MBA 290-Strategic Analysis
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MBA290: MBA290: ADVANCED ADVANCED STRATEGIC STRATEGIC
MANAGEMENTMANAGEMENT
Professor Stanley Han College of Business Administration
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
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
THE CONCEPT OF STRATEGY
THE CONCEPT OF STRATEGY
The Concept of Strategy and the Pursuit of Sustainable Above-Normal Profits
Domain of Strategy 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
DefinitionDefinition
• 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
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
Levels of StrategyLevels 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
Common Elements in Successful StrategyCommon Elements in Successful Strategy
Successful Strategy
Profound understanding of the competitive environment
Objective appraisal of resources
Long-term, simple and agreed uponobjectives
$
EFFECTIVE IMPLEMENTATION
Strategy as a Quest for ProfitStrategy 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
From Profit Maximization to Value MaximizationFrom 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
The World’s Most Valuable Companies: Performance Under Different Profitability Measures
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
Shareholder Value Maximization and Strategy ChoiceShareholder 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
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 FrameworkA Comprehensive Value Metrics Framework
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 PerformanceSources of Superior Performance
Sources of Competitive AdvantageSources of Competitive Advantage
COST ADVANTAGE
COST ADVANTAGE
DIFFERENTIATIONADVANTAGE
DIFFERENTIATIONADVANTAGE
COMPETITIVEADVANTAGE
COMPETITIVEADVANTAGE
Similar product
at lower cost
Price premium
from unique product
The Experience CurveThe 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 $)
Cumulative Output
1992
1994
1996
19982000
2002 2004
Examples of Experience CurvesExamples of Experience Curves
100K 200K 500K 1,000K 5 10 50 Accumulated unit production Accumulated units
(millions) (millions)
1960
Yen
15K
20K
30
K
Pric
e In
dex
50
100
20
0 3
00
70% slope
75%
Japanese clocks & watches, 1962-72 UK refrigerators, 1957-71
Drivers of Cost AdvantageDrivers of Cost Advantage
PRODUCTION TECHNIQUES
PRODUCT DESIGN
INPUT COSTS
CAPACITY UTILIZATION
RESIDUAL EFFICIENCY
ECONOMIES OF LEARNING
ECONOMIES OF SCALE
• Organizational slack; Motivation & culture; Managerial efficiency
• Ratio of fixed to variable costs• Speed of capacity adjustment
• Location advantages• Ownership of low-cost inputs
• Non-union labor• Bargaining power
• Standardizing designs & components• Design for manufacture
• Process innovation• Reengineering business processes
• Increased dexterity• Improved organizational routines
• Indivisibli\ties• Specialization and division of labor
Economies of Scale: The Long-Run Cost Curve for a Plant
Economies of Scale: The Long-Run Cost Curve for a Plant
Units of outputper period
MinimumEfficient Plant Size: the point
where most scale economies are
exhausted
Cost perunit ofoutput
Sources of scale economies:- technical input/output relationships
- indivisibilities- specialization
10 20 50 100 200 500 1,000
Annual sales volume (millions of cases)
Adv
ertis
ing
Exp
endi
ture
($
per
case
)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 DrinksScale Economies in Advertising: U.S. Soft Drinks
Applying the Value Chain to Cost Analysis: The Case of Automobile Manufacture
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
ENGNRNG
COMPONENTMFR
ASSEMBLYTESTING,QUALITY
CONTROL
GOODSINVEN-TORIES
SALES &
MKITG
DISTRI-BUTION
DEALER &CUSTOMERSUPPORT
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)
Applying the Value Chain to Cost Analysis: The Case of Automobile Manufacture (continued)
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)
Applying the Value Chain to Cost Analysis: The Case of Automobile Manufacture (continued)
The Nature of DifferentiationThe 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
Identifying Differentiation Potential: The Demand Side
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
Using the Value Chain to Identify Differentiation Potential on the Supply Side
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
Identifying Differentiation Opportunities through Linking the Value Chains of the Firm and its
Customers: Can Manufacture
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.
Sup
plies of steel
& alum
inum
Service &
technical support
Sale
s
Distribu
tion
Inventory holding
Manufactu
ring
Design
Eng
ineering
Inventory holding
Purcha
sing
Distribu
tion
Marketing
Canning
Processing
Inventory holding
Purcha
sing
CANNER CAN MAKER
1
2 4
53
INDUSTRY ANALYSIS AND POSITIONING
INDUSTRY ANALYSIS AND POSITIONING
Determining Industry Attractiveness and Identifying Strategic Opportunities
Profitability of US Industries (selected industries only)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
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
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
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.
