MBA290:

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

1
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 (cont’d)

 To integrate the knowledge gained in previous

courses.
 To develop your capacity as a general manager in
terms of
- an appreciation of the work of the general
manager,
- the ability to view business problems from a
general management perspective,
- the ability to develop original and innovative
approaches to strategic problems,
- developing business judgment.
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 long-
term profits in the face of irreducible uncertainty and
aggressive competition
• strategy is the linkage between a business and its
current and future environment
 Definition
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 CORPORATE
STRATEGY HEAD OFFICE

BUSINESS
STRATEGY Division A Division B

R&D R&D
FUNCTIONAL Personnel Personnel
STRATEGIES
Finance Finance
Production Production
Marketing/Sales Marketing/Sales
 Levels
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

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

$
 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 Ct

(1 + r)t
Where: V market value of the firm.
Ct free cash flow in time t
r weighted average cost of capital
 The
TheWorld’s
World’sMost
MostValuable
ValuableCompanies:
Companies:
Performance
PerformanceUnder
Under Different
DifferentProfitability
ProfitabilityMeasures
Measures

COMPANY MARKET NET RETURN RETURN RETURN RETURN

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

Exxon Mobil 372 36.1 19.9 34.9 17.8 11.7

General Electric 363 16.4 10.7 22.2 14.7 (1.5)
Microsoft 281 12.3 40.3 30.0 18.8 (0.9)
Citigroup 239 24.6 22.0 21.9 1.5 4.6
BP 233 22.3 9.9 27.9 10.7 10.2
Bank of America 212 16.5 27.0 14.1 1.2 2.4
Royal Dutch Shell 211 25.3 14.7 26.7 11.6 11.8
Wal-Mart 197 11.2 5.5 21.4 8.1 (10.3)
Toyota Motor 197 12.1 10.7 13.0 4.8 (22.1)
Gazprom 196 7.3 28.1 9.8 7.1 n.a.
HSBC 190 15.9 23.0 16.3 1.0 (11.8)
Procter & Gamble 190 8.7 17.3 13.7 6.4 7.2
 Shareholder
ShareholderValue
ValueMaximization
Maximizationand
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 assets—maximize after-tax rate of return
b) On new investment—seek rate of return > cost of capital
• Utilize qualitative strategy analysis to evaluate future profit
potential
 AAComprehensive
Comprehensive Value
ValueMetrics
MetricsFramework
Framework

Shareholder Intrinsic Financial Value

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

Above Normal
Profits
(in Excess of the Competitive Level)

Avoid Be Better Than

Competitors Competition
Attractive Attractive Attractive
Industry Strategic Niche Cost Differentiation
Group Advantage Advantage
Entry Mobility Isolating
Barriers Barriers Mechanisms
 Sources
Sources of
of Competitive
CompetitiveAdvantage
Advantage

COST
COST
u ct ADVANTAGE
pro d ADVANTAGE
ila r
c ost
Sim r
l o we
COMPETITIVE at
COMPETITIVE
ADVANTAGE
ADVANTAGE Pri
fro ce
m pre
un mi
iqu um
ep
rod DIFFERENTIATION
DIFFERENTIATION
uc
t ADVANTAGE
ADVANTAGE
 The
The Experience
Experience Curve
Curve

The “Law of Experience”

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

Cumulative Output
 Examples
Examples of
of Experience
Experience Curves
Curves

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

50 100 200 300

20K 30K
1960 Yen

Price Index
15K

75%
70% slope

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

Accumulated unit production Accumulated units
(millions) (millions)
 Drivers
Drivers of
of Cost
Cost Advantage
Advantage

ECONOMIES OF SCALE • Indivisibli\ties

• Specialization and division of labor

ECONOMIES OF LEARNING • Increased dexterity

• Improved organizational routines

• Process innovation
PRODUCTION TECHNIQUES • Reengineering business processes

PRODUCT DESIGN • Standardizing designs & components

• Design for manufacture

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

CAPACITY UTILIZATION • Ratio of fixed to variable costs

• Speed of capacity adjustment

RESIDUAL EFFICIENCY • Organizational slack; Motivation &

culture; Managerial efficiency
 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 Units of output

