Strategic management


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Strategic management

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  • 2 2 3 routine decisions are not strategic can be replaced by policy or delegated Importance of making a decision Soccer analogy Road analogy Macro environment Stakeholders suppliers customers competitors Government Owners Employees
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  • VHS vs. DVD Cell phones vs. landline phones Dial-up vs. high-speed Internet services Yellow pages vs. Internet-based local service
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  • Strategic management

    2. 2. Course Overview: Objectives <ul><li>To acquire familiarity with the principal concepts, frameworks and techniques of strategic management. </li></ul><ul><li>To gain expertise in applying these concepts, frameworks and techniques in order to </li></ul><ul><li>- understand the reasons for good or bad performance by an enterprise, </li></ul><ul><li>- generate strategy options for an enterprise, </li></ul><ul><li>- assess available options under conditions of imperfect knowledge, </li></ul><ul><li>- select the most appropriate strategy, </li></ul><ul><li>- recommend the best means of implementing the chosen strategy. </li></ul>2
    3. 3. Course Overview: Objectives (cont’d) <ul><li>To integrate the knowledge gained in previous courses. </li></ul><ul><li>To develop your capacity as a general manager in terms of </li></ul><ul><li>- an appreciation of the work of the general manager, </li></ul><ul><li>- the ability to view business problems from a general management perspective, </li></ul><ul><li>- the ability to develop original and innovative approaches to strategic problems, </li></ul><ul><li>- developing business judgment. </li></ul>3
    4. 4. THE CONCEPT OF STRATEGY The Concept of Strategy and the Pursuit of Sustainable Above-Normal Profits
    5. 5. <ul><li>Domain of Strategy </li></ul><ul><li>strategic competitiveness and above normal returns </li></ul><ul><li>concerns managerial decisions and actions which materially affect the success and survival of business enterprises </li></ul><ul><li>involves the judgment necessary to strategically position a business and its resources so as to maximize long-term profits in the face of irreducible uncertainty and aggressive competition </li></ul><ul><li>strategy is the linkage between a business and its current and future environment </li></ul>
    6. 6. Definition <ul><li>The determination of the long run goals and objectives of an enterprise, the adoption of courses of action and the allocation of resources necessary for carrying out these goals </li></ul><ul><li>Alfred Chandler, Strategy and Structure </li></ul>
    7. 7. Levels of Strategy FUNCTIONAL STRATEGIES BUSINESS STRATEGY CORPORATE STRATEGY CORPORATE HEAD OFFICE Division A R & D Personnel Finance Production Marketing/Sales Division B R & D Personnel Finance Production Marketing/Sales
    8. 8. Levels of Strategy <ul><li>Corporate strategy ... defines the scope of the business in terms of the industries and markets in which it competes. </li></ul><ul><ul><li>includes decisions about diversification, vertical integration, acquisitions, new ventures, divestments, allocation of scarce resources between business units </li></ul></ul><ul><li>Business strategy ... is concerned with how the firm competes within a particular industry or market... to win a business unit must adopt a strategy that establishes a competitive advantage over its rivals. </li></ul><ul><li>Functional strategy ... the detailed deployment of resources at the operational level </li></ul>
    9. 9. Common Elements in Successful Strategy Successful Strategy $ EFFECTIVE IMPLEMENTATION Profound understanding of the competitive environment Objective appraisal of resources Long-term, simple and agreed upon objectives
    10. 10. Strategy as a Quest for Profit <ul><li>The stakeholder approach : The firm is a coalition of interest groups—it seeks to balance their different objectives </li></ul><ul><li>The shareholder approach : The firm exists to maximize the wealth of </li></ul><ul><li>its owners (= max. present value of profits over the life of the firm) </li></ul><ul><li>For the purposes of strategy analysis we assume that the primary goal of the firm is profit maximization. </li></ul><ul><li>Rationale: </li></ul><ul><li>Boards of directors legally obliged to pursue shareholder interest </li></ul><ul><li>To replace assets firm must earn return on capital > cost of capital </li></ul><ul><li>(difficult when competition strong). </li></ul><ul><li>Firms that do not max. stock-market value will be acquired </li></ul>Hence: Strategy analysis is concerned with identifying and accessing the sources of profit available to the firm
    11. 11. From Profit Maximization to Value Maximization <ul><li>Profit maximization an ambiguous goal </li></ul><ul><ul><li>Total profit vs. Rate of profit </li></ul></ul><ul><ul><li>Over what time period? </li></ul></ul><ul><ul><li>What measure of profit? </li></ul></ul><ul><ul><li>Accounting profit versus economic profit (e.g. Economic Value Added: Post-tax operating profit less cost of capital </li></ul></ul>Maximizing the value of the firm: Max. net present value of free cash flows: max. V =  t C t (1 + r) t Where: V market value of the firm. C t free cash flow in time t r weighted average cost of capital
    12. 12. The World’s Most Valuable Companies: Performance Under Different Profitability Measures COMPANY MARKET CAP. ($BN.) NET INCOME ($BN) RETURN ON SALES (%) RETURN ON EQUITY (%) RETURN ON ASSETS (%) RETURN TO SHARE-HOLDERS (%) Exxon Mobil 372 36.1 19.9 34.9 17.8 11.7 General Electric 363 16.4 10.7 22.2 14.7 (1.5) Microsoft 281 12.3 40.3 30.0 18.8 (0.9) Citigroup 239 24.6 22.0 21.9 1.5 4.6 BP 233 22.3 9.9 27.9 10.7 10.2 Bank of America 212 16.5 27.0 14.1 1.2 2.4 Royal Dutch Shell 211 25.3 14.7 26.7 11.6 11.8 Wal-Mart 197 11.2 5.5 21.4 8.1 (10.3) Toyota Motor 197 12.1 10.7 13.0 4.8 (22.1) Gazprom 196 7.3 28.1 9.8 7.1 n.a. HSBC 190 15.9 23.0 16.3 1.0 (11.8) Procter & Gamble 190 8.7 17.3 13.7 6.4 7.2
    13. 13. Shareholder Value Maximization and Strategy Choice <ul><li>The Value Maximizing Approach to Strategy Formulation: </li></ul><ul><li>Identify strategy alternatives </li></ul><ul><li>Estimate cash flows associated with cash strategy </li></ul><ul><li>Estimate cost of capital for each strategy </li></ul><ul><li>Select the strategy which generates the highest NPV </li></ul><ul><li>Problems: </li></ul><ul><li>Estimating cash flows beyond 2-3 years is difficult </li></ul><ul><li>Value of firm depends on option value as well as DCF value </li></ul><ul><li>Implications for strategy analysis: </li></ul><ul><li>Some simple financial guidelines for value maximization </li></ul><ul><ul><li>On existing assets—maximize after-tax rate of return </li></ul></ul><ul><ul><li>On new investment—seek rate of return > cost of capital </li></ul></ul><ul><li>Utilize qualitative strategy analysis to evaluate future profit potential </li></ul>
