1. Chapter Copyright© 2007 Thomson Learning All rights reserved 5 Strategic Management in the Multinational Company: Content and Formulation

2. Copyright© 2007 South-Western/Thomson Learning All rights reserved Learning Objectives Define differentiation and low cost Understand how low-cost and differentiation strategists make money Recall multinational examples of use of generic strategies Understand competitive advantage and value chain Understand offensive and defensive strategies Define differentiation and low cost Understand how low-cost and differentiation strategists make money Recall multinational examples of use of generic strategies Understand competitive advantage and value chain Understand offensive and defensive strategies

3. Copyright© 2007 South-Western/Thomson Learning All rights reserved Learning Objectives Understand basics of multinational diversification Understand how traditional strategy formulation techniques apply to the multinational company Realize both the convergence and divergence in strategies Understand basics of multinational diversification Understand how traditional strategy formulation techniques apply to the multinational company Realize both the convergence and divergence in strategies

4. Copyright© 2007 South-Western/Thomson Learning All rights reserved Basic Strategy for the Multinational Company Strategy: the central, comprehensive, integrated and externally oriented set of choices of how a company will achieve its objectives

5. Copyright© 2007 South-Western/Thomson Learning All rights reserved Basic Strategy for the Multinational Company Important strategic areas -Arenas: a company needs to be able to decide which businesses it wants to be in -Vehicles: a properly stated strategy also needs to include the vehicles a company will use to create a presence in specific markets or products -Differentiators/Economic Logic: a company also needs to decide what ways it will use to win over customers -Sequencing: a company also needs to decide in what sequence and at what pace major decisions will be made Important strategic areas -Arenas: a company needs to be able to decide which businesses it wants to be in -Vehicles: a properly stated strategy also needs to include the vehicles a company will use to create a presence in specific markets or products -Differentiators/Economic Logic: a company also needs to decide what ways it will use to win over customers -Sequencing: a company also needs to decide in what sequence and at what pace major decisions will be made

6. Copyright© 2007 South-Western/Thomson Learning All rights reserved Basic Strategy for the Multinational Company Multinational companies use many of the same strategies as domestic companies

7. Copyright© 2007 South-Western/Thomson Learning All rights reserved Competitive Advantage and Multinational Applications of Generic Strategies Generic strategies: basic ways to achieve and sustain competitive advantage Competitive advantage: when a company can outmatch its rivals in attracting and maintaining its targeted customers Generic strategies: basic ways to achieve and sustain competitive advantage Competitive advantage: when a company can outmatch its rivals in attracting and maintaining its targeted customers

8. Copyright© 2007 South-Western/Thomson Learning All rights reserved Competitive Advantage and Multinational Applications of Generic Strategies (cont.) Differentiation strategy: providing superior value to customers Ex.: BMW competing in the world market by providing high-quality and performance sports cars Low-cost strategy: producing at a lower cost than competitors Ex.: Korean semiconductor firms Differentiation strategy: providing superior value to customers Ex.: BMW competing in the world market by providing high-quality and performance sports cars Low-cost strategy: producing at a lower cost than competitors Ex.: Korean semiconductor firms

9. Copyright© 2007 South-Western/Thomson Learning All rights reserved How Do Low-Cost and Differentiation Firms Make Money? Differentiation Customers often pay a higher price for extra value Low-cost Additional profits come from cost savings Differentiation Customers often pay a higher price for extra value Low-cost Additional profits come from cost savings

10. Copyright© 2007 South-Western/Thomson Learning All rights reserved Exhibit 5.1: Costs, Prices, and Profits for Differentiation and Low-Cost Strategies

11. Copyright© 2007 South-Western/Thomson Learning All rights reserved Focus Strategy Strategies can be further subdivided on the basis of competitive scope Competitive scope: how broadly a firm targets its products or services - Narrow competitive scope for certain buyers or geographic areas - Broad competitive scope when a large range of buyers are targeted Strategies can be further subdivided on the basis of competitive scope Competitive scope: how broadly a firm targets its products or services - Narrow competitive scope for certain buyers or geographic areas - Broad competitive scope when a large range of buyers are targeted

