Global Strategies and the Global Strategies and the Multinational Corporation 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) Foreign market entry strategies Multinational Strategies: Globalization versus National Differentiation Strategy and Organization of the Multinational Corporation

Patterns of Internationalization Patterns of Internationalization

HIGH

Trading Industries
--aerospace --military hardware --diamond mining --agriculture

Global Industries
--automobiles --oil --semiconductors --consumer electronics

International Trade

Domestic Industries
--railroads --laundries/dry cleaning --hairdressing --milk

Multidomestic Industries
--retail banking --hotels --consulting

LO W

LOW

Foreign Direct Investment

HIGH

Implications of Internationalization Implications of Internationalization for Industry Analysis for 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 industrys margins & rate of return on capital

Competitive Advantage within an International Competitive Advantage within an International Context: The Basic Framework 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 National Influences on Competitiveness: The Theory of Competitiveness: The Theory of Comparative Advantage 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 in the 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 Revealed Comparative Advantage for a Certain Broad Product Categories a Certain Broad Product Categories
USA Food, drink & tobacco Raw materials Oil & refined products Chemicals Machinery and transportation equipment Other manufacturers -.68 -.07 .01 .29 .40 .31 .43 -.64 .42 .12 Canada .28 .51 .34 -.16 -.19 W. Germany -.36 -.55 -.72 .20 .34 Italy -.29 -.30 -.74 -.06 .22 Japan -.85 -.88 -.99 -.58 .80

Note:

Revealed comparative advantage for each product group is measured as: (Exports less Imports)/ Domestic production

Porters Competitive Advantage Porters Competitive Advantage of Nations of Nations

Extends and adapts traditional theory of comparative advantage to take account of three factors: International competitive advantage is about companies not countriesthe 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.

Porters National Diamond Framework Porters National Diamond Framework

FACTOR CONDITIONS

DEMAND CONDITIONS

RELATING AND SUPPORTING INDUSTRIES

STRATEGY, STRUCTURE, AND RIVALRY

. . .

FACTOR CONDITIONSHome grown resources/capabilities more important than natural endowments. RELATED AND SUPPORTING INDUSTRIESKey role of industry clusters DEMAND CONDITIONSDiscerning domestic customers drive quality & innovation STRATEGY, STRUCTURE, RIVALRY. E.g. domestic rivalry drives upgrading.

Consistency Between Strategy Consistency Between Strategy and National Conditions 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)

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

Japan Israel Korea

France Mexico

Uncertainty avoidance

USA Malaysia Philippines

India Denmark

Power distance

National cultures: individualism/collectivism National cultures: individualism/collectivism

Germany UK USA Aust. Denmark France Italy

Japan India Israel

Mexico Philippines Korea Venezuela Malaysia Guatemala

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 companys competitive advantage based upon firmspecific 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. Parts & components 7,750 Labor 700 Shipping cost 300 Inventory 20 TOTAL 8,770 Mexico 8,000 40 1,000 40 9,180

Location and the Value Chain Location and the Value Chain
Comparative advantage in textiles and apparel by stage of processing

Country

Stage of Processing

Index of Revealed Comparative Advantage

Country

Stage Index of of Revealed Processing Comparative Advantage

Hong Kong

1 2 3 4 1 2 3 4

-0.96 -0.81 -0.41 +0.75 -0.54 +0.18 +0.14 +0.72

Japan

1 2 3 4 1 2 3 4

-0.36 +0.48 +0.48 -0.48 +0.96 +0.64 +0.22 -0.73

Italy

U.S.A.

Note: 1 = production of fiber (natural & synthetic) 3 = production of textiles

2 = production of spun yarn 4 = production of clothing

Determining the Optimal Location Determining the Optimal Location of Value Chain Activities of Value Chain Activities
Where is the optimal location of X in terms of the cost and availability of inputs? What government incentives/ penalties affect the location decision?

The optimal location of activity X considered independently

WHERE TO LOCATE ACTIVITY X?

What internal resources and capabilities does the firm possess in particular locations? What is the firms 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
Spot sales Foreign agent / distributor

Licensing

Joint venture
Marketing & Distribution only Fully integrated

Wholly owned subsidiary

Longterm contract

Licensing patents & other IP

Franchising

Marketing& Distribution only

Fully integrated

Low

Resource commitment

High

Alliances and Joint Ventures: Alliances and Joint Ventures: Management Issues 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 partners resources and capabilities can more easily be captured by the other? Absorptive capacity of the company-- which partner is the more receptive learner?

General Motors Alliances with Competitors General Motors Alliances with Competitors
SAAB AVTOVAZ SUZUKI
Ru ssi an JV

to p

10%

ow n

r od uc e

50% owned
c ar s

gy 5) . 00- chnolo 0 e d (2 t wnetion on o 20%labora onents Col comp and

FIAT

ed.

C o-

pr od

ISUZU

49%

Co-p ow ned.

ro

n duction

uctio

GM
60% owned

20% owned; join

JV to p rod u ce

t production

FUJI

40% investment

IBC Vehicles Ltd. (U.K.)

