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CHAPTER 5

STRATEGIC MANAGEMENT IN THE MULTINATIONAL

COMPANY: CONTENT AND FORMULATION

Learning Objectives
 Define the generic strategies of differentiation and low cost
 Understand how low-cost and differentiation strategists make money
 Recall multinational examples of the use of the generic strategies
 Understand competitive advantage and the value chain and how they apply to multinational
operations
 Understand how multinational firms use offensive and defensive strategies
 Understand the basics of multinational diversification
 Understand how to apply the traditional strategy formulation techniques, industry, and
competitive analysis to the multinational company
 Realize that the national context affects both the convergence and divergence in the strategies
used by multinational companies

Basic Strategic Content Applied to the Multinational Company

 Strategy – the central, comprehensive, integrated, and externally oriented set of choices of
how a company will achieve its objectives
 A strategy needs to address important areas:
• Which business a company wants to be in
• What the company will use to create presence in a market
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 Chapter 5/ Strategic Management in the MNC: Content and Formulation ❖ 3

• How the company will win customers

• For MNCs, a major question is which country to enter at what time or what products to
produce
 Multi companies use many of the same strategies practiced by domestic companies

Competitive Advantage and Multinational Applications of Generic

Strategies
 Generic strategies – ways that both domestic and multinational companies keep and achieve
competitive advantage
 Competitive advantage – when a company can outmatch its rivals in attracting and
maintaining its targeted customers
 Two primary generic strategies
• Differentiation strategy – strategy based on finding ways to provide superior value to
customers
o Exceptional product quality, unique product features, or high quality service
• Low cost strategy – producing products or services equal to those of competitors at a
lower cost
o Lower cost by increasing efficiency – quality level acceptable to customers is not
sacrificed

How Do Low-Cost and Differentiation Firms Make Money?

 Differentiation: people will often pay a higher price for the extra value of a superior product
or service
 Low cost: products or services similar to competitors in price and value yield additional
profits from cost savings

Exhibit 5.1 Costs, Prices, and Profits for Differentiation and Low-Cost Strategies
(Shows how the relationships among costs, prices, and profits work for the differentiator and the
low-cost strategists, compared to the average competitor)

 Focus strategy – applying a differentiation or low-cost strategy to a narrow market

• Competitive scope – how broadly a firm targets its products or service
o Companies with narrow competitive scope may focus on limited products, certain
types of buyers, or specific geographical areas
o Companies with broad competitive scope may have many products targeted at a wide
range of buyers

Exhibit 5.2 Porter’s Generic Strategies

(Shows the four subdivisions of Porter’s generic strategies, including the basic differentiations
and cost-leadership strategies with their broad-market or narrow-market options)

Competitive Advantage and the Value Chain

 A firm can gain competitive advantage by finding sources of lower cost or differentiation in
any of its activities
 Value chain – all the activities that a firm uses to design, produce, market, deliver, and
support its product

Exhibit 5.3 Value Chain

(Shows a picture of a value chain)

 Value chain – Primary and Support activities

• Primary activities involve the physical actions of creating (or serving), selling, and
providing after-sale service of products

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 Chapter 5/ Strategic Management in the MNC: Content and Formulation ❖ 4

o Upstream refers to early activities in the value chain, such as R&D and dealing with
suppliers
o Downstream refers to later value chain activities, such as sales and dealing with
distribution channels
• Support activities include systems for human resources management, organizational
design and control, and a firm's basic technology
 Value chain enables companies to determine its internal cost structure to for benchmarking
efficiency against industry or other competitors
 Outsourcing – the deliberate decision to have outsiders or strategic allies perform certain
activities in the value chain
• About half of U.S. manufacturing jobs will be outsourced to more than 28 emerging
countries over the next 10 years
• In general, outsourcing makes sense if an outsider can perform a value-chain task better
or more cheaply
• Tasks that are crucial to the company’s ability to achieve competitive advantage should
not be outsourced

Distinctive Competencies
 Distinctive competencies – strengths that allow companies to outperform rivals
 Distinctive competencies come from two major sources
• Resources – inputs into the production or service processes (tangible or intangible)
• Capabilities – the ability to assemble and coordinate resources effectively (ways that lead
to lower costs or differentiated output)

