MBA290:

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

Course Overview: Objectives

To acquire familiarity with the principal concepts,

frameworks and techniques of strategic management.
To gain expertise in applying these concepts,
frameworks and techniques in order to
understand the reasons for good or bad
performance by an enterprise,
generate strategy options for an enterprise,
assess available options under conditions of
imperfect knowledge,
select the most appropriate strategy,
recommend the best means of implementing the
chosen strategy.
2

Course Overview: Objectives (contd)

To integrate the knowledge gained in previous

courses.
To develop your capacity as a general manager in
terms of
an appreciation of the work of the general
manager,
the ability to view business problems from a
general management perspective,
the ability to develop original and innovative
approaches to strategic problems,
developing business judgment.
3

THE
THE CONCEPT
CONCEPT OF
OF
STRATEGY
STRATEGY
The Concept of Strategy and the Pursuit of
Sustainable Above-Normal Profits

Domain
Domain of
of Strategy
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 longterm profits in the face of irreducible uncertainty and
aggressive competition
strategy is the linkage between a business and its
current and future environment

Definition
Definition
The determination of the long run goals
and objectives of an enterprise, the
adoption of courses of action and the
allocation of resources necessary for
carrying out these goals
Alfred Chandler, Strategy and Structure

Levels of Strategy
CORPORATE
STRATEGY

BUSINESS
STRATEGY

FUNCTIONAL
STRATEGIES

CORPORATE
HEAD OFFICE

Division A

Division B

R&D

R&D

Personnel

Personnel

Finance

Finance

Production

Production

Marketing/Sales

Marketing/Sales

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

Common
Common Elements
Elements in
in Successful
Successful Strategy
Strategy

Successful
Strategy

EFFECTIVE IMPLEMENTATION

Long-term, simple
and agreed upon
objectives

Profound
understanding of
the competitive
environment

Objective
appraisal of
resources

Strategy
Strategy as
as aa Quest
Quest for
for Profit
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

From
From Profit
Profit Maximization
Maximization to
to Value
Value Maximization
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 = t
Where:

V
Ct

market value of the firm.

free cash flow in time t

weighted average cost of capital

Ct
(1 + r)t

The
TheWorlds
WorldsMost
MostValuable
ValuableCompanies:
Companies:
Performance
PerformanceUnder
UnderDifferent
DifferentProfitability
ProfitabilityMeasures
Measures
COMPANY

MARKET
CAP.
($BN.)

NET
INCOME
($BN)

RETURN
ON
SALES
(%)

RETURN
ON
EQUITY
(%)

RETURN
ON
ASSETS
(%)

RETURN
TO
SHAREHOLDERS
(%)

Exxon Mobil

372

36.1

19.9

34.9

17.8

11.7

General Electric

363

16.4

10.7

22.2

14.7

(1.5)

Microsoft

281

12.3

40.3

30.0

18.8

(0.9)

Citigroup

239

24.6

22.0

21.9

1.5

4.6

BP

233

22.3

9.9

27.9

10.7

10.2

Bank of America

212

16.5

27.0

14.1

1.2

2.4

Royal Dutch Shell

211

25.3

14.7

26.7

11.6

11.8

Wal-Mart

197

11.2

5.5

21.4

8.1

(10.3)

Toyota Motor

197

12.1

10.7

13.0

4.8

(22.1)

Gazprom

196

7.3

28.1

9.8

7.1

n.a.

HSBC

190

15.9

23.0

16.3

1.0

(11.8)

Procter & Gamble

190

8.7

17.3

13.7

6.4

7.2

Shareholder
Shareholder Value
ValueMaximization
Maximization and
andStrategy
StrategyChoice
Choice
The Value Maximizing Approach to Strategy Formulation:

Identify strategy alternatives

Estimate cash flows associated with cash strategy

Estimate cost of capital for each strategy

Select the strategy which generates the highest NPV

Problems:

Estimating cash flows beyond 2-3 years is difficult

Value of firm depends on option value as well as DCF value

Implications for strategy analysis:

Some simple financial guidelines for value maximization

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

AAComprehensive
ComprehensiveValue
ValueMetrics
MetricsFramework
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
Sources of
of Superior
Superior Performance
Performance
Above Normal
Profits
(in Excess of the Competitive Level)

Avoid
Competitors
Attractive
Industry

Attractive
Strategic
Group

Attractive
Niche

Entry
Barriers

Mobility
Barriers

Isolating
Mechanisms

Be Better Than
Competition
Cost
Advantage

Differentiation
Advantage

Sources
Sources of
of Competitive
Competitive Advantage
Advantage

COMPETITIVE
COMPETITIVE
ADVANTAGE
ADVANTAGE

ct
u
d
ro
p
r
st
la
o
i
c
m
r
Si
we
o
l
at

Pri
ce
fro
pre
m
mi
un
um
iqu
ep
rod
uc
t

COST
COST
ADVANTAGE
ADVANTAGE

DIFFERENTIATION
DIFFERENTIATION
ADVANTAGE
ADVANTAGE

The
The Experience
Experience Curve
Curve

The Law of Experience

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

The unit cost value added to a standard product

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

1996
1998
2000

Cumulative Output

2002

2004

Examples
Examples of
of Experience
Experience Curves
Curves

75%

100K

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

UK refrigerators, 1957-71

Price Index
50 100 200 300

1960 Yen
15K
20K 30K

Japanese clocks & watches, 1962-72

70% slope

10
50
Accumulated units
(millions)

Drivers
Drivers of
of Cost
Cost Advantage
Advantage
ECONOMIES OF SCALE

ECONOMIES OF LEARNING

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

PRODUCTION TECHNIQUES

Process innovation
Reengineering business processes

PRODUCT DESIGN

Standardizing designs & components

Design for manufacture

INPUT COSTS

Location advantages
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

Economies
Economies of
of Scale:
Scale: The
The Long-Run
Long-Run
Cost
Cost Curve
Curve for
for aa Plant
Plant

Sources of scale economies:

- technical input/output relationships
- indivisibilities
- specialization
Cost per
unit of
output

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

Units of output
per period

Scale
ScaleEconomies
Economiesin
inAdvertising:
Advertising: U.S.
U.S. Soft
Soft Drinks
Drinks

Advertising Expenditure ($ per case)

0.02
0.05
0.10
0.15
0.20

Despite the massive advertising budgets of brand leaders Coke and Pepsi, their main
brands incur lower advertising costs per unit of sales than their smaller rivals.

