Crafting & Executing Strategy The Quest for Competitive Advantage Concepts and Cases 21st Edition By Arthur A. Thompson Jr -Test Bank A+

Outsourcing certain value chain activities makes strategic sense whenever: an activity can be performed better or more cheaply by outside specialists; the activity is not crucial to the firm’s ability to achieve sustainable competitive advantage; the outsourcing improves organizational flexibility and speeds time to market; it reduces the company’s risk exposure to changing technology and buyer preferences; and, it allows a company to concentrate on its core business, leverage its key resources, and do even better what it already does best.

The biggest danger of outsourcing is that a company will farm out the wrong types of activities and thereby hollow out its own capabilities.

A strategic alliance is a formal agreement between two or more separate companies in which they agree to work cooperatively toward some common objective.

A strategic alliance is a formal agreement between two or more separate companies in which they agree to work cooperatively toward some common objective.

An alliance becomes “strategic,” as opposed to just a convenient business arrangement, when it serves any of the following purposes: It facilitates achievement of an important business objective (like lowering costs or delivering more value to customers in the form of better quality, added features, and greater durability); It helps build, strengthen, or sustain a core competence or competitive advantage; It helps remedy an important resource deficiency or competitive weakness; It helps defend against a competitive threat, or mitigates a significant risk to a company’s business; It increases bargaining power over suppliers or buyers; It helps open up important new market opportunities; and, It speeds the development of new technologies and/or product innovations.

A joint venture entails forming a newcorporateentitythatisjointlyowned by two or more companies that agree to share in the revenues, expenses, and control of the newly formed entity.

Companies are employing strategic alliances and partnerships to extend their scope of operations via international expansion. It lowers investment costs and risks in comparison to going it alone. Strategic cooperation is a much-favored approach in industries where new technological developments are occurring at a furious pace along many different paths and where advances in one technology spill over to affect others (often blurring industry boundaries).

An alliance becomes “strategic,” as opposed to just a convenient business arrangement, when it serves any of the following purposes: it facilitates achievement of an important business objective (like lowering costs or delivering more value to customers in the form of better quality, added features, and greater durability); it helps build, strengthen, or sustain a core competence or competitive advantage; it helps remedy an important resource deficiency or competitive weakness; it helps defend against a competitive threat, or mitigates a significant risk to a company’s business; it increases bargaining power over suppliers or buyers; it helps open up important new market opportunities; and, it speeds the development of new technologies and/or product innovations.

The best alliances are highly selective, focusing on particular value chain activities and on obtaining a specific competitive benefit. They enable a firm to build on its strengths and to learn.

Strategic partnerships or cooperative arrangements: facilitate achievement of an important business objective (like lowering costs or delivering more value to customers in the form of better quality, added features, and greater durability); help build, strengthen, or sustain a core competence or competitive advantage; help remedy an important resource deficiency or competitive weakness; help defend against a competitive threat, or mitigate a significant risk to a company’s business; increase bargaining power over suppliers or buyers; help open up important new market opportunities; and, speed the development of new technologies and/or product innovations.

Strategic partnerships or cooperative arrangements: facilitate achievement of an important business objective (like lowering costs or delivering more value to customers in the form of better quality, added features, and greater durability); help build, strengthen, or sustain a core competence or competitive advantage; help remedy an important resource deficiency or competitive weakness; help defend against a competitive threat, or mitigate a significant risk to a company’s business; increase bargaining power over suppliers or buyers; help open up important new market opportunities; and, speed the development of new technologies and/or product innovations.

Whenever industries are experiencing high-velocity technological advances in many areas simultaneously, firms find it virtually essential to have cooperative relationships with other enterprises to stay on the leading edge of technology, even in their own area of specialization. In industries like these, alliances are all about fast cycles of learning, gaining quick access to the latest round of technological know-how, and developing dynamic capabilities. In bringing together firms with different skills and knowledge bases, alliances open up learning opportunities that help partner firms better leverage their own resources and capabilities.

The merits of strategic alliances and collaborative partnerships are: Picking a good partner; being sensitive to cultural differences; recognizing that the alliance must benefit both sides; ensuring that both parties live up to their commitments; structuring the decision-making process so that actions can be taken swiftly when needed; managing the learning process and then adjusting the alliance agreement over time to fit new circumstances.

Alliances are more likely to be long lasting when (1) they involve collaboration with partners that do not compete directly, (2) a trusting relationship has been established, and (3) both parties conclude that continued collaboration is in their mutual interest, perhaps because new opportunities for learning are emerging.

When outsourcing is conducted via alliances, there is no less risk of becoming dependent on other companies for essential expertise and capabilities—indeed, this may be the Achilles’ heel of such alliances. Moreover, there are additional pitfalls to collaborative arrangements. The greatest danger is that a partner will gain access to a company’s proprietary knowledge base, technologies, or trade secrets, enabling the partner to match the company’s core strengths and costing the company its hard-won competitive advantage.

Unless there is respect among all the parties for cultural differences, including those stemming from different local cultures and local business practices, productive working relationships are unlikely to emerge.

When outsourcing is conducted via alliances, there is no less risk of becoming dependent on other companies for essential expertise and capabilities—indeed, this may be the Achilles’ heel of such alliances.

The principal advantages of strategic alliances over vertical integration or horizontal mergers and acquisitions are threefold: they lower investment costs and risks for each partner by facilitating resource pooling and risk sharing; they are more flexible organizational forms and allow for a more adaptive response to changing conditions; and they are more rapidly deployed.

Companies that have greater success in managing their strategic alliances and partnerships often credit the following factors: they create a system for managing their alliance; they build relationships with their partners and establish trust; they protect themselves from the threat of opportunism by setting up safeguards; they make commitments to their partners and see that their partners do the same; they make learning a routine part of the management process.

Companies that have greater success in managing their strategic alliances and partnerships often credit the following factors: they create a system for managing their alliance; they build relationships with their partners and establish trust; they protect themselves from the threat of opportunism by setting up safeguards; they make commitments to their partners and see that their partners do the same; they make learning a routine part of the management process.

