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MBA 290-Strategic Analysis
MBA 290-Strategic Analysis
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
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
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 CORPORATE HEAD OFFICE
BUSINESS STRATEGY
Division A
Division B
R&D
FUNCTIONAL STRATEGIES
Successful Strategy
EFFECTIVE IMPLEMENTATION
Profound understanding of the competitive environment
From Profit Maximization to Value Maximization 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
Ct (1 + r)t
The Worlds Most Valuable Companies: The Worlds Most Valuable Companies: Performance Under Different Profitability Measures Performance Under Different Profitability Measures
COMPANY MARKET NET RETURN RETURN RETURN RETURN TO CAP. ($BN.) INCOME ON SALES ON EQUITY ON SHARE($BN) (%) (%) ASSETS HOLDERS (%) (%) 372 363 281 239 233 212 211 197 197 36.1 16.4 12.3 24.6 22.3 16.5 25.3 11.2 12.1 19.9 10.7 40.3 22.0 9.9 27.0 14.7 5.5 10.7 34.9 22.2 30.0 21.9 27.9 14.1 26.7 21.4 13.0 17.8 14.7 18.8 1.5 10.7 1.2 11.6 8.1 4.8 11.7 (1.5) (0.9) 4.6 10.2 2.4 11.8 (10.3) (22.1)
Exxon Mobil General Electric Microsoft Citigroup BP Bank of America Royal Dutch Shell Wal-Mart Toyota Motor
Shareholder Value Maximization and Strategy Choice 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
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
Avoid Competitors
Attractive Industry
Entry Barriers
Attractive Niche
Isolating Mechanisms
1992 1994
Cost per unit of output (in real $)
The unit cost value added to a standard product declines by a constant % (typically 20-30%) each time cumulative output doubles.
Cumulative Output
UK refrigerators, 1957-71
75%
70% slope
100K
ECONOMIES OF LEARNING
INPUT COSTS
CAPACITY UTILIZATION
RESIDUAL EFFICIENCY
Economies of Scale: The Long-Run Economies of Scale: The Long-Run Cost Curve for a Plant Cost Curve for a Plant
Sources of scale economies: - technical input/output relationships - indivisibilities - specialization Cost per unit of output
Minimum Efficient Plant Size: the point where most scale economies are exhausted
Scale Economies in Advertising: U.S. Soft Drinks Scale Economies in Advertising: U.S. Soft Drinks
Despite the massive advertising budgets of brand leaders Coke and Pepsi, their main brands incur lower advertising costs per unit of sales than their smaller rivals.
Advertising Expenditure ($ per case) 0.02 0.05 0.10 0.15 0.20
Diet Rite Fresca Seven Up Sprite Dr. Pepper Pepsi 10 20 50 100 200 500 Coke 1,000
Applying the Value Chain to Cost Analysis: Applying the Value Chain to Cost Analysis: The Case of Automobile Manufacture The Case of Automobile Manufacture
PURCHASING
PARTS INVENTORIES
GOODS INVENTORIES
Applying the Value Chain to Cost Analysis: The Case Applying the Value Chain to Cost Analysis: The Case of Automobile Manufacture (continued) of Automobile Manufacture (continued)
STAGE 3. IDENTIFY COST DRIVERS
--Plant scale for each component -- Process technology -- Plant location -- Run length -- Capacity utilization -- Level of quality targets -- Frequency of defects -- No. of dealers -- Sales / dealer -- Level of dealer support -- Frequency of defects under warranty
PURCHASING
PARTS INVENTORIES
GOODS INVENTORIES
Prices paid --Size of commitment -- Plant scale depend on: --Productivity of -- Flexibility of production -- Order size R&D/design -- No. of models per plant --Purchases per --No. & frequency of new -- Degree of automation supplier models -- Sales / model -- Bargaining power -- Wage levels -- Supplier location -- Capacity utilization
Applying the Value Chain to Cost Analysis: The Case Applying the Value Chain to Cost Analysis: The Case of Automobile Manufacture (continued) of Automobile Manufacture (continued)
STAGE 4. IDENTIFY LINKAGES
Designing different models around common components and platforms reduces manufacturing costs
PRCHSNG
PARTS INVNTRS
R&D DESIGN
COMPONENT MFR
ASSEMBLY
TESTING QUALITY
GOODS INV
Higher quality parts and materials reduces costs of defects at later stages
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
Identifying Differentiation Potential: Identifying Differentiation Potential: The Demand Side The Demand Side
THE PRODUCT What needs does it satisfy? What are key attributes? Relate patterns of customer preferences to product attributes What price premiums do product attributes command? What motivates them? What are demographic, 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
THE CUSTOMER
Using the Value Chain to Identify Using the Value Chain to Identify Differentiation Potential on the Supply Side Differentiation Potential on the Supply Side
MIS that supports fast response capabilities Training to support customer service excellence Unique product features. Fast new product development
INBOUND LOGISTICS
OPERATIONS
OUTBOUND LOGISTICS
SERVICE
Identifying Differentiation Opportunities through Identifying Differentiation Opportunities through Linking the Value Chains of the Firm and its Linking the Value Chains of the Firm and its Customers: Can Manufacture Customers: Can Manufacture
1 2 3 4
Inventory holding
Inventory holding
Inventory holding
Manufacturing
Purchasing
Distribution
Processing
Design Engineering
Marketing
Distribution
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.
