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Module 4

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Global Strategy

Business Diversification Strategy

• The need:
• 1. Risk mitigation
• 2. Adaptation to market changes
• 3. Resilience in economic uncertainty
• 4. Enhanced revenue stability
• 5. Competitive advantage
• 6. Customer base expansion
• 7. Chaptalizing on synergies
• 8. Future-proofing the business
Horizontal Expansion of a Global Business

• Why?
• 1. Market share enhancement
• 2. Economies of scale
• 3. Competitive advantage
• 4. Diversification of product port-folio
• 5. Enhanced research and development
• 6. Streamlined supply chain
Horizontal Expansion Cont:-

• 7. Increased bargaining power


• 8. Access to new markets and customers
• 9. Risk diversification
• 10. Efficient utilization of resources
• 11. Capital market perception
What is Horizontal Expansion?

• Horizontal expansion, also known as horizontal integration, is a business


growth strategy wherein a company expands its operations or presence
within the same industry or market. Unlike vertical expansion, which
involves moving along the supply chain either backward or forward,
horizontal expansion occurs when a business broadens its activities by
acquiring, merging with, or establishing partnerships with other firms
that operate at the same stage of production or offer similar products or
services.
Benefits of Horizontal Integration
Profits and profitability increase when horizontal integration:
1. Lowers the cost structure
• Creates increasing economies of scale
• Reduces the duplication of resources between two companies
2. Increases product differentiation
• Product bundling – broader range at single combined price
• Total solution – saving customers time and money
• Cross-selling – leveraging established customer relationships
3. Replicates the business model
• In new market segments within same industry
4. Reduces industry rivalry
• Eliminate excess capacity in an industry
• Easier to implement tacit price coordination among rivals
5. Increases bargaining power
• Increased market power over suppliers and buyers
• Gain greater control
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The Ansoff Matrix

• The Ansoff Matrix, developed by Igor Ansoff, is a strategic planning tool


that provides a framework for businesses to explore growth strategies. It
categorizes growth options into four distinct quadrants, based on two key
dimensions: products and markets. The matrix helps organizations
systematically evaluate and choose the most suitable strategies for their
specific growth objectives.
The Ansoff Matrix Approach & Example-Xiaomi Inc.,
Geographic Expansion

• Geographic expansion refers to the strategic move of a business to extend


its operations, market presence, and influence into new geographical
regions, whether domestically or internationally. This expansion can take
various forms, including establishing new physical locations, entering new
markets, or enhancing the distribution network to cover a wider
geographic footprint. The primary objectives of geographic expansion are
to tap into new customer bases, increase market share, and capitalize on
growth opportunities in different locations.
Vertical Integration
Entering New Industries
A company may expands its operations backward into industries
that produces inputs to its products or forward into industries that
utilize, distribute or sell it products.
❖ Backward Vertical Integration
• Company expands its operations into an industry that produces
inputs to the company’s products.
❖ Forward Vertical Integration
• Company expands into an industry that uses, distributes, or
sells the company’s products.
❖ Full Integration
• Company produces all of a particular input from its own
operations.
• Disposes of all of its completed products through its own outlets.
❖ Taper Integration
• In addition to company-owned suppliers, the company will also use other
suppliers for inputs or independent outlets in addition to company-owned
outlets.

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Increasing Profitability Through Vertical
Integration
A company pursues vertical integration to strengthen
the business model of its original or core business
or to improve its competitive position:
1. Facilitates investments in efficiency-enhancing
specialized assets
• Allows company to lower the cost structure or
• Better differentiate its products
2. Enhances or protects product quality
• To strengthen its differentiation advantage through either
forward or backward integration
3. Results in improved scheduling
• Makes it easier and more cost-effective to plan, coordinate,
and schedule the transfer of product within the value-added
chain
• Enables a company to respond better to changes in demand

