Strategic Management in a Multinational Company

Chapter
Copyright© 2007 Thomson Learning All rights reserved
4
Strategic Management in the
Multinational Company: Content
and Formulation

Copyright© 2007 South-Western/Thomson Learning All rights reserved
Learning Objectives
• Define differentiation and low cost
• Understand how low-cost and differentiation strategists
make money
• Recall multinational examples of use of generic
strategies
• Understand competitive advantage and value chain
• Understand offensive and defensive strategies
• Define differentiation and low cost
• Understand how low-cost and differentiation strategists
make money
• Recall multinational examples of use of generic
strategies
• Understand competitive advantage and value chain
• Understand offensive and defensive strategies

Learning Objectives
• Understand basics of multinational diversification
• Understand how traditional strategy formulation
techniques apply to the multinational company
• Realize both the convergence and divergence in
strategies
• Understand basics of multinational diversification
• Understand how traditional strategy formulation
techniques apply to the multinational company
• Realize both the convergence and divergence in
strategies

Basic Strategy for the
Multinational Company
• Strategy: the central, comprehensive, integrated and
externally oriented set of choices of how a company
will achieve its objectives
• Strategy: the central, comprehensive, integrated and
externally oriented set of choices of how a company
will achieve its objectives

• Important strategic areas
- Arenas: a company needs to be able to decide which
businesses it wants to be in
- Vehicles: a properly stated strategy also needs to include
the vehicles a company will use to create a presence in
specific markets or products
- Differentiators/Economic Logic: a company also needs to
decide what ways it will use to win over customers
- Sequencing: a company also needs to decide in what
sequence and at what pace major decisions will be made
• Important strategic areas
- Arenas: a company needs to be able to decide which
businesses it wants to be in
- Vehicles: a properly stated strategy also needs to include
the vehicles a company will use to create a presence in
specific markets or products
- Differentiators/Economic Logic: a company also needs to
decide what ways it will use to win over customers
- Sequencing: a company also needs to decide in what
sequence and at what pace major decisions will be made

• Multinational companies use many of the same
strategies as domestic companies
• Multinational companies use many of the same
strategies as domestic companies

Competitive Advantage and
Multinational Applications of
Generic Strategies
• Generic strategies: basic ways to achieve and sustain
competitive advantage
• Competitive advantage: when a company can
outmatch its rivals in attracting and maintaining its
targeted customers
• Generic strategies: basic ways to achieve and sustain
• Competitive advantage: when a company can
outmatch its rivals in attracting and maintaining its
targeted customers

Multinational Applications of
Generic Strategies (cont.)
• Differentiation strategy: providing superior value to
customers
• Ex.: BMW competing in the world market by
providing high-quality and performance sports cars
• Low-cost strategy: producing at a lower cost than
competitors
• Ex.: Korean semiconductor firms
• Differentiation strategy: providing superior value to
customers
• Ex.: BMW competing in the world market by
providing high-quality and performance sports cars
• Low-cost strategy: producing at a lower cost than
competitors
• Ex.: Korean semiconductor firms

How Do Low-Cost and
Differentiation Firms Make
Money?
• Differentiation
• Customers often pay a higher price for extra value
• Low-cost
• Additional profits come from cost savings
• Differentiation
• Customers often pay a higher price for extra value
• Low-cost
• Additional profits come from cost savings

Exhibit 5.1: Costs, Prices, and
Profits for Differentiation and
Low-Cost Strategies

Focus Strategy
• Strategies can be further subdivided on the basis of
competitive scope
• Competitive scope: how broadly a firm targets its
products or services
• - Narrow competitive scope for certain buyers or
geographic areas
• - Broad competitive scope when a large range of
buyers are targeted
• Strategies can be further subdivided on the basis of
competitive scope
• Competitive scope: how broadly a firm targets its
products or services
• - Narrow competitive scope for certain buyers or
geographic areas
• - Broad competitive scope when a large range of
buyers are targeted

Exhibit 5.2: Porter’s Generic
Strategies

the Value Chain
• A firm can gain competitive advantage by finding
differentiation or low costs in its activities
• Value chain is a convenient way of looking at the firm’s
activities
• Value chain: all the activities that a firm used to design,
produce, market, deliver, and support its product
• A firm can gain competitive advantage by finding
differentiation or low costs in its activities
• Value chain is a convenient way of looking at the firm’s
activities
• Value chain: all the activities that a firm used to design,
produce, market, deliver, and support its product

Exhibit 5.3: The Value Chain

Components of the Value
Chain
• Primary activities: physical actions of creating, selling,
and after-sale service of products
• Upstream: early activities in the value chain
• - R&D
• - Dealing with suppliers
• Primary activities: physical actions of creating, selling,
and after-sale service of products
• Upstream: early activities in the value chain
• - R&D
• - Dealing with suppliers

