Strategy Fundamentals and Corporate Strategy

Strategy Fundamentals and Corporate Strategy 119

ADITYA BIRLA GROUP AND THE SUNLIFE GROUP

OF CANADA ALLIANCE

The alliance of the Aditya Birla Group and Sunlife Group of

Canada is a good example of why firms create alliances.

The Aditya Birla Group is one of the largest conglomerates

in India and one of the world’s largest aluminum and

insulator manufacturers. The firm’s sales are approximately

$6 billion a year. In the mid 1990s, Aditya Birla formed a

series of joint ventures with Sunlife of Canada. Sunlife has

sales of over $16 billion a year and is a leading financial

firm in Canada. The two companies established three joint

ventures that offered mutual funds, wealth management

services, and life insurance. The joint venture was to bring

Aditya Birla Group’s knowledge of India together with

Sunlife’s knowledge of financial markets.

The result has been successful for both firms. For exam-

ple, the alliance exceeded the $1 billion mark in United

States variable annuity gross sales for the first five months of

2007, representing an increase of 66 percent over the

comparable period in 2006. Both Aditya and Sunlife have

extensive international operations, and have sought to

ensure that the cultural issues of the two firms are not

barriers to the success of the joint venture. In part, this

comes from the large international exposure of both firms.

Aditya has operations in 26 countries while Sunlife has

operations in 12. Thus, both firms come to the venture with

broad international exposure. This includes not only the

corporate officers but also the local managers assigned to

the venture by both parties.

Aditya Birla and Sunlife Group also have sought to

ensure there are no cultural conflicts through specialized

training and the employment of consultants who have aided

the managers in the joint venture. These individuals have

sought to ensure that the communication and interaction

between all parties are productive and not culturally

misunderstood.

a formal joint venture organization with its own organization structure, offices,

corporate name, and products. The costs and level of commitment of each type of

partnership can, in turn, vary widely, although the cost and level of commitment of

each type of alliance is less than in a merger or acquisition. One aspect of an alliance

that mergers and acquisitions do not have is monitoring costs. These are costs that

arise as each firm monitors the partnership to assure that all of its goals are

accomplished in a manner expected and that there are no negative consequences

from the partnership. Choosing the type of alliance depends on which one creates

more benefits than costs for the firm. Additionally, other factors, such as the learning

that occurs in such alliances, need to be considered.

Reasons for Alliances

A wide variety of reasons for alliances has been proposed. Kogut brought con-

sistency to these various reasons and argued that the reasons could be summar-

ized into three broad categories:^xxi

Organizational learning
Cost savings
Strategic behavior

Organizational learning in alliances occurs as firms attempt to gain knowledge

about products, processes, or markets from their alliance partners. This type of

alliance will allow the firm to gain a better understanding of a given domain

without having to commit extensive resources to the effort. The amount of learning

through any alliance is dependent on three factors: 1) the intent to learn; 2) the

receptivity to new information, and 3) the transparency of the partnering firm. The

form of the alliance will vary according to the type of learning desired. (Different

forms of alliances are discussed later in this section of the chapter.)

Learning about a market through a joint venture is a particularly powerful

motivator when a firm seeks to enter a developing market. For example, when

Wal-Mart entered China it partnered with local firms in the new cities it

entered to learn about their challenging environment and distribution system.

120 Strategy Fundamentals and Corporate Strategy

CULTURE MISTAKES: WHY YOU MAY WANT AN ALLIANCE

When major firms compete in a foreign market without the

benefit of a knowledgeable partner, they often make mis-

takes, sometimes major ones. For example, in 2004, Pepsi

had to remove an advertisement from Indian television. The

ad showed a young, happy child serving Pepsi to two well-

known cricket players, and was aired during a well-known

tournament in India. The firm was sued and the advertise-

ment killed because it was viewed as glorifying child labor.⁶

There are also problems with translation. For example,

at one time, Coors Beer had a slogan of ‘‘Turn it loose.’’

When that phrase was translated into Spanish, it was

understood to mean ‘‘Suffer from diarrhea.’’ In the United

States, the Milk Producers Association had a huge success

with their advertisement campaign, ‘‘Got milk?’’ But the

translation of the phrase in Mexico was, ‘‘Are you lactat-

ing?’’ Parker Pen marketed a ballpoint pen in Mexico with

an advertisement that supposedly said ‘‘It won’t leak in your

pocket and embarrass you.’’ However, the Spanish word

embarazar was incorrectly used for the word embarrass.

As a result, in Spanish, the ad actually read, ‘‘It won’t leak

in your pocket and make you pregnant.’’ In Taiwan, Pepsi’s

slogan ‘‘Come alive with the Pepsi Generation’’ translated

as ‘‘Pepsi will bring your ancestors back from the dead.’’

