Professor Stanley Han
College of Business Administration


Course Overview: Objectives


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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.


Course Overview: Objectives (cont’d)
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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.


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

• 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 CORPORATE HEAD OFFICE BUSINESS STRATEGY Division A Division B R&D FUNCTIONAL STRATEGIES R&D Personnel Finance Production Marketing/Sales Personnel Finance Production Marketing/Sales .

allocation of scarce resources between business units • Business strategy.. to win a business unit must adopt a strategy that establishes a competitive advantage over its rivals.. defines the scope of the business in terms of the industries and markets in which it competes. divestments.Levels of Strategy • Corporate strategy.. is concerned with how the firm competes within a particular industry or market. new ventures.... the detailed deployment of resources at the operational level .. • Functional strategy.. acquisitions. vertical integration. • includes decisions about diversification.

simple and agreed upon objectives Objective appraisal of resources $ .Common Elements in Successful Strategy Successful Strategy EFFECTIVE IMPLEMENTATION Profound understanding of the competitive environment Long-term.

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. 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 . 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).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.

V = Σ t Ct Where: V Ct r market value of the firm. Economic Value Added: Post-tax operating profit less cost of capital Maximizing the value of the firm: Max.From Profit Maximization to Value Maximization • Profit maximization an ambiguous goal – – – – Total profit vs.g. net present value of free cash flows: max. (1 + r)t free cash flow in time t weighted average cost of capital . Rate of profit Over what time period? What measure of profit? Accounting profit versus economic profit (e.

4 12.9 27.5 10.8 16.4 11.a.3 16.7 RETURN RETURN RETURN ON SALES ON EQUITY ON (%) (%) ASSETS (%) 19.3 22.3 34.2 30.8 7.7 18.7 28.0 21.0 17.2 12.9 8. ($BN.6 22.3 24.The World’s Most Valuable Companies: The World’s Most Valuable Companies: Performance Under Different Profitability Measures Performance Under Different Profitability Measures COMPANY MARKET CAP.8 14.9) 4.1 4.9 27. (11.7 (1.7 21.9 10.8) 7.0 9.7 40.2 2.6 10.8 1.1 7.1 23.6 8.2 Exxon Mobil General Electric Microsoft Citigroup BP Bank of America Royal Dutch Shell Wal-Mart Toyota Motor Gazprom HSBC Procter & Gamble .7 1.7 17.9 22.9 14.4 13.4 RETURN TO SHAREHOLDERS (%) 11.5 25.8 (10.3) (22.3 15.1 26.0 6.1) n.5 10.) 372 363 281 239 233 212 211 197 197 196 190 190 NET INCOME ($BN) 36.1 1.0 9.0 14.5) (0.3 11.1 16.3 13.7 5.2 11.

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 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 Sources of Superior Performance Above Normal Profits (in Excess of the Competitive Level) Avoid Competitors Attractive Industry Attractive Strategic Group Mobility Barriers Be Better Than Competition Cost Advantage Differentiation Advantage Attractive Niche Entry Barriers Isolating Mechanisms .

Sources of Competitive Advantage COMPETITIVE COMPETITIVE ADVANTAGE ADVANTAGE t duc ro t rp ila cos Sim wer o at l fro m P ri ce pre mi un um iq u ep rod uc t COST COST ADVANTAGE ADVANTAGE DIFFERENTIATION DIFFERENTIATION ADVANTAGE 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 2002 2004 Cumulative Output .

1957-71 75% Price Index 50 100 200 300 70% slope 100K 200K 500K 1. 1962-72 1960 Yen 15K 20K 30K UK refrigerators.Examples of Experience Curves Japanese clocks & watches.000K Accumulated unit production (millions) 5 10 Accumulated units (millions) 50 .

Motivation & culture. Managerial efficiency ECONOMIES OF LEARNING PRODUCTION TECHNIQUES PRODUCT DESIGN INPUT COSTS CAPACITY UTILIZATION RESIDUAL EFFICIENCY .Drivers of Cost Advantage ECONOMIES OF SCALE •Indivisibli\ties •Specialization and division of labor •Increased dexterity •Improved organizational routines •Process innovation •Reengineering business processes •Standardizing designs & components •Design for manufacture •Location advantages •Ownership of low-cost inputs •Non-union labor •Bargaining power •Ratio of fixed to variable costs •Speed of capacity adjustment •Organizational slack.

indivisibilities .Economies of Scale: The Long-Run Cost Curve for a Plant Sources of scale economies: .technical input/output relationships .specialization Cost per unit of output Minimum Efficient Plant Size: the point where most scale economies are exhausted Units of output per period .

10 0. their main brands incur lower advertising costs per unit of sales than their smaller rivals.15 0. Soft Drinks Despite the massive advertising budgets of brand leaders Coke and Pepsi.S. Pepper Pepsi 10 20 50 100 200 500 Coke 1.000 Annual sales volume (millions of cases) .02 0. Pepper Diet 7-Up Tab Diet Pepsi Diet Rite Fresca Seven Up Sprite Dr. Advertising Expenditure ($ per case) 0.20 Schweppes SF Dr.05 0.Scale Economies in Advertising: U.