Schweppes
SF Dr. Pepper
Diet 7-Up

Tab
Diet Pepsi

Diet Rite
Fresca
Seven Up
Dr. Pepper

Sprite

Pepsi
10

20

50

100

200

Annual sales volume (millions of cases)

500

Coke
1,000

Applying
Applyingthe
theValue
ValueChain
Chain to
toCost
CostAnalysis:
Analysis:
The
TheCase
Caseof
ofAutomobile
Automobile Manufacture
Manufacture

STAGE 1. IDENTIFY THE PRINCIPLE ACTIVITIES

PURCHASING

PARTS
INVENTORIES

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

GOODS
INVENTORIES

SALES DISTRI- DEALER &

&
BUTION CUSTOMER
MKITG
SUPPORT

STAGE 2. ALLOCATE TOTAL COSTS

Applying
Applyingthe
theValue
ValueChain
Chainto
toCost
CostAnalysis:
Analysis: The
TheCase
Case
of
ofAutomobile
Automobile Manufacture
Manufacture(continued)
(continued)
STAGE 3.
IDENTIFY
COST
DRIVERS

PURCHASING

PARTS
INVENTORIES

--Plant scale for each

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

-- Level of quality targets

-- Frequency of defects

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

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

GOODS
INVENTORIES

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

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

SALES
&
MKITG

DISTRI- DEALER &

BUTION CUSTOMER
SUPPORT

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

Applying
Applyingthe
theValue
ValueChain
Chain to
to Cost
CostAnalysis:
Analysis: The
TheCase
Case
of
ofAutomobile
Automobile Manufacture
Manufacture(continued)
(continued)
STAGE 4. IDENTIFY LINKAGES

Consolidation of orders to increase

discounts, increases inventories
PRCHSNG

PARTS
INVNTRS

R&D
DESIGN

Designing different models around

common components and platforms
reduces manufacturing costs

COMPONENT
MFR

Higher quality parts and materials

reduces costs of defects
at later stages

ASSEMBLY

TESTING GOODS
QUALITY
INV

SALES DSTRBTN DLR

MKTG
CTMR

Higher quality in manufacturing

reduces warranty costs

STAGE 5. RECCOMENDATIONS FOR COST REDUCTION

The
The Nature
Nature of
of Differentiation
Differentiation
DEFINITION: Providing something unique that is valuable to the
buyer beyond simply offering a low price. (M. Porter)
THE KEY IS TO CREATE VALUE FOR THE CUSTOMER

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

INTANGIBLE
DIFFERENTATION
Unobservable and subjective
characteristics that appeal to
customers image, status, identity,
and desire for exclusivity

TOTAL CUSTOMER RESPONSIVENESS

Differentiation not just about the product, it embraces the whole
relationship between the supplier and the customer.

Identifying
Identifying Differentiation
Differentiation Potential:
Potential:
The
The Demand
Demand Side
Side
THE PRODUCT

THE
CUSTOMER

What needs
does it satisfy?

By what
criteria do they
choose?

What are key

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

What
motivates
them?

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

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

Using
Using the
the Value
Value Chain
Chain to
to Identify
Identify
Differentiation
Differentiation Potential
Potential on
on the
the Supply
Supply Side
Side
MIS that supports
fast response
capabilities

Training to support
customer service
excellence

Unique product features.

Fast new product
development

FIRM INFRASTRUCTURE
HUMAN RESOURCE MANAGEMENT
TECHNOLOGY DEVELOPMENT

INBOUND

OPERATIONS

LOGISTICS

Quality of
components &
materials

Defect free
products.
Wide variety

OUTBOUND

MARKETING

LOGISTICS

& SALES

Fast delivery.
Efficient order
processing

Building brand
reputation

SERVICE

Customer technical
support. Consumer
credit. Availability of
spares

Identifying
IdentifyingDifferentiation
DifferentiationOpportunities
Opportunitiesthrough
through
Linking
Linkingthe
the Value
ValueChains
Chainsof
ofthe
the Firm
Firm and
and its
its
Customers:
Customers: Can
Can Manufacture
Manufacture

5
2

Distribution

Marketing

Canning

Processing

Inventory holding

Purchasing

Service &
technical support

Sales

Distribution

Inventory holding

Manufacturing

Design
Engineering

Inventory holding

Purchasing

Supplies of steel
& aluminum

CAN MAKER

CANNER

1. Distinctive can design can assist canners marketing activities.

2. High manufacturing tolerances can avoid breakdowns in customers canning lines.

3. Frequent, reliable delivery can permit canner to adopt JIT can supply.
4. Efficient order processing system can reduce customers ordering costs.
5. Competent technical support can increase canners efficiency of plant utilization.

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

Profitability
Profitabilityof
of US
USIndustries
Industries (selected
(selectedindustries
industriesonly)
only)
Median return on equity (%), 1999-2005
Household & Personal Products
Pharmaceuticals
Tobacco
Food Consumer Products
Securities
Diversified financials
Beverages
Mining & crude oil
Petroleum Refining
Medical Products & Equipment
Commercial Banks
15.5
Scientific & Photographic Equipt.
Apparel
Computer Software
Publishing, Printing
Health Care
Electronics, Electrical Equipment
Specialty Retailers
Computers, Office Equipment

22.7
Gas & Electric Utilities
10.4
22.3
Food and Drug Stores
10.0
21.6
Motor Vehicles & Parts
9.8
19.6
Hotels, Casinos, Resorts
9.7
18.9
Railroads
9.0
18.3
Insurance: Life and Health
8.6
18.8
Packaging & Containers
8.6
17.8
Insurance: Property & Casualty 8.3
17.3
Building Materials, Glass
8.3
17.2
Metals
8.0
Food Production
7.2
15.0
Forest and Paper Products
6.6
14.4
Semiconductors &
13.9
Electronic Components
5.9
13.5
Telecommunications
4.6
13.1
Communications Equipment
1.2
13.0
Entertainment
0.2
13.0
Airlines
(22.0)
11.7