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Problems with Vertical Integration
Companies may disintegrate or exit industries adjacent to the
industry value chain when encountering disadvantages from the
vertical integration:
❖ Cost structure is increasing.
• Company-owned suppliers develop a higher cost structure than those of
the independent suppliers
• Bureaucratic costs of solving transaction difficulties
❖ The technology is changing fast.
• Vertical integration may lock into old or inefficient technology
• Prevent company from changing to a new technology that could
strengthen the business model
❖ Demand is unpredictable.
❖ Creates risk in vertical integration investments.
Vertical integration can weaken business model when:
• Company-owned suppliers lack incentive to reduce costs
• Changing demand or technology reduces ability to be competitive

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Corporate-Level Strategy of Diversification
Diversification Strategy is the company’s decision to enter
one or more new industries (that are distinct from its
established operations) to take advantage of its existing
distinctive competencies and business model.
Types of diversification:
❖ Related diversification
❖ Unrelated diversification
Methods to implement a
diversification strategy:
❖ Internal new ventures
❖ Acquisitions
❖ Joint ventures
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Diversification and Reasons…

• Diversification in global businesses involves expanding a company's


operations, products, or services into new markets or industries.
Related Diversification

• Related diversification is a corporate strategy where a company expands


its operations into new, but related, products or markets. In this strategy,
the new business activities share strategic similarities with the existing
business of the company. The goal is to leverage existing capabilities,
knowledge, and resources to create synergies between different business
units. This type of diversification often involves entering industries or
markets that are related to the company's current activities in terms of
technology, distribution channels, or customer base.
Unrelated Diversification

• Unrelated diversification, also known as conglomerate diversification, is a


corporate strategy in which a company expands its business activities into
new and unrelated industries or markets. Unlike related diversification,
where the new ventures share strategic similarities with the existing core
business, unrelated diversification involves entering businesses that have
little to no connection to the company's current operations. The goal is to
spread risk and create a portfolio of businesses that can generate returns
independently of each other.
Disadvantages and Limits of Diversification
Conditions that can make diversification
disadvantageous:
1. Changing Industry and Firm-Specific Conditions
• Future success of this strategy is hard to predict.
• Over time, changing situations may require businesses to be
divested.
2. Diversification for the Wrong Reasons
• Must have clear vision as to how value will be created.
• Extensive diversification tends to reduce rather than improve
profitability.
3. Bureaucratic Costs of Diversification
• Costs are a function of the number of business units in a company’s
portfolio, and the
• Extent to which coordination is required to gain the benefits.

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Entry Strategies to Implement Multi business Model
Various entry strategies may be employed based on the
company’s competencies and capabilities:
❶ Internal New Ventures
• Company has a set of valuable competencies in its existing businesses.
• Competences leveraged or recombined to enter new business areas.
❷ Acquisitions
• Company lacks important competencies to compete in an area.
• Company can purchase an incumbent company that has those
competencies at a reasonable price.
❸ Joint Ventures
• Company can increase the probability of success by teaming up with
another company with complementary skills.
• Joint ventures are preferred when risks and costs of setting up a new
business unit are more than company can assume.

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❶ Pitfalls of New Ventures
❖ Scale of entry
• Large-scale entry is initially more expensive than small-
scale entry, but it brings higher returns in the long
run.
❖ Commercialization
• Technological possibilities should not overshadow
market needs and opportunities.
❖ Poor implementation
• Demands on cash flow
• Need clear strategic objectives
• Anticipate time and costs

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Scale of Entry and Profitability

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❶ Guidelines for Successful Internal New Venturing
Structured approach to managing internal new
venturing:
❖ Research aimed at advancing basic science and
technology
❖ Development research aimed at finding and refining
commercial applications for the technology
❖ Foster close links between R&D and marketing;
between R&D and manufacturing
❖ Selection process for choosing ventures
❖ Monitor progress

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❷ The Attractions of Acquisition

Acquisitions are the principle strategy used to


implement horizontal integration:
❖ Used to achieve diversification when the company
lacks important competencies
❖ Enable a company to move quickly
❖ Perceived as less risky than internal new ventures
❖ An attractive way to enter a new industry that is
protected by high barriers to entry

