MBA290:

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

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 (contd)

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
STRATEGY

BUSINESS
STRATEGY

FUNCTIONAL
STRATEGIES

CORPORATE
HEAD OFFICE

Division A

Division B

R&D

R&D

Personnel

Personnel

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

Long-term, simple
and agreed upon
objectives

Profound
understanding of
the competitive
environment

Objective
appraisal of
resources

Strategy as a Quest for Profit

The stakeholder approach : The firm is a coalition of interest

groupsit 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
Where:

V
Ct
r

market value of the firm.

free cash flow in time t
weighted average cost of capital

Ct
(1 + r)t

The Worlds Most Valuable Companies:

Performance Under Different Profitability Measures
COMPANY

MARKET
CAP.
($BN.)

NET
INCOME
($BN)

RETURN
ON
SALES
(%)

RETURN
ON
EQUITY
(%)

RETURN
ON
ASSETS
(%)

RETURN
TO
SHAREHOLDERS
(%)

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 assetsmaximize after-tax rate of return
b) On new investmentseek rate of return > cost of capital
Utilize qualitative strategy analysis to evaluate future profit
potential

A Comprehensive Value Metrics Framework

Shareholder
Value
Measures:
Market value of the
firm
Market value added
(MVA)
Return to
shareholders

Intrinsic
Value
Measures:
Discounted cash
flows
Real option values

Financial
Indicators
Measures:
Return on Capital
Growth (of
revenues & operating
profits
Economic profit (EVA)

Value
Drivers
Sources:
Market share
Scale economies
Innovation
Brands

Sources of Superior Performance

Above Normal
Profits
(in Excess of the Competitive Level)

Avoid
Competitors
Attractive
Industry

Attractive
Strategic
Group

Attractive
Niche

Entry
Barriers

Mobility
Barriers

Isolating
Mechanisms

Be Better Than
Competition
Cost
Advantage

Differentiation
Advantage

Sources of Competitive Advantage

COST
ADVANTAGE
COMPETITIVE
ADVANTAGE
DIFFERENTIATION
ADVANTAGE

The Experience Curve

The Law of Experience

1992
1994
Cost per
unit of
output (in
real $)

The unit cost value added to a standard product

declines by a constant % (typically 20-30%) each
time cumulative output doubles.

1996
1998
2000

Cumulative Output

2002

2004

Examples of Experience Curves

75%

100K

200K
500K
1,000K
Accumulated unit production
(millions)

UK refrigerators, 1957-71

Price Index
50 100 200 300

1960 Yen
15K
20K 30K

Japanese clocks & watches, 1962-72

70% slope

10
50
Accumulated units
(millions)

Drivers of Cost Advantage

ECONOMIES OF SCALE

ECONOMIES OF LEARNING

Indivisibli\ties
Specialization and division of labor
Increased dexterity
Improved organizational routines

PRODUCTION TECHNIQUES

Process innovation
Reengineering business processes

PRODUCT DESIGN

Standardizing designs & components

Design for manufacture

INPUT COSTS

CAPACITY UTILIZATION

RESIDUAL EFFICIENCY

Location advantages
Ownership of low-cost inputs
Non-union labor
Bargaining power
Ratio of fixed to variable costs
Speed of capacity adjustment
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
Efficient Plant
Size: the point
where most scale
economies are
exhausted

Units of output
per period

Scale Economies in Advertising: U.S. Soft Drinks

Advertising Expenditure ($ per case)

0.20
0.15
0.10
0.05
0.02

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.

