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Business-Level Strategy
Goal-oriented actions managers take in their quest for competitive advantage when competing in a single product market.

Broad questions: “How should we compete?”

Managers must answer:
Who – which customer segments will we serve?
What customer needs, wishes, and desires will we satisfy?
Why do we want to satisfy them?
How will we satisfy our customers’ needs?

Industry Effects
One route to competitive advantage is by:

Industry Attractiveness
– 5 Forces Model for profit potential
– Complements

– Within industry
(Strategic Groups)

Firm Effects
One route to competitive advantage is by:

Value position (relative to competitors
Cost Position (Relative to competitors)

Business Strategy
(Cost Leadership, Differentiation, Blue Ocean)

Competitive advantage is based on the difference between:
perceived value a firm is able to create for consumers (V)
and captured by how much consumers are willing to pay for a product or service,
and the total cost (C) the firm incurs to create that value.

A business is more likely to lead a competitive advantage if a firm has a clear strategic profile, (differentiator or low-cost leader)

Economic Value Created
V = value
C = cost

The greater economic value created, the greater is a firm’s potential for competitive advantage.

Rising costs reduce economic value created and erode profit margins.

Higher value creation tneds to require higher costs

Strategic Position
Its strategic profile based on value creation and cost in a specific product market.

A firm attempts to stake out a valuable and unique position that meets customer needs while simultaneously creating as large a gap as possible between the value the firm’s product creates and the cost required to produce it.

Higher value creation tends to be higher cost.

Strategic Trade-offs
Choices between a cost or value position.

The choices is necessary because higher value creation tends to generate higher cost.

Must keep cost in check so as not to erode the firm’s economic value creation and profit margin.

A business strategy is more likely to lead to a competitive advantage if a firm has a clear strategic profile either a differentiator or a low-cost leader.

Generic Business Strategy
Can be used by any organization (manufacturing or service, large or small, for profit or nonproft, public or private)
Value creation and cost tend to be positively correlated, important trade offs exist between value creation and low cost.

A Business strategy is more likely to lead to a competitive advantage if it allows firms to either:
– Perform similar activities differently
-Perform different activities than their rivals.

Must consider Scope of Competition

Differentiation Strategy
Focused Differentiation Strategy
Cost-Leadership Strategy
Focused cost-leadership Strategy

Differentiation Strategy
Generic business strategy that seeks to create higher value for customers than the value that competitors create, by delivering products or services with unique features while keeping costs at the same or similar levels, allowing the firm to charge higher prices to its customers.

Increase perceived value of goods and services so consumers are willing to pay that higher price.

Firms that successfully differentiate their products enjoy a competitive advantage.

Generally associated with premium pricing

When a firm is able to offer a differentiated product or service and can control its costs at the same time it is able to gain market share from other firms in the industry by charging a similar price but offering more perceived value.

Unique product features, service, and new product launches.

Value drivers:
Product features
Customer Service

Cost-leadership Strategy
Seeks to create the same or similar value for customers by delivering products or services at a lower cost than competitors, enabling the firm to offer lower prices to its customers.

Firms can keep their cost at the lower point in the industry while offering acceptable value are able to gain a competitive advantage.

Goal is to reduce the firm’s cost below that of its competitors while offering adequate value.

Scope of Competition
Whether to puruse a specific, narrow part of the market or go after the broader market.

Broad: Cost leadership, differentiation
Narrow: Focused cost leadership, focused differentiaton.

Focused Differentiation Strategy
Same as differentiation strategy BUT has a narrow focus on a niche market.
Focused Cost-Leadership Strategy
Same as Cost-Leadership strategy BUT has a narrow focus on a niche market.
Cost parity
matching prices
Economies of Scope
The savings that come from producing two or more outputs at less cost than producing each output individually even though using the same resources and technology.
Value Drivers
Related to a firm’s expertise in and organizations of different internal value chain activities.

Product features
Customer Service

Managers must remember that the different value drivers contribute to competitive advantage ONLY if their value creation exceeds the increase in costs.

Product Features
Value Driver

Increasing the perceived value of the product or service affering

Adding unique product attributes allows firms to turn commodity products into differentiated products commanding a premium price.

Customer Service
Value Driver

Focusing on this increases perceived value

Value Driver

Add value to a product or service when they are consumed in tandem.

The availability of complements as an important force determining the profit potential of an industry.

Finding complements is an important task for managers to enhance value of their offerings

Cost Leader
Focuses its attention and resources on reducing the cost to manufacture a product or deliver a service in order to offer lower prices to its customers.

They attempt to optimize all of its value chain activities to achieve a low-cost position.

Differentiation Parity
Creates the same value

Hard to achieve because value creation tends to go along with higher costs.

Cost Drivers
Cost of Input Factors
Economies of Scale
Learning-curve effects
Experience-curve effects
Cost of Input Factors
Cost Driver

Access to lower cost input factors such as:
Raw materials
IT services.

Economies of Scale
Cost Driver

Firms with greater market share might be in a position to reap economies of scale, decreases in cost per unit as output increases.

Bigger is better

Allows firms to:
Spread their fixed costs over a larger output
Employe specialized systems and equipment
Take advantage of certain physical properties

Spreading fixed costs over larger output
Economies of Scale

Larger output allows firms to spread their fixed costs over more units. That is why gains in market share are often critical to drive down per unit cost.

Employment Specialized Systems and Equipment
Economies of Scale

Larger output also allows firms to invest in more specialized systems and equipment, such as enterprise resource planning (ERP) software or manufacturing robots.

Taking advantage of certain physical properties
Economies of scale also occur because of certain physical properties.

Cube-Square rule
Minimum efficient Scale

Cube-square rule
Taking advantage of certain physical properties

The volume of a body increases disproportionately more than its surface (pipe or tank)

minimum efficient scale (MES)
Taking advantage of certain physical properties

Output range needed (Between Q1 and Q2, cost advantage) to bring down the cost per unit as much as possible allowing a firm to stake out the lowest cost position that is achievable through economies of scale

Less than Q1 or more than Q2 = cost disadvantage.

Also applies to manufacturing, managerial tasks, how to organize

Diseconomies of Scale
Taking advantage of certain physical properties

Increases in costs as output increases
As firms get too big, the complexity of managing and coordinating raises the cost, negating any benefits to scale.

Large firms become overly bureaucratic with too many layers of hierarchy

Scale Economies
Taking advantage of certain physical properties

Critical to driving down a firm’s cost and strengthening a cost-leadership position. Managers need to increase output to operate a minimum efficient scale (between Q1 and Q2)

Learning Curve
Cost Driver

God down as it takes less and less time to produce the same output as we learn how to be more efficient – learning by doing drives down cost.
The steeper, the more learning has taken place.

As cumulative output increases, firms move down the learning curve reaching lower per unit costs.

Differences in timing
Differences in complexity

Differences in timing
Learning Curve

Occur over time as output accumulates while economies of scale are captured at one point in time when output increases. Learning can decline or flatten, there are no diseconomies of learning.

Differences in Complexity
Learning Curve

Effects from economies of scale can be quite significant while learning effects are minimal. Some professionals learning curve can be substantial while economies of scale are minimal.

Experience Curve
Cost driver

Change the underlying technology while holding cumulative output constant.

Process Innovation
New method or technology to produce an existing product may initiate a new and steeper curve.

Experience curve on a process innovation.
Learning by doing allows a firm to lower its per unit costs by moving down a given learning curve while experience curve effects based on process innovation allow a firm to leapfrog to a steeper learning curve thereby driving down its per unit costs

Differentiation Strategy:

Benefits and Risks

Defined by establishing a strategic position that crates higher perceived value while controlling costs.

Well executed = reduces rivalry among competitors
Successful = based on unique or specialized features of the product, effective marketing campaign, or intangible resources such as a reputation for innovation, quality, and customer service.

Threat of entry is reduced

Providing uniqueness don’t rise customer’s willingness to pay

Cost-Leadership Strategy:

Benefits and Risks

Defined by obtaining the lowest cost position in the industry while offering acceptable value. Protected from other competitors because of having the lowest cost.
Price war = the low cost leader will be the last firm standing.

Isolated from powerful suppliers

New entry pose a risk

Relies on:
How well the strategy leverages the firm’s internal strengths while mitigating its weaknesses.
How well it helps the firm exploit external opportunities while avoiding external threats.

Blue Ocean Strategy
Business-level strategy that successfully combines differentiation and cost-leadership activities using value innovation to reconcile the inherent trade-offs

Blue oceans represent untapped market space, creation of additional demand, resulting opportunities for highly profitable growth. Allows to offer a differentiated product.

Red oceans represents rivalry among existing firms is cut throat because the market space is crowded and competition is a zero sum game. Products become commodities and competition mainly focused on price.

Difficult to implement because it requires the reconciliation of fundamentally different strategic positions – differentiation and low cost – which in turn require distinct internal value chain activities.
Strategy gone bad means stuck in the middle leads to inferior performance and ended up in red ocean of cut throat competition

Value Innovation
For a ocean strategy to succeed, mangers must resolve trade offs between low cost and differentiation.

Aligning innovation with total perceived consumer benefits, price and cost (economic value creation). Successful innovation makes competition irrelevant to providing a leap in value creation, opening a new and uncontested market spaces.

Requires that a firm’s strategic moves lower its costs and at the same increase the perceived value for buyers.

Value Innovation – Lower Costs
Eliminate. Which of the factors that the industry takes for granted should be eliminated?
Reduce. Which of the factors should be reduced well below the industry’s standard?
Value Innovation – Increase Perceived Consumer Benefits
Raise. Which of the factors should be raised well above the industry’s standard?

