Global Strategic Management
Department of International Business
University of Economics, the University of Danang
Part 3
Global Strategy
Development
Department of International Business
University of Economics, the University of Danang
Chapter 8
Headquarter-level Strategy
Department of International Business
University of Economics, the University of Danang
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Learning outcomes
After reading this chapter, you should be able to:
• Understand the four major headquarters-level strategic
management roles. • Select appropriate control mechanisms.
• List and discuss the different diversification strategies.
• Understand global sourcing strategies.
• Define offshoring and discuss its drivers.
• Discuss the advantages and disadvantages of vertical
integration strategy.
• Discuss the advantages and disadvantages of global
outsourcing.
• Develop a global market portfolio matrix.
Levels of global strategy
Parent Headquarter-
company/headquarters’ level strategy
strategy
Strategy of Strategy of Subsidiary-level
strategy
Subsidiary 1 Subsidiary 2
Roles of corporate parent
Roles of corporate
parent
Develop a
Decide on and basis for
enforce the Determine the Decide the maintaining
strategic scope of outsourcing an overview
direction of operations level of
the performance
multinational across all
firm subsidiaries
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Three key issues facing the headquarter
• Directional strategy: Orientation toward growth, stability,
retrenchment
• Portfolio strategy: The industries or markets in which the whole firm
competes
• Parenting strategy: The manner in which it coordinates activities and
transfers resources and cultivates capabilities among product line and
business units/subsidiaries
Directional Strategy
• Growth strategy
• Stability strategy
• Retrenchment strategy
Directional Strategy
➢ Growth strategy:
• Concentration (focused) strategies
• Diversification strategies
➢ Internal mechanisms for implementing the strategy: Developing
the internal network.
➢ External mechanisms for implementing the strategy
• Mergers: Transaction involving two or more firms in which stock is
exchanged but only one firm survives
• Acquisition: Purchase of a firm that is absorbed as an operating
subsidiary of the acquiring firm.
• Strategic Alliance: Partnership of two or more firms to achieve
strategically significant objectives that are mutually beneficial.
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Stability Strategy
• Choosing a stability strategy when:
– Need to consolidate after rapid recent growth
– Catching breath after a period of effort
– Pause to observe what will happen next when the
market/environment has new fluctuations
– Growth opportunities decline
– Emergence of new competitors
– Premonition of something abnormal internally
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Stability Strategy
• Status Quo Strategy: Maintain existing products,
markets, and operations without significant changes.
• Pause/Proceed with Caution Strategy: Temporarily
suspend growth initiatives to reassess market conditions
and strategic direction before taking further steps.
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Stability Strategy
• Profit Strategy: Focus on maximizing profits from
existing products and markets instead of seeking new
opportunities.
• Maintenance Strategy: Focus on maintaining the current
level of activity and presence in the market.
• Defensive Strategy: Protect market position from threats
from competitors or unfavorable market conditions
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Retrenchment strategy
• Turnaround Strategy:
- Reduce unprofitable business activities
- Exploit existing opportunities
- Tighten control and consolidate operations
• Captive Company Strategy:
- Partly or totally merge with another company for safety
- Downsize some functions
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Retrenchment strategy
• Selling-out:
- Sell all operations to another company
- Divest from a company that does not fit the investment
portfolio or has low productivity
• Bankruptcy
• Liquidation:
- Last resort
- Assets are worth more than the value of the business
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Business and operational scope strategy
• Business Scope Strategy
(Business portfolio strategy)
• Operational Scope Strategy
(Sourcing strategy)
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Business Scope Strategy
• Concentration Strategy: Focus on current product lines within
one industry/market
- Vertical Integration
- Horizontal Integration
• Diversification Strategy: Operate in different product lines in
different industries and markets
- Related Diversification (Concentric Diversification)
- Unrelated Diversification (Conglomerate Diversification)
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Concentration strategy
• Focus on a specific industry/market
• Advantages:
- Clear positioning
- High specialization
• Disadvantages:
- Risk from a specific context, especially when competitive
capability declines
- Products become outdated
- Market saturation
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Concentration Strategy
Serving the growth orientation
• Vertical Integration
- Integration along the product value chain
- Full, partial, or quasi-integration
- Backward or forward integration
• Horizontal Integration
- Expanding the market for the same product line
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Diversification Strategy
• Purpose of Diversification
• Objectives that create new value for the business
– Scope benefits
– Market power
– Transfer of core resources
– Financial economies
• Objectives that do not change the value of the business
– Overcoming legal restrictions, especially antitrust laws
– Reducing operational risk
– Solutions in case of declining business performance and unstable future context
• Objectives that can reduce the value of the business
– Serving the manager's purpose (salary, influence, reducing the risk of job loss)
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Diversification Strategy
• Industrial/product diversification
• Geographical diversification; global diversification
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Industry Diversification Strategy
• Related diversification (concentric)
– Expanding into related industries
– Exploiting benefits from synergies in operations
• Unrelated diversification (conglomerate)
– Expanding into unrelated industries
– Focusing on financial issues
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Related Diversification Strategy
• Relatedness in diversification: The diversified industries have relatedness in
aspects that can be exploited to bring greater value to the business's operations
if the connectivity between business areas is ensured appropriately.