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

From
From Environmental
Environmental Analysis
Analysis
to
to Industry
IndustryAnalysis
Analysis
The national/
international
economy

Technology

Government
& Politics

The natural
environment

THE INDUSTRY
ENVIRONMENT
Suppliers
Competitors
Customers

Demographic
structure

Social structure

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

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

Drawing
Drawing Industry
Industry Boundaries
Boundaries ::
Identifying
Identifying the
the Relevant
Relevant Market
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
The Spectrum
Spectrum of
of Industry
Industry Structures
Structures

Concentration

Perfect
Competition

Oligopoly

Duopoly

Monopoly

Many firms

A few firms

Two firms

One firm

Entry and Exit No/Low barriers

Barriers

Significant barriers

Product
Differentiation

Homogeneous
Product

Potential for product differentiation

Perfect
Information flow

Imperfect availability of information

Information

High barriers

Porters
Porters Five
Five Forces
Forces of
of Competition
Competition Framework
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
The Structural
Structural Determinants
Determinants of
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

INDUSTRY RIVALRY

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

BUYER POWER
Buyers price sensitivity
Relative bargaining
power

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

SUPPLIER POWER
LOW

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

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

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

DRUG
INDUSTRY
(ROE=22%)

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

Applying
Applying Five-Forces
Five-Forces Analysis
Analysis
Forecasting Industry Profitability

Past profitability a poor indicator of future

profitability.
If we can forecast changes in industry
structure we can predict likely impact on
competition and profitability.
Strategies to Improve Industry Profitability
What structural variables are depressing profitability
Which of these variables can be changed by
individual or collective strategies?

Neutralizing
Neutralizing The
The Five
Five
Competitive
Competitive Forces
Forces
Force
Entry

Method for Neutralizing Force

Erecting barriers (isolating
mechanisms) create & exploit economies of
scale, aggressive deterrence, design in switching
costs, etc.

Rivalry

Compete on nonprice dimensions:

cost leadership, differentiation, cooperation, etc.

Substitutes Improve attractiveness compared to

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

Reduce supplier uniqueness: backward

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

The Traditional Model of Industry Life Cycle

Shakeout

Maturity

Sales volume

Fermentation

Time

Decline

How
How Typical
Typical is
is the
the Life
Life Cycle
Cycle Pattern?
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 B&W

Color

Portable
HDTV ?

1900 50 90 07
MOTORCYCLES

1930

50 70
TVs

90

07

Life cycle model can help us to anticipate industry

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

Evolution
Evolutionof
of Industry
IndustryStructure
Structure over
over the
theLife
Life Cycle
Cycle
INTRODUCTION
Affluent buyers

GROWTH
Increasing
penetration

TECHNOLOGY

Rapid product
innovation

Product and
Incremental
process innovation innovation

PRODUCTS

Wide variety,
Standardization
rapid design change

MANUFACTURING

Short-runs, skill
Capacity shortage, Deskilling
intensive
mass-production

DEMAND

TRADE

MATURITY
Mass market
replacement
demand

Commoditization

DECLINE
Knowledgeable,
customers, residual segments
Well-diffused
technology
Continued
commoditization
Overcapacity

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

COMPETITION

Technology-

Entry & exit

KSFs

Product innovation

Process technology. Design for

Shakeout &
consolidation
Cost efficiency

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

The
The Driving
Driving Forces
Forces of
of Industry
Industry Evolution
Evolution
BASIC CONDITIONS
Customers become
more knowledgeable
& experienced

INDUSTRY STRUCTURE

Customers become
more price conscious

Products become
more standardized
Diffusion of
technology

Production
becomes less
R&D
& skill-intensive

Production shifts
to low-wage
countries

Excess capacity
increases
Demand growth
slows as market
saturation approaches

COMPETITION

Distribution channels
consolidate

Quest for new

sources of
differentiation

Price competition
intensifies

Bargaining power
of distributors
increases

Changes
Changesin
inthe
thePopulation
Population of
of Firms
Firmsover
overthe
the
Industry
IndustryLife
LifeCycle:
Cycle: US
USAuto
AutoIndustry
Industry1885-1961
1885-1961

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

Preparing
Preparing for
for the
the Future
Future :: The
The Role
Role of
of Scenario
Scenario
Analysis
Analysis in
in Adapting
Adapting to
to Industry
Industry Change
Change
Stages in undertaking multiple Scenario Analysis:
Identify major forces driving industry change
Predict possible impacts of each force on the industry
environment
Identify interactions between different external forces
Among range of outcomes, identify 2-4 most likely/ most
interesting scenarios: configurations of changes and
outcomes
Consider implications of each scenario for the company
Identify key signposts pointing toward the emergence of
each scenario
Prepare contingency plan

Innovation
Innovation &&Renewal
Renewal over
over the
the
Industry
IndustryLife
LifeCycle:
Cycle: Retailing
Retailing

Mail order,
catalogue
retailing
e.g. Sears
Roebuck

1880s

Chain
Stores
e.g. A&P

1920s

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

1960s

2000

Gary Hamel: Shaking the Foundations

OLD BRICK

NEW BRICK

Top management is responsible

for setting strategy

Everyone is responsible
for setting strategy

Getting better, getting faster

is the way to win

Rule-busting innovation
is the way to win

IT creates competitive advantage

Unconventional business concepts

create competitive advantage

Being revolutionary is high risk

More of the same is high risk

We can merge our way to

competitiveness

Theres no correlation between

size and competitiveness

Innovation equals new products

and new technology

Innovation equals entirely new

business concepts

Strategy is the easy part,

Implementation the hard part

Strategy is the easy only if youre

content to be an imitator

Change starts at the top

Change starts with activists

Our real problem is execution

Our real problem is innovation

Big companies cant innovate

Big companies can become gray-haired

revolutionaries

An Alternate Model of Industry Life Cycle

Convergence

Coexistence

Sales volume

Emergence

Dominance

Established
Industry

Emerging Industry
Time

The Industry Life Cycle as an S curve

Performance
Maturity
Discontinuity
Takeoff

Ferment
Time

The S-curve Maps Major Transitions

Maturity
Performance

Discontinuity
Takeoff

Ferment
Time

RESOURCES,
RESOURCES,
CAPABILITIES,
CAPABILITIES, AND
AND
CORE
CORE COMPETENCES
COMPETENCES

Shifting
Shifting the
the Focus
Focus of
of Strategy
StrategyAnalysis:
Analysis:
From
From the
the External
External to
to the
the Internal
Internal Environment
Environment