Efficient Plant per period
Size: the point
where most scale
economies are
exhausted
 Scale
ScaleEconomies
Economiesin
inAdvertising:
Advertising:U.S.
U.S. Soft
SoftDrinks
Drinks

Despite the massive advertising budgets of brand leaders Coke and Pepsi, their main
brands incur lower advertising costs per unit of sales than their smaller rivals.
0.20
Advertising Expenditure ($ per case)

Schweppes
SF Dr. Pepper
0.15

Tab
Diet 7-Up Diet Pepsi
Diet Rite
0.10

Fresca
Seven Up
0.05

Sprite Dr. Pepper

Pepsi
Coke
0.02

10 20 50 100 200 500 1,000

Annual sales volume (millions of cases)
 Applying
Applyingthe
the Value
ValueChain
Chain to
to Cost
CostAnalysis:
Analysis:
The
TheCase
Case of
ofAutomobile
Automobile Manufacture
Manufacture

STAGE 1. IDENTIFY THE PRINCIPLE ACTIVITIES

R&D TESTING, GOODS SALES DISTRI- DEALER &

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

STAGE 2. ALLOCATE TOTAL COSTS

 Applying
Applyingthe
theValue
ValueChain
Chainto
to Cost
CostAnalysis:
Analysis:The
The Case
Case
of
ofAutomobile
Automobile Manufacture
Manufacture(continued)
(continued)

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

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

PARTS R&D COMPONENT ASSEMBLY TESTING, GOODS

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

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

depend on: --Productivity of -- Flexibility of production predictability of sales
-- Order size R&D/design -- No. of models per plant --Customers’
--Purchases per --No. & frequency of new -- Degree of automation willingness to wait
supplier models -- Sales / model
-- Bargaining power -- Wage levels
-- Supplier location -- Capacity utilization
 Applying
Applyingthe
theValue
ValueChain
Chain to
to Cost
CostAnalysis:
Analysis:The
The Case
Case
of
ofAutomobile
Automobile Manufacture
Manufacture(continued)
(continued)
STAGE 4. IDENTIFY LINKAGES

Designing different models around

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

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

Higher quality parts and materials Higher quality in manufacturing

reduces costs of defects reduces warranty costs
at later stages

STAGE 5. RECCOMENDATIONS FOR COST REDUCTION

 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 INTANGIBLE

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

TOTAL CUSTOMER RESPONSIVENESS

Differentiation not just about the product, it embraces the whole
relationship between the supplier and the customer.
 Identifying
Identifying Differentiation
Differentiation Potential:
Potential:
The
The Demand
Demand Side
Side

THE PRODUCT What needs does What are key

it satisfy? attributes? FORMULATE
DIFFERENTIATION
Relate patterns of STRATEGY
customer
preferences to • Select product
By what
product attributes positioning in relation
criteria do they
to product attributes
choose?
THE • Select target
CUSTOMER What price
customer group
premiums do
product attributes • Ensure customer /
command? product compatibility
What What are • Evaluate costs and
motivates demographic, benefits of
them? sociological, differentiation
psychological
correlates of customer
behavior?
 Using
Using the
the Value
Value Chain
Chain toto Identify
Identify
Differentiation
Differentiation Potential
Potential on
on the
the Supply
Supply Side
Side
MIS that supports Training to support Unique product features.
fast response customer service Fast new product
capabilities excellence development

