Nokia Business Strategy Mangement by yrx14239

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									  MBA290:
 ADVANCED
 STRATEGIC
MANAGEMENT
Professor Stanley Han
College of Business Administration
                  hans@csus.edu


                                     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 (cont’d)

   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 CONCEPT OF
      STRATEGY

The Concept of Strategy and the Pursuit
  of Sustainable Above-Normal Profits
         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
                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                       CORPORATE
STRATEGY                        HEAD OFFICE




BUSINESS
STRATEGY           Division A                 Division B




                         R&D                        R&D
FUNCTIONAL               Personnel                  Personnel
STRATEGIES
                         Finance                    Finance
                         Production                 Production
                         Marketing/Sales            Marketing/Sales
          Levels 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 Strategy




                          Successful
                           Strategy


                    EFFECTIVE IMPLEMENTATION


                          Profound             Objective
Long-term, simple
                          understanding of     appraisal of
and agreed upon
                          the competitive      resources
objectives
                          environment


                                                  $
         Strategy 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 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 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 = St           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

 COMPANY            MARKET       NET    RETURN   RETURN   RETURN    RETURN
                      CAP.    INCOME      ON       ON       ON        TO
                     ($BN.)     ($BN)    SALES   EQUITY   ASSETS    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 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 return
      b) On new investment—seek rate of return > cost of capital
•     Utilize qualitative strategy analysis to evaluate future profit
      potential
           A Comprehensive Value Metrics Framework



 Shareholder              Intrinsic              Financial                Value
   Value                    Value                Indicators               Drivers
Measures:                                                              Sources:
                        Measures:             Measures:
• Market value of the                                                  • Market share
                        • Discounted cash     • Return on Capital
  firm                                                                 • Scale economies
                          flows               • Growth (of
•Market value added                                                    • Innovation
                        •Real option values     revenues & operating
 (MVA)                                                                 • Brands
                                                profits
•Return to
                                              •Economic profit (EVA)
  shareholders
    Sources of Superior Performance

                            Above Normal
                               Profits
                           (in Excess of the Competitive Level)




               Avoid                                   Be Better Than
             Competitors                                Competition
Attractive    Attractive   Attractive
Industry      Strategic     Niche                    Cost         Differentiation
               Group                               Advantage       Advantage
  Entry        Mobility      Isolating
 Barriers      Barriers     Mechanisms
   Sources of Competitive Advantage



                           COST
                         ADVANTAGE

COMPETITIVE
ADVANTAGE


                       DIFFERENTIATION
                          ADVANTAGE
                The Experience Curve


                                      The “Law of Experience”
             1992          The unit cost value added to a standard product
                          declines by a constant % (typically 20-30%) each
                                   time cumulative output doubles.
                1994
Cost per
 unit of
output (in             1996
 real $)
                               1998
                                             2000
                                                         2002     2004


                         Cumulative Output
                 Examples of Experience Curves



      Japanese clocks & watches, 1962-72                          UK refrigerators, 1957-71




                                                      50 100 200 300
     20K 30K
    1960 Yen




                                                         Price Index
15K




                                          75%
                                                                           70% slope


               100K   200K        500K      1,000K                     5   10                   50
                        Accumulated unit production                        Accumulated units
                                (millions)                                           (millions)
      Drivers of Cost Advantage

   ECONOMIES OF SCALE                • Indivisibli\ties
                          • Specialization and division of labor

ECONOMIES OF LEARNING            • Increased dexterity
                          • Improved organizational routines

                                  • Process innovation
PRODUCTION TECHNIQUES      • Reengineering business processes

      PRODUCT DESIGN      • Standardizing designs & components
                                 • Design for manufacture

                              • Location advantages
          INPUT COSTS     • 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 of Scale: The Long-Run
      Cost Curve for a Plant


                          Sources of scale economies:
                      - technical input/output relationships
                                - indivisibilities
                                 - specialization