Plant scale --Cyclicality & depend on: --Productivity of -.Run length -.Capacity utilization under warranty --Plant scale for each -.Wage levels -.Process technology -. DESIGN QUALITY MFR ENGNRNG CONTROL GOODS INVENTORIES SALES & MKITG DISTRI. component -.Frequency of defects -.No.Capacity utilization .Frequency of defects DRIVERS -.Bargaining power -.Sales / dealer -.DEALER & BUTION CUSTOMER SUPPORT Prices paid --Size of commitment -.Order size R&D/design -. of dealers PURCHASING PARTS INVENTORIES R&D COMPONENT ASSEMBLY TESTING.No.Level of quality targets -.Applying the Value Chain to Cost Analysis: The Case of Automobile Manufacture (continued) STAGE 3.Sales / model -.Degree of automation willingness to wait supplier models -.Supplier location -.Plant support COST location -.Flexibility of production predictability of sales -. of models per plant --Customers’ --Purchases per --No. & frequency of new -.Level of dealer IDENTIFY -.

Applying the Value Chain to Cost Analysis: The Case of Automobile Manufacture (continued)         STAGE 4. IDENTIFY LINKAGES Consolidation of orders to increase discounts. RECCOMENDATIONS FOR COST REDUCTION . increases inventories PRCHSNG PARTS INVNTRS R&D DESIGN Designing different models around common components and platforms reduces manufacturing costs COMPONENT MFR ASSEMBLY TESTING GOODS QUALITY INV SALES DSTRBTN DLR MKTG CTMR              Higher quality parts and materials reduces costs of defects at later stages Higher quality in manufacturing reduces warranty costs STAGE 5.

materials. etc. TOTAL CUSTOMER RESPONSIVENESS . •performance •packaging •complementary services INTANGIBLE DIFFERENTATION Unobservable and subjective characteristics that appeal to customer’s image. and desire for exclusivity Differentiation not just about the product. color. it embraces the whole relationship between the supplier and the customer. Porter) THE KEY IS TO CREATE VALUE FOR THE CUSTOMER TANGIBLE DIFFERENTATION Observable product characteristics: •size.The Nature of Differentiation DEFINITION: “Providing something unique that is valuable to the buyer beyond simply offering a low price.” (M. status. identity.

sociological.Identifying Differentiation Potential: The Demand Side THE PRODUCT What needs does it satisfy? 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. 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 By what criteria do they choose? THE CUSTOMER .

Efficient order processing Building brand reputation . Fast new product development FIRM INFRASTRUCTURE HUMAN RESOURCE MANAGEMENT TECHNOLOGY DEVELOPMENT INBOUND LOGISTICS OPERATIONS OUTBOUND MARKETING SERVICE LOGISTICS & SALES Customer technical support. Wide variety Fast delivery. Consumer credit. Availability of spares Quality of components & materials Defect free products.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.

Identifying Differentiation Opportunities through Linking the Value Chains of the Firm and its Customers: Can Manufacture 1 2 3 4 5 Inventory holding Supplies of steel & aluminum Inventory holding Inventory holding Service & technical support Manufacturing Purchasing Distribution Processing Design Engineering Marketing Distribution 2. 4. reliable delivery can permit canner to adopt JIT can supply. High manufacturing tolerances can avoid breakdowns in customer’s canning lines. Efficient order processing system can reduce customers’ ordering costs. Distinctive can design can assist canners’ marketing activities. Sales CAN MAKER CANNER . Frequent. 5. Purchasing Canning 1. 3. Competent technical support can increase canner’s efficiency of plant utilization.

INDUSTRY ANALYSIS AND POSITIONING Determining Industry Attractiveness and Identifying Strategic Opportunities .

6 Beverages 18.8 Packaging & Containers 8.0 Commercial Banks 15. Electrical Equipment 13.0) Computers. Office Equipment 11. Glass 8.6 Mining & crude oil 17.6 Hotels.0 Tobacco 21.2 Electronics.9 Publishing. Casinos.6 Motor Vehicles & Parts 9.8 Insurance: Property & Casualty 8.6 Health Care 13.5 Telecommunications 4.3 Insurance: Life and Health 8.8 Food Consumer Products 19. Resorts 9.7 .2 Scientific & Photographic Equipt.9 Railroads 9.4 Semiconductors & Computer Software 13.3 Food and Drug Stores 10. Printing 13.7 Gas & Electric Utilities 10.5 Food Production 7.9 Electronic Components 5.0 Diversified financials 18.3 Medical Products & Equipment 17.Profitability of US Industries (selected industries only) Profitability of US Industries (selected industries only) Median return on equity (%).2 Metals 8.4 Pharmaceuticals 22. 15.3 Building Materials.0 Entertainment 0.6 Apparel 14.3 Petroleum Refining 17.0 Airlines (22.1 Communications Equipment 1. 1999-2005 Household & Personal Products 22.0 Forest and Paper Products 6.2 Specialty Retailers 13.7 Securities 18.

