Felipe Soriano - Startegic Management - Soft

STRATEGIC MANAGEMENT
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PLANNING AND DECISION AIDS
KNOWLEDGE OBJECTIVES:
✓ Discuss and define the methods of forecasting
✓ Identify the principles of Forecasting
✓ Discuss the purpose of forecasting in the organization
✓ Identify types of forecasting methods and its characteristics
✓ Explain how forecasting models should be selected
INTRODUCTION
Forecasting plays a pivotal role in long-term business planning. An accurate

analysis of trends is vital in managing the growth of organization, and ultimately in
ensuring its success. However, necessary steps should be taken to review the forecasts
before making the blueprint of sales and marketing plans. A right forecast will make your
business more profitable and pave the way to a successful organization. In a nutshell,
forecasting is like a magical crystal ball that can see the future when asked the rights
questions and used the right techniques for all your business problems.
Data collected over time is complex in nature and include components related to
seasonality, irregularity, and cyclicality. As a result, it is important to select the right
forecasting method to handle the increasing variety and complexity of data to forecast
correctly. However, before selecting the forecasting model, a forecaster needs to have
answers to the following questions.
• What is the purpose of the forecast?

• Are there any relationships between variables?
• Is your historical data sufficient to make forecasts?
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FORECASTING
Forecasting is the process of predicting changing conditions and future events that
may significantly affect the business of an organization.
I. Forecasting is important to both planning and decision making.
II. Forecasting is used in a variety of areas such as: production planning, budgeting,
strategic planning, sales analysis, inventory control, marketing planning, logistics
planning, and purchasing among others.
It’s important to look at forecasting effectiveness. Forecasting techniques are most

accurate when the environment is not rapidly changing.
Some suggestions for improving forecasting effectiveness are as follows:
1) Use simple forecasting techniques.

2) Compare every forecast with “no change.”
3) Don’t rely on a single forecasting method.
4) Don’t assume that you can accurately identify turning points in a trend.
5) Shorten the length of the forecasts.
6) Forecasting is a managerial skill and can be practiced and improved.
Principles of Forecasting
Many types of forecasting models that differ in complexity and amount of data & way they
generate forecasts:
1. Forecasts are rarely perfect
2. Forecasts are more accurate for grouped data than for individual items
3. Forecast are more accurate for shorter than longer time periods
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METHODS OF FORECASTING
QUANTITIVE FORECASTING
Quantitative forecasting relies on numerical data and mathematical model to

predict future conditions. There are two types of quantitative forecasting most frequently
used.
1. Time-series methods used historical data to develop forecasts of the future.
A. The underlying assumption is that patterns exist and that the future will resemble
the past.
B. Time-series methods do not in themselves predict the impact of present or future
actions that managers might take to bring about change.
C. A trend reflects a long-range general movement is either an upward or a
downward direction.
D. A seasonal pattern indicates upward or downward changes that coincide with
particular points within a given year.
E. A cyclical pattern involves changes at particular points in time that span longer
than a Lyear.
F. Time-series are more valuable for predicting broad environmental factors than
in predicting the impact of present or future actions.
G. Because time-series rely on past trends there can be a danger in their use if
environmental changes are disregarded.
2. Explanatory or causal models attempt to identify the major variables that are related
to or have caused particular past conditions and then use current measures of those
variables (predictors) to predict future conditions.
A. Explanatory models allow managers to assess the probable impact of changes
in the predictors.
B. Regression models are equations that express the fluctuations in the variable
being forecasted in terms of fluctuations among one or more other variables.
C. Econometric models are systems of simultaneous multiple regression equations
involving several predictor variables used to identify and measure relationships or
interrelationships that exist in the economy.
D. Leading indicators are variables that tend to be correlate with the phenomenon
of major interest but also tend to occur in advance of the phenomenon.
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QUALITITIVE FORECASTING
Qualitative forecasting is used to make short-term forecasts. These models depend

on the information available in different sources which have been quoted by thought
leaders. The qualitative model is used when the availability of data is low. These models
are frequently used in predicting numbers based on:
Market Research: It incorporates procedures for testing hypothesis from the

available numbers for real markets.
Delphi Method: This method involves taking opinions from experts through
questionnaires and then using it into a forecast.
The objective of qualitative models is to forecast numbers based on logical and

unbiased opinions. A lot of organizations use a combination of these methods to forecast
sales and revenues. However, there are a few limitations to this method. The first one is
that it depends solely on opinions which may be wrong. Secondly, the accuracy of this
method is not high and mostly depends on human judgements.
Type Characteristics Strengths Weaknesses

Executive A group of managers Good for strategic or One person's opinion
opinion meet & come up with new-product can dominate the
a forecast forecasting forecast
Market Uses surveys & Good determinant of It can be difficult to

research interviews to identify customer preferences develop a good
customer preferences questionnaire
Delphi Seeks to develop a Excellent for Time consuming to

method consensus among a forecasting long-term develop
group of experts product demand,
technological
changes, and
Both qualitative and quantitative models provide decision-makers with numbers which
are useful in production planning, financing, and business optimization. A successful
forecaster removes irregularity and non-stationary components in data. However, there
are a few factors which might lead to wrong forecasts. This happens when:
1) The data is inaccurate.

2) The data is produced with a lag and requires revision.
3) The data is a proxy for the decision-making criteria.
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So, it is crucial to address them before jumping on any business decision.
EXHIBIT 0.0 QUALITIVE VS QUANTITIVE METHODS
JUDGEMENTAL FORECASTING
Judgmental Forecasting relies mainly on individual judgments or committee
agreements regarding future conditions.
1. Judgmental forecasting methods are highly susceptible to bias.
2. The jury of executive opinion is one of the two judgmental forecasting model. It is a
means of forecasting in which organization executives hold a meeting and estimate, as a
group, a forecast for a particular item.
3. The Sales-force composite is a means of forecasting that is used mainly to predict

future sales and typically involves obtaining the views of various salespeople, sales
managers, and/or distributors regarding the sales outlook.
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CHOOSING AND FORECASTING METHODS
The choice of which forecasting method to use depends upon the needs within
particular forecasting situations.
o Quantitative forecasting methods:
I. Have a short-to-medium time horizon

II. Require a short period of time if a method is developed
III. Often have high development costs
IV. Are high in accuracy in identifying patterns
V. Are low in accuracy in predicting turning points for time series, but medium
for other methods.
VI. Are difficult to understand
o Technological forecasting methods:
I. Have a medium-to-long time horizon

II. Require a medium-to-long time
III. Have medium development costs
IV. Are of medium accuracy in identifying patterns
V. Are of medium accuracy in predicting turning points
VI. Are easily understood.
o Judgmental forecasting methods:
I. Have a short-to-long time horizon

II. Require a short time
III. Have low development costs
IV. Are of medium-to-high accuracy in identifying patterns
V. Are of low accuracy in predicting turning points
VI. Are easily understood
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INTERNATIONAL STRATEGY
✓ Explain incentives that can influence firms to use an international strategy.
✓ Identify three basic benefits firms achieve by successfully implementing an
international strategy.
✓ Explore the determinants of national advantage as the basis for international
business-level strategies.
✓ Describe the three-international corporate-level strategies.
✓ Discuss environmental trends affecting the choice of international strategies,
particularly international corporate-level strategies.
✓ Explain the five modes firms use to enter international markets.
✓ Discuss the two major risks of using international strategies.
✓ Discuss the strategic competitiveness outcomes associated with international
strategies particularly with an international diversification strategy.
✓ Explain two important issues firms should have knowledge about when using
international strategies.
INTRODUCTION
The purpose of this chapter is to discuss how international strategies can be
a source of global strategic competitiveness. It addresses:
• Factors that influence firms to identify international opportunities
• Three basic benefits that can accrue to firms that successfully use
international strategies
• International business-level strategies and international corporate-level
strategies
• Five modes of entry firms consider when deciding how to enter international
markets
• Economic and political risks when implementing international strategies
• Outcomes firms seek when using international strategies
• International strategy: challenges to be mindful of
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OPPORTUNITIES AND OUTCOMES OF INTERNATIONAL

STRATEGY
EXHIBIT 1.1
International Strategy: a strategy through which the firm sells its goods or services
outside its domestic market
Reasons for having an international strategy
• International markets yield new opportunities
• Needed resources can be secured
• Greater potential product demand
• Borderless demand for globally branded products
• Pressure for global integration
• New market expansion extends product life cycle
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Many firms choose direct investment in assets over indirect investment because it:
• Provides better protection for assets
• Develops relationships with key resources faster
• May provide reduction in risk due to direct connections
INCENTIVES AND BASIC BENEFITS OF INTERNATIONAL STRATEGY
EXHIBIT 2.2
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IDENTIFYING INTERNATIONAL OPPORTUNITIES

INCENTIVES TO USE INTERNATIONAL STRATEGIES
Firms derive three basic benefits by successfully using international strategies:

1 Increased market size
Domestic market may lack the size to support efficient scale manufacturing facilities.
Generally, larger international markets offer higher potential returns and pose less risk for firms.
The strength of international markets may facilitate efforts to more effectively sell and/or produce
products that create value for customers
2. Increased economies of scale and learning

Expanding size or scope of markets helps achieve economies of scale in manufacturing as well
as marketing, R&D, or distribution. Costs are spread over a larger sale based and profit per unit
is increased.
Firms may also be able to exploit core competencies in international markets through resource
and knowledge sharing between units and network partners across country borders. By sharing
resources and knowledge in this manner, firms can learn how to create synergy, which in turn can
help each firm learn how to produce higher-quality products at a lower cost.
Working in multiple international markets also provides firms with new learning opportunities.
Increasing the firm’s R&D ability can contribute to its efforts to enhance innovation, which is critical
to both short- and long-term success. However, to take advantage of international R&D
investments, firms need to already have a strong system in place to absorb resulting R&D
knowledge
3. Development of a competitive advantage through location (e.g., access to low-cost
labor, critical resources, or customers)
Certain markets may offer superior access to critical resources, e.g., raw materials, lower-
cost labor, energy, suppliers, key customers. Cultural influences may be advantageous—a strong
cultural match facilitates international business transactions. Physical distances influence firms’
location choices, i.e., transportation costs
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INTERNATIONAL STRATEGIES
Firms choose one or both of two basic types of international strategies:

International business-level strategies
• Cost leadership
• Differentiation
• Focused cost leadership
• Focused differentiation
• Integrated cost leadership/differentiation
International Corporate-level strategies
• Multidomestic
• Global
• Transnational (the combination of the multidomestic and global strategies)
Each international strategy the firm uses must be based on one or more core
competencies.
INTERNATIONAL BUSINESS - LEVEL STRATEGY
● International firms first develop domestic strategies (at the business level and at the
corporate level if the firm has diversified at the product level).
● Firms may be able to leverage some of their domestic capabilities and core
competencies as the foundation for their international competitive success, however, this
type of domestic-global translation diminishes as geographic diversity increases.
● Home country is usually the most important source of competitive advantage:
Domestic resources and capabilities are the building blocks for international
capabilities and core competencies. This reasoning is grounded in Michael Porter’s
analysis of why some nations/industries are more competitive than others within nations
or in other nations.
● International business-level strategy is selected based on structural characteristics of
an economy, as identified by Porter’s four determinants of national advantage (see Figure
3.3).
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● Porter’s core argument is that conditions/ factors in a firm’s domestic market either help
or hinder the firm’s international business-level strategy implementation.
DETERMINANTS OF NATIONAL ADVANTAGE
EXHIBIT 3.3
Factors of production
• The inputs necessary to compete in any industry
➢ Labor ➢ Land ➢ Natural resources
➢ Capital ➢ Infrastructure
Basic factors
• Natural and labor resources
Advanced factors
• Digital communication systems and an educated workforce
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Demand conditions: characterized by the nature and size of buyers’ needs in the home
market for the industry’s goods or services
• Size of the market segment can lead to scale-efficient facilities
• Efficiency can lead to domination of the industry in other countries
• Specialized demand may create opportunities beyond national
boundaries
Related and supporting industries: supporting services, facilities, suppliers, etc.
• Support in design
• Support in distribution
• Related industries as suppliers and buyers
Firm strategy, structure, and rivalry: the pattern of strategy, structure, and rivalry
among firms
• Common technical training
• Methodological product and process improvement
• Cooperative and competitive systems
EXAMPLES:
• Germany - the excellent technical training system fosters a strong
emphasis on continuous product and process improvements
• Japan - unusual cooperative and competitive systems facilitate the cross-
functional management of complex assembly operations
• Italy - the national pride of the country’s designers spawns strong industries
in shoes, sports cars, fashion apparel, and furniture
• U.S. - Competition among computer manufacturers and software producers
accelerates development in these industries
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TYPES OF INTERNATIONAL BUSINESS-LEVEL STRATEGIES
1. Cost Leadership – Organizations compete for a wide customer based on price. Price
is based on internal efficiency in order to have a margin that will sustain above average
returns and cost to the customer so that customers will purchase your product/service.
Works well when product/service is standardized, can have generic goods that are
acceptable to many customers, and can offer the lowest price. Continuous efforts to
lower costs relative to competitors is necessary in order to successfully be a cost
leader. This can include:
• Building state of art efficient facilities (may make it costly for competition to
imitate)
• Maintain tight control over production and overhead costs
• Minimize cost of sales, R&D, and service.
Porter's 5 Forces Model
Earlier we discussed Porter's Model. A cost leadership strategy may help to remain
profitable even with: rivalry, new entrants, suppliers' power, substitute products, and
buyers' power.
• Rivalry – Competitors are likely to avoid a price war, since the low cost firm will
continue to earn profits after competitors compete away their profits (Airlines).
• Customers – Powerful customers that force firms to produce goods/service at
lower profits may exit the market rather than earn below average profits leaving
the low cost organization in a monopoly positions. Buyers then loose much of
their buying power.
• Suppliers – Cost leaders are able to absorb greater price increases before it
must raise price to customers.
• Entrants – Low cost leaders create barriers to market entry through its
continuous focus on efficiency and reducing costs.
• Substitutes – Low cost leaders are more likely to lower costs to entice customers
to stay with their product, invest to develop substitutes, purchase patents.
How to Obtain a Cost Advantage?
• Determine and Control Cost

• Reconfigure the Value Chain as Needed
Risks
• Technology
• Imitation
• Tunnel Vision
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Value Chain – A framework that firms can use to identify and evaluate the ways in which
their resources and capabilities can add value. The value of the analysis lays in being
able to break the organization's operations or activities into primary (such as operations,
marketing & sales, and service) and support ( staff activities including human resources
management & procurement) activities. Analyzing the firm's value-chain helps to assess
your organizations to what you perceive your competitors value-chain, uncover ways to
cut costs, and find ways add value to customer transactions that will provide a competitive
advantage.
2. Differentiation - Value is provided to customers through unique features and

characteristics of an organization's products rather than by the lowest price. This is done
through high quality, features, high customer service, rapid product innovation, advanced
technological features, image management, etc. (Some companies that follow this
strategy: Rolex, Intel, Ralph Lauren)
Create Value by:
• Lowering Buyers' Costs – Higher quality means less breakdowns, quicker

response to problems.
• Raising Buyers' Performance – Buyer may improve performance, have higher level
of enjoyment.
• Sustainability – Creating barriers by perceptions of uniqueness and reputation,
creating high switching costs through differentiation and uniqueness.
Risks of Using a Differentiation Strategy
• Uniqueness
• Imitation
• Loss of Value
Porter's Five Forces Model – Effective differentiators can remain profitable even when
the five forces appear unattractive.
• Rivalry – Brand loyalty means that customers will be less sensitive to price
increases, as long as the firm can satisfy the needs of its customers (audiofiles).
• Suppliers – Because differentiators charge a premium price they can more afford
to absorb higher costs and customers are willing to pay extra too.
• Entrants – Loyalty provides a difficult barrier to overcome. Substitutes (trans. 4-26)
– Once again brand loyalty helps combat substitute products.
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3. Focused Low Cost- Organizations not only compete on price, but also select a small
segment of the market to provide goods and services to. For example a company that
sells only to the U.S. government.
4. Focused Differentiation - Organizations not only compete based on differentiation,

but also select a small segment of the market to provide goods and services.
Focused Strategies - Strategies that seek to serve the needs of a particular customer
segment (e.g., federal gov't).
Companies that use focused strategies may be able serve the smaller segment
(e.g. business travelers) better than competitors who have a wider base of customers.
This is especially true when special needs make it difficult for industry-wide competitors
to serve the needs of this group of customers. By serving a segment that was previously
poorly segmented an organization has unique capability to serve niche.
Risks of Using Focused Strategies:
• Maybe out focused by competitors (even smaller segment)

• Segment may become of interest to broad market firm(s)
5. Using an Integrated Low-Cost/Differentiation Strategy
This new strategy may become more popular as global competition increases. Firms
that use this strategy may see improvement in their ability to:
• Adaptability to environmental changes.

• Learn new skills and technologies
• More effectively leverage core competencies across business units and products
lines which should enable the firm to produce produces with differentiated features
at lower costs.
Thus the customer realizes value based both on product features and a low price.
Southwest airlines is one example of a company that does uses this strategy.
However, organizations that choose this strategy must be careful not to: becoming stuck
in the middle i.e., not being able to manage successfully the five competitive forces and
not achieve strategic competitiveness. Must be capable of consistently reducing costs
while adding differentiated features.
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INTERNATIONAL CORPORATE - LEVEL STRATEGY
The type of corporate strategy selected will have an impact on the selection and
implementation of the business-level strategies
• Some strategies provide individual country units with the flexibility to choose
their own strategies
• Other strategies dictate business-level strategies from the home office and
coordinate resource sharing across units
Focuses on the scope of operations:
• Product diversification
• Geographic diversification
Required when the firm operates in:
• Multiple industries, and
• Multiple countries or regions
Headquarters unit guides the strategy
• However, business or country-level managers can have substantial
strategic input
EXHIBIT 4.4 INTERNATIONAL CORPORTE LEVEL STRATEGIES
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MULTI DOMESTIC STRATEGY

Multidomestic Strategy and operating decisions are
decentralized to strategic business units (SBU) in
each country
Strategy Products and services are tailored to local
markets
Business units in each country are independent
Assumes markets differ by country or regions
Focus on competition in each market
Prominent strategy among European firms due to broad variety of cultures and
markets
Strategy results in less knowledge sharing for the corporation as a whole
Strategy isolates the firm from global competitive forces
• Establish protected market positions
• Compete in industry segments most affected by differences among local
countries
• Deals with uncertainty from differences across markets
GLOBAL STRATEGY
o
Global Firm offers standardized products across
country markets, with the competitive strategy being
dictated by the home office
strategy o Strategic and operating decisions are
centralized at the home office
o Involves interdependent SBUs operating in
each country
o Home office attempts to achieve integration across SBUs, adding management
complexity
o Produces lower risk
o Facilitated by improved global reporting standards (i.e., accounting and financial)
o Emphasizes economies of scale
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o Less responsive to local market opportunities

o Requires resource sharing and coordination across borders (hard to manage)
o Offers less effective learning processes (pressure to conform and standardize)
o Strategy more effective in areas where regional integration is occurring
TRANSNATIONAL STRATEGY
• Seeks to achieve both global efficiency and
Transnational local responsiveness—competing goals
• Requires both:
Strategy
• Centralization - global coordination and control
• Decentralization - local flexibility
• Global competitive landscape fosters intense competition, thus pressures to
reduce costs, while at the same time information sharing has intensified the desire
for specialized, customized, differentiated products
• Firm must pursue organizational learning to achieve competitive advantage
• Challenging, but becoming increasingly necessary to compete in international
markets
• Increasingly popular as a strategy
Basis for Business Strategy Corporate Strategy

