Global Strategies n MNC

8/2/2019 Global Strategies n MNC

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Global Strategies and theMultinational Corporation

Implications of International Competition for Industry

Analysis

Analyzing Competitive Advantage within an InternationalContext

Applying the Framework

(1) International location of production

(2) Foreign market entry strategies

Multinational Strategies: Globalization versus NationalDifferentiation

Strategy and Organization of the Multinational Corporation

OUTLINE


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The Internationalization Process

International GlobalIndustries Industries

--aerospace --automobiles

--military hardware --oil--diamond mining --semiconductors--agriculture --consumer electronics

Domestic Multinational/

Industries Multidomestic--railroads Industries--laundries/dry cleaning --investment banking--hairdressing --hotels--milk --consulting

InternationalTrade

Foreign Direct Investment

LOW

LOW

HIGH

HIGH


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The Automobile Goes Global:

The GM Pontiac Le Mans

Design: Germany (by Opel) Brakes: France, U.S.

Sheetsteel: Japan S. Korea

Stamping of body parts: S. Korea Tires: S. KoreaEngines: 1.6 liter S. Korea Windshield: S. Korea

2.0 liter Australia Battery: S. Korea

Fuel injection: U.S. Wiring harness: S. Korea

Fuel pump: U.S. Radio: Singapore

Transmission: Canada & U.S. Assembly: S. Korea

Rear axle: U.S. Marketing &

Steering: U.S. distribution: N. America


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Implications of Internationalizationfor 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

industrys margins & rate of return on capital


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COMPETITIVEADVANTAGE

THE INDUSTRY ENVIRONMENT

Key Success Factors

FIRM RESOURCES& CAPABILITIES

-- Financial resources

-- Physical resources

-- Technology

-- Reputation

-- Functional capabilities-- General management

capabilities

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

Competitive Advantage within an International

Context: The Basic Framework


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National Influences onCompetitiveness: The Theory of

Comparative Advantage

A country has a relative efficiency advantage in those productsthat make intensive use of resources that are relativelyabundant within the country. E.g.

Philippines relatively more efficient in the production offootwear, apparel, and assembled electronic products than inthe 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, comparativeadvantage becomes competitive advantage.


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Revealed Comparative Advantage fora 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


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Porters Competitive Advantageof Nations

Extends and adapts traditional theory of comparativeadvantage to take account of three factors:

International competitive advantage is about companies notcountriesthe role of the national environment is providinga home basefor the company.

Sustained competitive advantage depends upon dynamicfactors-- innovationand the upgradingof resources and

capabilities The critical role of the national environment is its impact

upon the dynamics of innovation and upgrading.


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FACTOR CONDITIONS

DEMANDCONDITIONS

RELATING AND

SUPPORTINGINDUSTRIES

STRATEGY, STRUCTURE,AND RIVALRY

Porters National Diamond Framework

1. FACTOR CONDITIONSHome grownresources/capabilities more importantthan natural endowments.

2. RELATED AND SUPPORTING INDUSTRIESKey role of industry clusters3. DEMAND CONDITIONSDiscerning domestic customers drive quality & innovation

4. STRATEGY, STRUCTURE, RIVALRY. E.g. domestic rivalry drives upgrading.


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Consistency Between Strategyand National Conditions

In globally-competitive industries, firm strategy needs totake account of national conditions:

U.S. textile manufacturers must compete on the basis ofadvanced process technologies and focus on high quality,less price-sensitive market segments

In the semiconduictor industry, CA-based firms concentratemainly upon design of advanced chips, Malaysian firms

concentrate upon fabrication of high volume, lesstechnologically advanced items (e.g. DRAM chips)

Dispersion of value chain to exploit different nationalenvironments (e.g. Nike conducts R&D in US, components inKorea and Thailand, assembly in Indonesia, China, and India,marketing in Europe and North America)


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International Location of Production

3 considerations:

National resource conditions: What are the majorresources which the product requires? Where are these

available at low cost?