Create. Which factors should be created that the industry has never offered?

Value Curve
Horizontal connection of the points of each value on the strategy canvas that helps strategist diagnose and determine courses of action

A strong curve has its focus and divergence and can provide a tagline as to what strategy is being undertaken or should be undertaken.

Zigzag indicates lack of effectiveness in its strategic profile.

Strategy Canvas
Graphical depiction of a company’s relative performance vis a vis its competitors across the industry’s key success factors.
Stuck in the middle
Inferior performance and competitive disadvantage
Innovation Process
Idea, Invention, Innovation, Imitation

Begins with an idea. The idea is presented in terms of abstract concepts or as findings derived from basic research. Basic research is conducted to discover new knowledge and is often published in academic journals.

Enhance fundamental understanding of nature without commercial application or benefit in mind.

Long run research is transformed into applied research with commercial applications.

Step two of the innovation process

Transformation of an idea into a new product or process or the modification and recombination of existing ones.

If an invention if useful, novel, and non-obvious it can be patented.

form of intellectual property and gives the inventor exclusive rights to benefit from commercializing a technology for specified time period in exchange for public disclosure of the underlying idea.

Exclusive rights translate to temporary monopoly position until the patent expires.

Double edged sword – temporary monopoly thus form the basis for competitive advantage

Trade Secrets
Valuable proprietary info that is not in the public domain and where the firm makes every effort to maintain its secrecy.

(Coca-Cola recipe, Nutella recipe)

3rd Step in Innovation Process

Commercialization of any new product or process, or the modification and recombination of existing ones.

Successful commercialization of a new product or service allows a firm to extract temporary monopoly profits.
Sustain advantage, a firm must continuously innovate, product a string of successful new products or services over time.

Need not be high tech to be a potent competitive weapon.


First-mover Advantages
Competitive benefits that accrue to the successful innovator

Benefit from network effects

May hold important intellectual property such as critical patents. They may also be able to lock in key suppliers as well as customers through increasing switching costs.

Process by which change agents (entrepreneurs) undertake economic risk to innovate – to create new products, processes, and sometime new organizations.

Successful = derives competitive process and creates value for the individual entrepreneurs and society at large.

Agents who introduce change into competitive system

innovate by commercializing ideas and inventions. They seek out or create new business opportunities and then assemble the resources necessary to exploit them.

Drive innovation need just as much skill, commitment, and daring as the inventors who are responsible for the process of invention.

Succesful Entrepreneurs:
Reed Hastings
Jeff Bezos
Oprah Winfrey
Elon Musk

Strategic Entrepreneurship
The pursuit of innovation using tools and concepts from strategic management

Leverage innovation for competitive advantage by applying strategic Entrepreneurship

Social Entrepreneurship
describes the pursuit of social goals while creating profitable businesses. Evaluate the performance of their ventures not only by financial metrics but by ecological and social contributions (profits, planet, people)

Use triple bottom line approach to asses performance.

Industry life Cycle
Industries tend to follow a predictable one life cycle that include 5 stages that occur in the evolution of an industry over time.

Each stage has different strategic implications for competing firms

5 Stages:
1) Introduction
2) Growth
3) Shakeout
4) Maturity
5) Decline

Some industries may never go through the entire life cycle, others continually renewed through innovation

Things that can change externally can be captured in PESTEL framework on fads in fashion, change in demographics, deregulation

Introduction Stage
1st Stage of Industry Life Cycle

Individual inventor or company launches a successful innovation a new industry may emerge. INnovator’s core competency is R&D which is necessary to creating a new product category that will attract customers. Capital intensive process in which the innovator is investing in designing a unique products, trying new ideas to attract customers and producing small quantities – which contribute to a high price when the product is launched.

Market size is small and growth is low.

Emphasize unique product features and performance rather than price.

Encounter first mover disadvantages. Educate potential customers about product’s intended benefits, find distribution channels.

Network Effects
Positive effect (externality) that one user of a product or service has on the value of that product for other users.

Helpful in introduction stage

Growth Stage
2nd Stage of Industry Life Cycle

Market growth accelerates in this stage. After innovation has gained market acceptance, demand increases rapidly as first time buyers rush to enter the a market.

As market expands, standard signals the markets agreement on a common set of engineering features and design choices.

Process innovation ramps up (increasing marginal returns) as firms attempt to keep up with rapidly rising demand while bring down costs at the same time.

Core competency in this stage tend to shift toward manufacturing and marketing capabilities.

Agreed-upon solution about a common set of engineering features and design choices

in growth stage

Emerge bottom up through competition in the market place
Imposed top down by government or other standard setting agencies

Product Innovation
New or recombined knowledge embodied in new products

jet airplane
electric vehicle
wearable computers

Process Innovation
New ways to produce existing products or deliver existing services

Made possible through internet, lean manufacturing, Six Sigma, Biotechnology, nanotechnology

Must not be high tech to be impactful, like the standardized shipping container

Just in time (JIT) operations management

Shakeout Stage
3rd Stage of Industry Life Cycle

Rapid industry growth and expansion can’t go on indefinitely

Firms begin to compete directly against one another for market share, rather than to capture a share of increasing pie.

As competitive intensity increases, the weaker firms are forced out of the industry. Only the strongest survive as firms begin to cut prices and offer more services to attempt to gain more of a market that grows slowly. .

Maturity Stage
4th Stage of the Industry Life Cycle

Oligopoly – only a few large firms. Most demand was largely satisfied with prior shakeout stage.

Demand now consists of replacement or repeat purchases.

Market has reached its maximum size and industry growth is likely to be zero or even negative going forward

Decline Stage
5th Stage of the Industry Life Cycle

Changes in the external environment (PESTEL) often take industries from maturity to decline. The size of the market contracts further as demand falls, often rapidly.
If a technological or business model breakthrough emerges that opens up a new industry, this dynamic starts anew.


Decline Stage

By bankruptcy or liquidation.

Decline Stage

firm reduces investment in product support and allocates only a minimum of human and other rescues.

Decline Stage

Continuing to support to support marketing efforts at a given level

Decline Stage

Buying rivals, strong position, approaching monopolistic market power, albeit in declining industry.

Crossing the Chasm
Each stage of the industry life cycle is dominated by a different customer group. Different customer groups with distinctly different preferences enter the industry

Only companies that recognize these differences are able to apply the appropriate competencies at each stage.

Crossing the chasm framework
Conceptual model that shows how each stage of the industry life cycle is dominated by a different customer group.

Technology Enthusiasts
Early Adopters
(The Chasm)
Early Majority
Late Majority

Technology Enthusiasts
Smallest market segment, often have an engineering mind set and pursue new technology proactively. Frequently seek out new products before the products are officially introduced into the market. Enjoy using beta versions.
Early Majority
Main consideration is a sense practicality.
Pragmatists and most concerned with the question of what the new technology can do for them.

Weigh the benefits and costs carefully.
Aware that many hyped new products introductions will fade away

Late Majority
Entering the market in maturity stage.
Large customer segment
Lion’s share of the market potential
Demand drives most industry growth and firm profitability.

Not confident in their ability to master new technology. Prefer to wait until standards have emerged.

Entering in declining stage

Adopt a new product only if it is absolutely necessary.

Markets and Technology Framework
Conceptual model to categorize innovations along the market (existing/new) and technology (existing/new) dimensions

Horizontal axis we ask whether the innovation builds on existing technologies or creates a new one

Vertical axis we ask whether the innovations emerge: incremental, radical, architectural, and disruptive innovations.

Incremental Innovation
Innovation that squarely builds on an established knowledge base and steadily improves on existing product or service

Targets existing markets using technology

Radical Innovation
Innovation ;that draws on novel methods or materials, is derived either from an entirely different knowledge base or from recombination of the existing knowledge bases with a new stream of knowledge.

Targets markets by using new technoologies

Economic Incentives
Strategic choice
Once an innovator has become an establish incumbent firm, it has strong incentives to defend its strategic position and market power.

A focus on incremental innovation is attractive once an industry standard has emerged and technological uncertainty is reduced

Winner take all markets
Many markets where network effects are important become this.

Markets where the market leader captures almost all the new market share and is able to extract a significant amount of the value created.

Organizational Inertia
As firms become established and grow they rely more heavily on formalized business processes and structures. The firm may experience organizational inertia – resistance to changes in the status quo.

Tend to favor incremental innovations that reinforce the existing organizational structure and power distribution while avoiding radical innovation that could disturb existing power distribution.

Innovation Ecosystem
Incumbent firms tend to be incremental rather than radical is that they become embedded in this.

A network of suppliers, buyers, complementors, and so on.

NO longer make independent decisions but must consider the ramifications on other parties in their innovation ecosystem.

Architectural Innovation
New product in which known components based on existing technologies are reconfigured in a novel way to attack new markets.

Leveraging existing

Disruptive Innovation
Innovation that leverages new technologies to attack existing markets from the bottom up.

Disruptive force:
1) begins as a low cost solution to an existing problem
2) initially its performance is inferior to the existing technology but its rate of technological improvement over time is faster than the rate of performance increases required by different market segments.

Respond to Disruptive Innovation
1) Continue to innovate in order to stay ahead of the competition

2) Guard against disruptive innovation by protection the low end of the market

3) Disrupt yourself rather than wait for others to disrupt you.

