1. Global Strategies and the Multinational Corporation
OUTLINE
Implications of International Competition for Industry Analysis
Analyzing Competitive Advantage within an International Context
Applying the Framework
(1) International location of production
(2) Foreign market entry strategies
Multinational Strategies: Globalization versus National Differentiation
Strategy and Organization of the Multinational Corporation 1

2. The Internationalization Process Foreign Direct Investment
International Global
Industries Industries
--aerospace automobiles
--military hardware oil
--diamond mining semiconductors
--agriculture consumer electronics
Domestic Multinational/
Industries Multidomestic
--railroads Industries
--laundries/dry cleaning --investment banking
--hairdressing hotels
--milk consulting
HIGH
International Trade
LO W
LOW
Foreign Direct Investment
HIGH 1

3. The Automobile Goes Global: The GM Pontiac Le Mans
Design: Germany (by Opel) Brakes: France, U.S.
Sheetsteel: Japan S. Korea
Stamping of body parts: S. Korea Tires: S. Korea
Engines: 1.6 liter S. Korea Windshield: S. Korea
2.0 liter Australia Battery: S. Korea
Fuel injection: U.S. Wiring harness: S. Korea
Fuel pump: U.S. Radio: Singapore
Transmission: Canada & U.S. Assembly: S. Korea
Rear axle: U.S. Marketing &
Steering: U.S. distribution: N. America 4

4. Implications of Internationalization for Industry Analysis
INDUSTRY STRUCTURE
Lower entry barriers around national markets
Increased industry rivalry --- lower seller concentration
--- greater diversity of competitors
Increased buyer power: wider choice for dealers & consumers
COMPETITION
Increased intensity of competition
PROFITABILITY
Other things remaining equal, internationalization tends to reduce an industry’s margins & rate of return on capital 5

5. Competitive Advantage within an International Context: The Basic Framework
FIRM RESOURCES
& CAPABILITIES
-- Financial resources
-- Physical resources
-- Technology
-- Reputation
-- Functional capabilities
-- General management
capabilities
THE INDUSTRY ENVIRONMENT
Key Success Factors
COMPETITIVE ADVANTAGE
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 6

6. 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. 7

7. Revealed Comparative Advantage for a Certain Broad Product Categories
USA Canada W. Germany Italy Japan
Food, drink & tobacco
Raw materials
Oil & refined products
Chemicals
Machinery and trans
portation equipment
Other manufacturers
Note: Revealed comparative advantage for each product group
is measured as: (Exports less Imports)/ Domestic production 8

8. 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. 9

9. Porter’s National Diamond Framework
FACTOR CONDITIONS
RELATING AND
SUPPORTING
INDUSTRIES
DEMAND
CONDITIONS
STRATEGY, STRUCTURE,
AND RIVALRY
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 & innovation
4. STRATEGY, STRUCTURE, RIVALRY. E.g. domestic rivalry drives upgrading. 10

10. 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 semiconduictor 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) 11

11. International Location of Production
3 considerations:
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. 12

12. The Role of Labor Costs
Hourly Compensation for Production Workers, 1999 ($)
Germany 26.93
Japan
U.S France U.K
Spain
Korea Mexico
BUT, wages are only one element of costs:
Cost of Producing a Compact Automobile
U.S Mexico Parts & components 7,750 8,000 Labor Shipping cost ,000 Inventory TOTAL 8,770 9,180 13

13. Location and the Value Chain
Comparative advantage in textiles and apparel by stage of processing
Country Stage Index of Country Stage Index of
of Revealed of Revealed
Processing Comparative Processing Comparative
Advantage Advantage
Hong Kong
Italy
Japan
U.S.A
Note:
1 = production of fiber (natural & synthetic) 2 = production of spun yarn
3 = production of textiles 4 = production of clothing 14

14. Determining the Optimal Location
of Value Chain Activities
Where is the optimal location
of X in terms of the cost and
availability of inputs?
The optimal location
of activity X considered
independently
What government incentives/ penalties
affect the location decision?
What internal
resources and capabilities does the firm
possess in particular locations?
WHERE TO LOCATE
ACTIVITY X?
What is the firm’s business strategy
(e.g. cost vs. differentiation advantage)?
The importance of links
between activity X and
other activities of the firm
How great are the coordination
benefits from co-locating activities? 15

