Strategy Formulation in a

Global Environment

Lecture on May 9, 2005

International Strategic
Management
Prof. Dr. Michael Dowling

Bartlett & Goshal

Global Integration

Goal of global Transnational

efficiency
Corporations

Goal of
multinational
flexibility

Local Responsiveness
 Global Efficiency

) Ratio of value of outputs to inputs

– increase value of outputs or
– lower value of inputs or
– both

Multinational Flexibility

) Abilityto scan broad environment and

detect changes that present new risks
and opportunities
) Side bets to cover contingencies
 Worldwide learning

) Internalizationof international diversity

creates potential for enhanced learning
) Organization must exploit potential!
– Develop mechanisms and organizations
worldwide to sense customer needs and
market opportunities

Types

) Multinational
) International
) Global
) Transnational
 Multinational Strategy
) Focus on national differences
) Focus on revenues rather than cost
) Differentiation of products in response to
customer preferences, industry
characteristics, and government regulation
) Local resources to meet local needs
) Local autonomy
) Inability to exploit knowledge from other
national units
– E.g. Unilever, Philips, Nestle

International Strategy

) Development of home innovations to

develop competitive positions abroad
) Often involves attempt to transfer
products, processes, or strategies from
developed home market to less
developed ones
) Weakness in both efficiency and
flexibility
) E.g. in US - Kraft, Pfizer, P&G, GE
 Global Strategy

) Emphasis on efficiency through global

economies of scale
) Compromises on both flexibility and
learning
) High transport costs and exchange rate
risks
) Reduced learning through centralized
R&D
– E.g. Japan - Toyota, Canon, Komatsu,
Matushita

Transnational Strategy

) Both efficiency and flexibility important

) Costs and revenues must be managed
simultaneously
) Innovation can be found in many parts
of organization
) Capabilities and resources must be in
part centralized and in part
decentralized
) Complex!
 Examples of a Transnational - Asea
Brown Boveri

) 1987 merger of Asea AB of Sweden

and BBC Brown Boveri Ltd of
Switzerland
) world leader in power generation and
transmission equipment
) also supplier of process automation,
robotics, locomotives, pollution control
equipment

) local
organization - 1300 separate
companies
– customer strategies
– regional results
– day to day management
– relationships with local government
) Business Areas - 65 global
– world-wide strategy and results
– R&D and product development
– purchasing coordination
– transfer of know-how
– acquisitions and divestments

Hout, Porter & Rudden

) Change industry by
– Exploiting economies of scale through
global volume
– preempting competitor positions through
large investments in innovation
– managing interdependently to achieve
synergies
) No reliance on “world product”
 Hamel & Prahalad

) Best defense is a good offense!

– Use cash flow at home to attack home
markets of foreign competitors
‹ good example - Goodyear´s counterattack on
Michelin in Europe
‹ bad example - RCA with TVs in the US

Yip - Developing a Total

Global Strategy
Develop core
Core Business Strategy
business
strategy

Internationalize
the strategy

Globalize the Country Country Country Country Country

strategy A B C D E
 Framework of Global Strategy Forces

Position and resources

of business and Benefits/
parent company costs of
Appropriate setting for global
strategy levers global
• Major market participation strategy
• Product standardization
• Activity concentration
Industry globalization • Uniform marketing
drivers • Integrated competitive moves
• Market factors
• Cost factors
• Environmental factors
• Competitive factors
Organization´s ability to
implement a global strategy

Market Participation

) Multidomestic
– stand alone potential
for profits
– patterns of
investments accrue
from local advantage
) Global
– potential for global
benefits
– e.g. home market of
competitor
– pattern developed for
global advantage
 Product Offering

) Multidomestic ) Global
– tailored to local – standardized core
needs product with
minimum on local
adaptation

Location of Value Added Activities

) Multidomestic ) Global
– value chain – value chain activities
reproduced in each located in country
country with low cost for that
activity
 Marketing Approach