3 0 1 .9 7 . b v ra e . 1963-2003 U tilitie s T le o s rv e e c m e ic s T n p ra n ra s o tio Ee y n rg M te ls a ria O E A LA E A E VRL VRG R ta g e ilin C n u e d ra le a da p re o s mr u b s n p a l F o re ilin o d ta g C p lg o s a ita o d A to o ile a dc m o e ts u mb s n o p n n T c n lo yh rd a a de u m n e h o g a w re n q ip e t H te .7 8 .4 8 0 5 1 0 1 5 2 0 A e g R IC1 6 -2 0 (% v ra e O 9 3 0 3 ) .9 1 1 .The Profitability of Global Industries: Return on Invested Capital.3 0 1 1 1 .5 6 .8 2 1 .9 1 .7 4 1 5 1 .9 9 .6 9 .3 1 1 .4 9 9 9 .2 5 1 . is re F o .2 6 . to a c od ee gs bco H a c ree u m rn a ds rv e e lth a q ip e t n e ic s S m o d c rs e ic n u to C m e ia s rv e o m rc l e ic s Md e ia C m u r s ftw re a ds rv e o p te o a n e ic s H u e o a dp rs n l p d c o s h ld n e o a ro u ts P a a e tic ls h rm c u a 6 . re ta ra ts le u o ls s u n .5 9 .

From Environmental Analysis to Industry Analysis The national/ international economy The natural environment THE INDUSTRY ENVIRONMENT •Suppliers •Competitors •Customers Demographic structure Technology Government & Politics 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 The Spectrum of Industry Structures Perfect Competition Concentratio n Entry and Exit Barriers Product Differentiatio n Information Many firms No/Low barriers Homogeneou s Product Perfect Information flow Oligopoly A few firms Duopoly Two firms Monopoly One firm High barriers Significant barriers Potential for product differentiation Imperfect availability of information .

Porter’s 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 The Structural Determinants of Competition 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 •Concentration •Diversity of competitors •Product differentiation •Excess capacity & exit barriers •Cost conditions INDUSTRY RIVALRY SUBSTITUTE COMPETITION •Buyers’ propensity to substitute •Relative prices & performance of substitutes BUYER POWER •Buyers’ price sensitivity •Relative bargaining power .

(Changing with managed care. (Changing as managed care encourages generics.SUPPLIER POWER LOW DRUG INDUSTRY (ROE=22%) 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 THREAT OF SUBSTITUTES LOW No substitutes.) .) BUYER POWER LOW Physician as buyer: Not price sensitive No bargaining power.

• 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? .Applying Five-Forces Analysis  Forecasting Industry Profitability • Past profitability a poor indicator of future profitability.

aggressive deterrence. etc. etc. more features. differentiation. new customers. . cooperation. etc. Rivalry Substitutes Buyers Suppliers Compete on nonprice dimensions: cost Improve attractiveness compared to substitutes: better service... leadership.Neutralizing The Five Competitive Forces Force Entry Method for Neutralizing Force Erecting barriers (isolating mechanisms) create & exploit economies of scale.. obtain minority position. Reduce supplier uniqueness: backward integrate. Reduce buyer uniqueness: forward integrate. second source. differentiate product. etc. etc. design in switching costs.

The Traditional Model of Industry Life Cycle Fermentation Shakeout Maturity Decline e ml ov s e a S u l Time .

g. predetermined pattern of industry development . construction. apparel) reach maturity. • Industries may experience life cycle regeneration. pharmaceuticals. e. computers) may retain features of emerging industries. but not decline.     Sales Sales B&W Color Portable HDTV ?    1900 50 90 07 MOTORCYCLES 1930 50 70 TV’s 90 07 • Life cycle model can help us to anticipate industry evolution—but dangerous to assume any common.How Typical is the Life Cycle Pattern? • Technology-intensive industries (e. • Other industries (especially those providing basic necessities.g. food processing. semiconductors.

residemand dual segments Rapid product Product and Incremental innovation process innovation innovation DECLINE TECHNOLOGY PRODUCTS Well-diffused technology Continued Wide variety. Deskilling URING intensive mass-production TRADE COMPETITION KSFs Overcapacity -----Production shifts from advanced to developing countries----TechnologyEntry & exit Shakeout & consolidation exit Price wars.Evolution of Industry Structure over the Life Cycle          DEMAND INTRODUCTION GROWTH MATURITY Affluent buyers Increasing Mass market Knowledgeable. rationalization. skill Capacity shortage. penetration replacement customers. rapid design change Standardization Commoditization commoditization           MANUFACT.Short-runs. low cost sourcing . Design for uction. Overhead red-  Product innovation Process technoCost efficiency logy.

The Driving Forces of Industry Evolution BASIC CONDITIONS Customers become more knowledgeable & experienced INDUSTRY STRUCTURE Customers become more price conscious COMPETITION Products become more standardized Diffusion of technology Quest for new sources of differentiation Production becomes less R&D & skill-intensive Production shifts to low-wage countries Price competition intensifies Demand growth slows as market saturation approaches Excess capacity increases Distribution channels consolidate Bargaining power of distributors increases .

