Top Banner
1 MBA290: MBA290: ADVANCED STRATEGIC ADVANCED STRATEGIC MANAGEMENT MANAGEMENT Professor Stanley Han College of Business Administration [email protected]
110
Welcome message from author
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
Page 1: MBA 290-Strategic Analysis

1

MBA290: MBA290: ADVANCED ADVANCED STRATEGIC STRATEGIC

MANAGEMENTMANAGEMENT

Professor Stanley Han College of Business Administration

[email protected]

Page 2: MBA 290-Strategic Analysis

Course Overview: ObjectivesCourse Overview: Objectives To acquire familiarity with the principal concepts, To acquire familiarity with the principal concepts,

frameworks and techniques of strategic management. frameworks and techniques of strategic management. To gain expertise in applying these concepts, To gain expertise in applying these concepts,

frameworks and techniques in order toframeworks and techniques in order to- - understand the reasons for good or bad understand the reasons for good or bad performance by an enterprise,performance by an enterprise,- - generate strategy options for an enterprise,generate strategy options for an enterprise,- - assess available options under conditions of assess available options under conditions of imperfect knowledge,imperfect knowledge,- - select the most appropriate strategy,select the most appropriate strategy,- - recommend the best means of implementing recommend the best means of implementing the the chosen strategy. chosen strategy.

2

Page 3: MBA 290-Strategic Analysis

Course Overview: Objectives (cont’d)Course Overview: Objectives (cont’d)

To integrate the knowledge gained in previous To integrate the knowledge gained in previous courses. courses.

To develop your capacity as a general manager in To develop your capacity as a general manager in terms ofterms of-- an appreciation of the work of the general an appreciation of the work of the general manager, manager, -- the ability to view business problems from a the ability to view business problems from a general management perspective,general management perspective,-- the ability to develop original and innovative the ability to develop original and innovative approaches to strategic problems, approaches to strategic problems, - - developing business judgment. developing business judgment.

3

Page 4: MBA 290-Strategic Analysis

THE CONCEPT OF STRATEGY

The Concept of Strategy and the Pursuit of Sustainable Above-Normal Profits

Page 5: MBA 290-Strategic Analysis

Domain of Strategy• strategic competitiveness and above normal returns• concerns managerial decisions and actions which

materially affect the success and survival of business enterprises

• involves the judgment necessary to strategically position a business and its resources so as to maximize long-term profits in the face of irreducible uncertainty and aggressive competition

• strategy is the linkage between a business and its current and future environment

Page 6: MBA 290-Strategic Analysis

Definition

• The determination of the long run goals and objectives of an enterprise, the adoption of courses of action and the allocation of resources necessary for carrying out these goals

Alfred Chandler, Strategy and Structure

Page 7: MBA 290-Strategic Analysis

Levels of Strategy

Division A

R & D Personnel Finance Production Marketing/Sales

Division B

R & D Personnel Finance Production Marketing/Sales

FUNCTIONALSTRATEGIES

BUSINESSSTRATEGY

CORPORATESTRATEGY

CORPORATEHEAD OFFICE

Page 8: MBA 290-Strategic Analysis

Levels of Strategy• Corporate strategy... defines the scope of the

business in terms of the industries and markets in which it competes.• includes decisions about diversification, vertical

integration, acquisitions, new ventures, divestments, allocation of scarce resources between business units

• Business strategy... is concerned with how the firm competes within a particular industry or market... to win a business unit must adopt a strategy that establishes a competitive advantage over its rivals.

• Functional strategy... the detailed deployment of resources at the operational level

Page 9: MBA 290-Strategic Analysis

Common Elements in Successful Strategy

Successful Strategy

Profound understanding of the competitive environment

Objective appraisal of resources

Long-term, simple and agreed uponobjectives

$

EFFECTIVE IMPLEMENTATION

Page 10: MBA 290-Strategic Analysis

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 of its owners (= max. present value of profits over the life of the firm)

For the purposes of strategy analysis we assume that the primary goal of 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 accessing the sources of profit available to the firm

Page 11: MBA 290-Strategic Analysis

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. Economic

Value 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

Page 12: MBA 290-Strategic Analysis

The World’s Most Valuable Companies: Performance Under Different Profitability Measures

COMPANY MARKET CAP.

($BN.)

