Global Global Strategies Strategies and and the the Multinational Multinational Corporation Corporation OUTLIN E • • • • • 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 LO W International Trade HIGH The The Internationalization Internationalization Process Process International Industries aerospace military hardware diamond mining agriculture Domestic Industries railroads laundries/dry cleaning hairdressing milk LOW Global Industries automobiles oil semiconductors consumer electronics Multinational/ Multidomestic Industries investment banking hotels consulting Foreign Direct Investment HIGH The The Automobile Automobile Goes Goes Global: Global: The The GM GM Pontiac Pontiac Le Le Mans Mans Design: Germany (by Opel) Brakes: France, U.S Sheetsteel: Japan 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: S Korea N America Implications Implications of of Internationalization Internationalization for for Industry IndustryAnalysis 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 CompetitiveAdvantage Advantage within withinan anInternational International Context: Context:The The Basic BasicFramework Framework FIRM RESOURCES & CAPABILITIES THE INDUSTRY ENVIRONMENT Financial resources Physical resources Technology Reputation Functional capabilities General management capabilities 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 National Influences Influences on on Competitiveness: Competitiveness: The The Theory Theory of of Comparative Comparative Advantage 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 Revealed Comparative ComparativeAdvantage Advantage for for aa Certain Certain Broad Broad Product Product Categories Categories USA Canada W Germany Italy Japan 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 -.68 -.07 01 29 40 portation equipment Other manufacturers Note: Revealed comparative advantage for each product group is measured as: (Exports less Imports)/ Domestic production Porter’s Porter’s Competitive Competitive Advantage Advantage of of Nations 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 Porter’s National National Diamond Diamond Framework Framework FACTOR CONDITIONS RELATING AND SUPPORTING INDUSTRIES DEMAND CONDITIONS STRATEGY, STRUCTURE, AND RIVALRY FACTOR CONDITIONS—“Home grown” resources/capabilities more important than natural endowments RELATED AND SUPPORTING INDUSTRIES—Key role of “industry clusters” DEMAND CONDITIONS—Discerning domestic customers drive quality & innovation STRATEGY, STRUCTURE, RIVALRY E.g domestic rivalry drives upgrading Consistency Consistency Between Between Strategy Strategy and and National National Conditions 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) Determining Determiningthe theOptimal OptimalLocation Location of ofValue ValueChain ChainActivities Activities The optimal location of activity X considered independently WHERE TO LOCATE ACTIVITY X? Where is the optimal location of X in terms of the cost and availability of inputs? What government incentives/ penalties affect the location decision? What internal resources and capabilities does the firm possess in particular locations? 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 Alternative Modes Modes of of Overseas Overseas Market Market Entry Entry TRANSACTIONS DIRECT INVESTMENT Exporting: Exporting: Exporting: Licensing Franchising Spot Long-term with foreign technology transcontract distributor/ actions agent trademarks only ted only and Joint venture Marketing & Fully distribution integral& sales Wholly owned subsidiary Marketing Fully integrated 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 Alliances and and Joint Joint Ventures: Ventures: Management Management Issues 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 Alliances and and Joint Joint Ventures: Ventures: Management Management Issues 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? General GeneralMotors’ Motors’Alliances Allianceswith with Competitors Competitors SAAB ow 0% ne d FIAT 50% ned SUZUKI Supplies on owned w n o o i smal rat and l cars 20% o b y la 10%ow Col hnolog nts ne tec mpone d GM co 20% 49%owned o wn ed; j FUJI arts /p s k oint c ISUZU 60% u r t / s r a prod small c uctio owned Supplies n Su IBC Vehicles pp 40% investment lie Limited (U.K.) ss m Makes vans in UK al lc ar s 50%owned New United Motor TOYOTA Manufacturing DAEWOO Inc (NUMMI) Makes cars in US Analyzing Analyzing benefits/costs benefits/costs of of aa global global strategy strategy Forces Forcesfor forglobalization globalization MARKET MARKETDRIVERS DRIVERS Similarity Similarityof ofneeds needs Appeal Appealof offoreign-ness foreign-ness Network Networkeffects effects COST COSTDRIVERS DRIVERS Forces Forcesfor forlocalization localization//national national differentiation differentiation MARKET MARKETDRIVERS DRIVERS Different Differentcustomer customerpreferences preferences Cultural Culturaldifferences differences Scale Scale Learning Learning National Nationaldifferences differencesin in resource resourcecosts costs COST COSTDRIVERS DRIVERS Transportation Transportationcosts costs Transaction Transactioncosts costs Economic Economic&&political politicalrisk risk(+ (+or or-?) -?) Speed of response Speed of response COMPETITIVE COMPETITIVEDRIVERS DRIVERS Strategic Strategiccompetition competition(X (X subsidization) subsidization) GOVERNMENT GOVERNMENTDRIVERS DRIVERS Barriers Barriersto totrade trade&&inward inwardinv inv Regulations Regulations Multinational Multinational Strategies: Strategies: Globalization Globalization vs vs National National Differentiation 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 crosssubsidize 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 TheEvolution Evolution of of Multinational MultinationalStrategies Strategiesand and Structures: Structures: (1) (1) 1900-1939—Era 1900-1939—Eraof ofthe theEuropeans 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 TheEvolution Evolutionof of Multinational Multinational Strategies Strategies and and Structures: Structures: (2) (2) 1945-1970—U.S 1945-1970—U.S Dominance 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 TheEvolution Evolution of of Multinational Multinational Strategies Strategiesand and Structures: Structures: (3) (3) 1970s 1970sand and 1980s—The 1980s—TheJapanese Japanese Challenge 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 Matching Global Global Strategies Strategies and and Structures Structures to to Industry Industry Conditions 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 Benefits of global integration •Consumer electronics • Telecommunications equipment • Packaged • Cement grocery products Benefits of national differentiation Marketing MarketingGlobal GlobalStrategies Strategiesand and Situations Situationsto to Industry Industry Conditions: Conditions:Firm FirmSuccess Successin inDifferent DifferentIndustries Industries Philips General Electric local responsiveness - Global industry - Matsushita the most successful - Philips the survivor - GE sold out Ka o P&G Unilever local responsiveness - Substantial national differentiation, few global scale economies - Kao has limited success outside Japan - Unilever and P&G most successful Telecommunications Equipment NEC global integration Matsushit a Branded, Packaged Consumer Goods global integration global integration Consumer Electronics Erickson ITT local responsiveness - Requires both global integration and national differentiation - NEC only partially successful - ITT sold out - Ericsson most successful 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 ReconcilingGlobal GlobalIntegration Integrationwith withNational National Differentiation: Differentiation: The The Transnational TransnationalCorporation 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 Designing the the MNC: MNC: Key Key Learning 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 ... automobiles oil semiconductors consumer electronics Multinational/ Multidomestic Industries investment banking hotels consulting Foreign Direct Investment HIGH The The Automobile Automobile... CONDITIONS—Discerning domestic customers drive quality & innovation STRATEGY, STRUCTURE, RIVALRY E.g domestic rivalry drives upgrading Consistency Consistency Between Between Strategy Strategy and and National... company which partner is the more receptive learner? General GeneralMotors’ Motors’Alliances Allianceswith with Competitors Competitors SAAB ow 0% ne d FIAT 50% ned SUZUKI Supplies on owned w n o