Changes in the Population of Firms over the Changes in the Population of Firms over the Industry Life Cycle: US Auto Industry 1885-1961 Industry Life Cycle: US Auto Industry 1885-1961 250 200 150 100 50 0 No. of firms 1895 1905 1915 1925 1935 1945 1955 rce: S. Klepper. Industrial & Corporate Change. . 654. p. August 2002.

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 .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.

g.g. Amazon.g.Innovation & Renewal over the Innovation & Renewal over the Industry Life Cycle: Retailing Industry Life Cycle: Retailing Warehouse Clubs e. Price Club Sam’s Club Internet Retailers e. Toys-RUs. Home Depot Mail order. catalogue retailing e. Sears Roebuck Discount Stores e. K-Mart Wal-Mart Chain Stores e.g. Expedia “Category Killers” e.g.g. A&P ? 1880s 1920s 1960s 2000 .

Gary Hamel: Shaking the Foundations OLD BRICK Top management is responsible for setting strategy Getting better. getting faster is the way to win IT creates competitive advantage Being revolutionary is high risk We can merge our way to competitiveness Innovation equals new products and new technology Strategy is the easy part. Implementation the hard part Change starts at the top Our real problem is execution Big companies can’t innovate NEW BRICK Everyone is responsible for setting strategy Rule-busting innovation is the way to win Unconventional business concepts create competitive advantage More of the same is high risk There’s no correlation between size and competitiveness Innovation equals entirely new business concepts Strategy is the easy only if you’re content to be an imitator Change starts with activists Our real problem is innovation Big companies can become gray-haired revolutionaries .

An Alternate Model of Industry Life Cycle Emergence Convergence Coexistence Dominance Established Industry e ml ov s e a S u l 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 .


Shifting the Focus of Strategy Analysis: Shifting the Focus of Strategy Analysis: From the External to the Internal From the External to the Internal Environment Environment THE FIRM Goals and Values Resources and Capabilities Structure and Systems THE INDUSTRY ENVIRONMENT STRATE GY STRATEGY •Competitors •Customers •Suppliers The FirmStrategy Interface The EnvironmentStrategy Interface .

internal resources and capabilities offer a more secure basis for strategy than market focus. • • Resources and capabilities are the primary sources of profitability.Rationale for the Resource-based Approach to Strategy • When the external environment is subject to rapid change. .

Canon: Products and Core Technical Canon: Products and Core Technical Capabilities Capabilities Precisio n Fine Mechani Optics cs Plain-paper 35mm SLR camera copier Compact fashion Color copier camera Color laser EOS autofocus camera copier Basic fax Digital camera Laser fax Laser copier Video still camera Mask aligners Inkjet printer Excimer laser Laser printer aligners Color video Stepper aligners printer Calculator Notebook computer MicroElectron ics .

Photo CD System. Advantix cameras & film . Sterling Winthrop.g.Eastman Kodak’s Dilemma Resources & Capabilities 1980’s Chemical Imaging •Organic Chemistry •Polymer technology •Optomechtronics •Thin-film coatings Businesses Film Cameras Fine Chemicals Pharmaceuticals Diagnostics Brands Global Distribution 1990’s DIVESTS: Eastman Chemical. Diagnostics Need to build digital imaging capability Digital Imaging Products (e.

Capabilities and Competitive Advantage and Competitive Advantage COMPETITIVE ADVANTAGE INDUSTRY KEY SUCCESS FACTORS STRATEGY ORGANIZATIONAL CAPABILITIES RESOURCES INTANGIBLE •Technology •Reputation •Culture TANGIBLE •Financial •Physical HUMAN •Skills/knowhow •Capacity for communication & collaboration •Motivation . Capabilities The Links between Resources.The Links between Resources.

experience. Customer retention government) Supplier loyalty Training. know how No. Employee qualifications. Intangible Resources         Human Resources . location. Customer loyalty. copyrights. flexibility.Appraising Resources     RESOURCE CHARACTERISTICS INDICATORS Tangible Resources         Financial Borrowing capacity Debt/ Equity ratio Internal funds generation Credit rating Net cash flow Physical Plant and equipment: Market value of size. customers. Scale of plants Land and buildings. commitment and loyalty of employees pay rates. adaptability. Royalty income Technical and scientific R&D expenditure employees R&D staff Reputation Brands. fixed assets Technology Patents. technology fixed assets. turnover. Alternative uses for Raw materials. Company Brand equity reputation (with suppliers. of patents owned R&D facilities.

interbrand.6 Intel 35.5 16 BMW 11 Mercedes Benz 20.1 Toyota 24.4 17 Cisco 16.0 14 American Express 18.8 19 Honda 15.The World’s Most Valuable Brands.6 15 Gillette 17.0 53.) Brand 1 2 3  Coca-Cola Microsoft IBM 67.5 Nokia 26.0 Source: Interbrand http://www.1 Disney 26.asp .) Rank Company value ($bn. 2006     Rank Company Brand value ($bn.0 59.0 18 Louis Vuitton 16.8 Marlboro 21.2 20 Samsung 15.9 12 Citi 20.9 4 5 6 7 8 9 10      GE 47.6 McDonald’s 26.4 13 Hewlett-Packard 18.

