Fluent Essays

question Question 1: (450 words) The Indian software industry has become one of the leading global markets. According to Michael Porter, a nation’s competitiveness depends on the capacity of its leading industries to innovate and upgrade. Critically discuss Porter’s diamond of national competitive advantage. Illustrate your answer by referring to Indian software industry as an example. Question 2: (300 words) Diversification, either related or unrelated, allows a firm to achieve synergies. Diversification initiatives, must be justified by the creation of value for shareholders. Amazon, the well-known e-retailer has pursued diversification through acquiring Souq.com, the well-known e-retailer in the Arab region. In light of this, identify type of diversification adopted by Amazon. Critically discuss benefits drawn from pursued diversification of Amazon and souq.com. Question 3: (450 words) As a business consultant your advice was sought by an organization that seek to enter into a new market which will evoke a competitive dynamic-action and response from established incumbents. Before responding to subject competitors, your organization must understand the competitive dynamics of the business in order to succeed with a growth opportunity. Suggest and critically discuss a model that helps your organization to meet this objective. Making Diversification Work (1 of 2) Diversification initiatives must create value for shareholders through Mergers and acquisitions Strategic alliances Joint ventures Internal development Diversification should create synergy. Business 1 plus Business 2 equals More than two. ©McGraw-Hill Education. Diversification = the process of firms expanding their operations by entering new businesses. Diversification initiatives – whether through mergers and acquisitions, strategic alliances and joint ventures, or internal development – must be justified by the creation of value for shareholders. But this is not always the case. Firms typically pay high premiums when they acquire a target firm. So why should companies even bother with diversification initiatives? The answer is synergy, which means “working together,” and synergistic effects should be multiplicative – one plus one should equal more than two. 1 Making Diversification Work (2 of 2) 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, distribution channels via vertical integration 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 ©McGraw-Hill Education. Related businesses are those that share resources. Unrelated businesses have few similarities in products or industries, however the corporate office can add value through such activities as robust information systems or superb human resource practices. Benefits derived from horizontal (related diversification) and hierarchical (unrelated diversification) relationships are not mutually exclusive. Many firms that diversify into related areas benefit from information technology expertise in the corporate office. Similarly, unrelated diversifiers often benefit from the “best practices” of sister businesses even though their products, markets, and technologies may differ dramatically. An example would be a corporate parent with strong support activities in the value chain such as information systems or human resource practices. 2 Related Diversification 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, enhance differentiation Related businesses gain market power by: Pooled negotiating power Vertical integration ©McGraw-Hill Education. Related diversification = a firm entering a different business in which it can benefit from leveraging core competencies, sharing activities, or building market power. Economies of scope = cost savings from leveraging core competencies or sharing related activities among businesses in a corporation. Core competencies = a firm’s strategic resources that reflect the collective learning in the organization. Sharing activities = having activities of two or more businesses’ value chains done by one of the businesses. A firm can also enjoy greater revenues if two businesses attain higher levels of sales growth combined than either company could attain independently (this is the synergistic effect). Firms also can enhance the effectiveness of their differentiation strategies by means of sharing activities among business units. A shared order-processing system, for example, may permit new features and services that a buyer will value. Market power = firms’ abilities to profit through restricting or controlling supply to a market or coordinating with other firms to reduce investment. Pooled negotiation power = the improvement in bargaining position relative to suppliers and customers. Be careful, though: acquiring related businesses can enhance a corporation’s bargaining power, but it must be aware of the potential for retaliation. Vertical integration = an expansion or extension of the firm by integrating preceding or successive production processes. Vertical integration occurs when a firm becomes its own supplier or distributor. 3 Related Diversification: Market Power 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 ©McGraw-Hill Education. Market power = firms’ abilities to profit through restricting or controlling supply to a market or coordinating with other firms to reduce investment. Pooled negotiating power = the improvement in bargaining position relative to suppliers and customers. Similar businesses working together or the affiliation of the business with a strong parent can strengthen an organization’s purchasing clout. However, managers must carefully evaluate how the combined businesses may affect relationships with actual and potential customers, suppliers, and competitors – they may retaliate! Vertical integration = an expansion or extension of the firm by integrating preceding or successive production processes. Vertical integration occurs when a firm becomes its own supplier or distributor. The firm can incorporate more processes toward the original source of raw materials (backward integration) or toward the ultimate consumer (forward integration). 4 Example: Related Diversification: Vertical Integration Example: Simplified Stages of Vertical Integration: Shaw Industries Jump to Appendix 1 for long description. ©McGraw-Hill Education. Vertical integration can be a viable strategy for many firms. Shaw Industries is a carpet maker that has attained a dominant position in the industry via a strategy of vertical integration. Shaw has successfully implemented strategies of both forward AND backward integration. 