Session 4 Global Enterprise and Competition


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  • So, Corporate strategy … In pursuit of a vision, the corporation aligns its Goals and Objectives, Organizational Structure, Systems, and Processes, and choice of Industries and Strategies to build and leverage unique resources to give it a corporate advantage.
  • Session 4 Global Enterprise and Competition

    1. 1. Global Enterprise and Competition 66.511.202 Fall 2007 Ashwin Mehta, Visiting Faculty
    2. 2. International Strategy, Structure & Integration Corporate/ Global Strategy Corporate Structure & Integration Business Strategy Business Structure & Integration Strategy --- Global to Regional/Local
    3. 3. Corporate Strategy Framework Corporate strategy vision, goals, objectives building and exploiting corporate advantage (resources) Value creation one time Vs ongoing (businesses) Structure, Systems and Processes For coordination and control Industries
    4. 4. Hierarchy of Strategy Corporate Business Functional <ul><li>Growth </li></ul><ul><li>Stability </li></ul><ul><li>Retrenchment </li></ul><ul><li>Portfolio </li></ul><ul><li>Parenting </li></ul>Competitive (Cost, Differentiation) Cooperative Business ecosystem Functional plans & Integration Leadership, Followership
    5. 5. QUESTIONS OF CORPORATE-LEVEL AND BUSINESS-LEVEL STRATEGY <ul><li>Corporate-level strategy should ask </li></ul><ul><li>Business-level strategy should ask </li></ul><ul><ul><li>In which markets do we compete today? </li></ul></ul><ul><ul><li>In which markets do we want to compete tomorrow? </li></ul></ul><ul><ul><li>How does our ownership of a business ensure its competitiveness today and in the future? </li></ul></ul><ul><ul><li>How do we compete in this market today? </li></ul></ul><ul><ul><li>How will we compete in this market in the future? </li></ul></ul>
    6. 6. Corporate Strategy Directional Portfolio Parenting --- businesses, build, synergies between businesses Growth Concentration Diversification Vertical Horizontal Concentric Conglomerate Invest M&A Alliances Leveraged Growth Stability Retrenchment ---- multiple businesses, products --- analysis to lead to Directional strategy BCG matrix, GE Business Screen market share, industry attractiveness Qualitative and quantitative
    7. 7. <ul><li>Growth Strategy Options </li></ul><ul><li>Organic Growth – Investments in assets required to grow </li></ul><ul><li>Invest in factories. Machinery, skills, etc. </li></ul><ul><li>Time to reap benefits? Risks? Changing environment </li></ul><ul><li>2. Acquisition – buy necessary assets --- tangibles and intangibles </li></ul><ul><li>Upfront payments, Integration issues, unpredictable returns </li></ul><ul><li>3. Alliances – partner with companies to complement </li></ul><ul><li>Typically Buyer-Seller relationships </li></ul><ul><li>Tightly coupled relationship, too much legal, limited flexibility </li></ul><ul><li>4. Leveraged Growth – network of asset owners, orchestrated by A Mobilizer </li></ul><ul><li>Loosely coupled relationship </li></ul><ul><li>Governed by market based economic incentives, not legal agreements </li></ul>Leveraged Growth: Expanding sales without Sacrificing Profits, John Hagel, HBR 2002
    8. 8.
    9. 9. Founded in Guangzhou, the PRC in 1906, the Li & Fung Group is a multinational group of companies driving strong growth in three distinct core businesses - export sourcing through Li & Fung Limited, distribution through IDS and retailing through CRA and other non-listed entities. The Li & Fung Group has a total staff of over 24,000 across 40 countries worldwide, with a revenues of over US$8.5 billion in 2005. The Group's export trading arm is Li & Fung Limited – one of the largest export sourcing firm that manages the supply chain of high-volume, time-sensitive consumer goods through its office network in close to 40 countries. Li & Fung
    10. 10. As a Supply Chain Manager across many producers and countries, Li & Fung provides the convenience of a one-stop shop for customers through a Total Value-Added Package: from product design and development, through raw material and factory sourcing, production planning and management, quality assurance and export documentation to shipping consolidation.
