MBA290:

ADVANCED
STRATEGIC
MANAGEMENT

Professor Stanley Han

College of Business Administration
hans@csus.edu

1
Course Overview: Objectives
l To acquire familiarity with the principal concepts,
frameworks and techniques of strategic
management.
l To gain expertise in applying these concepts,
frameworks and techniques in order to
 - understand the reasons for good or bad
performance by an enterprise,
 - generate strategy options for an enterprise,
 - assess available options under conditions of
imperfect knowledge,
 - select the most appropriate strategy,
 - recommend the best means of implementing
the chosen strategy.
l 2
Course Overview: Objectives (cont’d)

l To integrate the knowledge gained in previous

courses.
l To develop your capacity as a general manager in
terms of
 - an appreciation of the work of the general
manager,
 - the ability to view business problems from a
general management perspective,
 - the ability to develop original and innovative
approaches to strategic problems,
 - developing business judgment.
l
3
 THE CONCEPT OF
STRATEGY

The Concept of Strategy and the Pursuit

of Sustainable Above-Normal Profits
 Domain of Strategy
• strategic competitiveness and above normal returns
• concerns managerial decisions and actions which
materially affect the success and survival of
business enterprises
• involves the judgment necessary to strategically
position a business and its resources so as to
maximize long-term profits in the face of irreducible
uncertainty and aggressive competition
• strategy is the linkage between a business and its
current and future environment
 Definition
• The determination of the long run goals
and objectives of an enterprise, the
adoption of courses of action and the
allocation of resources necessary for
carrying out these goals


 Alfred Chandler, Strategy and Structure

 Levels of Strategy

CORPORATE CORPORATE
STRATEGY HEAD OFFICE

BUSINESS
STRATEGY Division A Division B

R&D R&D
FUNCTIONAL Personnel Personnel
STRATEGIES
Finance Finance
Production Production
Marketing/Sales Marketing/Sales
 Levels of Strategy
• Corporate strategy... defines the scope of the
business in terms of the industries and markets in
which it competes.
• includes decisions about diversification, vertical
integration, acquisitions, new ventures,
divestments, allocation of scarce resources
between business units
• Business strategy... is concerned with how the firm
competes within a particular industry or market... to
win a business unit must adopt a strategy that
establishes a competitive advantage over its rivals.
• Functional strategy... the detailed deployment of
resources at the operational level
Common Elements in Successful Strategy

Successful
Strategy

EFFECTIVE IMPLEMENTATION

Profound Objective
Long-term, simple
understanding of appraisal of
and agreed upon
the competitive resources
objectives
environment

$
 Strategy as a Quest for Profit
• The stakeholder approach : The firm is a coalition of interest groups
—it seeks to balance their different objectives

§ The shareholder approach : The firm exists to maximize the wealth of

its owners (= max. present value of profits over the life of the firm)

For the purposes of strategy analysis we assume that the primary goal
of the firm is profit maximization.
Rationale:
1)Boards of directors legally obliged to pursue shareholder interest
2)To replace assets firm must earn return on capital > cost of capital
(difficult when competition strong).
3)Firms that do not max. stock-market value will be acquired

Hence: Strategy analysis is concerned with identifying and accessing

the sources of profit available to the firm
From Profit Maximization to Value Maximization

• Profit maximization an ambiguous goal

– Total profit vs. Rate of profit
– Over what time period?
– What measure of profit?
– Accounting profit versus economic profit (e.g. Economic
Value Added: Post-tax operating profit less cost of
capital

Maximizing the value of the firm:

Max. net present value of free cash flows: max. V = Σ t
Ct
Where: V market value t
(1 +ofr)the firm.
Ct free cash flow in time t
r weighted average cost of capital
 The
TheWorld’s
World’sMost
Most Valuable
ValuableCompanies:
Companies:
Performance
Performance Under
UnderDifferent
DifferentProfitability
Profitability Measures
Measures

COMPANY MARKET NET RETURN RETURN RETURN RETURN TO

CAP. INCOME ON SALES ON EQUITY ON SHARE-
($BN.) ($BN) (%) (%) ASSETS HOLDERS
(%) (%)
Exxon Mobil 372 36.1 19.9 34.9 17.8 11.7
General Electric 363 16.4 10.7 22.2 14.7 (1.5)
Microsoft 281 12.3 40.3 30.0 18.8 (0.9)
Citigroup 239 24.6 22.0 21.9 1.5 4.6
BP 233 22.3 9.9 27.9 10.7 10.2
Bank of America 212 16.5 27.0 14.1 1.2 2.4
Royal Dutch Shell 211 25.3 14.7 26.7 11.6 11.8
Wal-Mart 197 11.2 5.5 21.4 8.1 (10.3)
Toyota Motor 197 12.1 10.7 13.0 4.8 (22.1)
Gazprom 196 7.3 28.1 9.8 7.1 n.a.
HSBC 190 15.9 23.0 16.3 1.0 (11.8)
Procter & Gamble 190 8.7 17.3 13.7 6.4 7.2
 Shareholder Value Maximization and Strategy Choice

 The Value Maximizing Approach to Strategy Formulation:

• Identify strategy alternatives
• Estimate cash flows associated with cash strategy
• Estimate cost of capital for each strategy
• Select the strategy which generates the highest NPV

Problems:
•Estimating cash flows beyond 2-3 years is difficult
•Value of firm depends on option value as well as DCF value

Implications for strategy analysis:

•Some simple financial guidelines for value maximization
a)On existing assets—maximize after-tax rate of return
b)On new investment—seek rate of return > cost of capital
•Utilize qualitative strategy analysis to evaluate future profit potential
 AAComprehensive
ComprehensiveValue
Value Metrics
MetricsFramework
Framework

Shareholder Financial Value

Intrinsic
Value Indicators Drivers
Measures: Value Measures:
Measures: Sources:
•Market value of the •Return on Capital
•Discounted cash •Market share
firm •Growth (of
flows •Scale economies
•Market value revenues &
•Real option values •Innovation
added operating
• •Brands
(MVA) profits
•Return to •Economic profit
shareholders (EVA)
 Sources
Sources of
of Superior
Superior Performance
Performance

