Global Strategies and the Multinational Corporation

1
Global Strategies and the Multinational
Corporation
OUTLINE

• Implications of International Competition for
  Industry Analysis
• Analyzing Competitive Advantage within an
  International Context
• --Comparative advantage
• --Porters Competitive Advantage of Nations
• --Consistency between strategy and national
  conditions
• --Location of production
• Overseas Market Entry
• Alliances and Joint Ventures
• Multinational Strategies Globalization versus
  National Differentiation
• Strategy and Organization of the Multinational
  Corporation

2
The Internationalization of Industries
The Process of Internationalization
International Global Industries
Industries --aerospace --automobiles
--military hardware --oil --diamond mining
--semiconductors --agriculture --consumer
electronics Domestic Multinational/
Industries Multidomestic --railroads
Industries --laundries/dry cleaning
--retail banking --hairdressing --hotels
-milk --consulting
HIGH
International Trade
LO W
LOW
HIGH
Foreign Direct Investment
3
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. Mark
eting Steering U.S. distribution N.
America
4
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
  industrys margins rate of return on
  capital

5
Analyzing Competitive Advantage within an
International Context The Basic Framework
THE INDUSTRY ENVIRONMENT Key Success Factors
FIRM RESOURCES CAPABILITIES -- Financial
resources -- Physical resources -- Technology --
Reputation -- Functional capabilities -- General
management capabilities
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
6
National Influences on Competitiveness The
Theory of Comparative Advantage

• A country is relatively efficient in the
  production of those products which make intensive
  use of resources which 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 emerges as competitive
  advantage.

7
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

8
Porters Competitive Advantage of Nations

• Extends and modifies traditional theory of
  comparative advantage to take account of the
  following factors
• Competitive advantage is about companies --- the
  importance of the national environment is
  providing a home base for the company.
• Sustained competitive advantage depends upon
  dynamic factors-- innovation and the upgrading of
  firms resources and capabilities
• The critical role of the national environment is
  its influence upon the dynamics of innovation and
  upgrading.

9
Porters National Diamond Framework

• 1. FACTOR CONDITIONS. Home grown resources and
  capabilities more important than natural
  endowments.
• 2. RELATED AND SUPPORTING INDUSTRIES.
  Competitive advantage occurs in industry
  clusters (e.g. semiconductors-computers-software
  in the U.S.).
• 3. DEMAND CONDITIONS. Discerning domestic
  customers drive quality and innovation (e.g.
  Japanese camera industry)
• 4. STRATEGY, STRUCTURE, RIVALRY. E.g. domestic
  rivalry drives innovation and upgrading.

FACTOR CONDITIONS
RELATING AND SUPPORTING INDUSTRIES
DEMAND CONDITIONS
STRATEGY, STRUCTURE, AND RIVALRY
10
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
• Malaysian semiconductor manufacturers can be
  competitive in high volume, less technologically
  advanced items (e.g. memory chips)
• Dispersion of value chain to exploit different
  national environments (e.g. Nike RD in U.S.,
  components in Korea and Taiwan, assembly in
  China, Thailand and India, marketing in Europe
  and North America)

11
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
  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.

12
The Role of Labor Costs

• Hourly Compensation for Auto Workers, 1996 ()
• Germany 26.50
• Japan 19.90
• U.S. 17.40 France 16.90 U.K. 13
  .29
• Spain 11.92
• Korea 6.75 Mexico 3.85
• BUT, wages are only one element of costs
• Cost of Producing a Compact Automobile, 1992
• 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

13
Location and the Value Chain
Comparative advantage in textiles and apparel by
stage of processing
Country Stage of Index of Revealed
Country Stage of Index of Revealed
Processing Comp. Advant.
Processing Comp. Advant.
Hong Kong 1 -0.96 2 -0.81 3 -0.41 4 0.75 Italy
1 -0.54 2 0.18 3 0.14 4 0.72
Japan 1 -0.36 2 0.48 3 0.48 4 -0.48 U.S.A
. 1 0.96 2 0.64 3 0.22 4 -0.73
Note 1 production of fiber (natural
synthetic) 2 production of spun yarn 3
production of textiles 4 production of
clothing
14
International Location of Industrial Activities
within the Value Chain
Where is the optimal location of X in terms of
the cost and availability of inputs?
The optimal location of activity X
considered independently
What government incentives/ penalties affect the
location decision?
What internal resources and capabilities does the
firm possess in particular locations?
WHERE TO LOCATE ACTIVITY X?
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 benefits of linkages through
proximity?
15
Overseas Market Entry Alternative Modes

