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Global Strategies and the Multinational Corporation. OUTLINE. Implications of International Competition for Industry Analysis Analyzing Competitive Advantage within an International Context Applying the Framework (1) International l ocation of production

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Global strategies and the multinational corporation

Global Strategies and the Multinational Corporation

OUTLINE

  • Implications of International Competition for Industry Analysis

  • Analyzing Competitive Advantage within an International Context

  • Applying the Framework

    (1) International location of production

    (2) Foreignmarket entry strategies

  • Multinational Strategies: Globalization versus National Differentiation

  • Strategy and Organization of the Multinational Corporation


Global strategies and the multinational corporation

Patterns of Internationalization

Trading Global

Industries Industries

--aerospace --automobiles

--military hardware --oil

--diamond mining --semiconductors

--agriculture --consumer electronics

Domestic Multidomestic

Industries Industries

--railroads

--laundries/dry cleaning --retail banking

--hairdressing --hotels

--milk --consulting

HIGH

International Trade

LO W

LOW

Foreign Direct Investment

HIGH


Implications of internationalization for industry analysis

Implications of Internationalizationfor Industry Analysis

INDUSTRY STRUCTURE

  • Lower entry barriers around national markets

  • Increased industry rivalry--- lower seller concentration

    --- greater diversity of competitors

  • Increased buyer power: wider choice for dealers & consumers

  • COMPETITION

  • Increased intensity of competition

  • PROFITABILITY

  • Other things remaining equal, internationalization tends to reduce an industry’s margins & rate of return on capital


Competitive advantage within an international context the basic framework

Competitive Advantage within an International Context: The Basic Framework

FIRM RESOURCES

& CAPABILITIES

-- Financial resources

-- Physical resources

-- Technology

-- Reputation

-- Functional capabilities

-- General management

capabilities

THE INDUSTRY ENVIRONMENT

Key Success Factors

COMPETITIVE ADVANTAGE

THE NATIONAL ENVIRONMENT

-- National resources and capabilities (raw materials;

national culture; human resources; transportation,

communication, legal infrastructure

-- Domestic market conditions

-- Government policies

-- Exchange rates

-- Related and supporting industries


National influences on competitiveness the theory of comparative advantage

National Influences on Competitiveness: The Theory of Comparative Advantage

A country has a relative efficiency advantage in those products that make intensive use of resources that are relatively abundant within the country. E.g.

  • Philippines relatively more efficient in the production of

    footwear, apparel, and assembled electronic products than inthe production of chemicals and automobiles.

  • U.S. is relatively more efficient in the production of

    semiconductors and pharmaceuticals than shoes or shirts.

When exchange rates are well-behaved, comparative

advantage becomes competitive advantage.


Revealed comparative advantage for a certain broad product categories

Revealed Comparative Advantage fora Certain Broad Product Categories

USA Canada W. GermanyItalyJapan

Food, drink & tobacco .31 .28-.36-.29-.85

Raw materials .43 .51-.55-.30-.88

Oil & refined products-.64 .34-.72-.74-.99

Chemicals .42-.16 .20-.06-.58

Machinery and trans- .12-.19 .34 .22 .80

portation equipment

Other manufacturers-.68-.07 .01 .29 .40

Note:Revealed comparative advantage for each product group

is measured as: (Exports less Imports)/ Domestic production


Porter s competitive advantage of nations

Porter’s Competitive Advantage of Nations

Extends and adapts traditional theory of comparative advantage to take account of three factors:

  • International competitive advantage is about companies not countries—the role of the national environment is providing a home base for the company.

  • Sustained competitive advantage depends upon dynamic factors-- innovation and the upgrading of resources and capabilities

  • The critical role of the national environment is its impact upon the dynamics of innovation and upgrading.


Porter s national diamond framework

Porter’s National Diamond Framework

FACTOR CONDITIONS

RELATING AND

SUPPORTING

INDUSTRIES

DEMAND

CONDITIONS

STRATEGY, STRUCTURE,

AND RIVALRY

  • FACTOR CONDITIONS—“Home grown” resources/capabilities more important

  • than natural endowments.

