Chapter 5 Strategic Management in the Multinational Company

Chapter 5 Strategic Management in the Multinational Company: Content and Formulation Copyright© 2007 Thomson Learning All rights

Learning Objectives • Define differentiation and low cost • Understand how low-cost and differentiation strategists make money • Recall multinational examples of use of generic strategies • Understand competitive advantage and value chain • Understand offensive and defensive strategies Copyright© 2007 South-Western/Thomson Learning All rights

Learning Objectives • Understand basics of multinational diversification • Understand how traditional strategy formulation techniques apply to the multinational company • Realize both the convergence and divergence in strategies Copyright© 2007 South-Western/Thomson Learning All rights

Basic Strategy for the Multinational Company • Strategy: the central, comprehensive, integrated and externally oriented set of choices of how a company will achieve its objectives Copyright© 2007 South-Western/Thomson Learning All rights

Basic Strategy for the Multinational Company • Important strategic areas - Arenas: a company needs to be able to decide which businesses it wants to be in - Vehicles: a properly stated strategy also needs to include the vehicles a company will use to create a presence in specific markets or products - Differentiators/Economic Logic: a company also needs to decide what ways it will use to win over customers - Sequencing: a company also needs to decide in South-Western/Thomson Learning All rights what sequence and at. Copyright© what 2007 pace major decisions

Basic Strategy for the Multinational Company • Multinational companies use many of the same strategies as domestic companies Copyright© 2007 South-Western/Thomson Learning All rights

Competitive Advantage and Multinational Applications of Generic Strategies • Generic strategies: basic ways to achieve and sustain competitive advantage • Competitive advantage: when a company can outmatch its rivals in attracting and maintaining its targeted customers Copyright© 2007 South-Western/Thomson Learning All rights

Competitive Advantage and Multinational Applications of Generic Strategies (cont. ) • Differentiation strategy: providing superior value to customers • Ex. : BMW competing in the world market by providing high-quality and performance sports cars • Low-cost strategy: producing at a lower cost than competitors • Ex. : Korean semiconductor firms Copyright© 2007 South-Western/Thomson Learning All rights

How Do Low-Cost and Differentiation Firms Make Money? • Differentiation • Customers often pay a higher price for extra value • Low-cost • Additional profits come from cost savings Copyright© 2007 South-Western/Thomson Learning All rights

Exhibit 5. 1: Costs, Prices, and Profits for Differentiation and Low. Cost Strategies Copyright© 2007 South-Western/Thomson Learning All rights

Focus Strategy • Strategies can be further subdivided on the basis of competitive scope • Competitive scope: how broadly a firm targets its products or services • - Narrow competitive scope for certain buyers or geographic areas • - Broad competitive scope when a large range of buyers are targeted Copyright© 2007 South-Western/Thomson Learning All rights

Exhibit 5. 2: Porter’s Generic Strategies Copyright© 2007 South-Western/Thomson Learning All rights

Competitive Advantage and the Value Chain • A firm can gain competitive advantage by finding differentiation or low costs in its activities • Value chain is a convenient way of looking at the firm’s activities • Value chain: all the activities that a firm used to design, produce, market, deliver, and support its product Copyright© 2007 South-Western/Thomson Learning All rights

Exhibit 5. 3: The Value Chain Copyright© 2007 South-Western/Thomson Learning All rights

Components of the Value Chain • Primary activities: physical actions of creating, selling, and after-sale service of products • Upstream: early activities in the value chain • - R&D • - Dealing with suppliers Copyright© 2007 South-Western/Thomson Learning All rights

Components of the Value Chain (cont. ) • Downstream: later value chain activities • Sales and dealing with distribution channels • Support activities: systems for human resources management, organizational design and control, and technology Copyright© 2007 South-Western/Thomson Learning All rights

Outsourcing • Outsourcing: a deliberate decision to have outsiders or strategic allies perform certain activities in the value chain • About half of U. S. manufacturing jobs will be outsourced to more than 28 emerging countries over the next 10 years • About 10% of U. S. service jobs may be outsourced Copyright© 2007 South-Western/Thomson Learning All rights

Outsourcing • When should a multinational company outsource? • Outsourcing makes sense if an outsider can perform a value-chain task better or more cheaply • However, tasks that are outsourced should the ones that are not crucial to the company’s ability to achieve competitive advantage Copyright© 2007 South-Western/Thomson Learning All rights