5 Related Diversification: Vertical Integration, Issues Is the company satisfied with the quality of the value that its present suppliers & distributors are providing? Are there activities in the industry value chain presently being outsourced or performed independently by others that are a viable source of future profits? Is there a high level of stability in the demand for the organization’s products? Does the company have the necessary competencies to execute the vertical integration strategies? Will the vertical integration initiatives have potential negative impacts on the firm’s stakeholders? ©McGraw-Hill Education. In making vertical integration decisions, five issues should be considered. If the performance of organizations in the vertical chain is satisfactory, it may not, in general, be appropriate for a company to perform these activities itself. However, even if a firm IS outsourcing value-chain activities to companies that are doing a credible job, it may be missing out on substantial profit opportunities. Note: high demand or sales volatility are not that conducive to vertical integration. With a high level of fixed costs in plant and equipment as well as operating costs that accompany endeavors toward vertical integration, widely fluctuating sales demand can either strain resources (in times of high demand) or result in unused capacity (in times of low demand). Finally, successfully executing strategies of vertical integration can be very difficult and can require significant competencies. In addition, managers must carefully consider the impact that vertical integration may have on existing and future customers, suppliers, and competitors. 6 Related Diversification: Vertical Integration, Transaction Costs Transaction cost perspective Every market transaction involves some transaction costs. Search costs Negotiating costs Contract costs Monitoring costs Enforcement costs Need for transaction specific investments Administrative costs ©McGraw-Hill Education. Transaction cost perspective = a perspective that the choice of a transaction’s governance structure, such as vertical integration or market transaction, is influenced by transaction costs, including search, negotiating, contracting, monitoring, and enforcement costs, associated with each choice. Transaction costs are the sum of the above costs. These transaction costs can be avoided by internalizing the activity, in other words, by producing the input in-house. However, vertical integration gives rise to administrative costs as well. Coordinating different stages of the value chain now internalized within the firm causes administrative costs to go up. Decisions about vertical integration are, therefore, based on a comparison of transaction costs and administrative costs. If transaction costs are lower than administrative costs, it is best to resort to market transactions and avoid vertical integration. On the other hand, if transaction costs are higher than administrative costs, vertical integration becomes an attractive strategy. 7 Means of Diversification Diversification can be accomplished via Mergers & acquisitions And divestment Pooling resources of other companies with a firm’s own resource base through Strategic alliances & joint ventures Internal Development through Corporate entrepreneurship New venture development ©McGraw-Hill Education. Diversification, either related or unrelated, allows a firm to achieve synergies and create value for its shareholders. There are three basic means by which a firm can diversify. Mergers = the combining of two or more firms into one new legal entity. Acquisitions = the incorporation of one firm into another through purchase. Through mergers and acquisitions, corporations can directly acquire another firm’s assets and competencies. A firm can also divest previous acquisitions. Divestment = the exit of a business from the firm’s portfolio. By using a joint venture or strategic alliance, corporations can pool the resources of other companies with their own resource base. Strategic alliance = a cooperative relationship between two or more firms. Joint ventures = new entities formed within a strategic alliance in which two or more firms, the parents, contribute equity to form the new legal entity. Finally, corporations may diversify into new products, markets, and technologies through internal development. Internal development = entering a new business through investment in new facilities, often called corporate entrepreneurship and new venture development. Corporate entrepreneurship involves the leveraging and combining of the firm’s own resources and competencies to create synergies and enhance shareholder value. 8 Mergers and Acquisitions Mergers involve a combination or consolidation of two firms to form a new legal entity. Relatively rare On a relatively equal basis Acquisitions involve one firm buying another either through stock purchase, cash, or the issuance of debt. ©McGraw-Hill Education. The most visible and often costly means to diversify is through acquisitions. Exhibit 6.5 illustrates the dramatic volatility in worldwide M&A activity over the last several years. Increase in merger and acquisition activity can indicate market optimism. It’s an indication that markets are willing to finance these transactions. Government policies such as regulatory actions and tax policies can also make the M&A environment more or less favorable. Finally, currency fluctuations can influence the rate of cross-border acquisitions with firms in countries with stronger currencies being in a stronger position to acquire. 9 Mergers and Acquisitions: Motives 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. ©McGraw-Hill Education. In certain industries speed is critical, so acquiring is faster than building. Example = Apple acquiring Siri Inc. Acquisitions can quickly add new technology to product offerings and meet changing customer needs. Example = Cisco Systems. Acquisitions can help a firm leverage core competencies, share activities, and build market power. Example = eBay’s acquisition of GSI Commerce, StubHub and Gmarket allows it to become a full-service provider of online retailing systems. M&A can lead to consolidation within an industry, forcing other players to merge. Example = consolidation in the airline industry: Delta – Northwest, United – Continental. Corporations can also enter a new market segments by way of acquisitions. Example = Fiat acquired Chrysler to gain access to the U.S. auto market. See Exhibit 6.6. 10 Mergers and Acquisitions: Limitations Takeover premiums for acquisitions are typically very high. Competing firms can imitate advantages. Competing firms can copy synergies. Managers’ egos get in the way of sound business decisions Cultural issues may doom the intended benefits. ©McGraw-Hill Education. By estimates, 70 to 90% of acquisitions destroy shareholder value. See Strategy Spotlight 6.4. Two times out of three, the stock price of the acquiring company falls once the deal is made public. Since the acquiring firm often pays a 30% or higher premium for the target company, the acquirer must create synergies and scale economies that result in sales and market gains exceeding the premium price. This is sometimes hard to do. Because competing firms can often imitate advantages or copy synergies, investors may not be willing to pay a high premium for the stock. M&A costs are paid for upfront. Conversely, firms pay for R&D, ongoing marketing, and capacity expansion over time. This stretches out the payments needed to gain new competencies, but investors want to see immediate results. If the M&A does not perform as planned, managers who pushed for the deal may find their reputation tarnished. Finally, creating a singular organizational culture from multiple national or business cultures can be very difficult. Example = SmithKline and the Beecham Group. 