Purchasing
Canning
Sales
CAN MAKER
CANNER
Profitability of US Industries (selected industries only) Profitability of US Industries (selected industries only)
Median return on equity (%), 1999-2005 Household & Personal Products Pharmaceuticals Tobacco Food Consumer Products Securities Diversified financials Beverages Mining & crude oil Petroleum Refining Medical Products & Equipment Commercial Banks Scientific & Photographic Equipt. Apparel Computer Software Publishing, Printing Health Care Electronics, Electrical Equipment Specialty Retailers Computers, Office Equipment 22.7 22.3 21.6 19.6 18.9 18.3 18.8 17.8 17.3 17.2 15.5 15.0 14.4 13.9 13.5 13.1 13.0 13.0 11.7 Gas & Electric Utilities 10.4 Food and Drug Stores 10.0 Motor Vehicles & Parts 9.8 Hotels, Casinos, Resorts 9.7 Railroads 9.0 Insurance: Life and Health 8.6 Packaging & Containers 8.6 Insurance: Property & Casualty 8.3 Building Materials, Glass 8.3 Metals 8.0 Food Production 7.2 Forest and Paper Products 6.6 Semiconductors & Electronic Components 5.9 Telecommunications 4.6 Communications Equipment 1.2 Entertainment 0.2 Airlines (22.0)
1 0
1 5
2 0
A e g R IC1 6 -2 0 (% v ra e O 9 3 0 3 )
From Environmental Analysis From Environmental Analysis to Industry Analysis to Industry Analysis
The national/ international economy The natural environment
Technology
Social structure
The Industry Environment lies at the core of the Macro Environment. The Macro Environment impacts the firm through its effect on the Industry Environment.
Drawing Industry Boundaries :: Drawing Industry Boundaries Identifying the Relevant Market Identifying the Relevant Market
What industry is BMW in:
World Auto industry European Auto industry World luxury car industry?
We may need to analyze industry at different levels of aggregation for different types of decision
Entry and Exit No/Low barriers Barriers Product Differentiation Information Homogeneous Product Perfect Information flow
Significant barriers
Porters Five Forces of Competition Framework Porters Five Forces of Competition Framework
SUPPLIERS
Bargaining power of suppliers INDUSTRY COMPETITORS POTENTIAL Threat of ENTRANTS new entrants Threat of Rivalry among existing firms SUBSTITUTES substitutes
BUYERS
THREAT OF ENTRY
Capital requirements Economies of scale Absolute cost advantage Product differentiation Access to distribution channels Legal/ regulatory barriers Retaliation
Concentration Diversity of competitors Product differentiation Excess capacity & exit barriers Cost conditions
INDUSTRY RIVALRY
SUBSTITUTE COMPETITION
Buyers propensity to substitute Relative prices & performance of substitutes
BUYER POWER
Buyers price sensitivity Relative bargaining power
THREAT OF SUBSTITUTES
LOW No substitutes. (Changing as managed care encourages generics.)
Past profitability a poor indicator of future profitability. If we can forecast changes in industry structure we can predict likely impact on competition and profitability.
Strategies to Improve Industry Profitability What structural variables are depressing profitability Which of these variables can be changed by individual or collective strategies?
