This Document Contains Chapters 8 to 9 Chapter 8 International Strategy LEARNING OBJECTIVES 1. Explain incentives that can influence firms to use an international strategy. 2. Identify three basic benefits firms achieve by successfully implementing an international strategy. 3. Explore the determinants of national advantage as the basis for international business-level strategies. 4. Describe the three international corporate-level strategies. 5. Discuss environmental trends affecting the choice of international strategies, particularly international corporate-level strategies. 6. Explain the five modes firms use to enter international markets. 7. Discuss the two major risks of using international strategies. 8. Discuss the strategic competitiveness outcomes associated with international strategies particularly with an international diversification strategy. 9. Explain two important issues firms should have knowledge about when using international strategies. CHAPTER OUTLINE Opening Case: Netflix Ignites Growth through International Expansion, but Such Growth Also Fires Up the Competition IDENTIFYING INTERNATIONAL OPPORTUNITIES Incentives to Use International Strategy Three Basic Benefits of International Strategy INTERNATIONAL STRATEGIES International Business-Level Strategy International Corporate-Level Strategy Strategic Focus: Furniture Giant IKEA’s Global Strategy ENVIRONMENTAL TRENDS Liability of Foreignness Regionalization CHOICE OF INTERNATIONAL ENTRY MODE Exporting Licensing Strategic Alliances Acquisitions New Wholly Owned Subsidiary Dynamics of Mode of Entry RISKS IN AN INTERNATIONAL ENVIRONMENT Political Risks Economic Risks Strategic Focus: The Global Soccer Industry and the Effect of the FIFA Scandal STRATEGIC COMPETITIVENESS OUTCOMES International Diversification and Returns Enhanced Innovation THE CHALLENGE OF INTERNATIONAL STRATEGIES Complexity of Managing International Strategies Limits to International Expansion SUMMARY KEY TERMS REVIEW QUESTIONS MINI-CASE: An International Strategy Powers ABB’s Future ADDITIONAL QUESTIONS AND EXERCISES MINDTAP RESOURCES LECTURE NOTES Chapter Introduction: This chapter examines opportunities facing firms as they seek to develop technological innovation and exploit core competencies by diversifying into global markets. In addition, it addresses different problems, complexities, and threats that might accompany use of the firm’s international strategies. Although national boundaries, cultural differences, and geographical distances all pose barriers to entry into many markets, significant opportunities draw businesses into the international arena. A business that plans to operate globally must formulate a successful strategy to take advantage of these global opportunities. Furthermore, to mold their firms into truly global companies, managers must develop global mind-sets. Especially in regard to managing human resources, traditional means of operating with little cultural diversity and without global sourcing are no longer effective. These themes are all emphasized in the chapter. OPENING CASE Netflix Ignites Growth through International Expansion, but Such Growth Also Fires Up the Competition Netflix is a content streaming company that provides a broad selection of on-demand original content, as well as content produced by movie studios and network television. The company has reached a near saturation point in the U.S. and has begun to expand its services abroad, first in countries that are close culturally and geographically to the U.S. Company leaders have been pursuing a typical international strategy by developing strong capabilities in technological innovation domestically and then using that base technology to expand abroad. Growth is challenged as the company navigates varied content licensing and competitors in the U.S. and abroad. Teaching Note Netflix is a strong U.S. brand with a promising future. The Opening Case profiles some of the ways the company has grown and some of the challenges that are inherent in global business. Many students may be familiar with Netflix, and they should be able to identify and discuss some issues encountered by other growing technological firms with international operations. Ask them to identify instances in which firms have had to deal with problems/issues arising out of international operations. Although national boundaries, cultural differences, and geographical distances all pose barriers to entry into many markets, significant opportunities draw businesses into the international arena. • Global firms must formulate a successful strategy to take advantage of international opportunities. • Managers must develop global mind-sets. • Operating with little cultural diversity and without global sourcing is no longer effective. • Global tech firms must work within local laws and obtain local licenses to grow their customer base. Figure Note Figure 8.1 provides an overview of the various choices and outcomes of strategic competitiveness. FIGURE 8.1 Opportunities and Outcomes of International Strategy The following opportunities and outcomes of international strategy are illustrated in Figure 8.1: • Firms should first identify international opportunities related to increasing market size, return on investment, economies of scale and learning, and location-related advantages. • Once international opportunities have been identified, firms must develop international strategies based on firm resources and capabilities. • A mode of entry should be selected to take advantage of the firm’s core competencies. • A firm’s ability to realize strategic competitiveness is tempered by management’s ability to manage effectively and efficiently a complex organization with locations in multiple countries and the economic and political risks that accompany firm internationalization. • The strategic outcomes from the process can include better performance and more innovation.
1 Explain incentives that can influence firms to use an international strategy.
IDENTIFYING INTERNATIONAL OPPORTUNITIES International strategy refers to selling products in markets outside of the firm’s domestic market to expand the market for their products. Incentives to Use International Strategy This is explained by Vernon’s adaptation of the product life cycle concept formulated to explain internationalization. 1. A firm introduces an innovation (new product) in its domestic market. 2. Product demand develops in other countries and exports are provided from domestic operations. 3. As demand increases, foreign rivals produce the product; then firms justify investing in production abroad. 4. As products become standardized, firms relocate production to low-cost countries. Some firms implement an international strategy to secure critical resources, such as petroleum reserves (for the oil industry), bauxite (for the manufacture of aluminum), or rubber (for tire manufacturing). Traditional motives persist, but other emerging motives also drive international expansion. • Pressure has increased for global integration of operations, driven mostly by universal product demand. • In some industries, technology drives globalization because the economies of scale necessary to reduce costs to the lowest level often require an investment greater than that needed to meet domestic market demand. • New large-scale, emerging markets such as China and India provide a strong internationalization incentive because of the potential demand in them. Companies seeking to expand operations internationally need to understand the pressure on them to respond to local, national, or regional customs, especially where goods or services require customization due to cultural differences or effective marketing to entice customers to try a different product. • Firms adapt products to local tastes as they move into new national markets. • Local repair/service capabilities are another factor that increases desire for local country responsiveness. • Transportation costs of large products and their parts may preclude a firm’s suppliers from following the firm into an international market. • Employment contracts and labor forces differ. Host governments demand joint ownership and frequently require a high percentage of local procurement, manufacturing, and R&D. These issues increase the need for local investment. Opportunities available to firms through an international strategy include: • Increasing the size of potential markets • Achieving greater returns on capital and/or investment in new product/process developments • Gaining economies of scale, scope, or learning • Gaining location-based competitive advantage Teaching Note: Firms expanding into international markets must recognize that many countries have characteristics that are unique and may differ significantly from the traditional European markets into which US firms have expanded. Thus, firms must recognize this and: • Be capable of managing multiple risks—e.g., financial, economic, political risks • Be aware of increased pressure for local country or regional responsiveness, especially where cultural differences require customization of goods or services • Weigh the potential advantages of enhancing the firm’s strategic competitiveness relative to the costs of meeting managerial challenges and product/geographic diversification requirements in international markets
