Global Enterprise and Competition

66.511.202 Fall 2007 Ashwin Mehta, Visiting Faculty

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Strategy --- Global to Regional/Local

Corporate/ Global Strategy

Corporate Structure & Integration

Business Strategy Business Structure & Integration

International Strategy, Structure & Integration

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Corporate Strategy Framework

Corporate strategy vision, goals, objectives
building and exploiting corporate advantage (resources) Value creation one time Vs ongoing (businesses) Structure, Systems and Processes For coordination and control Industries

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Hierarchy of Strategy
Corporate
Growth Stability Retrenchment Portfolio Parenting

Business

Competitive (Cost, Differentiation) Cooperative Business ecosystem

Functional

Functional plans & Integration Leadership, Followership

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QUESTIONS OF CORPORATE-LEVEL AND BUSINESSLEVEL STRATEGY

Corporate-level strategy should ask

In which markets do we compete today? In which markets do we want to compete tomorrow? How does our ownership of a business ensure its competitiveness today and in the future?

Business-level strategy should ask

How do we compete in this market today? How will we compete in this market in the future?

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Concentration Growth

Vertical Horizontal

Invest M&A Alliances Leveraged Growth

Directional
Stability

Diversification

Concentric Conglomerate

Retrenchment

Corporate Strategy

Portfolio ---- multiple businesses, products --- analysis to lead to Directional strategy
BCG matrix, GE Business Screen market share, industry attractiveness Qualitative and quantitative

Parenting --- businesses, build, synergies between businesses

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Growth Strategy Options 1. Organic Growth Investments in assets required to grow

Invest in factories. Machinery, skills, etc. Time to reap benefits? Risks? Changing environment

2. Acquisition buy necessary assets --- tangibles and intangibles

Upfront payments, Integration issues, unpredictable returns

3. Alliances partner with companies to complement

Typically Buyer-Seller relationships Tightly coupled relationship, too much legal, limited flexibility

4. Leveraged Growth network of asset owners, orchestrated by A Mobilizer

Loosely coupled relationship Governed by market based economic incentives, not legal agreements
Leveraged Growth: Expanding sales without Sacrificing Profits, John Hagel, HBR 2002

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http://www.lifung.com/

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Li & Fung
Founded in Guangzhou, the PRC in 1906, the Li & Fung Group is a multinational group of companies driving strong growth in three distinct core businesses - export sourcing through Li & Fung Limited, distribution through IDS and retailing through CRA and other nonlisted entities. The Li & Fung Group has a total staff of over 24,000 across 40 countries worldwide, with a revenues of over US$8.5 billion in 2005. The Group's export trading arm is Li & Fung Limited one of the largest export sourcing firm that manages the supply chain of highvolume, time-sensitive consumer goods through its office network in close to 40 countries.

http://www.lifung.com/
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As a Supply Chain Manager across many producers and countries, Li & Fung provides the convenience of a one-stop shop for customers through a Total Value-Added Package: from product design and development, through raw material and factory sourcing, production planning and management, quality assurance and export documentation to shipping consolidation.
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An impressive financial performance (in HK$)

Sales Y-O-Y% Op Profits % of sales Equity Debt Debt/Equity

2,005 2,004 2,003 2,002 2,001 2,000 1,999 1,998 1,997 1,996 55,617,374 47,170,601 42,630,510 37,281,360 33,028,575 24,993,018 16,297,501 14,312,618 13,345,722 12,513,857

17.91%
1,884,600

10.65%
1,556,036

14.35%
1,251,986

12.88%
1,137,025

32.15%
668,985

53.35%
793,268

13.87%
595,305

7.24%
471,921

6.65%
361,490 302,075

3.39%
4,624,801 753,192

3.30%
4,709,435 509,487

2.94%
4,190,473 64,094

3.05%
3,786,469 69,199

2.03%
3,430,781 65,955

3.17%
3,361,916 137,642

3.65%
1,143,221 414,868

3.30%
1,337,485 397,058

2.71%
1,163,644 400,000

2.41%
1,054,894 283,431

0.16

0.11

0.02

0.02

0.02

0.04

0.36

0.30

0.34

0.27

http://www.lifung.com/investor/index.html
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How? Since its founding, in 1906, Li Fung family owned Trading company
Acting as a broker between manufacturers and buyers in Apparels Margin pressures as with direct links between buyers and manufacturers

Mid-1970s remade the company

From brokerage (connecting 2 points) to an orchestrator connecting and coordinating many different links of suppliers and buyers owns no factories owns no transportation equipment to ship material in various production stages

privileged access to 7,500 supply and manufacturing companies around the World Core competencies: deep knowledge of apparel market
Leverage other companies assets to grow!
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Remaking of the Company

Organization change from traditional geographical to customer centric structures
dedicated divisions serve largest apparel designers (Laura Ashley, Abercrombie & Finch, Levi Strauss, etc. other divisions focus on smaller customers Each division run by lead entrepreneur, with deep understanding of customers needs kept relatively small $30 to 50 million in revenue

Supply side up-to-date information on thousands of suppliers capability and performance

Allocate work across the network; give in-depth feedback to further improve performance

Knowledge of supply chain makes the Company tailor it to meet the customer need.
can begin production within hours after receiving the order from a customer Session 4 over the Internet!

