40966262 MBA 290 Strategic Analysis (1)

8/8/2019 40966262 MBA 290 Strategic Analysis (1)

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MBA290:MBA290:ADVANCEDADVANCEDSTRATEGICSTRATEGIC

MANAGEMENTMANAGEMENT

Professor Stanley HanCollege of Business Administration

[email protected]


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Course Overview: ObjectivesCourse Overview: Objectives

l To acquire familiarity with the principal concepts,frameworks and techniques of strategicmanagement.

l To gain expertise in applying these concepts,frameworks and techniques in order to

- understand the reasons for good or badperformance by an enterprise,

- generate strategy options for an enterprise, - assess available options under conditions of

imperfect knowledge, - select the most appropriate strategy, - recommend the best means of implementing

the chosen strategy.

l


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3

Course Overview: Objectives (contd)Course Overview: Objectives (contd)

l To integrate the knowledge gained in previouscourses.

l To develop your capacity as a general manager in

terms of - an appreciation of the work of the general

manager, - the ability to view business problems from a

general management perspective, - the ability to develop original and innovative

approaches to strategic problems, - developing business judgment.

l


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THE CONCEPT OFSTRATEGY

The Concept of Strategy and the Pursuit

ofSustainable Above-Normal Profits


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Domain of Strategy

strategic competitiveness and above normal returns

concerns managerial decisions and actions whichmaterially affect the success and survivalofbusiness enterprises

involves thejudgmentnecessary to strategicallyposition a business and its resources so as tomaximize long-term profits in the face ofirreducibleuncertainty and aggressive competition

strategy is the linkage between a business and itscurrent and future environment


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Definition

The determination of the long run goalsand objectives of an enterprise, the

adoption of courses of action and theallocation of resources necessary forcarrying out these goals

Alfred Chandler, Strategy and Structure


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Levels ofStrategy

Division A

R & D

Personnel

Finance

Production

Marketing/Sales

Division B

R & D

Personnel

Finance

Production

Marketing/Sales

FUNCTIONALSTRATEGIES

BUSINESSSTRATEGY

CORPORATESTRATEGY

CORPORATEHEAD OFFICE


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Levels of Strategy

Corporate strategy... defines the scope of thebusiness in terms of the industries and markets inwhich it competes.

includes decisions about diversification, verticalintegration, acquisitions, new ventures,divestments, allocation of scarce resourcesbetween business units

Business strategy... is concerned with how the firmcompetes within a particular industry or market... towin a business unit must adopt a strategy thatestablishes a competitive advantage over its rivals.

Functional strategy... the detailed deployment ofresources at the operational level


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Common Elements in Successful Strategy

SuccessfulStrategy

Profoundunderstanding ofthe competitiveenvironment

Objectiveappraisal ofresources

Long-term, simpleand agreed uponobjectives

$

EFFECTIVE IMPLEMENTATION


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Strategy as a Quest for Profit

The stakeholder approach : The firm is a coalition of interest groups

it seeks to balance their different objectives

The shareholder approach : The firm exists to maximize the wealth ofits owners (= max. present value of profits over the life of the firm)

For the purposes of strategy analysis we assume that the primary goalof the firm is profit maximization.

Rationale:1)Boards of directors legally obliged to pursue shareholder interest2)To replace assets firm must earn return on capital > cost of capital

(difficult when competition strong).3)Firms that do not max. stock-market value will be acquired

Hence: Strategy analysis is concerned with identifying and accessingthe sources of profit available to the firm


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From Profit Maximization to Value Maximization

Profit maximization an ambiguous goal Total profit vs. Rate of profit Over what time period? What measure of profit?

Accounting profit versus economic profit (e.g. EconomicValue Added: Post-tax operating profit less cost of

capital

Maximizing the value of the firm:

Max. net present value of free cash flows: max. V = t Ct

(1 + r)t Where: V market value of the firm.Ct free cash flow in time t

r weighted average cost of capital


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Shareholder Value Maximization and Strategy Choice

The Value Maximizing Approach to Strategy Formulation:

Identify strategy alternatives

Estimate cash flows associated with cash strategy

Estimate cost of capital for each strategy

Select the strategy which generates the highest NPV

Problems:

Estimating cash flows beyond 2-3 years is difficult

Value of firm depends on option value as well as DCF value

Implications for strategy analysis:Some simple financial guidelines for value maximization

a)On existing assetsmaximize after-tax rate of returnb)On new investmentseek rate of return > cost of capital

Utilize qualitative strategy analysis to evaluate future profit potential


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ShareholderValue

Measures:Market value of the

firmMarket valueadded(MVA)Return toshareholders

IntrinsicValue

Measures:

Discounted cashflowsReal option values

FinancialIndicators

Measures:Return on CapitalGrowth (of

revenues &operating

profitsEconomic profit(EVA)

ValueDrivers

Sources:

Market shareScale economiesInnovationBrands

A Comprehensive Value Metrics FrameworkA Comprehensive Value Metrics Framework


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Above NormalProfits

(in Excess of the Competitive Level)

AvoidCompetitors

Be Better ThanCompetition

AttractiveIndustry

AttractiveNiche Cost

AdvantageDifferentiation

Advantage

AttractiveStrategic

Group

Entry

Barriers

Mobility

Barriers

Isolating

Mechanisms

Sources of Superior PerformanceSources of Superior Performance


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Sources of Competitive Advantage

COSTADVANTAGE

COSTADVANTAGE

DIFFERENTIATIONADVANTAGE

DIFFERENTIATIONADVANTAGE

COMPETITIVEADVANTAGE


Similarpro

duct

atlow

ercost

Pricepremium

fromuniqueproduct


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The Experience Curve

The Law of Experience

The unit cost value added to a standard product

declines by a constant % (typically 20-30%) eachtime cumulative output doubles.