Reverse Innovation

(frugal innovation)

Innovation that was developed for emerging economies before being introduced in developed economies.
Open Innovation
A framework for R&D that proposes permeable firm boundaries to allow a firm to benefit not only from internal ideas and inventions, but also from external ones. The sharing goes both ways: some external ideas and inventions are insourced while others are spun out.

Increasing supply and mobility of skilled workers
Exponential growth of venture capital
Increasing availability of external options
Increasing capability of external suppliers globally.

Not invented here syndrome
Not invented or crated at the firm it cant be good enough there
Absorptive Capacity
Firm’s ability to understand external technology developments, evaluate them, and integrate them into current products or create new ones.
Business Stratety
How to compete in a single product market
Corporate Strategy
The decisions that senior management makes and the goal directed actions it takes in the quest for competitive advantage in several industries and markets simultaneously.
Provides answers to the key questions of where to compete.

Determines the boundaries of the firm along three dimensions:
Vertical Integration (along industry value chain)
Diversification (of products and services)
Geographic Scope (regional, national, or global markets)

Corporate Strategy

Executives must determine their strategy by answering these questions:

1) In what stages of the Industry value chain should the company participate (vertical integration)?

2) What range or products and services should the company offer (diversification)?

3) Where should the company compete geographically in terms of regional, national, or international markets (geographical scope)?

Why firms need to grow
Increase profits
Lower costs
Increase market power
Reduce risk
Motivate management
Increase profits
Why firms need to grow

Privately held: provide a higher return for shareholders/owners

Publicly traded: stock market valuation of a firm is determined to some extent by expected future revenue and profit streams.

If firms fail to achieve their growth target, their stock price often falls.

Lower stock price it is more costly for firms to raise the required capital to fuel growth by issuing stock

Lower Costs
Why firms need to grow

Motivated to grow in order to lower their cost.

Larger firm may benefit from economies of scale, driving down average costs as their output increases.

Need to achieve minimum efficient scale and stake out the lowest cost position achievable through economies of scale

Increase market power
Why firms need to grow

Motivated to achieve growth to increase their market share and with it their market power.

Fewer companies = higher industry profitability

Reduce Risk
Why firms need to grow

Motivated to grow in order to diversify their product and service portfolio through competing in an umber of different industries.

Rationale: falling sales and lower performance in one sector might be compensated by higher performance in another

Achieve economies of scope

Managerial Motives
Why firms need to grow

Research in behavioral economics suggests that firms may grow to achieve goals that benefits its managers more than their stockholders.

Principal agent problem -managers ay be more interested in pursing their own interests

Three Dimensions of Corporate Strategy
1) Core competencies – unique strengths embedded deep within a firm, allows to differentiate, creating higher value

2) Economies of scale – when a firm’s average cost per unit decreases as its output increases

3) Transaction costs – all costs associated with an economic advantage

Transaction Cost Economics
Theoretical framework in strategic management to explain and predict the boundaries of the firm which is central to formulating a corporate strategy that is more likely to lead to competitive advantage

Allows us to explain which activities a firm should pursue in house (make) versus which goods and services to obtain externally (buy). These decisions help determine the boundaries of the firm. Costs of using the market such as search costs, negotiating and drafting contracts, monitoring wok, and enforcing contracts when necessary may be higher than integrating the activity within a single firm

Vertically integrate by owning production of needed inputs or the channels for the distribution of outputs. When firms are more efficient in organizing economic activity than are markets, firms should vertically integrate.

Transaction costs
All internal and external costs associated with an economic exchange, whether within a firm or in markets
External Transaction Costs
Costs of searching for a firm or an individual with whom to contract and then negotiating, monitoring, and enforcing the contract.
Internal transaction costs
Costs pertaining to organizing the economic exchange within a hierarchy; also called administrative costs
Advantages of Firms of organizing economic activity within firms
Ability to make command and control decisions by flat along clear hierarchical lines of authority

Coordination of highly complex tasks to allow for specialized division of labor

Transaction specific investments high valuable within firms, but little or no use in external market

Creation of a community of knowledge meaning employees within firms have ongoing relationships, exchanging ideas and working closely together to solve problems.

Disadvantages of Firms of organizing economic activity within firms
Administrative costs because of necessary bureaucracy

Lower powered incentives, hourly wages and salaries

Principal agent problem

Advantages of Firms of organizing economic activity within markets
High powered incentives

Increased flexibility

Disadvantages of Firms of organizing economic activity within markets
Search costs

Opportunism by other parties

Incomplete contracting

Enforcement of contracts

Information Asymmetry
Situation in which one party is more informed than another because of the possession of private information

Can result in the crowding out of desirable goods and services by inferior ones. Many markets

Caveat Emptor
Buyer beware
Make or buy
anchor each end of the continuum from markets to firms.
Short term contracts
Closest to “buy” on make or buy scale

A firm sends out request for proposals (RFPs) to several companies which initiates competitive bidding to be awarded with a short duration, generally less than a year.
No incentive to make transaction specific investments

Strategic Alliances
Voluntary arrangements between firms that involve the sharing of knowledge, resources, and capabilities with the intent of developing processes, products, and services.

Umbrella term that denotes different hybrid organizational forms:
long term contracts
Equity alliances
joint ventures

Long Term Contracts
Strategic Alliances

Work like short term contracts but with a duration of longer than one year. Help facilitate transaction specific investments

Long term contract

Contracting in the manufacturing sector that enables firms to commercialize intellectual property

Long term contract

Contract in which a franchisor grants a franchisee the right to use the franchisor’s trademark and business processes to offer goods and services that carry the franchisor’s brand name

Equity Alliances
Strategic Alliances

A partnership in which at least one partner takes partial ownership in the other partner.
Partner purchases an ownership share by buying stock or assets and making an equity investment.

Credible Commitment
Long term strategic decision that is both difficult and costly to reverse
Joint Venture
Strategic Alliances

A stand alone organization owned by two or more parent companies

They make a long term commitment which facilitates transaction specific investments.

Parent Subsidiary Relationship
Most integrated alternative to performing an activity within one’s own corporate family.

Corporate family owns the subsidiary and can direct it via command and control.

Vertical Integration
The firm’s ownership of its production of needed inputs or of the channels by which it distributes its outputs.

Measured by a firm’s value added: What percentage of a firm’s sales is generated within the firm’s boundaries?

Industry Value Chain
Depiction of the transformation of raw materials into finished goods and services along distinct vertical stages, each of which typically represents a distinct industry in which a number of different firms are competing.
Types of Vertical Integration
Fully Vertical Integrated: All activities are conducted within the boundaries of the firm

Not all industry value chain stages are equally profitable

Backward Vertical Integration
Changes in an industry value chain that involve moving ownership of activities upstream to the originating (inputs) point of the value chain.
Forward Vertical Integration
Changes in an industry value chain that involve moving ownership of activities closer to the end (customer) point of the value chain.
Benefits of Vertical Integration
Lowering costs
Improving quality
Facilitating scheduling and planning
Facilitating investments and specialized assets
Securing critical supplies and distribution channels

Allows firms to increase operational efficiencies through improved coordination and the fine tuning of adjacent value chain activities

Specialized Assets
Unique assets with high opportunity cost: They have significantly more value in their intended use than in their next best use. They come in three types: site specificity, physical asset specificity, and human-asset specificity.

Site Specificity
Physical Asset Specificity
Human Asset Specificity

Site Specificity
Specialized Asset

Assets required to be co located such as

Physical Asset Specificity
Specialized Assets

physical and engineering properties are designed to satisfy a particular customer

Human Asset Specificity
Specialized Assets

Investments made in human capital to acquire unique knowledge and skills such as mastering the routines and procedures of a specific organization, not transferable to a different employer

Risks of Vertical Integration
Increasing costs
Reducing quality
Reducing flexibility
Increasing the potential for legal repercussions
Vertical Market Failure
When the markets along the industry value chain are too risky, and alternatives too costly in time or money.
Alternatives to Vertical Integration
Taper Integration
Strategic Outsourcing
Taper Integration
Alternatives to Vertical Integration

A way of orchestrating value activities in which a firm is backwardly integrated but also relies on outside-market firms for some of its supplies and/or is forwardly integrated but also relies on outside market firms for some of its distribution.

Strategic Outsourcing
Alternatives to Vertical Integration

Moving one or more internal value chain activities outside the firm’s boundaries to other firms in the industry value chain.

Reduces its level of vertical integration.

Rather than developing their own human resource management systems, firms outsource these non core activites which can leverage their deep competencies and produce scale efects

An increase in the variety of products and services a firm offers or markets and the geographic regions in which it competes.

Competes in several different markets simultaneously.

Product Diversification Strategy
Geographic Diversification Strategy
Product – Market Diversification Strategy

Product Diversification Strategy
Corporate strategy in which a firm is active in several different product markets.
Geographic Diversification Strategy
Corporate strategy in which a firm is active in several different countries.
Product—Market Diversification Strategy
Corporate strategy in which a firm is active in several different product markets and several different countries.
Types of Corporate Diversification
Percentage of revenue from the dominant or primary business
Relationship of the core competencies across the business units

1) Single Business (more than 95%)
2) Dominant Business (70-95%)
3) Related Diversification (less than 70%)
4) Unrelated diversification: conglomerate

Single Business
Types of Corporate Diversification

More than 95% of its revenues is from one business. The remainder is not yet significant to the success of the firm.

Single businesses leverages its competencies

Google, Facebook, Coca-Cola

Dominant Buisness
Types of Corporate Diversification

70-95% of its revenues from a single business, but pursues at least one other business activity that accounts for the remainder of the revenue.

