Strategic Analysis - Sacramento State

Strategic Analysis - Sacramento State

MBA290: ADVANCED STRATEGIC MANAGEMENT Professor Stanley Han College of Business Administration [email protected] 1 Course Overview: Objectives To acquire familiarity with the principal concepts, frameworks and techniques of strategic management. To gain expertise in applying these concepts, frameworks and techniques in order to understand the reasons for good or bad performance by an enterprise, generate strategy options for an enterprise, assess available options under conditions of imperfect knowledge, select the most appropriate strategy, recommend the best means of implementing the chosen strategy. 2 Course Overview: Objectives (contd) To integrate the knowledge gained in previous courses. To develop your capacity as a general manager in terms of an appreciation of the work of the general manager, the ability to view business problems from a general management perspective, the ability to develop original and innovative approaches to strategic problems,

developing business judgment. 3 THE THE CONCEPT CONCEPT OF OF STRATEGY STRATEGY The Concept of Strategy and the Pursuit of Sustainable Above-Normal Profits Domain Domain of of Strategy 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 longterm profits in the face of irreducible uncertainty and aggressive competition strategy is the linkage between a business and its current and future environment Definition Definition 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 CORPORATE STRATEGY BUSINESS STRATEGY

FUNCTIONAL STRATEGIES CORPORATE HEAD OFFICE Division A Division B R&D R&D Personnel Personnel Finance Finance Production Production Marketing/Sales Marketing/Sales Levels Levels of of Strategy 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 Common Elements Elements in in Successful Successful Strategy Strategy Successful Strategy EFFECTIVE IMPLEMENTATION Long-term, simple and agreed upon objectives Profound understanding of the competitive environment Objective appraisal of resources $ Strategy Strategy as as aa Quest Quest for for Profit 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 interest 2) 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 From Profit Profit Maximization Maximization to to Value Value Maximization 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 Where: V Ct

market value of the firm. free cash flow in time t r weighted average cost of capital Ct (1 + r)t The TheWorlds WorldsMost MostValuable ValuableCompanies: Companies: Performance PerformanceUnder Under Different DifferentProfitability ProfitabilityMeasures Measures COMPANY MARKET CAP. ($BN.) NET INCOME ($BN) RETURN ON SALES (%) RETURN ON EQUITY (%)

RETURN ON ASSETS (%) RETURN TO SHAREHOLDERS (%) 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 ShareholderValue ValueMaximization Maximizationand andStrategy StrategyChoice 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 assetsmaximize after-tax rate of return b) On new investmentseek rate of return > cost of capital Utilize qualitative strategy analysis to evaluate future profit potential AAComprehensive ComprehensiveValue Value Metrics MetricsFramework Framework Shareholder Value Measures: Market value of the firm Market value added (MVA) Return to shareholders Intrinsic Value Measures: Discounted cash flows Real option values Financial Indicators Measures: Return on Capital Growth (of revenues & operating profits Economic profit (EVA)

Value Drivers Sources: Market share Scale economies Innovation Brands Sources Sources of of Superior Superior Performance Performance Above Normal Profits (in Excess of the Competitive Level) Avoid Competitors Attractive Industry Attractive Strategic Group Attractive Niche Entry Barriers Mobility Barriers Isolating Mechanisms Be Better Than Competition Cost Advantage

Differentiation Advantage Sources Sources of of Competitive CompetitiveAdvantage Advantage COMPETITIVE COMPETITIVE ADVANTAGE ADVANTAGE ct u d ro p r st la o i c m r Si we o l at Pri ce fro pre m mi un um

iqu ep rod uc t COST COST ADVANTAGE ADVANTAGE DIFFERENTIATION DIFFERENTIATION ADVANTAGE ADVANTAGE The The Experience Experience Curve Curve The Law of Experience 1992 1994 Cost per unit of output (in real $) The unit cost value added to a standard product declines by a constant % (typically 20-30%) each time cumulative output doubles. 1996 1998 2000 Cumulative Output 2002

2004 Examples Examples of of Experience Experience Curves Curves 75% 100K 200K 500K 1,000K Accumulated unit production (millions) UK refrigerators, 1957-71 Price Index 50 100 200 300 1960 Yen 15K 20K 30K Japanese clocks & watches, 1962-72 70% slope 5 10 50 Accumulated units (millions) Drivers Drivers of of Cost Cost Advantage

Advantage ECONOMIES OF SCALE ECONOMIES OF LEARNING Indivisibli\ties Specialization and division of labor Increased dexterity Improved organizational routines PRODUCTION TECHNIQUES Process innovation Reengineering business processes PRODUCT DESIGN Standardizing designs & components Design for manufacture INPUT COSTS Location advantages Ownership of low-cost inputs Non-union labor Bargaining power CAPACITY UTILIZATION Ratio of fixed to variable costs Speed of capacity adjustment RESIDUAL EFFICIENCY Organizational slack; Motivation & culture; Managerial efficiency Economies Economies of of Scale: Scale: The The Long-Run