FIRM INFRASTRUCTURE
HUMAN RESOURCE MANAGEMENT
TECHNOLOGY DEVELOPMENT

INBOUND OPERATIONS OUTBOUND MARKETING SERVICE

LOGISTICS LOGISTICS & SALES
Customer technical
support. Consumer
credit. Availability of
Quality of Defect free Fast delivery. Building brand spares
components & products. Efficient order reputation
materials Wide variety processing
 Identifying
IdentifyingDifferentiation
DifferentiationOpportunities
Opportunitiesthrough
through
Linking
Linkingthe
the Value
ValueChains
Chainsof
ofthe
the Firm
Firm and
and its
its
Customers:
Customers: Can
CanManufacture
Manufacture

1
5
2 3 4

Inventory holding
Supplies of steel

Inventory holding

Inventory holding

technical support
Manufacturing
& aluminum

Purchasing

Distribution
Processing
Engineering

Marketing
Distribution
Purchasing

Canning
Service &
Design

Sales

CAN MAKER CANNER

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

2. High manufacturing tolerances can avoid breakdowns in customer’s canning lines.

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

Determining Industry Attractiveness and

Identifying Strategic Opportunities
 Profitability
Profitabilityof
ofUS
USIndustries
Industries (selected
(selectedindustries
industriesonly)
only)

Median return on equity (%), 1999-2005

Household & Personal Products 22.7 Gas & Electric Utilities 10.4
Pharmaceuticals 22.3 Food and Drug Stores 10.0
Tobacco 21.6 Motor Vehicles & Parts 9.8
Food Consumer Products 19.6 Hotels, Casinos, Resorts 9.7
Securities 18.9 Railroads 9.0
Diversified financials 18.3 Insurance: Life and Health 8.6
Beverages 18.8 Packaging & Containers 8.6
Mining & crude oil 17.8 Insurance: Property & Casualty 8.3
Petroleum Refining 17.3 Building Materials, Glass 8.3
Medical Products & Equipment 17.2 Metals 8.0
Commercial Banks 15.5 Food Production 7.2
Scientific & Photographic Equipt. 15.0 Forest and Paper Products 6.6
Apparel 14.4 Semiconductors &
Computer Software 13.9 Electronic Components 5.9
Publishing, Printing 13.5 Telecommunications 4.6
Health Care 13.1 Communications Equipment 1.2
Electronics, Electrical Equipment 13.0 Entertainment 0.2
Specialty Retailers 13.0 Airlines (22.0)
Computers, Office Equipment 11.7
The Profitability of Global Industries: Return on Invested Capital, 1963-2003
 From
From Environmental
EnvironmentalAnalysis
Analysis
to
to Industry
IndustryAnalysis
Analysis

The national/ The natural

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

Government Social structure

& Politics

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

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

Perfect
Oligopoly Duopoly Monopoly
Competition

Concentration Many firms A few firms Two firms One firm

Entry and Exit No/Low barriers Significant barriers High barriers

Barriers

Product Homogeneous
Differentiation Potential for product differentiation
Product

Perfect
Information Imperfect availability of information
Information flow
Porter’s
Porter’s Five
Five Forces
Forces of
of Competition
Competition Framework
Framework

SUPPLIERS
Bargaining power of suppliers

INDUSTRY
COMPETITORS

POTENTIAL Threat of Threat of

SUBSTITUTES
ENTRANTS
new Rivalry among substitutes
entrants existing firms

Bargaining power of buyers

BUYERS
The
The Structural
Structural Determinants
Determinants of
of Competition
Competition
SUPPLIER POWER
• Supplier concentration
• Relative bargaining
power

THREAT OF ENTRY INDUSTRY RIVALRY SUBSTITUTE

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

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

BUYER POWER
LOW
Physician as buyer:
Not price sensitive
No bargaining power.
(Changing with managed care.)
 Applying
Applying Five-Forces
Five-ForcesAnalysis
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  Method for Neutralizing Force
 Entry  Erecting barriers (isolating
mechanisms) create & exploit economies of
scale, aggressive deterrence, design in switching
costs, etc.
 Rivalry  Compete on nonprice dimensions:
cost leadership, differentiation, cooperation, etc.

