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D esigning the Value Chain Across Borders: The Dispersion Decision National Diamonds and International Competition. GLOBAL STRATEGY Dr. Ruth V. Aguilera College of Business University of Illinois at Champaign-Urbana March 2009. Session I: Topics to Cover. What is Global Strategy?

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Designing the Value Chain Across Borders: The Dispersion DecisionNational Diamonds and International Competition


Dr. Ruth V. Aguilera

College of Business

University of Illinois at Champaign-Urbana

March 2009

session i topics to cover
Session I: Topics to Cover
  • What is Global Strategy?
    • Global vs. Multi-domestic Firms
  • Multinational Firms
    • Types of Multinational Firms
    • Global Integration
  • Globalization or Regionalization?
  • Porter’s International Competitive Advantage
  • Vernon Product Life Cycle
what is global strategy ghoshal
What is Global Strategy?Ghoshal
  • Definition
    • Strategic Objectives
    • Sources of Competitive Advantage
  • Integration-Responsiveness Framework
multinational firms guillen
Multinational Firms Guillen
  • Definition
  • Dispersion (assets or employees)
  • Coordination:
    • Kobrin’s index of global integration
regional global strategies in mncs

Regional & Global Strategies in MNCs

Rugman & Verbeke (2004)

Thinking about how to measure how global a company is…

How would you measure it?

regional global strategies
Regional & Global Strategies
  • From WWII economic power has become more disperse
    • While in 1967, U.S. held 50.4% of the world stock of FDI, by 1990 it only participated with 25.4%.
    • Formation of a TRIAD: North America, EU & Asia.
  • The Fortune 500 (2001)
    • International sales
types of mncs
Types of MNCs
  • Home region oriented: At least 50% of their sales in their home region of the triad.
  • Bi-regional: At least 20% of their sales in each of two regions.
  • Host region oriented: More than 50% of their sales in a triad market other than their home region.
  • Global: at least 20% of their sales in all three triad regions, but less than 50% in any one region.
Particularly Rugman & Verbeke (2004) noted:
    • The majority of the world’s largest 500 companies are MNCs
    • Out of the 365 Co. within those 500, only 9 are considered “GLOBAL” from a sale profile viewpoint.
    • 320 of those companies have 80% of their sales in their home region of the TRIAD
percentages of types of mncs percentage intra regional sales
Percentages of Types of MNCs & Percentage intra-regional sales
  • Home region oriented (320 firms): 80.3%
  • Bi-regional (25 firms): 42%
  • Host region oriented (11 firms): 30.9%
  • Global (9 firms): 38.3%
global mncs rugman verbeke
Global MNCs (Rugman & Verbeke)
  • IBM
  • Sony
  • Royal Philips Electronics
  • Nokia
  • Intel
  • Canon
  • Coca-cola
  • Flextronics electronics
  • LVMH
to be continued by flores mba2003 and aguilera

To be continued by Flores (MBA2003) and Aguilera!

Check the course website for details

porter s five forces to industry analysis
Porter’s Five Forces to Industry Analysis








what makes entry barriers a strong force
What Makes Entry Barriers a Strong Force?

Few Economies of

Scale Effects

Few Technology


Few Tariffs or Other

Trade Barriers



Few Experience

Curve Effects

Low Capital Requirements

Low Brand Loyalty

Low Customer Loyalty

what makes substitute products a strong force
What Makes Substitute Products a Strong Force?

Low Priced Substitutes



Low Switching Costs

High Quality Substitute Products

what makes suppliers a strong force
What Makes Suppliers a Strong Force?

Suppliers have

Good Reputations

Few Suppliers


High Switching Costs

Few Substitute Products

Ability to Integrate


what makes customers a strong force
What Makes Customers a Strong Force?

Customers Purchase

in Large Quantities

Customers are Large


Low Switching Costs

Customer Profits are Low

Customers Purchase

From Several Suppliers

what makes competitors a strong force
What Makes Competitors a Strong Force?

