Financial Strategy

Lecture 1-4

Dr.Bhavish Jugurnath

Dr Bhavish Jugurnath 1

Course Overview: Objectives

⚫ To acquire familiarity with the principal concepts,
frameworks and techniques of Financial Strategy.
⚫ 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.
Dr Bhavish Jugurnath 2

1
 Course Overview: Objectives (cont’d)

⚫ 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.
Dr Bhavish Jugurnath 3

THE CONCEPT OF
STRATEGY

The Concept of Strategy and the Pursuit

of Sustainable Above-Normal Profits

2
 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

3
 Levels of Strategy

CORPORATE CORPORATE
STRATEGY HEAD OFFICE

BUSINESS
STRATEGY Division A Division B

R&D R&D
FUNCTIONAL Personnel Personnel
STRATEGIES
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

4
 Common Elements in Successful Strategy

Successful
Strategy

EFFECTIVE IMPLEMENTATION

Profound Objective
Long-term, simple
understanding of appraisal of
and agreed upon
the competitive resources
objectives
environment

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. 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

10

5
 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 Ct
(1 + r)t
Where: V market value of the firm.
Ct free cash flow in time t
r weighted average cost of capital

11

The World’s Most Valuable Companies:

Performance Under Different Profitability Measures

COMPANY MARKET NET RETURN RETURN RETURN RETURN

CAP. INCOME ON ON ON TO
($BN.) ($BN) SALES EQUITY ASSETS SHARE-
(%) (%) (%) HOLDERS
(%)
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

12

6
 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

13

A Comprehensive Value Metrics Framework

Shareholder Intrinsic Financial Value

Value Value Indicators Drivers
Measures: Sources:
Measures: Measures:
• Market value of the • Market share
• Discounted cash • Return on Capital
firm • Scale economies
flows • Growth (of
•Market value added • Innovation
•Real option values revenues & operating
(MVA) • Brands
profits
•Return to
•Economic profit (EVA)
shareholders

14

7
 Sources of Superior Performance

Above Normal
Profits
(in Excess of the Competitive Level)

Avoid Be Better Than

Competitors Competition
Attractive Attractive Attractive
Industry Strategic Niche Cost Differentiation
Group Advantage Advantage
Entry Mobility Isolating
Barriers Barriers Mechanisms

15

Sources of Competitive Advantage

COST
ADVANTAGE

COMPETITIVE
ADVANTAGE

DIFFERENTIATION
ADVANTAGE

16

8
 The Experience Curve

The “Law of Experience”

1992 The unit cost value added to a standard product
declines by a constant % (typically 20-30%) each
time cumulative output doubles.
1994
Cost per
unit of
output (in 1996
real $)
1998
2000
2002 2004

Cumulative Output

17

Examples of Experience Curves

Japanese clocks & watches, 1962-72 UK refrigerators, 1957-71

50 100 200 300
20K 30K
1960 Yen

Price Index
15K

75%
70% slope

100K 200K 500K 1,000K 5 10 50

Accumulated unit production Accumulated units
(millions) (millions)

18

9
 Drivers of Cost Advantage

ECONOMIES OF SCALE • Indivisibli\ties

• Specialization and division of labor

ECONOMIES OF LEARNING • Increased dexterity

• Improved organizational routines

• Process innovation
PRODUCTION TECHNIQUES • Reengineering business processes

PRODUCT DESIGN • Standardizing designs & components

• Design for manufacture

• Location advantages
INPUT COSTS • Ownership of low-cost inputs
• Non-union labor
• Bargaining power

CAPACITY UTILIZATION • Ratio of fixed to variable costs

• Speed of capacity adjustment

RESIDUAL EFFICIENCY • Organizational slack; Motivation &

culture; Managerial efficiency

19

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 Units of output

Efficient Plant per period
Size: the point
where most scale
economies are
exhausted

20

10
 Scale Economies in Advertising: U.S. Soft Drinks

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.
0.20
Advertising Expenditure ($ per case)

