CH-4-6 Business-Level Strategy – Strategic Management: Concepts and Cases: Competitiveness and Globalization : Book Guide

This Document Contains Chapters 4 to 6 Chapter 4 Business-Level Strategy ANSWERS TO REVIEW QUESTIONS What is a business-level strategy? Business-level strategy (the focus of Chapter 4) is an integrated and coordinated set of commitments and actions designed to provide value to customers and gain a competitive advantage by exploiting core competencies in specific, individual product markets. Thus, a business-level strategy reflects a firm’s belief about where and how it has an advantage over its rivals, while guiding decisions to choose to perform activities differently or to perform different activities than competitors. Key issues the firm must address when choosing a business-level strategy are the good or service to offer, how to manufacture or create it, and how to distribute it to the marketplace. Once formed, the business-level strategy reflects where and how the firm has an advantage over its rivals. The essence of a firm’s business-level strategy is choosing to perform activities differently or to perform different activities from rivals. What is the relationship between a firm’s customers and its business-level strategy in terms of who, what, and how? Why is this relationship important? The relationship between a firm’s customers and its business-level strategy is that, to survive and achieve strategic competitiveness, firms must create value that satisfies some group of customers’ needs. In other words, successful business-level strategies are founded or based on customers’ needs. Who represents the determination of specific customer groups to be served. The primary focus here is market segmentation. What is concerned with customer needs that will be satisfied. How represents the core competencies of the firm that can be used to satisfy customers’ needs that have been identified. Increasing segmentation of markets throughout the global economy creates opportunities for firms to identify increasingly unique customer needs they can try to serve by using one of the business-level strategies. What are the differences among the cost leadership, differentiation, focused cost leadership, focused differentiation, and integrated cost leadership/differentiation business-level strategies? Strategy Source(s) of Competitive Advantage Cost Leadership Lowest cost with a level of product features or characteristics acceptable to the most typical customers in the industry Differentiation Product’s unique attributes and characteristics that are valued by a broad group of customers Focused Cost Leadership Lowest cost with a level of product features or characteristics targeted to a particular customer group or segment in an industry Focused Differentiation Product’s unique attributes and characteristics that are valued by a particular customer group (niche) or segment in an industry Integrated Cost Leadership/ Differentiation Products have attributes of both relatively low cost and unique attributes, characteristics, or features; the level of product differentiation is less than the pure differentiator while cost is higher than that of the lowcost leader How can each one of the business-level strategies be used to position the firm relative to the five forces of competition in a way that helps the firm earn above-average returns? Strategy Dealing with the Five Forces of Competition Cost Leadership Can compete against rivals on price Can price below rivals to interest buyers Can absorb prince increases by suppliers better than rivals Discourages new entrants that can’t endure low profit margins Can reduce prices to maintain attractiveness over substitutes Differentiation Customers are loyal to firms offering differentiated products Uniqueness reduces sensitivity of buyers to price increases High margins shield the firm from losses to powerful suppliers Customer loyalty to differentiated products deters new entrants Unlikely to switch to substitutes when loyal to products Focused Cost Leadership An adaptation of the above Focused Differentiation An adaptation of the above Integrated CL/Differentiation An adaptation and combination of the above 5. What are the specific risks associated with using each business-level strategy? Strategy Risk(s) of Selecting and Implementing Cost Leadership Minimal investment in technology could result in process obsolescence; firm misses change in customers’ needs due to cost-only focus; competitors imitate strategy Differentiation Customers decide price differential between low cost producer and differentiator is too large; too many features offered; product’s means of differentiation no longer provides value to customers; customer learning (experience) may change their perception of the value of differentiation; counterfeit products displace the firm’s offerings Focused Cost Leadership & Focused Differentiation Beyond the general risks noted for the low-cost leader and the differentiator, focus strategies have the following risks: competitor “outfocuses” the focuser by defining a narrower segment; a firm competing on an industry-wide basis may decide that the segment served by the focus strategy firm is attractive and decides to pursue that segment; the needs of customers within the narrow segment may become more similar to all customers in the market, reducing or eliminating the advantages of a focus strategy Integrated Cost Leadership/ Product features not sufficiently valued by customers; Differentiation product is not sufficiently differentiated; product is too expensive to compete with low-cost leader’s products INSTRUCTOR'S NOTES FOR EXPERIENTIAL EXERCISES EXERCISE 1: MARKET SEGMENTATION THROUGH BRANDING By asking students to classify the brand by consumer or industrial markets this exercise provides the opportunity to view how firms segment and target various buying groups with their brands. The instructor should encourage both consumer and industrial products for class discussion variety. The posters will also present a visually appealing way in which to display and discuss the various findings. The instructor may also challenge the students to discuss potential opportunities for brand enhancement to other buying groups such as producers of drinking water extending their products to pets. EXERCISE 2: HOW INDUSTRIES DIFFER IN THEIR BUSINESS LEVEL STRATEGY You should familiarize yourself with the hotel industry basics by consulting a data source such as Datamonitor. Here you can find a SWOT analysis and influential trend data. Next, assign one team to each of the 5 different business level strategies: Cost leadership Differentiation Focused cost leadership Focused differentiation Integrated cost leadership/differentiation If you have more than 5 teams then you may duplicate BLSs as fits your class size. Now explain to the teams that they have been challenged as a team of consultants to develop a business level strategy for the hotel industry that matches their assignment. Their customer (you) is ready to invest money in this new operation and wants to hear how they plan to operationalize the choice as well as if there are any potential obstacles that need to be considered. Have each team put their poster on the wall and explain their decisions. The instructor should be prepared to discuss the merits of each proposal and to ensure it is consistent with the BLS being proposed. As teams present, ask them what risks they will encounter by implementing their chosen business-level strategy. And what sort of actions can they take to mitigate those risks? INSTRUCTOR'S NOTES FOR VIDEO EXERCISES Title: DIFFERENTIATION STRATEGY IN TOUGH ECONOMIC TIMES: HOWARD SHULTZ/CEO/STARBUCKS RT: 4:02 Topic Key: Business-Level Strategy, Managing Relationships with Customers, Market Segmentation, Differentiation Strategy, Five Forces of Competition The video opens with Howard Schultz, King of Coffee, CEO of Starbucks, working at a Starbuck’s store. Overseeing more than 16,000 stores worldwide, creating a new coffee lingo, he indicates that there are over 70,000 different ways to order a Starbuck’s coffee, which makes up the Starbucks experience. Now, seen as a symbol of grand indulgence, Starbuck’s is struggling. The company has announced the closing of 600 underperforming stores in the US and the need to cut more than 1,000 jobs. Schultz admits that Starbucks may have grown too big too fast given today’s economy and a business plan was not in place for the severity of the economic downturn. Schultz recognizes that such a recession has created more discretionary coffee decision making purchases. Dunkin Donuts, with its expansion, is providing some strong competition by offering an upgraded coffee experience at a lesser consumer cost. When asked if he would bring the Starbuck’s prices down, Schultz maintains that Starbuck’s will not cut corners but will reduce waste to save the company more than $400 million and continue to sell more than a cup of coffee. He says, post 911, that Starbuck’s traffic increased because of the need for a sense of community and that they don’t want to do anything to fracture the community experience. He also plans to continue to provide health insurance to all employees, including part-timers. When asked if Starbucks can keep its mission statement in this economy, he says he is optimistic and realistic and offers would be entrepreneurs this advice: Opportunities can be and have been created during tough economic times. Starbucks was created by believing in big dreams so dream big and dream bigger. Also check out http://www.starbucks.com/ Suggested Discussion Questions and Answers Describe Starbuck’s business-level strategy. Starbuck’s maintains a differentiation strategy by selling coffee in different varieties and lingos but selling more than a cup of coffee by providing the sense of community. How is Starbucks managing