Schweppes
SF Dr. Pepper
Diet 7-Up

Tab
Diet Pepsi

Diet Rite
Fresca
Seven Up
Dr. Pepper

Sprite

Pepsi
10

20

50

100

200

Annual sales volume (millions of cases)

500

Coke
1,000

Applying the Value Chain to Cost Analysis:

The Case of Automobile Manufacture

STAGE 1. IDENTIFY THE PRINCIPLE ACTIVITIES

PURCHASING

PARTS
INVENTORIES

R&D
TESTING,
COMPONENT
ASSEMBLY
DESIGN
QUALITY
MFR
ENGNRNG
CONTROL

GOODS
INVENTORIES

SALES DISTRI- DEALER &

&
BUTION CUSTOMER
MKITG
SUPPORT

STAGE 2. ALLOCATE TOTAL COSTS

Applying the Value Chain to Cost Analysis: The

Case of Automobile Manufacture (continued)
STAGE 3.
IDENTIFY
COST
DRIVERS

PURCHASING

PARTS
INVENTORIES

--Plant scale for each

component
-- Process technology
-- Plant location
-- Run length
-- Capacity utilization

-- Level of quality targets

-- Frequency of defects

R&D
COMPONENT ASSEMBLY TESTING,
DESIGN
QUALITY
MFR
ENGNRNG
CONTROL

Prices paid
--Size of commitment
depend on:
--Productivity of
-- Order size
R&D/design
--Purchases per
--No. & frequency of new
supplier
models
-- Bargaining power
-- Supplier location

GOODS
INVENTORIES

-- Plant scale
-- Flexibility of production
-- No. of models per plant
-- Degree of automation
-- Sales / model
-- Wage levels
-- Capacity utilization

-- No. of dealers
-- Sales / dealer
-- Level of dealer
support
-- Frequency of defects
under warranty

SALES
&
MKITG

DISTRI- DEALER &

BUTION CUSTOMER
SUPPORT

--Cyclicality &
predictability of sales
--Customers
willingness to wait

Applying the Value Chain to Cost Analysis: The

Case of Automobile Manufacture (continued)
STAGE 4. IDENTIFY LINKAGES

Consolidation of orders to increase

discounts, increases inventories

PRCHSNG

PARTS
INVNTRS

R&D
DESIGN

Designing different models around

common components and platforms
reduces manufacturing costs

COMPONENT
MFR

Higher quality parts and materials

reduces costs of defects
at later stages

ASSEMBLY

TESTING GOODS
QUALITY
INV

SALES DSTRBTN DLR

MKTG
CTMR

Higher quality in manufacturing

reduces warranty costs

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
Observable product characteristics:
size, color, materials, etc.
performance
packaging
complementary services

INTANGIBLE
DIFFERENTATION
Unobservable and subjective
characteristics that appeal to
customers image, status,
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
does it satisfy?

By what
criteria do they
choose?
THE
CUSTOMER

What are key

attributes?
Relate patterns of
customer
preferences to
product attributes
What price
premiums do
product attributes
command?

What
motivates
them?

What are
demographic,
sociological,
psychological
correlates of customer
behavior?

FORMULATE
DIFFERENTIATION
STRATEGY
Select product
positioning in relation
to product attributes
Select target
customer group
Ensure customer /
product compatibility
Evaluate costs and
benefits of
differentiation

Using the Value Chain to Identify

Differentiation Potential on the Supply Side
MIS that supports
fast response
capabilities

Training to support
customer service
excellence

Unique product features.

Fast new product
development

FIRM INFRASTRUCTURE

HUMAN RESOURCE MANAGEMENT

TECHNOLOGY DEVELOPMENT

INBOUND

OPERATIONS

LOGISTICS

Quality of
components &
materials

Defect free
products.
Wide variety

OUTBOUND

MARKETING

LOGISTICS

& SALES

Fast delivery.
Efficient order
processing

Building brand
reputation

SERVICE

Customer technical
support. Consumer
credit. Availability of
spares

Identifying Differentiation Opportunities through

Linking the Value Chains of the Firm and its
Customers: Can Manufacture

5
2

4
Distribution

Marketing

Canning

Processing

Inventory holding

Purchasing

Service &
technical support

Sales

Distribution

Inventory holding

Manufacturing

Design
Engineering

Inventory holding

Purchasing

Supplies of steel
& aluminum

CAN MAKER

CANNER

1. Distinctive can design can assist canners marketing activities.

2. High manufacturing tolerances can avoid breakdowns in customers 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 canners 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
Pharmaceuticals
Tobacco
Food Consumer Products
Securities
Diversified financials
Beverages
Mining & crude oil
Petroleum Refining
Medical Products & Equipment
Commercial Banks
Scientific & Photographic Equipt.
Apparel
Computer Software
Publishing, Printing
Health Care
Electronics, Electrical Equipment
Specialty Retailers
Computers, Office Equipment