Sustaining Competitive Advantage

 Sustainable - characteristic of strategies that are not easily defeated by competitors
 Capabilities that lead to competitive advantage must have four characteristics
• Valuable capabilities create demand for a company’s services or products or give
companies cost advantages
• Rare capabilities are those that a company possess but no or few competitors possess
• Difficult-to-imitate capabilities are not easily copied by competitors
• Non-substitutable capabilities have no strategic equivalent for competitors

Exhibit 5.4 How Distinctive Competencies Lead to Successful Strategies

(Summarizes the relationships among resources, capabilities, distinctive competencies, and
eventual profitability)

Offensive and Defensive Competitive Strategies in International Markets

 Competitive strategies – moves multinational firms use to defeat competitors
• In offensive strategies, companies directly target rivals from whom they wish to capture
market share
• In defensive strategies, companies seek to beat back or discourage their rival’s offensive
strategies
 Offensive competitive strategies – direct attacks, end-run offenses, pre-emptive strategies, and
acquisitions
• Direct attacks: price cutting, adding new features, comparison advertisements that show
lesser quality in competitor’s products, or going after severely neglected or poorly served
market segments
• End-run offensives: avoid direct competition and seek unoccupied markets
• Preemptive competitive strategies: being the first to gain some advantageous position
• Acquisitions: firm buys its competitors
 Defensive competitive strategies – attempts to reduce the risks of being attacked, to convince
an attacking firm to seek other targets, or to blunt the impact of any attack
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 Chapter 5/ Strategic Management in the MNC: Content and Formulation ❖ 5

• Counterparry – fending of a competitor's attack in one country by attacking them in

another country, usually the competitor's home country

Multinational Diversification Strategy

 Business-level strategies – those for a single business operation
 Corporate-level strategies – how companies choose their mixtures of different businesses (or
diversification)
 Two types of diversification
• Related diversification – a mix of businesses with similar products and markets
o Three reasons to chose related diversification: sharing activities, transferring core
competencies, and developing market power
• Unrelated diversification – a mix of businesses in any industry
o Main concern is only whether an acquisition is a good financial investment
 Like domestic companies, multinationals also pursue diversification strategies
• A quick way to gain a presence
• Allows coordination and use of resources from different businesses located anywhere
• Can more easily to establish global brand names for different but related products
• Allows crosssubsidization, both across countries and across companies
 Diversification is good up to a certain point – its benefits need to be weighed against the
added costs

Exhibit 5.5 Examples of Diversified Multinationals

(Shows a selection of Global Fortune 500 diversified multinational companies with major lines of
businesses)

Strategy Content: Brief Conclusions

 First section of chapter provided an overview of basic strategies – generic, competitive, and
diversified
 Next section review traditional strategy formulation

Strategy Formulation: Traditional Approaches

 Strategy formulation – process by which managers select the strategies to be used by their
company
 Popular analyses for successful strategy formulation help managers understand the following:
• The competitive dynamics of the industry
• Their company's competitive position in the industry
• The opportunities and threats faced by their company
• Their organization’s strengths and weaknesses

Industry and Competitive Analyses

 Industries are the main competitive arenas of a company's business activities
• Managers must understand the forces affecting the industry, its economic characteristics,
and the driving forces of change and competition within it
 Porter’s five forces model – a popular technique that can help a multinational firm understand
the major forces at work in the industry and the degree of attractiveness
• First force – the degree of competition in the industry
• Second force – the threat of new entrants – based on the barriers to entry
• Third force – the bargaining power of buyers – the degree to which buyers can influence
competitors within the industry
• Fourth force – the bargaining power of suppliers – the degree to which suppliers exert
influence on the industry

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 Chapter 5/ Strategic Management in the MNC: Content and Formulation ❖ 6