Cost perunit of

output (inreal $)

Cumulative Output

1992

1994

1996

1998

20002002 2004


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Examples of Experience Curves

100K 200K 500K 1,000K 5 10 50Accumulated unit production Accumulated units

(millions) (millions)

1960Ye n

15K

20K

30

K

PriceIndex

50100

2003

00

70% slope

75%

Japanese clocks & watches, 1962-72 UK refrigerators, 1957-71


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Drivers of Cost Advantage

PRODUCTION TECHNIQUES

PRODUCT DESIGN

INPUT COSTS

CAPACITY UTILIZATION

RESIDUAL EFFICIENCY

ECONOMIES OF LEARNING

ECONOMIES OF SCALE

Organizational slack; Motivation &culture; Managerial efficiency

Ratio of fixed to variable costsSpeed of capacity adjustment

Location advantagesOwnership of low-cost inputs

Non-union laborBargaining power

Standardizing designs & componentsDesign for manufacture

Process innovationReengineering business processes

Increased dexterityImproved organizational routines

Indivisibli\tiesSpecialization and division of labor


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Economies of Scale: The Long-RunCost Curve for a Plant

Units of outputper period

MinimumEfficient PlantSize: the point

where most scaleeconomies are

exhausted

Cost perunit ofoutput

Sources of scale economies:- technical input/output relationships

- indivisibilities

- specialization


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10 20 50 100 200 500 1,000

Annual sales volume (millions of cases)

Advertisin g

Expend

iture($per

case)

0.02

0 .0

5

0.10

0. 1

5

0.2

0

CokePepsi

Seven Up

Dr. PepperSprite

Diet Pepsi

Tab

FrescaDiet Rite

Diet 7-Up

SchweppesSF Dr. Pepper

Despite the massive advertising budgets of brand leaders Coke and Pepsi, their mainbrands incur lower advertising costs per unit of sales than their smaller rivals.

Scale Economies in Advertising: U.S. Soft Drinks


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Applying the Value Chain to Cost Analysis:The Case of Automobile Manufacture

STAGE 1. IDENTIFY THE PRINCIPLE ACTIVITIES

STAGE 2. ALLOCATE TOTAL COSTS

PURCH-ASING

PARTSINVEN-TORIES

R&DDESIGN

ENGNRNGCOMPONENT

MFRASSEMBLY

TESTING,QUALITY

CONTROL

GOODSINVEN-TORIES

SALES&

MKITG

DISTRI-BUTION

DEALER &CUSTOMERSUPPORT


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PURCH-ASING

PARTSINVEN-TORIES

R&DDESIGN

ENGNRNG

COMPONENTMFR

ASSEMBLYTESTING,QUALITY

CONTROL

GOODSINVEN-TORIES

SALES&

MKITG

DISTRI-BUTION

DEALER &CUSTOMERSUPPORT

--Plant scale for each -- Level of quality targets -- No. of dealerscomponent -- Frequency of defects -- Sales / dealer

-- Process technology -- Level of dealer -- Plant location support

-- Run length -- Frequency of defects-- Capacity utilization under warranty

Prices paid --Size of commitment -- Plant scale --Cyclicality &depend on: --Productivity of -- Flexibility of production predictability of sales-- Order size R&D/design -- No. of models per plant --Customers--Purchases per --No. & frequency of new -- Degree of automation willingness to wait

supplier models -- Sales / model-- Bargaining power -- Wage levels-- Supplier location -- Capacity utilization

STAGE 3.IDENTIFYCOSTDRIVERS

Applying the Value Chain to Cost Analysis: TheCase of Automobile Manufacture (continued)


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PRCHSNG PARTS R&D COMPONENT ASSEM- TESTING GOODS SALES DSTRBTN DLR INVNTRS DESIGN MFR BLY QUALITY INV MKTG CTMR

Consolidation of orders to increasediscounts, increases inventories

Designing different models aroundcommon components and platforms

reduces manufacturing costs

Higher quality parts and materialsreduces costs of defects

at later stages

Higher quality in manufacturingreduces warranty costs

STAGE 5. RECCOMENDATIONS FOR COST REDUCTION

STAGE 4. IDENTIFY LINKAGES

Applying the Value Chain to Cost Analysis: TheCase of Automobile Manufacture (continued)


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The Nature of Differentiation

TOTAL CUSTOMER RESPONSIVENESSDifferentiation not just about theproduct, it embraces the whole

relationship between the supplier and the customer.

INTANGIBLEDIFFERENTATION

Unobservable and subjectivecharacteristics that appeal to

customers image, status,

identity, and desire for exclusivity

TANGIBLE DIFFERENTATION

Observable product characteristics:size, color, materials, etc.

performancepackaging

complementary services

DEFINITION: Providing something unique that is valuable to thebuyer beyond simply offering a low price. (M. Porter)

THE KEY IS TO CREATE VALUE FOR THE CUSTOMER


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Identifying Differentiation Potential:The Demand Side

THE PRODUCT

THECUSTOMER

What needs doesit satisfy?

By whatcriteria do they

choose?

Whatmotivates

them?

What are keyattributes?

Relate patterns ofcustomer

preferences toproduct attributes

What pricepremiums do

product attributescommand?

What aredemographic,sociological,psychological

correlates of customerbehavior?

FORMULATEDIFFERENTIATION

STRATEGY

Select productpositioning in relationto product attributes

Select targetcustomer group

Ensure customer /

product compatibilityEvaluate costs and

benefits ofdifferentiation


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Using the Value Chain to IdentifyDifferentiation Potential on the Supply Side

FIRM INFRASTRUCTURE

HUMAN RESOURCE MANAGEMENT

TECHNOLOGY DEVELOPMENT

INBOUND OPERATIONS OUTBOUND MARKETING SERVICE

LOGISTICS LOGISTICS & SALES

MIS that supportsfast responsecapabilities

Training to supportcustomer service

excellence

Unique product features.Fast new product

development

Quality ofcomponents &

materials

Defect freeproducts.

Wide variety

Fast delivery.Efficient order

processing

Building brand

reputation

Customer technicalsupport. Consumercredit. Availability of

spares


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Identifying Differentiation Opportunities throughLinking the Value Chains of the Firm and its

Customers: Can Manufacture

1. Distinctive can design can assist canners marketing activities.

2. High manufacturing tolerances can avoid breakdowns in customers canning lines.

3. Frequent, reliable delivery can permit canner to adopt JIT can supply.

4. Efficient order processing system can reduce customers ordering costs.

5. Competent technical support can increase canners efficiency of plant utilization.

Suppliesofsteel

&aluminum

Service&

technicalsupport

Sales

Distribution

Inventoryholding

Manufact uring

Design

Engineering

Inventoryholding

Purchasing

Distribution

Marketing

Canning

Processing

Inventoryholding

Purchasing

CANNERCAN MAKER

1

2 4

5

3


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INDUSTRY ANALYSISAND POSITIONING

Determining Industry Attractiveness and

Identifying Strategic Opportunities


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Profitability of US Industries (selected industries only)Profitability of US Industries (selected industries only)

Household & Personal Products 22.7

Gas & Electric Utilities 10.4Pharmaceuticals 22.3 Food and Drug Stores 10.0Tobacco 21.6 Motor Vehicles & Parts 9.8Food Consumer Products 19.6 Hotels, Casinos, Resorts 9.7 Securities