Neutralizing The Five Neutralizing The Five Competitive Forces Competitive Forces
Force Entry Method for Neutralizing Force Erecting barriers (isolating mechanisms) create & exploit economies of
scale, aggressive deterrence, design in switching costs, etc.
cost
Improve attractiveness compared to substitutes: better service, more features, etc.. Reduce buyer uniqueness: forward
Fermentation
Shakeout
Maturity
Decline
e ml ov s e a S u l
Time
How Typical is the Life Cycle Pattern? 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
B&W Color Portable HDTV ?
1900 50 90 07 MOTORCYCLES
1930
50 TVs
70
90
07
Life cycle model can help us to anticipate industry evolutionbut dangerous to assume any common, predetermined pattern of industry development
Evolution of Industry Structure over the Life Cycle Evolution of Industry Structure over the Life Cycle
DEMAND INTRODUCTION Affluent buyers GROWTH Increasing penetration MATURITY Mass market replacement demand DECLINE Knowledgeable, customers, residual segments Well-diffused technology Continued commoditization Overcapacity
Wide variety, Standardization rapid design change Short-runs, skill intensive Capacity shortage, mass-production
-----Production shifts from advanced to developing countries----TechnologyProduct innovation Entry & exit Process technology. Design for Shakeout & consolidation Cost efficiency Price wars, exit Overhead reduction, rationalization, low cost sourcing
The Driving Forces of Industry Evolution The Driving Forces of Industry Evolution
BASIC CONDITIONS
Customers become more knowledgeable & experienced
INDUSTRY STRUCTURE
COMPETITION
Customers become more price conscious Quest for new sources of differentiation
Products become more standardized Diffusion of technology Production becomes less R&D & skill-intensive Production shifts to low-wage countries
Changes in the Population of Firms over the Changes in the Population of Firms over the Industry Life Cycle: US Auto Industry 1885-1961 Industry Life Cycle: US Auto Industry 1885-1961
250 200 150 100 50 0
No. of firms
Preparing for the Future :: The Role of Scenario Preparing for the Future The Role of Scenario Analysis in Adapting to Industry Change Analysis in Adapting to Industry Change
Stages in undertaking multiple Scenario Analysis: Identify major forces driving industry change Predict possible impacts of each force on the industry environment Identify interactions between different external forces Among range of outcomes, identify 2-4 most likely/ most interesting scenarios: configurations of changes and outcomes Consider implications of each scenario for the company Identify key signposts pointing toward the emergence of each scenario Prepare contingency plan
Innovation & Renewal over the Innovation & Renewal over the Industry Life Cycle: Retailing Industry Life Cycle: Retailing
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
1880s
1920s
1960s
2000
NEW BRICK
Everyone is responsible for setting strategy Rule-busting innovation is the way to win Unconventional business concepts create competitive advantage More of the same is high risk Theres no correlation between size and competitiveness Innovation equals entirely new business concepts Strategy is the easy only if youre content to be an imitator Change starts with activists Our real problem is innovation Big companies can become gray-haired revolutionaries
Emergence
Convergence
Coexistence
Dominance
Established Industry
e ml ov s e a S u l
Ferment Time
Discontinuity Takeoff
Ferment
Time
RESOURCES, RESOURCES, CAPABILITIES, AND CAPABILITIES, AND CORE COMPETENCES CORE COMPETENCES
Shifting the Focus of Strategy Analysis: Shifting the Focus of Strategy Analysis: From the External to the Internal Environment From the External to the Internal Environment
THE FIRM Goals and Values Resources and Capabilities Structure and Systems
STRATEGY
STRATEGY
Rationale for the Resource-based Rationale for the Resource-based Approach to Strategy Approach to Strategy
When the external environment is subject to rapid change, internal resources and capabilities offer a more secure basis for strategy than market focus. Resources and capabilities are the primary sources of profitability.