Long-Run Cost Cost Curve Curve for for aa Plant Plant Sources of scale economies: - technical input/output relationships - indivisibilities - specialization Cost per unit of output Minimum Efficient Plant Size: the point where most scale economies are exhausted Units of output per period Scale ScaleEconomies Economiesin inAdvertising: Advertising:U.S. U.S. Soft SoftDrinks Drinks Advertising Expenditure ($ per case) 0.02 0.05 0.10 0.15 0.20 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. Schweppes SF Dr. Pepper Diet 7-Up Tab Diet Pepsi Diet Rite Fresca Seven Up Dr. Pepper Sprite Pepsi 10 20 50 100 200 Annual sales volume (millions of cases) 500 Coke 1,000 Applying Applyingthe theValue ValueChain Chainto toCost CostAnalysis: Analysis:

The TheCase Case of ofAutomobile Automobile Manufacture Manufacture STAGE 1. IDENTIFY THE PRINCIPLE ACTIVITIES PURCHASING PARTS INVENTORIES R&D TESTING, COMPONENT ASSEMBLY DESIGN QUALITY MFR ENGNRNG CONTROL GOODS INVENTORIES SALES DISTRI- DEALER & & BUTION CUSTOMER MKITG SUPPORT STAGE 2. ALLOCATE TOTAL COSTS Applying Applyingthe theValue ValueChain Chainto toCost CostAnalysis:

Analysis:The TheCase Case of ofAutomobile Automobile Manufacture Manufacture(continued) (continued) STAGE 3. IDENTIFY COST DRIVERS defects PURCHASING PARTS INVENTORIES --Plant scale for each component -- Process technology -- Plant location -- Run length -- Level of quality targets -- Frequency of defects -- No. of dealers -- Sales / dealer -- Level of dealer support -- Frequency of -- Capacity utilization R&D COMPONENT ASSEMBLY TESTING, DESIGN QUALITY MFR ENGNRNG

CONTROL Prices paid --Size of commitment depend on: --Productivity of -- Order size R&D/design --Purchases per --No. & frequency of new supplier models -- Bargaining power -- Supplier location under warranty GOODS INVENTORIES -- Plant scale -- Flexibility of production -- No. of models per plant -- Degree of automation -- Sales / model -- Wage levels -- Capacity utilization SALES & MKITG DISTRI- DEALER & BUTION CUSTOMER SUPPORT --Cyclicality & predictability of sales --Customers willingness to wait Applying

Applyingthe theValue Value Chain Chain to to Cost CostAnalysis: Analysis:The TheCase Case of ofAutomobile Automobile Manufacture Manufacture(continued) (continued) STAGE 4. IDENTIFY LINKAGES Consolidation of orders to increase discounts, increases inventories PRCHSNG PARTS INVNTRS R&D DESIGN Designing different models around common components and platforms reduces manufacturing costs COMPONENT MFR Higher quality parts and materials reduces costs of defects at later stages ASSEMBLY TESTING GOODS QUALITY INV

SALES DSTRBTN DLR MKTG CTMR Higher quality in manufacturing reduces warranty costs STAGE 5. RECCOMENDATIONS FOR COST REDUCTION The The Nature Nature of of Differentiation Differentiation DEFINITION: Providing something unique that is valuable to the buyer beyond simply offering a low price. (M. Porter) THE KEY IS TO CREATE VALUE FOR THE CUSTOMER TANGIBLE DIFFERENTATION Observable product characteristics: size, color, materials, etc. performance packaging complementary services INTANGIBLE DIFFERENTATION Unobservable and subjective characteristics that appeal to customers image, status, identity, and desire for exclusivity TOTAL CUSTOMER RESPONSIVENESS Differentiation not just about the product, it embraces the whole relationship between the supplier and the customer. Identifying Identifying Differentiation Differentiation Potential: Potential: The

The Demand Demand Side Side THE PRODUCT THE CUSTOMER What needs does it satisfy? By what criteria do they choose? What are key attributes? Relate patterns of customer preferences to product attributes What price premiums do product attributes command? What motivates them? 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 Using the the Value Value Chain Chain to to Identify Identify Differentiation Differentiation Potential Potential on on the the Supply Supply Side Side MIS that supports fast response capabilities Training to support customer service excellence Unique product features. Fast new product development FIRM INFRASTRUCTURE HUMAN RESOURCE MANAGEMENT TECHNOLOGY DEVELOPMENT INBOUND OPERATIONS

LOGISTICS Quality of components & materials Defect free products. Wide variety OUTBOUND MARKETING LOGISTICS & SALES Fast delivery. Efficient order processing Building brand reputation SERVICE Customer technical support. Consumer credit. Availability of spares Identifying IdentifyingDifferentiation DifferentiationOpportunities Opportunitiesthrough through Linking Linkingthe theValue ValueChains

Chainsof ofthe theFirm Firmand andits its Customers: Customers: Can CanManufacture Manufacture 1 5 2 3 4 Distribution Marketing Canning Processing Inventory holding Purchasing Service & technical support Sales Distribution Inventory holding Manufacturing

Design Engineering Inventory holding Purchasing Supplies of steel & aluminum CAN MAKER CANNER 1. Distinctive can design can assist canners marketing activities. 2. High manufacturing tolerances can avoid breakdowns in customers 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 canners efficiency of plant utilization. INDUSTRY INDUSTRY ANALYSIS ANALYSIS AND AND POSITIONING POSITIONING Determining Industry Attractiveness and Identifying Strategic Opportunities Profitability Profitabilityof ofUS USIndustries Industries (selected (selectedindustries industriesonly) only) Median return on equity (%), 1999-2005 Household & Personal Products Pharmaceuticals