 Substitutes  Improve attractiveness compared to

substitutes: better service, more features, etc..
 Reduce buyer uniqueness: forward
 Buyers integrate, differentiate product, new customers, etc..
 Reduce supplier uniqueness: backward
 Suppliers integrate, obtain minority position, second source, etc..
The Traditional Model of Industry Life Cycle

Fermentation Shakeout Maturity Decline

Sales volume

Time
 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.

Color
Sales Sales B&W Portable

HDTV ?

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

• Life cycle model can help us to anticipate industry

evolution—but dangerous to assume any common, pre-
determined pattern of industry development
 Evolution
Evolutionof
of Industry
Industry Structure
Structure over
overthe
theLife
LifeCycle
Cycle

INTRODUCTION GROWTH MATURITY DECLINE

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

TECHNOLOGY Rapid product Product and Incremental Well-diffused

innovation process innovation innovation technology

PRODUCTS Wide variety, Standardization Commoditiz- Continued

rapid design change ation commoditization

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

URING intensive mass-production

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

COMPETITION Technology- Entry & exit Shakeout & Price wars,

consolidation exit

KSFs Product innovation Process techno- Cost efficiency Overhead red-

logy. Design for uction, ration-
alization, low
cost sourcing
 The
The Driving
Driving Forces
Forces of
of Industry
Industry Evolution
Evolution

BASIC CONDITIONS INDUSTRY STRUCTURE COMPETITION

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

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

Excess capacity
increases
Demand growth Bargaining power
slows as market of distributors
saturation approaches Distribution channels increases
consolidate
 Changes
Changesininthe
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 toto 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
overthe
the
Industry
Industry Life
LifeCycle:
Cycle: Retailing
Retailing
Warehouse
Clubs Internet
e.g. Price Club Retailers
Sam’s Club e.g. Amazon;
Discount Expedia
“Category
Stores Killers”
e.g. K-Mart e.g. Toys-R-Us,
Mail order, Wal-Mart
catalogue Chain Home Depot
?
Stores
retailing
e.g. A&P
e.g. Sears
Roebuck

1880s 1920s 1960s 2000

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

Getting better, getting faster Rule-busting innovation

is the way to win is the way to win

IT creates competitive advantage Unconventional business concepts

create competitive advantage

Being revolutionary is high risk More of the same is high risk

We can merge our way to There’s no correlation between

competitiveness size and competitiveness

Innovation equals new products Innovation equals entirely new

and new technology business concepts

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

Implementation the hard part content to be an imitator

Change starts at the top Change starts with activists

Our real problem is execution Our real problem is innovation

Big companies can’t innovate Big companies can become gray-haired

revolutionaries
An Alternate Model of Industry Life Cycle

Emergence Convergence Coexistence Dominance

Sales volume

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 ofof Strategy
StrategyAnalysis:
Analysis:
From
From the
the External
External to
to the
the Internal
Internal Environment
Environment

THE FIRM THE

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

The The
Firm-Strategy Environment-Strategy
Interface Interface
 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 Fine
Mechanics Optics

35mm SLR camera Plain-paper copier

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

Micro-
Electronics
 Eastman Kodak’s Dilemma

Resources & Capabilities Businesses

Chemical Imaging Film

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

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

Need to build digital Digital Imaging

imaging capability Products (e.g. Photo CD
System; Advantix
cameras & film
The
The Links
Links between
between Resources,
Resources, Capabilities
Capabilities
and
and Competitive
CompetitiveAdvantage
Advantage

INDUSTRY KEY
COMPETITIVE SUCCESS FACTORS
STRATEGY
ADVANTAGE
ORGANIZATIONAL
CAPABILITIES

RESOURCES
TANGIBLE INTANGIBLE HUMAN

•Financial •Skills/know-how
•Technology •Capacity for
•Physical •Reputation
communication
•Culture
& collaboration
•Motivation
 Appraising
Appraising Resources
Resources
RESOURCE CHARACTERISTICS INDICATORS