) Multidomestic ) Global
– tailored to each – uniform approach
country

Competitive Moves

) Multidomestic ) Global
– made specific to a – integrated across
country countries
 Main Benefits of a Global Strategy

) Cost reduction
– economies of scale
– lower factor costs
– flexibility to seek lowest cost
– enhance bargaining power to reduce input
costs
) Improved quality
– fewer products mean usually better quality
control
– e.g. Toyota vs.. GM

) Enhanced Customer Preference

– better to establish brand name - e.g. Coca
Cola
) Increased competitive leverage
– more points for counterattack of
competitors
 Downside of Global Strategy

) Significantmanagement costs for

coordination, staff, etc.
) Product standardization may not satisfy
all customers!
) Increase currency risks by activity
concentration
) Integrated competition may lead to
losses in particular countries

Ideal Strategy!

) Find a balance between level of

strategy globalization and globalization
potential of the industry
) Balance also depends on limitations of
organization such as structure, culture,
people, etc.
 Globalization Potential of Industry versus
Globalization Strategy

High National strategic

Business C
disadvantage
Globalization of strategy

Business D

Balanced global and

national strategic
advantage

Business B

Global strategic
Business A
Low disadvantage

Low Globalization potential of industry High

Strategy Implementation in a
Global Environment
 Early Research

) John Stopford, late 1960s

– 187 largest US-based MNCs
– number of products sold internationally (diversity)
– importance of international sales
) World wide companies adopt different
organizational structures at different phases
of development.
) End result often a “matrix” structure

Stopford and Well`s International Structural Stages Model

Worldwide
Product
Foreign Product Diversity

Division Global Matrix

(or „Grid“)

Alternate Paths
of Development

Area
International Division
Division

Foreign Sales as a Percentage of Total Sales

 Bartlett and Goshal:
Adapting to Administrative Heritage

) Everycompany is influenced by its

development path
– history
– management culture

Organizational Configuration Models

(a) Decentralized Federation -
common to European multinational strategy
Mainly
Financial
Flows
(capital out;
dividends back)

Loose, Simple Controls;

(strategic decisions
decentralized)
(b) Coordinated Federation -
common to US international strategy

Mainly
Knowledge
Flows
(technology products,
processes, systems)

Formal System Controls;

(planning, budgeting,
replicating parent company
administrative system)

(c) Centralized Hub

- common to Japanese global strategy

Mainly Flows
of Goods

Tight, Simple Controls;

(key strategic decisions
made centrally)
 Solution: Building Organizational
Capabilities

) Formal structure not enough!

) MNC must develop multiple
organizational capabilities:
– administrative systems
– communication systems
– interpersonal relationships

Integrated Network Model -

the Transnational Solution

Distributed, Specialized
Resources and Capabilities

Large Flows of
Componets, Products,
Resorces, People,
and Information among
Interdependent Units
Complex Process of Coordination
and Cooperation in an Environment
of Shared Decision Making
 The “Biological Model” of the
Transnational
) Anatomy
– line structures for formal relationships,
but task forces and committees for
additional decision making forums
) Physiology
– Information flows, including informal
relationships
– Importance of meetings, trips,
committee assignments

) Psychology
– corporate values and beliefs
– vision and mission
– behavior and public actions of senior
management
– personnel policies, practices, systems
 Problems with Matrix structures

) Positive Theory
– managers report both to area and
functional supervisors
– multiple channels of communication
) Negative practice
– raised level of disagreement and conflict
– dual reporting led to confusion and conflict
– cultural differences heightened problems

International Cooperative Strategy

 Typical Day for McKinsey Consultant –
David Ernst
) Gas pumped into his car is a product of an
alliance between Royal/Dutch Shell and
Texaco
) Credit card to pay is co-branded with Shell
and Mastercard
) Starbucks Coffee sold in airport through a JV
with Marriott Corp.
) Airline he uses part of a group of several
international carriers.
– „For most companies the basis of competition has
shifted to groups of companies competing against
groups of companies.“
 Other Examples