    11. 11. An impressive financial performance (in HK$)
    12. 12. How? Since its founding, in 1906, Li Fung family owned Trading company Acting as a broker between manufacturers and buyers in Apparels Margin pressures as with direct links between buyers and manufacturers Mid-1970’s remade the company From brokerage (connecting 2 points) to an orchestrator – connecting and coordinating many different links of suppliers and buyers owns no factories owns no transportation equipment to ship material in various production stages privileged access to 7,500 supply and manufacturing companies around the World Core competencies: deep knowledge of apparel market Leverage other companies’ assets to grow!
    13. 13. Remaking of the Company Organization – change from traditional geographical to customer centric structures dedicated divisions serve largest apparel designers (Laura Ashley, Abercrombie & Finch, Levi Strauss, etc. other divisions focus on smaller customers Each division run by “lead entrepreneur”, with deep understanding of customers’ needs kept relatively small $30 to 50 million in revenue Supply side – up-to-date information on thousands of suppliers capability and performance Allocate work across the network; give in-depth feedback to further improve performance Knowledge of supply chain makes the Company tailor it to meet the customer need . can begin production within hours after receiving the order from a customer over the Internet!
    14. 14. Global Value Added Idea Design Raw Material Sourcing Consolidation Logistics Quality Control Outsource mfg. to network of suppliers Finding Production Partner Customer network of retail chains Customer (Traditional Trading House)
    15. 15. <ul><li>What are the sources of Li & Fung’s value added? </li></ul><ul><li>Providing integrated supply-chain management through an extensive network </li></ul><ul><li>Reducing customer inventory </li></ul><ul><li>Price and quality control </li></ul><ul><li>Delivery and logistics management </li></ul><ul><li>IT network: production and dist. mgmt. </li></ul><ul><li>Front end: design, engineering, production planning </li></ul><ul><li>Back end: quality control, logistics </li></ul><ul><li>Sourcing, raw materials, components </li></ul><ul><li>Extensive manufacturing network (3000 factories, over 1 million workers) </li></ul>
    16. 16. <ul><li>Creates Li & Fung Distribution </li></ul><ul><li>More customers in Europe </li></ul><ul><li>Greater scale and adds production capacity </li></ul><ul><li>Adds new sources of supply </li></ul><ul><li>Changes IBS from introducing agent between clients and manufacturers to a higher margin sourcing company </li></ul><ul><li>Import business fills gaps </li></ul><ul><li>Additional entry into retail </li></ul><ul><li>Fills in the mosaic by extending sourcing and distribution networks </li></ul>What does merger with Inchcape do for Li & Fung’s strategy?
    17. 17. <ul><li>Li & Fung’s strategy maximizes global value added: </li></ul><ul><li>Supplier network of quality manufacturers with extensive set of relationships </li></ul><ul><li>Li & Fung coordinates supply chain for a specialized set of a products (textiles, toys) </li></ul><ul><li>Customer network of large retail chains (Abercrombie & Fitch, Gymboree) </li></ul><ul><li>Li & Fung consolidates demands and consolidates supplies, establishes prices, coordinates exchange, balances supply and demand, allocates products. </li></ul>
    18. 18. <ul><li>Li & Fung’s supplier networks optimize: </li></ul><ul><li>Gains from trade – taking advantage of economies of scale of suppliers </li></ul><ul><li>Gains from trade – taking advantage of comparative advantages of countries in the supply chain – constant location adjustment </li></ul><ul><li>Costs of trade – taking advantage of best combination to reduce costs of transactions, transportation, tariffs, and time </li></ul><ul><li>Combining elements of supply chain to maximize gains from trade net of costs of trade </li></ul>
    19. 19. Other Examples of Orchastrators Nike (own process network) Cisco (Semi Closed Network) Wal-Mart (Own process network) Technology Systems Integrators (such as EDS, IBM) created a Global network to deliver solutions
    20. 20. Business Strategy Considerations: Arenas – Where will we be active? Vehicles – How do we get there? Differentiators – How will we win? Staging – What speed and sequence? Economic Logic – How will returns be obtained?