its relationship with customers? Text: Relationships with customers are characterized by three dimensions: reach, richness, and affiliation. Starbuck’s manages reach by having over 16,000 stores worldwide. In terms of richness, Starbucks may be a bit in default in that their products are so exquisite (fancy names and orders) that some consumers are shunned away for lack of knowledge. Whereas many customers may want and like the sense of community that Starbuck’s offers, its differentiation strategy may alienate information flow to potential customers. This in turn affects affiliation sense in that potential customers are driven to the competition. Starbucks may need greater work in viewing its business through the customer’s eyes—their desire to hang on to differentiation drives this wedge. How would you describe the market segment(s) that Starbuck’s serves? Based on Table 4.1, Basis for Customer Segmentation and Consumer Markets: 20–40, male and female, middle to upper class, metropolitan areas, college educated, $30,000 + income, light users (social), looking for status and social discussions and networking Is the differentiation strategy appropriate for Starbucks? Why or why not? Now or in the future? Providing more than a coffee experience is something that differentiates Starbucks and that they should keep. However, getting more in touch with their target market would increase their ability to satisfy customers, produce appropriate innovative products, and perhaps they may need focused differentiation. They seem to serve a more narrow target market than they think and are certainly distinctive in their pricing and coffee shop experience. Using the five forces model of competition, how should Starbuck’s plan to position itself in these economic times? Rivalry with Existing Competitors: Don’t compete on price; offer more value (value chain) to the target market; reduce rivalry through acquisition or joint venture Bargaining Power of Suppliers: There are many outlets that desire the coffee association with Starbucks. Therefore, Starbucks should leverage its status with other outlets of delivery—college campuses and grocery chains Bargaining Power of Buyers: Build quality and innovation with the true target market; Starbucks’ true buyers are not looking for low cost but rather the experience and status associated with Starbucks Substitutes: Continue to distinguish products and services to which there are no substitutes for this target market. Attract customers away from cost leaders with a better coffee drinking experience Barriers to New Entrants: New entrants will have low margins automatically, therefore Starbucks should limit the low cost competition from selling more volume. Again, joint ventures and acquisitions may be an opportunity to control the market. — ADDITIONAL QUESTIONS AND EXERCISES The following questions and exercises can be presented for in-class discussion or assigned as homework. Application Discussion Questions Students are customers of the university or college. What actions does your school take to recognize and satisfy its students’ needs? Students should be prepared to discuss their views. Student Needs at the University: My school recognizes student needs through various initiatives, such as academic advising, mental health resources, and career services. They solicit feedback via surveys and focus groups to address concerns. Events like open forums foster communication, allowing students to voice their needs directly. Additionally, clubs and organizations promote engagement and community building. Overall, these actions help create a supportive environment tailored to student interests. Students should select a local firm, and based on interactions with this company, determine which business-level strategy they think the firm is implementing. Ask what evidence they can provide to support their opinions. Is the Internet affecting the firm’s strategic actions? If so, how? Local Firm Analysis: I would choose a local coffee shop. Based on my interactions, I believe they implement a differentiation strategy by offering unique blends and a cozy atmosphere. They focus on high-quality products and personalized customer service. The Internet influences their strategy through social media marketing, online ordering, and customer engagement. These tools help them reach a broader audience and enhance customer loyalty. Assuming that students have decided to establish and operate a restaurant in your local community, ask them what market segment would they intend to serve. What needs do these customers have that the students could satisfy with their restaurant? How would they satisfy those needs? They should be prepared to discuss their responses. Restaurant Market Segment: If I were to open a restaurant, I would target young professionals seeking healthy, quick meal options. Their needs include convenience, nutritious food, and affordability. To satisfy these needs, I would offer a menu featuring fresh ingredients and customizable meal options. Incorporating a fast-casual dining model and using apps for easy ordering would further enhance the customer experience. What business-level strategy do students think your school is implementing? What core competencies are being used to implement this strategy? School Business-Level Strategy: I think my school implements a differentiation strategy by offering unique programs and extracurricular opportunities. Core competencies include specialized faculty, diverse course offerings, and strong industry partnerships. These elements help create a distinctive educational experience that attracts a wide range of students. By focusing on student outcomes and innovative teaching methods, the school positions itself as a leader in education. Propose the following statement to the class: “It is impossible for a firm to produce a relatively low-cost, yet somewhat highly differentiated product.” Is this statement true or false? Ask students for their reasoning behind their answer. Cost and Differentiation Statement: I believe the statement is false. It is indeed possible for a firm to produce a product that is both relatively low-cost and somewhat differentiated. For example, a company might achieve this through efficient production processes or innovative materials that reduce costs while still offering unique features. However, balancing these two aspects can be challenging and may require careful strategic planning. Do students feel the Internet is potentially of more value for firms implementing either the differentiation strategy or the focused differentiation strategy than for those using either the cost leadership or focused cost leadership strategy? If so, why? Internet Value for Differentiation vs. Cost Leadership: I think the Internet is potentially more valuable for firms using differentiation or focused differentiation strategies. These firms benefit from online platforms to showcase unique products and engage with customers, enhancing brand loyalty. In contrast, cost leadership strategies may rely more on operational efficiencies, where the Internet plays a less critical role. Ultimately, differentiation strategies leverage online visibility to highlight their unique offerings. Is it possible for a traditional firm to become too reliant on the Internet? If so, why? If not, why not? Reliance on the Internet: Yes, a traditional firm can become too reliant on the Internet. Over-dependence may lead to vulnerability, especially if online systems fail or customer preferences shift. Additionally, heavy reliance can reduce personal interactions, which are vital in certain industries. Balancing online and offline strategies is crucial to maintain customer relationships and adaptability in a dynamic market. Ethics Questions Can a commitment to ethical conduct on issues such as the environment, product quality, and fulfilling contractual agreements affect a firm’s competitive advantage? If so, how? Commitment to Ethical Conduct and Competitive Advantage: Yes, a commitment to ethical conduct can enhance a firm’s competitive advantage by building trust with consumers and stakeholders. Ethical practices, such as sustainable sourcing and transparency, can differentiate a brand and attract environmentally conscious customers. Moreover, adhering to high product quality and fulfilling agreements strengthens reputation, leading to customer loyalty and potentially higher market share. Ultimately, ethical conduct can be a key factor in long-term success. Is there more incentive for differentiators or cost leaders to pursue stronger ethical conduct? Think of an example to support your answer. Incentives for Ethical Conduct: Differentiators generally have more incentive to pursue stronger ethical conduct. For example, a luxury brand that emphasizes sustainability can attract consumers who value ethical consumption, thereby enhancing its brand image. In contrast, cost leaders may prioritize price over ethics to maintain low costs, which can lead to less concern about ethical practices. However, both strategies can benefit from ethical conduct, but the impact is often more pronounced for differentiators. Can an overemphasis on cost leadership or differentiation lead to ethical challenges (such as poor product design and manufacturing) that create costly problems (e.g., product liability lawsuits)? Challenges of Cost Leadership and Differentiation: Yes, an overemphasis on either strategy can lead to ethical challenges, such as neglecting product safety or quality. For instance, a cost leader might cut corners in manufacturing to reduce expenses, resulting in defective products and potential liability lawsuits. Similarly, a differentiator might prioritize unique features without adequate testing, leading to safety concerns. Both scenarios can create significant financial and reputational repercussions for the firm. Reexamine the