22.7
22.3
21.6
19.6
18.9
18.3
18.8
17.8
17.3
17.2
15.5
15.0
14.4
13.9
13.5
13.1
13.0
13.0
11.7

Gas & Electric Utilities

10.4
Food and Drug Stores
10.0
Motor Vehicles & Parts
9.8
Hotels, Casinos, Resorts
9.7
Railroads
9.0
Insurance: Life and Health
8.6
Packaging & Containers
8.6
Insurance: Property & Casualty 8.3
Building Materials, Glass
8.3
Metals
8.0
Food Production
7.2
Forest and Paper Products
6.6
Semiconductors &
Electronic Components
5.9
Telecommunications
4.6
Communications Equipment
1.2
Entertainment
0.2
Airlines
(22.0)

The Profitability of Global Industries: Return on Invested Capital, 1963-2003

Utilities

6.2
6.5

Telecom services
Transporation

6.9

Energy

7.7

Materials

8.4

OVERALL AVERAGE

Retailing

Consumer durables and apparel

9.5

Food retailing

9.6

Capital goods

9.9

Automobiles and components

9.9

Technology hardware and equipment

10.3

Hotels, restaurants, leisure

10.3

Food, beverages, tobacco

11

Healthcare equipmernt and services

11.3
11.9

Semiconductors
Commercial services

12.8

Media

14.7

Computer software and services

15

Household and personal products

15.2

Pharmaceuticals

18.4

10

15

Average ROIC 1963-2003 (%)

20

From Environmental Analysis

to Industry Analysis
The national/
international
economy

Technology

Government
& Politics

The natural
environment

THE INDUSTRY
ENVIRONMENT
Suppliers
Competitors
Customers

Demographic
structure

Social structure

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

Concentration

Perfect
Competition

Oligopoly

Duopoly

Monopoly

Many firms

A few firms

Two firms

One firm

Entry and Exit No/Low barriers

Barriers

Significant barriers

Product
Differentiation

Homogeneous
Product

Potential for product differentiation

Perfect
Information flow

Imperfect availability of information

Information

High barriers

Porters Five Forces of Competition Framework

SUPPLIERS
Bargaining power of suppliers
INDUSTRY
COMPETITORS
POTENTIAL Threat of
ENTRANTS
new
entrants

Threat of
Rivalry among
existing firms

SUBSTITUTES
substitutes

Bargaining power of buyers

BUYERS

The Structural Determinants of Competition

SUPPLIER POWER
Supplier concentration
Relative bargaining
power

THREAT OF ENTRY
Capital requirements
Economies of scale
Absolute cost advantage
Product differentiation
Access to distribution
channels
Legal/ regulatory barriers
Retaliation

INDUSTRY RIVALRY

Concentration
Diversity of
competitors
Product differentiation
Excess capacity &
exit barriers
Cost conditions

BUYER POWER
Buyers price sensitivity
Relative bargaining
power

SUBSTITUTE
COMPETITION
Buyers propensity
to substitute
Relative prices &
performance of
substitutes

SUPPLIER POWER
LOW

THREAT OF ENTRY
LOW
economies of scale
capital requirements
for R&D and clinical
trials
product differentiation
control of distribution
channels
patent protection

INDUSTRY
COMPETITIVENESS
LOW
high concentration
product differentiation
patent protection
steady demand growth
no cyclical fluctuations
of demand

BUYER POWER
LOW
Physician as buyer:
Not price sensitive
No bargaining power.
(Changing with managed care.)