NET INCOME ($BN)

RETURN ON

SALES (%)

RETURN ON

EQUITY (%)

RETURN ON

ASSETS (%)

RETURN TO

SHARE-HOLDERS

(%)Exxon Mobil 372 36.1 19.9 34.9 17.8 11.7

General Electric 363 16.4 10.7 22.2 14.7 (1.5)

Microsoft 281 12.3 40.3 30.0 18.8 (0.9)

Citigroup 239 24.6 22.0 21.9 1.5 4.6

BP 233 22.3 9.9 27.9 10.7 10.2

Bank of America 212 16.5 27.0 14.1 1.2 2.4

Royal Dutch Shell 211 25.3 14.7 26.7 11.6 11.8

Wal-Mart 197 11.2 5.5 21.4 8.1 (10.3)

Toyota Motor 197 12.1 10.7 13.0 4.8 (22.1)

Gazprom 196 7.3 28.1 9.8 7.1 n.a.

HSBC 190 15.9 23.0 16.3 1.0 (11.8)

Procter & Gamble 190 8.7 17.3 13.7 6.4 7.2

Page 13: MBA 290-Strategic Analysis

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 assets—maximize after-tax rate of returnb) On new investment—seek rate of return > cost of capital

• Utilize qualitative strategy analysis to evaluate future profit potential

Page 14: MBA 290-Strategic Analysis

Shareholder ValueMeasures:• Market value of the firm•Market value added (MVA)•Return to shareholders

Intrinsic ValueMeasures:• Discounted cash flows•Real option values

Financial IndicatorsMeasures:• Return on Capital • Growth (of revenues & operating profits•Economic profit (EVA)

Value DriversSources:• Market share• Scale economies• Innovation• Brands

A Comprehensive Value Metrics Framework

Page 15: MBA 290-Strategic Analysis

Above Normal Profits

(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 Performance

Page 16: MBA 290-Strategic Analysis

Sources of Competitive Advantage

COST ADVANTAGE

DIFFERENTIATIONADVANTAGE

COMPETITIVEADVANTAGE

Similar product

at lower cost

Price premium

from unique product

Page 17: MBA 290-Strategic Analysis

The Experience Curve

The “Law of Experience”

The unit cost value added to a standard product declines by a constant % (typically 20-30%) each

time cumulative output doubles.

Cost per unit of

output (in real $)

Cumulative Output

1992

1994

1996

19982000 2002 2004

Page 18: MBA 290-Strategic Analysis

Examples of Experience Curves

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

(millions) (millions)

1960

Yen

15K

20K

30

K

Pric

e In

dex

50

100

20

0 3

00

70% slope

75%

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

Page 19: MBA 290-Strategic Analysis

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 costs• Speed of capacity adjustment

• Location advantages• Ownership of low-cost inputs

• Non-union labor• Bargaining power

• Standardizing designs & components• Design for manufacture

• Process innovation• Reengineering business processes

• Increased dexterity• Improved organizational routines

• Indivisibli\ties• Specialization and division of labor

Page 20: MBA 290-Strategic Analysis

Economies of Scale: The Long-Run Cost Curve for a Plant

Units of outputper period

MinimumEfficient Plant Size: the point

where most scale economies are

exhausted

Cost perunit ofoutput

Sources of scale economies:- technical input/output relationships

- indivisibilities- specialization

Page 21: MBA 290-Strategic Analysis

10 20 50 100 200 500 1,000

Annual sales volume (millions of cases)

Adv

ertis

ing

Exp

endi

ture

($ p

er c

ase)

0.02

0.0

5

0.

10

0.

15

0

.20

CokePepsi

Seven Up

Dr. PepperSprite

Diet PepsiTab

FrescaDiet Rite

Diet 7-Up

SchweppesSF Dr. Pepper

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

Scale Economies in Advertising: U.S. Soft Drinks

Page 22: MBA 290-Strategic Analysis

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

Page 23: MBA 290-Strategic Analysis

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 dealers component -- 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. IDENTIFY COST DRIVERS

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

Page 24: MBA 290-Strategic Analysis

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: The Case of Automobile Manufacture (continued)

Page 25: MBA 290-Strategic Analysis

The Nature of Differentiation

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

relationship between the supplier and the customer.

INTANGIBLE DIFFERENTATION

Unobservable and subjectivecharacteristics that appeal to

customer’s image, status, identity, and desire for exclusivity

TANGIBLE DIFFERENTATIONObservable product characteristics:

• size, color, materials, etc.• performance

• packaging• 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

Page 26: MBA 290-Strategic Analysis

Identifying Differentiation Potential: The Demand Side

THE PRODUCT

THE CUSTOMER

What needs does it satisfy?

By what criteria do they

choose?

What motivates

them?

What are key attributes?

Relate patterns of customer

preferences to product attributes

What price premiums do

product attributes command?

What are demographic, sociological, psychological

correlates of customer behavior?