11 Question (2 of 2) Divestment can be the common result of an acquisition. Divesting businesses can accomplish many different objectives. These include enabling managers to focus their efforts more directly on the firm’s core businesses. providing the firm with more resources to spend on more attractive alternatives. raising cash to help fund existing businesses. all of the above. ©McGraw-Hill Education. Answer: D. Divestment = the exit of a business from the firm’s portfolio. See limitations of mergers and acquisitions, and how divesting a business can accomplish many different objectives, as on the next slide. . 12 Mergers and Acquisitions: Divestment Objectives Divestment objectives include: Cutting the financial losses of a failed acquisition Redirecting focus on the firm’s core businesses Freeing up resources to spend on more attractive alternatives Raising cash to help fund existing businesses ©McGraw-Hill Education. Divestments, the exit of the business from the firm’s portfolio, are quite common. Large, prestigious U.S. companies may have divested more acquisitions than they have kept. Investing can enhance a firm’s competitive position only to the extent that it reduces its tangible (e.g., maintenance, investments, etc.) or intangible (e.g., opportunity costs, managerial attention) costs without sacrificing a current competitive advantage or the seeds of future advantages. To be effective, divesting requires a thorough understanding of the business unit’s current ability and future potential to contribute to a firm’s value creation. Modes of divestment include sell-offs, spin-offs, equity carve-outs, asset sales/dissolution, and split-ups. 13 Mergers and Acquisitions: Divestment Success Successful divestiture involves: Removing emotion from the decision Knowing the value of the business you’re selling Timing the deal right Maintaining a sizable pool of potential buyers Telling a story about the deal Running divestitures systematically through a project office Communicating clearly and frequently ©McGraw-Hill Education. Successful divestment requires a thorough understanding of a business unit’s current ability and future potential to contribute to a firm’s value creation. Since the decision to divest involves a great deal of uncertainty, it’s very difficult to make such evaluations. In addition, because of managerial self interests and organizational inertia, firms often delay investments of underperforming businesses. The Boston Consulting Group has identified the above seven principles for successful divestiture. 14 Strategic Alliances & Joint Ventures: Motives Strategic alliances & joint ventures are cooperative relationships between two (or more) firms with potential advantages. Ability to enter new markets through Greater financial resources Greater marketing expertise Ability to reduce manufacturing or other costs in the value chain Ability to develop & diffuse new technologies ©McGraw-Hill Education. Strategic alliances and joint ventures are assuming an increasingly prominent role in the strategy of leading firms, both large and small. A strategic alliance can help firms better understand customer needs, acquire know-how for promoting the product, acquire access to the proper distribution channels. Example = Zara cooperating with Tata in India. Strategic alliances enable firms to pool capital, value-creating activities, or facilities in order to reduce costs. Example = PGA and LPGA tours joined together to save costs in marketing and joint utilization of media platforms. Strategic alliances may also be used to build jointly on the technological expertise of two or more companies, enabling them to develop products beyond the capability of other companies acting independently. Example = alliance between Ericsson and Cisco in Strategy Spotlight 6.5 allowed for development of new telecommunication equipment. 15 Strategic Alliances & Joint Ventures: Limitations Need for the proper partner: Partners should have complementary strengths. Partner’s strengths should be unique. Uniqueness should create synergies. Synergies should be easily sustained & defended. Partners must be compatible & willing to trust each other. ©McGraw-Hill Education. Despite their promise, many alliances and joint ventures fail to meet expectations for a variety of reasons. The proper partner is essential. However, unfortunately, often little attention is given to nurturing the close working relationship and interpersonal connections that bring together the partnering organizations. 16 Internal Development Corporate entrepreneurship & new venture internal development motives: No need to share the wealth with alliance partners. No need to face difficulties associated with combining activities across the value chains. No need to merge diverse corporate cultures. No need for external funding for new development. Limitations: Time-consuming Need to continually develop new capabilities ©McGraw-Hill Education. Internal development = entering a new business through investment in new facilities, often called corporate entrepreneurship and new venture development. Internal development is such an important means by which companies expand their businesses that there’s a whole chapter devoted to it – see Chapter 12. Compared to mergers and acquisitions, firms that engage in internal development capture the value created by their own innovative activities without having to share the wealth with alliance partners or face the difficulties associated with combining activities across the value chains of several firms or merging corporate cultures. On their own, firms can often develop new products or services that are relatively lower cost, and thus rely on their own resources rather than turning to external funding. However this may be time-consuming, so firms may forfeit the benefits of speed that growth through mergers or acquisitions can provide. In addition, firms that choose to diversify through internal development must develop capabilities that allow them to move quickly from initial opportunity recognition to market introduction. 17 International Strategy (1 of 2) Consider . . . The global marketplace provides many opportunities for firms to increase their revenue base and their profitability. However, managers face many opportunities and risks when they diversify abroad. What should a firm do in order to create value and attain a competitive advantage in this global marketplace? ©McGraw-Hill Education. The trade among nations has increased dramatically in recent years and it is estimated that by 2025, 45 percent of the Fortune Global 500 will be based in emerging economies, which are now producing world-class companies with huge domestic markets and a commitment to invest in innovation. This makes international expansion a viable diversification strategy. In a variety of industries such as semiconductors, automobiles, commercial aircraft, telecommunications, computers, and consumer electronics, it is almost impossible to survive unless firms scan the world for competitors, customers, human resources, suppliers, and technology. Firms need to know how to be successful and create value when diversifying into global markets. Some of the questions that need to be answered include: What explains the level of success of a given industry in a given country? What are some of the major motivations and risks associated with international expansion? How can firms handle the opposing forces of cost reduction and local adaptation – should firms pursue international, global, multidomestic, or transnational strategies? What entry strategies should a firm choose in order to enter a foreign market? 