assumptions about effective TQM systems presented in the chapter. Do these assumptions urge top-level managers to maintain higher ethical standards than they now have? If so, how? TQM Assumptions and Ethical Standards: The assumptions about effective Total Quality Management (TQM) systems do urge top-level managers to maintain higher ethical standards. TQM emphasizes continuous improvement and customer satisfaction, which require ethical decision-making in all processes. A strong ethical foundation fosters trust among employees and stakeholders, encouraging a culture of quality and responsibility. Thus, TQM can drive firms to align their ethical practices with their operational goals. As discussed in Chapter 3, a brand image is one way a firm can differentiate its good or service. However, many questions are now being raised about the effect brand images have on consumer behavior. For example, considerable concern has arisen about brand images that are managed by tobacco firms and their effect on teenage smoking habits. Should firms be concerned about how they form and use brand images? Why or why not? Concerns About Brand Images: Yes, firms should be concerned about how they form and use brand images. Negative associations, such as those with tobacco firms and their influence on teenage smoking, can lead to public backlash and legal repercussions. Additionally, unethical brand images can erode consumer trust and loyalty, ultimately affecting sales. Companies must consider the broader social impact of their branding strategies to ensure they align with ethical standards and consumer expectations. What ethical issues do you believe are associated with use of the Internet to implement the firm’s business-level strategy? Ethical Issues with Internet Use: Ethical issues associated with Internet use in business strategies include data privacy concerns, misleading advertising, and the potential for cyberbullying or harassment. Companies must navigate the fine line between aggressive marketing and consumer manipulation. Moreover, issues like transparency in data collection and user consent are critical to maintaining ethical standards. Firms must be vigilant in ensuring their online practices reflect their values and ethical commitments. If ethical issues do exist regarding Internet use, who do you believe should be responsible for addressing them: governments or companies themselves? Why? Responsibility for Ethical Issues: Both governments and companies share responsibility for addressing ethical issues related to Internet use. Governments can establish regulations and guidelines to protect consumers and ensure fair practices, while companies must implement policies and training to foster ethical behavior among employees. Collaboration between the two can create a framework for accountability and best practices, ultimately benefiting consumers and the market as a whole. Internet Exercise Colleges and universities use different strategies to draw a wider customer base as well as to serve the needs of their current students and staff. Explore the websites of these diverse US universities: University of Phoenix (http://www.phoenix.edu/), University of Chicago (http://www.uchicago.edu), Oglala Lakota College (http://www.olc.edu), the Ohio State University (http://www.ohio-state.edu), and Central Community College (http://www.cccneb.edu). Decide what types of strategy each pursues. How does each university or college determine its customer groups and utilize its core competencies to attract and retain its customers? With online course offerings increasing, do some of the institutions’ target markets overlap? *e-project: Go to the website of the school you currently attend. Based on your knowledge of students, staff, and curricula, what steps can be taken to improve customer satisfaction? Chapter 5 Competitive Rivalry and Competitive Dynamics ANSWERS TO REVIEW QUESTIONS Who are competitors? How are competitive rivalry, competitive behavior, and competitive dynamics defined in the chapter? Competitors are firms competing in the same market, offering similar products, and targeting similar customers. Competitive rivalry is the ongoing set of competitive actions and competitive responses occurring between competitors as they compete against each other for an advantageous market position. The outcomes of competitive rivalry influence the firm’s ability to sustain its competitive advantages as well as the level (average, below-average, or above-average) of its financial returns. For the individual firm, the set of competitive actions and responses it takes while engaged in competitive rivalry is called competitive behavior. Competitive dynamics is the set of actions taken by all firms that are competitors within a particular market. What is market commonality? What is resource similarity? What does it mean to say that these concepts are the building blocks for a competitor analysis? Market commonality refers to the number of markets with which competitors are jointly involved and their importance to each. Resource similarity refers to how comparable competitors’ resources are in terms of type and amount. These are the building blocks of a competitor analysis (which is the first step the firm takes to be able to predict its competitors’ actions and responses) because they are foundational to this understanding. Chapter 2 discussed what firms must do to understand competitors. The discussion is extended further in the current chapter to describe what the firm does to predict competitors’ market-based actions. Thus, understanding precedes prediction. And in general, the greater the market commonality and resource similarity, the more firms acknowledge that they are direct competitors. How do awareness, motivation, and ability affect the firm’s competitive behavior? As shown in Figure 5.2, market commonality and resource similarity influence the drivers (awareness, motivation, and ability) of competitive behavior. In turn, the drivers influence the firm’s competitive behavior, as shown by the actions and responses it takes while engaged in competitive rivalry. Awareness, which is a prerequisite to any competitive action or response being taken by the firm or its competitor, refers to the extent to which competitors recognize the degree of their mutual interdependence that results from market commonality and resource similarity. Awareness tends to be greatest when firms have highly similar resources (in terms of types and amounts) to use while competing against each other in multiple markets. Awareness affects the extent to which the firm understands the consequences of its competitive actions and responses. Motivation, which concerns the firm’s incentive to take action or to respond to a competitor’s attack, relates to perceived gains and losses. Thus, a firm may be aware of competitors but may not be motivated to engage in rivalry with them if it perceives that its position will not improve as a result of doing so or that its market position won’t be damaged if it doesn’t respond. In some instances, the firm may be aware of the large number of markets it shares with a competitor and may be motivated to respond to an attack by that competitor, but it lacks the ability to do so. Ability relates to each firm’s resources and the flexibility they provide. Without available resources (such as financial capital and people), the firm lacks the ability to attack a competitor or respond to its actions. However, similar resources suggest similar abilities to attack and respond. When a firm faces a competitor with similar resources, careful study of a possible attack before initiating it is essential because the similarly resourced competitor is likely to respond to that action. What factors affect the likelihood a firm will take a competitive action? In addition to market commonality and resource similarity and awareness, motivation, and ability, three more specific factors affect the likelihood a competitor will take competitive actions. The first of these concerns is first mover incentives. First movers, those taking an initial competitive action, often earn above-average returns until competitors can successfully respond to their action and gain loyal customers. Not all firms can be first movers in that they may lack the awareness, motivation, or ability required to engage in this type of competitive behavior. Moreover, some firms prefer to be a second mover (the firm responding to the first mover’s action). One reason for this is that second movers, especially those acting quickly, can successfully compete against the first mover. By studying the first mover’s product, customers’ reactions to it, and the responses of other competitors to the first mover, the second mover can avoid the early entrant’s mistakes and find ways to improve on the value created for customers by the first mover’s good or service. Late movers (those that respond a long time after the original action was taken) often are lower performers and much less competitive. Organizational size, the second factor, tends to reduce the number of different types of competitive actions that large firms launch though it results in smaller competitors’ using a wide variety of actions. Ideally, the firm would like to initiate a large number of diverse actions when engaged in competitive rivalry. The third factor, quality, dampens firms’ abilities to take competitive actions, in that product quality is a base denominator to successful competition in the global economy. What factors affect the likelihood a firm will initiate a competitive response to a competitor’s action(s)? The type of competitive action (strategic or tactical) the firm took, the competitor’s reputation for the nature of its competitor behavior, and its dependence on the market in which the action was taken are studied to predict a competitor’s response to the firm’s action. In