Canon: Products and Core Technical Capabilities Canon: Products and Core Technical Capabilities Precision Mechanics Fine Optics
35mm SLR camera Plain-paper copier Compact fashion camera Color copier EOS autofocus camera Color laser copier Digital camera Basic fax Laser copier Video still camera Laser fax Mask aligners Inkjet printer Excimer laser aligners Laser printer Color video printer Stepper aligners Calculator Notebook computer
MicroElectronics
Businesses
Film Cameras Fine Chemicals Pharmaceuticals Diagnostics
DIVESTS: Eastman Chemical, Sterling Winthrop, Diagnostics Need to build digital imaging capability Digital Imaging Products (e.g. Photo CD System; Advantix cameras & film
The Links between Resources, Capabilities The Links between Resources, Capabilities and Competitive Advantage and Competitive Advantage
COMPETITIVE ADVANTAGE INDUSTRY KEY SUCCESS FACTORS
Physical
Patents, copyrights, know how No. of patents owned R&D facilities. Royalty income Technical and scientific R&D expenditure employees R&D staff Brands. Customer loyalty. Company reputation (with suppliers, customers, government) Training, experience, adaptability, commitment and loyalty of employees Brand equity Customer retention Supplier loyalty Employee qualifications, pay rates, turnover.
Human Resources
The Worlds Most Valuable Brands, 2006 The Worlds Most Valuable Brands, 2006
Rank Company Brand value ($bn.) Rank Company Brand value ($bn.)
1 2 3 4 5 6 7 8 9 10
67.5 59.9 53.4 47.0 35.6 26.5 26.4 26.0 24.8 21.2
11 12 13 14 15 16 17 18 19 20
American Express 18.6 Gillette 17.5 BMW 17.1 Cisco 16.6 Louis Vuitton 16.1 Honda 15.8 Samsung 15.0 Source: Interbrand
http://www.interbrand.com/best_brands_2007.asp
Organizational Capabilities = firms capacity for undertaking a particular activity. (Grant) Distinctive Competence = things that an organization does particularly well relative to competitors. (Selznick) Core Competence = capabilities that are fundamental to a firms strategy and performance. (Hamel and Prahalad)
Identifying Organizational Capabilities: Identifying Organizational Capabilities: A Functional Classification A Functional Classification
FUNCTION Corporate Management CAPABILITY Financial management Strategic control Coordinating business units Managing acquisitions EXEMPLARS ExxonMobil, GE IBM, Samsung BP, P&G Citigroup, Cisco Wal-Mart, Dell Capital One Merck, IBM Apple, 3M Briggs & Stratton Nucor, Harley-D Zara, Four Seasons Apple, Nokia P&G, LVMH Johnson & Johnson MTV, LOreal PepsiCo, Pfizer LL Bean, Dell Singapore Airlines Caterpillar
Speed and responsiveness through rapid information transfer Research capability Development of innovative new products Efficient volume manufacturing Continuous Improvement Flexibility Design Capability Brand Management Quality reputation Responsiveness to market trends Sales Responsiveness Efficiency and speed of distribution Customer Service
Design Marketing
The Value Chain: The Value Chain: The McKinsey Business System The McKinsey Business System
TECHNOLOGY
PRODUCT DESIGN
MANUFACTURING
MARKETING
DISTRIBUTION
SERVICE
INBOUND LOGISTICS
SERVICE
PRIMARY ACTIVITIES
The Rent-Earning Potential The Rent-Earning Potential of Resources and Capabilities of Resources and Capabilities
THE EXTENT OF THE COMPETITIVE ADVANTAGE ESTABLISHED Scarcity Relevance Durability SUSTAINABILITY OF THE COMPETITIVE ADVANTAGE Transferability Replicability Property rights APPROPRIABILITY Relative bargaining power Embeddedness
Assessing a Companies Resources Assessing a Companies Resources and Capabilities: The Case of VW and Capabilities: The Case of VW
RESOURCES
R1. Finance R2. Technology R3. Plant and equipment R4. Location R5. Distribution Importan ce 6 7 8 7 8 VWs Relative Strength 4 5 8 4 5
CAPABILITIES
C1. Product development C2. Purchasing C3. Engineering C4. Manufacturing C5. Financial management C6. R&D C7. Marketing & sales C8. Government relations
Importance
9 7 7 8 6 6 9
Appraising VWs Resources and Capabilities Appraising VWs Resources and Capabilities
(Hypothetical only) 10
Superfluous Strengths
Key Strengths
C3
Relative Strength
C8 C2 R2 R1 C6
Zone of Irrelevance 1 5
R3 C4 R5 C1 C7
R4 C5
Key Weaknesses
10
Strategic Importance
2) Acquire/access capabilities externally through acquisition 2) Acquire/access capabilities externally through acquisition or or alliance alliance 3) Greenfield development of capabilities in separate 3) Greenfield development of capabilities in separate organizational unit (IBM & the PC, Xerox & PARC, GM & Saturn) organizational unit (IBM & the PC, Xerox & PARC, GM & Saturn) 4) Build team-based capabilities through training and team 4) Build team-based capabilities through training and team development (i.e. develop organizational routines) development (i.e. develop organizational routines) 5) 5) 6) 6) 7) 7) 8) 8) Align structure & systems with required capabilities Align structure & systems with required capabilities Change management to transform values and behaviors (GE, Change management to transform values and behaviors (GE,
