module 5 - generic competitive strategies

7/31/2019 Module 5 - Generic Competitive Strategies

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Competitive strategy is about being

different. It means deliberately

choosing to perform activities

differently or to perform different

activities than rivals to deliver aunique mix of value.

Michael E. Porter


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Chapter Roadmap

Five Competitive Strategies

Low-Cost Provider Strategies

Differentiation Strategies

Best-Cost Provider Strategies

Focused (or Market Niche) Strategies

The Contrasting Features of the Five GenericCompetitive Strategies: A Summary


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Strategy and

Competitive Advantage

Competitive advantageexists when a firmsstrategy gives it an edge in

Attracting customers and

Defending against competitive forces

Convince customers firms product / serviceoffers superior value

A good productat a low price

A superior productworth paying more for

A best-value product

Key to Gaining a Competitive Advantage


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What Is

Competitive Strategy?

Deals exclusively with a companysbusinessplans to compete successfully

Specific efforts toplease customers

Offensive and defensive movesto counter maneuvers of rivals

Responses to prevailing market conditions

Initiatives to strengthen its market position

Narrower in scope than business strategy


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Fig. 5.1: The Five Generic

Competitive Strategies


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Low-Cost Provider Strategies

Make achievement ofmeaningful lower costs

than rivals the themeof firms strategy

Includefeatures and services in product

offering that buyers consider essential

Find approaches to achieve a cost advantage

in ways difficultfor rivals to copy or match

Low-cost leadership means low

overall costs, not just low

manufacturing or production costs!

Keys to Success


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Options: Achieving a

Low-Cost Advantage

Option 1: Use lower-cost edge to

Underprice competitors and attractprice-sensitive buyers in enough

numbers to increase total profits

Option 2: Maintain present price, be content withpresent market share, and use lower-cost edge to

Earn a higher profit margin oneach unit sold, therebyincreasing total profits


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Nucor Corporations

Low-Cost Provider Strategy

Eliminate some production processes from value chain used by traditionalintegrated steel mills; cut investment in facilities and equipment

Strive hard for continuous improvement in the efficiency of its plants andfrequently invest in state-of-the art equipment to reduce unit costs

Carefully select plan sites to minimize inbound and outbound shipping costsand to take advantage of low rates for electricity

Hire a nonunion workforce that uses team-based incentive compensationsystems

Heavily emphasize consistent product quality and maintain rigorous qualitysystems

Minimize general and administrative expenses by maintaining a lean staff atcorporate headquarters and allowing only 4 levels of management


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Approaches to Securing

a Cost Advantage

Do a better job than rivals of

performing value chain activities

efficiently and cost effectively

Revamp value chain to bypass cost-

producing activities that add little

value from the buyers perspective

Approach 1

Approach 2

Controlcosts!

By-passcosts!


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Approach 1: Controlling

the Cost Drivers

Capture scale economies; avoid scale diseconomies

Capture learning and experience curve effects

Manage costs of key resource inputs

Consider linkages with other activities in value chain

Find sharing opportunities with other business units

Compare vertical integration vs. outsourcing

Assess first-mover advantages vs. disadvantages

Control percentage of capacity utilization

Make prudent strategic choices related to operations


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Approach 2: Revamping

the Value Chain

Make greater use of Internet technology applications

Use direct-to-end-user sales/marketing methods

Simplify product design

Offer basic, no-frills product/service Shift to a simpler, less capital-intensive, or more

flexible technological process

Find ways to bypass use of high-cost raw materials

Relocate facilities closer to suppliers or customers

Drop something for everyone approach and focus ona limited product/service


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Keys to Success in Achieving

Low-Cost Leadership

Scrutinize each cost-creating activity, identifying cost drivers

Use knowledge about cost drivers to manage

costs of each activity down year after year

Find ways to restructure value chain to eliminatenonessential work steps and low-value activities

Work diligently to create cost-conscious corporate cultures

Feature broad employee participation in continuous cost-

improvement efforts and limited perks for executives

Strive to operate with exceptionally small corporate staffs

Aggressively pursue investments in resources and capabilities

that promise to drive costs out of the business


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Characteristics of a

Low-Cost Provider

Cost conscious corporate culture

Employee participation in cost-control efforts

Ongoing efforts to benchmark costs

Intensive scrutiny of budget requests

Programs promoting continuous costimprovementSuccessful low-cost producerschampion

frugalitybut wisely and aggressively

invest in cost-saving improvements !