There can also be difficulties with images. For example, in

1997, Nike employed a ‘‘flaming air’’ logo for its Nike Air

sneakers. However, Muslims thought it looked similar to the

Arabic rendering of God’s name, ‘‘Allah.’’ As a result, Nike

had to remove over 38,000 pairs of sneakers from the market.⁷

The nature of China is that the culture and political power can vary widely

from one major city to another. Thus, joint ventures in such situations allow

learning about the local ‘‘system,’’ such as legal standards, consumer character-

istics, labor markets, and building relationships with the government and local

distributors.^xxii

There are transaction costs associated with an alliance, such as the legal

documents required to form the alliance, building any independent facilities

needed by the alliance, and monitoring the alliance. However, there are also

costs that can be reduced or eliminated because most costs are shared. For

international firms from mature markets, cost savings often occur through lower

labor costs and can be particularly significant. For example, it is estimated that IT

costs can be cut up to 70 percent when programming is done in India. Similar

savings levels have been found in a wide range of other activities from back-

office operations, service work, telephone support centers, and even the reading

of X-rays.

Alliances may be pursued for strategic reasons as well. A competitor may

have entered a given market or geographic region, or a firm may wish to match

its competitor’s actions. However, if this firm does not wish to commit the level

of resources necessary to purchase another firm or to internally develop oper-

ations to match the competitor, then an alliance is an option. Particularly if the

firm is not sure that the competitor has made the correct decision, or if the firm

has a lack of resources, a strategic alliance is advisable. This strategic choice is

less expensive since two firms will share the costs of the activity. Additionally,

the long-term commitment is lower because the alliance can be abandoned if

necessary.

Most often, when individuals think of alliances they think of joint ventures, or

formal agreements between two or more firms in which a new, separate entity is

created. However, joint ventures are just one type of alliance. Alliances can be

differentiated along several dimensions; however, the most important dimension

is the formality of the alliance.

⁶‘‘Pepsi ad depicts child labour?’’ BS Corporate Bureau in New Delhi | October 09, 2004 http://

in.rediff.com/money/2004/oct/09pepsi.htm

⁷The examples cited here are taken from ‘‘Translations That Embarrass Marketing Departments’’ http://

www.i18nguy.com/translations.html

Strategy Fundamentals and Corporate Strategy 121

FIGURE 4-6 Alliance Types

Formal

Informal

Equity joint

venture

Subcontract Licensing Understanding

between parties

Types of Alliances: Formal versus Informal

The formality of the alliance is critical because it sometimes determines the costs

and risks involved with the alliance. Formality of an alliance can be conceptualized

as a continuum with joint ventures anchoring the more formal end, and informal

alliances where no formal documentation exists anchoring the other. We begin our

discussion with the more formal alliances and move to those that are less formal.

(Figure 4-6 summarizes the range of alliances available.)

In an equity joint venture two or more firms both put some resources into a

new, separate entity. The level of equity can vary from very small amounts to large

multimillion-dollar investments. A joint venture commonly has detailed agree-

ments covering what each party is to provide in the joint venture, what each can

expect from the joint venture, and how each is to operate within the joint venture.

An example of a successful joint venture is Placer Dome Turquoise Ridge, Inc.

The joint venture was formed by the Canadian mining company Placer Dome and

the U.S. firm Newmont Mining. The joint venture was owned 75 percent by Placer

Dome and 25 percent by Newmont Mining. It operated the Nevada gold mine that

had previously been run solely by Newmont Mining. The new joint venture brought

in the expertise of Placer Dome to run the mine, and as a result it had lower

operating costs than those of the U.S. company. The joint venture expects to mine

30,000 ounces of gold a year, or $90 million worth of gold at current market prices.

Often equity alliances do not last a long period of time, but there are also examples

of long-term, successful, equity joint ventures. One of the best known and largest

strategic alliances is the long-running joint venture in Asia-Pacific called Caltex. This

entity is a joint venture between the energy firms Texaco and Standard Oil of Cal-

ifornia. Caltex has operated around the Pacific Rim since 1926, and is a well recognized

brand for energy products, retailing, and charity in some of Asia’s poorest regions.

Alliances that are intermediate in their formality are agreements that have clear

documentation but less interaction between the parties, and less agreement

between each party in the alliance is required. Examples of intermediate alliances

include consortia and licensing agreements. Consortia are characterized by several

organizations joining together to share expertise and funding for developing,

gathering, and distributing new knowledge. For example, Dr. Woo Suk Hwang

of Korea in late 2005 led the formation of a consortia of 10 research teams around

the world to study stem cells. The consortia had teams in the United States, Korea,

and England. It had the leading scholars on stem cells in the world working

together, seeking to develop new insights into how stem cells can be used to solve

a wide range of disease and disorders, from paralysis from spinal cord injuries to

Alzheimer’s. (Interestingly, Dr. Hwang later was forced to resign due to evidence

that he faked some of his data. The consortia is a loose organizational form, so the

various parties in the original consortia were not substantively harmed by this

embarrassing situation.)