Schweppes
SF Dr. Pepper
0.15

Tab
Diet 7-Up Diet Pepsi
0.10

Diet Rite
Fresca
Seven Up
0.05

Sprite Dr. Pepper

Pepsi
Coke
0.02

10 20 50 100 200 500 1,000

Annual sales volume (millions of cases)

21

Applying the Value Chain to Cost Analysis:

The Case of Automobile Manufacture

STAGE 1. IDENTIFY THE PRINCIPLE ACTIVITIES

R&D TESTING, GOODS SALES DISTRI- DEALER &

PARTS
PURCH- DESIGN COMPONENT ASSEMBLY QUALITY INVEN- &
INVEN- BUTION CUSTOMER
ASING ENGNRNG MFR CONTROL TORIES MKITG SUPPORT
TORIES

STAGE 2. ALLOCATE TOTAL COSTS

22

11
 Applying the Value Chain to Cost Analysis: The
Case of Automobile Manufacture (continued)

--Plant scale for each -- Level of quality targets -- No. of dealers

STAGE 3. component -- Frequency of defects -- Sales / dealer
IDENTIFY -- Process technology -- Level of dealer
-- Plant location support
COST -- Run length -- Frequency of defects
DRIVERS -- Capacity utilization under warranty

PARTS R&D TESTING, GOODS

PURCH- COMPONENT ASSEMBLY SALES
INVEN- DESIGN QUALITY INVEN- DISTRI- DEALER &
ASING MFR &
TORIES ENGNRNG CONTROL TORIES BUTION CUSTOMER
MKITG SUPPORT

Prices paid --Size of commitment -- Plant scale --Cyclicality &

depend on: --Productivity of -- Flexibility of production predictability of sales
-- Order size R&D/design -- No. of models per plant --Customers’
--Purchases per --No. & frequency of new -- Degree of automation willingness to wait
supplier models -- Sales / model
-- Bargaining power -- Wage levels
-- Supplier location -- Capacity utilization

23

Applying the Value Chain to Cost Analysis: The

Case of Automobile Manufacture (continued)

STAGE 4. IDENTIFY LINKAGES

Designing different models around

Consolidation of orders to increase common components and platforms
discounts, increases inventories reduces manufacturing costs

PRCHSNG PARTS R&D COMPONENT ASSEM- TESTING GOODS SALES DSTRBTN DLR
INVNTRS DESIGN MFR BLY QUALITY INV MKTG CTMR

Higher quality parts and materials Higher quality in manufacturing

reduces costs of defects reduces warranty costs
at later stages

STAGE 5. RECCOMENDATIONS FOR COST REDUCTION

24

12
 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 INTANGIBLE

Observable product characteristics:
• size, color, materials, etc.
• performance
• packaging
• complementary services
DIFFERENTATION
Unobservable and subjective
characteristics that appeal to
customer’s 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.

25

Identifying Differentiation Potential:

The Demand Side

THE PRODUCT What needs What are key

does it satisfy? attributes? FORMULATE
DIFFERENTIATION
Relate patterns of STRATEGY
customer
preferences to • Select product
By what
product attributes positioning in relation
criteria do they
to product attributes
choose?
THE • Select target
CUSTOMER What price
customer group
premiums do
product attributes • Ensure customer /
command? product compatibility
What What are • Evaluate costs and
motivates demographic, benefits of
them? sociological, differentiation
psychological
correlates of customer
behavior?

26

13
 Using the Value Chain to Identify
Differentiation Potential on the Supply Side
MIS that supports Training to support Unique product features.
fast response customer service Fast new product
capabilities excellence development

FIRM INFRASTRUCTURE
HUMAN RESOURCE MANAGEMENT
TECHNOLOGY DEVELOPMENT

INBOUND OPERATIONS OUTBOUND MARKETING SERVICE

LOGISTICS LOGISTICS & SALES
Customer technical
support. Consumer
credit. Availability of
Quality of Defect free Fast delivery. Building brand spares
components & products. Efficient order reputation
materials Wide variety processing

27

Identifying Differentiation Opportunities through

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

1
5
2 3 4
Inventory holding
Supplies of steel

Inventory holding

Inventory holding

technical support
Manufacturing
& aluminum

Purchasing

Distribution
Processing
Engineering

Marketing
Purchasing

Distribution

Canning
Service &
Design

Sales

CAN MAKER CANNER

1. Distinctive can design can assist canners’ marketing activities.

2. High manufacturing tolerances can avoid breakdowns in customer’s 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 canner’s efficiency of plant utilization.