2 Identify three basic benefits firms achieve by successfully implementing an international strategy.
Three Basic Benefits of International Strategy Increased Market Size Expanding internationally enables firms to increase greatly the size of the potential market for their products. This may be of critical importance if the domestic market is too small to support scale-efficient manufacturing facilities. The size of a particular international market affects a firm’s willingness to invest in it with larger markets tending to provide higher returns and lower risk. The strength of the science base in a country also can affect a firm’s foreign R&D investments, so most firms prefer to invest more heavily in those countries with the scientific knowledge and talent that produce more effective new products and processes from their R&D. Economies of Scale and Learning By expanding the size and scope of their markets, firms may be able to achieve economies of scale in manufacturing (and in other operations, such as marketing, research and development, and distribution) by standardizing products across national borders and spreading fixed costs over a larger sales base. Teaching Note: Economies of scale are critical in the global auto industry. Honda has been a largely successful firm with substantial competencies in the manufacture of engines; however, it has sometimes struggled to compete against larger and more resource-rich auto makers (e.g., Ford and GM). To have a chance to survive, Honda achieved economies of scale in the development and application of its engines (e.g., by providing engines for many applications [e.g., lawnmowers, weed trimmers, snowmobiles] and forming an alliance with GM to produce engines). Thus, Honda may excel as an independent engine manufacturer. Firms may also be able to exploit core competencies in international markets through resource and knowledge sharing between units across country borders. This sharing generates synergy, which helps the firm produce higher-quality goods or services at lower cost. In addition, working across international markets provides the firm with new learning opportunities. Location Advantages Firms also may be able to achieve a comparative advantage and lower the basic costs of their products by locating facilities in low-cost markets for critical raw materials, cheap labor, key suppliers, energy, customers, and/or natural resources. Other factors that may impact location advantages are as follows: • The needs of intended customers • Cultural influences (if there is a strong match between the cultures involved, the liability of foreignness is lower than if there is high cultural distance) • Physical distances that influence the firms’ location choice and how facilities are managed
3 Explore the determinants of national advantage as the basis for international business-level strategies.
INTERNATIONAL STRATEGIES International strategies available to firms are business-level and corporate-level (see Chapters 4 and 6). • Business-level strategy choices are generic, extending our earlier discussion of cost leadership, differentiation, focus, and integrated cost leadership/differentiation strategies. • Corporate-level strategies are dependent on the complexity and scope of product and geographic diversification, and these include multi-domestic, global, and transnational (hybrid) strategies. International Business-Level Strategy Each business must develop a competitive strategy focused on its own domestic market. Business-level generic strategies are discussed in Chapter 4, but international business-level strategies have some unique features. • In an international business-level strategy, the home country of operation is often the most important source of competitive advantage. • The resources and capabilities established in the home country frequently allow the firm to pursue the strategy into markets located in other countries. • As a firm continues its growth into multiple international locations, research indicates that the country of origin diminishes in importance as the dominant factor. Figure Note Porter’s Diamond of Advantage model can be used to introduce the discussion of Figure 8.3. FIGURE 8.3 Determinants of National Advantage As Figure 8.3 illustrates, four interrelated national or regional factors contribute to the competitive advantage of firms competing in global industries. • Factor conditions or the factors of production • Demand conditions • Related and supporting industries • Firm strategy, structure, and rivalry Note: Each of these factors is discussed in the following section. Perhaps the most basic factor in the model, factor conditions or factors of production, refers to the inputs necessary to compete in any industry. These include labor, land, natural resources, capital, and infrastructure (such as highway, postal, and communications systems). These factors can be subdivided into four categories: • Basic factors, such as labor and natural resources • Advanced factors, including digital communications systems and highly educated work forces • Generalized factors (required by all industries), such as highway systems and a supply of capital • Specialized factors that are most valuable in specific uses (e.g., skilled personnel employed at a port who specialize in the handling of bulk chemicals) Nations having both advanced and specialized factors are likely to be characterized by growth in new firms that are strong global competitors. Ironically, countries often develop advanced and specialized factors because they lack critical basic resources. • Some Asian countries, such as South Korea, lack abundant natural resources but offer a strong work ethic, a large number of engineers, and systems of large firms to create expertise in manufacturing. • Germany developed a strong chemical industry, partially because Hoechst and BASF spent years creating a synthetic indigo dye to reduce their dependence on imports, unlike Britain, whose colonies provided large supplies of natural indigo. The second factor that determines national advantage is demand conditions, which are characterized by the nature and size of buyers’ needs in the home market for the industry’s products or services. The size of the segment can create demand sufficient to justify the construction of scale-efficient facilities. Related and supporting industries are the third factor of the national advantage model. National firms may be able to develop competitive advantage when industries that provide either materials or components or that support the activities of the primary industry are present. • Italian firms are world leaders in the shoe industry because of the related and supporting industries present in Italy (e.g., a mature leather processing industry and design and manufacture of leather-working machinery). • In Japan, copiers and cameras are related, as are cartoon, consumer electronics, and video game industries. Growth in certain industries is fostered by the fourth factor—firm strategy, structure, and rivalry. As expected, patterns of firm strategy, structure, and competitive rivalry among firms in an industry vary between nations. • In Italy, the national pride of the country’s designers has spawned strong industries in sports cars, fashion apparel, and furniture. • In the United States, competition among computer manufacturers and software producers has favored the development of these industries. As described, the four basic factors of Porter’s Diamond of Advantage model emphasize the impact or influence of the environmental or structural attributes of a nation’s economy that may contribute to a national advantage for its firms in specific industries. In spite of the presence of the four factors and government support, the factors leading to national advantage are likely to result in a firm achieving competitive advantage only when the firm develops and implements strategies that enable it to take advantage of country-specific factors.
4 Describe the three international corporate-level strategies.
International Corporate-Level Strategy The type of corporate-level strategy adopted by a firm has an impact on the selection and implementation of its international business-level strategy. Some corporate-level strategies provide individual country units with the flexibility to develop country-specific strategies, whereas others dictate all country business-level strategies from the home office and coordinate activities across units for the purposes of resource-sharing and product standardization. International corporate-level strategy can be distinguished from international business-level strategy by the scope of operations, in terms of both product and geographic diversification. Figure Note: The three types of international corporate-level strategies are illustrated in Figure 8.4, whereas relationships between structural arrangements and strategy type are discussed further in Chapter 11. FIGURE 8.4 International Corporate-Level Strategies As Figure 8.4 illustrates, a firm should choose its international corporate-level strategy based on the need for both local responsiveness and for global integration. • When the need for global integration is high and there is little need for local market responsiveness, the firm should adopt a global strategy. • When the need for global integration is low, but there is great need for local market responsiveness, the firm should adopt a multi-domestic strategy. • When there is a great need for both global integration and local market responsiveness, the firm should adopt a transnational strategy. Multi-domestic Strategy Multi-domestic strategy is one where strategic and operating decisions are decentralized to the strategic business unit in each country in order to tailor products and services to the local market. The multi-domestic strategy: • Assumes business units in different countries are independent of one another • Contends that markets differ and can be segmented by national borders • Focuses on competition within each country • Suggests products and/or services can be customized to meet individual market needs or preferences • Assumes economies of scale are not possible because of demand for market-specific customization Teaching Note A few years back, Sony’s entertainment business changed its strategy from global to multi-domestic when it decided to produce films and television programs for local markets around the world through production facilities and television channels in most larger Latin American and Asian countries. In 1999, Sony produced approximately 4,000 hours of foreign-language programs and about 1,700 hours of English-language programs. Sony now has more than 24 channels operating across 62 countries, and some of these channels are highly successful. The use of multi-domestic strategies: • Usually expands the firm’s local market share because the firm can pay attention to the needs of local buyers • Results in more uncertainty for the corporation as a whole, because of the differences across markets and thus the different strategies employed by local country units • Does not allow for the achievement of economies of scale and can be more costly • Decentralizes a firm’s strategic and operating decisions to the business units operating in each country Global Strategy A global strategy is one where standardized products are offered across country markets and competitive strategy is dictated by the home office. The global strategy: • Assumes strategic business units operating in each country are interdependent • Attempts to achieve integration across business and national markets, as directed by the home office • Emphasizes economies of scale • Offers greater opportunities to use innovations developed at home or in one country in other markets • Often lacks responsiveness to local market needs and preferences • Is difficult to manage because of the need to coordinate strategies and operating decisions across borders • Requires resource-sharing and an emphasis on coordination across national borders Teaching Note: U.K.-based temporary energy provider, Aggreko, operates in 48 countries and employs a global strategy. The firm’s fleet of equipment is integrated globally, which allows it to shift equipment to different regions of the world to meet specific needs. Its global strategy also allows Aggreko to design and assemble its equipment in-house to meet the needs of its customers.