    14. 14. <ul><li>Shareholder </li></ul><ul><li>Value </li></ul><ul><li>Measures : </li></ul><ul><li>Market value of the </li></ul><ul><li>firm </li></ul><ul><li>Market value added </li></ul><ul><li>(MVA) </li></ul><ul><li>Return to </li></ul><ul><li>shareholders </li></ul><ul><li>Intrinsic </li></ul><ul><li>Value </li></ul><ul><li>Measures : </li></ul><ul><li>Discounted cash </li></ul><ul><li>flows </li></ul><ul><li>Real option values </li></ul><ul><li>Financial </li></ul><ul><li>Indicators </li></ul><ul><li>Measures : </li></ul><ul><li>Return on Capital </li></ul><ul><li>Growth (of </li></ul><ul><li>revenues & operating </li></ul><ul><li>profits </li></ul><ul><li>Economic profit (EVA) </li></ul><ul><li>Value </li></ul><ul><li>Drivers </li></ul><ul><li>Sources : </li></ul><ul><li>Market share </li></ul><ul><li>Scale economies </li></ul><ul><li>Innovation </li></ul><ul><li>Brands </li></ul>A Comprehensive Value Metrics Framework
    15. 15. Above Normal Profits (in Excess of the Competitive Level) Avoid Competitors Be Better Than Competition Attractive Industry Attractive Niche Cost Advantage Differentiation Advantage Attractive Strategic Group Entry Barriers Mobility Barriers Isolating Mechanisms Sources of Superior Performance
    16. 16. Sources of Competitive Advantage COST ADVANTAGE DIFFERENTIATION ADVANTAGE COMPETITIVE ADVANTAGE Similar product at lower cost Price premium from unique product
    17. 17. The Experience Curve The “Law of Experience” The unit cost value added to a standard product declines by a constant % (typically 20-30%) each time cumulative output doubles. Cost per unit of output (in real $) Cumulative Output 1992 1994 1996 1998 2000 2002 2004
    18. 18. Examples of Experience Curves 100K 200K 500K 1,000K 5 10 50 Accumulated unit production Accumulated units (millions) (millions) 1960 Yen 15K 20K 30K Price Index 50 100 200 300 70% slope 75% Japanese clocks & watches, 1962-72 UK refrigerators, 1957-71
    19. 19. Drivers of Cost Advantage PRODUCTION TECHNIQUES PRODUCT DESIGN INPUT COSTS CAPACITY UTILIZATION RESIDUAL EFFICIENCY ECONOMIES OF LEARNING ECONOMIES OF SCALE <ul><li>Organizational slack; Motivation & </li></ul><ul><li>culture; Managerial efficiency </li></ul><ul><li>Ratio of fixed to variable costs </li></ul><ul><li>Speed of capacity adjustment </li></ul><ul><li>Location advantages </li></ul><ul><li>Ownership of low-cost inputs </li></ul><ul><li>Non-union labor </li></ul><ul><li>Bargaining power </li></ul><ul><li>Standardizing designs & components </li></ul><ul><li>Design for manufacture </li></ul><ul><li>Process innovation </li></ul><ul><li>Reengineering business processes </li></ul><ul><li>Increased dexterity </li></ul><ul><li>Improved organizational routines </li></ul><ul><li>Indivisiblities </li></ul><ul><li>Specialization and division of labor </li></ul>
    20. 20. Economies of Scale: The Long-Run Cost Curve for a Plant Units of output per period Minimum Efficient Plant Size: the point where most scale economies are exhausted Cost per unit of output Sources of scale economies: - technical input/output relationships - indivisibilities - specialization
    21. 21. Scale Economies in Advertising: U.S. Soft Drinks 10 20 50 100 200 500 1,000 Annual sales volume (millions of cases) Advertising Expenditure ($ per case) 0.02 0.05 0.10 0.15 0.20 Coke Pepsi Seven Up Dr. Pepper Sprite Diet Pepsi Tab Fresca Diet Rite Diet 7-Up Schweppes SF Dr. Pepper Despite the massive advertising budgets of brand leaders Coke and Pepsi, their main brands incur lower advertising costs per unit of sales than their smaller rivals.
    23. 23. Applying the Value Chain to Cost Analysis: The Case of Automobile Manufacture (continued) PURCH- ASING PARTS INVEN- TORIES R&D DESIGN ENGNRNG COMPONENT MFR ASSEMBLY TESTING, QUALITY CONTROL GOODS INVEN- TORIES SALES & MKITG DISTRI- BUTION DEALER & CUSTOMER SUPPORT --Plant scale for each -- Level of quality targets -- No. of dealers component -- Frequency of defects -- Sales / dealer -- Process technology -- Level of dealer -- Plant location support -- Run length -- Frequency of defects -- Capacity utilization under warranty Prices paid --Size of commitment -- Plant scale --Cyclicality & depend on: --Productivity of -- Flexibility of production predictability of sales -- Order size R&D/design -- No. of models per plant --Customers’ --Purchases per --No. & frequency of new -- Degree of automation willingness to wait supplier models -- Sales / model -- Bargaining power -- Wage levels -- Supplier location -- Capacity utilization STAGE 3. IDENTIFY COST DRIVERS
    24. 24. <ul><li>PRCHSNG PARTS R&D COMPONENT ASSEM- TESTING GOODS SALES DSTRBTN DLR </li></ul><ul><li>INVNTRS DESIGN MFR BLY QUALITY INV MKTG CTMR </li></ul>Applying the Value Chain to Cost Analysis: The Case of Automobile Manufacture (continued) Consolidation of orders to increase discounts, increases inventories Designing different models around common components and platforms reduces manufacturing costs Higher quality parts and materials reduces costs of defects at later stages Higher quality in manufacturing reduces warranty costs STAGE 5. RECCOMENDATIONS FOR COST REDUCTION STAGE 4. IDENTIFY LINKAGES
    25. 25. The Nature of Differentiation TOTAL CUSTOMER RESPONSIVENESS Differentiation not just about the product , it embraces the whole relationship between the supplier and the customer. INTANGIBLE DIFFERENTATION Unobservable and subjective characteristics that appeal to customer’s image, status, identity, and desire for exclusivity <ul><li>TANGIBLE DIFFERENTATION </li></ul><ul><li>Observable product characteristics: </li></ul><ul><li>size, color, materials, etc. </li></ul><ul><li>performance </li></ul><ul><li>packaging </li></ul><ul><li>complementary services </li></ul>DEFINITION: “ Providing something unique that is valuable to the buyer beyond simply offering a low price .” (M. Porter) THE KEY IS TO CREATE VALUE FOR THE CUSTOMER
    26. 26. Identifying Differentiation Potential: The Demand Side THE PRODUCT THE CUSTOMER What needs does it satisfy? By what criteria do they choose? What motivates them? What are key attributes? Relate patterns of customer preferences to product attributes What price premiums do product attributes command? What are demographic, sociological, psychological correlates of customer behavior? <ul><li>FORMULATE DIFFERENTIATION STRATEGY </li></ul><ul><li>Select product positioning in relation to product attributes </li></ul><ul><li>Select target customer group </li></ul><ul><li>Ensure customer / product compatibility </li></ul><ul><li>Evaluate costs and benefits of differentiation </li></ul>
    27. 27. Using the Value Chain to Identify Differentiation Potential on the Supply Side FIRM INFRASTRUCTURE HUMAN RESOURCE MANAGEMENT TECHNOLOGY DEVELOPMENT INBOUND OPERATIONS OUTBOUND MARKETING SERVICE LOGISTICS LOGISTICS & SALES MIS that supports fast response capabilities Training to support customer service excellence Unique product features. Fast new product development Quality of components & materials Defect free products. Wide variety Fast delivery. Efficient order processing Building brand reputation Customer technical support. Consumer credit. Availability of spares
    28. 28. Identifying Differentiation Opportunities through Linking the Value Chains of the Firm and its Customers: Can Manufacture 1. Distinctive can design can assist canners’ marketing activities. 2. High manufacturing tolerances can avoid breakdowns in customer’s canning lines. 3. Frequent, reliable delivery can permit canner to adopt JIT can supply. 4. Efficient order processing system can reduce customers’ ordering costs. 5. Competent technical support can increase canner’s efficiency of plant utilization. Supplies of steel & aluminum Service & technical support Sales Distribution Inventory holding Manufacturing Design Engineering Inventory holding Purchasing Distribution Marketing Canning Processing Inventory holding Purchasing CANNER CAN MAKER 1 2 4 5 3