In a licensing arrangement, one firm agrees to pay another firm for the right to

either manufacture or sell a product. The firm selling the right to this product

typically loses the ability to control various aspects of the product, such as how the

licensee produces or sells it. There will be a contract between the parties, but the

contract in the licensing agreement commonly specifies only the item to be sold

and its cost.

Consortia

Where several organizations join

together to share expertise and funding

for developing, gathering, and

distributing new knowledge.

Licensing arrangement

One firm agrees to pay another firm

for the right to either manufacture or

sell a product.

122 Strategy Fundamentals and Corporate Strategy

ALLIANCE OF MERCK AND THE GATES

FOUNDATION IN AFRICA

Alliances can involve more than two firms. Pharmaceutical

firms face a difficult ethical situation in very poor countries

and regions, such as Africa. These firms sell products such as

AIDS medications that can have a positive impact on the lives

of many people. Yet even if those drugs were sold at cost, no

one who survives on a $1 or $2 a day would be able to

afford them. It has been noted earlier that Africa is being

decimated by HIV/AIDS. The fact that so many individuals

were dying of AIDS and they could not obtain medicine that

would extend their lives led Nelson Mandela to claim that

large pharmaceutical firms were exploiting the disease. There

was a massive outpouring of protest and condemnation in

addition to Mr. Mandela’s statements about the pharmaceut-

ical firms in the early 2000s. As a result of this highly negative

profile, pharmaceutical firms began committing to serve the

poor and ensure that they received life-saving drugs.

The country suffering the worst of the AIDS crisis is

Botswana in southern Africa. It is estimated that the infection

rate of AIDS in the country may be as high as 36% of all

adults. In 2000 a new alliance was formed to address this

problem, the African Comprehensive HIV/AIDS Partnerships

(ACHAP). This alliance was made up of the government of

Botswana, Merck & Co., Inc./The Merck Company

Foundation, and the Bill and Melinda Gates Foundation.

The alliance was formed out of a need for all parties to

address the problem. The approval and support of the gov-

ernment was needed if the effort to deliver the drugs was to

proceed smoothly throughout the country. Merck had com-

mitted to provide the medicine to the population, but it had

no skills in the delivery of the drugs themselves to the very

poor. This required that public health experts be hired and

an infrastructure be developed in order to support the exist-

ing clinics treating those with AIDS and to develop clinics

where none previously existed. To do this, the Gates Foun-

dation experts were needed. The Gates Foundation was

founded by Bill Gates of the Microsoft Corporation and is

the world’s largest charitable foundation with assets esti-

mated at over $34 billion and billions more committed from

famed investor Warren Buffet and others. Mr. Gates has

recently stepped down from Microsoft to devote himself to

the foundation and its charitable activities.

The outcome of this alliance has been very successful. It

is now estimated that half of those who can benefit from

antiretroviral (ARV) therapy for AIDS are now receiving

these lifesaving drugs. The alliance is continuing its effec-

tive work in combating this deadly disease.

Another type of alliance that is intermediate in its formality is subcontracting.

The activities subcontracted may or may not be high-value-adding activities to the

business, but the activities outsourced are not what the firm’s competitive advant-

age is built upon. For example, today firms like Hong Kong’s PCCW subcontract

their computer networks and related support to other firms like IBM. The firms

also combine computing and telecommunication resources to provide similar tele-

communication and network management services to major customers.

Informal alliances have the least written about them in academic literature

because they are the least documented. In such an alliance, two firms agree to

support each other’s activities in some manner. The agreements are strictly infor-

mal with few, if any, legal protections to enforce the agreements.

The Challenges of Alliances

The major challenges facing strategic alliances can be summarized as:

Finding the proper partner
Ensuring that there is a shared vision
Getting the timing right
Communicating effectively and efficiently
Protecting intellectual property
Measuring real costs and profits from the alliance

Before a firm can identify the proper partner or understand the costs of what it

is attempting to do, it needs to have a realistic set of goals for the alliance, and an

understanding of what the partner firm will bring to the alliance. Once these issues

have been dealt with, the firm can develop an understanding of the costs and the

best potential partner. Once an alliance is entered into, the firm must be proactive

Strategy Fundamentals and Corporate Strategy 123

KVANT AND IBM: A FAILED ALLIANCE

The Kvant and IBM alliance shows

how difficult it can be for an alliance

to succeed. The economic liberaliza-

tion in Russia in the early 1990s led

to widespread speculation that the

nation was beginning an economic

transformation that would produce tre-

mendous economic growth. IBM had

been active in Russia since the 1970s,

but had no manufacturing facilities

there. The firm wanted to participate

in the potential economic growth in

Russia, but rather than rushing in and

opening a factory, IBM decided to

form a strategic alliance with one of

the leading computer manufacturers in

the former Soviet Union. Kvant had

recently become a private firm but

had a strong history of technological

success in the Soviet Union.

