Global Strategies and the Multinational Corporation

• 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

OUTLINE

Patterns of Internationalization

Trading Global Industries Industries --aerospace --automobiles --military hardware --oil --diamond mining --semiconductors --agriculture --consumer electronics

Domestic Multidomestic Industries Industries --railroads --laundries/dry cleaning --retail banking --hairdressing --hotels --milk --consulting

Inte

rnat

iona

l Tr

ade

Foreign Direct Investment

LO W

LOW

HIG

H

HIGH

Implications of Internationalizationfor 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 industry’s margins & rate of return on capital

COMPETITIVE ADVANTAGE

THE INDUSTRY ENVIRONMENTKey Success Factors

FIRM RESOURCES & CAPABILITIES

-- Financial resources-- Physical resources-- Technology-- Reputation-- Functional capabilities-- General management capabilities

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

Competitive Advantage within an International Context: The Basic Framework

National Influences on Competitiveness: The Theory of

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 fora Certain Broad Product 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

portation equipment

Other manufacturers -.68 -.07 .01 .29 .40

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

Porter’s Competitive Advantage of 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.

FACTOR CONDITIONS

DEMAND CONDITIONS

RELATING ANDSUPPORTINGINDUSTRIES

STRATEGY, STRUCTURE,AND RIVALRY

Porter’s National Diamond Framework

1. FACTOR CONDITIONS—“Home grown” resources/capabilities more important than natural endowments.2. RELATED AND SUPPORTING INDUSTRIES—Key role of “industry clusters”3. DEMAND CONDITIONS—Discerning domestic customers drive quality & innovation4. STRATEGY, STRUCTURE, RIVALRY. E.g. domestic rivalry drives upgrading.

Consistency Between Strategy 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)

Power distance

Uncertainty avoidance

KoreaIsrael

USA

France

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

Denmark

Mexico

MalaysiaPhilippines

India

Japan

Individualist

KoreaIsraelUSA France

National cultures: individualism/collectivism

Denmark

MexicoPhilippinesIndia

Japan

Collectivist

UKAust.

Germany

Malaysia GuatemalaVenezuela

Italy

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 company’s competitive advantage based upon firm-specific 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

Hourly Compensation for Production Workers, 1999 ($)Germany 26.93Japan 20.89U.S. 19.20 France 19.98 U.K. 16.56Spain 12.11Korea 6.75 Mexico 2.12

BUT, wages are only one element of costs:Cost of Producing a Compact Automobile U.S. Mexico Parts & components 7,750 8,000 Labor 700 40 Shipping cost 300 1,000 Inventory 20 40 TOTAL 8,770 9,180

Location and the Value Chain

Comparative advantage in textiles and apparel by stage of processing

Hong Kong 1 -0.962 -0.813 -0.414 +0.75

Italy 1 -0.542 +0.183 +0.144 +0.72

Japan 1 -0.362 +0.483 +0.484 -0.48

U.S.A. 1 +0.962 +0.643 +0.224 -0.73

Country Stage Index of Country Stage Index of of Revealed of Revealed Processing Comparative Processing Comparative

Advantage Advantage

Note:1 = production of fiber (natural & synthetic) 2 = production of spun yarn3 = production of textiles 4 = production of clothing

The optimal locationof activity X considered

independently

WHERE TO LOCATEACTIVITY X?

The importance of linksbetween activity X and

other activities of the firm

Where is the optimal locationof X in terms of the cost and

availability of inputs?

What government incentives/ penalties affect the location decision?

What internalresources and capabilities does the firm

possess in particular locations?

What is the firm’s business strategy (e.g. cost vs. differentiation advantage)?

How great are the coordinationbenefits from co-locating activities?

Determining the Optimal Location of Value Chain Activities

Resource commitment

TRANSACTIONS DIRECT INVESTMENT

Spot sales

Exporting

Foreignagent /

distributor

Licensing

Franchising

Joint venture

Marketing & Distribution

only

Long-term

contract

Licensing patents & other IP

Fullyintegrated

Wholly ownedsubsidiary

Marketing& Distribution

only

Fullyintegrated

Low High

Alternative Modes of Overseas Market Entry

Alliances and Joint Ventures: 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 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?