Components of the Value
Chain (cont.)
• Downstream: later value chain activities
• Sales and dealing with distribution channels
• Support activities: systems for human resources
management, organizational design and control, and
technology
• Downstream: later value chain activities
• Sales and dealing with distribution channels
• Support activities: systems for human resources
management, organizational design and control, and
technology

Outsourcing
• Outsourcing: a deliberate decision to have outsiders or
strategic allies perform certain activities in the value
chain
• About half of U.S. manufacturing jobs will be
outsourced to more than 28 emerging countries over
the next 10 years
• About 10% of U.S. service jobs may be outsourced
• Outsourcing: a deliberate decision to have outsiders or
strategic allies perform certain activities in the value
chain
• About half of U.S. manufacturing jobs will be
outsourced to more than 28 emerging countries over
the next 10 years
• About 10% of U.S. service jobs may be outsourced

Outsourcing
• When should a multinational company outsource?
• Outsourcing makes sense if an outsider can perform
a value-chain task better or more cheaply
• However, tasks that are outsourced should the ones
that are not crucial to the company’s ability to
achieve competitive advantage
• When should a multinational company outsource?
• Outsourcing makes sense if an outsider can perform
a value-chain task better or more cheaply
• However, tasks that are outsourced should the ones
that are not crucial to the company’s ability to
achieve competitive advantage

Exhibit: 5.4: The Major
Advantages and
Disadvantages of Outsourcing

Distinctive Competencies
• Strengths that allow companies to outperform rivals
- Ex.: Quality, innovation, customer service
• Resources: inputs into the production or service
processes
- Ex.: Buildings, land, equipment, employees
• Strengths that allow companies to outperform rivals
- Ex.: Quality, innovation, customer service
• Resources: inputs into the production or service
processes
- Ex.: Buildings, land, equipment, employees

Distinctive Competencies
• Capabilities: ability to assemble and coordinate
resources effectively
• Resources provide the organization with potential
capabilities.
• For long-term success, capabilities must lead to
sustainable competitive advantage.
• Capabilities: ability to assemble and coordinate
resources effectively
• Resources provide the organization with potential
capabilities.
• For long-term success, capabilities must lead to
sustainable competitive advantage.

Sustaining Competitive
Advantage
• Sustainable: strategies not easily defeated by
competitors
• Four characteristics of capabilities that lead to
- Valuable
- Rare
- Difficult to imitate
- Non-substitutable
• Sustainable: strategies not easily defeated by
competitors
• Four characteristics of capabilities that lead to
- Valuable
- Rare
- Difficult to imitate
- Non-substitutable

Exhibit 5.5: Relationships Among
Resources, Capabilities, Distinctive
Competencies, and Eventual
Profitability

Competitive Strategies in
International Markets
• Competitive strategies: strategic moves multinationals
use to defeat competitors
- Offensive competitive strategies: direct attacks to
capture market share
- Defensive competitive strategies: attempts to
discourage offensive strategies
- Counter-parry: fending off a competitor’s attack in
one country by attacking in another country
• Competitive strategies: strategic moves multinationals
use to defeat competitors
- Offensive competitive strategies: direct attacks to
capture market share
- Defensive competitive strategies: attempts to
discourage offensive strategies
- Counter-parry: fending off a competitor’s attack in
one country by attacking in another country

Offensive Strategies
• Direct attacks: price cutting, adding new features, or
going after poorly served markets
• End-run offensives: seeking unoccupied markets
• Preemptive competitive strategies: being first to obtain
particular advantageous position
• Acquisitions: buying out a competitor
• Direct attacks: price cutting, adding new features, or
going after poorly served markets
• End-run offensives: seeking unoccupied markets
• Preemptive competitive strategies: being first to obtain
particular advantageous position
• Acquisitions: buying out a competitor

Defensive Strategies
• Attempts to reduce risks of being attacked
• Convince an attacking firm to seek other targets
• Blunt the impacts of any attack
• Exclusive contracts with best suppliers
• New models to match competitor’s lower prices
• Public announcements about the willingness to fight
• Attempts to reduce risks of being attacked
• Convince an attacking firm to seek other targets
• Blunt the impacts of any attack
• Exclusive contracts with best suppliers
• New models to match competitor’s lower prices
• Public announcements about the willingness to fight

Counter-parry
• Popular strategy for multinationals
• Respond to attack by attacking competitor in another
country
• Ex.: Kodak—When Fuji attacked Kodak in the U.S.,
Kodak retaliated by attacking Fuji in Japan.
• Goodyear also attacked Michelin in Europe as
response to attack in U.S.
• Popular strategy for multinationals
• Respond to attack by attacking competitor in another
country
• Ex.: Kodak—When Fuji attacked Kodak in the U.S.,
Kodak retaliated by attacking Fuji in Japan.
• Goodyear also attacked Michelin in Europe as
response to attack in U.S.