  • 2. RELATED AND SUPPORTING INDUSTRIES—Key role of “industry clusters”

  • 3. DEMAND CONDITIONS—Discerning domestic customers drive quality & innovation

  • 4. STRATEGY, STRUCTURE, RIVALRY. E.g. domestic rivalry drives upgrading.


Consistency between strategy and national conditions

Consistency Between Strategy and National Conditions

In globally-competitive industries, firm strategy needs to take account of national conditions:

  • U.S. textile manufacturers must compete on the basis of advanced process technologies and focus on high quality, less price-sensitive market segments

  • In the semiconduictor industry, CA-based firms concentrate mainly upon design of advanced chips, Malaysian firms concentrate upon fabrication of high volume, less technologically advanced items (e.g. DRAM chips)

  • Dispersion of value chain to exploit different national environments (e.g. Nike conducts R&D in US, components in Korea and Thailand, assembly in Indonesia, China, and India, marketing in Europe and North America)


Global strategies and the multinational corporation

National cultures: “power difference” & “uncertainty avoidance”

Japan

France

Korea

Israel

Uncertainty

avoidance

Mexico

USA

Malaysia

Philippines

India

Denmark

Power distance


Global strategies and the multinational corporation

National cultures: individualism/collectivism

Japan

Mexico

Germany

India

Philippines

Denmark

Israel

Venezuela

UK

Korea

France

USA

Aust.

Malaysia

Guatemala

Italy

Individualist

Collectivist


International location of production

International Location of Production

3 considerations:

  • National resource conditions: What are the major resources which the product requires? Where are these available at low cost?

  • Firm-specific advantages: to what extent is the company’s competitive advantage based upon firm-specific resources and capabilities, and are these transferable?

  • Tradability issues: Can the product be transported at economic cost? If not, or if trade restrictions exist, then production must be close to the market.


The role of labor costs

The Role of Labor Costs

Hourly Compensation for Production Workers, 1999 ($)

Germany26.93

Japan20.89

U.S.19.20France19.98U.K.16.56

Spain12.11

Korea 6.75Mexico 2.12

BUT, wages are only one element of costs:

Cost of Producing a Compact Automobile

U.S. MexicoParts & components7,7508,000Labor 700 40Shipping cost 3001,000Inventory 20 40TOTAL8,7709,180


Location and the value chain

Location and the Value Chain

Comparative advantage in textiles and apparel by stage of processing

Country Stage Index of Country Stage Index of

ofRevealed of Revealed

Processing Comparative ProcessingComparative

Advantage Advantage

Hong Kong1-0.962-0.813-0.414+0.75

Italy1-0.542+0.183+0.144+0.72

Japan1-0.362+0.483+0.484-0.48

U.S.A.1+0.962+0.643+0.224-0.73

Note:

1 = production of fiber (natural & synthetic)2 = production of spun yarn

3 = production of textiles4 = production of clothing


Global strategies and the multinational corporation

Determining the Optimal Location

of Value Chain Activities

Where is the optimal location

of X in terms of the cost and

availability of inputs?

The optimal location

of activity X considered

independently

What government incentives/ penalties

affect the location decision?

What internal

resources and capabilities does the firm

possess in particular locations?

WHERE TO LOCATE

ACTIVITY X?

What is the firm’s business strategy

(e.g. cost vs. differentiation advantage)?

The importance of links

between activity X and

other activities of the firm

How great are the coordination

benefits from co-locating activities?


Alternative modes of overseas market entry

Alternative Modes of Overseas Market Entry

TRANSACTIONS

DIRECT INVESTMENT

Exporting

Licensing

Joint venture

Wholly owned

subsidiary

Marketing & Distribution only

Fully

integrated

Spot

sales

Foreign

agent / distributor

Long-term contract

Licensing patents & other IP

Franchising

Marketing& Distribution only

Fully

integrated

Resource commitment

High

Low


Alliances and joint ventures management issues

Alliances and Joint Ventures: Management Issues

  • Benefits:

    --Combining resources and capabilities of different companies

    --Learning from one another

    --Reducing time-to-market for innovations

    --Risk sharing

  • Problems:

    --Management differences between the two partners. Conflict

    most likely where the partners are also competitors.