Dominant and minor businesses share competencies

Harley-Davidson, UPS

Related Diversification Strategy
Corporate strategy in which a firm derives less than 70% of its revenues from a single business activity and obtains revenues from other lines of business that are linked to the primary business activity.

Benefit economies of scope: Firms can pool and share resources as well as leverage competencies across different business lines.

Related Constrained Diversification
Related Linked Diversification

Related Constrained Diversification Strategy
A kind of related diversification strategy in which executives pursue only businesses where they can apply the resources and core competencies already available in the primary business.

Generally share competencies

Less than 70% of its revenues from a single business activity and obtains revenues from other lines of business related to the primary business activity

Nike, Johnson&Johnson

Related linked diversification strategy
A kind of related diversification strategy in which executives pursue various businesses opportunities that share only a limited number of linkages.

Some share competencies

Less than 70% of its revenues obtained

Amazon, Disney

Unrelated Diversification Strategy
Corporate strategy in which a firm derives less than 70 percent of its revenues from a single business and there are few, if any, linkages among its businesses.

Few share, if any, competencies

Unrelated diversification is advantageous in emerging economies

A company that combines two or more strategic business units under one overarching corporation; follows an unrelated diversification strategy.
Core Competence – Market Matrix
A framework to guide corporate diversification strategy by analyzing possible combinations of existing/new core competencies and existing/new markets
Four Options to Formulate Corporate Strategy vs Core Competencies
Leverage existing core competencies to improve current market position
Build new

1) Leverage existing core competencies to improve current market position
2) Build new core competencies to protect and extend current market position
3) Redeploy and recombine existing core competencies to compete in markets of the future
4) Build new core competencies to create and compete in markets of the future

Diversification Discount
Situation in which the stock price of highly diversified firms is valued at less than the sum of their individual business units.
Diversification Premium
Situation in which the stock price of related diversification firms is valued at greater than the sum of their individual business units

For diversification to enhance firm performance it must do at least one of the following:
Provide economies of scale which reduces cost
Exploit economies of scope which increases value
Reduce costs and increase value

The process of reorganizing and divesting business units and activities to refocus a company in order to leverage its core competencies more fully.
Boston Consulting Group (BCG) growth share matrix
A corporate planning tool in which the corporation is viewed as a portfolio of business units, which are represented graphically along relative market share (horizontal axis) and speed of market growth (vertical axis). SBUs are plotted into four categories (dog, cash cow, star, and question mark), each of which warrants a different investment strategy.
Internal Capital Markets
Source of value creation in a diversification strategy if the conglomerate’s headquarters does a more efficient job of allocating capital through its budgeting process than what could be achieved in external capital markets.
How do firms achieve growth?
Three options to drive firm growth:

Organic growth through internal development

External growth through alliances

External growth through acquisitions.

Build-to-borrow-or-buy Framework
Conceptual model that aids firms in deciding whether to:
– Pursue internal development (build)
– Enter a contractual arrangement or
strategic alliance (borrow)
– Acquire new resources, capabilities, and competencies (buy)

Firms that are able to learn how to select the right pathways to obtain new resources are more likely to gain and sustain a competitive advantage.

resources = capabilities and competencies

Starting point is the firm’s identification of a strategic resource gap that will impede future growth. It is strategic because closing this gap is likely to lead to competitive advantage.


How relevant are the rim’s existing internal resources to solving the resource gap?

If the firm’s internal resources are highly relevant to closing the identified gap, the firm should build itself the new resources through internal development

Firms evaluate relevancy by testing whether resources are:
1) Similar to those the firm needs to develop
2) Superior to those of competitors in the targeted area.

If both conditions are met, then the firm’s internal resources are relevant and the firm should pursue internal development.

Resources are similar to those the firm needs to develop
One requirement of Relevancy

Mangers are often misled because things that might appear similar at the surface are actually quite different deep down. Managers focus on the known (similarities) rather than unknown (differences)

Often don’t know how the resources needed for the existing and new business opportunity differ.

Resources are superior to those of competitors in the targeted area.
One requirement of Relevancy

Assessed by applying the VRIO framework.

How tradable are the targeted resources that may be available externally?

Implies that the firm is able to source the resource externally through a contract that allows for the transfer of ownership or use of the resource.

Short term and long term contracts (licensing or franchising) are a way to borrow resources from another company

If a resource is highly tradable, it should be borrowed via licensing agreement or other contractual agreements.

If not easily tradable then the firm needs to consider either a deeper strategic alliance through an equity alliance or a joint venture or an outright acquisition.

How close do you need to be to our external resource partner?

Firms are able to obtain the required resources to fill the strategic gap through more integrated strategic alliances such as equity alliances or joint ventures rather than through outright acquisition.

Mergers and acquisitions are most costly, complex, and difficult to reverse strategic option.

The firm should always first consider borrowing the necessary resources through strategic alliances before looking at M&A

How well can you integrate the targeted firm, should you determine you need to acquire the resource partner?
Strategic Alliances
Voluntary arrangements between firms that involve the sharing of knowledge, resources, and capabilities with the intent of developing processes, products, or services. The use of strategic alliances to implement corporate strategy has exploded in the past few decades with thousands forming each year.

Globalization has also contributed to an increase in cross-border strategic alliances.

May join complementary parts of a firm’s value chain (R&D or marketing)
on joining the same value chain activities.

Attractive because they enable firms to achieve goals faster and at lower costs than going it alone.

Different motivations for forming alliances are not necessarily independent and can’t be intertwined.
Alliance formation is frequently motivated by leveraging economies of scale, scope, specialization, and learning.

Strategic Alliance vs. M&A (Mergers and Acquisitions)
Strategic alliances allow firms to circumvent potential legal repercussions including potential lawsuits filed by US federal agencies.
Relational View of Competitive Advantage
Strategic management framework that proposes that critical resources and capabilities frequently are embedded in strategic alliances that span firm boundaries.

Applying the VRIO framework we know that the basis for competitive advantage is formed when a strategic alliance creates resource combinations that are valuable, rare, and difficult to imitate, and the alliance is organized appropriately to allow for value capture.

Why do firms enter Strategic alliances?
An alliance must promise a positive effect on the firm’s economic value creation through increasing value and or lowering costs.

– Strengthen competitive position
– Enter new markets
– Hedge against uncertainty
– Access critical complementary assets
– Learn new capabilities

Strengthen Competitive Position
Firms can use strategic alliances to change the industry structure in their favor.

Firms frequently use strategic alliances when competing in so called battles for industry standards.

Enter New Markets
Firms may use strategic alliances to enter new markets, either in terms of products and services or geography.

Some governments may require that foreign firms have a local joint venture before doing business in their countries. Cross boarder strategic alliances have both benefits and risks

Hedge Against Uncertainty
In dynamic markets, strategic alliances allow firms to limit their exposure to uncertainty in the market.

Real options perspective

Real options perspective
Hedge against uncertainty

Approach to strategic decision making that breaks down a larger investment decision into a set of smaller decisions that are staged sequentially over time.

(Whether to enter biotechnology or not, nanotechnology, semiconductors)

At each stage, after new info is revealed, the firm evaluates whether or not to make future investments.

A real option which is the right but not the obligation, to continue making investments allows the firm to buy time until sufficient information for a go versus no-go decision is revealed.

Access Critical Complementary Assets
Successful commercialization of a new product or service often requires complementary assets such as marketing, manufacturing, and after-sale service.

New firms are in need of complementary assets to complete the value chain from upstream innovation to downstream commercialization.

Downstream complementary assets (marketing and regulatory expertise or a sales force) often prohibitively expensive and time consuming and not an option for new ventures.

Strategic alliance allow firms to match complementary skills and resources to complete the value chain.

Licensing agreements allow the partners to benefit from a division of labor, allowing each to efficiently focus on its core competency.

Learn New Capabilities
Firms enter strategic alliances because they are motivated by the desire to learn new capabilities from their partners.

Alliance formation is frequently motivated by leveraging economies of scale, scope, specialization, and learning

Learning Races

Portmanteau describing cooperation by competitors, achieve a strategic objective by cooperating with competitors.

They may cooperate to create a larger pie but then might compete about how the pie should be divided.

Leads to learning races

Learning Races
Situations in which both partners in a strategic alliance are motivated to form an alliance for learning but the rate at which the firms learn may vary.

The firm that learns faster and accomplishes its goal more quickly has an incentive to exit the alliance or, at a minimum, reduce its knowledge sharing.

Can have a positive effect on the winning firm

Three Governing Strategic Alliances
Non Equity Alliances
Equity Alliances
Joint Ventures

(These 3 lie in the middle of the make or buy continuum)

Non Equity Alliances
Governing Strategic Alliances

Partnership based on contracts between firms, most common. Firms tend to share Explicit Knowledge

Vertical strategic alliances:
Supply agreements
Distribution agreements
Licensing agreements

Contractural nature, temporary
easy to initiate and terminate.
sometimes produce weak ties between the alliance partners which can result in a lack of trust and commitment.

Explicit Knowledge
Knowledge that can be codified; concerns knowing about a process or product.

user manuals
fact sheets
scientific publications

Concerns the notion of knowing about a certain process or product

Licensing agreements
Non Equity Alliances

Contractual alliances in which the participants regularly exchange codified knowledge.

Equity Alliances
Governing Strategic Alliances

At least one partner takes partial ownership in the other.

They are less common because they often require larger investments.
Based on partial ownership rather than contracts, used to signal stronger commitments

Tactic Knowledge
Corporate Venture Capital (CVC)

Partners frequently exchange personnel to make the acquisition of tactic knowledge possible.

