Module 3

Module 3 – Strategic Development Module outcomes At the successful completion of this module a student should be able to: 

●Identify and assess firm capabilities that lead to competitive advantage;

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●Apply different strategic models that assess and respond to industry key success factors;

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●Demonstrate how to develop and apply generic business strategies;

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●Demonstrate how to develop and apply corporate-level strategies;

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●Distinguish and reflect on international strategies that lead to corporate growth;

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●Critically reflect on contemporary strategic models in practice.

Text Grant, R, Butler, B, Orr, S & Murray, P 2014, Contemporary strategic management: an Australasian perspective, 2nd edn, John Wiley, Milton, Queensland.

Selected readings All selected readings can be downloaded from the MGT8002 Study Desk. Readings are closely related to the Module they relate to.

Text Reading: Grant et al. (2014), Chapters 5, 6, 7, 8, 9 & 11 

Reading 1: Gehani, R.R. 2013, Innovative strategic leader transforming from a lowcost strategy to product differentiation strategy. Journal of Technology Management & Innovation, Vol. 8, No. 2, pp.144-155.

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Reading 2: Brenes, E.R. Montoya, D. Ciravegna, L. 2014, Differentiation strategies in emerging markets: The case of Latin American Agribusinesses. Journal of Business Research, Vol.67, No.5, pp. 847-855.

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Reading 3: Lee, S-J, Joongwha, K, Park, B. 2015, Culture clashes in crossborder mergers and acquisitions: A case study of Sweden’s Volvo and South Korea’s Samsung. International Business Review, Vol. 24, No. 4, pp.580-593.

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Reading 4: Kim, H. Hoskisson, R.E. Lee, S-H. 2015, Why strategic factor markets matter:

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“New” multinationals’ geographic diversification and firm profitability. Strategic Management Journal, Vol. 36, No. 4, pp. 518-536.

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Reading 5: Hitt, M.A. Li, D. Xu, K. 2015, International strategy: From local to global and beyond. Journal of World Business, in press.

Recommended references 

Fitzroy, P. Hulbert, J.M. Ghobadian, A. 2012, Strategic Management: The challenge of creating value. 2nd edn. Routledge: New York.

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Barney, J & Hesterly, W 2010, Strategic management and competitive advantage: concepts, 3rd edn, Prentice Hall, Boston, Massachusetts.

3.1 Developing Resources, Capabilities, Competencies 3.1.1 Building competitive advantage Reading activity 3.1 For section 3.1 as a whole, read Chapter 5 and 6 of Grant et al.

In Module 1 and 2, we went some of the way in determining how to build competitive advantage however the discussion was limited more to analysis and reflection of what RBV means.

Similarly, assessing industry forces and determining key success factors were all part of gathering information about an industry so that a firm can achieve a competitive advantage. The discussion in Module 1 about heterogeneous resources is critical for this next stage of discussion.

That is, we must now seek to identify more carefully where resources come from, how they coalesce to form capabilities and how the latter lead to strategy development. Hence, our analysis in this Module is purposed around strategic development including the means and actions firms need to turn strategy into sustained competitive advantage. Reflecting on RBV as groups of resources such as physical capital resources (such as technology), human capital resources and organizational capital resources is the basis for building firm capability. Let’s now analyse these resource-linkedcapabilities. In Chapter 5 of your text on p.167, we discuss the ‘Resources of the Company.’ Here, on page 168, we talk of Toll Holdings capacity to utilise the assets they hold more strategically by using existing resources to support larger volumes of business. The key is the quality of a range of tangible, intangible and human resources (Figure 3.1).

Yet as important as tangible assets are, intangible ones are possibly more important because they are difficult to replicate and cannot easily be turned into close substitutes that we spoke of in Module 1. You will see in Figure 3.1 how KSFs cannot be ignored as they need to be combined with organisational capabilities to establish a firm’s competitive advantage. For instance, at the

bottom of page 168 we talk of trademarks and brand names that instil confidence in customers.

Notice in Table 5.1 on page 169 how Nokia has slipped down in brand value. Let’s address this in our first learning activity for this Module. Š University of Southern Queensland Figure 3.1: Building competitive advantage from resources CompetitiveStrategyIndustry KSFs advantage Organisational capabilities Resources Tangible

Intangible

Human

Financial (cash,

Technology (patents,

Skills & know-how

securities, borrowing

copyrights, trade secrets)Capacity for

capacity)

Reputation (brands,

communication &

Physical (property, relationships)

collaboration

plant, equipment)

Motivation

Culture

Adapted from Grant et al. (2014).

Learning activity 3.1

Why has Nokia lost market share and competitive advantage? Given a RBV and competitive advantage approach, what factors have led to this? Let’s discuss this on the study desk.