  • Benefits are seldom shared equally. Distribution of benefits determined by:

    • Strategic intent of the partners- which partner has the clearer vision of the purpose of the alliance?

    • Appropriability of the contribution-- which partner’s resources and capabilities can more easily be captured by the other?

    • Absorptive capacity of the company-- which partner is the more receptive learner?


Global strategies and the multinational corporation

General Motors’ Alliances with Competitors

SAAB

AVTOVAZ

20% owned (2000-5). Collaboration on technology and components

FIAT

50%

owned

SUZUKI

Russian JV to produce cars

10% owned. Co-production

GM

20% owned; joint production

FUJI

60%

owned

49%owned. Co-production

ISUZU

JV to produce cars in China

40% investment

IBC Vehicles

Ltd. (U.K.)

50%

owned

SAIC

(Makes vans in UK)

50.9% owned; technical &

production collaboration

New United Motor

Manufacturing

Inc. (NUMMI)

TOYOTA

50% owned

DAEWOO

(Makes cars in US)


Multinational strategies globalization v s national d ifferentiation

Multinational Strategies: Globalization vs. National Differentiation

The case for a global strategy:

  • National preferences in decline—world becoming a single,

    if segmented, market

  • Accessing global scale economies—in purchasing,

    manufacturing, product development, marketing.

  • Strategic strength from global leverage—ability to cross-

    subsidize a national subsidiary with cash flows from

    other national subsidiaries

  • Need to access market trends and technological

    developments in each of the world’s major economic

    centers- N. America, Europe, East Asia.

Ted

Levitt

“Globaliz-

-ation of

Markets” Thesis

Hamel &

Prahalad

Thesis

Kenichi Ohmae’s

“Triad Power”

Thesis


Global strategies and the multinational corporation

Globalization & Global Strategy —What are they?

  • GLOBALIZATION ?

  • --Something to do with increasing interdependence between countries.

  • GLOBAL STRATEGY

  • --At simplest level: Treating the world as a single market

  • E.g. Japanese companies during the 1970s & 1980s,

  • (YKK, Honda) standard products, developed &

  • manfactured within Japan; distributed & marketed

  • worldwide

  • --At more sophisticated level: Strategy that recognizes

  • and exploits linkages between countries (e.g. exploits

  • global scale, national resource differences, strategic

  • competition)

World as

separate national mkts.

World as

single mkt.

World as inter-

related mkts.

global strategy

multidomestic strategy


Global strategies and the multinational corporation

Analyzing benefits/costs of a global strategy

Forces for globalization

MARKET DRIVERS

--Common customer needs

--Global customers

--Cross-border network effects

COST DRIVERS

--Global scale economies

--Differences in national resource availability

--Learning

COMPETITIVE DRIVERS

--Potential for strategic competition (e.g. cross- subsidization)

Forces for localization / national differentiation

MARKET DRIVERS

--Different languages

--Different customer preferences

--Cultural differences

COST DRIVERS

--Transportation costs

--Transaction costs

--Economic & political risk

--Speed of response

GOVERNMENT DRIVERS

--Barriers to trade & inward inv.

--Regulations


Global strategies and the multinational corporation

Jet engines

Autos

Benefits

of

global

integration

Consumer

electronics

Telecom

equipment

Investment

banking

Steel

Restaurant

chains

Cement

Online C2C auctions

Retail

banking

Beer

Auto

repair

Dry

cleaning

Funeral

services

Benefits of national differentiation


Global strategies and the multinational corporation

Positioning industries in terms of benefits of globalization and national differentiation

Jet engines

Autos

Benefits

of

global

integration

Consumer

electronics

Telecom

equipment

Investment

banking

Retail

banking

Cement

Auto

repair

Funeral

services

Benefits of national differentiation


The evolution of multinational strategies and structures 1 1900 1939 era of the europeans

The Evolution of Multinational Strategies and Structures: (1) 1900-1939—Era of the Europeans

The European MNC as Decentralized Federation :

  • National subsidiaries self-sufficient and autonomous

  • Parent control through appointment of subsidiaries senior management

  • Organization and management systems reflect conditions of transport and communications at the time e.g. Unilever, Phillips, Courtaulds, Royal Dutch/Shell.