Cost per
 unit of
 output



                  Minimum            Units of output
               Efficient Plant        per period
               Size: the point
              where most scale
               economies are
                 exhausted
  Scale Economies in Advertising: U.S. Soft Drinks


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.
                                        0.20
       Advertising Expenditure ($ per case)




                                                    Schweppes
                                                        SF Dr. Pepper
                               0.15




                                                                      Tab
                                                       Diet 7-Up     Diet Pepsi
                       0.10




                                                          Diet Rite
                                                                  Fresca
                                                                                                Seven Up
              0.05




                                                                             Sprite         Dr. Pepper
                                                                                                           Pepsi
                                                                                                                    Coke
      0.02




                                               10          20           50            100         200         500    1,000
                                                                    Annual sales volume (millions of cases)
              Applying the Value Chain to Cost Analysis:
                The Case of Automobile Manufacture



             STAGE 1. IDENTIFY THE PRINCIPLE ACTIVITIES




                    R&D                      TESTING,   GOODS    SALES DISTRI- DEALER &
         PARTS
PURCH-             DESIGN COMPONENT ASSEMBLY QUALITY    INVEN-     &
         INVEN-                                                        BUTION CUSTOMER
 ASING            ENGNRNG    MFR             CONTROL    TORIES   MKITG         SUPPORT
         TORIES




                      STAGE 2. ALLOCATE TOTAL COSTS
              Applying the Value Chain to Cost Analysis: The
               Case of Automobile Manufacture (continued)

                         --Plant scale for each         -- Level of quality targets    -- No. of dealers
STAGE 3.                         component              -- Frequency of defects        -- Sales / dealer
IDENTIFY                 -- Process technology                                         -- Level of dealer
                         -- Plant location                                                    support
COST                     -- Run length                                                 -- Frequency of defects
DRIVERS                  -- Capacity utilization                                              under warranty




            PARTS       R&D                      TESTING,                 GOODS
PURCH-                        COMPONENT ASSEMBLY                                   SALES      DISTRI- DEALER &
            INVEN-     DESIGN                    QUALITY                  INVEN-
ASING                            MFR                                                 &
            TORIES    ENGNRNG                    CONTROL                  TORIES              BUTION CUSTOMER
                                                                                   MKITG              SUPPORT


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
               Applying the Value Chain to Cost Analysis: The
                Case of Automobile Manufacture (continued)

 STAGE 4. IDENTIFY LINKAGES


                                            Designing different models around
 Consolidation of orders to increase       common components and platforms
  discounts, increases inventories            reduces manufacturing costs



PRCHSNG        PARTS           R&D         COMPONENT        ASSEM-     TESTING GOODS         SALES DSTRBTN DLR
               INVNTRS         DESIGN          MFR           BLY       QUALITY  INV          MKTG          CTMR




                  Higher quality parts and materials                            Higher quality in manufacturing
                      reduces costs of defects                                     reduces warranty costs
                           at later stages


STAGE 5. RECCOMENDATIONS FOR COST REDUCTION
                 The Nature of 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                            INTANGIBLE
Observable product characteristics:               DIFFERENTATION
   • size, color, materials, etc.            Unobservable and subjective
           • performance                     characteristics that appeal to
             • packaging                       customer’s image, status,
    • complementary services               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 Differentiation Potential:
                     The Demand Side

THE PRODUCT        What needs             What are key
                  does it satisfy?         attributes?           FORMULATE
                                                              DIFFERENTIATION
                                        Relate patterns of        STRATEGY
                                            customer
                                         preferences to         • Select product
                     By what
                                        product attributes    positioning in relation
                 criteria do they
                                                              to product attributes
                     choose?
   THE                                                            • Select target
CUSTOMER                                  What price
                                                                 customer group
                                         premiums do
                                       product attributes     • Ensure customer /
                                          command?            product compatibility
                    What                    What are          • Evaluate costs and
                  motivates              demographic,               benefits of
                   them?                  sociological,           differentiation
                                         psychological
                                     correlates of customer
                                           behavior?
            Using the Value Chain to Identify
      Differentiation Potential on the Supply Side
     MIS that supports            Training to support                Unique product features.
      fast response                customer service                     Fast new product
       capabilities                   excellence                          development


