
Major Risks of Integrated Strategy
An integrated cost/differentiation business level strategy often
involves compromises (neither the lowest cost nor the most
differentiated firm)
The firm may become “stuck in the middle” lacking the strong
commitment and expertise that accompanies firms following either
a cost leadership or a differentiated strategy

40
Corporate Level
Strategy

10/17/2024 DR. BHUMIKA ACHHNANI, FMS, MARWADI UNIVERSITY

 Key Questions in Corporate
Strategy
1. What businesses should the corporation be in?
2. How should the corporate office manage the array of business
units?

Corporate Strategy is what makes

the corporate whole add up to more
than the sum of its business unit
parts

42
 Levels and Types of Diversification
Low Levels of Diversification
Single Business
> 95% of business from a single business unit

Dominant Business
Between 70 and 95% of business from a single business unit

43
Levels and Types of Diversification
Moderate to High Levels of Diversification

Related Constrained
<70% of revenues from dominant business; all
businesses share product, technological and
distribution linkages

44
Levels and Types of Diversification
Moderate to High Levels of Diversification

Related Linked (Mixed)

< 70% of revenues from dominant business,
and only limited links exist

45
Levels and Types of Diversification

Very High Levels of Diversification

Unrelated
< 70% of revenue comes from the dominant
business, and there are no common links
between businesses

46
Reasons for Diversification
Reasons to Enhance Strategic
Incentives
Competitiveness
• Economies of scope
Resources
• Market power
• Financial economics

Managerial
Motives

47
Reasons for Diversification
Incentives with Neutral Effects on
Incentives
Strategic Competitiveness

• Anti-trust regulation
Resources
• Tax laws
• Low performance
• Uncertain future cash flows
Managerial
Motives
• Firm risk reduction

48
Reasons for Diversification
Resources with varying effects on value
Incentives
creation and strategic competitiveness

• Tangible resources
Resources
− financial resources
− physical assets
• Intangible resources
Managerial
Motives
− tacit knowledge
− customer relations
− image and reputation
49
Reasons for Diversification
Managerial Motives (Value
Incentives
Reduction)
• Diversifying managerial
employment risk
Resources
• Increasing managerial
compensation

Managerial
Motives

50
Value-creating Strategies of Diversification: Operational and
Corporate Readiness
Both Operational and
Related Constrained
Corporate Relatedness
Sharing: Operational Relatedness Between
Diversification
High (Rare Capability
and can Create
Vertical Integration
Diseconomies of
(Market Power)
Scope)
Businesses

Related Linked
Unrelated
Low Diversification
Diversification
(Economies of
(Financial Economies)
Scope)
Low High

Corporate Readiness: Transferring Skills into Businesses Through

Corporate Headquarters 51
Adding Value by Diversification
Diversification most effectively adds value by either of two
mechanisms:
◦ Economies of scope: cost
savings attributed to transferring the capabilities and
competencies developed in one business to a new business
◦ Market power: when a firm is able to sell its products above the existing
competitive level or reduce the costs of its primary and support activities
below the competitive level, or both

52
Alternative Diversification
Strategies
Related Diversification Strategies
◦ sharing activities

◦ transferring core competencies

Unrelated Diversification Strategies

◦ efficient internal capital market allocation

◦ restructuring

53
Alternative Diversification Strategies

Related Diversification Strategies

– sharing activities

54
Sharing Activities:
Key Characteristics

Sharing activities often lowers costs or raises differentiation

Sharing activities can lower costs if it:
◦ achieves economies of scale
◦ boosts efficiency of utilization
◦ helps move more rapidly down the Learning Curve
Sharing activities can enhance potential for or reduce the cost of
differentiation
Must involve activities that are crucial to competitive advantage

55
 Sharing
Assumptions
Activities:
Strong sense of corporate identity
Clear corporate mission that emphasizes the importance of integrating
business units
Incentive system that rewards more than just business unit
performance

56
 Alternative Diversification Strategies

Related Diversification Strategies

– sharing activities
◦ transferring core competencies

57
Transferring Core Competencies:
Key Characteristics
Exploits interrelationships among divisions
Start with value chain analysis
◦ identify ability to transfer skills or expertise among similar value chains
◦ exploit ability to transfer activities

