Chapter 7:
Strategy

Integrated and coordinated set of actions used to exploit core competencies and gain competitive advantage.

Comprise of

Long Term (>3yrs)/ Medium (2-3yrs) & Short term goals (1yr)

Strategies may be modified or dropped

Ans 3 questions:

  1. Where are we now?
  2. Where we want to be in the future?
  3. How do we get there?

3 Level of Business Environment Analysis

1. External Environment

  1. Institutions
  2. PESTEL
  3. CAGE

2. Industry

  1. Porter's 5 Forces
  2. 3 Generic Strategies

3. Inside company

  1. Strength & Weakness
  2. VRIO - Resource based view

Alternative 3 Level of Business Strategies

1. Corporate Level Strategy (External Environment)

  • Overall scope of organisation
  • Broad based strategies concerning long term goals
  • Pursue firm's activities consistent with comp. adv.
  • Formulated by top management to oversee various stakeholders

2. Business Level Strategy (Industry)

  • Medium term goals
  • Decide on ways to compete; Identify competitors
  • Identify weakness/strength of firm
  • Identify what customers like in the firms products/services and how it can be further tailored to fit them

3. Functional Level Strategy (Internal)

  • Short term/detailed plans for each department
  • Align goals of different functions to work towards company goals
    (e.g. Biz strategy dept propose development of new product then R&D will create plan on to develop the product)

Main Strategies Companies need:
Increase profitability and profit growth

Ways to increase profit:
1. Reduce Cost
(E.g. Budget Hotels, Motels)
2. Add value/Differentiate products & services (Identify market segment which your product is more attractive than competitors' (Niche/Focus)
(E.g. Luxury hotels - Four Seasons)
(E.g. Marriott, Sheraton, Westin chains - balance between reduce cost & add value)

  1. Other ways:
    - Sell more to existing market
    - Enter new markets (go international)

Challenges:

  1. Cut cost reduces quality of products/services & customer experience
  2. Higher prices can be justified by improved products/services - too high price will drive customers away
    (Need to find the balance between 1 & 2)

VALUE

Value Creation
Creation of superior value of a product that enhances company's comp. adv. in the long run to achieve sustainable profit and profit growth

  • Can be done if activities (primary/support) are organised efficiently
    E.g. Singapore Airlines - primary activities organised around producing its services (selling right plane seat, provide responsive service to airport during and after flight, marketing activities showcase its top class services)

Value Chain
Series of primary and secondary activities used in the production of goods and services that make the products/services more valuable.

Value Chain Analysis

Primary Activities

  1. R&D: Value add thru design of products/services/production process
    (E.g. Banks compete on designing new financial products like mortgages, insurance policies, online banking, smart money cards.

2. Production:
Convert raw material to product
(E.g. Producing cars, computers)
Health care services: Production consists of delivering a service. (Eg. Heart operations, prescription)

3. Marketing & Sales:
Increase perceived value of a product/service through branding and advertising.
(E.g. Gillette differentiate its razors from non-branded razors)

4. Customer services:
Giving support throughout the whole buying experience
(E.g. US-based company Caterpillar manufactures heavy earth-moving machines and vehicles, and can deliver spare parts to a customer anywhere in the world within 24 hours after a malfunction.)

Support Activities
(Inputs that allow the primary activities to occur)

Logistics, Information system, HR management, Procurement…

E.g. Logistics:
Dell: Lower cost increase value of product

  • Direct Model - Sells PC directly to customer without a retail channel
  • Build to Order Mode: Keep inventories to zero
  • Worldwide Integrated Supply Chain

E.g. HaiDiLao:

  • Customer Service: Exceptional service
  • Employee Management (HR): Managers evaluated based on customer satisfaction and employee satisfaction; Empowerment
  • Supply Chain Management: Central kitchen and distribution networks - standardised food

Reduce Cost of Production

1. Economies of Scale

  • Reduction of unit cost achieved by producing a large volume of a product.
  • Selling internationally can help to achieve this.
    (E.g. Pfizer, pharmaceutical company:
    Exceed US$900 million and take 12 years to develop new major drug - sell their products worldwide to reduce average unit costs by spreading fixed costs over a large sales volume.)

