Chapter Readings and Analysis (Management)

Rating sheet

Thompson et al. Crafting & Executing Strategy

Chapter Rating Form

Content and Organization of the Presentation.

TOTAL POINTS ____________________

Example

This paper will discuss chapters 7 and 8. Chapter 7, “Strategies for competing in international markets”, presents reasons why a company choose to compete in international markets. It also presents strategic options for entering foreign markets, and the advantages and disadvantages of each. Chapter 8, “Corporate Strategy”, discusses diversification. Diversification is the act of broadening one’s capabilities and hedging risk to ensure more shareholder value. Chapter 8 discusses how, why, and when to diversify.

Chapter 7 Strategies for Competing in International Markets

LO 1: The primary reason companies choose to compete in international markets.

Learning objective 1 explains why a company may opt to expand outside its domestic market. There are five major reasons a company might do so. These reasons are new customers, lower costs, access to low-cost production, exploit core competencies, and to gain access to resources and capabilities located in foreign markets.

1. To gain access to new customers. Expanding into foreign markets offers potential for revenues, profits, and growth. It is especially attractive to companies that are stagnating in their domestic market. Companies might also expand to new markets to extend the life of their products. Toyota expanded into Hong Kong, and one of their older models have been in use as Hong Kong’s taxi cabs. The Toyota comfort started as a taxicab in Japan in 1995, and Toyota was able to expand the use of these cars to Hong Kong. Toyota Comfort has been the main taxicab in Hong Kong, as well. A large target market may also offer companies opportunity to earn a return on large investments more rapidly, than staying in a domestic market. This is important to R&D industries, where innovation is fast-paced and imitated rapidly.

2. To achieve lower costs through economics of scale, experience, and increased purchasing power. Companies are driven to sell in international level because domestic sales volume is, sometimes, not large enough to capture fully economies of scale in product development, marketing, or manufacturing. Firms expand internationally to increase the rate of accumulating experience and move down the learning curve. Expansion can also lower a company’s input costs by having a greater pooled purchasing power. Popular businesses of today are all international. Brands such as McDonald’s, KFC, Nestle, Toyota, Honda, and Sony, moved into markets in different continents to achieve more capabilities.

3. To gain access to low-cost inputs of production. Companies in industries based on natural resources often find it necessary to operate in international level because of raw material supplies. Raw materials are located in different parts of the world. Companies that enter foreign markets that have access to these have lower costs than companies who stay domestic and need to find outside partners for raw materials. Aside from this, companies also enter foreign markets to access low-cost labor costs. Apple designs their products in California and makes their products in China because of lower labor cost. This drives down the cost to make their products and getting a larger margin from cost of goods sold to revenues.

4. To further exploit its core competencies. A company can extend its domestic market-leading position into a regional or global market-leading position by furthering its core competencies. Companies can often leverage their resources internationally by replicating a successful business model, using it as a basic blueprint for international operations. Examples of these blueprints are Starbucks, McDonald’s, KFC, and other restaurant chains. While, these chains are successful, there are still countries that they have not yet expanded into. The core competencies of Starbucks is serving coffee, and other tasty drinks that are to the liking of many people, they have expanded in many different countries doing the same thing, and adding the culture of the country in the menu.

5. To gain access to resources and capabilities located in foreign markets. An important motive for entering foreign markets is to acquire resources and capabilities that may be unavailable in a company’s domestic market. Companies often make acquisitions in other markets to gain access to capabilities that complement their own. Companies may also choose to establish operations in other countries to utilize local distribution networks, gain local marketing expertise, or gain technical knowledge. One company that is famous for acquisitions is Nestle. Nestle is a Swiss multinational food and drink company that has bought and merged with many different international companies. They are one of the biggest conglomerates of food making and are now making pet food as well.

LO 3: The five major strategic options for entering foreign markets.

There five major different ways for a company to expand and enter foreign markets. These are exporting, licensing, franchising, establishing a subsidiary, and joint ventures. Each have their own advantages and disadvantages.

1. Exporting has low foreign investment. A company will not need to invest plenty of capital into exporting unlike the other choices. Exporting involves using domestic plants as a production base for exporting their products to foreign markets. Although exporting has low direct investment, an export strategy is vulnerable to higher manufacturing costs against companies that already have factories in foreign countries. Exporting can also provide a barrier by having shipping, exchange rate risks, and tariffs. The biggest exporters in the United States are Apple, ExxonMobil, Ford motors, and General Motors.