Tobacco Food Consumer Products Securities Diversified financials Beverages Mining & crude oil Petroleum Refining Medical Products & Equipment Commercial Banks 15.5 Scientific & Photographic Equipt. Apparel Computer Software Publishing, Printing Health Care Electronics, Electrical Equipment Specialty Retailers Computers, Office Equipment 22.7 Gas & Electric Utilities 10.4 22.3 Food and Drug Stores 10.0 21.6 Motor Vehicles & Parts 9.8 19.6 Hotels, Casinos, Resorts 9.7 18.9 Railroads 9.0 18.3 Insurance: Life and Health 8.6 18.8 Packaging & Containers 8.6 17.8 Insurance: Property & Casualty 8.3

17.3 Building Materials, Glass 8.3 17.2 Metals 8.0 Food Production 7.2 15.0 Forest and Paper Products 6.6 14.4 Semiconductors & 13.9 Electronic Components 5.9 13.5 Telecommunications 4.6 13.1 Communications Equipment 1.2 13.0 Entertainment 0.2 13.0 Airlines (22.0) 11.7 The Profitability of Global Industries: Return on Invested Capital, 1963-2003 Utilities 6.2 Telecom services 6.5 Transporation 6.9

Energy 7.7 Materials 8.4 OVERALL AVERAGE 9 Retailing 9 Consumer durables and apparel 9.5 Food retailing 9.6 Capital goods 9.9 Automobiles and components 9.9 Technology hardware and equipment 10.3 Hotels, restaurants, leisure 10.3 Food, beverages, tobacco

11 Healthcare equipmernt and services 11.3 Semiconductors 11.9 Commercial services 12.8 Media 14.7 Computer software and services 15 Household and personal products 15.2 Pharmaceuticals 18.4 0 5 10 15 Average ROIC 1963-2003 (%) 20

From From Environmental EnvironmentalAnalysis Analysis to to Industry IndustryAnalysis Analysis The national/ international economy Technology Government & Politics The natural environment THE INDUSTRY ENVIRONMENT Suppliers Competitors Customers Demographic structure Social structure 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 Drawing Industry Industry Boundaries Boundaries :: Identifying Identifying the

the Relevant Relevant Market 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 The Spectrum Spectrum of of Industry Industry Structures Structures Concentration Perfect Competition Oligopoly Duopoly Monopoly Many firms

A few firms Two firms One firm Entry and Exit No/Low barriers Barriers Significant barriers Product Differentiation Homogeneous Product Potential for product differentiation Perfect Information flow Imperfect availability of information Information High barriers Porters Porters Five Five Forces Forces of of Competition Competition Framework Framework SUPPLIERS Bargaining power of suppliers INDUSTRY COMPETITORS POTENTIAL Threat of

ENTRANTS new entrants Threat of Rivalry among existing firms SUBSTITUTES substitutes Bargaining power of buyers BUYERS The The Structural Structural Determinants Determinants of of Competition Competition SUPPLIER POWER Supplier concentration Relative bargaining power THREAT OF ENTRY Capital requirements Economies of scale Absolute cost advantage Product differentiation Access to distribution channels Legal/ regulatory barriers Retaliation INDUSTRY RIVALRY Concentration Diversity of competitors Product differentiation

Excess capacity & exit barriers Cost conditions BUYER POWER Buyers price sensitivity Relative bargaining power SUBSTITUTE COMPETITION Buyers propensity to substitute Relative prices & performance of substitutes SUPPLIER POWER LOW THREAT OF ENTRY LOW economies of scale capital requirements for R&D and clinical trials product differentiation control of distribution channels patent protection INDUSTRY COMPETITIVENESS LOW high concentration product differentiation patent protection steady demand growth no cyclical fluctuations of demand BUYER POWER

LOW Physician as buyer: Not price sensitive No bargaining power. (Changing with managed care.) DRUG INDUSTRY (ROE=22%) THREAT OF SUBSTITUTES LOW No substitutes. (Changing as managed care encourages generics.) Applying Applying Five-Forces Five-ForcesAnalysis 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 Neutralizing The The Five Five Competitive Competitive Forces Forces Force Entry

Method for Neutralizing Force Erecting barriers (isolating mechanisms) create & exploit economies of scale, aggressive deterrence, design in switching costs, etc. Rivalry Compete on nonprice dimensions: cost leadership, differentiation, cooperation, etc. Substitutes Improve attractiveness compared to substitutes: better service, more features, etc.. Reduce buyer uniqueness: forward Buyers integrate, differentiate product, new customers, etc.. Reduce supplier uniqueness: backward integrate, obtain minority position, second source, etc.. Suppliers The Traditional Model of Industry Life Cycle Shakeout Maturity Sales volume Fermentation Time Decline How How Typical Typical is is the the Life Life Cycle Cycle Pattern?

