The document discusses strategies for multinational corporations operating internationally. It covers topics such as the international location of production, modes of foreign market entry, implications of internationalization on industry analysis, and developing competitive advantage within an international context. National influences on competitiveness are also examined.

1. 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 OUTLINE

2. 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

3. Implications of Internationalization for Industry Analysis INDUSTRY STRUCTURE Lower entry barriers around national markets Increased industry rivalry --- lower seller concentration --- greater diversity of competitors Increased buyer power: wider choice for dealers & consumers COMPETITION Increased intensity of competition PROFITABILITY Other things remaining equal, internationalization tends to reduce an industry’s margins & rate of return on capital

4. 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

5. 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.

6. 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

7. 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.

8. 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” 3. DEMAND CONDITIONS — Discerning domestic customers drive quality & innovation 4. STRATEGY, STRUCTURE, RIVALRY. E.g. domestic rivalry drives upgrading.

9. 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)

10. Power distance Uncertainty avoidance Korea Israel USA France National cultures: “power difference” & “uncertainty avoidance” Denmark Mexico Malaysia Philippines India Japan

11. Individualist Korea Israel USA France National cultures: individualism/collectivism Denmark Mexico Philippines India Japan Collectivist UK Aust. Germany Malaysia Guatemala Venezuela Italy

12. International Location of Production 3 considerations: National resource conditions : What are the major resources which the product requires? Where are these available at low cost? Firm-specific advantages : to what extent is the 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.

13. 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

14. 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

15. 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

16. 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

17. Alliances and Joint Ventures: Management Issues Benefits: --C ombin ing resources and capabilities of different companies --L earn ing from one another --Reducing time-to-market for innovations --Risk sharing Problems: --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?

18. 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

19. 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 :

20. Globalization & Global Strategy —What are they? GLOBALIZATION ? --Something to do with increasing interdependence between countries. GLOBAL STRATEGY -- 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 worldwide --At more sophisticated level: Strategy that recognizes and exploits linkages between countries (e.g. exploits global scale, national resource differences, strategic competition) World as single mkt. World as separate national mkts. global strategy World as inter- related mkts. multidomestic strategy

21. 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)

22. 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

23. 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

24. 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.

25. 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

26. 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

27. Marketing Global Strategies and Situations to Industry Conditions: Firm Success in Different Industries Consumer Electronics Branded, Packaged Telecommunications Consumer Goods Equipment - Global industry - Substantial national - Requires both global - Matsushita the most differentiation, few global integration and national successful scale economies differentiation. - Philips the survivor - Kao has limited success - NEC only partially - GE sold out outside Japan successful - Unilever and P&G most - ITT sold out successful - Ericsson most s uccessful local responsiveness local responsiveness local responsiveness global integration global integration global integration Matsushita Philips General Electric Kao P&G Unilever NEC Erickson ITT

28. Reconciling Global Integration with National Differentiation: The Transnational Corporation The Transnational : an integrated network of distributed interdependent resources and capabilities. Each national unit and source of ideas, skills and capabilities that can be harnessed to benefit whole corporation. National units become world sources for particular products, components, and activities. Corporate center involved in orchestrating collaboration through creating the right organizational context. Tight complex controls and coordination and a shared strategic decision process. Heavy flows of technology, finances, people, and materials between interdependent units .

29. On what basis to organize—products, geography, functions? --Where is coordination most important? --How global is the industry? How global is the firm’s strategy? If one dimension is dominant, how to coordination along the other dimensions? --Maintain single line accountability --Other dimensions of coordination can be “dotted line” relations What’s the role of HQ? --Control function --Coordination function --Exploiting scale economies in centralized provision of services The need for internal differentiation --By product/business --By function --By country Formal & informal organization Designing the MNC: Key Learning