dimensions at once.

An overall differentiation strategy: Creates

higher entry barriers due to customer loyalty Provides higher
margins that enable the firm to deal with supplier power Reduces
buyer power because buyers lack suitable alternatives Establishes
customer loyalty and hence less threat from substitutes. Pitfalls of
Differentiation: Uniqueness that is not valuable Too much
differentiation Too high a price premium Differentiation that is
easily imitated Dilution of brand identification through product
line extensions Perceptions of differentiation may vary between
Overall cost leadership is based on: Creating a low-cost position buyers and sellers. A focus strategy is based on the choice of a
relative to a
narrow competitive scope within an industry. A firm selects a
firms peers Managing relationships throughout the entire value
segment or group of segments (or niche) and tailors its strategy to
chain to lower costs
serve them A firm achieves competitive advantages by dedicating
Differentiation implies: Products and/or services that are
itself to these segments exclusively. A focus strategy has two
unique &
variants: Cost focus Creates a cost advantage in its target
Valued Emphasis on non-price attributes for which customers will segment Exploits differences in cost behavior Differentiation
gladly pay a premium.
focus Differentiates itself in its target market Exploits the
Focus strategy requires: Narrow product lines, buyer segments,
special needs of buyers. An overall focus strategy: Creates
or targeted geographic markets Advantages obtained either
higher entry barriers due to cost leadership or differentiation or both
through
Can provide higher margins that enable the firm to deal with
differentiation or cost leadership.
supplier power Reduces buyer power because the firm provides
Examples: Three Generic Strategies Companies pursuing an
specialized products or services Focused niches are less
overall cost leadership strategy: McDonalds Wal-Mart
vulnerable to substitutes.
Companies pursuing a differentiation strategy: Apple Target Pitfalls of Focus: Erosion of cost advantages within the narrow
Companies pursuing a focus strategy: Ikea Costco
segment Highly focused products and services are still subject to
Overall Low-Cost Leadership -Cost leadership involves
competition from new entrants & from imitation Focusers can
Aggressive construction of efficient scale facilities Vigorous
become too focused to satisfy buyer needs. Integration of lowpursuit of cost reductions from experience Tight cost & overhead cost and differentiation strategies makes it difficult for competitors
control Avoidance of marginal customer accounts Cost
to duplicate or imitate strategy The goal of a combination strategy
minimization in all activities in the firms value chain, such as R&D, is to provide unique value in an efficient manner. Combining
service, sales force, & advertising. Cost leadership requires;
overall low-cost and differentiation strategies can take several
Learning to lower costs through experience: the experience curve forms: Automated & flexible manufacturing systems allow for
With experience, unit costs of production
mass customization Exploitation of the profit pool concept
processes decline as output increases This strategy also requires
creates a competitive advantage Using information technology,
competitive parity Being on par with competitors with respect
firms can integrate activities throughout the extended value chain.
to low-cost, differentiation, or other strategic product characteristics An integrated overall low-cost & differentiation strategy:
Permits cost leaders to translate cost advantages directly into
Creates higher entry barriers due to both cost leadership &
higher profits.
differentiation Can provide higher margins that enable the firm to
An overall low-cost position: Protects a firm against rivalry
deal with supplier power Reduces buyer power because of fewer
from competitors
competitors An overall value proposition reduces threat from
Protects the firm against powerful buyers Provides more
substitutes. Pitfalls of Combination Strategies: Firms that fail to
flexibility to cope with demands from powerful suppliers who want
attain both overall low-cost & differentiation strategies may end up
to increase input costs Provides substantial entry barriers due to
with neither and become stuck in the middle Firms can also
economies of scale and cost advantages Puts the firm in a
underestimate the challenges & expenses associated with
favorable position with respect to substitute products. Pitfalls of
coordinating value-creating activities in the extended value chain
Cost Leadership: Too much focus on one or a few value chain
Firms can also miscalculate sources of revenue and profit pools in
activities. Increase in the cost of the inputs on which the
the firms industry.
advantage is based The strategy is imitated too easily A lack of
parity on differentiation Reduced flexibility Obsolescence of
Internet-Enabled Low-Cost Leader Strategies:
the basis of a cost advantage. Differentiation requires: A level of The Internet and digital technologies lower transaction costs:
cost parity relative to competitors Integration of multiple points
No in-person sales calls Paperless transactions
along the value chain Superior material handling operations to
Disintermediation or removing intermediaries also lowers
minimize damage Accurate and responsive order processing
transaction costs Reduced search costs No need for a
Personal relationships with key customers Rapid response to
permanent retail location. Internet-Enabled Differentiation
customer service requests Differentiation along several different
Strategies The Internet and digital technologies have created new
Three Generic Strategies:

ways of differentiating by enabling mass customization

Customers can judge the quality & uniqueness of a product or
service by their ability to be involved in its planning & design
Lowered transaction costs allow firms to
achieve parity on cost while providing a unique experience.
Internet-Enabled Focus Strategies The Internet and digital
technologies have created new ways of competing in a narrow
market segment Customers can access markets less expensively,
and small firms can extend their reach Social media allows niche
firms to solicit input and respond quickly to customer feedback.
Internet-Enabled Combination Strategies The Internet and
digital technologies have provided all companies with greater tools
for managing costs With lower costs for all, the net effect is fewer
rather than more opportunities for sustainable advantage The ease
of comparison shopping also erodes differentiation advantages.
Industry Life Cycle Stages: Introduction Growth Maturity
Decline Generic strategies, value-creating activities, & overall
objectives all vary. Strategies in the Introduction Stage: The
introduction stage is when: Products are unfamiliar to consumers
Market segments are not well-defined Product features are not
clearly specified Competition tends to be limited Strategies:
Develop a product and get users to try it Generate exposure so the
product becomes standard. Strategies in the Growth Stage The
growth stage is: Characterized by strong increases in sales
Attractive to potential competitors When firms can build brand
recognition Strategies: Create branded differentiated products
Stimulate selective demand Provide financial resources to
support value-chain activities. Strategies in the Maturity Stage
The maturity stage is when: Aggregate industry demand slows
Market becomes saturated, few new adopters Direct competition
becomes predominant Marginal competitors begin to exit
Strategies: Create efficient manufacturing operations Lower
costs as customers become price sensitive Adopt reverse or
breakaway positioning. Strategies in the Decline Stage: The
decline stage is when: Industry sales and profits begin to fall
Price competition increases Industry consolidation occurs
Strategies: Maintaining the product position Harvesting profits
& reducing costs Exiting the market Consolidating or acquiring
surviving firms. Turnaround Strategies: A turnaround strategy
involves reversing performance decline & reinvigorating growth
toward profitability through Asset & cost surgery Selected
market & product pruning Piecemeal productivity improvements
Example = Ford Motor Company Example = Jamba Juice.
Chapter 6 Diversification initiatives must create
value for shareholders through Mergers and acquisitions
Strategic alliances Joint ventures Internal development
Diversification should create synergy A firm may diversify into
related businesses Benefits derive from horizontal relationships
Sharing intangible resources such as core competencies in
marketing Sharing tangible resources such as production facilities
A firm may diversify into unrelated businesses Benefits derive
from hierarchical relationships Value creation derived from the
corporate office Leveraging support activities in the value chain.
Related diversification enables a firm to benefit from horizontal
relationships across different businesses Economies of scope

allow businesses to: Leverage core competencies Share related

activities Enjoy greater revenues Related businesses gain
market power by: Pooled negotiating power Vertical
integration. Core competencies reflect the collective learning in
organizations. Can lead to the creation of value and synergy if
They create superior customer value The value chain elements in
separate businesses require similar skills They are difficult for
competitors to imitate or find substitutes for. Related
Diversification: Sharing Activities Corporations can also achieve
synergy by sharing activities across their business units. Sharing
tangible & value-creating activities can provide payoffs: Cost
savings through elimination of jobs, facilities & related expenses, or
economies of scale Revenue enhancements through increased
differentiation & sales growth. Market power can lead to the
creation of value and synergy through Pooled negotiating
power Gaining greater bargaining power with suppliers &
customers Vertical integration - becoming its own supplier or
distributor through Backward integration Forward integration.