The two firms formed an alliance in

1993 to assemble laptop computers. The

alliance production varied according to

the number of orders, but ranged up to

4,000 a month. Product quality was

consistent with the worldwide standards

of IBM, which are quite high. Although

the alliance experienced some initial suc-

cess, it was cancelled in 1996, despite

the relatively heavy investment by IBM in

training and equipment, because IBM

learned how difficult it was to deal with

certain Russian institutions and practices.

For example, the Russian government

had initially promised there would be

tariff-free importation of computer parts,

but the government never followed

through on that promise. The tax on

imported parts remained, and that was

added to the 20 percent value-added tax

(or VAT) on the finished product. The

government, in the early stages, allowed

certain charitable organizations to

import goods tariff-free and did not

charge them taxes. The net effect to the

PC’s price was such that a group of Rus-

sian Afghan War veterans could go to

Europe and buy IBM laptops, bring them

back into Russia and still enjoy a 30

percent cost advantage over the IBM

laptop the joint venture had assembled

locally. Furthermore, the Moscow city

government had also committed to buy

large numbers of the IBM product and to

provide other support to the joint venture,

but ultimately failed to do so.

IBM’s experience demonstrates that

even two willing parties to an alliance

may find that there are factors in the

external environment that negatively

affect the ability of the alliance to suc-

ceed. A firm must have an institutional

strategy to cope with the elements in the

institutionalenvironment,suchasthegov-

ernment, other powerful organizations,

and individuals that can cause difficulty

for a new entrant. IBM failed to cultivate

connections with different levels of gov-

ernment in Russia that are necessary to

navigatethesometimestreacherouslocal

environment.

Bruton, G., & Samiee, S. (1998). Anatomy

of a failed high technology strategic alli-

ance. Organizational Dynamics, 27(1),

51–64.

in managing its relationship with the partner firm. Understanding each other’s

needs and ensuring they are met takes time and effort by both parties. There will

be ambiguities but an active effort must be made, typically built on effective and

efficient communication among the parties.

Occasionally, alliance partners may have seemed to share the same goal(s) for the

alliance, but in fact, there is no shared vision. In those cases, the firm must act quickly to

build a shared vision or it should leave the alliance. Without common goals, building a

successful alliance is difficult. Finally, the firm must ensure that, while it partners with

another firm in an alliance, it does not eliminate its own competitive advantages. Often

international firms enter an alliance to learn about the other firm’s technology or

customers. That firm can then leave the alliance and become a competitor once it has

gained the knowledge it wants. This is a problem that many Western firms worry

about in working with alliance partners in rapidly growing economies, such as those of

China and India. The weak legal protections in these environments can result in the

shared information providing a competitive advantage to a firm that later becomes a

competitor. In many ways, the ability to avoid such situations relates to the need to

identify the proper partner and to share a common vision with that partner. A firm

must also understand the true costs and profits accruing from the alliance. Without

such information, sound judgment on the effectiveness of the alliance is not possible.

SUMMARY

This chapter has laid the foundation for understanding an international firm’s

strategy. The firm’s strategy should be based on an ongoing process built around

planning, implementation, and evaluation and control. The planning process

124 Strategy Fundamentals and Corporate Strategy

should include the development of the firm’s mission, goals and objectives, and

strategy. The mission, goals and objectives, and strategy need to develop at each

level of the firm’s structure (corporate, business, and functional). Corporate strat-

egy concerns the portfolio of businesses that the corporation chooses to operate in.

The principle means that a firm has to affect its portfolio through mergers and

acquisitions or alliances. Mergers and acquisitions can be classified as either

related or unrelated, or vertical/horizontal. Alliances are differentiated by their

degree of formality in the alliance.

MANAGERIAL GUIDELINES

Misunderstanding a firm’s culture can reduce the likelihood of a successful

merger with that firm and other corporate strategy actions. Taking the time to

understand the cultures of the firm you would like to acquire can reduce

conflict and smooth the integration process.

The firm needs to clearly establish its mission and strategy. As the firm

expands internationally, it is easy to lose focus on where it wishes to go as it

is pulled in various directions. The preparation of a clear mission statement

and strategy will prevent this loss of focus.

A focus on the skills necessary to operate a firm in an M&A or alliance is one

of the key concerns in evaluating the prospect of conducting such activities. If

a firm does not already have the skills necessary in the M&A or alliance, it will

have only limited ability to analyze or address problems.

Planning is a critical step as a firm enters into an M&A or alliance. Due diligence

is the research on the nature of the situation the firm will face in the M&A or the

alliance. The firm should conduct planning based on that due diligence. The fast

pace of events after the M&A or alliance begins will require advance planning in

order to manage various situations that arise. If a firm doesn’t plan properly,

problems will arise that could have been prevented through better planning.

People are a key resource and at the same time, represent a potential

stumbling block to success in a merger, acquisition, or a strategic alliance.

