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Lesson 4

Lesson 4. Global Strategic Management Readings: Chapter 6 & 7, Book 1 Chapter 13 & 14, Book 2. Main Issues:. International Management Strategies The MNE’s Strategic Orientations Strategic leadership Main Strategies for Growth Strategic flexibility

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Lesson 4

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  1. Lesson 4 Global Strategic Management Readings: Chapter 6 & 7, Book 1 Chapter 13 & 14, Book 2

  2. Main Issues: International Management Strategies The MNE’s Strategic Orientations Strategic leadership Main Strategies for Growth Strategic flexibility MNEs’ Competitive Advantage Building Blocks of Competitive Advantage Value Chain Analysis Cases: Larry Bossidy at AlliedSignal Wal-Mart; Intel Mechanical excavator industry

  3. 4.1 International Management Strategies A challenging issue for The MNEs: Globalization vs. Localization What’s globalization? On the macro level, it’s the trend toward an integration of national economies, that is, growing interdependence among national economies. On the micro level, globalization refers to companies’ drive to standardize worldwide production and distribution of products and services. Localization: It is a multidomestic practice of customizing products and services to different national markets.

  4. Globalization vs. Localization The MNE’s Strategic Orientation Graph High Globalization Low High Localization Regiocentric Strategy Geocentric Strategy Ethnocentric Strategy Multidomestic Strategy

  5. The MNEs’ Strategic Orientations Ethnocentric Strategy: (以母国为中心的） To centralize R&D at home, and transfer competencies & products abroad Multidomestic Strategy: To customize products for local tastes Regiocentric Strategy: To centralize R&D, production, marketing activities in a few low-cost locations globally. Geocentric Strategy: To simultaneously achieve low-cost and differentiation advantages The trend is to move toward geocentric strategy

  6. Globalization vs. Localization The MNE’s Strategic Orientation Graph High Globalization Low High Localization Regiocentric Strategy (Intel) Geocentric Strategy (Caterpillar) Ethnocentric Strategy (McDonald’s) Multidomestic Strategy (TV Co.)

  7. Case:Larry Bossidy at AlliedSignal Corporate Superstar IBM, Merck, and Kodak wanted him to be their CEO. His high performance at AlliedSignal: In 1991 he became its CEO, the firm’s profit: $342 million; the stock: $3.5/share. In 1998, the firm’s profit: $1.33 billion; the stock: $60/share. His background: Before 1991, he held No. 2 position at GE.

  8. Case: Larry Bossidy at AlliedSignal Discussion Questions: I. What’s the typical strategy management process demonstrated by Larry at AlliedSingnal? II. What international management strategy did Bossidy adopt? III. How would you describe Bossidy’s capability for strategic management? Do you consider Bossidy as a good role model for strategic management?

  9. I. Bossidy’s Strategic Management Process Look at Larry’s steps. (1) Define basic Mission Increase the firm’s profitability & the stock value (2) Establish major goal：“Profitable growth” (3) Quantify objective： 15% annual rise in earnings share (4) Execution Plan: New markets, new products, new methods Action: Communication, push, weekly visits (5) Control & evaluation: Fired & transferred 6 of the top 10 executives at one division in a year.

  10. In short, strategic management process includes: Strategy formulation, Strategy implementation, Strategic control & evaluation. Note: Useful Tools for Strategy Formulation (1) SWOT Analysis Strength, Weakness, Opportunity, Threat It’s an essential pat of strategy formulation, and a useful guide for assessing both internal & external environments. (2) Scenario Planning Approach Pioneered by Royal Dutch Shell in 1984 It was preparing for $15/barrel when oil price at $30.

  11. II. What international management strategy did Bossidy adopt? “Going global” is an important part of his corporate strategy. Bossidy pushed his managers to exploit opportunities in foreign markets like Asia. It appears that he was adopting an ethnocentric strategy. III. How would you describe Bossidy’s capability for strategic management?Do you consider Bossidy as a good role model for strategic management? Why or why not?

  12. Larry Bossidy He was an effective strategic leader Vision & action plan Commitment e.g. enter Asia markets e.g. weekly visits Emotional Intelligence Astute Use of Power (empower subordinates) e.g.leaky-bucket” award, e.g. negotiate “goals” Replacing poor performers Talented Strategic Leader

  13. Do you consider Bossidy as a good role model for strategic management? Being “demanding, relentless, and tough,” (严、狠、凶) he has succeeded in achieving strategic goals. But can one succeed by being “forgiving, kind, and gentle” (宽、亲、善)？ Bossidy’s style & method worked specially well for a company (1) In mature industry, or market; (2) under the turnaround situations.

