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Introduction IB
Lecture 2: Competitiveness: firm and country factors HBR Hout & Ghemawat, Dec 2010
IB&M / Professor Dr. S. Beugelsdijk

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1. Did you hand in the HBR assignment today?

2. 3. 4. 5. Did you check nestor? Did you find a teammate? Did you print the slides before the lecture? Be prepared for next tutorial Grades? When? ASAP

Figure 1.2: last time we stopped here: Honda?

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Depending on the FSAs, the fit with the host country location advantages,
and the reason for going abroad, different ways of organizing exist.

Verbeke distinguishes 4 archetypes: 1. 2. 3. 4. Centralized exporter International projector International coordinator Multi-centered MNE

There is not one best model, depends on FSAs and host country.

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1. Centralized exporter
Market seeker, FSA = final product Host country location factor = customers Figure 1.3

Internationally transferable FSAs are used to directly target the host country location advantages. No development of NLB FSAs let alone LB FSAs in the host country.

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Centralized exporter
Figure 1.3 Centralized exporter

Home Country

International border

Host Country

The arrow cutting through dotted areas represents the direct link between home country NLB FSAs, and the host countrys LAs (i.e. the foreign market), without development of new, LB FSAs in the host country, or formal transfer of existing NLB FSAs to the host country (the NLB FSAs are embodied in the centralized exporters products).

Internationally Location advantages Non-transferable (or location-bound) FSAs transferable (or nonhome country home country location bound) FSAs

Internationally Non-transferable (or Location advantages transferable (or non- location-bound) FSAs host country location bound) FSAs host country

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2. International projector: clones home operations develops no new FSAs Figure 1.4

FSAs from home country are copied. Only the internationally transferable FSAs are taken to the host country. No development of location bound FSAs in the host country.

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International projector
Figure 1.4 International projector

Home Country

International border

Host Country

The dotted area of LB FSAs in the middle of the host country triangle reflects the international projectors lack of development of LB FSAs in the host country, where operations simply clone those prevailing in the home country. Extant NLB FSAs suffice to access and benefit from host country LAs.

Location advantages Non-transferable (or location-bound) FSAs home country home country

Internationally transferable (or nonlocation bound) FSAs

Internationally transferable (or nonlocation bound) FSAs

Non-transferable (or location-bound) FSAs host country

Location advantages host country

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3. International coordinator:
Main transferable FSA = ability to coordinate location advantages present in multiple countries

Figure 1.5

Often for efficiency seeking MNE activity. Global value chain. Use internationally transferable FSAs in each host country to develop LB FSAs that fit the host country location factors.

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International coordinator
Figure 1.5 International coordinator

International border

Host Country A

Home Country

Host Country B

The different sizes of the shaded areas in the various host countries reflect the different types and levels of home country NLB FSAs to be transferred to different host environments in function of the LAs the firm wishes to access. The circle linking the various countries reflects the international coordinators strengths in putting together a value chain based upon access to the coveted LAs of each country where the firm operates.

Host Country C

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4. Multi centred MNE:

each host country develops own location bound FSAs only tranfer of core routines (like financial management or IT system)

Figure 1.6
- Basically a full fledged replica in each host country. - Maximum local responsiveness - Portfolio of independent businesses: perfect example is Lafarge as discussed on page 22: see last sentence: next slide

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Multi centred MNE

Figure 1.6 Multi-centered MNE
International border Host Country A

Stand-alone FSAs

Home Country

Routines

Host Country B

Re-combination capabilities

The multi-centered MNE transfers only key routines from the home country to host countries. The large, shaded middle areas in the host countries represent the necessity to build new, LB FSAs in each host country. The double-headed arrows reflect the close alignment the host country operations must develop between their own LB FSAs and the hosts LAs.

Host Country C

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Illustration of multi-centered MNE local adaptation

Each of our businesses is primarily a local business: our products cannot economically be transported over significant distances, construction markets have strong local characteristics, proximity is important for our customers, relationships with local communities are key, and much of know-how originates from local experience Lafarge (concrete business in France) in book

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Figure 1.1 Core concepts

FSAs
Stand-alone FSAs

Bounded rationality

Home Country

Routines

International border

Host Country

Re-combination capabilities

The triangular shape in the model represents the pyramidal nature of the firms advantages: on the broad base of the location advantages (LAs) of its home country (left) it builds a smaller subset of FSAs that are locationbound (LB; middle), and then a still smaller subset that are non-location bound (NLB; right). Bounded rationality and bounded reliability influence the ability of these nonlocation bound FSAs to be transferred across the international border to the host country.

Bounded reliability

Location advantages home country

Non-transferable (or location-bound) FSAs home country

Internationally transferable (or non-location bound) FSAs

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FSA is related to firm and country location advantages, so:

Introduce the notion of firms core competences Introduce Porters diamond of country/industry competitiveness

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Firm level: Core Competences (Prahalad and Hamel,

1990, HBR)

Interpreted as higher order FSAs, but difficult to distinguish from FSA

i.e. the firms routines and recombination capabilities (entrepreneurial ability) to produce core products, which are put together to create end products. core competencies core products end products that create value e.g. book example Honda with the compact engine

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Four key characteristics of core competences:

+ Difficult to imitate Be broadly used in a variety of markets Make a contribution to customer needs A loss of a core competence would have a large negative effect on the firms present and future performance

Role of strategic mngt: develop strategic architecture to allow this. Thus, to develop a road map of the future that identifies core competencies to build the required technologies. Heuh? What?