Comparison
Meaning Business Strategy is the strategy Corporate Strategy is stated in
framed by the business managers the mission statement, which
to strengthen the overall explains the business type and
performance of the enterprise. ultimate goal of the firm.
Created by Middle level management Top level management
Nature Executive and Governing Decisive and Legislative
Relates to Selection of plan to fulfill the Business selection in which the
objectives of organization. company should compete.
Deals with Particular business unit or Entire business organization
division
Term Short term strategy Long term strategy
Focus Competing successfully in the Maximizing profitability and
marketplace. business growth.
Approach Introverted Extroverted
Major Cost Leadership, Focus and Multi Domestic, Global and
strategies Differentiation Transnational Strategy
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ENVIRONMENTAL TRENDS
Brazil, Russia, India, and China (BRIC) represent major international market opportunities
and threats.
A. Liability of foreignness: costs associated with entering foreign markets

• Increased after terrorists’ attacks and Iraq War
• Four types of distances:
• Cultural differences
• Administrative (unfamiliar operating environments)
• Geographic (challenges of distance coordination)
• Economic
B. Regionalization: Is a business strategy that maintains focus on a particular region
or area as such, this approach employs differentiation based on regions.
• Global strategies not as prevalent today; difficult to implement even with
Internet-based strategies
• Regional focus allows firms to marshal resources to compete effectively in
regional markets
• Increases understanding of market: cultures, legal and social norms
• Achieve some economies through coordination and sharing of resources
• Trade agreements (e.g., EU, OAS, NAFTA) promote trade flows across
country boundaries with their respective regions
• Most firms enter regional markets sequentially, beginning in more familiar
markets, introducing their largest and strongest lines of business first
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CHOICE OF INTERNATIONAL ENTRY MODE
Following the selection of an international strategy, the five main entry modes are:
1. Exporting
2. Licensing
3. Strategic Alliances
4. Acquisitions
5. New Wholly Owned Subsidiary
EXHIBIT 5.5
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EXHIBIT 6.6
Exporting: The firm sends products it produces in its domestic market to international
markets
• Involves low expense to establish operations in host country
• Often involves contractual agreements
• Involves high transportation costs
• Tariffs maybe imposed
• Low control over marketing and distribution
Licensing: An agreement is formed that allows a foreign company to purchase the right
to manufacture and sell a firm’s products within a host country’s market or a set of markets
• Involves low cost to expand internationally
• Allows licensee to absorb risks
• Has low control over manufacturing and marketing
• Offers lower potential returns (shared with licensee)
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• Involves risk of licensee imitating technology and product for own use
• May have inflexible ownership arrangement
Strategic Alliance: Collaboration with a partner firm for international market entry
• Involves shared risks and resources
• Facilitates development of core competencies
• Involves fewer resources and costs required for entry
• May involve possible incompatibility, conflict, or lack of trust with partner
• Difficult to manage
Acquisitions
Cross-border acquisition: a firm from one country acquires a stake in or purchases
100% of a firm located in another country
• Allows for quick access to market
• Involves possible integration difficulties
• Is costly (debt financing)
• Has complex negotiations and transaction requirements
New Wholly Owned Subsidiary
Greenfield venture: a firm invests directly in another country/market by establishing a
new wholly owned subsidiary
• Is costly
• Involves complex processes
• Allows for maximum control
• Has the highest potential returns
• Carries high risk
DYNAMICS OF MODE OF ENTRY
Use the best suited mode of entry to the situation at hand; affected by several factors:
• Export, licensing, and strategic alliance: good tactics for early market development
• Strategic alliance: used in more uncertain situations
• Wholly owned subsidiary may be preferred if:
• Intellectual Property (IP) rights in emerging economy are not
well protected
• Number of firms in industry is accelerating
• Need for global integration is high
• Acquisitions or Greenfield ventures: secure a stronger
presence in international markets
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What’s the best solution?

EXHIBIT 7.7
SITUATION OPTIMAL SOLUTION

The firm has no foreign manufacturing
expertise and requires investment only in
distribution. Exporting
The firm needs to facilitate the product

improvements necessary to enter foreign
markets.
Licensing
The firm needs to connect with an

experienced partner already in the
targeted market.
Strategic Alliance
The firm needs to reduce its risk through the

sharing of costs. Strategic Alliance
The firm is facing uncertain situations such
as an emerging economy in its targeted
market.
Strategic Alliance
The firm must act quickly to gain rapid

access to this new market, where Acquisition
corruption is not an issue.
The firm’s intellectual property rights in an

emerging economy are not well protected, Wholly Owned Subsidiary
the number of firms in the industry is
growing fast, and the need for global (Greenfield Venture)
integration is high.
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RISKS IN AN INTERNATIONAL ENVIRONMENT
EXHIBIT 8.8
Political risks: Disruption of MNC operations by political forces or events whether they
occur in host countries or home country, or result from changes in the international
environment
Prior to implementing any of the five modes of international entry, political risk
analysis should be conducted, where the firm examines potential sources and factors of
noncommercial disruptions of their foreign investments and the operations.
International strategy implementation may be disrupted by the following examples
of political risk:
o Government instability
o Conflict or war
o Government regulations
o Conflicting and diverse legal authorities
o Potential nationalization of private assets
o Government corruption
o Changes in government policies
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Economic risks: Fundamental weaknesses in a country or region’s economy with the

potential to adversely impact the successful implementation of a firm’s international
strategies.
International strategy implementation may be disrupted by the following examples
of economic risk:
o Foremost economic risk - currency volatility
o Currency effect on the prices of globally manufactured goods, thus
exports/imports
o Government oversight and control of economic/financial capital.
o Weak Intellectual Property (IP) rights protections, impact FDI attractiveness.
o Investment losses due to political risks
o Terrorism
o Security risk of foreign firms acquiring key natural resources or strategic IP.
EXHIBIT 9.9 EXAMPLES OF POLITICAL AND ECONOMIC RISKS
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STRATEGIC COMPETITIVENESS OUTCOMES
INTERNATIONAL DIVERSIFICATION AND RETURNS
International diversification: firm expands sales of its goods or services across

the borders of global regions and countries into different geographic locations or markets
From Figure 8.1, the benefits of implementing international strategies are critical
to strategic competitiveness, as measured by improved performance and enhanced
innovation.
Implementation follows the selection of international strategy and mode of entry:
1. International diversification and returns
2. International diversification and innovation
3. Complexity of managing multinational firms
As international diversification increases, firms’ returns initially decrease, but then
increase quickly as the firm learns to manage international expansion. Firms that are
broadly diversified into multiple international markets usually achieve the most positive
stock returns, especially when they diversify geographically into core business areas.
Many factors contribute to the positive effects of international diversification:
✓ Private versus government ownership
✓ Economies of scale and experience
✓ Location advantages
✓ Increased market size
✓ Opportunity to stabilize returns, which helps reduce a firm’s overall
risk
✓ Exposure to new products and markets
✓ Opportunity to integrate new knowledge into operations
✓ Generation of resources to sustain innovation efforts
✓ The relationship among international geographic diversification,
innovation, and returns is complex
Some level of performance is necessary to provide the resources the firm needs to
diversify geographically; in turn, geographic diversification provides incentives and
resources to invest in Research & Development. Effective R&D should enhance the firm’s
returns, which then provides more resources for continued geographic diversification and
investment in R&D.
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THE CHALLENGE OF INTERNATIONAL STRATEGIES
THE COMPLEXITY OF MANAGING INTERNATIONAL STRATEGIES
Complexity of managing multinational firms–six considerations:

1. Geographic dispersion
2. Costs of coordination
3. Logistical costs
4. Trade barriers
5. Cultural diversity
6. Host government
LIMITS TO INTERNATIONAL EXPANSION
There are several reasons that explain the limits to the positive effects of the diversification
associated with international strategies:
• Geographic dispersion
• Trade barriers
• Logistical costs
• Cultural diversity and barriers
• Complexity of competition
• Relationship between firm and host country
• Other country differences
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COOPERATIVE STRATEGY
✓ Define cooperative strategies and explain why firms use them.
✓ Define and discuss the three major types of strategic alliances.
✓ Name the business-level cooperative strategies and describe their use.
✓ Discuss the use of corporate-level cooperative strategies in diversified firms.
✓ Understand the importance of cross-border strategic alliances as an international
cooperative strategy.
✓ Explain cooperative strategies’ risks
✓ Describe two approaches used to manage cooperative strategies.
INTRODUCTION
Firms collaborate for the purpose of working together to achieve a shared

objective.
• Cooperating with other firms is a strategy that:
• Creates value for a customer
• [Benefits] Exceed the cost of constructing customer value in other ways
• Establishes a favorable position relative to competitors
• Examples of cooperative behavior known to contribute to alliance success:
• Actively solving problems
• Being trustworthy
• Consistently pursuing ways to combine partners’ resources and capabilities
to create value
• Collaborative (Relational) Advantage
• A competitive advantage developed through a cooperative strategy
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STRATEGIC ALLIANCES AS A PRIMARY TYPE OF COOPERATIVE STRATEGY
Strategic alliance: Cooperative strategy in which firms combine resources and

capabilities to create a competitive advantage
Three types of strategic alliances
1. Joint venture
2. Equity strategic alliance
3. Nonequity strategic alliances, which include:
• Licensing agreements
• Distribution agreements
• Supply contracts
• Outsourcing commitments
TYPES OF MAJOR STRATEGIC ALLIANCES