• TRANSACTIONS DIRECT INVESTMENT
• Exporting Exporting Exporting Licensing
  Franchising Joint
  Wholly owned
• Spot Long-term with foreign
  technology venture
  subsidiary
  
• trans- contract distributor/
  and Marketing
  Fully Marketing Fully
• actions agent trademarks
  distribution integral- sales
  integral-
• only ted only
  ted
• Key issues
• Is the firms 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?

16
Alliances and Joint Ventures Management Issues

• Benefits ability to combine different resources
  and capabilities of separate partners, ability to
  learn from one another.
• Problems management differences between the two
  partners. Conflict potential greatest where the
  partners are also competitors.
• Collaborating with competitors benefits seldom
  shared equally. Determinants of distribution of
  benefits
• 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?

17
Alliances and Joint VenturesU.S. Japanese
Auto Producers
Supplies finished small cars
GM
SUZUKI
3.5 investment
37.5 investment
ISUZU
Supplies finished small cars, small and medium
trucks, and parts
IBC Vehicles Limited (U.K.)
40 investment
60 investment
Makes vans in UK
New United Motor Manufacturing Inc. (NUMMI)
50 investment
50 investment
TOYOTA
Makes small cars in US
18
Alliances and Joint VenturesU.S. Japanese
Auto Producers, Cont.
Multipurpose vehicle joint development and
production
NISSAN
FORD
AUTO ALLIANCE International Inc.
50 investment
50 investment
MAZDA
Supplies parts to US Ford supplies cars and
parts to Ford in Asia and Pacific
24 investment exports Ford vehicles production
and consignment sales in US for Mazda
Diamond-Star Motors Corporation
92.5 invest.
Supplies cars
MITSUBISHI MOTORS
CHRYSLER
Supplies small cars, commercial vehicles, and
engines
15 invest.
Sale of Chry- sler vehicles
100 inv.
CHRYSLER JAPAN Sales Limited
U.S. HONDA
HONDA
Makes cars in US
19
Multinational Strategies Globalization versus
National differentiation

• The case for a global strategy
• National preferences in decline-- possible to
  view the
• world becoming a single, if segmented, market.
• Access to global scale economies--cost savings in
  purchasing, manufacturing, product development
  and marketing.
• Strategic strength from global positioning-- but
• locating in multiple national markets, by
  locating in multiple national markets, the
  global competitor can cross-subsidize
  to attack nationally focused rivals.
• Need to access market trends and technological
• developments in each of the worlds major
  economic
• centers- N. America, Europe, EastAsia.

Ted Levitt Global- -ization Thesis
Hamel Prahalad Thesis
Kenichi Ohmaes Triad Power Thesis
20
Strategy and Organization of the MNCThe
Evolution of Multinational Strategies and
Structures (1) Pre 2nd WW 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.

21
Strategy and Organization of the MNC The
Evolution of Multinational Strategies and
Structures (2) Post 2nd WW U.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

22
Strategy and Organization of the MNC 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

23
Matching Global Strategies and Structures to
Industry Conditions

• Degree of globalization depends upon the benefits
  of global
• integration versus the benefits of national
  differentiation.
• Key issue --How important are global scale
  economies?
• --How different are customer
  requirements between countries?

• Jet engines

Benefits of global integration

• Consumer
• electronics

• Telecommunications
• equipment

• Packaged
• grocery products

• Cement

Benefits of national differentiation

24
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 PG most - ITT sold out
  successful - Ericsson most
  successful

Matsushita
NEC
Kao
Erickson
Philips
global integration
global integration
global integration
PG
Unilever
General Electric
ITT
local responsiveness local
responsiveness local responsiveness
25
Reconciling Global Integration with National
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.