Alliance management is an organizational capability, much like any other. It develops over time, out of effort, experience, and learning. For this reason, it is wise to begin slowly, with simple alliances designed to meet limited, short-term objectives.

The principal offensive strategy options include: (1) offering an equally good or better product at a lower price; (2) leapfrogging competitors by being the first to market with next-generation technology or products; (3) pursuing continuous product innovation to draw sales and market share away from less innovative rivals; (4) pursuing disruptive product innovations to create new markets; (5) adopting and improving on the good ideas of other companies; (6) using hit-and-run or guerrilla warfare tactics to grab sales and market share from complacent or distracted rivals; and (7) launching a preemptive strike to capture a rare opportunity or secure an industry’s limited resources.

Strategic assets are a company’s most valuable resources and capabilities such as a better-known brand name, a more efficient production or distribution system, greater technological capability, or a superior reputation for quality. Ignoring the need to tie a strategic offensive to a company’s competitive strengths and what it does best is like going to war with a popgun—the prospects for success are dim. For instance, it is foolish for a company with relatively high costs to employ a price-cutting offensive. Likewise, it is ill advised to pursue a product innovation offensive without having proven expertise in R&D and new product development.

Cost-based strategies involve lowering prices to gain market share. Lower prices can produce market share gains if competitors don’t respond with price cuts of their own and if the challenger convinces buyers that its product is just as good or better. Price-cutting offensives should be initiated only by companies that have firstachievedacostadvantage. A blue-ocean strategy seeks to gain a dramatic and durable competitive advantage by abandoning efforts to beat out competitors in existing markets and, instead, inventing a new market segment that renders existing competitors irrelevant and allows a company to create and capture altogether new demand. A “blue ocean” is a market space where the industry does not really exist yet, is untainted by competition, and offers wide-open opportunity for profitable and rapid growth if a company can create new demand with a new type of product offering. A terrific example of such blue-ocean market space is the online auction industry that eBay created and now dominates.

A blue-ocean strategy seeks to gain a dramatic and durable competitive advantage by abandoning efforts to beat out competitors in existing markets and, instead, inventing a new industry or distinctive market segment that renders existing competitors largely irrelevant and allows a company to create and capture altogether new demand. Blue-ocean strategies provide a company with a great opportunity in the short run. But they don’t guarantee a company’s long-term success, which depends more on whether a company can protect the market position it created.

The purposes of defensive strategies are to lower the risk of being attacked, weaken the impact of any attack that occurs, and influence challengers to aim their efforts at other rivals. Examples of defensive strategies are: (1) adding new features or models and otherwise broadening the product line to close off vacant niches and gaps to opportunity-seeking challengers; (2) thwarting the efforts of rivals to attack with lower prices by maintaining economy-priced options of its own; (3) signaling challengers that retaliation is likely in the event that they launch an attack; or (4) making early announcements about impending new products or price changes to induce potential buyers to postpone switching.

Being first to initiate a strategic move can have a high payoff when (1) pioneering helps build a firm’s image and reputation with buyers; (2) early commitments to new technologies, new-style components, new or emerging distribution channels, and so on, can produce an absolute advantage over rivals; (3) first-time customers remain strongly loyal to pioneering firms in making repeat purchases; and (4) moving first constitutes a preemptive strike, making imitation extra hard or unlikely. In situations when rapid market evolution including growth in demand occurs (due to fast-paced changes in either technology or buyer needs and expectations), fast followers and maybe even cautious late movers have an opening to leapfrog a first mover’s products with more attractive next-version or even complementary products.

Two “best targets” for offensive attacks by companies are:

• Runner-upfirmswithweaknessesinareaswherethechallengerisstrong. These firms are an especially attractive target when a challenger’s resources and capabilities are well suited to exploiting their weaknesses.
• Strugglingenterprisesthatareonthevergeofgoingunder. Challenging a hard-pressed rival in ways that further sap its financial strength and competitive position can weaken its resolve and hasten its exit from the market. In this type of situation, it makes sense to attack the rival in the market segments where it makes the most profits, since this will threaten its survival the most.

When to make a strategic move is often as crucial as what move to make. Timing is especially important when first-mover advantages or disadvantage sexist. Under certain conditions, being first to initiate a strategic move can have a high payoff in the form of a competitive advantage that later movers can’t dislodge. If the market responds well to its initial move, the pioneer will benefit from a monopoly position (by virtue of being first to market) that enables it to recover its investment costs and make an attractive profit. If the firm’s pioneering move gives it a competitive advantage that can be sustained even after other firms enter the market space, its first-mover advantage will be greater still.

a. horizontal scope
b. vertical scope
c. scope of the firm

Horizontal scope is the range of product and service segments that a firm serves within its focal market. Vertical scope is the extent to which a firm’s internal activities encompass the range of activities that makeup an industry’s entire value chain system, from raw material production to final sales and service activities. Scope of the firm refers to the range of activities that the firm performs internally, the breadth of its product and service offerings, the extent of its geographic market presence, and its mix of businesses.

Merger and acquisition strategies are a better solution than a strategic alliance when it comes to: (1) extending the company’s business into new product categories; (2) creating a more cost-efficient operation out of the combined companies; (3) expanding a company’s geographic coverage; (4) gaining quick access to new technologies or complementary resources and capabilities; and (5) leading the convergence of industries whose boundaries are being blurred by changing technologies and new market opportunities. Strategic alliances commonly stop short of formal ownership ties between the partners (although there are a few strategic alliances where one or more allies have minority ownership in certain of the other alliance members). The main benefits of these collaborative relationships is to expedite the development of promising new technologies or products, to overcome deficits in their own technical and manufacturing expertise, to bring together the personnel and expertise needed to create desirable new skill sets and capabilities, to improve supply chain efficiency, to gain economies of scale in production and/or marketing, and to acquire or improve market access through joint marketing agreements. However, strategic alliances are only temporary in nature, and all too often partners in those collaborations go their separate ways, while mergers and acquisitions are permanent.