(Grant) Distinctive Competence = things that an organization does particularly well relative to competitors.Defining Organizational Capabilities Defining Organizational Capabilities  Organizational Capabilities = firm’s capacity for undertaking a particular activity. (Selznick) Core Competence = capabilities that are fundamental to a firm’s strategy and performance. (Hamel and Prahalad)   .

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



The Rent-Earning Potential of Resources and Capabilities THE EXTENT OF THE COMPETITIVE ADVANTAGE ESTABLISHED Scarcity Relevance Durability SUSTAINABILITY OF THE COMPETITIVE ADVANTAGE Transferability Replicability Property rights APPROPRIABILITY Relative bargaining power Embeddedness THE PROFIT EARNING POTENTIAL OF A RESOURCE OR CAPABILITY .

Location R5. Financial management C6.Assessing a Companies Resources Assessing a Companies Resources and Capabilities: The Case of VW and Capabilities: The Case of VW RESOURCES R1. Product development C2. Technology R3. Distribution Importan ce 6 7 8 7 8 VW’s Relative Strength 4 5 8 4 5 C5. Plant and equipment R4. R&D C7. Engineering C4. Manufacturing Importance VW’s Relative Strength 4 5 9 7 9 7 7 8 4 8 . Marketing & sales C8. Government relations 6 6 9 3 4 4 CAPABILITIES C1. Finance R2. Purchasing C3.

Appraising VW’s Resources and Capabilities (Hypothetical only) 10 Superfluous Strengths Key Strengths C3 Relative Strength C8 C2 R2 R1 C6 R4 C5 R3 C4 5 R5 C1 C7 1 1 Zone of Irrelevance 5 Key Weaknesses 10 Strategic Importance .

6)Change management to transform values and behaviors (GE. develop organizational routines) development (i. and accessing knowledge) storing. replicating. Especially human resources human resources --Externally (hiring) --Externally (hiring) --Internally through developing individual skills --Internally through developing individual skills 2)Acquire/access capabilities externally through acquisition or 2)Acquire/access capabilities externally through acquisition or alliance alliance 3)Greenfield development of capabilities in separate 3)Greenfield development of capabilities in separate organizational unit (IBM & the PC. Especially 1)Acquire and develop the underlying resources. replicating. develop organizational routines) 5)Align structure & systems with required capabilities 5)Align structure & systems with required capabilities 6)Change management to transform values and behaviors (GE.Sony. and accessing knowledge) .Approaches to Capability Development Approaches to Capability Development 1)Acquire and develop the underlying resources. Hyundai) 8)Knowledge Management (systematic approaches to acquiring.e. 8)Knowledge Management (systematic approaches to acquiring.e. storing. . GM & Saturn) organizational unit (IBM & the PC. BP) BP) 7)Product sequencing (Intel . Xerox & PARC. Xerox & PARC. Hyundai) 7)Product sequencing (Intel Sony. GM & Saturn) 4)Build team-based capabilities through training and team 4)Build team-based capabilities through training and team development (i.


the scope of its activities • The dimensions of scope are • product scope • vertical scope • geographical scope • .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.

Are the administrative costs of the integrated firm less than the transaction costs of markets? . In situation [B] the business units are independent firms linked by markets.Transactions Costs and the Scope of the Firm VerticalProduct Geographical Scope Scope Scope V 1 [A] Single Integrated Firm [B] Several Specialized Firms linked by Markets V 2 P 1 P 2 P 3 C 1 C 2 C 3 V 3 V V V 3 2 1 P 1 P 2 P 3 C 1 C 2 C 3 In situation [A] the business units are integrated within a single firm.

organizational innovations. of managerial Admin. large corporations better at reconciling size with agility .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. Also. aluminium. financial techniques. information and communication technologies • Advances in management—accounting systems. scientific management 1980 – 1995 Shrinking size and scope of biggest industrial corporations. banking. decision sciences. costs of decisions. beer. Increasingly turbulent external environment Increased no. oil. cement). Need for fast firms rise relative responses to external to transaction change costs of markets 1995 – 2007 Rapid increase in global concentration (steel. Key drivers: quest for market power and scale economies.

The Basic Issues in Diversification Decisions 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? .

5 53.3 53.0 1949 Percentage of Specialized Companies (single-business. vertically-integrated and dominant-business) Percentage of Diversified Companies (related-business and unrelated business) 1954 1959 1964 1969 1974    Note: During the 1980s and 1990s the trend reversed as large companies refocused upon their core businesses  .0 63.2 29.5 36. 1949-74               70.1 37.Diversification among the US Fortune 500.8 63.9 46.7 46.1 39.9 60.