FORMULATE DIFFERENTIATION

STRATEGY

• Select product positioning in relation to product attributes

• Select target customer group

• Ensure customer / product compatibility

• Evaluate costs and benefits of

differentiation

Page 27: MBA 290-Strategic Analysis

Using the Value Chain to Identify Differentiation Potential on the Supply Side

FIRM INFRASTRUCTURE

HUMAN RESOURCE MANAGEMENT

TECHNOLOGY DEVELOPMENT

INBOUND OPERATIONS OUTBOUND MARKETING SERVICE

LOGISTICS LOGISTICS & SALES

MIS that supports fast response capabilities

Training to support customer service

excellence

Unique product features. Fast new product

development

Quality of components &

materials

Defect free products.

Wide variety

Fast delivery. Efficient order

processing

Building brand reputation

Customer technical support. Consumer credit. Availability of

spares

Page 28: MBA 290-Strategic Analysis

Identifying Differentiation Opportunities through Linking 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 customer’s 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 canner’s efficiency of plant utilization.

Supplies of steel&

aluminum

Service &

technical support

Sales

Distribution

Inventory holding

Manufacturing

Design

Engineering

Inventory holding

Purchasing

Distribution

Marketing

Canning

Processing

Inventory holding

Purchasing

CANNER CAN MAKER

1

2 4

53

Page 29: MBA 290-Strategic Analysis

INDUSTRY ANALYSIS AND POSITIONING

Determining Industry Attractiveness and Identifying Strategic Opportunities

Page 30: MBA 290-Strategic Analysis

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 8.6Beverages 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

Page 31: MBA 290-Strategic Analysis

18.4

15.2

15

14.7

12.8

11.9

11.3

11

10.3

10.3

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, leisure

Technology hardware and equipment

Automobiles and components

Capital goods

Food retailing

Consumer durables and apparel

Retailing

OVERALL AVERAGE

Materials

Energy

Transporation

Telecom services

Utilities

Average ROIC 1963-2003 (%)

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

Page 32: MBA 290-Strategic Analysis

THE INDUSTRYENVIRONMENT

• Suppliers• Competitors• Customers

Social structure

The national/ The national/ international international

economyeconomy

TechnologyTechnology

GovernmentGovernment& Politics& Politics

The natural The natural environmentenvironment

Demographic Demographic structurestructure

Social structureSocial structure

From Environmental Analysis to Industry Analysis

•The Industry Environment lies at the core of the Macro Environment. •The Macro Environment impacts the firm through its effect on the Industry Environment.

Page 33: MBA 290-Strategic Analysis

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 of aggregation for different types of decision

Page 34: MBA 290-Strategic Analysis

The Spectrum of Industry Structures

Concentration

Entry and ExitBarriers

ProductDifferentiation

Information

Perfect Competition Oligopoly Duopoly Monopoly

Many firms A few firms Two firms One firm

No/Low barriers Significant barriers High barriers

HomogeneousProduct Potential for product differentiation

PerfectInformation flow Imperfect availability of information

Page 35: MBA 290-Strategic Analysis

Porter’s Five Forces of Competition Framework

SUPPLIERS

POTENTIALENTRANTS SUBSTITUTES

BUYERS

INDUSTRYCOMPETITORS

Rivalry amongexisting firms

Bargaining power of suppliers

Bargaining power of buyers

Threat of

new entrants

Threat of

substitutes

Page 36: MBA 290-Strategic Analysis

THREAT OF ENTRY•Capital requirements•Economies of scale•Absolute cost advantage•Product differentiation•Access to distribution channels•Legal/ regulatory barriers•Retaliation

SUBSTITUTECOMPETITION• Buyers’ propensity to substitute• Relative prices & performance of substitutes

BUYER POWER• Buyers’ price sensitivity • Relative bargaining power

INDUSTRY RIVALRY•Concentration•Diversity of competitors•Product differentiation•Excess capacity & exit barriers•Cost conditions

SUPPLIER POWER• Supplier concentration • Relative bargaining power

The Structural Determinants of Competition

Page 37: MBA 290-Strategic Analysis

SUPPLIER POWERLOW

THREAT OF ENTRYLOW

•economies of scale•capital requirements

for R&D and clinical trials

•product differentiation •control of distribution

channels•patent protection

INDUSTRY COMPETITIVENESSLOW

•high concentration•product differentiation•patent protection•steady demand growth•no cyclical fluctuations of demand

THREAT OF SUBSTITUTES

LOW

No substitutes.(Changing as managed care

encourages generics.)

BUYER POWER LOW

Physician as buyer: Not price sensitive No bargaining power.(Changing with managed care.)