Mergers and acquisitions are much-used strategic options to strengthen a company’s market position. Horizontal mergers and acquisitions, which involve combining the operations of firms withinthesameproductorservicemarket, provide an effective means for firms to rapidly increase the scale and horizontal scope of their core business. Horizontal mergers and acquisitions can strengthen a firm’s competitiveness in five ways: (1) by improving the efficiency of its operations, (2) by heightening its product differentiation, (3) by reducing market rivalry, (4) by increasing the company’s bargaining power over suppliers and buyers, and (5) by enhancing its flexibility and dynamic capabilities.

The general strategic objectives of merger and acquisition strategies are:

• Creating a more cost-efficient operation out of the combined companies.
• Expanding a company’s geographic coverage.
• Extending the company’s business into new product categories.
• Gaining quick access to new technologies or other resources and capabilities.
• Leading the convergence of industries whose boundaries are being blurred by changing technologies and new market opportunities.

Backward vertical integration can produce a differentiation-based competitive advantage when performing activities internally contributes to a better-quality product or service offering, improves the caliber of customer service, or in other ways enhances the performance of the final product. On occasion, integrating into more stages along the industry value chain system can add to a company’s differentiation capabilities by allowing it to strengthen its core competencies, better master key skills or strategy-critical technologies, or add features that deliver greater customer value.

It is harder than one might think to generate cost savings or improve profitability by integrating backward into activities such as the manufacture of parts and components (which could otherwise be purchased from suppliers with specialized expertise in making the parts and components). For backward integration to be a cost-saving and profitable strategy, a company must be able to (1) achieve the same scale economies as outside suppliers and (2) match or beat suppliers’ production efficiency with no drop off in quality. Neither outcome is easily achieved. To begin with, a company’s in-house requirements are often too small to reach the optimum size for low-cost operation. Furthermore, matching the production efficiency of suppliers is fraught with problems when suppliers have considerable production experience, when the technology they employ has elements that are hard to master, and/or when substantial R&D expertise is required to develop next-version components or keep pace with advancing technology in components production.

Forward integration can lower costs by increasing efficiency and bargaining power. In addition, it can allow manufacturers to gain better access to end users, improve market visibility, and include the end user’s purchasing experience as a differentiating feature. Some producers have opted to integrate forward by selling directly to customers at the company’s website. Bypassing regular wholesale and retail channels in favor of direct sales and Internet retailing can have appeal if it reinforces the brand and enhances consumer satisfaction or if it lowers distribution costs, produces a relative cost advantage over certain rivals, and results in lower selling prices to end users.

The most serious drawbacks to vertical integration include the following concerns:

• Vertical integration raises a firm’s capital investment in the industry, thereby increasingbusinessrisk.
• Vertically integrated companies are often slowtoembracetechnologicaladvances or more efficient production methods when they are saddled with older technology or facilities.
• Vertical integration can result in lessflexibilityinaccommodatingshiftingbuyerpreferences.
• Vertical integration maynotenableacompanytorealizeeconomiesofscale if its production levels are below the minimum efficient scale.
• Vertical integration poses all kinds of capacity-matchingproblems.
• Integration forward or backward often callsfordevelopingnewtypesofresourcesandcapabilities.

Outsourcing strategies narrow the scope of a business’s operations, in terms of what activities are performed internally. A company can improve its cost position and competitiveness by performing a broader range of industry value chain activities in-house rather than having such activities performed by outside suppliers. When there are few suppliers and when the item being supplied is a major component, vertical integration can lower costs by limiting supplier power. Vertical integration can also lower costs by facilitating the coordination of production flows and avoiding bottleneck problems. Furthermore, when a company has proprietary know-how that it wants to keep from rivals, then in-house performance of value-adding activities related to this know how is beneficial even if such activities could otherwise be performed by outsiders.
Outsourcing certain value chain activities makes strategic sense whenever:

• An activity can be performed better or more cheaply by outside specialists.
• The activity is not crucial to the firm’s ability to achieve sustainable competitive advantage.
• The outsourcing improves organizational flexibility and speeds time to market.
• It reduces the company’s risk exposure to changing technology and buyer preferences.
• It allows a company to concentrate on its core business, leverage its key resources, and do even better what it already does best.

Strategic alliances suffer from some drawbacks. Anticipated gains may fail to materialize due to an overly optimistic view of the synergies or a poor fit in terms of the combination of resources and capabilities. When outsourcing is conducted via alliances, there is no less risk of becoming dependent on other companies for essential expertise and capabilities—indeed, this may be the Achilles’ heel of such alliances. Moreover, there are additional pitfalls to collaborative arrangements. The greatest danger is that a partner will gain access to a company’s proprietary knowledge base, technologies, or trade secrets, enabling the partner to match the company’s core strengths and costing the company its hard-won competitive advantage.

The principal advantages of strategic alliances over vertical integration or horizontal mergers and acquisitions are threefold:

1. They lower investment costs and risks for each partner by facilitating resource pooling and risk sharing. This can be particularly important when investment needs and uncertainty are high, such as when a dominant technology standard has not yet emerged.
2. They are more flexible organizational forms and allow for a more adaptive response to changing conditions. Flexibility is essential when environmental conditions or technologies are changing rapidly. Moreover, strategic alliances under such circumstances may enable the development of each partner’s dynamic capabilities.
3. They are more rapidly deployed—a critical factor when speed is of the essence. Speed is of the essence when there is a winner-take-all type of competitive situation, such as the race for a dominant technological design or a race down a steep experience curve, where there is a large first-mover advantage.