28

14
 INDUSTRY ANALYSIS
AND POSITIONING

Determining Industry Attractiveness and

Identifying Strategic Opportunities

29

Profitability of US Industries (selected industries only)

Median return on equity (%), 1999-2005

Household & Personal Products 22.7 Gas & Electric Utilities 10.4
Pharmaceuticals 22.3 Food and Drug Stores 10.0
Tobacco 21.6 Motor Vehicles & Parts 9.8
Food Consumer Products 19.6 Hotels, Casinos, Resorts 9.7
Securities 18.9 Railroads 9.0
Diversified financials 18.3 Insurance: Life and Health 8.6
Beverages 18.8 Packaging & Containers 8.6
Mining & crude oil 17.8 Insurance: Property & Casualty 8.3
Petroleum Refining 17.3 Building Materials, Glass 8.3
Medical Products & Equipment 17.2 Metals 8.0
Commercial Banks 15.5 Food Production 7.2
Scientific & Photographic Equipt. 15.0 Forest and Paper Products 6.6
Apparel 14.4 Semiconductors &
Computer Software 13.9 Electronic Components 5.9
Publishing, Printing 13.5 Telecommunications 4.6
Health Care 13.1 Communications Equipment 1.2
Electronics, Electrical Equipment 13.0 Entertainment 0.2
Specialty Retailers 13.0 Airlines (22.0)
Computers, Office Equipment 11.7

30

15
 The Profitability of Global Industries: Return on Invested Capital, 1963-2003

Utilities 6.2

Telecom services 6.5

Transporation 6.9

Energy 7.7

Materials 8.4

OVERALL AVERAGE 9

Retailing 9

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

Semiconductors 11.9

Commercial services 12.8

Media 14.7

Computer software and services 15

Household and personal products 15.2

Pharmaceuticals 18.4

0 5 10 15 20

Average ROIC 1963-2003 (%)

31

From Environmental Analysis

to Industry Analysis

The national/ The natural

international environment
economy THE INDUSTRY
ENVIRONMENT
Demographic
Technology • Suppliers structure
• Competitors
• Customers

Government Social structure

& Politics

•The Industry Environment lies at the core of the Macro Environment.

•The Macro Environment impacts the firm through its effect on the Industry
Environment.

32

16
 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

33

The Spectrum of Industry Structures

Perfect
Oligopoly Duopoly Monopoly
Competition

Concentration Many firms A few firms Two firms One firm

Entry and Exit No/Low barriers Significant barriers High barriers

Barriers

Product Homogeneous
Differentiation Potential for product differentiation
Product

Perfect
Information Imperfect availability of information
Information flow

34

17
 Porter’s Five Forces of Competition Framework

SUPPLIERS
Bargaining power of suppliers

INDUSTRY
COMPETITORS

POTENTIAL Threat of Threat of

SUBSTITUTES
ENTRANTS
new Rivalry among substitutes
entrants existing firms

Bargaining power of buyers

BUYERS

35

The Structural Determinants of Competition

SUPPLIER POWER
• Supplier concentration
• Relative bargaining
power

THREAT OF ENTRY INDUSTRY RIVALRY SUBSTITUTE

•Capital requirements •Concentration COMPETITION
•Economies of scale •Diversity of
•Absolute cost advantage competitors • Buyers’ propensity
to substitute
•Product differentiation •Product differentiation
• Relative prices &
•Access to distribution •Excess capacity &
channels exit barriers performance of
substitutes
•Legal/ regulatory barriers •Cost conditions
•Retaliation