Multinational Diversification
Strategy
• Business-level strategies: strategies for a single
business operation
• Corporate-level strategies: how companies choose
their mixture of different businesses
• Business-level strategies: strategies for a single
business operation
• Corporate-level strategies: how companies choose
their mixture of different businesses

Diversification
• Related diversification: companies acquire businesses
that are similar in some way to their original or core
business
• - Ex.: Nike adding clothing line to its shoe
operations
• Unrelated diversification: firms acquire businesses in
any industry
• - Main concern is whether it’s a good financial
investment
• Related diversification: companies acquire businesses
that are similar in some way to their original or core
business
• - Ex.: Nike adding clothing line to its shoe
operations
• Unrelated diversification: firms acquire businesses in
any industry
• - Main concern is whether it’s a good financial
investment

Strategy Formulation:
Traditional Approaches
• Strategy formulation: process by which managers
select the strategies to be used by their company
• Popular analysis techniques
• Competitive dynamics of the industry
• Company’s competitive position in the industry
• Opportunities and threats faced by their company
• Company’s strengths and weaknesses
• Strategy formulation: process by which managers
select the strategies to be used by their company
• Popular analysis techniques
• Competitive dynamics of the industry
• Company’s competitive position in the industry
• Opportunities and threats faced by their company
• Company’s strengths and weaknesses

Industry and Competitive
Analysis
• Porter’s five forces model: a popular technique that
can help a multinational firm understand the major
forces at work in the industry and the degree of
attractiveness of the industry
• Porter’s five forces model: a popular technique that
can help a multinational firm understand the major
forces at work in the industry and the degree of
attractiveness of the industry

Analysis
• Porter’s Five Forces Model
1. The degree of competition among existing
competitors in the industry
2. The threat of new entrants
3. The bargaining power of buyers
4. The bargaining power of suppliers
5. The threat of substitutes
• Porter’s Five Forces Model
1. The degree of competition among existing
competitors in the industry
2. The threat of new entrants
3. The bargaining power of buyers
4. The bargaining power of suppliers
5. The threat of substitutes

Analysis
• Managers must understand their industry well to
formulate good strategies.
• Must understand economic characteristics of industries
and driving forces
• Economic characteristics include
- Market size
- Ease of entry
- Opportunities for economies of scale
• Managers must understand their industry well to
formulate good strategies.
• Must understand economic characteristics of industries
and driving forces
• Economic characteristics include
- Market size
- Ease of entry
- Opportunities for economies of scale

Driving Forces
• The important changes that have potential to affect an
industry
- Speed of new product innovations
- Technological changes
- Changing societal attitudes and lifestyles
• The important changes that have potential to affect an
industry
- Speed of new product innovations
- Technological changes
- Changing societal attitudes and lifestyles

Key Success Factors (KSFs)
• Important characteristics of a company or its product
that lead to success in an industry
- Innovative technology or products
- Broad product line
- Effective distribution channels
- Price advantages
- Effective promotion
- Superior physical facilities or skilled labor
• Important characteristics of a company or its product
that lead to success in an industry
- Innovative technology or products
- Broad product line
- Effective distribution channels
- Price advantages
- Effective promotion
- Superior physical facilities or skilled labor

Key Success Factors
- Experience of firm in business
- Cost position for raw materials
- Cost position for production
- R&D quality
- Financial assets
- Product quality
- Quality of human resources
- Experience of firm in business
- Cost position for raw materials
- Cost position for production
- R&D quality
- Financial assets
- Product quality
- Quality of human resources

Competitor Analysis
• Profiles of competitor’s strategies and objectives
• Four steps
1. Identify strategic intent of competitors
2. Identify current and anticipated generic strategies
3. Identify current and anticipated offensive and
defensive competitive strategies
4. Assess current positions of competitors
• Profiles of competitor’s strategies and objectives
• Four steps
1. Identify strategic intent of competitors
2. Identify current and anticipated generic strategies
3. Identify current and anticipated offensive and
defensive competitive strategies
4. Assess current positions of competitors

Competitor Analysis (cont.)
1. Strategic intent
- Broad objectives of competitors
1. Current and anticipated generic strategies
- Helps determine key KSF
1. Current and anticipated offensive and defensive
competitive strategies
2. Current positions
1. Strategic intent
- Broad objectives of competitors
1. Current and anticipated generic strategies
- Helps determine key KSF
1. Current and anticipated offensive and defensive
competitive strategies
2. Current positions

Exhibit 5.7: Hypothetical Competitive
Profiles of Four Companies in Different
Countries