12. Copyright© 2007 South-Western/Thomson Learning All rights reserved Exhibit 5.2: Porter’s Generic Strategies

13. Copyright© 2007 South-Western/Thomson Learning All rights reserved Competitive Advantage and the Value Chain A firm can gain competitive advantage by finding differentiation or low costs in its activities Value chain is a convenient way of looking at the firm’s activities Value chain: all the activities that a firm used to design, produce, market, deliver, and support its product A firm can gain competitive advantage by finding differentiation or low costs in its activities Value chain is a convenient way of looking at the firm’s activities Value chain: all the activities that a firm used to design, produce, market, deliver, and support its product

14. Copyright© 2007 South-Western/Thomson Learning All rights reserved Exhibit 5.3: The Value Chain

15. Copyright© 2007 South-Western/Thomson Learning All rights reserved Components of the Value Chain Primary activities: physical actions of creating, selling, and after-sale service of products Upstream: early activities in the value chain - R&D - Dealing with suppliers Primary activities: physical actions of creating, selling, and after-sale service of products Upstream: early activities in the value chain - R&D - Dealing with suppliers

16. Copyright© 2007 South-Western/Thomson Learning All rights reserved Components of the Value Chain (cont.) Downstream: later value chain activities Sales and dealing with distribution channels Support activities: systems for human resources management, organizational design and control, and technology Downstream: later value chain activities Sales and dealing with distribution channels Support activities: systems for human resources management, organizational design and control, and technology

17. Copyright© 2007 South-Western/Thomson Learning All rights reserved Outsourcing Outsourcing: a deliberate decision to have outsiders or strategic allies perform certain activities in the value chain About half of U.S. manufacturing jobs will be outsourced to more than 28 emerging countries over the next 10 years About 10% of U.S. service jobs may be outsourced Outsourcing: a deliberate decision to have outsiders or strategic allies perform certain activities in the value chain About half of U.S. manufacturing jobs will be outsourced to more than 28 emerging countries over the next 10 years About 10% of U.S. service jobs may be outsourced

18. Copyright© 2007 South-Western/Thomson Learning All rights reserved Outsourcing When should a multinational company outsource? Outsourcing makes sense if an outsider can perform a value-chain task better or more cheaply However, tasks that are outsourced should the ones that are not crucial to the company’s ability to achieve competitive advantage When should a multinational company outsource? Outsourcing makes sense if an outsider can perform a value-chain task better or more cheaply However, tasks that are outsourced should the ones that are not crucial to the company’s ability to achieve competitive advantage

19. Copyright© 2007 South-Western/Thomson Learning All rights reserved Exhibit: 5.4: The Major Advantages and Disadvantages of Outsourcing

20. Copyright© 2007 South-Western/Thomson Learning All rights reserved Distinctive Competencies Strengths that allow companies to outperform rivals - Ex.: Quality, innovation, customer service Resources: inputs into the production or service processes - Ex.: Buildings, land, equipment, employees Strengths that allow companies to outperform rivals - Ex.: Quality, innovation, customer service Resources: inputs into the production or service processes - Ex.: Buildings, land, equipment, employees

21. Copyright© 2007 South-Western/Thomson Learning All rights reserved Distinctive Competencies Capabilities: ability to assemble and coordinate resources effectively Resources provide the organization with potential capabilities. For long-term success, capabilities must lead to sustainable competitive advantage. Capabilities: ability to assemble and coordinate resources effectively Resources provide the organization with potential capabilities. For long-term success, capabilities must lead to sustainable competitive advantage.

22. Copyright© 2007 South-Western/Thomson Learning All rights reserved Sustaining Competitive Advantage Sustainable: strategies not easily defeated by competitors Four characteristics of capabilities that lead to competitive advantage - Valuable - Rare - Difficult to imitate - Non-substitutable Sustainable: strategies not easily defeated by competitors Four characteristics of capabilities that lead to competitive advantage - Valuable - Rare - Difficult to imitate - Non-substitutable

23. Copyright© 2007 South-Western/Thomson Learning All rights reserved Exhibit 5.5: Relationships Among Resources, Capabilities, Distinctive Competencies, and Eventual Profitability