    21. 21. JET BLUE STRATEGY <ul><li>Arenas </li></ul><ul><ul><li>Low fare commercial air carrier </li></ul></ul><ul><ul><li>Underserved but over-priced US cities </li></ul></ul><ul><li>Vehicles </li></ul><ul><ul><li>Start from scratch and achieve all growth internally (i.e., do not purchase a regional airline) </li></ul></ul><ul><li>Differentiators </li></ul><ul><ul><li>High level of service compared to low fare competitors (e.g., leather seating, satellite TV) </li></ul></ul><ul><li>Strategy </li></ul><ul><ul><li>Grow from one route between two cities to serving 20 cities in just 3 years </li></ul></ul><ul><li>Economic logic </li></ul><ul><ul><li>Secure cost advantage by being willing and able to perform key tasks differently </li></ul></ul><ul><ul><ul><li>One type of plan </li></ul></ul></ul><ul><ul><ul><li>JFK home base </li></ul></ul></ul><ul><ul><ul><li>Secondary location </li></ul></ul></ul><ul><li>Objective </li></ul><ul><li>To “bring humanity back to air travel” </li></ul>
    22. 22. <ul><li>Evaluating Corporate Strategy --- Five Tests: </li></ul><ul><ul><ul><li>Vision </li></ul></ul></ul><ul><ul><ul><li>Internal Consistency </li></ul></ul></ul><ul><ul><ul><li>External Fit </li></ul></ul></ul><ul><ul><ul><li>Corporate Advantage </li></ul></ul></ul><ul><ul><ul><li>Feasibility </li></ul></ul></ul>
    23. 23. Strategy Formulation process Hierarchy of Strategy---multidimensional view Corporate Global Business Regional Functional Local (Country-level)
    24. 24. A FIRM CAN GAIN ADVANTAGE OVER RIVALS IN TWO WAYS <ul><li>No advantage over rivals </li></ul><ul><li>Advantage over rivals </li></ul><ul><li>Low-cost </li></ul><ul><li>Differentiation </li></ul><ul><li>Description </li></ul><ul><li>Produce an essentially equivalent product at a lower cost </li></ul><ul><li>Produce a differentiated product and charge sufficiently higher prices to more than off-set the added costs of differentiation </li></ul>
    25. 25. THE STRATEGIC POSITIONING MODEL* <ul><li>Low-cost </li></ul><ul><li>Differentiation </li></ul><ul><li>Strategic advantage </li></ul><ul><li>Strategic target </li></ul><ul><li>Narrow (i.e., particular segment only) </li></ul><ul><li>Broad (i.e., industry wide) </li></ul><ul><li>Broad differentiation </li></ul><ul><li>Focused cost leadership </li></ul><ul><li>Focused differentiation </li></ul><ul><li>Broad low-cost leadership </li></ul>*: Michael Porter
    26. 26. LOW-COST LEADERSHIP AND DIFFERENTIATION OFFER GREATER MARKET SHARE AND/OR PROFITS <ul><li>Examples </li></ul><ul><li>Benefits </li></ul><ul><li>Low-cost leadership </li></ul><ul><li>Differentiation </li></ul><ul><ul><li>Pacific Cycle </li></ul></ul><ul><ul><li>Gallo Wines </li></ul></ul><ul><ul><li>Wal-Mart </li></ul></ul><ul><ul><li>Southwest Airlines </li></ul></ul><ul><ul><li>Home Depot </li></ul></ul><ul><ul><li>Trek Bicycles </li></ul></ul><ul><ul><li>Coca-Cola and Pepsi </li></ul></ul><ul><ul><li>Mercedez Benz </li></ul></ul><ul><ul><li>Honda, Yamaha, and Suzuki motorcycles </li></ul></ul><ul><ul><li>Stouffers (frozen foods) </li></ul></ul><ul><ul><li>Capture market share by offering lower-price or </li></ul></ul><ul><ul><li>Earn higher by maintaining price parity </li></ul></ul><ul><ul><li>Capture market share by offering higher quality at same price or </li></ul></ul><ul><ul><li>Earn higher margins by raising prices over competitors </li></ul></ul>
