Global Strategies and the Multinational Corporation
Implications of International Competition for Industry Analysis
Analyzing Competitive Advantage within an International Context
Applying the Framework
(1) International l ocation of production
(2) Foreign m arket e ntry strategies
Multinational Strategies: Globalization versus National Differentiation
Strategy and Organization of the Multinational Corporation
Patterns of Internationalization Trading Global Industries Industries --aerospace --automobiles --military hardware --oil --diamond mining --semiconductors --agriculture --consumer electronics Domestic Multidomestic Industries Industries --railroads --laundries/dry cleaning --retail banking --hairdressing --hotels - - milk --consulting International Trade Foreign Direct Investment LO W LOW HIGH HIGH
Implications of Internationalization for Industry Analysis
Lower entry barriers around national markets
Increased industry rivalry --- lower seller concentration
--- greater diversity of competitors
Increased buyer power: wider choice for dealers & consumers
Increased intensity of competition
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 COMPETITIVE ADVANTAGE 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
National Influences on Competitiveness: The Theory of Comparative Advantage
A country has a relative efficien cy advantage in those products that make intensive use of resources that are relatively abundant within the country. E.g.
Philippines relatively more efficient in the production of
footwear, apparel, and assembled electronic products than in the production of chemicals and automobiles.
U.S. is relatively more efficient in the production of
semiconductors and pharmaceuticals than shoes or shirts .
When exchange rates are well-behaved, comparative advantage becomes competitive advantage.
Revealed Comparative Advantage for a Certain Broad Product Categories USA Canada W. Germany Italy Japan Food, drink & tobacco .31 .28 -.36 -.29 -.85 Raw materials .43 .51 -.55 -.30 -.88 Oil & refined products -.64 .34 -.72 -.74 -.99 Chemicals .42 -.16 .20 -.06 -.58 Machinery and trans- .12 -.19 .34 .22 .80 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 th ree factors:
International c ompetitive 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 i mpact upon the dynamics of innovation and upgrading.
Porter’s National Diamond Framework FACTOR CONDITIONS DEMAND CONDITIONS RELATING AND SUPPORTING INDUSTRIES STRATEGY, STRUCTURE, AND RIVALRY
FACTOR CONDITIONS — “Home grown” resources / capabilities more important
than natural endowments.
2. RELATED AND SUPPORTING INDUSTRIES —Key role of “industry clusters”
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 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, component s in Korea and Thailand, assembly in Indonesia, China, and India, marketing in Europe and North America)
Power distance Uncertainty avoidance Korea Israel USA France National cultures: “power difference” & “uncertainty avoidance” Denmark Mexico Malaysia Philippines India Japan
Individualist Korea Israel USA France National cultures: individualism/collectivism Denmark Mexico Philippines India Japan Collectivist UK Aust. Germany Malaysia Guatemala Venezuela Italy
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, 199 9 ($)
Germany 26. 93
Japan 20 . 8 9
U.S. 1 9 . 2 0 France 1 9 .9 8 U.K. 1 6 . 56
Spain 1 2 . 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 Hong Kong 1 -0.96 2 -0.81 3 -0.41 4 +0.75 Italy 1 -0.54 2 +0.18 3 +0.14 4 +0.72 Japan 1 -0.36 2 +0.48 3 +0.48 4 -0.48 U.S.A. 1 +0.96 2 +0.64 3 +0.22 4 -0.73 Country Stage Index of Country Stage Index of of Revealed of Revealed Processing C omp arative Processing Comp arative Advant age Advantage Note : 1 = production of fiber (natural & synthetic) 2 = production of spun yarn 3 = production of textiles 4 = production of clothing
The optimal location of activity X considered independently WHERE TO LOCATE ACTIVITY X? The importance of links between activity X and other activities of the firm Where is the optimal location of X in terms of the cost and availability of inputs? What government incentives/ penalties affect the location decision? What internal resources and capabilities does the firm possess in particular locations? What is the firm’s business strategy (e.g. cost vs. differentiation advantage)? How great are the coordination benefits from co-locating activities? Determining the Optimal Location of Value Chain Activities
Alternative Modes of Overseas Market Entry Resource commitment TRANSACTIONS DIRECT INVESTMENT Spot sales Exporting Foreign agent / distributor Licensing Franchising Joint venture Marketing & Distribution only Long-term contract Licensing patents & other IP Fully integrated Wholly owned subsidiary Marketing& Distribution only Fully integrated Low High
Alliances and Joint Ventures: Management Issues
--C ombin ing resources and capabilities of different companies
--L earn ing from one another
--Reducing time-to-market for innovations
--M anagement differences between the two partners. Conflict
most likely where the partners are also competitors.
B enefits are seldom shared equally. D istribution 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?
SUZUKI ISUZU TOYOTA IBC Vehicles Ltd. (U.K.) GM New United Motor Manufacturing Inc. (NUMMI) 10% owned. Co-production 49%owned. Co-production 40% investment 60% owned 50% owned 50% owned (Makes vans in UK) (Makes cars in US) SAAB 50% owned FIAT 20% owned (2000-5). Collaboration on technology and components FUJI 20% owned; joint production DAEWOO 50.9% owned; technical & production collaboration AVTOVAZ Russian JV to produce cars SAIC JV to produce cars in China General Motors ’ Alliances with Competitors
Multinational Strategies: Globalization v s. National D ifferentiation
National preferences in decline — world becoming a single,
if segmented, market
Access ing global scale economies —in purchasing,
manufactu rin g, product development , marketing.
Strategic strength from global leverage—ability to cross-
subsidize a national subsidiary with cash flows from
other national subsidiaries
Need to access market trends and technological
developments in each of the world’s major economic
centers- N. America, Europe, East Asia.
Hamel & Prahalad Thesis Kenichi Ohmae’s “ Triad Power” Thesis Ted Levitt “ Global iz - - at ion of Markets” Thesis The case for a global strategy :
Globalization & Global Strategy —What are they?
--Something to do with increasing interdependence between countries.
-- At simplest level: Treating the world as a single market
E.g. Japanese companies during the 1970s & 1980s,
(YKK, Honda) standard products, developed &
manfactured within Japan; distributed & marketed
--At more sophisticated level: Strategy that recognizes
and exploits linkages between countries (e.g. exploits
global scale, national resource differences, strategic
World as single mkt. World as separate national mkts. global strategy World as inter- related mkts. multidomestic strategy
Analyzing benefits/costs of a global strategy Forces for localization / national differentiation MARKET DRIVERS --Different languages --Different customer preferences --Cultural differences COST DRIVERS --Transportation costs --Transaction costs --Economic & political risk --Speed of response GOVERNMENT DRIVERS --Barriers to trade & inward inv. --Regulations Forces for globalization MARKET DRIVERS --Common customer needs --Global customers --Cross-border network effects COST DRIVERS --Global scale economies --Differences in national resource availability --Learning COMPETITIVE DRIVERS --Potential for strategic competition (e.g. cross- subsidization)
Benefits of national differentiation Benefits of global integration Cement Telecom equipment Jet engines Consumer electronics Autos Funeral services Retail banking Investment banking Auto repair Restaurant chains Steel Online C2C auctions Beer Dry cleaning
Benefits of national differentiation Benefits of global integration Cement Telecom equipment Jet engines Consumer electronics Autos Funeral services Retail banking Investment banking Auto repair Positioning industries in terms of benefits of globalization and 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 S tructures: (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 S tructures: (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