Chapter Copyright© 2004 Thomson Learning All rights reserved 4 Strategic Management in the Multinational Company: Content and Formulation Strategic Management in the Multinational Company: Content and Formulation

Copyright© 2005 South-Western/Thomson Learning All rights reserved Chapter Outline Competitive advantage and generic strategies Differentiation and low cost Competitive scope: broad or niche market Competitive advantage and the value chain The value chain and its components Capabilities, resources, and distinctive competencies Competitive advantage and generic strategies Differentiation and low cost Competitive scope: broad or niche market Competitive advantage and the value chain The value chain and its components Capabilities, resources, and distinctive competencies

Copyright© 2005 South-Western/Thomson Learning All rights reserved Chapter Outline (2) Competitive strategies in international markets Offensive Defensive Counter-parry Multinational diversification Related diversification Unrelated diversification Competitive strategies in international markets Offensive Defensive Counter-parry Multinational diversification Related diversification Unrelated diversification

Copyright© 2005 South-Western/Thomson Learning All rights reserved Chapter Outline (3) Multinational strategy formulation Industry analysis Economic characteristics and driving forces – help to determine Key Success Factors Competitor analysis Company situation analysis (SWOT) Country selection Strategic considerations in country selection National advantage and Porter's diamond Multinational strategy formulation Industry analysis Economic characteristics and driving forces – help to determine Key Success Factors Competitor analysis Company situation analysis (SWOT) Country selection Strategic considerations in country selection National advantage and Porter's diamond

Copyright© 2005 South-Western/Thomson Learning All rights reserved Competitive Advantage and Multinational Applications of Generic Strategies Multinational companies use many of the same strategies as domestic companies 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 Multinational companies use many of the same strategies as domestic companies 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

Copyright© 2005 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

Copyright© 2005 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 The company strives to become the lowest-cost producer and compete on low price Additional profits come from cost savings Differentiation Customers often pay a higher price for extra value Low-cost The company strives to become the lowest-cost producer and compete on low price Additional profits come from cost savings

Copyright© 2005 South-Western/Thomson Learning All rights reserved Exhibit 4.1: Costs, Prices, and Profits for Differentiation and Low-Cost Strategies

Copyright© 2005 South-Western/Thomson Learning All rights reserved Competitive Scope 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

Copyright© 2005 South-Western/Thomson Learning All rights reserved Exhibit 4.2: Porter’s Generic Strategies

Copyright© 2005 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

Copyright© 2005 South-Western/Thomson Learning All rights reserved Exhibit 4.3: The Value Chain

Copyright© 2005 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

Copyright© 2005 South-Western/Thomson Learning All rights reserved Components of the Value Chain (2) Downstream: later value chain activities Sales and dealing with distribution channels Competitive advantage can be obtained through superior performance at almost any stage in the value chain Support activities: systems for human resources management, organizational design and control, and technology Downstream: later value chain activities Sales and dealing with distribution channels Competitive advantage can be obtained through superior performance at almost any stage in the value chain Support activities: systems for human resources management, organizational design and control, and technology

Copyright© 2005 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 Many companies use strategic alliances with suppliers to get access to additional resources 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 Many companies use strategic alliances with suppliers to get access to additional resources

Copyright© 2005 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.

Copyright© 2005 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

Copyright© 2005 South-Western/Thomson Learning All rights reserved Exhibit 4.4: Relationships Among Resources, Capabilities, Distinctive Competencies, and Eventual Profitability

Copyright© 2005 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

Copyright© 2005 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 a particular advantageous position Acquisitions: buying out a competitor How much will the acquisition add to your company's profits? 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 a particular advantageous position Acquisitions: buying out a competitor How much will the acquisition add to your company's profits?

Copyright© 2005 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

Copyright© 2005 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. The counter-parry forces the attacker to use some of its resources to defend its home turf 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. The counter-parry forces the attacker to use some of its resources to defend its home turf

Copyright© 2005 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 Two types of diversification Related diversification Unrelated diversification Business-level strategies: strategies for a single business operation Corporate-level strategies: how companies choose their mixture of different businesses Two types of diversification Related diversification Unrelated diversification

Copyright© 2005 South-Western/Thomson Learning All rights reserved Related Diversification Related diversification: companies acquire businesses that are similar in some way to their original or core business Nike started with shoes, later added athletic clothing and equipment Honda started making motorcycles and developed a core competency in designing and making internal combustion engines. Honda used this core competency to diversify into cars and lawn mowers. Related diversification: companies acquire businesses that are similar in some way to their original or core business Nike started with shoes, later added athletic clothing and equipment Honda started making motorcycles and developed a core competency in designing and making internal combustion engines. Honda used this core competency to diversify into cars and lawn mowers.