I. Joint Venture: Two or more firms create a legally independent company to share
resources and capabilities to develop a competitive advantage
• Optimal when firms need to combine their resources and capabilities to
create a competitive advantage that is substantially different from individual
advantages, and when highly uncertain, hypercompetitive markets are
targeted.
II. Equity Strategic Alliance: Two or more firms own different percentages of the
company they have formed by combining some of their resources and
capabilities for the purpose of creating a competitive advantage.
Many foreign direct investments (FDIs), such as those companies from multiple
countries are making in China, are completed through an equity strategic alliance
III. Nonequity Strategic Alliance: Two or more firms develop a contractual
relationship to share some of their unique resources and capabilities to
create a competitive advantage
Separate independent company NOT established, thus no equity positions: less
formal, fewer partner commitments, and intimate relationship among partners is
not fostered
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EXAMPLES OF MAJOR STRATEGIC ALLIANCES

1. Joint Venture
• EXAMPLE: 1999 - Germany’s Siemens AG and Japan’s Fujitsu Ltd. each
owned 50 percent of the joint venture Fujitsu Siemens Computers B.V., later
to become Fujitsu Technology Solutions when Fujitsu bought Siemens’
share of the joint venture.
2. Equity Strategic Alliance
• EXAMPLE: Japanese telecom operator NTT DOCOMO Inc. and Chinese
Internet search operator Baidu Inc. established an equity strategic alliance
in China to distribute games and other mobile-phone content.
3. Nonequity Strategic Alliance
• EXAMPLES: Licensing agreements, distribution agreements, and supply
contracts. Hewlett-Packard (HP) actively uses this type of cooperative
strategy to license some of its intellectual property.
Nonequity Strategic Alliance
Outsourcing, a type of nonequity strategic alliance, is the purchase of a value-creating

primary or support activity from another firm.
EXAMPLE OF OUTSOURCING:
• Dell Inc. and most other computer firms outsource most or all of their
production of laptop computers and often form nonequity strategic alliances.
• To protect IP, modularity is employed, which prevents the contracting
partner from gaining too much knowledge or from sharing certain aspects
of the business the outsourcing firm does not want revealed.
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REASONS FIRMS DEVELOP STRATEGIC ALLIANCES
Most firms lack the full set of resources and capabilities needed to reach their
objectives
Cooperative behavior allows partners to create value that they could not develop
by acting independently
Collaborative strategies are particularly valuable for small firms with constrained
resources for reaching new customers and broadening their distribution channels
Aligning stakeholder interests (both inside and outside the organization) can
reduce environmental uncertainty
Alliances can:
• provide a new source of revenue (can account for 25% or more of a
firm’s sales revenue)
• be a vehicle for firm growth
• enhance the speed and depth of responding to market opportunities,
technological changes, and global conditions
• allow firms to gain new knowledge and experiences to increase
competitiveness
In summary, strategic alliances:

• Can reduce competition and enhance a firm’s competitive capabilities
• Create an avenue for the firm to gain access to resources
• Allow a firm to take advantage of opportunities, build strategic flexibility, and
innovate
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The THREE competitive market conditions:
1. Slow-cycle markets – firm’s competitive advantages are shielded from

imitation for relatively long periods of time and where imitation is costly
• These markets are close to monopolistic conditions. Railroads and,
historically, telecommunications, utilities, financial services, and steel
manufacturers are industries characterized as slow-cycle markets.
Slow-cycle markets are becoming rare due to:
▪ Privatization of industries and economies
▪ Rapid expansion of the Internet's capabilities
▪ Quick dissemination of information
▪ Speed with which advancing technologies permit imitation of even complex
products)
Cooperative strategies can help firms transition from sheltered markets to more
competitive ones.
2. Fast-cycle markets: Hypercompetitive, unstable, unpredictable, and complex

• Firm’s competitive advantages are not shielded from imitation, preventing their
long-term sustainability.
• These conditions virtually preclude establishing long-lasting competitive
advantages, forcing firms to constantly seek sources of new competitive
advantages while creating value by using current ones.
• Collaboration mindset” is paramount.
• Alliances between firms with current excess resources and capabilities and those
with promising capabilities help companies compete in fast-cycle markets to
effectively transition from the present to the future and to gain rapid entry into new
markets.
3. Standard-cycle markets. Competitive advantages are moderately shielded from

imitation in these markets, typically allowing them to be sustained for a longer period of
time than in fast-cycle market situations, but for a shorter period of time than in slow-cycle
markets.
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▪ Alliances are more likely to be made by partners that have

complementary resources and capabilities, e.g., airline alliances provide
opportunities to reduce costs and have access to additional international
routes
EXHIBIT 10.10 REASONS FIRMS DEVELOP STRATEGIC ALLIANCES
REASONS USING
MARKET CONDITIONS STRATEGIC ALLIANCE
o Gain access to a restricted market
o Establish a franchise in a new market
Slow-Cycle o Maintain market stability (e.g.,
establishing standards)
o Speed up development of new goods

or service
o Speed up new market entry
Fast-Cycle o Maintain market leadership
o Form an industry technology standard
o Share risky R&D expenses
o Overcome uncertainty
o Gain market power (reduce industry

overcapacity)
o Gain access to complementary
resources
o Establish economies of scale
o Overcome trade barriers
Standard-Cycle o Meet competitive challenges from
other competitors
o Pool resources for very large capital
projects
o Learn new business techniques
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BUSINESS - LEVEL COOPERATIVE STRATEGY
BUSINESS-LEVEL COOPERATIVE STRATEGY: Firms combine some of their

resources and capabilities for the purpose of creating a competitive advantage by
competing in one or more product markets
Vertical Complementary Strategic Alliance

• Partnering firms share resources and capabilities from different stages of
the value chain to create a competitive advantage
• Outsourcing is one example of this type of alliance
Horizontal Complementary Strategic Alliance

• Partnering firms share resources and capabilities from the same stage of
the value chain to create a competitive advantage
• Commonly used for long-term product development and distribution
opportunities
• The partners may become competitors, which requires a great deal of trust
between the partners.
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EXHIBIT 11.11
Competition Response Strategy

Competitors
o Initiate competitive actions to attack rivals
o Launch competitive responses to their competitor’s actions
Strategic alliances
o Can be used at the business level to respond to competitor’s attacks
o Primarily formed to take strategic vs. tactical actions
o Can be difficult to reverse expensive to operate
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Uncertainty Reducing Strategy

o Are used to hedge against risk and uncertainty
o These alliances are most noticed in fast-cycle markets
o Uncertainty is reduced by combining knowledge and capabilities
▪ For example, when entering new product markets, emerging economies, and
establishing technology standards, these are unknown areas, so by partnering with a firm
in the respective industry, a firm’s uncertainty (risk) is reduced.
Competition Reducing Strategy

o Collusive strategies differ from strategic alliances in that they are usually illegal
o Created to avoid destructive or excessive competition
o Explicit collusion: Direct negotiation among firms to establish output levels and
pricing agreements that reduce industry competition. (illegal)
o Tacit collusion: Indirect coordination of production and pricing decisions by
several firms, which impacts the degree of competition faced in the industry.
o Mutual forbearance: (tacit collusion) Firms do not take competitive actions
against rivals they meet in multiple markets.
ASSESSING BUSINESS-LEVEL COOPERATIVE STRATEGIES
i. Used to develop competitive advantages for contributing to successful positions

and performance in individual product markets.
ii. Developing a competitive advantage using a strategic alliance, the integrated
resources and capabilities must be valuable, rare, imperfectly imitable, and no
substitutable.
iii. Vertical alliances have greatest probability of creating competitive advantage;
horizontal are sometimes difficult to maintain since they are usually between
competitors.
iv. Strategic alliances designed to respond to competition and reduce uncertainty are
more temporary than complementary (horizontal and vertical) strategic alliances.
v. Of the four business-level cooperative strategies, the competition reducing
strategy has the lowest probability of creating a sustainable competitive
advantage; it also tends to be temporary.
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CORPORATE - LEVEL COOPERATIVE STRATEGIES
CORPORATE - LEVEL COOPERATIVE STRATEGY is a strategy through which a firm

collaborates with one or more companies for the purpose of expanding its operations.
A. Helps a firm diversify itself in terms of products offered, markets served, or both.
B. Requires fewer resource commitments
C. Permits greater flexibility in terms of efforts to diversify partners’ operations
DIVERSIFYING SYNERGISTIC
STRATEGIC STRATEGIC
ALLIANCE ALLIANCE
FRANCHISING
EXHIBIT 12.12 CORPORATE - LEVEL STRATEGIES
Diversifying Strategic Alliance

• Firms share some of their resources and capabilities to diversify into new product
or market areas
• Allows a firm to expand into new product or market areas without completing a
merger or acquisition
• Provides some of the potential synergistic benefits of a merger or acquisition, but
with less risk and greater levels of flexibility
• Permits a “test” of whether a future merger between the partners would benefit
both parties
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Synergistic Strategic Alliance

• Firms share some of their resources and capabilities to create economies of scope
• Creates synergy across multiple functions or multiple businesses between partner
firms
Franchising
• Firm uses a franchise as a contractual relationship to describe and control the
sharing of its resources and capabilities with partners
• Franchise: contractual agreement between two legally independent companies
whereby the franchisor grants the right to the franchisee to sell the franchisor's
product or do business under its trademarks in a given location for a specified
period of time
• Spreads risks and uses resources, capabilities, and competencies without merging
or acquiring another company
ASSESSING CORPORATE - LEVEL COOPERATIVE STRATEGIES
Compared to business-level strategies