  14. Superior Rules of Game Strategic flexibility Execution Skills Global Perspectives Vision & Action Plan Scenario Planning Superior Strategy Effective Strategic Leader Emotional Intelligence Characteristics of High-Performance Strategic Leader

  15. Case: Strategic flexibility Why do incumbent firms often decline following introduction of new tech? Example: Mechanical excavator (挖掘机) industry Prior to 1940’s, cable-&-pulley (电缆滑轮) system to lift bucket. Drawback: large, cumbersome & expensive. In the 1940’s, hydraulic system was introduced. Drawback: initially, seals on hydraulic cylinder may leak under high pressure, limiting the bucket size. Not powerful enough. Incumbents’ strategic decision: Continue using cable-&-pulley tech. A disaster. Why?

  16. Partly they listened to their customers too closely. Incumbents asked: Are you interested in this new tech? General contractors (main customers): “Given its limited functionality, we cannot see a need for it” Incumbent firms thought: New tech has limited appeal to our main customers. Market for new tech is small. It’s not worth our bother. But new entrants saw an opportunity: Residential contractors and farmers, who needed small buckets for digging, were poorly served by incumbent firms. Outcome: New tech improved, & gradually dominates the markets (p105, Textbook) Q. How should incumbents avoid such strategic mistakes?

  17. How should incumbents avoid such strategic mistakes? (1) Ask the right question: “Would you be interested in this new tech if it improves its functionality over time?” (2) Hedge bets on new tech: Parallel development Parallel business models e.g. HP laser jet printer v.s ink jet printer (3) Buy out new tech, or new tech firms

  18. 4.2 Main Strategies for Growth Product-Market Matrix (H. Igor Ansoff, HBR, 1957) Product Present New Market Present Withdrawal Consolidation Product Market Development penetration New Market Diversification development (Related & unrelated) Q. What type of strategy is the firms’ pursuit of global expansion? Market development strategy

  19. 4.3 Strategic Decision: Should You Enter an Industry? Case: U.S. Semiconductor Industry in Early 1990s High capital investment, and high R&D costs, Short product life cycles, economies of scale;  Many suppliers of conventional materials for use, No threat of forward integration;  No substitutes for semiconductors, but some buyers making backward integration, favorable growth trend; New semiconductor products developed continually, customer loyalty low; Many competitors, cyclical sales, differentiating products not easy. Is this industry attractive? Should you enter or not?

  20. Suppliers’ Bargaining Power Threat of substitutes Entry Barrier Intensity of Rivalry Buyer’s Bargaining Power Porter’s Five Forces Model

  21. Application of Five Forces Model Entry barriers: very attractive +, + Bargaining power of suppliers: +, + Threat of substitutes: + Bargaining power of buyers: - Rivalry & competition: very unattractive -, - On the whole, the industry is attractive. Large scale of operations is necessary for committing substantial resources to R & D.

  22. 4.4 MNEs’ Competitive Advantage Strategy build Resources & capabilities (Firm’s competencies) shape Competitive Advantage (C.A.) The basic aim of strategy is to achieve C.A. through building resources & capabilities.

  23. Competitive Advantage (C.A.): It’s the ability of a company to outperform its competitors. It is reflected by the firm’s higher profit rate than the average for its industry. Sustained Competitive Advantage: It is the ability to maintain the company’s superior performance over a long period of time. C.A. as Value Creation Ability Profit per unit = Price per unit – Cost per unit (products’ value to the customers) A firm’s profit rate and thus competitive advantage are determined by its ability to create more value for its customers than rivals do.

  24. Advantage of Global Operations International production and multinational operation have been the trend of development. e.g. Chip manufacturing base for semiconductor industry Advantages of global operations or global leverage: (1) Global learning Valuable knowledge is created and shared globally (2) Cost advantages Economies of scale, or lower resource costs (3) Cross-subsidization: The MNE can use the profits earned in one part of the world to reinforce its competitive position in another. (4) Risk Diversification: Multiple bases of both operations and sales reduce the operation risks.

  25. Superior Innovation Global Leverage Superior Efficiency Competitive Advantage Superior Customer Responsiveness Superior Quality Building Blocks of Competitive Advantage

  26. Case Study: Wal-Mart Stores, Inc. I. What’s its success? II. What are the main reasons for its success? III. Regarding the sustainability of its competitive advantage in the discount retailing industry, what problem do you foresee for Wal-Mart as it continues to expand its business model?