 FIRM INFRASTRUCTURE
 HUMAN RESOURCE MANAGEMENT
 TECHNOLOGY DEVELOPMENT


 INBOUND        OPERATIONS        OUTBOUND          MARKETING         SERVICE
 LOGISTICS                        LOGISTICS             & SALES
                                                                                Customer technical
                                                                                support. Consumer
                                                                                credit. Availability of
  Quality of     Defect free    Fast delivery.      Building brand                      spares
components &      products.     Efficient order       reputation
  materials      Wide variety    processing
                    Identifying Differentiation Opportunities through
                      Linking the Value Chains of the Firm and its
                              Customers: Can Manufacture


                                                                         1
                                                                                                                                                                        5
                                                                                2                                        3                                  4




                                                                                                                                                                             Inventory holding
Supplies of steel




                                       Inventory holding




                                                                                             Inventory holding




                                                                                                                                        technical support
                                                                             Manufacturing
  & aluminum




                                                                                                                                                                Purchasing




                                                                                                                                                                                                                                    Distribution
                                                                                                                                                                                                 Processing
                                                           Engineering




                                                                                                                                                                                                                        Marketing
                          Purchasing




                                                                                                                 Distribution




                                                                                                                                                                                                              Canning
                                                                                                                                            Service &
                                                             Design




                                                                                                                                Sales




                                                                                                                                  CAN MAKER                                                                             CANNER

                                       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.
INDUSTRY ANALYSIS
 AND POSITIONING

Determining Industry Attractiveness and
    Identifying Strategic Opportunities
       Profitability of US Industries (selected industries only)

                         Median return on equity (%), 1999-2005


Household & Personal Products       22.7     Gas & Electric Utilities       10.4
Pharmaceuticals                     22.3     Food and Drug Stores           10.0
Tobacco                             21.6     Motor Vehicles & Parts          9.8
Food Consumer Products              19.6     Hotels, Casinos, Resorts        9.7
Securities                          18.9     Railroads                       9.0
Diversified financials              18.3     Insurance: Life and Health      8.6
Beverages                           18.8     Packaging & Containers          8.6
Mining & crude oil                  17.8     Insurance: Property & Casualty 8.3
Petroleum Refining                  17.3     Building Materials, Glass       8.3
Medical Products & Equipment        17.2     Metals                          8.0
Commercial Banks                    15.5     Food Production                 7.2
Scientific & Photographic Equipt.   15.0     Forest and Paper Products       6.6
Apparel                             14.4     Semiconductors &
Computer Software                   13.9     Electronic Components           5.9
Publishing, Printing                13.5     Telecommunications              4.6
Health Care                         13.1     Communications Equipment        1.2
Electronics, Electrical Equipment   13.0     Entertainment                   0.2
Specialty Retailers                 13.0     Airlines                      (22.0)
Computers, Office Equipment         11.7
The Profitability of Global Industries: Return on Invested Capital, 1963-2003
              From Environmental Analysis
                  to Industry Analysis

The national/                                         The natural
international                                        environment
  economy              THE INDUSTRY
                       ENVIRONMENT
                                                      Demographic
 Technology            • Suppliers                      structure
                       • Competitors
                       • Customers
Government                                             Social structure
 & Politics

•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

• 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 Structures

                    Perfect
                                     Oligopoly       Duopoly         Monopoly
                  Competition


Concentration      Many firms        A few firms      Two firms       One firm


Entry and Exit No/Low barriers          Significant barriers        High barriers
  Barriers

   Product        Homogeneous
Differentiation                         Potential for product differentiation
                    Product