    27. 27. LOW-COST AND DIFFERENTIATION CAN GENERATE HIGH MARGINS <ul><li>Hyundai Elantra </li></ul><ul><li>Honda Civic </li></ul><ul><li>Chevy Cavalier </li></ul>2 <ul><li>Hyundai has a cost advantage </li></ul><ul><li>Honda has a differentiation advantage </li></ul>Price Price Price * Including maintenance and other intangibles <ul><li>Product cost </li></ul><ul><li>Producer’s margin </li></ul><ul><li>Buyer’s cost* </li></ul>
    28. 28. KEY DRIVERS OF COST ADVANTAGE <ul><ul><li>Economies of scale </li></ul></ul><ul><ul><li>Learning </li></ul></ul><ul><ul><li>Product technology </li></ul></ul><ul><ul><li>Product design </li></ul></ul><ul><ul><li>Location advantages for sourcing inputs </li></ul></ul>
    29. 29. KEY DRIVERS OF DIFFERENTIATION ADVANTAGES Key Drivers Purpose <ul><ul><li>Premium brand image </li></ul></ul><ul><ul><li>Customization </li></ul></ul><ul><ul><li>Unique styling </li></ul></ul><ul><ul><li>Speed </li></ul></ul><ul><ul><li>More convenient access </li></ul></ul><ul><ul><li>Unusually high-quality </li></ul></ul><ul><li>To drive up customer’s willingness to pay and generate demand sufficient to </li></ul><ul><li>Recoup added costs and </li></ul><ul><li>Generate enough profits to make strategy worthwhile </li></ul>
    30. 30. DRIVERS AND THREATS TO DIFFERENTIATION AND LOW-COST ADVANTAGE <ul><li>Low-cost </li></ul><ul><li>Differentiation </li></ul><ul><ul><li>Economies of scale </li></ul></ul><ul><ul><li>Learning </li></ul></ul><ul><ul><li>Economies of scope </li></ul></ul><ul><ul><li>Superior technology </li></ul></ul><ul><ul><li>Product design </li></ul></ul><ul><ul><li>Location </li></ul></ul><ul><li>Drivers </li></ul><ul><li>Threats </li></ul><ul><ul><li>New technology </li></ul></ul><ul><ul><li>Too low-quality </li></ul></ul><ul><ul><li>Social, political, and economic risks of outsourcing </li></ul></ul><ul><ul><li>Premium brand image </li></ul></ul><ul><ul><li>Customization </li></ul></ul><ul><ul><li>Unique styling </li></ul></ul><ul><ul><li>Speed </li></ul></ul><ul><ul><li>Convenient access </li></ul></ul><ul><ul><li>Unusually high-quality </li></ul></ul><ul><ul><li>Failure to increase buyer’s willingness to pay higher prices </li></ul></ul><ul><ul><li>Under estimating cost of differentiation </li></ul></ul><ul><ul><li>Over fulfillment of buyer’s needs </li></ul></ul><ul><ul><li>Lower cost imitation </li></ul></ul>
    31. 31. STRATEGIES FOR DIFFERENT PHASES OF THE INDUSTRY LIFE CYCLE <ul><li>Decline </li></ul><ul><li>Mature </li></ul><ul><li>Embryonic </li></ul><ul><li>Growth </li></ul><ul><li>Phases of industry life cycle </li></ul>Rationalizing cost Acquisitions for diversifying moves Divestitures to exit for some competitors Some arenas may be abandoned if decline is severe Focus on segments which provide most profitability Consolidation results in fewer competitors (favoring higher margins) but declining growth demands cost containment and rationalization of operations. Choosing international markets and new industry diversification; need rational sequencing More stable positions emerge across competitors Mergers and acquisitions result in consolidation Globalization Diversification Margins can improve rapidly because of experience and scale Price premiums accrue to successful differentiators Integrated positions require choice of focusing first on cost or differentiation Increased efforts toward differentiation Low cost leaders emerge through gaining experience advantages and scale Alliances for cooperation Acquisitions in targeted markets Penetration into adjacent markets Prices tend to be high. Costs are also high Focus is on securing additional capital to fund growth phase. Tactics to gain early footholds Target basic needs, minimal differentiation Internal development Alliances to secure missing inputs or distribution access Local Economic Logic Staging Differentiators Vehicles Arenas