• Fifth force – the threat of substitutes – the extent to which competitors are confronted
with alternatives for their products
 Economic characteristics that influence strategy selection: market size, ease of entry and exit,
and whether there are economies of scale in production
 Driving forces of change should be monitored – includes the speed of new product
innovations, technological changes, and changing society attitudes and lifestyles
 Extent of competition also affects the industry
 Key success factors (KSFs) – important characteristics of a company or its product that lead
to success in an industry
• Examples: innovative technology or products, broad product line, effective distribution
channels, price advantages, effective promotion, superior physical facilities or skilled
labor, experience of firm in business, cost position for raw materials, cost position for
production, R&D quality, financial assets, product quality, and quality of human
resources
 Competitor analysis – profile of a competitor’s strategies and objectives
• Four steps to the analysis
1. Identify the strategic intents of competitors
2. Identify current and anticipated generic strategies used by competitors
3. Identify current and anticipated offensive and defensive competitive strategies used
by rivals
4. Assess the current positions of competitors

Exhibit 5.6 Hypothetical Country-by-Country Competitive Analysis of Rivals

(Shows hypothetical competitive profiles of four companies in different countries)

Company-Situation Analysis
 The most common tool for a company situation analysis is called the SWOT
 SWOT – analysis of an organization’s internal strengths and weaknesses and the opportunities
or threats from the environment
• Strength: a distinctive capability, resource, skill, or other advantage of an organization
relative to its competitors
• Weakness: any competitive disadvantage of a company relative to its competitors
• Opportunities: favorable conditions in a firm's environment
• Threats: unfavorable conditions in the environment
 The SWOT analysis for the multinational company is more complex than for the domestic
company
• More complex general and operating environments because they operate in two or more
countries
• Each country provides its own national context, representing different opportunities and
threat
• Import and export barriers
• Volatile exchange rates
• Local inflation affects international markets
• Governmental policies affecting repatriation of earnings
 A country-by-country SWOT is probably the most prudent approach

Corporate Strategy Selection

 The major strategic question is which businesses in the portfolio are targets for growth and
investment and which are targets for divestment or harvesting
 Matrix analysis is one way of assessing a corporate business portfolio
• The BCG growth-share matrix – one popular choice that is used to decide how much of
its resources a corporation should devote to any unit

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 Chapter 5/ Strategic Management in the MNC: Content and Formulation ❖ 7

o Divides businesses into four categories based on the industry growth rate and the
relative market share of the business in question
1. Stars – the most attractive businesses – located in fast growing industries where
a company has a relatively large market share
2. Dogs – businesses with relatively low market shares in low-growth industries
3. Cows – businesses in slow-growth industries where the company has a strong
market share
4. Problem children – business in high-growth industries where the company has a
poor market share

Exhibit 5.7 BCG Growth-Share Matrix for a Diversified Multinational Company

(Shows that for each type of business, the growth-share matrix has a suggested strategy)

 GE portfolio matrix – another popular choice

• Contains nine cells based on high, medium, and low levels of industry attractiveness and
on strong, average and weak levels of a business’s competitive position in the industry
• Used to determine the competitive position of a business in its industry
 For the diversified multinational company, the portfolio assessment becomes more complex
• Portfolio analyses must be conducted for each business in each country or region of
operation

The National Context and Organizational Strategy: Overview and

Observations
 The national context affects organizational design and strategy formulation and content
through the following processes
• The social institutions and national and business cultures encourage or discourage certain
forms of businesses and strategies in each nation
• Each nation must rely on its available factor conditions for developing industries and the
firms within industries
• Social institutions and culture determine which resources are used, how they are used,
and which resources are developed
 Multinational managers can generalize and apply these ideas in order to understand the
actions of rivals or alliance partners in any country where their firms do business

Summary and Conclusions

 Few students will work in industries untouched by global competition
 Even the managers of domestic firms need a good understanding of multinational business
strategy
 Competitive strategies must be considered on a country-by-country basis
 Despite global trends of convergence in strategies, the institutional and cultural conditions
favor different strategies by competitors from different nations
 Strategy is a combination of planned intent and adaptive reactions to changing circumstances
(new opportunities and threats)
 Beyond the traditional strategic questions facing all managers, the multinational manager
must confront other issues related to strategy, discussed in Chapter 6

Chapter 5

Harley-Davidson, Inc.: Troubled Times Increase H-D’s

Reliance on International Sales

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 Chapter 5/ Strategic Management in the MNC: Content and Formulation ❖ 8

Synopsis
This case describes Harley Davidson and its experiences going international. The case describes
the heavyweight motorcycle industry in the light of the luxury goods market. The case discusses
the main markets of luxury goods and how Harley Davidson has fared in these various markets.
The case also describes Harley Davidson’s many competitors such as Ducati, BMW, Honda,
Suzuki, Kawasaki and Yamaha. The case also discusses Harley Davidson as selling a product to a
traditional customer base built on nostalgia/comfort and design to evoke an earlier image while the
other main competitors focus on other competitive bases such as technological development,
performance, style and performance.