Diversification among Large UK Diversification among Large UK Corporations. 1950-93 Corporations. 1950-93 70 60 50 40 30 20 10 0 1950 1960 1970 1983 1993 Single business Dom inant business Related business Unrelated business .

 --Growth strategies (esp. then bringing together of different businesses under common ownership & must somehow increase their profitability.  --But. . by acquisition). tend to  destroy shareholder value  RISK SPREADING --Diversification reduces variance of profit flows --But.g. tobacco. PROFIT --For diversification to create shareholder value. newspapers).Motives for Diversification GROWTH --The desire to escape stagnant or declining industries is a powerful motive for diversification (e. --Capital Asset Pricing Model shows that diversification lowers unsystematic risk not systematic risk. doesn’t create value for shareholders—they can hold diversified portfolios of securities. growth satisfies managers not shareholders.  oil.

or vice-versa.e. it must meet three tests: 1. some form of “synergy” must be present) Additional source of value from diversification: Option value       .Diversification and Shareholder Value: Porter’s Three Essential Tests  If diversification is to create shareholder value. The Attractiveness Test: diversification must be directed towards attractive industries (or have the potential to become attractive). 3. The Better-Off Test: either the new unit must gain competitive advantage from its link with the company. 2. The Cost of Entry Test: the cost of entry must not capitalize all future profits. (i.

superior access to information ECONOMIES OF SCOPE ECONOMIES FROM INTERNALIZING TRANSACTIONS . technology) across multiple businesses •Transferring functional capabilities (marketing. distribution systems) across multiple businesses •Sharing intangible resources (brands.Competitive Advantage from Diversification •Sharing tangible resources (research labs. product development) across businesses •Applying general management capabilities to multiple businesses •Economies of scope not a sufficient basis for diversification ----must be supported by transaction costs •Diversification firm can avoid transaction costs by operating internal capital and labor markets •Key advantage of diversified firm over external markets--.

the benefits in terms of economies of scope may be dwarfed by the administrative costs involved in their exploitation.synergies at the corporate level deriving from the ability to apply common management capabilities to different businesses. . joint R&D) • Strategic Relatedness-.Relatedness in Diversification Economies of scope in diversification derive from two types of relatedness: • Operational Relatedness-.    Problem of operational relatedness:. brands.synergies from sharing resources across businesses (common distribution facilities.

transaction costs of the market vs. • Residential remodeling industry -. • Key issue -. plumbers. electricians. • In 18th century English woollen industry.Transactions Costs and The Existence of the Firm • Transaction cost theory explains not just the boundaries  of firms.mainly independent self employed builders.  administrative costs of firms. no firms –  independent spinners and weavers linked by merchants. also the existence of firms. painters. • Where transaction costs high—firm is more efficient means  of organization   Note: transaction costs comprise costs of search and contract negotiation and enforcement .

iron and steel production  —but doesn’t necessarily require common ownership • Superior coordination • Avoids transactions costs of market contracts in situations where there are:  -.The Costs and Benefits of Vertical Integration: BENEFITS • Technical economies from integrating processes e.small numbers of firms  -.transaction-specific investments  -.g.taxes and regulations on market transactions .opportunism and strategic misrepresentation  -.

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 responding to changes in technology.  (But. etc.  customer preferences. VI may be conducive to system-wide flexibility) • Compounding of risk .in responding to demand cycles  -.

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 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   .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. 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.

while others are linked by market transactions? . VERTICAL INTEGRATI ON MARKET CONTRA CTS MARKET CONTRA CTS VERTICAL INTEGRATI ON.The value chain for steel cans Iron ore mining Steel production Steel strip production Can making Canning of food. AND MARKET CONTRACT S What factors explain why some stages are vertically integrated. drink. etc. oil.

Are the incentives appropriate? .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?  -.

IBM. . and administrative services).g. also IT.Apple.HP) • Inter-firm networks   General conclusion: boundaries between firms and markets becoming increasingly blurred. in autos • From vertical integration to outsourcing (not just components. Canon.Recent Trends in Vertical Relationships • From competitive contracting to supplier partnerships. e.g. distribution. • Diffusion of franchising • Technology partnerships (e.

Patterns of Internationalization Patterns of Internationalization HIG H Trading Industries Global Industries International Trade --aerospace --automobiles --military hardware --oil --diamond mining --semiconductors --agriculture --consumer electronics Domestic Industries Multidomestic Industries LO W --railroads --laundries/dry cleaning --retail banking --hairdressing --hotels --milk --consulting LOW Foreign Direct Investment HIGH .

internationalization tends to reduce an industry’s margins & rate of return on capital .greater diversity of competitors Increased buyer power: wider choice for dealers & consumers  COMPETITION • Increased intensity of competition PROFITABILITY • Other things remaining equal.lower seller concentration --.Implications of Internationalization for Industry Analysis • •  • INDUSTRY STRUCTURE Lower entry barriers around national markets Increased industry rivalry --.