Strategic Focus: Furniture Giant Ikea’s Global Strategy Headquartered in Sweden, IKEA has pursued a global strategy in developing its well-designed, but inexpensive retail furniture strategy. As with most companies pursuing a global strategy, it emphasizes global efficiencies. A tradeoff that they have experienced is that packaging can become too efficient at the expense of consumer frustration at the complexity of assembly once at the home location. So, simple assemble is also an important criteria. In 2015, IKEA plans to open 13 new stores, adding to its current total of 315. It is seeking to buy land also in India to open its first locations. Although, IKEA is focused on efficiency, it also takes a long time to study each new country market entry. It focuses on where a growing middle-class is developing. It has entered China and is planning on a strong entry into India and is considering Brazil as well. All of these economies have growing middle-classes. Even in these countries though, it focuses on “flat packing, transporting, and reassembling its quirky Swedish-styling all across the planet.”
Transnational Strategy A transnational strategy is a corporate strategy that seeks to achieve both global efficiency and local (national market) responsiveness. • It is difficult to achieve because of requirements for both strong central control and coordination to achieve efficiency and local flexibility and decentralization to achieve local responsiveness. • A transnational strategy mandates building a shared vision and individual commitment through an integrated network to produce a core competence that would result in strategic competitiveness (that competitors would find difficult to imitate). • Effective implementation of a transnational strategy often produces higher performance than does implementation of either the multi-domestic or global international corporate-level strategies. Teaching Note: Students sometimes find the transnational strategy difficult to grasp. This has prompted some to refer to this option as an “idealized form,” suggesting that this is not possible to achieve in reality. This also suggests, however, that this model represents a worthy goal for the international firm. It is worth asking students if they believe it will ever be possible to be truly transnational and ask what would be needed to make this a reality. Teaching Note: Refer back to Figure 8.4 to summarize relationships between the need for global integration and local responsiveness and international corporate-level strategies.
5 Discuss environmental trends affecting the choice of international strategies, particularly international corporate-level strategies.
ENVIRONMENTAL TRENDS Implementing a transnational strategy is difficult; however, firms are challenged to do so because of these facts: • There is an increased emphasis on local requirements, e.g., customization to meet government regulations within particular countries or to fit customer tastes and preferences. • Most multinational firms desire coordination and sharing of resources across country markets to hold down costs. • Some products and industries may be more suited than others for standardization across country borders. Liability of Foreignness Research shows that firms may focus less on truly global strategies and more on regional adaptation. Even Internet-based strategies now require local adaptation. Regionalization A firm competing in international markets must decide whether to compete in all (or many) world markets or to focus its efforts on a specific region or regions. 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 by narrowing 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. Teaching Note: At this point, it might useful to draw a parallel between competing in multiple national markets and owning businesses in multiple industries. Firms may be better positioned by focusing on a specific region where markets are more similar, thus allowing a degree of integration and resource sharing. In Chapter 7, a similar comment was made regarding disadvantages that often accompany over-diversification and the prescribed downscoping to refocus the firm more on related as opposed to unrelated diversification.
Lands’ End Adjusts to the Liability of Foreignness: A Mini-Case The globalization of businesses with local strategies is demonstrated by the online operation of Lands' End, Inc. (now owned by Sears), which uses local Internet portals to offer its products for sale. Lands’ End, formerly a direct-mail catalog business, launched its web-based business in 1995. The firm established websites in the U.K. and Germany in 1999, and in France, Italy, and Ireland in 2000—all of this prior to initiating a catalog business in those countries. Not only are catalogs very expensive to print and mail outside the United States, but they also must be sent to the right people, and buying mailing lists is expensive. With limited online advertising and word-of-mouth, a website business can be built in a foreign country without a lot of initial marketing expenses. Once the online business is large enough, a catalog business can be launched with mailing targeted to customers who have used the business online. Sam Taylor, vice president of international operations for Lands’ End, indicated that the firm has a centralized Internet team (handling development, design, etc.) at the home office, but a local presence is also needed. So the firm hired local Internet managers, designers, marketing support, and so on, to gain insight into the nuances of local markets. He also explained that each additional website was cheaper to implement. For example, to set up the Websites for Ireland, France, and Italy, the firm cloned the U.K. site and partnered with Berlitz for French and Italian translations. This made the process cheaper—12 times less than the U.K. site for France and 16 times less for Italy. Lands’ End now gets 16 percent of its total revenues from Internet sales and ships to 185 countries, primarily from its Dodgeville, Wisconsin, corporate headquarters. This shows that smaller companies can sell their goods and services globally when facilitated by electronic infrastructure without having significant (brick-and-mortar) facilities outside of their home location. But significant local adaptation is still needed in each country or region.
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 following: • Membership in the European Union (EU) is limited to Western European countries, but it is being expanded to include other Western European countries as well as countries in Central and Eastern Europe. • The North American Free Trade Agreement (NAFTA) is an integration designed to facilitate trade among the US, Canada, and Mexico (and it may be expanded to include some South American countries). • South America’s Organization of American States (OAS) is a system of country associations that developed trade agreements to promote the flow of trade across country boundaries within their respective regions. • CAFTA is a US trade agreement with Central American nations that is designed to reduce tariffs with five countries in Central America plus the Dominican Republic in the Caribbean. Teaching Note 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. Most firms enter regional markets sequentially, beginning in markets with which they are more familiar. And they introduce their largest and strongest lines of business into these markets first, followed by their other lines of business once the first lines are successful. They also usually invest in the same area as their original investment location.
6 Explain the five modes firms use to enter international markets.
CHOICE OF INTERNATIONAL ENTRY MODE Firms have a variety of alternative means of expanding internationally as indicated in Figure 8.5. Table Note Students can refer to Figure 8.5 as you discuss each of the modes of entry into international markets. FIGURE 8.5 Modes of Entry and Their Characteristics Figure 8.5 presents five alternative entry modes available to firms for international expansion: • Exporting • Licensing • Strategic alliances • Acquisition • New wholly owned subsidiary (greenfield venture) The next section of this chapter discusses characteristics of each mode, including cost/control trade-offs. Exporting A common—but not necessarily the least costly or most profitable—form of international expansion is for firms to export products from the home country to other markets. • Exporters have no need to establish operations in other countries. • Exporters must establish channels of distribution and outlets for their goods, usually by developing contractual relationships with firms in the host country to distribute and sell products. However, exporting also has disadvantages: • Exporters may have to pay high transportation costs. • Tariffs may be charged on products imported to the host country. • Exporters have less control over the marketing and distribution of their products. Because of the potentially significant transportation costs and the usually greater similarity of geographic neighbors, firms often export mostly to countries that are closest to its facilities. Small businesses are the most likely to use exporting. One of the largest problems with which small businesses must deal is currency exchange rates, a challenge for which only large businesses are likely to have specialists. Licensing Through licensing, a firm authorizes a foreign firm to manufacture and sell its products in a foreign market. • The licensing firm (licensor) generally is paid a royalty payment on every unit that is produced and sold. • The licensee takes the risks, making investments in manufacturing and paying marketing/distribution costs. • Licensing is the least costly (and potentially the least risky) form of international expansion because the licensor does not have to make capital investments in the host countries. • Licensing is a way to expand returns based on previous innovations, even if product life cycles are short. Teaching Note Counterfeiting is one risk to licensing strategies. Sony and Philips co-designed the audio CD. In the past, they licensed the rights to companies to make CDs and Sony and Philips collected 5 cents for every CD sold. However, the returns to Sony and Philips from CD sales were threatened by cheap counterfeit disks. Sales of counterfeit disks in China alone are estimated to exceed $1 billion annually. The costs or potential disadvantages of licensing include the following: • The licensing firm has little control over manufacture and distribution of its products in foreign markets. • Licensing offers the least revenue potential as profits must be shared between licensor and licensee. • The licensee can learn the firm’s technology and, upon license expiration, may create a competing product. Strategic Alliances Strategic alliances enable firms to: • Share the risks and resources required to enter international markets • Facilitate the development of new core competencies that yield strategic competitiveness Most strategic alliances represent ventures between a foreign partner (that provides access to new products and new technology) and a host country partner (that has knowledge of competitive conditions, legal and social norms, and cultural idiosyncrasies that enable the foreign partner to successfully manufacture or develop and market a competitive product or service in the host country market). Strategic alliances also present potential problems and risks due to (1) selection of incompatible partners and (2) conflict between partners. Several factors may cause a relationship to sour. Trust between the partners is critical and is affected by a number of fundamental issues: • The initial condition of the relationship • The negotiation process to arrive at an agreement • Partner interactions • External events • The country cultures involved in the alliance or joint venture Note: Strategic alliances are covered in much greater depth in Chapter 9. Teaching Note British Telecommunications planned to create a virtual shopping mall in Spain through its joint venture with Banco Popular, a retail-focused Spanish bank. The two firms jointly developed a website for business-to-business transactions. They were to use BT’s portal in Spain to develop a client base of small- and medium-sized businesses. BT would provide the common portal free of charge for the first year and Banco Popular would charge only a nominal commission for brokering sales. Research suggests that alliances are more favorable when uncertainty is high and where cooperation is needed to access knowledge dispersed between partners and where strategic flexibility is important; acquisitions work best in situations with less need for flexibility and when the transaction supports economies of scale or scope. Acquisitions Cross-border acquisitions have also been increasing significantly. In recent years, cross-border acquisitions have comprised more than 45 percent of all acquisitions completed worldwide. As explained in Chapter 7, acquisitions can provide quick access to a new market. In fact, acquisitions may provide the fastest and often the largest initial international expansion of any of the alternatives. Beyond the disadvantages previously discussed for domestic acquisitions (Chapter 7), international acquisitions also can be quite expensive (because of debt financing) and require difficult and complex negotiations due to: • The same disadvantages as domestic acquisitions • The great expense that often requires debt financing • The exceedingly complex international negotiations for acquisitions—only about 20 percent of the cross-border bids made lead to a completed acquisition, compared to 40 percent for domestic acquisitions • Different corporate cultures • The challenges of merging the new firm into the acquiring firm, which often are more complex than with domestic acquisitions—i.e., different corporate culture, but also different social cultures and practices Teaching Note Emphasize that firms often use multiple entry strategies. For example, Walmart has used multiple entry strategies as it globalizes its operations, ranging from joint ventures in China and Latin America to acquisitions in Germany and the U.K. New Wholly Owned Subsidiary Firms that choose to establish new, wholly owned subsidiaries are said to be undertaking a greenfield venture. This is the most costly and complex of all international market entry alternatives. The advantages of establishing a new wholly owned subsidiary include: • Achieving maximum control over the venture • Being potentially the most profitable alternative (if successful) • Maintaining control over the technology, marketing, and distribution of its products Though the profit potential is high, establishing a new wholly owned subsidiary is risky for two reasons: • This alternative carries the highest costs of all entry alternatives since a firm must build new manufacturing facilities, establish distribution networks, and learn and implement the appropriate marketing strategies. • The firm also may have to acquire knowledge and expertise relevant to the new market, often having to hire host country nationals (in many cases from competitors) and/or costly consultants. Dynamics of Mode of Entry The choice of a market entry strategy is determined by a number of factors. However, initial market development strategies generally are selected to establish a firm’s products in the new market. • Exporting does not require foreign manufacturing expertise; it only requires an investment in distribution. • Licensing also can facilitate direct market entry by enabling the firm to learn the technologies required to improve its products in order to achieve success in international markets or to facilitate direct entry. • Strategic alliances are also popular because the firm forms a partnership with a firm that is already established in the new target market and reduces risks by sharing costs with the partner. If intellectual property rights in an emerging economy are not well protected, the number of firms in the industry is growing fast, and the need for global integration is high, entry modes such as joint ventures or wholly owned subsidiary are preferred. Firms interested in establishing a stronger presence (in most instances, in the later stages of the firm’s international diversification strategy) and in controlling technology, marketing, and distribution adopt riskier, more costly entry strategies, such as acquisitions or greenfield ventures. However, the entry strategy should be matched to the particular situation. In some cases, a firm may pursue entry strategies in sequential order—beginning with exporting and ending with greenfield ventures. The entry mode decision should be based on the following conditions: • The industry’s competitive conditions • The target country’s situation • Government policies • The firm’s unique set of resources, capabilities, and core competencies
7 Discuss the two major risks of using international strategies.
RISKS IN AN INTERNATIONAL ENVIRONMENT Political and economic risks complicate the management of international diversification. One reason is that these risks result in competitive conditions that may differ significantly from what was expected. Examples of political and economic risks related to international diversification are listed in Figure 8.6. Figure Note Be sure to note any developments in the international risk situations noted in Figure 8.6 as well as the emergence of significant new issues. FIGURE 8.6 Risks in the International Environment This figure presents some specific examples of political and economic risks that multinational firms face. Political Risks Political risks are those related to instability in national governments and to war, civil or international. Teaching Note For a useful way of identifying the political risk associated with different countries, see the map on page 105 of Small Business Management: An Entrepreneurial Emphasis, by Longenecker, Moore, Petty, and Palich (2006, SWCP). National government instability creates multiple potential problems for internationally diversified firms. Economic risks come up as governments react to a variety of events, reflected in uncertainty in terms of: • Economic risks and uncertainty created by government regulation • Existence of many, possibly conflicting, legal authorities or corruption • The potential nationalization of private assets Teaching Note A number of national governments attempt to minimize political risk (to themselves) by requiring that a significant portion of profits from investments be reinvested only in that country (to achieve economic stability, which can reduce probability of political instability). STRATEGIC FOCUS The Global Soccer Industry and the Effect of the FIFA Scandal The Fédération Internationale de Football Association (FIFA) is an international sports organization founded in the Europe in the early 1900s. The organization, known for its World Cup competition, has grown into an international force the last several decades. However, because of the weak institutional infrastructure in many countries where the game of soccer is played around the world, there is ripe opportunity for corruption. Apparently, many involved in the FIFA infrastructure globally, regionally, and within specific countries have taken advantage of this opportunity. With nearly 1 billion worldwide viewers, the World Cup drew large corporate sponsorship under longtime FIFA president Sepp Blatter. But in 2015, the U.S. Department of Justice and the FBI announced a long list of indictments and simultaneous arrests of FIFA officials were made at the Zurich FIFA meetings in Switzerland. Blatter eventually stepped down from his presidency. Apparently, intermediaries were paid exorbitant amounts for contracts that they helped to establish. Then these intermediaries would funnel the bribes to the leaders of the regional and country FIFA related associations. Now, many of the former large corporate sponsors are cautious about supporting an organization that has been as tainted politically as has FIFA. Teaching Note FIFA, the international soccer federation, which sponsors World Cup soccer matches along with its regional and country affiliates, have come under heavy scrutiny for possible corrupt practices, as illustrated in the strategic focus. Much of the alleged corruption that has taken place has been indirectly supported by the nature of the governments and institutions in which soccer is popular, especially in less developed countries. Bribes were alleged to have been paid for Africa to receive the World Cup, and the recent decisions by FIFA to host the games in Russian and Qatar in 2018 and 2022 have come under question. Many of the countries, for example Brazil and Paraguay, are seeking to overhaul their country soccer regulating bodies because of the scandal. Economic Risks Economic risks are interdependent with political risks; however, some economic risks are specific to international diversification. For example, differences and fluctuations in the value of the different currencies are a primary concern to internationally diversified firms. • For US firms, the value of international assets, liabilities, and earnings are affected by the value of the dollar relative to other currencies (e.g., as the dollar value increases, the value of foreign assets decreases). The value of the dollar may make US firms’ exports uncompetitive in international markets because of price differentials (and, in turn make imports from other countries more attractive to US customers).
8 Discuss the strategic competitiveness outcomes associated with international strategies particularly with an international diversification strategy.