58
Transferring Core Competencies:
Assumptions
Transferring core competencies leads to competitive advantage only
if the similarities among business units meet the following
conditions:
◦ activities involved in the businesses are similar enough that sharing expertise
is meaningful
◦ transfer of skills involves activities which are important to competitive
advantage
◦ the skills transferred represent significant sources of competitive advantage
for the receiving unit

59
Alternative Diversification
Strategies

Related Diversification Strategies

– sharing activities
– transferring core competencies

Unrelated Diversification Strategies

◦ efficient internal capital market allocation

60
Efficient Internal Capital Market
Allocation:
Key Characteristics
Firms pursuing this strategy frequently diversify by acquisition:
◦ acquire sound, attractive companies
◦ acquired units are autonomous
◦ acquiring corporation supplies needed capital
◦ portfolio managers transfer resources from units that generate cash to those
with high growth potential and substantial cash needs
◦ add professional management & control to sub-units
◦ sub-unit managers compensation based on unit results

61
Efficient Internal Capital Market Allocation:
Assumptions
Managers have more detailed knowledge of firm relative to outside
investors
Firm need not risk competitive edge by disclosing sensitive
competitive information to investors
Firm can reduce risk by allocating resources among diversified
businesses, although shareholders can generally diversify more
economically on their own

62
Alternative Diversification
Strategies

Related Diversification Strategies

– sharing activities
– transferring core competencies

Unrelated Diversification Strategies

– efficient internal capital market allocation

◦ restructuring

63
 Restructuring:
Key Characteristics

Seek out undeveloped, sick or threatened organizations or industries

Parent company (acquirer) intervenes and frequently:
◦ changes sub-unit management team
◦ shifts strategy
◦ infuses firm with new technology
◦ enhances discipline by changing control systems
◦ divests part of firm
◦ makes additional acquisitions to achieve critical mass

64
Restructuring:
Key Characteristics
Frequently sell unit after making one-time changes since parent no
longer adds value to ongoing operations

65
Restructuring:
Assumptions

Requires keen management insight in selecting firms with depressed

values or unforeseen potential
Must do more than restructure companies
Need to initiate restructuring of industries to create a more attractive
environment

66
 Incentives to Diversify
External Incentives:
Relaxation of anti-trust regulation allows more related acquisitions than in the past
Before 1986, higher taxes on dividends favored spending retained earnings on
acquisitions
After 1986, firms made fewer acquisitions with retained earnings, shifting to the use
of debt to take advantage of tax deductible interest payments

67
 Incentives to Diversify
Internal Incentives:
Poor performance may lead some firms to diversify to attempt to achieve better
returns
Firms may diversify to balance uncertain future cash flows
Firms may diversify into different businesses in order to reduce risk

68
Resources and Diversification
Besides strong incentives, firms are more likely to diversify if they
have the resources to do so
Value creation is determined more by appropriate use of resources
than incentives to diversify

69
Managerial Motives to Diversify
Managers have motives to diversify
◦ diversification increases size; size is associated with executive compensation
◦ diversification reduces employment risk
◦ effective governance mechanisms may restrict such motives

70
 Relationship Between Diversification and
Performance
Performance

Dominant Related Unrelated

Business Constrained Business

Level of Diversification 71
Relationship Between Firm Performance and
Diversification
Capital Market
Intervention and the
Market for
Managerial Talent
Incentives

Diversificatio
Firm
Resources n
Performance
Strategy

Managerial
Motives Strategy
Internal
Implementatio
Governance
n
72
Acquisition and
Restructuring
Strategies

10/17/2024 DR. BHUMIKA ACHHNANI, FMS, MARWADI UNIVERSITY

 Mergers and Acquisitions
Merger: a strategy through which two firms agree to integrate their operations
on a relatively co-equal basis
Acquisition: a strategy through which one firm buys a controlling interest in
another firm with the intent of making the acquired firm a subsidiary business
within its own portfolio

Takeover: a special type of an acquisition strategy wherein the target firm did not
solicit the acquiring firm’s bid

74
Reasons for Making Acquisitions
Learn and develop
new capabilities
Increase Reshape firm’s
market power competitive scope

Overcome Acquisition Increase

entry barriers s diversification

Cost of new Lower risk compared

product to developing new
development Increase speed products
to market

75
Reasons for Making Acquisitions:
Increased Market Power
Factors increasing market power
◦ when a firm is able to sell its goods or services above competitive levels or
◦ when the costs of its primary or support activities are below those of its
competitors
◦ usually is derived from the size of the firm and its resources and capabilities
to compete
Market power is increased by
◦ horizontal acquisitions
◦ vertical acquisitions
◦ related acquisitions