general, the number of tactical responses taken exceeds the number of strategic responses. Competitors respond more frequently to the actions taken by the firm with a reputation for predictable and understandable competitive behavior, especially if that firm is a market leader. In most cases, the firm can anticipate that when its competitor is highly dependent for its revenue and profitability in the market in which the firm took a competitive action, that competitor is likely to launch a strong response. However, firms that are more diversified across markets are less likely to respond to a particular action that affects only one of the markets in which they compete. What competitive dynamics can be expected among firms competing in slow-cycle markets? In fast-cycle markets? In standard-cycle markets? Competitive dynamics concerns the ongoing competitive behavior occurring among all firms competing in a market for advantageous positions. Market characteristics affect the set of actions and responses firms take while competing in a given market as well as the sustainability of firms’ competitive advantages. In slow-cycle markets, where competitive advantages can be maintained, competitive dynamics finds firms taking actions and responses that are intended to protect, maintain, and extend their proprietary advantages. In fast-cycle markets, competition is almost frenzied as firms concentrate on developing a series of temporary competitive advantages. This emphasis is necessary because firms’ advantages in fast-cycle markets aren’t proprietary and as such, are subject to rapid and relatively inexpensive imitation. Standard-cycle markets are between slow-cycle and fast-cycle markets, in that firms are moderately shielded from competition in these markets as they use competitive advantages that are moderately sustainable. Competitors in standard-cycle markets serve mass markets and try to develop economies of scale to enhance their profitability. Innovation is vital to competitive success in each of the three types of markets. Firms should recognize that the set of competitive actions and responses taken by all firms differs by type of market. INSTRUCTOR'S NOTES FOR EXPERIENTIAL EXERCISES EXERCISE 1: TRAGEDY OF THE COMMONS This is a short exercise that should take no longer than 30 minutes depending upon the instructor’s interest in debriefing the subject. This exercise comes from reading Harding’s article in Science The Tragedy of the Commons". 162 (3859): 1243–1248, 1968 and ideas found on Psyche SITE which is located at the web address http://www.abacon.com/psychsite/ . This exercise is focused on the concept of competitive behavior and individuals seeking to maximize their own self-interest, regardless of the consequences. Basically the tragedy of the commons occurs when individuals have equal access to a shared resource and each individual attempts to maximize their own self-interest. The classic Hardin example is that of medieval farm land where farmers are giving equal access to grazing rights and the tendency is to overgraze to the individuals benefit but serves in the long run to deteriorate due to overgrazing by all concerned. Materials Needed: one large bowl; 50 poker chips, pennies or the like; and a timer. Exercise: Ask 4 volunteers to come to the front of the class. Assemble them so that they are around the bowl and facing the class. On the table place the bowl and 20 poker chips or whatever you are using. Explain the rules to the volunteers so that the class can overhear. Rule #1: The number of poker chips (or whatever you are using) left in the bowl will double at the end of each session. You are free to choose the duration of each session but short is usually adequate, i.e 10 seconds. Rule #2: The object of the game is to acquire as many objects from the bowl as possible. Ensure that the volunteers understand the rules. Say “GO” and stop when your timer dictates or the bowl is empty. When time is up double the number of objects left in the bowl and start the process over. If objects are left over pay careful attention to the strategy that your volunteers are using so that this can be part of the debrief (or alternatively ask them what their strategy was). You may find that the bowl is empty after the first round. As you said “GO” each volunteer reached in to make sure he she was not the only one without objects. Your volunteers are likely to remember rule 2 but are quick to forget rule 1. In the exercise the objects represent some renewable resource such as land, trees, water. The key to renewable is that the resource is refreshed and “renewed” as needed and not starved by overuse. But if the bowl becomes empty the point that Hardin was making is very clear and why this is called to tragedy of the commons. You should be able to link your follow up discussion around the concept of competitive behavior and self-interest to align with the chapter. EXERCISE 2: IS THE FIRST MOVER USUALLY ADVANTAGEOUS? The purpose of this exercise is for students to examine the interplay between first mover advantage and the competitive dynamics of the three industry markets (slow, fast, standard). Working individually or in small teams, you can assign this exercise as best suits your particular class size. This is best assigned the week before your visit this chapter in order to allow students to choose their preferred industry to investigate. The reason to do this is to avoid teams from all doing firms or products that happened to be in the news cycle the most (NetFlix, Apple, Amazon, etc.). This will also provide some nice context as some will likely choose historical examples (baby diapers) as well as more recent examples (portable hard drive music players). It is also desirable to have many different industries represented so as to provide context for different industry life cycle stages and how that may or may not play into the likelihood of success. An excellent resource for the instructor or students is The Half-Truth of First-Mover Advantage. By: Suarez, Fernando, Lanzolla, Gianvito, Harvard Business Review, 00178012, Apr2005, Vol. 83, Issue 4. This would be a good article for the instructor to help identify the concepts behind first mover and highlight some good examples for discussion. One of the highlights of these authors’ findings is that industry context matters significantly, one of the key take aways for students from this assignment. Is the product a disruptive technology or an incremental one? During the discussion the instructor can prod students with the following questions: Why was the first mover successful or not. If the clock could be rewound, what might that firm have done differently, if anything? How important was the competitive dynamics of the market at the time of the new product introduction. How important was the new introduction to the company’s future. Did the firm need a home run, was this a risky strategy? What other contextual issues did the students find? What about the firms core products, were they in decline? How about management: long tenured CEO, new CEO, acquisition history? What did rivals do? Driving the discussion through items as above will provide a foundation for first mover advantage and its relevance to the chapter on competitive dynamics. By using historical and current examples many of the books relevant topics can be discussed that have been studied to this point; Sustainable competitive advantage Business level strategy Value chain Tangible vs. intangible resources Industry environment Macro environment ADDITIONAL EXPERIENTIAL EXERCISE AND TEACHING NOTE: [THIS DOES NOT APPEAR IN TEXT] EXERCISE: COMPETITIVE RIVALRY- WHAT’S THE NEXT MOVE? Competitive rivalry exists when firms jockey with one another in the hopes of gaining some advantageous market opportunity. Therefore it is incumbent upon rivals to understand their competitor’s actions and reactions. This seems particularly important in fast cycle markets where the pace of change happens quickly. This is also prominent when one competitor seems to dominate the innovation space within its industry thereby leaving rivals to catch up. This exercise requires teams of students to pick a competitor to Apple Corp. You may find this at most any research database. For example most will list companies such as Dell or IBM or Hewlett Packard or the like. However you might also note that many databases will list printing and software companies as competitors. Your team is to pick one of the competitors, be it a main direct competitor or one that seems less so. Next your team is to create a market commonality and resource similarity matrix that pits your chosen competitor against Apple. Note the degree of intersection between the two (format as in Figure 5.3 in you text). Once the matrix is completed be prepared to present your conclusion(s) in class. How will your competitor respond to strategic or tactical actions that Apple might undertake in a contested space? Be prepared to answer the following questions: When is the last time Apple launched a direct attack that impacted the competitor you choose? How did the competitor react? Prepare a hypothetical example of another new Apple launch and how your competitor might react differently, or the same this time. TEACHING NOTE FOR EXERCISE: COMPETITIVE RIVALRY – WHAT’S THE NEXT MOVE? The purpose of this exercise is to predict what competitors’ market-based actions through the completion of a competitor analysis. Students will examine the interplay between market commonality and resource similarity. To identify Apple’s direct or indirect competitors, a variety of research tools can be used such as ReferenceUSA or Hoovers. However, as a quick starting point, you can reference NASDAQ (http://www.nasdaq.com/symbol/aapl/competitors) or Morningstar’s competitor analysis (http://financials.morningstar.com/competitors/industrypeer.action?t=AAPL&region=USA&culture=en-US). You