STRATEGIC COMPETITIVENESS OUTCOMES Once its international strategy and mode of entry have been selected, the firm turns its attention to implementation issues (see Chapter 11). It is important to do this because international expansion is risky and may not result in a competitive advantage (see Figure 8.1). The probability the firm will achieve success by using an international strategy increases when that strategy is effectively implemented. International Diversification and Returns Recall that in Chapter 6, the discussion centered on product diversification where a firm manufactures and sells a diverse variety of products. Based on the advantages discussed earlier, international diversification should be positively related to firm performance. Research has shown that, as international diversification increases, firms’ returns decrease and then increase as firms learn to manage international expansion. There are several reasons for the positive relationship between international diversification and performance. • Potential advantages from economies of scale and experience • Location advantages • Increased market size • The potential to stabilize returns Enhanced Innovation As mentioned in Chapter 1, developing new technology is critical to strategic competitiveness. In fact, Porter indicates that a nation’s competitiveness depends on the innovativeness of its industries and that firms achieve strategic competitiveness in international markets through innovation (see Figure 8.2). As stated earlier in this chapter, one of the advantages of international expansion is having larger potential markets. Larger markets allow firms to achieve greater returns on innovation, which yields lower R&D-related risk. Thus, international diversification provides firms with incentives to innovate. A complex relationship exists among international diversification, innovation, and performance. This leads, in fact, to the following circular relationship: • Some level of performance is necessary to provide the resources required to diversify internationally. • International diversification provides incentives (advantages) to firms to invest in R&D (innovation). • If done properly, R&D and the resulting innovations should improve firm performance. • Improved performance provides resources for continued international diversification and investments in R&D innovation. It also is possible that international diversification may result in improved returns for product-diversified firms (referred to as unrelated diversification) by increasing the size of the potential market for each of the firm’s products. But managing a firm that is both product and internationally diversified is very complex. Cultural diversity may enable a firm to compete more effectively in international markets. • Culturally diverse top management teams often have a greater knowledge of international markets. • An in-depth understanding of diverse markets among top-level managers facilitates inter-firm cooperation, the use of strategically relevant, long-term criteria to evaluate managerial and business unit performance, and improved innovation and performance.
9 Explain two important issues firms should have knowledge about when using international strategies
THE CHALLENGE OF INTERNATIONAL STRATEGIES Complexity of Managing International Strategies Managers of internationally diversified firms face a number of complex challenges. • Firms face multiple risks from being in several countries. • Firms can grow only so large before they become unmanageable. • The costs of managing large diversified firms may outweigh the benefits of diversification. • Global markets are highly competitive. • Firms must understand and effectively deal with multiple cultural environments. • Systems and processes must exist to manage shifts in the relative values of multiple currencies. • Firms must scan the environment to be prepared for potential government instability. Limits to International Expansion As mentioned before, firms generally earn positive returns by diversifying internationally. However, there are limits to the advantages of international diversification. • Greater geographic dispersion across country borders increases the costs of coordination between units and the distribution of products. • Trade barriers, logistical costs, cultural diversity, and other differences by country greatly complicate the implementation of an international diversification strategy. • Institutional and cultural factors can present strong barriers to the transfer of a firm’s competitive advantages from one country to another. • Marketing programs often have to be redesigned and new distribution networks established when firms expand into new countries. • Firms may encounter different labor costs and capital charges. • In general, it is difficult to effectively implement, manage, and control a firm’s international operations. Teaching Note The complex nature of the management challenges that face internationally diversified firms is illustrated by the following cases: • Robert Shapiro, CEO of Monsanto, assumed that Europe was similar to the US, but the firm’s genetically engineered seeds have been strongly rejected in Europe. • Walmart made mistakes in some Latin American markets, for example, when it learned that giant parking lots do not draw huge numbers of car-less customers. And the lots were far from the bus stops used by many Mexicans, so potential customers could not easily transport their goods home. • Home Depot’s expansion into China fell flat due to the fact that, unlike in the U.S., the Do-It-Yourself market is very small. Customers in China are considered to be Do-It-For-Me buyers and Home Depot’s value proposition is not important to them. MINI-CASE An International Strategy Powers ABB’s Future ABB is a large global competitor in the power and automation technologies industries. It has built its success using geographic diversification around the world. However, ABB’s recent troubles (due to poor performance in some countries), underscore some of the difficulties encountered by firms with international operations. In response, ABB is closing, or limiting, operations in some of these countries. As a result of these moves, and strong performance of its North American businesses, performance is trending in a positive direction. Most of ABB’s recent growth has come from acquisitions, but it has entered into a joint venture recently with a Chinese firm to design and manufacture high voltage instrument transformers. Chapter 9 Cooperative Strategy LEARNING OBJECTIVES 1. Define cooperative strategies and explain why firms use them. 2. Define and discuss the three major types of strategic alliances. 3. Name the business-level cooperative strategies and describe their use. 4. Discuss the use of corporate-level cooperative strategies in diversified firms. 5. Understand the importance of cross-border strategic alliances as an international cooperative strategy. 6. Explain cooperative strategies’ risks. 7. Describe two approaches used to manage cooperative strategies. CHAPTER OUTLINE Opening Case: Google, Intel and Tag Heuer: Collaborating to Produce a Smartwatch STRATEGIC ALLIANCES AS A PRIMARY TYPE OF COOPERATIVE STRATEGY Types of Major Strategic Alliances Reasons Firms Develop Strategic Alliances BUSINESS-LEVEL COOPERATIVE STRATEGY Complementary Strategic Alliances Competition Response Strategy Uncertainty-Reducing Strategy Competition-Reducing Strategy Strategic Focus: Strategic Alliances as the Foundation for Tesla Motors’ Operations Assessing Business-Level Cooperative Strategies CORPORATE-LEVEL COOPERATIVE STRATEGY Diversifying Strategic Alliance Synergistic Strategic Alliance Franchising Assessing Corporate-Level Cooperative Strategies INTERNATIONAL COOPERATIVE STRATEGY NETWORK COOPERATIVE STRATEGY Alliance Network Types COMPETITIVE RISKS WITH COOPERATIVE STRATEGIES Strategic Focus Failing to Obtain Desired Levels of Success with Cooperative Strategies MANAGING COOPERATIVE STRATEGIES SUMMARY KEY TERMS REVIEW QUESTIONS MINI-CASE: Alliance Formation, Both Globally and Locally, in the Global Automobile Industry ADDITIONAL QUESTIONS AND EXERCISES MINDTAP RESOURCES LECTURE NOTES Chapter Introduction: This chapter provides students with a slightly different perspective on strategic management. It represents a shift from achieving strategic competitiveness and above-average returns through competitive strategy to achieving them through cooperative strategies—i.e., competitive advantage gained by cooperating with other firms. OPENING CASE Google, Intel and Tag Heuer: Collaborating to Produce a Smartwatch A key reason cooperative strategies are used is that individual firms sometimes identify opportunities they can’t pursue because they lack the type and/or quantity of resources needed to do so. Some partnerships are formed between similar firms that desire to develop scale economies to enhance their competitiveness. For years, automobile manufacturers have formed large numbers of partnerships for this reason. In other instances, firms competing in different industries uniquely combine their resources to pursue what they believe is a value-creating shared objective. This reason describes the rationale driving the partnership among Google, Intel and TAG Heuer to design and produce a smartwatch. A number of observers of the partnership viewed it positively, given their conclusion that TAG Heuer lacked the technology skills to build a competitive smartwatch while the Silicon Valley firms lacked the design skills to make a watch successfully. Teaching Note The Opening Case profiles the cooperative strategies (strategic alliances) that have been established by several firms to create a smart watch. Students should realize that cooperative strategies allow firms to combine resources and capabilities that contribute to successful performance. More specifically, these are resources and capabilities that neither partner possesses individually. A good discussion could be initiated by asking students to identify other examples of firms that utilize cooperative strategies and to explain how these cooperative strategies contribute to the success of both partners.