Learning Objectives
This case is well suited for a good discussion of strategic management issues facing a luxury
company like Harley-Davidson. Specifically, the following issues can be highlighted:
• Is a differentiation strategy appropriate for Harley Davidson? Will this strategy work in all
countries?
• Is the strategic bases for Harley Davidson (nostalgia, comfort) adequate to ensure sustainable
competitive advantage? Should they be concerned about other companies’ efforts to
manufacture heavyweight motorcycles based on performance, design, and technology?
• The case also provides enough information for a good discussion of Porter’s five forces
model. Specifically, the case also provides some understanding of the application of five
forces model across countries and cultures.
• The case also illustrates a comprehensive comparison of the competition as relevant to global
and local markets.

Case Discussion Questions

1. Which of Porter’s generic strategies is Harley Davidson using? Will this strategy work for all
of the countries described in the case? Why or why not?

2. What does a Porter’s five forces analysis reveal about the strategies Harley Davidson has
employed in recent years?

3. How does Harley Davidson compare to its competitors?

Analysis

1. Which of Porter’s generic strategies is Harley Davidson using? Will this strategy work for
all of the countries described in the case? Why or why not?

For this section, it is necessary to first discuss the various generic strategies available. The two
generic strategies are low cost and differentiation. More specifically, companies can try to reduce
costs as much as possible (low cost strategy) and target either the broad market (cost leadership -
general) or specific narrower segment in the market (cost leadership – focused). Alternatively,
companies can produce and sell products at a premium price by incorporating additional desirable
traits (differentiation strategy), and target either the broad (general) market or narrow (niche)
market.

By examining Harley Davidson’s strategic approaches, it is clear that they are manufacturing a
product that incorporates unique characteristics (nostalgia, comfort, American image, etc.) and
selling their motorcycles at a premium price. It is therefore easy to conclude that they are
pursuing a differentiation strategy.

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 Chapter 5/ Strategic Management in the MNC: Content and Formulation ❖ 9

The next key issue is whether they are targeting the broad market or a narrow segment of the
market. It should be clear from the case that they are targeting certain types of buyers and offering
a somewhat limited range of products. Thus, H-D is pursuing a focused or niche market strategy.
Harley Davidson is therefore a focused differentiator.

It seems likely that this strategy will work in all countries because it is customized enough to
accommodate local preferences. Harley Davidson is very keen on preserving their image and
reputation for highly exclusive motorcycles. By targeting a narrower segment and maintaining
exclusivity, they are more likely to maintain their image and reputation.

2. What does a Porter’s five forces analysis reveal about the strategies Harley Davidson
has employed in recent years?

At this point, it is useful to discuss Porter’s five forces model and what each force represents. You
can break the class in groups and ask each group to focus on each of the geographic areas
mentioned in the text (i.e., U.S., Europe, Japan, China, India and Russia). The ensuing discussion
will hopefully reveal that the forces are different from one region to the other.

U.S.
• Degree of competition among existing rivals – moderate. There is some significant
competition although Harley Davidson clearly enjoys the dominant position with a 55%
market share in 2008.
• Threat of new entrants – weak. The heavyweight motorcycle industry already has a
number of significant competitors. Harley Davidson’s brand name represents a strong
barrier to entry that will be difficult to match.
• Bargaining power of buyers – weak to moderate. Heavyweight motorcycle buyers
clearly prefer Harley Davidson in the U.S. because of its iconic status. H-D enjoys a
strong loyalty from its customer base, and H-D manages its supply carefully so that their
bikes are “not too easy to come by”
• Bargaining power of suppliers – weak to moderate. Because Harley Davidson fully
involves their suppliers in the design and manufacture of their products, suppliers can
obviously have more power on Harley Davidson. However, it is important to note that
Harley Davidson strives for mutually beneficial, long-term relationships with suppliers,
and requires that its suppliers be committed to annual cost reductions.
• Threat of substitutes – weak. Most buyers in the U.S. buy Harley’s because of the
perceived image of freedom and adventure that is afforded by a Harley, its iconic status
that is essentially unmatchable by other substitutes.

