CH-5-8 Competitive Rivalry and Competitive Dynamics – Strategic Management: Concepts and Cases: Competitiveness and Globalization-2 : Book Guide

This Document Contains Chapters 5 to 8 Chapter 5 Competitive Rivalry and Competitive Dynamics ANSWERS TO REVIEW QUESTIONS 1. 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. 2. 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. 3. 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. 4. 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. 5. 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. 6. 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. MINI-CASE FedEx and United Parcel Service (UPS): Maintaining Success While Competing Aggressively The mini-case makes it clear that FedEx and UPS have a number of similarities – resources, markets, and the competitive dimensions they emphasize to implement their strategies. However, as resources are not identical, both companies have sought to differentiate themselves to some degree. FedEx concentrates more on transportation services and international markets. UPS concentrates more on the entire value chain while competing domestically. Both firms are continually trying to outcompete. Actions FedEx has taken recently include securing its contract with the US Postal Services to fly domestic mail and restructuring some of its operations to increase efficiency and findings ways for its independent express, ground, and freight networks to work together more synergistically. UPS is buying a Hungary-based pharmaceutical-logistics company to strengthen its health-care business in Europe (and giving it improved access to Central and Eastern Europe), and emphasizing trans-border European Union services to fuel its growth. An important point that is made at the end of the Strategic Focus is that while competition between these two companies is intense, it has made both firms better. ANSWERS TO MINI CASE DISCUSSION QUESTIONS 1. FedEx and UPS have many similar resources and compete across many of the same markets. How are they different? Stated differently, how do they differentiate themselves? FedEx concentrates more on transportation services and international markets. UPS concentrates more on the entire value chain while competing domestically. 2. What are some of major and unique strategic actions taken by each firm? Have these actions been successful? Both firms are continually trying to out-compete each other. Actions FedEx has taken recently include securing its contract with the US Postal Services to fly domestic mail and restructuring some of its operations to increase efficiency and findings ways for its independent express, ground, and freight networks to work together more synergistically. UPS is buying a Hungary-based pharmaceutical-logistics company to strengthen its health-care business in Europe (and giving it improved access to Central and Eastern Europe), and emphasizing trans-border European Union services to fuel its growth. ADDITIONAL QUESTIONS AND EXERCISES The following questions and exercises can be presented for in-class discussion or assigned as homework. Application Discussion Questions 1. 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: Example: Apple's strategic shift toward services (e.g., Apple TV+) in 2022; tactical move: bundling services via Apple One. Competitor Response: Amazon ramped up Prime content offerings. These actions and responses demonstrate competitive dynamics and market adaptation. 2. Why would a firm regularly choose to be a second mover? Likewise, why would a firm purposefully be a late mover? Second and Late Movers: Second movers benefit by learning from first movers' successes and mistakes (e.g., PepsiCo launching healthier snacks after Coca-Cola). Late movers adopt trends with lower risks, targeting niche markets or underdeveloped customer segments. 3. How did Walmart’s strategic actions affect its primary European competitors? How has Walmart’s e-commerce strategy affected competitors? Walmart’s Competitive Impact: In Europe, Walmart’s strategic actions pressured competitors like Tesco to adopt cost-cutting measures. Its e-commerce advancements (e.g., Walmart+) challenged Amazon with price-based strategies and fast delivery services. 4. 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. Large Firm Analysis: Example: Tesla's speed in innovation (e.g., battery technology) and high-quality EVs have positioned it as a market leader. Popular business press highlights its advantage in R&D investments and first-mover benefits. 5. 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: Firm: TikTok. Strategic actions like algorithm-driven personalized content and rapid feature updates drove success. The Internet amplified its reach, enabling exponential global growth and user engagement. Ethics Questions 1. 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 More Important Ethical Practices: •Healthcare, Finance, and Pharmaceuticals are examples where ethical practices are crucial due to the direct impact on human lives and well-being. Competitive actions in these industries may focus on product safety, transparency, and regulatory compliance, with responses likely emphasizing long-term relationships and trust-building. 2. 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 Competitor Intelligence-Gathering: •Ethical methods include market research, public reports, and customer feedback. The Internet has expanded access to publicly available data, but firms must avoid tactics like hacking or stealing confidential information, as these undermine ethical standards. 3. 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? Second Movers in Competitive Rivalry: •It is not inherently unethical for a second mover to engage in competition, as long as they do not engage in deceptive practices. Imitating a competitor’s product or service is part of healthy competition, but copying proprietary technology or infringing on intellectual property is unethical. 4. 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 Global Competitive Rivalry Differences: •Firms should study and understand local cultural norms and ethical standards. Ethical practices can vary, such as in bribery laws, so firms should ensure compliance with both local regulations and their own ethical codes to prevent conflicts. 5. 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: •Total Quality Management (TQM) encourages continuous improvement and customer satisfaction, which can promote ethical behavior by focusing on transparency, accountability, and product quality. The alignment of TQM with ethics arises from its emphasis on fairness, collaboration, and long-term success over short-term gains. 6. What ethical issues are involved in fast-cycle markets? Ethical Issues in Fast-Cycle Markets: •In fast-cycle markets, companies may prioritize speed and innovation, sometimes at the cost of product quality or safety. Ethical issues include cutting corners in R&D, exploiting workers for faster delivery, or failing to provide accurate information to customers. The pressure to maintain a competitive edge can lead to compromising ethical standards. INSTRUCTOR'S NOTES FOR MINDTAP Cengage offers additional online activities, assessments and resources inside MindTap, our online learning platform. The following activities can be assigned within MindTap for students to complete. INSTRUCTOR'S NOTES FOR EXPERIENTIAL EXERCISES Competitive Advantage: First-Movers Coming In Second The purpose of this exercise is to take a look at competition in the marketplace and whether success is based on being a first-mover. In this group project, students will have the opportunity to practice valuable management skills including critical thinking, research comparisons, presentations, and discussing competitive actions. • Select a consumer or manufacturing industry • Research that industry and identify one or two instances of a first mover • Outline a brief history and description of the industry • Identify one or two first movers and provide a description of how they introduced their products and what their results were • Teams will present their findings to the class with a 10-15 minute presentation This exercise provides students an opportunity to identify competitive behaviors and the benefits of companies who are first movers. Instructors should encourage students to discuss competitive rivalry and the strategic and tactical actions companies can take to achieve competitive advantage. To modify this project as an individual assignment, consider requiring just one deliverable – identify a first mover and describe the benefits. INSTRUCTOR'S NOTES FOR VIDEO EXERCISES The media quiz offers additional opportunities for students to apply the concepts in the chapter to a real-world scenario as it is described in news reports. Title: Competition Among Car Companies RT: 2:58 Topic Key: Competitive behavior, Competitive dynamics, Multimarket competition, Competitive response, Strategic actions This video illustrates competition in the automobile industry. With profit margins generally around one to two percent, manufacturers face stiff competition with many players in a multimarket industry. This video features General Motors, one the large manufacturers in the United States. To be competitive, GM focuses on designing cars that hopefully will have a “wow” factor with its customers, and produce cars in an efficient manner to save costs in fast-cycle market. It’s also very important for GM to understand the different markets they are in in terms of what their customers want and the competitive rivalry that exists. Suggested Discussion Questions and Answers 1. How can GM understand its competitive environment? Text: A competitive analysis is the first step the firm must take to be able to predict the extent and nature of its rivalry with its competitors 2. General Motors and its competitors are constantly “thinking of tomorrow” in terms of their products. Describe the rate of competitive speed in this industry. Text: The car industry operates in a fast-cycle market in which the firm’s capabilities that contribute to competitive advantages aren’t shielded from imitation and where imitation is often rapid and inexpensive. INSTRUCTOR'S NOTES FOR DIRECTED CASE Directed Case exercises are a series of multiple choice questions designed to focus on the concepts from the chapter utilizing the case study analysis steps, such as gaining familiarity, recognizing symptoms, identifying goals, conducting the analysis, making the diagnosis and doing the action planning. In order to prepare an oral/written case presentation, an effective case analysis should include general external environmental issues, issues relative to the firm’s particular industry, and the firm’s direct competitors. This analysis provides the insights needed to identify the firm’s strengths and weaknesses. You must then synthesize information gained from your analysis of the firm’s external environment and internal organization. This allows you to generate alternatives that can resolve significant problems or challenges facing the firm. J.C. Penney J. C. Penney is a mid-tier retailer that sells apparel and home goods. This case takes students through the company’s 100 year history as well as the challenges of competing against other strong mid-tire competitors, and increased competition by lower-tier retailers. Students will review these concepts: o Business-level Strategies o Integrated Cost leadership/Differentiation Strategies o Standard-Cycle Markets o Competitive Rivalry o Competitive Dynamics MindTap Cengage offers additional online activities, assessments and resources inside MindTap, our online learning platform. The following activities can be assigned within MindTap for students to complete. Chapter 6 Corporate-Level Strategy ANSWERS TO MINI CASE DISSCUSSION QUESTIONS 1. 