76
Reasons for Making Acquisitions:
Overcome Barriers to Entry

Barriers to entry include

◦ economies of scale in established competitors
◦ differentiated products by competitors
◦ enduring relationships with customers that create product loyalties with competitors
acquisition of an established company
◦ may be more effective than entering the market as a competitor offering an
unfamiliar good or service that is unfamiliar to current buyers
◦ provides a new entrant with immediate market access

77
Reasons for Making Acquisitions:
Cost of New Product Development and Speed to Market

Significant investments of a firm’s resources are required to

◦ Develop new products internally
◦ introduce new products into the marketplace
Acquisition of a competitor may result in
◦ more predictable returns
◦ faster market entry
◦ rapid access to new capabilities

78
Reasons for Making Acquisitions:
Lower Risk Compared to Developing New Products

An acquisition’s outcomes can be estimated more easily and accurately

compared to the outcomes of an internal product development process
Therefore managers may view acquisitions as lowering risk

79
Reasons for Making Acquisitions:
Increased Diversification

It may be easier to develop and introduce new products in markets

currently served by the firm
It may be difficult to develop new products for markets in which a firm
lacks experience
◦ it is uncommon for a firm to develop new products internally to diversify its
product lines
◦ acquisitions are the quickest and easiest way to diversify a firm and change its
portfolio of business

80
Reasons for Making Acquisitions:
Reshaping the Firms’ Competitive Scope

Firms may use acquisitions to reduce their dependence on one or more

products or markets
Reducing a company’s dependence on specific markets alters the firm’s
competitive scope

81
Reasons for Making Acquisitions:
Learning and Developing New Capabilities
Acquisitions may gain capabilities that the firm does not possess
Acquisitions may be used to
◦ acquire a special technological capability
◦ broaden a firm’s knowledge base
◦ reduce inertia

82
Problems With Acquisitions
Integration Resulting firm
difficulties is too large

Managers overly
Inadequate Acquisitions
focused on
evaluation of target
acquisitions

Large or Too much

extraordinary debt diversification

Inability to
achieve synergy

83
Problems With Acquisitions
Integration Difficulties
Integration challenges include
◦ melding two disparate corporate cultures
◦ linking different financial and control systems
◦ building effective working relationships (particularly when management
styles differ)
◦ resolving problems regarding the status of the newly acquired firm’s
executives
◦ loss of key personnel weakens the acquired firm’s capabilities and reduces its
value

84
Problems With Acquisitions
Inadequate Evaluation of Target

Evaluation requires that hundreds of issues be closely examined,

including
◦ financing for the intended transaction
◦ differences in cultures between the acquiring and target firm
◦ tax consequences of the transaction
◦ actions that would be necessary to successfully meld the two workforces
Ineffective due-diligence process may
◦ result in paying excessive premium for the target company

85
Problems With Acquisitions
Large or Extraordinary Debt
Firm may take on significant debt to acquire a company
High debt can
◦ increase the likelihood of bankruptcy
◦ lead to a downgrade in the firm’s credit rating
◦ preclude needed investment in activities that contribute to the firm’s
long-term success

86
Problems With Acquisitions
Inability to Achieve Synergy
Synergy exists when assets are worth more when used in
conjunction with each other than when they are used separately
Firms experience transaction costs when they use acquisition
strategies to create synergy
Firms tend to underestimate indirect costs when evaluating a
potential acquisition

87
Problems With Acquisitions
Too Much Diversification
Diversified firms must process more information of greater diversity
Scope created by diversification may cause managers to rely too
much on financial rather than strategic controls to evaluate business
units’ performances
Acquisitions may become substitutes for innovation

88
Problems With Acquisitions
Managers Overly Focused on Acquisitions
Managers in target firms may operate in a state of virtual suspended
animation during an acquisition
Executives may become hesitant to make decisions with long-term
consequences until negotiations have been completed
Acquisition process can create a short-term perspective and a
greater aversion to risk among top-level executives in a target firm

89
Problems With Acquisitions
Too Large
Additional costs may exceed the benefits of the economies of scale
and additional market power
Larger size may lead to more bureaucratic controls
Formalized controls often lead to relatively rigid and standardized
managerial behavior
Firm may produce less innovation