) Oracle software has 15-16.000

alliances!
) IBM has announced $30 billion in
alliances since May 1999 including Dell
and Cisco Systems
) Average large company has 30
alliances

Types

) Networks Loose
) Licenses
) Contracts, e.g. for R&D
) Joint Ventures
) Consortia
) Minority Investments Tight
 Reasons

) risksharing
) scale economies
) access to markets
) access to technology
) converging markets

Why alliances can make more sense than

acquisitions (Business Week 10/99)
) Flexibility and informality promote efficiencies
) Access to new markets and technologies
) Ability to create and disband projects easily
) Multiple parties share risks and expenses
) Partners can retail their independent brand
identification
) Working with partners possessing multiple skills can
create major synergies
) Rivals can often work harmoniously together
) Alliances can take multifarious forms, from simple
R&D deals to huge projects
) Ventures can accommodate dozens of participants
) Antitrust laws can shelter cooperative R&D activities
 Goals

) Product goals
– Cost reductions
– Product range additions
) Knowledge goals
– transfer of capabilities

Risks - Giving away your future?

) skills
) jobs
) technology
 Cost

) Complexity
) Uncertainty
) Difficultyin merging cultures
) Failure rate
– Andersen Consulting:
‹ “61% of corporate partnerships are either
outright failures or seen as ´limping´along.”

Management of Alliances
(Bartlett and Goshal)

) Choice of Partner
) Managing Boundaries
) Structure of Alliance
) Managing Knowledge Flows
Guideline for strong and lasting Alliances

) Compatibilityand Responsibility
) Equal contributions
) Strong management
) Separate Culture

Management of Alliances
(Gomes-Casseres - HBS)
 Global Logic of Alliances
Kenichi Ohmae
) Globalization makes them essential
– restatement of Triad power
) Dispersion of Technology
– no one company can be expert at everything
) Need to spread fixed costs
) Danger of building internally through equity
) Focus on ROS not ROA

Collborate with Competitors and Win

Hamel, Doz, Prahlad

) Based on research on 15 alliances

– four European-US
– two intra-European
– two European-Japan
– seven US-Japan
) In part in response to HBR article by
Robert Reich, “Joint Ventures with
Japan Give Away our Future”
 Findings

) Allianceswith Asian companies not

always one sided
) Collaboration is a form of competition
) Harmony not the most important
measure of success
) Cooperation has limits

) Japanese firms
– make major effort to learn from partners
) Western firms
– enter alliances to avoid investments,
reduce risks
– many “alliances” just outsourcing
– e.g. Honda-Rover: Rover used Honda
technology to avoid investments in design
for new cars.
Conditions under which partners both can
profit

) Strategic goals converge even as

competitive goals diverge: e.g. Siecor
) Size and market power of partners is
modest compared to industry leaders
) Each partner believes it can learn from
other but still protect proprietary skills

Secure Defenses Important

) Defenses depends on type of skills

– danger of tranfer is greater when
‹ easilytransported (in drawings, etc)
‹ workers can leave with knowledge
‹ independent of cultural context

– Asian companies contribute complex

process skills (hard to tranfer), Western
companies often contribute technology
(easier to transfer).
) Written agreements important
– limited in scope
‹ e.g. single technology rather than a whole group of
technologies
‹ time limit

– specific performance requirements

– careful control of gatekeepers of information (informal
relationships)
) too much collegiality is dangerous!
‹ Western managers and engineers too open.
‹ Japanese managers more closed.
– “We don´t feel any need to reveal what we know. It is not an
issue of pride for us. We are glad to sit and listen. If we´re
patient we usually learn what we want to know.”
) physical separation sometimes important

Enhance learning capabilities

) Western companies must become more receptive

to learning from partners
– Japanese executive
‹ “Our Western partners approach us with the attitude of
teachers. We are quite happy with this, because we have the
attitudes of students”
) Top management must be committed to learning
) Lower level employees must be trained to be
observant and learn.
Proceed with Care -
but Proceed