Downside: amount of investment that can be involved as well as a possible lack of flexibility and speed in putting together and reaping benefits from the partnership.

Tactic Knowledge
Equity Alliances

Knowledge that cannot be codified; concerns knowing how to do a certain task and can be acquired only through active participation in that task.
Only acquired through actively participating in the process.

Corporate Venture Capital (CVC)
Equity Alliances

Equity investments by established firms in entrepreneurial ventures; CVC falls under the broader rubric of equity alliances.

Estimated to be in the double digit billion dollar range each year
Creates real options in terms of gaining access to new and potentially disruptive technologies.

Joint Ventures
Governing Strategic Alliances

Standalone organization created and jointly owned by two or more parent companies.

Contribute equity, they are making a long term commitment.

Exchange of both explicit and tacit knowledge through interaction of personnel is typical.

Strong ties, trust and commitment

Can entail long negotiations and significant investments.
If it doesn’t work out as expected, it can be costly.
Knowledge shared with the new partner could be misappropriated by opportunistic behavior.

any rewards must be shared between partners.

A country may require to form a joint venture and provide knowledge and advanced technology in exchange for access to the market

Alliance Management Capability
A firm’s ability to effectively manage three alliance related tasks concurrently:

1) Partner selection and alliance formation
2) Alliance design and governance
3) Post formation alliance management

Partner selection and alliance formation
1st phase of Alliance Management Capability

The expected benefits for the alliance must exceed its costs.

When one or more of the five reasons for alliance formation are present (strengthen competitive position, enter new markets, hedge against uncertainty, access critical complementary resource, learn new capabilities)
The firm must select the best possible alliance partner

Necessary conditions:
Partner compatibility
Partner commitment

Partner Compatibility
Captures the cultural fit between firms
Partner Commitment
Concerns the willingness to make available necessary resources and to accept short-term sacrifices to ensure long-term rewards.
Alliance design and governance
2nd Phase of Alliance Management Capability

Once two or more firms agree to pursue an alliance managers must then design the alliance and choose an appropriate governance mechanism from among the three options (non equity contractual agreement, equity alliances, or joint venture)

Effective governance comes from skillfully combining formal and informal mechanism.

Interorganizational Trust
Alliance design and governance

Critical dimension of alliance success. All contracts are necessarily incomplete, trust between the alliance partners plays an important role for effective post formation alliance management.

Post formation alliance management
3rd phase of Alliance Management Capability

Concerns the ongoing management of the alliance. The partnership needs to create resource combinations that obey the VRIO criteria.

Can me accomplished if:
make relation specific investments
establish knowledge sharing routines
build interfirm trust

Trust is critical in any alliance.

Build capability through repeated experiences over time.

Interfirm Trust
Entails the expectation that each alliance partner will behave in good faith and develop norms of reciprocity and fairness.

Helps ensures the relationship survives and thereby increases the possibility of meeting the intended goals of the alliance.

Important for fast decision making.

Learning by doing
value for small ventures in which a few key people coordinate most of the firms’ activities.

Clear limitations by larger companies.

Alliance are best managed at the corporate level.

Dedicated alliance function
Should be given the tasks of coordinating all alliance related activity in the entire organization, taking a corporate level perspective.

It should serve as a repository of prior experience and be responsible for creating processes and structures to teach and leverage that experience and related knowledge throughout the rest of the organization across all levels.

Alliance Champion
senior corporate level executive responsible for high level support and oversight.

Responsible for making sure that the alliance fits within the firm’s existing alliance portfolio and corporate level strategy

Alliance Leader
Technical expertise and knowledge needed for specific technical area and is responsible for the day to day management of the alliance
Alliance Manager
Positioned with Office of Alliance management serves as an alliance process resource and business integrator between the two alliance partners and provides alliance training and development as well as diagnostic tools
The joining of two independent companies to form a combined entity. Mergers tend to be friendly. Two firms agree to join in order to create a combined entity.

hundreds of mergers each year, cumulative value in trillions of dollars

The purchase of takeover of one company by another. Can be friendly or unfriendly.
Hostile takeover
When a target firm does not want to be acquired.
Horizontal Integration
Process of merging with a competitor at the same stage of the industry value chain. Type of corporate strategy that can improve a firm’s strategic position in a single industry.

Firms should go ahead with horizontal integration if the target is more valuable inside the acquiring firm than as continued standalone company.

Tends to lead to consolidation. (airlines, banking, telecommunications, pharmaceuticals, health insurance)

3 Main benefits: (sources of value creation)
Reduction in competitive intensity
Lower Costs
Increased differentiation

Reduction in competitive intensity
Horizontal Integration

Horizontal integration changes the underlying industry structure in favor of the surviving firms.

Excess capacity is taken out of the market, and competition tends to decrease with a consequence of horizontal integration, assuming no new entrants.

The industry structure becomes more consolidated and potentially more profitable.

Favorable affect several five forces: Strengthening bargaining power vis a vis suppliers and buyers, reducing the threat of entry, and reducing rivalry among firms.

Lower Costs
Horizontal Integration

Firms use horizontal integration to lower costs through economies of scale and to enhance their economic value through creation and in turn their performance.

Industries with high fixed costs, achieving economies of scale through large output is critical in lowering costs.

Increased Differentiation
Horizontal Integration

Help firms strengthen their competitive positions by increasing the differentiation of their product and service offerings

Why do firms acquire other firms?
– To gain access to new markets and distribution channels
– To gain access to a new capability or competency
– To preempt rivals
To gain access to new markets and distribution channels
Why do firms acquire other firms?

Resort to acquisitions when they need to overcome entry barriers into markets they are currently not competing in or to access new distribution channels.

To gain access to a new capability or competency
Why do firms acquire other firms?

Firms resort to obtain new capabilities or competencies

To preempt rivals
Why do firms acquire other firms?

Sometimes firms may acquire promising startups not only to gain access to a new capability or competency but also to preempt rivals from doing so.

Mergers&Acquisitions and Competitive Advantage
Most cases, mergers and acquistiioners do not create competitive advantage.

Many mergers destroy shareholder value because the anticipated synergies never materialize.

If value is created it generally accrues to the shareholders of the firm that was taken over (acquiree), acquirers often pay a premium when buying the target company.

Why do we see so many mergers:
– Principal agent problems
– Desire to overcome competitive disadvantage
– Superior acquisition and integration capability

Principal agent problems
M&A and Competitive Advantage

Managers, as agents, are supposed to act in the best interest of the principals, the shareholders.

Managers may have incentives to grow their firms through acquisitions – not for anticipated shareholder value appreciation.

Higher compensation, job security

Managerial Hubris

Managerial Hubris
Principal agent problems

Form of self-delusion in which managers convince themselves of their superior skills in the face of clear evidence to the contrary.

1) Managers of the acquiring company convince themselves that they are able to manage the business of the target company more effectively and therefore create additional shareholder value. Unrelated diversification strategy
2) They see themselves as the exceptional rule.

led to many ill fated deals, destroying billions of dollars.

Desire to overcome competitive disadvantage
M&A and Competitive Advantage

Managers are motived not by competitive advantage in some instances.

Benefit from economies of scale

Superior acquisition and integration capability
M&A and Competitive Advantage

Acquisition and integration capabilities are not equally distributed across firms.

On average, destroy rather than create shareholder value, it does not exclude the possibility that some firms are consistently able to identify, acquire, and integrate target companies to strengthen their competitive postions.

Strategists cant grow their firms by growing organically through internal development or externally through alliances and
Managerial advantages of building a firm into a large organization
Greater Prestige
More job security
Increased power
The main reasons to pursue mergers include the desire to overcome competitive disadvantage, superior acquisition and integration capability and
principal agent problems
Gaining new capabilities or competencies is one of the three main reasons why companies
make acquisitions
When two competitors merge, leading to industry consolidation, they are engaging in
horizontal integration
a firm with alliance management capability is able to effectively manage which of the following tasks?

Phases of alliance management

post formation alliance management
alliance design and governance
partner selection and alliance formation
Alliance between disney and pixar was successful because
complementary assets matched
Mergers vs acquisitions
Merger joining of two independent companies

Acquisition – the purchase or takeover of a firm

Advantages of strategic alliances
might give companies a competitive advantage
firms achieve goals faster than they would alone
Relational view of competitive advantage
important resources and capabilities are commonly embedded in strategic alliances that cross firm boundaries.
Process of closer integration and exchange between different countries and peoples worldwide made possible by falling trade and investment barriers, advances in telecommunications, and reductions in transportation costs.

These factors reduce the costs of doing business around the world and opening the doors to a much larger market than any home country.

Allows companies to source supplies at a lower costs, learn new competencies, and to differentiate products.

Led to significant increases in living standards in many economies around the world

Multinational Enterprise (MNE)
Engine behind globalization

A company that deploys resources and capabilities in the procurement, production, and distribution of goods and services in at least two countries.

By making investments in value chain activities abroad, MNEs engage in foreign direct investment

MNEs need an effective global strategy

Disproportionately positive impact on the US economy

Foreign Direct Investment
Firm’s investments in value chain activities abroad.
Global Strategy
Part of a firm’s corporate strategy to gain and sustain a competitive advantage when competing against other foreign and domestic companies around the world
Born Global
Companies that have their founders start with them with the intent of running global operations.

Internet companies

Stages of Globalizatoin
Three notable stages

Globalization 1.0 1900-1941
Globalization 2.0 1945-2000
Globalization 3.0 21st Century

Globalization 1.0 1900-1941
All important business functions were located in their home country.
Only sales and distribution operations took place overseas – essentially exporting goods to other markets. Firms procured raw materials from overseas

Strategy formulation and implementation, knowledge flows, followed a one path way – domestic headquarters to international outposts.