Competitors of Equal Size

Many Competitors

Low Switching Costs

High Exit Barriers


Diversity Rivalry

Entry of New Firms

High “First Mover” Advantages

porter s diamond of national advantage
Porter’sDiamond of National Advantage



Strong firms Intense rivalry Rapid innovation










Market size Scale effects Sophisticated buyers Government support & demand

Land & Capital Skilled labor Infrastructure Open markets Free trade flows





Supplier industries feed innovation into industry & place pressures on industry to innovate.

determinants of national competitive advantage
Determinants of National Competitive Advantage
  • Factor Conditions: the nation’s position in factors of production such as skilled labor or infrastructure, necessary to compete in a given industry.
  • Demand Conditions: the nature of home-marketdemand for the industry’s product or service.
  • Related and Supporting Industries: the presence or absence in the nation of supplier industries and other related industries that are internationally competitive.
  • Firm Strategy, Structure and Rivalry: the conditions in the nation governing how companies are created, organized, and managed, as well as the nature of domestic rivalry.
points to remember
Points to Remember
  • Factor conditions change and are malleable.
  • Rivalry generally good, although perhaps not among your suppliers.
  • Pay attention to global demand.
  • Complacency breeds failure.
  • Next discontinuity?
internet impact
Internet Impact
  • Product design, features, and use:
    • Data-carrying watches (w/ Sega).
    • Watches with email, internet connection, cash chip, telephone? (w/ HP).
  • Marketing: Need to redesign colors.
  • Services: Internet time (1,000 beats/day). 51 million visits to its website.
sources of firm advantages that stem from national advantages
Sources of Firm Advantages that stem from National Advantages
  • Efficiency:
    • Combination & recombination of K, L, and technology to lower costs.
    • Experience/learning curve effect from operating in one location.
    • Problem: Adverse changes in relative prices.
  • Specialization:
    • Become a “category-killer.”
    • Benefit from networks of long-term relations with specialized suppliers.
  • Flexibility:
    • Long-term connections with related & support industries.
    • Problem: Difficulty in shifting production in the short run?
  • Innovation:
    • Advantage of co-locating R&D and manufacturing.
    • Problem: Sophistication/universality of home-country demand?
international product cycles vernon
International Product Cycles(Vernon)
  • Traditional Product Cycle Hypothesis (PCH):
  • Products go through a “life cycle”:
    • Introduction
    • Growth
    • Maturation
    • Decline
2. Entrepreneurs and managers:

Introduce new products when they see a market opportunity

They tend to be “myopic” and/or “rationally bounded”

Market opportunities are first seen in the home market of the firm.


Consumer electronics



Medicinal herbs

Life insurance

Fast food

3. Introduction and Growth stages:

Product is unstandardized: different designs, inputs & processes.

Hard to determine optimum location, production scale or sale price.

High product differentiation across firms.

Individual firms do not differentiate.

Low price-elasticity of demand

4. Maturation & Decline

Standarization within differentiated kinds.

Normalization of designs, inputs & processes.

Less uncertainty as to optimum location, production sale or sale price.

Individual firms differentiate through brands, advertising, and variations.

Increased price-elasticity of demand.

5 implications of the theory
5. Implications of the theory
  • Product or service innovations reflect features of the home country
  • Home country features are taken into account when locating activities abroad
  • International expansion ought to be careful, cautious, incremental, one-step-at-a-time process
  • Countries most similar to the home country are approached first
6. Sequence of expansion:

Exporting arms-length from home

Licensing a foreign producer

Establishing a sales subsidiary

Establishing a first plant

Establishing subsequent plants


International migration of production

Swedish multinationals

Japanese consumer electronics

b the new product cycle theory
B. The New Product Cycle Theory:
  • Big changes since the mid-1970s
      • Globalization & Trade Blocs.
      • Firms and managers are now less “myopic” (learning, experience, training, telecommunications, the “global” village).
      • Many firms are now global in reach
      • Cross-national lags in new product introduction have been shortened.
  • Vernon’s qualifications in 1979
      • “Global scanner” companies =>PCH is useless to them.
      • “Multidomestic” companies => PCH still applies.
      • Small exporting companies => PCH still applies
3 other limitations
3. Other Limitations

