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Foundations of Strategy: Chapter 8 Global Strategies & the multinational corporation Team 5 Rachel Parrish Nikki Chaib Banner Owen Alex Gonzalez.

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Presentation on theme: "Foundations of Strategy: Chapter 8 Global Strategies & the multinational corporation Team 5 Rachel Parrish Nikki Chaib Banner Owen Alex Gonzalez."— Presentation transcript:

1 Foundations of Strategy: Chapter 8 Global Strategies & the multinational corporation Team 5 Rachel Parrish Nikki Chaib Banner Owen Alex Gonzalez

2 Internationalism Most important and pervasive force that has reshaped the competitive environment of business during the past half- century. Because of trade and financial links, problems in one part of the global economy are now quickly transmitted around the world in a chain reaction. It is both a threat and an opportunity. Adds considerable complexity to our strategy analysis Broadens the scope of markets Complicates analysis of competitive advantage

3 Patterns of Industry Internationalism Occurs through trade and direct investment. Based on these, we can identify different types of industries by the extent and mode of their internationalism. Four types of industries: Sheltered Trading Multidomestic Global

4 Sheltered Industries Sheltered from both imports and inward direct investment by regulation, trade barriers, or localized nature of the goods and services. Examples: primarily fragmented service industries like dry cleaning and funeral services, small scale manufacturing industries, and industries producing products that are non tradable because they are perishable (milk, bread) or difficult to move (4 poster bed)

5 Trading Industries Internationalism occurs primarily through imports and exports. If a product is transportable, not nationally differentiated, and subject to substantial scale economies, exporting from a single location is the most efficient means to exploit overseas markets. Examples are aircraft, shipbuilding, and diamonds from South Africa.

6 Multidomestic Industries Internationalism is through direct investment because trade is not feasible, or because products are nationally differentiated. Examples: Retail banking, hotels, recorded music

7 Global Industries Those which trade and direct investment are important. Most large scale manufacturing industries. Examples: Cars, Electronics

8 Trading Aerospace Diamonds Agriculture Trading Aerospace Diamonds Agriculture Sheltered Railroads Dry cleaning Hair dressing Milk Sheltered Railroads Dry cleaning Hair dressing Milk Global Cars Oil Electronics Global Cars Oil Electronics Multidomestic Banking Hotels Groceries Multidomestic Banking Hotels Groceries International Trade Foreign Direct Investment Low High Figure 8.1

9 Analyzing Competitive Advantage Firm Resources & Capabilities Financial Resources Physical Resources Technology Reputation Functional Capabilities Gen. Mgmt. Capabilities Firm Resources & Capabilities Financial Resources Physical Resources Technology Reputation Functional Capabilities Gen. Mgmt. Capabilities The National Environment National Resources & Capabilities (raw materials, national culture, human resources, transportation, communication, legal infrastructure) Domestic Market Conditions Govt Policies Exchange Rates Related and Supporting industries The National Environment National Resources & Capabilities (raw materials, national culture, human resources, transportation, communication, legal infrastructure) Domestic Market Conditions Govt Policies Exchange Rates Related and Supporting industries The Industry Environment Key Success Factors The Industry Environment Key Success Factors Competitive Advantage

10 Comparative Advantage The role of national resource availability on international competitiveness. A country has a comparative advantage in those products that make intensive use of those resources available in abundance within that country. Example: U.S. has abundance of technological resources, so we have a comparative advantage in technology-intensive products (microprocessors, computer software, etc)

11 Porter’s National Diamond 4 factors which determine a country’s competitive advantage within a particular sector: 1) Factor Conditions 2) Related & Supporting Industries 3) Demand Conditions 4) Strategy, Structure, & Rivalry

12 Factor Conditioning Porter emphasizes the role of highly specialized resources, many of which are “home-grown” rather then “endowed”.

13 Related & Supporting Industries Porter’s most striking empirical findings is that national competitive strengths tend to be associated with clusters of industries. For each industry, closely related industries are sources of critical resources & capabilities Ex: Silicon Valley’s clusters comprises of semiconductor, computer, software & venture capital firms

14 Demand Conditions The power driver of innovation and quality improvement Example: Switzerland’s supremacy in watches is supported by the obsessive punctuality of the Swiss.

15 Strategy, Structure, & Rivalry National competitive performance in particular sectors is inevitably related to the strategies & structures of firms in those industries. Porter puts emphasis on the role of intense domestic competition in driving innovation, efficiency, and the upgrading of competitive advantage.

16 IKEA’s Competitive Advantage Factor Conditions: Sweden has a plentiful supply of timber. When winters were harsh, farming suffered which made farmers independent and self-sufficient by making furniture out of the timber. Sweden developed a strong base of skilled furniture makers. Their designs are known for their simplicity, clean lines, & light minimalistic look.

17 IKEA’s Competitive Advantage Related & Supporting Industries: In Sweden the Tibro cluster comprises of more than 70 furniture companies. Their close proximity facilitates the exchange of information and means that innovative ideas are quickly spread.

18 IKEA’s Competitive Advantage Demand Conditions: Swedish customers are sensitive to environmental considerations and are concerned with sustainability. The environmental concerns of IKEA’s Swedish customers are reflected in the company’s commitment to environmental stewardship. IKEA goes for low cost, but not at the cost of the environment

19 IKEA’s Competitive Advantage Local Firm Strategy, Structure, and Rivalry: IKEA’s development of “flat pack”, non-assembled furniture together with reductions in transportation costs, moved competition beyond regional and national boundaries.

20 Consistency between Strategy & National Conditions Establishing competitive advantage in global industries requires congruence between business strategy and the pattern of the country’s comparative advantage.