2. Experience Curve Effects

  • Reduction in production costs over product lifetime - people learn to work more productively and achieve efficiencies in organising work, production costs fall.
    (E.g. In the airframe industry, whenever output doubles, the cost per unit falls to 80% of the previous cost.)

3. Location Economies

  • Situate value creation activities in locations where they can be carried out most efficiently and effectively.
  • Comparative adv.
    (E.g. Lenovo Thinkpad – products is designed in USA, case keyboard and hard drives are made in Thailand, wireless card in Malaysia, final assembly in Mexico, and finally shipped to USA for final sale.)

Analysis of External Environment

1. Formal & Informal Institutions

2. PESTLE & SWOT

3. CAGE & AAA

PESTLE

1. Political/Legal:

  • promotes favourable conditions for economic growth?
  • legislation to regulate business activities
    (E.g. Labour law, Education and training policies, Product Safety Law)

2. Economic

  • Wealth of Market
  • Presence of Financial Markets – Banks/loan (Check)
  • Investment by government, private sector, SMEs (Check)

3. Social-Cultural

  • Young workforce/aging population
  • Values (e.g. support buying luxury items?)
  • Education
  • Demographic Profile
  • Preference/tastes, health conscious, work-life

4. Technological (Check)

  • Adopt new technology/speed of change (e.g. Internet)
  • Investment on R&D
  • Infrastructure, Communication network

5. Environmental: (Check)

  • Sustainable and green issues
  • Recycling and waste disposal
  • Pollution laws
  • Renewable energy

E.g. Automotive industry (Sports vehicle)


P/L: Government COE can affect the sale of cars. Speed limit?
Economic: Taxes for owning a car, tax on fuel. GDP per capital, Interest rates affects whether to take out loan to buy cars.
Social-cultural: Society support the purchase of luxury items/ Interested in material things/status symbols? People Tech-savvy; buy things online and drive less.
Technological: Infrastructure available? (E.g communications network, transport system, traffic condition) Technological expertise in the country?

SWOT

  • Analyse the internal and external influences of a company
  • Focus on strengths, minimise weakness and threats, and take advantage of opportunities available

Minimax Analysis
& SWOT of ZARA and Ikea (See my notes)

CAGE
(Distance still matters - act as barriers)

Cultural
religious beliefs, language, social norms and behaviours

Administration

  • political, legal, formal institutional systems
    (E.g. Formal colonies are more likely to trade with each other. Regional trading arrangements and common currency also increases trade by 300%.)

Geographical

  • Physical distance, different time zone
  • More likely to trade with countries that are nearer
  • Physical distance affects cost of transportation
    (More likely to trade within 1000 miles apart, only 20% of trade with those 5000 mile apart)

Economic

  • personal income, infrastructure, human talent
  • similar economic profiles to replicate their existing business model
    (E.g. Walmart in USA and Canada are similar; failure to understand this made Walmart suffer badly in Asian countries - India, South Korea)

Example: CEMEX

  • 3rd largest cement company in the world
  • Success is partly due to entering markets with shared similarities on several CAGE dimensions
    Cultural:Acquire companies from former Spanish colonies - less cultural differences
    Administrative:Many common policies, legal and institutional frameworks with other former Spanish colonies.
    Geographical:Cement have low value to weight - incur high cost of transportation with distance. Trade with former Spanish colony countries that are located near Mexico helps them to save cost on transportation.
    Economic:Most former Spanish colony countries are developing countries like Mexico - CEMEX’s business model will also work well with the other trading countries.

AAA

Purpose:

  1. Adapt to host country to add value
  2. Lower cost by Aggregation and Arbitrage

Adaptation:

  • Adjusting to difference between countries
  • Offer different products/services to suit different consumer tastes in foreign countries. (Exploiting local differences)

Aggregation:
(Overcome differences using economies of scale – by grouping devices)

Pros: Adjust to host country needs
Cons: Costly to implement

Example: IKEA
Adapts kitchen products to suit local living conditions
(E.g. Chopsticks in Asia)
(E.g. Asian countries (prefer public transport)- sited in locations with public transport; Europe - sited in suburbs with huge parking space)
(E.g. Asia: DIY Fix-it culture is not dominant , hence it offers delivery and logistics services where a handyman team will help home owners with fixing the furniture.)