1 International Strategy: Globalization 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? ©McGraw-Hill Education. Globalization = has two meanings. One is the increase in international exchange, including trade in goods and services as well as exchange of money, ideas, and information. Two is the growing similarity of laws, rules, norms, values, and ideas across countries. Globalization has undeniably created tremendous business opportunities for multinational corporations. One of the challenges with globalization is determining how to meet the needs of customers at very different income levels. In many developing economies, distributions of income remain much wider than they do in the developed world, leaving many impoverished even as the economies grow. The concept “bottom of the pyramid” refers to the practice of a multinational firm targeting its goods and services to the nearly 5 billion poor people in the world who inhabit developing countries. 2 Factors Affecting a Nation’s Competitiveness Michael Porter’s 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 ©McGraw-Hill Education. Some nations and their industries are more competitive than others. Understanding these differences helps a firm create a competitive advantage when it expands internationally. Diamond of national advantage = a framework for explaining why countries foster successful multinational corporations, consisting of four factors – factor endowments; demand conditions; related and supporting industries; and firm strategy, structure, and rivalry. These four attributes jointly determine the playing field that each nation establishes and operates for its industries. Factor endowments = a nation’s position in factors of production. Demand conditions = the nature of home-market demand for the industry’s product or service. Related and supporting industries = the presence, absence and quality in the nation of supplier industries and other related industries that supply services, support, or technology to firms in the industry value chain. Firm strategy, structure, and rivalry = the conditions in the nation governing how companies are created, organized, and managed, as well as the nature of domestic rivalry. 3 Factors Affecting a Nation’s Competitiveness: Factor Endowments 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 ©McGraw-Hill Education. Factors of production are the building blocks that create usable consumer goods and services. Companies in advanced nations seeking competitive advantage over firms in other nations create many of these factors of production. For example, a country or industry dependent on scientific innovation must have a skilled human resource pool to draw upon. This resource pool is not inherited; it is created through investment in industry–specific knowledge and talent. The actual pool of resources is less important than the speed and efficiency with which these resources are deployed. Thus, firm-specific knowledge and skills created within a country that are rare, valuable, difficult to imitate, and rapidly and efficiently deployed are the factors of production that ultimately lead to a nation’s competitive advantage. The island nation of Japan is given as an example. 4 Factors Affecting a Nation’s Competitiveness: Demand Conditions 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. ©McGraw-Hill Education. Consumers who demand highly specific, sophisticated products and services force firms to create innovative, advanced products and services to meet the demand. This consumer pressure presents challenges to a country’s industries. Countries with demanding consumers drive firms in that country to meet high standards, upgrade existing products and services, and create innovative products and services. The conditions of consumer demand influence how firms view a market. This, in turn, helps the nation’s industries to better anticipate future global demand conditions and proactively respond to product and service requirements. Denmark is given as an example. 5 Factors Affecting a Nation’s Competitiveness: Related & Supporting Industries 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 ©McGraw-Hill Education. A home country’s industries can become a source of competitive advantage when related and supporting industries are developed. Countries with a strong supplier base benefit by adding efficiency to downstream activities. A competitive supplier base helps a firm obtain inputs using cost effective, timely methods, thus reducing manufacturing costs. Also, close working relationships with suppliers provide the potential to develop competitive advantages through joint research and development and the ongoing exchange of knowledge. Related industries create the probability that new companies will enter the market, increasing competition and forcing existing firms to become more competitive through efforts such as cost control, product innovation, and novel approaches to distribution. Combined, these give the home country’s industries a source of competitive advantage. The Italian footwear industry is given as an example. 6 Factors Affecting a Nation’s Competitiveness: Firm Strategy 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. Response to rivalry is a strong indicator of global competitive success. ©McGraw-Hill Education. Rivalry is particularly intense in nations with conditions of strong consumer demand, strong supplier bases, and high new entrant potential from related industries. This competitive rivalry in turn increases the efficiency with which firms develop, market, and distribute products and services within the home country. Domestic rivalry thus provides a strong impetus for firms to innovate and find new sources of competitive advantage. This intense rivalry forces firms to look outside their national boundaries for new markets, setting up the conditions necessary for global competitiveness. Domestic rivalry is perhaps the strongest indicator of global competitive success. Firms that have experienced intense domestic competition are more likely to have designed strategies and structures that allow them to successfully compete in world markets. The European grocery retail industry is given as an example. 7 Example: Factors Affecting a Nation’s Competitiveness Exhibit 7.2 India’s Diamond in Software Source: From Kampur D.,and Ramamurti R., “India’s Emerging Competition Advantage in Services,” Academy of Management Executive: The Thinking Managers Source. Copyright © 2001 by Academy of Management. Jump to Appendix 1 for long description. ©McGraw-Hill Education. Firms that succeed in global markets have first succeeded in intensely competitive home markets. Competitive advantage for global firms typically grows out of relentless, continuing improvement and innovation. The Indian software industry offers a clear example of how the attributes in Porter’s “diamond” interact to lead to the conditions for a strong industry to grow. See Strategy Spotlight 7.1 for information on how mutually reinforcing elements work in this market. 