The evolution of multinational strategies and s tructures 2 1945 1970 u s dominance

The Evolution of MultinationalStrategies and Structures: (2) 1945-1970—U.S. Dominance

American MNC’s as Coordinated Federations :

  • National subsidiaries fairly autonomous

  • Dominant role as U.S. parent-- especially in developing new technology and products

  • Parent-subsidiary relations involved flows of technology and finance, and appointment of top management.e.g. Ford, GM, Coca Cola, IBM


The evolution of multinational strategies and s tructures 3 1970s and 1980s the japanese challenge

The Evolution of Multinational Strategies and Structures: (3) 1970s and 1980s—The Japanese Challenge

The Japanese MNC as Centralized Hub

  • Pursuit of global strategy from home base

  • Strategy, technology development, and manufacture concentrated at home

  • National subsidiaries primarily sales and distribution companies with limited autonomy. e.g. Toyota, NEC, Matsushita


Global strategies and the multinational corporation

Marketing Global Strategies and Situations to Industry Conditions: Firm Success in Different Industries

Consumer Electronics Branded, Packaged Telecommunications

Consumer Goods Equipment

- Global industry - Substantial national - Requires both global

- Matsushita the most differentiation, few global integration and national

successful scale economies differentiation.

-Philips the survivor - Kao has limited success- NEC only partially

- GE sold out outside Japan successful - Unilever and P&G most - ITT sold out successful- Ericsson most

successful

Matsushita

NEC

Kao

Erickson

global integration

Philips

global integration

global integration

P&G

Unilever

General Electric

ITT

local responsivenesslocal responsivenesslocal responsiveness


Reconciling global integration with national differentiation the transnational corporation

Reconciling Global Integration with National Differentiation: The Transnational Corporation

Tight complex controls and coordination and a shared strategic decision process.

Heavy flows of technology, finances, people, and materials between interdependent units.

The Transnational: an integrated network of distributed interdependent resources and capabilities.

  • Each national unit and source of ideas, skills and capabilities that can be harnessed to benefit whole corporation.

  • National units become world sources for particular products, components, and activities.

  • Corporate center involved in orchestrating collaboration through creating the right organizational context.


Global strategies and the multinational corporation

Designing the MNC: Key Learning

  • On what basis to organize—products, geography, functions?

    --Where is coordination most important?

    --How global is the industry? How global is the firm’s strategy?

  • If one dimension is dominant, how to coordination along the other dimensions?

    --Maintain single line accountability

    --Other dimensions of coordination can be “dotted line” relations

  • What’s the role of HQ?

    --Control function

    --Coordination function

    --Exploiting scale economies in centralized provision of services

  • The need for internal differentiation

    --By product/business

    --By function

    --By country

  • Formal & informal organization


Outback steakhouse

Outback Steakhouse

  • What are the principal features of Outback Steakhouse’s strategy in the US? Why has the strategy been so successful?

  • What are the key elements of the international expansion strategy being proposed by Hugh Connerty?

  • Assess the proposed strategy in relation to:

    • Should Outback Steakhouse expand internationally, or would it be better to expand through starting new restaurant chains within the US?

    • Does the strategy outlined by Connerty make sense?

  • If Outback is to expand internationally, advise Chris Sullivan on:

    • The optimal rate of international expansion;

    • The best mode of entry into foreign markets (e.g. direct management, JV, franchise);

    • Which country(ies) to enter first;

    • Whether Connerty is the right person to head the International Division.


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