Financial Borrowing capacity Debt/ Equity ratio

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

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

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

Reputation Brands. Customer loyalty. Company Brand equity

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

Human Training, experience, adaptability, Employee qualifications,

Resources commitment and loyalty of employees pay rates, turnover.
 The
The World’s
World’s Most
Most Valuable
Valuable Brands,
Brands, 2006
2006

Rank Company Brand Rank Company Brand

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

1 Coca-Cola 67.5 11 Mercedes Benz 20.0

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

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

 Defining
Defining Organizational
Organizational Capabilities
Capabilities

Organizational Capabilities = firm’s capacity for

undertaking a particular activity. (Grant)

Distinctive Competence = things that an organization

does particularly well relative to competitors. (Selznick)

Core Competence = capabilities that are fundamental to a

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

INBOUND OPERATIONS OUTBOUND MARKETING SERVICE

LOGISTICS LOGISTICS & SALES

PRIMARY
ACTIVITIES
 The
The Rent-Earning
Rent-Earning Potential
Potential
of
of Resources
Resources and
and Capabilities
Capabilities

THE EXTENT OF THE Scarcity

COMPETITIVE ADVANTAGE
ESTABLISHED Relevance

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

Property rights

Relative
APPROPRIABILITY bargaining power

Embeddedness
 Assessing
AssessingaaCompanies
CompaniesResources
Resources
and
andCapabilities:
Capabilities:The
TheCase
Case of
ofVW
VW
  Importan VW’s VW’s
RESOURCES ce Relative
CAPABILITIES Importance
Relative
Strength Strength
C1. Product
R1. Finance 6 4 9 4
development

R2. Technology 7 5 C2. Purchasing 7 5

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

C7. Marketing &

9 4
sales

C8. Government
4 8
relations
 Appraising
AppraisingVW’s
VW’sResources
Resourcesand
andCapabilities
Capabilities
(Hypothetical only)

10 Key Strengths
Superfluous Strengths
C3
R3
Relative Strength

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

Zone of Irrelevance Key Weaknesses

1
1 5 10
Strategic Importance
 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
developmentofofcapabilities
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) Align
Alignstructure
structure&&systems
systemswith
withrequired
requiredcapabilities
capabilities
6)
6) Change
Changemanagement
managementto totransform
transformvalues
valuesand
andbehaviors
behaviors(GE,
(GE,
BP)
BP)
7)
7) Product
Productsequencing
sequencing(Intel
(Intel, ,Sony,
Sony,Hyundai)
Hyundai)
8)
8) Knowledge
KnowledgeManagement
Management(systematic
(systematicapproaches
approachesto
toacquiring,
acquiring,
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
the Firm
Firm

VerticalProduct Geographical
Scope Scope Scope

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

[B] Several V1
Specialized P1 P2 P3 C1 C2 C3
V2
Firms linked
by Markets V3
In situation [A] the business units are integrated within a single firm.
In situation [B] the business units are independent firms linked by markets.
Are the administrative costs of the integrated firm less than the transaction
costs of markets?
 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 management—accounting systems, decision sciences,
financial techniques, organizational innovations, scientific management

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

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

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

oil, beer, banking, cement).
Key drivers: quest for market power and scale economies.
Also, large corporations better at reconciling size with agility
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 63.5 53.7 53.9 39.9 37.0

29.8 36.5 46.3 46.1 60.1 63.0

1949 1954 1959 1964

Percentage of Specialized Companies (single-business,
1969 1974
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
Diversificationamong
amongLarge
LargeUK
UK
Corporations,
Corporations,1950-93
1950-93

70
60
Single business
50
40 Dominant
business
30 Related business
20
Unrelated
10 business
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 --Diversification reduces variance of profit flows

SPREADING --But, doesn’t create value for shareholders—they can
hold diversified portfolios of securities.
--Capital Asset Pricing Model shows that diversification
lowers unsystematic risk not systematic risk.