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Note that Prahalad and Hamels concept of core competences was published in 1990; Japanese superior
management in certain industries (e.g. automobile).

Verbeke argues (p. 81) that core competences of firms in industries may differ. E.g Japanese superior in industry A (productivity and just in time production systems), and Americans superior in industry B (economies of scale).

This is often historically driven! Key is fit between industry demands and FSA types.

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Key critique on core competence approach is that Prahalad and Hamel do not include country factors in their analysis:
~ overestimate the role of strategic management ~ underestimate role of (host) country location factors

This is where Porter comes in

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Porter devotes attention to these country advantages Porters Diamond consists of five forces. Key idea:
Location advantages in the home country Home country + External Competition in the home market pressure push innovation and implies upgrade of FSA = Creation of FSA instrument in expanding abroad IB activity:
going abroad

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So crucial question: what are these home country location advantages that affect firm competitiveness and FSA development? 1. Factor conditions
2. Demand conditions 3. Related and supporting industries 4. Firm strategy, structure and rivalry 5. Government and chance five forces model / related factors/ industry-specific

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1. Factor conditions
Factors relate to productions factors: Capital, labor, technology
Firms need to constinuously develop new skills - Continuous learning of employees - Continuous innovation of machines e.g. Japan, firms had a lack of space (small & densely populated country) minimize warehouse space Just In Time production as a management tool

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2. Demand conditions
If buyers are demanding, external pressure on firms increases competitiveness increases.

3. Related and supporting industries

High quality suppliers

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4. Firm strategy, structure and rivalry

Competitive industry Not-sheltered protective markets Well-functioning industry

The first 2 force firms to focus on their FSA development

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5. Government and chance

Well functioning and not corrupt
Lucky; for example innovation process, or e.g. choice of a person to locate somewhere (Silicon Valley was started by an engineer who liked the good climate, but also Philips Eindhoven) Often long-term consequences of chance

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Together these five forces are related and each industry has its own characteristics leading to different patterns of international competitiveness But also critique: key concern: FSAs are in Porters theory completely domestically determined
Porter places too (?) much emphasis on the home country as the appropriate level of analysis.

Figure 3.1
Figure 3.1 Domestic diamond determinants as drivers of home-base location advantages, and subsequent FSAs
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B
Weak

A domestic C
diamond

LAs

LAs

LB FSAs

Where the domestic diamond is strong (pictured here as a large diamond), this model predicts the creation of NLB FSAs will be stimulated, while this will not occur where the diamond is weak (pictured here as a small diamond).

Strong domestic diamond

LAs

LAs

LB FSAs

LAs

LB FSAs Non-LB FSAs

D A. Factor conditions B. Related and supporting industries C. Demand conditions D. Firm strategy, industry structure, and rivalry Home country Host country

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In sum, key critique on Porters diamond model from IB perspective: Porters work misses one key point in IB:
firms expand abroad only if they can establish a match between their FSAs and the location advantages of the host economies they penetrate, whether input or output markets (Verbeke, 2009, p. 113 bottom) Porter is too much home country driven, and deterministic

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Wrap up Lecture 2:

Understand the four archetypes of organizing IB activity Understand notion of core competencies (CC) Understand and explain critique on CC Understand Porters diamond model Understand critique on Porter

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Assignment for tomorrow: Please re-read the book chapters 1, 2 and 3 as specified in coursebook on Nestor Assignment next tutorial (next week): Prepare Ikea case (as in Book) and exercise questions (as shown on next page): hand in Ikea case in tutorial and prepare exercise questions Assignment next lecture (in 2 weeks): have a look at the Excel data on sales of US multinationals

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Exercise questions that will be discussed in the tutorial:

1. 2. 3. Which four archetypes does Verbeke distinguish? Draw the figures associated with these archetypes. Is there one best model? Why or why not? Do you consider a centralized exporter a true multinational?

4.
5.

What does it mean that the FSA is embodied in the product in case of an international exporter?
Does the firm develop FSAs in the host country in case of the international projector?

6.

Why is the international coordinator an example of a global value chain?

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Exercise question (contd):

7. 8. Why is a multi-centred MNE characterized by maximum local responsiveness? The FSA is also framed in terms of core competences. That is the FSA is strongly related to the core competences of a firm. What key characteristics does Verbeke list for these core competences? What critique does Verbeke have on the concept of core competences?

9.

10. What are the five forces that Porter distinguishes? Explain these in your own words 11. How does Porters model fit in figure 1.2? Where does it belong? 12. What is the big problem of Porters model when applied in the context of International Business?

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Thank you for your attention