21 Limitation on the Diamond Model 2 different perspectives: 1) Rugman & Dunning see the diamond model as omitting key factors. The model fails to take into consideration the attributes of the home country’s largest trading partners, isn’t applicable to to smaller nations Ignores the role of multinational corporations in influencing the competitive success of nations Needs to be expanded & amended

22 Limitation of Diamond Model 2) Waverman and Davies & Ellis suggest that the model is so general that it lacks value. By trying to explain all aspects of trade and competition the model ends up explaining nothing because it is insufficiently precise to generate testable predictions.

23 Applying the Framework: Choosing where to locate production The decision of where to locate production requires consideration of 4 sets of factors: 1)National Resource Availability: key resources differ between counties on their availability or cost. Firms should manufacture in countries where resources are favorable 2)Firm-Specific Competitive Advantage: if advantage is based on internal resources, optimal location is where resources are situated and how mobile they are

24 Choosing where to Locate Production 3) Tradability: the more difficult it is to transport a product and the more subject it is to trade barriers, the more production will need to take place within the local market. 4) Political Considerations: Government incentives, penalties, & restrictions affect location decisions

25 Location & the Value Chain Different countries offer advantages at different stages of the value chain. Key feature of internationalization is the international division of value chains as firms seek to locate to countries whose resource availability and cost, best match each stage of the value chain.

26 How should a firm enter foreign markets? The basic principle of entering a foreign market is to seek profitability. The potential for establishing a competitive advantage within that market is correlated with how they enter the market. Transactions Direct investment

27 5 key factors in choosing entry mode Is the firms competitive advantage based on firm specific or country specific resources? Is the product tradable and what are the barriers to trade? Does the firm possess the full range of resources and capabilities for establishing a competitive advantage in the overseas market? Can the firm directly appropriate the returns to its resources? What transaction costs are involved?

28 International alliances and joint ventures Strategic alliances- collaborative arrangements between firms. Do your companies have strategic alliances? Companies can enter global markets by these alliances and greatly benefit by gathering vast resources and sharing means such as management, technological, knowledge and etc.

29 Multinational strategies: global integration vs. national differentiation

30 Benefits of a global strategy Allows access to scale economies in product development, manufacturing, and marketing. Locally differentiated customer preferences is diminishing rapidly.

31 Cost benefits of scale and replication Primary sources of scale economy is product development. Subsequent replication costs a fraction of the original. Ex. McDonalds and Disneyland Theme Parks.

32 Serving Global Customers The customer base has been revolutionized to become a global market for consumers.

33 Exploiting National Resources- Arbitrage Benefits The ability for the company to access knowledge within the host country. This also pertains to exploiting local resources which will benefit the incoming firm.

34 Learning Benefits The ability to recognize that by entering the overseas market place there is a need to acquire knowledge within the local community. This will also allow for the cross differentiation of multiple national environments to gain a competitive edge. Bringing together all of the knowledge from the different places that the subsidiaries have been placed.

35 Competing Strategically Cross subsidization- using profits or surpluses generated by one part of a business to support other parts of the business that perform less well. Allows for having global backing in markets to allow for specific strategies to drive out competitors such as predatory pricing.

36 The need for national differentiation It has been shown recently although there has been a push for a global customer base and one that can be provided for with one simple product. This is just simply not the case the customers demand for an individual product that meets their personal needs. How can you see this in your companies today?

37 Reconciling global integration with national differentiation This is a cross between embarking upon the global customer but doing it with their national characteristics in mind. So what has formed is a locally specialized firms that can provide the specific needs being sought but still represent the firm to the standards of the company.

38 Multinational Corporations or MNCs The evolution of multinational strategies and Structures Captive of their history Radical changes in Strategy and Structure are difficult Their history continues to shape their organizational capabilities today

39 Reconfiguring the MNC Changing organization Structure Creating worldwide product divisions Principal structural changes: national subsidiaries and regional groupings to creation of worldwide product divisions Ex. A U.S. based company can have headquarters in different countries

40 New Approach to Reconciling Localization and Global Integration More important than changing Structure Changes in Responsibilities Decision powers Modes of coordination Decentralization

41 Accelerating technological change Centralization helps with cost and mass production Innovation occurs when the company is decentralized Example Google with the place they work at, campus like. and Apple is really incentive based Ford, Chipotle, Exxon

42 New Approach to Reconciling Localization and Global Integration Cont. Transnational organization Becoming an integrated network of distributed and interdependent resources and capabilities Company must adapt to 1.Differential requirements of different products 2.Different functions 3.Different countries

43 Transnational Organization Is a concept and direction of development Rather than a distinct organizational archetype Involves convergence of the different strategy configurations of MNCs Reassign roles and responsibilities Increasing integration among different national subsidiaries

44 Organizing R&D and New Product Development Greatest challenges facing top managers Organizing Fostering and exploiting innovation New product development Innovation is stimulated by diversity and autonomy, while its exploitation and diffusion require critical mass and coordination

45 Organizing R&D and New Product Development Building a globally integrated approach to new product development should be a major priority for MNCs Example – the traditional European decentralized model is conducive to local initiatives- but not to their global exploitation Allows them to take advantage of local resources and develop distinctive capabilities while exploiting globally the results of their initiatives

46 Conclusion Competitive advantages Is not just determined by its own resources and capabilities But also by the conditions of the national environment in which it operates We simplified the complexities of international strategy International management can be complex Because what works at home might not work somewhere else But we are starting to understand it better and it helps us to compete globally

47 Conclusion cont.


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