                       Perfect
 Information                             Imperfect availability of information
                  Information flow
Porter’s Five Forces of Competition Framework


                        SUPPLIERS
               Bargaining power of suppliers

                          INDUSTRY
                        COMPETITORS

 POTENTIAL Threat of                       Threat of
                                                    SUBSTITUTES
 ENTRANTS
             new        Rivalry among    substitutes
           entrants     existing firms


              Bargaining power of buyers
                          BUYERS
The Structural Determinants of Competition

                                SUPPLIER POWER
                              • Supplier concentration
                              • Relative bargaining
                                power



THREAT OF ENTRY                INDUSTRY RIVALRY             SUBSTITUTE
•Capital requirements         •Concentration                COMPETITION
•Economies of scale           •Diversity of
•Absolute cost advantage       competitors                  • Buyers’ propensity
                                                              to substitute
•Product differentiation      •Product differentiation
                                                            • Relative prices &
•Access to distribution       •Excess capacity &
 channels                      exit barriers                  performance of
                                                              substitutes
•Legal/ regulatory barriers   •Cost conditions
•Retaliation


                                  BUYER POWER
                              • Buyers’ price sensitivity
                              • Relative bargaining
                                power
                           SUPPLIER POWER
                           LOW
                                                             DRUG
                                                             INDUSTRY
                                                             (ROE=22%)
THREAT OF ENTRY
LOW                          INDUSTRY
                             COMPETITIVENESS
•economies of scale          LOW                                THREAT OF
•capital requirements                                          SUBSTITUTES
   for R&D and clinical      •high concentration                     LOW
   trials                    •product differentiation
•product differentiation     •patent protection                  No substitutes.
•control of distribution     •steady demand growth         (Changing as managed care
   channels                  •no cyclical fluctuations        encourages generics.)
•patent protection              of demand



                             BUYER POWER
                                 LOW
                           Physician as buyer:
                            Not price sensitive
                            No bargaining power.
                           (Changing with managed care.)
          Applying 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
Force         Method for Neutralizing Force
Entry         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..
Buyers        Reduce buyer uniqueness: forward
              integrate, differentiate product, new customers, etc..
              Reduce supplier uniqueness: backward
Suppliers     integrate, obtain minority position, second source, etc..
The Traditional Model of Industry Life Cycle



                Fermentation   Shakeout          Maturity   Decline
 Sales volume




                                          Time
    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            Color
                                        B&W             Portable

                                                               HDTV
                                                                ?
               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
       Evolution 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 Evolution

BASIC CONDITIONS             INDUSTRY STRUCTURE                    COMPETITION

Customers become
more knowledgeable              Customers become
  & experienced                 more price conscious
                                                                    Quest for new
                                                                      sources of
                                                                    differentiation
                                  Products become
                                  more standardized

     Diffusion of
                                                                   Price competition
     technology            Production                                  intensifies
                                               Production shifts
                        becomes less R&D
                                                 to low-wage
                         & skill-intensive
                                                   countries


                                    Excess capacity
                                       increases
   Demand growth                                                   Bargaining power
   slows as market                                                  of distributors
saturation approaches           Distribution channels                 increases
                                      consolidate
           Changes in the Population of Firms over the
         Industry Life Cycle: US Auto Industry 1885-1961




rce: S. Klepper, Industrial & Corporate Change, August 2002, p. 654.
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
              Innovation & Renewal over the
               Industry Life Cycle: Retailing
                                      Warehouse
                                        Clubs                  Internet
                                   e.g. Price Club             Retailers
                                      Sam’s Club             e.g. Amazon;
                           Discount                             Expedia
                                                 ―Category
                            Stores                 Killers‖
                          e.g. K-Mart          e.g. Toys-R-Us,
Mail order,                Wal-Mart
catalogue
                Chain                           Home Depot             ?
 retailing      Stores
               e.g. A&P
e.g. Sears
   Roebuck