Drawing Industry Boundaries :
Identifying the Relevant Market 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
The Spectrum of Industry StructuresThe 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
Porter’s Five Forces of Competition FrameworkPorter’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
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 CompetitionThe Structural Determinants of Competition
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%)
Applying Five-Forces AnalysisApplying 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?
Neutralizing The Five Competitive Forces
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..
The Traditional Model of Industry Life CycleThe Traditional Model of Industry Life Cycle
Time
Sa
les
volu
me
Fermentation Shakeout Maturity Decline
How Typical is the Life Cycle Pattern?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 ?
Evolution of Industry Structure over the Life CycleEvolution 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
TECHNOLOGY Rapid 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
The Driving Forces of Industry EvolutionThe Driving Forces of Industry Evolution
Customers become more knowledgeable
& experienced
Diffusion of
technology
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
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
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.
Preparing for the Future : The Role of Scenario Analysis in Adapting to Industry Change
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
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
Innovation & Renewal over the Industry Life Cycle: Retailing
?
Gary Hamel: Shaking the Foundations
OLD BRICK NEW BRICK
Top management is responsible for setting strategy
Everyone 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
An Alternate Model of Industry Life CycleAn Alternate Model of Industry Life Cycle
Time
Sa
les
volu
me
Emergence Convergence Coexistence Dominance
Established Industry
Emerging Industry
The Industry Life Cycle as an S curveThe Industry Life Cycle as an S curve
Performance
Time
Ferment
Takeoff
Maturity
Discontinuity
The S-curve Maps Major TransitionsThe S-curve Maps Major Transitions
Performance
Time
Ferment
Takeoff
Maturity
Discontinuity
RESOURCES, CAPABILITIES, AND
CORE COMPETENCES
RESOURCES, CAPABILITIES, AND
CORE COMPETENCES
THE FIRM
Goals and Values
Resources andCapabilities
Structure 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
Shifting the Focus of Strategy Analysis:From the External to the Internal Environment
Rationale for the Resource-based Approach to Strategy
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.
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 CapabilitiesCanon: Products and Core Technical Capabilities
Eastman Kodak’s Dilemma
1980’s
1990’s
Resources & Capabilities Businesses
Chemical Imaging•Organic Chemistry
•Polymer technology
•Optomechtronics
•Thin-film coatings
Brands
Global Distribution
Film
Cameras
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
STRATEGY
INDUSTRY KEYSUCCESS FACTORSCOMPETITIVE
ADVANTAGE
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
The Links between Resources, Capabilities and Competitive Advantage
Appraising ResourcesAppraising Resources
RESOURCE CHARACTERISTICS INDICATORS
Financial Borrowing capacity Debt/ Equity ratioInternal funds generation Credit rating
Tangible Net cash flow
Resources 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.
The World’s Most Valuable Brands, 2006The 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
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 Defining Organizational Capabilities
Identifying Organizational Capabilities:A Functional Classification
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, LVMH
Quality 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
The Value Chain: The McKinsey Business System
The Value Chain: The McKinsey Business System
TECHNOLOGY PRODUCT DESIGN MANUFACTURING MARKETING DISTRIBUTION SERVICE
The Porter Value Chain The Porter Value Chain
FIRM INFRASTRUCTURE
HUMAN RESOURCE MANAGEMENT
TECHNOLOGY DEVELOPMENT
PROCUREMENT
INBOUND OPERATIONS OUTBOUND MARKETING SERVICE
LOGISTICS LOGISTICS & SALES
PRIMARY ACTIVITIES
SUPPORT ACTIVITIES
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
The Rent-Earning Potential of Resources and Capabilities
ImportanceVW’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
Assessing a Companies Resources and Capabilities: The Case of VW
Rel
ativ
e S
tren
gth
Strategic Importance
Superfluous Strengths Key Strengths
Zone of Irrelevance Key Weaknesses
1
1
5 10
5
10
R1
R2
R3
R4
R5
C1
C2
C3
C4
C5C6 C7
C8
Appraising VW’s Resources and Capabilities Appraising VW’s Resources and Capabilities
(Hypothetical only)
Approaches to Capability DevelopmentApproaches 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 capabilities
6) 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)
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 capabilities
6) 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)
COMPETITIVE ADVANTAGE AND THE SCOPE OF THE FIRM
COMPETITIVE ADVANTAGE AND THE SCOPE OF THE FIRM
From Business Strategy to Corporate Strategy: The Scope of the Firm
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
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
Transactions Costs and the Scope of the Firm
Determinants of Changes in Corporate ScopeDeterminants 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
RATE OF PROFIT
> COST OF CAPITAL
INDUSTRY
ATTRACTIVENESS
COMPETITIVE
ADVANTAGE
The Basic Issues in Diversification DecisionsThe 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?