Strategic alliances and cooperative partnerships provide one way to gain some of the benefits offered by vertical integration, outsourcing, and horizontal mergers and acquisitions while minimizing the associated problems. Increasingly, companies are also employing strategic alliances and partnerships to extend their scope of operations via international expansion and diversification strategies. Strategic alliances help lower a company’s investment costs and risks in comparison to going it alone. It allows two companies to achieve jointly the global scale required for cost competitiveness.

Strategic cooperation is a much-favored approach in industries where new technological developments are occurring at a furious pace along many different paths and where advances in one technology spill over to affect others (often blurring industry boundaries). Whenever industries are experiencing high-velocity technological advances in many areas simultaneously, firms find it virtually essential to have cooperative relationships with other enterprises to stay on the leading edge of technology, even in their own area of specialization. In industries like these, alliances are all about fast cycles of learning, gaining quick access to the latest round of technological know-how, and developing dynamic capabilities. In bringing together firms with different skills and knowledge bases, alliances open up learning opportunities that help partner firms better leverage their own resources and capabilities.

Three factors that can aid companies in forming a successful strategic alliance are:

1. Recognizingthatthealliancemustbenefitbothsides. Information must be shared as well as gained, and the relationship must remain forthright and trustful. If either partner plays games with information or tries to take advantage of the other, the resulting friction can quickly erode the value of further collaboration. Open, trustworthy behavior on both sides is essential for fruitful collaboration.
2. Ensuringthatbothpartiesliveuptotheircommitments. Both parties have to deliver on their commitments for the alliance to produce the intended benefits. The division of work has to be perceived as fairly apportioned, and the caliber of the benefits received on both sides has to be perceived as adequate.
3. Structuringthedecision-makingprocesssothatactionscanbetakenswiftlywhenneeded. In many instances, the fast pace of technological and competitive changes dictates an equally fast decision-making process. If the parties get bogged down in discussions or in gaining internal approval from higher-ups, the alliance can turn into an anchor of delay and inaction.

The most serious drawbacks to vertical integration include the following concerns:

• Vertical integration raises a firm’s capital investment in the industry, thereby increasingbusinessrisk.
• Vertically integrated companies are often slowtoembracetechnologicaladvances or more efficient production methods when they are saddled with older technology or facilities. A company that obtains parts and components from outside suppliers can always shop the market for the newest, best, and cheapest parts, whereas a vertically integrated firm with older plants and technology may choose to continue making suboptimal parts rather than face the high costs of premature abandonment.
• Vertical integration can result in lessflexibilityinaccommodatingshiftingbuyerpreferences. It is one thing to design out a component made by a supplier and another to design out a component being made in-house (which can mean laying off employees and writing off the associated investment in equipment and facilities). Integrating forward or backward locks a firm into relying on its own in-house activities and sources of supply.
• Vertical integration maynotenableacompanytorealizeeconomiesofscale if its production levels are below the minimum efficient scale. Small companies in particular are likely to suffer a cost disadvantage by producing in-house.

Typically, strategic alliances involve shared financial responsibility, joint contribution of resources and capabilities, shared risk, shared control, and mutual dependence.
Advantages of a strategic alliance are:

1. It facilitates achievement of an important business objective (like lowering costs or delivering more value to customers in the form of better quality, added features, and greater durability).
2. It helps build, strengthen, or sustain a core competence or competitive advantage.
3. It helps remedy an important resource deficiency or competitive weakness.
4. It helps defend against a competitive threat, or mitigates a significant risk to a company’s business.
5. It increases bargaining power over suppliers or buyers.
6. It helps open up important new market opportunities.
7. It speeds the development of new technologies and/or product innovations.

There are circumstances when other organizational mechanisms are preferable to alliances and partnering. Mergers and acquisitions are especially suited for situations in which strategic alliances or partnerships do not go far enough in providing a company with access to needed resources and capabilities. Ownership ties are more permanent than partnership ties, allowing the operations of the merger or acquisition participants to be tightly integrated and creating more in-house control and autonomy. Other organizational mechanisms are also preferable to alliances when there is limited property rights protection for valuable know-how and when companies fear being taken advantage of by opportunistic partners.

The merits of strategic alliances and collaborative partnerships are: Picking a good partner; being sensitive to cultural differences; recognizing that the alliance must benefit both sides; ensuring that both parties live up to their commitments; structuring the decision-making process so that actions can be taken swiftly when needed; managing the learning process and then adjusting the alliance agreement over time to fit new circumstances.
Strategic cooperation is a much-favored approach in industries where new technological developments are occurring at a furious pace along many different paths and where advances in one technology spill over to affect others (often blurring industry boundaries). Whenever industries are experiencing high-velocity technological advances in many areas simultaneously, firms find it virtually essential to have cooperative relationships with other enterprises to stay on the leading edge of technology, even in their own area of specialization. In industries like these, alliances are all about fast cycles of learning, gaining quick access to the latest round of technological know-how, and developing dynamic capabilities. In bringing together firms with different skills and knowledge bases, alliances open up learning opportunities that help partner firms better leverage their own resources and capabilities.

In order to capture the benefits of engaging in strategic alliances a company must:

1. Pickagoodpartner. A good partner must bring complementary strengths to the relationship. To the extent that alliance members have non-overlapping strengths, there is greater potential for synergy and less potential for coordination problems and conflict. In addition, a good partner needs to share the company’s vision about the overall purpose of the alliance and to have specific goals that either match or complement those of the company. Strong partnerships also depend on good chemistry among key personnel and compatible views about how the alliance should be structured and managed.
2. Besensitivetoculturaldifferences. Cultural differences among companies can make it difficult for their personnel to work together effectively. Cultural differences can be problematic among companies from the same country, but when the partners have different national origins, the problems are often magnified. Unless there is respect among all the parties for cultural differences, including those stemming from different local cultures and local business practices, productive working relationships are unlikely to emerge.
3. Recognizethatthealliancemustbenefitbothsides. Information must be shared as well as gained, and the relationship must remain forthright and trustful. If either partner plays games with information or tries to take advantage of the other, the resulting friction can quickly erode the value of further collaboration. Open, trustworthy behavior on both sides is essential for fruitful collaboration.