  27. I. What’s its success? (1) King of retailing & enterprises The world’s largest company with over $405 billion of revenues in 2008. Only 24 countries had greater GDP than its revenues. (2) Money machine $1,000 invested in its stock in 1970, now worth about $3 million; The stock for Walton’s heirs worth $100 billion, ranking them as wealthiest Americans. P1, ROE: 33% annual rate for over 20 years Sales growth: 35% annual growth rate until 90’s

  28. II. What are the main reasons for its success? (I) Competitive Advantage is shaped by its business strategy: cost leadership Its competitiveness in terms of Porter’s 5 forces (“BERSB”): (1) It has strong bargaining power over suppliers due to its large purchases, & high density of stores; (2) It’s economies of scale & brand name constitute entry barriers; (3) It beats industry competitors by its “everyday low price;” (4) It is less threatened by substitutes due to its ability to cut prices to compete them; (5) Its product buyers have limited bargaining power as it has a large number of local monopolies.

  29. (II) Sources of its competitive advantage (1) Innovation e.g.1 Small town rural strategy: 1st Mover Advantage “Common wisdom” of 1960s: A discount store could not succeed in a city with less than 100,000 people. The Preemption Game: Payoffs Company Y Enter Don’t Enter Wal-Mart Enter -10, -10 20, 0 Don’t Enter 0, 20 0, 0 e.g.2 Human resource management strategy Associates “live to work for the glory of Wal-Mart.”

  30. “To Walton, the most important ingredient in Wal Mart’s success was the way it treated its associates.” Wal-Mart is named as one of the 100 best companies to work for in the U.S. Concept: Competence Carriers Employees are competence carriers, and should be treated well. (2) Global Leverage About one fourth of its stores are outside the U.S.

  31. (3) Efficiency: Thin Profits + Quick Turnover e.g.1 Superior logistics Trucks are over 60% full on back hauls (industry average is less than 20%). e.g.2 Superior cost control P16: Its operating expenses are 18.5% as against industrial average of 24.6 %. It’s 6.1% lower. (4) Customer responsiveness e.g. “10 feet rule” “best smile” (5) Quality e.g. refund policy

  32. Innovations: Associates Rural Town Strategy Global Leverage: Worldwide operation Competitive Advantage Customer Service: 10 feet rule, best smile Quality: Refund Policy Efficiency: Logistics Wal-Mart’s Building Blocks of Competitive Advantage

  33. Case: Wal-Mart Stores, Inc. √ I. What’s its success? √ II. What are the main reasons for its success? III. Regarding the sustainability of its competitive advantage in the discount retailing industry, what problem do you foresee for Wal-Mart as it continues to expand its business model?

  34. Sustainability of its competitive advantage Its competitive position: superior cost structure reinforced by its market dominance. The threats to its competitive advantage: (1) Format or innovation risk: “The wheel of retailing” Mom & pop stores, Dept. stores, Chains of dept. stores Discount stores Supercenters Warehouse clubs Computer shopping Homes shopping networks … … …

  35. (2)Imitation risk Competitors imitate its core competencies. (3) Culture erosion risk Can its values be maintained in places like New York or Guangzhou? (4) Diseconomies of scale (5) Limits to growth It has already a high density of stores in most small towns in the U.S.

  36. Recapitulation  Globalization vs localization is a key strategic issue;  There are four global strategic orientations: ethnocentric, regioncentric, multidomestic, and geocentric; A strategic leader needs: vision & action plans, commitment, emotional intelligence, and astute management skills;  Parallel development is a important strategy; Strategy is designed to enhance competitive advantage; C.A. depends on the ability to create value for customers;  Building blocks of competitive advantage are superior innovation, efficiency, quality, global leverage, customer responsiveness; Distinctive competency arise from combing capability & resources

  37. Next Class: Lecture & Group Presentation Lecture: International Investment Management Reading: Chapter 8, Book 1 Individual Homework (Case Write-ups): 4 students are needed to do each of the following case: IBM PC Goes to Lenovo or Matsushita in Hollywood (Discussion Questions for Lenovo are stated on the syllabus) Discussion Questions for Matsushita: I. Why did Matsushita acquire MCA？ II. What type of merger was it？ III. What international management strategy did Matsushita adopt? IV. How can the acquirer reform & integrate the acquired firm successfully?

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