Other Example: McDonald's adapt menu to countries

Regional strategies that aggregate on geography – regional hubs, shared service centres in the region, regional marketing and sales platforms. (Exploit cost differences)

Example: Tata Consultancy Services (TCS) - aggregates by language
(Uruguayan operations service Spanish-speaking markets, Hungarian operation service German-speaking countries, and Morocco services French speaking countries)

Arbitrage:
(Locating different parts of supply chain in different countries to take advantage of location economies)

Produce in the location with lower cost, and sell it at locations with higher economic power.
(Possible with the global supply chain management and improved communications and technology networks)

Example: Lenovo Thinkpad

  • Designed in the US, case keyboard and hard drives made in Thailand, wireless cards in Malaysia, microprocessor in the US, final assembly in Mexico, and then shipped back to US for final sale.

Other example: DELL

Conclusion: Need to look at the trade-offs between the 3 A’s when entering a specific country to form an integrated AAA strategy.

Uses of AAA: Helps a firm design strategy to deal with international differences highlighted by CAGE and PESTEL.


  • 4 international strategies

Limitations:

  • Only large MNEs can implement AAA
  • Stretch a managerial's bandwidth
  • Force a company to operate with multiple corporate cultures
  • Serious constraint to use all 3 A’s

4 International Strategies to compete in International Markets

1. Home replication strategy

2. Location Strategy

3. Global Standardisation Strategy

4.Transnational Strategy

  • Usually the first strategy the company use when expanding globally.
  • Low pressure for both cost reduction and local responsiveness
  • Company produce in home country with economies of scale and export overseas.
  • Companies need to have a strong brand name

Pros:

  • Logical first step for firms to expand overseas

Cons:

  • Lack of local responsiveness, profit growth becomes limited.
  • Not viable in long term – no R&D investment to adapt to local markets
  • Invests in R&D to adapt to every nation
  • Put a manager in the country to have a feel of the culture, the people and what they want
  • Adaptation can be any P or all 4Ps of Marketing

Pros:

  • Can be very profitable
  • Adapt products to individual local markets
  • Main competitive strategy is differentiation
  • Wants to be perceived like a local company

Cons:

  • Costly. Only viable in large stand-alone (sizable) markets.
    E.g. China, Japan, Saudi Arabia, Germany,
    India – Hindu/vegetarian meals.
  • Little or no economies of scale
  • Little or no learning across different regions
  • Too much autonomy to local office can weaken the company’s organisational
    culture.
  • May lose the brand name and what the company is about.
  • Highly centralised structure, strong pressure to reduce cost, few pressures to local responsiveness, enjoy economies of scale.

Examples:
KFC - Youtiao in China for breakfast and Rice for lunch - Profits exceeded Burger King which use Global standardisation in China;
Netflix - Asian movies to suit Asian markets

Pros:

  • Main competitive strategy is price.
  • Uses location economies for production.
  • Lower operating cost helps firms to save money = lower prices for customers.
  • Global brand recognition, customer pay for a brand they recognise and trust

Cons:

  • No local responsiveness, little or no differentiation in products
  • Can hurt profits where products have different norms (e.g. Food, leisure products)

Example: NIKE - their products are similar everywhere.

  • Cost efficient (aggregation focus) and locally responsive (adaptation focus).

Pros:

  • Have both global centralisation and local responsiveness benefits

Cons:

  • Difficult to implement, usually only big companies can do it.

Example: McDonald's ; Ikea (low cost & adapt to Asian market)

Pressure for Cost Reduction:

  • Commodity products - price is main competitive weapon
  • Competitors based in low cost locations
  • Persistent excess capacity
  • Consumers face low switching costs

Pressure for Local Responsiveness:

  • Consumer preference & taste
  • Traditional practices & infrastructure
  • Difference in distribution channels
  • Host gov. demands - E.g. Health safety law