PROFIT --For diversification to create shareholder value, then

bringing together of different businesses under
common ownership & must somehow increase
their profitability.
 Diversification
Diversification and
and Shareholder
Shareholder Value:
Value:
Porter’s
Porter’s 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
CompetitiveAdvantage
Advantage from
from Diversification
Diversification

• Sharing tangible resources (research labs, distribution

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

• Economies of scope not a sufficient basis for

ECONOMIES diversification ----must be supported by transaction costs
FROM • Diversification firm can avoid transaction costs by
INTERNALIZING
TRANSACTIONS
operating internal capital and labor markets
• Key advantage of diversified firm over external markets---
superior access to information
 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 self-
employed builders, plumbers, electricians, painters.
• Key issue -- transaction costs of the market vs.
administrative costs of firms.
• Where transaction costs high—firm is more efficient means
of organization

Note: transaction costs comprise costs of search and contract

negotiation and enforcement
 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 doesn’t necessarily require common ownership
• Superior coordination
• Avoids transactions costs of market contracts in situations
where there are:
-- small numbers of firms
-- transaction-specific investments
-- opportunism and strategic misrepresentation
-- taxes and regulations on market transactions
 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
Vertical Integration
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 If yes, VI more attractive
needed?
Does limited information permit VI can limit opportunism
cheating?
Are taxes or regulation imposed VI can avoid them
on transactions?
Do the different stages have similar Greater the similarity, the
optimal scales of operation? more attractive is VI
Are the two stages strategically Greater the strategic
similar? similarity ---the more 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? Greater the unpredictability
----the more costly is VI
Are risks compounded by VI increases risk.
linkages between vertical stages
 The value chain for steel cans

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

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

What factors explain why some stages are vertically integrated,

while others are linked by market transactions?
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.
 Patterns
Patterns of
of Internationalization
Internationalization
HIGH

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

--diamond mining --semiconductors

--agriculture --consumer electronics

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

--milk --consulting

LOW Foreign Direct Investment HIGH

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

COMPETITION
• Increased intensity of competition

PROFITABILITY
• Other things remaining equal, internationalization tends to
reduce an industry’s margins & rate of return on capital
 Competitive
CompetitiveAdvantage
Advantagewithin
withinan
anInternational
International
Context:
Context:The
The Basic
Basic Framework
Framework

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

THE NATIONAL ENVIRONMENT

-- National resources and capabilities (raw materials;
national culture; human resources; transportation,
communication, legal infrastructure
-- Domestic market conditions
-- Government policies
-- Exchange rates
-- Related and supporting industries
 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
ComparativeAdvantage
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
portation equipment
Other manufacturers -.68 -.07 .01 .29 .40

Note: Revealed comparative advantage for each product group

is measured as: (Exports less Imports)/ Domestic production
 Porter’s
Porter’s 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 countries—the role of the national environment is
providing a home base for the company.
 Sustained competitive advantage depends upon dynamic
factors-- innovation and the upgrading of resources and
capabilities
 The critical role of the national environment is its impact
upon the dynamics of innovation and upgrading.
 Porter’s
Porter’s National
National Diamond
Diamond Framework
Framework

FACTOR CONDITIONS

RELATING AND
DEMAND SUPPORTING
CONDITIONS INDUSTRIES

STRATEGY, STRUCTURE,
AND RIVALRY

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

than natural endowments.
. RELATED AND SUPPORTING INDUSTRIES—Key role of “industry clusters”
. DEMAND CONDITIONS—Discerning 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

company’s competitive advantage based upon firm-
specific resources and capabilities, and are these
transferable?