24. Copyright© 2007 South-Western/Thomson Learning All rights reserved Competitive Strategies in International Markets Competitive strategies: strategic moves multinationals use to defeat competitors - Offensive competitive strategies: direct attacks to capture market share - Defensive competitive strategies: attempts to discourage offensive strategies - Counter-parry: fending off a competitor’s attack in one country by attacking in another country Competitive strategies: strategic moves multinationals use to defeat competitors - Offensive competitive strategies: direct attacks to capture market share - Defensive competitive strategies: attempts to discourage offensive strategies - Counter-parry: fending off a competitor’s attack in one country by attacking in another country

25. Copyright© 2007 South-Western/Thomson Learning All rights reserved Offensive Strategies Direct attacks: price cutting, adding new features, or going after poorly served markets End-run offensives: seeking unoccupied markets Preemptive competitive strategies: being first to obtain particular advantageous position Acquisitions: buying out a competitor Direct attacks: price cutting, adding new features, or going after poorly served markets End-run offensives: seeking unoccupied markets Preemptive competitive strategies: being first to obtain particular advantageous position Acquisitions: buying out a competitor

26. Copyright© 2007 South-Western/Thomson Learning All rights reserved Defensive Strategies Attempts to reduce risks of being attacked Convince an attacking firm to seek other targets Blunt the impacts of any attack Exclusive contracts with best suppliers New models to match competitor’s lower prices Public announcements about the willingness to fight Attempts to reduce risks of being attacked Convince an attacking firm to seek other targets Blunt the impacts of any attack Exclusive contracts with best suppliers New models to match competitor’s lower prices Public announcements about the willingness to fight

27. Copyright© 2007 South-Western/Thomson Learning All rights reserved Counter-parry Popular strategy for multinationals Respond to attack by attacking competitor in another country Ex.: Kodak—When Fuji attacked Kodak in the U.S., Kodak retaliated by attacking Fuji in Japan. Goodyear also attacked Michelin in Europe as response to attack in U.S. Popular strategy for multinationals Respond to attack by attacking competitor in another country Ex.: Kodak—When Fuji attacked Kodak in the U.S., Kodak retaliated by attacking Fuji in Japan. Goodyear also attacked Michelin in Europe as response to attack in U.S.

28. Copyright© 2007 South-Western/Thomson Learning All rights reserved Multinational Diversification Strategy Business-level strategies: strategies for a single business operation Corporate-level strategies: how companies choose their mixture of different businesses Business-level strategies: strategies for a single business operation Corporate-level strategies: how companies choose their mixture of different businesses

29. Copyright© 2007 South-Western/Thomson Learning All rights reserved Diversification Related diversification: companies acquire businesses that are similar in some way to their original or core business - Ex.: Nike adding clothing line to its shoe operations Unrelated diversification: firms acquire businesses in any industry - Main concern is whether it’s a good financial investment Related diversification: companies acquire businesses that are similar in some way to their original or core business - Ex.: Nike adding clothing line to its shoe operations Unrelated diversification: firms acquire businesses in any industry - Main concern is whether it’s a good financial investment

30. Copyright© 2007 South-Western/Thomson Learning All rights reserved Strategy Formulation: Traditional Approaches Strategy formulation: process by which managers select the strategies to be used by their company Popular analysis techniques Competitive dynamics of the industry Company’s competitive position in the industry Opportunities and threats faced by their company Company’s strengths and weaknesses Strategy formulation: process by which managers select the strategies to be used by their company Popular analysis techniques Competitive dynamics of the industry Company’s competitive position in the industry Opportunities and threats faced by their company Company’s strengths and weaknesses

31. Copyright© 2007 South-Western/Thomson Learning All rights reserved Industry and Competitive Analysis Porter’s five forces model: a popular technique that can help a multinational firm understand the major forces at work in the industry and the degree of attractiveness of the industry

32. Copyright© 2007 South-Western/Thomson Learning All rights reserved Industry and Competitive Analysis Porter’s Five Forces Model 1.The degree of competition among existing competitors in the industry 2.The threat of new entrants 3.The bargaining power of buyers 4.The bargaining power of suppliers 5.The threat of substitutes Porter’s Five Forces Model 1.The degree of competition among existing competitors in the industry 2.The threat of new entrants 3.The bargaining power of buyers 4.The bargaining power of suppliers 5.The threat of substitutes