Above Normal
Profits
(in Excess of the Competitive Level)

Avoid Be Better Than

Competitors Competition

Attractive Attractive Attractive

Industry Strategic Niche Cost Differentiation
Group Advantage Advantage

Entry Mobility Isolating

Barriers Barriers Mechanisms
 Sources of Competitive Advantage

COST
COST
duct ADVANTAGE
ADVANTAGE
r pro st
ila co
Sim wer
o
COMPETITIVE at l
COMPETITIVE
ADVANTAGE
ADVANTAGE P ri
fro ce
m pre
un mi
iq u um
ep
rod DIFFERENTIATION
DIFFERENTIATION
uc
t ADVANTAGE
ADVANTAGE
 The Experience Curve

The “Law of Experience”

1992 The unit cost value added to a standard product
declines by a constant % (typically 20-30%) each
time cumulative output doubles.
1994
Cost per
unit of
output (in 1996
real $)
1998
2000
2002 2004

Cumulative Output
 Examples of Experience Curves

Japanese clocks & watches, 1962-72 UK refrigerators, 1957-71

50 100 200 300

15K 20K 30K
1960 Yen

Price Index
75%
70% slope

100K 200K 500K 1,000K 5 10 50

Accumulated unit production Accumulated units
(millions) (millions)
 Drivers of Cost Advantage

ECONOMIES OF SCALE •Indivisibli\ties

•Specialization and division of labor

ECONOMIES OF LEARNING •Increased dexterity

•Improved organizational routines

•Process innovation
PRODUCTION TECHNIQUES •Reengineering business processes

PRODUCT DESIGN •Standardizing designs & components

•Design for manufacture

•Location advantages
INPUT COSTS •Ownership of low-cost inputs
•Non-union labor
•Bargaining power

CAPACITY UTILIZATION •Ratio of fixed to variable costs

•Speed of capacity adjustment

RESIDUAL EFFICIENCY •Organizational slack; Motivation &

culture; Managerial efficiency
 Economies of Scale: The Long-Run
Cost Curve for a Plant

Sources of scale economies:

- technical input/output relationships
- indivisibilities
- specialization

Cost per
unit of
output

Minimum Units of output

Efficient Plant per period
Size: the point
where most scale
economies are
exhausted
 Scale Economies in Advertising: U.S. Soft Drinks

Despite the massive advertising budgets of brand leaders Coke and Pepsi, their main
brands incur lower advertising costs per unit of sales than their smaller rivals.
0.20
Advertising Expenditure ($ per case)

Schweppes
SF Dr. Pepper
0.15

Tab
Diet 7-Up Diet Pepsi
Diet Rite
0.10

Fresca
Seven Up
0.05

Sprite Dr. Pepper

Pepsi
Coke
0.02

10 20 50 100 200 500 1,000

Annual sales volume (millions of cases)
 Applying the Value Chain to Cost Analysis:
The Case of Automobile Manufacture

STAGE 1. IDENTIFY THE PRINCIPLE ACTIVITIES

R&D TESTING, GOODS SALES DISTRI- DEALER &

PARTS
PURCH- DESIGN COMPONENT ASSEMBLY QUALITY INVEN- &
INVEN- BUTION CUSTOMER
ASING ENGNRNG MFR CONTROL TORIES MKITG SUPPORT
TORIES

STAGE 2. ALLOCATE TOTAL COSTS

 Applying the Value Chain to Cost Analysis: The
Case of Automobile Manufacture (continued)

--Plant scale for each -- Level of quality targets -- No. of dealers

STAGE 3. component -- Frequency of defects -- Sales / dealer
IDENTIFY -- Process technology -- Level of dealer
-- Plant location support
COST -- Run length -- Frequency of defects
DRIVERS -- Capacity utilization under warranty

PURCH- PARTS R&D COMPONENT ASSEMBLY TESTING, GOODS SALES

INVEN- DESIGN QUALITY INVEN- DISTRI- DEALER &
ASING MFR & BUTION CUSTOMER
TORIES ENGNRNG CONTROL TORIES MKITG SUPPORT

Prices paid --Size of commitment -- Plant scale --Cyclicality &

depend on: --Productivity of -- Flexibility of production predictability of sales
-- Order size R&D/design -- No. of models per plant --Customers’
--Purchases per --No. & frequency of new -- Degree of automation willingness to wait
supplier models -- Sales / model
-- Bargaining power -- Wage levels
-- Supplier location -- Capacity utilization
 Applying the Value Chain to Cost Analysis: The
Case of Automobile Manufacture (continued)


STAGE 4. IDENTIFY LINKAGES


 Designing different models around

 Consolidation of orders to increase common components and platforms
 discounts, increases inventories reduces manufacturing costs


 PRCHSNG PARTS R&D COMPONENT ASSEM- TESTING GOODS SALES DSTRBTN DLR
 INVNTRS DESIGN MFR BLY QUALITY INV MKTG CTMR


 Higher quality parts and materials Higher quality in manufacturing


reduces costs of defects reduces warranty costs
at later stages


STAGE 5. RECCOMENDATIONS FOR COST REDUCTION

 The Nature of Differentiation

DEFINITION: “Providing something unique that is valuable to the

buyer beyond simply offering a low price.” (M. Porter)
THE KEY IS TO CREATE VALUE FOR THE CUSTOMER

TANGIBLE DIFFERENTATION INTANGIBLE

Observable product characteristics:
•size, color, materials, etc.
•performance
•packaging
•complementary services
DIFFERENTATION
Unobservable and subjective
characteristics that appeal to
customer’s image, status,
identity, and desire for exclusivity

TOTAL CUSTOMER RESPONSIVENESS

Differentiation not just about the product, it embraces the whole
relationship between the supplier and the customer.
 Identifying Differentiation Potential:
The Demand Side

THE PRODUCT What needs does What are key

it satisfy? attributes? FORMULATE
DIFFERENTIATION
Relate patterns of STRATEGY
customer
•Select product
By what preferences to
positioning in relation
criteria do they product attributes
to product attributes
choose?
THE •Select target
CUSTOMER What price customer group
premiums do
•Ensure customer /
product attributes
product compatibility
command?
•Evaluate costs and
What What are benefits of
motivates demographic, differentiation
them? sociological,
psychological
correlates of customer
behavior?
 Using the Value Chain to Identify
Differentiation Potential on the Supply Side