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 B&W Color Portable HDTV ? 1900 50 90 07 MOTORCYCLES 1930 50 70 TVs 90 07 Life cycle model can help us to anticipate industry evolutionbut dangerous to assume any common, predetermined pattern of industry development Evolution Evolutionof of Industry Industry Structure Structure over overthe theLife LifeCycle

Cycle INTRODUCTION Affluent buyers GROWTH Increasing penetration TECHNOLOGY Rapid product innovation Product and Incremental process innovation innovation PRODUCTS Wide variety, Standardization rapid design change MANUFACTURING Short-runs, skill Capacity shortage, Deskilling intensive mass-production DEMAND TRADE MATURITY Mass market replacement demand Commoditization DECLINE

Knowledgeable, customers, residual segments Well-diffused technology Continued commoditization Overcapacity -----Production shifts from advanced to developing countries----- COMPETITION Technology- Entry & exit KSFs Product innovation Process technology. Design for Shakeout & consolidation Cost efficiency Price wars, exit Overhead reduction, rationalization, low cost sourcing The The Driving Driving Forces Forces of of Industry Industry Evolution Evolution BASIC CONDITIONS Customers become more knowledgeable & experienced

INDUSTRY STRUCTURE Customers become more price conscious Products become more standardized Diffusion of technology Production becomes less R&D & skill-intensive Production shifts to low-wage countries Excess capacity increases Demand growth slows as market saturation approaches COMPETITION Distribution channels consolidate Quest for new sources of differentiation Price competition intensifies Bargaining power of distributors increases

Changes Changesin inthe thePopulation Population of of Firms Firmsover overthe the Industry IndustryLife LifeCycle: Cycle:US USAuto AutoIndustry Industry1885-1961 1885-1961 250 200 150 No. of firms 100 50 0 1895 1905 1915 1925 1935 1945 1955 rce: S. Klepper, Industrial & Corporate Change, August 2002, p. 654. Preparing Preparing for for the the Future Future :: The The Role Role of of Scenario Scenario Analysis Analysis in in Adapting

Adapting to to Industry Industry Change 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 Innovation Innovation &&Renewal Renewal over overthe the Industry Industry Life LifeCycle: Cycle: Retailing Retailing Mail order, catalogue retailing e.g. Sears Roebuck 1880s Chain Stores e.g. A&P 1920s

Warehouse Internet Clubs Retailers e.g. Price Club e.g. Amazon; Sams Club Expedia Discount Category Stores Killers e.g. K-Mart e.g. Toys-R-Us, Wal-Mart Home Depot ? 1960s 2000 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 faster is the way to win Rule-busting innovation is the way to win IT creates competitive advantage

Unconventional business concepts create competitive advantage Being revolutionary is high risk More of the same is high risk We can merge our way to competitiveness Theres 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 youre 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 cant innovate Big companies can become gray-haired revolutionaries An Alternate Model of Industry Life Cycle Convergence

Coexistence Sales volume Emergence Dominance Established Industry Emerging Industry Time The Industry Life Cycle as an S curve Performance Maturity Discontinuity Takeoff Ferment Time The S-curve Maps Major Transitions Maturity Performance Discontinuity Takeoff Ferment Time RESOURCES, RESOURCES, CAPABILITIES, CAPABILITIES, AND AND CORE CORE COMPETENCES COMPETENCES

Shifting Shifting the the Focus Focus of of Strategy Strategy Analysis: Analysis: From From the the External External to to the the Internal Internal Environment Environment THE FIRM THE INDUSTRY ENVIRONMENT Goals and Values Resources and Capabilities Structure and Systems STRATEGY STRATEGY The Firm-Strategy Interface Competitors Customers Suppliers The Environment-Strategy

Interface Rationale Rationale for for the the Resource-based Resource-based Approach Approach to to Strategy 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. Canon: Canon: Products Products and and Core Core Technical Technical Capabilities Capabilities Precision Mechanics Fine Optics 35mm SLR camera Plain-paper copier Compact fashion camera Color copier EOS autofocus camera Color laser copier Digital camera Basic fax Laser copier Video still camera Laser fax

Mask aligners Inkjet printer Excimer laser aligners Laser printer Color video printer Stepper aligners Calculator Notebook computer MicroElectronics Eastman Kodaks Dilemma Resources & Capabilities 1980s Chemical Imaging Organic Chemistry Polymer technology Optomechtronics Thin-film coatings Brands Businesses Film Cameras Fine Chemicals Pharmaceuticals Diagnostics Global Distribution 1990s DIVESTS: Eastman Chemical, Sterling Winthrop, Diagnostics Need to build digital imaging capability Digital Imaging Products (e.g. Photo CD System; Advantix cameras & film

The The Links Links between between Resources, Resources, Capabilities Capabilities and and Competitive Competitive Advantage Advantage COMPETITIVE ADVANTAGE INDUSTRY KEY SUCCESS FACTORS STRATEGY ORGANIZATIONAL CAPABILITIES RESOURCES TANGIBLE INTANGIBLE Financial Physical Technology Reputation Culture HUMAN Skills/know-how Capacity for communication & collaboration Motivation Appraising Appraising Resources

Resources RESOURCE Tangible Resources CHARACTERISTICS Financial Borrowing capacity Internal funds generation Physical Plant and equipment: size, location, technology flexibility. Land and buildings. Raw materials. Debt/ Equity ratio Credit rating Net cash flow Market value of fixed assets. Scale of plants Alternative uses for fixed assets Technology Patents, copyrights, know how R&D facilities. Technical and scientific employees No. of patents owned Royalty income R&D expenditure R&D staff Reputation

