Foundations of Strategy

1. Foundations of Strategy Team 1: Alexa McDaniel Allyson Hatz Bonnie Lee Rafael Garcia Molly Moseley Chapter 8: Global Strategies and Multinational Corporations

2. IKEA’s International Strategy • 1 of the largest furniture markers and retailers in the world. • Established by Ingvar Kamprad, a Swedish entrepreneur in 1943. • In 2010 it had net profits of 2.7 billion and had 300 stores in 26 countries. • Known for its cost-minimizing approach and its associated capabilities in cost-efficient design, sourcing, and logistics. (Flat-packed furniture to minimize transportation costs.) • But, overseas expansion did not progress smoothly. 80% of sales came from Europe.

3. Patterns of Internationalization • In the early years, their formula for international expansion was simple: they identified markets with the potential for high sales volumes and then purchased cheap land on the outskirts of a big city to build. • Kept its product catalogue and its management process the same. • Kept their Swedish roots. • Pragmatic problem-solving style and egalitarian approach to decision making.

4. Challenges of Internationalization • United States • American tastes were different. • Recognized the need to adapt to local demands. • Made it possible for area managers to put forward suggestions. • China • IKEA is seen as an expensive brand by its target market of young professionals. • Cut prices significantly and sacrificed short-term profitability for long-term growth.

5. Patterns of Internationalization • Sheltered Industries • Served exclusively by indigenous firms from both imports and inward direct investment by regulation, trade barriers, or because of the localized nature of the goods and services they offer. • Railroads, laundries, hairdressing, milk • Trading Industries • Internationalization occurs through imports and exports. • Aerospace, military hardware, diamond mining, agriculture. • Multi-domestic Industries • Internationalize through direct investment because trade is not feasible or because products are nationally differentiated. • Packaged groceries, investment banking, hotels, consulting. • Global Industries • Both trade and direct investment are important. • Cars, oil, semiconductors, consumer electronics.

6. Analyzing Competitive Advantage in an International Context • Competitive Advantage: The ability of one firm to earn (or have the potential to earn) a persistently higher rate of profit than rivals who operate in the same market. • Achieved when a firm matches its internal strengths in resources and capabilities to the key success factors of the industry. • In international industries, competitive advantage depends on its national environment- in particular, the availability of resources within the countries where it does business.

7. National Influences on Competitiveness: Comparative Advantage • Comparative Advantage: A situation in which a country or a region can produce a particular good or service at a lower opportunity cost than its rivals • Bangladesh: • Abundant supply of unskilled labor • Comparative advantage: Products that make intensive use of unskilled labor • Clothing, handicrafts, leather goods • United States: • Abundant supply of technological resources • Trained scientists and engineers, research facilities and universities • Comparative advantage: technology-intensive products • Microprocessors, computer software, pharmaceuticals, medical equipment • If exchange rates are well behaved, comparative advantage translates into competitive advantage

8. Porter’s National Diamond • Factor Conditions: • “Home-grown” instead of endowed • Related and Supporting Industries • Industry “clusters” • For each industry, closely related industries are sources of critical resources and capabilities. • Demand Conditions • Primary driver of innovation and quality improvement • Switzerland- watches (punctuality) • Japan- cameras (photography) • Germany- cars (quality engineering and autobahns) • Strategy, Structure, and Rivalry • Intense domestic competition drives innovation, efficiency, and the upgrading of competitive advantage

9. Limitations of the Diamond Model • Criticism has mainly come from two different perspectives: • The diamond model is omitting key factors • Fails to take into consideration the attributes of the home country’s largest trading partners • Isn’t applicable to most of the world’s smallest nations • Ignores the role of multinational corporations in influencing the competitive success of nations • The diamond is so general that it lacks value • By trying to explain all aspects of trade and competition, it ends up explaining nothing

10. Does IKEA Gain a Competitive Advantage from Being Swedish? • Factor Conditions: • Plentiful supply of timber • Farmers would make furniture during the winter when they could not farm • Long tradition of design appreciation • Related and Supporting Industries: • Favorable conditions for furniture making have produced a number of furniture clusters in Sweden • Demand Conditions: • Swedish customers are sensitive to environmental considerations • IKEA argues that it goes for low costs, but not at the expense of the environment • Local Firm Strategy, Structure, and Rivalry • “Flat Pack” to reduce transportation costs

11. Applying the Framework • National resource conditions influence international strategies • Where to locate productions activities • How to enter a foreign market • Firms move beyond their national borders to access resources and capabilities • Decisions on where to produce are being separated from decisions on where to sell

12. Choosing Where To Locate Production • National resource availability • Where key resources differ between countries • Firm-specific competitive advantages • Where resources and capabilities are situated • Tradability • Difficulty in transport causes problems • Political consideration • Government incentives, penalties, and restrictions

13. Globalization of IKEA’s Supply Chain • Changing from Swedish to Polish sources • Product design remained in Sweden • Company moved headquarters to Netherlands with logistics center in Germany • Swedwood: IKEA’s own manufacturing subsidiary • Suppliers chosen for ability to provide products at low costs

14. How Should a Firm Enter Foreign Markets? • Firms enter markets in pursuit of profitability • Entry by means of transactions or direct investment • 5 key factors of entry modes • Is the firm’s competitive advantage based on firm-specific or country-specific resources • Is the product tradable and what are the barriers to trade • Does the firm possess the full range of resources and capabilities for establishing a competitive advantage in the overseas market • Can the firm directly appropriate the returns to its resources • What transaction costs are involved

15. IKEA’s Foreign Entry Strategy • Private company with complex ownership • INGKA Holdings: parent organization • IKEA Systems BV: owns IKEA concept and trademark • Operates a franchise system: beneficial for company • Careful monitoring of each store keeps from damaging IKEA brand

16. Benefits of a Global Strategy • Global players win out over their national competitors for 2 reasons: • Supplying the world market allows access to scale economies in product development, manufacturing, and marketing. • The key barrier to exploiting these scale economies, locally differentiated customer preferences, are fast disappearing in the face of uniformity imposed by technology, communication and travel.

17. 5 Major Benefits of Global Strategy • Cost Benefits of Scale and replication • McDonald’s has developed its business system within the US and replicated it across 200 countries. • Serving Global Customers • In several industries, the primary driver of globalization has been the need to service global customers-the internationalization of car parts manufacturers has tended to follow the internationalization patterns of the car assemblers. • Exploiting National Resources • Exploiting the efficiencies from locating different activities in different places-quest for raw materials and low-cost labor. • Learning benefits • Integration of knowledge from different locations and the creation of new knowledge through interacting with different national environments-IKEA adjusting to Japanese style and design preferences. • Competing Strategically • Multinational companies can fight aggressive battles in individual national markets using their resources from other national markets.

18. Strategy and Organization within the Multinational Corporation • One of the greatest challenges of facing the the senior managers of MNCs is aligning organizational structures and management systems and their fit with the strategies being pursued.

19. The evolution of multinational strategies and structures • International firms have adopted different strategies and different structural configurations • Structural configurations have tended to persist over time • Radical changes in strategy-structure are difficult

20. Three eras in the development of the MNC • Early 20th century: era of the European multinational • Decentralized Federations • Post-World War II: era of the American multinational • Coordinated Federations • The 1970s and 1980s: the Japanese challenge • Centralized Hubs

21. Reconfiguring the MNC: the transnational corporation • Changing Organizational Structure • New approaches to reconciling localization and global integration • Organizing R&D and new product development