Global%20Strategies%20and%20the%20Multinational%20Corporation

1
Global Strategies and the 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

2
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
HIGH
International Trade
LO W
Foreign Direct Investment
LOW
HIGH
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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

4
Competitive Advantage within an International
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
5
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.
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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
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Porters 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 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.

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Porters National Diamond Framework
FACTOR CONDITIONS
RELATING AND SUPPORTING INDUSTRIES
DEMAND CONDITIONS
STRATEGY, STRUCTURE, AND RIVALRY

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

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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 RD in
  US, components in Korea and Thailand, assembly in
  Indonesia, China, and India, marketing in Europe
  and North America)

10
National cultures power difference
uncertainty avoidance
Japan
France
Korea
Israel
Uncertainty avoidance
Mexico
USA
Malaysia Philippines
India
Denmark
Power distance
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National cultures individualism/collectivism
Japan
Mexico
India
Germany
Philippines
Israel
Denmark
Venezuela
Korea
UK
France
USA
Aust.
Malaysia
Guatemala
Italy
Individualist
Collectivist
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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.

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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. Mexico Parts
  components 7,750 8,000 Labor 700
  40 Shipping cost 300 1,000 Inventory
  20 40 TOTAL 8,770 9,180

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Location and the Value Chain
Comparative advantage in textiles and apparel by
stage of processing
Country Stage Index of
Country Stage Index of
of Revealed of
Revealed Processing Comparative
Processing Comparative
Advantage Advantage
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
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Determining the Optimal Location of Value Chain
Activities
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 coordination benefits from
co-locating activities?
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Alternative Modes of Overseas Market Entry
TRANSACTIONS
DIRECT INVESTMENT
Exporting
Licensing
Joint venture
Wholly owned subsidiary
Marketing Distribution only
Fully integrated
Spot sales
Foreign agent / distributor
Franchising
Long-term contract
Licensing patents other IP
Marketing Distribution only
Fully integrated
Resource commitment
Low
High
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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
  partners resources and capabilities can more
  easily be captured by the other?
• Absorptive capacity of the company-- which
  partner is the more receptive learner?

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General Motors Alliances with Competitors
SAAB
FIAT
20 owned (2000-5). Collaboration on technology
and components
AVTOVAZ
50 owned
SUZUKI
Russian JV to produce cars
10 owned. Co-production
GM
20 owned joint production
FUJI
60 owned
49owned. Co-production
ISUZU
JV to produce cars in China
IBC Vehicles Ltd. (U.K.)
40 investment
50 owned
SAIC
(Makes vans in UK)
50.9 owned technical production collaboration
New United Motor Manufacturing Inc. (NUMMI)
TOYOTA
50 owned
DAEWOO
(Makes cars in US)
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Multinational Strategies 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 cross-
• subsidize 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
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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 as separate national mkts.
World as single mkt.
World as inter- related mkts.
global strategy
multidomestic strategy
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Analyzing benefits/costs of a global strategy
Forces for localization / national
differentiation MARKET DRIVERS --Different
languages --Different customer preferences --Cultu
ral differences COST DRIVERS --Transportation
costs --Transaction costs --Economic political
risk --Speed of response GOVERNMENT
DRIVERS --Barriers to trade inward
inv. --Regulations
Forces for globalization MARKET 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)
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Jet engines
Autos
Benefits of global integration
Consumer electronics
Telecom equipment
Investment banking
Steel
Restaurant chains
Cement
Online C2C auctions
Retail banking
Beer
Auto repair
Funeral services
Dry cleaning
Benefits of national differentiation

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Positioning industries in terms of benefits of
globalization and national differentiation
Jet engines
Autos
Benefits of global integration
Consumer electronics
Telecom equipment
Investment banking
Retail banking
Cement
Auto repair
Funeral services
Benefits of national differentiation

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The Evolution of Multinational Strategies and
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.

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The Evolution of Multinational Strategies 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

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The Evolution of Multinational Strategies and
Structures (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

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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
global integration
Philips
global integration
global integration
PG
Unilever
General Electric
ITT
local responsiveness local responsiveness loca
l responsiveness
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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.

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Designing the MNC Key Learning

• 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