For some products, shifts in location do not usually take place The innovating country maintains its export ability through the product’s life cycle

  • Products w/ extremely short life cycles
  • Luxury products for which cost is of little concern to the consumer
  • Products for which the company can use a differentiation strategy
  • Products that require specialized technical labor to evolve into the next generation
comparative vs competitive advantage
Comparative vs. Competitive Advantage
  • Comparative Advantage – location-specific
  • Competitive Advantage – firm-specific
  • Value-added


  • Where should the value-added chain be broken across borders?
  • In what functional activities should a firm concentrate resources?
comparative vs competitive
Comparative vs. Competitive

1. Each stage’s contribution to the : VALUE ADDED CHAIN.

  • Highly competitive industries => low cost oriented strategies (total cost) – American steel industry
  • Low competitive industries =>Revenue oriented strategies (product differentiation; market value), -- ex. home computers
2 value added analysis
2. Value-Added Analysis
  • “Strategy is not jus the selection of profitable product markets; it is also the attempt to create a competitive advantage by investing in the link that generates the product attribute most strongly desired by consumers and which corresponds to the firm’s distinctive competence relative to its competitors.”
  • “An application of the value-added chain in this context rests on the identification of the characteristics of consumer demand and the strategic positioning of firms in terms of their control over the critical links that supply these characteristics”
example panasonic radio shack
Example: Panasonic/Radio Shack





Marketing, Sales & Distribution


the value added chain of comparative advantage
The Value-Added Chain of Comparative Advantage

3. International environment. Differences in:

  • Institutional & cultural barriers
  • Endowments, costs, productivities

4. Distortions:

  • Transportation costs
  • Tariffs & other trade regulations
  • Competitive advantage if firms (scale, scope, and learning)

5. International strategy is a/ either comparative or competitive strategy, or both.

comparative advantage of nations
Comparative Advantage of Nations

Gov’t: Competition Policy.

Firm strategy,

structure, and


Gov’t: Education;



Gov’t: product standards and

regulations; trade protection.





Related and



Gov’t: Industrial policies, infrastructure for business.








main exporting countries in 2007
Main Exporting Countries in 2007

* Includes re-exports. Note that Seiko and Citizen manufacture a large proportion of their inexpensive watches in Hong Kong and China.


swatch operating margins
Swatch: Operating Margins

Upper segment: 24%.

Middle segment: 13%.

Lower segment: 5%.

Movements: 4%.



Launched in 2003.

Weight (grams) Approx. 113 (including battery). Continuous talk time (minutes) Approx. 120. Continuous stand-by time (hours) Approx. 200. Data transmission speed 64 kbps/ 32 kbps.

citizen s virt
Citizen’s VIRT

Bluetooth-enabled watch.

The watch communicates with the owner’s cell phone.

When a call comes in, the number and name of the caller is shown on the watch.

Calls can be put on hold or forwarded from the watch.

It alerts the owner if he o she leaves the cell phone behind.

Announced in June 2006.

citizen s virt1
Citizen’s VIRT

Bluetooth-enabled watch.

The watch communicates with the owner’s cell phone.

When a call comes in, the number and name of the caller is shown on the watch.

Calls can be put on hold or forwarded from the watch.

It alerts the owner if he o she leaves the cell phone behind.

Announced in June 2006.

points to remember1
Points to Remember

Location advantages are contingent on the technology employed.

Location advantages can turn into disadvantages very quickly.

Importance of paying attention to global demand shifts.

Complacency breeds failure.

Next technological discontinuity?

It will affect low-cost producers (i.e. China) to a greater extent than higher-end & differentiated producers (Switzerland, France).