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When Does a Low-Cost

Strategy Work Best?

Price competition is vigorous

Product is standardized or readily availablefrom many suppliers

There are few ways to achieve

differentiation that have value to buyers Most buyers use product in same ways

Buyers incur low switching costs

Buyers are large and have

significant bargaining power Industry newcomers use introductory low prices to

attract buyers and build customer base


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Pitfalls of Low-Cost Strategies

Being overly aggressive in cutting price

Low cost methods are easily imitated by rivals

Becoming too fixated on reducing costs

and ignoring

Buyer interest in additional features

Declining buyer sensitivity to price

Changes in how the product is used

Technological breakthroughs open up costreductions for rivals


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Incorporate differentiating features that causebuyers topreferfirmsproduct or service overbrands of rivals

Find ways to differentiate that create value for

buyers and are not easily matchedor cheaplycopiedby rivals

Not spending more to achieve differentiationthan theprice premium that can be charged

Objective

Keys to Success


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Benefits of Successful Differentiation

A product / service with unique, appealing

attributes allows a firm to

Command apremium priceand/or

Increase unit salesand/or

Buildbrand loyalty

= Competitive Advantage

Whichhat is

unique?


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Types of Differentiation Themes

Unique taste -- Dr. Pepper

Multiple features -- Microsoft Windows and Office

Wide selection and one-stop shopping -- Home Depot andAmazon.com

Superior service -- FedEx, Ritz-Carlton Spare parts availability-- Caterpillar

More for your money-- McDonalds, Wal-Mart

Prestige -- Rolex

Quality manufacture -- Honda, Toyota

Technological leadership -- 3M Corporation

Top-of-line image -- Ralph Lauren, Chanel, Cross


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Sustaining Differentiation: Keys to


Most appealing approaches to differentiation

Those hardest for rivals to match or imitate

Those buyers will find most appealing

Best choices to gain a longer-lasting, moreprofitable competitive edge

New product innovation

Technical superiority

Product quality and reliability Comprehensive customer service

Unique competitive capabilities


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Where to Find Differentiation

Opportunities in the Value Chain

Purchasing and procurement activities

Product R&D and product design activities

Production process / technology-relatedactivities

Manufacturing / production activities

Distribution-related activities

Marketing, sales, and customer serviceactivities

Internally

Performed

Activities,

Costs, &

Margins

Activities,

Costs, &

Margins of

Suppliers

Buyer/User

Value

Chains

Activities, Costs,

& Margins of

Forward Channel

Allies &

Strategic Partners


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How to Achieve a

Differentiation-Based Advantage

Approach 1

Incorporate features/attributes that raise theperformance a buyer gets out of the product

Approach 2

Incorporate features/attributes that enhance buyersatisfaction in non-economic or intangible ways

Approach 3

Compete on the basis ofsuperior capabilities

Approach 4

Incorporate product features/attributes thatlower buyers overall costs of using product


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Importance of Perceived Value

Buyers seldom pay for value that is not perceived

Price premium of a differentiation strategy reflects

Value actually deliveredto the buyer and

Value perceivedby the buyer

Actual and perceived value can differ when buyersare unable to assess their experience with aproduct


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Signaling Value as Well

as Delivering Value

Incomplete knowledge of buyers causes them tojudge value based on such signals as

Price

Attractive packaging

Extensive ad campaigns

Ad content and image Characteristics of seller

Facilities

Customers

Professionalism and personality of employees

Signals of value may be as important as actual value when Nature of differentiation is hard to quantify

Buyers are making first-time purchases

Repurchase is infrequent

Buyers are unsophisticated


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When Does a Differentiation

Strategy Work Best?

There are many ways to differentiate a productthat have value and please customers

Buyer needs and uses are diverse

Few rivals are following a similardifferentiation approach

Technological change andproduct innovation are fast-paced


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When Does a Differentiation

Strategy Work Best?

