Designing the Value Chain Across
Borders: The Dispersion Decision National Diamonds and International Competition
GLOBAL STRATEGY
Dr. Ruth V. Aguilera College of Business University of Illinois at Champaign-Urbana
March 2009
Session I: Topics to Cover
• What is Global Strategy?
– Global vs. Multi-domestic Firms
• Multinational Firms
– Types of Multinational Firms – Global Integration
• Globalization or Regionalization? • Porter‘s International Competitive Advantage • Vernon Product Life Cycle
What is Global Strategy? Ghoshal
• Definition
– Strategic Objectives – Sources of Competitive Advantage
• Integration-Responsiveness Framework
Multinational Firms Guillen
• Definition • Dispersion (assets or employees) • Coordination:
– Kobrin‘s index of global integration
Regional & Global Strategies in MNCs
Rugman & Verbeke (2004)
Thinking about how to measure how global a company is… How would you measure it?
Regional & Global Strategies
• From WWII economic power has become more disperse
– While in 1967, U.S. held 50.4% of the world stock of FDI, by 1990 it only participated with 25.4%. – Formation of a TRIAD: North America, EU & Asia.
• The Fortune 500 (2001)
– International sales
Types of MNCs
• Home region oriented: At least 50% of their sales in their home region of the triad. • Bi-regional: At least 20% of their sales in each of two regions. • Host region oriented: More than 50% of their sales in a triad market other than their home region. • Global: at least 20% of their sales in all three triad regions, but less than 50% in any one region.
• Particularly Rugman & Verbeke (2004) noted:
– The majority of the world‘s largest 500 companies are MNCs – Out of the 365 Co. within those 500, only 9 are considered ―GLOBAL‖ from a sale profile viewpoint. – 320 of those companies have 80% of their sales in their home region of the TRIAD
Percentages of Types of MNCs & Percentage intra-regional sales
• • • • Home region oriented (320 firms): 80.3% Bi-regional (25 firms): 42% Host region oriented (11 firms): 30.9% Global (9 firms): 38.3%
Global MNCs (Rugman & Verbeke)
• • • • • • • • • IBM Sony Royal Philips Electronics Nokia Intel Canon Coca-cola Flextronics electronics LVMH
What is the conclusion of this study?
To be continued by Flores (MBA2003) and Aguilera!
Check the course website for details
Porter’s Five Forces to Industry Analysis
SUBSTITUTE PRODUCTS
SUPPLIERS
COMPETITORS
CUSTOMERS
ENTRY BARRIERS
What Makes Entry Barriers a Strong Force?
Few Economies of
Scale Effects
Few Tariffs or Other
Few Technology
Advantages
Trade Barriers
ENTRY BARRIERS
Low Capital Requirements
Few Experience
Curve Effects
Low Brand Loyalty
Low Customer Loyalty
What Makes Substitute Products a Strong Force?
Low Priced Substitutes
SUBSTITUTE PRODUCTS
Low Switching Costs
High Quality Substitute Products
What Makes Suppliers a Strong Force?
Suppliers have
Good Reputations
Few Suppliers
SUPPLIERS
High Switching Costs
Few Substitute Products Ability to Integrate
Forward
What Makes Customers a Strong Force?
Customers Purchase
in Large Quantities
Customers are Large
CUSTOMERS
Low Switching Costs
Customer Profits are Low Customers Purchase
From Several Suppliers
What Makes Competitors a Strong Force?
Competitors of Equal Size Many Competitors Low Switching Costs
High Exit Barriers
COMPETITORS
Diversity Rivalry Entry of New Firms
High “First Mover” Advantages
What about at the COUNTRY level?
Why These Country Differences in World-Class Manufacturing? USA
Aerospace
Japan
Autos
Germany
Luxury autos
France
High-speed trains
Taiwan
Electronic components
South Korea
Steel
Pharmaceuticals
Consumer electronics
Heavy machinery
Machine-tools, instruments
Specialty chemicals
Satellite launchers
Nuclear engineering
Machinetools
Clothing & footwear
Ships
Medical equipment
Subcompact automobiles
…or in World-Class Services?
USA
Entertainment Software & information
Money & finance
UK
Money & finance Waste mgmt
Germany
Insurance Custom software
France
Tourism Design
Spain
Tourism Retail banking
Privatized Utilities
Italy
Design
Switzerland
‗Suitcase‘ banking Hospitality
Airlines
Large-scale software
Porter‘s Diamond of National Advantage
innovation Firm Strategy, Structure, Rivalry
Strong firms Intense rivalry Rapid innovation
Leaders CHANGE
Factor Conditions
Land & Capital Skilled labor Infrastructure Open markets Free trade flows
Demand Conditions
Market size Scale effects Sophisticated buyers Government support & demand
Government
Related Industries
chance
Supplier industries feed innovation into industry & place pressures on industry to innovate.