Global Value Added

Customer

(Traditional Trading House)

Finding Production Partner

Idea

Design

Raw Material Sourcing

Outsource mfg. to network of suppliers

Quality Control

Consolidation Logistics

Customer network of retail chains

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What are the sources of Li & Fungs value added? Providing integrated supply-chain management through an extensive network Reducing customer inventory Price and quality control Delivery and logistics management IT network: production and dist. mgmt. Front end: design, engineering, production planning Back end: quality control, logistics Sourcing, raw materials, components Extensive manufacturing network (3000 factories, over 1 million workers)
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What does merger with Inchcape do for Li & Fungs strategy? Creates Li & Fung Distribution More customers in Europe Greater scale and adds production capacity Adds new sources of supply Changes IBS from introducing agent between clients and manufacturers to a higher margin sourcing company Import business fills gaps Additional entry into retail Fills in the mosaic by extending sourcing and distribution networks
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Li & Fungs strategy maximizes global value added: Supplier network of quality manufacturers with extensive set of relationships Li & Fung coordinates supply chain for a specialized set of a products (textiles, toys) Customer network of large retail chains (Abercrombie & Fitch, Gymboree) Li & Fung consolidates demands and consolidates supplies, establishes prices, coordinates exchange, balances supply and demand, allocates products.
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Li & Fungs supplier networks optimize: Gains from trade taking advantage of economies of scale of suppliers Gains from trade taking advantage of comparative advantages of countries in the supply chain constant location adjustment Costs of trade taking advantage of best combination to reduce costs of transactions, transportation, tariffs, and time Combining elements of supply chain to maximize gains from trade net of costs of trade
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Other Examples of Orchastrators Nike (own process network) Cisco (Semi Closed Network) Wal-Mart (Own process network)

Technology Systems Integrators (such as EDS, IBM) created a Global network to deliver solutions

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Business Strategy Considerations:

Arenas Where will we be active?

Vehicles How do we get there?

Differentiators How will we win?

Staging What speed and sequence?

Economic Logic How will returns be obtained?

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Evaluating Corporate Strategy --- Five Tests: Vision Internal Consistency External Fit Corporate Advantage Feasibility

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Strategy Formulation process

Hierarchy of Strategy---multidimensional view
Corporate Business Functional Global Regional Local (Country-level)

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STRATEGIES FOR DIFFERENT PHASES OF THE INDUSTRY LIFE CYCLE Phases of industry life cycle Arenas
Local

Vehicles
Internal development Alliances to secure missing inputs or distribution access Alliances for cooperation Acquisitions in targeted markets

Differentiators
Target basic needs, minimal differentiation

Staging
Tactics to gain early footholds

Economic Logic

Embryonic
Penetration into adjacent markets

Growth

Globalization Diversification

Mergers and acquisitions result in consolidation

Mature

Increased efforts toward differentiation Low cost leaders emerge through gaining experience advantages and scale More stable positions Choosing emerge across international competitors markets and new industry diversification; need rational sequencing

Prices tend to be high. Costs are also high Focus is on securing additional capital to fund growth phase. Integrated Margins can improve positions require rapidly because of choice of focusing experience and scale first on cost or Price premiums accrue differentiation to successful differentiators Consolidation results in fewer competitors (favoring higher margins) but declining growth demands cost containment and rationalization of operations. Rationalizing cost

Decline

Some arenas may be abandoned if decline is severe Focus on segments which provide most profitability

Acquisitions for diversifying moves Divestitures to exit for some competitors

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Strategy Formulation process

Hierarchy of Strategy Corporate Business Functional

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Functional Strategies
Marketing
Operations

Technology/Development
Production

Logistics
Servicing

Purchasing
Human Resource

Finance

Information Technology

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Functional Strategies --- Considerations

Core Competency Integration Timing (first mover Vs Follower) In-house Vs Outsourcing Strategy Options and Scenarios Evaluation

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Regional strategies for Global leadership* Global Regional Local

Regional teams are the key to Companys Globalization initiatives

Jeffrey Immelt, CEO, GE, HBR 12/2005

Global leverage is about playing 3-D chess- at the global, regional and local levels
John Manzer, CEO International, Wal-Mart, HBR 12/2005

*: Pankaj Ghemawat, HBR 12/2005

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Source: Global Marketing Management, Kotabe andSession Helsen 4 Session 1

LENOVO
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How did Lenovos home country affect its initial development and management strategy?
Yang Yuanqing Vice Chairman, President and CEO Domestic strategy-customer focus Economies of scale and experience from large domestic market Pricing strategy above domestic competitors and below international entrants Strong domestic brand Retail outlets and 19 branch offices Distribution (2000 distributors and resellers)
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From humble beginnings