18.9 Railroads 9.0Diversified financials 18.3 Insurance: Life and Health 8.6

Beverages 18.8 Packaging & Containers 8.6Mining & crude oil 17.8 Insurance: Property & Casualty 8.3Petroleum Refining 17.3 Building Materials, Glass 8.3Medical Products & Equipment 17.2 Metals 8.0Commercial Banks 15.5 Food Production 7.2Scientific & Photographic Equipt. 15.0 Forest and Paper Products 6.6Apparel 14.4 Semiconductors &

Computer Software 13.9 Electronic Components 5.9Publishing, Printing 13.5 Telecommunications 4.6Health Care 13.1 Communications Equipment 1.2Electronics, Electrical Equipment 13.0 Entertainment 0.2Specialty Retailers 13.0 Airlines (22.0)Computers, Office Equipment 11.7

Median return on equity (%), 1999-2005


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18.4

15.2

15

14.7

12.8

11.9

11.3

11

10.310.3

9.9

9.9

9.6

9.5

9

9

8.4

7.7

6.9

6.5

6.2

0 5 10 15 20

Pharmaceuticals

Household and personal products

Computer software and services

Media

Commercial services

Semiconductors

Healthcare equipmernt and services

Food, beverages, tobacco

Hotels, restaurants, leisureTechnologyhardware and equipment

Automobiles and components

Capital goods

Food retailing

Consumer durables andapparel

Retailing

OVERALL AVERAGE

Materials

Energy

Transporation

Telecomservices

Utilities

Average ROIC 1963-2003 (%)

The Profitability of Global Industries: Return on Invested Capital, 1963-2003


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THE INDUSTRYENVIRONMENT

SuppliersCompetitorsCustomers

Social structure

The national/The national/internationalinternational

economyeconomy

TechnologyTechnology

GovernmentGovernment

& Politics& Politics

The naturalThe naturalenvironmentenvironment

DemographicDemographicstructurestructure

Social structureSocial structure

From Environmental Analysisto Industry Analysis

The Industry Environment lies at the core of the Macro Environment.

The Macro Environment impacts the firm through its effect on the IndustryEnvironment.


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Drawing Industry Boundaries :

Identifying the Relevant Market

What industry is BMW in: World Auto industry

European Auto industry

World luxury car industry?

Key criterion: SUBSTITUTABILITY On the demand side : are buyers willing to substitute

between types of cars and across countries

On the supply side : are manufacturers able to switch

production between types of cars and across countries

We may need to analyze industry at different levels ofaggregation for different types of decision


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The Spectrum of Industry StructuresThe Spectrum of Industry Structures

Concentration

Entry andExit

Barriers

ProductDifferentiatio

n

Information

PerfectCompetition Oligopoly Duopoly Monopoly

Many firms A few firms Two firms One firm

No/Lowbarriers

Significant barriersHigh

barriers

Homogeneous

Product

Potential for product differentiation

PerfectInformation flow

Imperfect availability of information


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Porters Five Forces of Competition Framework

SUPPLIERS

POTENTIALENTRANTS SUBSTITUTES

BUYERS

INDUSTRYCOMPETITORS

Rivalry among

existing firms

Bargaining power of suppliers

Bargaining power of buyers

Threat of

new

entrants

Threat of

substitutes


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THREAT OF ENTRYCapital requirements

Economies of scale

Absolute cost advantage

Product differentiation

Access to distributionchannels

Legal/ regulatory barriersRetaliation

SUBSTITUTECOMPETITION

Buyers propensityto substitute

Relative prices &performance ofsubstitutes

BUYER POWERBuyers price sensitivityRelative bargaining

power

INDUSTRY RIVALRYConcentration

Diversity ofcompetitors

Product differentiation

Excess capacity &exit barriers

Cost conditions

SUPPLIER POWERSupplier concentrationRelative bargaining

power

The Structural Determinants ofCompetition

The Structural Determinants ofCompetition

SUPPLIER POWER DRUG


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SUPPLIER POWERLOW

THREAT OF ENTRYLOW

economies of scalecapital requirements forR&D and clinical trialsproduct differentiationcontrol of distributionchannelspatent protection

INDUSTRYCOMPETITIVENESSLOW

high concentrationproduct differentiationpatent protectionsteady demand growthno cyclical fluctuations

of demand

THREAT OF

SUBSTITUTESLOW

No substitutes.(Changing as managed care

encourages generics.)

BUYER POWERLOW

Physician as buyer:Not price sensitiveNo bargaining power.

(Changing with managed care.)

DRUGINDUSTRY(ROE=22%)


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Applying Five-Forces Analysis

Forecasting Industry Profitability

Past profitability a poor indicator offuture profitability.

If we can forecast changes inindustry structure we can predictlikely impact on competition and

profitability.

Strategies to Improve Industry Profitability

What structural variables are depressingprofitability

Which of these variables can be changed byindividual or collective strategies?


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Neutralizing The FiveCompetitive Forces

Force EntryRivalrySubstitutesBuyersSuppliers

Method for Neutralizing Force Erecting barriers (isolatingmechanisms)create & exploit economies ofscale, aggressive deterrence, design in switchingcosts, etc.

Compete on nonprice dimensions: costleadership, differentiation, cooperation, etc. Improve attractiveness compared tosubstitutes: better service, more features, etc.. Reduce buyer uniqueness:forwardintegrate, differentiate product, new customers,etc.. Reduce supplier uniqueness:backwardintegrate, obtain minority position, second source,etc..


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The Traditional Model of Industry Life CycleThe Traditional Model of Industry Life Cycle

Time

Sale

svolu

me

Fermentation Shakeout Maturity Decline


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How Typical is the Life Cycle Pattern?

Technology-intensive industries (e.g. pharmaceuticals,semiconductors, computers) may retain features ofemerging industries.

Other industries (especially those providing basicnecessities, e.g. food processing, construction, apparel)reach maturity, but not decline.

Industries may experience life cycle regeneration.

Sales Sales

1900 50 90 07 1930 50 70 90 07 MOTORCYCLES TVs

Life cycle model can help us to anticipate industryevolutionbut dangerous to assume any common, pre-determined pattern of industry development

ColorB&W Portable

HDTV ?