15. Alternative Modes of Overseas Market Entry
TRANSACTIONS DIRECT INVESTMENT
Exporting: Exporting: Exporting: Licensing Franchising Joint Wholly owned
Spot Long-term with foreign technology venture subsidiary
trans contract distributor/ and Marketing & Fully Marketing Fully
actions agent trademarks distribution integral & sales integrated
only ted only
Key issues:
Is the firm’s competitive advantages based upon firm-specific or
country-specific resources and capabilities?
Is the product tradable and what are the barriers to/ costs of trade?
Does the firm possess the full range of resources and capabilities
needed to serve the overseas market?
Can the firm directly appropriate the returns to its resources?
What transaction costs are involved? 16

16. Alliances and Joint Ventures: Management Issues
Benefits:
--Access to the resources and capabilities of another company
--Learning from one another
--Reducing time-to-market for innovations
--Risk sharing
Problems:
--Disagreements & conflict between the partners. Disputes
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? 17

17. 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? 17

18. General Motors’ Alliances with Competitors
SAAB
FIAT
50%
owned
SUZUKI
20%owned
Supplies small cars
Collaboration on
technology and
components
10%owned GM
49%owned
FUJI
ISUZU
60%
owned
20%owned; joint production
Supplies small cars/ trucks/parts
IBC Vehicles
Limited (U.K.)
40% investment
50%
owned
Supplies small cars
Makes vans in UK
New United Motor
Manufacturing
Inc. (NUMMI)
50%owned
TOYOTA
DAEWOO
Makes cars in US 18

19. Analyzing benefits/costs of a global strategy
Forces for globalization
MARKET DRIVERS
--Similarity of needs
--Appeal of foreign-ness
--Network effects
COST DRIVERS
--Scale
--Learning
--National differences in resource costs
COMPETITIVE DRIVERS
--Strategic competition (X subsidization)
Forces for localization / national differentiation
MARKET DRIVERS
--Different customer preferences
--Cultural differences
COST DRIVERS
--Transportation costs
--Transaction costs
--Economic & political risk (+ or -?)
--Speed of response
GOVERNMENT DRIVERS
--Barriers to trade & inward inv.
--Regulations

20. Multinational Strategies: Globalization vs. National Differentiation
The case for a global strategy:
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 economic
centers- N. America, Europe, East Asia.
Ted
Levitt
“Globaliz-
-ation of
Markets” Thesis
Hamel &
Prahalad
Thesis
Kenichi Ohmae’s
“Triad Power”
Thesis 20

21. 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. 21

22. 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 22

23. 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 23

24. Matching Global Strategies and Structures to Industry Conditions
Degree of globalization depends upon the benefits of global
integration versus the benefits of national differentiation.
Key issues: --How important are global scale economies?
--How different are customer requirements
between countries?
Jet engines
Telecommunications
equipment
Benefits of
global
integration
Consumer
electronics
Packaged
grocery products
Cement
Benefits of national differentiation 24

25. 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
Matsushita
NEC
Kao
Erickson
global integration
Philips
global integration
P&G
global integration
Unilever
General Electric
ITT
local responsiveness local responsiveness local responsiveness 25

26. Figure 14.8. The Transnational Corporation
Tight complex controls and coordination and a shared strategic decision process.
Heavy flows of technology, finances, people, and materials between interdependent units. 26

27. Reconciling Global Integration with National Differentiation: The Transnational Corporation
Tight complex controls and coordination and a shared strategic decision process.
Heavy flows of technology, finances, people, and materials between interdependent units.
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. 26

28. Designing the MNC: Key Learning
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?
If one dimension is dominant, how to coordination along the other dimensions?
--Maintain single line accountability
--Other dimensions of coordination can be “dotted line” relations
What’s the role of HQ?
--Control function
--Coordination function
--Exploiting scale economies in centralized provision of services
The need for internal differentiation
--By product/business
--By function
--By country
Formal & informal organization