DRUG
INDUSTRY
(ROE=22%)

THREAT OF
SUBSTITUTES
LOW
No substitutes.
(Changing as managed care
encourages generics.)

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
Entry

Method for Neutralizing Force

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
Buyers
Suppliers

Improve attractiveness compared to

substitutes: better service, more features, etc..
Reduce buyer uniqueness: forward
integrate, differentiate product, new customers, etc..

Reduce supplier uniqueness: backward

integrate, obtain minority position, second source, etc..

The Traditional Model of Industry Life Cycle

Shakeout

Maturity

Sales volume

Fermentation

Time

Decline

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

1900 50 90 07
MOTORCYCLES

Color
B&W

1930

50 70
TVs

Portable

90

HDTV
?

07

Life cycle model can help us to anticipate industry

evolutionbut dangerous to assume any common, predetermined pattern of industry development

Evolution of Industry Structure over the Life Cycle

INTRODUCTION
Affluent buyers

GROWTH
Increasing
penetration

TECHNOLOGY

Rapid product
innovation

Product and
Incremental
process innovation innovation

PRODUCTS

Wide variety,
Standardization
rapid design change

Commoditization

Continued
commoditization

MANUFACTURING

Short-runs, skill
intensive

Deskilling

Overcapacity

DEMAND

TRADE

Capacity shortage,
mass-production

MATURITY
Mass market
replacement
demand

DECLINE
Knowledgeable,
customers, residual segments
Well-diffused
technology

-----Production shifts from advanced to developing countries-----

COMPETITION

Technology-

Entry & exit

KSFs

Product innovation

Process technology. Design for

Shakeout &
consolidation
Cost efficiency

Price wars,
exit
Overhead reduction, rationalization, low
cost sourcing

The Driving Forces of Industry Evolution

BASIC CONDITIONS
Customers become
more knowledgeable
& experienced

INDUSTRY STRUCTURE

Customers become
more price conscious

Products become
more standardized
Diffusion of
technology

COMPETITION

Production
becomes less R&D
& skill-intensive

Production shifts
to low-wage
countries

Quest for new

sources of
differentiation

Price competition
intensifies

Excess capacity
increases
Demand growth
slows as market
saturation approaches

Distribution channels
consolidate

Bargaining power
of distributors
increases

Changes in the Population of Firms over the

Industry Life Cycle: US Auto Industry 1885-1961
250
200
150
No. of firms

100
50
0

1895

1905

1915

1925

1935

1945

1955

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

Mail order,
catalogue
retailing
e.g. Sears
Roebuck

1880s

Chain
Stores
e.g. A&P

1920s

Warehouse
Internet
Clubs
Retailers
e.g. Price Club
e.g. Amazon;
Sams Club
Expedia
Discount
Category
Stores
Killers
e.g. K-Mart
e.g. Toys-R-Us,
Wal-Mart
Home Depot

1960s

2000

Gary Hamel: Shaking the Foundations

OLD BRICK

NEW BRICK

Top management is responsible

for setting strategy

Everyone is responsible
for setting strategy

Getting better, getting faster

is the way to win

Rule-busting innovation
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

competitiveness

Theres no correlation between

size and competitiveness

Innovation equals new products

and new technology

Innovation equals entirely new

business concepts

Strategy is the easy part,

Implementation the hard part

Strategy is the easy only if youre

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 cant innovate

Big companies can become gray-haired

revolutionaries

An Alternate Model of Industry Life Cycle

Convergence

Coexistence

Sales volume

Emergence

Dominance

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
Goals and
Values
Resources and
Capabilities
Structure and
Systems

THE
INDUSTRY
ENVIRONMENT

STRATEGY
STRATEGY

The
Firm-Strategy
Interface

Competitors
Customers
Suppliers

The
Environment-Strategy
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
Mechanics

Fine
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
Color video printer
Stepper aligners
Calculator
Notebook computer