DRUG INDUSTRY(ROE=22%)

Page 38: MBA 290-Strategic Analysis

Applying Five-Forces Analysis

Forecasting Industry Profitability

• Past profitability a poor indicator of future profitability.

• If we can forecast changes in industry structure we can predict likely impact on competition and profitability.

Strategies to Improve Industry Profitability• What structural variables are depressing profitability• Which of these variables can be changed by

individual or collective strategies?

Page 39: MBA 290-Strategic Analysis

Neutralizing The Five Competitive Forces

Force Entry

Rivalry

Substitutes

Buyers

Suppliers

Method for Neutralizing Force Erecting barriers (isolating

mechanisms) create & exploit economies of scale, aggressive deterrence, design in switching costs, etc.

Compete on nonprice dimensions: cost leadership, differentiation, cooperation, etc.

Improve attractiveness compared to substitutes: better service, more features, etc..

Reduce buyer uniqueness: forward integrate, differentiate product, new customers, etc..

Reduce supplier uniqueness: backward integrate, obtain minority position, second source, etc..

Page 40: MBA 290-Strategic Analysis

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

Time

Sal

es v

olum

e

Fermentation Shakeout Maturity Decline

Page 41: MBA 290-Strategic Analysis

How Typical is the Life Cycle Pattern?

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

• Other industries (especially those providing basic necessities, 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 TV’s

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

ColorB&W Portable

HDTV ?

Page 42: MBA 290-Strategic Analysis

Evolution of Industry Structure over the Life Cycle

INTRODUCTION GROWTH MATURITY DECLINE DEMAND Affluent buyers Increasing Mass market Knowledgeable,

penetration replacement customers, resi- demand dual segments

TECHNOLOGYRapid product Product and Incremental Well-diffused innovation process innovation innovation technology

PRODUCTS Wide variety, Standardization Commoditiz- Continued rapid design change ation commoditization

MANUFACT- Short-runs, skill Capacity shortage, Deskilling Overcapacity URING 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

Page 43: MBA 290-Strategic Analysis

The Driving Forces of Industry Evolution

Customers become more knowledgeable

& experienced

Diffusion oftechnology

Demand growthslows as market

saturation approaches

Customers become more price conscious

Products become more standardized

Distribution channels consolidate

Production shifts to low-wage countries

Price competition intensifies

Bargaining power of distributors

increases

BASIC CONDITIONS INDUSTRY STRUCTURE COMPETITION

Excess capacity increases

Production becomes less

R&D & skill-intensive

Quest for new sources of

differentiation

Page 44: MBA 290-Strategic Analysis

0

50

100

150

200

250

1895 1905 1915 1925 1935 1945 1955

No. of firms

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

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

Page 45: MBA 290-Strategic Analysis

Preparing for the Future : The Role of Scenario Analysis 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 external forces• Among range of outcomes, identify 2-4 most likely/ most

interesting scenarios: configurations of changes and outcomes

• Consider implications of each scenario for the company• Identify key signposts pointing toward the emergence of

each scenario• Prepare contingency plan

Page 46: MBA 290-Strategic Analysis

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

WarehouseClubs

e.g. Price ClubSam’s Club

Innovation & Renewal over the Industry Life Cycle: Retailing

?

Page 47: MBA 290-Strategic Analysis

Gary Hamel: Shaking the Foundations

OLD BRICK NEW BRICKTop management is responsible

for setting strategyEveryone is responsible

for 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 to competitiveness

There’s no correlation between size and competitiveness

Innovation equals new products and new technology

Innovation equals entirely new business concepts

Strategy is the easy part, Implementation the hard part

Strategy is the easy only if you’re 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 can’t innovate Big companies can become gray-hairedrevolutionaries

Page 48: MBA 290-Strategic Analysis

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

Time

Sal

es v

olum

e

Emergence Convergence Coexistence Dominance

Established Industry

Emerging Industry

Page 49: MBA 290-Strategic Analysis

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

Performance

Time

Ferment

Takeoff

Maturity

Discontinuity

Page 50: MBA 290-Strategic Analysis

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

Performance

Time

Ferment

Takeoff

Maturity

Discontinuity

Page 51: MBA 290-Strategic Analysis

RESOURCES, CAPABILITIES, AND

CORE COMPETENCES

Page 52: MBA 290-Strategic Analysis

THE FIRMGoals and

ValuesResources and

CapabilitiesStructure and

Systems

THE INDUSTRY

ENVIRONMENT

•Competitors•Customers•Suppliers

STRATEGYSTRATEGY

The Firm-Strategy

Interface

TheEnvironment-Strategy

Interface

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

Page 53: MBA 290-Strategic Analysis

Rationale for the Resource-based Approach to Strategy

• When the external environment is subject to rapid change, internal resources and capabilities offer a more secure basis for strategy than market focus.