Related and supporting industries . legal infrastructure -.General management capabilities THE INDUSTRY ENVIRONMENT Key Success Factors COMPETITIVE ADVANTAGE THE NATIONAL ENVIRONMENT -.Financial resources -.Competitive Advantage within an International Context: The Basic Framework FIRM RESOURCES & CAPABILITIES -. human resources. communication.Exchange rates -.Government policies -.Domestic market conditions -. transportation.Functional capabilities -. national culture.Physical resources -.National resources and capabilities (raw materials.Technology -.Reputation -.

S.    When exchange rates are well-behaved. E.g. • Philippines relatively more efficient in the production of footwear. and assembled electronic products than in the production of chemicals and automobiles. .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. • U. comparative advantage becomes competitive advantage. apparel. is relatively more efficient in the production of semiconductors and pharmaceuticals than shoes or shirts.

40 Canada .68 -.88 -. drink & tobacco Raw materials Oil & refined products Chemicals Machinery and transportation equipment Other manufacturers -.80 Italy Japan -.19 .29 . Germany -.85 Note: Revealed comparative advantage for each product group is measured as: (Exports less Imports)/ Domestic production .Revealed Comparative Advantage for Certain Broad Product Categories USA Food.99 -.42 -.51 -.55 -.36 -.16 .28 .22 .12 -.29 -.43 .74 -.07 .34 .20 .64 .01 .72 W.34 -.06 -.31 .30 -.58 .

. § Sustained competitive advantage depends upon dynamic factors-.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.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.

RELATED AND SUPPORTING INDUSTRIES—Key role of “industry clusters” 3.g. STRUCTURE. STRATEGY. domestic rivalry drives upgrading. AND RIVALRY 1. .FACTOR CONDITIONS—“Home grown” resources/capabilities more important than natural endowments.Porter’s National Diamond Framework FACTOR CONDITIONS DEMAND CONDITIONS RELATING AND SUPPORTING INDUSTRIES STRATEGY. DEMAND CONDITIONS—Discerning domestic customers drive quality & innovation 4. RIVALRY. STRUCTURE. E. 2.

textile manufacturers must compete on the basis of advanced process technologies and focus on high quality. marketing in Europe and North America)  . firm strategy needs to take account of national conditions: – U. and India.S. Malaysian firms concentrate upon fabrication of high volume. assembly in Indonesia.g.g.Consistency Between Strategy and National Conditions  In globally-competitive industries. Nike conducts R&D in US. components in Korea and Thailand. China. DRAM chips) – Dispersion of value chain to exploit different national environments (e. CA-based firms concentrate mainly upon design of advanced chips. less technologically advanced items (e. less price-sensitive market segments – In the semiconductor industry.

and are these transferable? – – Tradability issues: Can the product be transported at economic cost? If not. or if trade restrictions exist.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. . then production must be close to the market.

Mexico components 7.The Role of Labor Costs Hourly Compensation for Production Workers.750 8.56  Spain 12.98 U. 1999 ($)  Germany 26.K. wages are only one element of costs:  Cost of Producing a Compact Automobile  U. 16. 19.75 2.S.770 9.89  U.000 Labor 40 Shipping cost 300 Inventory 20 40 8.180  Parts & 1.S.12  France Mexico BUT.20 19.000 TOTAL 700 .11  Korea 6.93  Japan 20.

48 1 +0.54 +0.36 2 +0.Location and the Value Chain Comparative advantage in textiles and apparel by stage of processing Country Stage Index of Country of Revealed of Processing Comparative Advantage Stage Index of Revealed Processing Comparative Advantage Hong Kong 1 -0. 0.41 4 +0.72 - Japan 0.14 4 3 - Note: 1 = production of fiber (natural & synthetic) 2 = production of spun yarn 3 = production of textiles 4 = production of clothing .81 3 0.S.75 Italy 1 -0.96 2 +0.64 +0.18 3 4 +0.48 +0.22 4 3 - 2 +0.73 1 -0.96 2 -0.48 U.A.

Determining the Optimal Location Determining the Optimal Location of Value Chain Activities of Value Chain Activities Where is the optimal location of X in terms of the cost and availability of inputs? What government incentives/ penalties affect the location decision? The optimal location of activity X considered independently WHERE TO LOCATE ACTIVITY X? What internal resources and capabilities does the firm possess in particular locations? What is the firm’s business strategy (e.g. 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? . cost vs.