MicroElectronics

Eastman Kodaks Dilemma

Resources & Capabilities

1980s

Chemical Imaging
Organic Chemistry
Polymer technology

Optomechtronics
Thin-film coatings

Brands
Global Distribution
1990s

Businesses
Film
Cameras
Fine Chemicals
Pharmaceuticals
Diagnostics

DIVESTS: Eastman Chemical, Sterling Winthrop, Diagnostics

Need to build digital
imaging capability

Digital Imaging
Products (e.g. Photo CD
System; Advantix
cameras & film

The Links between Resources, Capabilities

and Competitive Advantage
COMPETITIVE
ADVANTAGE

INDUSTRY KEY
SUCCESS FACTORS

STRATEGY
ORGANIZATIONAL
CAPABILITIES
RESOURCES

TANGIBLE

INTANGIBLE

Financial
Physical

Technology
Reputation
Culture

HUMAN

Skills/know-how
Capacity for
communication
& collaboration
Motivation

Appraising Resources
RESOURCE

Tangible
Resources

CHARACTERISTICS
Financial

Borrowing capacity
Internal funds generation

Physical

Plant and equipment:

size, location, technology
flexibility.
Land and buildings.
Raw materials.

Debt/ Equity ratio

Credit rating
Net cash flow
Market value of
fixed assets.
Scale of plants
Alternative uses for
fixed assets

Technology

Patents, copyrights, know how

R&D facilities.
Technical and scientific
employees

No. of patents owned

Royalty income
R&D expenditure
R&D staff

Reputation

Brands. Customer loyalty. Company

reputation (with suppliers, customers,
government)

Brand equity
Customer retention
Supplier loyalty

Training, experience, adaptability,

commitment and loyalty of employees

Employee qualifications,
pay rates, turnover.

Intangible
Resources

Human
Resources

INDICATORS

The Worlds Most Valuable Brands, 2006

Rank Company

Brand
value
($bn.)

1
2
3
4
5
6
7
8
9
10

67.5
59.9
53.4
47.0
35.6
26.5
26.4
26.0
24.8
21.2

Coca-Cola
Microsoft
IBM
GE
Intel
Nokia
Disney
McDonalds
Toyota
Marlboro

Rank

11
12
13
14
15
16
17
18
19
20

Company

Brand
value
($bn.)

Mercedes Benz
20.0
Citi
20.0
Hewlett-Packard 18.9
American Express 18.6
Gillette
17.5
BMW
17.1
Cisco
16.6
Louis Vuitton
16.1
Honda
15.8
Samsung
15.0

http://www.interbrand.com/best_brands_2007.asp

Source: Interbrand

Defining Organizational Capabilities

Organizational Capabilities = firms 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
firms strategy and performance. (Hamel and Prahalad)

Identifying Organizational Capabilities:

A Functional Classification
FUNCTION
Corporate
Management

CAPABILITY
Financial management
Strategic control
Coordinating business units
Managing acquisitions

EXEMPLARS
ExxonMobil, GE
IBM, Samsung
BP, P&G
Citigroup, Cisco

MIS

Speed and responsiveness through

rapid information transfer

Wal-Mart, Dell
Capital One

R&D

Research capability
Development of innovative new products

Merck, IBM
Apple, 3M

Manufacturing

Efficient volume manufacturing

Continuous Improvement
Flexibility

Briggs & Stratton

Nucor, Harley-D
Zara, Four Seasons

Design

Design Capability

Apple, Nokia

Marketing

Brand Management
Quality reputation
Responsiveness to market trends

P&G, LVMH
Johnson & Johnson
MTV, LOreal

Sales, Distribution
& Service

Sales Responsiveness
Efficiency and speed of distribution
Customer Service

PepsiCo, Pfizer
LL Bean, Dell
Singapore Airlines
Caterpillar

The Value Chain:

The McKinsey Business System

TECHNOLOGY

PRODUCT DESIGN

MANUFACTURING

MARKETING

DISTRIBUTION

SERVICE

The Porter Value Chain

FIRM INFRASTRUCTURE

SUPPORT
ACTIVITIES

HUMAN RESOURCE MANAGEMENT

TECHNOLOGY DEVELOPMENT
PROCUREMENT

INBOUND
LOGISTICS

OPERATIONS

OUTBOUND

MARKETING

LOGISTICS

& SALES

SERVICE

PRIMARY
ACTIVITIES

The Rent-Earning Potential

of Resources and Capabilities
THE EXTENT OF THE
COMPETITIVE ADVANTAGE
ESTABLISHED

THE PROFIT
EARNING POTENTIAL
OF A RESOURCE OR
CAPABILITY

Scarcity
Relevance
Durability

SUSTAINABILITY OF THE
COMPETITIVE
ADVANTAGE

Transferability
Replicability
Property rights

APPROPRIABILITY

Relative
bargaining power
Embeddedness

Assessing a Companies Resources

and Capabilities: The Case of VW
Importan
ce

VWs
Relative
Strength

R1. Finance

C1. Product
development

R2. Technology

C2. Purchasing

R3. Plant and

equipment

C3. Engineering

C4. Manufacturing

C5. Financial
management

C6. R&D

C7. Marketing &

sales

C8. Government
relations

RESOURCES

R4. Location
R5. Distribution

7
8

CAPABILITIES

Importance

VWs
Relative
Strength

4
5

Appraising VWs Resources and Capabilities

(Hypothetical only)

10

Key Strengths

Superfluous Strengths

Relative Strength

C3
R3
C4

C8
C2
R2

R1
C6

Zone of Irrelevance

1
1

R5

R4

C5

C1
C7

Key Weaknesses
5

Strategic Importance

10

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
Integrated
Firm

V1
V2
V3

[B] Several
V1
Specialized
V2
Firms linked
by Markets V3

P1

P1

P2

P2

P3

P3

C1

C1

C2

C2

C3

C3

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 managementaccounting systems, decision sciences,
financial techniques, organizational innovations, scientific management

1980 1995 Shrinking size and scope of biggest industrial corporations.

Increasingly
turbulent
external
environment

Increased no. of managerial

decisions. Need for fast
responses to external
change

Admin. costs of
firms rise relative
to transaction
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
29.8

1949

63.5

53.7
36.5

1954

53.9
46.3

1959

39.9
46.1

1964

37.0
60.1

1969

63.0

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

70
60
Single business

50

Dominant
business
Related business

40
30
20

Unrelated
business

10
0
1950 1960 1970 1983 1993

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
SPREADING

--Diversification reduces variance of profit flows

--But, doesnt create value for shareholdersthey 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:

Porters 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

ECONOMIES
OF
SCOPE

Sharing tangible resources (research labs, distribution

systems) across multiple businesses
Sharing intangible resources (brands, technology) across
multiple businesses
Transferring functional capabilities (marketing, product
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
operating internal capital and labor markets
TRANSACTIONS
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 selfemployed builders, plumbers, electricians, painters.
Key issue -- transaction costs of the market vs.
administrative costs of firms.
Where transaction costs highfirm 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 doesnt 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
to undertake the activities?

The fewer the companies

the more attractive is VI

Is transaction-specific investment
needed?

If yes, VI more attractive

Does limited information permit

cheating?

VI can limit opportunism

Are taxes or regulation imposed

on transactions?

VI can avoid them

Do the different stages have similar

optimal scales of operation?

Greater the similarity, the

more attractive is VI

Are the two stages strategically

similar?

Greater the strategic

similarity ---the more
attractive is VI

How great the need for entrepreneurship

& continual upgrading of capabilities

Greater the need, the greater

the disadvantages of VI

How uncertain is market demand?

Greater the unpredictability

----the more costly is VI

Are risks compounded by

linkages between vertical stages

VI increases risk.

The value chain for steel cans

Iron ore
mining

Steel
production

Steel strip
production

Can
making

VERTICAL
INTEGRATION,
AND MARKET
CONTRACTS

VERTICAL
INTEGRATION

MARKET
CONTRACTS

Canning of
food, drink,
oil, etc.