BUYER POWER
• Buyers’ price sensitivity
• Relative bargaining
power

36

18
 SUPPLIER POWER
LOW
DRUG
INDUSTRY
(ROE=22%)
THREAT OF ENTRY
LOW INDUSTRY
COMPETITIVENESS
•economies of scale LOW THREAT OF
•capital requirements SUBSTITUTES
for R&D and clinical •high concentration LOW
trials •product differentiation
•product differentiation •patent protection No substitutes.
•control of distribution •steady demand growth (Changing as managed care
channels •no cyclical fluctuations encourages generics.)
•patent protection of demand

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

37

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?

38

19
 Neutralizing The Five
Competitive Forces
Force Method for Neutralizing Force
Entry 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 Improve attractiveness compared to
substitutes: better service, more features, etc..
Buyers Reduce buyer uniqueness: forward
integrate, differentiate product, new customers, etc..
Reduce supplier uniqueness: backward
Suppliers integrate, obtain minority position, second source, etc..

39

The Traditional Model of Industry Life Cycle

Fermentation Shakeout Maturity Decline

Sales volume

Time
Dr Bhavish Jugurnath 40

40

20
 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 Color

B&W Portable

HDTV
?
1900 50 90 07 1930 50 70 90 07
MOTORCYCLES TV’s

• Life cycle model can help us to anticipate industry

evolution—but dangerous to assume any common, pre-
determined pattern of industry development

41

Evolution of Industry Structure over the Life Cycle

INTRODUCTION GROWTH MATURITY DECLINE

DEMAND Affluent buyers Increasing Mass market Knowledgeable,
penetration replacement customers, resi-
demand dual segments

TECHNOLOGY Rapid product Product and Incremental Well-diffused

innovation process innovation innovation technology

PRODUCTS Wide variety, Standardization Commoditiz- Continued

rapid design change ation commoditization

MANUFACT- Short-runs, skill Capacity shortage, Deskilling Overcapacity

URING intensive mass-production

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

COMPETITION Technology- Entry & exit Shakeout & Price wars,

consolidation exit

KSFs Product innovation Process techno- Cost efficiency Overhead red-

logy. Design for uction, ration-
alization, low
cost sourcing

42

21
 The Driving Forces of Industry Evolution

BASIC CONDITIONS INDUSTRY STRUCTURE COMPETITION

Customers become
more knowledgeable Customers become
& experienced more price conscious
Quest for new
sources of
differentiation
Products become
more standardized

Diffusion of
Price competition
technology Production intensifies
Production shifts
becomes less R&D
to low-wage
& skill-intensive
countries

Excess capacity
increases
Demand growth Bargaining power
slows as market of distributors
saturation approaches Distribution channels increases
consolidate

43

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

Source: S. Klepper, Industrial & Corporate Change, August 2002, p. 654.

44

22
 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

45

Innovation & Renewal over the

Industry Life Cycle: Retailing
Warehouse
Clubs Internet
e.g. Price Club Retailers
Sam’s Club e.g. Amazon;
Discount Expedia
“Category
Stores Killers”
e.g. K-Mart e.g. Toys-R-Us,
Mail order, Wal-Mart
catalogue Chain
Home Depot ?
retailing Stores
e.g. A&P
e.g. Sears
Roebuck

1880s 1920s 1960s 2000

46

23
 Gary Hamel: Shaking the Foundations
OLD BRICK NEW BRICK
Top management is responsible Everyone is responsible
for setting strategy for setting strategy