  1880s           1920s               1960s                        2000
              Gary Hamel: Shaking the Foundations
      OLD BRICK                             NEW BRICK
Top management is responsible         Everyone is responsible
      for setting strategy              for setting strategy

Getting better, getting faster        Rule-busting innovation
      is the way to win                  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               There’s no correlation between
    competitiveness                     size and competitiveness

Innovation equals new products        Innovation equals entirely new
      and new technology                    business concepts

 Strategy is the easy part,           Strategy is the easy only if you’re
Implementation the hard part               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-haired
                                                revolutionaries
An Alternate Model of Industry Life Cycle



                Emergence   Convergence     Coexistence    Dominance
 Sales volume




                                                          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,
 CAPABILITIES, AND
CORE COMPETENCES
    Shifting the Focus of Strategy Analysis:
 From the External to the Internal Environment


  THE FIRM                                 THE
  Goals and                             INDUSTRY
    Values                            ENVIRONMENT
Resources and
 Capabilities       STRATEGY           •Competitors
                     STRATEGY
Structure and                           •Customers
   Systems                               •Suppliers


                The                The
          Firm-Strategy   Environment-Strategy
             Interface          Interface
     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.
Canon: Products and Core Technical Capabilities


 Precision                                          Fine
 Mechanics                                         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
             Stepper aligners            Color video printer
                               Calculator
                           Notebook computer

    Micro-
  Electronics
                  Eastman Kodak’s Dilemma


             Resources & Capabilities             Businesses
             Chemical Imaging                       Film
1980’s           •Organic Chemistry                 Cameras
                 •Polymer technology                Fine Chemicals
                 •Optomechtronics
                                                    Pharmaceuticals
                 •Thin-film coatings
             Brands                                 Diagnostics
             Global Distribution

1990’s   DIVESTS: Eastman Chemical, Sterling Winthrop, Diagnostics

             Need to build digital                 Digital Imaging
             imaging capability                    Products (e.g. Photo CD
                                                   System; Advantix
                                                   cameras & film
The Links between Resources, Capabilities
        and Competitive Advantage

                                             INDUSTRY KEY
COMPETITIVE            STRATEGY            SUCCESS FACTORS
ADVANTAGE
                ORGANIZATIONAL
                 CAPABILITIES

                      RESOURCES
         TANGIBLE      INTANGIBLE       HUMAN

         •Financial                  •Skills/know-how
                       •Technology   •Capacity for
         •Physical     •Reputation   communication
                       •Culture      & collaboration
                                     •Motivation
                        Appraising Resources
RESOURCE                   CHARACTERISTICS                           INDICATORS

             Financial     Borrowing capacity                       Debt/ Equity ratio
                           Internal funds generation                Credit rating
Tangible                                                            Net cash flow
Resources    Physical      Plant and equipment:                     Market value of
                           size, location, technology               fixed assets.
                           flexibility.                             Scale of plants
                           Land and buildings.                      Alternative uses for
                           Raw materials.                           fixed assets

             Technology    Patents, copyrights, know how            No. of patents owned
                           R&D facilities.                          Royalty income
Intangible                 Technical and scientific                 R&D expenditure
Resources                  employees                                R&D staff

             Reputation    Brands. Customer loyalty. Company        Brand equity
                           reputation (with suppliers, customers,   Customer retention
                           government)                              Supplier loyalty

Human                      Training, experience, adaptability,      Employee qualifications,
Resources                  commitment and loyalty of employees      pay rates, turnover.
     The 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            15.8
10   Marlboro          21.2       20    Samsung          15.0

http://www.interbrand.com/best_brands_2007.asp    Source: Interbrand
         Defining Organizational Capabilities



