International Business Chapter 10 Case Study 2 questions. Please read the article and then answer two questions highlighted in pink.
Opening Case: Making a Splash with Splash Corporation The tale of husband -and -wife Rolando and Rosalinda Hortaleza is well known in the Philippines. As the story goes, the couple launched a backyard business in 1985 to supplement their entry -level salaries as doctors at a government hospital. From this humble beginning, the Splash Group of Companies was born. Beyon d the Backyard Like many entrepreneurs, the Hortalezas sought big success. In 1987, they spotted an opportunity in hair spray, because “big hair” was the fad in the Philippines at that time. So the couple created a company that offered a high -quality, low -price alternative to imported hair spray. Tyrone Solee, “:ortaleza Success Story,” Millionaire Acts (blog), February 15, 2009, accessed Hune 3, 2010, http://www.millionaireacts.com/808/hortaleza -success -story.html. The gambit proved successful, and the Hortalezas earned their first million Philippine pesos in sales that yea r. Over the years, the company name changed several times, reflecting its growth and evolving strategy. What began as Hortaleza Cosmetics in 1986 became Splash Cosmetics in 1987, Splash Manufacturing Corporation in 1991, and finally Splash Corporation in 2 001.“Splash Corporation, Making Waves in the Global Beauty and Personal Care =ndustry,” Splash Corporation, accessed November 10, 2010, http://www.splash.com.ph/NewsAndEvents.aspx?ID=8 . Today, Splash Corporation sells more skin -care products than intern ational giants like Johnson and Unilever and local brands. With sales of 90 billion pesos (nearly $2 billion), Splash Corporation is the number one maker of skin -care products in the Philippines and is sixth in the international market, being the only Fili pino -owned company to hold a position among global companies and brands. Tyrone Solee, “:ortaleza Success Story,” Millionaire Acts (blog), February 15, 2009, accessed December 27, 2010, http://www.millionaireacts.com/808/hortaleza – success -story.html. In twenty years, the small business that the Hortalezas started has posted 5 billion Philippine pesos in sales, putting it among the country’s 300 largest corporations. Splash Corporation exports and markets Splash products to almost twenty countries around the world. =n =ndonesia, unlike the rest of the company’s market destinations, Splash entered into a joint venture with an Indonesian company, Parit Padang. By itself, Parit Padang is one of the largest pharmaceutical and healthcare distribution companies in Indonesia. The joint venture, called Splash Indonesia PT, began operating in 2000, importing Splash soap and skin -care products every month from Manila. The venture now pr oduces some of its products locally in Indonesia, employing a staff of 40 there in its factory. Splash Indonesia PT has even developed a new product for the local market, the SkinWhite Whitening Bath Soap. This product blends innovative ingredients and tec hnology from the Philippines with a fine Indonesian noodle soap, creating a whitening body soap of seemingly better quality than other local soaps. Splash recently launched the Splash Nutraceutical Corporation. The term nutraceutical was coined in the 19 90s by Dr. Stephen DeFelice, founder of the US -based Foundation for Innovation in Medicine. DeFelice defined the word as any substance that is a food or part of a food and provides medical or health benefits, including the prevention and treatment of disea se. =n essence, nutraceuticals are “a food (or part of a food) that provides medical or health benefits, including the prevention and/or treatment of a disease. “Vicki Brower, “Nutraceuticals: Poised for a :ealthy Slice of the :ealthcare Market?,” Nature B iotechnology 16, no. 8 (1998): 728 –731, quoted in Ekta K. Kalra, “Nutraceutical — Definition and =ntroduction,” AAPS PharmSci 5, no. 2 (2003), accessed November 9, 2010, http://www.aapsj .org/view.asp?art=ps050325#ref1. The nutraceuticals market is growing rapidly worldwide, especially in such developed countries where disposable incomes are higher and the challenges of diet -disease links, aging populations, and rising healthcare costs a re more pronounced. Nutraceuticals currently address health concerns like cardiovascular disease, osteoporosis, high blood pressure, diabetes, and gastrointestinal disorders. Worldwide sales of nutraceutical products have grown exponentially and are curren tly estimated at $80 billion. The establishment of Splash Nutraceuticals completes the company’s mission of becoming a total – wellness company. Fondly called “Doc” by Splash employees (while his wife is the “Doctora”), Dr. Rolando Hortaleza considers nutr aceuticals a natural extension of the company’s personal care line of products. :e defines the term wellness as “beauty inside and out —if you feel good about yourself, you then become more productive.” :e estimates the market potential of nutraceuticals to be in the billions of pesos. The Values, Mission, and Vision behind Splash Corporate Cause: We shall uplift the pride and economic well -being of the societies we serve. Mission: Splash is a world -class company that is committed to making accessible, i nnovative, high – quality, and value personal care products for everyone. Vision: We are a marketing company in the beauty, personal and healthcare industries where we shall be known for strong brand management of pioneering, high -quality and innovative pro ducts derived from extensive research to improve the well -being of our consumers. We shall do this through: Leading edge trade and consumer marketing systems. Pursuit of excellence in all other business systems. We shall be generous in sharing the rewar ds with our employees, business partners, stockholders and our community for the realization of our corporate cause. “Corporate Cause/Vision/Mission,” Splash Corporation, accessed November 9, 2010, http://www.splash.com.ph/our_company.aspx?id=2. Opening Case Exercises (AACSB: Ethical Reasoning, Multiculturalism, Reflective Thinking, Analytical Skills) Questions 1 & 2 1)Describe Splash Corporation’s corporate strategy and business strategy. 