Alternative Modes of Overseas Market Entry TRANSACTIONS Exporting Spot sales Foreign agent / distributor Licensing patents & other IP DIRECT INVESTMENT Joint venture Marketing & Distribution only Franchising Fully integrated Licensing Wholly owned subsidiary Longterm contract Marketing& Distribution only Fully integrated Low Resource commitment High .

which partner has the clearer vision of the purpose of the alliance? – Appropriability of the contribution-. 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 is the more receptive learner? .which partner’s resources and capabilities can more easily be captured by the other? – Absorptive capacity of the company-.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.

y 000 nolog (2 ned n tech ts ow o en 20%orationmpon co la b Col and FIAT 10% ow n e d. join JV to p rod u t production FUJI ce 40% investment IBC Vehicles Ltd.9 uc 50 prod 50% owned SAIC TOYOTA 50% owned New United Motor Manufacturing Inc. lla n e co ow on % ti . (NUMMI) (Makes cars in US) DAEWOO . C opr od ISUZU 49% Co-pro owned.General Motors’ Alliances with Competitors General Motors’ Alliances with Competitors SAAB AVTOVAZ Ru s si an JV t op 50% owned rod uc e c ar s SUZUKI -5).) (Makes vans in UK) c ar s in Ch i na l& ca n ni t i o ch ra t e bo d. n duction uctio GM 60% owned 20% owned. (U.K.

Europe.  manufacturing.Multinational Strategies: Globalization vs. National Differentiation The case for a global strategy: • National preferences in decline—world becoming a single. Ted Levitt “Globaliz-ation of Markets” Thesis Hamel & Prahalad Thesis Kenichi Ohmae’s “Triad Power” Thesis . East Asia.  if segmented.N. product development. marketing. market • • Accessing global scale economies—in purchasing. America. • • Strategic strength from global leverage—ability to cross subsidize a national subsidiary with cash flows from  other national subsidiaries • • Need to access market trends and technological  developments in each of the world’s major economic  centers.

World as strategic World as World as interstrategic separate single mkt. competition) national mkts. global strategy multidomestic strategy . between countries.g.g. Honda) standard products.Globalization & Global Strategy —What are they? Globalization & Global Strategy —What are they? •GLOBALIZATION ? •GLOBALIZATION ? --Something to do with increasing interdependence --Something to do with increasing interdependence between countries. •GLOBAL STRATEGY •GLOBAL STRATEGY --At simplest level: Treating the world as a single --At simplest level: Treating the world as a single market market E. developed & (YKK. national resource differences. Honda) standard products. exploits exploits global scale. national resource differences. competition) related mkts.g. and exploits linkages between countries (e. global scale.g. distributed & marketed manfactured within Japan. distributed & marketed worldwide worldwide --At more sophisticated level: Strategy that --At more sophisticated level: Strategy that recognizes recognizes and exploits linkages between countries (e. Japanese companies during the 1970s & 1980s. E. (YKK. Japanese companies during the 1970s & 1980s. developed & manfactured within Japan.

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

Jet engines Autos Benefits of global integration Consumer electronics Telecom equipment

Steel Cement Auto repair

Investment banking Online C2C auctions Beer Restaurant chains Retail banking Funeral services Benefits of national differentiation

Dry cleaning

Positioning industries in terms of benefits of Positioning industries in terms of benefits of globalization and national differentiation globalization and national differentiation
Jet engines Autos Benefits of global integration Consumer electronics Telecom equipment

Investment banking Retail banking Auto repair Benefits of national differentiation Funeral services


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.

S.The Evolution of Multinational Strategies and Structures: (2) 1945-1970—U.g.especially in developing new technology and products • Parent-subsidiary relations involved flows of technology and finance. Coca Cola.S. e. GM. parent-. IBM . Dominance       American MNC’s as Coordinated Federations : • National subsidiaries fairly autonomous • Dominant role as U. Ford. and appointment of top management.

technology development. and manufacture concentrated at home • National subsidiaries primarily sales and distribution companies with limited autonomy. Matsushita . e.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.g. NEC. Toyota.

Matsushita the most successful .Ericsson most .Substantial national .Requires both global differentiation.Marketing Global Strategies and Situations to Industry Conditions: Firm Success in Different Industries Consumer Electronics Branded.ITT sold out successful successful local responsiveness local responsiveness  .GE sold out Unilever and P&G most .Philips the survivor .Kao has limited success . few global integration and national scale economies differentiation.NEC only partially outside Japan successful .Global industry . . Packaged  Consumer Goods   Telecommunications Equipment NEC global integration           global integration Philips General Electric local responsiveness P&G Unilever global integration Matsushit a Ka o Erickson ITT .

people. Heavy flows of technology. – Corporate center involved in orchestrating collaboration through creating the right organizational context. . and materials between interdependent units. finances. and activities.Reconciling Global Integration with National Differentiation: The Transnational Corporation Tight complex controls and coordination and a shared strategic decision process. – National units become world sources for particular products. – Each national unit and source of ideas. skills and capabilities that can be harnessed to benefit whole corporation. components.  The Transnational: an integrated network of distributed interdependent resources and capabilities.

The need for internal differentiation  --By product/business  --By function  --By country 5. What’s the role of HQ?  --Control function  --Coordination function  --Exploiting scale economies in centralized provision of services 4. how to coordination along the other dimensions?  --Maintain single line accountability  --Other dimensions of coordination can be “dotted line” relations 3. Formal & informal organization .Designing the MNC: Key Learning Designing the MNC: Key Learning 1. On what basis to organize—products. functions?  --Where is coordination most important?  --How global is the industry? How global is the firm’s strategy? 2. If one dimension is dominant. geography.

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