• Resources and capabilities are the primary sources of profitability.

Page 54: MBA 290-Strategic Analysis

Precision Mechanics

Fine Optics

Micro-Electronics

35mm SLR cameraCompact fashion cameraEOS autofocus camera

Digital cameraVideo still camera

Plain-paper copierColor copier

Color laser copier Laser copierBasic fax

Laser faxMask aligners

Excimer laser alignersStepper aligners

Inkjet printerLaser printer

Color video printerCalculator

Notebook computer

Canon: Products and Core Technical Capabilities

Page 55: MBA 290-Strategic Analysis

Eastman Kodak’s Dilemma

1980’s

1990’s

Resources & Capabilities BusinessesChemical Imaging

•Organic Chemistry•Polymer technology•Optomechtronics•Thin-film coatings

BrandsGlobal Distribution

FilmCameras

DIVESTS: Eastman Chemical, Sterling Winthrop, Diagnostics

Need to build digital imaging capability

Digital Imaging Products (e.g. Photo CD System; Advantix cameras & film

Fine Chemicals

Pharmaceuticals

Diagnostics

Page 56: MBA 290-Strategic Analysis

STRATEGYINDUSTRY KEY

SUCCESS FACTORSCOMPETITIVEADVANTAGE

ORGANIZATIONALCAPABILITIES

RESOURCESTANGIBLE INTANGIBLE HUMAN

•Financial•Physical

•Technology•Reputation•Culture

•Skills/know-how•Capacity for communication & collaboration•Motivation

The Links between Resources, Capabilities and Competitive Advantage

Page 57: MBA 290-Strategic Analysis

Appraising ResourcesRESOURCE CHARACTERISTICS INDICATORS

Financial Borrowing capacity Debt/ Equity ratioInternal funds generation Credit rating

Tangible Net cash flowResources Physical Plant and equipment:Market value of

size, location, technology fixed assets.flexibility. Scale of plantsLand and buildings. Alternative uses forRaw materials. fixed assets

Technology Patents, copyrights, know how No. of patents ownedR&D facilities. Royalty income

Intangible Technical and scientific R&D expenditureResources employees R&D staff

Reputation Brands. Customer loyalty. Company Brand equityreputation (with suppliers, customers, Customer retentiongovernment) Supplier loyalty

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

Page 58: MBA 290-Strategic Analysis

The World’s Most Valuable Brands, 2006

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

1 Coca-Cola 67.5 11 Mercedes Benz 20.0 2 Microsoft 59.9 12 Citi 20.0 3 IBM 53.4 13 Hewlett-Packard 18.9 4 GE 47.0 14 American Express 18.6 5 Intel 35.6 15 Gillette 17.5 6 Nokia 26.5 16 BMW 17.1 7 Disney 26.4 17 Cisco 16.6 8 McDonald’s 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

Page 59: MBA 290-Strategic Analysis

Organizational Capabilities = firm’s capacity for undertaking a particular activity. (Grant)

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

Core Competence = capabilities that are fundamental to a firm’s strategy and performance. (Hamel and Prahalad)

Defining Organizational Capabilities

Page 60: MBA 290-Strategic Analysis

Identifying Organizational Capabilities:A Functional Classification

FUNCTION CAPABILITY EXEMPLARSCorporate Financial management ExxonMobil, GEManagement Strategic control IBM, Samsung

Coordinating business units BP, P&GManaging acquisitions Citigroup, Cisco

MIS Speed and responsiveness through Wal-Mart, Dell rapid 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, LVMHQuality reputation Johnson & JohnsonResponsiveness to market trends MTV, L’Oreal

Sales, Distribution Sales Responsiveness PepsiCo, Pfizer& Service Efficiency and speed of distribution LL Bean, Dell