A. Broader in scope
B. More complex therefore more costly
Costs incurred regardless of type selected

o Important to monitor expenditures!
Can lead to competitive advantage and value when:
o Successful alliance experiences are internalized
o The firm uses such strategies to develop useful knowledge about how
to succeed in the future
o The firm gains maximum value from this knowledge by organizing it and
verifying that it is always properly distributed to those involved with
forming and using alliances
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INTERNATIONAL COOPERATIVE STRATEGY
CROSS-BORDER STRATEGIC ALLIANCE: an international cooperative strategy in

which firms with headquarters in different nations combine some of their resources and
capabilities to create a competitive advantage
● These alliances are sometimes formed instead of mergers and acquisitions,
which can be riskier
● Cross-border alliances can be complex and hard to manage
Why form cross-border strategic alliances?
• A firm may form cross-border strategic alliances to leverage core competencies
that are the foundation of its domestic success to expand into international
markets.
• Multinational corporations outperform firms that operate only domestically.
• Due to limited domestic growth opportunities, firms look outside their national
borders to expand business.
• Some foreign government policies require investing firms to partner with a local
firm to enter their markets.
NETWORK COOPERATIVE STRATEGY
Network cooperative strategy: A cooperative strategy wherein several firms agree

to form multiple partnerships to achieve shared objectives
• Stable alliance network
• Dynamic alliance network
Effective social relationships and interactions among partners are keys to a successful
network cooperative strategy.
Firms involved in networks of alliances use heterogeneous knowledge and are more
innovative.
There are disadvantages to participating in networks, as a firm can be locked into its
partnerships, precluding the development of alliances with others. In certain network
configurations, such as Japanese keiretsus, firms in a network are expected to help other
firms in that network whenever support is required. Such expectations can become a
burden and negatively affect the focal firm’s performance over time.
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TYPES OF NETWORK COOPERATIVE STRATEGY
STABLE ALLIANCE NETWORK DYNAMIC ALLIANCE NETWORK
• Long-term relationships that often • Arrangements that evolve in industries

appear in mature industries where with rapid technological change
demand is relatively constant and leading to short product life cycles and
predictable purpose is often exploration of new
ideas
• Stable networks are built for • Primarily used to stimulate rapid,

exploitation of the economies (of scale value-creating product innovation and
and/or scope) available between the subsequent successful market entries
firms
COMPETITIVE RISKS WITH COOPERATIVE STRATEGIES
• Partners may choose to act opportunistically

• Partner competencies may be misrepresented
• Partner may fail to make available the complementary resources and capabilities
that were committed
• One partner may make investments specific to the alliance while the other partner
may not
EXHIBIT 13.13 Managing Competitive Risks in Cooperative Strategies
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MANAGING COOPERATIVE STRATEGIES
Two primary approaches:

1. Cost minimization
• Relationship with partner is formalized with contracts

• Contracts specify how cooperative strategy is to be monitored and how
partner behavior is to be controlled
• Goal is to minimize costs and prevent opportunistic behaviors by partners
• Costs of monitoring cooperative strategy are greater
• Formalities tend to stifle partner efforts to gain maximum value from their
participation
2. Opportunity maximization
• Focus: maximizing partnership's value-creation opportunities

• Informal relationships and fewer constraints allow partners to:
• take advantage of unexpected opportunities
• learn from each other
• explore additional marketplace possibilities
• Partners need a high level of trust that each party will act in the partnership's
best interest, which is more difficult in international situations
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CORPORATE GOVERNANCE
✓ Define corporate governance and explain why it is used to monitor and control
top-level managers’ decisions.
✓ Explain why ownership is largely separated from managerial control in
organizations.
✓ Define an agency relationship and managerial opportunism and describe their
strategic implications.
✓ Explain the use of three internal governance mechanisms to monitor and control
managers’ decisions.
✓ Discuss the types of compensation top-level managers receive and their effects
on managerial decisions.
✓ Describe how the external corporate governance mechanism—the market for
corporate control—restrains top-level managers’ decisions.
✓ Discuss the nature and use of corporate governance in international settings,
especially in Germany, Japan, and China.
✓ Describe how corporate governance fosters the making of ethical decisions by a
firm’s top-level managers.
INTRODUCTION
Corporate governance: a set of mechanisms used to manage the relationships (and
conflicting interests) among stakeholders, and to determine and control the strategic direction and
performance of organizations (aligning strategic decisions with company values)
• When CEOs are motivated to act in the best interests of the firm—particularly, the
shareholders—the company’s value should increase.
• Successfully dealing with this challenge is important, as evidence suggests that
corporate governance is critical to firms’ success.
Effective corporate governance is of interest to nations as it reflects societal standards:
• Firms’ shareholders are treated as key stakeholders as they are the company’s
legal owners
• Effective governance can lead to competitive advantage
• How nations choose to govern their corporations affects firms’ investment
decisions; firms seek to invest in nations with national governance standards that
are acceptable
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SEPARATION OF OWNERSHIP AND MANAGERIAL CONTROL
INTRODUCTION
• Historically, firms managed by founder-owners and descendants

• Separation of ownership and managerial control allows each group to focus
on what it does best:
• Shareholders bear risk
• Managers formulate and implement strategy
• Small firms’ managers are high percentage owners, which implies less
separation between ownership and management control
• Family-owned businesses face two critical issues:
• As they grow, they may not have access to all needed skills to
manage the growing firm and maximize its returns, so may need
outsiders to improve management
• They may need to seek outside capital (whereby they give up some
ownership control)
Basis of the modern corporation:
• Shareholders purchase stock, becoming residual claimants
• Shareholders reduce risk by holding diversified portfolios
• Shareholder value reflected in price of stock
• Professional managers are contracted to provide decision making
Modern public corporation form leads to efficient specialization of tasks:
• Risk bearing by shareholders
• Strategy development and decision making by managers
EXHIBIT 14.14 SHAREHOLDERS VS MANAGERS
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EXHIBIT 15. 15 AN AGENCY RELATIONSHIP
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AGENCY RELATIONSHIPS
Managerial opportunism: seeking self-interest with guile (i.e., cunning or deceit)

• Opportunism: an attitude and set of behaviors
• Decisions in managers’ best interests, contrary to shareholders’ best
interests
• Decisions such as these prevent maximizing shareholder wealth
Principals establish governance and control mechanisms to prevent agents from acting
opportunistically.
PRODUCT DIVERSIFICATION AS AN EXAMPLE OF AN AGENCY PROBLEM

• Two benefits that accrue to top-level managers and not to shareholders:
1. Increase in firm size: product diversification usually increases the size of a firm; that size is
positively related to executive compensation
2. Firm portfolio diversification, which can reduce top executives’ employment risk (i.e., job loss,
loss of compensation, and loss of managerial reputation)
• Diversification reduces these risks because a firm and its managers are less
vulnerable to reductions in demand associated with a single/limited number of
businesses.
FREE CASH FLOW AS AN EXAMPLE OF AN AGENCY PROBLEM
Free cash flow: resources remaining after the firm has invested in all projects that have
positive net present values within its current businesses
Use of Free Cash Flows
■ Managers inclination to over-diversify and invest these funds in additional product diversification
■ Shareholders prefer distribution as dividends, so they can control how the cash is invested
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Exhibit 15.15 MANAGER AND SHAREHOLDER RISK AND DIVERSIFICATION
RISK
o In general, shareholders prefer riskier strategies than managers
DIVERSIFICATION
• Shareholders prefer more focused diversification
• Managers prefer greater diversification, a level that maximizes firm size and their
compensation while also reducing their employment risk
• However, their preference is that the firm’s diversification falls short of where it increases
their employment risk and reduces their employment opportunities (e.g., acquisition target
from poor performance)
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AGENCY COSTS AND GOVERNANCE MECHANISMS
AGENCY COSTS: The sum of incentive costs, monitoring costs, enforcement costs, and
individual financial losses incurred by principals, because governance mechanisms cannot
guarantee total compliance by the agent
o Principals may engage in monitoring behavior to assess the activities and decisions of
managers
o However, dispersed shareholding makes it difficult and inefficient to monitor
management’s behavior.
o Boards of Directors have a fiduciary duty to shareholders to monitor management
o However, Boards of Directors are often accused of being lax in performing this function
o Costs associated with agency relationships, and effective governance mechanisms
should be employed to improve managerial decision making and strategic effectiveness
AGENCY PROBLEMS GOVERNANCE MECHANISMS
AGENCY
RELATIONSHIPS
AGENCY
PROBLEMS
GOVERNANCE
MECHANISMS
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GOVERNANCE MECHANISMS
Three internal governance mechanisms and a single external one is used in the
modern corporation.
The three internal governance mechanisms are:
1. Ownership Concentration: represented by types of shareholders and

their different incentives to monitor managers and relative amounts of stock owned by
individual shareholders and institutional investors
• Governance mechanism defined by both the number of large-block
shareholders and the total percentage of shares owned
• Large block shareholders: shareholders owning a concentration of at least
5 percent of a corporation’s issued shares
• Large block shareholders have a strong incentive to monitor management closely
• They may also obtain Board seats, which enhances their ability to monitor
effectively
• Institutional owners: financial institutions such as stock mutual funds and
pension funds that control large block shareholder positions
• The growing influence of institutional owners
• Provides size to influence strategy and the incentive to discipline ineffective
managers
• Increased shareholder activism supported by SEC rulings in support of
shareholder involvement and control of managerial decisions
Shareholder activism:
• Shareholders can convene to discuss corporation’s direction
• If a consensus exists, shareholders can vote as a block to elect their
candidates to the board
• Proxy fights
• There are limits on shareholder activism available to institutional owners in
responding to activists’ tactics
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2. Board of Directors: Individuals responsible for representing the firm’s

owners by monitoring top-level managers’ strategic decisions
• Group of shareholder-elected individuals (usually called ‘directors’) whose
primary responsibility is to act in the owners’ interests by formally monitoring
and controlling the corporation’s top-level executives
• As stewards of an organization's resources, an effective and well-structured
board of directors can influence the performance of a firm:
• Oversee managers to ensure the company is operated in ways to maximize
shareholder wealth
• Direct the affairs of the organization
• Punish and reward managers
• Protect shareholders’ rights and interests
• Protect owners from managerial opportunism
• Criticisms of Boards of Directors include that they:
• Too readily approve managers’ self-serving initiatives
• Are exploited by managers with personal ties to board members
• Are not vigilant enough in hiring and monitoring CEO behavior
• Lack agreement about the number of and most appropriate role of outside
directors
Three director classifications: Insider, related outsider, and outsider:
• Insiders: the firm’s CEO and other top-level managers
• Related outsiders: individuals uninvolved with day-to-day operations,
but who have a relationship with the firm
• Outsiders: individuals who are independent of the firm’s day-to-day
operations and other relationships
Historically, BOD dominated by inside managers:
• Managers suspected of using their power to select and compensate
directors
• NYSE implemented an audit committee rule requiring outside directors to
head audit committee (a response to SEC’s proposal requiring audit
committees be made up of outside directors)
• Sarbanes-Oxley Act passed leading to BOD changes
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• Corporate governance becoming more intense through BOD mechanism