    29. 29. INDUSTRY ANALYSIS AND POSITIONING Determining Industry Attractiveness and Identifying Strategic Opportunities
    30. 30. Profitability of US Industries (selected industries only) Household & Personal Products 22.7 Gas & Electric Utilities 10.4 Pharmaceuticals 22.3 Food and Drug Stores 10.0 Tobacco 21.6 Motor Vehicles & Parts 9.8 Food Consumer Products 19.6 Hotels, Casinos, Resorts 9.7 Securities 18.9 Railroads 9.0 Diversified financials 18.3 Insurance: Life and Health 8.6 Beverages 18.8 Packaging & Containers 8.6 Mining & crude oil 17.8 Insurance: Property & Casualty 8.3 Petroleum Refining 17.3 Building Materials, Glass 8.3 Medical Products & Equipment 17.2 Metals 8.0 Commercial Banks 15.5 Food Production 7.2 Scientific & Photographic Equipt. 15.0 Forest and Paper Products 6.6 Apparel 14.4 Semiconductors & Computer Software 13.9 Electronic Components 5.9 Publishing, Printing 13.5 Telecommunications 4.6 Health Care 13.1 Communications Equipment 1.2 Electronics, Electrical Equipment 13.0 Entertainment 0.2 Specialty Retailers 13.0 Airlines (22.0) Computers, Office Equipment 11.7 Median return on equity (%), 1999-2005
    31. 31. The Profitability of Global Industries: Return on Invested Capital, 1963-2003
    32. 32. From Environmental Analysis to Industry Analysis <ul><li>THE INDUSTRY </li></ul><ul><li>ENVIRONMENT </li></ul><ul><li>Suppliers </li></ul><ul><li>Competitors </li></ul><ul><li>Customers </li></ul>Social structure The national/ international economy Technology Government & Politics The natural environment Demographic structure Social structure <ul><li>The Industry Environment lies at the core of the Macro Environment. </li></ul><ul><li>The Macro Environment impacts the firm through its effect on the Industry </li></ul><ul><li>Environment. </li></ul>
    33. 33. Drawing Industry Boundaries : Identifying the Relevant Market <ul><li>What industry is BMW in: </li></ul><ul><ul><li>World Auto industry </li></ul></ul><ul><ul><li>European Auto industry </li></ul></ul><ul><ul><li>World luxury car industry? </li></ul></ul><ul><li>Key criterion: SUBSTITUTABILITY </li></ul><ul><ul><li>On the demand side : are buyers willing to substitute between types of cars and across countries </li></ul></ul><ul><ul><li>On the supply side : are manufacturers able to switch production between types of cars and across countries </li></ul></ul><ul><li>We may need to analyze industry at different levels of aggregation for different types of decision </li></ul>
    34. 34. The Spectrum of Industry Structures Concentration Entry and Exit Barriers Product Differentiation Information Perfect Competition Oligopoly Duopoly Monopoly Many firms A few firms Two firms One firm No/Low barriers Significant barriers High barriers Homogeneous Product Potential for product differentiation Perfect Information flow Imperfect availability of information
    35. 35. Porter’s Five Forces of Competition Framework SUPPLIERS POTENTIAL ENTRANTS SUBSTITUTES BUYERS INDUSTRY COMPETITORS Rivalry among existing firms Bargaining power of suppliers Bargaining power of buyers Threat of new entrants Threat of substitutes
    36. 36. <ul><li>THREAT OF ENTRY </li></ul><ul><li>Capital requirements </li></ul><ul><li>Economies of scale </li></ul><ul><li>Absolute cost advantage </li></ul><ul><li>Product differentiation </li></ul><ul><li>Access to distribution </li></ul><ul><li>channels </li></ul><ul><li>Legal/ regulatory barriers </li></ul><ul><li>Retaliation </li></ul><ul><li>SUBSTITUTE </li></ul><ul><li>COMPETITION </li></ul><ul><li>Buyers’ propensity </li></ul><ul><li>to substitute </li></ul><ul><li>Relative prices & </li></ul><ul><li>performance of </li></ul><ul><li>substitutes </li></ul><ul><li>BUYER POWER </li></ul><ul><li>Buyers’ price sensitivity </li></ul><ul><li>Relative bargaining </li></ul><ul><li>power </li></ul><ul><li>INDUSTRY RIVALRY </li></ul><ul><li>Concentration </li></ul><ul><li>Diversity of </li></ul><ul><li>competitors </li></ul><ul><li>Product differentiation </li></ul><ul><li>Excess capacity & </li></ul><ul><li>exit barriers </li></ul><ul><li>Cost conditions </li></ul><ul><li>SUPPLIER POWER </li></ul><ul><li>Supplier concentration </li></ul><ul><li>Relative bargaining </li></ul><ul><li>power </li></ul>The Structural Determinants of Competition
    37. 37. SUPPLIER POWER LOW <ul><li>THREAT OF ENTRY </li></ul><ul><li>LOW </li></ul><ul><li>economies of scale </li></ul><ul><li>capital requirements for R&D and clinical trials </li></ul><ul><li>product differentiation </li></ul><ul><li>control of distribution channels </li></ul><ul><li>patent protection </li></ul><ul><li>INDUSTRY COMPETITIVENESS </li></ul><ul><li>LOW </li></ul><ul><li>high concentration </li></ul><ul><li>product differentiation </li></ul><ul><li>patent protection </li></ul><ul><li>steady demand growth </li></ul><ul><li>no cyclical fluctuations of demand </li></ul>THREAT OF SUBSTITUTES LOW No substitutes. (Changing as managed care encourages generics.) BUYER POWER LOW Physician as buyer: Not price sensitive No bargaining power. (Changing with managed care.) DRUG INDUSTRY (ROE=22%)
    38. 38. Applying Five-Forces Analysis <ul><li>Forecasting Industry Profitability </li></ul><ul><ul><ul><li>Past profitability a poor indicator of future profitability. </li></ul></ul></ul><ul><ul><ul><li>If we can forecast changes in industry structure we can predict likely impact on competition and profitability . </li></ul></ul></ul><ul><li>Strategies to Improve Industry Profitability </li></ul><ul><ul><ul><li>What structural variables are depressing profitability </li></ul></ul></ul><ul><ul><ul><li>Which of these variables can be changed by individual or collective strategies? </li></ul></ul></ul>
    39. 39. Neutralizing The Five Competitive Forces <ul><li>Force </li></ul><ul><li>Entry </li></ul><ul><li>Rivalry </li></ul><ul><li>Substitutes </li></ul><ul><li>Buyers </li></ul><ul><li>Suppliers </li></ul><ul><li>Method for Neutralizing Force </li></ul><ul><li>Erecting barriers (isolating mechanisms) create & exploit economies of scale, aggressive deterrence, design in switching costs, etc. </li></ul><ul><li>Compete on nonprice dimensions: cost leadership, differentiation, cooperation, etc. </li></ul><ul><li>Improve attractiveness compared to substitutes : better service, more features, etc.. </li></ul><ul><li>Reduce buyer uniqueness : forward integrate, differentiate product, new customers, etc.. </li></ul><ul><li>Reduce supplier uniqueness : backward integrate, obtain minority position, second source, etc.. </li></ul>
    40. 40. The Traditional Model of Industry Life Cycle Time Sales volume Fermentation Shakeout Maturity Decline
    41. 41. How Typical is the Life Cycle Pattern? <ul><li>Technology-intensive industries (e.g. pharmaceuticals, semiconductors, computers) may retain features of emerging industries. </li></ul><ul><li>Other industries (especially those providing basic necessities, e.g. food processing, construction, apparel) reach maturity, but not decline. </li></ul><ul><li>Industries may experience life cycle regeneration. </li></ul><ul><li>Sales Sales </li></ul><ul><li>1900 50 90 07 1930 50 70 90 07 </li></ul><ul><li>MOTORCYCLES TV’s </li></ul><ul><li>Life cycle model can help us to anticipate industry evolution—but dangerous to assume any common, pre-determined pattern of industry development </li></ul>Color B&W Portable HDTV ?