THE FIRM

THE
INDUSTRY
ENVIRONMENT

Goals and
Values
Resources and
Capabilities
Structure and
Systems

STRATEGY
STRATEGY

The
Firm-Strategy
Interface

Competitors
Customers
Suppliers

The
Environment-Strategy
Interface

Rationale
Rationale for
for the
the Resource-based
Resource-based
Approach
Approach to
to Strategy
Strategy

When the external environment is subject to

rapid change, internal resources and capabilities
offer a more secure basis for strategy than
market focus.
Resources and capabilities are the primary
sources of profitability.

Canon:
Canon: Products
Products and
and Core
Core Technical
Technical Capabilities
Capabilities
Precision
Mechanics

Fine
Optics

35mm SLR camera

Plain-paper copier
Compact fashion camera
Color copier
EOS autofocus camera
Color laser copier
Digital camera
Basic fax Laser copier
Video still camera
Laser fax
Mask aligners
Inkjet printer
Excimer laser aligners
Laser printer
Color video printer
Stepper aligners
Calculator
Notebook computer

MicroElectronics

Eastman Kodaks Dilemma

Resources & Capabilities

1980s

Chemical Imaging
Organic Chemistry

Businesses
Film

Polymer technology

Cameras
Fine Chemicals

Optomechtronics

Pharmaceuticals

Thin-film coatings

Brands

Diagnostics

Global Distribution
1990s

DIVESTS: Eastman Chemical, Sterling Winthrop, Diagnostics

Need to build digital
imaging capability

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

The
The Links
Links between
between Resources,
Resources, Capabilities
Capabilities
and
and Competitive
Competitive Advantage
Advantage
COMPETITIVE
ADVANTAGE

INDUSTRY KEY
SUCCESS FACTORS

STRATEGY
ORGANIZATIONAL
CAPABILITIES
RESOURCES

TANGIBLE
Financial
Physical

INTANGIBLE
Technology
Reputation
Culture

HUMAN
Skills/know-how
Capacity for
communication
& collaboration
Motivation

Appraising
Appraising Resources
Resources
RESOURCE

Tangible
Resources

CHARACTERISTICS
Financial

Borrowing capacity
Internal funds generation

Physical

Plant and equipment:

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

Debt/ Equity ratio

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

Technology

Patents, copyrights, know how

R&D facilities.
Technical and scientific
employees

No. of patents owned

Royalty income
R&D expenditure
R&D staff

Reputation

Brands. Customer loyalty. Company

reputation (with suppliers, customers,
government)

Brand equity
Customer retention
Supplier loyalty

Training, experience, adaptability,

commitment and loyalty of employees

Employee qualifications,
pay rates, turnover.

Intangible
Resources

Human
Resources

INDICATORS

The
The Worlds
Worlds Most
Most Valuable
Valuable Brands,
Brands, 2006
2006
Rank Company
value
($bn.)

Brand
value
($bn.)

1
2
3
4
5
6
7
8
9
10

67.5
59.9
13
14
35.6
26.5
26.4

Coca-Cola
Microsoft
IBM 53.4
GE 47.0
Intel
Nokia
Disney
McDonalds
Toyota
Marlboro

24.8

Rank

Company

Brand

11 Mercedes Benz
20.0
12 Citi
20.0
Hewlett-Packard 18.9
American Express 18.6
15 Gillette
17.5
16 BMW
17.1
17 Cisco
16.6
26.0
18 Louis Vuitton
19 Honda
15.8
21.2
20 Samsung

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

16.1
15.0

Source: Interbrand

Defining
Defining Organizational
Organizational Capabilities
Capabilities

Organizational Capabilities = firms capacity for

undertaking a particular activity. (Grant)
Distinctive Competence = things that an organization
does particularly well relative to competitors. (Selznick)
Core Competence = capabilities that are fundamental to a
firms strategy and performance. (Hamel and Prahalad)

Identifying
Identifying Organizational
Organizational Capabilities:
Capabilities:
A
AFunctional
Functional Classification
Classification
FUNCTION
Corporate
Management

CAPABILITY
Financial management
Strategic control
Coordinating business units
Managing acquisitions

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

MIS

Speed and responsiveness through

rapid information transfer

Wal-Mart, Dell
Capital One

R&D

Research capability
Development of innovative new products

Merck, IBM
Apple, 3M

Manufacturing

Efficient volume manufacturing

Continuous Improvement
Flexibility

Briggs & Stratton

Nucor, Harley-D
Zara, Four Seasons

Design

Design Capability

Apple, Nokia

Marketing

Brand Management
Quality reputation
Responsiveness to market trends

P&G, LVMH
Johnson & Johnson
MTV, LOreal

Sales, Distribution
& Service

Sales Responsiveness
Efficiency and speed of distribution
Customer Service

PepsiCo, Pfizer
LL Bean, Dell
Singapore Airlines
Caterpillar

The
The Value
Value Chain:
Chain:
The
The McKinsey
McKinsey Business
Business System
System

TECHNOLOGY

PRODUCT DESIGN

MANUFACTURING

MARKETING

DISTRIBUTION

SERVICE

The
The Porter
Porter Value
Value Chain
Chain
FIRM INFRASTRUCTURE

SUPPORT
ACTIVITIES

HUMAN RESOURCE MANAGEMENT

TECHNOLOGY DEVELOPMENT
PROCUREMENT

INBOUND
LOGISTICS

OPERATIONS

OUTBOUND

MARKETING

LOGISTICS

& SALES

SERVICE

PRIMARY
ACTIVITIES

The
The Rent-Earning
Rent-Earning Potential
Potential
of
of Resources
Resources and
and Capabilities
Capabilities
THE EXTENT OF THE
COMPETITIVE ADVANTAGE
ESTABLISHED