BP) BP)
Product sequencing (Intel , ,Sony, Hyundai) Product sequencing (Intel Sony, Hyundai) Knowledge Management (systematic approaches to acquiring, Knowledge Management (systematic approaches to acquiring,
storing, replicating, and accessing knowledge) storing, replicating, and accessing knowledge)
COMPETITIVE COMPETITIVE ADVANTAGE AND THE ADVANTAGE AND THE SCOPE OF THE FIRM SCOPE OF THE FIRM
From Business Strategy to Corporate From Business Strategy to Corporate Strategy: The Scope of the Firm Strategy: The Scope of the Firm
Business Strategy is concerned with how a firm computes within a particular market Corporate Strategy is concerned with where a firm competes, i.e. the scope of its activities The dimensions of scope are product scope vertical scope geographical scope
Transactions Costs and the Transactions Costs and the Scope of the Firm Scope of the Firm
Vertical Scope [A] Single Integrated Firm
V1 V2 V3 P1 P2 P3 C1 C2 C3
Product Scope
Geographical Scope
P1
P2
P3
C1
C2
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?
The Basic Issues in Diversification Decisions The Basic Issues in Diversification Decisions
Superior profit derives from two sources:
INDUSTRY ATTRACTIVENESS RATE OF PROFIT
Diversification decisions involve these same two issues: How attractive is the sector to be entered? Can the firm achieve a competitive advantage?
Diversification among the US Fortune 500, 1949-74 Diversification among the US Fortune 500, 1949-74
70.2 29.8 63.5 36.5 53.7 46.3 53.9 46.1 39.9 60.1 37.0 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
Diversification among Large UK Diversification among Large UK Corporations, 1950-93 Corporations, 1950-93
70 60 50 40 30 20 10 0 1950 1960 1970 1983 1993 Single business Dom inant business Related business Unrelated business
RISK SPREADING
PROFIT
Diversification and Shareholder Value: Diversification and Shareholder Value: Porters Three Essential Tests Porters Three Essential Tests
If diversification is to create shareholder value, it must meet three tests: 1. The Attractiveness Test: diversification must be directed towards attractive industries (or have the potential to become attractive). 2. The Cost of Entry Test: the cost of entry must not capitalize all future profits. 3. The Better-Off Test: either the new unit must gain competitive advantage from its link with the company, or vice-versa. (i.e. some form of synergy must be present)
Additional source of value from diversification: Option value
ECONOMIES OF SCOPE
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
Transactions Costs and The Transactions Costs and The Existence of the Firm Existence of the Firm
Transaction cost theory explains not just the boundaries of firms, also the existence of firms. In 18th century English woollen industry, no firms independent spinners and weavers linked by merchants. Residential remodeling industry -- mainly independent selfemployed builders, plumbers, electricians, painters. Key issue -- transaction costs of the market vs. administrative costs of firms. Where transaction costs highfirm is more efficient means of organization
Note: transaction costs comprise costs of search and contract negotiation and enforcement
The Costs and Benefits of Vertical The Costs and Benefits of Vertical Integration: BENEFITS Integration: BENEFITS
Technical economies from integrating processes e.g. iron and steel production but doesnt necessarily require common ownership Superior coordination Avoids transactions costs of market contracts in situations where there are: -- small numbers of firms -- transaction-specific investments -- opportunism and strategic misrepresentation -- taxes and regulations on market transactions
The Costs and Benefits of Vertical The Costs and Benefits of Vertical Integration: COSTS Integration: COSTS
Differences in optimal scale of operation between different stages prevents balanced VI Strategic differences between different vertical stages create management difficulties Inhibits development of and exploitation of core competencies Limits flexibility -- in responding to demand cycles -- in responding to changes in technology, customer preferences, etc.
(But, VI may be conducive to system-wide flexibility)
Compounding of risk
When is Vertical Integration More Attractive When is Vertical Integration More Attractive than Outsourcing? 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.