•Main related aspects (focal points): Demand, supply, competitive context.
•Three key potential benefits:
▪ Economies of scope
▪ Increase market power
▪ Knowledge competencies
• Value is created from sharing activities (operational relatedness) and
transferring core resources (corporate relatedness)
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Eight Factors Weakening Connectivity
• Unclear company strategy: Departments do not grasp the right signals for
cooperation implementation.
• Internal conflicts between key positions: Obstructing cooperation.
• "Secret" culture in the company: Reducing the willingness to share
information and trust each other in cooperation.
• Inappropriate cooperation motivation tools: Departments only focus on
their own activities.
• Excessive demands on results: Departments only focus on their own
activities.
• Low pressure on results: Lack of motivation to create cooperation.
• Authoritarianism of senior managers: Subordinates do not respect and
therefore do not obey superiors' orders.
• Lack of mutual trust: Difficulty cooperating with each other.
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Unrelated Diversification Strategy
• Unrelatedness in diversification: The diversified industries have no
relatedness in aspects that can be exploited to create connectivity between
these business areas. However, the benefits of diversification are exploited
through internal system connectivity (connectivity of separate blocks).
• Common unrelatedness: enters businesses whose value chains are so
dissimilar that no, or very little, real potential exists to transfer technology
or management knowhow from one business to another, to transfer
competencies to reduce costs, to achieve competitively valuable benefits
from operating under the same corporate umbrella, or to combine similar
activities.
• Value creation channel: Financial economic benefits: Effective internal
financial distribution, corporate asset restructuring.
•Value-creating activity: Parental advantage.
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Industry Diversification Strategy
• Three key tests to judge the appropriateness of a
diversification move:
▪ The attractiveness of the industry: yield consistently
high returns on investment..
▪ Entry-cost test: low enough to allow the potential for
good profitability and high enough to prohibit a flood of
new entrants and erode the potential for high profitability
▪ Better-off test: Diversification must offer potential for
generating synergy between the current business and the
new businesses and/or among the new businesses.
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Six key criteria to select an industry into
which to diversify
Thompson and Strickland (2003)
1. Can the new business meet corporate targets for profitability and return on
investment?
2. Does the new business require substantial infusion of capital to replace out-
of-date plants and equipment, fund expansion, and provide working capital?
3. Is the business in an industry with significant growth potential?
4. Is the business big enough to contribute significantly to the parent firm’s
bottom line?
5. Is there a potential for union difficulties or adverse government regulations
concerning product safety or the environment?
6. Whether there is industry vulnerability to recession, inflation, high interest
rates, or shift in government policy?
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Risks and pitfalls of industry diversification
• Managers' time is spread across many different areas
• Longer decision-making process
• Increased fixed and management costs
• Lack of motivation due to uneven use of shared resources
• Lack of innovation due to lack of coordinated guidance
from the parent company
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Global Diversification Strategy
• Two types of market diversification: Related
diversification and unrelated diversification
• Relatedness in global diversification depend on three
factors:
✓ Physical proximity
✓ Cultural proximity
✓ Level of economic development
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Benefits and risks of global strategy
• Benefits
▪ Enhance shareholder’s value
▪ Create flexibility within the firm
▪ Flexibility to shift production to low cost country
▪ Lower firm’s overall tax liability
▪ Lower risk by spreading it across markets
▪ Benefits corporate managers
• Costs and risks
▪ Complexity in operations (higher costs and risks of coordinating)
▪ Inefficient cross-subsidization of less profitable business units
▪ Adopt and maintain value-reducing diversification strategies as
manager’s private benefits
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Tool: Investment Portfolio Analysis
• Pursuing a specific orientation and choosing a business scope leads to the
need for continuous analysis and evaluation of the company's business units
(investment portfolio)
• Main evaluation content
▪ Attractiveness of the industries in which the company is competing
▪ Competitive capability of business units
▪ Checking the potential competitive advantage of sharing and/or
transferring resources between business units
▪ Checking the potential to capture financial benefits (financial economies)
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Investment Portfolio Analysis
• Best-case scenario
▪ All business units of the company compete in attractive industries and
have a strong competitive position and
▪ There are many opportunities to capture economies of scope and/or
financial economies
• Useful tools
▪ Industry attractiveness and competitive strength matrix
▪ BCG matrix
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9-cell matrix on industry attractiveness and competitive
strength
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BCG matrix
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International Investment Portfolio Analysis
• Attractiveness of each country market
Market size, growth rate, regulations
• Competitive strength
Market share, product fit, contribution rate, market
support
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Global Investment Portfolio Analysis
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Global sourcing strategy
• Sourcing strategy: the procurement of products and services
from independent suppliers or company-owned subsidiaries
located abroad for consumption in the home country or a third
country.