Getting better, getting faster Rule-busting innovation

is the way to win 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 There’s no correlation between

competitiveness size and competitiveness

Innovation equals new products Innovation equals entirely new

and new technology business concepts

Strategy is the easy part, Strategy is the easy only if you’re

Implementation the hard part 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 can’t innovate Big companies can become gray-haired

revolutionaries

47

An Alternate Model of Industry Life Cycle

Emergence Convergence Coexistence Dominance

Sales volume

Established
Industry

Emerging Industry

Time
Dr Bhavish Jugurnath 48

48

24
 The Industry Life Cycle as an S curve

Performance
Maturity

Discontinuity
Takeoff

Ferment

Time
Dr Bhavish Jugurnath 49

49

The S-curve Maps Major Transitions

Maturity

Performance

Discontinuity
Takeoff

Ferment

Time
Dr Bhavish Jugurnath 50

50

25
 RESOURCES,
CAPABILITIES, AND
CORE COMPETENCES

51

Shifting the Focus of Strategy Analysis:

From the External to the Internal Environment

THE FIRM THE

Goals and INDUSTRY
Values ENVIRONMENT
Resources and
Capabilities STRATEGY •Competitors
STRATEGY
Structure and •Customers
Systems •Suppliers

The The
Firm-Strategy Environment-Strategy
Interface Interface

52

26
 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.

53

Canon: Products and Core Technical Capabilities

Precision Fine
Mechanics 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
Stepper aligners Color video printer
Calculator
Notebook computer

Micro-
Electronics
54

27
 Eastman Kodak’s Dilemma

Resources & Capabilities Businesses

Chemical Imaging Film
1980’s •Organic Chemistry Cameras
•Polymer technology Fine Chemicals
•Optomechtronics
Pharmaceuticals
•Thin-film coatings
Brands Diagnostics
Global Distribution

1990’s DIVESTS: Eastman Chemical, Sterling Winthrop, Diagnostics

Need to build digital Digital Imaging

imaging capability Products (e.g. Photo CD
System; Advantix
cameras & film

55

The Links between Resources, Capabilities

and Competitive Advantage

INDUSTRY KEY
COMPETITIVE SUCCESS FACTORS
STRATEGY
ADVANTAGE
ORGANIZATIONAL
CAPABILITIES

RESOURCES
TANGIBLE INTANGIBLE HUMAN

•Financial •Skills/know-how
•Technology •Capacity for
•Physical •Reputation communication
•Culture & collaboration
•Motivation

56

28
 Appraising Resources
RESOURCE CHARACTERISTICS INDICATORS

Financial Borrowing capacity Debt/ Equity ratio

Internal funds generation Credit rating
Tangible Net cash flow
Resources Physical Plant and equipment: Market value of
size, location, technology fixed assets.
flexibility. Scale of plants
Land and buildings. Alternative uses for
Raw materials. fixed assets

Technology Patents, copyrights, know how No. of patents owned

R&D facilities. Royalty income
Intangible Technical and scientific R&D expenditure
Resources employees R&D staff

Reputation Brands. Customer loyalty. Company Brand equity

reputation (with suppliers, customers, Customer retention
government) Supplier loyalty

Human Training, experience, adaptability, Employee qualifications,

Resources commitment and loyalty of employees pay rates, turnover.

57

The World’s Most Valuable Brands, 2006

Rank Company Brand Rank Company Brand

value value
($bn.) ($bn.)

1 Coca-Cola 67.5 11 Mercedes Benz 20.0

2 Microsoft 59.9 12 Citi 20.0
3 IBM 53.4 13 Hewlett-Packard 18.9
4 GE 47.0 14 American Express 18.6
5 Intel 35.6 15 Gillette 17.5
6 Nokia 26.5 16 BMW 17.1
7 Disney 26.4 17 Cisco 16.6
8 McDonald’s 26.0 18 Louis Vuitton 16.1
9 Toyota 24.8 19 Honda 15.8
10 Marlboro 21.2 20 Samsung 15.0

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

58

29
 Defining Organizational Capabilities

Organizational Capabilities = firm’s 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

firm’s strategy and performance. (Hamel and Prahalad)

59

Identifying Organizational Capabilities:

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

60

30
 The Value Chain:
The McKinsey Business System

TECHNOLOGY PRODUCT DESIGN MANUFACTURING MARKETING DISTRIBUTION SERVICE

61

The Porter Value Chain

FIRM INFRASTRUCTURE
SUPPORT
HUMAN RESOURCE MANAGEMENT ACTIVITIES
TECHNOLOGY DEVELOPMENT
PROCUREMENT

INBOUND OPERATIONS OUTBOUND MARKETING SERVICE

LOGISTICS LOGISTICS & SALES

PRIMARY
ACTIVITIES

62

31
 The Rent-Earning Potential
of Resources and Capabilities

THE EXTENT OF THE Scarcity

COMPETITIVE ADVANTAGE
ESTABLISHED Relevance

Durability
THE PROFIT
EARNING POTENTIAL SUSTAINABILITY OF THE Transferability
OF A RESOURCE OR COMPETITIVE
CAPABILITY ADVANTAGE Replicability

Property rights

Relative
APPROPRIABILITY bargaining power

Embeddedness

63

Assessing a Companies Resources

and Capabilities: The Case of VW
Importan VW’s VW’s
RESOURCES ce Relative
CAPABILITIES Importance
Relative
Strength Strength
C1. Product
R1. Finance 6 4 9 4
development

R2. Technology 7 5 C2. Purchasing 7 5

8 8 C3. Engineering 7 9
R3. Plant and
equipment
C4. Manufacturing 8 7
R4. Location 7 4
C5. Financial
6 3
management
R5. Distribution 8 5
C6. R&D 6 4

C7. Marketing &

9 4
sales

C8. Government
4 8
relations

64

32
 Appraising VW’s Resources and Capabilities

(Hypothetical only)

10 Key Strengths
Superfluous Strengths
C3
R3
Relative Strength

C8
C4
C2
5 R2 R5
R1 R4 C1
C6 C7
C5

Zone of Irrelevance Key Weaknesses

1
1 5 10
Strategic Importance

65

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)

66

33
 COMPETITIVE
ADVANTAGE AND THE
SCOPE OF THE FIRM

67

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

68

34
 Transactions Costs and the
Scope of the Firm

VerticalProduct Geographical
Scope Scope Scope

[A] Single V1
Integrated V2
P1 P2 P3 C1 C2 C3
Firm V3

[B] Several V1
Specialized P1 P2 P3 C1 C2 C3
V2
Firms linked
by Markets V3
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?

69

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 management—accounting systems, decision sciences,
financial techniques, organizational innovations, scientific management

1980 – 1995 Shrinking size and scope of biggest industrial corporations.

Increasingly Increased no. of managerial Admin. costs of
turbulent decisions. Need for fast firms rise relative
external responses to external to transaction
environment change 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

70

35
 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?

71

Diversification among the US Fortune 500, 1949-74

70.2 63.5 53.7 53.9 39.9 37.0

29.8 36.5 46.3 46.1 60.1 63.0

1949 1954 1959 1964 1969 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

72

36
 Diversification among Large UK
Corporations, 1950-93

70
60
Single business
50
40 Dominant
business
30 Related business
20
Unrelated
10 business
0
1950 1960 1970 1983 1993

73

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 --Diversification reduces variance of profit flows

SPREADING --But, doesn’t create value for shareholders—they 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.

74

37
 Diversification and Shareholder Value:
Porter’s 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

75

Competitive Advantage from Diversification

• Sharing tangible resources (research labs, distribution

systems) across multiple businesses
• Sharing intangible resources (brands, technology) across
ECONOMIES multiple businesses
OF • Transferring functional capabilities (marketing, product
SCOPE 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
TRANSACTIONS
operating internal capital and labor markets
• Key advantage of diversified firm over external markets---
superior access to information

76

38
 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.