Diversification among the US Fortune 500, 1949-74Diversification 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
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
Diversification among Large UK Corporations, 1950-93
Motives for DiversificationMotives 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.
Diversification and Shareholder Value: Porter’s Three Essential Tests
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
Competitive Advantage from DiversificationCompetitive 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
Relatedness in DiversificationRelatedness 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.
Transactions Costs and The Existence of the Firm
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
The Costs and Benefits of Vertical Integration: BENEFITS
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
The Costs and Benefits of Vertical Integration: COSTS
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
When is Vertical Integration More Attractive than Outsourcing?
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 VI
Is 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 VI
Are the two stages strategically Greater the strategicsimilar? similarity ---the more
attractive is VI
How great the need for entrepreneurship Greater the need, the greater& continual upgrading of capabilities the disadvantages of VI
How uncertain is market demand? Greater the unpredictability ----the more costly is VI
Are risks compounded by VI increases risk.linkages between vertical stages
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?
Designing Vertical Relationships: Long-Term Contracts and Quasi-Vertical Integration
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?
Recent Trends in Vertical RelationshipsRecent 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.
Patterns of Internationalization 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
ion
al T
rad
e
Foreign Direct Investment
LO
W
LOW
HIG
H
HIGH
Implications of Internationalizationfor Industry 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
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
Competitive Advantage within an International Context: The Basic Framework
National Influences on Competitiveness: The Theory of
Comparative Advantage
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.
Revealed Comparative Advantage forCertain Broad Product Categories
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
Porter’s Competitive Advantage of Nations
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.
FACTOR CONDITIONS
DEMAND CONDITIONS
RELATING ANDSUPPORTINGINDUSTRIES
STRATEGY, STRUCTURE,AND RIVALRY
Porter’s National Diamond FrameworkPorter’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.
Consistency Between Strategy and National Conditions
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)
International Location of ProductionInternational 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.
The Role of Labor CostsThe Role of Labor Costs
Hourly Compensation for Production Workers, 1999 ($)Germany 26.93Japan 20.89U.S. 19.20
France 19.98U.K. 16.56
Spain 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 8,000Labor 700
40 Shipping cost 3001,000 Inventory
20 40 TOTAL8,770 9,180
Location and the Value ChainLocation 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
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
Determining the Optimal Location of Value Chain Activities
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 EntryAlternative Modes of Overseas Market Entry
Alliances and Joint Ventures: Management Issues
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?
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 General Motors’ Alliances with Competitors
Multinational Strategies: Globalization vs. National Differentiation
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:
Globalization & Global Strategy —What are they?Globalization & Global Strategy —What are they?
• GLOBALIZATION ? --Something to do with increasing interdependence between countries.
• 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)
• 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
Analyzing benefits/costs of a global strategyAnalyzing benefits/costs of a global strategy
Forces for localization / national differentiation
MARKET DRIVERS--Different languages--Different customer preferences--Cultural differences
COST DRIVERS--Transportation costs--Transaction costs --Economic & political risk --Speed of response
GOVERNMENT DRIVERS--Barriers to trade & inward inv.--Regulations
Forces for localization / national differentiation
MARKET DRIVERS--Different languages--Different customer preferences--Cultural differences
COST DRIVERS--Transportation costs--Transaction costs --Economic & political risk --Speed of response
GOVERNMENT DRIVERS--Barriers to trade & inward inv.--Regulations
Forces for globalization
MARKET 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)
Forces for globalization
MARKET 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)
Benefits of national differentiation
Benefitsof
global integration
Cement
Telecomequipment
Jet engines
Consumerelectronics
Autos
Funeralservices
Retailbanking
Investment banking
Autorepair
Restaurant chains
Steel
Online C2C auctions
Beer
Drycleaning
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
Positioning industries in terms of benefits of globalization and national differentiation
The Evolution of Multinational Strategies and Structures: (1) 1900-1939—Era of the Europeans
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.
The Evolution of Multinational Strategies and Structures: (2) 1945-1970—U.S. Dominance
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
The Evolution of Multinational Strategies and Structures:
(3) 1970s and 1980s—The Japanese Challenge
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
Marketing Global Strategies and Situations to Industry Conditions: Firm Success in Different Industries
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
glo
ba
l in
teg
rati
on
glo
ba
l in
teg
rati
on
glo
ba
l in
teg
rati
on
Matsushita
Philips
General Electric
Kao
P&GUnilever
NEC
Erickson
ITT
Reconciling Global Integration with National Differentiation: The Transnational Corporation
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.
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 LearningDesigning the MNC: Key Learning