See also in Table 5.2 how a company can seek to develop its capabilities on the basis of its functional areas; that is, functionality should lead to capabilities. We often use the example in lectures that resources lead to capabilities which in turn lead to competencies that given the right mix of strategy, lead to competitive advantage. Another way of thinking about capabilities is to assess how firms develop the heterogeneous resources that lead to capabilities; in rapidly shifting markets such as telecommunications, computing and IT, firms now need to accumulate competitive advantage through knowledge and learning – the focus shifts to how resources are developed, integrated and released. In strategy capsule 5.4, the India IT market develops dynamic capabilities through increased integration through greater supplier-client relationships, technical know-how and contract negotiation skills. In essence, dynamic capabilities emphasize resource deployment and renewal so that a firm’s resources can be sustained over time. This means that it is not just good enough to develop a competence or a number of competences. The latter have to be turned into sustained © University of Southern Queensland

competitive advantage. We discuss more of these differences as well on page 160 of Chapter 5 of your text.

3.1.2 Recognising advantage in value streams We started some analysis of value chains in Module 2 but this was mainly for the purposes of analysing external inputs and influences. The latter of course is important in seeking to understand how value is created in a value chain (traditionally known as a supply chain) except that Porter’s conception of supplier firms was to determine how they create value.

Thus, the discussions on page 158 through 159 help firms to identify the embedded capabilities that are located within a value chain. A value chain analysis is at one time analysing inputs but at another used to identify capabilities. It is not only a tool for analysis but is valuable for strategy development since new resources can be acquired (and developed) such as the example we spoke of in Module 2 of Ericsson’s mobile platform networks.

Support resources as discussed on page 159 mean more than a cursory glance of ‘known’ activities related to organisational infrastructure (planning, finance, accounting) and human resource management (recruiting, hiring , training). This kind of analysis may actually limit the development of capabilities as it is focused on strategy tools-in-use(Module 2) where the valuechain itself becomes an artefact that has many strategic affordances (see Section 2.3.2 in Module 2). Using the value chain then compels strategists to look for new multiple linkages that unearth the kind of capabilities that will be needed in fast changing market value streams. We note for instance on page 162 of your text where Prahalad and Hamel talk of the potential for such capabilities to be the ‘roots of competitiveness’ as the source of new products and the

foundations of strategy. Now read the rest of Chapter 5 then refer to the first 5 pages of Chapter 6.

Figure 3.2 now places value streams and value chains in perspective. The key is to use analysis to identify the internal sources for change and how to turn resource units into capabilities, and external sources of change illustrated in Figure 3.2. Note the key relationships in Figure 3.2. See page 191 (about middle of the page) where we note that ‘responsiveness to the opportunities provided by external change requires one key resource (information) and one key capability (flexibility)’ (Grant et al. 2014,p.191). The key is to ascertain how competitive advantage emerges which requires a discussion on innovation and new game strategies (see page 191). © University of Southern Queensland

Figure 3.2: Emerging competitive advantage How does competitive advantage emerge?

External Sources of Change -changing customer demand -changing prices -technological change

Resource heterogeneity among firms means

different impact

Some firms are faster

and more effective in exploiting change

Adapted from Grant et al. (2014) Internal sources of change Some firms have greater creative and innovative capability 3.1.3 Competitive Advantage – Innovation & Imitation

Reading activity 3.2 The key reading for this section is page 191 Grant et al. to page 204.

The emerging discussion thus far points to the accumulative value of identifying the sources of competitive advantage (CA) and how CA emerges in ways that exploit resources. What we illustrate later in this Module is how to use various matrixes to identify, develop and implement competitive advantage to help firms develop strategies. We also provide various matrixes that can be used to help a firm match resources, capabilities, and key success factors (Appendix 1). In turning to innovation strategies, the reality of rare and valuable resources plus those that are imperfectly imitable and not easily substituted are embodied within the innovation(s) itself. Both Figures 3.1 and 3.2 give us some idea how to build these resources. Yet, if resources can be thought of ‘bundles of resources’ that work together to create capabilities, then it is this emergent process that leads to sustained capabilities that when combined with an appropriate ‘new game’ or growth strategy, lead to firm innovation(s) in products and services.

On page 191 of your text, we talk of the new approaches to doing business by creating value for customers from novel experiences. We talk of how Costco has created this kind of © University of Southern Queenslan innovative value by carrying quality brand-name merchandise achieved at substantially lower cost through economies of scale. We discuss these generic (or general) strategies later. For Costco, the CA appears to relate to its intensive distribution strategy and size balancing differentiation with low cost. For Nike, it is the complex global network involving design and market research. See also our discussion on Apple who see themselves as not just a computer company but rather a global giant whose new game strategies are reflected in the reinvention of its recorded music products and in telecommunications more generally. Note how innovators isolate followers or imitators by reducing the range of investment opportunities open to challengers, by sustaining the innovation over a longer time than it takes a competitor to mount a challenge. See Figure 6.2 on page 193. As we note on page 192 of your text however, innovation is more than just developing new products and services and more about building layers of advantage in the way new products are developed over long periods. We use the example in the test of Toyotas lean production system and Proctor and Gamble’s brand management system.