8 International Strategies: Entry Modes Options for international market expansion include: Exporting Low risk, locals know more; but products may not meet local needs Licensing or franchising Limits risk; but licensor gives up control & profit Strategic alliance or joint venture Shares risk; but trust & culture issues can lead to conflict Wholly owned subsidiary Greatest control, highest returns; but expensive, greater potential for miss-steps ©McGraw-Hill Education. A firm has many options available to it when it decides to expand into international markets. Exporting = producing goods in one country to sell to residents of another country. This strategy enables the firm to invest the least amount of resources in terms of its product, its organization, and its overall corporate strategy. However, the firm has a limited ability to tailor its products to meet local market needs. Licensing = a contractual arrangement in which a company receives a royalty or fee in exchange for the right to use its trademark, patent, trade secret, or other valuable intellectual property. Franchising = a contractual arrangement in which a company receives a royalty or fee in exchange for the right to use its intellectual property; it usually involves a longer time period than licensing and includes other factors, such as monitoring of operations, training, and advertising. Franchising has the advantage of limiting the risk exposure that a firm has in overseas markets while, at the same time, the firm is able to expand the revenue base of the company. An advantage of licensing is that the firm granting a license incurs little risk, since it does not have to invest any significant resources into the country itself. In turn, the licensee (the firm receiving the license) gains access to the trademark, patent, and so on, and is able to potentially create competitive advantages. However, the licensor gives up control of its product and forgoes potential revenues and profits. Strategic alliances and joint ventures allow firms to increase revenues and reduce costs as well as enhance learning and diffuse technologies. However, trust is a vital element. (Remember the discussion of this in Chapter 6.) Wholly Owned Subsidiary = a business in which a multinational company owns 100% of the stock. A firm can establish a wholly owned subsidiary by acquiring an existing company in the home country or developing a totally new operation, often referred to as a “greenfield venture.” This can be expensive and risky, and is most appropriate where a firm already has the appropriate knowledge and capabilities that it can leverage rather easily through multiple locations. 9 International Strategies: Entry Modes, Chart Exhibit 7.8 Entry Modes for International Expansion Jump to Appendix 3 for long description. ©McGraw-Hill Education. Given the challenges associated with entry into international markets, many firms first start on a small-scale and then increase their level of investment and risk as they gain greater experience with the overseas market in question. The various types of entry form a continuum ranging from exporting (low investment and risk, low control) to a wholly owned subsidiary (high investment and risk, high control). Entry strategies can follow this progression. The key tradeoff in each of these strategies is the level of investment or risk versus the level of control, but many firms do not follow such an evolutionary approach, preferring to adopt one and develop as needed. 10 International Strategies: Entry Modes Refer to the smart book on LMS for the Benefits + Risk and Limitations For each Entry Mode ©McGraw-Hill Education. A firm has many options available to it when it decides to expand into international markets. Exporting = producing goods in one country to sell to residents of another country. This strategy enables the firm to invest the least amount of resources in terms of its product, its organization, and its overall corporate strategy. However, the firm has a limited ability to tailor its products to meet local market needs. Licensing = a contractual arrangement in which a company receives a royalty or fee in exchange for the right to use its trademark, patent, trade secret, or other valuable intellectual property. Franchising = a contractual arrangement in which a company receives a royalty or fee in exchange for the right to use its intellectual property; it usually involves a longer time period than licensing and includes other factors, such as monitoring of operations, training, and advertising. Franchising has the advantage of limiting the risk exposure that a firm has in overseas markets while, at the same time, the firm is able to expand the revenue base of the company. An advantage of licensing is that the firm granting a license incurs little risk, since it does not have to invest any significant resources into the country itself. In turn, the licensee (the firm receiving the license) gains access to the trademark, patent, and so on, and is able to potentially create competitive advantages. However, the licensor gives up control of its product and forgoes potential revenues and profits. Strategic alliances and joint ventures allow firms to increase revenues and reduce costs as well as enhance learning and diffuse technologies. However, trust is a vital element. (Remember the discussion of this in Chapter 6.) Wholly Owned Subsidiary = a business in which a multinational company owns 100% of the stock. A firm can establish a wholly owned subsidiary by acquiring an existing company in the home country or developing a totally new operation, often referred to as a “greenfield venture.” This can be expensive and risky, and is most appropriate where a firm already has the appropriate knowledge and capabilities that it can leverage rather easily through multiple locations. 11 Need for Entrepreneurial Strategy Consider . . . New technologies, shifting social and demographic trends, as well as sudden changes in the business environment can create opportunities for entrepreneurship. However, business opportunities can disappear as quickly as they appear. What do new ventures and entrepreneurial firms need to do to achieve and sustain a competitive advantage? ©McGraw-Hill Education. New ventures often face unique strategic challenges if they’re going to survive and grow. Whether the firm is an entrepreneurial startup, a small business, or an existing business entering a market or industry for the first time, it must rely on sound strategic principles to be successful. Entrepreneurial activity influences a firm’s strategic priorities and intensifies the rivalry among an industry’s close competitors. Even with a strong initial resource base, entrepreneurs are unlikely to succeed if their business ideas are easily imitated or the execution of the strategy falls short. Not only is it important for a firm to recognize an entrepreneurial opportunity, a firm must understand the competitive dynamics that are at work in the business environment in order to succeed with a growth opportunity. It’s important to have an effective competitive strategy. Note that here we focus on entrepreneurial strategy – the actions firms take to create new ventures in markets – but there’s also a related issue – how established firms can build or reinforce an entrepreneurial mindset as they strive to be innovative in markets in which they already compete. This will be covered in Chapter 12. 