Determinants of National Competitive Advantage
• Factor Conditions: the nation‘s position in factors of production such as skilled labor or infrastructure, necessary to compete in a given industry. • Demand Conditions: the nature of home-market demand for the industry‘s product or service. • Related and Supporting Industries: the presence or absence in the nation of supplier industries and other related industries that are internationally competitive. • Firm Strategy, Structure and Rivalry: the conditions in the nation governing how companies are created, organized, and managed, as well as the nature of domestic rivalry.
Points to Remember
• Factor conditions change and are malleable. • Rivalry generally good, although perhaps not among your suppliers. • Pay attention to global demand. • Complacency breeds failure. • Next discontinuity?
Internet Impact
• Product design, features, and use:
– Data-carrying watches (w/ Sega). – Watches with email, internet connection, cash chip, telephone? (w/ HP).
• Marketing: Need to redesign colors. • Services: Internet time (1,000 beats/day). 51 million visits to its website.
Applying the Framework
Bangalore software development
Factor conditions Abundant Englishspeaking engineers
Japanese consumer electronics
Abundant engineers
Silicon Valley
Swiss Watch Industry
Image; expensive craftsmen
Magnet for engineers
Rivalry
Global
Local
Global
Cartels global
Local global
Demand conditions
Global
Local
Global
Related industries
Weak infrastructure
Suppliers, banks
VCs, equipment, designers
Banks, machine tools
Sources of Firm Advantages that stem from National Advantages
• Efficiency: – Combination & recombination of K, L, and technology to lower costs. – Experience/learning curve effect from operating in one location. – Problem: Adverse changes in relative prices. • Specialization: – Become a ―category-killer.‖ – Benefit from networks of long-term relations with specialized suppliers. • Flexibility: – Long-term connections with related & support industries. – Problem: Difficulty in shifting production in the short run? • Innovation: – Advantage of co-locating R&D and manufacturing. – Problem: Sophistication/universality of home-country demand?
International Product Cycles (Vernon)
A. Traditional Product Cycle Hypothesis (PCH):
1. Products go through a “life cycle”:
• • • • Introduction Growth Maturation Decline
2. Entrepreneurs and managers: • Introduce new products when they see a market opportunity
• They tend to be ―myopic‖ and/or ―rationally bounded‖ • Market opportunities are first seen in the home market of the firm. • Examples:
– – – – – – Consumer electronics Automobiles Wristwatches Medicinal herbs Life insurance Fast food
3. Introduction and Growth stages:
• • • • • Product is unstandardized: different designs, inputs & processes. Hard to determine optimum location, production scale or sale price. High product differentiation across firms. Individual firms do not differentiate. Low price-elasticity of demand
4. Maturation & Decline
• • • • Standarization within differentiated kinds. Normalization of designs, inputs & processes. Less uncertainty as to optimum location, production sale or sale price. Individual firms differentiate through brands, advertising, and variations. • Increased price-elasticity of demand.
5. Implications of the theory
• Product or service innovations reflect features of the home country • Home country features are taken into account when locating activities abroad • International expansion ought to be careful, cautious, incremental, one-step-at-a-time process • Countries most similar to the home country are approached first
6. Sequence of expansion:
– – – – – Exporting arms-length from home Licensing a foreign producer Establishing a sales subsidiary Establishing a first plant Establishing subsequent plants
• Examples:
International migration of production Swedish multinationals Japanese consumer electronics
B. The New Product Cycle Theory:
1. Big changes since the mid-1970s
• • Globalization & Trade Blocs. Firms and managers are now less ―myopic‖ (learning, experience, training, telecommunications, the ―global‖ village). Many firms are now global in reach Cross-national lags in new product introduction have been shortened.
• •
2. Vernon‘s qualifications in 1979
• • • ―Global scanner‖ companies =>PCH is useless to them. ―Multidomestic‖ companies => PCH still applies. Small exporting companies => PCH still applies
3. Other Limitations
For some products, shifts in location do not usually take place The innovating country maintains its export ability through the product‘s life cycle
– Products w/ extremely short life cycles – Luxury products for which cost is of little concern to the consumer – Products for which the company can use a differentiation strategy – Products that require specialized technical labor to evolve into the next generation
Comparative vs. Competitive Advantage
• Comparative Advantage – location-specific • Competitive Advantage – firm-specific • Value-added Questions: Where should the value-added chain be broken across borders? In what functional activities should a firm concentrate resources?