Learning activity 3.2 China needs to evolve from an innovation “sponge” to an innovation leader to sustain GDP growth in the coming decade as other drivers of growth—an expanding labour force and capital investment—decline. Let’s discuss this on the study desk!

See file:///C:/Users/U1003691/Downloads/MGI%20China%20Effect_Full%20report_October _2015.pdf Competitive advantage is mostly possible in production markets because of the availability and development of resource heterogeneity. See the discussion in Chapter 6 on efficient markets and

the absence of competitive advantage in trading markets where CA is short lived (page 195 of Grant et al.). Put simply, when most if not all resource inputs and the information related to them are known in trading markets, there is little advantage left except that size and economies of scale become important e.g., think of large Banks. We are more interested however in production markets because they offer the most potential for sustained advantage.

In these markets, highly differentiated resource-bundles become critical to avoid imitation. In Figure 6.4 in Grant et al. page 197, the discussion illustrates how competitors are continuously searching for weaknesses in an industry and in competitor strategy. However, due to firms only achieving precarious advantage where high levels of weakness co-existwith other strengths and capabilities, firms are more vulnerable to rivals’ attacks meaning there will be greater variations to firm performance. The upshot of this discussion is that when a firm develops heterogeneous resources, it should simultaneously work to reduce its weakness sets. A recent example is Qantas, the Australian and international airline carrier. It is well known that Qantas prior to 2013 had accumulated market losses of over $1B, largely on the back of rising fuel costs but also inefficient routes, poor cabin service, ageing fleets and so on. However, through its transformation program from 2013 through 2018, the company started transforming weaknesses into strength sets by using a differentiation and cost cutting strategy enabling its assets to produce more resource-basedrents of return. This led to a net profit in 2014 of over $600m.

Now read the rest of Chapter 6. Note in particular the driving forces in industry life cycles and how to adjust and change a firms CA based on industry growth. The discussion on slow, standard and fast-cycle markets (page 201) is a useful way to think about the evolution of strategic advantage. In more mature markets where high barriers to entry and imitation exist, competitors find ways to imitate innovations as vulnerabilities become more obvious. © University of Southern Queensland

Incumbent firms then make new investments in related products and services that enable them to prolong their advantage. By comparison however, fast-cycle markets are different again because of intense and rapid competition that erodes competitive advantage. The intense rivalry between Apple and Samsung suggests CA might only be 3-6 months or less.

3.2. Business & Corporate Strategies Reading activity 3.3 See Chapter 7 Grant et al. plus Reading 1 by Gehani, 2013 & Reading 2 by Brenes et al., 2014. 

3.2.1 Strategy Interface at Different Levels

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Figure 3.3: Interface between Strategies at Different Levels

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Adapted from De Wit & Mayer (2004), p.230

In this section, we discuss the interface between business and

corporate level strategies. Later in Module 4, we will also examine strategies-in-action which will include strategies at the Functional level. Notice in Figure 3.3 however that strategic development occurs at all three levels. One way of analysing the different levels is to think of very large firms, e.g., Westfarmers in Australia, Thailand’s Central Group (see start of Chapter 6 Grant et al.).

© University of Southern Queensland

Such very large firms or organisations can be thought of as corporate companies that devise strategies on behalf of their businesses at the business-level and that while businesses develop a range of their own offensive and defensive strategies, they rely on corporate-level strategies for fundamental direction. Next, we examine business businesslevel strategy which can be described in terms of a business-unit within a company or some other kind of business that competes in mature markets by adopting a range of generic strategies. We then discuss how business-level strategy relates to corporate strategy.

3.2.2 Generic Business Strategies You may well know of different marketing strategies related to cost advantage, differentiation and focus. At the start of Chapter 7 in your text, we outline the difference: 1) cost advantage – supplying equivalent products or services at lower cost, 2) differentiation – where customers are willing to pay more from differentiating products and services, and on page 239, 3) focus – allows companies to concentrate their resources on the chosen target market where advantage is achieved by better understanding of the customers’ needs (Grant et al. 2014, p.239). These three generic (or general) strategies have become common-place to the strategist. Here, we will discuss these from a strategy development perspective.

The significant drivers of a cost advantage are observed on page 226 of your text. For example, economy of scale is often touted as a major industry dynamic (or key success factor) in different kinds of industries such as the mining industry. Here, barriers to entry become visible, not only because of the significant asset costs of entering the market but also because of fewer very large players who by virtue of their size dominate the market e.g., Rio Tinto. See also the other drivers.