(Makes vans in UK)

c ar s in

Ch i na

l& ca n ni tio ch r a te bo d; lla n e co ow on % cti . 9 du 50 pro

50% owned

SAIC

TOYOTA

50% owned

New United Motor Manufacturing Inc. (NUMMI)

(Makes cars in US)

DAEWOO

Multinational Strategies: Multinational Strategies: Globalization vs. National Differentiation Globalization vs. National Differentiation
The case for a global strategy: National preferences in declineworld becoming a single, if segmented, market Accessing global scale economiesin purchasing, manufacturing, product development, marketing. Strategic strength from global leverageability to crosssubsidize a national subsidiary with cash flows from other national subsidiaries Need to access market trends and technological developments in each of the worlds major economic centers- N. America, Europe, East Asia.
Ted Levitt Globaliz-ation of Markets Thesis

Hamel & Prahalad Thesis Kenichi Ohmaes Triad Power Thesis

Globalization & Global Strategy What are they? Globalization & Global Strategy What are they?
GLOBALIZATION ? GLOBALIZATION ?
--Something to do with increasing interdependence between --Something to do with increasing interdependence between countries. countries.

GLOBAL STRATEGY GLOBAL STRATEGY --At simplest level: Treating the world as a single market --At simplest level: Treating the world as a single market
E.g. Japanese companies during the 1970s & 1980s, E.g. Japanese companies during the 1970s & 1980s, (YKK, Honda) standard products, developed & (YKK, Honda) standard products, developed & manfactured within Japan; distributed & marketed manfactured within Japan; distributed & marketed worldwide worldwide

--At more sophisticated level: Strategy that recognizes --At more sophisticated level: Strategy that recognizes and exploits linkages between countries (e.g. exploits and exploits linkages between countries (e.g. exploits global scale, national resource differences, strategic global scale, national resource differences, strategic competition) competition)
World as single mkt. World as interrelated mkts. global strategy World as separate national mkts. multidomestic strategy

Analyzing benefits/costs of a global strategy Analyzing benefits/costs of a global strategy

Forces for globalization Forces for globalization MARKET DRIVERS MARKET DRIVERS --Common customer needs --Common customer needs --Global customers --Global customers --Cross-border network effects --Cross-border network effects COST DRIVERS COST DRIVERS --Global scale economies --Global scale economies --Differences in national --Differences in national resource availability resource availability --Learning --Learning COMPETITIVE DRIVERS COMPETITIVE DRIVERS --Potential for strategic --Potential for strategic competition (e.g. crosscompetition (e.g. crosssubsidization) subsidization)

Forces for localization //national Forces for localization national differentiation differentiation
MARKET DRIVERS MARKET DRIVERS --Different languages --Different languages --Different customer preferences --Different customer preferences --Cultural differences --Cultural differences COST DRIVERS COST DRIVERS --Transportation costs --Transportation costs --Transaction costs --Transaction costs --Economic & political risk --Economic & political risk --Speed of response --Speed of response GOVERNMENT DRIVERS GOVERNMENT DRIVERS --Barriers to trade & inward inv. --Barriers to trade & inward inv. --Regulations --Regulations

Jet engines Autos Benefits of global integration Consumer electronics Telecom equipment

Steel Cement
Dry cleaning

Investment banking Online C2C auctions Beer Auto repair Restaurant chains Retail banking Funeral services

Benefits of national differentiation

Positioning industries in terms of benefits of Positioning industries in terms of benefits of globalization and national differentiation globalization and national differentiation
Jet engines Autos Benefits of global integration Consumer electronics Telecom equipment

Investment banking Retail banking Funeral services Benefits of national differentiation

Cement Auto repair

The Evolution of Multinational Strategies and The Evolution of Multinational Strategies and Structures: (1) 1900-1939Era of the Europeans Structures: (1) 1900-1939Era 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 The Evolution of Multinational Strategies and Structures: (2) 1945-1970U.S. Dominance and Structures: (2) 1945-1970U.S. Dominance

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

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

Consumer Electronics
global integration

Branded, Packaged Consumer Goods

global integration
Ka o P&G Unilever

Telecommunications Equipment
NEC

global integration

Matsushit a Philips General Electric local responsiveness

Erickson

ITT

local responsiveness

local responsiveness

- Global industry

- Matsushita the most successful - Philips the survivor - GE sold out

- Substantial national differentiation, few global scale economies - Kao has limited success outside Japan - Unilever and P&G most successful

- Requires both global integration and national differentiation. - NEC only partially successful - ITT sold out - Ericsson most successful

Reconciling Global Integration with National Reconciling Global Integration with National Differentiation: The Transnational Corporation 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.

Designing the MNC: Key Learning Designing the MNC: Key Learning
1. On what basis to organizeproducts, geography, functions? --Where is coordination most important? --How global is the industry? How global is the firms 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 Whats 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

1.

1.

1.

1.

Outback Steakhouse
What are the principal features of Outback Steakhouses 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.