90
Attributes of Effective Acquisitions
Attributes Results
Complementary Assets or Buying firms with assets that meet current needs to
Resources build competitiveness

Friendly Acquisitions Friendly deals make integration go more smoothly

Careful Selection Process Deliberate evaluation and negotiations are more likely
to lead to easy integration and building synergies

Maintain Financial Slack Provide enough additional financial resources so that

profitable projects would not be foregone

91
Attributes of Effective Acquisitions
Attributes Results
Low-to-Moderate Debt Merged firm maintains financial flexibility

Sustain Emphasis on Continue to invest in R&D as part of the firm’s overall

Innovation strategy

Flexibility Has experience at managing change and is flexible and

adaptable

92
Restructuring Activities
Downsizing
◦ Wholesale reduction of employees
Downscoping
◦ Selectively divesting or closing non-core businesses
◦ Reducing scope of operations
◦ Leads to greater focus
Leveraged Buyout (LBO)
◦ A party buys a firm’s entire assets in order to take the firm private.

93
Restructuring and Outcomes
Reduced labor Loss of
costs human capital
Downsizing

Reduced debt Lower

costs performance
Downscoping

Emphasis on Higher
Leveraged strategic controls performance
buyout

High debt costs Higher risk

94
International Strategy

10/17/2024 DR. BHUMIKA ACHHNANI, FMS, MARWADI UNIVERSITY

Opportunities and Outcomes of International
Strategy
Explore Resources Use Core
and Capabilities Competence
Identify International International
Opportunities Strategies Modes of Entry
Increased market size International Exporting
business-level
Return on investment Licensing
strategy
Economies of scale and Strategic alliances
learning Multidomestic
strategy Acquisitions
Advantage in location
Global strategy Establishment of a
Transnational new subsidiary
strategy

96
Opportunities and Outcomes of
International Strategy:
Strategic
Use Core Competitiveness
Competence Outcomes
Modes of Entry Management
problems and Better
Exporting risk performance
Licensing
Strategic alliances
Acquisitions
Establishment of a
new subsidiary Innovation

Management
problems and
risk
97
International Strategy Life Cycle
Product Demand Foreign
Develops and Firm Competition
Exports Products Begins Production
Selling Products or
Services Outside a
Firm’s Domestic
Firm Introduces
Market Firm Begins
Innovation in
Production Abroad
Domestic Market

Production Becomes
Standardized and is
Relocated to Low
Cost Countries
98
Motivations for International Expansion
Increase Market Share
◦ domestic market may lack the size to support efficient scale manufacturing
facilities
Return on Investment
◦ large investment projects may require global markets to justify the capital
outlays
◦ weak patent protection in some countries implies that firms should expand
overseas rapidly in order to preempt imitators

99
 Motivations for International Expansion

Economies of Scale or Learning

◦ expanding size or scope of markets helps to achieve economies of scale in
manufacturing as well as marketing, R & D or distribution
◦ can spread costs over a larger sales’ base
◦ increase profit per unit
Location Advantages
◦ low cost markets may aid in developing competitive advantage
◦ may achieve better access to:
• Raw materials • Key customers
• Lower cost labor • Energy
100
International Business-Level Strategy:
Determinants of National Advantage
Factors of
production

Firm strategy,
Demand
structure, and
conditions
rivalry

Related and
supporting
industries

101
International Business-Level Strategy:
Determinants of National Advantage
Factors of production: the inputs necessary to compete in any
industry
◦ labor
◦ land
◦ natural resources
◦ capital
◦ infrastructure
◦ basic factors include natural and labor resources
◦ advanced factors include digital communication systems and educated
workforce

102
International Business-Level Strategy:
Determinants of National Advantage
Demand conditions: characterized by the nature and size of buyers’
needs in the home market for the industry’s goods or services
◦ size of market segment can lead to scale-efficient facilities
◦ efficiency can lead to domination of the industry in other countries
◦ specialized demand may create opportunities beyond national boundaries

103
International Business-Level Strategy:
Determinants of National Advantage
Related and supporting industries: supporting services, facilities,
suppliers and so on
◦ support in design
◦ support in distribution
◦ related industries as suppliers and buyers

104
International Business-Level Strategy:
Determinants of National Advantage
Firm strategy, structure, and rivalry: the pattern of strategy,
structure, and rivalry among firms
◦ common technical training
◦ methodological product and process improvement
◦ cooperative and competitive systems