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)
         Identifying Organizational Capabilities:
                A Functional Classification
FUNCTION              CAPABILITY                               EXEMPLARS
Corporate             Financial management                     ExxonMobil, GE
Management            Strategic control                        IBM, Samsung
                      Coordinating business units              BP, P&G
                      Managing acquisitions                    Citigroup, Cisco
MIS                   Speed and responsiveness through         Wal-Mart, Dell
                      rapid information transfer               Capital One
R&D                   Research capability                      Merck, IBM
                      Development of innovative new products   Apple, 3M
Manufacturing         Efficient volume manufacturing           Briggs & Stratton
                      Continuous Improvement                   Nucor, Harley-D
                      Flexibility                              Zara, Four Seasons
Design                Design Capability                        Apple, Nokia
Marketing             Brand Management                         P&G, LVMH
                      Quality reputation                       Johnson & Johnson
                      Responsiveness to market trends          MTV, L’Oreal
Sales, Distribution   Sales Responsiveness                     PepsiCo, Pfizer
& Service             Efficiency and speed of distribution     LL Bean, Dell
                      Customer Service                         Singapore Airlines
                                                               Caterpillar
                      The Value Chain:
               The McKinsey Business System




TECHNOLOGY   PRODUCT DESIGN   MANUFACTURING   MARKETING   DISTRIBUTION   SERVICE
                 The Porter Value Chain

FIRM INFRASTRUCTURE
                                                           SUPPORT
HUMAN RESOURCE MANAGEMENT                                  ACTIVITIES
TECHNOLOGY DEVELOPMENT
PROCUREMENT




INBOUND     OPERATIONS   OUTBOUND    MARKETING   SERVICE
LOGISTICS                LOGISTICS   & SALES

                                                           PRIMARY
                                                           ACTIVITIES
               The Rent-Earning Potential
             of Resources and Capabilities

                        THE EXTENT OF THE        Scarcity
                      COMPETITIVE ADVANTAGE
                           ESTABLISHED          Relevance


                                                  Durability
    THE PROFIT
EARNING POTENTIAL      SUSTAINABILITY OF THE    Transferability
OF A RESOURCE OR           COMPETITIVE
    CAPABILITY              ADVANTAGE            Replicability


                                               Property rights

                                                   Relative
                          APPROPRIABILITY      bargaining power

                                                 Embeddedness
                   Assessing a Companies Resources
                   and Capabilities: The Case of VW
                     Importan     VW’s                                        VW’s
  RESOURCES             ce      Relative
                                           CAPABILITIES        Importance
                                                                            Relative
                                Strength                                    Strength
                                           C1. Product
R1. Finance             6          4                               9           4
                                           development

R2. Technology          7          5       C2. Purchasing          7           5

                                           C3. Engineering         7           9
R3. Plant and           8          8
equipment
                                           C4. Manufacturing       8           7
R4. Location            7          4
                                           C5. Financial
                                                                   6           3
                                           management
R5. Distribution        8          5
                                           C6. R&D                 6           4

                                           C7. Marketing &
                                                                   9           4
                                           sales

                                           C8. Government
                                                                   4           8
                                           relations
                             Appraising VW’s Resources and Capabilities

                                                                   (Hypothetical only)


                    10                                                 Key Strengths
                               Superfluous Strengths
                                                                       C3
                                                                                   R3
Relative Strength




                                                     C8
                                                                                   C4
                                                                       C2
                    5                                                 R2           R5
                                                              R1      R4                 C1
                                                              C6                         C7
                                                                      C5

                               Zone of Irrelevance                     Key Weaknesses
                    1
                         1                                5                                   10
                                                Strategic Importance
         Approaches 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 or
   alliance
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
   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
                  Transactions Costs and the
                      Scope of the Firm

              VerticalProduct     Geographical
              Scope         Scope       Scope

 [A] Single        V1
 Integrated        V2
                               P1     P2    P3         C1     C2     C3
  Firm             V3

 [B] Several  V1
 Specialized                    P1     P2     P3        C1     C2    C3
              V2
 Firms linked
 by Markets V3
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 of Changes in Corporate 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 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 of
turbulent             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
The Basic Issues in Diversification 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 among the US Fortune 500, 1949-74