– Tradability issues: Can the product be transported at

economic cost? If not, or if trade restrictions exist, then
production must be close to the market.
 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 7,750 8,000 Labor
700 40 Shipping cost 300 1,000 Inventory 20
40 TOTAL 8,770 9,180
 Location
Location and
and the
the Value
Value Chain
Chain

Comparative advantage in textiles and apparel by stage of processing

Country Stage Index of Country Stage Index of

of Revealed of Revealed
Processing Comparative Processing Comparative
Advantage Advantage

Hong Kong 1 -0.96 Japan 1 -0.36

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

Note:
1 = production of fiber (natural & synthetic) 2 = production of spun yarn
3 = production of textiles 4 = production of clothing
 Determining
DeterminingthetheOptimal
Optimal Location
Location
of
of Value
ValueChain
ChainActivities
Activities
Where is the optimal location
of X in terms of the cost and
The optimal location availability of inputs?
of activity X considered
independently What government incentives/ penalties
affect the location decision?

What internal
WHERE TO LOCATE resources and capabilities does the firm
ACTIVITY X? possess in particular locations?

What is the firm’s business strategy

(e.g. cost vs. differentiation advantage)?
The importance of links
between activity X and
other activities of the firm How great are the coordination
benefits from co-locating activities?
 Alternative
Alternative Modes
Modes of
of Overseas
Overseas Market
Market Entry
Entry

TRANSACTIONS DIRECT INVESTMENT

Exporting Licensing Joint venture Wholly

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

Long- Licensing Franchising Marketing& Fully

term patents & Distribution integrated
contract other IP only

Low Resource commitment High

 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 partner’s resources
and capabilities can more easily be captured by the other?
– Absorptive capacity of the company-- which partner is the
more receptive learner?
 General
GeneralMotors’
Motors’Alliances
Allianceswith
withCompetitors
Competitors
SAAB 0 0 -5). gy
AVTOVAZ d (20 chnolo
e FIAT
Ru % own n on teents
ssi 50% 20 ratio pon
an
JV owned ol labo nd com
to p C a
SUZUKI r od
uc e
10%
ow n c ar
ed. s
C o-
pr od 20% owned; join
uc t i o
n GM t production
FUJI
JV
duction 60% to p
-p ro rod
ISUZU ned. C o owned u
49%ow ce
c ar
s in
Ch

50 pro
40% investment IBC Vehicles ina

. 9 du
Ltd. (U.K.)

% cti
50% SAIC

ow on
owned

ne co
(Makes vans in UK)

d; lla
t e bo
New United Motor

ch ra
ni t i o
Manufacturing

ca n
TOYOTA

l&
50% owned Inc. (NUMMI)
(Makes cars in US) DAEWOO
 Multinational
Multinational Strategies:
Strategies:
Globalization
Globalization vs.
vs. National
National Differentiation
Differentiation
The case for a global strategy:

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

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

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

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

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

•• GLOBAL
GLOBALSTRATEGY
STRATEGY
--At
--Atsimplest
simplestlevel:
level: Treating
Treatingthe
theworld
worldasasaasingle
singlemarket
market
E.g.
E.g.Japanese
Japanesecompanies
companiesduring
duringthethe1970s
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 inter- World as
single mkt. related mkts. separate
national mkts.

global strategy multidomestic strategy

Analyzing
Analyzing benefits/costs
benefits/costs of
of aa global
global strategy
strategy

Forces
Forcesfor
for globalization
globalization Forces
Forcesfor
forlocalization
localization/ /national
national
differentiation
differentiation
MARKET
MARKETDRIVERS
DRIVERS
--Common
--Commoncustomer
customerneeds
needs MARKET
MARKETDRIVERS
DRIVERS
--Global
--Globalcustomers
customers --Different
--Differentlanguages
languages
--Cross-border
--Cross-bordernetwork
networkeffects --Different
effects --Differentcustomer
customerpreferences
preferences
--Cultural
--Culturaldifferences
differences
COST
COST DRIVERS
DRIVERS
--Global COST
COSTDRIVERS
DRIVERS
--Globalscale
scaleeconomies
economies --Transportation
--Differences --Transportationcosts
costs
--Differencesin
innational
national --Transaction costs
resource --Transaction costs
resourceavailability
availability --Economic
--Learning --Economic&&political
politicalrisk
risk
--Learning --Speed
--Speedof
ofresponse
response
GOVERNMENT
GOVERNMENTDRIVERSDRIVERS
COMPETITIVE
COMPETITIVEDRIVERS
DRIVERS --Barriers
--Barriersto
totrade
trade&&inward
inwardinv.
inv.
--Potential
--Potentialfor
forstrategic
strategic --Regulations
--Regulations
competition
competition (e.g.
(e.g.cross-
cross-
subsidization)
subsidization)
 Jet engines

