Global Strategies and the
Multinational 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
Patterns of Internationalization
Trading
Industries
Global
Industries
--aerospace
--military hardware
--diamond mining
--agriculture
--automobiles
--oil
--semiconductors
--consumer electronics
Domestic
Industries
Multidomestic
Industries
--railroads
--laundries/dry cleaning
--hairdressing
--milk
--retail banking
--hotels
--consulting
LOW
Foreign Direct Investment
HIGH
Implications of Internationalization
for 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 within an International
Context: The Basic 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 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 for
a 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
-.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 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.
Porter’s National Diamond Framework
FACTOR CONDITIONS
RELATING AND
SUPPORTING
INDUSTRIES
DEMAND
CONDITIONS
STRATEGY, STRUCTURE,
AND RIVALRY
1.
2.
3.
4.
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 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)
National cultures: “power difference” &
“uncertainty avoidance”
Japan
Korea
Israel
France
Mexico
Uncertainty
avoidance
USA
India
Denmark
Power distance
Malaysia
Philippines
National cultures: individualism/collectivism
Germany
UK
USA Aust.
Individualist
Denmark
France
Italy
Japan
India
Israel
Mexico
Philippines
Korea Venezuela
Malaysia
Guatemala
Collectivist
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 firmspecific 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
26.93
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.
Parts & components
7,750
Labor
700
Shipping cost
300
Inventory
20
TOTAL
8,770
Mexico
8,000
40
1,000
40
9,180
Location and the Value Chain
Comparative advantage in textiles and apparel by stage of processing
Country
Stage
of
Processing
Index of
Revealed
Comparative
Advantage
Country
Stage
Index of
of
Revealed
Processing Comparative
Advantage
Hong Kong
1
2
3
4
-0.96
-0.81
-0.41
+0.75
Japan
1
2
3
4
-0.36
+0.48
+0.48
-0.48
Italy
1
2
3
4
-0.54
+0.18
+0.14
+0.72
U.S.A.
1
2
3
4
+0.96
+0.64
+0.22
-0.73
Note:
1 = production of fiber (natural & synthetic)
3 = production of textiles
2 = production of spun yarn
4 = production of clothing
Determining the Optimal Location
of Value Chain 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 Modes of Overseas Market Entry
DIRECT INVESTMENT
TRANSACTIONS
Exporting
Spot
sales
Foreign
agent /
distributor
Longterm
contract
Low
Licensing
Licensing
patents &
other IP
Joint venture
Marketing &
Distribution
only
Wholly owned
subsidiary
Fully
integrated
Franchising
Resource commitment
Marketing&
Distribution
only
Fully
integrated
High
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?
General Motors’ Alliances with Competitors
SAAB
AVTOVAZ
FIAT
50%
owned
SUZUKI
GM
60%
owned
ISUZU
40% investment
IBC Vehicles
Ltd. (U.K.)
(Makes vans in UK)
TOYOTA
FUJI
50% owned
50%
owned
SAIC
New United Motor
Manufacturing
Inc. (NUMMI)
(Makes cars in US)
DAEWOO
Multinational Strategies:
Globalization vs. National 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
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
single mkt.
World as interrelated mkts.
global strategy
World as
separate
national mkts.
multidomestic strategy
Analyzing benefits/costs of a global strategy
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. crosssubsidization)
Forces for localization / national
differentiation
MARKET DRIVERS
--Different languages
--Different customer preferences
--Cultural differences
COST DRIVERS
--Transportation costs
--Transaction costs
--Economic & political risk
--Speed of response
GOVERNMENT DRIVERS
--Barriers to trade & inward inv.
--Regulations
Jet engines
Autos
Benefits
of
global
integration
Consumer
electronics
Telecom
equipment
Investment
banking
Steel
Cement
Online C2C auctions
Beer
Dry
cleaning
Auto
repair
Restaurant
chains
Retail
banking
Funeral
services
Benefits of national differentiation
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
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
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
global integration
Matsushit
a
Branded, Packaged
Consumer Goods
global integration
global integration
Consumer Electronics
NEC
Erickson
ITT
local responsiveness
- Requires both global
integration and national
differentiation.
- NEC only partially
successful
- ITT sold out
- Ericsson most
successful
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.
Designing the MNC: Key Learning
1.
2.
3.
4.
5.
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
Outback Steakhouse
• What are the principal features of Outback Steakhouse’s strategy in the
US? Why has the strategy been so successful?
• What are the key elements of the international expansion strategy
being proposed by Hugh Connerty?
• Assess the proposed strategy in relation to:
– Should Outback Steakhouse expand internationally, or would it be better
to expand through starting new restaurant chains within the US?
– Does the strategy outlined by Connerty make sense?
• If Outback is to expand internationally, advise Chris Sullivan on:
– The optimal rate of international expansion;
– The best mode of entry into foreign markets (e.g. direct management, JV,
franchise);
– Which country(ies) to enter first;
– Whether Connerty is the right person to head the International Division.
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Global Strategies and the Multinational Corporation