105
International Corporate-Level Strategy
High
Transnati
Global

Need for Global Integration

onal
strategy
strategy

Multidom
estic
strategy
Low

Low High
Need for Local Responsiveness
106
International Corporate-Level Strategy
Type of corporate strategy selected will have an impact on the
selection and implementation of the business-level strategies
Some corporate strategies provide individual country units with
flexibility to choose their own strategies
Others dictate business-level strategies from the home office and
coordinate resource sharing across units

107
International Corporate-Level Strategy:
Multidomestic Strategy

• Strategy and operating decisions are decentralized to strategic

business units (SBU) in each country
• Products and services are tailored to local markets
Multidom • Business units in one country are independent of each other
estic • Assumes markets differ by country or regions
strategy • Focus on competition in each market
• Prominent strategy among European firms due to broad variety
of cultures and markets in Europe

108
International Corporate-Level Strategy:
Global Strategy

• Products are standardized across national markets

• Decisions regarding business-level strategies are centralized in
Global the home office
strategy • Strategic business units (SBU) are assumed to be
interdependent
• Emphasizes economies of scale
• Often lacks responsiveness to local markets
• Requires resource sharing and coordination across borders
(which also makes it difficult to manage)

109
International Corporate-Level Strategy:
Transnational Strategy

• Seeks to achieve both global efficiency and local

Transnati responsiveness
onal • Difficult to achieve because of simultaneous requirements
− strong central control and coordination to achieve
strategy efficiency
− decentralization to achieve local market responsiveness
• Must pursue organizational learning to achieve competitive
advantage

110
Global Market Entry: Choice of Entry
Mode
Type of Entry Characteristics
Exporting High cost, low control
Licensing Low cost, low risk, little control, low returns

Strategic alliances Shared costs, shared resources, shared risks, problems

of integration

Acquisition Quick access to new market, high cost, complex

negotiations, problems of merging with domestic
operations

New wholly owned Complex, often costly, time consuming, high risk,
subsidiary maximum control, potential above-average returns

111
Strategic Competitiveness Outcomes:
Returns

International diversification and returns: firm expands the sales of its goods
or services across the borders of global regions and countries into different
geographic locations or markets
◦ may increase a firm’s returns
◦ such firms usually achieve the most positive stock returns
◦ firm may achieve economies of scale and experience, location advantages,
increased market size and opportunity to stabilize returns

112
Strategic Competitiveness Outcomes:
Innovation

International diversification and innovation: firm expands the sales of its

goods or services across the borders of global regions and countries into different
geographic locations or markets
◦ potentially greater returns on innovations (larger markets)
◦ generate additional resources for investment in innovation
◦ exposed to new products and processes in international markets, generates
additional knowledge leading to innovations

113
Risks in an International
Environment

Political Risks Economic Risks

Political risks include

• instability in national governments
• war, both civil and international
• potential nationalization of a firm’s resources

114
Risks in an International Environment

Political Risks Economic Risks

Economic risks are interdependent with political

risks and include
• differences and fluctuations in the value of different currencies
• differences in prevailing wage rates
• difficulties in enforcing property rights
• unemployment

115
Limits to International Expansion:
Management Problems
Cost of coordination across diverse geographical business units
Institutional and cultural barriers
Understanding strategic intent of competitors
The overall complexity of competition

116
Strategic Alliances and
Joint Ventures

10/17/2024 DR. BHUMIKA ACHHNANI, FMS, MARWADI UNIVERSITY

 Cooperative Strategy
Cooperative strategy is a strategy in which firms
◦ work together
◦ to achieve a shared objective
Cooperating with other firms is a strategy that
◦ creates value for a customer
◦ exceeds the cost of constructing customer value in other ways
◦ establishes a favorable position relative to competition

118
 Strategic Alliance
A strategic alliance is a cooperative strategy in which
◦ firms combine some of their resources and capabilities
◦ to create a competitive advantage
A strategic alliance involves
◦ exchange and sharing of resources and capabilities
◦ co-development or distribution of goods or services

119
Strategic Alliance
Firm A Firm B

Resources Resources
Capabilities Capabilities
Core Competencies Core Competencies
Combined
Resources
Capabilities
Core Competencies

Mutual interests in designing, manufacturing,

or distributing goods or services

120
Types of Cooperative Strategies
Joint venture: two or more firms create an independent company by
combining parts of their assets
Equity strategic alliance: partners who own different percentages of
equity in a new venture
Nonequity strategic alliances: contractual agreements given to a
company to supply, produce, or distribute a firm’s goods or services
without equity sharing