1 Define cooperative strategies and explain why firms use them.
A cooperative strategy is a strategy in which firms work together to achieve a shared objective. Cooperative strategy is the third major alternative (internal growth and mergers and acquisitions are the other two) firms use to grow, develop value-creating competitive advantages, and create differences between them and competitors. Thus, cooperating with other firms is another strategy used to create value for a customer that exceeds the cost of creating that value and to create a favorable position in the marketplace relative to the five forces of competition (see Chapters 2 and 4). A collusive strategy is a cooperative strategy through which two or more firms cooperate to raise prices above the fully competitive level. Teaching Note
It should be noted that a more extreme form of collusion exists. Explicit collusion (which is illegal in the United States and most developed economies, except in regulated industries) exists when one firm negotiates a production output and pricing agreement with another firm in an effort to reduce competition. Used more frequently than explicit collusion, tacit collusion is considered later in the chapter in the discussion of business-level cooperative strategies. Teaching Note: It is important to emphasize that strategic alliances can serve a number of purposes, but they are also difficult to manage. • Two-thirds of all alliances have serious problems in their first two years, and as many as 50 percent fail. • A corporate alliance mind-set (one through which both the strengths and risks of a firm’s entire set of alliance relationships are recognized and understood by all involved with alliance formation and use) increases the probability of alliance success. STRATEGIC ALLIANCES AS A PRIMARY TYPE OF COOPERATIVE STRATEGY A strategic alliance is a partnership between firms whereby their resources and capabilities are combined to create a competitive advantage. Many firms, especially large global competitors, establish multiple strategic alliances. As described in the Opening Case, IBM has formed alliances with Sun Microsystems, SAP, Lenovo, and Cisco, among others. The goal with each cooperative relationship is different and very specific. In general, strategic alliance success requires cooperative behavior from all partners. Actively solving problems, being trustworthy, and consistently pursuing ways to combine partners’ resources and capabilities to create value are examples of cooperative behavior known to contribute to alliance success.
2 Define and discuss the three major types of strategic alliances.
Three Types of Strategic Alliances Three types of strategic alliances: joint ventures, equity strategic alliances, and non-equity strategic alliances. A joint venture is an alliance where a new, independent firm is formed from two or more partners, with each partner firm contributing some of their resources and capabilities. Joint ventures are effective in establishing long-term relationships and in transferring tacit knowledge. Because it can’t be codified, tacit knowledge is learned through experiences such as those taking place when people from partner firms work together in a joint venture. An equity strategic alliance is an alliance where partner firms own unequal shares of equity in a venture formed by combining some of their resources and capabilities to create a competitive advantage. For example, Citigroup Inc. has formed a strategic alliance with Shanghai Pudong Development Bank Co. through an equity investment totaling 25 percent. This equity strategic alliance served as a launching pad for Citigroup to enter the credit card business in China. A nonequity strategic alliance is an alliance where two or more firms contract to share some of their resources and capabilities to create a competitive advantage. This type of strategic alliance: • Does not establish a separate independent company and therefore firms don’t take equity positions. • Is less formal and demands fewer partner commitments. • Is unsuitable for complex projects requiring effective transfers of tacit knowledge between partners. Typically taking the form of a non-equity strategic alliance, outsourcing is the purchase of a value-creating primary or support activity from another firm. Other types of non-equity strategic alliances include licensing, distribution agreements, supply contracts, and marketing agreements (such as code-sharing agreements among airlines). Reasons Firms Develop Strategic Alliances Technology companies cannot possibly acquire the technology they need fast enough, so partnering becomes essential. Some believe strategic alliances may be the most powerful trend in American business in a century. Among other benefits, strategic alliances allow partners to create value that they couldn’t develop by acting independently and to enter markets more quickly than they could without a partner. In large firms, alliances account for more than 20 percent of revenue and are a prime vehicle for firm growth. In some industries (e.g., airlines), firms compete more alliance against alliance than firm against firm. Firms form strategic alliances to reduce competition, enhance their competitive capabilities, gain access to resources, take advantage of opportunities, and build strategic flexibility. To do so means that they must select the right partners and develop trust. FIGURE 9.1 Reasons for Strategic Alliances by Market Type Figure 9.1 presents reasons for strategic alliances for firms operating in slow-cycle, fast-cycle, and standard-cycle markets. Slow-Cycle: • Gain access to a restricted market • Establish a franchise in a new market • Maintain market stability Fast-Cycle: • Speed up development of new goods or services • Speed up new market entry • Maintain market leadership • Form an industry technology standard • Share risky R&D expenses • Overcome uncertainty Standard-Cycle: • Gain market power • Gain access to complementary resources • Establish better economies of scale • Overcome trade barriers • Meet competitive challenges from other competitors • Pool resources for very large capital projects • Learn new business techniques Slow-Cycle Markets Firms in slow-cycle markets often use strategic alliances to enter restricted markets or to establish franchises in new markets (especially global markets). Slow-cycle markets are becoming rare in the 21st century competitive landscape for several reasons, including the privatization of industries and economies, the rapid expansion of the Internet’s capabilities in terms of the quick dissemination of information, and the speed with which advancing technologies make quickly imitating even complex products possible. Firms competing in slow-cycle markets should recognize the future likelihood that they’ll encounter situations in which their competitive advantages become partially sustainable (in the instance of a standard-cycle market) or unsustainable (in the case of a fast-cycle market). Cooperative strategies can be helpful to firms making the transition from relatively sheltered markets to more competitive ones. Fast-Cycle Markets Fast-cycle markets are entrepreneurial and dynamic, with new products or services imitated rapidly. Cooperative strategies are used to increase the speed of product development or market entry or to improve strategic competitiveness. Standard-Cycle Markets In standard-cycle markets (which are often large and oriented toward economies of scale), alliances are more likely to be between partners with complementary resources and capabilities. Companies also may cooperate in standard-cycle markets to gain market power.
3 Name the business-level cooperative strategies and describe their use.
BUSINESS-LEVEL COOPERATIVE STRATEGY A business-level cooperative strategy is used to help the firm improve its performance in individual product markets. There are four business-level cooperative strategies (see Figure 9.2). A firm forms a business-level cooperative strategy when it believes combining its resources and capabilities with one or more partners creates competitive advantages that it can’t create by itself and that will lead to success in a specific product market. Complementary Strategic Alliances Complementary strategic alliances are partnerships that are designed to take advantage of market opportunities by combining partner firms’ resources and capabilities in complementary ways so that new value is created. Vertical Complementary Strategic Alliance A vertical complementary strategic alliance is formed between firms that agree to use their resources and capabilities in different stages of the value chain to create value. Oftentimes, vertical complementary alliances are formed in reaction to environmental changes, thus they serve as a means of adaptation to the environmental changes. A critical issue for firms is how much technological knowledge they should share with their partner. They need the partners to have adequate knowledge to perform the task effectively and to be complementary to their capabilities. Part of this decision depends on the trust and social capital developed between the partners. Figure Note Figure 9.2 outlines options for business-level cooperative strategies. FIGURE 9.2 Business-Level Cooperative Strategies The four general business level cooperative strategies are: • Complementary strategic alliances (vertical and horizontal) • Competition response strategy • Uncertainty-reducing strategy • Competition-reducing strategy Figure Note Two types of complementary strategic alliances—vertical and horizontal partnership agreements—are illustrated in Figure 9.2. FIGURE 9.3 Vertical and Horizontal Complementary Strategic Alliances A vertical complementary strategic alliance links suppliers, manufacturers, and/or distributors and represents linkages between different segments of each partner’s value chain. A horizontal complementary strategic alliance is an arrangement that links similar segments of competing firms’ value chains, such as linking R&D or new product development activities. Horizontal Complementary Strategic Alliance Horizontal complementary strategic alliances are partnerships that link similar activities of firms. Horizontal complementary alliances are used to increase each firm’s competitive advantage and often focus on the long-term development of product and service technology. Importantly, horizontal alliances may require equal investments of resources by the partners but they rarely provide equal benefits to the partners. There are several potential reasons for the imbalance in benefits. • Frequently, the partners have different opportunities as a result of the alliance. • Partners may learn at different rates and have different capabilities to leverage the complementary resources provided in the alliance. • Some firms are more effective in managing alliances and in deriving the benefits from them. • The partners may have different reputations in the market thus differentiating the types of actions firms can legitimately take in the marketplace. Competition Response Strategy Cooperative strategic alliances also may be established to enable partner firms to respond to major strategic actions initiated by competitors. Because they can be difficult to reverse and expensive to operate, strategic alliances are primarily formed to respond to strategic rather than tactical actions. Uncertainty-Reducing Strategy Firms also may form strategic alliances to hedge against risk and uncertainty (especially in fast-cycle markets). Alliances are often used where uncertainty exists, such as in entering new product markets or emerging economies. For example, Dutch bank ABN AMRO signed on to a venture called ShoreCap International, which will invest capital in and advise local financial institutions that do small and microbusiness lending in developing countries. Through this cooperative strategy with other financial institutions, ShoreBank (the venture’s leading sponsor) hopes to be able to reduce the risk of providing credit to smaller borrowers in disadvantaged regions. It also hopes to reduce poverty in the regions where it invests. In other cases, firms form alliances to reduce the uncertainty associated with developing new product or technology standards. For example, the alliance between France Telecom and Microsoft is a competition response alliance