Autos
Benefits
Consumer
of
electronics Telecom
global
integration equipment

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

Benefits of national differentiation

 Positioning
Positioningindustries
industriesin
interms
termsofof benefits
benefitsof
of
globalization
globalization and
andnational
national differentiation
differentiation

Jet engines

Autos
Benefits
Consumer
of
electronics Telecom
global
integration equipment

Investment
banking

Retail
Cement banking
Auto Funeral
repair services

Benefits of national differentiation

 The
TheEvolution
Evolution ofof Multinational
MultinationalStrategies
Strategies and
and
Structures:
Structures: (1)
(1) 1900-1939—Era
1900-1939—Era of of the
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
Evolution of
of Multinational
Multinational Strategies
Strategies
and
and Structures:
Structures:(2)
(2) 1945-1970—U.S.
1945-1970—U.S. Dominance
Dominance

American MNC’s as Coordinated Federations :

• National subsidiaries fairly autonomous
• Dominant role as U.S. parent-- especially in developing
new technology and products
• Parent-subsidiary relations involved flows of technology
and finance, and appointment of top management. e.g.
Ford, GM, Coca Cola, IBM
 The
TheEvolution
Evolution of
of Multinational
Multinational
Strategies
Strategiesand
and Structures:
Structures:
(3)
(3) 1970s
1970sand
and1980s—The
1980s—The Japanese
Japanese Challenge
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
MarketingGlobal
GlobalStrategies
Strategiesand
andSituations
SituationstotoIndustry
Industry
Conditions:
Conditions:Firm
Firm Success
Successin
inDifferent
DifferentIndustries
Industries

Consumer Electronics Branded, Packaged Telecommunications

Consumer Goods Equipment
Matsushit NEC
global integration

a Ka
o

integration

integration
Erickson
global

global
Philips P&G
General Electric Unilever
ITT

local responsiveness local responsiveness local responsiveness

- Global industry - Substantial national - Requires both global

- Matsushita the most differentiation, few global integration and national
successful scale economies differentiation.
- Philips the survivor - Kao has limited success - NEC only partially
- GE sold out outside Japan successful
- Unilever and P&G most - ITT sold out
successful - Ericsson most
successful
 Reconciling
ReconcilingGlobal
Global Integration
Integration with
withNational
National
Differentiation:
Differentiation:The
TheTransnational
TransnationalCorporation
Corporation

Tight complex Heavy flows of

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

The Transnational: an integrated network of distributed interdependent

resources and capabilities.
– Each national unit and source of ideas, skills and capabilities that can
be harnessed to benefit whole corporation.
– National units become world sources for particular products,
components, and activities.
– Corporate center involved in orchestrating collaboration through
creating the right organizational context.
 Designing the
Designing the MNC:
MNC: Key
Key Learning
Learning
1. On what basis to organize—products, geography, functions?
--Where is coordination most important?
--How global is the industry? How global is the firm’s
strategy?
2. If one dimension is dominant, how to coordination along the
other dimensions?
--Maintain single line accountability
--Other dimensions of coordination can be “dotted line”
relations
3. What’s the role of HQ?
--Control function
--Coordination function
--Exploiting scale economies in centralized provision of
services
4. The need for internal differentiation
--By product/business
--By function
--By country
5. Formal & informal organization