MIS that supports Training to support Unique product features.

fast response customer service Fast new product
capabilities excellence development

FIRM INFRASTRUCTURE
HUMAN RESOURCE MANAGEMENT
TECHNOLOGY DEVELOPMENT

INBOUND OPERATIONS OUTBOUND MARKETING SERVICE

LOGISTICS LOGISTICS & SALES

Customer technical
support. Consumer
credit. Availability of
Quality of Defect free Fast delivery. Building brand spares
components & products. Efficient order reputation
materials Wide variety processing
 Identifying Differentiation Opportunities through
Linking the Value Chains of the Firm and its
Customers: Can Manufacture

1
5
2 3 4

Inventory holding
Supplies of steel

Inventory holding

Inventory holding

technical support
Manufacturing
& aluminum

Purchasing

Distribution
Processing
Engineering

Marketing
Distribution
Purchasing

Canning
Service &
Design

Sales

CAN MAKER CANNER

1. Distinctive can design can assist canners’ marketing activities.

2. High manufacturing tolerances can avoid breakdowns in customer’s canning lines.

3. Frequent, reliable delivery can permit canner to adopt JIT can supply.
4. Efficient order processing system can reduce customers’ ordering costs.
5. Competent technical support can increase canner’s efficiency of plant utilization.
INDUSTRY ANALYSIS
AND POSITIONING

Determining Industry Attractiveness and

Identifying Strategic Opportunities
 Profitability
Profitabilityof
ofUS
USIndustries
Industries(selected
(selectedindustries
industriesonly)
only)

Median return on equity (%), 1999-2005

Household & Personal Products 22.7 Gas & Electric Utilities 10.4
Pharmaceuticals 22.3 Food and Drug Stores 10.0
Tobacco 21.6 Motor Vehicles & Parts 9.8
Food Consumer Products 19.6 Hotels, Casinos, Resorts 9.7 Securities
18.9 Railroads 9.0
Diversified financials 18.3 Insurance: Life and Health 8.6
Beverages 18.8 Packaging & Containers 8.6
Mining & crude oil 17.8 Insurance: Property & Casualty 8.3
Petroleum Refining 17.3 Building Materials, Glass 8.3
Medical Products & Equipment 17.2 Metals 8.0
Commercial Banks 15.5 Food Production 7.2
Scientific & Photographic Equipt. 15.0 Forest and Paper Products 6.6
Apparel 14.4 Semiconductors &
Computer Software 13.9 Electronic Components 5.9
Publishing, Printing 13.5 Telecommunications 4.6
Health Care 13.1 Communications Equipment 1.2
Electronics, Electrical Equipment 13.0 Entertainment 0.2
Specialty Retailers 13.0 Airlines (22.0)
Computers, Office Equipment 11.7
The Profitability of Global Industries: Return on Invested Capital, 1963-2003
Utilities 6.2

Telecomservices 6.5

Transporation 6.9

Energy 7.7

Materials 8.4

OVERALLAVERAGE 9

Retailing 9

Consumer durables andapparel 9.5

Foodretailing 9.6

Capital goods 9.9

Automobiles andcomponents 9.9

Technologyhardwareandequipment 10.3

Hotels, restaurants, leisure 10.3

Food, beverages, tobacco 11

Healthcareequipmernt andservices 11.3

Semiconductors 11.9

Commercial services 12.8

Media 14.7

Computer software andservices 15

Householdandpersonal products 15.2

Pharmaceuticals 18.4

0 5 10 15 20

Average ROIC1963-2003 (%)

 From Environmental Analysis
to Industry Analysis

The national/ The natural

international environment
economy
THE INDUSTRY
ENVIRONMENT
Demographic
Technology •Suppliers structure
•Competitors
•Customers

Government Social structure

& Politics

•The Industry Environment lies at the core of the Macro Environment.

•The Macro Environment impacts the firm through its effect on the Industry
Environment.
 Drawing Industry Boundaries :
Identifying the Relevant Market

• What industry is BMW in:

– World Auto industry
– European Auto industry
– World luxury car industry?


• Key criterion: SUBSTITUTABILITY

– On the demand side : are buyers willing to substitute
between types of cars and across countries
– On the supply side : are manufacturers able to switch
production between types of cars and across countries


• We may need to analyze industry at different levels of

aggregation for different types of decision
 The
The Spectrum
Spectrum of
of Industry
Industry Structures
Structures

Perfect
Oligopoly Duopoly Monopoly
Competition

Concentratio A few firms Two firms One firm

Many firms
n
Entry and No/Low High
Exit Significant barriers
barriers barriers
Barriers
Product Homogeneou
Differentiatio s Potential for product differentiation
n Product

Perfect
Information Imperfect availability of information
Information flow
Porter’s Five Forces of Competition Framework

SUPPLIERS
Bargaining power of suppliers

INDUSTRY
COMPETITORS

Threat of
POTENTIAL Threat of
ENTRANTS SUBSTITUTES
new substitutes
Rivalry among
entrants existing firms

Bargaining power of buyers

BUYERS
 The
The Structural
Structural Determinants
Determinants of
of
Competition
Competition
SUPPLIER POWER
•Supplier concentration
•Relative bargaining
power

THREAT OF ENTRY INDUSTRY RIVALRY SUBSTITUTE

•Capital requirements •Concentration COMPETITION
•Economies of scale •Diversity of
•Absolute cost advantage competitors •Buyers’ propensity
to substitute
•Product differentiation •Product differentiation
•Relative prices &
•Access to distribution •Excess capacity &
channels exit barriers performance of
substitutes
•Legal/ regulatory barriers •Cost conditions
•Retaliation

BUYER POWER
•Buyers’ price sensitivity
•Relative bargaining
power
 SUPPLIER POWER
LOW
DRUG
INDUSTRY
(ROE=22%)

THREAT OF ENTRY
LOW
•economies of scale
•capital requirements for
R&D and clinical trials
•product differentiation
•control of distribution
channels
•patent protection
INDUSTRY
COMPETITIVENESS
LOW THREAT OF
SUBSTITUTES
•high concentration LOW
•product differentiation
•patent protection No substitutes.
•steady demand growth (Changing as managed care
•no cyclical fluctuations encourages generics.)
of demand