a firms long-term viability. Diversification can reduce variability in

revenues & profits over time. However Stockholders can
diversify portfolios at a much lower cost & economic cycles are
difficult to predict, so why diversify? Example = General
Electrics businesses: Aircraft engines, power generation
equipment, locomotive trains, large appliances, healthcare products,
financial
products, lighting, mining, oil & gas Why is GE in so many
businesses? Diversification can be accomplished via Mergers &
acquisitions And divestment Pooling resources of other
companies with a firms own resource base through Strategic
alliances & joint ventures Internal Development through
Corporate entrepreneurship. Mergers and Acquisitions:
Mergers involve a combination or
consolidation of two firms to form a new legal entity: Are
relatively rare The two firms are on a relatively equal basis
Acquisitions involve one firm buying another either through stock
purchase, cash, or the issuance of debt. In high-technology &
knowledge intensive industries, speed is critical: acquiring is faster
than building. M&A allows a firm to obtain valuable resources
that help it expand its product offerings & services. M&A helps a
firm develop synergy: Leveraging core competencies Sharing
activities Building market power. M&A can lead to
consolidation within an industry, forcing other players to merge.
Corporations can also enter new market
segments by way of acquisitions. Takeover premiums for
Vertical Integration: The transaction cost perspective Every
market transaction involves some transaction costs: Search costs acquisitions are
typically, very high Competing firms can imitate advantages
Negotiating costs Contract costs Monitoring costs
Competing firms can copy synergies Managers egos get in the
Enforcement costs Need for transaction specific investments
Administrative costs. Unrelated diversification enables a firm to way of sound business decisions Cultural issues may doom the
intended benefits. Divestment objectives include: Cutting the
benefit from vertical or hierarchical relationships between the
financial losses of a failed acquisition Redirecting focus on the
corporate office & individual business units through The
firms core businesses
corporate parenting advantage Providing competent central
Freeing up resources to spend on more attractive alternatives
functions Restructuring to redistribute assets Asset, capital,
Raising cash to help fund existing businesses. Successful
& management restructuring Portfolio management BCG
growth/share matrix. Parenting allows the corporate office to create divestiture involves: Removing emotion from the decision
Knowing the value of the business youre Selling Timing the deal
value through management
right Maintaining a sizable pool of potential buyers Telling a
expertise & competent central functions
story about the deal Running divestitures systematically through a
In restructuring the parent intervenes: Asset restructuring
project office Communicating clearly and frequently. Strategic
involves the sale of unproductive assets Capital restructuring
alliances & joint ventures are cooperative relationships with
involves changing the debtequity mix, adding debt or equity
potential advantages: Ability to enter new markets through
Management restructuring involves changes in the top
Greater financial resources Greater marketing expertise Ability
management team, organizational structure, & reporting
to reduce manufacturing or other costs in the value chain Ability
relationships.
to develop & diffuse new technologies. Need for the proper
Portfolio management involves a better understanding of the
partner: Partners should have complementary strengths
competitive position of an overall portfolio or family of businesses
Partners strengths should be unique Uniqueness should create
by Suggesting strategic alternatives for each business
Identifying priorities for the allocation of resources Using Boston synergies Synergies should be easily sustained & defended
Partners must be compatible & willing to trust each other. Internal
Consulting Groups (BCG) growth/share matrix. Limitations of
portfolio models: SBUs are compared on only two dimensions & Development: Corporate entrepreneurship & new venture
development motives: No need to share the wealth with alliance
each SBU is considered a standalone entity Are these the only
factors that really matter? Can every unit be accurately compared Partners No need to face difficulties associated with combining
activities across the value chains No need to merge diverse
on that basis? What about possible synergies? An oversimplified
corporate cultures Limitations: Time-consuming Need to
graphical model substitutes for managers experience Following
strict & simplistic rules for resource allocation can be detrimental to continually develop new capabilities. Managerial motives:

Managers may act in their own self-interest eroding rather than

enhancing value creation through Growth for growths sake
Top managers gain more prestige, higher rankings, greater incomes,
more job security Its exciting and dramatic! Excessive
egotism Use of antitakeover tactics. Antitakeover tactics
include: Green mail Golden parachutes Poison pills Can
benefit multiple stakeholders not just management Can raise
ethical considerations because the managers of the firm are not
acting in the best interests of the shareholders.
Chapter 7 International Strategy: Globalization has to do with the
rise of market capitalization around the world: International
exchanges have increased Trade in goods & services Exchange
of money, information, & ideas Laws, rules, norms, values, and
ideas are growing more similar across countries Challenges
include balancing between emerging markets & developed markets
How to meet the needs of customers at very different income
levels. Factors Affecting a Nations Competitiveness: Michael
Porters diamond of national
advantage explains why some nations and
their industries outperform others: Factor endowments
Demand conditions Related and supporting industries
Firm strategy, structure, & rivalry
Factor endowments involve factors of production: Land
Capital Labor Factors of production must be industry & firm
specific Must be rare, valuable, difficult to imitate, and rapidly &
efficiently deployed. Demand conditions refer to the demands
that consumers place on an industry Demanding consumers drive
firms in that country to: Meet high standards Upgrade existing
products and services Create innovative products and services
Better anticipate future global demand Proactively respond to
product & service requirements. Related and supporting industries
enable firms to manage inputs more effectively: A competitive
supplier base Reduces manufacturing costs Close working
relationships with suppliers Allows for joint research &
development Development of related industries Forces
existing firms to practice cost control, product innovation, better
distribution methods. Firm strategy, structure, & rivalry due to
Strong consumer demand Strong supplier base High new
entrant potential from related industries Domestic rivalry leads to
a search for new markets Rivalry is a strong indicator of global
competitive success. A company decides to become a multinational
firm in order to: Increase market size Attain economies of
scale Take advantage of arbitrage opportunities In every stage
of the value chain Enhance a products growth potential
Reinvigorating the product life cycle. Multinational firms also
encounter risks: Political risk due to social unrest, military
turmoil, demonstrations, terrorism, absence of the rule of law can
lead to Destruction of property Disruption of operations
Non-payment for goods and services Arbitrary government
decisions Economic risk due to piracy and
counterfeiting. Currency risk due to fluctuations in the local
currencys exchange rate Affects cost of production or net profit
Management risk due to culture, customs, language, income

level, customer preferences, distribution systems Could lead to

the need for local adaptation of apparently standard products.
Example:
Risks from Corruption: Transparency International Corruption
Perceptions Index (CPI) reveals the most corrupt countries in the
world The scores range from 100 (very clean) to 0 (highly
corrupt). The most corrupt countries are: Somalia, North
Korea, & Afghanistan (CPI scores: 8) Sudan (CPI score: 13)
Myanmar (CPI score: 15) Uzbekistan & Turkmenistan (CPI
scores: 17). International Expansion: Managing Risks Managing
political risk through Market diversification Developing
stakeholder coalitions Wooing key influencers Putting key
stakeholders on their boards Managing economic risk through
global dispersion of value chains Outsourcing Offshoring.
Offshoring may be costly Common savings from offshoring
include: Lower wages, benefits, energy costs, regulatory costs,
taxes Hidden costs from offshoring include: Higher total wage
& indirect costs Increased coordination costs Increased
inventory due to longer lead time Reduced market responsiveness
Cost of protecting intellectual property. International Strategies:
Opposing Pressures Cost reduction or adaptation to local markets?
Strategies that favor global products & brands should do the
following: Standardize all products for all markets Reduce
overall costs by spreading investments over a larger market
Assumes: Homogenous customer needs & interests People
prefer lower prices at high quality Global markets produce
economies of scale. Assumptions may be incorrect: Product
markets DO vary widely between nations local adaptations work.
There is a growing interest in multiple product features, product
quality, & service. Technology permits flexible production; cost
of production may not be critical to product cost; and a firms
strategy should not be solely product driven. One size fits all
does NOT generally apply. International strategy requires
diffusion & adaptation of the parent companys knowledge &
expertise to foreign markets. The primary goal is worldwide
exploitation of the parent firms knowledge & capabilities. All
sources of core competencies are centralized. Pressure for both
local adaptation & low costs are rather low.