Steel production
Can making
What factors explain why some stages are vertically integrated, while others are linked by market transactions?
Designing Vertical Relationships: Long-Term Designing Vertical Relationships: Long-Term Contracts and Quasi-Vertical Integration 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?
Trading Industries
--aerospace --military hardware --diamond mining --agriculture --oil
Global Industries
--automobiles --semiconductors --consumer electronics
International Trade
Domestic Industries
--railroads --laundries/dry cleaning --hairdressing --milk
Multidomestic Industries
--retail banking --hotels --consulting
LO W
LOW
HIGH
Implications of Internationalization Implications of Internationalization for Industry Analysis for Industry Analysis
INDUSTRY STRUCTURE Lower entry barriers around national markets Increased industry rivalry --- lower seller concentration --- greater diversity of competitors Increased buyer power: wider choice for dealers & consumers
COMPETITION Increased intensity of competition PROFITABILITY Other things remaining equal, internationalization tends to reduce an industrys margins & rate of return on capital
Competitive Advantage within an International Competitive Advantage within an International Context: The Basic Framework Context: The Basic Framework
FIRM RESOURCES & CAPABILITIES
-- Financial resources -- Physical resources -- Technology -- Reputation -- Functional capabilities -- General management capabilities
COMPETITIVE ADVANTAGE
National Influences on National Influences on Competitiveness: The Theory of Competitiveness: The Theory of Comparative Advantage Comparative Advantage
A country has a relative efficiency advantage in those products that make intensive use of resources that are relatively abundant within the country. E.g.
Philippines relatively more efficient in the production of footwear, apparel, and assembled electronic products than in the production of chemicals and automobiles. U.S. is relatively more efficient in the production of semiconductors and pharmaceuticals than shoes or shirts
When exchange rates are well-behaved, comparative advantage becomes competitive advantage.
Revealed Comparative Advantage for Revealed Comparative Advantage for Certain Broad Product Categories Certain Broad Product Categories
USA Food, drink & tobacco Raw materials Oil & refined products Chemicals Machinery and transportation equipment Other manufacturers -.68 -.07 .01 .29 .40 .31 .43 -.64 .42 .12 Canada .28 .51 .34 -.16 -.19 W. Germany -.36 -.55 -.72 .20 .34 Italy -.29 -.30 -.74 -.06 .22 Japan -.85 -.88 -.99 -.58 .80
Note:
Revealed comparative advantage for each product group is measured as: (Exports less Imports)/ Domestic production
DEMAND CONDITIONS
. . .
FACTOR CONDITIONSHome grown resources/capabilities more important than natural endowments. RELATED AND SUPPORTING INDUSTRIESKey role of industry clusters DEMAND CONDITIONSDiscerning domestic customers drive quality & innovation STRATEGY, STRUCTURE, RIVALRY. E.g. domestic rivalry drives upgrading.
Consistency Between Strategy Consistency Between Strategy and National Conditions 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)
Location and the Value Chain Location and the Value Chain
Comparative advantage in textiles and apparel by stage of processing
Country
Stage of Processing
Country
Hong Kong
1 2 3 4 1 2 3 4
Japan
1 2 3 4 1 2 3 4
Italy
U.S.A.
Determining the Optimal Location Determining the Optimal Location of Value Chain Activities of Value Chain Activities
Where is the optimal location of X in terms of the cost and availability of inputs? What government incentives/ penalties affect the location decision?
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
Alternative Modes of Overseas Market Entry Alternative Modes of Overseas Market Entry
TRANSACTIONS Exporting
Spot sales Foreign agent / distributor Licensing patents & other IP
Licensing
Longterm contract
Fully integrated
Low
Resource commitment
High
Alliances and Joint Ventures: Alliances and Joint Ventures: Management Issues Management Issues
Benefits: --Combining resources and capabilities of different companies --Learning from one another --Reducing time-to-market for innovations --Risk sharing Problems: --Management differences between the two partners. Conflict most likely where the partners are also competitors. Benefits are seldom shared equally. Distribution of benefits determined by: Strategic intent of the partners- which partner has the clearer vision of the purpose of the alliance? Appropriability of the contribution-- which partners resources and capabilities can more easily be captured by the other? Absorptive capacity of the company-- which partner is the more receptive learner?
