Strategy and Nonmarket Environment - summary articles & lectures
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Course
Strategy and Nonmarket Environment (MANBCU012EN)
Institution
Radboud Universiteit Nijmegen (RU)
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Kranenburg & Voinea (2017) / Porter (1985) / Baron (1995) / Hu (1995) / Tallman & Cuervo-Cazurra (2021) / Dunni...
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L1 Introduction
Porter (1985) and Porter’s extended frameworks
Porter’s diamond model (competitive theory) (1985)) / extended single diamond model 2 / generalized double
diamond model
Porter’s diamond model (Porter, 1985) doesn’t include the nonmarket environment, nor the global environment. It
differs slightly from Porter’s five forces (1980), because it includes government policies influence (so from industry to
country level). Porter then extended this diamond model to include the nonmarket environment (i.e., government
and chance) into the extended single diamond model (Porter, 1990). Dunning (1992) then introduced the extended
single diamond model 2, which added the global aspect through its transnational extension. Then Moon et al (1998)
introduced the generalized double diamond model, which goes beyond a single diamond and introduces the concept
of a double diamond, where one diamond represents the home country (host) and the other represents the foreign
country (source). Moon's model looks at the interactions between these two countries and their industries.
Diamond model (Porter, 1985)
Factor conditions = assesses how efficienctly a country’s available production factors (e.g., skilled labor,
infrastructure, resources) can be used in a particular industry
Demand conditions = importance of demand (size, intensity and sophistication of demand)
Related and supporting industries = presence of firms, suppliers, and complementary industries in a close proximity
forms a competitive advantage. Competitive rivalry and cooperation among these entities can lead to efficiency,
innovation, and cost reduction.
Firm, strategy, industry structure and rivalry = The competitive advantage of firms operating within a country is
influenced by their strategies, the structure of the industry, and the level of competition among companies. High
competition can drive firms to produce better quality goods at lower costs
For the double diamond model the points above can simply also be applied to the foreign country
Extended single diamond model (2) (Dunning, 1992)
Chance refers to unexpected or unplanned events and circumstances that can impact a country's competitive
advantage
Government refers to the role of the state or public authorities in influencing the competitiveness of a nation's
industries. Government policies and actions can shape the business environment in various ways
Transnational Business Activity is also known as international business or cross-border operations, and refers to the
activities of companies that operate in multiple countries.
Generalized double diamond model (Moon et al. 1998)
This model goes beyond a single diamond and introduces a second one. A distinction is made between the home
country and foreign country. This model looks at the interaction between these two countries.
Porter’s five forces (1985) (one of the articles)
Competition determines the failure or success of a company.
2 central questions determine the choice of competitive strategy:
- Attractiveness of the industry
- Relative competitive position
,Porter presents a framework with 5 forces that determine the industry attractiveness and understanding
competitors. He presents 3 generic strategies that can be used against competitors. Porter tries to bridge strategy
and implementation
Porter's Five Forces Model helps managers and analysts understand the competitive landscape that a company faces
and to understand how a company is positioned within it. Porter identified five undeniable forces that play a part in
shaping every market and industry in the world. The Five Forces are frequently used to measure competition
intensity, attractiveness, and profitability of an industry or market.
The firm is not a prisoner in here though, it can influence the 5 forces through strategy. We should keep in mind that
every industry is different, therefore each force is different in importance for each industry.
A good organization should not always think about their direct own profitability but also about the industry. If your
product is too easily substituted, then how will you have the competitive advantage on the long term? So, it is also
about capturing value. Making new entrants more difficult for example is one way to do that.
There are two basic types of competitive advantage a firm can possess: low cost or differentiation. Porter defines
competitive advantage as the ability of a company to outperform its rivals in terms of profitability. Combined with
the scope of activities for which a firm seeks to achieve them, lead to three generic strategies for achieving above
average performance in an industry: cost leadership, differentiation, and focus. The focus strategy has two variants,
cost focus and differentiation focus.
These strategies are used to target specific market segments or niches, rather than trying to be the low-cost provider
or differentiator in the entire market. Non-focus is often standardized for a large market.
Competitive scope: Porter discusses the concept of competitive scope, which refers to the range of a company's
target market. Companies can choose to have a broad scope by serving a wide customer base or a narrow scope by
focusing on a specific niche.
Porter emphasizes that achieving a competitive advantage is not enough; it must be sustained over time to deliver
superior performance (sustainable competitive advantage). A competitive advantage is sustainable when it is difficult
for competitors to imitate or replicate. Trade-offs and choices: Porter highlights that pursuing a particular competitive
strategy involves making trade-offs. For example, a company pursuing cost leadership may have to compromise on
product differentiation. Making clear choices and trade-offs is crucial in developing a successful competitive strategy.
Note: a cost leader must achieve parity or at least proximity in the basis of differentiation even though it relies on
cost leadership as its competitive advantage. Differentiators must also do somewhat the same for costs.
Stuck in the middle often results in below-average profitability. If a firm does want to pursuit more than one generic
strategy it is mostly better off splitting the firm into two distinct ones that can both specialize in one thing.