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. 2. 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 dominant-business 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. In addition, 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. 3. What are three reasons firms choose to diversify their operations? Firms may choose 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. 4. 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). 5. 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. 6. 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. 7. What motives might encourage managers to over diversify 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. ADDITIONAL QUESTIONS AND EXERCISES The following questions and exercises can be presented for in-class discussion or assigned as homework. Application Discussion Questions 1. 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. Modifying the Curvilinear Relationship Between Diversification and Performance: To reduce the negative relationship between performance and diversification, firms can focus on strategic alignment and ensuring that their diverse business units are not too disconnected. By actively managing synergies between different segments, investing in related diversification, and improving coordination, firms can smooth the downward slope and enhance performance even as they diversify. 2. The Fortune 500 firms are very large, and many of them have significant product diversification. Ask students if they believe these large firms are over diversified. Do they experience lower performance than they should? Over Diversification in Fortune 500 Firms Some large firms may indeed be over-diversified, leading to inefficiencies, lack of focus, or dilution of core competencies. However, other firms use diversification as a way to reduce risk and maintain steady revenue streams across different markets. Over diversification might not always result in lower performance, but it can lead to diminished returns and a loss of competitive edge in core businesses. 3. What is the primary reason for over diversification? Is it industrial policies, such as taxes and antitrust regulation, or do firms over diversify because managers pursue their own self-interest through increased compensation, and a reduced risk of job loss? Why? Have students explain. Primary Reason for Over Diversification: Over diversification is often driven by managerial self-interest—managers might pursue diversification to increase the size of the firm, which enhances their compensation and job security. While industrial policies like taxes or antitrust regulations can influence diversification, the primary reason is usually driven by managers’ motivations, which can sometimes result in agency problems where personal interests outweigh company interests. 4. 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. Related Diversification and Market Power: Related diversification may be considered unfair competition if it leads to a dominant market position that stifles competition or violates antitrust laws. For example, if a company acquires competitors to reduce market rivalry or to control a substantial portion of a particular industry, it may face challenges from regulatory bodies like the U.S. Justice Department. 5. 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? Choosing Between Job Offers: If both offers have identical salaries, students might prefer the dominant-business firm because it offers greater focus and a clearer path for professional development. An unrelated diversified firm may be more complex to navigate due to its broader range of activities, and there may be less clear direction in the career progression. However, students might opt for the unrelated diversified firm if they value learning opportunities across industries. 6. 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: Large firms are likely to reduce diversification as they focus on their core competencies, emphasizing concentration and streamlined operations. The trend may be more pronounced in the U.S. due to a focus on shareholder value and efficiency. In Europe and Japan, trends may vary based on different corporate governance models, but diversification is likely to be more cautious or strategic, not as aggressive. 7. Will the Internet make it easier for firms to diversify? Why or why not? Impact of the Internet on Diversification: The Internet can make it easier for firms to diversify by providing new digital platforms and global market access. It allows firms to scale rapidly into new industries, share resources across business units, and access new customer segments. However, the ability to diversify successfully still depends on strategic alignment and operational integration, which the Internet can facilitate but not guarantee. Ethics Questions 1. 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 Unrelated Diversified Firms vs. Dominant-Business Firms: The statement is likely true, as managing an unrelated diversified firm presents more complex ethical challenges. In such firms, managers must make decisions across various industries, which may involve conflicts of interest, different regulatory environments, and ethical standards that vary from one market to another. In contrast, managers of dominant-business firms are focused on one core industry, making it easier to adhere to consistent ethical practices aligned with the firm's goals. In an unrelated diversified firm, ethical challenges could arise from managing multiple industries with different stakeholder expectations, increasing the complexity of decision-making. 2. 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 Rather Than Returning Earnings to Shareholders: Diversifying instead of returning excess earnings to shareholders may not be inherently unethical, but it can be questioned based on the agency problem. If managers decide to diversify to increase the firm's size or secure their position, rather than acting in the best interest of shareholders, it becomes unethical. If diversification is pursued without clear strategic intent or in a way that reduces shareholder value, managers are acting in their self-interest, which is an unethical use of corporate resources. Shareholders have a right to expect that excess earnings be used in ways that maximize their value, either through reinvestment into profitable opportunities or through returns such as dividends. 3. What unethical practices might occur when a firm restructures? 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? Unethical Practices in Restructuring and Managerial Motives to Diversify: Unethical practices during restructuring can include misleading financial reporting, hiding the true motives behind restructuring actions, or using resource allocation for personal benefits rather than improving the firm's long-term value. Managers may be influenced by self-interest, such as wanting to grow the company’s size or securing their job, rather than pursuing strategic, ethical goals. Ethical managers should be aware of these motives and actively help peers avoid making decisions based on personal benefits. They should encourage a culture of transparency, ensure decisions are based on strategic, long-term value creation, and avoid being swayed by short-term managerial interests that compromise ethics. This guidance is important for preserving the integrity of decision-making and ensuring that diversification or restructuring benefits the firm and its stakeholders rather than just serving managerial interests. INSTRUCTOR'S NOTES FOR MINDTAP Cengage offers additional online activities, assessments and resources inside MindTap, our online learning platform. The following activities can be assigned within MindTap for students to complete. INSTRUCTOR'S NOTES FOR EXPERIENTIAL EXERCISES Revolution or Evolution: Strategizing To Gain Competitive Advantage The introduction to this chapter defines corporate-level strategy as “actions a firm takes to gain a competitive advantage by selecting and managing a group of different businesses competing in different product markets.” In this group exercise, students will analyze the corporate-level strategy for a publically traded firm and how those strategies increase the company’s value. •Select an established publically traded firm •Research and critique the firm’s corporate level strategy-evolution •Create a timeline or infographic to share with the class sharing the research and critique •Create and deliver a presentation to the class discussing the company’s current corporate level strategy, different levels of diversification and one background story Students will form a research consultancy, providing large firms with background on corporate-level strategies and your recommendations for strategy for their firms. In this group project, you will have the opportunity to practice valuable strategic management skills, including research management, strategic thinking and teambuilding. To modify this project as an individual assignment, consider requiring just one deliverable – a poster, a presentation or a paper. To enhance the project, the instructor may also challenge the students to discuss how the company is building brand loyalty through its differentiations and/or market segmentation using different business-level strategies. INSTRUCTOR'S NOTES FOR BRANCHING EXERCISE Branching Exercises are real-world activities that allow each student to work through challenges by choosing from different decision-making options. These exercises provide students with the opportunity to practice strategic management in a business scenario utilizing company case studies. Students are placed in the role of a decision maker and asked to consider the needs and priorities of stakeholders as they determine strategy recommendations for a company. Lockheed Martin Lockheed Martin is a global aerospace, defense, security and advanced technologies company. The U.S.