THE PROFIT
EARNING POTENTIAL
OF A RESOURCE OR
CAPABILITY

Scarcity
Relevance
Durability

SUSTAINABILITY OF THE
COMPETITIVE
ADVANTAGE

Transferability
Replicability
Property rights

APPROPRIABILITY

Relative
bargaining power
Embeddedness

Assessing
AssessingaaCompanies
CompaniesResources
Resources
and
and Capabilities:
Capabilities: The
TheCase
Caseof
of VW
VW

Importan
ce

VWs
Relative
Strength

R1. Finance

C1. Product
development

R2. Technology

C2. Purchasing

R3. Plant and

equipment

C3. Engineering

C4. Manufacturing

R4. Location

C5. Financial
management

C6. R&D

C7. Marketing &

sales

C8. Government
relations

RESOURCES

R5. Distribution

4
5

CAPABILITIES

Importance

VWs
Relative
Strength

Appraising
AppraisingVWs
VWsResources
Resourcesand
andCapabilities
Capabilities
(Hypothetical only)
10

Key Strengths

Superfluous Strengths

Relative Strength

C3
R3
C4

C8
C2
R2

R1
C6
Zone of Irrelevance

1
1

R5

R4
C5

C1
C7

Key Weaknesses
5

Strategic Importance

10

Approaches
Approachesto
toCapability
CapabilityDevelopment
Development
1)
1) Acquire
Acquireand
anddevelop
developthe
theunderlying
underlyingresources.
resources.Especially
Especially
human
humanresources
resources
--Externally
--Externally(hiring)
(hiring)
--Internally
--Internallythrough
throughdeveloping
developingindividual
individualskills
skills

2)
2) Acquire/access
Acquire/accesscapabilities
capabilitiesexternally
externallythrough
throughacquisition
acquisitionor
or
alliance
alliance
3)
3) Greenfield
Greenfielddevelopment
developmentof
ofcapabilities
capabilitiesin
inseparate
separate
organizational
organizationalunit
unit(IBM
(IBM&&the
thePC,
PC,Xerox
Xerox&&PARC,
PARC,GM
GM&&Saturn)
Saturn)
4)
4) Build
Buildteam-based
team-basedcapabilities
capabilitiesthrough
throughtraining
trainingand
andteam
team
development
development(i.e.
(i.e.develop
developorganizational
organizationalroutines)
routines)
5)
5)
6)
6)

Align
Alignstructure
structure&&systems
systemswith
withrequired
requiredcapabilities
capabilities
Change
Changemanagement
managementto
totransform
transformvalues
valuesand
andbehaviors
behaviors(GE,
(GE,

7)
7)
8)
8)

Product
Productsequencing
sequencing(Intel
(Intel, ,Sony,
Sony,Hyundai)
Hyundai)
Knowledge
KnowledgeManagement
Management(systematic
(systematicapproaches
approachesto
toacquiring,
acquiring,

BP)
BP)

storing,
storing,replicating,
replicating,and
andaccessing
accessingknowledge)
knowledge)

COMPETITIVE
COMPETITIVE
ADVANTAGE
ADVANTAGE AND
AND THE
THE
SCOPE
SCOPE OF
OF THE
THE FIRM
FIRM

From
From Business
Business Strategy
Strategy to
to Corporate
Corporate
Strategy:
Strategy: The
The Scope
Scope of
of the
the Firm
Firm
Business Strategy is concerned with how a firm
computes within a particular market
Corporate Strategy is concerned with where a
firm competes, i.e. the scope of its activities
The dimensions of scope are
product scope
vertical scope
geographical scope

Transactions
Transactions Costs
Costs and
and the
the
Scope
Scope of
of the
theFirm
Firm
VerticalProduct
Geographical
Scope
Scope
Scope
[A] Single
Integrated
Firm

V1
V2
V3

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

P1

P1

P2

P2

P3

P3

C1

C1

C2

C2

C3

C3

In situation [A] the business units are integrated within a single firm.
In situation [B] the business units are independent firms linked by markets.
Are the administrative costs of the integrated firm less than the transaction
costs of markets?

Determinants
Determinants of
of Changes
Changes in
in Corporate
Corporate Scope
Scope
1800 1980 Expanding scale and scope of industrial corporations due to
declining administrative costs of firms:
Advances in transportation, information and communication
technologies
Advances in managementaccounting systems, decision sciences,
financial techniques, organizational innovations, scientific management

1980 1995 Shrinking size and scope of biggest industrial corporations.

Increasingly
turbulent
external
environment

Increased no. of managerial

decisions. Need for fast
responses to external
change

Admin. costs of
firms rise relative
to transaction
costs of markets

1995 2007 Rapid increase in global concentration (steel, aluminium,

oil, beer, banking, cement).
Key drivers: quest for market power and scale economies.
Also, large corporations better at reconciling size with agility

The
The Basic
Basic Issues
Issues in
in Diversification
Diversification Decisions
Decisions
Superior profit derives from two sources:
INDUSTRY
ATTRACTIVENESS
RATE OF PROFIT

> COST OF CAPITAL

COMPETITIVE
ADVANTAGE

Diversification decisions involve these same two issues:

How attractive is the sector to be entered?
Can the firm achieve a competitive advantage?