    32. 32. Strategy Formulation process Hierarchy of Strategy Corporate Business Functional
    33. 33. Functional Strategies Marketing Technology/Development Operations Production Logistics Purchasing Servicing Human Resource Finance Information Technology
    34. 34. Functional Strategies --- Considerations Core Competency Integration Timing (first mover Vs Follower) In-house Vs Outsourcing Strategy Options and Scenarios Evaluation
    35. 35. Global Regional Local Regional teams are the key to Company’s Globalization initiatives Jeffrey Immelt, CEO, GE, HBR 12/2005 Global leverage is about playing 3-D chess- at the global, regional and local levels John Manzer, CEO International, Wal-Mart, HBR 12/2005 Regional strategies for Global leadership* *: Pankaj Ghemawat, HBR 12/2005
    36. 36. Source: Global Marketing Management, Kotabe and Helsen Session 1
    37. 37. LENOVO
    38. 38. How did Lenovo’s home country affect its initial development and management strategy? <ul><li>Domestic strategy-customer focus </li></ul><ul><li>Economies of scale and experience from large domestic market </li></ul><ul><li>Pricing strategy – above domestic competitors and below international entrants </li></ul><ul><li>Strong domestic brand </li></ul><ul><li>Retail outlets and 19 branch offices </li></ul><ul><li>Distribution (2000 distributors and resellers) </li></ul>Yang Yuanqing Vice Chairman, President and CEO
    39. 39. From humble beginnings…
    40. 40. PC-Sales in China: Market Shares 1994 Source: Luo, Yadong, Multinationals in China , Copenhagen 2000
    41. 41. Chinese PC-Market (US$ million)
    42. 42. PC-Sales in China (Millions of Units)
    43. 43. The Chinese Hardware Market <ul><li>30% Average Annual Growth Rate </li></ul><ul><li>More than 50% of all buyers buy units between $1,200 and $1,800 </li></ul><ul><li>What customers value: </li></ul><ul><ul><li>Personal Relationships </li></ul></ul><ul><ul><li>After Sales-Service </li></ul></ul><ul><li>Tariffs (MFN): 15% </li></ul><ul><li>To be lowered. </li></ul><ul><li>Value-Added Tax: 17% </li></ul><ul><li>Market Segmentation by industry: </li></ul><ul><ul><li>Finance 33% </li></ul></ul><ul><ul><li>Telecom 17% </li></ul></ul><ul><ul><li>Government 10% </li></ul></ul><ul><ul><li>Transportation 10% </li></ul></ul><ul><ul><li>Power/Petrol 4% </li></ul></ul><ul><ul><li>Education 6% </li></ul></ul><ul><ul><li>Distribution 4% </li></ul></ul><ul><ul><li>Manufacturing 8% </li></ul></ul><ul><ul><li>Other 8% </li></ul></ul>
    44. 44. Did Lenovo derive any advantages/disadvantages from its home country? <ul><li>Production cost advantage from labor market relative to international competitors not manufacturing in China </li></ul><ul><li>Government connections compared to global entrants </li></ul><ul><li>Local distribution system hard to copy, Continued transaction costs for international companies </li></ul><ul><li>Would DELL’s direct sales approach fit Chinese consumer market? </li></ul>