    42. 42. Evolution of Industry Structure over the Life Cycle <ul><li>INTRODUCTION GROWTH MATURITY DECLINE </li></ul><ul><li>DEMAND Affluent buyers Increasing Mass market Knowledgeable, </li></ul><ul><li>penetration replacement customers, resi- </li></ul><ul><li>demand dual segments </li></ul><ul><li>TECHNOLOGY Rapid product Product and Incremental Well-diffused </li></ul><ul><li>innovation process innovation innovation technology </li></ul><ul><li>PRODUCTS Wide variety, Standardization Commoditiz- Continued rapid design change ation commoditization </li></ul><ul><li>MANUFACT- Short-runs, skill Capacity shortage, Deskilling Overcapacity </li></ul><ul><li>URING intensive mass-production </li></ul><ul><li>TRADE -----Production shifts from advanced to developing countries----- </li></ul><ul><li>COMPETITION Technology- Entry & exit Shakeout & Price wars, </li></ul><ul><li> consolidation exit </li></ul><ul><li>KSFs Product innovation Process techno- Cost efficiency Overhead red- logy. Design for uction, ration- alization, low </li></ul><ul><li> cost sourcing </li></ul>
    43. 43. The Driving Forces of Industry Evolution Customers become more knowledgeable & experienced Diffusion of technology Demand growth slows as market saturation approaches Customers become more price conscious Products become more standardized Distribution channels consolidate Production shifts to low-wage countries Price competition intensifies Bargaining power of distributors increases BASIC CONDITIONS INDUSTRY STRUCTURE COMPETITION Excess capacity increases Production becomes less R&D & skill-intensive Quest for new sources of differentiation
    44. 44. Changes in the Population of Firms over the Industry Life Cycle: US Auto Industry 1885-1961 Source: S. Klepper, Industrial & Corporate Change, August 2002, p. 654.
    45. 45. Preparing for the Future : The Role of Scenario Analysis in Adapting to Industry Change <ul><li>Stages in undertaking multiple Scenario Analysis: </li></ul><ul><ul><ul><li>Identify major forces driving industry change </li></ul></ul></ul><ul><ul><ul><li>Predict possible impacts of each force on the industry environment </li></ul></ul></ul><ul><ul><ul><li>Identify interactions between different external forces </li></ul></ul></ul><ul><ul><ul><li>Among range of outcomes, identify 2-4 most likely/ most interesting scenarios : configurations of changes and outcomes </li></ul></ul></ul><ul><ul><ul><li>Consider implications of each scenario for the company </li></ul></ul></ul><ul><ul><ul><li>Identify key signposts pointing toward the emergence of each scenario </li></ul></ul></ul><ul><ul><ul><li>Prepare contingency plan </li></ul></ul></ul>
    46. 46. 1880s 1920s 1960s 2000 Mail order, catalogue retailing e.g. Sears Roebuck Chain Stores e.g. A&P Discount Stores e.g. K-Mart Wal-Mart “ Category Killers” e.g. Toys-R-Us, Home Depot Internet Retailers e.g. Amazon; Expedia Warehouse Clubs e.g. Price Club Sam’s Club Innovation & Renewal over the Industry Life Cycle: Retailing ?
    47. 47. Gary Hamel: Shaking the Foundations OLD BRICK NEW BRICK Top management is responsible for setting strategy Everyone is responsible for setting strategy Getting better, getting faster is the way to win Rule-busting innovation is the way to win IT creates competitive advantage Unconventional business concepts create competitive advantage Being revolutionary is high risk More of the same is high risk We can merge our way to competitiveness There’s no correlation between size and competitiveness Innovation equals new products and new technology Innovation equals entirely new business concepts Strategy is the easy part, Implementation the hard part Strategy is the easy only if you’re content to be an imitator Change starts at the top Change starts with activists Our real problem is execution Our real problem is innovation Big companies can’t innovate Big companies can become gray-haired revolutionaries
    48. 48. An Alternate Model of Industry Life Cycle Time Sales volume Emergence Convergence Coexistence Dominance Established Industry Emerging Industry
    49. 49. The Industry Life Cycle as an S curve Performance Time Ferment Takeoff Maturity Discontinuity
    50. 50. The S-curve Maps Major Transitions Performance Time Ferment Takeoff Maturity Discontinuity
    52. 52. THE FIRM Goals and Values Resources and Capabilities Structure and Systems <ul><li>THE </li></ul><ul><li>INDUSTRY </li></ul><ul><li>ENVIRONMENT </li></ul><ul><li>Competitors </li></ul><ul><li>Customers </li></ul><ul><li>Suppliers </li></ul>STRATEGY STRATEGY The Firm-Strategy Interface The Environment-Strategy Interface Shifting the Focus of Strategy Analysis: From the External to the Internal Environment
    53. 53. Rationale for the Resource-based Approach to Strategy <ul><li>When the external environment is subject to rapid change, internal resources and capabilities offer a more secure basis for strategy than market focus. </li></ul><ul><li>Resources and capabilities are the primary sources of profitability. </li></ul>
    54. 54. Precision Mechanics Fine Optics Micro- Electronics 35mm SLR camera Compact fashion camera EOS autofocus camera Digital camera Video still camera Plain-paper copier Color copier Color laser copier Laser copier Basic fax Laser fax Mask aligners Excimer laser aligners Stepper aligners Inkjet printer Laser printer Color video printer Calculator Notebook computer Canon: Products and Core Technical Capabilities
    55. 55. Eastman Kodak’s Dilemma 1980’s 1990’s Resources & Capabilities Businesses <ul><li>Chemical Imaging </li></ul><ul><ul><li>Organic Chemistry </li></ul></ul><ul><ul><li>Polymer technology </li></ul></ul><ul><ul><li>Optomechtronics </li></ul></ul><ul><ul><li>Thin-film coatings </li></ul></ul><ul><li>Brands </li></ul><ul><li>Global Distribution </li></ul>Film Cameras DIVESTS : Eastman Chemical, Sterling Winthrop, Diagnostics Need to build digital imaging capability Digital Imaging Products (e.g. Photo CD System; Advantix cameras & film Fine Chemicals Pharmaceuticals Diagnostics
    56. 56. STRATEGY INDUSTRY KEY SUCCESS FACTORS COMPETITIVE ADVANTAGE ORGANIZATIONAL CAPABILITIES <ul><li>RESOURCES </li></ul><ul><li>TANGIBLE INTANGIBLE HUMAN </li></ul><ul><li>Financial </li></ul><ul><li>Physical </li></ul><ul><li>Technology </li></ul><ul><li>Reputation </li></ul><ul><li>Culture </li></ul><ul><li>Skills/know-how </li></ul><ul><li>Capacity for communication & collaboration </li></ul><ul><li>Motivation </li></ul>The Links between Resources, Capabilities and Competitive Advantage