For instance, process technologies and process design efficiencies have produced a whole range of new cost savings in production markets effectively pushing down the cost of production. Once again, see the discussion of value chains. It is important to identify where costs lie within the chain from a cost-strategy perspective. However, a cost advantage strategy can be easily copied e.g., Woolworths in Australia versus new low-cost entrants such as Aldi. Similarly, Bunnings and Masters. Without differentiation, it is much harder to hold on to competitive advantage.

Now turn to page 232 of your text.

Differentiation by comparison extends beyond mere physical comparisons to every aspect of how firms relate to customers. Firms both differentiate their products vertically (introducing new products to what already exists) and horizontally (new features and benefits to the same product in a line). Note the discussion on page 233 that products can be differentiated by almost any means such as size, shape, colour, weight, design. Firms tend to sustain competitive advantages from differentiated products and services through ongoing market research and new innovations as discussed earlier. See Figure 3.3 for how generic strategies can be represented and depicted. © University of Southern Queenslan

Figure 3.3: Generic Strategies Competitive advantage Lower Cost

Differentiation

Broad Cost LeadershipDifferentiation Target Competitive Scope NarrowCost Focus

Differentiation Focus

Target

A focused strategy is a useful way of thinking about market entry in an industry. Even large firms have often used a focus strategy to enter into completely new industries. Later after gaining a foothold, they subsequently build resources over time by searching for anomalies and gaps and then moving to differentiate their product. Hyundai for instance entered the Australian market in the 1980s with the Excel budget car. Once they had achieved relative scale and know-how, they introduced many new models and are now a leading player with substantial market share.

Focused strategy seems to fit well with smaller firms as they don’t have to compete with the broad target of competitive scope illustrated in Figure 3.3; mid-size firms also benefit as they compete in niche markets. They then search for anomalies and inconsistencies in existing competitive offerings.

Now refer to Reading 1 by Gehani. This reading builds on the ideas of RBV by explaining how cost advantage strategies also depend not only on continued low-cost approaches but also topclass innovative products that in turn yield, and help fund more top-class or value- added products. This description of ‘top-class’ products is similar to our earlier discussion of emerging CA and the need to develop dynamic capabilities. The author highlights how these are not based solely on cost which inevitably forces producers to continue to sell more products at reducing returns. Instead, such transformation in product strategy depended on innovative leaders who

could continually re-invent firm products. Reading 1 highlights the well-known skills of Steve Jobs in building the stock value of Apple through reinvention. It also by comparison highlights Kodak’s failure to recognise the accelerating assault of innovative digital imaging products on photographic film markets (Gehani, 2013: p. 146). Now read the rest of the article. Refer to page 153 where the author suggests that many well- known companies pursued simultaneously a blended strategy approach of cost advantage but also disruptive-product innovation.

Learning activity 3.3 The advent of digital channels has changed the way consumers communicate and search for product and service information. Let’s discuss this on the study desk.

See http://www.mckinsey.com/client_service/marketing_and_sales/latest_thinking/digitizing_ customer_care © University of Southern Queensland

In a study of agribusiness firms in emerging markets, Reading 2 by Brenes et al. (2014) makes more explicit the importance (and proof) of differentiation strategy. The principles of differentiation are similar. That is, firms differentiate as we noted above on the basis of features, products, service; but they also differentiate on other non-exclusive common criteria such as brand image, packaging quality, and time in business. Brenes et al.’s research confirms Porter’s notion of differentiation strategy (DS) by showing that firms that have a clear generic strategy (either cost advantage or differentiation) perform better than firms who do not. Note that in agribusinesses, the strategic dimension is classified in terms of 1) management ability - the ability to formally define strategy; ability to operationalize strategy), 2) innovation capability – senior managements capacity to support innovation plus R&D activities and take greater risks, 3) agribusiness scope – degree of vertical and geographic scope and the ‘where’ and ‘how’ firms compete, 4) marketing skills – skills in advertising and promotion plus market intelligence and knowledge of customers and information technology and 5) operations skills – understanding the quality of supplier relationships, prices paid relative to competitors (Brenes et al. 2014, p. 848).

Taken together, these differentiating factors appear to be highly similar to manufacturing firms wishing to expand their markets (scope), firm know-how and innovation capacity to achieve competitive advantage. Refer on the bottom of page 850 of the article where the authors note that firms implementing DS obtain higher average values that those that don’t; elsewhere, that innovation capability and marketing skills were featured more prominently than the others yet all factors were statistically significant.