BUYER POWER
LOW
Physician as buyer:
Not price sensitive
No bargaining power.
(Changing with managed care.)
 Applying Five-Forces Analysis

 Forecasting Industry Profitability

• Past profitability a poor indicator of
future profitability.
• If we can forecast changes in
industry structure we can predict
likely impact on competition and
profitability.
Strategies to Improve Industry Profitability
•What structural variables are depressing
profitability
•Which of these variables can be changed by
individual or collective strategies?
 Neutralizing The Five
Competitive Forces
Force Method for Neutralizing Force
Entry Erecting barriers (isolating
mechanisms) create & exploit economies of
scale, aggressive deterrence, design in switching
costs, etc.
Rivalry Compete on nonprice dimensions: cost
leadership, differentiation, cooperation, etc.
Substitutes Improve attractiveness compared to
substitutes: better service, more features, etc..
Buyers Reduce buyer uniqueness: forward
integrate, differentiate product, new customers,
etc..
Suppliers Reduce supplier uniqueness: backward
integrate, obtain minority position, second source,
etc..
The Traditional Model of Industry Life Cycle

Fermentation Shakeout Maturity Decline

e mul ov s el a S

Time
 How Typical is the Life Cycle Pattern?

• Technology-intensive industries (e.g. pharmaceuticals,

semiconductors, computers) may retain features of
emerging industries.
• Other industries (especially those providing basic
necessities, e.g. food processing, construction, apparel)
reach maturity, but not decline.
• Industries may experience life cycle regeneration.



Sales Sales
Color

B&W Portable



HDTV ?
 1900 50 90 07 1930 50 70 90 07

MOTORCYCLES TV’s

• Life cycle model can help us to anticipate industry

evolution—but dangerous to assume any common, pre-
determined pattern of industry development
 Evolution of Industry Structure over the Life Cycle

 INTRODUCTION GROWTH MATURITY DECLINE

DEMAND
 Affluent buyers Increasing Mass market Knowledgeable,
 penetration replacement customers, resi-
 demand dual segments


TECHNOLOGY
 Rapid product Product and Incremental Well-diffused
 innovation process innovation innovation technology


PRODUCTS
 Wide variety, Standardization Commoditiz- Continued
rapid design change ation commoditization


MANUFACT- Short-runs, skill

 Capacity shortage, Deskilling Overcapacity
URING
 intensive mass-production


TRADE
 -----Production shifts from advanced to developing countries-----


COMPETITION
 Technology- Entry & exit Shakeout & Price wars,
 consolidation exit


KSFs
 Product innovation Process techno- Cost efficiency Overhead red-
logy. Design for uction, ration-
alization, low
 cost sourcing
 The Driving Forces of Industry Evolution

BASIC CONDITIONS INDUSTRY STRUCTURE COMPETITION

Customers become
Customers become
more knowledgeable more price
& experienced conscious
Quest for new
sources of
differentiation
Products become
more standardized

Diffusion of
Price competition
technology Production Production intensifies
becomes less shifts
R&D to low-wage
& skill-intensive countries

Excess capacity
increases
Demand growth Bargaining power
slows as market
of distributors
saturation Distribution
approaches increases
channels
consolidate
 Changes
Changesinin the
the Population
Population of
of Firms
Firmsover
overthe
the
Industry
IndustryLife
LifeCycle:
Cycle:USUSAuto
Auto Industry
Industry1885-1961
1885-1961

250

200

150
No. of firms
100

50

0
1895 1905 1915 1925 1935 1945 1955

rce: S. Klepper, Industrial & Corporate Change, August 2002, p. 654.

Preparing for the Future : The Role of Scenario
Analysis in Adapting to Industry Change

 Stages in undertaking multiple Scenario Analysis:

• Identify major forces driving industry change
• Predict possible impacts of each force on the
industry environment
• Identify interactions between different external
forces
• Among range of outcomes, identify 2-4 most
likely/ most interesting scenarios:
configurations of changes and outcomes
• Consider implications of each scenario for the
company
• Identify key signposts pointing toward the
emergence of each scenario
• Prepare contingency plan
 Innovation
Innovation &&Renewal
Renewal over
overthe
the
Industry
IndustryLife
LifeCycle:
Cycle: Retailing
Retailing
Warehouse
Clubs Internet
e.g. Price Retailers
Club e.g. Amazon;
Sam’s Club Expedia
Discount “Category
Stores Killers”
e.g. K-Mart e.g. Toys-R-
Mail order, Wal-Mart Us,
catalogue Chain Home Depot ?
retailing Stores
e.g. Sears e.g. A&P

Roebuck

1880s 1920s 1960s 2000

 Gary Hamel: Shaking the Foundations
OLD BRICK NEW BRICK
Top management is responsible Everyone is responsible
for setting strategy for setting strategy

Getting better, getting faster Rule-busting innovation

is the way to win is the way to win

IT creates competitive advantage Unconventional business concepts

create competitive advantage

Being revolutionary is high risk More of the same is high risk

We can merge our way to There’s no correlation between

competitiveness size and competitiveness

Innovation equals new products Innovation equals entirely new

and new technology business concepts

Strategy is the easy part, Strategy is the easy only if you’re

Implementation the hard part content to be an imitator

Change starts at the top Change starts with activists

Our real problem is execution Our real problem is innovation

Big companies can’t innovate Big companies can become gray-haired

revolutionaries
An Alternate Model of Industry Life Cycle

Emergence Convergence Coexistence Dominance

Established
Industry
e mul ov s el a S

Emerging Industry

Time
 The Industry Life Cycle as an S curve

Performance
Maturity

Discontinuity
Takeoff

Ferment

Time
 The S-curve Maps Major Transitions

Maturity

Performance

Discontinuity
Takeoff

Ferment

Time
 RESOURCES,
CAPABILITIES, AND
CORE COMPETENCES
 Shifting
Shifting the
the Focus
Focus of
of Strategy
StrategyAnalysis:
Analysis:
From
From the
the External
External to
to the
the Internal
Internal
Environment
Environment