Saw the blossoming of MNEs, ended with US entry into WW2

Globalization 2.0 1945-2000
End of WW2
Meet the needs that went unfulfilled during the war years but also to reconstruct the damage from the war.

MNEs created smaller self contained copies of themselves with all business functions intact

Required significant amount of foreign direct investment.
It was costly to duplicated overseas, doing so did allow for greater local responsiveness to country specific circumstances.

Western European countries

Globalization 3.0 21st Century
MNEs that had been the vanguard of globalization have since become global collaboration networks.

Now freely locate business functions anywhere in the world based on optimal mix of costs, capabilities, and PESTEL factors.

State of Globalization
Many large firms are more than 50% globalized, half revenues are from outside the home country,

the world itself is far less global

The world is semi-globalized – many more gains in social welfare and living standards can be had through further globalization if future integration is managed effectively through coordinated efforts by governments.

Continued Economic development across globe has two consequences for MNEs
1) Rising wages and other costs are likely to negate any benefits of access to low cost input factors
2) As the standard of living rises in emerging economies, MNEs are hoping that increased purchasing power will enable workers to purchase the products they used to make the export only.
Going Global: Why?
Doing so enhances its competitive advantage and that the benefits of globalization exceed the costs.

Firms expand beyond their domestic borders if they can increase their economic value creation (C-V) and enhance competitive advantage

Advantages of Going Global
– Gain access to a larger market
– Gain access to low cost input factors
– Develop new competencies
Gain access to a larger market
Advantages of Going Global

Gaining much more significant opportunities because economies of scale and scope that can be reaped by participating in a much larger market. They have an incentive to gain access to larger markets because this can reinforce the basis of their competitive advantage

In turn allows MNEs to outcompete local rivals.

Gain access to low cost input factors
Advantages of Going Global

MNEs Base their competitive advantage on a low cost leadership strategy are particularly attracted to go oversease to gain access to low cost input factors

Raw materials behind globalization 1 and 2:
Iron ore

Globalization 3:
Benefit form lower labor costs in manufacturing and services

Develop new competencies
Advantages of Going Global

MNEs pursue a global strategy to develop new competencies

Attractive for firms that base their competitive advantage on a differentiation strategy. Making foreign direct investments to be part of communities of learning which are often contained in specific geographic regions.

Communities of learning – contained in specific regions
Location economies

Location Economies
Benefits from locating value chain activities in optimal geographies for a specific activity wherever that may be.
Polycentric Innovation Strategy
MNEs now draw on multiple, equally important innovation hubs throughout the world characteristic of Globalization 3.0
Disadvantages of Going Global
If the cost of going global as captured by the following disadvantages exceeds the expected benefits in terms of value added
If economic value creation is negative, then firms are better off by expanding internationally.

– Liability of Foreignness
– Loss of Reputation
– Loss of Intellectual property

Liability of Foreignness
Disadvantages of Going Global

Additional costs of doing business in an unfamiliar cultural and economic environment, and of coordinating across geographic distances.

Loss of Reputation
Disadvantages of Going Global

Most valuable resources that a firm may posses is its reputation. It’s reputation can have several dimensions, including a reputation for innovation, customer service, or brand reputation.

Globalization a supply chain can have unintended side effects and can lad to a loss of reputation and diminish the MNEs competitiveness.

Considerable risk and cost for doing business abroad.

Some host governments are either unwilling or unable to enforce regulation and safety codes, MNEs need t rise to the challenge.

Loss of Intellectual property
Disadvantages of Going Global

There is an issue of protecting intellectual property in foreign markets

Intellectual property exposure
Large scale copyright infringement of:

CAGE Distance Framework
MNEs need to consider relative distance by using this model

A decision framework based on the relative distance between home and a foreign target country along four dimensions:

Cultural Distance
Administrative and Political Distance
Geographic Distance
Economic Distance

Most costs and risk involved in expanding are created by distances.

Cultural Distance
CAGE Distance Framework

Cultural disparity between the internationally expanding firm’s home country and its targeted host country.

A firm’s decision to enter certain international markets is influenced by cultural differences.

Greater cultural distance can increase the cost and uncertainty of conducting business abroad.

National Culture
Collective mental and emotional “programming of the mind” that differentiates human groups. Culture is made up of a collection of norms and mores, beliefs and values.

Culture captures the often unwritten and implicitly understood rules of the game, increases the liability of foreignness.

Administrative and Political Distance
CAGE Distance Framework

Captured in factors such as the absence or presence of:

Shared monetary or political associations
Political hostilities
Weak or strong (the strength of) legal and financial institutions.

Geographic Distance
CAGE Distance Framework

Costs to cross-border trade rise with geographic distance. It doesn’t simply capture how far two countries are from each other but also includes additional attributes such as the country’s physical size, within country distances to its borders, topography, time zones, contiguous or waterways and ocean
Infrastructure, road, power, and telecommunications networks

Relevant when trading products with low value to weight ratios such as
steel, cement, or other bulk products, fragile and perishable products, glass or fresh meats and fruits

Economic Distance
CAGE Distance Framework
Wealth per capita income of consumers is the most important determinant of economic distance.

Wealthy countries engage in relatively more cross border trade than poorer ones.
Rich countries tend to trade with other rich countries; poor countries also trade more with rich countries than with other poor countries

Companies from wealthy countries benefit in cross border trade with over wealth countries when their competitive advantage is based on economies of experience, scale, scope, and standardization.

Economic Arbitrage
Companies from wealthy countries trade with companies from poor countries to benefit from this
CAGE, in conclusion
The framework helps determine the attractiveness of foreign target markets in a more fine grained manner based on relative differences, it is a first step

A deeper analysis requires looking inside the firm to see strengths and weaknesses work to increase or reduce distance form specific foreign markets.

How do MNEs enter foreign markets?
Different options managers have when entering foreign markets along with required investments necessary and the control they can exert.

Exporting – producing goods in one country to sell in another, oldest forms of internationalization (globalization 1.0) often used to test whether a foreign market is ready for a firm’s products.

Globalization Hypothesis
Consumer needs and preferences throughout the world are converging and thus becoming increasingly homogenous

Based primarily on cost reduction.

Lower cost is a key weapon. MNEs attempt to reap significant cost reductions by leveraging economies of scale and by managing global supply chains to access that lowest cost input factors

Local Responsiveness
The need to tailor product and service offerings to fit local consumer preferences and host country requirements

Entails higher cost and outweighs cost advantages from economies of scale and lower cost input factors

Integration responsiveness framework
Framework juxtaposes the opposing pressures for cost reductions and local responsiveness to derive four different strategic positions to gain and sustain competitive advantage when competing globally

International Strategy
Multidomestic Strategy
Global standardization Strategy
Transnational Strategy

International Strategy
Integration responsiveness framework

Strategy that involves leveraging home based core competencies by selling the same products or services in both domestic and foreign markets

Oldest type of global strategies (Globalization 1.0)

Successfully by MNEs with relatively large domestic markets with strong reputations and brand names.

local responsiveness
cost reductions

Multidomestic Strategy
Integration responsiveness framework

Strategy pursued by MNEs that attempts to maximize local responsiveness with the intent that local consumers will perceive them to be domestic companies

Globalization 2.0

Common in consumer products and food industries

Exchange rate exposure

Tacit knowledge risk of appropriation

Global standardization Strategy
Integration responsiveness framework

Attempt to reap significant economies of scale and location economies by pursuing a global division of labor based on wherever best of class capabilities reside at the lowest cost.

Globalization 3.0

Strive for the lowest cost position possible

Their business strategy tends to be cost leadership, to be price competitive, MNE must maintain a minimum efficient scale.

Transnational Strategy
Integration responsiveness framework

Think globally, act locally

Strategy that attempts to combine the benefits of a localization strategy (high local responsiveness) with those of a global standardization strategy (lowest cost position attainable)

Generally used by MNEs to pursue a blue ocean strategy at the business level by attempting to reconcile and or service differentiations at low cost

Death of Distance Hypothesis
Assumption that geographic location alone should not lead to firm level competitive advantage because firms are now more than ever able to source inputs globally
National Competitive Advantage
World leadership in specific industries

Has a direct effect on firm level competitive advantage.

Companies from home countries that are world leaders in specific industries tend to be the strongest competitors globally

Porter’s Diamond Framework
Diamond of competitive advantage

Factor Conditions
Demand Conditions
Competitive intensity in focal industry
Related and supporting industries/complementors

Factor Conditions
Porter’s Diamond Framework

Described a country’s endowments in terms of natural, human, and other resources. Capital markets, supportive institutional framework, research universities, and public infrastructure

Demand Conditions
Porter’s Diamond Framework

Specific characteristics of demand in a firm’s domestic market.

Customers in home market hold companies to a high standard of value creation and cost containment contributes to national competitive advantage. Demanding customers may also clue firms in to the latest developments in specific fields and may push firms to move research from basic findings to commercial applications for the marketplace

Competitive intensity in focal industry
Porter’s Diamond Framework

Companies that face a highly competitive environment at home tend to outperform global competitors that lack such intense domestic competition

Related and supporting industries/complementors
Porter’s Diamond Framework

Leadership in related and supporting industries can also foster world class competitors in downstream industries.

Organizational Design
Process of creating, implementing, monitoring, and modifying the structure, processes, and procedures of an organization.