• Important rule: Proprietary knowledge and business activities
and processes that are considered as firms' core competencies do
not end them- selves to outsourcing and therefore should not be
outsourced .
• The global sourcing strategy enables the multinational firm to
exploit both its own and its suppliers' competitive advantages as
well as the comparative locational advantages of various
countries where the suppliers are located.
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Types of outsourcing
Sourcing Types of
Location
methods sourcing
In-house sourcing
Domestic from domestic
subsidiaries
Vertical
integration In-house sourcing
Foreign from abroad
countries subsidiaries
Sourcing
Sourcing from
Domestic domestic external
suppliers
Outsourcing
Foreign Sourcing from
external suppliers
countries located abroad
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Vertical Integration: Advantages
• Enable multinational firms to cross-subsidize one stage of the
value chain with another in order to squeeze out competitors.
• The opportunity to retain control over proprietary knowledge,
thus preventing leakage of such knowledge to competitors and
preventing suppliers from becoming competitors
• Enable firms to raise the cost of-input and output markets to
competitors as well as reducing quality uncertainty
• Reduces uncertainties in demand and price
• Enable multinational firms to add value at different stages of the
value chain
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Vertical Integration: Disadvantages
• Cannot concentrate on certain core tasks it does best
• Often have higher costs relative to mul- tinational firms
which pursue an outsourcing strategy
• Inflexibility, especially in the case of high exit barriers
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Outsourcing
• Conditions of outsourcing
▪ Must be able to specify what attributes it needs from the
supplier;
▪ The technology and processes to measure those attributes
must be reliably and conveniently accessible;
▪ f and when there is a variation in what the supplier
delivers, the company needs to know what else in the
system must be adjusted.
• Types of outsourcing
▪ Arm-length oursourcing
▪ Strategic outsourcing
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Advantages and drawbacks of outsourcing
• Advantages
▪ Cost saving
▪ Access to proprietary knowledge
▪ Enables the firm to focus on
▪ Flexibility
• Drawbacks
▪ Damages capabilities
▪ High failure rate
▪ Very complex to manage
▪ Unethical practices
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Internal Management Strategy - Control Strategy
(parenting strategy)
• The parent company controls its subsidiaries to ensure that
the subsidiaries allocate their resources and efforts towards
achieving the parent company's goals.
• It is a process of ensuring that subsidiaries operate in a
coordinated and cooperative manner throughout the entire
system, through which resources are built up and
distributed optimally towards the parent company's
common goals.
• The main decisions in control: level, type/method, and
content of control.
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Types of control
• Personal control relies on human interaction.
• Impersonal control involves the utilization of an
extensive set of rules, regulations, and procedures
such as written manuals.
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Focus of control
• Output control: Setting output targets and
controlling results.
• Behavior control: Monitoring the behavior of
personnel in subsidiaries (input control)
• Culture control: Establishing a system of
standards and organizational values so that
companies act towards the output goals of the
parent company.
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Barriers and Challenges in Control
• Cross-cultural challenges: Cultural differences create many
challenges in applying and implementing appropriate control.
• Challenges at the subsidiary level: Asymmetric information and
conflicts in the principal-agent relationship.
• Challenges at the headquarters level: The inherent limitations of
headquarters (time, resources) while having to deal with a large
information system, leading to "rational" decisions being made based
on a sufficient amount of information (bounded rationality) rather than
optimal decisions.
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