There are many ways to differentiate a productthat have value and please customers

Buyer needs and uses are diverse

Few rivals are following a similardifferentiation approach

Technological change andproduct innovation are fast-paced


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Pitfalls of


Buyers see little value in unique attributes of product

Appealing product features are easily copied by rivals

Differentiating on a feature buyers do not perceive aslowering their cost or enhancing their well-being

Over-differentiating such that productfeatures exceed buyers needs

Charging a price premiumbuyers perceive is too high

Not striving to open up meaningful gaps in quality,service, or performance features vis--vis rivalsproducts


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Best-Cost Provider Strategies

Combine a strategic emphasis on low-costwith astrategic emphasis on differentiation

Make an upscale product at a lower cost

Give customers more value for the money

Deliver superior value by meeting or exceedingbuyer expectations on product attributes andbeating their price expectations

Be the low-cost provider of a product with good-to-excellent product attributes, then use costadvantage to underprice comparable brands

Objectives


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Competitive Strength of a

Best-Cost Provider Strategy

A best-cost providers competitive advantagecomes from matchingclose rivals on key productattributes and beating them on price

Success depends on having the skills andcapabilities toprovide attractive performanceand

features at a lower cost than rivals

A best-cost producer can often out-compete both

a low-cost provider and a differentiator when Standardized features/attributes

wont meet diverse needs of buyers

Many buyers are price and value sensitive


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Risk of a Best-Cost

Provider Strategy

A best-cost providermay get squeezedbetween strategies of firms using low-costand

differentiation strategies

Low-cost leaders may be able to siphon

customers away with a lower price

High-end differentiators may be able to

steal customers away with better product

attributes


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Focus / Niche Strategies

Involve concentrated attention on a narrow piece ofthe total market

Serve niche buyers better than rivals

Choose a market niche where buyers have distinctivepreferences, special requirements, or unique needs

Develop unique capabilities to serve needs of targetbuyer segment

Objective

Keys to Success


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Approaches to Defining

a Market Niche

Geographic uniqueness

Specialized requirements in

using product/service

Special product attributes

appealing only to niche buyers


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Examples of Focus Strategies

eBay Online auctions

Porsche

Sports cars Jiffy Lube International

Maintenance for motor vehicles

Pottery Barn Kids

Childrens furniture and accessories Bandag

Specialist in truck tire recapping


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Focus / Niche Strategies

and Competitive Advantage

Achieve lower costs than

rivals in serving the segment --

A focused low-cost strategy

Offer niche buyers something

different from rivals --

A focused differentiation strategy

Approach 1

Approach 2 Whichhat is

unique

?


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What Makes a Niche

Attractive for Focusing?

Big enough to be profitable and offers good growthpotential

Not crucial to success of industry leaders

Costly or difficult for multi-segment competitorsto meet specialized needs of niche members

Focuser has resources and capabilitiesto effectively serve an attractive niche

Few other rivals are specializing in same niche

Focuser can defend against challengers via superiorability to serve niche members


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Risks of a Focus Strategy

Competitors find effective ways to matcha focusers capabilities in serving niche

Niche buyers preferences shift towards productattributes desired by majority of buyers nichebecomes part of overall market

Segment becomes so attractive it becomescrowded with rivals, causing segment profits tobe splintered


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Deciding Which Generic Competitive

Strategy to Use

Each positions a company differently in its marketand competitive environment

Each establishes a central theme for how acompany will endeavor to outcompete rivals

Each creates some boundaries for maneuveringas market circumstances unfold

Each points to different ways of experimentingwith the basics of the strategy

Each entails differences in product line,production emphasis, marketing emphasis, andmeans to sustainthe strategy

d h h


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Deciding Which Generic Competitive

Strategy to Use

Each positions a company differently in its market

Each establishes a central theme for how a company will

endeavor to outcompete rivals

Each creates some boundaries for maneuvering as market

circumstances unfold

Each points to different ways of experimenting with the

basics of the strategy

Each entails differences in product line, productionemphasis, marketing emphasis, and means to sustain the

strategyThe big risk Selecting a stuck in the middlestrategy!

This rarely produces a sustainable competitive

advantage or a distinctive competitive position.


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Fig 6 1: A Companys Menu of Strategy Options


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Fig. 6.1: A Company s Menu of Strategy Options

S i Alli d C ll b i


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Strategic Alliances and Collaborative

Partnerships

Companies sometimes use

strategic alliances or

collaborative partnerships to

complement their own strategicinitiatives and strengthen their

competitiveness. Such

cooperative strategies go beyond

normal company-to-company

dealings but fall short of merger

or full joint venture partnership.


