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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
slide2

The Internationalization Process

International Global

Industries Industries

--aerospace --automobiles

--military hardware --oil

--diamond mining --semiconductors

--agriculture --consumer electronics

Domestic Multinational/

Industries Multidomestic

--railroads Industries

--laundries/dry cleaning --investment banking

--hairdressing --hotels

--milk --consulting

HIGH

International Trade

LO W

LOW

Foreign Direct Investment

HIGH

the automobile goes global the gm pontiac le mans
The Automobile Goes Global: The GM Pontiac Le Mans

Design: Germany (by Opel) Brakes: France, U.S.

Sheetsteel: Japan S. Korea

Stamping of body parts: S. Korea Tires: S. Korea

Engines: 1.6 liter S. Korea Windshield: S. Korea

2.0 liter Australia Battery: S. Korea

Fuel injection: U.S. Wiring harness: S. Korea

Fuel pump: U.S. Radio: Singapore

Transmission: Canada & U.S. Assembly: S. Korea

Rear axle: U.S. Marketing &

Steering: U.S. distribution: N. America

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. Germany ItalyJapan

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)
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 ($)

Germany 26.93

Japan 20.89

U.S. 19.20 France 19.98 U.K. 16.56

Spain 12.11

Korea 6.75 Mexico 2.12

BUT, wages are only one element of costs:

Cost of Producing a Compact Automobile

U.S. Mexico Parts & components 7,750 8,000 Labor 700 40 Shipping cost 300 1,000 Inventory 20 40 TOTAL 8,770 9,180

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

of Revealed of Revealed

Processing Comparative ProcessingComparative

Advantage Advantage

Hong Kong 1 -0.96 2 -0.81 3 -0.41 4 +0.75

Italy 1 -0.54 2 +0.18 3 +0.14 4 +0.72

Japan 1 -0.36 2 +0.48 3 +0.48 4 -0.48

U.S.A. 1 +0.96 2 +0.64 3 +0.22 4 -0.73

Note:

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

3 = production of textiles 4 = production of clothing

slide14

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: Exporting: Exporting: Licensing Franchising Joint Wholly owned

Spot Long-term with foreign technology venture subsidiary

trans- contract distributor/ and Marketing & Fully Marketing Fully

actions agent trademarks distribution integral- & sales integrated

only ted only

  • Key issues:
  • Is the firm’s competitive advantages based upon firm-specific or
  • country-specific resources and capabilities?
  • Is the product tradable and what are the barriers to/ costs of trade?
  • Does the firm possess the full range of resources and capabilities
  • needed to serve the overseas market?
  • Can the firm directly appropriate the returns to its resources?
  • What transaction costs are involved?
alliances and joint ventures management issues
Alliances and Joint Ventures: Management Issues
  • Benefits:

--Access to the resources and capabilities of another company

--Learning from one another

--Reducing time-to-market for innovations

--Risk sharing

  • Problems:

--Disagreements & conflict between the partners. Disputes

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?
alliances and joint ventures management issues17
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?
slide18

General Motors’ Alliances with Competitors

SAAB

FIAT

50%

owned

SUZUKI

20%owned

Supplies small cars

Collaboration on

technology and

components

10%owned

GM

49%owned

FUJI

ISUZU

60%

owned

20%owned; joint production

Supplies small cars/ trucks/parts

IBC Vehicles

Limited (U.K.)

40% investment

50%

owned

Supplies small cars

Makes vans in UK

New United Motor

Manufacturing

Inc. (NUMMI)

50%owned

TOYOTA

DAEWOO

Makes cars in US

slide19

Analyzing benefits/costs of a global strategy

Forces for globalization

MARKET DRIVERS

--Similarity of needs

--Appeal of foreign-ness

--Network effects

COST DRIVERS

--Scale

--Learning

--National differences in resource costs

COMPETITIVE DRIVERS

--Strategic competition (X subsidization)

Forces for localization / national differentiation

MARKET DRIVERS

--Different customer preferences

--Cultural differences

COST DRIVERS

--Transportation costs

--Transaction costs

--Economic & political risk (+ or -?)

--Speed of response

GOVERNMENT DRIVERS

--Barriers to trade & inward inv.

--Regulations

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

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
matching global strategies and structures to industry conditions
Matching Global Strategies and Structures to Industry Conditions

Degree of globalization depends upon the benefits of global

integration versus the benefits of national differentiation.

Key issues: --How important are global scale economies?

--How different are customer requirements

between countries?

  • Jet engines
  • Telecommunications
  • equipment

Benefits

of

global

integration

  • Consumer
  • electronics
  • Packaged
  • grocery products
  • Cement

Benefits of national differentiation

slide25
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 responsiveness local responsiveness local responsiveness

slide26

Figure 14.8. 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.

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.
slide28

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