a. outsourcing strategy
b. vertical integration strategy
c. first-mover advantage
d. first-mover disadvantage
e. horizontal and vertical scope

Outsourcing forgoes attempts to perform certain value chain activities internally and instead farms them out to outside specialists and strategic allies. A vertical integration strategy extends a firm’s competitive and operating scope within the same industry, expanding the firm’s range of value chain activities backward into sources of supply and/or forward toward end users. A first-mover advantage helps (1) build a firm’s image and reputation with buyers; (2) requires commitments to new technologies, new-style components, new or emerging distribution channels, and so on; (3) can produce an absolute cost advantage over rivals; (4) builds customer loyalty to pioneering firms in making repeat purchases; and (5) constitutes a preemptive strike, making imitation difficult or unlikely. First-mover disadvantages include vulnerability to fast-moving technology or rapid growth in customer demand, resulting in quickly appearing next-generation technology or products; and markets are sometimes slow to adopt the innovative product offering of a first mover, in which case a fast follower with substantial resources and marketing muscle can leapfrog the challenger. A company’s horizontal scope, i.e. the range of product and service segments that it serves, can be expanded through new-business development or mergers and acquisitions of other companies in the marketplace, while vertical scope describes the extent to which a company engages in the various activities that make up the industry’s entire value chain system—from raw-material or component production all the way to retailing and after-sales service.

Hit-and-run (also known as guerrilla) offensives are consider to be strategic moves incorporating the element of surprise. These surprise offensives are particularly well suited to small or medium sized challengers that have neither the resources nor the market visibility to mount a full-fledged attack on industry leaders.
A preemptive strike by a challenger means moving first to secure advantageous competitive assets that rivals cannot readily match or duplicate. Examples of preemptive moves include: (1) securing the best distributors in a particular geographic region or country; (2) moving to obtain the most favorable site at a new interchange or intersection, in a new shopping mall, and so on; and (3) tying up the most reliable, high-quality suppliers via exclusive partnerships, long-term contracts, or even acquisition.
The best targets for offensive attacks like hit-and-run or preemptive strike include: (1) market leaders that are vulnerable; (2) runner-up firms that possess weaknesses in areas where the challenger is strong; (3) struggling enterprises that are on the verge of going under; and (4) small local and regional firms that possess limited capabilities and resources. To be successful, neither offensive move has to totally block rivals from following or copying; it merely needs to provide the challenger with a prime position that is not easily circumvented.

The world economy is globalizing at an accelerating pace as ambitious, growth-minded companies race to build stronger competitive positions in the markets of more and more countries, as countries previously closed to foreign companies open up their markets, as countries that previously had planned economies embrace market or mixed economies, and as information technology shrinks the importance of geographic distance.

A company may opt to expand outside its domestic market for any of five major reasons: (1) To gain access to new customers; (2) To achieve lower costs through economies of scale, experience, and increased purchasing power; (3) To gain access to low-cost inputs of production; (4) To further exploit its core competencies; (5) To gain access to resources and capabilities located in foreign markets. Cross-border strategic alliances create value through resource sharing and risk spreading.

Strengthening capability to employ offensive strategies is not one of the five principal reasons that companies choose to expand into foreign markets. A company may opt to expand outside its home country for a variety of reasons, which include: (1) the ability to gain access to new customers; (2) to achieve lower costs and enhance competitiveness; (3) to leverage core competencies in new markets; (4) to gain access to resources and capabilities (labor, resources, technology, distribution networks) in foreign markets; and (5) to spread business risk across a wider market base.

Building a profit sanctuary to wage guerilla offensives is not one of the five principal reasons that companies choose to expand into foreign markets. A company may opt to expand outside its home country for a variety of reasons, which include: (1) the ability to gain access to new customers; (2) to achieve lower costs and enhance competitiveness; (3) to leverage core competencies in new markets; (4) to gain access to resources and capabilities (labor, resources, technology, distribution networks) in foreign markets; and (5) to spread business risk across a wider market base.

A company may opt to expand outside its domestic market for any of five major reasons: (1) To gain access to new customers; (2) To achieve lower costs through economies of scale, experience, and increased purchasing power; (3) To gain access to low-cost inputs of production; (4) To further exploit its core competencies; (5) To gain access to resources and capabilities located in foreign markets. Companies in industries based on natural resources (e.g., oil and gas, minerals, rubber, and lumber) often find it necessary to operate in the international arena since raw-material supplies are located in different parts of the world and can be accessed more cost-effectively at the source.

Many companies are driven to sell in more than one country because domestic sales volume alone is not large enough to capture fully economies of scale in product development, manufacturing, or marketing. Similarly, firms expand internationally to increase the rate at which they accumulate experience and move down the learning curve. International expansion can also lower a company’s input costs through greater pooled purchasing power. Companies often expand internationally to extend the life cycle of their products. An increasingly important motive for entering foreign markets is to acquire resources and capabilities that may be unavailable in a company’s home market.

Cross-border strategic alliances create value through resource sharing and risk spreading. A company may opt to expand outside its domestic markets to gain access to new customers; to achieve lower costs through economies of scale, experience, and increased purchasing power; and to further exploit its core competencies. Companies also choose to establish operations in other countries to utilize local distribution networks, gain local managerial or marketing expertise, or acquire technical knowledge.

Crafting a strategy to compete in one or more countries of the world is inherently more complex for five reasons. First, different countries have different home-country advantages in different industries. Second, there are location-based advantages to conducting particular value chain activities in different parts of the world. Third, different political and economic conditions make the general business climate more favorable in some countries than in others. Fourth, companies face risk due to adverse shifts in currency exchange rates when operating in foreign markets. And fifth, differences in buyer tastes and preferences present a challenge for companies concerning customizing versus standardizing their products and services.