Diversification
Diversificationamong
amongthe
theUS
US Fortune
Fortune500,
500,1949-74
1949-74
70.2
29.8

1949

63.5

53.7
36.5

1954

53.9
46.3

1959

39.9
46.1

1964

Percentage of Specialized Companies (single-business,

vertically-integrated and dominant-business)
Percentage of Diversified Companies (related-business
and unrelated business)

Note:

37.0
60.1

1969

63.0

1974

During the 1980s and 1990s the trend reversed as large

companies refocused upon their core businesses

Diversification
Diversificationamong
amongLarge
LargeUK
UK
Corporations,
Corporations,1950-93
1950-93

70
60

Single business

50

Dominant
business
Related business

40
30
20

Unrelated
business

10
0

1950 1960 1970 1983 1993

Motives
Motives for
for Diversification
Diversification
GROWTH

--The desire to escape stagnant or declining industries

is a powerful motive for diversification (e.g. tobacco,
oil, newspapers).
--But, growth satisfies managers not shareholders.
--Growth strategies (esp. by acquisition), tend to
destroy shareholder value

RISK
SPREADING

--Diversification reduces variance of profit flows

--But, doesnt create value for shareholdersthey can
hold diversified portfolios of securities.
--Capital Asset Pricing Model shows that diversification
lowers unsystematic risk not systematic risk.

PROFIT

--For diversification to create shareholder value, then

bringing together of different businesses under
common ownership & must somehow increase
their profitability.

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

Competitive
Competitive Advantage
Advantage from
from Diversification
Diversification

ECONOMIES
OF
SCOPE

Sharing tangible resources (research labs, distribution

systems) across multiple businesses
Sharing intangible resources (brands, technology) across
multiple businesses
Transferring functional capabilities (marketing, product
development) across businesses
Applying general management capabilities to multiple
businesses

Economies of scope not a sufficient basis for

ECONOMIES
diversification ----must be supported by transaction costs
FROM
Diversification firm can avoid transaction costs by
INTERNALIZING
operating internal capital and labor markets
TRANSACTIONS
Key advantage of diversified firm over external markets--superior access to information

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

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

The
The Costs
Costs and
and Benefits
Benefits of
of Vertical
Vertical
Integration:
Integration: BENEFITS
BENEFITS
Technical economies from integrating processes e.g. iron
and steel production
but doesnt necessarily require common ownership
Superior coordination
Avoids transactions costs of market contracts in situations
where there are:
-- small numbers of firms
-- transaction-specific investments
-- opportunism and strategic misrepresentation
-- taxes and regulations on market transactions

The
The Costs
Costs and
and Benefits
Benefits of
of Vertical
Vertical
Integration:
Integration: COSTS
COSTS

Differences in optimal scale of operation between different

stages prevents balanced VI
Strategic differences between different vertical stages create
management difficulties
Inhibits development of and exploitation of core
competencies
Limits flexibility -- in responding to demand cycles
-- in responding to changes in technology,
customer preferences, etc.
(But, VI may be conducive to system-wide flexibility)

Compounding of risk

When
Whenis
isVertical
VerticalIntegration
IntegrationMore
MoreAttractive
Attractive
than
than Outsourcing?
Outsourcing?
How many firms are available
The fewer the companies
to undertake the activities? the more attractive is VI
Is transaction-specific investment
needed?

If yes, VI more attractive

Does limited information permit

cheating?

VI can limit opportunism

Are taxes or regulation imposed

on transactions?

VI can avoid them

Do the different stages have similar

optimal scales of operation?

Greater the similarity, the

more attractive is VI

Are the two stages strategically

similar? similarity ---the more

Greater the strategic

attractive is VI

How great the need for entrepreneurship

Greater the need, the greater
& continual upgrading of capabilities the disadvantages of VI
How uncertain is market demand?
----the more costly is VI

Greater the unpredictability

Are risks compounded by VI increases risk.

linkages between vertical stages

The value chain for steel cans

Iron ore
mining

Steel
production

Steel strip
production

Can
making

VERTICAL
INTEGRATION,
AND MARKET
CONTRACTS

VERTICAL
INTEGRATION
MARKET
CONTRACTS

Canning of
food, drink,
oil, etc.

MARKET
CONTRACTS

What factors explain why some stages are vertically integrated,

while others are linked by market transactions?

Designing
Designing Vertical
Vertical Relationships:
Relationships: Long-Term
Long-Term
Contracts
Contracts and
and Quasi-Vertical
Quasi-Vertical Integration
Integration

Intermediate between spot transactions and vertical

integration are several types of vertical relationships
---such relationships may combine benefits of both market
transactions and internalization

Key issues in designing vertical relationships

-- How is risk allocated between the parties?
-- Are the incentives appropriate?

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

LO W

International Trade

HIGH

Patterns
Patterns of
of Internationalization
Internationalization
Trading
Industries

Global
Industries

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

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

Domestic
Industries

Multidomestic
Industries

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

--retail banking
--hotels
--consulting

LOW

Foreign Direct Investment

HIGH

Implications
Implications of
of Internationalization
Internationalization
for
for Industry
Industry Analysis
Analysis

INDUSTRY STRUCTURE
Lower entry barriers around national markets
Increased industry rivalry
--- lower seller concentration
--- greater diversity of competitors
Increased buyer power: wider choice for dealers & consumers

COMPETITION
Increased intensity of competition
PROFITABILITY
Other things remaining equal, internationalization tends to
reduce an industrys margins & rate of return on capital

Competitive
CompetitiveAdvantage
Advantagewithin
withinan
anInternational
International
Context:
Context: The
The Basic
Basic Framework
Framework
FIRM RESOURCES
& CAPABILITIES
-- Financial resources
-- Physical resources
-- Technology
-- Reputation
-- Functional capabilities
-- General management
capabilities

THE INDUSTRY
ENVIRONMENT
Key Success Factors

COMPETITIVE
ADVANTAGE

THE NATIONAL ENVIRONMENT

-- National resources and capabilities (raw materials;
national culture; human resources; transportation,
communication, legal infrastructure
-- Domestic market conditions
-- Government policies
-- Exchange rates
-- Related and supporting industries

National
National Influences
Influences on
on
Competitiveness:
Competitiveness: The
The Theory
Theory of
of
Comparative
Comparative Advantage
Advantage
A country has a relative efficiency advantage in those products
that make intensive use of resources that are relatively
abundant within the country. E.g.
Philippines relatively more efficient in the production of
footwear, apparel, and assembled electronic products than in
the production of chemicals and automobiles.
U.S. is relatively more efficient in the production of
semiconductors and pharmaceuticals than shoes or shirts.

When exchange rates are well-behaved, comparative

advantage becomes competitive advantage.

