Global Enterprise and Competition 66 511 202 Fall

Global Enterprise and Competition 66. 511. 202 Fall 2007 Ashwin Mehta, Visiting Faculty Session 4

Strategy --- Global to Regional/Local Corporate/ Global Strategy Corporate Structure & Integration Business Strategy Business Structure & Integration International Strategy, Structure & Integration Session 4

Corporate Strategy Framework Corporate strategy vision, goals, objectives building and exploiting corporate advantage (resources) Value creation one time Vs ongoing (businesses) Structure, Systems and Processes For coordination and control Industries Session 4

Hierarchy of Strategy Corporate Business Functional • Growth • Stability • Retrenchment • Portfolio • Parenting Competitive (Cost, Differentiation) Cooperative Business ecosystem Functional plans & Integration Leadership, Followership Session 4

QUESTIONS OF CORPORATE-LEVEL AND BUSINESSLEVEL STRATEGY • Corporate-level strategy should ask – In which markets do we compete today? – In which markets do we want to compete tomorrow? – How does our ownership of a business ensure its competitiveness today and in the future? • Business-level strategy should ask – How do we compete in this market today? – How will we compete in this market in the future? Session 4

Concentration Growth Horizontal Diversification Directional Vertical Stability Invest M&A Concentric Alliances Conglomerate Leveraged Growth Retrenchment Corporate Strategy Portfolio ---- multiple businesses, products --- analysis to lead to Directional strategy BCG matrix, GE Business Screen market share, industry attractiveness Qualitative and quantitative Parenting --- businesses, build, synergies between businesses Session 4

Growth Strategy Options 1. Organic Growth – Investments in assets required to grow Invest in factories. Machinery, skills, etc. Time to reap benefits? Risks? Changing environment 2. Acquisition – buy necessary assets --- tangibles and intangibles Upfront payments, Integration issues, unpredictable returns 3. Alliances – partner with companies to complement Typically Buyer-Seller relationships Tightly coupled relationship, too much legal, limited flexibility 4. Leveraged Growth – network of asset owners, orchestrated by A Mobilizer Loosely coupled relationship Governed by market based economic incentives, not legal agreements Leveraged Growth: Expanding sales without Sacrificing Profits, John Hagel, HBR 2002 Session 4

http: //www. lifung. com/ Session 4

Li & Fung Founded in Guangzhou, the PRC in 1906, the Li & Fung Group is a multinational group of companies driving strong growth in three distinct core businesses - export sourcing through Li & Fung Limited, distribution through IDS and retailing through CRA and other nonlisted entities. The Li & Fung Group has a total staff of over 24, 000 across 40 countries worldwide, with a revenues of over US$8. 5 billion in 2005. The Group's export trading arm is Li & Fung Limited – one of the largest export sourcing firm that manages the supply chain of highvolume, time-sensitive consumer goods through its office network in close to 40 countries. http: //www. lifung. com/ Session 4

As a Supply Chain Manager across many producers and countries, Li & Fung provides the convenience of a one-stop shop for customers through a Total Value-Added Package: from product design and development, through raw material and factory sourcing, production planning and management, quality assurance and export documentation to shipping consolidation. Session 4

An impressive financial performance (in HK$) http: //www. lifung. com/investor/index. html Session 4

How? Since its founding, in 1906, Li Fung family owned Trading company Acting as a broker between manufacturers and buyers in Apparels Margin pressures as with direct links between buyers and manufacturers Mid-1970’s remade the company From brokerage (connecting 2 points) to an orchestrator – connecting and coordinating many different links of suppliers and buyers owns no factories owns no transportation equipment to ship material in various production stages privileged access to 7, 500 supply and manufacturing companies around the World Core competencies: deep knowledge of apparel market Leverage other companies’ assets to grow! Session 4

Remaking of the Company Organization – change from traditional geographical to customer centric structures dedicated divisions serve largest apparel designers (Laura Ashley, Abercrombie & Finch, Levi Strauss, etc. other divisions focus on smaller customers Each division run by “lead entrepreneur”, with deep understanding of customers’ needs kept relatively small $30 to 50 million in revenue Supply side – up-to-date information on thousands of suppliers capability and performance Allocate work across the network; give in-depth feedback to further improve performance Knowledge of supply chain makes the Company tailor it to meet the customer need. can begin production within hours after receiving the order from a customer Session 4 over the Internet!

