Global Strategies and the Multinational Corporation

1. Global Strategies and the Multinational Corporation OUTLINE • Implications of International Competition for Industry Analysis • Analyzing Competitive Advantage within an International Context • Applying the Framework (1) International location of production (2) Foreignmarket entry strategies • Multinational Strategies: Globalization versus National Differentiation • Strategy and Organization of the Multinational Corporation

2. The Internationalization Process International Global Industries Industries --aerospace --automobiles --military hardware --oil --diamond mining --semiconductors --agriculture --consumer electronics Domestic Multinational/ Industries Multidomestic --railroads Industries --laundries/dry cleaning --investment banking --hairdressing --hotels --milk --consulting HIGH International Trade LO W LOW Foreign Direct Investment HIGH

3. The Automobile Goes Global: The GM Pontiac Le Mans Design: Germany (by Opel) Brakes: France, U.S. Sheetsteel: Japan S. Korea Stamping of body parts: S. Korea Tires: S. Korea Engines: 1.6 liter S. Korea Windshield: S. Korea 2.0 liter Australia Battery: S. Korea Fuel injection: U.S. Wiring harness: S. Korea Fuel pump: U.S. Radio: Singapore Transmission: Canada & U.S. Assembly: S. Korea Rear axle: U.S. Marketing & Steering: U.S. distribution: N. America

4. Implications of Internationalizationfor 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

5. Competitive Advantage within an International Context: The Basic Framework FIRM RESOURCES & CAPABILITIES -- Financial resources -- Physical resources -- Technology -- Reputation -- Functional capabilities -- General management capabilities THE INDUSTRY ENVIRONMENT Key Success Factors COMPETITIVE ADVANTAGE 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

6. National Influences on Competitiveness: The Theory of Comparative Advantage 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. • Philippines relatively more efficient in the production of footwear, apparel, and assembled electronic products than inthe 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.

7. Revealed Comparative Advantage fora Certain Broad Product Categories USA Canada W. Germany ItalyJapan 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

8. Porter’s Competitive Advantage of Nations Extends and adapts traditional theory of comparative advantage to take account of three factors: • International competitive 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 impact upon the dynamics of innovation and upgrading.

9. Porter’s National Diamond Framework FACTOR CONDITIONS RELATING AND SUPPORTING INDUSTRIES DEMAND CONDITIONS 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.

10. 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, components in Korea and Thailand, assembly in Indonesia, China, and India, marketing in Europe and North America)

11. 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.

12. The Role of Labor Costs Hourly Compensation for Production Workers, 1999 ($) Germany 26.93 Japan 20.89 U.S. 19.20 France 19.98 U.K. 16.56 Spain 12.11 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

13. Location and the Value Chain Comparative advantage in textiles and apparel by stage of processing Country Stage Index of Country Stage Index of of Revealed of Revealed Processing Comparative ProcessingComparative Advantage Advantage 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 Note: 1 = production of fiber (natural & synthetic) 2 = production of spun yarn 3 = production of textiles 4 = production of clothing

14. Determining the Optimal Location of Value Chain Activities Where is the optimal location of X in terms of the cost and availability of inputs? The optimal location of activity X considered independently What government incentives/ penalties affect the location decision? What internal resources and capabilities does the firm possess in particular locations? WHERE TO LOCATE ACTIVITY X? What is the firm’s business strategy (e.g. cost vs. differentiation advantage)? The importance of links between activity X and other activities of the firm How great are the coordination benefits from co-locating activities?

15. Alternative Modes of Overseas Market Entry TRANSACTIONS DIRECT INVESTMENT Exporting: Exporting: Exporting: Licensing Franchising Joint Wholly owned Spot Long-term with foreign technology venture subsidiary trans- contract distributor/ and Marketing & Fully Marketing Fully actions agent trademarks distribution integral- & sales integrated only ted only • Key issues: • Is the firm’s competitive advantages based upon firm-specific or • country-specific resources and capabilities? • Is the product tradable and what are the barriers to/ costs of trade? • Does the firm possess the full range of resources and capabilities • needed to serve the overseas market? • Can the firm directly appropriate the returns to its resources? • What transaction costs are involved?

16. Alliances and Joint Ventures: Management Issues • Benefits: --Access to the resources and capabilities of another company --Learning from one another --Reducing time-to-market for innovations --Risk sharing • Problems: --Disagreements & conflict between the partners. Disputes most likely where the partners are also competitors. • Benefits are seldom shared equally. Distribution 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?

17. Alliances and Joint Ventures: Management Issues • Benefits: --Combining resources and capabilities of different companies --Learning from one another --Reducing time-to-market for innovations --Risk sharing • Problems: --Management differences between the two partners. Conflict most likely where the partners are also competitors. • Benefits are seldom shared equally. Distribution 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. General Motors’ Alliances with Competitors SAAB FIAT 50% owned SUZUKI 20%owned Supplies small cars Collaboration on technology and components 10%owned GM 49%owned FUJI ISUZU 60% owned 20%owned; joint production Supplies small cars/ trucks/parts IBC Vehicles Limited (U.K.) 40% investment 50% owned Supplies small cars Makes vans in UK New United Motor Manufacturing Inc. (NUMMI) 50%owned TOYOTA DAEWOO Makes cars in US

19. Analyzing benefits/costs of a global strategy Forces for globalization MARKET DRIVERS --Similarity of needs --Appeal of foreign-ness --Network effects COST DRIVERS --Scale --Learning --National differences in resource costs COMPETITIVE DRIVERS --Strategic competition (X subsidization) Forces for localization / national differentiation MARKET DRIVERS --Different customer preferences --Cultural differences COST DRIVERS --Transportation costs --Transaction costs --Economic & political risk (+ or -?) --Speed of response GOVERNMENT DRIVERS --Barriers to trade & inward inv. --Regulations

20. Multinational Strategies: Globalization vs. National Differentiation The case for a global strategy: • National preferences in decline—world becoming a single, if segmented, market • Accessing global scale economies—in purchasing, manufacturing, 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. Ted Levitt “Globaliz- -ation of Markets” Thesis Hamel & Prahalad Thesis Kenichi Ohmae’s “Triad Power” Thesis

21. 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.

22. The Evolution of MultinationalStrategies and Structures: (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

23. The Evolution of Multinational Strategies and Structures: (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

24. Matching Global Strategies and Structures to Industry Conditions Degree of globalization depends upon the benefits of global integration versus the benefits of national differentiation. Key issues: --How important are global scale economies? --How different are customer requirements between countries? • Jet engines • Telecommunications • equipment Benefits of global integration • Consumer • electronics • Packaged • grocery products • Cement Benefits of national differentiation

25. 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 successful Matsushita NEC Kao Erickson global integration Philips global integration global integration P&G Unilever General Electric ITT local responsiveness local responsiveness local responsiveness

26. Figure 14.8. The Transnational Corporation Tight complex controls and coordination and a shared strategic decision process. Heavy flows of technology, finances, people, and materials between interdependent units.

27. Reconciling Global Integration with National Differentiation: The Transnational Corporation Tight complex controls and coordination and a shared strategic decision process. Heavy flows of technology, finances, people, and materials between interdependent units. 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.

28. Designing the MNC: Key Learning • 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