Key components:

Strategy implementation transforms strategy into actions and business models, it often requires changes within the organization.
Strategy implementation often fails because managers are unable to make the necessary changes due to the effects on resource allocation and power distribution within an organization. Managers are leery to disturb the status quo.

Structure follows strategy

Firm’s resistance to change the status quo, can set the stage for a firm’s subsequent failure.
Pattern for Successful firms
1) Mastery of and fit with the current environment
2) Success usually measured by financial measurements
3) A resulting organizational inertia that tends to minimize opportunities and challenges created by shifts in the internal and external environment

Missing – conscious strategic decision to change the firm’s internal environment to fit with the new external environment, rising above inertia

As a result of a tightly coupled albeit successful system, organizational inertia sets in and with it resistance to change. – puts pressure on the system.

Organizational Structure
Determines how the work of individuals and teams are orchestrated and how resources are distributed.

An organizational structure defines how jobs and tasks are divided and integrated, delineates the reporting relationships up and down the hierarchy, defines formal communication channels, and prescribes how individual and teams coordinate their work efforts.

Key building blocks:

Organizational Structure

Describes the degree to which a task is divided into separate jobs, the division of labor. Larger firms tend to have a high degree of specialization; smaller entrepreneurial ventures tend to have a low degree of specialization.

Requires a trade-off between breadth and depth of knowledge.

While a high degree of the division of labor increases productivity, it can also have unintended side effects such as reduced employee job satisfaction due to repetition of tasks

Organizational Structure

Captures the extent to which employee behavior is steered by explicit and codified rules and procedures.

Characterized by detailed written rules and policies of what to do in specific situations

Not necessarily negative, necessary to achieve consistent and predictable results.

Organizational Structure

The degree to which decision making is concentrated at the top of the organization.

Often correlates with slow response time and reduced customer satisfaction.

– Top down strategic planning takes place in highly centralized organizations
– Planned mergence is found in more decentralized organizations

The formal position based reporting lines and thus stipulates who reports to whom.
Tall structure
Flat structure

Span of control

Recent research suggests that managers are most effective at an intermediate point where the span of control is not too narrow or too wide.

Tall Structure
Many levels of hierarchy between CEO and frontline employees
Flat Structure
Few levels of hierarchy between CEO and frontline employees
Span Of Control
How many employees directly report to a manager.
Mechanist Organizatoin
High degree of specialization and formalization and by a tall hierarchy that relies on centralized decision making.

Allow for standardization and economies of scale, often are used when the firm pursues a cost leadership strategy at the business level

Organic Organizatoins
Low degree of specialization and formalization, flat organizational structure, and decentralized decision making.

Tend to be correlated with a fluid and flexible information flow among employees in both horizontal and vertical directions; faster decision making and higher employee motivation, retention, satisfaction, and creativity.

Typically exhibit a higher rate of entrepreneurial behaviors and innovation.

Allow firms to foster R&D and or marketing as a core competency.

Firms that pursue a differentiation strategy at the business level frequently have an organic structure.

Depends on context

Simple Structure
Generally used by small firms with low organizational complexity. The founders tend to make all the important strategic decisions and run the day to day operations.

Simple structures are flat hierarchies operated in a decentralized fashion.

Low degree of formalization and specialization.

Neither professional managers nor sophisticated systems are in place, often leads to an overload for the founder and/or CEO when the firms experience growth.

Functional Strucutre
As sales increase, firms generally adopt this.

Groups employees into distinct functional areas based on domain expertise. Often correspond to distinct stages in the value chain such as R&D, engineering and manufacturing, and marketing and sales, supporting areas such as human resources, finance, and accounting

allows for a higher degree of specialization and deeper domain expertise than a simple structure.

Higher specialization also allows for a greater division of labor, linked to higher productivity.

Allows for an efficient top down and bottom up communication chain between CEO and functional departments, relies on a relatively flat structure

Goal of Cost Leadership Strategy
Create a competitive advantage by reducing the firm’s cost below that of competitors while offering acceptable value.

Cost leader sells a no frills standardized product or service to the mainstream customer. Managers must create a functional structure that contains the organizational elements of a mechanistic structure – one that is centralized, well defined lines of authority up and down the hierarchy.

Functional strategy allows the cost leader to nurture and constantly upgrade necessary core competencies in manufacturing and logistics.

The goal of a differentiation strategy
come back
Successful blue ocean strategy
requires reconciliation of the trade-offs between differentiation and low cost

come back

Ambidextrous Organization
Enables managers to balance and harness different activities in trade off situations.

Trade offs to be addressed involve the simultaneous pursuit of low cost and differentiation strategies.

Flexible and lean manufacturing systems, total quality management, just in time inventory management, six sigma.

Decentralized decision making at the level of the individual customer.

Managers must constantly look for ways to change them in order to resolve trade offs across internal value chain activities

A firm’s ability to address trade offs not only at one point but over time. Encourages managers to balance exploitation with exploration
Applying current knowledge to enhance firm performance in the short term
Searching for new knowledge that may enhance a firm’s future performance
Functional Strategy Disadvantages
Facilitates rich and extensive communication between members of the same department. Lacks effective communication channels across departments.

lack of links between different functions, R&D managers often do not communicate directly with marketing managers.

To overcome, a firm can set up cross functional teams

Second drawback is that it cannot effectively address a higher level of diversification which often stems from further growth. This is the stage at which firms find it effective to evolve and adopt a multidivisional or matrix structure

Cross function teams
Temporary teams, members come from different functional areas to work together on a specific project or product, usually from start to completion.
Multidivisional Structure (M-Form)
Consists of several distinct strategic business units (SBUs) each with its own profit and loss responsibility. Each SBU is operated more or less independently from one another.
M-Form and Corporate Strategy
To achieve an optimal match between strategy and structure, different corporate strategies require different organizational structures

Single Business
Dominant Business
Related business
Unrelated Diversification

Each defined by the percentage of revenues obtained from the firm’s primary activity

Single Business or Dominant Business Stratetgy at the corporate level
gain at least 70% of their revenues from their primary activity, generally employ a functional strategy
Related diversification
M-form is the preferred organizational structure.

tend to concentrate decision making at the top of the organization, high level of integration. Also helps corporate headquarters leverage and transfer across different SBUs the core competencies that form the basis for a related diversification

Unrelated Diversification
M-form is the preferred organizational structure.

Often decentralize decision making.

Allows general managers to respond to specific circumstances and leads to a low level of integration at corporate headquarters

Disadvantages of M-Form (Multidivisional structure)
Known problems of increasing bureaucracy, red tape, and duplication of efforts.
Matrix Structure
Organizational structure that combines the functional structure with the M-Form (multidivisional structure)

The firm is organized according to SBUs along a horizontal axis and has a second dimension of organizational structure along a vertical axis.

The idea behind this structure is to combine the benefits of the M-form (domain expertise, economies of scale, and efficient processing of information) with those of a functional structure (responsiveness and decentralized focus)

Global Maxtrix Structure
Used to pursue transnational strategy, which the firms combines the benefits of a multidomestic strategy (high local responsiveness) with global standardization strategy (lowest cost position attainable)

Charged with local responsiveness and learning.

Allows the firm to feed local learning back to different SBUs and thus diffuse it throughout the organization.

International Strategy
company leverages its home based core competency by moving into foreign markets.

Advantageous when the company faces low pressure for both local responsiveness and cost reductions.

Companies pursue an international strategy through a differentiation strategy at the business level.

Multi-domestic Strategy
When MNEs (multinational enterprise) attempts to maximize local responsiveness in the face of low pressures for cost reductions.

Multidivisional structure enable the MNE to set up different divisions based on geographic regions.

SBUs to maximize local responsiveness

Decision making is decentralized.

Global standardization
MNE attempts to reap significant economies of scale as well as location economies by pursuing a global division of labor based on whatever best of class capabilities reside at the lowest cost. MNE pursues a cost leadership strategy

Optimal organizational structure is a multidivisional structure

Focus on driving down costs due to consolidation of activities across different geographic area

Disadvantages of the Matrix Structure
Difficult to implement: two layers of organizational structure creates significant organizational complexity and increases administrative costs.

Reporting structures are often not clear. Employees can have trouble reconciling goals presented by their two (or more supervisors

agent relationships make performance appraisals more difficult.

Organizational Culture
The collectively shared values and norms of an organization’s members.


Strongest asset but also its greatest liability, can become a core rigidity if a firm relies too long on the competency without honing, refining an upgrading as the firm and envionrment change

define what is considered to be important
define appropriate employee attitudes and behaviors
Process whereby employees internalize an organization’s values and norms through immersion in its day to day operations
Strong culture
Emerge when the company’s core values are widely shared among the firm’s employees and when the norms have been internalized
Corporate culture finds its expression through this. IT includes elements such as design and layout of physical space, symbols, vocabulary, what stories are told, what events are celebrated and highlighted, and how they are celebrated.
Founder Imprinting
A process by which the founder defines and shapes an organization’s culture, which can persist for decades after his or her departure.

Founders set the initial strategy, structure, and culture of an organization by transforming their vision into reality.

A situation in which opinions coalesce around a leader without individuals critically evaluating and challenging that leader’s opinions and assumptions

Cohesive non-diverse groups are highly susceptible to groupthink, lead to flawed decision making with potentially disastrous consequences.

Strategic Control and Reward System
Internal governance mechanisms put in place to align the incentives of principals (shareholders) and agents (employees).