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A Strategic Alliance

A Strategic Alliance is a relationship between

two or more parties to pursue a set of agreed

upon goals or to meet a critical business need

while remaining independent organizations

A partnership is an arrangement where parties

agree to cooperate to advance their mutualinterests


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Alliances Can Enhance a

Firms Competitiveness

Alliances and partnerships can help companies copewith two demanding competitive challenges

Racing against rivals to build amarket presence in many

different national markets

Racing against rivals to seizeopportunities on the frontiersof advancing technology

Collaborative arrangements can help a companylowerits costs and/or gain access to needed expertiseand capabilities

C i h F ll P i l


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Capturing the Full Potential

of a Strategic Alliance

Capacity of partners to defuse organizational frictions Ability to collaborate effectively over time and work through

challenges

Technological and competitive surprises

New market developments

Changes in their own prioritiesand competitive circumstances

Collaborative partnerships nearly always entailan evolvingrelationship whose competitive value depends on

Mutual learning

Cooperation

Adaptation to changing industry conditions

Competitive advantage emerges when a company acquires valuablecapabilities via alliances it could not obtain on its own

Wh Are Strategic


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Why Are Strategic

Alliances Formed?

To collaborate on technology development or newproduct development

To fill gaps in technical or manufacturing expertise

To acquire new competencies

To improve supply chain efficiency

To gain economies of scale in

production and/or marketing

To acquire or improve market access via jointmarketing agreements

i l fi f lli hi


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Potential Benefits of Alliances to Achieve

Global and Industry Leadership

Get into critical country markets quickly to accelerateprocess of building a global presence

Gain inside knowledge about unfamiliar markets andcultures

Access valuable skills and competencies concentratedin particular geographic locations

Establish a beachhead to participate in target industry

Master new technologies and build new expertise

faster than would be possible internally Open up expanded opportunities in target industry by

combining firms capabilities with resources of partners


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Why Alliances Fail

Ability of an alliance to endure depends on How well partners work together Success of partners in responding

and adapting to changing conditions Willingness of partners to

renegotiate the bargain Reasons for alliance failure

Diverging objectives and priorities of partners Inability of partners to work well together

Changing conditions rendering purpose of allianceobsolete Emergence of more attractive technological paths Marketplace rivalry between one or more allies


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Merger and Acquisition Strategies

Merger Combination and pooling of equals, withnewly created firm often taking on a new name

Acquisition One firm, the acquirer, purchases andabsorbs operations of another, the acquired

Merger-acquisition

Much-used strategic option

Especially suited for situations wherealliances do not provide a firm with neededcapabilities or cost-reducing opportunities

Ownership allows for tightly integrated operations,creating more control and autonomy than alliances

Objectives of Mergers


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Objectives of Mergers

and Acquisitions

To pave way for acquiring firm to gain more marketshare and create a more efficient operation

To expand a firms geographic coverage

To extend a firms business into new productcategories or international markets

To gain quick access to new technologies

To invent a new industry and lead the convergence ofindustries whose boundaries are blurred by changingtechnologies and new market opportunities


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Joint Ventures


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Background

Joint venture is a separate business entity

Participants continue as separate firms

May be organized as partnership, corporation,

or any other form of business

Formal long-term contract of 8 to 12 years

duration


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Characteristics of Joint Ventures

Limited scope and duration

Generally involve only two firms

Involve only small fraction of participants' total

activities

Each participant offers something of value

Joint production of single products

No sharing of assets/information beyond venture

Need not affect competitive relationships


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Joint property interest in subject matter of venture

Right of mutual control or management of

enterprise

Right to share in cash flows of the enterprise

Limited risk


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Joint Ventures in Business Strategy

Goals/objectives of joint ventures

Risk sharing

Each participant diversifies risk

Reduces investment cost of entering risky new area

Realizes benefits of economies of scale, critical mass, learning curve

effects sooner


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Knowledge acquisition learning experience

for both partners

Shared technology

Shared managerial skills in organization, planning, and control

Successive integration joint venturing as a way to learn aboutprospective merger partners

Entry into new, expanded, foreign markets

Augments financial or technical capabilities

Reduces risk

Foreign country may require joint venture with local partner


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Financing to raise capital

Share investment expense

Small company has product idea but no cash

Joint venture with large company that has cash to develop product

Distribution/marketing

To obtain distribution channels

To obtain raw materials supply


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More favorable tax/political treatment