THE FIRM THE

Goals and INDUSTRY
Values ENVIRONMENT
Resources and STRATE •Competitors
Capabilities
GY
STRATEGY •Customers
Structure and
Systems •Suppliers

The The
Firm- Environment-
Strategy Strategy
Interface Interface
 Rationale for the Resource-based
Approach to Strategy

• When the external environment is subject to

rapid change, internal resources and
capabilities offer a more secure basis for
strategy than market focus.
•
• Resources and capabilities are the primary
sources of profitability.
 Canon:
Canon: Products
Products and
and Core
Core Technical
Technical
Capabilities
Capabilities
Precisio
n Fine
Mechani Optics
cs
35mm SLR camera Plain-paper
Compact fashion copier
camera Color copier
EOS autofocus camera Color laser
Digital camera Basic fax copier
Video stillaligners
camera Laser fax Laser copier
Mask
Inkjet printer
Excimer laser
Laser printer
aligners
Color video
Stepper aligners
Calculator printer
Notebook
computer
Micro-
Electron
ics
 Eastman Kodak’s Dilemma

Resources & Capabilities Businesses

Chemical Imaging Film

1980’s
•Organic Chemistry Cameras
•Polymer technology Fine Chemicals
•Optomechtronics
Pharmaceuticals
•Thin-film coatings
Brands Diagnostics
Global Distribution

1990’s DIVESTS: Eastman Chemical, Sterling Winthrop, Diagnostics

Need to build digital Digital Imaging

imaging capability Products (e.g. Photo CD
System; Advantix
cameras & film
The
The Links
Links between
between Resources,
Resources, Capabilities
Capabilities
and
and Competitive
CompetitiveAdvantage
Advantage

INDUSTRY KEY
COMPETITIVE STRATEGY SUCCESS FACTORS
ADVANTAGE
ORGANIZATIONAL
CAPABILITIES

RESOURCES
TANGIBLE INTANGIBLE HUMAN

•Financial •Skills/know-
•Physical •Technology how
•Reputation •Capacity for
•Culture communication
& collaboration
•Motivation
 Appraising Resources
RESOURCE
 CHARACTERISTICS INDICATORS


 Financial Borrowing capacity Debt/ Equity ratio

 Internal funds generation Credit rating
Tangible Net cash flow
Resources Physical Plant and equipment: Market value of
 size, location, technology fixed assets.
 flexibility. Scale of plants
 Land and buildings. Alternative uses for
 Raw materials. fixed assets


 Technology Patents, copyrights, know how No. of patents owned

 R&D facilities. Royalty income
Intangible Technical and scientific R&D expenditure
Resources employees R&D staff


 Reputation Brands. Customer loyalty. Company Brand equity

 reputation (with suppliers, customers, Customer retention
 government) Supplier loyalty


Human
 Training, experience, adaptability, Employee qualifications,
Resources
 commitment and loyalty of employees pay rates, turnover.
 The World’s Most Valuable Brands, 2006

Rank Company
 Brand Rank Company Brand
 value value
 ($bn.) ($bn.)


1 Coca-Cola 67.5 11 Mercedes Benz 20.0

2 Microsoft 59.9 12 Citi 20.0
3 IBM 53.4 13 Hewlett-Packard 18.9
4 GE 47.0 14 American Express 18.6
5 Intel 35.6 15 Gillette 17.5
6 Nokia 26.5 16 BMW 17.1
7 Disney 26.4 17 Cisco 16.6
8 McDonald’s 26.0 18 Louis Vuitton 16.1
9 Toyota 24.8 19 Honda 15.8
10 Marlboro 21.2 20 Samsung 15.0


 http://www.interbrand.com/best_brands_2007.asp Source: Interbrand




 Defining
Defining Organizational
Organizational Capabilities
Capabilities

Organizational Capabilities = firm’s capacity for



undertaking a particular activity. (Grant)

Distinctive Competence = things that an organization



does particularly well relative to competitors. (Selznick)

Core Competence = capabilities that are fundamental to a



firm’s strategy and performance. (Hamel and Prahalad)

Identifying Organizational Capabilities:
A Functional Classification
FUNCTION CAPABILITY EXEMPLARS
Corporate Financial management ExxonMobil, GE
Management Strategic control IBM, Samsung
Coordinating business units BP, P&G
Managing acquisitions Citigroup, Cisco
MIS Speed and responsiveness through Wal-Mart, Dell
rapid information transfer Capital One
R&D Research capability Merck, IBM
Development of innovative new products Apple, 3M
Manufacturing Efficient volume manufacturing Briggs & Stratton
Continuous Improvement Nucor, Harley-D
Flexibility Zara, Four Seasons
Design Design Capability Apple, Nokia
Marketing Brand Management P&G, LVMH
Quality reputation Johnson & Johnson
Responsiveness to market trends MTV, L’Oreal
Sales, Distribution Sales Responsiveness PepsiCo, Pfizer
& Service Efficiency and speed of distribution LL Bean, Dell
Customer Service Singapore Airlines
Caterpillar
 The Value Chain:
The McKinsey Business System

TECHNOLOGY PRODUCT DESIGN MANUFACTURING MARKETING DISTRIBUTION SERVICE

 The Porter Value Chain

FIRM INFRASTRUCTURE SUPPOR

T
HUMAN RESOURCE MANAGEMENT ACTIVITI
TECHNOLOGY DEVELOPMENT ES

PROCUREMENT

INBOUND OPERATIONS OUTBOUND MARKETING SERVICE

LOGISTICS LOGISTICS & SALES

PRIMARY
ACTIVITI
ES
 The Rent-Earning Potential
of Resources and Capabilities

THE EXTENT OF THE Scarcity

COMPETITIVE ADVANTAGE
ESTABLISHED Relevance

Durability
THE PROFIT
EARNING POTENTIAL SUSTAINABILITY OF THE Transferability
OF A RESOURCE OR COMPETITIVE
CAPABILITY ADVANTAGE Replicability