Copyright© 2005 South-Western/Thomson Learning All rights reserved Related Diversification (2) Vertical integration: backward or forward Backward integration: a company produces goods or services to support its core business Example: Starbucks owns coffee plantations Forward integration: a firm adds value chain activities (retail, direct sales, or distribution) that bring it closer to the final customers (usually consumers) Vertical integration: backward or forward Backward integration: a company produces goods or services to support its core business Example: Starbucks owns coffee plantations Forward integration: a firm adds value chain activities (retail, direct sales, or distribution) that bring it closer to the final customers (usually consumers)

Copyright© 2005 South-Western/Thomson Learning All rights reserved Unrelated Diversification Unrelated diversification: firms acquire businesses in any industry Main concern is whether it’s a good financial investment Long-term investment: usually the acquired firm has growth potential, but it needs capital, managerial expertise, or marketing skills to grow Short-term investment: the acquiring firm hopes to sell the acquired firm's assets at a profit. Unrelated diversification: firms acquire businesses in any industry Main concern is whether it’s a good financial investment Long-term investment: usually the acquired firm has growth potential, but it needs capital, managerial expertise, or marketing skills to grow Short-term investment: the acquiring firm hopes to sell the acquired firm's assets at a profit.

Copyright© 2005 South-Western/Thomson Learning All rights reserved Strategy Formulation Strategy formulation: process by which managers select the strategies to be used by their company Types of analysis Industry analysis Economic characteristics and driving forces – help to determine Key Success Factors Porter's diamond Competitor analysis Company situation analysis (SWOT) Strategy formulation: process by which managers select the strategies to be used by their company Types of analysis Industry analysis Economic characteristics and driving forces – help to determine Key Success Factors Porter's diamond Competitor analysis Company situation analysis (SWOT)

Copyright© 2005 South-Western/Thomson Learning All rights reserved Industry Analysis Managers must understand their industry well to formulate good strategies. Must understand economic characteristics and driving forces Economic characteristics include Market size: in developing countries, many people are too poor to buy anything but basic necessities. Ease of entry: how easy or hard is it for a new competitor to enter the market? Opportunities for economies of scale: cost savings due to higher volume Managers must understand their industry well to formulate good strategies. Must understand economic characteristics and driving forces Economic characteristics include Market size: in developing countries, many people are too poor to buy anything but basic necessities. Ease of entry: how easy or hard is it for a new competitor to enter the market? Opportunities for economies of scale: cost savings due to higher volume

Copyright© 2005 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 attitudes and lifestyles The important changes that have potential to affect an industry Speed of new product innovations Technological changes Changing attitudes and lifestyles

Copyright© 2005 South-Western/Thomson Learning All rights reserved Key Success Factors 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

Copyright© 2005 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

Copyright© 2005 South-Western/Thomson Learning All rights reserved Competitor Analysis Profiles of competitors' strategies and objectives Four steps Strategic intent: broad objectives Current and anticipated generic strategies: helps determine key success factors Current and anticipated offensive and defensive competitive strategies Current positions: market share, trends in market share Look at each major competitor in each country where you compete, or expect to compete, with them Profiles of competitors' strategies and objectives Four steps Strategic intent: broad objectives Current and anticipated generic strategies: helps determine key success factors Current and anticipated offensive and defensive competitive strategies Current positions: market share, trends in market share Look at each major competitor in each country where you compete, or expect to compete, with them

Copyright© 2005 South-Western/Thomson Learning All rights reserved Company-Situation Analysis: SWOT Strengths: distinctive capabilities, resources, skills Weaknesses: competitive disadvantage compared to competitors Opportunities: favorable conditions in the environment Threats: unfavorable conditions in the environment MNC's should do a SWOT analysis for each country in which they do business – must consider the business environment in each country Strengths: distinctive capabilities, resources, skills Weaknesses: competitive disadvantage compared to competitors Opportunities: favorable conditions in the environment Threats: unfavorable conditions in the environment MNC's should do a SWOT analysis for each country in which they do business – must consider the business environment in each country

Copyright© 2005 South-Western/Thomson Learning All rights reserved Country Selection Advanced industrialized countries are attractive markets, but there is a high level of competition: United States and Canada, Japan, EU-15, other countries in western Europe Big emerging markets, particularly China and India, offer high opportunities for growth and fairly low wages. Other countries with low wage rates are located in Asia, central America, and South America The "new EU" countries offer lower wages than western Europe, an educated work force, and growing consumer markets Advanced industrialized countries are attractive markets, but there is a high level of competition: United States and Canada, Japan, EU-15, other countries in western Europe Big emerging markets, particularly China and India, offer high opportunities for growth and fairly low wages. Other countries with low wage rates are located in Asia, central America, and South America The "new EU" countries offer lower wages than western Europe, an educated work force, and growing consumer markets