• BOD scandals led to trend of separating roles of CEO and Board
Chairperson
Outside directors (problems)
• Limited contact with the firm’s day-to-day operations and incomplete
information about managers:
• Results in ineffective assessments of managerial decisions and
initiatives
• Leads to an emphasis on financial, rather than strategic controls to
evaluate performance of managers and business units, which could
reduce R&D investments and allow top-level managers to pursue
increased diversification for the purpose of higher compensation and
minimizing their employment risk
Enhancing the effectiveness of the Board of Directors:
1. Increase the diversity of the backgrounds of board members (e.g., public service,
academic, scientific; ethnic minorities and women; different countries)
2. Strengthen internal management and accounting control systems
3. Establish and consistently use formal processes to evaluate the board’s
performance
4. Modify the compensation of directors, especially reducing or eliminating stock
options as part of their package
5. Create the “lead director” role that has strong powers with regard to the board
agenda and oversight of non-management board member activities
6. Require that directors own significant equity stakes in the firm to keep focus on
shareholder interests
4. Executive Compensation: Use of salary, bonuses, and long-term incentives to

align managers’ interests with shareholders’ interests
• Governance mechanism that seeks to align the interests of top managers and
owners through salaries, bonuses, and long-term incentive compensation,
such as stock awards and stock options
• Thought to be excessive and out of line with performance
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Factors complicating executive compensation:

• Strategic decisions by top-level managers are complex, non-routine and
affect the firm over an extended period, making it difficult to assess the
current decision effectiveness
• Other intervening variables affect the firm’s performance over time
• Alignment of pay and performance: complicated board responsibility
• The effectiveness of pay plans as a governance mechanism is suspect
The effectiveness of executive compensation:
• Performance-based compensation used to motivate decisions that best
serve shareholder interest are imperfect in their ability to monitor and control
managers
• Incentive-based compensation plans intended to increase firm value, in
line with shareholder expectations, subject to managerial manipulation to
maximize managerial interests
The effectiveness of executive compensation:
• Many plans seemingly designed to maximize manager wealth rather than
guarantee a high stock price that aligns the interests of managers and
shareholders
• Stock options are popular:
• Repricing: strike price value of options is commonly lowered from
its original position
• Backdating: options grant is commonly dated earlier than actually
drawn up to ensure an attractive exercise price
Limits on the effectiveness of executive compensation:
• Unintended consequences of stock options
• Firm performance not as important as firm size
• Balance sheet not showing executive wealth
• Options not expensed at the time they are awarded
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The external corporate governance mechanism is:

4. Market for Corporate Control
This market is a set of potential owners seeking to acquire undervalued firms and earn
above-average returns on their investments by replacing ineffective top-level
management teams.
The purchase of a company that is underperforming relative to industry rivals in order to
improve the firm’s strategic competitiveness
• External governance: a mechanism consisting of a set of potential owners

seeking to acquire undervalued firms and earn above-average returns on their
investments
• Becomes active only when internal controls have failed
• Ineffective managers are usually replaced in such takeovers
• Need for external mechanisms exists to:
✓ Address weak internal corporate governance
✓ Correct suboptimal performance relative to competitors
✓ Discipline ineffective or opportunistic managers
• Threat of takeover may lead firm to operate more efficiently
• Changes in regulations have made hostile takeovers difficult
• Managerial defense tactics increase the costs of mounting a takeover
• Defense tactics may require:
• Asset restructuring
• Changes in the financial structure of the firm
• Shareholder approval
• External mechanism is less precise than the internal governance mechanisms
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INTERNATIONAL CORPORATE GOVERNANCE
Corporate Governance in Germany

• Concentration of ownership is strong
• In many private German firms, the owner and manager may be the same
individual
• In these instances, agency problems are not present.
• In publicly traded German corporations, a single shareholder is often
dominant, frequently a bank
• The concentration of ownership is an important means of corporate
governance in Germany, as it is in the U.S.
• Proponents of the German structure suggest that it helps prevent corporate
wrongdoing and rash decisions by “dictatorial CEOs”
• Critics maintain that it slows decision making and often ties a CEO’s hands
• The corporate governance practices in Germany make it difficult to restructure
companies as quickly as in the U.S.
• Banks are powerful; private shareholders rarely have major ownership positions
in German firms
• Large institutional investors, e.g., pension funds and insurance companies, are
also relatively insignificant owners of corporate stock
• Less emphasis on shareholder value
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Corporate Governance in Japan
● Cultural concepts of obligation, family, and consensus affect attitudes toward

governance
● Close relationships between stakeholders and a company are manifested in
cross-shareholding, and can negatively impact efficiencies
● Keiretsus: strongly interrelated groups of firms tied together by cross-
shareholdings
● Banks (especially “main bank”) are highly influential with firm’smanagers
● Japan has a bank-based financial and corporate governance structure whereas
the United States has a market-based financial and governance structure
● Banks play an important role in financing and monitoring large public firms
● Powerful government intervention
● Despite the counter-cultural nature of corporate takeovers, changes in
corporate governance have introduced this practice
● Diminishing role of banks monitoring and controlling managerial behavior, due
to their development as economic organizations
● CEOs of both public and private companies receive similar levels of
compensation, which is closely tied to observable performance goals
Corporate Governance in China

● Major changes over the past decade
● Privatization of business and the development and integrity of equity market
● The stock markets in China remain young and underdeveloped; in their early
years, they were weak because of significant insider trading, but with stronger
governance these markets have improved
● The state dominates—directly or indirectly—the strategies that most firms
employ
● Firms with higher state ownership have lower market value and more volatility
● The state is imposing social goals on these firms and executives are not trying
to maximize shareholder wealth
● Moving toward a Western-style model
● Chinese executives are being compensated based on the firm’s financial
performance
● Much work remains if the governance of Chinese companies is to meet international
and Western standards
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GOVERNANCE MECHANISMS AND ETHICAL BEHAVIOR
It is important to serve the interests of the firm’s multiple stakeholder groups!

Capital Market Stakeholders
• In the U.S., shareholders (in the capital market group) are the most important
stakeholder group served by the Board of Directors
• Governance mechanisms focus on control of managerial decisions to protect
shareholder interests
Product Market Stakeholders
• Product market stakeholders (customers, suppliers, and host communities) and
organizational stakeholders (managerial and non-managerial employees) are
also important stakeholder groups and may withdraw their support of the firm if
their needs are not met, at least minimally
Organizational Stakeholders
• Some observers believe that ethically responsible companies design and use
governance mechanisms that serve all stakeholders’ interests
• Importance of maintaining ethical behavior is seen in the examples of Enron,
Arthur Andersen, WorldCom, HealthSouth and Tyco
● For 2011, some of World Finance’s “Best Corporate Governance Awards” by country
were given to:
◘ Royal Bank of Canada (Canada)
◘ Vestas Wind Systems A/S (Denmark)
◘ BSF AG (Germany)
◘ Empresas ICA (Mexico)
◘ Cisco Systems (United States)
● These awards are determined by analyzing a number of corporate governance
issues:
◘ Board accountability/financial disclosure
◘ Executive compensation
◘ Shareholder rights
◘ Ownership base
◘ Takeover provisions
◘ Corporate behavior
◘ Overall responsibility exhibited by firm
P a g e 57 | 78
ORGANIZATIONAL STRUCTURE
AND CONTROLS
• Define organizational structure and controls and discuss the difference between
strategic and financial controls.
• Describe the relationship between strategy and structure
• Discuss the functional structures used to implement business-level strategies.
• Explain the use of three versions of the multidivisional (M-form) structure to
implement different diversification strategies.
• Discuss the organizational structures used to implement three international
strategies.
• Define strategic networks and discuss how strategic center firms implement such
networks at the business, corporate, and international levels.
INTRODUCTION
Strategy may be implemented via:
• Structure
• Reward mechanisms
• Organizational culture
• Leadership
This chapter focuses on structure.
IMPORTANT: The match or degree of fit between strategy and structure influences the
firm’s ability to earn above-average return.
● Organizational structure and controls provide the framework within which strategies
(business, corporate, international and cooperative) are used
● No one structure is the best for all organizations
● The choice of structure and controls should support the strategic goals of the firm
● Structure will change as the strategy of the organization changes
● Effective strategic leadership means selecting the appropriate structure.
P a g e 58 | 78
ORGANIZATIONAL STRUCTURE AND CONTROLS
Structure and Firm Performance