Property rights

Relative
APPROPRIABILITY bargaining power

Embeddedness
 Assessing
AssessingaaCompanies
CompaniesResources
Resources
and
and Capabilities:
Capabilities: The
TheCase
Caseof
of VW
VW
Importan VW’s VW’s
RESOURCES ce Relative
CAPABILITIES Importance
Relative
Strength Strength
C1. Product
R1. Finance 6 4 development
9 4

R2. Technology 7 5 C2. Purchasing 7 5

R3. Plant and 8 8 C3. Engineering 7 9

equipment
C4. Manufacturing 8 7
R4. Location 7 4
C5. Financial
6 3
management
R5. Distribution 8 5
C6. R&D 6 4

C7. Marketing &

9 4
sales

C8. Government
4 8
relations
 Appraising VW’s Resources and Capabilities

(Hypothetical only)

10 Key Strengths
Superfluous Strengths
C3
C8 R3
Relative Strength

C4
C2
5 R2 R5
R1 R4 C1
C6 C7
C5

Zone of Irrelevance Key Weaknesses

1
1 5 10
Strategic Importance
 Approaches
Approaches to
to Capability
CapabilityDevelopment
Development

1)Acquire
1)Acquireand
anddevelop
developthe
theunderlying
underlyingresources.
resources.Especially
Especially
human
humanresources
resources
--Externally
--Externally(hiring)
(hiring)
--Internally
--Internallythrough
throughdeveloping
developingindividual
individualskills
skills
2)Acquire/access
2)Acquire/accesscapabilities
capabilitiesexternally
externallythrough
throughacquisition
acquisitionoror
alliance
alliance
3)Greenfield
3)Greenfielddevelopment
developmentof ofcapabilities
capabilitiesin
inseparate
separate
organizational
organizationalunit
unit(IBM
(IBM&&the
thePC,
PC,Xerox
Xerox&&PARC,
PARC,GMGM&&Saturn)
Saturn)
4)Build
4)Buildteam-based
team-basedcapabilities
capabilitiesthrough
throughtraining
trainingand
andteam
team
development
development(i.e.
(i.e.develop
developorganizational
organizationalroutines)
routines)
5)Align
5)Alignstructure
structure&&systems
systemswithwithrequired
requiredcapabilities
capabilities
6)Change
6)Changemanagement
managementto
totransform
transformvalues
valuesand
andbehaviors
behaviors(GE,
(GE,
BP)
BP)
7)Product
7)Productsequencing
sequencing(Intel
(Intel, ,Sony,
Sony,Hyundai)
Hyundai)
8)Knowledge
8)KnowledgeManagement
Management(systematic
(systematicapproaches
approachesto
toacquiring,
acquiring,
storing,
storing,replicating,
replicating,and
andaccessing
accessingknowledge)
knowledge)
 COMPETITIVE
ADVANTAGE AND THE
SCOPE OF THE FIRM
 From Business Strategy to Corporate
Strategy: The Scope of the Firm

• Business Strategy is concerned with how a firm

computes within a particular market
• Corporate Strategy is concerned with where a
firm competes, i.e. the scope of its activities
• The dimensions of scope are
• product scope
• vertical scope
• geographical scope
•
 Transactions Costs and the
Scope of the Firm

VerticalProduct Geographical
Scope Scope Scope
V
1
[A] Single
Integrated V
P P P C C C
2
Firm 1 2 3 1 2 3
V
[B] Several 3V
P P P C C C
Specialized 1
V 1 2 3 1 2 3
Firms linked 2
by Markets V
3
In situation [A] the business units are integrated within a single firm.
In situation [B] the business units are independent firms linked by markets.
Are the administrative costs of the integrated firm less than the transaction
costs of markets?
 Determinants of Changes in Corporate Scope

1800 – 1980 Expanding scale and scope of industrial corporations due to

declining administrative costs of firms:
• Advances in transportation, information and communication
technologies
• Advances in management—accounting systems, decision sciences,
financial techniques, organizational innovations, scientific management

1980 – 1995 Shrinking size and scope of biggest industrial corporations.

Increasingly Increased no. of managerial Admin. costs of
turbulent decisions. Need for fast firms rise relative
external responses to external to transaction
environment change costs of markets

1995 – 2007 Rapid increase in global concentration (steel, aluminium,

oil, beer, banking, cement).
Key drivers: quest for market power and scale economies.
Also, large corporations better at reconciling size with agility
The
The Basic
Basic Issues
Issues in
in Diversification
Diversification Decisions
Decisions

Superior profit derives from two sources:

INDUSTRY
ATTRACTIVENESS
RATE OF PROFIT
> COST OF CAPITAL
COMPETITIVE
ADVANTAGE

Diversification decisions involve these same two issues:

•How attractive is the sector to be entered?
•Can the firm achieve a competitive advantage?
 Diversification among the US Fortune 500, 1949-74

 70.2 63.5 53.7 53.9 39.9 37.0

 29.8 36.5 46.3 46.1 60.1 63.0


1949 1954 1959 1964 1969 1974



 Percentage of Specialized Companies (single-business,

 vertically-integrated and dominant-business)
 Percentage of Diversified Companies (related-business
 and unrelated business)


 Note: During the 1980s and 1990s the trend reversed as

large
 companies refocused upon their core
businesses

 Diversification
Diversificationamong
amongLarge
LargeUK
UK
Corporations,
Corporations,1950-93
1950-93

70
60
Single business
50
40 Dominant
business
30 Related business
20
Unrelated
10 business
0
1950 1960 1970 1983 1993
 Motives for Diversification

GROWTH --The desire to escape stagnant or declining industries

is a powerful motive for diversification (e.g. tobacco,
 oil, newspapers).
 --But, growth satisfies managers not shareholders.
 --Growth strategies (esp. by acquisition), tend to
 destroy shareholder value

RISK --Diversification reduces variance of profit flows

SPREADING --But, doesn’t create value for shareholders—they can
hold diversified portfolios of securities.
--Capital Asset Pricing Model shows that diversification
lowers unsystematic risk not systematic risk.

PROFIT --For diversification to create shareholder value, then

bringing together of different businesses under
common ownership & must somehow increase
their profitability.
 Diversification and Shareholder Value:
Porter’s Three Essential Tests
 If diversification is to create shareholder value, it must meet
three tests:


 1. The Attractiveness Test: diversification must be directed

towards attractive industries (or have the potential to
become attractive).


