© 2013 Cengage Learning. All rights reserved. CHAPTERS 4 & 6 GLOBAL2 PENG © Nadine Hutton/Bloomberg via Getty Images Leveraging Resources &

© 2013 Cengage Learning. All rights reserved.

CHAPTERS 4 & 6

GLOBAL2 PENG

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Leveraging Resources Leveraging Resources &&

SWOT ANALYSIS

Strengths and Weaknesses – internal assessment of the organization leading to management decisions.

Opportunities and Threats – external assessment of the business environment to identify the uncontrollable events that might impact management decisions.

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RESOURCES AND CAPABILITIES(terms are used interchangeably in this text)

The tangible and intangible assets a firm uses to choose and implement its strategies.

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UNDERSTANDING RESOURCES AND CAPABILITIES

Tangible resources and capabilitiesAssets that are observable and easily quantified.

Intangible resources and capabilitiesAssets that are hard to observe and difficult (if not impossible) to quantify.

OUTSOURCING

OutsourcingTurning over an organizational activity to an outside supplier that will perform it on behalf of the focal firm.•Offshoring – foreign firm•Onshoring (inshoring) – domestic firm

Captive sourcingSetting up subsidiaries abroad so that the work done is in-house but the location is foreign. Also known as foreign direct investment (FDI).

TWO-STAGE DECISION MODEL

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VRIO FRAMEWORK

alue – do firm resources and capabilities add value?

arity – how rare are the resources and capabilities?

mitability – valuable and rare resources provide competitive advantage only if they are rare.

rganizational – valuable, rare, and hard to imitate resources must be well organized.

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VRIO FRAMEWORK AND FIRM PERFORMANCE

Sources: J. Barney, Gaining and Sustaining Competitive Advantage, 2nd ed. (Upper Saddle River, NJ: Prentice Hall, 2002) 173; R. Hoskisson, M. Hitt, and R. D. Ireland, Competing for Advantage (Cincinnati: Thomson South-Western, 2004) 118. 9

VALUE

Only value-adding resources provide competitive advantage.

Non-value-adding resources may lead to competitive disadvantage.

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RARITY

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• Intellectual property (IPR)• Reverse engineering

IMITABILITY

Imitation is difficult because of causal ambiguity, which means the difficulty of identifying the actual cause of a firm’s success. Outsiders usually have a hard time understanding what a firm does inside its boundaries. Additionally, even managers of a firm often do not know exactly what contributes to their success.

Example: Barbie

Other examples?

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KEY TERMS ASSOCIATED WITH FDI

Terms to know: Foreign direct investment (FDI) Foreign portfolio investment (FPI) Horizontal FDI Vertical FDI FDI flow FDI inflow FDI outflow

FDI VOCABULARY

Foreign direct investment (FDI)Putting money in activities that control and manage value-added activities in other countries (UN: equity stake of 10% or more)

Foreign portfolio investment (FPI)Holding securities, such as stocks and bonds, of companies in countries outside one’s own but does not entail the active management of foreign assets (foreign INdirect investment)

•Management control rightsAuthority to appoint key managers and establish

control mechanisms (adequate % equity required to accomplish control/ownership)

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FDI VOCABULARY

FDI flow - The amount of FDI moving in a given period (usually a year) in a given direction.

•FDI inflowFDI moving into a country in a year.

•FDI outflowFDI moving out of a country in a year.

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HORIZONTAL FDI

When a firm takes the same activity at the same value-chain stage from its home country and duplicates it in a host country.

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VERTICAL FDIWhen a firm moves upstream or downstream in different value-chain stages in a host country through FDI.

UPSTREAM AND DOWNSTREAM VERTICAL FDI

Upstream vertical FDIUsing FDI in an earlier activity in the value

chain

Downstream vertical FDIUsing FDI in an later activity in the value

chain

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WHY DOES FDI TAKE PLACE?

FDI provides gains to a firm through OLI

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HOW DOES FDI RESULT IN OLI ADVANTAGES?

OWNERSHIP ADVANTAGES – possession and leveraging of certain valuable, rare, hard-to-imitate, and organizationally embedded (VRIO) assets overseas in the contect of FDI.

Direct is the key word in FDI. Direct ownership provides combination of equity ownership rights and management control rights. Licensing – selling technology or intellectual property for a fee

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OWNERSHIP ADVANTAGES

FDI vs. Licensing

OLI ADVANTAGES

LocationFeatures unique to a place, such as its natural or

labor resources or its location near particular markets, that provide certain advantages to firms doing business there

InternalizationReplacement of cross-border markets (such as

exporting and importing) with one firm (the MNE) locating and operating in two or more countries

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LOCATION ADVANTAGES

Some locations possess geographical features that are difficult to match.

Location advantage can arise from agglomeration – the clustering of economic activities in certain locations.

Wichita KS – Who knew?

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LOCATION ADVANTAGES

Results from: Knowledge spillover – diffusion of

knowledge from one firm to others among closely located firms that attempt to hire individuals from competitors.

Industry demand for skilled workers

Industry demand that facilitates a pool of specialized suppliers and buyers in a region

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ACQUIRING AND NEUTRALIZING LOCATION ADVANTAGES

When one firm enters a foreign country through FDI, competitors are likely to increase FDI in order to acquire or neutralize location advantages.

Why?

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THE BENEFITS OF INTERNALIZATION

Replaces external market relationship with single organization (the MNE) spanning both countries—owning, controlling, and managing.

Reduces cross-border transaction costs.

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© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

© 2013 Cengage Learning. All rights reserved.

BENEFITS AND COSTS OF FDI TO HOST COUNTRIES

Benefits1. Capital inflow2. Technology

spillovers3. Advanced

management know-how

4. Creates jobs

Benefits1. Capital inflow2. Technology

spillovers3. Advanced

management know-how

4. Creates jobs

Costs1. Loss of

economic sovereignty

2. Loss of domestic firms

3. Capital outflow

Costs1. Loss of

economic sovereignty

2. Loss of domestic firms

3. Capital outflow

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BENEFITS AND COSTS OF FDI TO HOME COUNTRIES

Benefits1. Repatriated

earnings from FDI profits

2. Increased exports

3. Learning via FDI from operations abroad

Benefits1. Repatriated

earnings from FDI profits

2. Increased exports

3. Learning via FDI from operations abroad

Costs

1.Capital outflow

2. Job loss

Costs

1.Capital outflow

2. Job loss