Reading activity 3.3 Refer to Chapter 8 Grant et al. (2014) 3.2.3 Developing Corporate Strategies

Corporate-level strategies (CS) are fundamentally about growth. In Chapter 8 of your text, we discuss the scope of strategies at the corporate level often referred to as determining the ‘growth vector’ of the very large firm. Here, CS are mostly defined by diversification, mergers and acquisitions, integration and sometimes retrenchment. As outlined on page 251 of your text, the product scope of CS is a vital component ordinarily determined by a firm’s specialisation within one industry or across industries. Think of vertical scope and think of Dell who manufactures and sells its own computers. Think of geographical scope and a whole range of firms come to mind, from Honda and Toyota, Sony, Apple, Fox Corporation, Komatsu and more.

Many of these are called centralised global firms by virtue of their parent company, but what is interesting is their propensity for growth. See how corporate strategy is portrayed on page 251 which also includes product scope. If we think of Honda for a moment, one is inevitably drawn to its high precision quality cars (product scope) and its international geographical presence (multi-domestic strategy).

In Figure 3.4, firms diversify by expanding their existing range of products and services to new markets and or existing markets including their stages of production. Expanding existing products into existing markets refers to Quadrant 1 in Figure 3.4 whereas expanding existing products or services into new markets refers to Quadrant 2. Firms at various stages of their industry life cycle including whether they exist in standard or fast-cycle markets for competitive advantage often expand through intensive distribution since they may still have opportunities in existing markets. The RBV approach and much of our discussion in these Modules has demonstrated how heterogeneity produces variations to existing products but © University of Southern Queensland

Also new ones as new capabilities are identified. Stakeholders and shareholders want returns for their investment. Thus, corporate firms’ priority is to expand the business through growth strategies. Now read through pages 252 through 258 of your text.

Related diversification strategies are the most popular as this means firms expand into similar or related industries by using its synergies across its range of businesses. Think of a tyre manufacturer who diversifies vertically by acquiring tyre retailers and wholesalers within the same industry. For unrelated diversification, think of a manufacturing firm making car parts deciding to acquire horizontally situated firms making component parts in the computing industry.

Figure 3.4: Product/market grid analysis Products/services

Existing

New

Existing Market penetration New products/services 1

Markets

New

4

Market developmentDiversification 2

3

(Grant et al. 2014, p.253) The text talks of other examples such as educational suppliers. Refer to page 257 and different tests that might be conducted to determine if industries are attractive. For instance, the attractiveness, better-off and cost-of-entry test; market realities of the latter may be beyond the attractiveness test if only because of tough entry barriers suggesting firms may need an acquisition strategy by acquiring a firm already in the targeted industry or some other strategy.

Targeted firms for related diversification already possess the resource-based capabilities that an acquiring firm might want so diversification represents quite a rapid approach for firm growth.

Note on page 262 of your text that diversification can increase a firm’s market power.

However, on page 263 of your text Grant et al., the authors outline examples where diversification can be over complicated and lead to deteriorating profitability and loss of control.

For instance, mergers and acquisitions relate to which kind of diversification? Probably market development (Quadrant 2) in Figure 3.4 particularly related to mergers and acquisitions which we discuss in Section 3.3 below. The point about diversification is that it does satisfy the growth vector yet requires competing firms to carefully evaluate their options. It does make sense when a firm has exhausted its options for growth in existing markets and can either leverage its existing capabilities to new markets and/or can acquire other companies in similar industries that possess the capabilities that the acquiring firm needs. Š University of Southern Queensland 3.2.4 Mergers, Acquisitions, Integration Reading activity 3.3

Refer to Chapter 8 Grant et al. (2014) and Reading 3 by Lee et al. (2015) Now refer to your text Grant et al. page 263 through 267 and see the discussions on mergers and acquisitions; the reasons and benefits for both diversification strategies are discussed on page 267 such as economies of scale. See Strategy Capsule 8.2 of an example of growth through acquisition. Japanese firms (Suzuki and Takeda Pharmaceuticals) are examples of synergyseeking firms or those that seek to match their existing suite of capabilities with those of the acquired firms. Note the four factors outlined on page 234 and the need for mentor exchange programs, special coordination units and local trainers and company-wide swap programs such as leader swaps. Mostly, parent companies (or the acquiring firm) seek to create valuecreating synergies in its acquired subsidiaries. Here, Japanese firms were using the growth vector of market development through mergers and acquisitions to grow market share.

Learning activity 3.4 Think of any international firm that might benefit from merger and acquisition, from a Government run utility to a private firm. Discuss the benefits of merging. Discuss your chosen company on the study desk for the benefits of all students.

