GLOBAL STRATEGY Dr. Ruth V. Aguilera College of Business

1. Designing the Value Chain Across Borders: The Dispersion DecisionNational Diamonds and International Competition GLOBAL STRATEGY Dr. Ruth V. Aguilera College of Business University of Illinois at Champaign-Urbana March 2009

2. 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

3. What is Global Strategy?Ghoshal • Definition • Strategic Objectives • Sources of Competitive Advantage • Integration-Responsiveness Framework

4. Multinational Firms Guillen • Definition • Dispersion (assets or employees) • Coordination: • Kobrin’s index of global integration

5. Regional & Global Strategies in MNCs Rugman & Verbeke (2004) Thinking about how to measure how global a company is… How would you measure it?

6. 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

7. 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.

8. 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

9. 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%

10. Global MNCs (Rugman & Verbeke) • IBM • Sony • Royal Philips Electronics • Nokia • Intel • Canon • Coca-cola • Flextronics electronics • LVMH

11. What is the conclusion of this study?

12. To be continued by Flores (MBA2003) and Aguilera! Check the course website for details

13. Porter’s Five Forces to Industry Analysis SUBSTITUTE PRODUCTS SUPPLIERS COMPETITORS CUSTOMERS ENTRY BARRIERS

14. What Makes Entry Barriers a Strong Force? Few Economies of Scale Effects Few Technology Advantages Few Tariffs or Other Trade Barriers ENTRY BARRIERS Few Experience Curve Effects Low Capital Requirements Low Brand Loyalty Low Customer Loyalty

15. What Makes Substitute Products a Strong Force? Low Priced Substitutes SUBSTITUTE PRODUCTS Low Switching Costs High Quality Substitute Products

16. What Makes Suppliers a Strong Force? Suppliers have Good Reputations Few Suppliers SUPPLIERS High Switching Costs Few Substitute Products Ability to Integrate Forward

17. What Makes Customers a Strong Force? Customers Purchase in Large Quantities Customers are Large CUSTOMERS Low Switching Costs Customer Profits are Low Customers Purchase From Several Suppliers

18. What Makes Competitors a Strong Force? Competitors of Equal Size Many Competitors Low Switching Costs High Exit Barriers COMPETITORS Diversity Rivalry Entry of New Firms High “First Mover” Advantages

19. What about at the COUNTRY level?

21. Porter’sDiamond of National Advantage innovation Leaders Strong firms Intense rivalry Rapid innovation Firm Strategy, Structure, Rivalry CHANGE Factor Conditions Demand Conditions Market size Scale effects Sophisticated buyers Government support & demand Land & Capital Skilled labor Infrastructure Open markets Free trade flows Related Industries chance Government Supplier industries feed innovation into industry & place pressures on industry to innovate.

22. 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.

23. 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?

24. 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.

25. Applying the Framework

26. 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?

27. International Product Cycles(Vernon) • Traditional Product Cycle Hypothesis (PCH): • Products go through a “life cycle”: • Introduction • Growth • Maturation • Decline

28. 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. Examples: Consumer electronics Automobiles Wristwatches Medicinal herbs Life insurance Fast food

29. 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.

30. 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

31. 6. Sequence of expansion: Exporting arms-length from home Licensing a foreign producer Establishing a sales subsidiary Establishing a first plant Establishing subsequent plants Examples: International migration of production Swedish multinationals Japanese consumer electronics

32. 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

33. 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

34. Comparative vs. Competitive Advantage • Comparative Advantage – location-specific • Competitive Advantage – firm-specific • Value-added Questions: • Where should the value-added chain be broken across borders? • In what functional activities should a firm concentrate resources?

35. 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

36. 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”

37. Example: Panasonic/Radio Shack PANASONIC RADIO SHACK Components Assembly Marketing, Sales & Distribution Retailing

38. 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.

39. SWISS WATCH INDUSTRY

40. Where is Switzerland?

42. Comparative Advantage of Nations Gov’t: Competition Policy. Firm strategy, structure, and rivalry Gov’t: Education; financial regulation. Gov’t: product standards and regulations; trade protection. Factor conditions Demand conditions Related and supporting industries Gov’t: Industrial policies, infrastructure for business.

43. Technological Change & the Wristwatch

44. The Swatch story

48. Collections Irony Scuba Chrono Skin Original Beat

49. 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. Source: http://www.fhs.ch

50. Swiss Exports by Type of Watch in 2007 Source: http://www.fhs.ch