Exhibit: 5. 4: The Major Advantages and Disadvantages of Outsourcing Copyright© 2007 South-Western/Thomson Learning All rights

Distinctive Competencies • Strengths that allow companies to outperform rivals - Ex. : Quality, innovation, customer service • Resources: inputs into the production or service processes - Ex. : Buildings, land, equipment, employees Copyright© 2007 South-Western/Thomson Learning All rights

Distinctive Competencies • Capabilities: ability to assemble and coordinate resources effectively • Resources provide the organization with potential capabilities. • For long-term success, capabilities must lead to sustainable competitive advantage. Copyright© 2007 South-Western/Thomson Learning All rights

Sustaining Competitive Advantage • Sustainable: strategies not easily defeated by competitors • Four characteristics of capabilities that lead to competitive advantage - Valuable - Rare - Difficult to imitate - Non-substitutable Copyright© 2007 South-Western/Thomson Learning All rights

Exhibit 5. 5: Relationships Among Resources, Capabilities, Distinctive Competencies, and Eventual Profitability Copyright© 2007 South-Western/Thomson Learning All rights

Competitive Strategies in International Markets • Competitive strategies: strategic moves multinationals use to defeat competitors - Offensive competitive strategies: direct attacks to capture market share - Defensive competitive strategies: attempts to discourage offensive strategies - Counter-parry: fending off a competitor’s attack in one country by attacking in another country Copyright© 2007 South-Western/Thomson Learning All rights

Offensive Strategies • Direct attacks: price cutting, adding new features, or going after poorly served markets • End-run offensives: seeking unoccupied markets • Preemptive competitive strategies: being first to obtain particular advantageous position • Acquisitions: buying out a competitor Copyright© 2007 South-Western/Thomson Learning All rights

Defensive Strategies • Attempts to reduce risks of being attacked • Convince an attacking firm to seek other targets • Blunt the impacts of any attack • Exclusive contracts with best suppliers • New models to match competitor’s lower prices • Public announcements about the willingness to fight Copyright© 2007 South-Western/Thomson Learning All rights

Counter-parry • Popular strategy for multinationals • Respond to attack by attacking competitor in another country • Ex. : Kodak—When Fuji attacked Kodak in the U. S. , Kodak retaliated by attacking Fuji in Japan. • Goodyear also attacked Michelin in Europe as response to attack in U. S. Copyright© 2007 South-Western/Thomson Learning All rights

Multinational Diversification Strategy • Business-level strategies: strategies for a single business operation • Corporate-level strategies: how companies choose their mixture of different businesses Copyright© 2007 South-Western/Thomson Learning All rights

Diversification • Related diversification: companies acquire businesses that are similar in some way to their original or core business • - Ex. : Nike adding clothing line to its shoe operations • Unrelated diversification: firms acquire businesses in any industry • - Main concern is whether it’s a good financial investment Copyright© 2007 South-Western/Thomson Learning All rights

Strategy Formulation: Traditional Approaches • Strategy formulation: process by which managers select the strategies to be used by their company • Popular analysis techniques • Competitive dynamics of the industry • Company’s competitive position in the industry • Opportunities and threats faced by their company Copyright© 2007 South-Western/Thomson Learning All rights

Industry and Competitive Analysis • Porter’s five forces model: a popular technique that can help a multinational firm understand the major forces at work in the industry and the degree of attractiveness of the industry Copyright© 2007 South-Western/Thomson Learning All rights

Industry and Competitive Analysis • Porter’s Five Forces Model 1. The degree of competition among existing competitors in the industry 2. The threat of new entrants 3. The bargaining power of buyers 4. The bargaining power of suppliers 5. The threat of substitutes Copyright© 2007 South-Western/Thomson Learning All rights

Industry and Competitive Analysis • Managers must understand their industry well to formulate good strategies. • Must understand economic characteristics of industries and driving forces • Economic characteristics include - Market size - Ease of entry - Opportunities for economies of scale Copyright© 2007 South-Western/Thomson Learning All rights

Driving Forces • The important changes that have potential to affect an industry - Speed of new product innovations - Technological changes - Changing societal attitudes and lifestyles Copyright© 2007 South-Western/Thomson Learning All rights

Key Success Factors (KSFs) • Important characteristics of a company or its product that lead to success in an industry - Innovative technology or products - Broad product line - Effective distribution channels - Price advantages - Effective promotion - Superior physical facilities or skilled labor Copyright© 2007 South-Western/Thomson Learning All rights