Foreign ventures

Antitrust issues joint ventures increase rather than reduce number

of firms

Long-run strategic planning spider's web

strategy

Provide countervailing power among rivals

Small firms in a concentrated industry do multiple joint ventures with

dominant firms to form self-protective networks


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Tax aspects of joint ventures

Contribution of a patent or licensable technology to ajoint venture may have better tax consequences than a

licensing arrangement with royalties

Examples:One partner contributes technology

Other partner contributes depreciable assets

Depreciation offsets revenues

Joint venture ends up with lower tax rate than any of its partners

Partners pay deferred capital gains if/when venture is terminated


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Joint ventures and restructuring

Joint ventures can be used as transitional mechanism

in a broad restructuring process

Buyer can use joint venture experience to better

determine value of seller's brands, distribution

systems, and personnel

Risk of making mistakes is reduced through direct

involvement with business


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Advantages

Customers are moved to buyer over a period of time in

which both seller and buyer continue to be involved

Buyer builds experience with new line of business

Buyer receives managerial and technical advice and

assistance from seller during transition period

Experience and knowledge developed during life of joint

venture enable buyer to obtain better understanding of the

value of acquisition


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International joint ventures

Widely used

Reduce risks of expanding into foreign environments

May be legal requirement of local joint venturer in

some foreign countries

Local partner's contribution likely to be in the form

of specialized knowledge about local conditions

Subject to clashes of different cultures


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Rationale for Joint Ventures

Transaction cost theory of the firm why

joint ventures over other contractualarrangements

Transaction costs

Involved in all exchanges and organizing activities

Affect allocation of resources


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Complementary production

Joint use of assets or inputs to produce outputs which

cannot be attributed to any single input

Synergy output is more than sum of inputs


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Specialization

Asset's productivity increases with its specialization to

other inputs used in production

Specialization increases risk of loss to owner of

complementary asset if other inputs are withdrawn

Nonrecoverable portion of investment cost of

complementary asset lost if other inputs withdrawn


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Leads to pre-investment arrangements to promote confidence in

joint use of assets

Choose transaction-cost-minimizing form of pre-investment

arrangements

The greater the transaction costs relative to output value, the

more critical the search for economizing organizational form

Contractual arrangements

Costly to write and enforce

Repetitive transactions would require repetitive contracting


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Joint ownership

More likely with greater frequency of exchange of inputs

Frequency of transaction improves prospects of recovering

investment cost of specialized asset

Joint ventures more appropriate than merger where:

Complementary production involves only small subset of

each participant's assets

Complementary assets have limited service life

Complementary production has limited life


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Reasons for failure

Inflexibility problems similar to other long-term contracts

Implementation requires substantial commitments of

managerial resources

Joint ventures do not last as long as planned

About 70% are disbanded before scheduled maturity

On average they do not last as long as one-half the term

of years stated in agreement


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Reasons for disbanding joint ventures

Inadequate preplanning

Technology did not develop as expected

Disagreement between parties on approaches to joint venture objectives

Refusal to share knowledge with counterparts in venture firms wants to

learn as much as possible but not to convey too much

Inability of parent companies to share control or compromise on difficult

issues

Public policy concerns conflict with firms' long-term strategies


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Joint Venture

Joint ventures are new enterprises owned by two or more

participants.

They are typically formed for special reasons for a limited duration.

This brings the participants into what is essentially a medium to

long term contract which is both specific and flexible.

Each participant expects to gain from the activity but also must

make contribution .


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EXAMPLE

GM- Toyota JV, GM hoped to gain new

experience in the management techniques

of the Japanese in building high quality, low

cost compact cars. Toyota was seeking to learn from the

management traditions that had made GM

the number one auto producer in the world

and in addition to learn how to operate an

auto company in the environment under the

conditions in the US.

Outsourcing Strategies


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Outsourcing Strategies

Outsourcing involves withdrawing from certain value

chain activities and relying on outsiders

to supply needed products, support

services, or functional activities

Concept

Internally

Performed

Activities

Suppliers

Support

Services

Functional

Activities

Distributors or

Retailers

When Does Outsourcing


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Make Strategic Sense?