Firm-specific advantages: to what extent is thecompanys competitive advantage based upon firm-specific resources and capabilities, and are thesetransferable?

Tradability issues: Can the product be transported ateconomic cost? If not, or if trade restrictions exist, thenproduction must be close to the market.


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The Role of Labor Costs

Hourly Compensation for Production Workers, 1999 ($)

Germany 26.93

Japan 20.89

U.S. 19.20France 19.98

U.K. 16.56Spain 12.11

Korea 6.75Mexico 2.12

BUT, wages are only one element of costs:

Cost of Producing a Compact AutomobileU.S. Mexico

Parts & components 7,750 8,000Labor 700 40Shipping cost 300 1,000Inventory 20 40

TOTAL 8,770 9,180


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Location and the Value Chain

Comparative advantage in textiles and apparel by stage of processing

Hong Kong 1 -0.962 -0.813 -0.414 +0.75

Italy 1 -0.54

2 +0.183 +0.144 +0.72

Japan 1 -0.362 +0.483 +0.484 -0.48

U.S.A. 1 +0.96

2 +0.643 +0.224 -0.73

Country Stage Index of Country Stage Index ofof Revealed of Revealed

Processing Comparative Processing ComparativeAdvantage Advantage

Note:1 = production of fiber (natural & synthetic) 2 = production of spun yarn

3 = production of textiles 4 = production of clothing


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The optimal locationof activity X considered

independently

WHERE TO LOCATEACTIVITY X?

The importance of linksbetween activity X and

other activities of the firm

Where is the optimal locationof X in terms of the cost and

availability of inputs?

What government incentives/ penaltiesaffect the location decision?

What internalresources and capabilities does the firm

possess in particular locations?

What is the firms business strategy

(e.g. cost vs. differentiation advantage)?

How great are the coordination

benefits from co-locating activities?

Determining the Optimal Locationof Value Chain Activities


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TRANSACTIONS DIRECT INVESTMENT

Exporting: Exporting: Exporting: Licensing Franchising Joint Wholly owned

Spot Long-term with foreign technology venture subsidiary

trans- contract distributor/ and Marketing & Fully Marketing Fully

actions agent trademarks distribution integral- & sales integrated

only ted only

Alternative Modes of Overseas Market Entry

Key issues:

Is the firms competitive advantages based upon firm-specific or

country-specific resources and capabilities?

Is the product tradable and what are the barriers to/ costs of trade?

Does the firm possess the full range of resources and capabilitiesneeded to serve the overseas market?Can the firm directly appropriate the returns to its resources?What transaction costs are involved?


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Alliances and Joint Ventures: Management

Issues

Benefits:--Access to the resources and capabilities of another company--Learning from one another--Reducing time-to-market for innovations--Risk sharing

Problems:--Disagreements & conflict between the partners. Disputesmost likely where the partners are also competitors.

Benefits are seldom shared equally. Distribution of benefits determinedby:

Strategic intent of the partners- which partner has the clearer vision

of the purpose of the alliance? Appropriability of the contributionwhich partners resources and

capabilities can more easily be captured by the other?

Absorptive capacity of the company-- which partner is the morereceptive learner?


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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 benefitsdetermined by:

Strategic intent of the partners- which partner has the clearervision of the purpose of the alliance?

Appropriability of the contribution-- which partners resourcesand capabilities can more easily be captured by the other?

Absorptive capacity of the company-- which partner is themore receptive learner?


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SUZUKI

ISUZU

TOYOTA

IBC VehiclesLimited(U.K.)