121
Business-Level Cooperative
Strategies:
Complementary Complementary Strategic Alliances
Alliances

• complementary strategic alliances are designed

to take advantage of market opportunities by
combining partner firms’ assets in
complementary ways to create new value

– these include distribution, supplier or

outsourcing alliances where firms rely on
upstream or downstream partners to build
competitive advantage

122
Business-Level Cooperative
Strategies:
Buyer

M
Complementary Strategic Alliances
g in ar
ar gi
M n

Technological Development
Human Resource Mgmt.
Servic
• vertical complementary strategic

Support Activities
e

Firm Infrastructure
Marketing &
Sales alliance is formed between firms that

Procurement
Outbound
Logistics
Operation agree to use their skills and capabilities
s
Inbound
Logistics in different stages of the value chain to
Vertical Alliance

Primary create value for both firms

Supplier
Activities
• outsourcing is one example of this type
M
of alliance
g in ar
ar gi
M n
Technological Development
Human Resource Mgmt.

Servic
Support Activities

e
Firm Infrastructure

Marketing &
Sales
Procurement

Outbound
Logistics
Operation
s
Inbound
Logistics

Primary
Activities
123
Business-Level Cooperative Strategies:
Complementary Strategic Alliances

Buyer Horizontal Alliance Buyer

M
Potential Competitors M
in ar in ar
arg gin ar
g gin
M M

Technological Development

Technological Development
Human Resource Mgmt.

Human Resource Mgmt.

Support Activities

Support Activities
Service Service

Firm Infrastructure

Firm Infrastructure
Marketing & Sales Marketing & Sales

Procurement

Procurement
Outbound Logistics Outbound Logistics

Operations Operations
Inbound Logistics Inbound Logistics

Primary Activities Primary Activities

• horizontal complementary strategic alliance is formed between partners who
agree to combine their resources and skills to create value in the same stage of
the value chain
• focus on long-term product development and distribution opportunities
• the partners may become competitors
• requires a great deal of trust between the partners

124
Business-Level Cooperative
Strategies:
Complementary
Alliances
Competition Response Alliances
Competition
Response Alliances
• competition response strategic alliances occur
when firms join forces to respond to a strategic
action of another competitor
• because they can be difficult to reverse and
expensive to operate, competition response
strategic alliances are primarily formed to
respond to strategic rather than tactical actions

125
Business-Level Cooperative
Strategies:
Complementary
Alliances
Uncertainty Reducing Alliances
Competition
Response Alliances
• uncertainty reducing strategic alliances are
used to hedge against risk and uncertainty
Uncertainty • these alliances are most noticed in fast-cycle
Reducing Alliances markets
• alliance may be formed to reduce the
uncertainty associated with developing new
product or technology standards

126
Business-Level Cooperative
Strategies:
Complementary Competition Reducing Alliances
Alliances
• competition reducing strategic alliances may be
created to avoid destructive or excessive
Competition
competition
Response Alliances
• explicit collusion exists when firms directly
negotiate production output and pricing
agreements in order to reduce competition
Uncertainty
(illegal)
Reducing Alliances
• tacit collusion exists when several firms in an
industry indirectly coordinate their production
and pricing decisions by observing each other’s
Competition Reducing
competitive actions and responses
Alliances

127
Business-Level Cooperative
Strategies:
Complementary
Alliances
Competition Reducing Alliances

Competition
Response Alliances • mutual forbearance is a form of tacit collusion
in which firms avoid competitive attacks against
those rivals they meet in multiple markets
Uncertainty • competition reducing strategic alliances may
Reducing Alliances require governments to find ways to permit
collaboration among rivals without violating
antitrust laws
Competition Reducing
Alliances

128
Corporate-Level Cooperative
Strategies

• Corporate-level cooperative strategies are designed to facilitate

product and/or market diversification
- diversifying strategic alliance
- synergistic strategic alliance
- franchising
• Diversifying alliances and synergistic alliances allow firms
- to grow and diversify their operations
- through a means other than a merger or acquisition

129
Corporate-Level Cooperative
Strategies:
Diversifying
Alliances Diversifying Alliances
• diversifying strategic alliance allows a firm to
expand into new product or market areas
without completing a merger or an acquisition
• provides some of the potential synergistic
benefits of a merger or acquisition, but with
less risk and greater levels of flexibility
• permits a “test” of whether a future merger
between the partners would benefit both
parties