Revealed
Revealed Comparative
Comparative Advantage
Advantage for
for
Certain
Certain Broad
Broad Product
Product Categories
Categories
USA

Canada

W. Germany

Italy

Japan

Food, drink & tobacco

.31

.28

-.36

-.29

-.85

Raw materials

.43

.51

-.55

-.30

-.88

Oil & refined products

-.64

.34

-.72

-.74

-.99

Chemicals

.42

-.16

.20

-.06

-.58

Machinery and trans-

.12

-.19

.34

.22

.80

-.68

-.07

.01

.29

.40

portation equipment
Other manufacturers

Note:

Revealed comparative advantage for each product group

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

Porters
Porters Competitive
Competitive Advantage
Advantage
of
of Nations
Nations
Extends and adapts traditional theory of comparative
advantage to take account of three factors:
International competitive advantage is about companies
not countriesthe role of the national environment is
providing a home base for the company.
Sustained competitive advantage depends upon dynamic
factors-- innovation and the upgrading of resources and
capabilities
The critical role of the national environment is its impact
upon the dynamics of innovation and upgrading.

Porters
Porters National
National Diamond
Diamond Framework
Framework
FACTOR CONDITIONS

RELATING AND
SUPPORTING
INDUSTRIES

DEMAND
CONDITIONS

STRATEGY, STRUCTURE,
AND RIVALRY

1.
2.
3.
4.

FACTOR CONDITIONSHome grown resources/capabilities more important

than natural endowments.
RELATED AND SUPPORTING INDUSTRIESKey role of industry clusters
DEMAND CONDITIONSDiscerning domestic customers drive quality & innovation
STRATEGY, STRUCTURE, RIVALRY. E.g. domestic rivalry drives upgrading.

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

International
International Location
Location of
of Production
Production
National resource conditions: What are the major
resources which the product requires? Where are these
available at low cost?
Firm-specific advantages: to what extent is the
companys competitive advantage based upon firmspecific resources and capabilities, and are these
transferable?
Tradability issues: Can the product be transported at
economic cost? If not, or if trade restrictions exist, then
production must be close to the market.

The
The Role
Role of
of Labor
Labor Costs
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
700
40
Shipping cost
300
1,000
40 TOTAL 8,770 9,180

7,750 8,000
Inventory

Labor
20

Location
Location and
and the
the Value
Value Chain
Chain
Comparative advantage in textiles and apparel by stage of processing

Country

Stage
of
Processing

Index of
Revealed
Comparative
Advantage

Country

Stage
Index of
of
Revealed
Processing Comparative
Advantage

Hong Kong

1
2
3
4

-0.96
-0.81
-0.41
+0.75

Japan

1
2
3
4

-0.36
+0.48
+0.48
-0.48

Italy

1
2
3
4

-0.54
+0.18
+0.14
+0.72

U.S.A.

1
2
3
4

+0.96
+0.64
+0.22
-0.73

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

2 = production of spun yarn

4 = production of clothing

Determining
Determiningthe
theOptimal
Optimal Location
Location
of
ofValue
ValueChain
ChainActivities
Activities

The optimal location

of activity X considered
independently

WHERE TO LOCATE
ACTIVITY X?

Where is the optimal location

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

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

The importance of links

between activity X and
other activities of the firm

How great are the coordination

benefits from co-locating activities?

Alternative
Alternative Modes
Modes of
of Overseas
Overseas Market
Market Entry
Entry
TRANSACTIONS
Exporting
Spot
sales

Low

Licensing

Foreign
agent /
distributor

Longterm
contract

DIRECT INVESTMENT

Licensing
patents &
other IP

Joint venture
Marketing &
Distribution
only

Fully
integrated

Franchising

Resource commitment

Wholly
owned
subsidiary

Marketing&
Distribution
only

Fully
integrated

High

Alliances
Alliances and
and Joint
Joint Ventures:
Ventures:
Management
Management Issues
Issues

Benefits:
--Combining resources and capabilities of different companies
--Learning from one another
--Reducing time-to-market for innovations
--Risk sharing
Problems:
--Management differences between the two partners. Conflict
most likely where the partners are also competitors.
Benefits are seldom shared equally. Distribution of benefits
determined by:
Strategic intent of the partners- which partner has the clearer
vision of the purpose of the alliance?
Appropriability of the contribution-- which partners resources
and capabilities can more easily be captured by the other?
Absorptive capacity of the company-- which partner is the
more receptive learner?

General
GeneralMotors
MotorsAlliances
Allianceswith
withCompetitors
Competitors
SAAB
AVTOVAZ
SUZUKI

ISUZU

Ru
10%

ssi

own

an

ed.

JV

C o-

to p

r od
uc e

pr od
uctio

Co-pro
.
d
e
n
w
49%o

n
duction

c ar

GM

IBC Vehicles
Ltd. (U.K.)

50% owned

JV

60%
owned

(Makes vans in UK)

TOYOTA

20% owned; join

50%
owned

New United Motor

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

to p

rod
u

FIAT

t production

ce

c ar
s in

Ch

l&
ca n
ni t i o
ch ra
te bo
d; lla
n e co
ow on
% cti
. 9 du
50 pro

40% investment

50%
owned

-5). gy
0
0
(20 chnolo
d
e
own n on teents
%
20 ratio pon
labo nd com
l
o
C
a

FUJI

ina

DAEWOO

SAIC

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

National preferences in declineworld becoming a single,

if segmented, market

Accessing global scale economiesin purchasing,

manufacturing, product development, marketing.

Strategic strength from global leverageability to crosssubsidize a national subsidiary with cash flows from
other national subsidiaries

Need to access market trends and technological

developments in each of the worlds major economic
centers- N. America, Europe, East Asia.

Ted
Levitt
Globaliz-ation of
Markets
Thesis

Hamel &
Prahalad
Thesis
Kenichi
Ohmaes
Triad
Power
Thesis

Globalization
Globalization&&Global
GlobalStrategy
StrategyWhat
What are
are they?
they?

GLOBALIZATION
GLOBALIZATION??
--Something
--Somethingto
todo
dowith
withincreasing
increasinginterdependence
interdependence
between
betweencountries.
countries.

