Global Strategies and the Multinational Corporation OUTLINE Implications

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

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 -- 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

National Influences on Competitiveness: 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 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 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 Ru ssia SUZUKI ISUZU 10% n. J V to own ed. C 50% owned pro duc o-pr o duct io GM 60% owned IBC Vehicles Ltd. (U. K. ) (Makes vans in UK) TOYOTA 50% owned FIAT 20% owned; join JV t production to p rod uce car s in FUJI Ch in l& ca n ni tio ch ra te bo d; lla ne co ow on % cti. 9 du 50 pro 40% investment ars n tion produc ed. Co n 49%ow ec -5). nology 0 0 (20 tech d e wn tion on s o 20%labora onent Col comp and a 50% owned New United Motor Manufacturing Inc. (NUMMI) (Makes cars in US) DAEWOO SAIC

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 1970 s & 1980 s, (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 C 2 C 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 Cement Auto repair Retail banking 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) 1970 s and 1980 s—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 Kao 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 Matsushita Branded, Packaged Consumer Goods 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