may consider preparing for this assignment by assigning teams to a variety of competitors (for example, Blackberry, IBM, Nikon and Hewlett-Packard) for variety in class discussion variety. Have teams display their competitor analysis matrix and explain their findings. Be sure to have teams identify whether the actions taken by Apple against the competitor in question were strategic or tactical in nature. Following the presentations, you may drive a discussion towards the first-mover advantage and its relevance to the chapter on competitive dynamics. INSTRUCTOR'S NOTES FOR VIDEO EXERCISES Title: A FOCUS ON COMPETITIVE DYNAMICS: HYUNDAI SOUTH KOREA RT: 4:58 Topic Key: Competitive behavior, Competitive dynamics, Multimarket competition, Competitive response, Strategic actions, Late movers The video opens with a heavy traffic President’s Day sale at a Hyundai dealership in Long Island, NY. Consumers were shown raving about the new Hyundai Sonata style and price. Hyundai’s strategy is to sell more cars for less than the competition. With the rest of the auto industry in free fall (being off 21% from the previous year), Hyundai’s US sales had increased 8%. Michael Brown, Vice President of Atlantic Hyundai’s parent company, a dealership network, indicates that Hyundai has the hot hand with an aim to dominate the marketplace. John Kraft chick, President and CEO of Hyundai Motor America, is shown test driving one of the new Hyundais and is interviewed saying that Hyundai’s chairman initiated the move to achieve the highest level of quality in the industry in five years. With a quantum leap in quality, Hyundai has new models that are now well-equipped, fuel efficient, and stylish. James Bell, analyst for the auto industry’s Kelly Blue Book, reflects on the first 1986 Hyundai to enter the marketplace. He concludes that Hyundai retrenched and came back stronger by curing its reliability and durability concerns with longer warranties and a blitz of ads that gained consumer public attention. The Toyota downfall is an advantage for Hyundai but Hyundai, too, experienced its own recalls. The Vice President for Hyundai Motor America concludes with their concerns that Hyundai may experience the Toyota woes but it has been a wakeup call. John Kraftchick provides a sneak peek of the newest Hyundai flagship automobile that will compete with the BMW 7 Series, Mercedes Benz S Class, Lexus LS, and those cars that cost $70,000 to over $100,000. He concurs that Hyundai stands for something different rather than price. And though Hyundai remains reactive, it is concerned about vehicles from India, Vietnam, China, and other upstarts just like Hyundai once was. Also check out http://www.hyundaiusa.com/ and http://worldwide.hyundai.com/ Suggested Discussion Questions and Answers Describe Hyundai’s competitive behavior. Text: Competitive behavior is the set of competitive actions and responses the firm takes to build or defend its competitive advantages and improve its market position. Hyundai: Sell more cars for less than the competition; improved quality and style; increased warranties; advertising blitz What kind of competitive dynamics might you expect from Hyundai and other automakers? o The industry will use capabilities and core competencies to gain advantage in the market; Hyundai along with other automakers will perform competitive analysis, analyzing the market commonality and resource similarity; will look at their ability, awareness, and motivation level to compete; will look at each company’s likelihood of attack through mover incentives, organizational size, and quality; and will look at the likelihood of response including historical competitive actions, reputations, and market dependence. Larger firms such as GM and Toyota are not likely to initiate attacks but will respond aggressively when attacked by a company like Hyundai. Again, firms are likely to respond by bringing new products to the market but they do not use price a retaliatory weapon. Firms having resource similarities may arrange a “coopetition” agreement. A firm may be more likely to attack the rival with whom it has low market commonality than the one with whom it competes in multiple markets. Hyundai is likely to refrain from all-out attack due to fewer resources than the larger and more established competitors. Is Hyundai involved in multimarket competition? Why or why not? Text: Firms competing against each other in several product or geographic markets are engaged in multimarket competition. Hyundai: Yes; Hyundai is making a blitz attempt to compete in geographic markets similar to other competitors by offering a variety of products that compete in the same product categories offered by the competition. What impact will market commonality have on competitive responses in the auto industry? Text: Market commonality: Competing in most of the same segments of the market, from the luxury car to small fuel-efficient car, as well as hybrids, SUVs, and trucks. Market commonality is concerned with the number of markets with which the firm and a competitor are jointly involved and the degree of importance of the individual markets to each. Firms in the auto industry will be continually exploring knowledge in the same general areas to advance their products and make them more desirable for consumers. They will also be aware, motivated, and have the ability to compete for market share in each segment and country they have entered. Firms with market commonality are likely to compete on product rather than price, respond aggressively, and seek high reward opportunities. What strategic actions may occur as a result of your answer to question #4? Text: Strategic action: a market-based move that involves a significant commitment of organizational resources and is difficult to implement and reverse. The standards of quality by all firms will be raised to increase performance, the number and appeal of features, flexibility, durability, serviceability, aesthetics, and conformance. Service quality can also expect to play a key role, which would include increasing timeliness, courtesy, consistency, convenience, completeness, and accuracy. Increase support for research and development and technology so that processes may be quickly imitated and new product technical advances can be made. Can Hyundai be identified as a late mover? If so, why? And what consequences should they be knowledgeable about? o Text: A late mover is a firm that responds to a competitive action a significant amount of time after the first mover’s action and the second mover’s response. Hyundai has traditionally been a second mover in the automobile industry. Hyundai: Yes; Top automakers such as GM and Toyota have been competing for some time while Hyundai introduced a vehicle in 1986, long after their rivals began. Hyundai also hasn’t pushed into the market since that time—until now. Consequences: Success is likely to be less than the first and second movers; to be successful, they must have a unique way to compete and enter the market, which means keeping a niche strategy with lower cost production and manufacturing. ADDITIONAL QUESTIONS AND EXERCISES The following questions and exercises can be presented for in-class discussion or assigned as homework. Application Discussion Questions Have students read the popular business press (e.g., Business Week, Fortune, Fast Company), and identify a strategic action and a tactical action taken by firms approximately two years ago. Next, they should use the Internet to search the popular business press to see if and how competitors responded to those actions. They should be able to explain the actions and the responses, linking their findings to the discussion in this chapter. Strategic and Tactical Actions: Students can examine actions like Amazon's expansion into grocery delivery (strategic) and its promotional discounts (tactical). Competitors like Walmart responded by enhancing their online services and launching their own delivery options. This illustrates how strategic initiatives can reshape industry dynamics and prompt competitive adaptations. Why would a firm regularly choose to be a second mover? Likewise, why would a firm purposefully be a late mover? Second Mover and Late Mover Advantages: A second mover might benefit from observing the first mover’s mistakes, allowing them to refine their offerings and reduce risk. A late mover can leverage established market trends and technologies to avoid costly early investments, capitalizing on existing consumer behaviors for more effective market entry. How did Walmart’s strategic actions affect its primary European competitors? How has Walmart’s e-commerce strategy affected competitors? Walmart’s Impact in Europe: Walmart's aggressive pricing and supply chain efficiencies pressured European competitors like Tesco to lower prices and innovate. Additionally, Walmart's foray into e-commerce prompted rivals to enhance their online strategies, illustrating how a market leader can influence competitive behaviors and industry standards. Have students choose a large firm and examine the popular business press to identify how its size, speed of actions, level of innovation, and quality of goods or services have affected its competitive position in its industry. Ask them to explain their findings. Firm Analysis: Choosing a company like Apple, students can explore how its size allows for significant R&D investments, driving innovation. Apple's speed in product launches and high-quality offerings have solidified its competitive position, while its marketing strategies reinforce brand loyalty, creating a formidable barrier against competitors. Identify a firm in a fast-cycle market. What strategic actions account for its success or failure over the last several years? How has the Internet affected the firm? Fast-Cycle Market Example: Netflix exemplifies