2. Licensing works if a firm has a valuable technical information, an appealing brand, or have a unique patented product does not have the internal organizational capability nor resources to enter foreign markets. Licensing also avoids large direct investments and risks of committing resources to countries that are unfamiliar, volatile, or unstable. A company gains royalties once it licenses its product. However, licensing is also vulnerable to losing some degree of control and have a difficulty in safeguarding proprietary technology. Software and pharmaceutical companies are the ones often using the licensing strategy.

3. Franchising, like licensing, is suited for service and retailing enterprises. McDonald’s, Yum! Brands (Pizza Hut, KFC, Taco Bell, and Wing Street), 7-Eleven, and Hilton Hotels have used franchising to build a presence in foreign markets. Franchising has many of the same advantages as licensing. The franchisee bears the costs and risks of establishing foreign locations, while franchisors expend only in recruiting, training, supporting, and monitoring franchisees. A problem with this might be the loss of standardization and loss of quality control in the foreign market, because the franchisor does not have direct control on franchisees’ decisions.

4. Establishing a foreign subsidiary provides direct control over all aspects of operating in a foreign market, unlike franchising. Companies that want centralization establish a foreign subsidiary. A company have two choices when they want to establish a foreign subsidiary. They can either acquire a local company or establish a new operating organization from the ground up, this is called greenfield venture. Acquiring a local business is quicker, less risky, and more cost efficient. However, creating an internal setup is cheaper than making an acquisition, and doing a greenfield venture is better if a company already operates in a number of countries, and has experience in establishing subsidiary and overseeing their operations. Many famous subsidiaries include Google owned by Alphabet Inc., Volkswagen America owned by Volkswagen, Marvel Entertainment owned by Disney, and Starbucks Japan owned by Starbucks corporation.

5. Alliances and joint ventures with foreign companies are widely used means of entering foreign markets. A company can benefit immensely from a foreign partners knowledge with regulations, consumer habits, and product preferences. Alliances can also benefit both companies to capture economies of scale in production and marketing. Both parties will also benefit by sharing distribution facilities networks, strengthening both parties’ access to buyers. Teaming up can also benefit both parties by sharing knowledge in technology, manufacturing methods, and understanding how to market sales and approaches to their cultures and traditions. While it seems beneficial to always do alliances, it might not be beneficial if one party lacks the operating practices suited for the large-scale production, and it can also increase tensions between workers because of the lack of personal chemistry among workers and managers from the different parties.

Chapter 8 Corporate Strategy

LO 1: When and how business diversification can enhance shareholder value

As managers, or owners, the main goal is to increase the value of shareholder wealth. There are many risks to increasing the value of shareholder wealth. Diversification helps to hedge these risks. While diversification is beneficial, it must do more for a company than simply spread and hedge risk across different industries. Diversification is only wise if it results in added long-term economic value for shareholders. To diversify, a company must pass the three tests of corporate advantage.

1. The industry attractiveness test. The industry to be entered through diversification must be structurally attractive. This means the industry must have resource requirements and offer good prospects of growth, profitability, and return on investment.

2. The cost of entry test. The cost of entering must not be high as to exceed the potential for good profitability.

3. The better-off test. Diversifying must offer potential for company’s existing businesses and the new business to perform better together, this is an effect called synergy, in which both businesses combine to become better under a single corporate umbrella.

Diversification moves must satisfy all three tests to ensure growth in shareholder value over the long term. There are three approaches to diversifying: acquisition, internal setup, or joint ventures with other companies.

Acquisition is a quicker way to diversify than launch a new operation. It also helps on hurdles such as entry barriers in technology, supplier relationships, scale economies, brand awareness and distribution. However, acquiring an existing business can prove to be expensive. The cost is not only the acquisition price but also the costs of performing to keep the worth of the other company. Berkshire Hathaway is one of the biggest conglomerates that acquires other corporations, Berkshire acquired Heinz company that included an acquisition premium. Acquisition premium is the amount by which the price offered exceeds the pre-acquisition market value of the target company.

Another way to achieve diversification is by internal development. Internal development involves starting a new business subsidiary from the ground up. It is often referred to as corporate venturing, or new venture development. Although internal development is time-consuming and uncertain, it avoids disadvantages with entry via acquisitions. It may offer a viable means of entering a new market when there are no good candidates for acquisition. Internal development only has appeal when the parent company already has the resources and capabilities it needs to piece a new business.

