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. 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 HIGH International Trade LO W LOW Foreign Direct Investment HIGH

3. 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

4. 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

5. 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.

6. 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

7. 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.

8. 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.

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

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

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

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, 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

14. 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

15. 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?

16. Alternative Modes of Overseas Market Entry TRANSACTIONS DIRECT INVESTMENT Exporting Licensing Joint venture Wholly owned subsidiary Marketing & Distribution only Fully integrated Spot sales Foreign agent / distributor Long-term contract Licensing patents & other IP Franchising Marketing& Distribution only Fully integrated Resource commitment High Low

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 AVTOVAZ 20% owned (2000-5). Collaboration on technology and components FIAT 50% owned SUZUKI Russian JV to produce cars 10% owned. Co-production GM 20% owned; joint production FUJI 60% owned 49%owned. Co-production ISUZU JV to produce cars in China 40% investment IBC Vehicles Ltd. (U.K.) 50% owned SAIC (Makes vans in UK) 50.9% owned; technical & production collaboration New United Motor Manufacturing Inc. (NUMMI) TOYOTA 50% owned DAEWOO (Makes cars in US)

19. 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

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 separate national mkts. World as single mkt. World as inter- related mkts. global strategy multidomestic strategy

21. Analyzing benefits/costs of a global strategy 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) 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

22. Jet engines Autos Benefits of global integration Consumer electronics Telecom equipment Investment banking Steel Restaurant chains Cement Online C2C auctions Retail banking Beer Auto repair Dry cleaning Funeral services Benefits of national differentiation

23. Positioning industries in terms of benefits of globalization and national differentiation Jet engines Autos Benefits of global integration Consumer electronics Telecom equipment Investment banking Retail banking Cement Auto repair Funeral services Benefits of 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 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

26. 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

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

28. 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.

29. 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

30. Outback Steakhouse • What are the principal features of Outback Steakhouse’s strategy in the US? Why has the strategy been so successful? • What are the key elements of the international expansion strategy being proposed by Hugh Connerty? • Assess the proposed strategy in relation to: • Should Outback Steakhouse expand internationally, or would it be better to expand through starting new restaurant chains within the US? • Does the strategy outlined by Connerty make sense? • If Outback is to expand internationally, advise Chris Sullivan on: • The optimal rate of international expansion; • The best mode of entry into foreign markets (e.g. direct management, JV, franchise); • Which country(ies) to enter first; • Whether Connerty is the right person to head the International Division.