Europe
• Degree of competition among existing rivals – strong. -Harley Davidson faces a number
of strong European companies (Ducati, BMW) that offer products with characteristics
that Harley Davidson doesn’t offer
• Bargaining power of buyers – strong. European buyers are not necessarily looking for
nostalgia in their motorcycles. They are more willing to go for style and performance of
European manufacturers and are less likely to buy into Harley’s iconic status in the U.S.
• Other forces - similar to the U.S.

Japan
• Degree of competition among existing rivals – strong. Harley has to contend with strong
companies in the Asia-Pacific region
• Bargaining power of buyers - strong - Japanese buyers have more choice
• Other forces - similar to the U.S.

China and India

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 Chapter 5/ Strategic Management in the MNC: Content and Formulation ❖ 10

• Degree of competition among existing rivals – moderate. These markets are new and
attracting competitors. Import tariffs and emission standards provide significant barriers
to H-D entering these markets, so other competitors are taking advantage.
• Bargaining power of buyers – high. Price is the competitive issues in these markets.
Since motorcycles are often the preferred mode of transportation in these markets, a
competitive price and quality product are the preference, as opposed to high-end iconic
products like Harley Davidson.
• Other forces - similar to the U.S.

Australia and New Zealand

• Degree of competition among existing rivals – weak to moderate. These markets enjoy a
similar following to that seen in the United States. H-D is seen as a symbol of freedom
of the open road in these places, where their roads and landscapes are similar to that of
the U.S.
• Bargaining power of buyers – moderate. The growth segment in the Australian
motorcycle market is off-road or dirt bikes with 40% of the market
• Other forces – similar to the U.S.
3. How does Harley Davidson compare to its competitors?

On the whole, Harley-Davidson produces a good quality bike; however, the technology of their
bikes lags behind their competitors. This is, of course, largely intentional because they rely on
other factors to sell their product.

All of Harley’s major competitors have their headquarters outside of the U.S., and most operate
units of large diversified companies. H-D does have some newer domestic brands such as Big
Dog and Polaris, who focus on the ultrahigh-end motorcycle market.

An overview of the competition is as follows:

Ducati Motor Holdings

• European market
• Sells style and performance based on technologically-advanced designs
• Dominates the Superbike Championships
• Customer tends to be younger and somewhat less affluent than H-D’s
BMW
• Strategy based on premium pricing, and setting the standard in technology, environment,
and safety
• Production concentrated on 3 different series
• Focus on sophistication and class
• High resale value, but high purchase price limits market share

Honda
• World leader in motorcycle manufacturing
• Combination of excellent engineering and quality with highly automated manufacturing
to achieve economies of scale for low-cost advantage
• Highly diversified company with many product lines

Kawasaki
• World leader in the transportation equipment and industrial good industries with diverse
product lines for each category
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 Chapter 5/ Strategic Management in the MNC: Content and Formulation ❖ 11

• High performance and low maintenance products

• Offering of multiple models of motorcycles to suit different purposes
• Large international presence

Suzuki
• Third larges manufacturer of motorcycles
• Significant international presence – over 190 countries
• Joint manufacturing efforts and direct sales subsidiaries
• Efficiency is the backbone of their low-cost position

Yamaha
• Tailors its products to local market conditions
• Diverse produce line – boats, generators, golf carts, ATVs, snowmobiles, etc.
• Full line of motorcycles ranging from scooters to heavyweights
• Competitive advantage focuses on speedy and high performance racing bikes

Lessons
• Provides a key example of how competitors fare in the heavyweight motorcycle industry
• Good understanding of how to apply Porter’s five forces model in different regions/countries
• Understanding how to evaluate competitors
• Appropriate understanding of the luxury markets and growing demand from emerging
markets

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