Key Success Factors - Experience of firm in business - Cost position for raw materials - Cost position for production - R&D quality - Financial assets - Product quality - Quality of human resources Copyright© 2007 South-Western/Thomson Learning All rights

Competitor Analysis • Profiles of competitor’s strategies and objectives • Four steps 1. Identify strategic intent of competitors 2. Identify current and anticipated generic strategies 3. Identify current and anticipated offensive and defensive competitive strategies 4. Assess current positions of competitors Copyright© 2007 South-Western/Thomson Learning All rights

Competitor Analysis (cont. ) 1. Strategic intent - Broad objectives of competitors 2. Current and anticipated generic strategies - Helps determine key KSF 3. Current and anticipated offensive and defensive competitive strategies 4. Current positions Copyright© 2007 South-Western/Thomson Learning All rights

Exhibit 5. 7: Hypothetical Competitive Profiles of Four Companies in Different Countries Copyright© 2007 South-Western/Thomson Learning All rights

Exhibit 5. 7: Hypothetical Competitive Profiles of Four Companies in Different Countries Copyright© 2007 South-Western/Thomson Learning All rights

Company-Situation Analysis: SWOT • Strengths: distinctive capability, resource or skill • Weaknesses: competitive disadvantage compared to competitors • Opportunities: favorable conditions in the environment • Threats: unfavorable conditions in the environment Copyright© 2007 South-Western/Thomson Learning All rights

SWOT Analysis • More complex than for domestic firms • Multinationals face more complex general and operating environments • Environments vary by country Copyright© 2007 South-Western/Thomson Learning All rights

Corporate Strategy Selection • Diversified corporation has a portfolio of businesses • Major issue is which businesses to invest in and which businesses to divest • The basic tool: matrix analyses • The most popular is the growth-share matrix of the Boston Consulting Group (BCG). Copyright© 2007 South-Western/Thomson Learning All rights

BCG Share Matrix • Division into four categories based on market share and relative market share • Stars: the most successful firm • Dogs: businesses with low market shares in low-growth industries • Cash cows: businesses in slow-growth industries where company has strong market-share position • Problem children: businesses in highgrowth industries where company has a Copyright© 2007 South-Western/Thomson Learning All rights

Exhibit 5. 8: The BCG Growth Share Matrix Copyright© 2007 South-Western/Thomson Learning All rights

Matrices • All matrices help answer basic strategy formulation question such as • Are businesses in attractive industries? • Are most businesses growing? • Are there sufficient cash cows to finance other businesses? • Is business portfolio well positioned for the future? • Is the some strategic synergies among Copyright© 2007 South-Western/Thomson Learning All rights

Organizations Alike: Globalization and Convergence • Convergence: increasing similarity of management practices • Convergence is most apparent with transnational firms • Multinational firms competing in the same industry tend to have similar structures and strategies regardless of the location of the company’s headquarters Copyright© 2007 South-Western/Thomson Learning All rights

Organizations Alike: Globalization and convergence • How Globalization pushes organizations to be more similar - Global customers and products - Growing levels of industrialization and economic development - Global competition and global trade - Gross-border mergers, acquisitions, and alliances - Cross-national mobility of managers - Internationalization of business education Copyright© 2007 South-Western/Thomson Learning All rights

Organizations Alike: Globalization and convergence • National differences still affect the way many firms compete via their choices of strategies • Three important reasons to understand the national differences • Managers in successful multinational firms must understand anticipate the strategies of rivals from other countries • Managers in successful multinational firms must understand the strategies of potential business partners Copyright© South-Western/Thomson Learning All rights • Strategies developed in one 2007 national context

The National Context and Organizational Strategy: Overview and Observations • The national context affects organizational design and strategy formulation and content through the following processes - The social institutions and national and business cultures encourage or discourage certain forms of businesses and strategies in each nation - Social institutions and national culture serve as barriers to the easy transfer of competitive advantages among countries Copyright© 2007 South-Western/Thomson Learning All rights

The National Context and Organizational Strategy: Overview and Observations - Each nation must rely on its available factor conditions for developing industries and the firms within industries - Social institutions and culture determine which resources are used, how they are used, and which resources are developed Copyright© 2007 South-Western/Thomson Learning All rights