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PC-Sales in China: Market Shares 1994

Source: Luo, Yadong, Multinationals in China, Copenhagen 2000 Session 4

Chinese PC-Market (US$ million)

1996
Import Market Local Prod. Exports Total Market Imports (US)

1997 157 5,761 502 5,416 63

1998 (e) 221 8,114 707 7,628 88

87 4,218 439 3,866 32

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PC-Sales in China (Millions of Units)

1996 Foreign brands US brands Chinese brands Total 0.14 0.65 1.32 2.11 1997 0.21 0.77 2.05 3.03 1998 (e) 0.26 0.95 2.79 4.00

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The Chinese Hardware Market

30% Average Annual Growth Rate More than 50% of all buyers buy units between $1,200 and $1,800 What customers value: Personal Relationships After Sales-Service Tariffs (MFN): 15% To be lowered. Value-Added Tax: 17% Market Segmentation by industry: Finance 33% Telecom 17% Government 10% Transportation 10% Power/Petrol 4% Education 6% Distribution 4% Manufacturing 8% Other 8%

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Did Lenovo derive any advantages/disadvantages from its home country? Production cost advantage from labor market relative to international competitors not manufacturing in China Government connections compared to global entrants Local distribution system hard to copy, Continued transaction costs for international companies Would DELLs direct sales approach fit Chinese consumer market?

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What threats does Lenovo face, and what competitive advantages were sustainable?

Lowering of trade barriers DELL and other international businesses started producing in China DELL offered direct sales and marketing Entrants have global brands Entrants have access to latest technology Other Chinese companies offered low-cost clones Falling component prices affect Legends pricing strategy Growing importance of notebooks

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How did Legend update its strategy?

Local tailoring of products and brands to compete with international companies Partnerships with global companies Launches Lenovo brand Product diversification into cell phones and other consumer products

Adjustment of pricing policies Expansion of domestic distribution Expansion in business services First database server in China

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Lenovo Notebook

Configuration Soleil 8100DT/8200DT CPU Intel Pentium II 266/300MHz(1.7v) Monitor 14.2" TFT, XGA 1024*768*16M

Main Memory 80MB/144MB, expandable to 144MB 2*144Pin DIMM Cache L2 Cache 512 KB 24x CD-ROM, USB, PCMCIA, 7 pounds
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Lenovo organization 1999

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Lenovo Company Structure 2003

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What were strategic reasons behind decision to expand internationally?

Greater competitive challenges to domestic market from global companies Seeking greater economies of scale Chinese manufacturing gives cost advantage that can be used to expand to global markets Benefits of expanding sales for supporting R&D Benefits of developing global brand

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Launching a new global brand.

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Why did Lenovo choose to expand by IBM acquisition?

Lenovo becomes the third largest computer maker in the world Temporary access to IBM brand Access to Thinkpad brand IBM laptop and PC technology Access to suppliers Increased market power from merger Access to management
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The IBM acquisition

Separately, Lenovo and the PC Division possessed outstanding development, manufacturing, marketing and customer-care capabilities, with different areas of expertise and emphasis in the enterprise and consumer markets. Together, as the new Lenovo, those strengths are combined into a growth-oriented, global enterprise, strategically focused on the PC space and more committed to innovation in IT clients than any other company. We have a passion for innovation that is unique in our industry.
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The IBM acquisition Change of headquarters to Purchase, N.Y.

William J. AMELIO President and Chief Executive Officer

Now Raleigh, N.C.

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What challenges lie ahead for Lenovo?

Lenovo brand products make worldwide debut (3000 family) Head-to-head competition with HP and Dell Challenges from low-cost competitors, Acer and others More?

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Assignment 2 Due November 29, 2007

GO TO THIS LINK http://topics.nytimes.com/top/news/business/companies/claiborne_ liz_inc/index.html?adxnnl=1&inline=nyt-org&adxnnlx=1186160600Jqre2Ppd+F3BgUzNGlfiWw REVIEW THE ARTICLE, DO A WEB RESEARCH ON COMPANIES DISCUSSED IN THE ARTICLE, AND ADDRESS THESE QUESTIONS: (YOU SHOULD WRITE AN INTRODUCTION/CONTEXT BEFORE ADDRESSING THESE QUESTIONS) 1. What was Liz Claiborne value chain prior to Mr. McCombs arrival? Discuss its implications. 2. How is Mr. McComb changing the company directions, why and what are the implications (include competition implications)? 3. Review Liz Claiborne last 3-year financials (create a common size income statement), analyze trends and comment. 4. What are their major business segments? Discuss US Vs International business (including revenues). YOUR REPORT MUST BE BETWEEN 1000 AND 1500 WORDS AND MUST INCLUDE SOURCES REFERENCED.
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