Allow managers to specify goals, measure progress, and provide performance feedback

Input Controls
Seek to define and direct employee behavior through a set of explicit, codified rules and standard operating procedures. Firms use input controls when the goal is to define the ways and means to reach a strategic goal and to ensure a predictable outcome.

Management designs these mechanisms so they are considered before employees make any business decisions, input into the value creating activities.

Budgets, set before employees define and undertake the actual business activities.
Standard operating procedures, or policies & rules, also frequently used mechanism when relying on input controls.

Specify the conversion process from beginning to end in great detail to guarantee standardization and minimize deviation.

Output Controls
Seek to guide employee behavior by defining expected results but leave the means to those results open to individual employees, groups, or SBUs. Firms frequently tie employee compensation and rewards to predetermined goals such as sales target or return on invested capital.

Corporate level, outcome controls discourage collaboration among different strategic business units. Best applied when a firm focuses on a single line of business or pursues unrelated diversification.

Results only work environment (ROWEs)

Results only work environment (ROWEs)
Output controls that attempt to tap intrinsic employee motivation which is driven by the employee’s interest in and the meaning of the work itself.

Extrinsic motivation is driven by external factors such as awards and higher compensation or punishments like demotions and layoffs (carrot and stick approach).

Intrinsic motivation is highest when an employee has
Autonomy (what to do)
Mastery (how to do it)
Purpose (why to do it)

Shared Value Creation Framework
Provides guidance to managers about how to reconcile the economic imperative of gaining and sustaining competitive advantage with corporate social responsibility.

Helps managers create a larger pie that benefits both shareholders and other stakeholders.

Must understand role of public stock company

Public Stock Companies
Important institutional arrangement in modern, free market economies.
It provides goods and services as well as employment, pays taxes, and increases the standard of living.

Implicit contract based on trust between society and the public stock company. Society grants the right to incorporation, but in turn, expects companies to be good citizens by adding value to society.

Limited liability for investors
Transferability of investor ownership
Legal personality
Separation of legal ownership and management controls

Major contributor to value creation since its inception

Contributed to some black swan events

Limited liability for investors
The shareholders who provide the risk capital are liable only to the capital specifically invested, and not for other investments they may have made or for their personal wealth. Limited liability encourages investments by the wider public and entrepreneurial risk taking
Transferability of investor ownership
Through trading of shares of stock on exchanges like New York Stock Exchange and NASDAQ or exchanges in other countries. Each share represents only a minute fraction of ownership in a company, thus easing transferability
Legal personality
The law regards a non living entity such as a for profit firm as similar to a person with legal rights and obligations. Allows a firm’s continuation beyond the founder or founder’s family
Separation of legal ownership and management controls
In publicly traded companies the stockholders (principals represented by the board of directors) are the legal owners of the company and they delegate decision making authority to professional managers (the agents)
Shareholder Capitalism
Shareholders the providers of the necessary risk capital and the legal owners of public companies have the most legitimate claim on profits
Creating Shared value
A concept that involves creating economic value for shareholders while also creating social value by addressing society’s needs and challenges. Managers need to reestablish the important relationship between superior firm performance and society progress.

Will gain and sustain competitive advantage and reshape capitalism and its relationship to society.

Shared Value Creation Framework
Managers maintain a dual focus on shareholder value creation and value creation for society.

Defined by economic and societal needs.

Externalities such as pollution, wasted energy, and costly accidents actually create internal costs, lost in reputation if not directly on the bottom line.

1) Expand the customer base to bring nonconsumers
2) Expand traditional internal value chains to include more nontraditional partners (nongovernmental organizations, NGOs)
33) Focus on creation new regional clusters

GE’s strategic initiative to provide cleaner and more efficient sources of energy, provide abundant sources of clean water anywhere in the world and reduce emissions.

Solve the trade off between increasing value creation and lowering costs.

Create value for society by reducing emissions and lowering energy consumption.

Stakeholder theory
These strategic actions will lead to a larger pie of revenues and profits that can be distributed among a company’s stakeholders.
Corporate Governance
Mechanisms to direct and control an enterprise in order to ensure that it pursues its strategic goals successfully and legally.

Checks and balances and asking the tough questions at the right time.

Attempts to address the principal agent problem which can occur any time an agent performs activities on behalf of a principal. Can arise whenever a principal delegates decision making and control over resources to agents with the expectation that they will act in the principal’s best interest.

Information Asymmetry
Agents are generally better informed than the principals.

Breed on the job consumption, perquisites, and excessive compensation.

Agency Theory
Principal agent problem is a core part of agency theory.

Views the firm as nexus of legal contracts.

Corporations are viewed merely as a set of legal contracts between different parties. Conflicts may arise are to be addressed in the legal realm.

Everyday application in employment contracts

The firm needs to design work, tasks, incentives, and employment contracts and other mechanisms in ways that minimize opportunism by agents.

Adverse Selection
Moral Hazard

Adverse Selection
Agency Theory

Occurs when information asymmetry increases the likelihood of selecting inferior alternatives.

Principal agent relationships, adverse selection describes a situation in which an agent misrepresents his or her ability to do the job. Common during the recruiting process.

Creates an incentive for opportunistic employees to free ride on the efforts of others

Moral Hazard
Agency Theory

Situation in which information asymmetry increases the incentive of one party to take undue risks of shirk other responsibilities because the costs accrue to the other party.
Costs of default are rolled over to society.
Knowing that there is a high probability of being bailed out (too big to fail) increases moral hazard. Any profits remain private while losses become public.

Principal agent relationship – difficult of the principal to ascertain whether the agent has really put forth a best effort. Agent is able to do the work but may decide not to do so.

To overcome, firms put several governance mechanisms in place.

Board of Directors
Shareholders of public stock companies appoint board of directors.

The centerpiece of corporate governance in such companies. Shareholder’s interests are not uniform.

Long term viability and profitable growth should allow consistent dividend payments and result in stock appreciation over time.
Hedge funds often to profit from short tern movements of stock prices. More proactive investors and demand changes in a firm’s strategy.

Inside Directors
Board of Directors

Generally part of the company’s senior management team, chief financial officer (CFO) and chief operating officer (COO).

Appointed by shareholders to provide the board with necessary info pertaining to the company’s internal workings and performance.

Tend to align with the management and the CEO rather than shareholders

Outside Directors
Board of Directors

Not employees of the firm.

Frequently are senior executives from other firms or full time professionals who are appointed to a board and who serve on several boards simultaneously.

More likely to watch out for the interests of shareholders.

Ficuiary Responsibility
Legal duty to act solely in another party’s interests – toward shareholders because of the trust placed in him or her.
Prior to shareholders’ meeting the board slate of nominees, although they can directly nominate director candidates.

large institutional investors support their favored candidates through proxy votes.

Board Independence
Critical to effectively fulfilling a board’s governance responsibilities. Board members are directly responsible to shareholders, they have an incentive to ensure that shareholders’ interests are pursued.

If not, they can experience a loss in reputation or can be removed outright.

CEO/Chairperson Duality
Holding both the role of CEO and chairperson of the board, declining somewhat in recent years.
Other Governance Mechanisms
Executive Compensation
Market for Corporate Control
Financial statement auditors, government regulators, and industry analysts
Executive Compensation
Other Governance Mechanisms


Board of directors determines executive compensation packages. The board frequently grants stock options.

2 Issues:
Absolute size of pay package
CEO pay and firm performance

Stock Options
Executive Compensation

Based on agency theory and gives the recipient the right, but not obligation, to buy a company’s stock at a predetermined price sometime in the future.

If the company’s share price rises above the negotiated strike price, the executive stands to reap significant gains.

Absolute size of pay package
Executive Compensation

Ratio of CEO to average employee in US is 300 to 1

CEO pay and firm performance
Executive Compensation

2/3 of CEO pay is linked to firm performance.

Pay and performance is a positive relationship, but the link is weak at best.

Market for Corporate Control
Other Governance Mechanisms

Important external corporate governance mechanism.

Consists of activist investors who seek to gain control of an underperforming corporation by buying shares of its stock in the open market. Corporate managers strive to protect shareholder value by delivering strong share price performance or putting in place poison pills.

Shares fall to a low enough value, the become the target of hostile takeover.

Leveraged Buyout (LBO)
Market for Corporate Control

Single investor or group of investors buys with the help of borrowed money (leveraged against in the company’s assets, outstanding shares of a publicly traded company in order to take it private.

LBO changes the ownership structure of a company from public to private.

Expectation is often that the private owners will restructure the company and eventually take it public again through an initial public offering.

Poison Pill
Market for Corporate Control

Defensive provisions that kick in should a buyer reach a certain level of share ownership without top management approval.

Become rare because they retard an effective function of equity markets.

Financial statement auditors, government regulators, and industry analysts
Other Governance Mechanisms

External governance
All public companies must file a number of financial statements with SEC, a federal regulatory agency whose task it is to oversee stock trading and enforce federal securities.

follow GAAP and be audited by CPAs

Business Ethics
Agreed upon code of conduct in business, based on societal norms

Lay the foundation and provide training for behavior that is consistent with the principles, norms, and standards of business practice that have been agreed upon by society.
Differ to some degree in different cultures around the globe.

Fairness, honesty, and reciprocity are universal norms, many of these have been codified into law.

Staying within the law is a minimum acceptable standard. Can be legal, but ethicaly questionable

Codes of Conduct
Standard codified in law, go above and beyond the law in detailing how the organization expects an employee to behave and to represent the company in business dealings.

allow an organization to overcome moral hazards and adverse selections.

When facing ethical dilemma, acceptable norms of professional behavior
Feel comfortable explaining and defending the decision in public

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