2)Use the strategy diamond tool (see Section 10.4 “The Five Elements of Strategy”) Listed Below to summarize Splash Corporation’s strategy. 10.4 The Five Elements of Strategy LEARNING OBJECTIVES Know the five elements of strategy through the strategy diamond. Understand the interrelationship among the elements in the strategy diamond. Recognize how the strategy diamond helps you develop and articulate international strategy. Good strategy formulation means refining the elements of the strategy. First of all, don’t confuse part of a strategy for a strategy itself. Being a low -cost provider or first mover in a market may be part of a strategy or the underlying logic of a particular strategy, but it’s not a complete strate gy. =t’s also important not to confuse your mission or vision with a strategy, even though the former are essential to the development and execution of good strategies. As noted earlier, a strategy is an integrated and externally oriented concept of how a firm will achieve its objectives —how it will compete against its rivals. A strategy consists of an integrated set of choices. These choices relate to five elements managers must consider when making decisions: (1) arenas, (2) differentiato rs, (3) vehicles, (4) staging and pacing, and (5) economic logic. This group of elements, which are central to the strategic management process outlined in Figure 10.6 “The Strategy Diamond”, makes up the strategy diamond. Most strategic plans focus on one or two such elements, often leaving large gaps in the overall strategy. Only when you have answers to questions about each of these five elements can you determine whether your strategy is an integrated whole; you’ll also have a better idea of the areas i n which your strategy needs to be revised or overhauled. As the strategy diamond figure shows, a good strategy considers the five key elements in order to arrive at specific answers to five questions: Arenas. Where will we be active? Differentiators. How will we get there? Vehicles. How will we win in the marketplace? Staging. What will be our speed and sequence of moves? Economic logic. How will we obtain our returns? Let’s take a closer look at each of these elements. Figure 10.6 The Strategy Diam ond Source: Adapted from Donald C. :ambrick and Hames W. Fredrickson, “Are You Sure You :ave a Strategy?,” Academy of Management Executive 19, no. 4 (2005): 51 –62. Arenas Arenas are areas in which a firm will be active. Decisions about a firm’s arena s may encompass its products, services, distribution channels, market segments, geographic areas, technologies, and even stages of the value -creation process. Unlike vision statements, which tend to be fairly general, the identification of arenas must be v ery specific. It clearly tells managers what the firm should and should not do. In addition, because firms can contract with outside parties for everything from employees to manufacturing services, the choice of arenas can be fairly narrowly defined for so me firms. For example, as the largest US bicycle distributor, Pacific Cycle owns the Schwinn, Mongoose, and GT brands and sells its bikes through big -box retail outlets and independent dealers, as well as through independent agents in foreign markets. In addition to these arena choices, Pacific Cycle has entirely outsourced the production of its products to Asian manufacturers. This is important in the sense that the strategy diamond also helps the firm be precise in regard to which activities it will eng age itself and which ones it will outsource and where. As you know, Asia happens to be a low -cost source of high – quality manufactured goods. In outsourcing shoes and apparel lines, Nike follows a similar strategy in terms of arenas. One key difference, how ever, is that Nike, through its Nike Town retail outlets, has also chosen a direct retail presence in addition to its use of traditional retail -distribution channels. The arenas facet of the strategy diamond helps you answer questions about business stra tegy —that is, it helps you determine which particular industry or geographic segments are the firm’s prime competitive arenas. The arenas facet also allows you to summarize corporate strategy — that is, it allows you to summarize which group of industry and geographic segments the firm competes in. Differentiators Differentiators are features and attributes of a company’s product or service that help it beat its competitors in the marketplace. Firms can be successful in the marketplace along a number of com mon dimensions, including image, customization, technical superiority, price, quality, and reliability. Japanese automakers Toyota and Honda have done very well by providing effective combinations of differentiators. They sell both inexpensive cars and hig h-end cars with high -quality features, and many consumers find the value that they provide hard to match. However, even though the best strategies often combine differentiators, history has shown that firms often perform poorly when they try to be all thin gs to all consumers. =t’s difficult to imagine, for instance, a single product that boasts both state -of- the -art technology and the lowest price on the market. Part of the problem is perceptual —consumers often associate low quality with low prices. Part of it is practical —leading -edge technologies cost money to develop and command higher prices because of their uniqueness or quality. There are two critical factors in selecting differentiators: Decisions must be made early. Key differentiators rarely materialize without significant up -front decisions, and without valuable differentiators firms tend to lose marketplace battles. Identifying and executing successful differentiators mean making tough choices —trade -offs. Managers who can’t make tough decisions about trade -offs often end up trying to satisfy too broad a spectrum of customer needs; as a result, they execute poorly on most dimensions. Audi is an example of a company that has aligned these two factors successfully. Several years ago, Audi management realized that its cars were perceived as low -quality but high -priced German automobiles — obviously a poor competitive position. The firm decided that it had to move one way or another — up