 2. The Cost of Entry Test: the cost of entry must not capitalize
all future profits.


 3. The Better-Off Test: either the new unit must gain

competitive advantage from its link with the company, or
vice-versa. (i.e. some form of “synergy” must be present)

Additional source of value from diversification: Option value

 Competitive Advantage from Diversification

•Sharing tangible resources (research

labs, distribution systems) across
multiple businesses
ECONOMIES •Sharing intangible resources (brands,
OF technology) across multiple businesses
SCOPE •Transferring functional capabilities
(marketing, product development) across
businesses
•Applying general management
capabilities to multiple businesses
•Economies of scope not a sufficient
ECONOMIES basis for diversification ----must be
FROM supported by transaction costs
INTERNALIZING
TRANSACTIONS
•Diversification firm can avoid
transaction costs by operating internal
capital and labor markets
•Key advantage of diversified firm over
external markets--- superior access to
information
 Relatedness in Diversification

 Economies of scope in diversification derive from two

types of relatedness:
• Operational Relatedness-- synergies from sharing
resources across businesses (common distribution
facilities, brands, joint R&D)
• Strategic Relatedness-- synergies at the corporate level
deriving from the ability to apply common management
capabilities to different businesses.


 Problem of operational relatedness:- the benefits in

terms of economies of scope may be dwarfed by the
administrative costs involved in their exploitation.
 Transactions Costs and The
Existence of the Firm

• Transaction cost theory explains not just the boundaries

 of firms, also the existence of firms.
• In 18th century English woollen industry, no firms –
 independent spinners and weavers linked by merchants.
• Residential remodeling industry -- mainly independent self-
 employed builders, plumbers, electricians, painters.
• Key issue -- transaction costs of the market vs.
 administrative costs of firms.
• Where transaction costs high—firm is more efficient means
 of organization


 Note: transaction costs comprise costs of search and

contract negotiation and enforcement
 The Costs and Benefits of Vertical
Integration: BENEFITS

• Technical economies from integrating processes e.g. iron

and steel production
 —but doesn’t necessarily require common
ownership
• Superior coordination
• Avoids transactions costs of market contracts in situations
where there are:
 -- small numbers of firms
 -- transaction-specific investments
 -- opportunism and strategic misrepresentation
 -- taxes and regulations on market transactions
 The Costs and Benefits of Vertical
Integration: COSTS
• Differences in optimal scale of operation between different
stages prevents balanced VI
• Strategic differences between different vertical stages create
management difficulties
• Inhibits development of and exploitation of core
competencies
• Limits flexibility -- in responding to demand cycles
 -- in responding to changes in technology,
 customer preferences, etc.
 (But, VI may be conducive to system-wide flexibility)
• Compounding of risk
 When is Vertical Integration More Attractive
than Outsourcing?
How many firms are available The fewer the companies
to undertake the activities? the more attractive is VI
Is transaction-specific investment If yes, VI more attractive
needed?

Does limited information permit VI can limit opportunism

cheating?

Are taxes or regulation imposed VI can avoid them

on transactions?

Do the different stages have similar Greater the similarity, the
optimal scales of operation? more attractive is VI
Are the two stages strategically Greater the strategic
similar? similarity ---the more
attractive is VI
How great the need for entrepreneurship Greater the need, the greater

& continual upgrading of capabilities the disadvantages of VI

How uncertain is market demand? Greater the unpredictability
 ----the more costly is VI
Are risks compounded by VI increases risk.
linkages between vertical stages
 The value chain for steel cans

Canning of
Iron ore Steel Steel strip Can food, drink,
mining production production making oil, etc.

VERTICAL
VERTICAL INTEGRATI
INTEGRATI ON,
ON AND
MARKET
MARKET CONTRACT
MARKET CONTRA S
CONTRA CTS
CTS

What factors explain why some stages are vertically integrated,

while others are linked by market transactions?
Designing Vertical Relationships: Long-Term
Contracts and Quasi-Vertical Integration

• Intermediate between spot transactions and vertical

integration are several types of vertical relationships
 ---such relationships may combine benefits of both
market transactions and internalization


• Key issues in designing vertical relationships

 -- How is risk allocated between the parties?
 -- Are the incentives appropriate?
Recent Trends in Vertical Relationships

• From competitive contracting to supplier partnerships, e.g.

in autos
• From vertical integration to outsourcing (not just
components, also IT, distribution, and administrative
services).
• Diffusion of franchising
• Technology partnerships (e.g. IBM- Apple; Canon- HP)
• Inter-firm networks


 General conclusion: boundaries between firms and

markets becoming increasingly blurred.
 Patterns
Patterns of
of Internationalization
Internationalization
HIG
H

Trading Global
Industries Industries
--aerospace --automobiles
--military hardware --oil
International Trade

--diamond mining --semiconductors

--agriculture --consumer electronics

Domestic Multidomestic
Industries Industries
--railroads
--laundries/dry cleaning --retail banking
--hairdressing --hotels
LO W

--milk --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
THE INDUSTRY
& CAPABILITIES
-- Financial resources
ENVIRONMENT
-- Physical resources Key Success Factors
-- Technology
-- Reputation
-- Functional capabilities
-- General management COMPETITIVE
capabilities 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
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
 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
DEMAND SUPPORTING
CONDITIONS INDUSTRIES

STRATEGY, STRUCTURE,
AND RIVALRY

1.FACTOR CONDITIONS—“Home grown” resources/capabilities more important

than natural endowments.
2. RELATED AND SUPPORTING INDUSTRIES—Key role of “industry clusters”
3. DEMAND CONDITIONS—Discerning domestic customers drive quality &
innovation
4. 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 semiconductor 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)
International Location of Production

–
– 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
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.
 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
 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 Japan 1 -0.36

2 -0.81 3 - 2 +0.48 3
0.41 4 +0.75 +0.48 4 -
0.48
Italy 1 -0.54 2
+0.18 3 +0.14 U.S.A. 1 +0.96
4 +0.72 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
 Determining
Determining the
theOptimal
Optimal Location
Location
of
ofValue
ValueChain
ChainActivities
Activities
Where is the optimal location
of X in terms of the cost and
The optimal location availability of inputs?
of activity X considered
independently What government incentives/ penalties
affect the location decision?