Often, managers focus on a financial analysis that shows likely synergies

and cost savings and ignore the fact that most mergers and acquisitions

perform poorly and many fail to produce any value at all. The principal

reason for that failure is related to incompatible firm systems and cultures

that prevent the different people in the firms from working together effec-

tively. See Table 4-2.

TABLE 4-2 Corporate Strategy around the World

Country or

Region Corporate Strategy

East Asia The market for corporate control (buying and selling of firms or major divisions of firms) was traditionally

nonexistent in Asia. Originally, it was argued that Asian firms in Japan or Taiwan, for example, were

somehow ‘‘different,’’ and firm owners were so loyal to their communities and employees that they would

never sell their firms to outsiders; others argued that Japan would never have corporate raiders, and so on.

In recent years, however, the market for corporate control in East Asia has heated up considerably, helped

partly by studies in economics and management that have shown the importance of an active market for

corporate control for firm governance, innovation, and shareholder value. This has also been encouraged

by governments that realize equity markets and the banking and finance industries can be further

developed by allowing a more fluid corporate control setting.

Strategy Fundamentals and Corporate Strategy 125

North America U.S. and Canadian firms have been perhaps the fastest to abandon conglomerate or unrelated diversi-

fication strategies. This started to occur after work in finance and management in the 1970s showed that

conglomerates consistently underperformed more focused firms. The trend toward divestment and focus

was perhaps strengthened by the active market for corporate control and the availability of private equity

and active investment bank participation in that market.

Europe Conglomerate strategies are also now falling out of favor in Europe, as the case on the Ahlstrom

Corporation of Finland illustrates.

India Conglomerates are still quite important in India. Major conglomerates include Reliance—a diversified

group of manufacturing companies that is active in polymers, chemicals, fiber intermediates, petroleum,

textiles, and procurement—and Tata, also in numerous businesses from tea (for which they are perhaps

best known) to automobiles. It has been argued that conglomerates are still quite useful in India and other

emerging economies as firms must develop their own labor markets and be active in insuring and

financing their operations. This becomes less important in more developed markets where financing is

more available, the rule of law is stronger, and labor markets are very active.

CULTURE AND DOING BUSINESS IN SOUTH KOREA

South Korea in the 1960s had a level of economic development

that was similar to that of many of the poorer nations in Africa

and just above its North Korean rival. Today, South Korea has

left North Korea far behind as it has built a strong economy with

a per capita GDP of approximately $25,000, comparable to

many European economies and more than ten times that of its

Communist rival to the north. The transformation came about

through a close partnership between government and big busi-

ness. Today, the Korean government is increasingly seeking to

open the market to greater competition.

Korean men frequently greet each other with a slight bow,

which is a sign of respect. The importanceof respect is also seen

in the use of formal titles when addressing individuals. Respect

for the status of the person with whom you are conducting

business is important, with the senior person in the group given

special deference. Personal relationships are important and

critical to conducting business as well. If you do not have a prior

relationship with the person, an introduction is helpful.

Harmony and structure are culturally important. There-

fore, showing anger or other strong emotions in meetings

is generally inappropriate. In a Korean firm, decisions are

made by group consultation, although the top manager will

usually have the final say. Therefore, the time required to

reach decisions may seem longer than is typical in the west-

ern world. The importance of harmony and structure results

in senior managers having greater power and influence than

they may have in the West. This emphasis also results in

great respect being given to those who are older and have

high levels of education.

When meeting a Korean business person, his or her

business card should be accepted with two hands and

handled with great respect. The card is considered to be

an extension of the person, so do not write on it or place it in

a back pocket. At a meal, when someone pours a drink for

you, it is polite for you to take the bottle or teapot from that

person, and fill that person’s cup as well. This is different

than in China, where it is polite to refill everyone’s cup at the

table yourself, before refilling your own.

https://www.cia.gov/library/publications/the-world-factbook/geos/

ks.html (website accessed December 9, 2009)

ADDITIONAL RESOURCES

Sirower, M. (1997). The Synergy Trap. New York: Free Press.

Gatignon, H., & Kimberly, J. R. (2004). The INSEAD-Wharton Alliance on Globalizing:

Strategies for Building Successful Global Businesses. Cambridge: Cambridge Univer-

sity Press.

EXERCISES

Opening Vignette Discussion Questions

Do you think the Ahlstrom corporation would have as clear a strategy and

follow it so closely if the firm were in a commodity area?

126 Strategy Fundamentals and Corporate Strategy

Do you think that Ahlstrom is encouraged to pursue its strategy so closely

because it is based in a small country like Finland?

DISCUSSION QUESTIONS

Why would a firm that has a well-defined strategy perform better than a firm

without one?

Differentiate corporate- and business-level strategies.
Differentiate strategic planning and a strategic process in a firm.
What is the strategic mission of your school? If you do not know it, should the

school have made it known to its students in the same way a firm makes its

mission statement known to its workers?

