Strategy of Firms Flashcards
1
Q
What are the 3 dimensions of scope?
A
Geographic
Product
What activities keep in-house/outsource
2
Q
What drives scope?
A
Growth
3
Q
What is the geographic dimension of scope?
A
How many counties they are going to operate in?
What level of penetration in each?
4
Q
What is the product dimension of scope?
A
How many product lines
5
Q
What is the in-house/outsource dimension of scope?
A
How much of the value chain is undertaken in-house/outscourced
6
Q
What must the firm decide for Geographic scope?
A
Where
How
When
7
Q
What to consider for where?
A
Location choice:
Location specific advantages
Cultural disadvantages
Risks Assessment
8
Q
What to consider for how?
A
Entry mode:
Scale of entry
Mode of entry
9
Q
What to consider for when?
A
Entry time:
First mover advantage
Early entry strategies
10
Q
What are the four strategic goals of where to enter?
A
Natural resource seeking
Market seeking
Efficiency seeking
Innovations seeking
11
Q
What are the location specific advantages of natural resource seeking?
A
Possession of natural resources and related transport and communication
12
Q
What are the location specific advantages of market seeking?
A
Abundance of strong market demand and customer willing to pay
13
Q
What are the location specific advantages of efficiency seeking?
A
Economies of scale and abundance of low cost factors
14
Q
What are the location specific advantages of innovation seeking?
A
Abundance of innovative individuals, firms and universities
15
Q
What are two ways of assessing country attractiveness?
A
Market drivers
Income Growth
16
Q
What are market drivers?
A
Population and GDP per capita
Distribution of income important
17
Q
What are three types of income growth?
A
Developing
Emerging
Newly industrialised
18
Q
What is a developing economy?
A
Low income
Low growth
19
Q
What is an emerging economy?
A
Low income
High growth
20
Q
What is a new industrialised economy?
A
Moderately high income
High growth
21
Q
According to the Institutional perspective on where to enter, what are the 4 considerations?
A
- Regulatory Risks
- Trade Barriers
- Currency Risks
- Cultural Differences
22
Q
Importance of Regulatory Risks features
A
Adverse government policies
States much better disposed towards MNE’s
23
Q
Trade Barriers features
A
- Classic reason for switching from exporting to FDI
- Governments may impose local content requirements
- Tariff + non-tariff barriers e.g. safety inspection, local content requirement, entry mode restrictions
24
Q
Currency Risks features
A
Overseas profits can be eroded if currency weakens
Geographic diversification may also help
25
Cultural differences features
Dimensions of culture
| Hofstede
26
How to assess country risks?
PEST
27
What does PEST stand for?
Political
Economic
Socio-cultural
Technological
28
Examples of Political risks
```
Legislation
Regulatory bodies
Funding
Trade policies
Wars and conflicts
```
29
Examples of Economic risks
```
Home economy
Overseas economy
General Tax
Market Cycles
Interest rates
```
30
Example of Socio-cultural risks
```
Lifestyle
Demographics
Media
Ethical issues
Ethnics
Brand
Consumer attitudes
```
31
Example of technological risks
```
Competing technology
Research funding
IT
Technology legislation
Licensing
Intellectual property
```
32
When to enter options?
Early entry
| Late entry
33
What is early entry?
When an international business enters a foreign market before other foreign firms
34
What is late entry?
When an international business enters a foreign market after other foreign firms
35
What are first mover advantages?
- Ability to preempt rivals and capture demand
- Establish strong brand name
- Build sales volume and ride experience curve ahead of rivals = cost advantage
- Create switching costs that tie customers into products/services
36
What are first mover disadvantages?
Pioneering costs:
- business failure due to ignorance of foreign environment
- promoting and establishing
- educating customers
- sudden regulatory change
37
What are pioneering costs?
- business failure due to ignorance of foreign environment
- promoting and establishing
- educating customers
- sudden regulatory change
38
What is the experience curve?
```
cost per unit |\
| \
| \________
|___________
volume
```
39
Why does research suggest that the probability of survival increase if a firm enters a foreign market after several others?
Benefit from observing and learning from others mistakes
40
What are the two scales of entry?
Large scale
| Small scale
41
Large scale benefit?
Strategic committment
42
Large scale entry drawbacks?
Limited strategic flexibility
| Costly, huge potential lost
43
Small scale focus?
Accumulating experience- learn by doing
44
Small scale entry drawbacks?
Lack of strong strategic commitment
| Difficulties in building market share
45
What are the types of modes of entry?
Non-equity
| Equity
46
What are the two types of Non-equity modes of entry?
Exports
| Contractual agreements
47
What are the two types of Equity modes of entry?
Joint Ventures
| Wholly Owned Subsidiaries
48
What are the two types of Strategic Alliance modes of entry?
Contractual Agreements
| Joint Ventures
49
What are the types of Export?
Direct exports
Indirect exports
others
50
What are the types of Contractual Agreement?
Licensing/Franchising
Turnkey projects
R+D Contracts
Co-Marketing
51
What are the types of Joint Venture?
Minority
50/50
Majority
52
What are the types of Wholly Owned Subsidiaries?