77

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 self-
employed builders, plumbers, electricians, painters.
• Key issue -- transaction costs of the market vs.
administrative costs of firms.
• Where transaction costs high—firm is more efficient means
of organization

Note: transaction costs comprise costs of search and contract

negotiation and enforcement

78

39
 The Costs and Benefits of Vertical
Integration: BENEFITS

• Technical economies from integrating processes e.g. iron

and steel production
—but doesn’t 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

79

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

80

40
 When is Vertical Integration More Attractive
than Outsourcing?
How many firms are available
to undertake the activities?
Is transaction-specific investment
needed?
Does limited information permit
cheating?
Are taxes or regulation imposed
on transactions?
Do the different stages have similar
optimal scales of operation?
Are the two stages strategically
similar?
How great the need for entrepreneurship
& continual upgrading of capabilities
How uncertain is market demand?
Are risks compounded by
linkages between vertical stages
The fewer the companies
the more attractive is VI
If yes, VI more attractive
VI can limit opportunism
VI can avoid them
Greater the similarity, the
more attractive is VI
Greater the strategic
similarity ---the more
attractive is VI
Greater the need, the greater
the disadvantages of VI
Greater the unpredictability
----the more costly is VI
VI increases risk.

81

The value chain for steel cans

Canning of
Iron ore Steel Steel strip Can
mining production food, drink,
production making oil, etc.

VERTICAL
VERTICAL
INTEGRATION INTEGRATION,
AND MARKET
CONTRACTS
MARKET
MARKET
CONTRACTS
CONTRACTS

What factors explain why some stages are vertically integrated,

while others are linked by market transactions?

82

41
 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?

83

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.

84

42
 Patterns of Internationalization

HIGH Trading Global

Industries Industries
--aerospace --automobiles
--military hardware --oil
International Trade

--diamond mining --semiconductors

--agriculture --consumer electronics

Domestic Multidomestic
Industries Industries
--railroads
--laundries/dry cleaning --retail banking
--hairdressing --hotels
LO W

--milk --consulting

LOW Foreign Direct Investment HIGH

85

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 industry’s margins & rate of return on capital

86

43
 Competitive Advantage within an International
Context: The Basic Framework

FIRM RESOURCES
THE INDUSTRY
& CAPABILITIES
ENVIRONMENT
-- Financial resources
-- Physical resources Key Success Factors
-- Technology
-- Reputation
-- Functional capabilities COMPETITIVE
-- General management
ADVANTAGE
capabilities

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

87

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.

88

44
 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
portation equipment
Other manufacturers -.68 -.07 .01 .29 .40

Note: Revealed comparative advantage for each product group

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

89

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.
▪ 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.

90

45
 Porter’s National Diamond Framework

FACTOR CONDITIONS

RELATING AND
DEMAND SUPPORTING
CONDITIONS INDUSTRIES

STRATEGY, STRUCTURE,
AND RIVALRY

1. FACTOR CONDITIONS—“Home grown” resources/capabilities more important

than natural endowments.
2. RELATED AND SUPPORTING INDUSTRIES—Key role of “industry clusters”
3. DEMAND CONDITIONS—Discerning domestic customers drive quality & innovation
4. STRATEGY, STRUCTURE, RIVALRY. E.g. domestic rivalry drives upgrading.

91

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)

92

46
 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, 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.

93

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. Mexico
Parts & components 7,750 8,000
Labor 700 40
Shipping cost 300 1,000
Inventory 20 40
TOTAL 8,770 9,180

94

47
 Location and the Value Chain

Comparative advantage in textiles and apparel by stage of processing

Country Stage Index of Country Stage Index of

of Revealed of Revealed
Processing Comparative Processing Comparative
Advantage Advantage

Hong Kong 1 -0.96 Japan 1 -0.36

2 -0.81 2 +0.48
3 -0.41 3 +0.48
4 +0.75 4 -0.48
Italy 1 -0.54 U.S.A. 1 +0.96
2 +0.18 2 +0.64
3 +0.14 3 +0.22
4 +0.72 4 -0.73

Note:
1 = production of fiber (natural & synthetic) 2 = production of spun yarn
3 = production of textiles 4 = production of clothing

95

Determining the Optimal Location

of Value Chain Activities
The optimal location
of activity X considered
independently
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
WHERE TO LOCATE resources and capabilities does the firm
ACTIVITY X? possess in particular locations?