    57. 57. Appraising Resources <ul><li>RESOURCE CHARACTERISTICS INDICATORS </li></ul><ul><li> Financial Borrowing capacity Debt/ Equity ratio </li></ul><ul><li>Internal funds generation Credit rating </li></ul><ul><li>Tangible Net cash flow </li></ul><ul><li>Resources Physical Plant and equipment: Market value of </li></ul><ul><li>size, location, technology fixed assets. </li></ul><ul><li>flexibility. Scale of plants </li></ul><ul><li>Land and buildings. Alternative uses for </li></ul><ul><li>Raw materials. fixed assets </li></ul><ul><li> Technology Patents, copyrights, know how No. of patents owned </li></ul><ul><li>R&D facilities. Royalty income </li></ul><ul><li>Intangible Technical and scientific R&D expenditure </li></ul><ul><li>Resources employees R&D staff </li></ul><ul><li> Reputation Brands. Customer loyalty. Company Brand equity </li></ul><ul><li>reputation (with suppliers, customers, Customer retention </li></ul><ul><li>government) Supplier loyalty </li></ul><ul><li>Human Training, experience, adaptability, Employee qualifications, </li></ul><ul><li>Resources commitment and loyalty of employees pay rates, turnover. </li></ul>
    58. 58. The World’s Most Valuable Brands, 2006 <ul><li>Rank Company Brand Rank Company Brand </li></ul><ul><li>value value </li></ul><ul><li>($bn.) ($bn.) </li></ul><ul><li>1 Coca-Cola 67.5 11 Mercedes Benz 20.0 </li></ul><ul><li>2 Microsoft 59.9 12 Citi 20.0 </li></ul><ul><li>3 IBM 53.4 13 Hewlett-Packard 18.9 </li></ul><ul><li>4 GE 47.0 14 American Express 18.6 </li></ul><ul><li>5 Intel 35.6 15 Gillette 17.5 </li></ul><ul><li>6 Nokia 26.5 16 BMW 17.1 </li></ul><ul><li>7 Disney 26.4 17 Cisco 16.6 </li></ul><ul><li>8 McDonald’s 26.0 18 Louis Vuitton 16.1 </li></ul><ul><li>9 Toyota 24.8 19 Honda 15.8 </li></ul><ul><li>10 Marlboro 21.2 20 Samsung 15.0 </li></ul><ul><li> Source : Interbrand </li></ul>
    59. 59. <ul><li>Organizational Capabilities = firm’s capacity for undertaking a particular activity. (Grant) </li></ul><ul><li>Distinctive Competence = things that an organization does particularly well relative to competitors. (Selznick) </li></ul><ul><li>Core Competence = capabilities that are fundamental to a firm’s strategy and performance. (Hamel and Prahalad) </li></ul>Defining Organizational Capabilities
    60. 60. Identifying Organizational Capabilities: A Functional Classification FUNCTION CAPABILITY EXEMPLARS Corporate Financial management ExxonMobil, GE Management Strategic control IBM, Samsung Coordinating business units BP, P&G Managing acquisitions Citigroup, Cisco MIS Speed and responsiveness through Wal-Mart, Dell rapid information transfer Capital One R&D Research capability Merck, IBM Development of innovative new products Apple, 3M Manufacturing Efficient volume manufacturing Briggs & Stratton Continuous Improvement Nucor, Harley-D Flexibility Zara, Four Seasons Design Design Capability Apple, Nokia Marketing Brand Management P&G, LVMH Quality reputation Johnson & Johnson Responsiveness to market trends MTV, L’Oreal Sales, Distribution Sales Responsiveness PepsiCo, Pfizer & Service Efficiency and speed of distribution LL Bean, Dell Customer Service Singapore Airlines Caterpillar
    63. 63. The Rent-Earning Potential of Resources and Capabilities Scarcity Relevance Durability Transferability Replicability Property rights Relative bargaining power Embeddedness THE EXTENT OF THE COMPETITIVE ADVANTAGE ESTABLISHED SUSTAINABILITY OF THE COMPETITIVE ADVANTAGE APPROPRIABILITY THE PROFIT EARNING POTENTIAL OF A RESOURCE OR CAPABILITY
    64. 64. RESOURCES CAPABILITIES Assessing a Companies Resources and Capabilities: The Case of VW   Importance VW’s Relative Strength C1. Product development 9 4 C2. Purchasing 7 5 C3. Engineering 7 9 C4. Manufacturing 8 7 C5. Financial management 6 3 C6. R&D 6 4 C7. Marketing & sales 9 4 C8. Government relations 4 8   Importance VW’s Relative Strength R1. Finance 6 4 R2. Technology 7 5 R3. Plant and equipment 8 8 R4. Location 7 4 R5. Distribution 8 5
    65. 65. Appraising VW’s Resources and Capabilities <ul><ul><li>Relative Strength </li></ul></ul>Strategic Importance Superfluous Strengths Key Strengths Zone of Irrelevance Key Weaknesses 1 1 5 10 5 10 R1 R2 R3 R4 R5 C1 C2 C3 C4 C5 C6 C7 C8 (Hypothetical only)
    66. 66. Approaches to Capability Development <ul><li>Acquire and develop the underlying resources. Especially human resources </li></ul><ul><li> --Externally (hiring) </li></ul><ul><li> --Internally through developing individual skills </li></ul><ul><li>Acquire/access capabilities externally through acquisition or </li></ul><ul><li>alliance </li></ul><ul><li>Greenfield development of capabilities in separate organizational unit (IBM & the PC, Xerox & PARC, GM & Saturn) </li></ul><ul><li>Build team-based capabilities through training and team development (i.e. develop organizational routines ) </li></ul><ul><li>Align structure & systems with required capabilities </li></ul><ul><li>Change management to transform values and behaviors (GE, BP) </li></ul><ul><li>Product sequencing (Intel , Sony, Hyundai) </li></ul><ul><li>Knowledge Management (systematic approaches to acquiring, storing, replicating, and accessing knowledge) </li></ul>
    68. 68. From Business Strategy to Corporate Strategy: The Scope of the Firm <ul><li>Business Strategy is concerned with how a firm computes within a particular market </li></ul><ul><li>Corporate Strategy is concerned with where a firm competes, i.e. the scope of its activities </li></ul><ul><li>The dimensions of scope are </li></ul><ul><ul><ul><ul><li>product scope </li></ul></ul></ul></ul><ul><ul><ul><ul><li>vertical scope </li></ul></ul></ul></ul><ul><ul><ul><ul><li>geographical scope </li></ul></ul></ul></ul>
    69. 69. Transactions Costs and the Scope of the Firm P 1 P 2 P 3 C 1 C 2 C 3 Vertical Product Geographical Scope Scope Scope V 1 V 2 V 3 P 3 P 2 P 1 C 3 C 2 C 1 V 1 V 2 V 3 [A] Single Integrated Firm [B] Several Specialized Firms linked by Markets In situation [A] the business units are integrated within a single firm. In situation [B] the business units are independent firms linked by markets. Are the administrative costs of the integrated firm less than the transaction costs of markets?