Company-Situation Analysis:
SWOT
• Strengths: distinctive capability, resource or skill
• Weaknesses: competitive disadvantage compared to
competitors
• Opportunities: favorable conditions in the environment
• Threats: unfavorable conditions in the environment
• Strengths: distinctive capability, resource or skill
• Weaknesses: competitive disadvantage compared to
competitors
• Opportunities: favorable conditions in the environment
• Threats: unfavorable conditions in the environment

SWOT Analysis
• More complex than for domestic firms
• Multinationals face more complex general and
operating environments
• Environments vary by country
• More complex than for domestic firms
• Multinationals face more complex general and
operating environments
• Environments vary by country

Corporate Strategy Selection
• Diversified corporation has a portfolio of businesses
• Major issue is which businesses to invest in and which
businesses to divest
• The basic tool: matrix analyses
• The most popular is the growth-share matrix of the
Boston Consulting Group (BCG).
• Diversified corporation has a portfolio of businesses
• Major issue is which businesses to invest in and which
businesses to divest
• The basic tool: matrix analyses
• The most popular is the growth-share matrix of the
Boston Consulting Group (BCG).

BCG Share Matrix
• Division into four categories based on market share
and relative market share
• Stars: the most successful firm
• Dogs: businesses with low market shares in low-
growth industries
• Cash cows: businesses in slow-growth industries
where company has strong market-share position
• Problem children: businesses in high-growth
industries where company has a poor market share
• Division into four categories based on market share
and relative market share
• Stars: the most successful firm
• Dogs: businesses with low market shares in low-
growth industries
• Cash cows: businesses in slow-growth industries
where company has strong market-share position
• Problem children: businesses in high-growth
industries where company has a poor market share

Exhibit 5.8: The BCG Growth
Share Matrix

Matrices
• All matrices help answer basic strategy formulation
question such as
• Are businesses in attractive industries?
• Are most businesses growing?
• Are there sufficient cash cows to finance other
businesses?
• Is business portfolio well positioned for the future?
• Is the some strategic synergies among businesses?
• All matrices help answer basic strategy formulation
question such as
• Are businesses in attractive industries?
• Are most businesses growing?
• Are there sufficient cash cows to finance other
businesses?
• Is business portfolio well positioned for the future?
• Is the some strategic synergies among businesses?

Organizations Alike:
Globalization and
Convergence
• Convergence: increasing similarity of management
practices
• Convergence is most apparent with transnational firms
• Multinational firms competing in the same industry tend
to have similar structures and strategies regardless of
the location of the company’s headquarters
• Convergence: increasing similarity of management
practices
• Convergence is most apparent with transnational firms
• Multinational firms competing in the same industry tend
to have similar structures and strategies regardless of
the location of the company’s headquarters

Globalization and
convergence
• How Globalization pushes organizations to be more
similar
- Global customers and products
- Growing levels of industrialization and economic
development
- Global competition and global trade
- Gross-border mergers, acquisitions, and alliances
- Cross-national mobility of managers
- Internationalization of business education
• How Globalization pushes organizations to be more
similar
- Global customers and products
- Growing levels of industrialization and economic
development
- Global competition and global trade
- Gross-border mergers, acquisitions, and alliances
- Cross-national mobility of managers
- Internationalization of business education

Globalization and
convergence
• National differences still affect the way many firms compete via
their choices of strategies
• Three important reasons to understand the national differences
• Managers in successful multinational firms must understand
and anticipate the strategies of rivals from other countries
the strategies of potential business partners
• Strategies developed in one national context might be
copied and modified to fit another national context
• National differences still affect the way many firms compete via
their choices of strategies
• Three important reasons to understand the national differences
and anticipate the strategies of rivals from other countries
the strategies of potential business partners
• Strategies developed in one national context might be
copied and modified to fit another national context

The National Context and
Organizational Strategy:
Overview and Observations
• The national context affects organizational design and
strategy formulation and content through the following
processes
- The social institutions and national and business
cultures encourage or discourage certain forms of
businesses and strategies in each nation
- Social institutions and national culture serve as
barriers to the easy transfer of competitive
advantages among countries
• The national context affects organizational design and
strategy formulation and content through the following
processes
- The social institutions and national and business
cultures encourage or discourage certain forms of
businesses and strategies in each nation
- Social institutions and national culture serve as
barriers to the easy transfer of competitive
advantages among countries

The National Context and
Organizational Strategy:
Overview and Observations
- Each nation must rely on its available factor
conditions for developing industries and the firms
within industries
- Social institutions and culture determine which
resources are used, how they are used, and which
resources are developed
- Each nation must rely on its available factor
conditions for developing industries and the firms
within industries
- Social institutions and culture determine which
resources are used, how they are used, and which
resources are developed

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