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❷ Acquisition Pitfalls

There is ample evidence that many acquisitions fail to create


value or to realize their anticipated benefits:
❖ Integrating the acquired company
• Difficulty in integrating value-chain and management activities
• High management and employee turnover in acquired company
❖ Overestimating the economic benefits
• Overestimate the competitive advantages and value-added that can be
derived from the acquisition
• Pay too much for the target company
❖ The expense of acquisitions
• Premium paid for publicly traded companies
• Premium cancels out the prospective value-creating gains
❖ Inadequate preacquisition screening
• Weaknesses of acquisitions’ business model are not clear

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❷ Guidelines for Successful Acquisition
❖ Target identification and preacquisition screening
for:
1. Financial position
2. Distinctive competencies and competitive advantage
3. Changing industry boundaries
4. Management capabilities
5. Corporate culture
❖ Bidding strategy
• Avoid hostile takeovers and speculative bidding.
• Encourage friendly takeover with amicable merger.
❖ Integration
• Eliminate duplication of facilities and functions.
• Divest unwanted business units included in acquisition.
❖ Learning from experience
• Conduct post-acquisition audits.

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❸ Joint Ventures

Attractions:
❖ Helps avoid the risks and costs of building a new operation
from the ground floor
❖ Teaming with another company that has complementary
skills and assets may increase the probability of success
Pitfalls:
❖ Requires the sharing of profits if the new business succeeds
❖ Venture partners must share control – conflicts on how to
run the joint venture can cause failure
❖ Run the risk of giving critical know-how away to joint
venture partner

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Strategic Alliance

• A strategic alliance is a collaborative arrangement between two or more


organizations that involves sharing resources, capabilities, and risks to
achieve common goals. These alliances are formed to enhance the
competitiveness and capabilities of the involved parties in a rapidly
changing business environment. Strategic alliances can take various forms
and may involve partnerships, joint ventures, collaborations, or other
cooperative agreements.
Types Strategic Alliances

• 1. Joint Venture: A joint venture is established when the parent companies establish a
new child company. For example, Company A and Company B (parent companies)
can form a joint venture by creating Company C (child company).
• 2. Equity strategy alliance: An equity strategic alliance is created when one company
purchases a certain equity percentage of the other company. If Company A purchases
40% of the equity in Company B, an equity strategic alliance would be formed.
• 3. Non-equity strategy alliance: A non-equity strategic alliance is created when two or
more companies sign a contractual relationship to pool their resources and
capabilities together.
Value Creation in Strategic Alliances

• Strategic alliances create value by:


• Improving current operations
• Changing the competitive environment
• Ease of entry and exit
Contd:-

• Current operations are improved due to:


• Economies of scale from successful strategic alliances
• The ability to learn from the other partner(s)
• Risk and cost being shared between partner(s)
Contd:-

• Changing the competitive environment through:


• Creating technology standards (for example, Sony and
Panasonic announce to work together to produce a
new-generation TV). This would help set a new
standard in a competitive environment.
Challenges in Strategic Alliances

• Although strategic alliances create value, there are many challenges to


consider:
• Partners may misrepresent what they bring to the table (lie about
competencies that they do not have).
• Partners may fail to commit resources and capabilities to the other partners.
• One partner may commit heavily to the alliance while the other partner does
not.
• Partners may fail to use their complementary resources effectively.
Global Strategy: A Conceptual Framework
Choosing a Value Proposition: Value Disciplines
Global strategy as a business model change
• Global strategy involves a comprehensive and coordinated approach to
business operations that transcends national borders. When a company
undergoes a global strategy as a business model change, it signifies a shift
from a primarily domestic focus to an international or global orientation.
This transformation encompasses various aspects of the business model,
strategy, and operations.

https://www.youtube.com/watch?v=z7M1vQTvkx4
Components of a Business Model

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