• Research suggests that performance declines when the firm’s strategy is
not matched with the most appropriate structure and controls
• Example: CEO Jeffrey Immelt recognized the need to match strategy and
structure during the recent economic downturn, as evidenced by the
restructuring alignments in GE Capital, GE’s financial service group
Organizational structure
• Specifies the firm’s formal reporting relationships, procedures, controls,
and authority and decision-making processes
• Specifies the work to be done and how to do it, given the firm’s strategy or
strategies
• Is the pivotal component of effective strategy implementation
It is critical to match organizational structure to the firm’s strategy
Strategy pioneer Alfred Chandler found organizations change their structures when
inefficiencies force them to.
• A firm’s strategy is supported when its structure is properly aligned to its
strategy
• Two considerations regarding alignment
1. Structural stability: capacity firm requires to consistently and
predictably manage its daily work routines
2. Structural flexibility: opportunity to explore competitive
advantages firm will need to be successful in the future
Controls guide the use of strategy, indicate how to compare actual results with expected
results, and suggest corrective actions to take when the difference is unacceptable.
Two types:
1. Strategic Controls
2. Financial Controls
P a g e 59 | 78
STRATEGIC CONTROLS
Largely SUBJECTIVE criteria intended to verify that the firm is using appropriate
strategies for the conditions in the external environment and the company’s competitive
advantages.
• Are concerned with examining the fit between:
• What the firm might do (opportunities in its external
environment)
• What the firm can do (competitive advantages)
• Evaluate the degree to which the firm focuses on the requirements to
implement strategy
• Business-level: primary and support activities
• Corporate-level (related): sharing of knowledge, markets, and
technologies across businesses
• Focus on the content of strategic actions
FINANCIAL CONTROLS
Largely OBJECTIVE criteria used to measure firm’s performance against previously

established quantitative standards
• Focus on short-term financial outcomes
• Include accounting-based measures
• ROI (return on investment)
• ROA (return on assets)
• Include market-based measures
• EVA (economic value added)
• Produce risk-averse managerial decisions
• Are essential when a firm pursues a strategy with unrelated
diversification
P a g e 60 | 78
EXHIBIT 17.17 DIFFRENTIATION BEWTEEN STRATEGIC AND

FINANCIAL CONTROLS
RELATIONSHIPS BETWEEN STRATEGY AND STRUCTURE
● RECIPROCAL RELATIONSHIP - Change in one typically causes a change in the other,

underscoring the interconnectedness between strategy formulation and strategy implementation
STRATEGY STRUCTURE
Strategy typically has a much more important influence on structure than structure on strategy
P a g e 61 | 78
EVOLUTIONARY PATTERNS OF STRATEGY AND ORGANIZATIONAL

STRUCTURE
■ Firms typically alter their structure as they grow in size and complexity
■ Three key structural forms used to implement strategies:
• Simple structure
• Functional structure
• Multidivisional structure (M-form)
Chandler found that firms tend to grow in predictable patterns:

● first by volume
● then by geography
● then by integration (vertical, horizontal)
● Finally, through product/business diversification
EXHIBIT 18.18 STRATEGY STRUCTURE GROWTH PATTERN
P a g e 62 | 78
STRATEGY AND STRUCTURE: SIMPLE STRUCTURE
● Owner-manager makes all major decisions and monitors all activities

● Staff acts as extension of manager's supervisory authority
● Matched focus strategies and business-level strategies: these firms offer single
product lines in single geographic markets
● Few rules, limited task specialization, basic technology system
● With size comes complexity and managerial and structural challenges; firms
tend to move from a simple to a functional structure
STRATEGY AND STRUCTURE: FUNCTIONAL STRUCTURE
● CEO and a limited corporate staff make all decisions.
● Functional line managers are in dominant organizational areas

➢ Production ➢ Marketing
➢ Engineering ➢ R&D
➢ Accounting ➢ Human resources
● WITHIN – functional specialization results in active knowledge
sharing within each area
● BETWEEN – impedes communication and coordination among different
functional areas
● Facilitates career paths and professional development in specialized functional
areas
● Causes functional-area managers to focus on local versus overall company
strategic issues
● Supports implementing business-level strategies and some corporate-level
strategies (e.g., single or dominant business) with low levels of diversification
● When changing from a simple to a functional structure, need to focus on and
avoid value-destroying bureaucratic procedures
P a g e 63 | 78
STRATEGY AND STRUCTURE: MULTIDIVISIONAL (M-FORM) STRUCTURE
● Operating divisions each represent a separate business or profit center
● Top corporate officer delegates responsibilities for day-to-day operations and

business-unit strategies to division managers
● Ties together all operating divisions
● Each division represents a separate business or profit center with its own
functional hierarchy
● Each division is responsible for daily operations
● Business-unit strategy is delegated to the division
Three Major Benefits
A. Simplifies the problem of control through more accurate monitoring of the
performance of each business
B. Facilitates comparisons between divisions, which improves the resource
allocation process
C. Stimulates managers of poorly performing divisions to look for ways of improving
performance
MATCHES BETWEEN BUSINESS-LEVEL STRATEGIES AND THE

FUNCTIONAL STRUCTURE
Firms use different forms of the functional organizational structure to support their
strategy
• Business-level strategies are:
1. Cost leadership (broad or focused)
2. Differentiation (broad or focused)
3. Integrated cost leadership/differentiation
• Structural choices are:
1. Simple
2. Functional
3. Multidivisional
P a g e 64 | 78
USING THE FUNCTIONAL STRUCTURE TO IMPLEMENT THE COST LEADERSHIP

STRATEGY
EXHIBIT 18.18 Functional Structure for Implementing a Cost Leadership Strategy
The choice of structure is influenced by structural characteristics needed to

compete:
1. Specialization: The type and number of jobs required to complete the work
of the firm
2. Centralization: The degree to which decision-making authority is retained
at higher managerial levels
3. Formalization: The degree to which formal rules and procedures govern
work
The choice of structure is influenced by structural characteristics:
1. Specialization: Departments are designed around areas of expertise—
engineering to accounting
2. Centralization: Highly centralized; staff are all together
P a g e 65 | 78
3. Formalization: Reporting roles are clearly defined; simple lines of

communication
Cost Leadership and Five Forces of Competition
• Low-cost position is a valuable defense against rivals
• Powerful customers can demand reduced prices
• Cost leaders are in a position to absorb supplier price increases and
relationship demands, and to force suppliers to hold down their prices
• Continuously improving levels of efficiency and cost reduction can be
difficult to replicate and serve as significant entry barriers to potential
competitors
• Cost leaders hold an attractive position in terms of product substitutes, with
the flexibility to lower prices to retain customers
Cost leadership strategy risks
• Processes can become obsolete
• Focus on cost reductions can come at the expense of understanding
customer perceptions and needs
• Strategy could be imitated, requiring the firm to increase the value offered
to retain customers
USING THE FUNCTIONAL STRUCTURE TO IMPLEMENT THE DIFFERENTIATION

STRATEGY
EXHIBIT 19.19 Functional Structure for Implementing a Differentiation Strategy
P a g e 66 | 78
The choice of structure is influenced by structural characteristics

1. Specialization: Departments are designed around areas of expertise—
engineering to accounting
2. Centralization: The key departments are coordinated through a highly
centralized office that reflects a focus on product design and marketing;
otherwise DECENTRALIZED
3. Formalization: Reporting roles are clearly defined; simple lines of
communication
Differentiation strategy should deliver:
• An integrated set of actions designed by a firm to produce or deliver goods
or services at an acceptable cost that customers perceive as being
different in ways that are important to them
• Target customers – perceived product value
• Customized products – differentiating as many features as possible
• Unusual features include responsive customer service, rapid product
innovations, technological leadership, perceived prestige and status,
different tastes, engineering design, performance
Differentiation and Five Forces of Competition
• Customer loyalty: the most valuable defense against rivals
• Unique products reduce customer sensitivity to raised prices
• High margins (for differentiated products) insulate firm from supplier
influence
• Significant entry barriers: customer loyalty and product uniqueness
• Firms with customers loyal to their products are positioned effectively
against product substitutes
Differentiation strategy risks
• Price differential for differentiated product may be perceived as too large
• Firms’ means of differentiation may cease to provide value for which
customers are willing to pay a premium price (successful rival imitation)
• Experience can narrow customers' perceptions of the value of a product's
differentiated features
• Counterfeit goods may appear in the marketplace
P a g e 67 | 78
THREE VARIATIONS OF THE MULTIDIVISIONAL STRUCTURE
EXHIBIT 20.20
COOPERATIVE FORM OF THE MULTIDIVISIONAL STRUCTURE FOR IMPLEMENTING A

RELATED CONSTRAINED STRATEGY
● Structural integration devices create tight links among all divisions
● Corporate office dictates centralized decision-making

● Rewards are subjective and tend to emphasize overall corporate performance in
addition to divisional performance
● Culture emphasizes cooperative sharing
● Economies of scope (cost savings resulting from the sharing of competencies
developed in one division with another division) are important for the related constrained
strategy
● Interdivisional sharing of competencies depends on cooperation- links result from
effective integration mechanisms
● Sharing of both tangible and intangible resources
● The cooperative structure uses different characteristics of structure (centralization,
standardization, and formalization) as integrating mechanisms to facilitate interdivisional
cooperation
P a g e 68 | 78
EXHIBIT 21.21
SBU FORM OF THE MULTIDIVISIONAL STRUCTURE FOR IMPLEMENTING A RELATED

LINKED STRATEGY
● Firms that share fewer resources and assets among their businesses, concentrating
on the transfer of knowledge and competencies among the businesses (related linked
strategy)
● Organization structure with three levels to support the implementation diversification
strategy:
1. Corporate headquarters
2. Strategic business units (SBUs)
3. Divisions under each SBU
● SBU divisions related in terms of shared products/markets
● Divisions of one SBU have little in common with divisions of other SBUs
● Divisions within each SBU share product or market competencies to develop
economies of scope
● Integrations used in cooperative form are equally effective for the SBU form
● Each SBU is a profit center; has its own budget for staff to foster integration
● Financial controls are more vital for evaluating performance
EXHIBIT 22.22
P a g e 69 | 78
COMPETITIVE FORM OF THE MULTIDIVISIONAL STRUCTURE FOR IMPLEMENTING AN

UNRELATED STRATEGY
● Financial economies are pivotal for the unrelated strategy

Creates value through two types of financial economies
▪ Cost savings realized through improved allocations of financial resources based
on investments inside or outside firm
▪ Efficient internal capital market allocation: restructuring of acquired assets
● The efficient internal capital market is the key for this strategy, and requires divisional
competition rather than cooperation.
● Specific performance expectations and accountability for independent divisions
stimulate internal competition for future resources
● Divisions are independent and separate for financial evaluation purposes; and retain
strategic control
P a g e 70 | 78
● Three benefits from the internal competition:

1. Creates flexibility and resources can then be allocated to the division with the
greatest potential
2. Challenges the status quo and inertia
3. Motivates competition internally to be as intense as the challenge of external
competition
●Corporate headquarters has a small staff
● Finance and auditing are the most prominent functions in the headquarters office to
manage cash flow and assure the accuracy of performance data coming from divisions
● The legal affairs function is important for acquisitions/divestitures
EXHIBIT 23.23
P a g e 71 | 78
EXHIBIT 24.24
KEY POINTS:
● The three major forms of the multidivisional structure should each be paired with
a particular corporate-level strategy
● Differences exist in the degree of centralization, the focus of the performance
evaluation, the horizontal structures (integrating mechanisms), and the incentive
compensation schemes
● Cooperative structure - the most centralized and most costly structural form
● Competitive structure - the least centralized, with the lowest bureaucratic costs
● The SBU structure requires partial centralization, some of the mechanisms
necessary to implement the relatedness between divisions, and the divisional
incentive compensation awards allocated according to both SBUs and corporate
performance
P a g e 72 | 78
MATCHES BETWEEN INTERNATIONAL STRATEGIES AND

WORLDWIDE STRUCTURE
International strategies allow the firm to search for new:

o Markets
o Resources
o Core competencies
o Technologies
Three primary international strategies:
o Multidomestic
o Global
o Transnational
EXHIBIT 25.25 WORLDWIDE GEOGRAPHIC AREA STRUCTURE FOR

IMPLEMENTING A MULTIDOMESTIC STRATEGY
P a g e 73 | 78
Multidomestic Strategy: International strategy in which strategic and operating

decisions are decentralized to each country to allow the units to tailor products to local
markets
Worldwide Geographic Area Structure: Organizational structure emphasizing national
interests; facilitates efforts to satisfy local or cultural differences
A. Focuses on variations of competition within each country
B. Emphasis is on differentiation by local demand to fit an area or
country culture
C. Deals with uncertainty due to market differences
D. Corporate headquarters coordinates financial resources among
independent subsidiaries
EXHIBIT 26. 26 WORLDWIDE PRODUCT DIVISIONAL STRUCTURE FOR

IMPLEMENTING A GLOBAL STRATEGY
Global Strategy: International strategy with standardized products across country

markets, and the competitive strategy dictated by the home office
Worldwide Product Divisional Structure: Organizational structure with centralized
decision-making authority to coordinate/integrate decisions among divisional units
• Emphasizes economies of scale and scope
• Corporate headquarters allocates financial resources in a
cooperative way
• Facilitated by improved global accounting and financial reporting
standards
P a g e 74 | 78
• Produces lower risk

• Less effective learning processes due to the pressures to conform and
standardize
EXHIBIT 27.27 HYBRID FORM OF THE COMBINATION STRUCTURE FOR IMPLEMENTING
A TRANSNATIONAL STRATEGY
Transnational strategy: International strategy through which the firm seeks to achieve
both global efficiency and local responsiveness; usually implemented through global
matrix structure and hybrid global design
Flexible coordination: Building a shared vision and individual commitment through an
integrated network
Combination structure: Organizational structure in which characteristics and
mechanisms are drawn from both the worldwide geographic area structure and the
worldwide product divisional structure (used to implement transnational strategy)
IMPLEMENTING BUSINESS-LEVEL COOPERATIVE STRATEGIES
Business-level complementary alliances

• Vertical: partnering firms share their resources and capabilities from
different stages of the value chain to create a competitive advantage
• Horizontal: partnering firms share resources and capabilities from the
same stage of the value chain to create a competitive advantage;
P a g e 75 | 78
commonly used for long-term product development and distribution

opportunities
IMPLEMENTING CORPORATE-LEVEL COOPERATIVE STRATEGIES

Used to facilitate product and market diversification
• EXAMPLE - Franchising: contractual relationship to describe and control
the sharing of its resources and capabilities with partners
• Allows firms to use its competencies to extend or diversify product or
market reach, without completing a merger or acquisition
• Knowledge embedded in corporate-level cooperative strategies facilitates
synergy
IMPLEMENTING INTERNATIONAL COOPERATIVE STRATEGIES
• Strategic networks formed to implement cooperative strategies resulting in firms

competing in several different countries
• Distributed strategic networks: organizational structure used to manage international
cooperative strategies
• Several regional strategic center firms are included in the distributed network to manage
partner firms’ multiple cooperative arrangements
P a g e 76 | 78
SUMMARY
Forecasting plays a pivotal role in long-term business planning. An organization
needs to develop a forecasting system that involves several approaches to predicting
uncertain events. Such forecasting requires the development of expertise in identifying
forecasting problems, applying a range of forecasting methods, selecting appropriate
methods of each problem and evaluating and refining methods over time. It is also
important to have a strong organizational support for the use of formal forecasting
methods if they are to be used successfully.
An International strategy requires analyzing the international market, studying
resources, defining goals, understanding market dynamics and develop offerings.
International strategy for a company looking to grow is a continuous process.
A cooperative strategy gives a company advantages, specially to companies that
have a lack of competitiveness, know how or resources. This strategy gives to the
company the possibility to fulfill the lack of competitiveness. Cooperative strategy also
offers access to new and wider market to companies and the possibility of learning
through cooperation. Cooperative strategy has been recently applied by companies that
want to open their markets and have a liberalist vision of negotiation through cooperation.
Corporate governance is an important part of strategic management that can
improve firm performance. Despite its importance, many people are unclear about what
corporate governance is precisely. Both managers and investors should understand what
corporate governance is and the role that it plays in firms. Being aware of what corporate
governance is will allow them to see how it affects their respective businesses.
Strategies do not take place against a characterless background but must take
account of the features of the organization in which they will be implemented.
Organizational structures determine what actions are feasible and most optimal. The
importance of organizational structures in the implementation of a strategy is hard to
overemphasize. Good strategy involves taking account of where a company finds itself in
terms of the external market and its internal organizational structure. Strategy and
implementation must cohere.
P a g e 77 | 78
REFERRENCES:
https://www.analyticsinsight.net/how-to-choose-the-right-forecasting-method/
https://www.techfunnel.com/information-technology/forecasting-tools-and-techniques-in-
strategic-management/
https://managementstudyguid.blogspot.com/2014/02/planning-and-decision-aids-i.html
https://bizfluent.com/info-8511942-importance-organizational-structures-strategic-
implementation.html
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2184235
https://www.albany.edu/faculty/es8949/bmgt481/lecture4.html
PART 2: STRATEGIC ACTIONS: STRATEGY

FORMULATION
CHAPTER 8: INTERNATIONAL STRATEGY
CHAPTER 9: COOPERATIVE STRATEGY
CHAPTER 10: CORPORATE GOVERNANCE
CHAPTER 11: ORGANIZATIONAL STRUCTURE AND CONTROLS
P a g e 78 | 78

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STRATEGIC MANAGEMENT

PLANNING AND DECISION AIDS

Forecasting plays a pivotal role in long-term business planning. An accurate

• What is the purpose of the forecast?

It’s important to look at forecasting effectiveness. Forecasting techniques are most

Some suggestions for improving forecasting effectiveness are as follows:

1) Use simple forecasting techniques.

Quantitative forecasting relies on numerical data and mathematical model to

1. Time-series methods used historical data to develop forecasts of the future.

Qualitative forecasting is used to make short-term forecasts. These models depend

Market Research: It incorporates procedures for testing hypothesis from the

The objective of qualitative models is to forecast numbers based on logical and

Type Characteristics Strengths Weaknesses

Market Uses surveys & Good determinant of It can be difficult to

Delphi Seeks to develop a Excellent for Time consuming to

1) The data is inaccurate.

So, it is crucial to address them before jumping on any business decision.

EXHIBIT 0.0 QUALITIVE VS QUANTITIVE METHODS

1. Judgmental forecasting methods are highly susceptible to bias.

3. The Sales-force composite is a means of forecasting that is used mainly to predict

CHOOSING AND FORECASTING METHODS

o Quantitative forecasting methods:

I. Have a short-to-medium time horizon

o Technological forecasting methods:

I. Have a medium-to-long time horizon

o Judgmental forecasting methods:

I. Have a short-to-long time horizon

OPPORTUNITIES AND OUTCOMES OF INTERNATIONAL

INCENTIVES AND BASIC BENEFITS OF INTERNATIONAL STRATEGY

IDENTIFYING INTERNATIONAL OPPORTUNITIES

Firms derive three basic benefits by successfully using international strategies:

2. Increased economies of scale and learning

Firms choose one or both of two basic types of international strategies:

INTERNATIONAL BUSINESS - LEVEL STRATEGY

DETERMINANTS OF NATIONAL ADVANTAGE

TYPES OF INTERNATIONAL BUSINESS-LEVEL STRATEGIES

Porter's 5 Forces Model

How to Obtain a Cost Advantage?

• Determine and Control Cost

2. Differentiation - Value is provided to customers through unique features and

Create Value by:

• Lowering Buyers' Costs – Higher quality means less breakdowns, quicker

Risks of Using a Differentiation Strategy

4. Focused Differentiation - Organizations not only compete based on differentiation,

Risks of Using Focused Strategies:

• Maybe out focused by competitors (even smaller segment)

5. Using an Integrated Low-Cost/Differentiation Strategy

• Adaptability to environmental changes.

INTERNATIONAL CORPORATE - LEVEL STRATEGY

EXHIBIT 4.4 INTERNATIONAL CORPORTE LEVEL STRATEGIES

MULTI DOMESTIC STRATEGY

o Less responsive to local market opportunities

Basis for Business Strategy Corporate Strategy

A. Liability of foreignness: costs associated with entering foreign markets

CHOICE OF INTERNATIONAL ENTRY MODE

What’s the best solution?

SITUATION OPTIMAL SOLUTION

The firm needs to facilitate the product

The firm needs to connect with an

The firm needs to reduce its risk through the

The firm must act quickly to gain rapid

The firm’s intellectual property rights in an