Monday, April 19, 2010

Global Strategic Management Final Exam

Answer all three questions below and attach to this sheet

1. In Mature industries, firms often attempt to protect their competitive advantage. Examples of such an industry are: airlines, retail, coffee sales and fast food. Discuss what strategies firms in these industries use to deter entry and manage rivalry. Provide a detailed discussion of each strategy.

Naturally, when an industry enters maturity, barriers to entry increase.

Such barriers to entry include:
  • Intellectually property protection
  • Network effect
  • Economies of scale

Additionally, the threat of entry from potential competitors decrease because the financial opportunities aren't as prevalent as they are in growth industries.

Because there are fewer entrants, the existing firms begin to compete for market share, driving down prices, which can lead to price wars as evidenced from the airline industry.

To survive a price war, firms will begin focusing on minimizing costs, allowing them to become the price leader or building brand loyalty through differentiation so they can maintain price while not losing a large share of the market.

Strategies to build brand loyalty through differentiation include:
  • Excellent after-sales service
  • Marketing/Advertising
  • Customization
  • Response Time
  • Service/Product Innovation
  • Quality
  • Targeting market segments

Strategies that focus on minimizing costs include:
  • Direct to consumer selling
  • Lowering cost structures
  • Process Innovation
  • Targeting average customer
  • Increase inventory turnover and reduce cost of goods sold

These factors lead to higher barriers to entry and tend to create an oligopoly in the mature industry where companies try to avoid price wars and acknowledge that they are all interdependent. Combined with stable demand, this allows the firms in the oligopoly to enter into price-leadership agreements, reducing the threat of rivalry. 

2. Discuss how the need for control over foreign operations varies with the strategy and distinctive competencies of a company. What are the implications of this relationship for the choice of entry mode?

Pressures for cost reductions and pressures to be locally responsive are the two competitive pressures facing companies competing in the global marketplace. Unfortunately for these companies, these two forces put conflicting demands on a company.

In the world of cost leadership vs. differentiation, cost reduction in the global market falls under cost leadership while being locally responsive means differentiation by having a product or service that uniquely serves each of your markets best. Different nations have different preferences, tastes and culture. 

There are for main strategies companies can take for operating on a global market.

  1. Global Standardization: This strategy focuses on increasing profitability by reaping the cost reductions that come from economies of scale and location economies. These companies standardize their product or service in order to pursue a low-cost strategy on a global scale. Companies that face high pressure for cost reductions and low pressure for local responsiveness should pursue this strategy.
  2. Localization: Companies that pursue this strategy focus on differentiating their product or service to uniquely match the tastes and preferences in their different national markets. Companies that face low pressure for cost reductions and high pressure for local responsiveness should pursue this strategy.
  3. Transnational: This strategy looks to achieve the best of both Global Standardization and Localization simultaneously. That is both low costs and differentiation. Since these are competing goals, such a strategy is very difficult. Companies that face both high pressure for cost reductions and high pressure for local responsiveness should pursue this strategy.
  4. International: Global companies that don't face competition and sell a product that serves a universal need or needs don't need to differentiate their product to local tastes and preferences or cut costs. Companies that face both low pressure for cost reductions and low pressure for local responsiveness should pursue this strategy.

Additionally, there are five main choices for control over foreign operations.

  1. Exporting: Exporting avoids the costs of establishing manufacturing operations in host countries and should be pursued by companies that can produce the good cheaper domestically and ship it. Transport costs and tariff barriers hinder exporting.
  2. Licensing: This is when a foreign licensee buys the rights to product a company's product in the licensee's country for a negotiated feed and the licensee puts up most of the capital necessary to get the overseas operation underway.
  3. Franchising: Franchising shares many of the traits of licensing, but involves longer-term commitments and insists that the franchisee agree to abide by strict rules about how it does business.
  4. Joint Ventures: Joint ventures occur when a global company partners with a company that is established in the host country, allowing the global company to benefit from the local partner's knowledge of the host country's competitive conditions, culture, language, political systems and business systems.
  5. Wholly Owned Subsidiaries: This is when a parent company owns 100% of the stock of a company in a host country. This gives the global company tight control over production.

Generally speaking as we go from 1 to 5, we get more expensive, but also get more control. For example exporting is appropriate for companies facing the most pressure to reduce cost while wholly owned subsidiaries are appropriate for companies that need tight control over production and face pressure to be locally responsive.

The distinctive competencies of a company also affect what choice it should make. If a company's distinctive competency is based on proprietary technology, entering into a joint venture may risk losing control over that technology. 

Companies with distinctive competencies in technological know-how should avoid licensing and joint ventures, minimizing the risk of losing control of that technology. Companies of this type that are considering expanding into other countries should consider a wholly owned subsidiary in the host country to maintain control over this technology.

On the other hand, companies with distinctive competencies in management know-how don't face that great a risk of losing their management skills to franchisees or joint-venture partners and should pursue these arrangements for global strategy.

3. Explain in detail how the four building blocks of competitive advantage are related to each other. Provide detail on the relationships. Why is innovation often called the single most important building block?

As the text points out, there are four building blocks that a company can use to help build and sustain a competitive advantage. The book refers to these as "generic competencies," which allow a company to differentiate its product offering, and hence offer more utility to its customers and/or lower its cost structure. Thus these for building blocks worth together to form a company's competitive advantage. The are:

  • Efficiency: This is basically inputs over outputs. The more efficient a company is, the fewer inputs (cost) are required to produce a given output (product/service/etc).
  • Quality: This includes the form, features, performance, durability, reliability, style and design of a product or service. When consumers perceive that the attributes of a product or service provide them with higher utility than the attributes of a competitor's product or service, the product or service has superior quality. High-quality products provide more utility to customers and allow for greater efficiency and lower unit costs because of less time spent with customer service and returns. 
  • Innovation: This is the act of creating or improving new products or processes. There is product innovation, which is the development of new or improved products and process innovation, which is the development of a new or improved process for producing products and delivering them to customers. Product innovation creates more utility for costumers, thus increasing the product's value while process innovation allows for a company to sell the product at a lower price, raising the product's value to consumers.
  • Responsiveness: This is the process of identifying and satisfying customers. A company that does this better than competitors will create more utility for its products because its customers will be more satisfied with the overall experience of buying and using the company's product or service. The quality of a product is directly related to responsiveness because a high quality product does not require complicated support. Innovation, as well, is directly related to responsiveness because it is the process of using customer feedback to improve existing features or add missing features to a product or service.

The text calls innovation "perhaps the most important building block of competitive advantage" because competition is driven by these innovations. Successful innovations, at least for a time, give a company something unique, thus adding to or creating competitive advantage. The competitive advantage can lead to differentiation, allowing the company to charge a premium price, or to a reduction in cost, allowing the company to lower price to consumer.

Additionally, innovation touches directly on each of the other three building blocks. Process innovation can help a company produce its offering more efficiently or increase or add efficiencies to a company's product. Innovation can also directly affect the quality of a product by improving the performance, durability or reliability of a product or indirectly through process innovation, allowing the company to more cost-effectively add features to a product. Innovation, as well, is directly related to responsiveness because it is the process of using customer feedback to improve existing features or add missing features to a product or service. Finally, innovation affects innovation. Process innovation gives a company more resources to shift toward R&D. Also, product innovation, such as we see at Apple, necessitates more innovation to satisfy the next generation of product.

In the end, the four building blocks work together to form a company's distinctive competencies which then allow the company to pursue competitive advantage through either cost-leadership or differentiation.

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