How could an international merger or acquisition differ from a domestic-only

merger or acquisition?

IN-CLASS EXERCISES

You are a young financial professional at your company, a medium-sized

(US$200 million in annual sales) information technology (IT) firm on the U.S.

West Coast in the Silicon Valley. Your boss, the vice president of finance, must

make a recommendation to the CEO about a possible acquisition of a small IT

firm with some innovative technology that may be able to bring some new

users into the wireless email market that is located in Europe. She has asked

you to help prepare an internal report on the merits of this acquisition.

About one month later, you finish your report on the financial status of the

firm and its accounts based on solid due diligence and an effective analysis of

the firm’s accounting data and those of its competitors. The auditors are sat-

isfied with your results, and you hand in the report to your boss. She studies the

report and tells you it looks fine, but she wants more. She asks you to go back to

your report and add more information about whether your company should

actually buy this smaller IT firm. Needless to say, you are puzzled; you per-

formed the due diligence well, ran the numbers according to your training and

studies in finance, and correctly found that the acquisition candidate’s finances

are solid, as are their sales and profits. Their asking price is reasonable. What

else could your boss want? She hasn’t really told you and she doesn’t have the

time to explain herself fully—she just told you to ‘‘figure it out.’’

List and describe three more topics, apart from the financials, that you could

address in your report to help your boss with her recommendations to the

CEO. Describe what those topics should be and why such information may be

helpful regarding the merits of the acquisition. Give examples to illustrate

where possible.

Write a mission statement for your career. How are you trying to implement

that mission? Be prepared to present your mission statement to the class.

Churchill China plc is a major global manufacturer and distributor of ceramic

tableware. The English firm can date its founding back to 1795. Churchill China

has developed the following mission statement: ‘‘To be a leading provider to the

tabletop market and deliver value through excellence in design, quality, and

customer service.’’ Break into groups and analyze this mission statement. Do

you believe that it is a good mission statement? How can it be improved?

Assume you are representing a U.S. firm in the pharmaceutical industry. You

are assigned to develop an alliance with a Japanese pharmaceutical firm to co-

produce a heart medicine. This medicine is one that your firm developed, but

Strategy Fundamentals and Corporate Strategy 127

you want the alliance to result in the manufacturing of the product in Japan.

What are the issues you want to discuss with the Japanese firm as you begin

your negotiations? What are the concerns you have as you proceed in these

negotiations?

You assist a top manager in a major European luxury garment and accessories

firm that subscribes to a fairly strict corporate code of conduct. Your firm is

thinking of acquiring a supplier in Indonesia to make the highest line of shirts

your firm offers, in order to better control supply and quality—these shirts

have to be top-drawer variety and must be completed on time for demanding

retailers. Your company performed its due diligence carefully: you flew to

Indonesia with your firm’s auditors to ensure the supplier’s operation and

finances are solid and, with the help of a major accounting firm, determined

that the supplier is in good financial shape with modern factories and an

experienced workforce. The employee dormitories are old and not particularly

clean or well-lit, but in good enough shape so that they can be renovated. You

are confident that you can start this project some time in the next 12 months. A

few weeks after your firm purchases that Indonesian supplier, you are sent to

Indonesia to take stock of the renovations that are needed and to see what else

the factory will require. You leave on rather short notice, so there is no time to

prepare anything—you figure you can come up to speed once there.

One colleague of yours who transferred to Indonesia from your home office

meets you at the Jakarta airport in a huff. ‘‘A documentary filmmaker from the

United States, with his publicity people in tow, is here to record the ‘filthy

conditions’ in the dormitories,’’ he tells you. ‘‘He says he will name me, our boss,

and you by name as co-conspirators who are plotting to keep workers living in

squalid conditions to make more profits for luxury-goods fat cats. Can you believe

that?’’ Suddenly, the filmmaker appears in the airport arrival area with his camera

and microphone and asks if you want to comment on the squalor that you are

presiding over in Indonesia. ‘‘I’ve seen cluttered dorm rooms before,’’ says the

filmmaker, ‘‘but this is ridiculous.’’ You protest that renovations are planned.

‘‘Sure, sure,’’ the filmmaker replies. ‘‘Didn’t your fat-cat luxury company earn

about $200 million in profit last year? Why can’t you spend some money on the

workers?’’ At this point, you are tempted to tell the filmmaker what he can do

with his microphone, but you think better of it. ‘‘We are here to work on some

renovations,’’ you repeat loudly. ‘‘Besides, what did you expect to see here? Ivy

League College dorms complete with broadband and air conditioning?’’

Was it a good idea to respond to the documentary filmmaker in that way?

How might that look on film, especially in the hands of a wily film editor?

How can a company respond when confronted with sudden press inquiries

about its divisions and suppliers? What kind of preparation might have

helped you better manage this situation?