GM

New United MotorManufacturingInc. (NUMMI)

40% investment

60%

owned

50%owned

Makes vans in UK

Makes cars in US

SAAB

50%

owned

FIAT

FUJI

DAEWOO

General Motors Alliances with Competitors


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Analyzing benefits/costs of aglobal strategy

Forces for globalization

MARKET DRIVERS

--Similarity of needs--Appeal of foreign-ness

--Network effectsCOST DRIVERS

--Scale--Learning--National differences in

resource costsCOMPETITIVE DRIVERS--Strategic competition (X

subsidization)

Forces for localization / nationaldifferentiation

MARKET DRIVERS

--Different customer preferences

--Cultural differences

COST DRIVERS--Transportation costs--Transaction costs--Economic & political risk (+ or -?)

--Speed of responseGOVERNMENT DRIVERS--Barriers to trade & inward inv.--Regulations


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Multinational Strategies:Globalization vs. National Differentiation

National preferences in declineworld becoming a single,if segmented, market

Accessing global scale economiesin purchasing,manufacturing, product development, marketing.

Strategic strength from global leverageability to cross-

subsidize a national subsidiary with cash flows fromother national subsidiaries

Need to access market trends and technologicaldevelopments in each of the worlds major economic

centers- N. America, Europe, East Asia.

Hamel &

PrahaladThesis

KenichiOhmaes

Triad

Power

Thesis

TedLevitt

Globaliz-

-ation ofMarkets

Thesis

The case for a global strategy:


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The Evolution of Multinational Strategies and

Structures: (1) 1900-1939Era of the Europeans

The European MNC as Decentralized Federation :

National subsidiaries self-sufficient and autonomous

Parent control through appointment of subsidiaries seniormanagement

Organization and management systems reflect conditions oftransport and communications at the time e.g. Unilever, Phillips,Courtaulds, Royal Dutch/Shell.


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The Evolution of Multinational Strategies

and Structures: (2) 1945-1970U.S. Dominance

American MNCs as Coordinated Federations :

National subsidiaries fairly autonomous

Dominant role as U.S. parent-- especially in developingnew technology and products

Parent-subsidiary relations involved flows of technologyand finance, and appointment of top management.e.g.

Ford, GM, Coca Cola, IBM


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The Evolution of MultinationalStrategies and Structures:

(3) 1970s and 1980sThe 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 distributioncompanies with limited autonomy. e.g. Toyota, NEC,Matsushita


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Matching Global Strategies and Structuresto Industry Conditions

Degree of globalization depends upon the benefits of globalintegration versus the benefits of national differentiation.

Key issues: --How important are global scale economies?--How different are customer requirements

between countries?

Benefits of national differentiation

Benefitsof

global

integration

Cement

Telecommunicationsequipment

Packagedgrocery products

Jet engines

Consumerelectronics


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Marketing Global Strategies and Situations to IndustryConditions: Firm Success in Different Industries

Consumer Electronics Branded, Packaged TelecommunicationsConsumer Goods Equipment

-Global industry - Substantial national - Requires both global

- Matsushita the most differentiation, few global integration and nationalsuccessful 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 outsuccessful - Ericsson most

successful

local responsiveness local responsiveness local responsivenessglobalintegration

globalintegration

globalintegrationMatsushit

a

Philips

General Electric

Ka

o

P&G

Unilever

NEC

Erickson

ITT


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Tight complex controlsand coordination and a

shared strategicdecision process.

Heavy flows oftechnology, finances,people, and materials

betweeninterdependent units.

Figure 14.8. The Transnational Corporation


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Reconciling Global Integration with NationalDifferentiation: The Transnational Corporation

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 throughcreating the right organizational context.

Tight complexcontrols and

coordination and ashared strategic

decision process.

Heavy flows oftechnology,

finances, people,and materials

betweeninterdependent

units.


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1. On what basis to organizeproducts, geography, functions?

--Where is coordination most important?--How global is the industry? How global is the firmsstrategy?

2. If one dimension is dominant, how to coordination along theother dimensions?

--Maintain single line accountability--Other dimensions of coordination can be dotted line

relations

3. Whats 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

Designing the MNC: Key Learning

Global Strategies n MNC

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