1 Recognizing Entrepreneurial Opportunities Entrepreneurship involves value creation and the assumption of risk. New value can be created in many contexts. Startup ventures Major corporations Family-owned businesses Nonprofit organizations Established institutions Ideas and opportunities can come from many sources. Change or chance can uncover unmet customer needs. ©McGraw-Hill Education. Entrepreneurship = the creation of new value by an existing organization or new venture that involves the assumption of risk. Even though entrepreneurial activity is usually associated with startup companies, new value can be created in many different contexts. Startup venture ideas can come from: current or past work experiences, hobbies or suggestions by friends or family. For established firms, opportunities can come from: existing customers, suggestions by suppliers, technological developments. For all firms, change or chance events can uncover unmet consumer needs. 2 Entrepreneurial Opportunity Analysis Exhibit 8.1 Opportunity Analysis Framework Source: Based on Timmons, J.A., & Spinelli, S. 2004. New Venture Creation (6th edition). New York: McGraw Hill/Irwin; and Bygrave, W.D. 1997. The Entrepreneurial Process. In W.D. Bygrave (Ed.), The Portable MBA in Entrepreneurship (2nd edition). New York: Wiley. ©McGraw-Hill Education. For an entrepreneurial venture to create new value, three factors must be present – an entrepreneurial opportunity, the resources to pursue the opportunity, and an entrepreneur or entrepreneurial team willing and able to undertake the opportunity. The entrepreneurial strategy that an organization uses will depend on these three factors. Thus, beyond merely identifying a venture concept, the opportunity recognition process also involves organizing the key people and resources that are needed to go forward. 3 Entrepreneurial Opportunity Recognition Entrepreneurial opportunities require opportunity recognition. Two phases of activity: Discovery Becoming aware of a new business concept Evaluation Analyzing the opportunity to determine whether it is viable or feasible to develop further ©McGraw-Hill Education. Opportunity recognition = the process of discovering and evaluating changes in the business environment, such as a new technology, socio-cultural trends, or shifts in consumer demand, that can be exploited. Changes in the external environment can lead to new business creation, but the discovery of these new ideas is not enough. They then need to be evaluated to find out if they’re strong enough to become new ventures. Entrepreneurs must go through a process of identifying, selecting, and developing potential opportunities. 4 Entrepreneurial Opportunities: Discovery Discovery phase – Becoming aware of the new business concept. Ask: Where are the new venture opportunities? What might be a creative solution to a business problem? Can be spontaneous and unexpected Can also result from a deliberate search Are there frustrations with current products or processes? Do stakeholders have unmet needs? What do other markets or industries do? Can we revive old ideas? ©McGraw-Hill Education. The discovery phase refers to the process of becoming aware of a new business concept. Many entrepreneurs report that their idea for a new venture came through some unexpected insight, often based on their prior knowledge, that gave them an idea for a new business. The discovery of new opportunities is often spontaneous and unexpected. Opportunity discovery may also occur as the result of a deliberate search for new venture opportunities or creative solutions to business problems. Viable opportunities often emerge only after a concerted effort. To stimulate the discovery of new opportunities, companies often encourage creativity, out-of-the-box thinking, and brainstorming. A more structured search for entrepreneurial ideas can come from looking at what’s bugging you – what frustrations do you have with current products or processes? Or from talking to suppliers, customers or front line workers to see how needs aren’t being met, or borrowing ideas from other markets or industries, or being inspired by history and reviving good ideas that have slipped out of practice, but might be valued in the market again. 5 Entrepreneurial Opportunities: Evaluation Evaluation phase – Analyzing the viability of an opportunity Talk to potential target customers. Identify operational requirements. Conduct a feasibility analysis. What is the market potential? Is the idea strong enough to create value, and therefore, profits ? Viable opportunities have the following qualities: They are attractive. They are achievable. They are durable. They are value-creating. ©McGraw-Hill Education. The evaluation phase occurs after an opportunity has been identified, and involves analyzing this opportunity to determine whether it is viable and strong enough to be developed into a full-fledged new venture. Ideas developed by new product groups or in brainstorming sessions are tested by various methods, including talking to potential target customers and discussing operational requirements with production or logistics managers. Feasibility analysis is used to evaluate these and other critical success factors. This type of analysis often leads to the decision that a new venture project should be discontinued. Only if the venture concept continues to seem viable would a more formal business plan be developed. Among the most important factors to evaluate is the market potential for the product or service. New ventures must first determine whether a market exists for the product or service they are contemplating. For an opportunity to be viable, it needs to have four qualities. The opportunity must be attractive in the marketplace; that is, there must be market demand for the new product or service. The opportunity must also be achievable: it must be practical and physically possible. The opportunity must be durable or attractive long enough for the development and deployment to be successful; that is, the window of opportunity must be open long enough for it to be worthwhile. And finally the opportunity must be value-creating and potentially profitable; that is, the benefits must surpass the cost of development by a significant margin. If a new business concept meets these criteria, two other factors must be considered before the opportunity is launched as a business: the resources available to undertake it, and the characteristics of the entrepreneur pursuing it. 6 Entrepreneurial Resources Resources are essential for entrepreneurial success. Financial resources Human capital Social capital Government resources ©McGraw-Hill Education. Resources are an essential component of a successful entrepreneurial launch. For startups, the most important resource is usually money because a new firm typically has to expend substantial sums just to start the business. However, financial resources are not the only kind of resource a new venture needs. Human capital and social capital are also important. Many firms also rely on government resources to help them thrive. 