The third approach to diversifying is joint ventures. Joint ventures can be useful if an opportunity is complex, uneconomical, or risky for a company to pursue alone. It can also be helpful if knowledge in the industry require a broader range of competencies than a company can muster. Telecommunications, biotechnology, and most of network-based systems are all examples that need a broad range of competencies from building towers to having access to satellites. Lastly, companies sometimes use joint ventures to diversify into a new industry. However, joint ventures can have drawbacks such as conflicting objectives, disagreements on operations, and culture clashes.

A company’s choice on how to enter a new business will depend on four important questions:

1. Does the company have all of the resources and capabilities it requires to enter the business through internal development, or is it lacking some critical resources?

2. Are there entry barriers to overcome?

3. Is speed an important factor in the firm’s chances for successful entry?

4. Which is the least costly mode of entry, given the company’s objectives?

Based on the answers on these questions, a company can choose from the three ways to enter a new business for diversification. If speed is a factor, acquisition or joint venture will have more weight, as choices, than internal development. If a company has the resources and capabilities, and time is not a factor, then internal development will have more weight than the other two.

LO 5 What four main corporate strategy options a diversified company can employ for solidifying its strategy and improving company performance.

The conclusions from the five preceding analytic steps (1. Evaluating industry attractiveness, 2. Evaluating business unit competitive strength, 3. Determining the competitive value of strategic fit in diversified companies, 4. Checking for good resource fit, 5. Ranking business units and assigning a priority for resource allocation) set the plan for crafting strategic moves to improve a diversified company’s overall performance. The four main corporate strategic moves are:

1. Sticking closely with the existing business lineup and pursuing the opportunities these businesses present. This option will be chosen when the company’s existing businesses offer attractive growth opportunities and can be counted on to increase shareholder value. Executives can concentrate their attention on getting the best performance from each of the businesses, and steering resources into areas of greatest potential and profitability.

2. Broadening the company’s business scope by making new acquisitions in new industries. Diversified companies find it more desirable to build positions in new industries whether if it is related or unrelated. This method adds businesses that will complement and strengthen the market position and competitive capabilities of their company. P&G a big conglomerate that produces personal care and household products recently acquired Gillette and further extended their reach into personal care and household products.

3. Divesting certain businesses and retrenching to a narrower base of business operations. When broadening did not work for a company, a company will retrench and narrow their diversification range. This means a company will exit industries that are competitively weak, unattractive, or the lack of strategic and resource fit for the company. After divesting, a company will focus corporate resources on business in a few, carefully selected industry arenas to focus their efforts and resources there. Nike sold Umbro and Cole Haan brands to focus on their more popular brands, Jordan and Converse. Sara Lee corporation, a bread maker, sold its international coffee and tea business to J.M. Smucker.

4. Restructuring the company’s business lineup and putting a whole new face on the company’s business makeup. This involves divesting some businesses or acquiring others to put a whole new face on the company’s business lineup. If there is a serious mismatch between the company’s resources and capabilities, it might be wise to restructure and reface the company. VF Corporation, maker of North Face, decided to restructure their company by acquiring 19 additional businesses. Since these acquisitions and turnaround VF had returns that are more than five times greater than shareholder returns for competing apparel makers.

These topics are relevant to my paper because it discusses strategies in competing in the international market and diversification. McDonald’s is an international brand. While it is international, it still has the ability to expand into new territories. They have the resources and capabilities to not only expand, but also diversify. There are different strategies on diversifying. A company can acquire a new business, create their own from the ground up, or make alliances. McDonald’s is famous for franchising its arch, but they can improve their domestic market, and expand into new markets.

In conclusion, a company may opt to expand outside its domestic market. There are five major reasons a company might do so, gain new customers, to have lower costs, to access to low-cost production, to exploit core competencies, and to gain access to resources and capabilities located in foreign markets. There five major different ways for a company to expand and enter foreign markets: exporting, licensing, franchising, establishing a subsidiary, and joint ventures. Each have their own advantages and disadvantages. There are many risks to increasing the value of shareholder wealth and expansions. Diversification helps to hedge these risks. Diversification is only wise if it results in added long-term economic value for shareholders. There are three tests to pass in order to know when to diversify: industry attractiveness, cost of entry, and the better-off test. Lastly, a diversified company can solidify its position by sticking closely with the existing business lineup, broaden the company’s business scope, divest certain businesses, and to restructure the company’s business lineup.

Reference:

Thompson, Arthur A., Jr., Margaret A. Peteraf, Gamble J.E., & Strickland, A.J. (2019). Crafting and Executing Strategy: The Quest for Competitive Advantage: Concepts and Cases, 21e, McGraw- Hill Education, New York, NY.

12 | Page