General Motors Alliances with Competitors General Motors Alliances with Competitors
SAAB AVTOVAZ SUZUKI
Ru ssi an JV to p rod uce 10% car own s ed. Coprod uctio n
50% owned
-5). 000 nology (2 ned n tech s ow o nt 20% ration pone labo com Col and
FIAT
GM
60% owned
ISUZU
40% investment
20% owned; join t production JV to p rod uce car s in Ch ina 50% owned
l& ca n ni tio ch ra te bo d; lla ne co ow on % ti .9 uc 50 prod
FUJI
SAIC
TOYOTA
50% owned
DAEWOO
Multinational Strategies: Multinational Strategies: Globalization vs. National Differentiation Globalization vs. National Differentiation
The case for a global strategy: National preferences in declineworld becoming a single, if segmented, market Accessing global scale economiesin purchasing, manufacturing, product development, marketing. Strategic strength from global leverageability to crosssubsidize a national subsidiary with cash flows from other national subsidiaries Need to access market trends and technological developments in each of the worlds major economic centers- N. America, Europe, East Asia.
Ted Levitt Globaliz-ation of Markets Thesis
Globalization & Global Strategy What are they? Globalization & Global Strategy What are they?
GLOBALIZATION ? GLOBALIZATION ? --Something to do with increasing interdependence --Something to do with increasing interdependence between countries. between countries. GLOBAL STRATEGY GLOBAL STRATEGY --At simplest level: Treating the world as a single market --At simplest level: Treating the world as a single market E.g. Japanese companies during the 1970s & 1980s, E.g. Japanese companies during the 1970s & 1980s, (YKK, Honda) standard products, developed & (YKK, Honda) standard products, developed & manfactured within Japan; distributed & marketed manfactured within Japan; distributed & marketed worldwide worldwide --At more sophisticated level: Strategy that recognizes --At more sophisticated level: Strategy that recognizes and exploits linkages between countries (e.g. exploits and exploits linkages between countries (e.g. exploits global scale, national resource differences, strategic global scale, national resource differences, strategic competition) competition) World as
World as interrelated mkts. separate national mkts. multidomestic strategy
global strategy
Jet engines Autos Benefits of global integration Consumer electronics Telecom equipment
Steel Cement
Dry cleaning
Investment banking Online C2C auctions Beer Auto repair Restaurant chains Retail banking Funeral services
Positioning industries in terms of benefits of Positioning industries in terms of benefits of globalization and national differentiation globalization and national differentiation
Jet engines Autos Benefits of global integration Consumer electronics Telecom equipment
The Evolution of Multinational Strategies and Structures: The Evolution of Multinational Strategies and Structures: (1) 1900-1939Era of the Europeans (1) 1900-1939Era of the Europeans
The European MNC as Decentralized Federation : National subsidiaries self-sufficient and autonomous Parent control through appointment of subsidiaries senior management Organization and management systems reflect conditions of transport and communications at the time e.g. Unilever, Phillips, Courtaulds, Royal Dutch/Shell.
The Evolution of Multinational Strategies The Evolution of Multinational Strategies and Structures: (2) 1945-1970U.S. Dominance and Structures: (2) 1945-1970U.S. Dominance
The Evolution of Multinational The Evolution of Multinational Strategies and Structures: Strategies and Structures: (3) 1970s and 1980sThe Japanese Challenge (3) 1970s and 1980sThe Japanese Challenge
Marketing Global Strategies and Situations to Industry Marketing Global Strategies and Situations to Industry Conditions: Firm Success in Different Industries Conditions: Firm Success in Different Industries
Consumer Electronics
global integration
Telecommunications Equipment
global integration NEC Erickson
Matsushita
- Global industry
- Substantial national differentiation, few global scale economies - Kao has limited success outside Japan - Unilever and P&G most successful
- Requires both global integration and national differentiation. - NEC only partially successful - ITT sold out - Ericsson most successful
Reconciling Global Integration with National Reconciling Global Integration with National Differentiation: The Transnational Corporation Differentiation: The Transnational Corporation
Tight complex controls and coordination and a shared strategic decision process. Heavy flows of technology, finances, people, and materials between interdependent units.
resources and capabilities. Each national unit and source of ideas, skills and capabilities that can be harnessed to benefit whole corporation. National units become world sources for particular products, components, and activities. Corporate center involved in orchestrating collaboration through creating the right organizational context.
Designing the MNC: Key Learning Designing the MNC: Key Learning
1. 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
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