for France Telecom but it is an uncertainty reducing alliance for Microsoft. Microsoft is using the alliance to learn more about the telecom industry and business. It wants to learn how it can develop software to satisfy needs in this industry. By partnering with a firm in this industry, it is reducing its uncertainty about the market and software needs. And the alliance is clearly designed to develop new products so the alliance reduces the uncertainty for both firms by combining their knowledge and capabilities. Competition-Reducing Strategy Explicit collusion exists when firms get together to negotiate production output and pricing agreements with the goal of reducing competition. Explicit collusion strategies are illegal in the United States and most developed economies (except in regulated industries). Teaching Note: Some firms may adopt explicit alliances to reduce competition that is perceived as potentially destructive or excessive. Examples include the following: • OPEC, which manages the price and output of oil companies in member countries • Manufacturing and distribution cartels in Japan • Industry trade organizations • Government-industry relationships • Direct collusion or price-fixing agreements among participants in an industry or between industry participants and government agencies There are implicit cooperative alliances, such as tacit collusion, which exist when several firms in an industry observe others’ competitive actions and respond to reduce industry output below the potential competitive level to maintain higher-than-competitive prices. Another form of tacit collusion is mutual forbearance, by which firms avoid competitive attacks against rivals they meet in multiple markets. Rivals learn a great deal about each other when engaging in multimarket competition, including how to deter the effects of their rival’s competitive attacks and responses. Given what they know about each other as a competitor, firms choose not to engage in what could be destructive competitions in multiple product markets. Tacit collusion tends to be used as a business-level competition-reducing strategy in highly concentrated industries. At a broad level in free-market economies, governments must determine how rivals can collaborate to increase their competitiveness without violating established regulations. Assessing Business-Level Cooperative Strategies Firms use business-level strategies to develop competitive advantages that can contribute to successful positioning and performance in individual product markets. To develop a competitive advantage using an alliance, the particular set of resources and capabilities that are combined and shared in a particular manner through the alliance must be valuable, rare, imperfectly imitable, and nonsubstitutable. Complementary business-level strategic alliances (especially vertical ones) are the most likely to create sustainable competitive advantage. Horizontal complementary alliances are sometimes difficult to maintain because they are often formed between rival firms. Although strategic alliances designed to respond to competition and to reduce uncertainty can also create competitive advantages, these advantages tend to be more temporary than those developed through complementary (vertical and horizontal) strategic alliances. The primary reason is that complementary alliances have a stronger focus on the creation of value compared to competition-reducing and uncertainty-reducing alliances, which are far more reactive. Of the four business-level cooperative strategies, the competition-reducing strategy has the lowest probability of creating a sustainable competitive advantage. This suggests that companies using such competition-reducing business-level strategic alliances should carefully monitor them as to the degree to which they are facilitating the firm’s efforts to develop and successfully create competitive advantages.
4 Discuss the use of corporate-level cooperative strategies in diversified firms.
CORPORATE-LEVEL COOPERATIVE STRATEGY Corporate-level cooperative strategies are designed to facilitate product and market diversification (discussed in Chapter 6) through a means other than a merger or an acquisition. When a firm seeks to diversify into markets in which the host nation’s government prevents mergers and acquisitions, alliances become an especially appropriate option. Corporate-level strategic alliances are also attractive compared to mergers and particularly acquisitions, because they require fewer resource commitments and permit greater flexibility in terms of efforts to diversify partners’ operations. An alliance can be used as a way to determine if the partners might benefit from a future merger or acquisition between them. Figure Note Figure 9.4 shows the most common corporate-level cooperative strategies. FIGURE 9.4 Corporate-Level Cooperative Strategies The three corporate level strategies are: • Diversifying strategic alliances • Synergistic strategic alliances • Franchising Diversifying Strategic Alliance A diversifying strategic alliance is a corporate-level cooperative strategy in which firms share some of their resources and capabilities to diversify into new product or market areas. Teaching Note: Note that a diversification alliance enables firms that do not want to grow by merger or acquisition to achieve growth by forming strategic alliances. Exiting a strategic alliance is less difficult and less costly compared to divesting an acquisition that did not contribute expected levels of strategic success. In addition, some governments restrict acquisitions (especially horizontal ones) when regulators conclude that horizontal acquisitions foster explicit collusion. Teaching Note: Firms might form a diversifying alliance to determine if a future merger would benefit both parties—e.g., the formation of technology partnerships between GM and Toyota that may lead to broader linkups between the automakers. Highly diverse networks of alliances can lead to poorer performance by partner firms. However, cooperative ventures are also used to reduce diversification in firms that have overdiversified. For example, Fujitsu, realizing that memory chips were becoming a financial burden, dumped its flash-memory business into a joint venture company controlled by Advanced Micro Devices. This alliance helped Fujitsu refocus on its core businesses. STRATEGIC FOCUS Strategic Alliances as the Foundation for Tesla Motors’ Operations Founded in 2003, Tesla Motors, the manufacturer of electric vehicles, has formed many alliances as a means of competing during the early years of its life. For example, the company created an R&D partnership with Dana Holding Corporation initially for the purpose of jointly designing and producing a system capable of controlling the build-up of heat in its car batteries. Overall, Tesla has partnered with many companies working in the value chain that is used to produce its products. Interestingly, its ongoing work with batteries and recent hints from founder and CEO Elon Musk suggest that Tesla may at its core become a battery company rather than an automobile manufacturer. The firm’s decision to build and operate a 10-million-square-foot facility (dubbed the Gigafactory) to build batteries seems to reflect Tesla’s capacity to build an array of batteries with different functionalities. In early 2015, Apple announced an internal project that was aimed at developing an Apple-branded electric vehicle. Other recent speculation regarding Tesla and Apple centered on the possibility of Apple acquiring Tesla, at a rumored cost of roughly $75 billion. In contrast, some analysts were suggesting that “some sort of joint venture or collaboration remains the smartest get for both companies.” Teaching Note The Strategic Focus gives insight into Tesla’s use of alliances as a form of corporate strategy to, expand market reach, and develop technology that will result in lower vehicle and battery costs. Rather than trying to develop everything it needs in-house, Tesla has sought partners with complementary resources to achieve results. Students should realize that Tesla is a fast-growing company and yet it lacks some of the resources necessary to position itself for future growth. Forming alliances with companies that have the necessary resources should result in benefits for all of the partners. Synergistic Strategic Alliance Synergistic strategic alliances allow firms to combine some of their resources and capabilities to create joint economies of scope between partner firms. These alliances: • Are similar to business-level horizontal complementary strategic alliances at the business level • Create synergy across multiple functions or multiple businesses SBC Communications and EchoStar Communications were synergistically diversified by the arrangement to offer satellite TV billing services through SBC’s system. Thus, a synergistic strategic alliance is different from a complementary business-level alliance in that it diversifies both firms into a new business, but in a synergistic way. Teaching Note Through technology-oriented synergistic alliances, Toyota is attempting to gain access to technologies that it has had difficulty developing on its own. Avoiding equity alliances, the carmaker elected to link up with GM to develop electric, hybrid, and fuel cell vehicles. The firm has also joined Volkswagen for intelligent transportation systems, recycling, and marketing. In addition, it has a tie-in with Panasonic EV Energy for batteries. Franchising Franchising is a corporate-level cooperative strategy used by a franchisor to describe and control the sharing of its resources and capabilities. In other words, a franchise refers to a contract between two legally independent companies that allows the franchisee to sell the franchisor’s product or do business under its trademarks over a given time and location. Franchising is a popular strategy. In fact, the companies using it account for one-third of annual US retail sales while competing in over 75 industries. Already frequently used in developed nations, franchising is expected to account for significant portions of growth in emerging economies in the 21st century. The most successful franchising strategy is one in which the partners (i.e., franchisor, franchisees) work closely together. The franchisor is to develop programs to transfer knowledge and skills to the franchisees that are needed to successfully compete at the local level, and franchisees should provide feedback to the franchisor regarding how their units could become more effective and efficient. Franchising is a particularly attractive strategy to use in fragmented industries where no firm or small set of firms has a dominant share in the industry, making it possible for a company to gain a large market share by consolidating independent companies through contractual relationships. Assessing Corporate-Level Cooperative Strategies Compared to those at the business-level, corporate-level cooperative strategies are usually broader in scope and more complex, making them relatively more costly. Firms able to develop corporate-level cooperative strategies and manage them in ways that are valuable, rare, imperfectly imitable, and nonsubstitutable (see Chapter 3) develop a competitive advantage that is added to advantages gained through the activities of individual cooperative strategies. Teaching Note Corporate-level strategic decisions, such as pursuing cooperative strategies and diversification, may be the result of managerial motives instead of the appropriate desire to achieve strategic competitiveness and earn above-average returns for a company. Firms need corporate governance mechanisms to ensure managers do not use alliance strategies inappropriately. For example, without governance, top-level managers can use alliances to: • Increase the size of the business for the purpose of increasing his/her own compensation • Increase his/her worth or value to—or extend his/her tenure with—the firm by being the only top-level manager who understands the intricacies of a network of alliance partners Note Managers may use the intricacy of alliance networks to enrich their own position in the firm since alliances can be built on an upper-level manager’s personal contacts, which may be lost if that person leaves the company, thus making dismissal difficult.
