Foundations of Strategy Chapter 8: Global Strategies and the Multinational Company

1. Foundations of Strategy Chapter 8:Global Strategies and the Multinational Company Jacob Felty SabreaHebb Alexandra Hill Shaady Ibrahim Callie Myers Colby Wulf

2. Patterns of Internationalization • Occurs through: • Trade – the sale and shipment of goods and services from one country to another • Direct Investment – building or acquiring productive assets in another country USA China

3. Internationalization of Industries • Sheltered Industries – protected from trade and direct investment • Trading Industries – engaged in trade, not direct investment • Multidomestic Industries – engaged in direct investment, not trading • Global Industries – trade and direct investment involved High Low High Foreign Direct Investment International Trade Low

4. Competitive Advantage in an International World • Achieved when internal strengths in resources and capabilities to the key success factors of the industry are matched • Comparative Advantage: a country intensively uses those resources they have in abundance • Large home market is an additional source Coca – Cola Competitive Advantage

5. Porter’s National Diamond Framework • Factor Conditions – constraints or freedoms, beyond control • Related and Supporting Industries – clusters of inter-related and interdependent industries • Demand Conditions – domestic demand drives innovation and quality • Strategy, Structure, and Rivalry – intense domestic competition vital to success

6. Limitations of the Diamond Model • First Perspective: • Fails to consider attributes of home country’s trading partners • Not applicable to smallest nations • Ignores the role of multinational corporations in influencing competitive success of nations • Second Perspective: • Too general, lacks value • Insufficiently precise to generate predictions Would countries rich in cheap labor, such as Bangladesh, be competitive without clothing companies such as Gap?

7. International Location of Production Firms consider several factors for locating production: • National resource availability – Finding countries where resource supplies are good (ex: oil industry in the Gulf of Mexico) • Firm-specific competitive advantages – a firm’s competitive advantage dependent on internal resources need to find locations where they are located • Goldman Sachs and Toyota have succeeded in transferring their competitive advantage abroad

8. International Location of Production • Tradability – the harder it is to transport product, the more local production must become • Trade barriers (i.e. tariffs, quotas) or government restrictions (licensing) factor into the choice • Services are best produced nearby consumption • Political considerations – Location decision is affected by government incentives, penalties, and restrictions Freedom House - Economic Freedom Index

9. Location and Value Chain • A vertical chain of activities comprises the production of goods. But advantages for any stage varies by country • Consumer electronics is costly in capital and R&D. Neither is always in the same location • ECCO produces ‘leisure casual branded footwear’. The firm uses a vertically-integrated production chain (“from cow to consumer”) • Design, R&D, leather production, and distribution are handled in very different locations like Denmark, Portugal, Indonesia, China, Hong Kong, etc.

10. Factors of Entering Foreign Markets • Competitive Advantage: • firm specific vs. country specific (Toyota) • Firm specific = production/management capabilities • Country specific = Low domestic cost base • Tradability of product & barriers of trade • Barriers to trade • transportation constraints • import restrictions • Range of resources and capabilities • To establish competitive advantage • Directly appropriating Returns on resources • Licensing arrangement factors: • Reliability and capabilities of local licensee • Transaction costs involved • transport costs & tariffs, exchange rate risk, information costs • McDonald’s vs. Starbucks

11. Entering Foreign Markets

12. International alliances and joint ventures • Strategic Alliances • Collaborative arrangement between firms • Access the market knowledge, distribution capabilities, and product development of local companies • Sharing resources and capabilities between the partners • Helps minimize costs and increase market share

13. International Strategic Alliances

14. Multinational Strategies: Global Integration vs. National Differentiation • The benefits of a global strategy • The need for differentiation • Reconciling global integration with national differentiation

15. The Benefits of a Global Strategy • Views the world as a single, segmented market • Global players usually win • Access to scale economies • Barriers to exploiting these scale economies are fast disappearing

16. Levitt’s Analysis of the Potential for Global Strategies • Cost Benefits of Scale and Replication • Serving Global Customers • Exploiting National Resources – Arbitrage Benefits • Learning Benefits • Competing Strategically

17. Cost Benefits of Scale and Replication • Primary sources of scale economy is product development • Replication costs are a fraction of the original cost of developing the product • Disneyland theme parks

18. Serving Global Customers • Investment Banking • Audit services • Advertising

19. Exploiting National Resources • Exploiting the efficiencies from locating different activities in different places • Search of resource opportunities • Raw materials • Low cost labor • Therefore, leads to a search for knowledge

20. Learning Benefits • Refers to • Ability to access and transfer local knowledge • Integration of this knowledge • Creation of new knowledge learned from interacting with different national environments • IKEA expansion

21. Competing Strategically • International firms can fight more aggressively with national firms using resources from other national markets • Can cut prices lower than national firms • Can contradict standards set by the World Trade Organization

22. The Need for National Differentiation • Products designed to meet the needs of a global customer tend to be unappealing to most customers • Costs of national differentiation are low if • Designs are basic • Common major components remain the same • CAGE framework • Cultural distance • Administrative and political distance • Geographical distance • Economic distance

23. Reconciling Global Integration with National Differentiation • International strategy is a tradeoff between global integration and national adaptation • Industries where scale economies are large  global strategy • If national preferences are pronounced  multi-domestic strategy • Reconciling conflicting forces is one of the greatest strategic challenges

24. Strategy and Structure of the Multinational Corporation • The strategy-structure mix for MNCs are dependent on the ones they used to enter the international marketplace. • Over the past 100 years, different time periods have called for different strategies and structures. • However, radical changes are difficult and dangerous. • Three main eras in strategy-structure development: • Early 20th Century • Post World-War II • The 1970s and 1980s

25. Early 20th Century: era of the European Multinational • Pioneers of multinational expansion: Unilever, Shell, ICI, and Phillips. • Poor transportation and communication called for the invention of “multinational federations”.

26. Post World War II: era of the American Multinational • The dominance of the US economy was the basis for emergence of multinationals such as Ford and Coca-Cola. • US-based technology and resources were their primary competitive advantage at this time. • During WWII, Coke began representing itself as a patriotic brand, setting the stage for their multinational expansion.

27. The 1970s and 80s: the Japanese Challenge • Japanese MNCs such as Honda and Toyota dominated during this era. • R&D and manufacturing were based in Japan while sales and distribution were done overseas. • Globally standardized products were produced in large quantities, providing a cost and quality advantage.

28. Reconfiguring the MNC • Changing the organization structure: • Changes in structure must be backed by changes in responsibilities, decision making, and coordination modes. • Escalating local customer needs calls for more decentralization. However, this should not stifle innovation and creation. • These factors introduce a new idea: “The Transnational Organization”.

29. The Transnational Firm • The transnational firm is a concept and direction for strategy rather than a strategy itself. • P&G adopts global standardization for some products and national differentiation for others. • Aligning resources with these changing strategies may require a headquarters relocation.

30. Organizing R&D and NPD • Innovation and creation requires autonomy while distribution requires heavy coordination. • Assigning national subsidiaries can remedy this problem.