Differences in buyer tastes and preferences present a challenge for companies concerning customizing versus standardizing their products and services. Greater standardization of a global company’s product offering can lead to scale economies and learning-curve effects, thus contributing to the achievement of a low-cost advantage. Differing population sizes, income levels, and other demographic factors give rise to considerable differences in market size and growth rates from country to country. Sometimes, product designs suitable in one country are inappropriate in another because of differing local standards. When companies produce and market their products and services in many different countries, they are subject to the impacts of sometimes favorable and sometimes unfavorable changes in currency exchange rates.

The diamond framework can be used to reveal the answers to several questions that are important for competing on an international basis. First, it can help predict where foreign entrants into an industry are most likely to come from. Second, it can reveal the countries in which foreign rivals are likely to be weakest. And third, because it focuses on the attributes of a country’s business environment that allow firms to flourish, it reveals something about the advantages of conducting particular business activities in that country. Thus the diamond framework is an aid to deciding where to locate different value chain activities most beneficially.

Differing population sizes, income levels, and other demographic factors give rise to considerable differences in market size and growth rates from country to country. Moreover, market growth can be limited by the lack of infrastructure or established distribution and retail networks in emerging markets.

Norway is the correct answer. In 2013, hourly compensation for manufacturing workers averaged about $3.07 in China, $6.82 in Mexico, $9.37 in Taiwan, $9.44 in Hungary, $10.69 in Brazil, $12.90 in Portugal, $21.96 in South Korea, $29.13 in Japan, $36.33 in Canada, $36.34 in the United States, $48.98 in Germany, and $65.86 in Norway. Not surprisingly, China has emerged as the manufacturing capital of the world—virtually all of the world’s major manufacturing companies now have facilities in China.

Crafting a strategy to compete in one or more countries of the world is inherently more complex for five reasons. First, different countries have different home-country advantages in different industries. Second, there are location-based advantages to conducting particular value chain activities in different parts of the world. Third, different political and economic conditions make the general business climate more favorable in some countries than in others. Fourth, companies face risk due to adverse shifts in currency exchange rates when operating in foreign markets. And fifth, differences in buyer tastes and preferences present a challenge for companies concerning customizing versus standardizing their products and services.

Differences in buyer tastes and preferences present a challenge for companies competing in one or more countries of the world concerning customizing versus standardizing their products and services.

Four important factors shape a company’s strategic approach to competing in foreign markets: (1) the degree to which there are important cross-country differences in demographic, cultural, and market conditions; (2) whether opportunities exist to gain a location-based advantage based on wage rates, worker productivity, inflation rates, energy costs, tax rates, and other factors that impact cost structure; (3) the risks of adverse shifts in currency exchange rates; and (4) the extent to which governmental policies affect the local business climate. Franchising opportunities are not among these four important factors.

Four important factors shape a company’s strategic approach to competing in foreign markets: (1) the degree to which there are important cross-country differences in demographic, cultural, and market conditions; (2) whether opportunities exist to gain a location-based advantage based on wage rates, worker productivity, inflation rates, energy costs, tax rates, and other factors that impact cost structure; (3) the risks of adverse shifts in currency exchange rates; and (4) the extent to which governmental policies affect the local business climate. The level of industry-related support activities to support customization of products and services is not among these four important factors.

Increasingly, companies are locating different value chain activities in different parts of the world to exploit location-based advantages that vary from country to country. This is particularly evident with respect to the location of manufacturing activities. By locating its plants in certain countries, firms in some industries can reap major manufacturing cost advantages because of lower input costs, relaxed government regulations, the proximity of suppliers and technologically related industries, or unique natural resources. South Africa is the world leader in diamond production and De Beers dominate diamond mining and trading. Therefore, by setting up operations in South Africa, De Beers is likely to gain on account of proximity to suppliers.

National governments eager to spur economic growth, create more jobs, and raise living standards for their citizens usually make a special effort to create a business climate that outsiders will view favorably. They may provide such incentives as (1) reduced taxes, (2) low-cost loans, and (3) site-development assistance to companies agreeing to construct or expand production and distribution facilities in the host country.
National governments sometimes enact policies that, from a business perspective, make locating facilities within a country’s borders less attractive. For example, the nature of a company’s operations may make it particularly costly to achieve compliance with environmental regulations in certain countries. Some governments, wishing to discourage foreign imports, may enact deliberately burdensome customs procedures and requirements or impose tariffs or quotas on imported goods. Host-country governments may also specify that products contain a certain percentage of locally produced parts and components, require prior approval of capital spending projects, limit withdrawal of funds from the country, and require local ownership stakes in foreign-company operations in the host country. Such governmental actions make a country’s business climate unattractive and in some cases may be sufficiently onerous as to discourage a company from locating facilities in that country or selling its products there.

Robust industries often develop in locales where there is a cluster of related industries, including others within the same value chain system (e.g., suppliers of components and equipment, distributors) and the makers of complementary products or those that are technologically related. The advantage to firms that develop as part of a related-industry cluster comes from the close collaboration with key suppliers and the greater knowledge sharing throughout the cluster, resulting in greater efficiency and innovativeness.

The governments of some countries are anxious to attract foreign investments, and thus they go all out to create a business climate that outsiders will view as favorable. Such governments may provide incentives such as reduced taxes, low-cost loans, site location and site development assistance, and government-sponsored training for workers to encourage companies to construct production and distribution facilities. On the other hand, governments sometimes enact policies that, from a business perspective, make locating facilities within a country’s borders less attractive. For example, the nature of a company’s operations may make it particularly costly to achieve compliance with a country’s environmental regulations. To discourage foreign imports, governments may impose tariffs or quotas on imports. Additionally, they may require partial ownership of foreign company operations by local companies or investors.