Brands. Customer loyalty. Company reputation (with suppliers, customers, government) Brand equity Customer retention Supplier loyalty Training, experience, adaptability, commitment and loyalty of employees Employee qualifications, pay rates, turnover. Intangible Resources Human Resources INDICATORS The The Worlds Worlds Most Most Valuable Valuable Brands, Brands, 2006 2006 Rank Company value value ($bn.) Brand 1 2 3 4 5 6

7 8 9 10 67.5 59.9 13 14 35.6 26.5 26.4 Coca-Cola Microsoft IBM 53.4 GE 47.0 Intel Nokia Disney McDonalds Toyota Marlboro Rank Company Brand ($bn.) 24.8 11 Mercedes Benz 20.0 12 Citi 20.0 Hewlett-Packard 18.9 American Express 18.6 15 Gillette 17.5

16 BMW 17.1 17 Cisco 16.6 26.0 18 Louis Vuitton 19 Honda 15.8 21.2 20 Samsung http://www.interbrand.com/best_brands_2007.asp 16.1 15.0 Source: Interbrand Defining Defining Organizational Organizational Capabilities Capabilities Organizational Capabilities = firms 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 firms strategy and performance. (Hamel and Prahalad) Identifying Identifying Organizational Organizational Capabilities: Capabilities: A AFunctional Functional Classification Classification FUNCTION Corporate Management

CAPABILITY Financial management Strategic control Coordinating business units Managing acquisitions EXEMPLARS ExxonMobil, GE IBM, Samsung BP, P&G Citigroup, Cisco MIS Speed and responsiveness through rapid information transfer Wal-Mart, Dell Capital One R&D Research capability Development of innovative new products Merck, IBM Apple, 3M Manufacturing Efficient volume manufacturing Continuous Improvement Flexibility Briggs & Stratton Nucor, Harley-D Zara, Four Seasons Design Design Capability

Apple, Nokia Marketing Brand Management Quality reputation Responsiveness to market trends P&G, LVMH Johnson & Johnson MTV, LOreal Sales, Distribution & Service Sales Responsiveness Efficiency and speed of distribution Customer Service PepsiCo, Pfizer LL Bean, Dell Singapore Airlines Caterpillar The The Value Value Chain: Chain: The The McKinsey McKinsey Business Business System System TECHNOLOGY PRODUCT DESIGN MANUFACTURING MARKETING

DISTRIBUTION SERVICE The The Porter Porter Value Value Chain Chain FIRM INFRASTRUCTURE SUPPORT ACTIVITIES HUMAN RESOURCE MANAGEMENT TECHNOLOGY DEVELOPMENT PROCUREMENT INBOUND LOGISTICS OPERATIONS OUTBOUND LOGISTICS MARKETING SERVICE & SALES PRIMARY ACTIVITIES The The Rent-Earning Rent-Earning Potential Potential of of Resources Resources and and Capabilities Capabilities THE EXTENT OF THE

COMPETITIVE ADVANTAGE ESTABLISHED THE PROFIT EARNING POTENTIAL OF A RESOURCE OR CAPABILITY Scarcity Relevance Durability SUSTAINABILITY OF THE COMPETITIVE ADVANTAGE Transferability Replicability Property rights APPROPRIABILITY Relative bargaining power Embeddedness Assessing AssessingaaCompanies CompaniesResources Resources and andCapabilities: Capabilities:The TheCase Case of ofVW VW Importan ce VWs Relative

Strength R1. Finance 6 4 C1. Product development 9 4 R2. Technology 7 5 C2. Purchasing 7 5 R3. Plant and equipment 8 8 C3. Engineering 7 9 C4. Manufacturing

8 7 R4. Location 7 C5. Financial management 6 3 C6. R&D 6 4 C7. Marketing & sales 9 4 C8. Government relations 4 8 RESOURCES R5. Distribution 8 4

5 CAPABILITIES Importance VWs Relative Strength Appraising AppraisingVWs VWsResources Resourcesand andCapabilities Capabilities (Hypothetical only) 10 Key Strengths Superfluous Strengths Relative Strength C3 R3 C4 C8 C2 R2 5 R1 C6 Zone of Irrelevance 1 1

R5 R4 C5 C1 C7 Key Weaknesses 5 Strategic Importance 10 Approaches Approachesto toCapability CapabilityDevelopment Development 1) 1) Acquire Acquireand anddevelop developthe theunderlying underlyingresources. resources.Especially Especially human humanresources resources --Externally --Externally(hiring) (hiring) --Internally --Internallythrough throughdeveloping developingindividual individualskills skills