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Evolution of Industry Structure over the Life Cycle

INTRODUCTION GROWTH MATURITY DECLINEDEMAND Affluent buyers Increasing Mass market Knowledgeable, penetration replacement customers, resi- demand dual segments

TECHNOLOGY Rapid product Product and Incremental Well-diffused innovation process innovation innovation technology

PRODUCTS Wide variety, Standardization Commoditiz- Continuedrapid design change ation commoditization

MANUFACT- Short-runs, skill Capacity shortage, Deskilling OvercapacityURING intensive mass-production

TRADE -----Production shifts from advanced to developing countries-----

COMPETITION Technology- Entry & exit Shakeout & Price wars, consolidation exit

KSFs Product innovation Process techno- Cost efficiency Overhead red-logy. Design for uction, ration-

alization, low cost sourcing


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The Driving Forces of Industry Evolution

Customers become

more knowledgeable

& experienced

Diffusion of

technology

Demand growthslows as market

saturationapproaches

Customers becomemore priceconscious

Products becomemore standardized

Distributionchannels

consolidate

Productionshifts

to low-wagecountries

Price competitionintensifies

Bargaining power

of distributors

increases

BASIC CONDITIONS INDUSTRY STRUCTURE COMPETITION

Excess capacityincreases

Productionbecomes less

R&D& skill-intensive

Quest for newsources of

differentiation


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0

50

100

150

200

250

1895 1905 1915 1925 1935 1945 1955

No. of firms

Changes in the Population of Firms over theIndustry Life Cycle: US Auto Industry 1885-1961

Changes in the Population of Firms over theIndustry Life Cycle: US Auto Industry 1885-1961

ce: S. Klepper, Industrial & Corporate Change, August 2002, p. 654.


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Preparing for the Future : The Role of ScenarioAnalysis in Adapting to Industry Change

Stages in undertaking multiple Scenario Analysis:

Identify major forces driving industry change Predict possible impacts of each force on the

industry environment

Identify interactions between different externalforces

Among range of outcomes, identify 2-4 mostlikely/ most interesting scenarios:configurations of changes and outcomes

Consider implications of each scenario for thecompany Identify key signposts pointing toward the

emergence of each scenario

Prepare contingency plan


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1880s 1920s 1960s 2000

Mail order,catalogueretailing

e.g. Sears

Roebuck

ChainStores

e.g. A&P

DiscountStores

e.g. K-MartWal-Mart

CategoryKillers

e.g. Toys-R-Us,

Home Depot

InternetRetailers

e.g. Amazon;Expedia

Warehouse

Clubse.g. Price

ClubSams Club

Innovation & Renewal over theIndustry Life Cycle: Retailing

Innovation & Renewal over theIndustry Life Cycle: Retailing

?

Gary Hamel: Shaking the Foundations


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y g

OLD BRICK NEW BRICK

Top management is responsiblefor setting strategy

Everyone is responsiblefor setting strategy

Getting better, getting fasteris the way to win

Rule-busting innovationis the way to win

IT creates competitive advantage Unconventional business conceptscreate competitive advantage

Being revolutionary is high risk More of the same is high risk

We can merge our way tocompetitiveness

Theres no correlation betweensize and competitiveness

Innovation equals new productsand new technology

Innovation equals entirely newbusiness concepts

Strategy is the easy part,Implementation the hard part

Strategy is the easy only if youre

content to be an imitator

Change starts at the top Change starts with activists

Our real problem is execution Our real problem is innovation

Big companies cant innovate Big companies can become gray-hairedrevolutionaries


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An Alternate Model of Industry Life CycleAn Alternate Model of Industry Life Cycle

Time

Sa

lesvolu

me

Emergence Convergence Coexistence Dominance

EstablishedIndustry

Emerging Industry


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The Industry Life Cycle as an S curveThe Industry Life Cycle as an S curve

Performance

Time

Ferment

Takeoff

Maturity

Discontinuity


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The S-curve Maps Major TransitionsThe S-curve Maps Major Transitions

Performance

Time

Ferment

Takeoff

Maturity

Discontinuity


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RESOURCES,CAPABILITIES, AND

CORE COMPETENCES

Shifti th F f St t A l i


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THE FIRM

Goals andValues

Resources andCapabilities

Structure andSystems

THEINDUSTRY

ENVIRONMENT

Competitors

Customers

Suppliers

STRATEGY

STRATEGY

TheFirm-

StrategyInterface

TheEnvironment-

StrategyInterface

Shifting the Focus of Strategy Analysis:From the External to the Internal

Environment

Shifting the Focus of Strategy Analysis:From the External to the Internal

Environment


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Rationale for the Resource-basedApproach to Strategy

When the external environment is subject to

rapid change, internal resources andcapabilities offer a more secure basis forstrategy than market focus.

Resources and capabilities are the primarysources of profitability.

Canon: Products and Core Technical

Canon: Products and Core Technical


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Precisio

nMechani

cs

FineOptics

Micro-Electron

ics

35mm SLR camera

Compact fashioncamera

EOS autofocus cameraDigital camera

Video still camera

Plain-paper

copierColor copierColor laser

copierLaser copier

Basic faxLaser fax

Mask alignersExcimer laser

aligners

Stepper aligners

Inkjet printerLaser printer

Color videoprinterCalculatorNotebookcomputer

Canon: Products and Core TechnicalCapabilities

Canon: Products and Core TechnicalCapabilities


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Eastman Kodaks Dilemma

1980s

1990s

Resources & Capabilities Businesses

Chemical Imaging

Organic Chemistry

Polymer technologyOptomechtronics

Thin-film coatings

Brands

Global Distribution

Film

Cameras

DIVESTS: Eastman Chemical, Sterling Winthrop, Diagnostics

Need to build digitalimaging capability

Digital ImagingProducts (e.g. Photo CDSystem; Advantix

cameras & film

Fine Chemicals

Pharmaceuticals

Diagnostics


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STRATEGY

INDUSTRY KEYSUCCESS FACTORSCOMPETITIVE

ADVANTAGE

ORGANIZATIONALCAPABILITIES

RESOURCESTANGIBLE INTANGIBLE HUMAN

FinancialPhysical Technology

ReputationCulture

Skills/know-howCapacity forcommunication& collaborationMotivation

The Links between Resources, Capabilitiesand Competitive Advantage

The Links between Resources, Capabilitiesand Competitive Advantage

Appraising Resources


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Appraising Resources

RESOURCE CHARACTERISTICS INDICATORS

Financial Borrowing capacity Debt/ Equity ratio Internal funds generation Credit ratingTangible Net cash flowResources Physical Plant and equipment: Market value of size, location, technology fixed assets. flexibility. Scale of plants Land and buildings. Alternative uses for Raw materials. fixed assets

TechnologyPatents, copyrights, know how No. of patents owned R&D facilities. Royalty incomeIntangible Technical and scientific R&D expenditureResources employees R&D staff

Reputation Brands. Customer loyalty. Company Brand equity reputation (with suppliers, customers, Customer retention government) Supplier loyalty

Human Training, experience, adaptability, Employee qualifications,Resources commitment and loyalty of employees pay rates, turnover.