Activity can be performed better or more cheaplyby outside specialists

Activity is not crucial to achieve a sustainablecompetitive advantage

Risk exposure to changing technology and/orchanging buyer preferences is reduced

Operations are streamlined to Cut cycle time Speed decision-making Reduce coordination costs

Firm can concentrate on core value chainactivities that best suit its resource strengths

Strategic Advantages


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of Outsourcing

Improves firms ability to obtain high qualityand/or cheaper components or services

Improves firms ability to innovate by interactingwith best-in-world suppliers

Enhances firms flexibility should customer needsand market conditions suddenly shift

Increases firms ability to assemble diverse kindsof expertise speedily and efficiently

Allows firm to concentrate its resources onperforming those activities internally which it canperform better than outsiders

Pitf ll f O t i


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Pitfalls of Outsourcing

Farming out too manyor the wrong

activities, thus

Hollowing outcapabilities

Losing touch with activities and expertise that

determine overall long-term success

The Four Big Strategic Issues


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The Four Big Strategic Issues

in Competing Multi-nationally

Whether to customizea companys offerings in eachdifferent country market to match preferences of localbuyers or offer a mostly standardizedproduct worldwide

Whether to employ essentially the same

basic competitive strategyin all countriesor modify the strategy country by country

Where to locatea companys production facilities,distribution centers, and customer service operationsto realize the greatest location advantages

Whether and how to efficiently transfer acompanys resource strengths and capabilitiesfromone country to another to secure competitive advantage

What Is the Motivation


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What Is the Motivation

for Competing Internationally?

Gain access to

new customers

Capitalizeon core

competencies

Help

achieve

lower costs

Spreadbusiness riskacross widermarket base

Obtain access to

valuable natural

resources

Two Primary Patterns


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Multi-country

Competition

Global Competition

y

of International Competition

Characteristics of


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Characteristics of

Multi-Country Competition

Market contest among rivals in one country notclosely connected to market contests in other

countries

Buyers in different countries areattracted to different product attributes

Sellers vary from country to country

Industry conditions and competitive forces ineach national market differ in important

respects

Rival firms battle fornational championships

winning in one country does not necessarily signal

the ability to fare well in other countries!

Characteristics of


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Global Competition

Competitive conditions acrosscountry markets are strongly linked

Many of same rivals compete in

many of the same country markets A true international market exists

A firms competitive position in one country is

affected by its position in other countries

Competitive advantage is based on a firms world-

wide operations and overall global standingRival firms in globally competitive industries

vie forworldwide leadership!

Strategy Options for


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gy p

Competing in Foreign Markets

Exporting

Licensing

Franchising strategy

Multi-country strategy

Global strategy

Strategic alliances or joint ventures

Export Strategies


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Export Strategies

Involve using domestic plants as aproduction base forexporting to foreign markets

Excellent initial strategyto pursue international sales

Advantages

Conservative way to test international waters Minimizes both risk and capital requirements

Minimizes direct investments in foreign countries

An export strategyis vulnerable when Manufacturing costs in home country are higher

than in foreign countries where rivals have plants

High shipping costs are involved

Adverse fluctuations in currency exchange rates

i i i


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Licensing Strategies

Licensing makes sense when a firm Has valuable technical know-how or a patented

product but does not have international capabilities toenter foreign markets

Desires to avoid risks of committing resources tomarkets which are Unfamiliar

Politically volatile

Economically unstable

Disadvantage Risk of providing valuable technical know-how to

foreign firms and losing some control over its use

F hi i S i


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Franchising Strategies

Often is better suitedto global expansion effortsofservice and retailing enterprises

Advantages

Franchisee bears most of costs andrisks of establishing foreign locations

Franchisor has to expend only theresources to recruit, train, and support franchisees

Disadvantage Maintaining cross-country quality control

Multi Country Strategy


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Multi-Country Strategy

Strategyis matchedto local market needs Different country strategies are called for when

Significant country-to-country differences in customersneeds exist

Buyers in one country want a product differentfrom buyers in another country

Host government regulations precludeuniform global approach

Two drawbacks1. Poses problems of transferring

competencies across borders

2. Works against building a unified competitive advantage

Global Strategy


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Global Strategy

Strategyfor competing is similarin all countrymarkets

Involves

Coordinating strategic moves globally

Selling in many, if not all, nations where a significantmarket exists

Works best when productsand buyer requirements aresimilar from country to country

Fig. 7.1: How a Multi-country Strategy Differs from a Global Strategy


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The Quest for Competitive Advantage in


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The Quest for Competitive Advantage in

Foreign Markets

Three ways to gain competitive advantage

1.Locating activities among nations in ways that lowercosts or achieve greater product differentiation

2.Efficient/effective transferof competitivelyvaluable competencies and capabilities fromcompany operations in one country tocompany operations in another country

3.Coordinating dispersed activities inways a domestic-only competitor cannot

Locating Activities to Build a


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Global Competitive Advantage

Two issues

Whether to

Concentrate each activity in a

few countries or

Disperse activities to manydifferent nations

Where to locate activities Which country is best

location for which activity?