    70. 70. Determinants of Changes in Corporate Scope <ul><li>1800 – 1980 Expanding scale and scope of industrial corporations due to </li></ul><ul><li>declining administrative costs of firms: </li></ul><ul><ul><li>Advances in transportation, information and communication </li></ul></ul><ul><ul><li>technologies </li></ul></ul><ul><ul><li>Advances in management—accounting systems, decision sciences, </li></ul></ul><ul><ul><li>financial techniques, organizational innovations, scientific management </li></ul></ul>1980 – 1995 Shrinking size and scope of biggest industrial corporations. Increasingly Increased no. of managerial Admin. costs of turbulent decisions. Need for fast firms rise relative external responses to external to transaction environment change costs of markets 1995 – 2007 Rapid increase in global concentration (steel, aluminium, oil, beer, banking, cement). Key drivers: quest for market power and scale economies. Also, large corporations better at reconciling size with agility
    71. 71. RATE OF PROFIT > COST OF CAPITAL INDUSTRY ATTRACTIVENESS COMPETITIVE ADVANTAGE The Basic Issues in Diversification Decisions Superior profit derives from two sources: <ul><li>Diversification decisions involve these same two issues: </li></ul><ul><li>How attractive is the sector to be entered? </li></ul><ul><li>Can the firm achieve a competitive advantage? </li></ul>
    72. 72. Diversification among the US Fortune 500, 1949-74 <ul><li>Percentage of Specialized Companies (single-business, </li></ul><ul><li> vertically-integrated and dominant-business) </li></ul><ul><li>Percentage of Diversified Companies (related-business </li></ul><ul><li>and unrelated business) </li></ul><ul><ul><ul><li>Note: During the 1980s and 1990s the trend reversed as large </li></ul></ul></ul><ul><ul><ul><li> companies refocused upon their core businesses </li></ul></ul></ul>1949 1954 1959 1964 1969 1974 70.2 63.5 53.7 53.9 39.9 37.0 29.8 36.5 46.3 46.1 60.1 63.0
    73. 73. Diversification among Large UK Corporations, 1950-93
    74. 74. Motives for Diversification <ul><li>GROWTH --The desire to escape stagnant or declining industries is a powerful motive for diversification (e.g. tobacco, </li></ul><ul><li> oil, newspapers). </li></ul><ul><li> -- But , growth satisfies managers not shareholders . </li></ul><ul><li>--Growth strategies (esp. by acquisition), tend to </li></ul><ul><li> destroy shareholder value </li></ul>RISK --Diversification reduces variance of profit flows SPREADING -- But , doesn’t create value for shareholders—they can hold diversified portfolios of securities. --Capital Asset Pricing Model shows that diversification lowers unsystematic risk not systematic risk . PROFIT --For diversification to create shareholder value, then bringing together of different businesses under common ownership & must somehow increase their profitability.
    75. 75. Diversification and Shareholder Value: Porter’s Three Essential Tests <ul><li>If diversification is to create shareholder value, it must meet three tests: </li></ul><ul><li>1. The Attractiveness Test : diversification must be directed towards attractive industries (or have the potential to become attractive). </li></ul><ul><li>2. The Cost of Entry Test : the cost of entry must not capitalize all future profits. </li></ul><ul><li>3. The Better-Off Test : either the new unit must gain competitive advantage from its link with the company, or vice-versa. (i.e. some form of “ synergy” must be present) </li></ul>Additional source of value from diversification: Option value
    76. 76. Competitive Advantage from Diversification <ul><ul><ul><ul><ul><li>Sharing tangible resources (research labs, distribution systems) across multiple businesses </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Sharing intangible resources (brands, technology) across multiple businesses </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Transferring functional capabilities (marketing, product development) across businesses </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Applying general management capabilities to multiple businesses </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Economies of scope not a sufficient basis for diversification ----must be supported by transaction costs </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Diversification firm can avoid transaction costs by operating internal capital and labor markets </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Key advantage of diversified firm over external markets--- superior access to information </li></ul></ul></ul></ul></ul>ECONOMIES OF SCOPE ECONOMIES FROM INTERNALIZING TRANSACTIONS
    77. 77. Relatedness in Diversification <ul><li>Economies of scope in diversification derive from two types of relatedness: </li></ul><ul><li>Operational Relatedness -- synergies from sharing resources across businesses (common distribution facilities, brands, joint R&D) </li></ul><ul><li>Strategic Relatedness -- synergies at the corporate level deriving from the ability to apply common management capabilities to different businesses. </li></ul><ul><li>Problem of operational relatedness :- the benefits in terms of economies of scope may be dwarfed by the administrative costs involved in their exploitation. </li></ul>
    78. 78. Transactions Costs and The Existence of the Firm <ul><li>Transaction cost theory explains not just the boundaries </li></ul><ul><li>of firms , also the existence of firms . </li></ul><ul><li>In 18th century English woollen industry, no firms – </li></ul><ul><li>independent spinners and weavers linked by merchants. </li></ul><ul><li>Residential remodeling industry -- mainly independent self- </li></ul><ul><li>employed builders, plumbers, electricians, painters. </li></ul><ul><li>Key issue -- transaction costs of the market vs. </li></ul><ul><li>administrative costs of firms. </li></ul><ul><li>Where transaction costs high—firm is more efficient means </li></ul><ul><li>of organization </li></ul><ul><li>Note : transaction costs comprise costs of search and contract negotiation and enforcement </li></ul>
    79. 79. The Costs and Benefits of Vertical Integration: BENEFITS <ul><li>Technical economies from integrating processes e.g. iron and steel production </li></ul><ul><li>— but doesn’t necessarily require common ownership </li></ul><ul><li>Superior coordination </li></ul><ul><li>Avoids transactions costs of market contracts in situations where there are: </li></ul><ul><li>-- small numbers of firms </li></ul><ul><li>-- transaction-specific investments </li></ul><ul><li>-- opportunism and strategic misrepresentation </li></ul><ul><li>-- taxes and regulations on market transactions </li></ul>
    80. 80. The Costs and Benefits of Vertical Integration: COSTS <ul><li>Differences in optimal scale of operation between different stages prevents balanced VI </li></ul><ul><li>Strategic differences between different vertical stages create management difficulties </li></ul><ul><li>Inhibits development of and exploitation of core competencies </li></ul><ul><li>Limits flexibility -- in responding to demand cycles </li></ul><ul><ul><li> -- in responding to changes in technology, </li></ul></ul><ul><ul><li> customer preferences, etc. </li></ul></ul><ul><ul><li>(But, VI may be conducive to system-wide flexibility) </li></ul></ul><ul><li>Compounding of risk </li></ul>