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The Worlds Most Valuable Brands, 2006

Rank Company Brand Rank Company Brand value value ($bn.) ($bn.)

1 Coca-Cola 67.5 11 Mercedes Benz 20.02 Microsoft 59.9 12 Citi 20.03 IBM 53.4 13 Hewlett-Packard 18.9

4 GE 47.0 14 American Express 18.65 Intel 35.6 15 Gillette 17.56 Nokia 26.5 16 BMW 17.17 Disney 26.4 17 Cisco 16.68 McDonalds 26.0 18 Louis Vuitton 16.1

9 Toyota 24.8 19 Honda 15.810 Marlboro 21.2 20 Samsung 15.0

http://www.interbrand.com/best_brands_2007.asp Source: Interbrand
http://www.interbrand.com/best_brands_2007.asphttp://www.interbrand.com/best_brands_2007.asp


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Organizational Capabilities = firms capacity forundertaking a particular activity. (Grant)

Distinctive Competence = things that an organizationdoes particularly well relative to competitors. (Selznick)

Core Competence = capabilities that are fundamental to afirms strategy and performance. (Hamel and Prahalad)

Defining Organizational CapabilitiesDefining Organizational Capabilities

Identifying Organizational Capabilities:


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Identifying Organizational Capabilities:A Functional Classification

FUNCTION CAPABILITY EXEMPLARSCorporate Financial management ExxonMobil, GE

Management Strategic control IBM, SamsungCoordinating business units BP, P&GManaging acquisitions Citigroup, Cisco

MIS Speed and responsiveness through Wal-Mart, Dellrapid information transfer Capital One

R&D Research capability Merck, IBMDevelopment of innovative new products Apple, 3M

Manufacturing Efficient volume manufacturing Briggs & StrattonContinuous Improvement Nucor, Harley-DFlexibility Zara, Four Seasons

Design Design Capability Apple, Nokia

Marketing Brand Management P&G, LVMH

Quality reputation Johnson & Johnson

Responsiveness to market trends MTV, LOrealSales, Distribution Sales Responsiveness PepsiCo, Pfizer& Service Efficiency and speed of distribution LL Bean, Dell

Customer Service Singapore AirlinesCaterpillar


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The Value Chain:The McKinsey Business System

TECHNOLOGY PRODUCT DESIGN MANUFACTURING MARKETING DISTRIBUTION SERVICE


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The Porter Value Chain

FIRM INFRASTRUCTURE

HUMAN RESOURCE MANAGEMENT

TECHNOLOGY DEVELOPMENT

PROCUREMENT

INBOUND OPERATIONS OUTBOUND MARKETING SERVICE

LOGISTICS LOGISTICS & SALES

PRIMARYACTIVITIES

SUPPORTACTIVITIES


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Scarcity

Relevance

Durability

Transferability

Replicability

Property rights

Relativebargaining power

Embeddedness

THE EXTENT OF THECOMPETITIVE ADVANTAGE

ESTABLISHED

SUSTAINABILITY OF THECOMPETITIVEADVANTAGE

APPROPRIABILITY

THE PROFITEARNING POTENTIALOF A RESOURCE OR

CAPABILITY

The Rent-Earning Potentialof Resources and Capabilities

A i C i R

Assessing a Companies Resources


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ImportanceVWs

RelativeStrength

C1. Productdevelopment

9 4

C2. Purchasing 7 5

C3. Engineering 7 9

C4. Manufacturing 8 7

C5. Financialmanagement

6 3

C6. R&D 6 4

C7. Marketing &sales

9 4

C8. Government

relations4 8

Importan

ce

VWs

RelativeStrength

R1. Finance 6 4

R2. Technology 7 5

R3. Plant andequipment

8 8

R4. Location 7 4

R5. Distribution 8 5

RESOURCES CAPABILITIES

Assessing a Companies Resourcesand Capabilities: The Case of VW

Assessing a Companies Resourcesand Capabilities: The Case of VW


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Relativ

eStrength

Strategic Importance

Superfluous Strengths Key Strengths

Zone of Irrelevance Key Weaknesses

1

1

5 10

5

10

R1

R2

R3

R4

R5

C1

C2

C3

C4

C5C6 C7

C8

Appraising VWs Resources and Capabilities

(Hypothetical only)

Approaches to Capability Development

Approaches to Capability Development


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Approaches to Capability Developmentpp p y p

1)Acquire and develop the underlying resources. Especially

human resources --Externally (hiring)--Internally through developing individual skills

2)Acquire/access capabilities externally through acquisition oralliance

3)Greenfield development of capabilities in separateorganizational unit (IBM & the PC, Xerox & PARC, GM & Saturn)

4)Build team-based capabilities through training and teamdevelopment (i.e. develop organizational routines)

5)Align structure & systems with required capabilities

6)Change management to transform values and behaviors (GE,BP)

7)Product sequencing (Intel , Sony, Hyundai)

8)Knowledge Management (systematic approaches to acquiring,storing, replicating, and accessing knowledge)

1)Acquire and develop the underlying resources. Especiallyhuman resources

--Externally (hiring)--Internally through developing individual skills

2)Acquire/access capabilities externally through acquisition oralliance

3)Greenfield development of capabilities in separateorganizational unit (IBM & the PC, Xerox & PARC, GM & Saturn)

4)Build team-based capabilities through training and teamdevelopment (i.e. develop organizational routines)

5)Align structure & systems with required capabilities

6)Change management to transform values and behaviors (GE,BP)

7)Product sequencing (Intel , Sony, Hyundai)

8)Knowledge Management (systematic approaches to acquiring,storing, replicating, and accessing knowledge)


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COMPETITIVEADVANTAGE AND THESCOPE OF THE FIRM


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From Business Strategy to CorporateStrategy: The Scope of the Firm

Business Strategyis concerned with howa firmcomputes within a particular market

Corporate Strategyis concerned with where afirm competes, i.e. the scope of its activities

The dimensions of scope are

product scope

vertical scope

geographical scope


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P

1

P

2

P

3

C

1

C

2

C

3

VerticalProduct GeographicalScope Scope Scope

V

1

V

2

V

3

P

3

P

2

P

1

C

3

C

2

C

1

V

1V

2V

3

[A] SingleIntegratedFirm

[B] Several

Specialized

Firms linkedby Markets

In situation [A] the business units are integrated within a single firm.In situation [B] the business units are independent firms linked by markets.Are the administrative costs of the integrated firm less than the transaction

costs of markets?