Customer Service Singapore AirlinesCaterpillar

Page 61: MBA 290-Strategic Analysis

The Value Chain: The McKinsey Business System

TECHNOLOGY PRODUCT DESIGN MANUFACTURING MARKETING DISTRIBUTION SERVICE

Page 62: MBA 290-Strategic Analysis

The Porter Value Chain

FIRM INFRASTRUCTURE

HUMAN RESOURCE MANAGEMENT

TECHNOLOGY DEVELOPMENT

PROCUREMENT

INBOUND OPERATIONS OUTBOUND MARKETING SERVICE

LOGISTICS LOGISTICS & SALES

PRIMARY ACTIVITIES

SUPPORT ACTIVITIES

Page 63: MBA 290-Strategic Analysis

Scarcity

Relevance

Durability

Transferability

Replicability

Property rights

Relative bargaining power

Embeddedness

THE EXTENT OF THE COMPETITIVE ADVANTAGE

ESTABLISHED

SUSTAINABILITY OF THE COMPETITIVE ADVANTAGE

APPROPRIABILITY

THE PROFITEARNING POTENTIALOF A RESOURCE OR

CAPABILITY

The Rent-Earning Potential of Resources and Capabilities

Page 64: MBA 290-Strategic Analysis

  Importance VW’s Relative Strength

C1. Product development 9 4

C2. Purchasing 7 5

C3. Engineering 7 9

C4. Manufacturing 8 7

C5. Financial management 6 3

C6. R&D 6 4

C7. Marketing & sales 9 4

C8. Government relations 4 8

  Importance

VW’s Relative Strength

R1. Finance 6 4

R2. Technology 7 5

R3. Plant and equipment

8 8

R4. Location 7 4

R5. Distribution 8 5

RESOURCES CAPABILITIES

Assessing a Companies Resources and Capabilities: The Case of VW

Page 65: MBA 290-Strategic Analysis

Rel

ativ

e St

reng

th

Strategic Importance

Superfluous Strengths Key Strengths

Zone of Irrelevance Key Weaknesses

11

5 10

5

10

R1R2

R3

R4

R5C1

C2

C3

C4

C5C6 C7

C8

Appraising VW’s Resources and Capabilities

(Hypothetical only)

Page 66: MBA 290-Strategic Analysis

Approaches to Capability Development

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 separate organizational unit (IBM & the PC, Xerox & PARC, GM & Saturn)

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

5) Align structure & systems with required capabilities6) 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)

Page 67: MBA 290-Strategic Analysis

COMPETITIVE ADVANTAGE AND THE SCOPE OF THE FIRM

Page 68: MBA 290-Strategic Analysis

From Business Strategy to Corporate Strategy: The Scope of the Firm

• Business Strategy is concerned with how a firm computes within a particular market

• Corporate Strategy is concerned with where a firm competes, i.e. the scope of its activities

• The dimensions of scope are• product scope• vertical scope• geographical scope

Page 69: MBA 290-Strategic Analysis

P1 P2 P3 C1 C2 C3

Vertical Product GeographicalScope Scope Scope

V1

V2

V3

P3P2P1 C3C2C1

V1

V2

V3

[A] Single Integrated Firm

[B] SeveralSpecialized 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 transactioncosts of markets?

Transactions Costs and the Scope of the Firm

Page 70: MBA 290-Strategic Analysis

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 communication technologies• Advances in management—accounting 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 relative external 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

Page 71: MBA 290-Strategic Analysis

RATE OF PROFIT > COST OF CAPITAL

INDUSTRYATTRACTIVENESS

COMPETITIVE ADVANTAGE

The 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?

Page 72: MBA 290-Strategic Analysis

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 as large companies refocused upon their core businesses

1949 1954 1959 1964 1969 1974

70.2 63.5 53.7 53.9 39.9 37.029.8 36.5 46.3 46.1 60.1 63.0

Page 73: MBA 290-Strategic Analysis

0

10

20

30

40

50

60

70

1950 1960 1970 1983 1993

Single business

DominantbusinessRelated business

Unrelatedbusiness

Diversification among Large UK Corporations, 1950-93

Page 74: MBA 290-Strategic Analysis

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, doesn’t create value for shareholders—they can

hold diversified portfolios of securities.--Capital Asset Pricing Model shows that diversification lowers unsystematic risk not systematic risk.

PROFIT --For diversification to create shareholder value, then bringing together of different businesses under common ownership & must somehow increase their profitability.

Page 75: MBA 290-Strategic Analysis

Diversification and Shareholder Value: Porter’s Three Essential Tests

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

1. The Attractiveness Test: diversification must be directed towards attractive industries (or have the potential to become attractive).

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

3. The Better-Off Test: either the new unit must gain competitive advantage from its link with the company, or vice-versa. (i.e. some form of “synergy” must be present)

Additional source of value from diversification: Option value

Page 76: MBA 290-Strategic Analysis

Competitive Advantage from Diversification

• Sharing tangible resources (research labs, distribution systems) across multiple businesses• Sharing intangible resources (brands, technology) across multiple businesses• Transferring functional capabilities (marketing, product development) across businesses• Applying general management capabilities to multiple businesses

• Economies of scope not a sufficient basis for diversification ----must be supported by transaction costs• Diversification firm can avoid transaction costs by operating internal capital and labor markets• Key advantage of diversified firm over external markets--- superior access to information

ECONOMIES OF

SCOPE

ECONOMIESFROM

INTERNALIZINGTRANSACTIONS

Page 77: MBA 290-Strategic Analysis

Relatedness in Diversification

Economies of scope in diversification derive from two types of relatedness:

• Operational Relatedness-- synergies from sharing resources across businesses (common distribution facilities, brands, joint R&D)

• Strategic Relatedness-- synergies at the corporate level deriving from the ability to apply common management capabilities to different businesses.