Global Value Added Customer Idea Outsource mfg. to network of suppliers Design Quality Control Raw Material Sourcing (Traditional Trading House) Finding Production Partner Consolidation Logistics Customer network of retail chains Session 4

What are the sources of Li & Fung’s value added? • Providing integrated supply-chain management through an extensive network • Reducing customer inventory • Price and quality control • Delivery and logistics management • IT network: production and dist. mgmt. • Front end: design, engineering, production planning • Back end: quality control, logistics • Sourcing, raw materials, components • Extensive manufacturing network (3000 factories, over 1 million workers) Session 4

What does merger with Inchcape do for Li & Fung’s strategy? • • • Creates Li & Fung Distribution More customers in Europe Greater scale and adds production capacity Adds new sources of supply Changes IBS from introducing agent between clients and manufacturers to a higher margin sourcing company • Import business fills gaps • Additional entry into retail • Fills in the mosaic by extending sourcing and distribution networks Session 4

Li & Fung’s strategy maximizes global value added: • Supplier network of quality manufacturers with extensive set of relationships • Li & Fung coordinates supply chain for a specialized set of a products (textiles, toys) • Customer network of large retail chains (Abercrombie & Fitch, Gymboree) • Li & Fung consolidates demands and consolidates supplies, establishes prices, coordinates exchange, balances supply and demand, allocates products. Session 4

Li & Fung’s supplier networks optimize: • Gains from trade – taking advantage of economies of scale of suppliers • Gains from trade – taking advantage of comparative advantages of countries in the supply chain – constant location adjustment • Costs of trade – taking advantage of best combination to reduce costs of transactions, transportation, tariffs, and time • Combining elements of supply chain to maximize gains from trade net of costs of trade Session 4

Other Examples of Orchastrators Nike (own process network) Cisco (Semi Closed Network) Wal-Mart (Own process network) Technology Systems Integrators (such as EDS, IBM) created a Global network to deliver solutions Session 4

Business Strategy Considerations: Arenas – Where will we be active? Vehicles – How do we get there? Differentiators – How will we win? Staging – What speed and sequence? Economic Logic – How will returns be obtained? Session 4

Evaluating Corporate Strategy --- Five Tests: Vision Internal Consistency External Fit Corporate Advantage Feasibility Session 4

Strategy Formulation process Hierarchy of Strategy---multidimensional view Corporate Global Business Regional Functional Local (Country-level) Session 4

STRATEGIES FOR DIFFERENT PHASES OF THE INDUSTRY LIFE CYCLE • Phases of industry life cycle Arenas Vehicles Differentiators Staging Local Internal development Alliances to secure missing inputs or distribution access Alliances for cooperation Acquisitions in targeted markets Target basic needs, minimal differentiation Tactics to gain early footholds • Embryonic Penetration into adjacent markets • Growth Globalization Diversification Mergers and acquisitions result in consolidation Some arenas may be abandoned if decline is severe Focus on segments which provide most profitability Acquisitions for diversifying moves Divestitures to exit for some competitors • Mature • Decline Economic Logic Prices tend to be high. Costs are also high Focus is on securing additional capital to fund growth phase. Integrated Margins can improve positions require rapidly because of choice of focusing experience and scale first on cost or Price premiums accrue differentiation to successful differentiators Increased efforts toward differentiation Low cost leaders emerge through gaining experience advantages and scale More stable positions Choosing emerge across international competitors markets and new industry diversification; need rational sequencing Consolidation results in fewer competitors (favoring higher margins) but declining growth demands cost containment and rationalization of operations. Rationalizing cost Session 4

Strategy Formulation process Hierarchy of Strategy Corporate Business Functional Session 4

Functional Strategies Marketing Technology/Development Operations Production Logistics Purchasing Servicing Human Resource Finance Information Technology Session 4

Functional Strategies --- Considerations Core Competency Integration Timing (first mover Vs Follower) In-house Vs Outsourcing Strategy Options and Scenarios Evaluation Session 4