market or down market. It had to do one of two things: (1) lower its costs so that its pricing was consistent with customers’ perceptions of product quality or (2) improve quality sufficiently to justify premium pricing. Given limited resources, the firm couldn’t go in both directions; that is, it couldn’t produce cars in both the low -price and high -quality strata. Audi made a decision to invest heavily in quality programs and in refining its marketing efforts. Ten years later, the quality of Audi cars has increased significantly, and customer perc eption has moved them much closer to the level of BMW and Mercedes -Benz. Audi has reaped the benefits of premium pricing and improved profitability, but the decisions behind the strategic up -market move entailed significant trade -offs. Differentiators ar e what drive potential customers to choose one firm’s offerings over those of competitors. The earlier and more consistent the firm is at driving these differentiators, the greater the likelihood that customers will recognize them. Vehicles Vehicles are the means for participating in targeted arenas. For instance, a firm that wants to go international can do so in different ways. In a recent drive to enter certain international markets (e.g., Argentina), Walmart has opened new stores and grown organically —meaning that it developed all the stores internally as opposed to acquiring stores already based in the countries it wanted to enter. Elsewhere (namely, in England and Germany), Walmart has purchased existing retailers and is in the process of transferrin g its unique way of doing business to the acquired companies. Likewise, a firm that requires a new technology could develop it through investments in research and development (R&D). Or it could opt to form an alliance with a competitor or a supplier that a lready possesses the technology, accelerating the integration of the missing piece into its set of resources and capabilities. Finally, it could simply buy another firm that owns the technology. In this case, the possible vehicles for entering a new arena include acquisitions, alliances, and organic investment and growth. Staging and Pacing Staging and pacing refer to the timing and speed, or pace, of strategic moves. Staging choices typically reflect available resources, including cash, human capital, an d knowledge. At what point, for example, should Walmart have added international markets to its strategy? Perhaps if the company had pursued global opportunities earlier, it would have been able to develop a better sense of foreign market conditions and ev en spread the cost of entry over a longer period of time. However, by delaying its international moves, the company was able to focus on dominating the US market, which is —after all — the largest retail market in the world. Despite mixed results overseas, Wa lmart is the undisputed leader in global retailing and has recently increased its emphasis on international markets as the basis for future growth. Staging decisions should be driven by several factors —resources, urgency, credibility, and the need for ea rly wins. Because few firms have the resources to do everything they’d like to do immediately, they usually have to match opportunities with available resources. In addition, not all opportunities to enter new arenas are permanent; some have only brief win dows. In such cases, early wins and the credibility of certain key stakeholders may be necessary to implement a strategy. Economic Logic Economic logic refers to how the firm will earn a profit —that is, how the firm will generate positive returns over an d above its cost of capital. Economic logic is the “fulcrum” for profit creation. Earning normal profits, of course, requires a firm to meet all fixed, variable, and financing costs. Achieving desired returns over the firm’s cost of capital is a tall order for any organization. =n analyzing a firm’s economic logic, think of both costs and revenues. Sometimes economic logic resides primarily on the cost side of the equation. Irish airline Ryanair, for example, can fly passengers for significantly lower costs per passenger mile than any major competitor. At other times, economic logic may rest on the firm’s ability to increase the customer’s willingness to pay premium prices for products (in other words, prices that significantly exceed the costs of providing enhanced products). When the five elements of strategy are aligned and mutually reinforcing, the firm is generally in a position to perform well. High performance levels, however, ultimately mean that a strategy is also being executed well. This leads to strategy implementation. The Five Elements and International Strategy As you learn to apply the strategy diamond to issues about international business, you will probably work through three related questions: Do we need to expand outside our home coun try? If so, where should we expand? Finally, how should we do that? Answering the first question requires an understanding of the international strategy’s economic logic and how the strategy is supported by the current differentiators. Answering the second question includes identifying specific regions and countries and the criteria that might be used to prioritize potential markets. Finally, the answer to the third question involves whether the organization should enter the new international market on its own, with a partner, or through acquisition. Considering the responses to these questions, you’ll then have a new strategy diamond that addresses the following: Arenas. The specific geographic markets and the channels and value -chain activities in those markets. Differentiators. How being international differentiates the organization from competitors, makes products or services more attractive to future customers, and strengthens the effectiveness of the differentiators in the chosen a renas. Vehicles. The preference to use organic investment and growth, alliances, or acquisitions as expansion vehicles. Staging and pacing. When you start expanding, how quickly you expand and the sequence of your expansion efforts. Economic logic. How you r international strategy contributes to the overall economic logic of your business and corporate strategies.