,Generic strategies are vulnerable to certain attacks as can be seen underneath:
Each generic strategy has an own way of doing things. Cost leadership is good when you have tight control for
example. But on the other hand it is a bad idea when you constantly want to renew yourself. Differentiation is more
about the culture of innovations, individuality and risk-taking.
Sustainable competitive advantage is the focus.
Non-transferability (Hu, 1995)
Why do successful and competitive corporations struggle to replicate their success when they expand
internationally? Aims to shed light on the complexities of international business operations and the transferability of
competitive advantages from domestic to international markets.
International transfer and transferability of the firm’s advantages
*The article discusses questions regarding the competitive advantage of companies operating across borders. It
explores the concept of international transferability of a firm's advantages. Researchers like Hymer and Bain laid the
foundation for understanding advantages related to international operations. Advantages are defined as relative
strengths or weaknesses in a specific competitive arena or context, and they may vary in levels, from downstream
(between firm and consumer: lower prices) to upstream at an intermediate level (the firm itself: skills) and at the
most upstream level there are dynamic advantages (source of an advantage is in itself an advantage: learning).
There is a distinction between a firm's advantages in domestic competition and its advantages in international
competition. What matters as an advantage varies between countries and competitive contexts. A firm expanding
internationally must deal with the advantages native companies enjoy in their home territory while also facing the
disadvantages of being a foreign player.
Distinctions:
Domestic strengths do not necessarily mean competitive advantages and success in a foreign country
The company that operates most successfully abroad may not be the strongest firm in the industry at home
For the same firm with international operations, the advantage that matters most in the home nation may
not be the same as the advantage that has most value in a foreign country
Successful international operation often requires transferring advantages from the home country to foreign
subsidiaries, with the transfer often occurring more from the home country to foreign subsidiaries than the other
, way around. Transferring advantages refers to the process of taking the strengths or competitive advantages that a
company has in its home country and attempting to use them in a foreign market. The aim is to maintain or leverage
these advantages in a different setting.
Advantages for a firm's operations in a foreign country can come from unique or firm-specific advantages at home,
assets that, while not superior to domestic competitors, can be advantageous in a less advanced country, and general
attributes or access to factors shared by the industry or nation. Complementary assets may need to be developed or
acquired in the target country to fully exploit the firm's advantages. Two reasons for non-transferability are:
Non-transferability can occur due to geographical specificity (monopoly position; reputation in a specific market;
relationships) or the tacit (non-codifiable) nature of knowledge, skills and technology (international immobility). Tacit
knowledge is challenging to transfer due to its complexity, experiential nature, collective knowledge, and continuous
evolution. (The difficulty of transferring tacit knowledge helps to explain why dynamic firms are more inclined to
transfer abroad the technology itself (end result) than the entire process of creating that technology).
The second reason non-transferability can occur is because the transfer of an advantage fails to take place if the
advantage or asset, even though mobile, loses its value in the target country. This can happen either because the
advantage is no longer relevant in a different context, or because it can easily be neutralized by local competitors.
Whether an advantage retains its value depends on the fit between conditions in the target country and the nature
of the advantage. A misfit happen when an advantage loses its value in the host environment. The transfer of
advantages may require adaptation, investment, and reconfiguration to maintain their value in the target country.
This adaptation is necessary for these advantages or innovations to be effective and successful in their new setting.
Own add-on: global (market) strategy may help the transferability of competitive (market) advantage (think for
example three managerial decisions below).
Global strategy (Tallman & Cuervo-Cazurra, 2021)
Global strategy involves the study of cross-border activities of economic agents or the strategies and governance of
firms engaged in such activity.
Why is it important? (maybe also because the contexts underneath change so managerial decisions need to be
reconsidered)
Global trends in technology, society, politics, economics, etc.
Variations in the sociocultural, politico- legal, techno-economic, and geographic characteristics of countries
(i.e., non-market elements!)
Global strategy merges insights from international business (IB) with corporate (competitive) strategy
Article
Discussion of global strategy around three significant managerial decisions:
Expansion
- Internationalization / taking the firm abroad (why to internationalize?)
- Country selection (country opportunities; incremental internalization process: psychic distance (i.e., the
factors that limit the cross-country transfer and use of knowledge), where close is chosen initially and
possibly more distant in the future) (success in host country depends on solving three sources of costs: 1
competing in host country 2 operating in host country 3 coordinating activities across countries. These three
costs create the liability of internationalization, that is, the additional costs of foreign operations in
comparison to home country ones. This concept is often confused with the liability of foreignness, or the cost
of doing business abroad, which refers to the disadvantages and costs, respectively, that subsidiaries of
foreign firms face in comparison to established domestic competitors in the host country)
- Entry mode selection (internalization modes; incremental internalization model; contextual differences etc.)
Management
- Structure (the usual sequence is serving foreign markets with the same structure used for the domestic
setting until the foreign business becomes too significant. This prompts the creation of an international
department that coordinates foreign activities and is staffed with managers and employees with
international experience.)
- Coordination (the coordination of activities across countries ensures the identification, transfer, and use of
best practices that support efficiency and innovation.)
- Control (control within the multinational ensures that subsidiary managers and operations behave as
expected to achieve efficiency)
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