Transactions Costs and theScope of the Firm


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Determinants of Changes in Corporate Scope

1800 1980 Expanding scale and scope of industrial corporations due todeclining administrative costs of firms:

Advances in transportation, information and communicationtechnologies

Advances in managementaccounting systems, decision sciences,financial techniques, organizational innovations, scientific management

1980 1995 Shrinking size and scope of biggest industrial corporations.

Increasingly Increased no. of managerial Admin. costs ofturbulent decisions. Need for fast firms rise relativeexternal responses to external to transaction

environment change costs of markets

1995 2007 Rapid increase in global concentration (steel, aluminium,oil, beer, banking, cement).

Key drivers: quest for market power and scale economies.

Also, large corporations better at reconciling size with agility


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RATE OF PROFIT

> COST OF CAPITAL

INDUSTRY

ATTRACTIVENESS

COMPETITIVE

ADVANTAGE

The Basic Issues in Diversification DecisionsThe Basic Issues in Diversification Decisions

Superior profit derives from two sources:

Diversification decisions involve these same two issues:How attractive is the sector to be entered?

Can the firm achieve a competitive advantage?


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Diversification among the US Fortune 500, 1949-74

Percentage of Specialized Companies (single-business, vertically-integrated and dominant-business) Percentage of Diversified Companies (related-business and unrelated business)

Note: During the 1980s and 1990s the trend reversed aslarge

companies refocused upon their corebusinesses

1949 1954 1959 1964 1969 1974

70.2 63.5 53.7 53.9 39.9 37.0

29.8 36.5 46.3 46.1 60.1 63.0


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0

10

20

30

40

50

60

70

1950 1960 1970 1983 1993

Single business

Dominant

business

Related business

Unrelatedbusiness

Diversification among Large UKCorporations, 1950-93

Diversification among Large UKCorporations, 1950-93

Motives for Diversification


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Motives for Diversification

GROWTH --The desire to escape stagnant or declining industries

is a powerful motive for diversification (e.g. tobacco, oil, newspapers). --But, growth satisfies managers not shareholders. --Growth strategies (esp. by acquisition), tend to destroy shareholder value

RISK --Diversification reduces variance of profit flowsSPREADING --But, doesnt create value for shareholdersthey can

hold diversified portfolios of securities.--Capital Asset Pricing Model shows that diversification

lowers unsystematic risknot systematic risk.

PROFIT --For diversification to create shareholder value, thenbringing together of different businesses undercommon ownership & must somehow increasetheir profitability.


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Diversification and Shareholder Value:Porters Three Essential Tests

If diversification is to create shareholder value, it must meetthree tests:

1. The Attractiveness Test: diversification must be directedtowards attractive industries (or have the potential to

become attractive).

2. The Cost of Entry Test: the cost of entry must not capitalizeall future profits.

3. The Better-Off Test: either the new unit must gaincompetitive advantage from its link with the company, orvice-versa. (i.e. some form of synergymust be present)

Additional source of value from diversification: Option value

Competitive Advantage from Diversification


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Competitive Advantage from Diversification

Sharing tangible resources (researchlabs, distribution systems) acrossmultiple businessesSharing intangible resources (brands,technology) across multiple businessesTransferring functional capabilities

(marketing, product development) acrossbusinessesApplying general managementcapabilities to multiple businesses

Economies of scope not a sufficientbasis for diversification ----must be

supported by transaction costsDiversification firm can avoidtransaction costs by operating internalcapital and labor marketsKey advantage of diversified firm overexternal markets--- superior access to

information

ECONOMIESOF

SCOPE

ECONOMIES

FROMINTERNALIZINGTRANSACTIONS


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Relatedness in Diversification

Economies of scope in diversification derive from twotypes of relatedness:

Operational Relatedness-- synergies from sharingresources across businesses (common distribution

facilities, brands, joint R&D) Strategic Relatedness-- synergies at the corporate level

deriving from the ability to apply common managementcapabilities to different businesses.

Problem of operational relatedness:- the benefits interms of economies of scope may be dwarfed by theadministrative costs involved in their exploitation.


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Transactions Costs and TheExistence of the Firm

Transaction cost theory explains not just the boundaries of firms, also the existence of firms.

In 18th century English woollen industry, no firms independent spinners and weavers linked by merchants.

Residential remodeling industry -- mainly independent self- employed builders, plumbers, electricians, painters.

Key issue -- transaction costs of the market vs. administrative costs of firms.

Where transaction costs highfirm is more efficient means

of organization

Note: transaction costs comprise costs of search andcontract negotiation and enforcement


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The Costs and Benefits of VerticalIntegration: BENEFITS

Technical economies from integrating processes e.g. ironand steel production

but doesnt necessarily require common

ownership Superior coordination

Avoids transactions costs of market contracts in situationswhere there are:

-- small numbers of firms

-- transaction-specific investments -- opportunism and strategic misrepresentation -- taxes and regulations on market transactions


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The Costs and Benefits of VerticalIntegration: COSTS

Differences in optimal scale of operation between differentstages prevents balanced VI

Strategic differences between different vertical stages createmanagement difficulties

Inhibits development of and exploitation of corecompetencies

Limits flexibility -- in responding to demand cycles -- in responding to changes in technology, customer preferences, etc. (But, VI may be conducive to system-wide flexibility)

Compounding of risk

When is Vertical Integration More Attractive


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When is Vertical Integration More Attractive

than Outsourcing?

How many firms are available The fewer the companiesto undertake the activities? the more attractive is VI

Is transaction-specific investment If yes, VI more attractiveneeded?

Does limited information permit VI can limit opportunismcheating?

Are taxes or regulation imposed VI can avoid themon transactions?Do the different stages have similar Greater the similarity, theoptimal scales of operation? more attractive is VI

Are the two stages strategically Greater the strategicsimilar? similarity ---the more

attractive is VI

How great the need for entrepreneurship Greater the need, the greater& continual upgrading of capabilities the disadvantages of VI

How uncertain is market demand? Greater the unpredictability ----the more costly is VI

Are risks compounded by VI increases risk.linkages between vertical stages


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Iron oremining

Steelproduction

Steel stripproduction

Canmaking

The value chain for steel cans

MARKETCONTRA

CTS

VERTICALINTEGRATI

ON

MARKETCONTRACTS

Canning offood, drink,

oil, etc.