2) 2) Acquire/access Acquire/accesscapabilities capabilitiesexternally externallythrough throughacquisition acquisitionor or alliance alliance 3) 3) Greenfield Greenfielddevelopment developmentof ofcapabilities capabilitiesin inseparate separate organizational organizationalunit unit(IBM (IBM&&the thePC, PC,Xerox Xerox&&PARC, PARC,GM GM&&Saturn) Saturn) 4) 4) Build Buildteam-based team-basedcapabilities capabilitiesthrough throughtraining trainingand andteam team development development(i.e. (i.e.develop developorganizational organizationalroutines)

routines) 5) 5) 6) 6) Align Alignstructure structure&&systems systemswith withrequired requiredcapabilities capabilities Change Changemanagement managementto totransform transformvalues valuesand andbehaviors behaviors(GE, (GE, 7) 7) 8) 8) Product Productsequencing sequencing(Intel (Intel, ,Sony, Sony,Hyundai) Hyundai) Knowledge KnowledgeManagement Management(systematic (systematicapproaches approachesto toacquiring, acquiring,

BP) BP) storing, storing,replicating, replicating,and andaccessing accessingknowledge) knowledge) COMPETITIVE COMPETITIVE ADVANTAGE ADVANTAGE AND AND THE THE SCOPE SCOPE OF OF THE THE FIRM FIRM From From Business Business Strategy Strategy to to Corporate Corporate Strategy: Strategy: The The Scope Scope of of the the Firm 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 Transactions Transactions Costs Costs and and the the Scope Scope of of the the Firm Firm Vertical Scope [A] Single Integrated Firm Product Scope Geographical Scope V1 V2 V3 [B] Several V1 Specialized V2 Firms linked by Markets V3 P1 P1 P2 P2

P3 P3 C1 C1 C2 C2 C3 C3 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 transaction costs of markets? Determinants Determinants of of Changes Changes in in Corporate Corporate Scope Scope 1800 1980 Expanding scale and scope of industrial corporations due to declining administrative costs of firms: Advances in transportation, information and communication technologies Advances in managementaccounting systems, decision sciences, financial techniques, organizational innovations, scientific management 1980 1995 Shrinking size and scope of biggest industrial corporations. Increasingly turbulent external environment

Increased no. of managerial decisions. Need for fast responses to external change Admin. costs of firms rise relative to transaction 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 The The Basic Basic Issues Issues in in Diversification Diversification Decisions Decisions Superior profit derives from two sources: INDUSTRY ATTRACTIVENESS RATE OF PROFIT > COST OF CAPITAL COMPETITIVE ADVANTAGE Diversification decisions involve these same two issues: How attractive is the sector to be entered? Can the firm achieve a competitive advantage? Diversification Diversificationamong amongthe theUS US Fortune Fortune500, 500,1949-74

1949-74 70.2 29.8 1949 63.5 53.7 36.5 1954 53.9 46.3 1959 39.9 46.1 1964 Percentage of Specialized Companies (single-business, vertically-integrated and dominant-business) Percentage of Diversified Companies (related-business and unrelated business) 37.0 60.1 1969 63.0 1974 Note: During the 1980s and 1990s the trend reversed as large companies refocused upon their core businesses Diversification Diversificationamong

amongLarge LargeUK UK Corporations, Corporations,1950-93 1950-93 70 60 Single business 50 Dominant business Related business 40 30 20 Unrelated business 10 0 1950 1960 1970 1983 1993 Motives Motives for for Diversification 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 SPREADING --Diversification reduces variance of profit flows --But, doesnt create value for shareholdersthey 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 Diversification and and Shareholder Shareholder Value: Value: Porters Porters Three Three Essential Essential Tests 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 CompetitiveAdvantage Advantage from

from Diversification Diversification ECONOMIES OF SCOPE 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 ECONOMIES diversification ----must be supported by transaction costs FROM Diversification firm can avoid transaction costs by INTERNALIZING operating internal capital and labor markets TRANSACTIONS Key advantage of diversified firm over external markets--superior access to information Relatedness Relatedness in in Diversification 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 Transactions Costs Costs and and The The Existence Existence of of the the Firm 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 selfemployed builders, plumbers, electricians, painters. Key issue -- transaction costs of the market vs. administrative costs of firms. Where transaction costs highfirm is more efficient means of organization Note: transaction costs comprise costs of search and contract negotiation and enforcement The The Costs Costs and and Benefits Benefits of of Vertical Vertical Integration: Integration: BENEFITS BENEFITS Technical economies from integrating processes e.g. iron and steel production but doesnt 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 The Costs Costs and and Benefits Benefits of of Vertical Vertical Integration: Integration: COSTS 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 Whenis isVertical Vertical Integration IntegrationMore MoreAttractive Attractive than than Outsourcing? Outsourcing? How many firms are available The fewer the companies to undertake the activities? the more attractive is VI Is transaction-specific investment

needed? If yes, VI more attractive Does limited information permit cheating? VI can limit opportunism Are taxes or regulation imposed on transactions? VI can avoid them Do the different stages have similar optimal scales of operation? Greater the similarity, the more attractive is VI Are the two stages strategically similar? similarity ---the more Greater the strategic 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? ----the more costly is VI Greater the unpredictability Are risks compounded by VI increases risk. linkages between vertical stages The value chain for steel cans Iron ore mining