a firm in a fast-cycle market. Its strategic actions, including investing in original content and adapting to consumer preferences, have driven its success. The Internet has enabled rapid content delivery and direct audience engagement, transforming traditional media consumption and reshaping competitive landscapes. Ethics Questions Are there some industries in which ethical practices are more important than in other industries? If so, name the industries that are ethical, and explain how the competitive actions and competitive responses might differ for these industries compared with a typical industry. Industries with Greater Ethical Importance: Industries such as healthcare, finance, and education prioritize ethical practices due to their significant societal impact. In these sectors, competitive actions and responses are often guided by regulations and a strong emphasis on consumer trust. Unlike typical industries, unethical practices can lead to severe legal repercussions and damage to reputation, prompting more cautious and transparent competitive strategies. When engaging in competitive rivalry, firms jockey for a market position that is advantageous, relative to competitors. In this jockeying, what types of competitor intelligence-gathering approaches are ethical? How has the Internet affected competitive intelligence activities? Ethical Intelligence-Gathering: Ethical competitor intelligence approaches include gathering information through public sources, market research, and industry reports. The Internet has expanded access to such data but also blurs ethical lines, as firms must navigate issues like data privacy and intellectual property. Online platforms can facilitate both ethical and unethical intelligence-gathering, making adherence to ethical standards crucial. A second mover is a firm that responds to a first mover’s competitive actions, often through imitation. Is there anything unethical about how a second mover engages in competition? Why or why not? Ethics of Second Movers: There is nothing inherently unethical about a second mover's actions as long as they adhere to legal and ethical standards. Imitating successful practices can stimulate competition and innovation. However, if a second mover engages in deceptive practices or infringes on intellectual property, that would raise ethical concerns, highlighting the importance of maintaining integrity in competitive actions. Standards for competitive rivalry differ in countries throughout the world. What should firms do to cope with these differences? How do the differences relate to ethical practices? Coping with International Standards: Firms should conduct thorough research on local laws, cultural norms, and ethical standards when operating globally. They may need to adapt their business practices to align with varying ethical expectations. These differences can influence competitive behavior, as firms must balance compliance with local norms while maintaining their ethical integrity across markets. Could total quality management practices result in firms operating more ethically than before such practices were implemented? If so, what might account for an increase in the ethical behavior of a firm using TQM principles? TQM and Ethical Behavior: Implementing total quality management (TQM) practices can lead to more ethical operations by fostering a culture of accountability and continuous improvement. TQM emphasizes customer satisfaction and stakeholder engagement, encouraging firms to act responsibly and ethically. This focus on quality can lead to better decision-making and enhance corporate social responsibility, resulting in improved ethical behavior. What ethical issues are involved in fast-cycle markets? Ethical Issues in Fast-Cycle Markets: Fast-cycle markets can present ethical dilemmas related to rapid innovation and the pressure to cut corners. Firms may face temptations to engage in misleading marketing, exploitative labor practices, or compromise product safety to maintain competitive advantage. Ensuring ethical standards in such environments requires strong corporate governance and commitment to integrity amidst the urgency of market demands. Internet Exercise Cisco Systems ranks as one of the greatest success stories of the last decade. The firm used acquisitions to gain access to R&D with a pace that accelerated from four companies in 1995 to twenty-three companies in 2000. This strategy allowed Cisco to adopt and integrate innovations faster than its competitors. But when the Internet bubble burst in early 2000, venture funding for the kinds of start-ups on which Cisco had been feasting (i.e., those spawning networking innovations) evaporated. The firm faced two immediate problems: (1) dealing with the complexity of managing the integration of a fast growing stable of new technology products, and (2) learning again how to innovate without acquisition. Look up Cisco Systems (http://www.cisco.com) on the Web and try to discern what the firm is doing to adjust to its new industry circumstances. *e-project: Discuss how the Internet has become a vital component in increasing the speed, ease, and frequency of today’s large mergers and acquisitions. Chapter 6 Corporate-Level Strategy ANSWERS TO REVIEW QUESTIONS What is corporate-level strategy and why is it important? Corporate-level strategies are strategies that detail actions taken to gain a competitive advantage through the selection and management of a mix of businesses competing in different product markets. They are concerned with what businesses the firm should be in and how the corporate office should manage its group of businesses. Corporate-level strategies are important to the diversified firm because developing and implementing multibusiness strategies is necessary for effective utilization of resources, capabilities, and core competencies across multiple businesses to create value. In the final analysis, a corporate-level strategy’s value is ultimately determined by the degree to which the businesses in the portfolio are worth more under the management of the company than they would be under any other ownership. What are the different levels of diversification firms can pursue by using different corporate-level strategies? Low levels of diversification. Single- and dominant-business firms represent those for which at least 95 percent and 70 percent of total sales, respectively, come from a single business. Several advantages accrue to these firms. For example, managers of single- and dominantbusiness firms may be more capable of understanding the competitive dynamics of the smaller number of industries in which their business(es) compete. Furthermore, managers in these firms can develop more specialized skills, concentrating on formulating and implementing a narrower range of business-level strategies and managing synergies between businesses that may be easier to identify and master. However, these firms must also overcome a number of disadvantages. For example, single- and dominant-business firms are affected more negatively by an economic downturn that affects their single or dominant industry. Also, by focusing their operations, these firms cannot enjoy the advantages that are realized only by diversified firms Moderate to high levels of diversification. A firm generating more than 30 percent of its revenue outside a dominant business and whose businesses are related to each other in some manner uses a related diversification corporate-level strategy. When the links between the diversified firm’s businesses are rather direct, a related constrained diversification strategy is being used. The diversified company with a portfolio of businesses with only a few links between them is called a mixed related and unrelated firm and is using the related linked diversification strategy. Compared with related constrained firms, related linked firms share fewer resources and assets between their businesses, concentrating instead on transferring knowledge and core competencies between the businesses. As with firms using each type of diversification strategy, companies implementing the related linked strategy constantly adjust the mix in their portfolio of businesses as well as make decisions about how to manage their businesses. Very high levels of diversification. A highly diversified firm that has no relationships between its businesses follows an unrelated diversification strategy. These businesses are not related to each other, and the firm makes no effort to share activities or to transfer core competencies between or among them. What are three reasons firms choose to diversify their operations? Firms may chose to move from a single- or dominant-business position to a more diversified position for three general reasons. First (value-creating), they do this to enhance strategic competitiveness via increased economies of scope (e.g., by sharing activities and transferring core competencies), market power (e.g., by blocking competitors through multipoint competition or implementing vertical integration), and financial economies (e.g., from efficient internal capital allocations and business restructuring). Second (value-neutral), firms may diversify in response to incentives. For example, they may do so to respond to advantages from tax law, to overcome a low performance trend, or to balance out uncertain future cash flows. Finally (value-reducing), unrelated acquisitions also may be made for managerial reasons (either to diversify managerial employment risk or to increase managerial compensation). It is important to note that diversification is not always pursued in an effort to enhance the firm’s strategic competitiveness; in fact, diversification may have neutral or even negative effects on firm performance. How do firms create value when using a related diversification strategy? Activity sharing and transferring core