-based company is a top U.S. government contractor and employees 16,000 people across the globe. Students will choose among competing strategies for developing an international diversification international strategy as Lockheed Martin’s primary customer, the U.S. government consumes less of its services. It is important to guide the discussion to focus on themes presented throughout the chapter including related and unrelated diversification strategies; as well as business and corporate-level strategies that could exist. In particular, be sure that the class is addressing issues such as different corporate level strategies, the risks and rewards of innovation, and the challenges of vertical integration and the transfer of competencies. Students will review these concepts: •Related and Unrelated Diversification in value creation •Different levels of Innovation •Innovation and Research and Development •Reasons firms diversify •Vertical Integration vs. Transfer Competencies The ideal path that earns a perfect score is the following: •Choose a related diversification strategy •Begin a venture in the private sector for space tourism •Collaborate with an established space tourism firm, specifically Virgin Galactic •Share activities across the current business units to produce the new shuttle components and equipment and compile them into a complete product •Final: Entering into a collaborative arrangement with Virgin Galactic was an excellent plan. The other firm has established competencies in many of the areas required to be successful that you do not have – such as customer service and marketing. By sharing activities across your firm, you are increasing the chances of Lockheed Martin’s success of a venture in private sector space tourism. INSTRUCTOR'S NOTES FOR VIDEO EXERCISES The media quiz offers additional opportunities for students to apply the concepts in the chapter to a real-world scenario as it is described in news reports. Title: Starbucks Buys Bakery Chain to Improve Food Quality RT: 2:30 Topic Key: International strategy, Business-level strategy, Corporate-level strategy, National advantage Starbucks built a top international brand by offering coffee-related drinks. However, it has struggled to sell its coffee drinkers on food. The corporation recently took a $100 million gamble by purchasing a small San Francisco bakery chain, retaining its French-born owner to train partner bakers across the country. The new baked goods will fill all 8,000 U.S.-based Starbucks stores. Suggested Discussion Questions and Answers 1. By purchasing La Boulange what competitive advantage, does Starbucks hope to gain? In implementing a corporate-level strategy, Starbucks redefines its business model to allow it to increase its competitive advantage in its changing industry by offering high-quality bakery items 2. How does Starbucks’ current market power increase its chances for success in expanding its product offerings to include bakery items? Starbucks’ premium brand enables it to charge higher prices for its beverage products. Its current market power in its beverage offerings gives Starbucks the ability to implement those same premium price points for its new bakery items. 3. Starbucks’ previous attempts to include food in its product offerings have met with mediocre results. Currently, only one-third of customers buy food products at Starbucks. How does using vertical integration increase Starbucks’ financial risk by buying and operating its own bakery supplier? Starbucks’ premium brand enables it to charge higher prices for its beverage products. Its current market power in its beverage offerings gives Starbucks the ability to implement those same premium price points for its new bakery items. Chapter 7 Merger and Acquisition Strategies ANSWERS TO REVIEW QUESTIONS 1. Why are merger and acquisition strategies popular in many firms competing in the global economy? Acquisition strategies are increasingly popular around the world. Because of globalization, deregulation of multiple industries in many different economies, favorable legislation, etc., the number of domestic and cross-border acquisitions is high (though the frequency has slowed recently). As is the case for all strategies, acquisitions indicate a choice a firm has made regarding how it intends to compete. Because each strategic choice affects a firm’s performance, the possibility of diversification merits careful analysis. A firm may make an acquisition to increase its market power because of a competitive threat, to enter a new market because of the opportunity available in that market, or to spread the risk due to the uncertain environment. In addition, a firm may acquire other companies as options that allow the firm to shift its core business into different markets as volatility brings undesirable changes to its primary markets. 2. What reasons account for firms’ decisions to use acquisition strategies as a means to achieving strategic competitiveness? Firms often choose to follow acquisition strategies (1) to increase market power (by becoming larger); (2) to overcome entry barriers (by acquiring a firm with a position in the target industry); (3) to reduce cost of new-product development and increase the speed to market entry; (4) to reduce the risk associated with developing new products internally; (5) to diversify both firm and managerial risk by increasing the level of diversification; (6) to reshape the firm’s competitive scope; and (7) to boost learning and the development of new capabilities. 3. What are the seven primary problems that affect a firm’s efforts to successfully use an acquisition strategy? Firms following acquisition strategies face seven major problems. (1) They may face difficulty in successfully integrating the two firms. This is especially true when integration involves melding disparate corporate cultures, linking disparate financial and control systems, building effective working relationships when management styles differ, and when the status of acquired firm executives is uncertain. (2) Owing to inadequate evaluation of the target firm (a process known as due diligence), acquirers may pay more for the target firm than it is worth. (3) If the acquisition is financed with debt, as many were in the 1980s, the costs related to a significant increase in debt—interest payments and debt repayment—may squeeze the firm’s cash flow and limit managerial flexibility resulting in the firm passing up attractive long-term investment opportunities. It is also important to note that debt also has positive effects since leverage can assist a firm in its development, allowing it to take advantage of attractive expansion opportunities. (4) Acquiring firms also may overestimate the existence and value of synergies from combining the two firms. In many cases, the value to be gained from synergy is overestimated due to a failure to consider the integration and coordination costs that may be incurred. (5) Too much diversification may mean that the portfolio of businesses that the firm owns is beyond the expertise of managers, that management depends too much on financial controls (rather than more effective strategic controls), and that acquisitions may become a substitute for innovation. (6) Managers may be overly focused on acquisitions and neglect the firm’s core businesses. (7) The combined firm may become too large to manage efficiently and effectively, as the firm experiences diseconomies of scale or bureaucratic controls stifle decision making. 4. What are the attributes associated with a successful acquisition strategy? As identified in Table 7.1, the following attributes tend to lead to successful acquisitions: • Acquired firm has assets or resources that are complementary to the acquiring firm’s core business • Acquisition is friendly • Acquiring firm selects target firms and conducts negotiations carefully and deliberately • Acquiring firm has financial slack (cash or a favorable debt position) • Merged firm maintains low to moderate debt position • Has experience with change and is flexible and adaptable • Sustained and consistent emphasis on R&D and innovation 5. What is the restructuring strategy, and what are its common forms? Defined formally, restructuring is a strategy through which a firm changes its set of businesses and/or financial structure. There are three common forms of restructuring strategies. Downsizing is a reduction in the number of a firm’s employees, and sometimes in the number of its operating units, but it may or may not change the composition of businesses in the company’s portfolio. Thus, downsizing is an intentional proactive management strategy, whereas decline is an environmental or organizational phenomenon that the firm cannot avoid and that leads to erosion of the organization’s resource base. As compared to downsizing, the downscoping restructuring strategy has a more positive effect on firm performance. Downscoping refers to divestiture, spin-offs, or some other means of eliminating businesses that are unrelated to a firm’s core businesses. Commonly, downscoping is referred to as a set of actions that results in a firm strategically refocusing on its core businesses. A firm that downscopes often also downsizes simultaneously. However, it does not eliminate key employees from its primary businesses while doing so because such action could lead to the loss of one or more core competencies. Instead, a firm simultaneously downscoping and downsizing becomes smaller by reducing the diversity of businesses in its portfolio. A leveraged buyout (LBO) is a restructuring strategy whereby a party buys all of a firm’s assets in order to take it private. Once the transaction is complete, the company’s stock is no longer traded publicly. It is common for the firm to incur significant amounts of debt to finance a leveraged buyout. The three types of leveraged buyouts include management buyouts (MBO), employee buyouts (EBO), and a whole firm buyout (the last occurring when another company or partnership purchases an entire company instead of a part of it). 