130
Corporate-Level Cooperative
Strategies:
Diversifying
Alliances
Synergistic Alliances
Synergistic
Alliances • synergistic strategic alliances create joint
economies of scope between two or more firms
• create synergy across multiple functions or
multiple businesses between partner firms

131
Corporate-Level Cooperative
Strategies:
Diversifying
Alliances
Franchising
Synergistic
Alliances • franchising spreads risks and uses resources,
capabilities, and competencies without merging
or acquiring another company
• contractual relationship concerning the
Franchising franchise that is developed between two
parties, the franchisee and the franchisor
• an alternative to pursuing growth through
mergers and acquisitions

132
International Cooperative Strategies
Cross-border strategic alliance
◦ an international cooperative strategy in which firms with headquarters in
different nations combine some of their resources and capabilities to
create a competitive advantage
◦ a firm may form cross-border strategic alliances to leverage core
competencies that are the foundation of its domestic success to expand
into international markets

133
International Cooperative Strategies
Allows risk sharing by reducing financial investment
Host partner knows local market and customs
International alliances can be difficult to manage due to
differences in management styles, cultures or regulatory
constraints
Must gauge partner’s strategic intent so they do not gain access
to important technology and become a competitor

134
 Network Cooperative Strategies
A network strategy is a cooperative strategy wherein several firms
agree to form multiple partnerships to achieve shared objectives
◦ stable alliance network
◦ dynamic alliance network
Effective social relationships and interactions among partners are keys
to a successful network cooperative strategy

135
Network Cooperative Strategies:

Stable Alliance
Network
Stable Alliance Network

• long term relationships that often appear in

mature industries where demand is relatively
constant and predictable
• stable networks are built for exploitation of the
economies available between firms

136
Network Cooperative Strategies:

Stable Alliance
Network Dynamic Alliance Network

Dynamic Alliance
Network
• arrangements that evolve in industries with
rapid technological change leading to short
product life cycles
• primarily used to stimulate rapid, value-creating
product innovations and subsequent successful
market entries
• purpose is often exploration of new ideas

137
Competitive Risks with Cooperative
Strategies

Competitive
Risks

• Partner may act opportunistically

• Misrepresentation of competencies brought to the partnership
• Partner fails to make committed resources and capabilities available to its
partners
• Firm may make investments that are specific to the alliance while its
partner does not

138
Competitive Risks with Cooperative
Strategies

Risk and Asset

Competitive
Management
Risks
Approaches

• Manage the balance between learning from partners while protecting knowledge
and sources of competitive advantages from excessive learning by partners
• Assign managerial responsibility for a firm’s cooperative strategies to a high-level
executive or team
• Specify resources and capabilities that will be shared and those that will not be
shared (detailed contracts and monitoring)
• Develop trusting relationships

139
Approaches for Managing Cooperative
Strategies

cost minimization
◦ formal contracts specify how the cooperative strategy is to be
monitored and how partner behavior is to be controlled

opportunity maximization
◦ maximize partnership’s value-creation opportunities
◦ partners take advantage of unexpected opportunities to learn from
each other and to explore additional marketplace possibilities
◦ fewer formal, limiting, contracts

140
Competitive Risks with Cooperative
Strategies

Risk and Asset

Competitive Desired
Management
Risks Outcome
Approaches

• Creating value
• Above-average
returns

141
Retrenchment
Strategies

10/17/2024 DR. BHUMIKA ACHHNANI, FMS, MARWADI UNIVERSITY

 Retrenchment Strategy
The Retrenchment Strategy is used when a company wants to scale back one or more company
operations to save costs and improve its financial situation. In other words, the strategy used when a
company discontinues its operations through a significant reduction in its business operations is
known as the retrenchment strategy. This can be applied to customer groups, customer functions,
and technology alternatives individually or collectively.
To achieve financial stability, a retrenchment strategy entails eliminating all the goods and services
that aren't profitable for your company. It also entails removing your company from a market where
it can no longer survive. Typically, it leads to the sale of assets like product lines and the dismissal of
personnel.