Now refer to Reading 3 by Lee et al. (2015). This study draws out the problems associated with cross-cultural mergers and acquisitions. Read the first couple of pages. Here, we can note the two broad approaches of studying how one acquiring firm’s culture and values might conflict with the acquired firm. These issues are particularly salient given 50-80%failure rates of crossborder mergers and acquisitions (CMA). The authors explore the CMA between Volvo Construction Equipment and Samsung heavy industry’s division through two competing cultural lens: 1) a value-conflict approach measured as the sum of the differences in value orientations between acquiring and acquired firms, and 2) social identity: that is, problems between acquired/acquiring firms occur not from value differences but acquired employees refusal to accept the new groups identity because they were still attached to the old firm. On page 581 of Reading 3, the authors outline why some of these failures might occur. They propose two alternative propositions; that acquired employees MAY perceive national differences negatively and conversely, that they DO NOT ALWAYS perceive national differences negatively. Now read the discussions and conclusions section. Some interesting findings were that cultural differences are not predetermined; rather, they depend on the social context each subcultural group faces.

The article notes ‘it is practical impossible to predict which culture-dependent problems will occur in advance and that national culture differences possibly have a negative effect on postmerger integration’..(And)..’the acceptance of national culture of the acquiring firm is dependent on whether acquired employees perceive their newly created positions to be more attractive’ (see Lee et al. 2015: page 591-592). Yet, as strategy capsule 8.2 on page 264 Grant et al. highlights, there are a number of contributing factors for merger success. A different kind of integration is described from pages 267 to 274 of your text. Mergers can be a form of horizontal integration when firms acquire businesses at the same level of the value chain. Conversely, vertical integration is where firms acquire other firms up or down the value chain. Interestingly, diversification strategies bring to the forefront the need to locate or find dynamic capabilities that

we discussed earlier and this occurs as more powerful firms use integration strategies to buy the resource and capability sets that other firms produce. Yet as Š University of Southern Queensland

we see in Reading 3, this is not always easy particularly when different national cultures and values need to be aligned.

3.2.5 Corporate Parenting In Figure 3.5, corporate parenting illustrates the important of parent firm intervention in strategic business units.

Essentially, parents need to add value to their SBUs through valuecreating synergies. On page 279 of your text, we highlight how GM adds value to its SBU in China, allowing the SBU to compete better through added global knowledge, unique know- how of technical skills from car body structures, power trains

and assembly processes. The idea of the parent corporate is to assist the SBU to create value over its nearest rivals.

Figure 3.5 Creating parenting advantage Identifying existing

Clarifying current

distinctive

heartland

parenting

businesses

characteristics

Parent characteristics

SBU characteristics

Parenting

Rival

advantage &

Trends &

parents

Value

Scenarios

creation

Parent decisions

Portfolio decisions

To develop or enhance distinctive parenting

Based on prospective heartland criteria

characteristics

Adapted from Grant et al. 2014.

The other key lesson for corporate parents is asking two important questions: 1) what businesses should this company, rather than rival companies, own and why? and 2) what organizational structure, management processes, and philosophy will foster (or lead to) superior performance from its businesses? (See Campbell et al. 1995; Grant et al. 2014: p.280). Additionally, assessing a parent’s fit with its businesses mean asking questions about key success factors that we spoke of in Module 2. A diversified company will need to assess these for each of its businesses. On page 280 and 281 of your text, value-creatingsynergies are those that help in value creation. We won’t mention all of these here but identifying distinctive capabilities for the business will be critical such as functions and services. Š University of Southern Queensland

dentifying the key success factors will be important also to avoid value-destroyingsynergies such as too much emphasis on the short term to meet parent goals for profit and cost control. The characteristics of the parent relate to which capabilities are best able to add value in the business become central to success. Now read the rest of Chapter 8 and different kinds of matrix that can be used to measure market share, the competitive strengths of a business unit, and more.

3.3. Contemporary International & Multinational Strategy Reading activity 3.3 Refer to Chapter 9 and 11 Grant et al. (2014); then Reading 4 by Kim et al. (2015) and Reading 5 by Hitt et al. (2015).

Our priority in this section is to use a contemporary lens to analyse international strategy. Thus, we are cherry picking some aspects of Chapter 9 and some of Chapter 11 and combining these with two contemporary readings. Reading 4 by Kim et al. (2015) examines how both organisational learning needs to be combined with resource-basedviews to determine the extent of competitive advantage achieved in emerging economies while Reading 5 by Hitt et al. (2015) takes another expansive probe into the development of international strategy over a 50 year period. Here, we will extract some of the main points to see how they relate to our central theme in our Modules in MGT8002, that is, how firms build dynamic capabilities for competitive advantage. Let’s start this section with Chapter 9 and 11 of Grant et al. (2014).