Greenfields
Acquisitions
Others
53
What is the difference between equity and non-equity modes of entry?
Equity involves ownership, non-equity does not
54
What are the OLI advantages?
Ownership
Location
Internationalisation
(Dunning)
55
Is exporting equity or non-equity?
Non-equity
56
What are the advantages of exporting?
- Avoids cost of establishing manufacturing operations
| - May help firm achieve experience curve and location economies
57
What is location economies?
Optimal trade barriers and transportation
58
How can exporting help achieve experience curve and location economies?
By manufacturing in a certain location that is centralised then exporting the firm will apply economies of scale from global sales volume
e.g. Sony TV, Honda and Toyota Japanese in US
59
What are the disadvantages of exporting?
- Exporting from home may be more expensive when lower cost manufacturing can be found abroad e.g. more favourable conditions for value creation
- High transportation costs
- Tariff barriers
- Marketing/Sales and service activities take place through local agent - often carriers products for competing firms so divided loyalties appear
60
What are turnkey projects?
A project in which the contractor/supplier agrees to handle every detail for a foreign client, including construction of new facilities and training of personnel
(Contractor fully responsible, client handed 'key' at end)
61
Turnkey is found in what sort of countries/industries?
- FDI restrictive countries
| - Complex and expensive tech e.g. Chemicals, Pharmaceuticals, Metal and Petroleum refining
62
Is turnkey equity or non-equity?
Non-equity
63
Advantages of turnkey projects?
- Allows focal firms/contractors to earn returns from process technology (construction)
- Useful when host government regulations limit FDI
- Less risky than conventional FDI
64
Disadvantages of turnkey projects?
- Don't allow for long term presence in foreign country
- May create a competitor, facilitate know-how spillover e.g. Western firms pass oil and gas to Saudi Arabia + Kuwait
- Initial competitive advantage of firm passing to competitor
65
Is Licensing equity or non-equity?
Non-equity
66
What is licensing?
Arrangement whereby a licensor grants the rights to intangible property to another entity (licensee) for a specified period of time and in return receives a royalty fee
67
What are some examples of intangible property for licensing?
```
Inventions
Copyrights
Designs
Processes
Formulas
Trademarks
```
68
Examples of licensing
Coca Cola trademark licensed to clothing manufacturers
69
Advantages of licensing?
- Firms doesn't have to bear development costs and risk
- Attractive for firms lacking capital to develop operations overseas
- When firm is unwilling to commit financially to an unfamiliar/volatile foreign market
- Used when firm has intangible property that might have business applications but doesn't want to develop them itself
70
Disadvantages of licensing?
- Doesn't give firm tight control over manufacturing, marketing and strategy that is required for experience curve and location economies (licensee sets up)
- Competing in a global market might involve transfer of profits from one country's licensee to another's - licensing limits this
- Risks associated with licensing tech know-how to foreign countries (easily loose control)
71
Remedies of disadvantages of licensing?
- Cross-licensing agreement which means both sides reveal know-how
- Fuji-Xerox both sides take important equity stakes to align interests and ensure success (Xerox licensed to Fuji for 10 years with 5% royalty of sales)
72
What is franchising?
A specialised form of licensing in which franchise not only sell intangible property (normally trademark) but also insists that the franchise agrees to abide by strict rules as to how it does business
73
Features of franchising?
- Tends to involve longer-term commitments
- Franchiser will also assist franchisee to run business on an on-going basis
- Tends to be trademarks e.g. McDonalds, KFC
- Typically franchiser receives a royalty payment of a % of franchisees revenues
74
What are the advantages of Franchising?
- Firms relieved from many costs and risks of opening in foreign market on its own (typically franchisee takes costs and risks, good incentive to build profit quickly)
- Service firms can build a global presence quickly at a relatively low cost and risk
75
Who takes on costs and risks of franchising?
Typically franchisee, good incentive to build profit quickly
76
What are the disadvantages of Franchising?
- No need to consider coordination of manufacturing to achieve experience curve and location eocnomies
- Quality control, geographical distance can make poor quality difficult to detect
77
Way around quality control issues in franchising?
Set up a subsidiary in each country in which the firm expands e.g. JV, WOS
- McDonalds establishes master franchisee in many countries, JV between McD and local firm, partly owned so sets up own managers to monitor. KFC same.
78
What sort of firms primarily use franchising?
Services firms
79
What sort of firms primarily use licensing?
Manufacturing firms
80
What are some of McDonalds strict rules on how Franchisees should operate?
Menu control
Cooking methods
Staffing policies
Design and Location
81
McDonalds provides what to its franchisees?
Financial Assistance
Management Training
Organises Supply Chain
82
What are joint ventures?
Entails establishing a firm that is jointly owned by two or more otherwise independent firms.
It is a new entity jointly created and owned
Most commonly 50/50
83
Example of Joint Venture?
BMW + Toyota research into hydrogen fuel cells
| KFC + Mitsubishi in Japan
84
Advantages of Joint Ventures?
- Benefits from local partner knowledge of host country e.g. competition, culture, language
- High sharing of development costs and risks
- Many country's political considerations make JV's only feasible mode
85
Disadvantages of Joint Ventures?