VERTICALINTEGRATI

ON,AND

MARKET

CONTRACTS

What factors explain why some stages are vertically integrated,while others are linked by market transactions?


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Designing Vertical Relationships: Long-TermContracts and Quasi-Vertical Integration

Intermediate between spot transactions and verticalintegration are several types of vertical relationships

---such relationships may combine benefits of bothmarket transactions and internalization

Key issues in designing vertical relationships -- How is risk allocated between the parties? -- Are the incentives appropriate?


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Recent Trends in Vertical Relationships

From competitive contractingto supplier partnerships, e.g.in autos

From vertical integration to outsourcing (not justcomponents, also IT, distribution, and administrative

services). Diffusion of franchising

Technology partnerships (e.g. IBM- Apple; Canon- HP)

Inter-firm networks

General conclusion: boundaries between firms andmarkets becoming increasingly blurred.


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Patterns of InternationalizationPatterns of Internationalization

Trading GlobalIndustries Industries

--aerospace --automobiles--military hardware --oil

--diamond mining --semiconductors--agriculture --consumer electronics

Domestic MultidomesticIndustries Industries--railroads --laundries/dry cleaning --retail banking--hairdressing --hotels--milk --consulting

InternationalTr a

de

Foreign Direct Investment

LOW

LOW

HIG H

HIGH

Implications of Internationalization


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for 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 toreduce an industrys margins & rate of return on capital

Competitive Advantage within an InternationalC t t Th B i F k


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THE INDUSTRYENVIRONMENT

Key Success Factors

FIRM RESOURCES

& CAPABILITIES-- Financial resources

-- Physical resources

-- Technology-- Reputation

-- Functional capabilities

-- General managementcapabilities

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

Context: The Basic Framework

National Influences on


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Competitiveness: The Theory ofComparative Advantage

A country has a relative efficiency advantage in thoseproducts that make intensive use of resources that arerelatively abundant within the country. E.g.

Philippines relatively more efficient in the productionof

footwear, apparel, and assembled electronic productsthan in the production of chemicals and automobiles.

U.S. is relatively more efficient in the production of

semiconductors and pharmaceuticals than shoes orshirts.

When exchange rates are well-behaved, comparativeadvantage becomes competitive advantage.

R l d C ti Ad t f


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Revealed Comparative Advantage forCertain Broad Product Categories

USA Canada W. Germany Italy Japan

Food, drink & tobacco .31 .28 -.36 -.29 -.85

Raw materials .43 .51 -.55 -.30 -.88

Oil & refined products -.64 .34 -.72 -.74 -.99Chemicals .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 groupis measured as: (Exports less Imports)/ Domestic production

P t C titi Ad t


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Porters Competitive Advantageof Nations

Extends and adapts traditional theory of comparativeadvantage to take account of three factors:

International competitive advantage is about companies

not countriesthe role of the national environment isproviding a home base for the company.

Sustained competitive advantage depends upon dynamicfactors-- innovation and the upgradingof resources andcapabilities

The critical role of the national environment is its impactupon the dynamics of innovation and upgrading.


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FACTOR CONDITIONS

DEMAND

CONDITIONS

RELATING ANDSUPPORTING

INDUSTRIES

STRATEGY, STRUCTURE,AND RIVALRY

Porters National Diamond Framework

1.FACTOR CONDITIONSHome grownresources/capabilities more importantthan natural endowments.

2. RELATED AND SUPPORTING INDUSTRIESKey role of industry clusters3. DEMAND CONDITIONSDiscerning domestic customers drive quality &

innovation4. STRATEGY, STRUCTURE, RIVALRY. E.g. domestic rivalry drives upgrading.


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Consistency Between Strategyand National Conditions

In globally-competitive industries, firm strategy needsto take account of national conditions:

U.S. textile manufacturers must compete on the basis ofadvanced process technologies and focus on highquality, less price-sensitive market segments

In the semiconductor industry, CA-based firmsconcentrate mainly upon design of advanced chips,Malaysian firms concentrate upon fabrication of highvolume, less technologically advanced items (e.g.DRAM chips)

Dispersion of value chain to exploit different nationalenvironments (e.g. Nike conducts R&D in US,components in Korea and Thailand, assembly inIndonesia, China, and India, marketing in Europe andNorth America)


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International Location of Production

National resource conditions: What are the majorresources which the product requires? Where arethese available at low cost?

Firm-specific advantages: to what extent is thecompanys competitive advantage based uponfirm-specific resources and capabilities, and arethese transferable?

Tradability issues: Can the product be transportedat economic cost? If not, or if trade restrictionsexist, then production must be close to themarket.

Th R l f L b C t


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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 70040 Shipping cost 300 1,000Inventory 20 40 TOTAL8,770 9,180

Location and the Value Chain


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Location and the Value Chain

Comparative advantage in textiles and apparel by stage of processing

Hong Kong 1 -0.962 -0.81 3 -

0.41 4 +0.75

Italy 1 -0.54 2+0.18 3 +0.14

4 +0.72

Japan 1 -0.362 +0.48 3+0.48 4 -

0.48

U.S.A. 1 +0.962 +0.64 3

+0.22 4 -0.73

Country Stage Index of Country Stage Index ofof Revealed of Revealed

Processing Comparative Processing ComparativeAdvantage Advantage

Note:1 = production of fiber (natural & synthetic) 2 = production of spun yarn3 = production of textiles 4 = production of clothing

Determining the Optimal Location

Determining the Optimal Location


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The optimal locationof activity X consideredindependently

WHERE TO LOCATEACTIVITY X?

The importance of linksbetween activity X andother activities of the firm

Where is the optimal locationof X in terms of the cost andavailability of inputs?

What government incentives/ penaltiesaffect the location decision?

What internalresources and capabilities does the firm

possess in particular locations?

What is the firms business strategy(e.g. cost vs. differentiation advantage)?

How great are the coordinationbenefits from co-locating activities?

Determining the Optimal Locationof Value Chain Activities

Determining the Optimal Locationof Value Chain Activities

Alternative Modes of Overseas Market Entry


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Resource commitment

TRANSACTIONS DIRECT INVESTMENT

Spot

sales

Exporting

Foreign

agent /distributor

Licensing

Franchising

Joint venture

Marketing &Distribution

only

Long-termcontract

Licensingpatents &other IP

Fullyintegrated

Whollyownedsubsidiary

Marketing&Distributiononly

Fullyintegrated

Low High

Alternative Modes of Overseas Market Entry

Alliances and Joint Ventures:


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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 benefitsdetermined by:

Strategic intent of the partners- which partner has theclearer vision of the purpose of the alliance?