    45. 45. What threats does Lenovo face, and what competitive advantages were sustainable? <ul><li>Lowering of trade barriers </li></ul><ul><li>DELL and other international businesses started producing in China </li></ul><ul><li>DELL offered direct sales and marketing </li></ul><ul><li>Entrants have global brands </li></ul><ul><li>Entrants have access to latest technology </li></ul><ul><li>Other Chinese companies offered low-cost clones </li></ul><ul><li>Falling component prices affect Legend’s pricing strategy </li></ul><ul><li>Growing importance of notebooks </li></ul>
    46. 46. How did Legend update its strategy? <ul><li>Local tailoring of products and brands to compete with international companies </li></ul><ul><li>Partnerships with global companies </li></ul><ul><li>Launches Lenovo brand </li></ul><ul><li>Product diversification into cell phones and other consumer products </li></ul><ul><li>Adjustment of pricing policies </li></ul><ul><li>Expansion of domestic distribution </li></ul><ul><li>Expansion in business services </li></ul><ul><li>First database server in China </li></ul>
    47. 47. Lenovo Notebook <ul><li>Configuration Soleil 8100DT/8200DT </li></ul><ul><li>CPU Intel Pentium II 266/300MHz(1.7v) </li></ul><ul><li>Monitor 14.2&quot; TFT, XGA 1024*768*16M </li></ul><ul><li>Main Memory 80MB/144MB, expandable to 144MB </li></ul><ul><li>2*144Pin DIMM Cache L2 Cache 512 KB </li></ul><ul><li>24x CD-ROM, USB, PCMCIA, 7 pounds </li></ul>
    48. 48. Lenovo organization 1999
    49. 49. Lenovo Company Structure 2003
    50. 50. What were strategic reasons behind decision to expand internationally? <ul><li>Greater competitive challenges to domestic market from global companies </li></ul><ul><li>Seeking greater economies of scale </li></ul><ul><li>Chinese manufacturing gives cost advantage that can be used to expand to global markets </li></ul><ul><li>Benefits of expanding sales for supporting R&D </li></ul><ul><li>Benefits of developing global brand </li></ul>
    51. 51. Launching a new global brand.
    52. 52. Why did Lenovo choose to expand by IBM acquisition? <ul><li>Lenovo becomes the third largest computer maker in the world </li></ul><ul><li>Temporary access to IBM brand </li></ul><ul><li>Access to Thinkpad brand </li></ul><ul><li>IBM laptop and PC technology </li></ul><ul><li>Access to suppliers </li></ul><ul><li>Increased market power from merger </li></ul><ul><li>Access to management </li></ul>
    53. 54. The IBM acquisition “ Separately, Lenovo and the PC Division possessed outstanding development, manufacturing, marketing and customer-care capabilities, with different areas of expertise and emphasis in the enterprise and consumer markets. Together, as the new Lenovo, those strengths are combined into a growth-oriented, global enterprise, strategically focused on the PC space and more committed to innovation in IT clients than any other company. We have a passion for innovation that is unique in our industry.”
    54. 55. The IBM acquisition Change of headquarters to Purchase, N.Y. Now Raleigh, N.C. William J. AMELIO President and Chief Executive Officer
    55. 56. What challenges lie ahead for Lenovo? <ul><li>Lenovo brand products make worldwide debut (3000 family) </li></ul><ul><li>Head-to-head competition with HP and Dell </li></ul><ul><li>Challenges from low-cost competitors, Acer and others </li></ul><ul><li>More? </li></ul>