33. Copyright© 2007 South-Western/Thomson Learning All rights reserved Industry and Competitive Analysis Managers must understand their industry well to formulate good strategies. Must understand economic characteristics of industries and driving forces Economic characteristics include - Market size - Ease of entry - Opportunities for economies of scale Managers must understand their industry well to formulate good strategies. Must understand economic characteristics of industries and driving forces Economic characteristics include - Market size - Ease of entry - Opportunities for economies of scale

34. Copyright© 2007 South-Western/Thomson Learning All rights reserved Driving Forces The important changes that have potential to affect an industry - Speed of new product innovations - Technological changes - Changing societal attitudes and lifestyles The important changes that have potential to affect an industry - Speed of new product innovations - Technological changes - Changing societal attitudes and lifestyles

35. Copyright© 2007 South-Western/Thomson Learning All rights reserved Key Success Factors (KSFs) Important characteristics of a company or its product that lead to success in an industry - Innovative technology or products - Broad product line - Effective distribution channels - Price advantages - Effective promotion - Superior physical facilities or skilled labor Important characteristics of a company or its product that lead to success in an industry - Innovative technology or products - Broad product line - Effective distribution channels - Price advantages - Effective promotion - Superior physical facilities or skilled labor

36. Copyright© 2007 South-Western/Thomson Learning All rights reserved Key Success Factors - Experience of firm in business - Cost position for raw materials - Cost position for production - R&D quality - Financial assets - Product quality - Quality of human resources - Experience of firm in business - Cost position for raw materials - Cost position for production - R&D quality - Financial assets - Product quality - Quality of human resources

37. Copyright© 2007 South-Western/Thomson Learning All rights reserved Competitor Analysis Profiles of competitor’s strategies and objectives Four steps 1.Identify strategic intent of competitors 2.Identify current and anticipated generic strategies 3.Identify current and anticipated offensive and defensive competitive strategies 4.Assess current positions of competitors Profiles of competitor’s strategies and objectives Four steps 1.Identify strategic intent of competitors 2.Identify current and anticipated generic strategies 3.Identify current and anticipated offensive and defensive competitive strategies 4.Assess current positions of competitors

38. Copyright© 2007 South-Western/Thomson Learning All rights reserved Competitor Analysis (cont.) 1.Strategic intent - Broad objectives of competitors 2.Current and anticipated generic strategies - Helps determine key KSF 3.Current and anticipated offensive and defensive competitive strategies 4.Current positions 1.Strategic intent - Broad objectives of competitors 2.Current and anticipated generic strategies - Helps determine key KSF 3.Current and anticipated offensive and defensive competitive strategies 4.Current positions

39. Copyright© 2007 South-Western/Thomson Learning All rights reserved Exhibit 5.7: Hypothetical Competitive Profiles of Four Companies in Different Countries

40. Copyright© 2007 South-Western/Thomson Learning All rights reserved Exhibit 5.7: Hypothetical Competitive Profiles of Four Companies in Different Countries

41. Copyright© 2007 South-Western/Thomson Learning All rights reserved Company-Situation Analysis: SWOT Strengths: distinctive capability, resource or skill Weaknesses: competitive disadvantage compared to competitors Opportunities: favorable conditions in the environment Threats: unfavorable conditions in the environment Strengths: distinctive capability, resource or skill Weaknesses: competitive disadvantage compared to competitors Opportunities: favorable conditions in the environment Threats: unfavorable conditions in the environment

42. Copyright© 2007 South-Western/Thomson Learning All rights reserved SWOT Analysis More complex than for domestic firms Multinationals face more complex general and operating environments Environments vary by country More complex than for domestic firms Multinationals face more complex general and operating environments Environments vary by country

43. Copyright© 2007 South-Western/Thomson Learning All rights reserved Corporate Strategy Selection Diversified corporation has a portfolio of businesses Major issue is which businesses to invest in and which businesses to divest The basic tool: matrix analyses The most popular is the growth-share matrix of the Boston Consulting Group (BCG). Diversified corporation has a portfolio of businesses Major issue is which businesses to invest in and which businesses to divest The basic tool: matrix analyses The most popular is the growth-share matrix of the Boston Consulting Group (BCG).