7 Entrepreneurial Financial Resources Financial resources depend on the stage of venture development & venture scale. Initial, startup financing Personal savings, family, and friends Crowdfunding Early-stage financing Bank financing, angel investors Later-stage financing Commercial banks, venture capitalists equity financing ©McGraw-Hill Education. Entrepreneurial firms must have financing. In fact, the level of available financing is often a strong determinant of how the business is launched and its eventual success. Cash finances are, of course, highly important, but access to capital, such as a line of credit or favorable payment terms with the supplier, can also help a new venture succeed. The types of financial resources that may be needed depend on two factors: the stage of venture development and the scale of the venture. The majority of new firms are low-budget startups launched with personal savings and the contributions of family and friends, and can also appeal to the public through a crowdfunding website such as Kickstarter. (See Case: Kickstarter) Crowdfunding = funding a venture by pooling small investments from a large number of investors, often raised on the internet. Angel investors = private individuals who provide equity investments for seed capital during the early stages of a new venture. These outside investors favor companies that already have a winning business model and dominance in a market niche. Once a venture has established itself as a going concern, other sources of financing become readily available, such as commercial loans taken out by the business. Venture capitalists = companies organized to place their investors’ funds in lucrative business opportunities. Through venture capitalists, entrepreneurs can raise money by selling shares in the new venture. Businesses with extensive development costs or firms on the brink of rapid growth are likely to turn to venture capitalists. 8 Entrepreneurial Human, Social & Governmental Resources Human capital Strong, skilled management Social capital Extensive social contacts & strategic alliances Technology, manufacturing, or retail alliances Federal, state, & local government resources Government contracting Loan guarantee programs Training, counseling, & support services ©McGraw-Hill Education. Bankers, venture capitalists, and angel investors agree that the most important asset an entrepreneurial firm can have is strong and skilled management. Managers need to have a strong base of experience and extensive domain knowledge, as well as an ability to make rapid decisions and change direction as shifting circumstances may require. Startups with multiple partners are more likely to succeed. New ventures founded by entrepreneurs who have extensive social contacts are also more likely to succeed. In addition, strategic alliances can provide a key avenue for growth. By partnering with other companies, through technology, manufacturing, or retail licensing agreements, young or small firms can expand or give the appearance of entering numerous markets or handling a range of operations. In the United States, the federal, state, and local government provides support for entrepreneurial firms in two key areas – financing and government contracting. Through government contracting, small businesses have the opportunity to bid on contracts to provide goods and services to the government. Regarding financing, the small business administration (SBA) has several loan guarantee programs designed to support the growth and development of entrepreneurial firms. The government itself does not typically lend money but underwrites loans made by banks to small businesses, thus reducing the risk associated with lending to firms with unproven records. Local offices offer training, counseling, and support services. 9 Entrepreneurial Leadership Entrepreneurial leadership needs: Courage Belief in one’s convictions Energy to work hard Leadership personality traits: Higher self-confidence, conscientiousness, openness to new experiences, emotional stability Lower agreeableness Leadership characteristics: Vision Dedication and drive Commitment to excellence ©McGraw-Hill Education. Launching a new venture requires a special kind of leadership. Entrepreneurial leadership = leadership appropriate for new ventures that requires courage, belief in one’s convictions, and the energy to work hard even in difficult circumstances, and that embodies vision, dedication and drive, and commitment to excellence. Entrepreneurs tend to have the following personality traits that distinguish them from corporate managers: higher self-confidence; a higher degree of organization, persistence and hard work in pursuit of goal attainment; more intellectual curiosity; a higher ability to handle ambiguity, less likely to be overcome by anxieties; and lower agreeableness, typically looking out for their own self-interest, willing to influence or manipulate others for their own advantage. However, ventures built on the charisma of a single person may have trouble growing “from good to great” once that person leaves. Thus, the leadership that is needed to build a great organization is usually exercised by a team of dedicated people rather than a single leader. The leadership team must attract members who fit with the company’s culture, goals, and work ethic. For a venture’s leadership to be a valuable resource and not a liability it must be cohesive in its vision, drive and dedication, and commitment to excellence. 10 Entrepreneurial Leadership: Vision, Drive & Dedication Vision is an entrepreneur’s most important asset. Requires transformational leadership Ability to envision realities that do not yet exist Ability to share this vision with others Drive & dedication are necessary. Involves internal motivation Calls for intellectual commitment Requires patience Stamina, willingness to work long hours Enthusiasm that attracts others ©McGraw-Hill Education. Vision may be an entrepreneur’s most important asset. Entrepreneurs envision realities that do not yet exist. With vision, entrepreneurs are able to exercise a kind of transformational leadership that creates something new and, in some way, changes the world. In order to develop support, get financial backing, and attract employees, entrepreneurial leaders must share their vision with others. Drive and dedication are reflected in hard work. Drive involves internal motivation; dedication calls for intellectual commitment that keeps an entrepreneur going even in the face of bad news or poor luck. They both require patience, stamina, and a willingness to work long hours. The dedicated entrepreneur’s enthusiasm is also important – it attracts others to the business to help with the work. 11 Entrepreneurial Leadership: Commitment to Excellence Commitment to excellence is required. Commit to knowing the customer. Provide quality goods and services. Pay attention to details. Continuously learn. Connect the dots. Hire people smarter than themselves. ©McGraw-Hill Education. Excellence requires entrepreneurs to commit to knowing the customer, providing quality goods and services, paying attention to details, and continuously learning. Entrepreneurs who achieve excellence are sensitive to how these factors work together. The most successful entrepreneurs often report that they owed their success to hiring people smarter than themselves. 