Concentrating Activities to Build a Global


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Activities should be concentrated when Costs of manufacturing or other value chain activities

are meaningfully lower in certain locations than inothers

There are sizable scale economiesin performing the activity

There is a steep learning curve associatedwith performing an activity in a single location

Certain locations have

Superior resources

Allow better coordination of related activities or

Offer other valuable advantages

Dispersing Activities to Build a


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Activities should be dispersed when

They need to be performed close to buyers

Transportation costs, scale diseconomies, ortrade barriers make centralization expensive

Buffers for fluctuating exchange rates, supplyinterruptions, and adverse politics are needed

Transferring Valuable Competencies to Build a


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Transferring competencies, capabilities, and resourcestrengths across borders contributes to

Development of broader competencies and capabilities

Achievement of dominating depth in some competitively

valuable area

Dominating depth in a competitively valuablecapability is a strong basis for sustainable competitiveadvantage over

Other multinational or global competitors and

Small domestic competitors in host countries

Coordinating Cross-Border Activities to Build a


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Aligning activities located in different countriescontributes to competitive advantage in several ways

Choose where and how to challenge rivals

Shift production from one location to another to take

advantage of most favorable cost or trade conditions orexchange rates

Use Internet technology to collect ideas for newor improved products and to determine whichproducts should be standardized or customized

Enhance brand reputation by incorporatingsame differentiating attributes in itsproducts in all markets where it competes

What Are Profit Sanctuaries?


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What Are Profit Sanctuaries?

Profit sanctuaries are countrymarkets where a firm

Has a strong, protected market

position and

Derives substantial profits

Generally, a firms most strategically

crucial profit sanctuary is its home marketProfit sanctuaries are a valuable

competitive asset in global industries!

Fig. 5.2: Profit Sanctuary Potential of Various


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g y

Competitive Approaches

What Is Cross-Market Subsidization?


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What Is Cross Market Subsidization?

Involves supporting competitive offensives in one market withresources/profits diverted from operations in other markets

Competitive power of cross-market subsidization results from a

global firms ability to

Draw upon its resources and profits in other country markets tomount an attack on single-market or one-country rivals and

Try to lure away their customers with

Lower prices

Discount promotions

Heavy advertising

Other offensive tactics

Global Strategic Offensives


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Global Strategic Offensives

1. Direct onslaught Objective Capture a major slice of market share, forcing rival to

retreat

Involves

Price cutting

Heavy expenditures on marketing, advertising, and promotion

Efforts to gain upper hand in one or more distribution channels

2. Contest

More subtle and focused than an onslaught

Focuses on a particular market segment

unsuited to defenders capabilities and inwhich attacker has a new next-generation product

3. Feint

Move designed to divert the defenders attention away from

attackers main target

Three Options

Achieving Global


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Competitiveness via Cooperation

Cooperative agreements / strategic alliances withforeign companies are a means to

Enter a foreign market or

Strengthen a firms competitiveness

in world markets Purpose of alliances

Joint research efforts

Technology-sharing

Joint use of production or distribution facilities

Marketing / promoting one anothers products

Benefits of Strategic Alliances


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Benefits of Strategic Alliances

Gain scale economies in productionand/or marketing

Fill gaps in technical expertise

or knowledge of local markets

Share distribution facilities and dealer networks

Direct combined competitive energies toward defeating mutual

rivals

Take advantage of partners local market knowledge and

working relationships with key government officials in hostcountry

Useful way to gain agreement on important technical standards

Pitfalls of Strategic Alliances


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Pitfalls of Strategic Alliances

Different motives and conflicting objectives

Time consuming; slows decision-making

Language and cultural barriers

Mistrust when collaborating incompetitively sensitive areas

Clash of egos and company cultures

Becoming too dependent on another firm foressential expertise over the long-term

module 5 - generic competitive strategies

Documents