44. Copyright© 2007 South-Western/Thomson Learning All rights reserved BCG Share Matrix Division into four categories based on market share and relative market share Stars: the most successful firm Dogs: businesses with low market shares in low- growth industries Cash cows: businesses in slow-growth industries where company has strong market-share position Problem children: businesses in high-growth industries where company has a poor market share Division into four categories based on market share and relative market share Stars: the most successful firm Dogs: businesses with low market shares in low- growth industries Cash cows: businesses in slow-growth industries where company has strong market-share position Problem children: businesses in high-growth industries where company has a poor market share

45. Copyright© 2007 South-Western/Thomson Learning All rights reserved Exhibit 5.8: The BCG Growth Share Matrix

46. Copyright© 2007 South-Western/Thomson Learning All rights reserved Matrices All matrices help answer basic strategy formulation question such as Are businesses in attractive industries? Are most businesses growing? Are there sufficient cash cows to finance other businesses? Is business portfolio well positioned for the future? Is the some strategic synergies among businesses? All matrices help answer basic strategy formulation question such as Are businesses in attractive industries? Are most businesses growing? Are there sufficient cash cows to finance other businesses? Is business portfolio well positioned for the future? Is the some strategic synergies among businesses?

47. Copyright© 2007 South-Western/Thomson Learning All rights reserved Organizations Alike: Globalization and Convergence Convergence: increasing similarity of management practices Convergence is most apparent with transnational firms Multinational firms competing in the same industry tend to have similar structures and strategies regardless of the location of the company’s headquarters Convergence: increasing similarity of management practices Convergence is most apparent with transnational firms Multinational firms competing in the same industry tend to have similar structures and strategies regardless of the location of the company’s headquarters

48. Copyright© 2007 South-Western/Thomson Learning All rights reserved Organizations Alike: Globalization and convergence How Globalization pushes organizations to be more similar -Global customers and products -Growing levels of industrialization and economic development -Global competition and global trade -Gross-border mergers, acquisitions, and alliances -Cross-national mobility of managers -Internationalization of business education How Globalization pushes organizations to be more similar -Global customers and products -Growing levels of industrialization and economic development -Global competition and global trade -Gross-border mergers, acquisitions, and alliances -Cross-national mobility of managers -Internationalization of business education

49. Copyright© 2007 South-Western/Thomson Learning All rights reserved Organizations Alike: Globalization and convergence National differences still affect the way many firms compete via their choices of strategies Three important reasons to understand the national differences Managers in successful multinational firms must understand and anticipate the strategies of rivals from other countries Managers in successful multinational firms must understand the strategies of potential business partners Strategies developed in one national context might be copied and modified to fit another national context National differences still affect the way many firms compete via their choices of strategies Three important reasons to understand the national differences Managers in successful multinational firms must understand and anticipate the strategies of rivals from other countries Managers in successful multinational firms must understand the strategies of potential business partners Strategies developed in one national context might be copied and modified to fit another national context

50. Copyright© 2007 South-Western/Thomson Learning All rights reserved The National Context and Organizational Strategy: Overview and Observations The national context affects organizational design and strategy formulation and content through the following processes -The social institutions and national and business cultures encourage or discourage certain forms of businesses and strategies in each nation -Social institutions and national culture serve as barriers to the easy transfer of competitive advantages among countries The national context affects organizational design and strategy formulation and content through the following processes -The social institutions and national and business cultures encourage or discourage certain forms of businesses and strategies in each nation -Social institutions and national culture serve as barriers to the easy transfer of competitive advantages among countries

51. Copyright© 2007 South-Western/Thomson Learning All rights reserved The National Context and Organizational Strategy: Overview and Observations - Each nation must rely on its available factor conditions for developing industries and the firms within industries - Social institutions and culture determine which resources are used, how they are used, and which resources are developed - Each nation must rely on its available factor conditions for developing industries and the firms within industries - Social institutions and culture determine which resources are used, how they are used, and which resources are developed