     70.2        63.5          53.7          53.9          39.9          37.0
         29.8           36.5          46.3          46.1          60.1          63.0




      1949        1954         1959           1964          1969          1974
             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
Diversification among Large UK
     Corporations, 1950-93
            Motives 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 flows
SPREADING   --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
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 Diversification


                • Sharing tangible resources (research labs, distribution
                systems) across multiple businesses
                • Sharing intangible resources (brands, technology) across
ECONOMIES       multiple businesses
    OF          • Transferring functional capabilities (marketing, product
  SCOPE         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
TRANSACTIONS
              operating internal capital and labor markets
              • Key advantage of diversified firm over external markets---
              superior access to information
         Relatedness 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

• 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

• 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
• 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?
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 attractive
needed?
Does limited information permit           VI can limit opportunism
cheating?
Are taxes or regulation imposed           VI can avoid them
on 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 strategic
similar?                                  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
             The value chain for steel cans



                                                             Canning of
Iron ore         Steel        Steel strip       Can
 mining                       production                     food, drink,
              production                       making          oil, etc.


                                                     VERTICAL
                       VERTICAL
                     INTEGRATION                   INTEGRATION,
                                                    AND MARKET
                                                    CONTRACTS
                                      MARKET
      MARKET
                                     CONTRACTS
     CONTRACTS



      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


• 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 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
HIGH


                        Trading                      Global
                        Industries                   Industries
                         --aerospace                  --automobiles
                         --military hardware          --oil
International Trade




                         --diamond mining             --semiconductors
                         --agriculture                --consumer electronics




                        Domestic                     Multidomestic
                        Industries                   Industries
                        --railroads
                        --laundries/dry cleaning     --retail banking
                        --hairdressing               --hotels
LO W




                        --milk                       --consulting


                        LOW            Foreign Direct Investment          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 industry’s margins & rate of return on capital
         Competitive Advantage within an International
               Context: The Basic Framework

FIRM RESOURCES
                                                        THE INDUSTRY
& CAPABILITIES
                                                        ENVIRONMENT
-- Financial resources
-- Physical resources                                  Key Success Factors
-- Technology
-- Reputation
-- Functional capabilities           COMPETITIVE
-- General management
                                     ADVANTAGE
   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
        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
          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
      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.
          Porter’s National Diamond Framework


                              FACTOR CONDITIONS



                                                          RELATING AND
         DEMAND                                            SUPPORTING
        CONDITIONS                                         INDUSTRIES



                           STRATEGY, STRUCTURE,
                               AND RIVALRY



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 & 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 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 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 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


    Country      Stage      Index of     Country          Stage    Index of
                  of        Revealed                       of      Revealed
              Processing   Comparative                 Processing Comparative
                           Advantage                               Advantage

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

Note:
1 = production of fiber (natural & synthetic)      2 = production of spun yarn
3 = production of textiles                         4 = production of clothing
             Determining the Optimal Location
                 of Value Chain Activities
                                           Where is the optimal location
                                           of X in terms of the cost and
         The optimal location              availability of inputs?
         of activity X considered
         independently                 What government incentives/ penalties
                                           affect the location decision?


                                                   What internal
WHERE TO LOCATE                        resources and capabilities does the firm
ACTIVITY X?                                possess in particular locations?