Governments in host countries sometimes enact policies that, from a business perspective, make locating facilities within a country’s borders less attractive. Some governments provide subsidies and low-interest loans to domestic companies to enable them to better compete against foreign companies. To discourage foreign imports, governments may enact deliberately burdensome procedures and requirements regarding customs inspection for foreign goods and may impose tariffs or quotas on imports. Additionally, they may specify that a certain percentage of the parts and components used in manufacturing a product be obtained from local suppliers, require prior approval of capital spending projects, limit withdrawal of funds from the country, and require partial ownership of foreign company operations by local companies or investors. There are times when a government may place restrictions on exports to ensure adequate local supplies and regulate the prices of imported and locally produced goods.

Political risks stem from instability or weakness in national governments and hostility to foreign business, whereas economic risks stem from the stability of a country’s monetary system, economic and regulatory policies, and the lack of property rights protections.

The products made in the U.S. plants are more cost-competitive when the dollar is weaker than the currency of the countries where the goods are being exported. In other words, if the currency of the countries where goods are being exported are stronger against dollar, the cost of production in the U.S. manufacturing units fall. This clearly puts the manufacturer at an advantage and in a better position to compete with other market players in the countries where the products are being exported. On the other hand, if the U.S. dollar gets stronger than the currencies of the countries where the products are being exported, the U.S. based manufacturing plants will be generating the same quantity of products at a higher cost, putting the manufacturer at a disadvantage. Clearly, the attraction of manufacturing a good in the U.S. and exporting it to foreign countries is greater when the currencies of the foreign countries are stronger than when they are weaker than the U.S. dollar.

The attraction of manufacturing a good in Europe and exporting it to the U.S. is greater when the euro declines, as products become cost-competitive in the U.S. market. On the contrary, if the U.S. dollar is stronger than the euro, the cost of manufacturing goods in European plants will be higher and therefore puts manufacturers at a disadvantage. In other words, the products manufactured in Europe become cost-competitive when the euro declines in value against the U.S. dollar.

Goods manufactured in Brazil become cost-competitive if the real (the Brazilian currency) declines in value against the currencies of the markets where these goods are being exported. In other words, as the real declines, the cost of manufacturing the same quantity of goods becomes lesser than what it was when the real had a greater value, or when it was stronger against the currencies of the countries where the goods are being exported. Therefore, the U.S. company is competitively advantaged when the Brazilian currency declines in value.

Goods manufactured in Brazil become cost-competitive in the markets where they are being exported to when the Brazilian currency declines against the currencies of the markets to which these goods are being exported. On the other hand, if the currencies of the markets where these goods are being exported get weaker than the real and real gets stronger against these currencies, the cost of manufacturing the goods in Brazil becomes higher. Therefore, the goods manufactured in Brazil become less competitive when the real gains against the currencies of the countries to which these Brazilian-made goods are being exported.

Fluctuating exchange rates pose significant economic risks to a company’s competitiveness in foreign markets. Exporters are disadvantaged when the currency of the country where goods are being manufactured grows stronger relative to the currency of the importing country. On the contrary, the exporters stand to gain when the currency of the country where goods are being manufactured declines relative to the currency of the importing country.

Fluctuating exchange rates pose significant economic risks to a company’s competitiveness in foreign markets. Exporters are disadvantaged when the currency of the country where goods are being manufactured grows stronger relative to the currency of the importing country.

Sizable shifts in exchange rates pose significant risks for two reasons: (1) They are hard to predict because of the variety of factors involved and the uncertainties surrounding when and by how much these factors will change; (2) They shuffle the cards of which countries represent the low-cost manufacturing locations and which rivals have the upper hand in the marketplace. When the currency of the country where the goods are being manufactured becomes weak, the cost of producing the same quantity of goods declines, making these goods cost-competitive in the countries where they are being exported. Therefore, the companies exporting goods being manufactured in countries with weak currencies are likely to benefit rather than be disadvantaged by such a shift in exchange rates. On the contrary, if the currency of the country where the goods are being manufactured gets stronger vis-à-vis currencies of the country where the good are being exported, the cost of manufacturing goes up, making these goods less cost competitive in the countries where they are being exported. Also, domestic companies facing competitive pressure from lower-cost imports benefit when their government’s currency grows weaker because the imports get expensive and therefore, the demand for imported goods decline.

Sizable shifts in exchange rates pose significant risks for two reasons: (1) They are hard to predict because of the variety of factors involved and the uncertainties surrounding when and by how much these factors will change; (2) They shuffle the cards of which countries represent the low-cost manufacturing locations and which rivals have the upper hand in the marketplace. When the currency of the country where the goods are being manufactured becomes weak, the cost of producing the same quantity of goods declines, making these goods cost-competitive in the countries where they are being exported. Therefore, the companies exporting goods being manufactured in countries with weak currencies are likely to benefit rather than be disadvantaged by such a shift in exchange rates. On the contrary, if the currency of the country where the goods are being manufactured gets stronger vis-à-vis currencies of the country where the good are being exported, the cost of manufacturing goes up, making these goods less cost competitive in the countries where they are being exported. Also, domestic companies facing competitive pressure from lower-cost imports benefit when their government’s currency grows weaker because the imports get expensive and therefore, the demand for imported goods decline.

Fluctuating exchange rates impact companies that export goods to foreign countries. Companies always gain in cost/price competitiveness when the currency of the country in which the goods are manufactured is weak. Exporters are disadvantaged when the currency of the country where goods are being manufactured grows stronger.

A weaker U.S. dollar is an economically favorable exchange rate shift for manufacturing plants based in the United States because a decline in the value of the U.S. dollar strengthens the cost competitiveness of U.S.-based manufacturing plants and boosts buyer demand for U.S.-made goods.

Buyer tastes for a particular product or service sometimes differ substantially from country to country. Because Pizza Hut’s store formats and menus are identical regardless of which market it serves, it does not tailor its strategy to country differences in demographic, cultural, or market conditions.

Buyer tastes for a particular product or service sometimes differ substantially from country to country. Because cows are considered sacred in India, offering beef burgers is not a viable strategy in the country.