    81. 81. When is Vertical Integration More Attractive than Outsourcing? <ul><li>How many firms are available The fewer the companies </li></ul><ul><li>to undertake the activities? the more attractive is VI </li></ul><ul><li>Is transaction-specific investment If yes, VI more attractive </li></ul><ul><li>needed? </li></ul><ul><li>Does limited information permit VI can limit opportunism </li></ul><ul><li>cheating? </li></ul><ul><li>Are taxes or regulation imposed VI can avoid them </li></ul><ul><li>on transactions? </li></ul><ul><li>Do the different stages have similar Greater the similarity, the </li></ul><ul><li>optimal scales of operation? more attractive is VI </li></ul><ul><li>Are the two stages strategically Greater the strategic </li></ul><ul><li>similar? similarity ---the more attractive is VI </li></ul><ul><li>How great the need for entrepreneurship Greater the need, the greater </li></ul><ul><li>& continual upgrading of capabilities the disadvantages of VI </li></ul><ul><li>How uncertain is market demand? Greater the unpredictability </li></ul><ul><li>----the more costly is VI </li></ul><ul><li>Are risks compounded by VI increases risk. </li></ul><ul><li>linkages between vertical stages </li></ul>
    82. 82. Iron ore mining Steel production Steel strip production Can making The value chain for steel cans MARKET CONTRACTS VERTICAL INTEGRATION MARKET CONTRACTS Canning of food, drink, oil, etc. VERTICAL INTEGRATION, AND MARKET CONTRACTS What factors explain why some stages are vertically integrated, while others are linked by market transactions?
    83. 83. Designing Vertical Relationships: Long-Term Contracts and Quasi-Vertical Integration <ul><li>Intermediate between spot transactions and vertical integration are several types of vertical relationships </li></ul><ul><li>---such relationships may combine benefits of both market transactions and internalization </li></ul><ul><li>Key issues in designing vertical relationships </li></ul><ul><li>-- How is risk allocated between the parties? </li></ul><ul><li>-- Are the incentives appropriate? </li></ul>
    84. 84. Recent Trends in Vertical Relationships <ul><li>From competitive contracting to supplier partnerships, e.g. in autos </li></ul><ul><li>From vertical integration to outsourcing (not just components, also IT, distribution, and administrative services). </li></ul><ul><li>Diffusion of franchising </li></ul><ul><li>Technology partnerships (e.g. IBM- Apple; Canon- HP) </li></ul><ul><li>Inter-firm networks </li></ul><ul><li>General conclusion : boundaries between firms and markets becoming increasingly blurred. </li></ul>
    85. 85. 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
    86. 86. Implications of Internationalization for Industry Analysis <ul><li>INDUSTRY STRUCTURE </li></ul><ul><li>Lower entry barriers around national markets </li></ul><ul><li>Increased industry rivalry --- lower seller concentration </li></ul><ul><li>--- greater diversity of competitors </li></ul><ul><li>Increased buyer power: wider choice for dealers & consumers </li></ul><ul><li>COMPETITION </li></ul><ul><li>Increased intensity of competition </li></ul><ul><li>PROFITABILITY </li></ul><ul><li>Other things remaining equal, internationalization tends to reduce an industry’s margins & rate of return on capital </li></ul>
    87. 87. 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
    88. 88. National Influences on Competitiveness: The Theory of Comparative Advantage <ul><li>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. </li></ul><ul><ul><ul><li>Philippines relatively more efficient in the production of </li></ul></ul></ul><ul><ul><ul><li>footwear, apparel, and assembled electronic products than in the production of chemicals and automobiles. </li></ul></ul></ul><ul><ul><ul><li>U.S. is relatively more efficient in the production of </li></ul></ul></ul><ul><ul><ul><li>semiconductors and pharmaceuticals than shoes or shirts . </li></ul></ul></ul>When exchange rates are well-behaved, comparative advantage becomes competitive advantage.
    89. 89. Revealed Comparative Advantage for 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
    90. 90. Porter’s Competitive Advantage of Nations <ul><li>Extends and adapts traditional theory of comparative advantage to take account of three factors: </li></ul><ul><li>International competitive advantage is about companies not countries— the role of the national environment is providing a home base for the company. </li></ul><ul><li>Sustained competitive advantage depends upon dynamic factors-- innovation and the upgrading of resources and capabilities </li></ul><ul><li>The critical role of the national environment is its impact upon the dynamics of innovation and upgrading. </li></ul>
    91. 91. Porter’s National Diamond Framework FACTOR CONDITIONS DEMAND CONDITIONS RELATING AND SUPPORTING INDUSTRIES STRATEGY, STRUCTURE, AND RIVALRY <ul><li>FACTOR CONDITIONS— “Home grown” resources/capabilities more important </li></ul><ul><li>than natural endowments. </li></ul><ul><li>2. RELATED AND SUPPORTING INDUSTRIES—Key role of “industry clusters” </li></ul><ul><li>3. DEMAND CONDITIONS—Discerning domestic customers drive quality & innovation </li></ul><ul><li>4. STRATEGY, STRUCTURE, RIVALRY. E.g. domestic rivalry drives upgrading. </li></ul>
    92. 92. Consistency Between Strategy and National Conditions <ul><li>In globally-competitive industries, firm strategy needs to take account of national conditions: </li></ul><ul><ul><li>U.S. textile manufacturers must compete on the basis of advanced process technologies and focus on high quality, less price-sensitive market segments </li></ul></ul><ul><ul><li>In the semiconductor 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) </li></ul></ul><ul><ul><li>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) </li></ul></ul>
    93. 93. International Location of Production <ul><ul><li>National resource conditions : What are the major resources which the product requires? Where are these available at low cost? </li></ul></ul><ul><ul><li>Firm-specific advantages : to what extent is the company’s competitive advantage based upon firm-specific resources and capabilities, and are these transferable? </li></ul></ul><ul><ul><li>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. </li></ul></ul>
    94. 94. The Role of Labor Costs <ul><li>Hourly Compensation for Production Workers, 1999 ($) </li></ul><ul><li>Germany 26.93 </li></ul><ul><li>Japan 20.89 </li></ul><ul><li>U.S. 19.20 France 19.98 U.K. 16.56 </li></ul><ul><li>Spain 12.11 </li></ul><ul><li>Korea 6.75 Mexico 2.12 </li></ul><ul><li>BUT , wages are only one element of costs: </li></ul><ul><li>Cost of Producing a Compact Automobile </li></ul><ul><li> 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 </li></ul>
    95. 95. 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 Comparative Processing Comparative Advantage Advantage Note : 1 = production of fiber (natural & synthetic) 2 = production of spun yarn 3 = production of textiles 4 = production of clothing
    96. 96. 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
    97. 97. 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