Global strategy implies a firm is interested in lowering costs:

Competitive strategy is centralized & controlled by the corporate
office Products are standardized, operations centralized,
producing economies of scale Worldwide volume supports R&D
Theres a standard level of quality worldwide Pressure for
reducing cost is high; pressure for adaptation to local markets is
weak.

Multi-domestic strategy puts emphasis on differentiating products

& services to adapt to local markets Decisions are decentralized
Products & services are tailored to local use Consider

language, culture, income levels, customer preferences, distribution

systems Markets can expand rapidly Prices are differentiated
by market Pressure for local adaptation is high; pressure for
lowering costs is low.

3. The risks of vertical integration include all of the following

EXCEPT: lack of control over valuable assets.
4. The downsides or limitations of mergers and acquisitions include
all of the following except: It is a slow means to enter new markets
and acquire skills and competences.
5. Verizon Wireless and ILS Technology have a _________ whereby
Verizon integrates technology developed by ILS to improve its
Transnational strategy seeks global competitiveness via trade-offs: machine-to machine (M2M) data transmission systems. M2M
Efficiency versus local adaptation versus organizational learning systems allow firms to securely transmit data to and from various
devices. strategic alliance
Assets & capabilities are disbursed according to the most
beneficial location for a specific activity; some value chain activities 6. Internal development may be time consuming and, therefore,
firms may forfeit the benefits of speed that growth through
are centralized, some are decentralized. Economies of scale,
__________ and __________ can provide. mergers; acquisitions
increased knowledge flows Pressures for both local adaptation
7. Creating value within business units can happen when a firm tries
and lowering costs are high.
to find and acquire either poorly performing firms with unrealized
potential or firms in industries on the threshold of significant,
positive change. This is action is known as ______.restructuring
8. For a core competence to be a viable basis for the corporation
International Strategies: Global or Regional? It may be unwise strengthening a new business unit, there are three requirements.
for companies to rush into full-scale globalization
Which one of the following is not one of these requirements? The
Regionalization may be more reasonable Distance still matters
new business must have an established large market share.
Commonalities of language, culture, economics, legal & political 9. McKesson, a large distribution company, sells many product lines
systems, and infrastructure all make a difference Trading blocs
such as pharmaceuticals and liquor through its super warehouses.
and free trade zones ease trade restrictions, taxes, & tariffs. Example: This is an example of ____________. using related diversification to
International Strategies Regional Difficulties eBay has
achieve value by sharing activities to create economies of scope
successfully expanded into Europe & Latin America through joint
10. At Cooper Industries, there are few similarities in the products it
ventures & acquisitions Appropriate partners allow quick
makes or the industries in which it completes. The corporate office
adaptation to local needs eBay has struggled in Asia Limited
adds value through such activities as superb human resource
local market know-how, lack of innovative products & processes in
practices and budgeting systems. This is an example of
the local market, centralized management style Are these
__________________. using unrelated diversification to achieve
insurmountable local market differences?
value through restructuring and parenting
Chapter 7

Does size matter? Small & Medium-sized Business Enterprises

(SMEs) should engage in cross-border trade. SMEs that trade
internationally are twice as likely to outperform those that dont.
Chapter 5
Chapter 6
In the BCG Matrix, a business that has a low market share in an
industry characterized by high market growth is termed a
____________.
When using a BCG matrix, a business that currently holds a large
market share in a rapidly growing market and has minimal or
negative cash flow would be known as a __________.