6. What are the short- and long-term outcomes associated with the different restructuring strategies? As identified in Figure 7.3, the short-term outcome from downsizing is a reduction in labor costs, but this yields two negative long-term outcomes—loss of human capital and lower performance. Downscoping leads to reduced debt costs and an emphasis on strategic controls, which in turn produce higher firm performance as a long-term outcome. Finally, leveraged buyouts can lead to higher performance (long-term) through an emphasis on strategic controls, but it also yields high debt costs (short-term) that produce higher risk for the firm (long-term). MINI-CASE Strategic Acquisitions and Accelerated Integration of Those Acquisitions are a Vital Capability of Cisco Systems Cisco has perfected the art of acquisition strategy. The technology firm seeks to provide hardware for connectivity, from the internet to mobile networks to entertainment services. The next stage of Cisco’s evolution appears to be “the Internet of everything” connecting people, processes, data, and things. Throughout its history Cisco Systems has used acquisition strategy to build network products and strategically extend their reach into new areas – related and unrelated. In this case, several of Cisco’s recent acquisitions are described. It should be noted that in the IT sector, 90 percent of acquisitions fail. However, Cisco’s failure rate is only one in three – still significant, but far below industry norms. Cisco has developed a distinct ability to integrate acquisitions. In addition to due diligence to make sure they price they pay for companies is reasonable, it also develops a detailed plan for possible post-merger integration to ensure that anticipated value is achieved. Teaching Note: In fast-cycle industries, like those built around information technology, companies often lack the time to develop businesses or capabilities that they need to complement their existing businesses or capitalize on changing external conditions in a timely manner. Acquisitions can help firms achieve their objectives much faster than other options. To drive this point home, ask students why Cisco doesn’t just develop internally the businesses/capabilities that it obtains through acquisitions. Then, ask students why they think the target firms agreed to be acquired. Students should realize that truly successful acquisitions provide benefits to both parties. ANSWERS TO MINI CASE DISCUSSION QUESTIONS 1. Of the “Reasons for Acquisitions” section in the chapter, which reasons are the primary drivers of Cisco’s acquisition strategy? Cost of new product development and increased speed to market are among the key reasons for acquisition for Cisco. It also lowers the risk compared to developing new products by bringing semi-proven products and services into the Cisco portfolio through acquisition. However, the acquisitions also allow the company to increase its market power, increase diversification across the technology sector. 2. Of the acquisitions Cisco has completed, which ones are horizontal acquisitions and which ones are vertical acquisitions? Which of these acquisitions do you believe have the strongest likelihood of being successful and why? NDS Group and Meraki were both horizontal acquisitions, allowing the company to expand into cloud services and television network software. Ubiquisys may be described as a vertical integration because it adds a step in the value-chain. Now, in addition to the infrastructure for cellular networks, the company offers more control through traffic-shifting, providing greater value to its existing service. The success of these acquisitions will be determined based on the integration strategy and the ongoing evolution of the technology sector. 3. Explain John Chambers’ views about acquisitions. How have his views affected the nature of Cisco’s acquisition strategy? Chambers’ view on acquisitions is pragmatic. He understands that they come with the high potential for failure, but he’s willing to take on that calculated risk to achieve the rewards. His “healthy paranoia” and pragmatic approach has led to a deliberate and process-oriented path to acquisition, including financial due diligence and custom integration plans for each acquired firm. 4. Describe the core plan Cisco has in place to guide the integration of an acquired firm into its operations. What are the strengths of this plan, and what are its potential weaknesses? Cisco’s core plan for integration is to begin with identifying how the acquisition target with add value to the company and develop an individualized plan based on how best to integrate (or not) that value proposition. The strength of this plan and the processes surrounding it – including pre-planning, communication and a post-mortem – is that it is process-oriented and not a one-size fits all. The weakness of the plan is that it can lead to complexity, with some acquired firms fully integrated and others only partially integrated or operating in a more stand-alone fashion. ADDITIONAL QUESTIONS AND EXERCISES The following questions and exercises can be presented for in-class discussion or assigned as homework. Application Discussion Questions 1. Evidence indicates that the shareholders of many acquiring firms gain little or nothing in value from the acquisitions. Why, then, do so many firms continue to use an acquisition strategy? Reasons for Continued Use of Acquisition Strategy Despite Limited Shareholder Gains: •Firms continue to pursue acquisitions to achieve strategic objectives such as market expansion, gaining new technologies, or achieving economies of scale. •Managers may also be motivated by personal interests, such as increased compensation or job security, which may drive acquisition decisions even if they don't immediately benefit shareholders. •Acquisitions can also help firms enter new markets quickly, which might be more attractive than internal growth, even when the immediate financial returns are not positive. 2. Of the problems that affect the success of an acquisition, ask students which one they believe is the most critical in the global economy. Why? What should firms do to make certain that they do not experience such a problem when they use an acquisition strategy? Critical Problem Affecting Acquisition Success: •The most critical problem is cultural integration, especially in the global economy. Mismatched corporate cultures can lead to employee dissatisfaction, reduced productivity, and operational inefficiencies. •Firms should conduct thorough due diligence, including assessing cultural compatibility between the acquiring and target companies, and develop robust integration plans to ensure smooth transitions. 3. Have students use the Internet to read about acquisitions that are currently underway and to choose one of these acquisitions. Based on the firms’ characteristics and experiences and the reasons cited to support the acquisition, do they feel it will result in increased strategic competitiveness for the acquiring firm? Why or why not? Current Acquisition Example: •For example, Microsoft’s acquisition of Activision Blizzard aims to expand its presence in the gaming industry, especially in the metaverse and cloud gaming sectors. •This acquisition could increase Microsoft’s strategic competitiveness by diversifying its gaming portfolio and leveraging Activision’s content for cross-platform growth. •However, the success will depend on smooth integration and achieving the expected synergies, particularly in the face of regulatory scrutiny. 4. Have students research recent merger and acquisition activity that is taking place throughout the global economy. Are most of the transactions they found between domestic companies or are they cross-border acquisitions? What accounts for the nature of what they found? Nature of Recent M&A Activity (Domestic vs. Cross-Border): •Recent global M&A activity has seen a significant number of cross-border transactions, with companies looking to enter international markets or acquire complementary capabilities in other regions. •For example, the merger between Swiss multinational Nestlé and Brazilian healthcare firm Acelot was driven by Nestlé's desire to expand in the Latin American market. •This trend is driven by the globalization of business operations and the need to access new markets and resources. 5. What is synergy, and how do firms create it through mergers and acquisitions? In the students’ opinion, how often do acquisitions create private synergy? What evidence can they cite to support their position? Synergy in Mergers and Acquisitions: •Synergy refers to the idea that the combined value of two companies will be greater than the sum of their individual values. This can be achieved through cost savings, increased market power, or enhanced technological capabilities. •However, creating synergy is difficult, and many acquisitions fail to deliver the expected benefits. For example, the AOL-Time Warner merger failed to produce the anticipated synergy, leading to significant losses. •Acquisitions that create true private synergy, where both firms benefit significantly, are relatively rare and often require strong integration strategies. 6. What can a top management team do to ensure that its firm does not become diversified to the point of earning negative returns from its diversification strategy? Preventing Negative Returns from Over-Diversification: •To avoid negative returns from over-diversification, top management must ensure that any new acquisitions align with the firm’s core competencies and strategic goals. •They should focus on creating value in areas where they have expertise and avoid diversifying into unrelated industries without a clear strategic fit. •Regular performance reviews and strategic assessments can help manage diversification risk. 7. Some companies enter new markets through internally developed products, whereas others do so by acquiring other firms. What are the advantages and disadvantages of each approach? Advantages and Disadvantages of Internal Development vs. Acquisition: •Internal Development: Allows for greater control, alignment with company culture, and gradual scaling. However, it may be slower and more resource-intensive. •Acquisitions: Provide immediate market access, capabilities, and expansion but can involve high costs, integration challenges, and the risk of cultural clashes. •Companies need to balance both approaches depending on the specific market conditions and strategic objectives. 8. How do the Internet’s capabilities influence a firm’s ability to study acquisition candidates? Impact of the Internet on Studying Acquisition Candidates: •The Internet provides firms with vast amounts of data, financial reports, and competitive intelligence about potential acquisition targets. •It has made it easier to evaluate candidates through online databases, market research tools, and financial analysis platforms. •However, firms must be careful in ensuring the accuracy of information and ethical considerations when conducting due diligence using online sources. Ethics Questions 1. Some evidence suggests that there is a direct and positive relationship between a firm’s size and its top-level managers’ compensation. If this is so, what inducement does that relationship provide to upper-level executives? What can be done to influence the relationship so that it serves shareholders’ interests? Inducements for Executives from the Size-Compensation Relationship: •If a firm’s size is positively related to top-level managers' compensation, it can provide an inducement for executives to focus on growing the firm, as larger firms typically offer higher pay, bonuses, and stock options. This incentivizes executives to pursue strategies that lead to growth, even if those strategies are not always aligned with shareholders’ long-term interests. •To align this relationship with shareholders’ interests, compensation packages can be tied more directly to long-term performance metrics such as stock price appreciation, profitability, and sustainable growth rather than just firm size or short-term financial goals. Shareholders can also ensure that executive pay is linked to broader corporate social responsibility objectives to promote ethical and sustainable business practices. 