- Risk giving control of its technology to its partner
- Doesn't give tight control over foreign subsidiaries that is might need for global coordination
- Can lead to conflicts for control, often arises with firms of different nationalities (Hofstede)
86
How to minimise risk fo Joint Ventures?
By holding majority ownership, but this is difficult to be accepted by partner firm
87
What is a Wholly Owned Subsidiary?
Parent company owns 100% of the stock of the entity located in a foreign country
88
What are the two ways a wholly owned subsidiary can be done?
Greenfield
| Acquisition
89
What is Acquisition?
Acquire an established firm in host nation and use to promote its products
90
What is Greenfield?
Set up a new operation in that country
91
What are the advantages of wholly owned subsidiaries?
- Reduces risk of losing control over competences e.g. high tech
- Gives firm tight control over operations, necessary for strategic coordination e.g. sharing profits across countries
92
What are the disadvantages of wholly owned subsidiaries?
- Most costly method of serving a foreign market
| - Effort to marry divergent corporate cultures
93
What are strategic alliances?
Voluntary cooperative agreements between potential or actual competitors
94
What are the two types of strategic alliances?
Contractual (non-equity based)
| Equity based
95
What are strategic networks?
Strategic alliances formed by multiple firms and are inherently more complex than single SA's
96
What are the advantages of strategic networks?
- Reduce costs, risks and uncertainties
- Gain access to complementary assets and capabilities
- Opportunities to learn from partners
- Possible to use alliance networks as real options
97
What are the disadvantages of strategic networks?
- Possibility of choosing wrong partner
- Costs of negotiation and coordination
- Possibilities of partner opportunism
- Risks of helping nurture competitors (learning race)
98
What are the range of strategic alliances?
From formal joint ventures to short-term contractual agreements
99
What are strategic alliances a compromise between?
Contractual agreements nd long-term organisational solutions e.g. Mergers and Acquisitions
100
Main disadvantage of going abroad?
Liability of Foreignness
101
What is the Liability of Foreignness?
The inherent disadvantage foreign firms experiences in hose countries because of their non-native status
102
Features of Liability of Foreignness?
- Foreign firms are often discriminated against
| - Difference in formal and informal institutions govern the rules of the game in different countries
103
How to offset the Liability of Foreignness?
Firms often deploy overwhelming or dynamic resources and capabilities
104
Two main growth strategies?
Geographic diversification
Product diversification
*Both equally important
105
What is geographic diversification?
Expanding into new geographic markets
106
What is product diversification?
Expanding into product markets
107
Two types of geographic diversification?
Limited international scope
| Extensive international scope
108
What is limited international scope?
Geographically and culturally adjacent countries
109
What is extensive international scope?
Beyond geographically and culturally neighbouring countries
110
Two types of product diversification?
Product related diversification
| Product unrelated diversificaiton
111
What is product related diversification?
Entry into new markets and/or business activities that are related to a firms existing markets and/or activities
112
What is product unrelated diversification?
Entry into industries that have no obvious product related connections to firms current lines of business
113
What does product related diversification emphasise?
Operational synergy
- Common technologies, marketing and manufacturing
- Increases in competitiveness beyond what can be achieved in separate markets (2+2=5)
- Known as economies of scale
114
Firms that undertake product unrelated diversification are called what?
Conglomerates
115
What is conglomeration?
- Strategy of firms that undertake product unrelated diversification, intent to obtain financial synergies
- Corporate HQ acts as ask informal capital market that channels finance to high potential and growth areas
116
Merges and Acquisitions are a
Mode of entry and form of growth
117
What are a mode of entry AND form of growth?
Mergers and Acquisitions
118
What is an acquisition?
A transfer of the control, assets, operations and management from one firms (target) to another (acquire)
119
What is a merger?
A combination of assets, operations and management of two firms to establish a new identity
120
Features of Mergers and Acquisitions compared to Strategic Alliances
M+A:
- Higher transaction costs
- Practically irreversible
- Enable firm to absorb + integrate targets strengths + acquire full control over how targets business is run
- Can protect firms from partners opportunistic behaviour
- More expensive (buy whole company, tangible + intangible assets)
121
Joint Venture
| Mergers and Acquisitions
1+1=3
| 1+1=1
122
What is restructuring?
Adjustments to firm size and scope
| Commonly referred to as reduction of size and scope
123
What are the three forms of restructuring?
Downsizing
Downscoping
Refocusing
124
What is downsizing?
Reducing number of employees
125
What is downscoping?
Reducing scope of firm through divestitures
126
What is divestiture?
Reduction of an asset or business through sale, liquidation, exchange, closure, or any other means for financial or ethical reasons
- Opposite of investment
127
What is refocusing?
Narrowing scope of firm by focusing on a few areas
128
Features of Strategic Alliances over Mergers and Acquisitions
SA:
- Better options in situations where companies want short to medium term relationships - partners decide tenure of relationship
- Flexibility to decide if want to continue collaborate
- Don't have full control
- Need VRIO, gives partner opportunity to imitate, erodes CA