Companies operating in an international marketplace have to wrestle with whether and how much to customize their offerings in each country market to match local buyers’ tastes and preferences or whether to pursue a strategy of offering a mostly standardized product worldwide. The tension between the market pressures to localize a company’s product offerings country by country and the competitive pressures to lower costs is one of the big strategic issues that participants in foreign markets have to resolve.

The five general modes for entering foreign markets are: (1) Exporting from a national base; (2) Licensing foreign firms to produce and distribute goods and services abroad; (3) Franchising involving local ownership; (4) Establishing a subsidiary via acquisition or greenfield development; and (5) Relying on strategic alliances, joint ventures, and other cooperative agreements with foreign companies.

A profit sanctuary strategy is not one of the five general modes for entering foreign markets. Strategy options for expanding into markets of foreign countries include: (1) exporting from a national base; (2) licensing foreign firms to produce and distribute goods and services abroad; (3) franchising involving local ownership; (4) establishing a subsidiary via acquisition or greenfield development; and (5) relying on strategic alliances, joint ventures, and other cooperative agreements with foreign companies.

Which option to employ depends on a variety of factors, including the nature of the firm’s strategic objectives, the firm’s position in terms of whether it has the full range of resources and capabilities needed to operate abroad, country-specific factors such as trade barriers, and the transaction costs involved (the costs of contracting with a partner and monitoring its compliance with the terms of the contract, for example). The options vary considerably regarding the level of investment required and the associated risks—but higher levels of investment and risk generally provide the firm with the benefits of greater ownership and control.

Using domestic plants as a production base for exporting goods to foreign markets is an excellent initial strategy for pursuing international sales. It is a conservative way to test the international waters.

The top three artificial heart valve manufacturers use U.S. domestic plants as a production base for exporting goods to foreign markets. It is a conservative way to dominate international markets.

Licensing as an entry strategy makes sense when a firm with valuable technical know-how, an appealing brand, or a unique patented product has neither the internal organizational capability nor the resources to enter foreign markets. Licensing also has the advantage of avoiding the risks of committing resources to country markets that are unfamiliar, politically volatile, economically unstable, or otherwise risky.

The franchisee bears most of the costs and risks of establishing foreign locations; a franchisor has to expend only the resources to recruit, train, support, and monitor franchisees.

The problem a franchisor faces is maintaining quality control; foreign franchisees do not always exhibit strong commitment to consistency and standardization, especially when the local culture does not stress the same kinds of quality concerns.

Companies that prefer direct control over all aspects of operating in a foreign market can establish a wholly owned subsidiary, either by acquiring a foreign company or by establishing operations from the ground up via internal development.

One thing an acquisition-minded firm must consider is whether to pay a premium price for a successful local company or to buy a struggling competitor at a bargain price.

A subsidiary business that is established by setting up the entire operation from the ground up is called a greenfield venture.

Acquisition of an existing firm operating in a foreign country may be the less risky and more cost-efficient than internal development when it comes to hurdling such entry barriers as gaining access to local distribution channels, building supplier relationships, and establishing working relationships with key government officials and other constituencies.

Entering a new foreign country via internal development and building a foreign subsidiary from scratch makes sense when: (1) a company already operates in a number of countries, (2) has experience in getting new subsidiaries up and running and overseeing their operations, (3) has a sufficiently large pool of resources and competencies to rapidly equip a new subsidiary, (4) an internal start-up is cheaper than making an acquisition, (5) adding new production capacity will not adversely impact the supply-demand balance in the local market, (6) a start-up subsidiary has the ability to gain good distribution access (perhaps because of the company’s recognized brand name), and/or (7) a start-up subsidiary will have the size, cost structure, and resources to compete head-to-head against local rivals. Adding new production capacity that results in a supply-demand imbalance would tend to make an internally developed start-up in a foreign country unappealing.

Entering a new foreign country via a greenfield venture makes sense when a company already operates in a number of countries, has experience in establishing new subsidiaries and overseeing their operations, and has a sufficiently large pool of resources and capabilities to rapidly equip a new subsidiary with the personnel and competencies it needs to compete successfully and profitably.

Entering a new foreign country via a greenfield venture makes sense when a company already operates in a number of countries, has experience in establishing new subsidiaries and overseeing their operations, and has a sufficiently large pool of resources and capabilities to rapidly equip a new subsidiary with the personnel and competencies it needs to compete successfully and profitably. Four other conditions make a greenfield venture strategy appealing:

• When creating an internal startup is cheaper than making an acquisition.
• When adding new production capacity will not adversely impact the supply-demand balance in the local market.
• When a startup subsidiary has the ability to gain good distribution access (perhaps because of the company’s recognized brand name).
• When a startup subsidiary will have the size, cost structure, and capabilities to compete head-to-head against local rivals.

An alliance offers the flexibility to readily disengage once its purpose has been served or if the benefits prove elusive, whereas mergers and acquisitions are more permanent arrangements.

Cross-border alliances enable a growth-minded company to widen its geographic coverage and strengthen its competitiveness in foreign markets; at the same time, they offer flexibility and allow a company to retain some degree of autonomy and operating control.

Strategic alliances, joint ventures, and other cooperative agreements with foreign companies are a favorite and potentially fruitful means for entering a foreign market or strengthening a firm’s competitiveness in world markets. All of the above except the acquisition of Travelex by Western Union are examples of cross-border alliances that were formed in order to: (1) strengthen a company’s ability to gain a foothold in a desirable market; (2) capture economies of scale in production and/or marketing; (3) fill gaps in technical expertise and/or knowledge of local markets (buying habits and product preferences of consumers, local customs, and so on); (4) share distribution facilities and dealer networks to mutually strengthen access to buyers; and (5) refocus energies away from competition between allies and instead towards teaming up to close the gap on leading companies; and (6) allow each partner to preserve its independence and avoid using perhaps scarce financial resources to fund acquisitions.

An alliance offers the flexibility to readily disengage once its purpose has been served or if the benefits prove elusive, whereas mergers and acquisitions are more permanent arrangements.