competencies are used to obtain economies of scope while pursuing a related diversification strategy because cost savings are attributed to entering an additional related business using capabilities and competencies developed in one business that can be transferred to another business without significant additional costs. In other words, it may be possible for related firms to share production facilities or distribution networks, or a core competency such as marketing expertise might be transferred between related business units. However, related firms also must take into account the costs related to activity sharing and core competency transfers, namely the cost of coordination and sharing of control created by the interdependencies that result or the savings imputed to economies of scope may not be realized. Firms using a related diversification strategy may gain market power when successfully using their related constrained or related linked strategy. Market power exists when a firm is able to sell its products above the existing competitive level or to reduce the costs of its primary and support activities below the competitive level, or both. Some firms using a related diversification strategy engage in vertical integration to gain market power. Vertical integration exists when a company produces its own inputs (backward integration) or owns its own source of output distribution (forward integration). What are the two ways to obtain financial economies when using an unrelated diversification strategy? Two ways to obtain financial economies when pursuing an unrelated diversification strategy are by establishing an efficient internal capital market and by restructuring the assets of purchased businesses. Financial economies can be achieved by establishing an efficient internal capital market that enables corporate managers—because they have access to more detailed and more accurate (or more relevant) information—to make better (more value-enhancing) capital allocation decisions relative to those made by the market. Restructuring focuses exclusively on buying and selling other firms’ assets in the external market. This usually entails selling off corporate headquarters facilities, laying off corporate staff, selling underperforming divisions to other firms that may be able to enhance the division’s strategic competitiveness, and managing the remaining business units to maximize net cash flow. What incentives and resources encourage diversification? Incentives that encourage diversification include antitrust regulation, tax laws, low firm performance, uncertain future cash flows, and opportunities to reduce overall firm risk. Resources that encourage diversification include both tangible and intangible resources such as plant and equipment (excess productive capacity) and financial resources (free cash flows) for which no attractive (positive) investment opportunities are available as the firm is currently structured. What motives might encourage managers to overdiversify their firm? Managers might be encouraged to push a firm toward a more diversified position to reduce the risk of job loss by diversifying employment risk (so long as profitability does not suffer excessively) or to increase their compensation. Increased levels of diversification are strongly correlated with firm size, and firm size in turn is strongly correlated with managerial compensation because of the increased complexity that results from increases in firm size and diversification level. INSTRUCTOR'S NOTES FOR EXPERIENTIAL EXERCISES EXERCISE 1: WHAT’S MY CORPORATE LEVEL STRATEGY; AND HOW DID I GET THIS WAY? The goals of this exercise are to allow the student to view the evolution of corporate level strategy rather than seeing this as a snapshot at any one point in time. It is important to have your students use publicly traded firms and encourage them to pick companies that have been around awhile, in order to get a sense of how firms’ strategies evolve. The next goal is to place the chapter’s concepts on corporate level strategy in context by allowing the student teams to present their findings and also to allow them to critique each firm. Too much diversification; then what should be done? Too little; what should the firm be looking for in terms of acquisitions? As a twist you may want to have the students hide the name of the firm and just present the evolution and see if the other students can guess who they are presenting. This would preclude the use of common companies such as Ford or GM but suggest they pick prominent firms that have significant histories. It is also interesting to trace the history of firms over time, most of this information may be gleaned from the respective histories, most often found on the respective web site. EXERCISE 2: WHAT DOES THIS ANNOUNCEMENT MEAN? The purpose of this exercise is to have students analyze an 8-K filing in the context of its corporate level strategy. Students are encouraged to utilize library resources available to them to find acquisition data on a publically traded company. Some library databases that will be particularly useful for this exercise are: Thomson One (Provides the most comprehensive M&A data) Bloomberg Orbis (M&A tab) LexisNexis Academic (Search by Company Name, then M&A tab) Alternatively, you may also elect to direct students to use the Securities and Exchange commission EDGAR database: http://www.sec.gov/edgar/searchedgar/companysearch.html The SEC provides a guide on reading 8-K filings, which may be useful to you and the class: http://www.sec.gov/investor/pubs/readan8k.pdf During the discussion, be certain that teams address the following topics addressed throughout the chapter: Diversification Strategy of Business (Single business, dominant business, related constrained, related linked – mixed related and unrelated; or Unrelated) Rational for Diversification (Value-Creating, Value-Neutral, or Value-Reducing) For companies with related diversification; ensure teams identify what sharing activities or transferring of core competencies will result as a result of the merger or acquisition For companies with unrelated diversification strategies; ensure teams address how financial economies will be obtained INSTRUCTOR'S NOTES FOR VIDEO EXERCISES Title: THE ROAD TO DIVERSIFICATION: BARRY DILLER/SENIOR EXECUTIVE/IAC RT: 5:38 Topic Key: Corporate-level strategy, Levels of diversification, Value-creating diversification, Operational and corporate relatedness, Related and unrelated diversification, Motivations to overdiversify In an interview with Leslie Stahl, Barry Diller, once Paramount CEO, reflected on seeing this primitive interactivity of computers, televisions, and phones and how it seized his curiosity. Diller saw a future where most shopping would be done by interacting with a screen. Even his wife indicated they were intrigued by this entire new world. She said Barry Diller can see something way before you can see anything. In the interview, Diller concurs that most of the public considered him to be losing his mind with the purchase of QVC and trading the glamour of Hollywood away. In Westchester, PA, Barry Diller made his first fortune as his own boss. But in a string of setbacks, he involved himself in a bidding war to buy Paramount only to make a mistake by not making the last bid. Learning from his mistakes and making other deals, he ended up losing QVC. Despite this, his gut feeling told him that interactive commerce would catch on so he purchased QVC’s competitor HSN. In the interview, Diller confirms that the public’s perception of his company is correct as a hodge podge but it’s an interactive conglomerate operating in financial services and flirt services. Diller says that the development of his company has been a journey and they are figuring it out along the way. He says he knows now that many of his businesses are related to one another and has united all his brands under one new corporate headquarters. He wanted to give his company, IAC, the same cache as other big Internet companies. In comparison to Google, Barry Diller says that IAC is an endless multiproduct company and his desire would be to be like Procter & Gamble one day. With a personal fortune of well over a billion, Diller’s wife says he is driven by the vision. Shown in business meetings, Diller makes decisions quickly and his employees say that his ability to grasp new and difficult concepts is uncanny. With 20,000 employees, Diller runs intense meetings and he is the ultimate decider who controls the votes in the company. Also check out http://www.fastcompany.com/1767926/barry-diller-iac-launch-socialnetwork-for-nostalgic-seniors Suggested Discussion Questions and Answers Describe Diller’s corporate-level strategy. Text: A corporate-level strategy specifies actions a firm takes to gain a competitive advantage by selecting and managing a group of different businesses competing in different product markets. Diller’s: To be an endless interactive conglomerate of multi-products similar to Procter & Gamble—presently all activities for creating financial to flirt services. Describe IAC’s level of diversification. IAC is considered related linked diversification signifying a moderate to high level of diversification. IAC appears to share resources and products and services, technologies, and distribution channels. What do you think was Diller’s reason to diversify? Reduce managerial risk would be an estimate but really he appears to be diversifying based on what he sees and likes. Is Diller’s approach value-creating diversification? Why or Why not? Yes, the expansion of IAC has brought economies of scope, sharing of some activities with the interactive nature of many of the businesses, core competencies can be transferred into other ventures, and overall market power has increased. At some point, it appears that Diller was attempting to block competitors