2. When a firm is in the process of restructuring itself by divesting some assets and acquiring others, managers may have incentives to restructure in ways that increase their power base and compensation package. Does this possibility explain at least part of the reason for the less-than-encouraging outcomes of acquisitions for shareholders of the acquiring firm? Restructuring and Managers’ Power/Compensation Incentives: •Managers may be incentivized to restructure the company (through divestitures and acquisitions) to enhance their power and compensation, especially if these actions increase the company’s complexity, provide opportunities for increased bonuses, or improve their own job security. •This could partly explain why many acquisitions fail to create value for shareholders. In some cases, managers may pursue acquisitions that benefit them personally, rather than focusing on actions that would create long-term shareholder value. •To counteract this, firms should have strong governance structures in place that hold executives accountable for long-term performance and ensure that restructuring decisions are based on objective strategic goals, not personal gain. 3. When shareholders increase their wealth through downsizing, does this come, to some degree, at the expense of loyal employees—those who have worked diligently to serve the firm in terms of accomplishing its vision and mission? If so, what actions would students take to be fair to both shareholders and employees if they were charged with downsizing or “smartsizing” a firm’s employment ranks? What ethical base would they employ to make decisions regarding downsizing? Downsizing and Employee Welfare: •When shareholders benefit from downsizing (through increased profitability or cost reductions), it may come at the expense of loyal employees, especially those who have worked hard for the company’s success. •If tasked with downsizing, students should balance shareholder interests with fairness to employees by considering the ethical implications of layoffs. This could involve providing adequate severance packages, offering retraining programs, or helping employees find new employment opportunities. •The ethical base for making these decisions could be rooted in fairness and transparency, considering the well-being of employees while maintaining the firm’s competitiveness. The “justice approach” to ethics, which emphasizes fairness and equity, can help guide such decisions, ensuring that actions taken are justifiable to all stakeholders. 4. Are takeovers ethical? If not, why not? Ethics of Takeovers: •Takeovers can be ethical or unethical depending on the circumstances. Ethical concerns arise when the takeover benefits a few stakeholders (e.g., executives or shareholders of the acquiring firm) at the expense of other stakeholders (e.g., employees, customers, or shareholders of the target firm). •Takeovers that are done with transparency, proper due diligence, and a focus on enhancing long-term value for all stakeholders are more likely to be considered ethical. However, hostile takeovers that ignore the interests of the target firm’s stakeholders or lead to job losses without proper compensation are often viewed as unethical. 5. Is it ethical for managers to acquire other companies just because industry competitors are doing so? Ethics of Acquiring Companies Because Competitors Are Doing So: •It may not be ethical for managers to acquire companies just because competitors are doing so unless the acquisition aligns with the firm’s long-term strategy and benefits shareholders. •Acquiring companies simply to keep pace with competitors could result in wasteful spending, poor strategic fit, and the distraction of the firm’s resources. Ethical managers should base acquisition decisions on thorough strategic analysis, not peer pressure, and ensure that their actions are in the best interest of shareholders and other stakeholders in the long run. INSTRUCTOR’S NOTES FOR MINDTAP Cengage offers additional online activities, assessments and resources inside MindTap, our online learning platform. The following activities can be assigned within MindTap for students to complete. INSTRUCTOR’S NOTES FOR DIRECTED CASE Directed Case exercises are a series of multiple choice questions designed to focus on the concepts from the chapter utilizing the case study analysis steps, such as gaining familiarity, recognizing symptoms, identifying goals, conducting the analysis, making the diagnosis and doing the action planning. Equal Exchange Harley-Davidson, Inc. is an American motorcycle manufacturer, founded in Milwaukee, Wisconsin in 1903. Harley Davidson claims its brand is successful because its customers desire more than just motorcycles. Its customers desire the motorcycles and products because they symbolize the American dream of freedom. This is the company’s differentiation. Students will review these concepts: • Mergers and Acquisition Strategies • Global Competition Challenges • Restructuring Strategies • Strategic Competitiveness INSTRUCTOR'S NOTES FOR EXPERIENTIAL EXERCISES HIGHS AND LOWS OF MERGERS AND ACQUSITIONS The text argues that mergers and acquisitions are a popular strategy for businesses both in the United States and across borders. However, returns for acquiring firms do not always live up to expectations. In this group exercise, students will examine the concept of growth by acquisition by analyzing the results of an actual acquisition. • Identify a merger or acquisition that was completed in the last few years • Describe the environment for this arrangement at the time completed • Determine if the acquirer paid a premium for the target firm, and if so, how much? • Search for investor comments regarding the wisdom of the agreement • Describe the merger or acquisition going forward • Present finding to the class in 15-20 minutes In this group project, students will have the opportunity to practice valuable strategic management skills, including: research, public speaking, teamwork and critical thinking. Note: Each group must get their M&A company choice approved by your instructor in advance to avoid duplicates. To modify this project as an individual assignment, consider requiring just one deliverable – a poster, a presentation or a paper. To enhance the project, the instructor may also challenge the students to discuss in detail the short- and long-term outcomes of the different types of restructuring strategies. INSTRUCTOR'S NOTES FOR VIDEO EXERCISES Title: Comcast Stops Plans for Merger RT: 1:45 Topic Key: Mergers and Acquisitions, Competition, Global Economy Following months of strong federal government opposition, Comcast pulled the plug on its $45 billion planned merger with Time Warner Cable. The merger would have created a company that controlled 30 percent of the U.S. paid TV market and 57 percent of the broadband internet market. Major regulator concerns included the potential to squeeze out competitors and raise rates on consumers. Suggested Discussion Questions and Answers 1. Why did the government and consumers have regulatory opposition to the proposed merger and acquisition to the proposed merger between Comcast and Time Warner? If Comcast and Time Warner were to merge and control over half of all broadband services, Comcast would have too much power within the market to set prices and limit competition. 2. Why would Comcast’s partnership with Time Warner be considered a merger instead of an acquisition? As a merger, the two companies would have combined each of their operations to work together. In an acquisition, one company’s operations take control of the other’s operations. 3. Although the merger between Comcast and Time Warner didn’t go through, why might Comcast continue exploring merger options? By merging with another broadband service company, Comcast can bring its services to new cities and parts of the U.S. market it is not already serving. The company gains profitability through economies of scale. The cost of building infrastructure and competing in new markets might outweigh the potential of entering into these markets on its own, rather than through merger or acquisition. Chapter 8 International Strategy ANSWERS TO REVIEW QUESTIONS 1. How can the resource-based view of the firm (see Chapters 1 and 3) help us understand why firms develop and use cooperative strategies such as strategic alliances and joint ventures? By assessing a firms internal strengths and weaknesses, strategic leaders can determine what additional resources would be useful to help it achieve a competitive advantage. After identifying these needed resources, the firm can approach other companies that have these resources to enter into strategic alliances or joint ventures. 2. What is the relationship between the core competencies a firm possesses, the core competencies the firm feels it needs, and decisions to form cooperative strategies? When a company determines that it does not have a core competency that it needs or determines it has a core competency that another firm might need, it may approach other firms to establish a cooperative strategy. This is especially true of outsourcing, which can become a source of competitive advantage. 3. What does it mean to say that the partners of an alliance have “complementary assets”? What complementary assets do Renault and Nissan share? Complementary assets are often the resources that one firm has and another firm needs and can form the basis of a strategic alliance or joint venture. In the case of Renault and Nissan, both firms lacked the size they needed for economies of scale that were critical to success in the automobile industry. 4. What are the risks associated with the corporate-level strategic alliance between Renault and Nissan? What have these firms done to mitigate these risks? The risk is that one firm may take advantage of the other to gain a greater benefit. In this case, the two firms have built trust, respect and transparency to mitigate these risks. 