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Global Strategies and the Multinational CorporationGlobal 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
The Internationalization Process The Internationalization Process
International Global Industries Industries --aerospace --automobiles --military hardware --oil --diamond mining --semiconductors --agriculture --consumer electronics
Domestic Multinational/ Industries Multidomestic --railroads Industries --laundries/dry cleaning --investment banking --hairdressing --hotels --milk --consulting
Inte
rnat
ion
al T
rad
e
Foreign Direct Investment
LO
W
LOW
HIG
H
HIGH
The Automobile Goes Global: The GM Pontiac Le Mans
The Automobile Goes Global: The GM Pontiac Le Mans
Design: Germany (by Opel) Brakes: France, U.S.
Sheetsteel: Japan S. Korea
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: N. America
Implications of Internationalizationfor Industry Analysis
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 ENVIRONMENT
Key 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
Competitive Advantage within an International Context: The Basic Framework
National Influences on Competitiveness: The Theory of
Comparative Advantage
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
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
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 FrameworkPorter’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
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)
International Location of ProductionInternational 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 CostsThe Role of Labor Costs
Hourly Compensation for Production Workers, 1999 ($)Germany 26.93Japan 20.89U.S. 19.20
France 19.98U.K. 16.56
Spain 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 8,000Labor 700
40 Shipping cost 3001,000 Inventory
20 40 TOTAL8,770 9,180
Location and the Value ChainLocation 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
Determining the Optimal Location of Value Chain Activities
TRANSACTIONS DIRECT INVESTMENTExporting: Exporting: Exporting: Licensing Franchising Joint Wholly ownedSpot Long-term with foreign technology venture subsidiary trans- contract distributor/ and Marketing & Fully Marketing Fully actions agent trademarks distribution integral- & sales integrated
only ted only
Alternative Modes of Overseas Market EntryAlternative Modes of Overseas Market Entry
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 and Joint Ventures: Management Issues
Alliances and Joint Ventures: Management 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 and Joint Ventures: Management Issues
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 VehiclesLimited (U.K.)
GM
New United MotorManufacturingInc. (NUMMI)
Supplies small cars10%owned
49%owned
Supplies small cars/ trucks/parts
40% investment
60%owned
50%owned50
%ow
ned
Makes vans in UK
Makes cars in US
SAAB
50%owned
FIAT
20%owned
Collaboration on
technology and
components
FUJI20%owned; joint production
DAEWOO
Supplies small cars
General Motors’ Alliances with Competitors General Motors’ Alliances with Competitors
Analyzing benefits/costs of a global strategy
Analyzing benefits/costs of a global strategy
Forces for globalization
MARKET DRIVERS--Similarity of needs--Appeal of foreign-ness--Network effects
COST DRIVERS--Scale--Learning --National differences in
resource costs
COMPETITIVE DRIVERS--Strategic competition (X
subsidization)
Forces for globalization
MARKET DRIVERS--Similarity of needs--Appeal of foreign-ness--Network effects
COST DRIVERS--Scale--Learning --National differences in
resource costs
COMPETITIVE DRIVERS--Strategic competition (X
subsidization)
Forces for localization / national differentiation
MARKET DRIVERS--Different customer preferences--Cultural differences
COST DRIVERS--Transportation costs--Transaction costs --Economic & political risk (+ or -?)--Speed of response
GOVERNMENT DRIVERS--Barriers to trade & inward inv.--Regulations
Forces for localization / national differentiation
MARKET DRIVERS--Different customer preferences--Cultural differences
COST DRIVERS--Transportation costs--Transaction costs --Economic & political risk (+ or -?)--Speed of response
GOVERNMENT DRIVERS--Barriers to trade & inward inv.--Regulations
Multinational Strategies: Globalization vs. National Differentiation
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:
The Evolution of Multinational Strategies and Structures: (1) 1900-1939—Era of the Europeans
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
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 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
Matching Global Strategies and Structures to Industry Conditions
Matching Global Strategies and Structures to Industry Conditions
Degree of globalization depends upon the benefits of globalintegration versus the benefits of national differentiation.
Key issues: --How important are global scale economies? --How different are customer requirements
between countries?
Benefits of national differentiation
Benefitsof
global integration
• Cement
• Telecommunicationsequipment
• Packaged grocery products
• Jet engines
•Consumer electronics
Marketing Global Strategies and Situations to Industry Conditions: Firm Success in Different Industries
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
glo
ba
l in
teg
rati
on
glo
ba
l in
teg
rati
on
glo
ba
l in
teg
rati
on
Matsushita
Philips
General Electric
Kao
P&GUnilever
NEC
Erickson
ITT
Tight complex controls and coordination and a
shared strategic decision process.
Heavy flows of technology, finances, people, and materials
between interdependent units.
Figure 14.8. The Transnational Corporation
Reconciling Global Integration with National Differentiation: The Transnational Corporation
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 LearningDesigning the MNC: Key Learning