Global Strategies and the Multinational Corporation

OUTLIN E
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

The Internationalization Process

HIGH

International Industries
--aerospace --military hardware --diamond mining --agriculture

Global Industries
--automobiles --oil --semiconductors --consumer electronics

International Trade

Domestic Industries
--railroads --laundries/dry cleaning --hairdressing --milk

Multinational/ Multidomestic Industries

--investment banking --hotels --consulting

LO W

LOW

Foreign Direct Investment

HIGH

The Automobile Goes Global: The GM Pontiac Le Mans

Design: Sheetsteel: Stamping of body parts: Engines: 1.6 liter 2.0 liter Fuel injection: Fuel pump: Transmission: Rear axle: Steering: Germany (by Opel) Japan S. Korea S. Korea Australia U.S. U.S. Canada & U.S. U.S. U.S. Tires: Windshield: Battery: Brakes: France, U.S. S. Korea S. Korea S. Korea S. Korea

Wiring harness: S. Korea Radio: Assembly: Marketing & distribution: N. America Singapore S. Korea

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 industrys 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: 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 a Certain Broad Product Categories

USA Food, drink & tobacco Raw materials Oil & refined products .31 .43 -.64 Canada .28 .51 .34 W. Germany -.36 -.55 -.72 Italy -.29 -.30 -.74 Japan -.85 -.88 -.99

Chemicals
Machinery and transportation equipment Other manufacturers

.42
.12

-.16
-.19

.20
.34

-.06
.22

-.58
.80

-.68

-.07

.01

.29

.40

Note:

Revealed comparative advantage for each product group is measured as: (Exports less Imports)/ Domestic production

Porters 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 countriesthe 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.

Porters National Diamond Framework

FACTOR CONDITIONS

DEMAND CONDITIONS

RELATING AND SUPPORTING INDUSTRIES

STRATEGY, STRUCTURE, AND RIVALRY

1. 2. 3. 4.

FACTOR CONDITIONSHome grown resources/capabilities more important than natural endowments. RELATED AND SUPPORTING INDUSTRIESKey role of industry clusters DEMAND CONDITIONSDiscerning 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)

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 companys 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 1 2 3 4

-0.96 -0.81 -0.41 +0.75 -0.54 +0.18 +0.14 +0.72

Japan

1 2 3 4 1 2 3 4

-0.36 +0.48 +0.48 -0.48 +0.96 +0.64 +0.22 -0.73

Italy

U.S.A.

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

Where is the optimal location of X in terms of the cost and availability of inputs? What government incentives/ penalties affect the location decision?

The optimal location of activity X considered independently

WHERE TO LOCATE ACTIVITY X?

What internal resources and capabilities does the firm possess in particular locations?
What is the firms 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 Exporting: Exporting: Exporting: Licensing Franchising Joint Spot Long-term with foreign technology venture transcontract distributor/ and Marketing & actions agent trademarks distribution only DIRECT INVESTMENT Wholly owned subsidiary Fully Marketing Fully integral& sales integrated ted only

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 capabilities needed to serve the overseas market? Can the firm directly appropriate the returns to its resources? What transaction costs are involved?

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. Disputes 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 contributionwhich partners resources and capabilities can more easily be captured by the other? Absorptive capacity of the company-- which partner is the more receptive learner?

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 partners 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 SUZUKI 50% owned GM ISUZU 40% investment 60% owned FUJI FIAT

IBC Vehicles Limited (U.K.) Makes vans in UK

New United Motor Manufacturing Inc. (NUMMI) Makes cars in US

TOYOTA

50%owned

DAEWOO

Analyzing benefits/costs of a global strategy

Forces for globalization
MARKET DRIVERS

--Similarity of needs --Appeal of foreign-ness --Network effects

COST DRIVERS

Forces for localization / national differentiation

MARKET DRIVERS --Different customer preferences --Cultural differences COST DRIVERS --Transportation costs --Transaction costs --Economic & political risk (+ or -?) --Speed of response GOVERNMENT DRIVERS --Barriers to trade & inward inv. --Regulations

--Scale --Learning --National differences in resource costs

COMPETITIVE DRIVERS --Strategic competition (X subsidization)

Multinational Strategies: Globalization vs. National Differentiation

The case for a global strategy:

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 crosssubsidize a national subsidiary with cash flows from other national subsidiaries Need to access market trends and technological developments in each of the worlds major economic centers- N. America, Europe, East Asia.

Ted Levitt Globaliz-ation of Markets Thesis

Hamel & Prahalad Thesis Kenichi Ohmaes Triad Power Thesis

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 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) 1945-1970U.S. Dominance

American MNCs 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 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 distribution companies with limited autonomy. e.g. Toyota, NEC, Matsushita

Matching Global Strategies and Structures to Industry Conditions

Degree of globalization depends upon the benefits of global integration versus the benefits of national differentiation. Key issues: --How important are global scale economies? --How different are customer requirements between countries?
Jet engines Benefits of global integration Consumer electronics
Telecommunications

equipment

Packaged

Cement

grocery products Benefits of national differentiation

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

Consumer Electronics
global integration

Branded, Packaged Consumer Goods

global integration Ka o P&G Unilever local responsiveness

Telecommunications Equipment
global integration NEC Erickson

Matsushit a Philips General Electric local responsiveness

ITT local responsiveness

- Global industry
- Matsushita the most successful - Philips the survivor - GE sold out

- Substantial national differentiation, few global scale economies - Kao has limited success outside Japan - Unilever and P&G most successful

- Requires both global integration and national differentiation. - NEC only partially successful - ITT sold out - Ericsson most successful

Figure 14.8. 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.

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. On what basis to organizeproducts, geography, functions? --Where is coordination most important? --How global is the industry? How global is the firms 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 Whats 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

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5.