5. Is it possible that some of the firms mentioned in this Mini-Case (e.g., Renault, Nissan, Mazda, Peugot-Citroen, Opel-Vauxhall) might form a network cooperative strategy? If so, what conditions might influence a decision by these firms to form this particular type of strategy? The growth of the largest players in the automobile industry may inspire these smaller players to form networks, making it easier for them to obtain economies of scale. They may also choose to do so to gain international markets for their cars. ANSWERS TO REVIEW QUESTIONS 1. What incentives influence firms to use international strategies? Traditional incentives that are causing firms to expand internationally are to gain access to larger markets, to extend the product life cycle, to secure key resources, and to access low-cost factors of production (e.g., cheap labor or raw materials). Emerging motives include the increase in pressure for global integration (driven by global communications, which lead to a global convergence of lifestyles and, in turn, universal product demand), rising obligations for cost cutting (e.g., seeking the lowest cost provider of resources or low-cost global suppliers), the realization that R&D expertise for the next new product extension may not come from the domestic market, and the emergence of large scale markets. 2. What are the three basic benefits firms can achieve by successfully using an international strategy? Firms can derive four basic benefits from international strategies. These benefits are: Increased market size – firms can expand the size of their market, sometimes dramatically, by entering foreign markets. Economies of scale and learning – through international expansion firms may be able to realize economies of scale, especially in manufacturing operations. This is even more important to the extent that firms can standardize their products across country borders. In addition, operating across borders creates new opportunities for learning and this can lead to process improvements. Location advantages – firms can realize significant cost savings by locating operations at the optimal place in the world. Location advantages include low labor, energy, and natural material costs. Other advantages include access to critical suppliers and to customers. 3. What four factors are determinants of national advantage and serve as a basis for international business-level strategies? According to Michael Porter, the resources and capabilities established in a firm’s home country often enable the firm to pursue its strategy beyond the domestic market. Porter specified a model that describes the factors contributing to the advantage of firms in a dominant global industry and associated with a specific country or regional environment. These four factors are as follows: • Factors of production, or the basic inputs necessary to compete in any industry, such as labor, land, capital, and infrastructure • Demand conditions, or the nature and size of the buyers’ needs in the home market for the industry’s products or services (reflected either by segment size, which enables a firm to achieve economies of scale, or specialized demand, which enables the firm to develop a higher level of competency in producing products/services) • Related and supporting industries or the presence of other industries in the home market that are either related to or support the primary industry. For example, the shoe industry in Italy benefits from a well-established industry in leather processing, people traveling to Italy to purchase leather goods, and an industry presence in leather-working machinery and design services) • Firm strategy, structure, and rivalry are interrelated as patterns of strategy that impact (and are impacted by) industry structure, which in turn affect and are affected by competitive rivalry. 4. What are the three international corporate-level strategies? What are the advantages and disadvantages associated with these individual strategies? The three international corporate-level strategies are multi-domestic, global, and transnational (see Figure 8.4). Firms following multi-domestic strategies assume that markets are different and should be segmented by national boundary. They decentralize or delegate strategic and operating decisions to the strategic business unit in each country to enable the flexibility necessary to tailor products and services to local market preferences. The use of multi-domestic strategies usually produces expansion of local market share because of the attention paid to local demands; however, it also leads to greater uncertainty for the corporation as a whole (due to market differences and the strategies designed to fit these). Multi-domestic strategies do not allow for the achievement of economies of scale and thus can be more costly, leading firms following this strategy to decentralize strategic and operating decisions to the business units operating in each country. Firms that follow a global strategy assume significant standardization of products across markets. The primary focus is on efficiency through economies of scale and the leveraging of innovation across country markets. Business-level strategy is centralized and controlled by the home office. It requires resource sharing and coordination and cooperation between subsidiaries and across country boundaries. Thus, a global strategy produces lower risk but may forgo growth opportunities in local markets because they are less likely to identify opportunities or these require product adaptation for local market preferences. Therefore, this strategy lacks local market responsiveness and is difficult to manage because of the need to coordinate strategies and operating decisions across country borders. A transnational strategy seeks to achieve both global efficiency and local responsiveness. It is difficult to realize the diverse goals of the transnational strategy because one goal requires close global coordination, whereas the other requires local flexibility; thus, “flexible coordination” is required to implement the transnational strategy. Management must build a shared vision and individual commitment through an integrated network. Effective implementation of a transnational strategy often produces higher performance than either the global or multi-domestic strategy alone. 5. What are some global environmental trends affecting the choice of international strategies, particularly international corporate-level strategies? Global strategies require integration and coordination across units (and across national boundaries) and enable the achievement of economies of scale and efficiency. On the other hand, multi-domestic strategies emphasize responsiveness to local market needs and preferences, providing the opportunity to more effectively meet customer needs and preferences. Successfully balancing the need for local responsiveness and global efficiency implies that local responsiveness should facilitate competition based on an international differentiation strategy, whereas global efficiency should facilitate competition based on an international cost leadership strategy. The threat of wars and terrorist attacks increases the risks and costs of international strategies. Furthermore, research suggests that the liability of foreignness is more difficult to overcome than once thought. Competing in many markets may enable the firm to achieve economies of scale because of the size of the combined markets, but only if customer preferences in multiple markets do not differ significantly. If customer preferences vary significantly among national markets, a firm might be better served to narrow its focus to a specific region. A regional focus may enable the firm to better understand cultures, legal and social norms, and other factors that may be important to achieving strategic competitiveness. Regionalization is another trend that has become more common in global markets. Companies need to decide if they are going to compete in all markets or selectively choose specific regions within which to operate. Regional strategies also are being promoted by groups of countries that have developed trade agreements to enhance the economic power of a region. Examples include the European Union (EU) and the Organization of American States (OAS) in South America. Another example of a regional market is the North American Free Trade Agreement (NAFTA), which is designed to facilitate free trade among the US, Canada, and Mexico. NAFTA may be expanded to include some South American countries and the movement of investment funds has not been only from the US to Mexico as Mexican investors have made significant investments in the US and some European firms have invested in Canada to gain access to this unified market. 6. What five entry modes do firms consider as paths to use to enter international markets? What is the typical sequence in which firms use these entry modes? Choice of mode of entry is determined by a number of factors, and the following modes are listed in a sequence that is typical in practice. Initial market entry will often be through export because this requires no foreign manufacturing expertise and demands investment only in distribution. Licensing can also facilitate the product improvement necessary to enter foreign markets. Strategic alliances have been popular because they allow partnering with an experienced player already in the targeted market. Strategic alliances also reduce risk through the sharing of costs. These modes therefore are best for early market development. To secure a stronger presence, acquisitions or new wholly owned subsidiaries (greenfield venture) may be required. Both acquisitions and greenfield ventures are likely to come at later stages in the development of an international diversification strategy. Additionally, these strategies tend to be more successful when the firm making the investment has considerable resources, particularly in the form of valuable core competencies. Thus, there are multiple means of entering new global markets. Firms select the entry mode that is best suited to the situation at hand. In some instances, these options will be followed sequentially, beginning with exporting and ending with greenfield ventures. In other cases, the firm may use several (but perhaps not all) of the different entry modes. The decision regarding the entry mode to use is primarily a result of the industry’s competitive conditions, the country’s situation and government policies, and the firm’s unique set of resources, capabilities, and core competencies. 