TAKE-HOME EXERCISES

Find a Latin American company on the Internet (with an English language Web

site). Read about the description of the firm and then write a mission statement

for that firm based on the principles of effective missions. (Do not copy its current

mission statement, but think up an ideal mission statement for that firm.)

Research a Fortune 500 firm that is pursuing some form of diversification.

Identify whether that diversification is related or unrelated and give your

reasons for saying so.

Pick a recent merger or acquisition in which at least one of the parties involved

was a European firm. Was the merger or acquisition vertical or horizontal in

nature? Explain your answer.

128 Strategy Fundamentals and Corporate Strategy

The opening case was about the success of Toyota. Research the major recent

strategic actions of General Motors (5–10 major strategic actions over the last

three or four years). Comparing these actions to Toyota’s, why do you think

Toyota’s performance is ascending while General Motors is in decline?

Explain what merger and acquisition professionals mean by ‘‘synergy.’’ Why

is synergy difficult to achieve? Provide an example of a merger or acquisition

in which one of the parties was from outside your home country. In describing

the merger and acquisition, was synergy discussed? If so, describe where they

believed that synergy would be found. Do you think they will be able to

achieve that synergy?

SHORT CASE QUESTIONS

Hutchison Whampoa: Unrelated Diversification/Business Groups

(p. 116)

If you had to predict, will business groups continue to exist in Continental

Europe, or do you think that diversification patterns will come to reflect those

in the United States and the United Kingdom?

What cultural reasons do you think exist for the development of business

groups in Asia? Think specifically of the role of family and inheritance.

Hutchison Whampoa comprises both high-technology 3G wireless firms and

mature industries, such as retail grocery stores. How do you think this firm

makes key decisions?

BUSINESS- AND FUNCTIONAL-LEVEL STRATEGY

Overview

Once a firm determines its corporate-level strategy (where it will compete), it must

decide on its business-level strategy (in which domains it will compete). An interna-

tional firm must decide not only what business-level strategy it wants in one market

but also whether it wants to have the same business-level strategy for each country in

which it competes or whether to give its managers in other countries the responsibility

for creating their own business strategies. This chapter discusses how firms balance the

choices about business-level strategies. The special case of entrepreneurial firms and

business-level strategy is also examined. The chapter then covers functional strategies

for specific domains, such as marketing, finance, and accounting, which are developed

from the business-level strategy. A part of the functional-level strategy that will be

examined is quality management. The major topics covered in the chapter include:

Porter’s Five Forces model to understand competition within an industry
Business-level strategies—low cost versus differentiation and broad versus narrow
Global versus multi-domestic strategies
Functional strategies
Quality management

130 Business- and Functional-Level Strategy

HSBC

The Hong Kong-Shanghai Banking

Corporation (HSBC) is one of the

world’s leading banking organiza-

tions. The firm’s history is one of sur-

vival. HSBC was one of the leading

banks in China (and in Asia) prior to

the communist revolution in that coun-

try. Following the revolution, the firm

had to struggle with the loss of many

of its assets, and it had look for other

regions to operate in because it had

lost its major market—China. The

result was a major international

expansion effort that continues today.

The bank is now based in London,

with operations in 77 countries and

territories in most major countries

around the world.

HSBC organizes itself into five

major geographic regions with five

main lines of business in each region

(personal commercial services, com-

mercial banking, corporate invest-

ment banking, private banking, and

other activities). The firm follows a

modified global strategy, that is, it

allows some variation in its actions

to conform to the differing banking

laws in each nation. However, it is

critical for an international bank to

have consistent standards. For exam-

ple, simply because it is more difficult

to obtain information to validate a

loan application from a commercial

client in China does not mean that

the bank can accept lower standards

of information without having com-

mensurate higher interest rates. Risk

management for a worldwide bank

requires reasonable standards to be

met across the board. In situations

where these standards cannot be

met, the risk is perceived as a higher

expectation of higher rates of return.

At some level, a deal may be dis-

carded if standards cannot be met.

Therefore, the firm has uniform risk

standards that must be met around

the world.

HSBC has developed an evalua-

tion and control system that is

consistent with the modified global

strategy used by that firm. HSBC

holds its country managers responsi-

ble for the quality of the portfolio in

their particular country. The bank

allows many loans to be approved

without receiving permission from Lon-

don headquarters, but as the size of

the loan increases, so does the need

to have others outside the nation, or

region, approve it. Having these

checks and balances ensures that

each country’s operation functions

according to corporate goals and

does not take too many risks.

One critical functional area for a

global financial institution, such as

HSBC, is the internal audit. The

accounting function in a business with

great geographic dispersion ensures

that the organization operates as

intended. For example, a few years

ago Barings Bank—one the largest

and oldest financial institutions in

Great Britain with over 200 years of

history—was driven into bankruptcy

due to the activities of a rogue trader

in Singapore. That single trader con-

ducted a large and enormously risky

trading scheme that was not caught

by the parent company for several

years; by that time it was too late.