GLOBAL
GLOBALSTRATEGY
STRATEGY
--At
--Atsimplest
simplestlevel:
level: Treating
Treatingthe
theworld
worldas
asaasingle
singlemarket
market
E.g.
E.g.Japanese
Japanesecompanies
companiesduring
duringthe
the1970s
1970s&&1980s,
1980s,
(YKK,
(YKK,Honda)
Honda) standard
standardproducts,
products,developed
developed&&
manfactured
manfacturedwithin
withinJapan;
Japan;distributed
distributed&&marketed
marketed
worldwide
worldwide
--At
--Atmore
moresophisticated
sophisticatedlevel:
level: Strategy
Strategythat
thatrecognizes
recognizes
and
andexploits
exploitslinkages
linkagesbetween
betweencountries
countries(e.g.
(e.g.exploits
exploits
global
globalscale,
scale,national
nationalresource
resourcedifferences,
differences,strategic
strategic
competition)
competition)
World as

World as
single mkt.

World as interrelated mkts.

global strategy

separate
national mkts.
multidomestic strategy

Analyzing
Analyzing benefits/costs
benefits/costs of
of aa global
global strategy
strategy
Forces
Forcesfor
for globalization
globalization
MARKET
MARKETDRIVERS
DRIVERS
--Common
--Commoncustomer
customerneeds
needs
--Global
--Globalcustomers
customers
--Cross-border
--Cross-bordernetwork
networkeffects
effects
COST
COST DRIVERS
DRIVERS
--Global
--Globalscale
scaleeconomies
economies
--Differences
--Differencesin
innational
national
resource
resourceavailability
availability
--Learning
--Learning
COMPETITIVE
COMPETITIVEDRIVERS
DRIVERS
--Potential
--Potentialfor
forstrategic
strategic
competition
competition (e.g.
(e.g.crosscrosssubsidization)
subsidization)

Forces
Forcesfor
forlocalization
localization/ /national
national
differentiation
differentiation
MARKET
MARKETDRIVERS
DRIVERS
--Different
--Differentlanguages
languages
--Different
--Differentcustomer
customerpreferences
preferences
--Cultural
--Culturaldifferences
differences
COST
COSTDRIVERS
DRIVERS
--Transportation
--Transportationcosts
costs
--Transaction
costs
--Transaction costs
--Economic
--Economic&&political
politicalrisk
risk
--Speed
--Speedof
ofresponse
response
GOVERNMENT
GOVERNMENTDRIVERS
DRIVERS
--Barriers
--Barriersto
totrade
trade&&inward
inwardinv.
inv.
--Regulations
--Regulations

Jet engines
Autos
Benefits
of
global
integration

Consumer
electronics

Telecom
equipment

Investment
banking

Steel
Cement

Online C2C auctions

Beer

Dry
cleaning

Auto
repair

Restaurant
chains
Retail
banking
Funeral
services

Benefits of national differentiation

Positioning
Positioningindustries
industriesin
interms
termsof
of benefits
benefitsof
of
globalization
globalization and
andnational
national differentiation
differentiation
Jet engines
Autos
Benefits
of
global
integration

Consumer
electronics

Telecom
equipment

Investment
banking

Cement
Auto
repair

Retail
banking
Funeral
services
Benefits of national differentiation

The
TheEvolution
Evolutionof
ofMultinational
MultinationalStrategies
Strategiesand
and
Structures:
Structures: (1)
(1) 1900-1939Era
1900-1939Eraof
ofthe
theEuropeans
Europeans

The European MNC as Decentralized Federation :

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

The
TheEvolution
Evolutionof
ofMultinational
Multinational Strategies
Strategies
and
and Structures:
Structures: (2)
(2) 1945-1970U.S.
1945-1970U.S.Dominance
Dominance

American MNCs as Coordinated Federations :

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

The
TheEvolution
Evolutionof
of Multinational
Multinational
Strategies
Strategiesand
and Structures:
Structures:
(3)
(3)1970s
1970sand
and1980sThe
1980sTheJapanese
JapaneseChallenge
Challenge

The Japanese MNC as Centralized Hub

Pursuit of global strategy from home base
Strategy, technology development, and manufacture
concentrated at home
National subsidiaries primarily sales and distribution
companies with limited autonomy. e.g. Toyota, NEC,
Matsushita

Marketing
Marketing Global
Global Strategies
Strategiesand
and Situations
Situationsto
toIndustry
Industry
Conditions:
Conditions: Firm
Firm Success
Successin
in Different
Different Industries
Industries

Philips
General Electric
local responsiveness

- Global industry

- Matsushita the most

successful
- Philips the survivor
- GE sold out

Ka
o
P&G
Unilever
local responsiveness

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

Telecommunications
Equipment
NEC
global
integration

Matsushit
a

Branded, Packaged
Consumer Goods
global
integration

global integration

Consumer Electronics

Erickson

ITT
local responsiveness

- Requires both global

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

Reconciling
ReconcilingGlobal
Global Integration
Integration with
withNational
National
Differentiation:
Differentiation: The
The Transnational
Transnational Corporation
Corporation
Tight complex
controls and
coordination and a
shared strategic
decision process.

Heavy flows of
technology,
finances, people,
and materials
between
interdependent
units.

The Transnational: an integrated network of distributed interdependent

resources and capabilities.

Each national unit and source of ideas, skills and capabilities that can
be harnessed to benefit whole corporation.
National units become world sources for particular products,
components, and activities.
Corporate center involved in orchestrating collaboration through
creating the right organizational context.

Designing
Designing the
the MNC:
MNC: Key
Key Learning
Learning
1.

2.

3.

4.

5.

On what basis to organizeproducts, geography, functions?

--Where is coordination most important?
--How global is the industry? How global is the firms
strategy?
If one dimension is dominant, how to coordination along the
other dimensions?
--Maintain single line accountability
--Other dimensions of coordination can be dotted line
relations
Whats the role of HQ?
--Control function
--Coordination function
--Exploiting scale economies in centralized provision of
services
The need for internal differentiation
--By product/business
--By function
--By country
Formal & informal organization