Copyright© 2005 South-Western/Thomson Learning All rights reserved Strategies for Developing Countries More than 4 billion people have incomes of less than $2 per day These people need inexpensive, basic, reliable products that meet their needs Even small items (aspirin, cigarettes, etc.) must often be sold in small quantities Before making a decision about market entry, find out whether you can distribute your product to customers in remote areas More than 4 billion people have incomes of less than $2 per day These people need inexpensive, basic, reliable products that meet their needs Even small items (aspirin, cigarettes, etc.) must often be sold in small quantities Before making a decision about market entry, find out whether you can distribute your product to customers in remote areas

Copyright© 2005 South-Western/Thomson Learning All rights reserved Key Success Factors for Manufacturing & Distribution Centers Access to target markets Availability of transportation Electric power and other utilities Availability of telecommunications Availability of skilled labor Availability of suppliers and raw materials Desirability of the location for employees coming in from elsewhere Access to target markets Availability of transportation Electric power and other utilities Availability of telecommunications Availability of skilled labor Availability of suppliers and raw materials Desirability of the location for employees coming in from elsewhere

Copyright© 2005 South-Western/Thomson Learning All rights reserved Natural and acquired advantages Some countries have advantages in producing certain goods and services Natural advantages result from: Climate Location Land Natural resources Labor force availability, particularly unskilled labor. An educated work force is not a natural advantage Some countries have advantages in producing certain goods and services Natural advantages result from: Climate Location Land Natural resources Labor force availability, particularly unskilled labor. An educated work force is not a natural advantage

Copyright© 2005 South-Western/Thomson Learning All rights reserved Natural and acquired advantages (2) Acquired advantages result from advanced product and process technology education and worker skills infrastructure (transportation, utilities, communications) management knowledge and skills availability of capital Developed countries compete with each other primarily on the basis of acquired advantages. Developed countries have more acquired advantages than developing countries. Acquired advantages result from advanced product and process technology education and worker skills infrastructure (transportation, utilities, communications) management knowledge and skills availability of capital Developed countries compete with each other primarily on the basis of acquired advantages. Developed countries have more acquired advantages than developing countries.

Copyright© 2005 South-Western/Thomson Learning All rights reserved Porter's diamond Michael Porter analyzed the exports, including goods and services, of 10 important trading nations, which accounted for 50% of global exports. U. S., 6 countries in western Europe, Japan, South Korea, Singapore He then analyzed the factors that created advantages for each country in those products (goods or services) where it had the largest share of world exports He identified 4 factors that lead to national competitive advantage: factor conditions demand conditions firm strategy, structure, and rivalry related and supporting industries Michael Porter analyzed the exports, including goods and services, of 10 important trading nations, which accounted for 50% of global exports. U. S., 6 countries in western Europe, Japan, South Korea, Singapore He then analyzed the factors that created advantages for each country in those products (goods or services) where it had the largest share of world exports He identified 4 factors that lead to national competitive advantage: factor conditions demand conditions firm strategy, structure, and rivalry related and supporting industries

Copyright© 2005 South-Western/Thomson Learning All rights reserved Porter's diamond (2) Factor conditions: factors of production, such as skilled labor or infrastructure, required to compete in a particular industry Natural and acquired advantages affect the factors available for production Demand conditions in the home market (where the company headquarters is located): the degree to which products developed for the home market will be in demand elsewhere. Demanding, sophisticated customers drive companies to create more advanced products, which may then be marketable elsewhere Factor conditions: factors of production, such as skilled labor or infrastructure, required to compete in a particular industry Natural and acquired advantages affect the factors available for production Demand conditions in the home market (where the company headquarters is located): the degree to which products developed for the home market will be in demand elsewhere. Demanding, sophisticated customers drive companies to create more advanced products, which may then be marketable elsewhere

Copyright© 2005 South-Western/Thomson Learning All rights reserved Porter's diamond (3) Firm strategy, structure and management, and rivalry Competitive objectives of different firms Management priorities: technical excellence, high rates of financial return, etc. Firm size How companies compete Related and supporting industries The U. S. textile industry was supported by companies that made textile machinery and dyes, and textile designers German chemical firms diversified into pharmaceuticals, printing inks, dyes, synthetic fibers (related industries) Firm strategy, structure and management, and rivalry Competitive objectives of different firms Management priorities: technical excellence, high rates of financial return, etc. Firm size How companies compete Related and supporting industries The U. S. textile industry was supported by companies that made textile machinery and dyes, and textile designers German chemical firms diversified into pharmaceuticals, printing inks, dyes, synthetic fibers (related industries)

Copyright© 2005 South-Western/Thomson Learning All rights reserved Porter's diamond (4) Firm strategy, structure, and rivalry Factor conditions Demand conditions Related and supporting industries