What is the firm’s 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?

96

48
 Alternative Modes of Overseas Market Entry

TRANSACTIONS DIRECT INVESTMENT

Exporting Licensing Joint venture Wholly

owned
Marketing & Fully
Spot Foreign Distribution integrated
subsidiary
sales agent / only
distributor

Long- Licensing Franchising Marketing& Fully

term patents & Distribution integrated
contract other IP only

Low Resource commitment High

97

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 partner’s resources
and capabilities can more easily be captured by the other?
– Absorptive capacity of the company-- which partner is the
more receptive learner?

98

49
 General Motors’ Alliances with Competitors

SAAB
AVTOVAZ FIAT
50%
owned
SUZUKI

GM FUJI
60%
ISUZU owned

40% investment IBC Vehicles

Ltd. (U.K.) 50%
owned SAIC
(Makes vans in UK)

New United Motor

TOYOTA Manufacturing
50% owned Inc. (NUMMI)
(Makes cars in US) DAEWOO

99

Multinational Strategies:
Globalization vs. National Differentiation

The case for a global strategy:

• National preferences in decline—world becoming a single, Ted

if segmented, market Levitt
“Globaliz-
-ation of
• Accessing global scale economies—in purchasing, Markets”
manufacturing, product development, marketing. Thesis

• Strategic strength from global leverage—ability to cross- Hamel &

Prahalad
subsidize a national subsidiary with cash flows from Thesis
other national subsidiaries
Kenichi
Ohmae’s
• Need to access market trends and technological “Triad
developments in each of the world’s major economic Power”
centers- N. America, Europe, East Asia. Thesis

100

50
 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 World as inter- World as
single mkt. related mkts. separate
national mkts.

global strategy multidomestic strategy

101

Analyzing benefits/costs of a global strategy

Forces for globalization Forces for localization / national

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

102

51
 Jet engines

Autos
Benefits
Consumer
of
electronics Telecom
global
integration equipment

Steel Investment
banking
Cement Online C2C auctions Restaurant
Retail chains
Beer banking
Dry Auto Funeral
cleaning repair services

Benefits of national differentiation

103

Positioning industries in terms of benefits of

globalization and national differentiation

Jet engines

Autos
Benefits
Consumer
of
electronics Telecom
global
integration equipment

Investment
banking

Retail
Cement banking
Auto Funeral
repair services

Benefits of national differentiation

104

52
 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.

105

The Evolution of Multinational Strategies

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

American MNC’s 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

106

53
 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, technology development, and manufacture
concentrated at home
• National subsidiaries primarily sales and distribution
companies with limited autonomy. e.g. Toyota, NEC,
Matsushita

107

Marketing Global Strategies and Situations to Industry

Conditions: Firm Success in Different Industries

Consumer Electronics Branded, Packaged Telecommunications

Consumer Goods Equipment
Matsushit NEC
global integration

global integration

global integration

a Ka
o Erickson
Philips P&G
General Electric Unilever
ITT

local responsiveness local responsiveness local responsiveness

- Global industry - Substantial national - Requires both global
- Matsushita the most differentiation, few global integration and national
successful scale economies differentiation.
- Philips the survivor - Kao has limited success - NEC only partially
- GE sold out outside Japan successful
- Unilever and P&G most - ITT sold out
successful - Ericsson most
successful

108

54
 Reconciling Global Integration with National
Differentiation: The Transnational Corporation

Tight complex Heavy flows of

controls and technology,
coordination and a finances, people,
shared strategic and materials
decision process. 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.

109

Designing the MNC: Key Learning

1. On what basis to organize—products, geography, functions?
--Where is coordination most important?
--How global is the industry? How global is the firm’s
strategy?
2. 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
3. What’s the role of HQ?
--Control function
--Coordination function
--Exploiting scale economies in centralized provision of
services
4. The need for internal differentiation
--By product/business
--By function
--By country
5. Formal & informal organization

110

55