Chapter 9 of Grant et al. presents useful background for developing alliances and other ways that large firms diversify. Table 9.2 and 9.3 in particular outline the key success factors of alliances including why they fail. Also, Table 9.1 illustrates the equity arrangements embedded in alliances. Note also the discussions on page 300 and 301 related to a joint venture and equity alliances which can be very similar to merges. There are many examples in Chapter 9 of international airline alliances. Equity alliances for instance are interesting because one or more partners have greater control and ownership, e.g., Fiat and Chrysler. Notice bottom of page 300 how ‘Chrysler helped Fiat take its brands to the US market’ (Grant et al. 2014, p. 300). Note also that the embedded capabilities in Fiat, while not explicitly outlined here, enabled Chrysler to use Fiat’s dynamic capabilities of production efficiency and manufacturing platforms. For Fiat, this arrangement would fit its growth vector outlined earlier in Figure 3.4 and for Chrysler, it dramatically lifted its dynamic capabilities that had fallen behind other producers. For one reason or another, Chrysler had become inefficient so that this alliance arrangement effectively allowed Chrysler to leverage off Fiat’s capabilities to create a competitive advantage. In this sense, both companies are collaborating with competitors and winning. Here, see the discussion on page 307.

One point that stands out for me is point d) of learning from partners is paramount.

Reflective Comment 3.1 Reflect on an international company that has expanded to quickly. Can you think of examples?

What about Masters in Australia? In expanding into Australia, what kind of generic strategy is Masters following? How can it be successful? © University of Southern Queensland

Now turn to Chapter 11. Read the key terms and their definitions on the first few pages. See the discussion at the bottom of page 358 where ‘born globals’ achieve success and a global strategy within a relatively short time period; most expansion strategies of diversification are learned over a longer time period. As noted earlier, alliances, mergers and acquisitions appear to represent the quickest form of expansion but these also come with substantial risks and complexity. The benefits of global strategy are outlined in page 360 such as exploiting resource factors or national resources and serving global customers. Notice how Porter’s Five

Forces emerges again as a way to analyse global industries. Following Ricardo’s notion of comparative advantage – which incidentally is the basis of assessing resource endowments in targeted international companies for growth – suggests that one country (Australia) has highly specialised technology intensive products whereas a targeted country for growth (Bangladesh) has comparative advantage in cheap unskilled labour. Comparative advantage in factor markets helps to explain why many foreign firms have set up multinational companies in such countries as China, Bangladesh, Vietnam and China.

The factor conditions of a country (see page 367 of Chapter 11) which are often called ‘factor markets’ in contemporary strategy, is essentially about leveraging Ricardo’s earlier analogy.

At the bottom of page 367 of your text however the authors suggest that ‘….clearly, the ability of an organisation to create competitiveness-enhancing resources would be at least partially affected by external environmental conditions’ (2014, p. 367). So this means that while firms want to develop resource-based heterogeneous resources that lead to capabilities for international markets, they need also to consider the factor resources for comparative advantage in those markets. Figure 11.2 on page 370 encapsulates much of the discussion. Now go on to read the remainder of Chapter 11 of your set text and the different kinds of entry strategies.

Now refer to Reading 4 by Kim et al. (2015). Read the first 3 pages. This study explores how the degree of success of a new multinational enterprise (NMNEs) – those companies that are not among the most advanced in the world - will be dependent on the context of both the home and host country strategic factor markets. By strategic factors, the authors mean the availability of resource inputs in those countries - such as home-grown firm specific advantages. The authors also set out to determine whether profitability of NMNEs is in part contingent on the stage of development of strategic factors markets in host and home countries. The authors argue that generally NMNEs (e.g., those in emerging economies) do NOT possess absolute comparative advantages in comparison to long-established and developed economy-based MNEs. They contend that in resource-poor(R-P) host countries – in comparison to resource-rich (RR) countries - the capacity to develop resource-based capabilities using an RBT logic should be higher, because as noted on page 520 of Reading 3, firms can overcome home country constraints by entering host countries where higher quality, superior strategic resources are available for purchase. While the rest of the article goes on to define their approach, see page 534 to see what these authors found. The study notes the importance of careful geographic location.

Overall, the study found that ‘..when NMNEs pursue geographic diversification into R-Phost countries, they are able to exploit their home grown, firm specific advantages, that is, from their country-of-origin’ (p.534). These resources are relatively superior to indigenous firms.

They can also take advantage of experiential learning by limiting the costs of doing business abroad. They also noted that in R-R countries, NMNEs should compete in niche markets initially as local firms may possess equal or better resources.