Regional strategies for Global leadership* Global Regional Local Regional teams are the key to Company’s Globalization initiatives Jeffrey Immelt, CEO, GE, HBR 12/2005 Global leverage is about playing 3 -D chess- at the global, regional and local levels John Manzer, CEO International, Wal-Mart, HBR 12/2005 *: Pankaj Ghemawat, HBR 12/2005 Session 4

Source: Global Marketing Management, Kotabe and. Session Helsen 4 Session 1

LENOVO Session 4

How did Lenovo’s home country affect its initial development and management strategy? Yang Yuanqing Vice Chairman, President and CEO • Domestic strategy-customer focus • Economies of scale and experience from large domestic market • Pricing strategy – above domestic competitors and below international entrants • Strong domestic brand • Retail outlets and 19 branch offices • Distribution (2000 distributors and resellers) Session 4

From humble beginnings… Session 4

PC-Sales in China: Market Shares 1994 Source: Luo, Yadong, Multinationals in China, Copenhagen 2000 Session 4

Chinese PC-Market (US$ million) Session 4

PC-Sales in China (Millions of Units) Session 4

The Chinese Hardware Market • 30% Average Annual Growth Rate • More than 50% of all buyers buy units between $1, 200 and $1, 800 • What customers value: – Personal Relationships – After Sales-Service • Tariffs (MFN): 15% To be lowered. • Value-Added Tax: 17% Market Segmentation by industry: – Finance 33% – Telecom 17% – Government 10% – Transportation 10% – Power/Petrol 4% – Education 6% – Distribution 4% – Manufacturing 8% – Other 8% Session 4

Did Lenovo derive any advantages/disadvantages from its home country? • • Production cost advantage from labor market relative to international competitors not manufacturing in China Government connections compared to global entrants Local distribution system hard to copy, Continued transaction costs for international companies Would DELL’s direct sales approach fit Chinese consumer market? Session 4

What threats does Lenovo face, and what competitive advantages were sustainable? • • Lowering of trade barriers DELL and other international businesses started producing in China DELL offered direct sales and marketing Entrants have global brands Entrants have access to latest technology Other Chinese companies offered low-cost clones Falling component prices affect Legend’s pricing strategy Growing importance of notebooks Session 4

How did Legend update its strategy? • • Local tailoring of products and brands to compete with international companies Partnerships with global companies Launches Lenovo brand Product diversification into cell phones and other consumer products • • Adjustment of pricing policies Expansion of domestic distribution Expansion in business services First database server in China Session 4

Lenovo Notebook • Configuration Soleil 8100 DT/8200 DT • CPU Intel Pentium II 266/300 MHz(1. 7 v) • Monitor 14. 2" TFT, XGA 1024*768*16 M • Main Memory 80 MB/144 MB, expandable to 144 MB • 2*144 Pin DIMM Cache L 2 Cache 512 KB • 24 x CD-ROM, USB, PCMCIA, 7 pounds Session 4

Lenovo organization 1999 Session 4

Lenovo Company Structure 2003 Session 4

What were strategic reasons behind decision to expand internationally? • Greater competitive challenges to domestic market from global companies • Seeking greater economies of scale • Chinese manufacturing gives cost advantage that can be used to expand to global markets • Benefits of expanding sales for supporting R&D • Benefits of developing global brand Session 4

Launching a new global brand. Session 4

Why did Lenovo choose to expand by IBM acquisition? • Lenovo becomes the third largest computer maker in the world • Temporary access to IBM brand • Access to Thinkpad brand • IBM laptop and PC technology • Access to suppliers • Increased market power from merger • Access to management Session 4

Session 4

The IBM acquisition “Separately, Lenovo and the PC Division possessed outstanding development, manufacturing, marketing and customer-care capabilities, with different areas of expertise and emphasis in the enterprise and consumer markets. Together, as the new Lenovo, those strengths are combined into a growth-oriented, global enterprise, strategically focused on the PC space and more committed to innovation in IT clients than any other company. We have a passion for innovation that is unique in our industry. ” Session 4

The IBM acquisition Change of headquarters to Purchase, N. Y. William J. AMELIO President and Chief Executive Officer Now Raleigh, N. C. Session 4

What challenges lie ahead for Lenovo? Ø Lenovo brand products make worldwide debut (3000 family) Ø Head-to-head competition with HP and Dell Ø Challenges from low-cost competitors, Acer and others Ø More? Session 4

Session 4

Session 4