Steel production Steel strip production Can making VERTICAL INTEGRATION, AND MARKET CONTRACTS VERTICAL INTEGRATION MARKET CONTRACTS Canning of food, drink, oil, etc. MARKET CONTRACTS What factors explain why some stages are vertically integrated, while others are linked by market transactions? Designing Designing Vertical Vertical Relationships: Relationships: Long-Term Long-Term Contracts Contracts and and Quasi-Vertical Quasi-Vertical Integration 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 Recent Trends Trends in in Vertical Vertical Relationships 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. LO W International Trade HIGH Patterns Patterns of of Internationalization Internationalization Trading Industries Global Industries

--aerospace --military hardware --diamond mining --agriculture --automobiles --oil --semiconductors --consumer electronics Domestic Industries Multidomestic Industries --railroads --laundries/dry cleaning --hairdressing --milk --retail banking --hotels --consulting LOW Foreign Direct Investment HIGH Implications Implications of of Internationalization Internationalization for for Industry IndustryAnalysis 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 industrys margins & rate of return on capital Competitive CompetitiveAdvantage Advantagewithin withinan anInternational International Context: Context:The The Basic Basic Framework 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 National National Influences Influences on on Competitiveness: Competitiveness: The The Theory Theory of of Comparative Comparative Advantage 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 Revealed Comparative ComparativeAdvantage Advantage for for Certain Certain Broad Broad Product

Product Categories 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 -.68 -.07 .01 .29 .40 portation equipment Other manufacturers

Note: Revealed comparative advantage for each product group is measured as: (Exports less Imports)/ Domestic production Porters Porters Competitive Competitive Advantage Advantage of of Nations Nations Extends and adapts traditional theory of comparative advantage to take account of three factors: International competitive advantage is about companies not countriesthe 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. Porters Porters National National Diamond Diamond Framework Framework FACTOR CONDITIONS RELATING AND SUPPORTING INDUSTRIES DEMAND CONDITIONS STRATEGY, STRUCTURE, AND RIVALRY 1.

2. 3. 4. FACTOR CONDITIONSHome grown resources/capabilities more important than natural endowments. RELATED AND SUPPORTING INDUSTRIESKey role of industry clusters DEMAND CONDITIONSDiscerning domestic customers drive quality & innovation STRATEGY, STRUCTURE, RIVALRY. E.g. domestic rivalry drives upgrading. Consistency Consistency Between Between Strategy Strategy and and National National Conditions 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 International Location Location of of Production 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 companys competitive advantage based upon firmspecific 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 The Role Role of of Labor Labor Costs Costs Hourly Compensation for Production Workers, 1999 ($) Germany 26.93 Japan 20.89 U.S. 19.20 France 19.98 U.K. 16.56 Spain 12.11 Korea 6.75 Mexico 2.12 BUT, wages are only one element of costs: Cost of Producing a Compact Automobile U.S. Parts & components 7,750 Labor 700 Shipping cost 300 Inventory 20 TOTAL 8,770

Mexico 8,000 40 1,000 40 9,180 Location Location and and the the Value Value Chain Chain Comparative advantage in textiles and apparel by stage of processing Country Stage of Processing Index of Revealed Comparative Advantage Country Stage Index of of Revealed Processing Comparative Advantage Hong Kong 1 2 3 4

-0.96 -0.81 -0.41 +0.75 Japan 1 2 3 4 -0.36 +0.48 +0.48 -0.48 Italy 1 2 3 4 -0.54 +0.18 +0.14 +0.72 U.S.A. 1 2 3 4 +0.96 +0.64 +0.22 -0.73 Note:

1 = production of fiber (natural & synthetic) 3 = production of textiles 2 = production of spun yarn 4 = production of clothing Determining Determiningthe theOptimal Optimal Location Location of of Value ValueChain ChainActivities Activities The optimal location of activity X considered independently WHERE TO LOCATE ACTIVITY X? Where is the optimal location of X in terms of the cost and availability of inputs? What government incentives/ penalties affect the location decision? What internal resources and capabilities does the firm possess in particular locations? What is the firms 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?

Alternative Alternative Modes Modes of of Overseas Overseas Market Market Entry Entry DIRECT INVESTMENT TRANSACTIONS Exporting Spot sales Foreign agent / distributor Longterm contract Low Licensing Licensing patents & other IP Joint venture Marketing & Distribution only Fully integrated Franchising Resource commitment

Wholly owned subsidiary Marketing& Distribution only Fully integrated High Alliances Alliances and and Joint Joint Ventures: Ventures: Management Management Issues 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 partners resources and capabilities can more easily be captured by the other? Absorptive capacity of the company-- which partner is the

more receptive learner? General GeneralMotors Motors Alliances Allianceswith withCompetitors Competitors SAAB AVTOVAZ SUZUKI ISUZU Ru ssi an 10% own ed. JV to p Copr 50% owned r od odu uc e ction duction o r

p o ned. C 49%ow s GM IBC Vehicles Ltd. (U.K.) 50% owned JV 60% owned (Makes vans in UK) TOYOTA 20% owned; join 50% owned New United Motor Manufacturing Inc. (NUMMI) (Makes cars in US) to p rod u FIAT t production

ce c ar s in Ch l& ca n ni t i o ch ra t e bo d; lla n e co ow on % cti . 9 du 50 pro 40% investment c ar -5). gy 0 0 (20 chnolo d e own n on teents % 0 2 atio mpon r o co la b Col and FUJI

ina DAEWOO SAIC Multinational Multinational Strategies: Strategies: Globalization Globalization vs. vs. National National Differentiation Differentiation The case for a global strategy: National preferences in declineworld becoming a single, if segmented, market Accessing global scale economiesin purchasing, manufacturing, product development, marketing. Strategic strength from global leverageability to crosssubsidize a national subsidiary with cash flows from other national subsidiaries Need to access market trends and technological developments in each of the worlds major economic centers- N. America, Europe, East Asia. Ted Levitt Globaliz-ation of Markets Thesis