What internal
WHERE TO LOCATE resources and capabilities does the firm
ACTIVITY X? 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

TRANSACTIONS DIRECT INVESTMENT

Exporting Licensing Joint venture Wholly

owned
Marketing & Fully subsidiary
Spot Foreign Distribution integrated
sales agent / only
distributor

Long- Licensing Franchising Marketing& Fully

term patents & Distribution integrated
contract other IP only

Low Resource commitment 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
General Motors’
Motors’Alliances
Allianceswith
with Competitors
Competitors
SAAB ).
0 0 0-5 logy
AVTOVAZ n e d (2 techno FIAT
Ru ow on ents
s si 50% 20%orationmpon
an la b co
JV
t op
owned Col and
SUZUKI rod
10% uc e
ow n c ar
e d. s
C o-
pr od 20% owned; join
uctio
n
GM t production
FUJI
JV
duction 60% to p
Co-pro rod
ISUZU 49% owned. owned u ce
c ar
s in
40% investment IBC Vehicles Ch

50 prod
i na

.9 uc
Ltd. (U.K.)

% ti
50%
SAIC

ow on
owned

n e co
(Makes vans in UK)

d; lla
t e bo
New United Motor

ch ra
ni t i o
Manufacturing

ca n
TOYOTA

l&
50% owned 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, Ted

 if segmented, market Levitt
“Globaliz-
• -ation of
• Accessing global scale economies—in purchasing, Markets”
Thesis
 manufacturing, product development, marketing.
•
• Strategic strength from global leverage—ability to cross- Hamel &
 subsidize a national subsidiary with cash flows from Prahalad
 other national subsidiaries Thesis
• Kenichi
• Need to access market trends and technological Ohmae’s
 developments in each of the world’s major economic “Triad
 centers- N. America, Europe, East Asia. Power”
Thesis
 Globalization
Globalization &&Global
Global Strategy
Strategy—What
—What are
arethey?
they?

•GLOBALIZATION
•GLOBALIZATION??
--Something
--Somethingto tododowith
withincreasing
increasinginterdependence
interdependence
between
between countries.
countries.
•GLOBAL
•GLOBALSTRATEGY
STRATEGY
--At
--Atsimplest
simplestlevel:
level: Treating
Treatingthe
theworld
worldas
asaasingle
single
market
market
E.g.
E.g.Japanese
Japanesecompanies
companiesduring
duringthe
the1970s
1970s&&1980s,
1980s,
(YKK,
(YKK,Honda)
Honda) standard
standardproducts,
products,developed
developed&&
manfactured
manfacturedwithin
withinJapan;
Japan;distributed
distributed&&marketed
marketed
worldwide
worldwide
--At
--Atmore
moresophisticated
sophisticatedlevel:level: Strategy
Strategythat
that
recognizes
recognizes
and
andexploits
exploitslinkages
linkagesbetween
betweencountries
countries(e.g.
(e.g.
exploits
exploits
global
globalscale,
scale,national
nationalresource
resourcedifferences,
differences,
strategic
strategic
World as World as inter- World as
separate
single mkt.competition)
competition) related mkts.
national mkts.

global strategy multidomestic strategy

Analyzing
Analyzing benefits/costs
benefits/costs of
of aa global
global strategy
strategy

Forces
Forcesfor
for globalization
globalization Forces
Forcesforforlocalization
localization/ /national
national
differentiation
differentiation
MARKET
MARKETDRIVERS
DRIVERS
--Common
--Commoncustomer
customerneeds
needs MARKET
MARKETDRIVERS
DRIVERS
--Global customers
--Global customers --Different
--Differentlanguages
languages
--Cross-border
--Cross-bordernetwork
networkeffects --Different
effects --Differentcustomer
customerpreferences
preferences
--Cultural differences
--Cultural differences
COST
COST DRIVERS
DRIVERS COST
COSTDRIVERS
DRIVERS
--Global
--Globalscale
scaleeconomies
economies --Transportation
--Transportationcosts
costs
--Differences
--Differencesin
innational
national --Transaction
--Transactioncosts
costs
resource
resourceavailability
availability --Economic
--Economic&&political
politicalrisk
risk
--Learning
--Learning --Speed
--Speedof ofresponse
response
GOVERNMENT
GOVERNMENTDRIVERS DRIVERS
COMPETITIVE
COMPETITIVEDRIVERS
DRIVERS --Barriers
--Barrierstototrade
trade&&inward
inwardinv.
inv.
--Potential
--Potentialfor
forstrategic
strategic --Regulations
--Regulations
competition
competition (e.g.
(e.g.cross-
cross-
subsidization)
subsidization)
 Jet engines

Autos
Benefits
of Consumer
global electronics Telecom
integration equipment

Steel Investment
banking
Cement Online C2C auctions Restaurant
Retail chains
Beer banking
Dry Auto Funeral
cleaning repair services

Benefits of national differentiation

 Positioning
Positioningindustries
industriesin
in terms
termsofofbenefits
benefitsofof
globalization
globalization and
and national
national differentiation
differentiation

Jet engines

Autos
Benefits
of Consumer
global electronics Telecom
integration equipment

Investment
banking

Retail
Cement banking
Auto Funeral
repair 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

 Consumer Electronics Branded, Packaged Telecommunications

 Consumer Goods Equipment

Matsushit NEC
global integration

 a Ka
o Erickson

integration

integration


global

global
 Philips P&G
General Electric Unilever
 ITT

local responsiveness local responsiveness local responsiveness
 - 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 P&G most - ITT sold out successful
- Ericsson most
 successful
 Reconciling Global Integration with National
Differentiation: The Transnational Corporation

Tight complex Heavy flows of

controls and technology,
coordination and a finances, people,
shared strategic and materials
decision process. 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
Designing the MNC:
MNC: Key
Key Learning
Learning
1. 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?
2. 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
3. What’s the role of HQ?
 --Control function
 --Coordination function
 --Exploiting scale economies in centralized provision
of services
4. The need for internal differentiation
 --By product/business
 --By function
 --By country
5. Formal & informal organization