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

Page 78: MBA 290-Strategic Analysis

Transactions Costs and The Existence 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 high—firm is more efficient means of organization

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

Page 79: MBA 290-Strategic Analysis

The Costs and Benefits of Vertical Integration: BENEFITS

• Technical economies from integrating processes e.g. iron and steel production—but doesn’t necessarily require common ownership

• Superior coordination • Avoids transactions costs of market contracts in situations

where there are:-- small numbers of firms-- transaction-specific investments-- opportunism and strategic misrepresentation-- taxes and regulations on market transactions

Page 80: MBA 290-Strategic Analysis

The Costs and Benefits of Vertical Integration: COSTS

• Differences in optimal scale of operation between different stages prevents balanced VI

• Strategic differences between different vertical stages create management difficulties

• Inhibits development of and exploitation of core competencies

• 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

Page 81: MBA 290-Strategic Analysis

When is Vertical Integration More Attractive than Outsourcing?

How many firms are available The fewer the companies to undertake the activities? the more attractive is VIIs transaction-specific investment If yes, VI more attractiveneeded?Does limited information permit VI can limit opportunism cheating? Are taxes or regulation imposed VI can avoid themon transactions?Do the different stages have similar Greater the similarity, the optimal scales of operation? more attractive is VIAre the two stages strategically Greater the strategicsimilar? similarity ---the more attractive is VIHow great the need for entrepreneurship Greater the need, the greater& continual upgrading of capabilities the disadvantages of VIHow uncertain is market demand? Greater the unpredictability ----the more costly is VIAre risks compounded by VI increases risk.linkages between vertical stages

Page 82: MBA 290-Strategic Analysis

Iron oremining

Steelproduction

Steel stripproduction

Canmaking

The value chain for steel cans

MARKETCONTRACTS

VERTICAL INTEGRATION

MARKETCONTRACTS

Canning of food, drink,

oil, etc.

VERTICAL INTEGRATION,AND MARKETCONTRACTS

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

Page 83: MBA 290-Strategic Analysis

Designing Vertical Relationships: Long-Term Contracts and Quasi-Vertical Integration

• Intermediate between spot transactions and vertical integration are several types of vertical relationships---such relationships may combine benefits of both market transactions and internalization

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

Page 84: MBA 290-Strategic Analysis

Recent Trends in Vertical Relationships

• From competitive contracting to supplier partnerships, e.g. in autos

• From vertical integration to outsourcing (not just components, 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 and markets becoming increasingly blurred.

Page 85: MBA 290-Strategic Analysis

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

Inte

rnat

iona

l Tr

ade

Foreign Direct Investment

LO W

LOW

HIG

H

HIGH

Page 86: MBA 290-Strategic Analysis

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

Page 87: MBA 290-Strategic Analysis

COMPETITIVE ADVANTAGE

THE INDUSTRY ENVIRONMENT

Key Success Factors

FIRM RESOURCES & CAPABILITIES-- Financial resources-- Physical resources-- Technology-- Reputation-- Functional capabilities-- General management capabilities

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

Competitive Advantage within an International Context: The Basic Framework

Page 88: MBA 290-Strategic Analysis

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 in

the 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.

Page 89: MBA 290-Strategic Analysis

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 -.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

Page 90: MBA 290-Strategic Analysis

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.

Page 91: MBA 290-Strategic Analysis

FACTOR CONDITIONS

DEMAND CONDITIONS

RELATING ANDSUPPORTINGINDUSTRIES

STRATEGY, STRUCTURE,AND RIVALRY

Porter’s National Diamond Framework

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

Page 92: MBA 290-Strategic Analysis

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 semiconductor 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)

Page 93: MBA 290-Strategic Analysis

International Location of Production

– 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.