7. What are political risks and what are economic risks? How should firms approach dealing with these risks? Political risks are related to instability in national governments and to war, civil or international. Instability in a national government creates multiple problems. Among these are economic risks and the uncertainty created in terms of government regulation, the presence of many (possibly conflicting) legal authorities, and potential nationalization of private assets. For example, foreign firms that are investing in Russia may have concerns about the stability of the national government and what might happen to their investments/ assets in Russia should there be a major change in government. Different concerns exist for foreign firms investing in China where foreign investors are less worried about the potential for major changes in China’s national government than about the uncertainty of China’s regulation of foreign business investments. Economic risks are highly interdependent with political risks. The primary economic risk is differences and fluctuations in the value of different currencies that can affect the value of a firm’s assets, liabilities, and earnings, as well as its price competitiveness in international markets. Although firms can realize many benefits by implementing an international strategy, doing so is complex and can produce greater uncertainty. For example, multiple risks are involved when a firm operates in several different countries. Firms can grow only so large and diverse before becoming unmanageable, or before the costs of managing them exceed their benefits. Other complexities include the highly competitive nature of global markets, multiple cultural environments, the security risks posed by terrorists, potentially rapid shifts in the value of different currencies, and the possible instability of some national governments. 8. What are the strategic competitiveness outcomes firms can reach through international strategies, and particularly through an international diversification strategy? International diversification provides the potential for firms to achieve greater returns on their innovations (through larger and/or more numerous markets) and thus lowers the often substantial risks of R&D investments. Therefore, international diversification provides incentives for firms to innovate. In addition, international diversification may be necessary to generate the resources required to sustain a large-scale R&D operation. The accelerating trend toward rapid technological obsolescence makes it difficult to invest in new technology and the capital-intensive operations required to take advantage of it; therefore, firms operating solely in domestic markets may find it difficult to justify such investments due to the length of time required to recoup the original investment. Even if the time frame is extended, it may not be possible to recover the investment before the technology becomes obsolete. Thus international diversification improves the firm’s ability to appropriate additional and necessary returns from innovation before competitors can overcome the initial competitive advantage created by the innovation. Additionally, firms moving into international markets are exposed to new products and processes, so they can learn and integrate this knowledge in an effort enhance their innovation efforts. The relationship among international diversification, innovation, and returns is complex. Some level of performance is necessary to provide the resources to generate international diversification. International diversification provides incentives and resources to invest in research and development. Research and development, if done appropriately, should enhance the returns of the firm, thereby providing more resources for continued international diversification and investment in R&D. 9. What are two important issues that can potentially affect a firm’s ability to successfully use international strategies? Firms pursuing international strategies often find that success leads to growth in both firm size and complexity. These conditions make it more difficult to manage. At some point the degree of geographic and product diversification may cause returns to become flat or even negative. This occurs because geographic dispersion increases the costs of operational coordination and product distribution. In addition, trade barriers, logistical costs, cultural diversity, and other differences by country all serve to complicate the implementation of international strategy. Evidence suggests that international expansion is managed differently by different companies—some do it better than others. Managers’ abilities to deal with complexity and ambiguity are key determinants to the success of international strategies. ADDITIONAL QUESTIONS AND EXERCISES The following questions and exercises can be presented for in-class discussion or assigned as homework. Application Discussion Questions 1. Given the advantages of international diversification, why do some firms choose not to expand internationally? Despite the advantages of international diversification, some firms choose not to expand internationally due to several reasons: •Cost and Complexity: Expanding internationally requires substantial investments in market research, infrastructure, and understanding local regulations. For some firms, the cost and complexity outweigh the potential benefits. •Risk Exposure: International expansion exposes firms to risks such as political instability, currency fluctuations, and economic downturns in foreign markets. •Cultural Barriers: Firms may face challenges related to cultural differences, language barriers, and unfamiliar consumer preferences that make international markets less attractive. •Focus on Core Competencies: Some firms may prefer to focus on their domestic market or core business functions rather than diversifying internationally. 2. How can a small firm diversify globally using the Internet? A small firm can diversify globally using the Internet in several ways: •E-commerce: Selling products or services online through a global e-commerce platform allows firms to reach international customers without the need for a physical presence in foreign markets. •Digital Marketing: Small firms can use digital marketing tools, such as social media, search engine optimization (SEO), and online advertising, to promote their brand globally and attract customers from different regions. •Global Outsourcing: Small firms can expand their operations by outsourcing functions like customer service, manufacturing, or IT to global partners using the internet to manage these activities. •Online Marketplaces: Platforms like Amazon, eBay, and Alibaba provide small firms with an international marketplace to sell their products. 3. How do firms choose among the alternative modes for expanding internationally and moving into new markets (e.g., forming a strategic alliance versus establishing a wholly owned subsidiary)? Firms decide between different modes of international expansion based on factors such as: •Risk and Control: A wholly owned subsidiary provides the highest level of control but involves greater financial and managerial risk, while forming a strategic alliance allows for shared risks and resources. •Market Entry Barriers: In markets with high barriers to entry (e.g., regulatory requirements or competition), firms may opt for joint ventures or alliances to share costs and risks. •Resources and Capabilities: If a firm lacks the resources or local expertise to enter a market alone, it might choose a partnership or licensing agreement to tap into local knowledge. •Long-term Strategy: Firms focused on long-term, full control and high investment may prefer wholly owned subsidiaries, whereas firms looking for quicker market access with less investment may prefer alliances or franchising. 4. Does international diversification affect innovation similarly in all industries? Why or why not? Impact of International Diversification on Innovation: International diversification does not affect innovation in the same way across all industries: •Technology and Consumer Goods: In industries like technology, where global scale and access to diverse markets can foster innovation through cross-border collaboration, international diversification tends to have a positive impact on innovation. •Manufacturing or Service Industries: In industries with less emphasis on R&D or where local market adaptations are more important than technological breakthroughs, the impact of international diversification on innovation may be less pronounced. 5. What is an example of political risk in expanding operations into Latin America or China? Political risk in Latin America or China could manifest as: •Expropriation: Governments in these regions may nationalize foreign-owned companies or impose excessive taxes on foreign firms. •Regulatory Changes: Sudden changes in laws or regulations can affect foreign firms' operations, such as trade restrictions, tariffs, or changes in labor laws. •Political Instability: In some Latin American countries or China, political instability and protests could disrupt business operations, supply chains, or market demand. 6. Why do some firms gain competitive advantages in international markets? Have students explain their answers. Firms gain competitive advantages in international markets by: •Economies of Scale: Expanding into global markets allows firms to increase production volume, reducing per-unit costs. •Access to Resources: International markets provide access to new resources, such as cheaper labor, raw materials, or innovative technologies. •Brand Recognition: Expanding globally helps build a global brand and consumer loyalty, increasing the firm’s competitive edge. •First-Mover Advantage: Firms that enter markets early can establish themselves as leaders, setting industry standards and gaining customer trust. 7. Why is it important to understand the strategic intent of strategic alliance partners and competitors in international markets? Understanding the strategic intent of alliance partners and competitors in international markets is crucial for: •Aligning Goals: Firms must ensure that the objectives of strategic alliances align with their own goals to prevent conflicts and maximize synergies. •Anticipating Competitive Moves: By understanding competitors' strategies, firms can anticipate their actions and respond proactively. •Identifying Opportunities and Threats: Understanding the moves of both partners and competitors helps identify new opportunities for growth or potential threats to market share. 