MARKET
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.

LO W

International Trade

HIGH

Patterns of Internationalization
Trading
Industries

Global
Industries

--aerospace
--military hardware
--diamond mining
--agriculture

--automobiles
--oil
--semiconductors
--consumer electronics

Domestic
Industries

Multidomestic
Industries

--railroads
--laundries/dry cleaning
--hairdressing
--milk

--retail banking
--hotels
--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 industrys margins & rate of return on capital

Competitive Advantage within an International

Context: The Basic Framework
FIRM RESOURCES
& CAPABILITIES
-- Financial resources
-- Physical resources
-- Technology
-- Reputation
-- Functional capabilities
-- General management
capabilities

THE INDUSTRY
ENVIRONMENT
Key Success Factors

COMPETITIVE
ADVANTAGE

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

-.68

-.07

.01

.29

.40

portation equipment
Other manufacturers

Note:

Revealed comparative advantage for each product group

is measured as: (Exports less Imports)/ Domestic production

Porters Competitive Advantage

of Nations
Extends and adapts traditional theory of comparative
advantage to take account of three factors:
International competitive advantage is about companies not
countriesthe role of the national environment is providing
a home base for the company.

Sustained competitive advantage depends upon dynamic

factors-- innovation and the upgrading of resources and
capabilities
The critical role of the national environment is its impact
upon the dynamics of innovation and upgrading.

Porters National Diamond Framework

FACTOR CONDITIONS

RELATING AND
SUPPORTING
INDUSTRIES

DEMAND
CONDITIONS

STRATEGY, STRUCTURE,
AND RIVALRY

1.
2.
3.
4.

FACTOR CONDITIONSHome grown resources/capabilities more important

than natural endowments.
RELATED AND SUPPORTING INDUSTRIESKey role of industry clusters
DEMAND CONDITIONSDiscerning domestic customers drive quality & innovation
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
companys competitive advantage based upon firmspecific 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.
Parts & components
7,750
Labor
700
Shipping cost
300
Inventory
20
TOTAL
8,770

Mexico
8,000
40
1,000
40
9,180

Location and the Value Chain

Comparative advantage in textiles and apparel by stage of processing

Country

Stage
of
Processing

Index of
Revealed
Comparative
Advantage

Country

Stage
Index of
of
Revealed
Processing Comparative
Advantage

Hong Kong

1
2
3
4

-0.96
-0.81
-0.41
+0.75

Japan

1
2
3
4

-0.36
+0.48
+0.48
-0.48

Italy

1
2
3
4

-0.54
+0.18
+0.14
+0.72

U.S.A.

1
2
3
4

+0.96
+0.64
+0.22
-0.73

Note:
1 = production of fiber (natural & synthetic)
3 = production of textiles

2 = production of spun yarn

4 = production of clothing

Determining the Optimal Location

of Value Chain Activities

The optimal location

of activity X considered
independently

WHERE TO LOCATE
ACTIVITY X?

Where is the optimal location

of X in terms of the cost and
availability of inputs?
What government incentives/ penalties
affect the location decision?

What internal
resources and capabilities does the firm
possess in particular locations?
What is the firms business strategy
(e.g. cost vs. differentiation advantage)?

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

DIRECT INVESTMENT

TRANSACTIONS
Exporting
Spot
sales

Foreign
agent /
distributor

Longterm
contract

Low

Licensing

Licensing
patents &
other IP

Joint venture
Marketing &
Distribution
only

Fully
integrated

Franchising

Resource commitment

Wholly
owned
subsidiary

Marketing&
Distribution
only

Fully
integrated

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 partners 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
60%
owned

ISUZU
40% investment

IBC Vehicles
Ltd. (U.K.)
(Makes vans in UK)

TOYOTA

FUJI

50% owned

50%
owned

SAIC

New United Motor

Manufacturing
Inc. (NUMMI)
(Makes cars in US)

DAEWOO

Multinational Strategies:
Globalization vs. National Differentiation
The case for a global strategy:

National preferences in declineworld becoming a single,

if segmented, market
Accessing global scale economiesin purchasing,
manufacturing, product development, marketing.
Strategic strength from global leverageability to crosssubsidize a national subsidiary with cash flows from
other national subsidiaries
Need to access market trends and technological
developments in each of the worlds major economic
centers- N. America, Europe, East Asia.