ING bought what was left of Barings

and kept the name, which had consid-

erable brand equity. Thus, internal

auditing and control are critical to

firms with widely dispersed global

operations.

The Asia Pacific area for HSBC

includes Singapore, Australia and

New Zealand, Malaysia, the Middle

East, Indonesia, South Korea, Thai-

land, Japan, mainland China, India,

and Taiwan. It is common for many

businesses to include the Middle East

with their Asian businesses despite the

great religious and cultural differen-

ces in the two regions. This is because

the region is not large enough to sup-

port its own regional-office structure,

and the size of the market and

location make Asia the natural

domain for it to be combined with.

For HSBC, Singapore and the Middle

East represent the largest areas of

activity in the Asia-Pacific region, but

mainland China is considered to have

the greatest growth potential.

HSBC typically charges a pre-

mium for its products. However, the

high quality of the services it offers

resulted in a wide variety of awards.

In 2004 alone, for example, awards

included:

• Best Bank and Best Bond House in

Hong Kong—FinanceAsia Country

Awards

• India-Best Foreign Bank—

FinanceAsia Country Awards

• Indonesia-Best Foreign Bank—

FinanceAsia Country Awards

• Best Bank in Hong Kong—Euromo-

ney Awards for Excellence

• Best Regional Cash Manage-

ment—Euromoney Awards for

Excellence

• Best Bank at Risk Management—

Euromoney Awards for Excellence

• Most Admired Corporate Brand—

Most Admired Brands Poll

• Best Trade Finance in Asia—Asset

Magazine

• Best Domestic Bank in Hong

Kong—Asiamoney

• Best Domestic Bond House in Hong

Kong—Asiamoney

• Best Foreign Exchange Bank—

Global Finance Magazine

• Best Managed Company in Asia—

Asiamoney

Thus, HSBC charges a premium, but it

offers a high-quality product that is

worth the price. HSBC has built a

successful organization through the

effective integration of strategy, struc-

ture, and operations, and has done so

while operating in a large number of

countries and diverse markets.

Business- and Functional-Level Strategy 131

FIGURE 5-1 Chapter 5 Conceptual Flow

• Five Forces

– Buyers

– Suppliers

– Substitutes

– New entrants

– Rivalry

• Business Strategy

– Low cost

– Differentiation

– Focus

– Global

– Multi-domestic

• Functional

Strategies

– Quality

management

Chapter 4 established the means by which management decides what busi-

nesses (industries) in which they want to compete. However, once a firm enters a

particular product-market, such as the hotel industry, that firm must develop a

strategy for that particular business. The business-level strategy is how a firm

will compete in that product-market.¹ From this understanding of the business-

level strategy, the firm will then develop its functional-level strategies for each

business domain, such as marketing, finance, and operations. This chapter will

analyze how firms develop strategies based on their environment. It then dis-

cusses business-level strategies and how they lead to functional-level strategies.

Figure 5-1 summarizes the chapter discussion.

Business-level strategy

How a specific business will operate in

order to succeed in that specific

marketplace.

PORTER’S FIVE FORCES MODEL

Before developing the firm’s business-level strategy, the business must understand

what forces determine the profits in an industry. One tool to make such analysis is

called Porter’s Five Forces model. This model is based on industrial organization

(IO) economics. This specialty within the economics discipline argues that all

firms in a particular industry face forces within their industry that significantly

affect profitability. If a firm understands these forces, then it can develop a

business-level strategy that allows the business to either take advantage of or

protect itself from these forces, which in turn allows the firm to be consistently

profitable. The model focuses on how five forces in an industry (buyers, suppliers,

new entrants, substitutes, and rivalry) impact each other, not how they impact an

individual firm. A sixth force, complementors, is now widely used with this model

and will also be discussed here. We shall explore the world auto industry to illustrate

the concepts as we go through the model. Figure 5-2 summarizes the model.

The forces in the Five Forces model are analyzed from the perspective of how

they are able to limit industry profits. For example, in some industries such as the

pharmaceutical industry, firms are able to consistently earn higher profits than

those in other industries. Some of the forces that constrain profitability in less

attractive industries are stronger than in the pharmaceutical industry. If all five

forces are weak, then it is likely that the industry will be an attractive one with

firms that are quite profitable. For there to be above-average profits, at least some

of the five forces must be low so that the firms in that industry can take advantage

of them. If all of the five forces are high it is almost certain that the industry is low-

profit. Once the forces are understood, a firm can develop a strategy that utilizes

them to their advantage. Even though an industry’s five forces may all produce an

unfavorable environment, it is still possible for individual firms in that industry to

earn above-average profits. For example, Southwest Airlines has a very steady

record of profits and growth in spite of the low profitability of the U.S. airline

¹Here we discuss the concept of product-market to refer to a specific industry sector because the authors feel

it is a clearer term than industry.

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