Comparative vs. Competitive
1. Each stage‘s contribution to the : VALUE ADDED CHAIN.
• Highly competitive industries => low cost oriented strategies (total cost) – American steel industry • Low competitive industries =>Revenue oriented strategies (product differentiation; market value), -- ex. home computers
2. Value-Added Analysis
• ―Strategy is not jus the selection of profitable product markets; it is also the attempt to create a competitive advantage by investing in the link that generates the product attribute most strongly desired by consumers and which corresponds to the firm‘s distinctive competence relative to its competitors.‖ • ―An application of the value-added chain in this context rests on the identification of the characteristics of consumer demand and the strategic positioning of firms in terms of their control over the critical links that supply these characteristics‖
Example: Panasonic/Radio Shack
PANASONIC RADIO SHACK
Components
Assembly Marketing, Sales & Distribution
Retailing
The Value-Added Chain of Comparative Advantage
3. International environment. Differences in:
• Institutional & cultural barriers • Endowments, costs, productivities
4. Distortions:
• Transportation costs • Tariffs & other trade regulations • Competitive advantage if firms (scale, scope, and learning)
5. International strategy is a/ either comparative or competitive strategy, or both.
SWISS WATCH INDUSTRY
Where is Switzerland?
Comparative Advantage of Nations
Gov‘t: Competition Policy.
Firm strategy, structure, and rivalry
Gov‘t: Education; financial regulation.
Factor conditions
Demand conditions
Gov‘t: product standards and regulations; trade protection.
Related and supporting industries
Gov‘t: Industrial policies, infrastructure for business.
Technological Change & the Wristwatch
Components Power
Case
mid-19th C. Spring
Metal
1950s Battery
Metal
1960s Battery
Metal
1970s Battery
Metal
1980s Battery
Plastic
Materials
Movement
Gold, metals, jewels
Escapement
Metals, alloys
Escapement
Metals, alloys
Tuning fork
Plastic, Plastic, metals, alloys metals, alloys
Quartz Quartz
Transmission Face
Dominant firms:
Gears Analog
Gears Analog
Gears Analog
Gears Digital or Analog
Circuit Digital or Analog
The Swatch story
Collections
Irony
Original
Skin
Chrono
Scuba
Beat
Main Exporting Countries in 2007
Value ($bn) 13.4 6.4 2.4 1.2 1.3 Units Value per (mn) unit 25.9 517.4 472.9 13.5 638.3 3.8 14.1 85.1 5.8 224.1
Switzerland Hong Kong* China Germany France
* Includes re-exports. Note that Seiko and Citizen manufacture a large proportion of their inexpensive watches in Hong Kong and China.
Source: http://www.fhs.ch
Swiss Exports by Type of Watch in 2007
Type of watch: Value Units Value ($bn) (mn) per unit ($) Mechanical 67% 16% 1965 Electronic 33% 84% 187 Total 12.3 25.9 476
Source: http://www.fhs.ch
Swatch: Operating Margins
– – – – Upper segment: 24%. Middle segment: 13%. Lower segment: 5%. Movements: 4%.
http://www.fhs.ch/en/swissm.php
Competence-Destroying Innovations
Ice Telegraph Gas lamps Vacuum tube Vinyl record Propeller Typewriter Minitel Chemical photography Traditional toys Mechanical watch Digital watch Refrigeration Telephone Incandescent lamps Transistor Compact disc Jet engine Word processor Internet Digital photography Videogames Digital watch ???
Wristomo
• DoCoMo—Seiko. • Launched in 2003.
• Weight (grams) Approx. 113 (including battery). Continuous talk time (minutes) Approx. 120. Continuous stand-by time (hours) Approx. 200. Data transmission speed 64 kbps/ 32 kbps. http://www.3gnewsroom.com/3g_n ews/mar_03/news_3234.shtml
•
Other DoCoMo Gear
Citizen‘s VIRT
• Bluetooth-enabled watch. • The watch communicates with the owner‘s cell phone. • When a call comes in, the number and name of the caller is shown on the watch. • Calls can be put on hold or forwarded from the watch. • It alerts the owner if he o she leaves the cell phone behind. • Announced in June 2006.
Seiko reacts with its own bluetooth watch.
Citizen‘s VIRT
• Bluetooth-enabled watch. • The watch communicates with the owner‘s cell phone. • When a call comes in, the number and name of the caller is shown on the watch. • Calls can be put on hold or forwarded from the watch. • It alerts the owner if he o she leaves the cell phone behind. • Announced in June 2006.
Seiko reacts with its own bluetooth watch.
SMS Technology Australia
Detective Dick Tracy (1946)
Points to Remember
• Location advantages are contingent on the technology employed. • Location advantages can turn into disadvantages very quickly. • Importance of paying attention to global demand shifts. • Complacency breeds failure. • Next technological discontinuity?
– It will affect low-cost producers (i.e. China) to a greater extent than higher-end & differentiated producers (Switzerland, France).