8. What are the challenges associated with pursuing the transnational strategy? Have students explain their answers. The transnational strategy, which seeks to balance global efficiency with local responsiveness, presents several challenges: •Coordination Complexity: Managing a transnational strategy requires coordination between global operations and local subsidiaries, which can be difficult and costly. •Cultural Differences: Addressing local consumer needs while maintaining global efficiency can be challenging due to cultural and market differences. •Resource Allocation: Firms must balance the allocation of resources between central operations and local markets, which may require trade-offs and careful management. •Regulatory Compliance: Different countries have varying regulations that require firms to adapt their business practices, adding complexity to the strategy. Ethics Questions 1. As firms attempt to internationalize, they may be tempted to locate their facilities where product liability laws are lax in testing new products. What are some examples in which this motivation is the driving force behind international expansion? Internationalization Motivated by Lax Product Liability Laws: Firms may expand internationally to take advantage of lax product liability laws in certain countries. For example, some pharmaceutical companies have been criticized for testing drugs in countries with less stringent regulatory requirements, such as in parts of Africa or Eastern Europe, where oversight of clinical trials may be weaker. Similarly, companies in the food and beverage industry may locate production facilities in countries with less strict food safety standards to avoid the costs of compliance with tougher regulations in their home countries. 2. Regulation and laws regarding the sale and distribution of tobacco products are stringent in the US market. Use the Internet to investigate selected US tobacco firms to identify if sales are increasing in foreign markets compared to domestic markets. In what countries are sales increasing and why? What is your assessment of this practice? Tobacco Firms Expanding in Foreign Markets: Tobacco firms like Philip Morris have been focusing on increasing sales in foreign markets due to stringent regulations in the U.S. and declining domestic demand. Sales in regions like Southeast Asia, Eastern Europe, and parts of Africa have seen growth, largely because these regions have fewer restrictions on advertising, tobacco sales, and product content compared to the U.S. This practice, while potentially profitable, raises ethical concerns about exploiting regions with less regulatory protection and contributing to public health issues in those regions. 3. Some firms outsource production to foreign countries. Although the presumed rationale for such outsourcing is to reduce labor costs, examine the labor laws (for instance, the strictness of child labor laws) and laws on environmental protection in another country. What does your examination suggest from an ethical perspective? Ethics of Outsourcing to Countries with Lax Labor and Environmental Laws: Outsourcing production to countries with lax labor laws or poor environmental protections is often motivated by the desire to reduce labor costs. However, from an ethical perspective, such outsourcing can involve significant exploitation. For example, child labor or unsafe working conditions in factories, as seen in some developing nations, raise concerns about the rights of workers. Similarly, countries with weaker environmental regulations may lead to significant environmental degradation. Firms must consider the ethical implications of these practices, especially regarding worker welfare and environmental sustainability. 4. Are there markets that the US government protects through subsidies and tariffs? If so, which ones and why? How will the continuing development of e-commerce potentially affect these efforts? U.S. Market Protection through Subsidies and Tariffs: The U.S. government protects certain markets through subsidies and tariffs. For example, the agricultural sector benefits from subsidies, ensuring that domestic farmers can compete against cheaper imported products. Similarly, tariffs on steel and aluminum help protect U.S. manufacturing from foreign competition. However, the rise of e-commerce and digital trade could weaken the effectiveness of traditional tariffs and subsidies, as products can be easily sourced from international online platforms, reducing the impact of these protections. 5. Should the United States seek to impose trade sanctions on other countries, such as China, because of human rights violations? Trade Sanctions on Countries Like China for Human Rights Violations: Imposing trade sanctions on countries like China for human rights violations is a controversial issue. Supporters argue that sanctions are a way to pressure governments to change harmful practices, such as the treatment of ethnic minorities or suppression of free speech. Critics, however, argue that sanctions can harm ordinary citizens more than the government and may lead to retaliatory measures that negatively impact U.S. businesses. Balancing ethical concerns with economic interests is a key challenge in deciding whether or not to impose such sanctions. 6. Latin America has been experiencing significant changes in both political orientation and economic development. Describe these changes. What strategies should foreign international businesses implement, if any, to influence government policy in these countries? Is there a chance that the political changes will reverse? Latin America has seen significant political shifts, with countries like Brazil and Argentina moving toward more left-leaning governments, while others like Chile and Colombia have embraced more market-oriented policies. These political changes have been driven by factors like income inequality, public dissatisfaction with traditional elites, and a desire for economic growth. Foreign businesses in Latin America must adapt their strategies based on local political climates. They should engage in advocacy and relationship-building with governments to influence policy decisions that may impact their business. However, political changes in Latin America can be unpredictable, and there is a chance that the region may swing back toward conservative policies depending on public opinion and economic conditions. INSTRUCTOR'S NOTES FOR MINDTAP Cengage offers additional online activities, assessments and resources inside MindTap, our online learning platform. The following activities can be assigned within MindTap for students to complete. INSTRUCTOR'S NOTES FOR BRANCHING EXERCISE Branching Exercises are real-world activities that allow each student to work through challenges by choosing from different decision-making options. These exercises provide students with the opportunity to practice strategic management in a business scenario utilizing company case studies. Students are placed in the role of a decision maker and asked to consider the needs and priorities of stakeholders as they determine strategy recommendations for a company. Lululemon Athletica lululemon athletica, is a yoga-inspired athletic apparel company, which produces a clothing line and runs international clothing stores from its company based in Vancouver, British Columbia, Canada. The student will choose among competing strategies for developing the international strategy as lululemon athletica enters the Chinese market. It is important to guide the discussion to focus on themes presented throughout the chapter such as risks and advantages of international strategies; as well as business and corporate-level strategies that could exist. In particular be sure that the class is addressing issues such as increased coordination and distribution costs, management problems that arise as a result of factors such as trade barriers, licensing, logistical costs and cultural diversity. Students will review these concepts: • Reviewing the different strategies that companies use to compete in the global market place • Global vs. Transnational Strategy Export vs. Licensing • Export vs. Wholly Owned Subsidiary • Liability of Foreignness • Regionalization The ideal path that earns a perfect score is the following: • Select a transnational strategy • Choose to export from an existing supplier network • Customize products aimed at Chinese customers. • Export products to China aimed specifically at the Chinese market INSTRUCTOR'S NOTES FOR EXPERIENTIAL EXERCISES International Expansion: Is It for Everyone? The purpose of this exercise is to investigate the feasibility of a company expanding internationally. Students will learn if international expansion makes sense for all industries or just for some. In this group project, students will have the opportunity to practice valuable strategic management skills, including: team building, data analysis, critical thinking and research management. In this exercise, each team will act as a consultant to a multi-national fast food restaurant company that is trying to increase its international exposure in the near future. This exercise also can be assigned to individuals. INSTRUCTOR'S NOTES FOR VIDEO EXERCISES Title: Chinese Manufacturing for American Products RT: 2:23 Topic Key: International strategy, Business-level strategy, Corporate-level strategy, National advantage American small businesses often find it hard to operate in the US, given the high costs of developing the infrastructure to produce goods. One option overseas offers some businesses a cheaper solution — China’s booming manufacturing industry. Mike Tomberlin, found and CEO of U.S. company Tomberlin Automotive has partnered with a Chinese vehicle manufacturer to assemble his vehicles. Sales for his electric vehicles are brisk, but Tomberlin says his company is still too small to invest in building its own manufacturing hub in the United States. He says the access to manufacturing in China allows the company to focus on building the brand and channel. Suggested Discussion Questions and Answers 1. What are some of the benefits of the strategic alliance between Tomberlin Automotive and the Chinese manufacturing plant? In the strategic alliance between Tomberlin Automotive and the Chinese manufacturing plant, they are sharing the risks and resources of operations. Strategic alliances are the most common arrangements for outsourcing and offshoring. Tomberlin Automotive has cheaper access to manufacturing facilities and skilled labor, while the Chinese manufacturer benefits from increased investment in his factories and access to U.S. supply chain. 2. What benefits does Tomberlin Automotive receive from its international strategy by manufacturing in China? By manufacturing in China, Tomberlin Automotive can reduce costs through lower-cost labor. 3. What risks are associated with Tomberlin Automotive moving its manufacturing operations to China? If the country doesn’t maintain proper infrastructure for shipping the product overland and exporting it back to the U.S. The ability to carry out successful manufacturing operations is dependent on the infrastructure of where the operations are taking place, which is an economical risk. In addition, new laws and regulations could impact the company’s cost of business in China, which is a political risk. Solution Manual for Strategic Management: Concepts and Cases: Competitiveness and Globalization Michael A. Hitt, R. Duane Ireland, Robert E. Hoskisson 9781305502147, 9780357033838