through multipoint competition, especially when he lost QVC. Explain how IAC businesses and brands are related. Related diversification? All IAC businesses and brands use an interactive computer component. Corporate relatedness is high whereas operational relatedness is low Is Diller in a position to overdiversify? Diller is likely to overdiversify due his consideration that IAC is just “figuring it out.” In other words, he appears to have no real plan for businesses to add and chooses fresh and new ideas because he likes them, which could produce a lot of different and related companies with each failing to impact overall market share. His vision without a plan may only result in too many companies. ADDITIONAL QUESTIONS AND EXERCISES The following questions and exercises can be presented for in-class discussion or assigned as homework. Application Discussion Questions This chapter suggests that there is a curvilinear relationship between diversification and performance. Ask students how this relationship can be modified so that the negative relationship between performance and diversification is reduced and the downward curve has less slope or begins at a higher level of diversification. Curvilinear Relationship Modification: To modify the curvilinear relationship between diversification and performance, firms could focus on strategic alignment between diversified units to enhance synergies. Implementing robust management practices that foster collaboration and resource sharing can help mitigate inefficiencies. Additionally, conducting thorough market research before diversification can ensure that new ventures align with core competencies, thus stabilizing performance. The Fortune 500 firms are very large, and many of them have significant product diversification. Ask students if they believe these large firms are overdiversified. Do they experience lower performance than they should? Overdiversification in Fortune 500 Firms: Students may argue that many Fortune 500 firms are indeed overdiversified, leading to complexity and inefficiencies that dilute performance. They might analyze cases where diversification strategies have not yielded expected financial returns, suggesting that excessive product lines can confuse brand identity and weaken competitive focus, ultimately resulting in lowerthan-expected performance. What is the primary reason for overdiversification? Is it industrial policies, such as taxes and antitrust regulation, or do firms overdiversify because managers pursue their own self-interest through increased compensation, and a reduced risk of job loss? Why? Have students explain. Primary Reason for Overdiversification: Overdiversification is often driven by managers’ self-interest, seeking increased compensation and job security through expansive corporate growth. While industrial policies can influence diversification, the personal incentives for managers often outweigh external factors. This pursuit of personal benefit can lead to decisions that prioritize short-term gains over long-term strategic alignment. One rationale for pursuing related diversification is to obtain market power. In the United States, however, too much market power may result in a challenge by the US Justice Department (because it may be perceived as anticompetitive). Ask students in what situations related diversification might be considered unfair competition. Unfair Competition and Related Diversification: Related diversification might be considered unfair competition when it leads to monopolistic practices, such as price fixing or unfair market dominance that stifles competition. Situations where a firm uses its power to exclude competitors or manipulate market conditions could draw scrutiny from regulatory bodies. Such practices undermine fair competition and can result in legal challenges. Tell students they have two job offers, one from a dominant-business firm and one from an unrelated diversified firm (suppose the beginning salaries are virtually identical). Which offer would they accept and why? Job Offer Preference: Students might choose the dominant-business firm for its potential for focused expertise and growth in a specific area, which can lead to career advancement. Conversely, they may prefer the unrelated diversified firm for its potential for varied experiences and exposure to different industries, which could foster broader skills and networking opportunities. Personal career goals and risk preferences will influence their choice. Ask students if they believe that by the year 2015 large firms will be more or less diversified than they are today. Why? Will the trends regarding diversification be identical in Europe, the United States, and Japan? Explain. Trends in Diversification by 2015: Students may predict that large firms will be less diversified due to increasing specialization and the pursuit of core competencies. However, regional trends may vary; for example, the U.S. may see a shift towards focused strategies, while firms in emerging markets might diversify to gain competitive advantage. Cultural attitudes towards risk and investment in innovation will shape these trends differently across Europe, the U.S., and Japan. Will the Internet make it easier for firms to diversify? Why or why not? Internet and Diversification: The Internet can facilitate diversification by providing access to vast market data, reducing entry barriers for new ventures, and enabling online platforms for diverse product offerings. However, it also increases competition, making it harder for firms to succeed in multiple markets simultaneously. Thus, while the Internet can simplify the process, strategic foresight remains essential for effective diversification. Ethics Questions Propose the following statement: “Those managing an unrelated diversified firm face far more difficult ethical challenges than do those managing a dominant- business firm.” Based on their reading of this chapter, do the students this statement true or false? Why? Ethical Challenges in Diversification: Students may argue that the statement is true, as managers of unrelated diversified firms must navigate complex ethical dilemmas across varied industries and stakeholders. They face challenges in aligning diverse business practices with ethical standards, which can differ significantly between sectors. In contrast, managers of dominant-business firms often have a more focused ethical landscape, making it easier to maintain consistent ethical practices and decision-making. Is it ethical for managers to diversify a firm rather than return excess earnings to shareholders? Have students provide their reasoning in support of their answers. Ethics of Diversifying vs. Returning Earnings: Students might contend that it is ethical for managers to diversify if it aligns with the firm's long-term strategy and adds value. However, if diversification is pursued merely to inflate managerial compensation or to avoid returning profits to shareholders, it could be viewed as unethical. The key lies in transparency and whether the diversification serves the best interests of shareholders and stakeholders. What unethical practices might occur when a firm restructures? Explain. Unethical Practices During Restructuring: Unethical practices during restructuring may include misrepresentation of financial health to stakeholders, prioritizing personal job security over employee welfare, or executing layoffs without proper communication. Additionally, managers might engage in favoritism in selecting which employees to retain or fail to provide adequate severance, undermining trust and ethical standards within the organization. Ask students if they believe that ethical managers are unaffected by the managerial motives to diversify discussed in this chapter. If so, why? In addition, do they believe that ethical managers should help their peers learn how to avoid making diversification decisions on the basis of the managerial motives to diversify? Why or why not? Impact of Managerial Motives on Ethical Managers: Students might believe that ethical managers can still be influenced by managerial motives, as the pressures to diversify for personal gain can cloud judgment. They may argue that ethical managers should actively educate their peers about recognizing and resisting these motives to ensure that diversification decisions are made based on sound strategic reasoning rather than self-interest, fostering a more ethical corporate culture. Internet Exercise Search the websites of CMGI (http://www.cmgi.com), Cisco Systems (http://www.cisco.com), EMC (http://www.emc.com), and ICG (http://www.internetcapital.com). Compare their business models, and explain the type of strategy and level of diversification that describes each one. In the extremely fast-cycle Internet economy, these companies run exceptional risks. Track the success of each company’s stocks over the past six months. Can you pinpoint changes within the industry that have affected the rise and fall of stock prices? What advancements in information technology and electronic commerce have had the greatest effect on the continuing strategies of these companies? Does this type of collaboration amongst Internet companies foster growth and value within the industry? *e-project: In January 2000, Hyundai (http://www.hyundai.com), Samsung (http://www.samsung.com), and LG Group (http://www.lg.co.kr) were fined for illegally allocating funds to their failing subsidiaries. Using the information provided on the company websites, choose one of these companies and provide alternative strategies for it to better compete in international markets. Solution Manual for Strategic Management: Concepts and Cases: Competitiveness and Globalization Michael A. Hitt, R. Duane Ireland, Robert E. Hoskisson 9781285425184, 9781285425177, 9780538753098, 9781133495239, 9780357033838, 9781305502208, 9781305502147