                                         What is the firm’s business strategy
                                       (e.g. cost vs. differentiation advantage)?
        The importance of links
        between activity X and
        other activities of the firm     How great are the coordination
                                         benefits from co-locating activities?
    Alternative Modes of Overseas Market Entry

 TRANSACTIONS                          DIRECT INVESTMENT


   Exporting           Licensing       Joint venture              Wholly
                                                                  owned
                                    Marketing &    Fully
Spot     Foreign                    Distribution   integrated
                                                                  subsidiary
sales    agent /                    only
         distributor

   Long-          Licensing    Franchising                 Marketing&     Fully
   term           patents &                                Distribution   integrated
   contract       other IP                                 only




   Low                        Resource commitment                           High
         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?
   General Motors’ Alliances with Competitors

                                  SAAB
AVTOVAZ                                                          FIAT
                                       50%
                                      owned
SUZUKI


                                   GM                               FUJI
                                    60%
ISUZU                              owned

    40% investment     IBC Vehicles
                        Ltd. (U.K.)            50%
                                              owned                SAIC
                     (Makes vans in UK)

                                  New United Motor
  TOYOTA                           Manufacturing
              50% owned             Inc. (NUMMI)
                                   (Makes cars in US)   DAEWOO
                Multinational Strategies:
        Globalization vs. National Differentiation

 The case for a global strategy:

• National preferences in decline—world becoming a single,    Ted
  if segmented, market                                        Levitt
                                                              ―Globaliz-
                                                              -ation of
• Accessing global scale economies—in purchasing,             Markets‖
  manufacturing, product development, marketing.              Thesis



• Strategic strength from global leverage—ability to cross-   Hamel &
                                                              Prahalad
  subsidize a national subsidiary with cash flows from        Thesis
  other national subsidiaries
                                                              Kenichi
                                                              Ohmae’s
• Need to access market trends and technological              ―Triad
  developments in each of the world’s major economic          Power‖
  centers- N. America, Europe, East Asia.                     Thesis
    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                World as inter-          World as
    single mkt.             related mkts.            separate
                                                     national mkts.

                  global strategy              multidomestic strategy
Analyzing benefits/costs of a global strategy

Forces for globalization         Forces for localization / national
MARKET DRIVERS                       differentiation
--Common customer needs          MARKET DRIVERS
--Global customers               --Different languages
--Cross-border network effects   --Different customer preferences
                                 --Cultural differences
COST DRIVERS
--Global scale economies         COST DRIVERS
--Differences in national        --Transportation costs
     resource availability       --Transaction costs
--Learning                       --Economic & political risk
                                 --Speed of response
                                 GOVERNMENT DRIVERS
COMPETITIVE DRIVERS
                                 --Barriers to trade & inward inv.
--Potential for strategic
                                 --Regulations
    competition (e.g. cross-
    subsidization)
              Jet engines


                             Autos
  Benefits
                   Consumer
    of
                   electronics                       Telecom
  global
integration                                         equipment




                Steel                          Investment
                                                 banking
                    Cement        Online C2C auctions             Restaurant
                                                           Retail   chains
                                             Beer         banking
                 Dry      Auto                                       Funeral
              cleaning   repair                                     services

                                  Benefits of national differentiation
       Positioning industries in terms of benefits of
         globalization and national differentiation

              Jet engines


                                Autos
  Benefits
                  Consumer
    of
                  electronics                        Telecom
  global
integration                                         equipment




                                                Investment
                                                  banking

                                                            Retail
              Cement                                       banking
                        Auto                                              Funeral
                       repair                                             services

                                   Benefits of national differentiation
    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




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 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


Consumer Electronics                          Branded, Packaged                             Telecommunications
                                               Consumer Goods                                   Equipment
                            Matsushit                                                                                 NEC
 global integration




                                                global integration




                                                                                              global integration
                                a                                       Ka
                                                                        o                                          Erickson
                            Philips                                     P&G
                      General Electric                                   Unilever
                                                                                                                              ITT

                       local responsiveness                          local responsiveness                          local responsiveness
- 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
        Reconciling Global Integration with National
       Differentiation: The Transnational Corporation

  Tight complex                                                        Heavy flows of
   controls and                                                         technology,
coordination and a                                                   finances, people,
 shared strategic                                                      and materials
decision process.                                                         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 the MNC: Key Learning
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‖
              relations
3.   What’s 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

								
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