Appropriability of the contribution-- which partnersresources and capabilities can more easily be capturedby the other?

Absorptive capacity of the company-- which partner is the

more receptive learner?

General Motors Alliances with Competitors

General Motors Alliances with Competitors


99/110

SUZUKI

ISUZU

TOYOTA

IBC VehiclesLtd. (U.K.)

GM

New United MotorManufacturingInc. (NUMMI)

10%owned.Co-production

49%owned.Co-productio

n

40% investment

60%owned

50% owned

50%owned

(Makes vans in UK)

(Makes cars in US)

SAAB

50%owned

FIAT

20%o

wned(2

000-5).

Collaborati

ononte

chnolog

y

andcompo

nents

FUJI

20%owned;jointproduction

DAEWOO

50.9%ow

ned;tech

nical&

productioncollaboration

AVTOVAZRussianJVtoproducecars

SAIC

JVtoproducecarsinChina

Multinational Strategies:


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Multinational Strategies:Globalization vs. National Differentiation

National preferences in declineworld becoming a single, if segmented, market

Accessing global scale economiesin purchasing, manufacturing, product development, marketing.

Strategic strength from global leverageability 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 worlds major economic centers- N. America, Europe, East Asia.

Hamel &Prahalad

Thesis

KenichiOhmaesTriadPowerThesis

TedLevittGlobaliz--ation of

MarketsThesis

The case for a global strategy:

Globalization & Global Strategy What are they?

Globalization & Global Strategy What are they?


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gy y

GLOBALIZATION ?

--Something to do with increasing interdependencebetween countries.

GLOBALIZATION ?--Something to do with increasing interdependence

between countries.GLOBAL STRATEGY

--At simplest level: Treating the world as a singlemarket

E.g. Japanese companies during the 1970s & 1980s,

(YKK, Honda) standard products, developed &manfactured within Japan; distributed & marketedworldwide

--At more sophisticated level: Strategy thatrecognizes

and exploits linkages between countries (e.g.exploits

global scale, national resource differences,strategic

competition)

GLOBAL STRATEGY

--At simplest level: Treating the world as a singlemarket

E.g. Japanese companies during the 1970s & 1980s,

(YKK, Honda) standard products, developed &manfactured within Japan; distributed & marketedworldwide

--At more sophisticated level: Strategy thatrecognizes

and exploits linkages between countries (e.g.exploitsglobal scale, national resource differences,

strategiccompetition)

World assingle mkt.

World asseparatenational mkts.

global strategy

World as inter-related mkts.

multidomestic strategy

A l i b fit / t f l b l t t

Analyzing benefits/costs of a global strategy


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Analyzing benefits/costs of a global strategyAnalyzing benefits/costs of a global strategy

Forces for localization / nationaldifferentiation

MARKET DRIVERS

--Different languages

--Different customer preferences--Cultural differences

COST DRIVERS--Transportation costs--Transaction costs--Economic & political risk

--Speed of responseGOVERNMENT DRIVERS--Barriers to trade & inward inv.--Regulations

Forces forlocalization / nationaldifferentiation

MARKET DRIVERS

--Different languages

--Different customer preferences--Cultural differences

COST DRIVERS--Transportation costs--Transaction costs--Economic & political risk

--Speed of responseGOVERNMENT DRIVERS--Barriers to trade & inward inv.--Regulations

Forces for globalization

MARKET DRIVERS--Common customer needs--Global customers

--Cross-border network effectsCOST DRIVERS

--Global scale economies--Differences in national

resource availability--Learning

COMPETITIVE DRIVERS--Potential for strategic

competition (e.g. cross-subsidization)

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)


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Benefits of national differentiation

Benefitsof

globalintegration

Cement

Telecomequipment

Jet engines

Consumerelectronics

Autos

Funeralservices

Retailbanking

Investmentbanking

Autorepair

Restaurant

chains

Steel

Online C2C auctions

Beer

Drycleaning

Positioning industries in terms of benefits ofglobalization and national differentiation

Positioning industries in terms of benefits ofglobalization and national differentiation


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Benefits of national differentiation

Benefitsof

globalintegration

Cement

Telecomequipment

Jet engines

Consumerelectronics

Autos

Funeralservices

Retailbanking

Investmentbanking

Autorepair


105/110

The Evolution of Multinational Strategies andStructures: (1) 1900-1939Era 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 conditionsof transport and communications at the time e.g.Unilever, Phillips, Courtaulds, Royal Dutch/Shell.


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The Evolution of Multinational Strategiesand Structures: (2) 1945-1970U.S. Dominance

American MNCs 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

The Evolution of Multinational


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Strategies and Structures:(3) 1970s and 1980sThe Japanese Challenge

The Japanese MNC as Centralized Hub Pursuit of global strategy from home base

Strategy, technology development, andmanufacture concentrated at home

National subsidiaries primarily sales anddistribution companies with limited autonomy.e.g. Toyota, NEC, Matsushita

Marketing Global Strategies and Situations to IndustryC diti Fi S i Diff t I d t i


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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

local responsiveness local responsiveness local responsiveness

global

integratio

n

globalinte

gration

global

integratio

n

Matsushita

Philips

General Electric

Kao

P&G

Unilever

NEC

Erickson

ITT

Reconciling Global Integration with National


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Reconciling Global Integration with NationalDifferentiation: The Transnational Corporation

The Transnational: an integrated network of distributed interdependentresources and capabilities.

Each national unit and source of ideas, skills and capabilities thatcan be harnessed to benefit whole corporation.

National units become world sources for particular products,components, and activities.

Corporate center involved in orchestrating collaboration throughcreating the right organizational context.

Tight complexcontrols and

coordination and ashared strategic

decision process.

Heavy flows oftechnology,

finances, people,and materials

betweeninterdependent

units.

Designing the MNC: Key Learning

Designing the MNC: Key Learning


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1. On what basis to organizeproducts, geography, functions? --Where is coordination most important?

--How global is the industry? How global is the firmsstrategy?

2. If one dimension is dominant, how to coordination along the otherdimensions?

--Maintain single line accountability --Other dimensions of coordination can be dotted

line relations

3. Whats the role of HQ? --Control function --Coordination function --Exploiting scale economies in centralized provision

of services

4. The need for internal differentiation

--By product/business --By function --By country

5. Formal & informal organization

40966262 MBA 290 Strategic Analysis (1)

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