Now refer to Reading 5 by Hitt et al. (2015), and read the first 4-5 pages. You will note that many approaches to studying international strategy are as broad as they are informative. For instance, note the different findings of studies and how they contribute to our knowledge of © University of Southern Queensland

international strategy. Generally, these approaches can be related to international-strategydiversification and speed, cultural and formal institutional arrangements, and exploring and exploiting critical capabilities. For example, for speed and diversification, some studies found that related product diversification strengthened the positive relationship between international diversification and firm performance (p. 2). For cultural and formal institutional environments, many studies have found that ‘specific types of country institutional environments offered better opportunities for certain activities and ownership advantages such as R&D Centres established in countries such as the U.S. and Germany because of their technological advantages’ (p.4). Notice the heading ‘exploiting and exploring critical capabilities’ on page 7 and the supporting discussion of seeking new capabilities. The latter in particular seems highly consistent with Figures 3.1 and 3.2 discussed earlier. See also how many of their conclusions related to international strategy support Reading 4, that more ‘research is needed on the distinctiveness of emerging economy MNEs, their internationalization strategies, paths and outcomes’ (Hitt et al. 2015: p. 8).

What Readings 4 and 5 highlight are the inconsistencies, vagaries and difficulties of research related to international strategy. Thus, while models offer ways of analysing how firms can be successful in international markets, strategists and MNEs wishing to expand into global markets need to assess the international context. One point that stands out is that international strategy depends entirely on the host country context and the home-country firm’s resource- based capabilities and how to leverage them in international markets.

3.2 Summary: Module 3 This Module has dealt with many aspects of strategy development. Overall, the Module builds on Modules 1 and 2 by illustrating how strategies are formed and why. The RBV approach is once again essential in understanding how to build competitive advantage and how this emerges. We also examined business and corporate-level strategy, international strategy in factor markets and some contemporary ways of thinking about firm expansion. In developing competitive advantage now and into the future, rapid market growth is upsetting the traditional ways in which market analysis takes place and strategies are formed. However, these rapid collapse of discreet value chains and their relationships such as the speed to production markets and digital technologies means that creating competitive advantage has become increasingly based on knowledge economies. Our approach in MGT8002 is that irrespective of these approaches, the RBV holds sway because of its underlying capacity to create value for firms.

Additional references Campbell, A. Goold, M. Alexander, M. 1995, Corporate strategy: The quest for parenting advantage. Harvard Business Review, March-April.

Parmigiani, A. Holloway, S.S. 2011, Actions speak louder than modes: Antecedents and implications of parent implementation capabilities on business unit performance. Strategic Management Journal, Vo. 32, pp.457-485.

MacLean, D. MacIntosh, R. Seidl, D. 2015, Rethinking dynamic capabilities from a creative action perspective. Strategic Organization, pp.1-13.

De Wit, R & Meyer, R 2004, Strategy: process, content, context, Thomson Learning, London.

Hart S., 1997, Beyond Greening: strategies for a sustainable world, Harvard Business Review, Vol.75 No.1, pp. 66-76. © University of Southern Queensland

Kay, J 1993, Foundations of corporate success, Oxford University Press, Oxford. Lynch, R 2003, Corporate strategy, 3rd edn, Financial Times, Prentice Hall, Harlow.

Oliver, C 1997, ‘Sustainable competitive advantage: combining international and resource- based views’, Strategic Management Journal, vol. 18, no. 9, Oct., pp. 697–713.

Porter, M, 1980, Competitive strategy, The Free Press, New York.

Prahalad, CK & Hamel, G, 1990, ‘The core competence of the corporation’, Harvard business Review, vol. 90, no. 3, pp. 79–91.

Spender, JC, 1989, Industry recipe, Basil Blackwell, New York.

Appendix 1: Tools for Matching, Assessing and Ranking Capabilities Figure 3.6: Matching capabilities with resources

Worse thanabout the sameBetter than Resources Capability -5 -4 -3 -2 -1

Tangible resourcesNote: Match each

0 +1 +2 +3 +4

e.g. Physical

capability with each resource

Rank (√ or

(2)

X) each

competitorsby

capability is from

Intangible resources

e.g. Brands

capability

relative to closest two

seeing how far away

your

your closest competitors. If for

example, you think

that your firm is 2 points worse

than competitors,

then you would rank

pointsbetter +2. If the

it -2; if 2

same, rank it 0

Figure 3.7: Capability matching with key success factors Key Success Factors

(from case study 1)

1

1.Research &

Capabilities Match each capability with each KSF in Column 1) 2

e.g. technological superiority is ‌..x,

y, z Development

2

3.

Š USQ Business School Figure 3.8: Ranking Key Success Factors and with Firm Capabilities

KSFs 1

2

3

4

5

Capabilities (From Table 2.1 above)

Technological superiority

Rate or rankeach capability from Rank capacity key the identified

1 to 10 with

6

1 the lowest to 10 the

highest. each Add

column to complete the exercise its on capabilityeach of advantage take to you factors success

TOTAL Add each column to complete the exercise

Š USQ Business School Š University of Southern Queensland