10/17/2024 DR. BHUMIKA ACHHNANI, FMS, MARWADI UNIVERSITY

Different Types Of Retrenchment
Strategies
Turnaround Strategy
Divestment Strategy
Liquidation Strategy
Captive Company Strategy

10/17/2024 DR. BHUMIKA ACHHNANI, FMS, MARWADI UNIVERSITY

Turnaround Strategy
A turnaround plan is a retrenchment strategy that reduces the harmful tendencies that affect
the performance of the business. It is a management strategy that has the potential to revive a
failing company. It reverses negative directions like declining market share, rising material costs,
reduced sales, a widening debt-to-equity ratio, lower profitability, working capital concerns,
negative cash flows, and numerous challenges. How businesses use this strategy differs
depending on the circumstances.
Dell Technologies declared in 2006 that it would employ a cost-cutting strategy by selling
products directly to customers. The direct sale was unsuccessful, and the corporation suffered a
significant financial loss. In 2007, Dell made a turnaround and abandoned its direct-sale
strategy. Dell is currently the second-largest retailer in the world for computers.

10/17/2024 DR. BHUMIKA ACHHNANI, FMS, MARWADI UNIVERSITY

Divestment Strategy
A divestment strategy sells a section of your company, an asset, or a division. Companies use a
disposal plan after a failed turnaround strategy.
Divestment is a technique that businesses and companies use for a variety of reasons, including
merger plans, resource creation, the existence of multiple investment plans, technology
upgrades, enduring problems, mismatched assets, and negative cash flows. When a company
divests, it scales back operations or sells a division to concentrate on its core challenges and
utilises the proceeds to expand that division's business. Keep in mind that liquidation is not the
same as divestment. In a divestiture, a company sells a non-strategic business. It receives cash
for strategic investments in its core business, as opposed to a liquidation, where a company sells
its unit and shuts the door.

10/17/2024 DR. BHUMIKA ACHHNANI, FMS, MARWADI UNIVERSITY

Liquidation Strategy
The extreme level of the retrenchment strategy is the liquidation approach, in which you
permanently close your company and sell all of your resources. Because it might have negative
effects, liquidation is the last resort for any firm with issues. Most small enterprises close their
doors, and creditors, suppliers, financial institutions, trade unions, and government agencies are
large businesses that don't go out of business.

10/17/2024 DR. BHUMIKA ACHHNANI, FMS, MARWADI UNIVERSITY

 Captive Company Strategy
When a company depends on another company to survive, it defines a captive company strategy. When the
industry prospects are not promising enough to justify the work needed to turn the firm around, a company with
weak competition may choose not to pursue a turnaround strategy. The business still has to solve the issue of
declining sales and profitability. In this case, the business is looking for an "angel," often one of its biggest
clients. As a result, this customer becomes a prisoner of the business and receives a secure and assured
business. It can also assist cut costs by reducing certain functions, like marketing. The advantage for the smaller
company is that it receives guaranteed revenue and must surrender its independence in exchange.
For instance, Simpson Motors decided to become a captive firm to General Motors, supplying the automaker
with 80% of its manufacturing under contractual agreements. The advantage for the smaller company is that it
receives guaranteed revenue and must surrender its independence in exchange.

10/17/2024 DR. BHUMIKA ACHHNANI, FMS, MARWADI UNIVERSITY

 Reasons For Retrenchment Strategy
1. Poor Performance
It makes perfect sense to close down business lines or centres that are not generating value and serve
as productivity laggards in the company when performance is subpar and losses are incurred.
2.Threat to Survival
A corporation will frequently shut down a portion of its operations when unexpected activity in its
product markets hinders the company's success. Many times, the company's shareholders also
compel such a plan.
3. Redistribution of Resources
The corporation may be required to scale back operations in the current business and redistribute the
resources freed to more productive areas if other outstanding investment possibilities arise.

10/17/2024 DR. BHUMIKA ACHHNANI, FMS, MARWADI UNIVERSITY

Reasons For Retrenchment Strategy
4. Inadequate Resources
The corporation might also require financial resources to maintain its current market position.
The corporation might not have the money and might be compelled to separate off unproductive
parts of its operations to redeploy the resources.
5. To Ensure Better Management and Greater Effectiveness
A corporation may occasionally diversify too much. As a result, it loses control, which impacts
operational efficiency. Retrenching helps the company reduce its size to a tolerable level by
streamlining its product line.

10/17/2024 DR. BHUMIKA ACHHNANI, FMS, MARWADI UNIVERSITY

THANK YOU!!

10/17/2024 DR. BHUMIKA ACHHNANI, FMS, MARWADI UNIVERSITY