SUZUKI

ISUZU

TOYOTA

IBC VehiclesLtd. (U.K.)

GM

New United MotorManufacturingInc. (NUMMI)

10% owned. Co-production

49%owned. Co-production

40% investment

60%owned

50% owned

50%owned

(Makes vans in UK)

(Makes cars in US)

SAAB

50%owned

FIAT20% owned (2000-5).

Collaboration on technology

and components

FUJI20% owned; joint production

DAEWOO

50.9% owned; technical &

production collaboration

AVTOVAZ Russian JV to produce cars

SAIC

JV to produce cars in China

General Motors’ Alliances with Competitors

Multinational Strategies: Globalization vs. National Differentiation

• 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 cross- subsidize 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 economiccenters- N. America, Europe, East Asia.

Hamel &PrahaladThesis

Kenichi Ohmae’s

“Triad Power”Thesis

Ted Levitt

“Globaliz--ation ofMarkets”

Thesis

The case for a global strategy:

Globalization & Global Strategy —What are they?

• GLOBALIZATION ? --Something to do with increasing interdependence between countries.

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

--At more sophisticated level: Strategy that recognizes and exploits linkages between countries (e.g. exploits global scale, national resource differences, strategic competition)

World assingle mkt.

World asseparate national mkts.

global strategy

World as inter-related mkts.

multidomestic strategy

Analyzing benefits/costs of a global strategy

Forces for localization / national differentiation

MARKET DRIVERS--Different languages--Different customer preferences--Cultural differencesCOST DRIVERS--Transportation costs--Transaction costs --Economic & political risk --Speed of responseGOVERNMENT DRIVERS--Barriers to trade & inward inv.--Regulations

Forces for globalizationMARKET DRIVERS--Common customer needs --Global customers--Cross-border network effects

COST DRIVERS--Global scale economies--Differences in national

resource availability --Learning

COMPETITIVE DRIVERS--Potential for strategic

competition (e.g. cross- subsidization)

Benefits of national differentiation

Benefitsof

global integration

Cement

Telecomequipment

Jet engines

Consumerelectronics

Autos

Funeralservices

Retailbanking

Investment banking

Autorepair

Restaurant chains

Steel

Online C2C auctions

BeerDry

cleaning

Benefits of national differentiation

Benefitsof

global integration

Cement

Telecomequipment

Jet engines

Consumerelectronics

Autos

Funeralservices

Retailbanking

Investment banking

Autorepair

Positioning industries in terms of benefits of globalization and national differentiation

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

(3) 1970s and 1980s—The 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 Conditions: Firm Success in Different Industries

Consumer Electronics Branded, Packaged Telecommunications Consumer Goods Equipment

- Global industry - Substantial national - Requires both global - Matsushita the most differentiation, few global integration and national successful scale economies differentiation. - Philips the survivor - Kao has limited success - NEC only partially - GE sold out outside Japan successful - Unilever and P&G

most - ITT sold out successful - Ericsson most successful

local responsiveness local responsiveness local responsiveness

glob

al

inte

grat

ion

glob

al in

tegr

atio

n

glob

al

inte

grat

ion

Matsushita

Philips

General Electric

Kao

P&GUnilever

NEC

Erickson

ITT

Reconciling Global Integration with National Differentiation: The Transnational Corporation

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.

Tight complex controls and

coordination and a shared strategic

decision process.

Heavy flows of technology,

finances, people, and materials

between interdependent

units.

1. 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? 2. If one dimension is dominant, how to coordination along the

other dimensions? --Maintain single line accountability--Other dimensions of coordination can be “dotted line”

relations3. What’s the role of HQ?

--Control function--Coordination function--Exploiting scale economies in centralized provision of

services4. The need for internal differentiation

--By product/business --By function --By country

5. Formal & informal organization

Designing the MNC: Key Learning