Hamel & Prahalad Thesis Kenichi Ohmaes Triad Power Thesis Globalization Globalization&&Global GlobalStrategy StrategyWhat Whatare arethey? they? GLOBALIZATION GLOBALIZATION?? --Something --Somethingto todo dowith withincreasing increasinginterdependence interdependence between betweencountries. countries. GLOBAL GLOBALSTRATEGY STRATEGY --At --Atsimplest simplestlevel: level: Treating Treatingthe theworld

worldas asaasingle singlemarket market E.g. E.g.Japanese Japanesecompanies companiesduring duringthe the1970s 1970s&&1980s, 1980s, (YKK, (YKK,Honda) Honda) standard standardproducts, products,developed developed&& manfactured manfacturedwithin withinJapan; Japan;distributed distributed&&marketed marketed worldwide worldwide --At --Atmore moresophisticated sophisticatedlevel: level: Strategy Strategythat thatrecognizes recognizes and andexploits exploitslinkages linkagesbetween betweencountries countries(e.g. (e.g.exploits exploits

global globalscale, scale,national nationalresource resourcedifferences, differences,strategic strategic competition) competition) World as World as single mkt. World as interrelated mkts. global strategy separate national mkts. multidomestic strategy Analyzing Analyzing benefits/costs benefits/costs of of aa global global strategy strategy Forces Forcesfor for globalization globalization MARKET MARKETDRIVERS DRIVERS --Common --Commoncustomer customerneeds needs --Global --Globalcustomers customers

--Cross-border --Cross-bordernetwork networkeffects effects COST COST DRIVERS DRIVERS --Global --Globalscale scaleeconomies economies --Differences --Differencesin innational national resource resourceavailability availability --Learning --Learning COMPETITIVE COMPETITIVEDRIVERS DRIVERS --Potential --Potentialfor forstrategic strategic competition competition (e.g. (e.g.crosscrosssubsidization) subsidization) Forces Forcesfor forlocalization localization/ /national national differentiation differentiation MARKET MARKETDRIVERS DRIVERS

--Different --Differentlanguages languages --Different --Differentcustomer customerpreferences preferences --Cultural --Culturaldifferences differences COST COSTDRIVERS DRIVERS --Transportation --Transportationcosts costs --Transaction costs --Transaction costs --Economic --Economic&&political politicalrisk risk --Speed --Speedof ofresponse response GOVERNMENT GOVERNMENTDRIVERS DRIVERS --Barriers --Barriersto totrade trade&&inward inwardinv. inv. --Regulations --Regulations Jet engines Autos Benefits

of global integration Consumer electronics Telecom equipment Investment banking Steel Cement Online C2C auctions Beer Dry cleaning Auto repair Restaurant chains Retail banking Funeral services Benefits of national differentiation Positioning Positioningindustries industriesin interms termsof of benefits benefitsof of

globalization globalization and andnational national differentiation differentiation Jet engines Autos Benefits of global integration Consumer electronics Telecom equipment Investment banking Cement Auto repair Retail banking Funeral services Benefits of national differentiation The TheEvolution Evolution of of Multinational MultinationalStrategies Strategies and and Structures: Structures: (1) (1) 1900-1939Era 1900-1939Era of

of the theEuropeans 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 TheEvolution Evolution of of Multinational Multinational Strategies Strategies and and Structures: Structures:(2) (2) 1945-1970U.S. 1945-1970U.S. Dominance Dominance American MNCs 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 TheEvolution Evolution of of Multinational Multinational Strategies Strategiesand and Structures: Structures:

(3) (3) 1970s 1970sand and1980sThe 1980sThe Japanese Japanese Challenge 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 MarketingGlobal GlobalStrategies Strategiesand andSituations Situationsto toIndustry Industry Conditions: Conditions:Firm Firm Success Successin inDifferent DifferentIndustries Industries Philips General Electric local responsiveness - Global industry - Matsushita the most successful - Philips the survivor - GE sold out

Telecommunications Equipment NEC Kao P&G Unilever local responsiveness - Substantial national differentiation, few global scale economies - Kao has limited success outside Japan - Unilever and P&G most successful global integration Matsushit a Branded, Packaged Consumer Goods global integration global integration Consumer Electronics Erickson ITT local responsiveness - Requires both global integration and national differentiation. - NEC only partially

successful - ITT sold out - Ericsson most successful Reconciling ReconcilingGlobal Global Integration Integration with withNational National Differentiation: Differentiation:The TheTransnational Transnational Corporation 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. Designing Designing the

the MNC: MNC: Key Key Learning Learning 1. 2. 3. 4. 5. On what basis to organizeproducts, geography, functions? --Where is coordination most important? --How global is the industry? How global is the firms 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 Whats 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

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