12 Competitive Dynamics New entry threatens existing competitors. Competitive dynamics helps explain why competitive strategies evolve and how to respond. Need to identify new competitive action. Engage in threat analysis. Have the motivation and capability to respond. Understand the types of competitive action. Evaluate the likelihood of competitive reaction. ©McGraw-Hill Education. New entry into markets, whether by startups or by incumbent firms, nearly always threatens existing competitors. As a result, the competitive actions of the new entrants are very likely to provoke negative response from companies that feel threatened. Competitive dynamics = intense rivalry, involving actions and responses among similar competitors vying for the same customers in a marketplace. Intense rivalry among similar competitors has the potential to alter a company’s strategy. New entry is among the most common reasons why a cycle of competitive actions and reactions gets started. It might also occur because of threatening actions among existing competitors, such as aggressive cost-cutting. Thus, studying competitive dynamics helps explain why strategies evolve and reveals how, why, and when to respond to the actions of close competitors. New competitive action = acts that might provoke competitors to react, such as new market entry, price-cutting, imitating successful products, and expanding production capacity. Threat analysis = a firm’s awareness of its closest competitors and the kinds of competitive actions they might be planning. 13 Competitive Dynamics Model Exhibit 8.4 Model of Competitive Dynamics Source: Adapted from Chen, M.J. 1996. Competitor Analysis and Interfirm Rivalry: Toward a Theoretical Integration. Academy of Management Review, 21(1): 100-134; Ketchen, D.J., Snow, C.C., & Hoover, V.L. 2004. Research on Competitive Dynamics: Recent Accomplishments and Future Challenges. Journal of Management, 30(6): 779-804; and Smith, K.G., Ferrier, W.J., & Grimm, C.M. 2001. King of the Hill: Dethroning the Industry Leader . Academy of Management Executive, 15(2): 59-70. Jump to Appendix 1 for long description. ©McGraw-Hill Education. Exhibit 8.4 identifies the factors competitors need to consider when determining how to respond to a competitive act. 14 Competitive Dynamics: Why Launch Actions? Why do companies launch new competitive actions? To improve market position To capitalize on growing demand To expand production capacity To provide an innovative new solution To obtain first mover advantages To strengthen financial outcomes & capture profits To grow the business ©McGraw-Hill Education. When a company enters a market for the first time, it is an attack on existing competitors. In addition, price-cutting, imitating successful products, or expanding production capacity are all examples of competitive acts that might provoke a reaction. Companies are motivated to launch competitive challenges because they want to strengthen financial outcomes, capture some of the extraordinary profits that industry leaders enjoy, and grow the business. They also may want to build their reputation for innovativeness or efficiency. The likelihood that a competitor will launch an attack depends on many factors. Some of these factors include competitor analysis, market conditions, types of strategic actions available, and the resource endowments and capabilities companies need in order to take this competitive action. 15 Competitive Dynamics: Incumbents Competition among incumbent rivals can involve “hardball” strategies. Devastating rivals’ profit sanctuaries Plagiarizing with pride Deceiving the competition Unleashing massive & overwhelming force Raising competitors’ costs ©McGraw-Hill Education. Competitive attacks can come from many sources besides new entrants. Some of the most intense competition is among incumbent rivals intent on gaining strategic advantages. According to Boston Consulting Group authors George Stalk, Jr. and Rob Lachenauer, “winners in business play rough and don’t apologize for it.” Exhibit 8.5 outlines their five strategies for playing “hardball.” While the “big boys” are competing, it’s possible an entrepreneur might be able to take advantage of some of these activities. 16 Competitive Dynamics: Threat Analysis Threat analysis involves an assessment of: Market commonality Resource similarity How serious is the threat? Motivation & capability to respond means asking: What type of competitive response is necessary? What resources are needed to fend off a competitive attack? Am I willing & able to launch an action? Which competitive action should I take? ©McGraw-Hill Education. Awareness of the threats posed by industry rivals allows a firm to understand what type of competitive response, if any, may be necessary. Threat analysis = a firm’s awareness of its closest competitors and the kinds of competitive actions they might be planning. Competitive dynamics are likely to be most intense among companies that are competing for the same customers or who have highly similar sets of resources. Market commonality = the extent to which competitors are vying for the same customers in the same markets. Resource similarity = the extent to which rivals draw from the same types of strategic resources. When any two firms have both a high degree of market commonality and highly similar resource bases, a stronger competitive threat is present. Once attacked, competitors are faced with deciding how to respond: What is their motivation and capability to respond? Before deciding, they need to evaluate not only how they will respond, but also their reasons for responding and their capability to respond: How serious is the attack, and what might be the intent of the competitive response? Is it merely to blunt the attack of the competitor, or is it an opportunity to enhance its competitive position? Sometimes the most a company can hope for is to minimize the damage caused by a competitive action. Companies also have to consider what strategic resources can be deployed to fend off a competitive attack. Does the company have an array of internal strengths it can draw on, or is it operating from a position of weakness? 17 Competitive Dynamics: Actions Types of competitive actions include: Strategic actions Entering new markets Creating new product introductions Changing production capacity Pursuing mergers or alliances Tactical actions Doing price cutting (or offering increases) Making product/service enhancements Increasing marketing efforts Developing new distribution channels ©McGraw-Hill Education. Once an organization determines whether it is willing and able to launch a competitive action, it must determine what type of action is appropriate. The actions taken will be determined by both its resource capabilities and its motivation for responding. Two broadly defined types of competitive action include strategic actions and tactical actions. Strategic actions = major commitments of distinctive and specific resources to strategic initiatives. Tactical actions= refinements or extensions of strategies usually involving minor resource commitments. See Exhibit 8.6 for some examples. 18