Ted
Levitt
Globaliz-ation of
Markets
Thesis

Hamel &
Prahalad
Thesis
Kenichi
Ohmaes
Triad
Power
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
single mkt.

World as interrelated mkts.

global strategy

World as
separate
national mkts.
multidomestic strategy

Analyzing benefits/costs of a global strategy

Forces for globalization
MARKET DRIVERS
--Common customer needs
--Global customers
--Cross-border network effects
COST DRIVERS
--Global scale economies
--Differences in national
resource availability
--Learning

COMPETITIVE DRIVERS
--Potential for strategic
competition (e.g. crosssubsidization)

Forces for localization / national

differentiation
MARKET DRIVERS
--Different languages
--Different customer preferences
--Cultural differences
COST DRIVERS
--Transportation costs
--Transaction costs
--Economic & political risk
--Speed of response
GOVERNMENT DRIVERS
--Barriers to trade & inward inv.
--Regulations

Jet engines
Autos
Benefits
of
global
integration

Consumer
electronics

Telecom
equipment

Investment
banking

Steel
Cement

Online C2C auctions

Beer

Dry
cleaning

Auto
repair

Restaurant
chains
Retail
banking
Funeral
services

Benefits of national differentiation

Positioning industries in terms of benefits of

globalization and national differentiation
Jet engines
Autos
Benefits
of
global
integration

Consumer
electronics

Telecom
equipment

Investment
banking

Retail
banking

Cement
Auto
repair

Funeral
services
Benefits of national differentiation

The Evolution of Multinational Strategies and

Structures: (1) 1900-1939Era of the Europeans

The European MNC as Decentralized Federation :

National subsidiaries self-sufficient and autonomous
Parent control through appointment of subsidiaries senior
management
Organization and management systems reflect conditions of
transport and communications at the time e.g. Unilever, Phillips,
Courtaulds, Royal Dutch/Shell.

The Evolution of Multinational Strategies

and Structures: (2) 1945-1970U.S. Dominance

American MNCs as Coordinated Federations :

National subsidiaries fairly autonomous
Dominant role as U.S. parent-- especially in developing
new technology and products
Parent-subsidiary relations involved flows of technology
and finance, and appointment of top management. e.g.
Ford, GM, Coca Cola, IBM

The Evolution of Multinational

Strategies and Structures:
(3) 1970s and 1980sThe Japanese Challenge

The 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

Philips
General Electric
local responsiveness

- Global industry
- Matsushita the most
successful
- Philips the survivor
- GE sold out

Ka
o
P&G
Unilever
local responsiveness

- Substantial national
differentiation, few global
scale economies
- Kao has limited success
outside Japan
- Unilever and P&G most
successful

Telecommunications
Equipment
global integration

Matsushit
a

Branded, Packaged
Consumer Goods
global integration

global integration

Consumer Electronics

NEC
Erickson

ITT
local responsiveness

- Requires both global

integration and national
differentiation.
- NEC only partially
successful
- ITT sold out
- Ericsson most
successful

Reconciling Global Integration with National

Differentiation: The Transnational Corporation
Tight complex
controls and
coordination and a
shared strategic
decision process.

Heavy flows of
technology,
finances, people,
and materials
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.

2.

3.

4.

5.

On what basis to organizeproducts, geography, functions?

--Where is coordination most important?
--How global is the industry? How global is the firms
strategy?
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
Whats the role of HQ?
--Control function
--Coordination function
--Exploiting scale economies in centralized provision of
services
The need for internal differentiation
--By product/business
--By function
--By country
Formal & informal organization