Page 94: MBA 290-Strategic Analysis

The Role of Labor Costs

Hourly Compensation for Production Workers, 1999 ($)Germany 26.93Japan 20.89U.S. 19.20 France 19.98 U.K. 16.56Spain 12.11Korea 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

Page 95: MBA 290-Strategic Analysis

Location and the Value Chain

Comparative advantage in textiles and apparel by stage of processing

Hong Kong 1 -0.962 -0.813 -0.414 +0.75

Italy 1 -0.542 +0.183 +0.144 +0.72

Japan 1 -0.362 +0.483 +0.484 -0.48

U.S.A. 1 +0.962 +0.643 +0.224 -0.73

Country Stage Index of Country Stage Index of of Revealed of Revealed Processing Comparative Processing Comparative

Advantage Advantage

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

Page 96: MBA 290-Strategic Analysis

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/ penalties affect the location decision?

What internalresources and capabilities does the firm

possess in particular locations?

What is the firm’s business strategy (e.g. cost vs. differentiation advantage)?

How great are the coordinationbenefits from co-locating activities?

Determining the Optimal Location of Value Chain Activities

Page 97: MBA 290-Strategic Analysis

Resource commitment

TRANSACTIONS DIRECT INVESTMENT

Spot sales

Exporting

Foreignagent / distributor

Licensing

Franchising

Joint venture

Marketing & Distribution only

Long-term contract

Licensing patents & other IP

Fullyintegrated

Wholly ownedsubsidiary

Marketing& Distribution only

Fullyintegrated

Low High

Alternative Modes of Overseas Market Entry

Page 98: MBA 290-Strategic Analysis

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?

Page 99: MBA 290-Strategic Analysis

SUZUKI

ISUZU

TOYOTA

IBC VehiclesLtd. (U.K.)

GM

New United MotorManufacturingInc. (NUMMI)

10% owned. Co-production

49%owned. Co-production

40% investment

60%owned

50% owned

50%owned

(Makes vans in UK)

(Makes cars in US)

SAAB

50%owned

FIAT20% owned (2000-5).

Collaboration on technology

and components

FUJI20% owned; joint production

DAEWOO

50.9% owned; technical &

production collaboration

AVTOVAZRussian JV to produce cars

SAIC

JV to produce cars in China

General Motors’ Alliances with Competitors

Page 100: MBA 290-Strategic Analysis

Multinational Strategies: Globalization vs. National Differentiation

• 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 economiccenters- N. America, Europe, East Asia.

Hamel &PrahaladThesis

Kenichi Ohmae’s“Triad Power”Thesis

Ted Levitt“Globaliz--ation ofMarkets” Thesis

The case for a global strategy:

Page 101: MBA 290-Strategic Analysis

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 assingle mkt.

World asseparate national mkts.

global strategy

World as inter-related mkts.

multidomestic strategy

Page 102: MBA 290-Strategic Analysis

Analyzing benefits/costs of a global strategy

Forces for localization / national differentiation

MARKET DRIVERS--Different languages--Different customer preferences--Cultural differencesCOST DRIVERS--Transportation costs--Transaction costs --Economic & political risk --Speed of responseGOVERNMENT DRIVERS--Barriers to trade & inward inv.--Regulations

Forces for globalizationMARKET 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)

Page 103: MBA 290-Strategic Analysis

Benefits of national differentiation

Benefitsof

global integration

Cement

Telecomequipment

Jet engines

Consumerelectronics

Autos

Funeralservices

Retailbanking

Investment banking

Autorepair

Restaurant chains

Steel

Online C2C auctions

BeerDry

cleaning

Page 104: MBA 290-Strategic Analysis

Benefits of national differentiation

Benefitsof

global integration

Cement

Telecomequipment

Jet engines

Consumerelectronics

Autos

Funeralservices

Retailbanking

Investment banking

Autorepair

Positioning industries in terms of benefits of globalization and national differentiation

Page 105: MBA 290-Strategic Analysis

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.

Page 106: MBA 290-Strategic Analysis

The Evolution of Multinational Strategies 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

Page 107: MBA 290-Strategic Analysis

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

Page 108: MBA 290-Strategic Analysis

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

local responsiveness local responsiveness local responsiveness

glob

al

inte

grat

ion

glob

al in

tegr

atio

n

glob

al

inte

grat

ion

Matsushita

Philips

General Electric

Kao

P&GUnilever

NEC

Erickson

ITT

Page 109: MBA 290-Strategic Analysis

Reconciling Global Integration with National Differentiation: The Transnational Corporation

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.

Tight complex controls and

coordination and a shared strategic

decision process.

Heavy flows of technology,

finances, people, and materials

between interdependent

units.

Page 110: MBA 290-Strategic Analysis

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

other dimensions? --Maintain single line accountability--Other dimensions of coordination can be “dotted line”

relations3. What’s the role of HQ?

--Control function--Coordination function--Exploiting scale economies in centralized provision of

services4. The need for internal differentiation

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

5. Formal & informal organization

Designing the MNC: Key Learning