5 Understand the importance of cross-border strategic alliances as an international cooperative strategy.
INTERNATIONAL COOPERATIVE STRATEGY A cross-border strategic alliance is an international cooperative strategy in which firms with headquarters in different nations combine some of their resources and capabilities to create a competitive advantage. There are several reasons for the increasing use of cross-border strategic alliances: • Multinational corporations outperform firms operating on only a domestic basis. • A firm can form cross-border strategic alliances to leverage core competencies that are the foundation of its domestic success to expand into international markets. • Limited domestic growth opportunities also cause firms to use cross-border alliances. • Government economic policies can influence firms to form cross-border alliances. • Strategic alliances with local partners can help firms overcome certain liabilities of moving into a foreign country, such as lack of knowledge of the local culture or institutional norms. • Firms also use cross-border alliances to help transform themselves to better use their competitive advantages to exploit opportunities surfacing in the rapidly changing global economy. In general, cross-border alliances are more complex and risky than domestic strategic alliances. NETWORK COOPERATIVE STRATEGY Rather than cooperative alliances between two or very few firms, alliances can also be expanded to include a larger number (or network) of partners as a complement to other forms of cooperative strategy. This is a network cooperative strategy. A network cooperative strategy is particularly effective when it is formed by geographically clustered firms, as in California’s Silicon Valley and Singapore’s Silicon Island. Effective social relationships and interactions among partners while sharing their resources and capabilities make it more likely that a network cooperative strategy will be successful, as does having a productive strategic center firm. Firms involved in networks of alliances tend to be more innovative than firms that are not involved in these networks. However, disadvantages to participating in networks include: • becoming locked into partnerships that preclude the development of alliances with others; • firms in a network are expected to help other network firms whenever support is required. Teaching Note The strategic approach of networks is discussed in this chapter whereas the structural characteristics of network organizations are covered in Chapter 11. Alliance Network Types An important advantage of a network cooperative strategy is that firms gain access to the partners of their partners. The set of partnerships, such as strategic alliances, that result from the use of a network cooperative strategy is commonly called an alliance network. Stable alliance networks often appear in mature industries with predictable market cycles and demand. Through a stable alliance network, firms try to extend their competitive advantages to other settings while continuing to profit from operations in their core, relatively mature industry. Teaching Note: An example of a US firm’s stable network is Nike’s long-established relationships between the firm and its global network of suppliers and distributors. Dynamic alliance networks often are used in industries with frequent technological innovation and short product life cycles. Thus, dynamic alliance networks are primarily used to stimulate rapid, value-creating product innovations and subsequent successful market entries.
6 Explain cooperative strategies’ risks.
COMPETITIVE RISKS WITH COOPERATIVE STRATEGIES Many cooperative strategies fail. Evidence suggests that two-thirds of cooperative strategies have serious problems in their first two years and that as many as 70 percent of them eventually fail. This failure rate suggests that even when the partnership has potential synergies, alliance success can be elusive. The risks associated with cooperative strategies are significant because the firms that are cooperating may also be competing with each other. These risks include: • Poor contract development that may result in one (or more) of the partners acting opportunistically and taking advantage of other venture partners • Misrepresentation of partner firms’ competencies by misstating or exaggerating an intangible resource such as knowledge of local market conditions • Failure of partner firms to make complementary resources available to the venture as agreed • The possibility that a firm may make investments that are specific to that alliance while its partner does not Figure Note: Competitive risks of cooperative strategies, as well as risk management approaches, are summarized in Figure 9.5. FIGURE 9.5 Managing Competitive Risks in Cooperative Strategies As Figure 9.5 indicates, the competitive risks of cooperative strategies are: • Inadequate contracts • Misrepresentation of competencies • Partners failing to use complementary resources • Holding alliance partners’ specific investments hostage And can be managed by: • Detailed contracts and monitoring • Developing trusting relationships to ensure that the strategy creates value. Strategic Focus Failing to Obtain Desired Levels of Success with Cooperative Strategies The complexity associated with most cooperative strategies increases the difficulty of successfully using them. One complexity is the fact that often, firms collaborating to complete certain projects are simultaneously competing with each other as well. This describes the relationship between Cisco and IBM, as well as those existing with airline companies that have joined one of the three major alliance networks (Star, Oneworld, and SkyTeam). Another complication is that firms sometimes form a partnership with a company that is itself a collaboration between other companies. Carefully executing the operational details of a planned cooperative strategy is foundational to its performance and influences if it will succeed or fail. Teaching Note The Strategic Focus discusses the challenges of implementing a successful cooperative strategy. Ask students to identify some recent successful and unsuccessful strategies of which they are aware. Ask students to do a little research on those companies, and discover what factors contributed to success or failure.
7 Describe two approaches used to manage cooperative strategies.
MANAGING COOPERATIVE STRATEGIES Cooperative strategies are an important option for firms competing in the global economy; however, they are complex and challenging to manage. The two basic approaches to managing cooperative strategies are: • Cost minimization • Opportunity maximization In the cost-minimization approach, the firm develops formal contracts with its partners. These contracts specify how the cooperative strategy is to be monitored and how partner behavior is controlled. The goal of this approach is to minimize the cooperative strategy’s cost and to prevent opportunistic behavior by partners. The opportunity-maximization approach focuses on a partnership’s value-creation opportunities. In this case, partners are prepared to take advantage of unexpected opportunities to learn from each other and to explore additional marketplace possibilities. Less formal contracts, with fewer constraints on partners’ behaviors, make it possible for partners to explore how their resources and capabilities can be shared in multiple value-creating ways. Firms can successfully use both approaches to manage cooperative strategies. However, the costs to monitor the cooperative strategy are greater with cost minimization, in that writing detailed contracts and using extensive monitoring mechanisms is expensive, even though the approach is intended to reduce alliance costs. As a strategic asset, trust can enable partner firms to reduce the cost of contracting and monitoring because the probability of opportunistic behavior is reduced if partners are able to trust each other. Trust also may enable the venture to take advantage of unforeseen opportunities. Because trust enables partner firms to reduce venture-related contracting and monitoring costs and increase venture flexibility, a venture between trusted partners is more likely both to reduce costs and add/create value. Instructor Manual for Strategic Management: Concepts and Cases: Competitiveness and Globalization Michael A. Hitt, R. Duane Ireland, Robert E. Hoskisson 9781305502147, 9780357033838