    98. 98. Alliances and Joint Ventures: Management Issues <ul><li>Benefits: </li></ul><ul><li>--Combining resources and capabilities of different companies </li></ul><ul><li>--Learning from one another </li></ul><ul><li>--Reducing time-to-market for innovations </li></ul><ul><li>--Risk sharing </li></ul><ul><li>Problems: </li></ul><ul><li>--Management differences between the two partners. Conflict </li></ul><ul><li> most likely where the partners are also competitors. </li></ul><ul><li>Benefits are seldom shared equally. Distribution of benefits determined by: </li></ul><ul><ul><li>Strategic intent of the partners- which partner has the clearer vision of the purpose of the alliance? </li></ul></ul><ul><ul><li>Appropriability of the contribution-- which partner’s resources and capabilities can more easily be captured by the other? </li></ul></ul><ul><ul><li>Absorptive capacity of the company-- which partner is the more receptive learner? </li></ul></ul>
    99. 99. 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
    100. 100. Multinational Strategies: Globalization vs. National Differentiation <ul><li>National preferences in decline—world becoming a single, </li></ul><ul><li>if segmented, market </li></ul><ul><li>Accessing global scale economies—in purchasing, </li></ul><ul><li>manufacturing, product development, marketing. </li></ul><ul><li>Strategic strength from global leverage—ability to cross- </li></ul><ul><li>subsidize a national subsidiary with cash flows from </li></ul><ul><li>other national subsidiaries </li></ul><ul><li>Need to access market trends and technological </li></ul><ul><li>developments in each of the world’s major economic </li></ul><ul><li>centers- N. America, Europe, East Asia. </li></ul>Hamel & Prahalad Thesis Kenichi Ohmae’s “ Triad Power” Thesis Ted Levitt “ Globaliz- -ation of Markets” Thesis The case for a global strategy:
    101. 101. Globalization & Global Strategy —What are they? <ul><li>GLOBALIZATION ? </li></ul><ul><li>--Something to do with increasing interdependence between countries. </li></ul><ul><li>GLOBAL STRATEGY </li></ul><ul><li>--At simplest level: Treating the world as a single market </li></ul><ul><li> E.g. Japanese companies during the 1970s & 1980s, </li></ul><ul><li> (YKK, Honda) standard products, developed & </li></ul><ul><li> manfactured within Japan; distributed & marketed </li></ul><ul><li> worldwide </li></ul><ul><li>--At more sophisticated level: Strategy that recognizes </li></ul><ul><li> and exploits linkages between countries (e.g. exploits </li></ul><ul><li> global scale, national resource differences, strategic </li></ul><ul><li> competition) </li></ul>World as single mkt. World as separate national mkts. global strategy World as inter- related mkts. multidomestic strategy
    102. 102. 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)
    103. 103. 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
    104. 104. 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
    105. 105. The Evolution of Multinational Strategies and Structures: (1) 1900-1939—Era of the Europeans <ul><li>The European MNC as Decentralized Federation : </li></ul><ul><ul><ul><li>National subsidiaries self-sufficient and autonomous </li></ul></ul></ul><ul><ul><ul><li>Parent control through appointment of subsidiaries senior management </li></ul></ul></ul><ul><ul><ul><li>Organization and management systems reflect conditions of transport and communications at the time e.g. Unilever, Phillips, Courtaulds, Royal Dutch/Shell. </li></ul></ul></ul>
    106. 106. The Evolution of Multinational Strategies and Structures: (2) 1945-1970—U.S. Dominance <ul><li>American MNC’s as Coordinated Federations : </li></ul><ul><ul><ul><li>National subsidiaries fairly autonomous </li></ul></ul></ul><ul><ul><ul><li>Dominant role as U.S. parent-- especially in developing new technology and products </li></ul></ul></ul><ul><ul><ul><li>Parent-subsidiary relations involved flows of technology and finance, and appointment of top management. e.g. Ford, GM, Coca Cola, IBM </li></ul></ul></ul>
    107. 107. The Evolution of Multinational Strategies and Structures: (3) 1970s and 1980s—The Japanese Challenge <ul><li>The Japanese MNC as Centralized Hub </li></ul><ul><ul><ul><li>Pursuit of global strategy from home base </li></ul></ul></ul><ul><ul><ul><li>Strategy, technology development, and manufacture concentrated at home </li></ul></ul></ul><ul><ul><ul><li>National subsidiaries primarily sales and distribution companies with limited autonomy. e.g. Toyota, NEC, Matsushita </li></ul></ul></ul>
    108. 108. Marketing Global Strategies and Situations to Industry Conditions: Firm Success in Different Industries <ul><li>Consumer Electronics Branded, Packaged Telecommunications </li></ul><ul><li> Consumer Goods Equipment </li></ul><ul><li>- Global industry - Substantial national - Requires both global </li></ul><ul><li>- Matsushita the most differentiation, few global integration and national </li></ul><ul><li>successful scale economies differentiation. </li></ul><ul><li>- Philips the survivor - Kao has limited success - NEC only partially </li></ul><ul><li>- GE sold out outside Japan successful - Unilever and P&G most - ITT sold out successful - Ericsson most </li></ul><ul><li> successful </li></ul>local responsiveness local responsiveness local responsiveness global integration global integration global integration Matsushita Philips General Electric Kao P&G Unilever NEC Erickson ITT
    109. 109. Reconciling Global Integration with National Differentiation: The Transnational Corporation <ul><li>The Transnational : an integrated network of distributed interdependent resources and capabilities. </li></ul><ul><ul><li>Each national unit and source of ideas, skills and capabilities that can be harnessed to benefit whole corporation. </li></ul></ul><ul><ul><li>National units become world sources for particular products, components, and activities. </li></ul></ul><ul><ul><li>Corporate center involved in orchestrating collaboration through creating the right organizational context. </li></ul></ul>Tight complex controls and coordination and a shared strategic decision process. Heavy flows of technology, finances, people, and materials between interdependent units .
    110. 110. <ul><li>On what basis to organize—products, geography, functions? </li></ul><ul><ul><ul><li>--Where is coordination most important? </li></ul></ul></ul><ul><ul><ul><li>--How global is the industry? How global is the firm’s strategy? </li></ul></ul></ul><ul><li>If one dimension is dominant, how to coordination along the other dimensions? </li></ul><ul><ul><ul><li>--Maintain single line accountability </li></ul></ul></ul><ul><ul><ul><li>--Other dimensions of coordination can be “dotted line” relations </li></ul></ul></ul><ul><li>What’s the role of HQ? </li></ul><ul><ul><ul><li>--Control function </li></ul></ul></ul><ul><ul><ul><li>--Coordination function </li></ul></ul></ul><ul><ul><ul><li>--Exploiting scale economies in centralized provision of services </li></ul></ul></ul><ul><li>The need for internal differentiation </li></ul><ul><ul><li> --By product/business </li></ul></ul><ul><ul><li> --By function </li></ul></ul><ul><ul><li> --By country </li></ul></ul><ul><li>Formal & informal organization </li></ul>Designing the MNC: Key Learning