Global Strategies and the

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

LOW
H
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HIGH
Implications of Internationalization
for Industry Analysis
INDUSTRY STRUCTURE
Lower entry barriers around national markets
Increased industry rivalry --- lower seller concentration
--- greater diversity of competitors
Increased buyer power: wider choice for dealers & consumers
COMPETITION
Increased intensity of competition
PROFITABILITY
Other things remaining equal, internationalization tends to reduce an
industrys 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
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 for
a Certain 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
Porters 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
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.
FACTOR CONDITIONS
DEMAND
CONDITIONS
RELATING AND
SUPPORTING
INDUSTRIES
STRATEGY, STRUCTURE,
AND RIVALRY
Porters National Diamond Framework
1. FACTOR CONDITIONSHome grown resources/capabilities more important
than natural endowments.
2. RELATED AND SUPPORTING INDUSTRIESKey role of industry clusters
3. DEMAND CONDITIONSDiscerning domestic customers drive quality & innovation
4. STRATEGY, STRUCTURE, RIVALRY. E.g. domestic rivalry drives upgrading.
Consistency Between Strategy
and National Conditions
In globally-competitive industries, firm strategy needs to
take account of national conditions:

U.S. textile manufacturers must compete on the basis of
advanced process technologies and focus on high quality,
less price-sensitive market segments
In the semiconduictor industry, CA-based firms concentrate
mainly upon design of advanced chips, Malaysian firms
concentrate upon fabrication of high volume, less
technologically advanced items (e.g. DRAM chips)
Dispersion of value chain to exploit different national
environments (e.g. Nike conducts R&D in US, components in
Korea and Thailand, assembly in Indonesia, China, and India,
marketing in Europe and North America)
Power distance
Uncertainty
avoidance
Korea
Israel
USA
France
National cultures: power difference &
uncertainty avoidance
Denmark
Mexico
Malaysia
Philippines
India
Japan
Individualist
Korea
Israel
USA
France
National cultures: individualism/collectivism
Denmark
Mexico
Philippines
India
Japan
Collectivist
UK
Aust.
Germany
Malaysia Guatemala
Venezuela
Italy
International Location of Production
3 considerations:

National resource conditions: What are the major
resources which the product requires? Where are these
available at low cost?

Firm-specific advantages: to what extent is the
companys 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 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. Mexico
Parts & components 7,750 8,000
Labor 700 40
Shipping cost 300 1,000
Inventory 20 40
TOTAL 8,770 9,180
Location and the Value Chain
Comparative advantage in textiles and apparel by stage of processing
Hong Kong 1 -0.96
2 -0.81
3 -0.41
4 +0.75
Italy 1 -0.54
2 +0.18
3 +0.14
4 +0.72
Japan 1 -0.36
2 +0.48
3 +0.48
4 -0.48
U.S.A. 1 +0.96
2 +0.64
3 +0.22
4 -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 yarn
3 = production of textiles 4 = production of clothing
The optimal location
of activity X considered
independently
WHERE TO LOCATE
ACTIVITY X?
The importance of links
between activity X and
other activities of the firm
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)?
How great are the coordination
benefits from co-locating activities?
Determining the Optimal Location
of Value Chain Activities
Resource commitment
TRANSACTIONS
DIRECT INVESTMENT
Spot
sales
Exporting
Foreign
agent /
distributor
Licensing
Franchising
Joint venture
Marketing &
Distribution
only
Long-
term
contract
Licensing
patents &
other IP
Fully
integrated
Wholly owned
subsidiary
Marketing&
Distribution
only
Fully
integrated
Low High
Alternative Modes of Overseas Market Entry
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 partners 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 Vehicles
Ltd. (U.K.)
GM
New United Motor
Manufacturing
Inc. (NUMMI)
40% investment
60%
owned
50% owned
50%
owned
(Makes vans in UK)
(Makes cars in US)
SAAB
50%
owned
FIAT
FUJI
DAEWOO
AVTOVAZ
SAIC
General Motors Alliances with Competitors
Multinational Strategies:
Globalization vs. National Differentiation
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 cross-
subsidize 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.
Hamel &
Prahalad
Thesis
Kenichi
Ohmaes
Triad
Power
Thesis
Ted
Levitt
Globaliz-
-ation of
Markets
Thesis
The case for a global strategy:
Globalization & Global Strategy What are they?
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)
World as
single mkt.
World as
separate
national mkts.
global strategy
World as inter-
related mkts.
multidomestic strategy
Analyzing 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 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
Benefits
of
global
integration
Cement
Telecom
equipment
Jet engines
Consumer
electronics
Autos
Funeral
services
Retail
banking
Investment
banking
Auto
repair
Restaurant
chains
Steel
Online C2C auctions
Beer
Dry
cleaning
Benefits of national differentiation
Benefits
of
global
integration
Cement
Telecom
equipment
Jet engines
Consumer
electronics
Autos
Funeral
services
Retail
banking
Investment
banking
Auto
repair
Positioning industries in terms of benefits of
globalization and national differentiation
The Evolution of Multinational Strategies and
Structures: (1) 1900-1939Era 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) 1945-1970U.S. 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 Evolution of Multinational
Strategies and Structures:
(3) 1970s and 1980sThe Japanese Challenge






The J apanese 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
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
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Matsushit
a
Philips
General Electric
Ka
o
P&G
Unilever
NEC
Erickson
ITT
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 organizeproducts, geography, functions?
--Where is coordination most important?
--How global is the industry? How global is the firms
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
relations
3. Whats the role of HQ?
--Control function
--Coordination function
--Exploiting scale economies in centralized provision of
services
4. The need for internal differentiation
--By product/business
--By function
--By country
5. Formal & informal organization
Designing the MNC: Key Learning